American Homes 4 Rent (AMH) 2013 Q3 法說會逐字稿

Welcome to the American Homes 4 Rent third-quarter 2013 earnings conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to turn the call over to Mr. Peter Nelson. Mr. Nelson, please go ahead.

Good morning. Thank you for joining us for our third-quarter conference call. I'm Pete Nelson, Chief Financial Officer. I'm here today with Dave Singelyn, our Chief Executive Officer; and Jack Corrigan, our Chief Operating Officer.

At the outset, I need to advise you that this call may include forward-looking statements. All statements other than statements of historical fact included in this conference call are forward-looking statements that are subject to a number of risks and uncertainties that could cause actual results to differ materially from those projected in 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, November 8, 2013. We assume no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

A reconciliation to GAAP of the non-GAAP financial measures we are providing on this call is included in our earnings press release. You can find our press release, SEC reports and the audio webcast replay of this conference call on our website at www.americanhomes4rent.com.

With that, I will turn the call over to David Singelyn.

Thank you, Pete. Today, I would like to make some opening comments. Then turn the call over to Jack to discuss our current operating environments and progress. He will then be followed by Pete, who will discuss our third quarter operating results and other financial matters.

Yesterday, the Company issued a press release announcing its earnings for the third quarter of 2013. In our press release, we reviewed our results of operations for our first full quarter since we internalized our property management advisor's operations. Earlier this morning, we issued a second press release discussing our progress toward a securitization loan facility. Before we discuss the details of these press releases, I think it would be helpful to take a step back and review our activities over the past year.

One year ago this month, American Homes 4 Rent was created when we raised $530 million in a private placement offering of common equity. Since that time, the Company has, one, raised additional common equity in two additional offerings -- first, a $748 million private placement of common equity in March 2013. Second, in our IPO and concurrent private placements, which raised $887 million and closed this quarter in August.

Two, in December of 2012 and February of 2013, we acquired the single-family home portfolios assembled by Management, and in June, 2013, the portfolio owned by a joint venture with the Alaska Permanent Fund. These portfolios were acquired for an aggregate of $1.4 billion of equity securities and included more than 7,500 single-family homes. Three, in June of 2013, the Company acquired the administrative or advisory operations and the property management operations from the Company's sponsor group. In addition, the Company has been transitioning property management from third-party property managers to Company operations. Today, Company personnel handle all administration functions in all aspects of our property management, covering more than 90% of our properties.

Fourth, on August 1, 2013, the Company's common shares began trading on the New York Stock Exchange under the symbol AMH, a proud moment for the Company, its shareholders and its employees. Fifth, we have an $800 million revolving credit facility with commercial banks. This credit facility was modified during the quarter to increase its size and extend its terms, providing fuel for growth in the near-term.

Finally, last month the Company issued $110 million of Series A participating perpetual preferred shares with a current pay rate of 5%. These shares may be redeemed by the Company for common shares or cash at any time between years 4 and 7, at a price equal to the original issue price plus a participation amount based on home price appreciation during the period. The underwriters exercised 100% of the green shoot today, providing the Company an additional $16 million in proceeds.

So a little information about the current statistics of the Company. Today, the Company has current market capitalization, assuming all operating partnership units are converted to common shares, of approximately $4 billion. As of October 31, the Company had approximately 21,900 properties, of which approximately 15,800 were leased.

With respect to our third-quarter financial operations and financial results, Jack and Pete will provide a more fulsome review in a moment. I, however, am very excited with our third quarter results. These results begin to demonstrate the potential of our business model. For the third quarter, we are pleased to report positive funds from operations of $20 million or $0.09 per share. This is the result of significant rental progress in the quarter.

Our revenues increased to $49.5 million for the third quarter. That's up from $18.1 million in the second quarter, or 173% increase. Net result in net operating income from leased property of $31.2 million for the quarter, 191% increase from the second quarter.

