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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Greetings and welcome to the AMH Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Nick Fromm, Director of Investor Relations. Thank you, Mr. Fromm, you may begin.
Good morning. Thank you for joining us for our fourth quarter 2022 earnings conference call. With me today are David Singelyn, Chief Executive Officer; Bryan Smith, Chief Operating Officer; and Chris Lau, Chief Financial Officer.
Please be advised 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, February 24th, 2023. We assume no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law.
A reconciliation of GAAP to non-GAAP financial measures is included in our earnings press release and supplemental information package. As a note, our operating and financial results, including GAAP and non-GAAP measures, are fully detailed in our earnings release and supplemental information package. You can find these documents as well as SEC reports and the audio webcast replay of this conference call on our website at www.amh.com.
With that, I will turn the call over to our CEO, David Singelyn.
Thanks Nick. Welcome, everyone, and thank you for joining us today. To start, I would like to highlight our company-wide rebranding that was announced last month. Our goal has always been to make leasing a high-quality home easy, so our residents can focus on what really matters to them in life. Our rebranding embraces a simplified modern look representing our commitment to continued innovation, including an updated website and enhanced mobile experience.
But this is just one part of the equation. The single-family rental sector is constantly evolving and we plan to further solidify our market leadership by continuing our investment in customer service and maintenance delivery this year through an initiative we named the Resident 360 program.
Investments this year will include a combination of added resources to our property management platform, continued system innovation, and bolstering our various supporting functions. In a few moments, Bryan and Chris will share details on our operational plan and the financial impacts of this very important initiative.
Now, turning to the quarter and full year. We closed out 2022 strong, resulting in 13% core FFO growth per share for the year. This represents the second consecutive year of double-digit growth, which is a testament to the AMH team, platform, and portfolio.
As we look ahead to 2023, we recognize the landscape is changing as the economy cools and inflation continues to pressure consumers and businesses alike. With that in mind, our 2023 outlook contemplates our topline to remain resilient with growth stronger than historical norms, even with some moderation from 2022. This strength and resiliency is due to long-term fundamental tailwinds in our industry. First, there is an undersupply of housing and current building permits project a significant decline in new housing inventory.
Second, housing affordability significantly favors renting. According to the latest John Burns data, it is more than 20% more affordable to rent versus own across our top 20 markets.
And finally, our portfolio is concentrated in high quality of life markets with the majority of our households consisting of dual incomes that are employed in resilient sectors with some of the most common professions for our residents being nurses, firefighters, and other first responders.
Shifting gears to the investment front, we continue to benefit from our AMH Development program, the backbone of our growth. Currently, our traditional and national builder channels are largely on pause. As today, it remains difficult to acquire properties in an accretive and responsible manner with expected return to today's pricing, still too low to clear our required return thresholds.
The channels will reopen one day, but we do not have a crystal ball showing us the exact timing. As such, our investment guidance reflects no material activity across these two channels in 2023. Updates will be provided should market conditions change.
A key benefit of our three-pronged growth strategy is that unlike others, we do not rely solely on open market acquisitions to grow. In 2022, we continue to have consistent and predictable growth through our AMH Development program that delivered 2,183 homes, consistent with our 2022 plan. We expect another year of consistent growth in deliveries during 2023.
Similar to commentary from our last earnings call, we are seeing signs of reduced development labor and input costs in many of our markets. While the deliveries in the fourth quarter reflect peak pricing, today, we are seeing those prices decline. As an example, today, lumber is one-third the cost of its peak pricing in May of 2022. We expect to see further price reductions in vertical input costs for the balance of this year.
Please keep in mind that the vertical development phase is six to nine months resulting in today's cost reduction benefits showing up in yields in late 2023 or 2024. With respect to asset management, we continue to be focused on optimizing our existing asset base.
Specifically, we anticipate another active year on the disposition front to capitalize on current market pricing opportunities by selling homes that do not align with our long-term objectives. This can already be seen in the fourth quarter where we sold approximately $130 million of homes, bringing the full year total to nearly $300 million. The vast majority of these homes were sold to individuals.
In closing, as we head into 2023, our resilient asset class, strong tenant base, and one-of-a-kind development program positions us well during these uncertain economic times. Our Resident 360 program as well as long-term favorable rental demand tailwinds pave the way for consistent value creation for many years to come.
And now I'll turn the call over to Bryan for an update on our operations. Bryan?
Thank you, Dave. 2022 was another great year for AMH. Our team posted strong operating results and an impressive 9.1% same-home core NOI growth for the full year.
Before I get into our results, I'd like to recognize the team for delivering on key technology initiatives that set the stage for our Resident 360 program. First, we launched our upgraded website last month, which is a key step in delivering the modern resident experience. With a focus on mobile, our new website makes leasing more convenient than ever before.
New functionality includes simplified home searches, streamline map functions, and an even easier showing process. This new website is the key platform for future resident experience improvements.
Second, we've made great progress on our next-generation maintenance services platform, which includes system enhancements to our logistics, scheduling, and communications functions. We expect to deliver another round of improvements later this year. Most importantly, these initiatives allow us to capture even more data on prospects and residents, which is already driving our analytics engine.
Moving on to operating results. Fourth quarter demand was in line with our expectations. Although we saw some seasonality, demand metrics continue to exceed pre-pandemic levels.
Same-home average occupied days was 97%. New, renewal, and blended rental rate growth was 8.5%, 7.9%, and 8.1%, respectively, which drove 7.3% same-home core revenue growth for the quarter.
Core operating expense growth was 10.5%, primarily driven by the Texas property tax true-up that we discussed last quarter. All of this resulted in 5.7% same-home core NOI growth for the quarter.
Turning to the current year, 2023 is off to a great start with strong demand for our homes continuing in the January and February. So, far this year, we are seeing increased website traffic and inbound leasing inquiries, driving a 20% increase in distinct showings per ready property when compared to our long-term averages for the same period.
For the month of January, same-home average occupied days was 97% and new and renewal spreads were 7.2% and 7.6%, respectively. This resulted in blended rate growth of 7.5% for the month.
On a full year basis, our same-home core revenues growth outlook is 6% at the midpoint. This is primarily driven by forecasted growth in average monthly realized rent in the 6.5% area, which includes a low 4% earnings from last year's leasing activity and the partial year contribution from 2023 blended rate growth expectations.
