Greetings and welcome to the American Homes 4 Rent Third Quarter 2020 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. At this time, I’d like to turn the call over to Anne McGuinness, Manager of Investor Relations. Please go ahead.

Good morning. Thank you for joining us for our third quarter 2020 earnings conference call. I am here today with David Singelyn, Chief Executive Officer; Bryan Smith, Chief Operating Officer; Jack Corrigan, Chief Investment Officer; and Chris Lau, Chief Financial Officer or American Homes 4 Rent. At the outset, I need to advise you that this call may include forward-looking statements. All statements other than statements of historical facts 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. The current and expected future economic impact of the COVID-19 pandemic, including extraordinary increases in national unemployment, may pose headwinds to our future results. All forward-looking statements speak only as of today, November 6, 2020. 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 to GAAP of the non-GAAP financial measures we are providing on this call is included in our earnings press release. 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 americanhomes4rent.com. With that, I will turn the call over to our CEO, David Singelyn.

Thank you, Anne. Good morning and thank you all for joining us today. During one of the most challenging periods in the country’s history, I am so proud of how resilient our business has been and how we have continued to grow profitably. Demand for single-family rental homes is stronger than ever and we expect this trend to continue. Since our inception, we intentionally set out to create outsized shareholder returns through consistent operational excellence and long-term growth. Before the team reviews this quarter’s results, I will review how our prior strategic decisions have been the foundation to today’s strong operating performance and growth and what we expect for our future. Our strategic plan is anchored by four objectives or cornerstones. First, our high-quality and diversified portfolio is the foundation of our operating resiliency and growth potential. We intentionally created a portfolio diversification strategy that targets key markets with less economic volatility, above-average population and job growth and lower unemployment rates relative to the national average and our peers. This diversification strategy, with no single market representing more than 10% of our footprint, provides a more stable long-term performance with lower risk. In addition, our broader footprint delivers more growth opportunities across a wider array of market in contrast to our peers. Second, our best-in-class operating platform delivered leading customer service and consistent strong results. We have utilized technology to scale an industry that was previously believed to be un-scalable. Our highly-efficient technology-driven platform enhanced our ability to adapt quickly to COVID’s unforeseen conditions with few disruptions or additional costs. During these challenging times, we continue to deliver timely maintenance with no deferred workloads. That is what our residents need and count on. Third, our financial flexibility enables us to succeed and grow in every market cycle. We have the…

Thank you, Dave and good morning everyone. Single-family rental fundamentals are as strong as we have ever seen, and our best-in-class operating platform is translating this demand into superior results. Our success is directly related to the strategic operational investments that we have made over the past 10 years as we revolutionize the single-family rental industry. One of our original goals was to combine the inherent benefits of single-family living with the best parts of the Class A multifamily experience. For years, we’ve been offering quick and easy leasing, excellent service, high-quality assets and great locations. Our platform is empowered by a foundation of integrated technology and a focus on constant data-driven innovation. Our proprietary property management systems, including our fully-digital leasing experience and maintenance platform, balance an efficient centralized approach with a local touch. All of this enables us to deliver a best-in-class resident experience, while generating the highest fully adjusted EBITDA margins in our industry. Turning now to third quarter operating results, for the quarter, we achieved impressive same home core NOI growth of 4%, driven by 3.6% growth in core revenues and 3% growth in core property operating expenses. If we exclude incremental COVID-related bad debt, same home core NOI growth would have been nearly 6%. Again, because of the strength and quality of our platform, we’ve been able to capture the surge in demand and dot the typical seasonal trends. As a key example, rather than the typical end of summer leasing slowdown, we were able to drive an acceleration in same home average occupied days throughout the quarter from 96.4% in July to 97% in August and 97.2% in September. And this trend is held into the fourth quarter, with average occupied days of 97.2% in October. And on the run-rate side, our proprietary pricing…

Thank you, Brian and good morning everyone. As we capture the wave of demand using our superior operating platform, we are also translating strong fundamentals to fuel our outsized external growth. We strategically designed our growth programs based on a three-pronged approach, which positions us for consistent growth and to be able to take advantage of the most attractive growth opportunities through various points in the cycle. Today, I want to focus on our overall strategy, and Chris will provide specific details around our third quarter investments later in the call. As Dave mentioned in his opening remarks, we are actively deploying capital through all 3 of our external growth channels. First, our one of the kind build for rent AMH Development program, which I will expand on in a moment; second, our national builder program, which provides acquisition access to new construction homes and homebuilders and is a growth supplement to our AMH Development program; and third, our traditional channel, which consists of experienced in-market acquisition teams that shark suit existing inventory opportunities, adding additional market scale and density. Many years ago, when we began to formulate the prongs of our growth program, we knew that internal development was a key discipline that was necessary to unlock our ability to grow throughout various points in the cycle. And right now, historically low MLS and homebuilder inventories are creating a challenging acquisition environment, further reinforcing the value proposition of our internal AMH Development program and our strategic foresight on the opportunity. We began our AMH Development program 4 years ago. It took us years to create and nurture the land pipeline we have today. Using our proprietary data, we strategically selected and are active in 15 of our high-growth markets. We have assembled a team of accomplished industry leaders, built…

