Kelly Residential & Apartment Real Estate ETF
Q2 2020 Earnings Call Transcript

Published: 10 Aug 2020

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Front Yard Residential Corporation Second Quarter 2020 Conference Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] I would now like to turn the conference over to your host, Ms. Alysia Cherry, Head of Investor Relations, please go ahead.

[Alysia Cherry:]

Thank you, Jerome. Good morning. And thank you for joining us for Front Yard’s Second Quarter 2020 Earnings Conference Call. Joining me on today's call is George Ellison, Chief Executive Officer; Miles Adams, Senior Vice President of Property Operations; and Robin Lowe, Chief Financial Officer. I'd like to guide everyone to the earnings slide presentation available through the Investors section of our website at frontyardresidential.com. These slides were created to accompany our remarks and provide additional information investors may find useful. I'd also like to inform you that our comments today may contain forward-looking statements relating to the future performance of our business, the company's financial results, capital allocation and other nonhistorical information. These statements may involve risks and uncertainties that could cause the company's actual results to differ materially from those discussed in the forward-looking statements, particularly in light of the ongoing COVID-19 pandemic. We describe some of these risks and potential differences in our earnings release as well as the company's filings with the SEC, including the Form 10-Q we filed today. We may also discuss certain non-GAAP financial measures. You can find additional information on these measures, including a reconciliation to GAAP, within our earnings release and earnings presentation located in the Investors section of our website. I'll now turn the call over to George Ellison, Chief Executive Officer. George?

[George Ellison:]

Thanks, Alysia. Good morning, everyone. We at Front Yard Residential wish all of you the best in these challenging days. And as the country is in the process of reopening, we remain focused on the safety of the families in our homes, as well as the safety of our teammates around the world. These are incredibly challenging times. But nonetheless, our teams have remained determined and committed to the task at hand, serving their families and producing results for our shareholders. With that said, I'm happy to report that the second quarter of 2020, was very strong. In fact, our performance improved significantly even compared to our record first quarter. We think there are clear macro trends supporting our business and the pandemic has only accelerated them. We can see some of that positive impact in our Q2 numbers. Additionally, Miles and his team continue to tighten up operations and as good as things are, we believe there's still room for improvement. So let's get into the numbers. If you look at Page 4, you will see a lot of information, but rental revenue of $55 million; stabilized rental NOI, $33 million; stabilized rental core NOI margin, 61.5%, core FFO $0.18 per share; AFO, $0.09 per share; stabilized rent growth, 4.1%; stabilized lease percentage, 98.3%; stabilized rental turnover, 7%; truly a very strong quarter. I'll leave the details to Miles. But as we start the third quarter, July numbers continue to be strong as well and demonstrate the dedication of our team and the resilience of our business. Page 5 is our company's snapshot. Compared to a year ago, this quarter’s occupancy is up significantly, turns are down and blended rent growth remains strong. As a result, improved NOI. Miles?

[Miles Adams:]