This is partially offset by small year-over-year movements in occupancy and fees and our expectation for a modest 35 basis point increase in our bad debt percentage. This expected increase can be attributed to a small cohort of lingering COVID-impacted accounts taking longer to resolve than expected.
Looking ahead to core property operating expenses, next year's same-home growth outlook of 9.75% at the midpoint reflects another year of elevated property taxes and insurance, which Chris will speak to in a moment.
For all other expenses, our outlook contemplates general inflationary pressures and proactive investments into our Resident 360 program.
Today, our platform provides the best customer service in the industry which has allowed us to differentiate ourselves from the competition. Resident 360 expands our platform's capabilities, which will benefit resident retention, provide for greater cost control and strengthen our position as the market leader in customer service over the long-term.
I can't wait to see Resident 360 come to life. We have a great operational platform and team already in place and our market-leading customer service will only get better as this program was fully rolled out.
With that, I'll turn the call over to Chris.
Thanks Bryan and good morning everyone. I'll cover three areas in my comments today. First, a brief review of our year-end results; second, an update on our balance sheet and recent capital activity. And third, I'll close with an overview of our 2023 guidance.
Beginning with our operating results, we closed out 2022 with another strong quarter of consistent execution with net income attributable to common shareholders of $87.5 million or $0.25 per diluted share and $0.40 of core FFO per share in unit, representing 6.7% year-over-year growth.
And for full year 2022, we generated net income attributable to common shareholders of $250.8 million or $0.71 per diluted share and $1.54 of core FFO per share and unit, which was in line with the midpoint of our most recent 2022 guidance.
Additionally, given our continued strong growth in taxable income, after year-end, our Board of Trustees approved a 22% increase in our quarterly distribution to $0.22 per share.
As a reminder, our distribution increases have been outsized in recent years as we burned off our remaining net operating losses. Now, that our net operating losses have been materially utilized, we expect future distribution increases to trend similar to earnings growth over time.
From an investment standpoint, during the quarter, we delivered 701 total homes from our AMH Development program, which was modestly better than our expectations. Of our total deliveries, 415 homes and 286 homes were delivered to our wholly-owned and joint venture portfolios, respectively.
On the acquisitions front, our programs continue to remain largely on pause as we patiently look for further stabilization in home values and the capital markets. During the quarter, we acquired a modest 74 homes, which largely consisted of pre-existing national homebuilder contract closings.
Next, I'd like to turn to our balance sheet and recent capital activity. At the end of the year, our net debt, including preferred shares to adjusted EBITDA was six times. We had $69 million of cash available on the balance sheet and our $1.25 billion revolving credit facility had a $130 million drawn balance.
Subsequent to year-end, we settled the remaining 8 million Class A common shares from last year's forward equity sale agreement, receiving net proceeds of $298.4 million, which was partially used to pay down our credit facility with remaining proceeds funding a portion of our 2023 capital plan that I'll discuss more in a couple of minutes.
Additionally, recognizing the continued uncertainty in the public capital markets, we recently agreed to increase the total capital capacity of our existing joint venture with institutional investors advised by JPMorgan Asset Management to approximately $900 million. This provides nearly $300 million of additional joint venture capital capacity that will be used to target incremental land and development opportunities.
Notably, this increased JV capital capacity enables us to remain opportunistic while also ensuring that our wholly-owned development pipeline remains strategically sized to be fundable without the need for additional common equity.
Next, I'd like to share an overview of our initial 2023 guidance. For full year 2023, we expect core FFO per share in unit of $1.58 to $1.64, which at the midpoint, represents year-over-year growth of 4.5%.
As some additional color, at the midpoint, our expectations contemplate same-home core revenues growth of 6%, which Bryan discussed a few minutes ago, along with same-home core property operating expense growth of 9.75%, driven by property tax growth in the 9% area as we have now completed our year-end property tax forecasting process and believe that 2023 property tax growth will likely remain at the same peak levels as last year, driven by the impact of multi-year revaluation states continuing to capture backwards-looking home price appreciation.
On a positive note, we are beginning to see modest deceleration in certain of our annual revaluation states, supporting our view that property tax moderation is still to come in future years.
Additionally, we expect 10% to 11% combined growth on all other expense line items, reflecting the general inflationary environment, a challenging property insurance market, and the incremental costs associated with the Resident 360 program. And putting together our same-home portfolio revenue and expense growth expectations, we expect 2023 same-home core NOI growth of 4% at the midpoint.
From an investment standpoint, given ongoing market conditions, our 2023 investment expectations do not contemplate any material acquisitions through our traditional or national builder channels.
And although we expect these channels to eventually reopen in the future, we cannot predict when, which, as a reminder, underscores the consistent and predictable value from our AMH Development program.
Despite the currently constrained acquisition environment, we still expect to attractively deploy $1 billion to $1.2 billion of total capital this year adding between 2,200 and 2,400 newly constructed AMH Development homes to our wholly-owned and joint venture portfolios.
Specifically, for our wholly-owned portfolio, at the midpoint of our ranges, we expect to invest approximately $900 million of AMH Capital consisting of $650 million or 1,850 homes added from our development program, along with $250 million of combined investment into our wholly-owned development pipeline, pro rata share of JV investments, and property enhancing CapEx programs.
From a funding standpoint, we expect this year's $900 million AMH Capital plan to be funded through a combination of retained cash flow, $200 million to $300 million of recycled capital from dispositions, and net proceeds from our forward equity shares settled last month, and modest leverage capacity utilization from our balance sheet, leaving a couple of hundred million dollars of dry capital capacity to take advantage of additional growth opportunities should market conditions change.
That brings us to the end of our prepared remarks. But before we open the call to your questions, I'd like to remind you that our asset class, diversified portfolio footprint, and investment-grade balance sheet position us for resiliency during these uncertain economic times.
Additionally, our operating platform is further bolstered by Resident 360 along with our one-of-a-kind AMH Development program position us for continued long-term value creation.
And with that, thank you again for your time and we'll open the call to your questions. Operator?
Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]
Thank you. And our first question is from Nick Joseph with Citi. Please proceed with your question.
Thank you. I completely understand the capital allocation plan, but what would get you more interested in acquisitions going forward from here? And then maybe just where do you see cap rates today?