Thanks, Jack, and good morning, everyone. I will cover three areas in my comments today: first, a brief review of our quarterly operating results and growth activity; second, an update on our balance sheet and recent capital markets activity; and third, I’ll close with some final thoughts around our corporate strategy. And to kick off the quarterly discussion, I’d like to reiterate that our strategy and its foundational cornerstones have required years of investment, but those investments have now been made and they are paying off, as demonstrated by this quarter’s results. In the quarter, we generated net income attributable to common shareholders of $22.6 million or $0.07 per diluted share. And on an FFO share and unit basis, we generated $0.29 of core FFO, representing an impressive 6.7% growth over prior year and $0.25 of adjusted FFO, representing 4.7% growth over prior year. A key driver of this quarter’s results was our best-in-class operating platform that produced a strong performance within our same home portfolio, where we generated 4.4% growth in rental revenues, driven by a 160 basis point increase in occupancy and a 270 basis point increase in average monthly realized rent, which was further benefited by 10 basis points of contribution from higher fees and partially offset by 90 basis points of drag from COVID-related bad debt this quarter, translating into an overall 3.6% core revenue growth. On the expense side, we reported a modest 3% growth in core property operating expenses, comprised of 3.5% growth in property taxes, which was lower this quarter due to the timing of prior year quarterly comps, 7% growth in R&M and turnover costs comprised of an underlying 3.8% inflationary increase and approximately $600,000 of COVID-related bad debt on tenant utility reimbursements and a 1.1% combined decrease on all other core…

Thank you. [Operator Instructions] Our first question comes from the line of Nick Joseph with Citigroup. Please proceed with your question.

Thanks. Maybe just starting on operations, how many of your markets are back to normal in terms of late fees and other charges, maybe just outside of the CDC of fixed moratorium, but just trying to get an idea of kind of how much of a return to normal you’ve seen from an operating perspective?

Hi, Nick, it’s Bryan. We went back to normal operating procedures for late fees and month-to-month premiums across all markets in August. There are a couple of markets that have some specific rules, but it’s very small in nature, so probably best to consider that we’re operating normally, at least from that perspective across the whole portfolio.

Okay. So the fourth quarter should be fully back to normal outside just the eviction moratorium?

Yes, yes.

Perfect. And then maybe just on development. What is the kind of – how many days is it between a completion on average and somebody actually moving in? And then how does that compare to a turn time on somebody on a lease expiring to the new resident moving in?

Hi, Nick, this is Jack. Thanks for the question. It’s a little different. They both have about 9 to 10 days from lease sign to move in, and the days on market is pretty similar, 15 to 20 days. The only difference from move out to rent ready, there obviously is no move out, so you’re automatically rent ready and you have probably 9, 10, 11 days for getting house rent ready on a turn. So that’s really the major difference.

Thank you.

Thank you. Our next question comes from the line of Richard Hill with Morgan Stanley. Please proceed with your question.

Hi, you got Ron Kamdem on the line for Richard. Just going back to sort of the 400 homes that were delivered in the quarter, any sort of early read or anything performance-related that we can get on those homes? Just sort of one more color in terms of how are they leasing up. Do they come on target? Is it going according to plan? Thanks.

Yes, Ron, this is Jack Corrigan. Yes, everything is leasing up as fast as we could hope for. So that’s on target. We’re probably slightly ahead of where we projected the rents to be and the amount of time to lease-up. So as far as costs, costs are pretty close to what we underwrote, we have some variation occasionally. We expect to see more variation towards the end of the year due to a lumber spike, but that appears to be coming back down.

Got it. That’s helpful. And then if I can just turn to the same-store revenue growth than the 90 basis points from uncollectible rents, when does that normalize? And does that become a tailwind in 2021? Also, sort of similar question on wage fees, I know it was only at higher fees as only 10 basis points. But the same question is, does that also become a tailwind potentially in ‘21 as you sort of comp?