Yesterday, as a result of the Company's performance, the funds from operations generated in the third quarter and the Company's outlook for 2014, the Board of Trustees initiated distributions on the common shares of the Company with a $0.05 distribution per share, payable January 10, 2014, to shareholders of record on December 15 of this year. In addition, we declared a distribution of approximately $0.22 per share on the Company's newly issued Series A participating perpetual preferred shares. The distribution on the preferred shares is payable December 31, 2013, to shareholders of record December 15.

With respect to this morning's press release, Pete will provide additional details on the Company's efforts with underwriters and rating agencies with respect to a securitization transaction.

At this time, I ask Jack Corrigan, our Chief Operating Officer, to give you an update on the Company's acquisition and management activities for the third quarter.

Thanks, Dave.

I will first talk about acquisitions, then renovations, and finally our property operations. As described in our last investor call, we have slowed our acquisition pace until we have more visibility to the timing and amount of our future capital-raising activities. During the third quarter, we acquired approximately 2,900 homes for an estimated total investment of $450 million. This is about 50% of the pace of the prior quarter. We expect that the pace of acquisitions in the fourth quarter to be approximately 2,000 homes, for an estimated total investment of approximately $300 million.

We have slowed the pace down by limiting the number of MLS purchases and the number of acquisitions in our lower-yielding markets. We purchased approximately 55% of our homes at trustee auctions in the third quarter. The combination of limiting our purchases in lower-yielding markets and higher percentage of acquisitions from trustee auctions resulted in higher pro forma yields in the third quarter as compared to the second quarter by about 35 basis points.

We continue to renovate at a fast pace, renovating approximately 5,300 homes during the third quarter.

Now, before getting into leasing and occupancy, I will first talk about our transition of third-party property management to in-house property management. We are currently internally managing 33 markets representing more than 90% of our homes. We plan to transition the remaining markets by the end of the year. This is significant because of the effectiveness of our property management platforms relative to the third-party property manager platform. In addition, we are able to leverage the fixed cost of our platform over a greater number of properties.

Now, getting into leasing, we experienced some modest seasonality once the fall back-to-school season started. Despite this, our leasing numbers continued to be strong, our active leases increased from approximately 10,200 on June 30 to 14,400 on September 30, and then to 15,800 on October 31. The pace was expected to be seasonally slower through the Thanksgiving and Christmas holidays; however, we expect to continue increasing occupancy throughout our portfolio.

Our occupancy at October 31 was approximately 72% on all properties, 85% on rent-ready homes, 90% on homes rent-ready for 30 days, and 96% on homes rents-ready for 90 days or more, which we believe is a pretty strong metric for showing the demand for our product, combined with the effectiveness of our leasing program. We experienced strong tenant retention for the third quarter of about 73%, with relatively modest rent increases averaging approximately 2%. I would like to remind everyone that our tenant retention statistics are based on a relatively small sample.

I will now turn it over to Pete.

Thank you, Jack.

I would like to review the third quarter operating results that were summarized in yesterday's press release. The Company reported a net loss of $3.9 million for the third quarter on revenues of $49.5 million. As Dave mentioned, these revenues represent an increase of 173% over the second quarter amount of $18.1 million. Our reported net loss is primarily the result of a number of non-cash expenses. I will review these in a bit. Eliminating certain of the non-cash items in accordance with the NAREIT guidelines, the Company's funds from operations for the third quarter was $19.6 million, resulting in FFO per FFO share for the quarter of $0.09.

As Jack indicated, we have 14,384 leased properties as of the end of the quarter. Revenues from leased properties in the third quarter were $48.7 million, a 177% increase from the amount reported for the second quarter. Cost of operations of leased properties was $17.6 million, resulting in net operating income of $31.2 million, a 191% increase over NOI for the second quarter. Operating margins for leased properties improved to 64% for the quarter compared to 61% for the second quarter, in line with our expectations as we continue to reach a more efficient level of operation in many of our markets.