Yes. Nick, it's Dave. Good afternoon. The capital plan and the investment plan are intertwined and it's really about where is your cost of capital today and where is the growth opportunities.
Today, what we are seeing is the acquisition market as well as the national builder market. The yields at the current pricing are in the mid-5s. And at the mid-5s, they are not attractive to us. We look at our acquisition program or our investment program, having three channels. And the development program gives us the best assets and in the long-term, the best yields in the acquisition channels are the opportunistic.
Today, we need to see another 50 basis points or more increase before we would be entering into that market. Nick, you can see or heard from the prepared remarks, we don't have any material acquisitions planned, but that's -- if the market changes, we will be ready to acquire in an opportunistic manner.
Thanks. That's very helpful. And then just maybe on the expense growth guidance, obviously, real estate taxes continue to have an impact. Do you view that as a 2023 catch-up from all the home price appreciation? Or is that something that we should kind of expect in the next -- over the next two or three years, just given how different municipalities handle real estate tax assessments?
Yes. Nick, it's Chris here. Good question. And look, I would actually tie back to some of our commentary from last quarter. And as we all know, home price appreciation, which is one of the primary drivers of property taxes hit an inflection point, somewhere around middle of last year or so. And as a result, as we've shared before, our expectation is that property taxes will hit an inflection point as well.
But given that property taxes are backwards-looking and also the fact that about a third or so of our property taxes are paid in states that revalue on a multiyear basis, meaning that they're still capturing multiple years of backwards-looking record home price appreciation at this point. Our expectation is that 2023 property tax growth will still remain similar to 2022 in that 9% area.
But as I mentioned in my prepared remarks, we are beginning to see some green shoots in a couple of our annual revaluation markets. Notably, we talked about a decent amount last quarter and last year. In Florida and Georgia, rather than the mid-teens increases we saw last year, we're seeing those cool into the low teens or so this year.
And then notably in Texas, we're still expecting 2023 to run higher than average. But given that home price appreciation there has moderated as well and is likely now below the home-set [ph] exemption cap, we're not expecting to see a repeat of last year's disproportionate treatment, if you want to call it that, to non-homeowner occupied properties.
But like I said, these are good leading indicators on likely property tax trajectory into the future. They're just not material enough yet to change the complexion of this year's property tax growth, which is being anchored by those backwards-looking multi-year revaluation states.
Thank you. And our next question is from Juan Sanabria with BMO Capital Markets. Please proceed with your question.
Hello. Good morning. Just hoping you could spend a little time talking about the Resident 360 program and what that may be doing in the operating cost expense guidance as well as implications for G&A? And how we should think about return on those investments going forward?
Good morning Juan, it's Dave. Let me go through and really kind of frame what the Resident 360 program is, and then Chris might pick it up and go through a little bit of the numbers.
Specifically, the Resident 360 program is an enhancement of our current platform. It's an enhancement of that platform around resident communications and further improvements and enhancements in our maintenance delivery program.
Today, we're proud of our leadership in customer service and maintenance programs, that's evidenced by third-party surveys that you see in some that we have commissioned. And those that we've commissioned also give us commentary as to what residents are looking for as improvements from residential, institutional landlords, whether they be single-family, whether they be American homes, whether they be multifamily.
And that's really around those two elements, communications as well as maintenance delivery. So, we listen to our residents and being a leader doesn't mean that we can't improve. So, that's the initiative.
How does it benefit us? Well, like other investments that we have made and that others make, there's a little bit of an investment time period and then a benefit time period. That benefit time period will come -- what we will see, and we know this because we did pilot this program over 2022 is that we'll see improvements in customer satisfaction and where we have tested, it has led to better retention. That leads to better turnover or reduce turnover cost.
And we also have seen better execution in the maintenance platform, better execution, allowing us to do more internal work, that's -- improves the quality of the work, but it also keeps the cost down.
So, there's going to be a little bit of an investment in 2023. Those benefits will start seeing towards the end of the year, but probably more importantly, in 2024. Talking about the components of expenses, I'll turn it over to Chris.
Yes, Juan, the primary place you're going to see the investment this year will be in the property management line. For reference, what's contemplated in guidance is about a 12% increase this year on property management and it reflects a couple of different considerations.
One, of course, just a general inflationary environment. Two, we did have some modest understaffing in the first quarter of last year that will compare somewhat a little bit unfavorably on a year-over-year basis into this year. And then the balance of this year will be represented by the investments into our Resident 360 program.
Great. And then if I could just switch gears to bad debt. It increased sequentially. You kind of called it out at the top. Just curious if there's any particular parts of the country or regions or the type of customer that you're seeing cause that? And when do you think we'll get past that kind of COVID noise, if you will?
Yes. Juan, Chris here again. Good question. Let me start, I'll frame things a little bit, and then Bryan can probably share some more thoughts as well. Generally speaking, we would characterize collections as continuing to hold strong.
Full year 2022 bad debt landed in the low 1% area, which was very consistent with our expectations that were contemplated in guidance. The one aspect that has played out slightly different than our initial expectations, Bryan, preview this a little bit. We have a small subset of residents that are taking a little longer to work through COVID resolution, given that some of the court systems are still moving a little bit slower than normal.
And then additionally, we've seen a few more households that appeared to be back on their financial feet after the expiration of rental assistance that we're really excited about, that unfortunately were able to sustain permanently without assistance. And so that is what you saw drive our fourth quarter bad debt in the 1.4% area.
And given just a slow moving timeline on some of these final resolutions, at this point, we've conservatively assumed that our current level of bad debt in the 1.4% area continues over the course of 2023.
But our hope is that we may be able to do better than that. But just given some of the aspects of that timeline that are out of our control, we wanted to make sure we started the year with a conservative improvement view on that timeline.
And Juan, this is Bryan. To answer the second part of your question, we're really seeing it can be divided into really two areas of specific cohort of the kind of the impacted accounts. First, there are some procedural requirements in Washington that are causing significant delays. That's probably the most concentrated area.
And second, as Chris mentioned, there's really just core backlogs and the process has been elongated significantly in some other states such as Georgia and North Carolina. We're working through it as quickly as we can. I had hoped that we could get it -- we would have it resolved by now, but we are continuing to process. And the state of Washington is what not Washington, D.C., just for reference.