Yes. Good morning, Ron, it’s Chris. Let me start with that one. Maybe first on the bad debt, look, you’re exactly right. There will come a point where bad debt normalizes and the headwind will flip to a tailwind. The trick there is, obviously, none of us have a crystal ball on being able to predict exactly when that slip happens. But as we’re thinking about it going forward, there will come a point, collections will normalize and that will flip into a tailwind. And then on the fee side, you’re correct as well. Keep in mind, late fees and things like month-to-month premiums were only turned off for about 4 months or so. But as we think about that in the April to July context going into ‘21, that will be a favorable tailwind comp as we’re thinking about things on a year-over-year basis.

Got it. That’s helpful. That’s all for me. Thank you.

Thanks, Ron.

Thank you. Our next question comes from the line of Haendel Juste with Mizuho. Please proceed with you question.

Hey, good morning, out there.

Morning, good morning.

So I wanted to talk a little bit about your development on balance sheet, I guess, your development platform here. You added another 400 homes via your platform this quarter, put you on track to hit your full year 2020 goals that you outlined, and most of this was started pre-COVID and built through the COVID period. So sitting here today with the added momentum in the Sun Belt and a new capital source, I guess I’m curious how you think about the opportunity set over the next few years there. I assume you can easily match this year’s production again next year and see that as a minimum. I guess I’m more interested in perhaps what the upside limit is here. How much you’d be willing to push the lever, that lever here, given more experience as you played out and more capital sources with the new JV and what looks to be a very supportive demand backdrop as you discussed?

Yes. Good question, Haendel. It’s Chris. Why don’t – I’ll lead off on this one and then Jack can come in with some additional color. You’re exactly right. Look, we’ve been, as we all know, investing heavily into our own development program and the land pipeline for years at this point. And you also have another good point, our teams have been doing a great job keeping us on track to deliver between 1,500 and 1,600 homes this year, which importantly is the high end of the range that we are expecting just last quarter. And when you look at it on a year-over-year ‘19 into ‘20 basis, this year’s production represents a nearly 70% increase over last year, so we’re on a great trajectory. And as we all know, our objective is to continue growing our annual production volumes for years to come. Specifically, when we think about 2021, it’s probably a little bit too early to be talking hard numbers at this point, but I think we’d like to see our total production volume in, call it, the 2,000 homes area or so, which is a nice increase over this year as the total program number, including both homes on balance sheet and vendor development ventures. And then as we’re thinking about overall growth, of course, we’ll continue supplementing our development program deliveries with complementary acquisitions through our traditional and national builder programs.

Yes, Haendel, this is Jack. I would echo what Chris says. But as far as our infrastructure, we could handle probably 3,000 to 4,000 over 15 markets with the infrastructure that we have 3,000 to 4,000 deliveries. If we expand the number of markets, which we are always looking at the possibility of doing, then that could go higher.

Go it, got it. Okay. Thanks, thanks you for that. And just a question on operating strategy here, clearly, you guys have had a pretty favorable tailwind here, all-time high occupancies, retentions are very strong, favorable demand. So I guess, here we are in November, I’m curious how much more aggressively and how much longer do you think you continue to push pricing here or are you starting to get a sense that it’s kind of pull back a bit? So I guess the question is how much occupancy would you be willing to trade this year if you had to – as you push the rate or do you think you can achieve both getting continued rate increases and maintain occupancy?

Hi, Haendel, this is Bryan. We are really, really pleased with the demand levels that we’re seeing in the marketplace. Our record-high occupancy and record rate growth is an example of that. We saw fantastic increases in applications per rent-ready property in the third quarter, up almost 100% from 2019, and that’s translating into some really good pricing power. Our expectations are that this is going to continue. If you look at the expected difference in rate growth Q4 to 2020 to Q4 ‘19, we’re expecting a really large increase. So we see that pricing power continuing into next year. We’ve never been in a position of occupancy at these levels going in or closing out a year before, so I’m very optimistic about having that ability to push rents into the first quarter.

Go it. Thanks for that, Bryan. If I could follow-up, I see that October renewals were, I think, 3.5%. Curious, what were you asking to get that 3.5%? And then what’s the early read on November, December renewals? Thanks.

Yes. Our difference between ask and sign, it’s usually pretty tight, somewhere in the neighborhood of 10 and 20 basis points. There’s not a ton of negotiation. We’re pretty precise, I think, in our renewal pricing offers. We – the offers for November were up from October, slightly in the low to mid-4s. And then on our offers for December and January, there’s a slight increase off of the November asks as well.