Expenses related to unleased properties that are rent-ready are reflected in the Company's operating expenses. These expenses are included as property operating expenses in the line referred to as Vacant Properties and Other operating expenses. As you may know, on average it takes the Company about 30 days to lease a property once it is rent-ready. Also included in this line are some operating expenses not directly related to continuing property operations. The largest of these for the third quarter is $468,000 in one-time costs associated with fees and other costs to terminate third-party property managers in our significant and continuing efforts to internalize our property management to our own proprietary platform.

With respect to G&A, on June 10, 2013, the Company internalized both its administrative and its property management functions. With respect to G&A expenses, through June 10 the Company directly paid administrative expenses, excluding payroll costs and a 1.75% annual fee based on the equity of the Company. That fee is no longer paid. So the Company is now responsible for all administrative expenses including those that were previously paid by the Company's advisor. For the third quarter, our general and administrative expenses were $2.7 million. This compares to $4.4 million of expenses reported in the second quarter for the combination of advisory fee and administrative expenses.

As I previously mentioned, there are a number of non-cash expense items that are generally non-operational in nature. I will review these here. The largest of these is depreciation and amortization. For the third quarter, the Company reported $24 million in depreciation and amortization expense. In addition to depreciation of operating assets, this also includes amortization of deferred leasing commissions and certain intangibles related to the acquisition of the Alaska property and the internalization transaction in June.

Acquisition fees and costs incurred in the acquisition of properties are generally capitalized as a component of the acquisition cost of the assets acquired. However, if the property is leased when it is acquired, GAAP requires that such costs be expensed. During the third quarter, we incurred $496,000 of these costs that were shown as an expense in our income statement.

The Company has also been left with some ongoing non-cash accounting related to the remeasuring of the value of the Series E units issued in connection with the internalization transaction. Those Series E units are shown as a liability on our balance sheet. The change in value each period is estimated and is shown as an adjustment in our income statement each quarter. This year it is shown as an expense. This, together with non-cash stock compensation expenses associated with grants of stock options, result in approximately $600,000 of non-cash expenses during this quarter. Going forward, we expect to have a non-cash adjustment like these on a quarterly basis.

Now, let us take a look at our balance sheet as of September 30. As Dave previously mentioned, we have been very active over the past year raising equity capital. This equity capital is presented on our balance sheet as Class A or B common shares issued at the Company level. We also have non-controlling interest, which is equity issued at the operating partnership level. As of September 30, the Company's book value of capital was approximately $3.5 billion. Its market cap was approximately $4 billion.

During the third quarter, the Company modified its credit facility. The modification added an additional lender; extended the maturity date of the facility to September 2018, or five years from the date of the modification; and increased the size of the facility from $500 million to $800 million. As of September 30, $238 million was outstanding on this facility. This outstanding balance was partially repaid with the proceeds of the participating preferred stock offering in October.

As Dave previously indicated, the Company has been working with banks, underwriters and rating agencies to evaluate various credit structures for the Company, including securitization and institutional term loans. As you are aware, the rating agencies have been evaluating the issues and concerns surrounding credit facility structures for the single-family rental industry for the past year. During this recent period, we have met with each of the rating agencies, and each rating agency has already made field visits to our offices in connection with the due diligence of the Company. The Company continues to work closely with the rating agencies to finalize the appropriate structure and terms of a securitization financing transaction, and expects to be in the market in the next 90 days.

That is the end of our prepared comments. Operator, you may open up the line for Q&A.

(Operator Instructions)

Steve Stelmach, FBR.

Guys, can you -- or, Pete, maybe, it was good color around your progress on the financing side. Can you just give us an update on where you feel comfortable with your leverage going forward? I know you guys tend to be a little bit more on the conservative side. But just any more recent or updated thoughts on where you feel that going?

We look at leverage, anything that provides benefits to the common, both preferreds and in debt structures. We have increased our revolver to $800 million. As Pete indicated, we have been working with the rating agencies and underwriters on looking at, not only the securitization but term loans. And look to do a pretty sizable transaction here over the next 90 days. I don't think our guidance is any different than it has been. We've talked in that 30% to 35%, 40% range combined. Maybe a little bit higher as we go on. But we are going to take it in bite size pieces.