Thank you. Our next question comes from Josh Dennerlein with Bank of America. Please proceed with your question.
Yes, hey guys. Thanks for the time. I guess I wanted to kind of touch base on maybe some of the underlying assumptions in same-store expense guidance. I was just hoping you guys can elaborate on what your expectations for turn is in the portfolio? And then what's embedded as far as turnover cost?
Yes. Good morning Josh. Chris here. Why don't I unpack the pieces just to put all of this in context, and then I'm sure Bryan has some thoughts on a few more of the assumptions of what we're thinking about.
But in terms of major components of the expense guide, remember, we're expecting 9% property taxes at the midpoint, which we talked about a couple of minutes ago. And then that comes to about 10% to 11% or so on everything else, driven by a couple of different key considerations.
First, about 20% or so on insurance. Our insurance renewal is still in process of being finalized. We're not quite there yet. But as we all know; the property insurance market is very challenging right now. And we want to make sure we have that factored into our expectations on the year.
Two, as I mentioned a minute ago, 12% on property management. As I mentioned, that reflects the inflationary environment. the year-over-year comping of some of last year's understaff miss at the very beginning of the year and then the investments into our Resident 360 program. And then inflationary-like increases on R&M and turn costs in HOAs in, call it, the 7% area or so, all of which gets you to the midpoint of 9.75%.
But before Bryan shares any other color, I just wanted to remind everyone, when we're thinking about expenses in 2023, don't forget that because our Texas property taxes were under accrued for the first nine months of 2022, which were trued up in the fourth quarter of last year, our 2023 expense growth is going to be lumpy this year with higher growth in the first nine months, which will then normalize in the fourth quarter into our expected guidance range.
And Josh, further regarding our expectations on turnover costs and turnover rates for 2023, we expect occupancy to be similar to 2022. We're pushing a number of initiatives that Dave mentioned, and some operationally to see if we can improve on that turnover rate. But going on, our expectation is to be similar to 2022 from that perspective.
In terms of turnover costs, we are still seeing some cost pressures on the CapEx side and some of those COVID-related accounts may be more costly to turn than normal turns within the portfolio. So those are built into our expectations as well.
I appreciate that. And maybe stepping back this year, if I thinking about it, it seems like margins on the same-store pool are going to shrink. Is -- do you think we're at kind of peak margins? Or is there additional opportunity to expand margins in the future across the portfolio?
Yes. So, Sam, it's Dave. When you look at 2022, 2023 and margins, shrinking a number -- a fair amount of it can be attributed to timing, timing of property taxes where we've seen significant growth in revenues and HPA in prior years and property taxes, as we know, is a lagging measurement tool. So, that's a little bit of a catchup tool.
When you look at margins going forward -- well, and one other item I would talk about for 2022 and 2023 is what you just brought up. And what we've already talked about, and that is the temporary adjustment to our expectations on bad debt. Moving forward, I would expect bad debts to go back in line to 2019 levels.
The initiatives that we are embarking upon today, consistent with all other initiatives that we have done in our history, have had a cost upfront and benefits on the backside, whether it's been prior enhancements in the early days of our operating platform, whether it is in our development program, there is an investment cost upfront. And then the benefits will accrue to us in the future.
So, I see our margins what you are looking at in 2022 and 2023, shouldn't be trended down for future years. I would expect that we will see going back to 2018, 2019, those trendlines from there, taking out the COVID years being much more consistent way of looking at life.
Thank you. Our next question comes from the line of Sam Choe with Credit Suisse. Please proceed with your question.
Hey Sam. Are you there? Are you on mute?
Please check your line--
Sorry. Yes, I was on mute. Can you guys hear me now?
Yes, we can.
Okay. Sorry about that. So, I applaud your guys' commitment to technology and resident is pretty much a testament to that. I guess just when you are planning technology initiatives, I know you guys think about the long-term. So, when we have a backdrop like 2023 when there's an inflationary backdrop, I guess, were there some concerns about rolling Resident 360 out because expense a lot of excitement with what this can do to the business? But just wondering if you had any concerns about the timing?
Hi Sam. Thank you. This is Bryan. Our Resident 360 program is really -- it's a testament to our long-term outlook. And as Dave mentioned earlier in the call, this is a program that we tested. We tested it in markets. We really like the results. And we didn't want to wait to roll it out nationally. The quicker we can get it out, the quicker we can optimize it and make sure that those benefits start to show up on expense control and retention.
On the technology side, we're -- we have a really good feedback loop within our system within our company. We're listening to what the residents are saying, and we're trying to match those needs and those requests with enhancements that we can make to our platform.
And many times, the opportunities lie on technical improvements. An example is the improvements that we're making in the logistics program ties in with how we communicate that -- with the resident, which ties in with our communications initiative. So, we're constantly innovating.
The technology piece is a very important part. The Resident 360 is in direct response to what our residents are asking for. So, we didn't want to wait on it. There's really no better time than to start now.
Got it. That's really helpful color. And then just looking at your January metrics that you provided, I mean, it does show a lot of resiliency. I guess when I'm thinking about the same-store revenue guide, what kind of economic assumptions did you make in getting to the high and lows for that range?
Sam, Chris here. In terms of levers to the high and the low range, look, I would say -- let me take a step back and remind and just kind of unpack some of the components driving the revenue guidance.
Bryan touched on this, but we're expecting average monthly realized rent this year to grow about 6.5%. Remember, that's driven by last year's earn-in and then partial year contribution from this year's leasing spreads, which we expect to be in the 5% to 6% area on a full year basis.
And then on occupancy, we see full year 2023 being in the 97% area, which is still really, really strong, just a touch below last year's 97.2%. That translates into rent revenue growth in the low 6% area, add to that about 20 basis points from contribution from our growing ancillary income programs and about 40 basis points of bad debt drag that we talked about a couple of minutes ago, and that will get you to our midpoint of 6%.
As I think about levers and opportunities up from there, look, 97% occupancy, that's pretty full. That's pretty close to structurally full occupancy. So, to us, we see the opportunity for upside being on spreads, naturally, as we've been talking about, there is uncertainty in this year ahead.