Thank you, George. And good morning, everyone. The second quarter has been a story of continued progress with improvement in nearly every operating metric of our company. We've hit record highs in occupancy, grown rents at an accelerated pace, lowered expenses and turnover and improved NOI margins, all while facing the ongoing global pandemic. While we improved our operations, it has been and continues to be paramount that we protect our team members and the families in our homes. In March, we began to take steps to respond to the COVID-19 pandemic. Our highest priority was to take significant action to preserve the safety and wellbeing of our employees and residents. To that end, we modified the way we interact with residents to limit physical contact, limited maintenance to the central work orders and encouraged our employees to work remotely. To further support our team, we've provided our employees with enhanced leave and sick time policies and additional COVID-19 paid time off among other benefits. In addition, during these unprecedented times, we focused on helping our residents in need to stay in their homes and maintain their health and safety. To that end for Q2, we offered residents payment plans, waived delayed fees and have not pursued remedies for nonpayment of rent under our lease agreement. Those actions were not without cost as it resulted in a reduction in other income and same-store revenue growth of approximately 125 basis points. However, we felt strongly about demonstrating our significant commitment to the social wellbeing of the communities we serve. The pandemic has also highlighted the value of and demand for our homes. Our occupancy has increased substantially since March. In fact, our stabilized lease percentage rose from 97% at March 31 up to 98.3% by the end of June, with the average occupied days, a record high of 96.7% for the month of June. On a same home sequential quarterly basis, average occupied days improved by nearly 200 basis points from 94.3% up to 96.2% for the quarter and compared with Q2 2019 it improved 390 basis points. As of July 31, our stabilized leased percentage continued to rise to 98.7%. And our average occupied days for July climbed to 97.2% for the month. These gains were driven largely by improvement in our Texas, Midwest and Tennessee markets. From March to June monthly average occupied days grew in DFW from 92.6% to 96.3% and in Houston from 91.3% to 97%. For Minneapolis, our second largest Midwest market, average occupied days grew 420 basis points to 97.5%. And St. Louis grew 260 basis points up to 96.2% for the month of June. Average occupied days for our portfolio second largest market, Memphis, average is an astounding 97.2% for the quarter. For the month of June, our top 10 largest markets all had average occupied days in excess of 95%. Growth in demand has accelerated significantly this quarter. In fact, our one key measure of market demand that we track applications received per market at home, we saw nearly a 100% increase in demand across our portfolio between the end of March, as compared with the months of May through July. Certainly seasonal summer demand does play a part in this increase. However, we believe there is a fundamental shift in consumer demand for suburban, single-family rentals, relative to other more crowded housing alternatives that has been accelerated by the pandemic. We believe with the continued uncertainty due to the pandemic that this shift is not temporary in nature and will continue for the foreseeable future. While we continue to grow our occupancy, we also improved and accelerated our rental rate growth. Q2 blended rents grew at a rate of 4%, up from Q1's 3.2%. This was comprised of renewal rent growth of 4.1% and re-lease rent growth of 3.9%, which was up substantially from Q1s average release rent growth of 1.4%. Blended rent growth, further improved to 4.7% in July comprised of renewal rent growth of 4.3%, while re-lease rent growth accelerated further to 5.6%. Overall, we are very pleased with collection rates, given the uncertainty caused by the pandemic. Although we did see an increase in bad debt during the quarter of approximately 0.6% as a percentage of revenue, we suspended evictions and the assessment of late fees for Q2. Still June collections at 30 days were 99% of the trailing 12-month historical average. May collections at 60 days and April collections at 90 days were in line with the trailing 12-month historical averages. July collections remained in line with our Q2 collection rates and August is off to a similar start. With solid collection rates and increase demand for single-family homes retention rates have continued to improve this year. Even though the number of lease expirations during Q2 represents our highest quarter, stabilized rental turnover remain quite low for the quarter and actually fell from 7.2% for Q1, down to 7%. We continue to believe turnover will remain lower than normal in the near-term due to concerns related to COVID-19. This will benefit by physical occupancy, rental rate growth, and turn costs in the near-term. On a same home basis for the quarter, year-over-year net operating income grew very strong 8.7%. Core revenue growth of 5% was driven by 390 basis point increase in average occupied days, combined with strong rental rate growth of 4% on a same home basis. Same home operating expenses declined by 0.5% as controllable expense net of charge-backs declined by 7.3% partially offset by 6.2% increase in non-controllable expense. Cost to maintain homes, net of charge-backs declined by 12.3% over this same period. Through a combination of additional staff and route optimization, we've seen an increase in the volume of in-house performance of work orders and turns at a corresponding reduction in cost to maintain our homes. Prior to the suspension of non-emergency work orders due to COVID-19, we were performing approximately 47% of our work orders in-house. As a result of the increased efficiency, R&M per home declined by 11.1% on a same-home basis year-over-year. So let's recap. Demand has increased substantially with applications received from marketed home, up almost 100%. Portfolio average occupied days was up almost 200 basis points quarter-over-quarter at 96.2%. Stabilized lease percentage is at record levels and was 98.3% at June 30th. Each of these metrics continue to improve in July to 97.2% and 98.7% at July 31st, respectively. Blended rent growth is accelerating and improved from 3.2% for Q1, up to 4% this quarter with July coming in at a healthy 4.7%. Even though we suspended late fees, demands and eviction filings, collections were strong during the quarter and were consistent with historical performance. Turnover dropped to 7% for Q2 from an already low 7.2% in Q1, even though expirations this quarter were at their peak for the year. NOI on a same-home basis grew 8.7% year-over-year, driven by revenue growth of 5% and a 7.3% reduction of controllable expense net of chargebacks. To summarize, this quarter's results reflect a sustained incremental improvement in our key performance metrics and a team that remained dedicated to serving shareholders, residents and our communities in a time of significant uncertainty. We look forward to continuing to raise the bar and are excited about the future of our company and industry. I will now turn the call over to Robin.