Got it. Very helpful. Thank you, guys.

Thanks, Haendel.

Thank you. Our next question comes from the line of Buck Horne with Raymond James. Please proceed with your question.

Hey, thanks. Good morning. Congratulations on the results. I’m curious if you could dive a little bit further into the discussion about the migration patterns you’re seeing or picking up in your leasing traffic. To the extent you have it, I’m just curious, what percentage maybe of new leases are you seeing from houses versus maybe a more typical year prior? Or any other indication, what percentage upticks are you getting from former apartment renters? Any sort of quantification in terms of these macro trends I think would be really interesting?

Thank you, Buck. This is Bryan. Yes, we are still seeing increased application activity from people coming from multifamily. It’s probably most pronounced in a couple of states, Arizona, Georgia and Colorado come to mind or the increases are in the 25% to 30% range year-over-year? Again, as I mentioned in my prepared remarks, probably the most dramatic increases are the interstate movement that we’re tracking. As an example, our applications for prospects coming out of California and Arizona, is up 91% year-over-year. California to Nevada is an excess of 100%. And California to Texas is up over 90% as well. So we’re seeing a lot of increased demand for people moving out-of-state into what we think maybe higher quality life markets, certainly from a financial perspective. And then on the flip side, you get to the East Coast, and we’re seeing a big uptick in migration out of New York and New Jersey into Florida, with applications up into the state of Florida, over 120% year-over-year. So those are probably the most dramatic changes. We’re really pleased with the activity, and our expectation is that this is going to continue.

Yes. Wow, those are huge statistics. That is really helpful. I’m curious now with this shift in lifestyle, these shipping migration patterns and a lot of it driven by this work-from-home culture that we’re all living through, does that change how you think about the product you’re building development-wise? Are you getting requests from customers that they need more space or need a dedicated kind of work from home area? Are you building stuff like that in to the product now? Or how are you adapting the needs in to the development platform?

Hi, Buck, this is Jack. Thanks for the question. Yes, we’re building in extra bedrooms we are building in office nooks and office areas inside the home. We started – and when I say we’re building in, this thing really started in March, and it took us a little bit, maybe a month or two to kind of get the plans redrawn to have these things in it. And so we’re just starting to deliver homes with these additional features.

Great. Alright. Thanks, Jack. Appreciate that. And as you grew, is the land market changing at all in terms of pricing for the communities or maybe locations that you can build these communities at?

Yes. The – I mean, there’s a lot of competition. A lot of the national builders and local builders kind of shut down their land acquisition for 3 to 6 months from March, and now they’re trying to catch up, so we’re definitely seeing a lot of competition. It’s one of the advantages that we have is that we’re – we have a highly-diversified portfolio, including where we have our development platform. And so we’re able to get the number of lots that we may have to buy more in Columbus and less in Florida, but we’re definitely getting the number of lots that we’re anticipating.

Okay. Thanks guys. Congrats.

Thanks Buck.

Thank you. Our next question comes from the line of Jade Rahmani with KBW. Please proceed with your question.

Thank you very much. A couple of big picture questions, you all formed the company during the housing crisis in the 2009 era and at the cusp of the formation of the single-family industry for rent in terms of institutionalization. So the first question is, how do you compare the investment opportunities in front of the company today with that of the post ‘09 era? And secondly, if you believe investment opportunities are increasing in the SFR space, what strategies will AMH employ to differentiate itself and accelerate that growth?

Hi, Jade. It’s Dave. Good morning. There is some – a lot of comparisons between the two, there are some differences. But the one thing that differentiates American Homes today is that we have 3 different acquisition channels, so we can be nimble and we can take advantage of any opportunities that come about, and we have the capital in place and access to capital that we need to take advantage of those opportunities. Today, the acquisition market of existing homes as well as those from national builders is a little more challenging, a little tighter. The build-for-rent is our best product, but we’re still getting opportunities through the other channels. As things change in the future, for any reason, we’re in position to take advantage of those opportunities.

And secondly, not a related question, but what are your expectations for bad debt expense in the coming one to two quarters? Do you expect a continued downward trend or should we be thinking about something similar to what we saw in the third quarter?