2023 is going to look different than 2022. So, we want to make sure that we're starting the year with a prudent level of conservatism in our expectations and recognizing that there will probably be some level of moderation this year, hopefully, we're able to do better than where we're starting the year. And if we don't see as much moderation, that would naturally be a lever to the upper end of the range.
And then as I talked about a couple of minutes ago as well, we're taking a conservative view to bad debt. At the start of the year as well. And so, if we're able to work through some of those remaining resolutions and do better than that 1.4% or so that's contemplated in guidance at the start of the year, that would be another lever to the upper end as well.
Got it. Thank you.
Thanks Sam.
Thank you. Our next question is from Steve Sakwa with Evercore ISI. Please proceed with your question.
Great. Thanks. I guess, Bryan, could you maybe just talk about what your expectations are for leasing spreads this year, kind of new renewal blended and how that might trend over the year?
And Dave, could you just maybe reclarify that margin improvement, are you suggesting that, that will take place in 2024? Or could there still be, I guess, expense pressures next year that kind of keep that margin from maybe improving until 2025 and beyond?
Thanks Steve. I'll start on the rate side. Our expectations for the full year are for re-leasing and renewal spreads to grow in the 5% to 6% range pretty close to being in step. We had an excellent start to January, where we've exceeded that. The guide contemplates a little bit of a slowdown as we proceed through the year.
We're going to continue to push those rates as much as we can, but we're also being conservative in light of the current economic environment. So, 5% to 6% for the year, blended with new and renewals being consistent.
Yes. And Steve, to your second question on the Resident 360 program and margins and cost pressures. It -- based on what we saw in the pilot program, it takes about one year to get the program rolled out, get the individuals trained, get some of the redundancies that do occur when you roll out initiatives like this behind you. So, I would expect that we will start seeing benefits maybe in the fourth quarter, but we would see benefits in 2024.
I don't expect we would see any material incremental cost from this program in 2024, maybe a little bit of trailing cost at the beginning of the year, depending on how fast it gets rolled out. But based on what we saw in the pilot program, it took us about one year to start enjoying or seeing the benefits of the initiative.
Okay. And just one other question on CapEx, Chris, I don't know if maybe I missed it, but did you talk about just what maintenance CapEx would be? I mean I know that, that's kind of been trending up for you and some of your peers. And I'm just wondering what your expectations are for maintenance CapEx in 2023.
Yes. Good question, Steve. I can share thoughts and if Bryan wants to add any color. We didn't comment on it -- in guidance. But generally speaking, the primary driver to CapEx is the inflationary environment.
And as we've talked about before, the highest and best use for our internal labor is more on the maintenance and turn side, not the full system replacement type of work, which is more represented in CapEx, which means that line item is a little bit more susceptible to third-party labor and full material inflationary pressures, which is why we saw it in the 20% area in 2022.
We'll probably see something like that again in 2023, given that we continue to expect another year of strong inflationary pressures in terms of third-party labor and materials. But we're doing everything we can to maintain it and mitigate it.
And Bryan can comment as well as Resident 360 continues to roll out, expanding focus on maintenance delivery capabilities and bandwidth. One of the areas of potential benefit there is being able to do more on the CapEx side as well.
Steve, this is Dave. Let me add a couple of things. One is our asset management program, which includes our development deliveries. And as you saw, we sold about 1,000 homes this year.
The whole thing focuses on many, many variables. But one of the variables that you get through your development program is keeping the average age of your portfolio to be younger. And that has a benefit on maintaining expenses and capital expenditures as well.
And if you look back over the last five years or so, I think our AFFO as a percent of FFO has been 88%, 89%, very consistent year in and year out. And I would expect that to be materially the same this year with inflationary impacts impacting our CapEx.
Our next question comes from Haendel St. Juste with Mizuho. Please proceed with your question.
Hey, I guess good morning to you guys out there. I guess a couple of quick questions from me here. Chris, you had mentioned the preferred on your list of potential uses for this year, they're yielding, I think, over 6%. How are you thinking about that? Any scenario in which you contemplate buying those in this year? Thanks.
Yes. Good question, Haendel. Look, it's something that we watch very closely is something we were watching throughout last year. And yes, you're correct. We have a couple of series that either callable or will become callable.
It is a simple function of relative considerations compared to current cost of capital. Given some of the volatility in the capital markets currently and where new issue pricing is. I think it's probably lower likelihood that we would be calling those in.
But keep in mind that, that is one of the great aspects of preferred is that they are truly perpetual capital with one-way optionality to redeem them after we get past call dates. And so, we will watch it closely. The optionality doesn't go away. And when we find the right time in the marketplace relative to current capital market pricing and considerations, we'll look for the best opportunity to take those out.
Got it. Got it. I appreciate that. I wanted to ask you a follow-up on the development. You guys mentioned the lower cost in lumber and the expected improvement in yields and the timeline later this year, next year. Where are you underwriting new development yields for new starts today versus the 6% bog you guys have talked about in the past? Thanks.
Yes. So, today, when we are underwriting new acquisitions and new developments where you look at our cost of capital today. And so, we would be underwriting in the high 6%s or 7%.
Keep in mind, if you look at 2022 fourth quarter, you'll see that we are being patient and disciplined, I believe, that we acquired one lot or one track of land, I believe it's 180 lots. That's because at this point, our underwriting, we need to get land, land development cost and vertical costs in line. We extended many, many land contracts. We've attempted to renegotiate many land contracts. We obviously did on one to get it into an acceptable price range.
Let me just -- just so there's clarity on these numbers. So, we don't have this expectation. The land that we are developing today that delivers in 2023, that land was acquired in prior years, the land development was done in prior years. That cost is incurred.
What we are seeing in vertical cost on lumber was one of the items that you mentioned, but also all the other vertical costs. We have seen benefits in the last few months, especially from peak pricing back in the second quarter. Lumber had peak pricing in May. Lumber's pricing was $1,250. Today, it's in the low $400s per 1,000 board feet. The future is on the Random Lengths expects that to continue throughout the year.
However, the way development works is that it's about a six-month -- five to six-month time period to do vertical construction, but you contract for your supplies, your labor, et cetera, prior to that. So, it's about a six to nine-month time period.
So, what we delivered in the fourth quarter of this year would have been a peak pricing. That's the stuff that was contracted for in May of this year. What we will see going into 2023 is benefits on vertical cost scale in over the year. land and land development are already baked in. Those happened in prior years.