[Robin Lowe:]

Thanks, Miles, and good morning, everyone. Today, I will cover the financial results for the quarter, touch on our balance sheet and provide an update on the activity in our portfolio. GAAP net income for the quarter was $4 million, including the $25 million payment received from Amherst during the second quarter. Rental revenue was $55.1 million, up 1.5% sequentially and up 6.9% year-on-year. Stabilized rental net operating income was $33 million, up 4.1% sequentially and up 9% year-on-year. Stabilized rental core NOI margin of 61.5 %, up from 60% last quarter. Core FFO was $0.18 per share, an increase of $0.06 over last quarter and up $0.13 over the second quarter of 2019, reflecting the very strong operating performance that Miles has discussed, the positive impact of lower interest rates on our floating cap rate debt and lower ordinary course G&A. For the first time this quarter, we're presenting same home metrics. Same-home core NOI margin was 61.6%, up 1.7% sequentially and 2.2% year-on-year. More details on same-home performance can be found on Slides 13 to 20 of our supplemental deck. Turning to the balance sheet. Approximately $805 million or 49% of our financing was either capped or floating, meaning that we saw an interest expense benefit due to the recent rate reductions. In the second quarter, we saw an interest expense reduction of approximately $1.4 million compared to the first quarter. During the second quarter, we extended our line with Credit Suisse for another year to 29 June, 2021. This is our earliest debt maturity. The next being the $100 million term loan agreement that matures in April 2022. At the end of the second quarter, the combined weighted average time to maturity of our debt was 4.4 years, and the weighted average interest rate was 3.46%. Turning to liquidity. At the end of the second quarter, we reported $109 million of unrestricted cash. In addition, we have access to a further $20 million of revolving unsecured credit under the promissory note agreement. We believe this puts us in a strong position not only to weather any potential short-term challenges in our industry, but also to take advantage of any potential attractive opportunities. During the quarter, we sold 30 non-core homes that did not fit our rental criteria. Net sale proceeds were approximately $5.9 million with a gain of approximately $0.3 million over GAAP carrying value. Finally, on Slide 21, we provide details of investment cost and home price appreciation by key markets that we believe provides support for a baseline value of our portfolio. I'll now turn the call back to George.

[George Ellison:]

Thanks, Rob. Thanks, Miles. In conclusion, a truly excellent quarter for Front Yard Residential. We've seen tremendous progress in our operational performance over the last 12 months, and we believe there's room for further improvement, given the impact COVID-19 will still have on our business. On a macro level, the fundamentals of single-family rentals as an investment thesis are stronger than ever, and they've continued to improve in the midst of this pandemic. We're now starting to see how defensive a business this is. Before, this was just a theory. Now it's a fact. Access to clean, safe and affordable housing is undeniably important, especially now. We're extremely proud to be able to serve our communities and are motivated by the huge potential that exists in the business going forward. We look forward to speaking to all of you and even more, we hope to see you in person soon. I'll now turn it back to the operator, and we can open up for Q&A, please.

[Operator:]

[Operator Instructions] Your first question comes from the line of Anthony Paolone with JPMorgan. You may now ask your question.

[Anthony Paolone:]

Hey. Thanks. Good morning and appreciate all the added disclosure in the packet. My first question is, when I'm looking at the core revenue picture that you're showing, like, it looks like your rent growth was 3.6%, your occupancy was up to 390 basis points so you get somewhere in the mid-7s just from those two numbers combined. How do we reconcile that with the 5% same-store revenue growth? Is the difference the bad debts? Or what's sort of the drag there?

[Miles Adams:]

Well, we did suspend – as I mentioned in my remarks, we did suspend charging late fees. That was about 125 basis points, and I mentioned about a 60 basis point increase in bad debt as a result of the pandemic. So yes, I would say that those two factors account for the difference.

[Anthony Paolone:]

Okay. And so what were the – you kind of gave the collections on relative to history based on the incremental bad debt. Can you talk to just like what the nominal figures were for the quarter and for July?