Yes, Jade. Good morning. It’s Chris. Really good question, difficult to answer, there is just a number of factors outside of our control as we think about November and December. What we do know, however, is that the fourth quarter is off to a really good start. You probably caught this in my prepared remarks, but October collections are actually running at 101% of second quarter payment patterns. With that said, as we’re thinking about the fourth quarter, I would probably expect to see slightly less rollover revenue into the fourth quarter compared to what we saw in the third quarter, just given comparisons and revenue recognition third quarter versus second quarter. And like I said, it’s really difficult to speculate. If I were – if I had to, and I was holding everything constant with today, I could see fourth quarter bad debt kind of in the two’s. If I were hypothetically holding everything constant with today, but again, it’s a really area to predict, but what we do know is that, so far, collections are trending well, and October is looking good.

Hey, Jade. It’s Dave. Let me just follow-up with a couple of thoughts on that. I agree with Chris, it’s very difficult to predict the future and there is a lot of factors outside our control, obviously. But if you look at our portfolio and our tenant underwriting, our portfolio being well-diversified, it’s in markets, I think we presented this in a couple of our slide decks previously. With our underwriting of the markets looking for high job growth as well as high population growth, we have seen significantly below national average unemployment in the markets that we have our homes. In fact, it’s better than the rest of the residential public companies, with the exception of one multifamily company. So our underwriting is very strong. Our tenant underwriting – our market underwriting is strong, our tenant underwriting is strong. And all of those are going to benefit us as we navigate these uncertain waters.

Thanks for the update.

Okay, thank you.

Thank you. Our next question comes from the line of Alua Askarbek with Bank of America. Please proceed with your question.

Hi, everyone. So just going back to market a little bit again, I know things are much better in the fumble and things are outperforming. But are there any markets that are new to your watch list or any markets that are off of your watch list? And then are there any markets that surprised you with their performance this quarter that you did not expect?

Hi, Lou, it’s Bryan. We are really pleased with the performance of all of our markets on the occupancy side. We’ve seen gains in each of the markets in occupancy year-over-year, and the demand that we talked about earlier is really throughout the entire portfolio. If you want to talk about the markets that may be a little bit more challenged on the – from a collections perspective, it’s similar to what we saw last quarter, a little bit in Las Vegas, Houston and to a certain extent, our Chicago markets, but they’re still holding up well. They would be kind of at the lower end of the pack from a collections perspective.

Got it. Thank you. And then also looking at the utility reimbursement, I know the bad debt has decreased from 2Q, but how are the collections in terms of the utility reimbursements compared to the rent collection? Because I think I remember you guys saying there was a bit of a difference.

Yes. Directionally, Lou – this is Chris. Directionally, we’ve seen continued strength on both sides. We obviously saw some nice continued collections on both fronts into the third quarter, kind of this concept of rollover receipts from the second quarter. But directionally, I’d say they’re both trending very similarly from a quarter-over-quarter perspective.

Okay, thank you.

Thanks, Alua.

Thank you. Our next question comes from the line of Rick Skidmore with Goldman Sachs. Please proceed with your question.

Hi, good morning. Bryan, if I could just follow-up on the migration pattern question that you answered, what’s sort of the absolute delta that you’re seeing, those 100% increased numbers, is that off a base of 100, off of 1,000 in terms of the application numbers?

Hi, Rick, yes, I don’t have the exact numbers in front of me, but all of the statistics that I cited were significant increases off of a significant base. So thinking in terms of doubling off of the 100 for a particular market would be appropriate.

Okay. And then, Bryan, just on occupancy, how much further do you think you can raise occupancy? And what’s sort of that frictional number for your portfolio, do you think?

Yes. We’ve seen fantastic improvements in retention. We still think there’s a little bit of room there. Our pre-leasing efforts are starting to really pay dividends. We’ve reduced our churn times dramatically year-over-year. So I think there still is a little bit of room, obviously, it’s a different scenario when you’re in the 97s as when you’re in the 95s, but we’re optimistic that we can maintain and maybe pick up a little bit of incremental occupancy as we go forward with this robust demand.

Great. And then, Chris, one question for you, how do you think about – or how should we be thinking about real estate taxes as we go into 2021? Thanks.

Yes. Good morning, Rick. Good question. It is – I’ll start by saying it’s a little bit early to provide any hard quantitative thoughts at this point. Remember that this is the exact time of year where we are working very closely with our team of property tax experts and end market advisers to form a view on property taxes, including assessed value trajectories and even rates going into next year. And next quarter, I will be able to provide a more precise and quantitative thoughts on it. With that said, from a high level where we stand now on the valuation side, I think it’s no surprise that we continue seeing strong home price appreciation, and so I would expect that to likely continue to pressure property tax values into next year. However, I would remind everyone that we have 1 of the best property tax teams in the industry in a super robust appeals process that each and every year files upwards of 25,000 individual property tax appeals. And so in this environment of home price appreciation, we will definitely plan to continue leveraging and utilizing that into next year. And then on the rate side, it’s just a little bit too early to speculate on that, quite frankly. But we’re watching the situation very closely with our dedicated team of experts like I said we will be able to provide another update with more formal thoughts on property taxes next quarter.