So, the delivery this year will not be in the high 6%s or low 7%s or 7%. They will be 5.5% scaling up to 6% throughout the year. They will get benefit over time of vertical development pricing benefits, but it takes time for those to factor in. So, the ones that we deliver at the end of the year will be much greater.
So, that -- I just want to make sure that we don't expect that deliveries that we are doing tomorrow are based on what we're underwriting today. What we're underwriting today is based on the capital that we employ today and we will deliver those probably in 2025.
One last point your question, Haendel, is that the deliveries that we're doing today, the ones that are 5.5% to 6%, that capital is in the bank. So, we raised that capital when we made the investment decisions, at least the equity component of capital. So, there is some match funding that occurred.
Our next question comes from Adam Kramer with Morgan Stanley. Please proceed with your question.
Hey guys, thanks for the question. I just wanted to ask about maybe where lost the lease stands today look certainly recognize it's probably not nearly as kind of robust as it was at points in 2022. I'm wondering where off-these stands today?
I think kind of a related question is, is maybe just kind of on the sequential trends in market rents for new lease growth, whether it's 4Q into January, 4Q into January into February, but wondering just kind of given normal seasonal impacts, which I think returned in the fourth quarter, what are kind of the sequential trends in market rent growth that you guys are seeing?
Hi Adam, thanks for the question. This is Bryan. We're estimating our loss to lease to be in the 5% to 6% range today. And in terms of our expectations for new lease growth, we had a really good start to the year. We see -- we had a lot of pricing power, we're fully occupied and great demand. I'm hoping that, that continues.
What we've contemplated in our guide is a moderation off of the 7%s that we started with finishing the first quarter on re-leasing around 7%. And then a graduate moderation towards the back half of the year.
We're going to do our best to continue to push those new lease rates. I'm hoping that demand continues to stay as strong. So, I'm open to beat that, but that's the expectation right now from a conservative perspective.
Great. That's really helpful. Thanks Bryan. Just on this kind of the JV kind of side of things. Look, I know you kind of expanded this relationship with JPMorgan in that group. But just wondering overall kind of the desire or ability to kind of go further down the JV path. Is that something that you're thinking about looking at? Are there opportunities there or maybe less so?
Yes. Adam, Chris here. Simple answer is yes. There are plenty of opportunities. But let me just take a step back from more of a higher level strategic standpoint. As we've shared many times before, given the right attractive and accretive opportunities, our focus is to prioritize growth on the balance sheet as much as possible.
But with that said, we also believe that a mix of joint venture capital is strategically very important, giving us additional opportunity to leverage our platform and fixed costs over a larger base of assets with compensation through fees. JVs create really unique opportunities for attractive longer term economics via our promoted interests.
And then very importantly, during times of public capital market uncertainty and volatility like right now, they strategically provide access to high-quality, long-term forms of capital, which is exactly the thought process and strategy behind the recent agreement to upsize our joint venture with JPMorgan Asset Management, which -- as a reminder, provides nearly $300 million of increased JV capital capacity that enables us to remain opportunistic on incremental land and development opportunities that might not make sense right now relative to our current on-balance sheet cost of capital.
Thanks so for the time. Appreciate it Chris.
Thanks Adam.
Our next question is from Keegan Carl with Wolfe Research. Please proceed with your question.
Thanks for the time guys. I know it's touched on a little bit earlier, but as we enter peak leasing season, just kind of curious how demand compares both the last year and pre-pandemic levels. It was touched on about website traffic and home visits, but maybe where application is at and kind of how do they compare to previous periods?
Thank you, Keegan. We looked at kind of year-to-date and I talked about it in the prepared remarks, one of our key metrics is our check-ins per rent ready. So those are distinct shoppers going into our homes. And as I mentioned, that was up around 20% based compared to a rolling historical average. That's one component of it. And then getting those check-ins to applications is the next piece.
So, far this year, the application activity and the leasing activity has been fantastic. We're very pleased at how it started continuing through February. We've had good absorption of homes in the portfolio. I'm optimistic that, that's going to continue. And if it does, we'll have really good pricing power coming in the spring leasing season.
One thing that I would expect to see this year potentially is kind of a return to a more normal sequence where peak leasing season, we're allowed to push re-leasing rates. And then really in the first and fourth quarter of the year, you see more strength maybe on the renewal side, just to kind of match the way it used to look historically.
But as it sits right now, demand continues to be really strong across all metrics. The new website has made it easier to navigate, especially from a mobile perspective. So, we're getting really good feedback from our prospects from that side there. They are coming onto the website and staying longer and getting to the relevant check-in and application pages quicker than they did under the old website. So, that's been real positive. And we're going to hope to continue to see those benefits as we enter the busier season.
Keegan, it's Dave. Let me just add a couple of maybe more macro thoughts of the marketplace. Today, nothing has changed from prior periods in that there are still many, many households that are looking for high-quality housing in this country remains under supply.
With that said, a couple of things have changed. One is that the homebuilders, the velocity and pace at which they were building new homes has slowed. And so, the ability to meet that demand has waned a little bit as well.
The second is the affordability of a brand new house, the mortgage, the other ancillary costs that go with homeownership versus the affordability of a rental, while they were pretty much an equilibrium for a significant period of time.
Today, if you look at some data out there, primarily the John Burns data that we've looked at, you'll see that it's significantly more affordable today to rent. So, it's greater than 20% more affordable, which is a very, very significant change from where we were. All of that is putting significant -- keep significant demand for rental product in the marketplace.
Now, keep in mind, we're also in volatile and uncertain times and a little bit of pricing pressures on households, but the demand is there. And so, it's just incumbent upon us to capture that demand.
Then shifting gears here. I know I feel like we discussed on every call, but it seems like there's just more and more chatter on regulation in the SFR space, most recently in North Carolina.
Just kind of curious how are you guys thinking about not just the broader regulatory environment, maybe even on a state-by-state basis, how that impacts your decisions?
Yes. Well, Kean, I think you're probably right that there is a little bit more at least awareness of the political side. And I would say, North Carolina is one of the states, but there -- it's not the only state. We see it in Georgia. We see it in California. We see it in the state of Washington.