[Miles Adams:]

So you're talking about day 30, 60, 90? Is that what you're looking for?

[Anthony Paolone:]

Yes. Just how much of, say, Q2 rents were collected as a percentage of what's billed, basically.

[Miles Adams:]

So very consistently, April through July at day 30, we're right at that 92% mark. Each month, some – a little over 92%, but very tight pattern there. At day 60, we're in that – just shy of 96%. And then from a terminal basis or 90-day collections for April, are right around that 97.5%. So that's where we are on those collections.

[Anthony Paolone:]

Okay. And so it sounds like bad debts for the second quarter, that you took something around a couple of points or a point or two in total?

[Miles Adams:]

Right around 2.5. What I would tell you also is that on a net basis, our AR at June 30 as compared to December 31 actually went down. We collected and/or reserved more at June 30th than December 31. So I feel very comfortable that our finance team has appropriately considered the risk of collections and provided for that.

[George Ellison:]

I think the soundbite Tony is – which is, I think, pretty powerful for this asset class is when this started, Miles, Rob and I were modeling out with the team what we thought the changes in this metric might be. And as you know, no one knew. Is it going to be – was that 2.5 going to be five or 10 or 20 or 25? No one knew. And the most powerful news is that, I would say, usually around day 90, you see money stop coming in. It's still trickling in past day 90. As he said, April – so April was the first month. And April actually didn't have a whole lot of help from the checks that had started coming in, in May. In some states like Florida, it's still delayed. So I think the powerful soundbite is if we hit 2% or 1.5% bad debt, that's a great result. And April's at 97.5%. That's very surprising – very pleasing, but very surprising, and May and June and July are on the same vector.

[Anthony Paolone:]

Got it. And I guess on that note of the checks coming in. What have you all done? Or what kind of insight have you been able to gather in terms of the effect of the stimulus checks on your resident base? And any change there ceasing those checks? Like what you think the effect might be?

[George Ellison:]

Miles, I'll start that and then turn it to you. It's very difficult to tell exactly, and we get that question all the time. And people say, how much of an effect do you think the checks have had on your business? You can't sort of ask people that question directly. It's probably bad for them. So I think we would all agree that they're incredibly helpful. Obviously, there's some pushing and shoving going on this weekend over the continuation. So I think that might tell us something as we move forward. Is it 600, is it 200, is it 300 plus 100 from the state? As I read about all these different amounts, so it has had a positive effect, I'm sure. We can't really see – can't tell you a percentage of how much of the checks to come in or going towards our rent. We just don't know. So I would say it's definitely been helpful. But I think as we move throughout the year, which is why the industry and we all still need to be prudent and cautious, is just going from six to four change things. While at the same time, there was a pretty positive unemployment report. So maybe people are slowly getting back to work. I think it will sort of balance out. Miles, would you agree with that?

[Miles Adams:]

I think that's right. And the only data point that we have thus far is that through day eight, our collections are on the higher end of where they've been at that point over the past 12 months, even looking back into 2019. So far, so good in terms of August. As George mentioned, we don't know how the actions that we're taking this weekend will play out and what impact they'll have and when the monies would be received and in what form. But we're going to continue to reach out to our residents and have a dialogue and work with them as best we can as we did during Q2 and make sure that we're doing the right thing for them and for the company.

[Anthony Paolone:]

Okay. And then just last question, I think, probably for Robin. I think you guys called out about $5 million, I want to say, for just the various expenses in the quarter related to the deal and whatnot. If we pull that out, is that a fair overhead run rate for the rest of the year? Or anything else we should think about there?

[Robin Lowe:]

Yes, I mean, if you pull that out, I think, you can see that on Slide 11, the non-ordinary cost legal and professional fees, $5,358. You actually see the normalized G&A actually dropped by about 9% during the quarter. So we are very focused on that and continuing to become more and more efficient on our day-to-day operations. So yes, we're very focused on becoming more efficient in that respect.

[Anthony Paolone:]

Okay, great. Thanks for your time.

[George Ellison:]

Thanks Tony.

[Operator:]

Your next question comes from the line of Douglas Harter with Crédit Suisse. You may now ask your question. Thanks.

[Douglas Harter:]

Thanks. Yes, I guess, given the combination of the uncertainty you were just talking about with feature rent collections, combined with the improved performance, can you talk about how you and the Board are thinking about the dividend going forward?