Thanks, Chris.

Thank you. Our next question comes from the line of Douglas Harter with Credit Suisse. Please proceed with your question.

Thanks. I was just wondering if you have or could share with us any kind of early results of the initial build-to-rent portfolio, kind of how retention looks and the ability to get rent renewals, how that looks relative to kind of the other parts of the portfolio?

Yes. It’s – thanks for the question, Douglas. It’s pretty early to tell. We have a relatively small group that we can compare to same home or that are in our same home portfolio. But as far as that group is, we are seeing similar retention rates and similar increases. And it’s market specifics, so if we had a development in Arizona, we are seeing significant increases in more significant than maybe other areas. The one area that we are seeing that’s very positive is that the turn and maintenance costs are running about 25% of what our same home portfolio is running.

Great, thank you.

Thank you. Our next question comes from the line of John Pawlowski with Green Street Advisors. Please proceed with your question.

Thanks for the time. Just a few questions for me. Dave, on your portfolio, market footprint, there is the amount of capital flowing into the space, making take a step back and evaluate maybe more meaningful market shifts, market dispositions as you see it today?

No. At this time, we are very – we have looked at our markets, so If you go back a couple of years ago, we had more than 40 markets, and we have done a little bit of pruning. Today, we are very happy with our footprint. Not only is it performing very well as you see in the numbers, but we also – it also gives us a lot of growth opportunities throughout the portfolio. So at this time, I don’t see it is doing any meaningful pruning of markets. There will be properties here and there consistent with our path as to how we do our asset management, and there will be properties in each of the markets that will get identified for a number of reasons to be disposed of, but it will be minimal against the total number of homes that we own.

Okay. And then second question, Jack, could you give us a sense for how cap rates have trended in some of just your top few Sun Belt markets in recent months or recent quarters?

Yes, that is a good question because you are seeing increased prices for acquisitions, but you’re also seeing increased rents, so we are trying to be balanced in how we are underwriting and acquiring the properties. But I would say there’s a little pressure downwards, but not a lot because of the rate increases.

Alright thank you.

Thanks John.

Thank you. Our next question comes from the line of Dennis McGill from Zelman & Associates. Please proceed with your question.

Hi, thank you. Dave, maybe similar question just on the cost of capital, when you look at all the interest in the space now with built-for-rent or just in general, acquiring portfolios, how would you describe what cost of capital has done over the last year and if you speculate what do you think it would do over the next year or two?

Yes. There’s – you are absolutely correct, Dennis. There is more capital looking at the single-family-for-rent concept. In particular, a lot are looking at the built-for-rent concept, specifically. Today, we are sitting in a place that we have got good currencies for ourselves, both in – in all of our channels, whether it’s the common, the debt and there is a lot of JV interest that is expressed to us by a number of parties. The difference between American Homes 4 Rent and our peers is those cornerstones that we talked about in our prepared remarks we can marry the development program with an operating program. And as Jack previously discussed, we have the ability to basically have a feedback loop as to what’s going well, how do we need to modify, whether it’s home designs or marketing programs because we control all the different platforms ourselves. But there is more capital, keep in mind that this is a very fragmented market. We own less than 1% of the assets, less than 0.5% in all our peer zone with us, all the institutional peers own less than 3%. So there’s a lot of opportunity out there. I am very pleased with where we are sitting today. The investments of the prior years are really putting us in a great position going forward.

How likely would it you do more joint ventures over the next year or two versus growing organically or with partners you already have?

Yes. Look, the joint ventures are one channel, and joint ventures at times bring more than just capital to the table. And there are reasons to do joint ventures. We have a very high – our joint venture partners to date have been very high quality, and they have been – they brought more to the table than just capital. They bring opportunities, etcetera, so teaming up with them is a lot more than what you see in the financial statements. At the end of the day, we – our preference is to do as much as we – as much as possible on our own balance sheet, but there are times that there will be other reasons that we will consider joint ventures as well.

Okay. That’s helpful. And then just one more, I’m not sure if it’s for Chris or Bryan, but just looking at recurring CapEx this quarter and thinking about the pressure on usage of the home with work from home, if that does end up becoming more permanent, how are you thinking internally about underwriting those expenses on a go-forward basis? And also, any additional color you can provide on the increase that you did see this quarter? Are you seeing that geographically concentrated at all or fairly distributed?