We've been very proactive on the government fair side. We started a year and half years -- about a year and half ago, a government affairs department. We have government affairs people on our staff. We invest time at the executive level talking to government officials at the federal, state, and local levels.
And when you look at a lot of the rhetoric that has come out through government officials or even in newspapers, you will see that we may be listed in the article as another player in the single-family rental industry, but there's not much that has been targeted at us directly. And that is really having those good relationships out there.
And so, we will continue to pursue and have those discussions each and every year. Part of Resident 360, will address some of that as well, not the primary focus, but maybe a secondary ancillary benefit of that program.
So yes, there is at least the rhetoric. At the federal level, that is the most visible, it's more theater than it is at the local levels where it's more action. So, yes, we have a ground game as well as we're very focused at the federal level as well.
Our next question is from Alan Peterson with Green Street. Please proceed with your question.
Hi everyone, thanks for the time. Chris, are you able to talk about the appeals process from the assessments you got late last year. Right now, does your current expense guide, does that assume that you win any of the appeals process that you're currently engaging in?
Yes. Alan, Chris, great question. We've talked about this for years. we are one of, if not the most active appealer of property tax values across the country. We are very, very active each and every year. A couple of updates. Last year, we filed 12,000 to 13,000 to 14,000 individual property tax value appeals.
We had a pretty successful year. I think our actual success rate last year was about 70%. We saw a 4% to 5% value reduction based on the successful appeals that we won. There are still, I'd call it, a couple of hundred or so open appeals that are rolling from last year into this year. I think we've got a pretty good idea where those are going to land. And largely, all of that has been captured into our actuals.
And as we're heading into 2023, we absolutely expect to lean into the appeals machine again. And hopefully, we have another year of good success there in terms of how we contemplate it in our guidance, no different than any other year. We always start the year with a conservative expectation or a conservative consideration of likelihood of success. We don't want to be on the wrong side of that.
And so, we've got, like I said, a conservative estimate factored into 2023. Hopefully, we can do better than that. But again, that's not something that we really hear back on until the second half of the year, and we'll have to provide updates as we get through the process.
I appreciate that. And maybe just following up on your response to Adam's question on the development pipeline. I know that Jack had mentioned a couple of years ago that the development program could ramp to 3,000, 4,000 new deliveries on a yearly basis. Is the current guidance of 2,300 homes? Is that a capital allocation considerations today? Or are there any other factors limiting your ability to scale construction to that new delivery target?
Yes, it's a good question. There's a number of factors. The first answer is 3,000, 4,000 homes is very doable from an infrastructure and a demand standpoint. With respect to actually executing on the deliveries, what we have experienced over the last three years is a slowdown through the COVID years of getting inspectors out to be able and permitting at the municipal level of the horizontal or land delivery or the land development process. And you need to develop the land in order to be able to do vertical buildings.
So, we're set back a little bit on the 2023-2024 delivery plan not because of what's happening in 2023 and 2024, but what happened in 2020, 2021, 2022 with respect to land development and getting the inspections of that work done.
Going into 2025. Again, this is not necessarily COVID, this is more the economic and interest rate changes that we saw late 2022, which has slowed down our land acquisition pipeline. We're going to grow in a disciplined and controlled way. We can be patient if we need to. We don't need to grow just for adding numbers to an infrastructure line.
So, what we have seen in 2022, as I indicated earlier, we've only acquired one parcel in the fourth quarter because of the pricing and what we're seeing in the changing environment.
So, what we're experiencing today, probably one of the greatest economic adjustments in a short period of time. To me, that doesn't reflect the long-term viability or long-term benefits. It's a short-term impact.
However, in development short-term is multiple years, not a single day, single month or even a single year. And so, I think the opportunity is there. I know the opportunity is there to get to 3,000 and 4,000 homes and maybe even a little bit more. In the short-term, a couple of things have happened along the way.
Our next question is from Brad Heffern with RBC. Please proceed with your question.
Yes, thanks. So, how does the supply picture look for build-to-rent product? And are you seeing increasing competition as we sit here today, either in terms of elevated listings or anything else that you track?
Yes, on the actual building of build-to-rent, we're actually seeing that significantly slow the number of people looking to do build-to-rent, including some of the national builders that we're getting into build-to-rent have pulled back a little bit. A lot of the build-to-rent was private equity, small projects where they would be doing one or two projects.
One is, I think their initial models were a little optimistic. But the other piece is the economics that we have talked about that we have worked through. And we have economies of scale. We have vendor rebates, et cetera. We're in a different place than they are they got impacted. So, they have slowed.
We have seen slowing on that side. We have had inquiries from those that are doing build-to-rent as to whether we would like to partner or acquire those build-to-rent projects, in some cases, in mid-flight. The opportunity there is there if we can find the pricing to make that an attractive opportunity for us. And then I'm sorry, the other -- I think there was another part to your question that I may have forgotten.
Yes. Just the supply today, are you seeing anything like increased listings that suggest that maybe the competition is more intense right now?
Well, I don't -- increased listings, when I hear that, Brad, I think of the market. And the MLS market, we are not seeing -- we are seeing increased listings from a couple of months ago. But the listings are not at the historical norm levels. I think what you're seeing is today, there are a number of individuals, households that over the last couple of years have acquired very favorable mortgage notes -- loans, maybe in the 2% range.
So, for their mobility, if they're a homeowner to move and list their homes has been challenged. So, there's less inventory on the market today. Pricing is still a little higher than it would meet our yield and investment targets. But we are seeing some movement in those prices coming down, but they have a ways to go before the viable opportunities for us.
Okay. Thank you.
Thanks Brad.
Our next question is from Linda Tsai with Jefferies. Please proceed with your question.
Hi. In terms of it being 20% more affordable to rent than owned, how much does that vary by market?
It definitely varies by market. That 20% that we quote is actually a little north of that. I think it's 24% is the average of our top 20 markets. but obviously, it does vary. They all are more affordable, but they do vary. And I don't have the range on my hands, Linda.
Got it. And then what percentage of your residents are dual income? And would you consider tightening your credit standards in the current environment?
Linda, the majority of our residents are, I don't know the exact number, but it is significantly more than half our dual-income families. In terms of tightening the credit requirements, we're really pleased with our collections, especially when you look at -- when you take away the COVID affected residents and they're in line with historical norms.