[George Ellison:]

Yes, I think that's, I was actually sort of a segue into that topic or giving you some foreshadowing on that. Obviously we've been tremendously focused on getting the business tight once the Amherst deal went away and we were starting to get stronger into last year's fourth quarter. If you remember, that's when we kind of predicted the third quarter was the low point. So all we're focused on is trying to run the business tighter and tighter. And so obviously that's happening. So that's good. And that's a good question to get. Start to thinking about the dividend again. I would just say obviously it's a Board decision. But I would say watching how these – this whole issue that I just talked about in terms of stimulus and people coming back to work, and who is still getting checked, I can't say it, we can't say it, no one can. No one knows what the pandemic is going to do, as we go into colder weather again. So I think it's prudent to still hold off. The great news is that we're going to start getting that question which means the operations and the earnings are coming. I just think we're probably going to hold off a little bit longer until we see how this year plays out.

[Douglas Harter:]

Yes. And then sort of like along those lines, obviously you still have a strong liquidity position. What are your outlooks deploying that liquidity, either through home purchases, buying back stock, kind of what are your thoughts on that?

[George Ellison:]

We always look at the classic two or three things that you just mentioned there, buying back stock, paying down debt, acquiring things. We balance them all. But as I said, I think, just as every industry right now is pretty cautious about liquidity and taking actions to spend money. I think it's just we're just being very cautious and we want our shareholders to know – if something comes along, these packages that are out there, there's a pretty significant package that's been floating around. We looked at it as an example of what you are alluding to. We didn't particularly like the locations or the size of the home which didn't fit our when Miles looked at it particularly didn't really fit the footprint. We're looking to continue to fill out in markets where he's already so strong. So, we'll look at everything and we'll keep all options on the table. But I would still say that the tone is yellow, green, proceed with caution because we just – you just don't know how this thing is going to play out.

[Douglas Harter:]

Thanks, George.

[George Ellison:]

Thank you.

[Operator:]

Your next question comes from the line of Jade Rahmani with KBW. You may now ask your question.

[Jade Rahmani:]

Thank you very much. Can you give an update on what's going on with RESI and AAMC?

[George Ellison:]

Yes, I mean we've been pretty open about that, we'll continue to be. I mean, we're – let's kind of take it from the top. Our job is to increase shareholder value. So making sure the business is running is job one that's the most important thing we have to do, and obviously that's thankfully going very well. So, revisiting, outside asset management or internalizing is something that I've said we're clearly looking at and both boards are discussing. So, we'll continue to consider what needs to be done between the two companies. And if we're supposed to internalize how do we do that, when do we do that, so we're continuing to look at that. It's very, very high on our, I think, I said on our last calls, it's at the top of our list of things to focus on. So I would reiterate that. Obviously it's three months down the road, so – but it is still a top priority for both boards to consider. And we'll see where that plays out.

[Jade Rahmani:]

That, question can you give it as a percentage of revenue, was that asked to. And secondly, do you have any information on what the unemployment rate across the portfolio might be?

[George Ellison:]

So you cut out there a little bit. But I think you were asking bad debt as a percentage of revenue, is that – did I understand that correctly?

[Jade Rahmani:]

Yes.

[George Ellison:]

2.5%.

[Jade Rahmani:]

Okay. Any…

[George Ellison:]

Yes, on employment, we haven't surveyed our residents to ask them if they about their jobs, current job status. So I don't have any data on that. That would be current, without doing a survey I'm not sure how we would know.

[Jade Rahmani:]

Okay. And just lastly, what do you think recurring CapEx per property is running at on a total basis?

[Miles Adams:]

So we did put in this quarter some cost to maintain metrics. They're in the – on Slide 14. So that's disclosed. And for the quarter on a gross and net basis, we're running at approximately 2,700 2,450 for total cost to maintain.

[Jade Rahmani:]

Thanks.

[George Ellison:]

Thanks.

[Operator:]

That would be your last question. I'll now hand the call back to the company for any closing remarks.

[George Ellison:]

Great. Thank you very much. Thanks everyone for dialing in and for our team, for the job they've done in the field and to put these packages and the earnings together. So thank you everyone. And we'll be speaking to most of the analyst community throughout the day. So we look forward to catching up. Thanks everyone,

[Operator:]

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.