Dennis, this is Bryan. The overall – the CapEx for the third quarter came in line with our expectations as we signaled in prior quarters and through some of our presentations. I don’t think it’s specifically prevalent in any markets, but as an example, we anticipated extra stress on the systems with people working from home with remote learning, people not going on vacations in the summer. And it tracks with our data on the utility side, too, so for example, we saw increases in electricity bills in Arizona 30% this summer. And then there is subsequent replacements on HVAC that follow that. So we did anticipate it, it came in line with what we expected. The difference between the second quarter and the third quarter, there was an increase in some appliance replacements as part of these systems, and there’s been some pricing and supply pressures on appliances nationally, so that contributed a little bit to that increase. But again, it was expected. We made a commitment at the onset of COVID to provide excellent service to our residents. We’ve implemented, we’ve executed the maintenance program from the beginning, as Dave mentioned, with no deferred work orders, and there’s been a little bit of a premium in some cases on the replacements.

And Dennis, this is Chris. If I could just add.

Okay.

Sorry, do, I am just going to add, if you hold aside the COVID piece of recurring CapEx, you can see disclosed in the footnotes to the table. Underlying CapEx is running right around the 5% area, which is much closer to inflationary increases and actually very consistent with what we were expecting at the start of the year as well. I am sorry, Dennis, go ahead. I cut you off.

No, it’s okay. We can follow-up offline. I appreciate it. Thanks again.

Thanks Dennis

Thank you. Our next question comes from the line of Tyler Batory with Janney Capital Markets. Please proceed with your question.

Hi, good morning. Thank you. Just to tie together a number of the prior questions, I appreciate you can’t give a specific guidance, but as we look at the fourth quarter and really into 2021, what are your thoughts about the seasonality of this business? I mean should we just throw out the historical because this is a new normal or how should we think about that in terms of occupancy and rent growth, but also curious on the cost structure as well?

Yes. Good morning, Tyler, it’s Chris. Definitely for this year, as Brian talked about in his prepared remarks, I think the theme of the fourth quarter is that we are bucking the typical seasonal trends, right? As we know traditionally, our business, our leasing activity, et cetera, begins to taper and slow as we enter the end of the summer. Certainly, as we cross over Labor Day, kids go back to school and things definitely seasonally slow down in the fourth quarter. As you can tell, we’re not seeing that this year with occupancy continuing to hold in at record-high levels. Brian mentioned this in his prepared remarks, we’ve held our 97.2% average occupancy into October, and we are seeing acceleration in blended spreads as renewals are returning to normal levels throughout the fourth quarter, and we’re continuing to push on new lease rates. And our expectation there for the fourth quarter is that we’ll see 6% plus. I don’t think we’ve ever seen that before. And so clearly, I think our expectations are demonstrating that the seasonal trends are being bucket for this year. What that means for next year and beyond, honestly, it’s difficult for us to speculate. And it is likely that some portion of the seasonal trends may return, but we really don’t know. Obviously, the world is different these days with work from home and everything else that the pandemic has brought on. And so hard to say. But clearly, for this year, we’re definitely looking at that seasonal trend heading into the fourth quarter.

Tyler, it’s Dave. Let me just add a couple of items to that. The trends that you are seeing are not new. When we got into this industry or into this sector 10 years ago, there were 13 million single-family rentals. Today, there are 17 million single-family rentals, and the occupancies are stronger today than they were. Institutionally, I mentioned that we have a very small percentage, less than 3%, but we did, as an institutional group, shine a spotlight on the value proposition that single-family rentals brings. And COVID has actually increased that awareness of single-family rental, whether it’s the social distancing ability, etcetera. Jack or Bryan discussed migration trends, and migration trends from 1 state to another are pretty permanent in most cases. People are not going to move to another state. And then when the COVID prices is back, all move back. So we’re seeing a lot of migration trends into our markets. The demand that we see today is totally insatiable, and it’s continually growing. Whether in next year, there’s a little bit more seasonality than this year, as Chris said, that is a wait and see call. But the demand in this industry is getting stronger and stronger. It’s a continuum of 8 to 10 years. COVID has just accelerated it.

Okay, great. And just as a follow-up question, can you elaborate a little more on input costs, specifically in the build-to-rent channel, just curious if that’s influencing your underwriting at all?