So, I wouldn't anticipate making any adjustments there. The residents who have moved in over the last couple of years are paying and have bad debt that's very consistent with what we saw pre-COVID. So, I don't think any changes there are necessary.
Thanks. And then just one last one. In terms of pushing those new lease rates, where would you like to be occupancy-wise ideally, if you're at 97%?
We think 97% is very healthy for the way that we -- the way that we're turning homes, the speed with which we're able to re-tenant them. We think it matches the demand. We're comfortable with that level.
We're -- just terms as a reminder, too, we look at the revenue line holistically. We're managing to maximize revenue across and there's a little bit of push and pull on rate and occupancy. But I think 97% occupancy is a good target for us this year.
Thank you. Our next question is from Austin Wurschmidt with KeyBanc Capital Markets. Please proceed with your question.
Great. Thank you and good morning everybody. The breakdown of development this year is tilting more heavily towards the wholly-owned projects versus last year, a fairly significant shift in increase in your funding commitment.
But I guess if the capital markets remain volatile and your cost of capital isn't where you'd like it to be, presumably, you won't have the benefit of that accessing equity proceeds that you guys fortuitously did last year.
So, just how do you think about future funding to keep your share of development funding commitments ramping in future years to get you moving closer towards that 3,000 to 5,000 home goal that you referenced earlier?
Yes, good morning Austin, Chris here. Good question. One of my favorite topics. A couple of considerations here is, one, Part of this is the rationale and thought process behind agreeing to expand our joint venture with JPMorgan Asset Management, bringing in incremental JV capital capacity to make sure that we're remaining opportunistic on incremental land and development opportunities.
But we're in -- as we're thinking about the existing wholly owned pipeline, as we've talked about many times before, we've strategically sized that to-date to be fundable without the need for equity.
And so, if you think about the development of the existing pipeline this year or next year, et cetera, building out the land that we already have is fundable be a combination of retained cash flow from the business, recycled capital -- a little bit of recycled capital from dispositions, and modest leverage capacity off of the balance sheet with, again, no need for equity to build out what we have on the balance sheet for our wholly-owned pipeline.
And then expanding going forward, will be a consideration relative to current cost of capital considerations and looking for the right sourcing of capital, whether that's on balance sheet or via our joint ventures.
That's helpful, Chris. And then, Dave, you referenced cap rates in the mid-5% range or 50 basis points inside where they become more attractive to you. But I'm just curious who are the most active buyers you see today at that mid-5% level, are you seeing deals get re-traded at all?
And what do you think changes to push pricing in your direction? Because today, I think you're on a spot basis in and around or just inside that mid-5% level, but yes, just curious about your thoughts there. Thank you.
Yes. So, the actual buyers today at an institutional level have significantly gone to the sidelines most have -- there are a couple of private SFR companies that have started repurchasing at a very reduced level from what they were acquiring at previously.
What we are seeing in the pricing is we are starting to finally see some of that pricing coming down. The asset value is coming down. Now, that's an interesting statement because it is a very volatile market. And we have also seen the pricing of the national builder programs been coming down.
And then in the last week or two, it looks like they've either moderated, flatlined or maybe even gone the other way. So, it continues to go up and down. This is where you need to be patient. This is where you need to continue to underwrite and -- in all of our markets. This is a diversified portfolio being in the number of markets that we're in. More than 30 markets gives us a lot more opportunity.
But we don't need to press to buy. And so, we need to be patient, WE need to be disciplined. And those opportunities are closer today than they were in our last call, 30 or 90 days ago or maybe a little more than that, but they're still not there. and the cost of capital is also a variable that is not constant either. It's volatile, and ever-changing as well.
So, you got to continually match the two of them up and evaluate between the two on a month-to-month basis. We are closer, but we're not that close today.
Thank you. Our next question comes from Daniel [Indiscernible] with Scotiabank. Please proceed with your question.
Thanks. Good afternoon. Question on the development platform following up on Haendel's question. So, you're guiding to about 1,850 wholly-owned delivery this year at an average 350,000 home. That's based on the $650 million capital investment guidance. How much of the vertical cost softening that you mentioned, Dave, does that imply versus the stuff that's being delivered today?
Yes. So, the stuff that is delivered today, defining today as the fourth quarter -- wrong -- the vertical -- the total cost of the deliveries is about $350,000 and it's about -- $250,000 of that is in vertical. I don't have the exact specific numbers, but that's directionally correct.
What we are seeing on the vertical cost reductions from peak is today, we're probably in that 10% to 15% on vertical alone, expecting to get to maybe 20%. But keep in mind, that doesn't mean that you're going to see a 20% reduction, two things that you have to factor in. You have to factor in the fact that there's land and land development.
So, you're going to see about 20 -- I'm sorry, about $40,000 of benefit coming through. We already are seeing in our acquisition of lumber today, about $17,000 to $18,000 of benefit just on the lumber line of what we were contracting nine months ago. And then other lines throughout the entire development platform, we have some savings now, and we expect to see more savings in a number of those lines.
The overall, we'll expect to probably see a 10% reduction on home costs between fourth quarter of last year. in what we delivered fourth quarter of next year. As long as you comp -- and make sure that you are looking at comparable markets.
So, market mix will have an impact. Land is more expensive in the West than in the Southeast. And so as long as we are looking at market-by-market and not to the average of our entire company, it's about -- going to be about a 10% reduction fourth quarter to fourth quarter.
Really helpful, Dave. Thank you. Chris, a quick follow-up. How much rental assistance did you receive last year? And I guess what's left for, if anything, for 2023?
It's definitely tapering down in last year, I'm just doing some quick math, let's see a live and call it, $16 million to $18 million or so for last year, and that's tapered from, call it, $5 million to $6 million per quarter in the first half of last year, down to I think we got about $3 million or so in the fourth quarter.
Hard to predict exactly where it's going to taper to into the first couple of quarters of 2023, I'd expect us to still be receiving some, but glide pathing down over the course of the year.
Great. Thank you.
Thanks Dan.
There are no further questions at this time. I would like to turn the floor back over to Mr. Dave Singelyn for closing comments.
Thank you, operator. Thank you to all of you for your interest this quarter, kind of a marathon call for us. We will see you next quarter. Have a great day. Take care. Bye, bye.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.