Yes. There is really only been 1 item that’s caused any disruption to our projections of costs, and that’s lumber. Lumber began to have a shortage and started spiking in July. A year ago, it was about $375 per 1,000 board feet and July it started moving up, peaking in September at $950, which added about $15,000 per home to our costs. That has now started to come back down as more of the plants or mills got online. This morning, it was at $567, so it’s – we expect it to come back down to normal, and we expect the price disruption or the cost disruption to be relatively minor over just a very short period of time.

Thanks guys. That’s all for me. Thank you.

Our next question comes from the line of Ryan Gilbert with BTIG. Please proceed with your question.

Hi, thanks good morning everyone. First question for me is on the – another one on the built-to-rent portfolio. I guess looking across your markets, how do you feel like the portfolio competed against comparable new construction for sale in the third quarter? And maybe anything that you feel like differentiates your product against for sale, new construction, aside from the fact that it’s a rental?

Yes. I will take that, Ryan. Thanks for the question. I think we competed very well. I think the – whether you’re in the market to buy a home or to rent a home, they’re both the – I mean, the builders are selling as fast as they can build them, and we’re leasing them as fast as we can build them. So it’s hard to say we’re doing better, but we’re doing just as well.

Okay, great. And then looking at deliveries from the national builder program, it was a bit better than I expected given the strength in the Market Day. You just talked about, was that all pre-COVID or I should say, I guess, pre-early spring or spring backlog? And how should we think about deliveries from that program going forward? Just I think in the prepared remarks, you said that sourcing acquisitions in both national builder and traditional channels were getting a little more challenged?

Yes. Well, I will answer the first part of the question. Most of our homes that we build are – we’re planning two to three years out because there’s horizontal development and getting all the permits and then the verticals from...

For the national builder. For the national builder program.

For the national builder program, we kind of shut that down for a while from March until, I believe, June or July, is my recollection and just in the last quarter or so, pick that back up. And we’re getting some response, but it is very competitive, and the builders are seeing a lot of retail buyers out there, but I think they will still like the guaranteed purchases of an all-cash buyer, so we’re still getting our share of those products.

Okay, got it. And then just very quickly, property management down in the quarter, how should we think about the growth rate on that expense line item going forward?

Good morning, Ryan. It’s Chris. There are a couple of small drivers on the margin. Realistically, it has more to do with the timing of prior year quarterly comps. And if you look at it on a full year basis, we’re running 2% to 3%, and that’s probably the right way to think about it on a full year kind of something in the inflationary environment, which is some timing and quarterly comps, which is what we saw this year – I mean, sorry, this quarter.

Okay great thanks very much.

Thank you. Our next question comes from the line of Keegan Carl with Berenberg. Please proceed with your question.

Hey thanks for taking my question guys. So first off, could you give us any color on the demographics of new applicants and residents? Maybe what jobs and industries are they skewed to? And how would their rental coverage compare to your existing rents resident?

This is Bryan. Yes, it’s a very good question. The profile of the applicants is remarkably consistent, pretty pandemic to the current. We’ve seen a slight uptick in income, but the credit scores, for example, are right on top of each other. So the quality of the applicant has remained high, and there really isn’t any major differences between what we – between the applicants who were getting approved prior to the pandemic as to those that are getting approved currently.

Okay. And just to switch gears a little bit. I mean, given the potential for a second lockdown in certain markets, what sort of plans do you guys have in place? Would you expect to see softness in rental increases again or maybe not as much just given where you’re seeing demand at kind of the strength of your residents?

Yes. It’s a good question. Again, it’s difficult to predict the future on this. I think the initial shock and all of the uncertainty that came with it is going to be unique. Subsequent changes that we’re seeing, there’s some pressure in Illinois, for example, on bars and restaurants and some shutdown that we’ve noticed. But in terms of predicting as dramatic of an effect, if there happens to be a second wave, I think it will be muted a little bit. Our resident base has been extremely resilient. We talked about the benefit of diversification. And also, we are very pleased with the fact that we are not susceptible to any specific industries necessarily. So I don’t know exactly how dramatic or to the extent of a second wave would be on performance, but my instincts tell me that it won’t be as dramatic as the first.

That’s it for me thanks guys.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I will turn the floor back to Mr. Singelyn for any final comments.

Thank you, operator. This quarter has been a very strong quarter in light of the COVID headwinds. It’s really a testament to their insatiable demand, as I indicated, for single-family rentals, and we see that actually increasing. As strong as this quarter is, the management team here is actually more excited about our future and what potential lies with this demand and the fact that all of our systems are in place and ready to take advantage of any opportunities that present themselves. I thank you for your time, and we will talk to you guys next quarter. Take care. Bye-bye.

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