Great. Thanks, David. Jack, you talked about acquisition pace. You reminded us that was supposed to slowdown in the third quarter, which it did. That was more a reflection of available capital. It sounds like guidance now on terms of acquisitions more of a yield focus. Is that the right inference I took away from that? If so can you give us a little bit more color on that?

No, I wouldn't say that. We get our best deals at the trustee auctions. So when we cut back on acquisitions, we cut back on the MLS purchases even though we get good deals on the MLS purchases, just not as good. The effect of that is to raise the yields, but it is not strictly a focus on yield.

Okay. All right, the last one and then maybe I will hop back in the queue. Can you just give a little more color around the JV? The Johnson Capital JV that's a pretty interesting acquisition channel for you guys. Should that change your make-up or profile of what you are acquiring? Or maybe the volume of what you expect out of that channel, would be helpful?

Yes, right now it is in its infancy. We are in the process of bidding on our first package. It is a relatively small package. We like to experiment a little bit and make sure we know exactly what we are doing before we ramp it up. So, it has the potential to be something significant but at this point, I would say that's three to six months away.

Great. All right guys. Thanks a lot. Congrats on a great quarter.

Thank you, Steve.

Jeff Donnelly, Wells Fargo.

Pete, I saw the announcement you are looking to engage an advisor to explore that securitization. What you guys thinking from a size perspective? Something along the lines that we saw that just maybe would mirror Invitation Homes?

I think that is -- this is Dave -- I think that is a good proxy for our first transaction. Yes.

I think it leads to a successful execution if we keep the size in that range.

Okay. I guess, is the bigger thinking that you mentioned in your overall leverage of around, say 30% to 40%. Is the logic here maybe that you're going to try and use one of these securitizations to maybe put higher loan to value leverage on a place of your portfolio, but it keeps a good chunk of your assets unencumbered so maybe you can progress to an unsecured rating?

That is one of the thoughts of keeping flexibility in allowing us to do things in the future, keeping some of our assets unencumbered for potential other transactions.

I'll hop back in the queue in a sec, but just on rollovers, Jack, I think I missed your numbers on rollovers. Are you able to repeat those for what retention rates were and the average rent increases? Then I guess as maybe a follow-up, did you see any rent declines in any markets or regions? I'm just, I guess, I'm curious, how did you guys go about determining the rent increase you did pass through?

The numbers were 73% retention and approximately 2% rent increases. We didn't see any decreases, I won't say on any individual house we may have had a decrease, but regionally we didn't see any decreases. We are really still in the process of training our people to get the increases. I think there is a lot more room to move in and this is a pretty small sample of the portfolio. So, I would expect that number will go up in the future. But time will tell.

Thanks, guys.

Thanks, Jeff.

Anthony Paolone, JPMorgan.

I guess first as an aside, just my condolences on your former colleague Harvey Lenkin and his passing.

Thanks, Tony.

On the securitization, I was just wondering if you can comment on duration. I know in the past, maybe it has been somewhat tongue-in-cheek, but you guys have said, you're not so much debt adverse as you are just maturity adverse. It seemed like the Invitation Homes deal was about five years. So just wondering how you think about that kind of duration as you form out the capital structure?

I think we are looking at both 5 and 10 year structures at this point.

Okay. Then Jack, on the yield, you mentioned just up 35 bps, but can you just remind us of what the starting point was there?

We were, I believe, [6.2] in the second quarter on pro forma basis. In the third quarter, we are up 35 basis points from that.

Okay, is that a before or after CapEx number?

That was including a reserve for CapEx. They can see in the number.

That is it an economic yield.

Okay. Then just a couple additional questions on the turnover. Any statistics relating to the non-renewals? How much downtime you're experiencing to get a new tenant in there? What those new rents look like relative to the prior one?

The new rents are roughly the same, about 2%. The downtime in markets where we're managing is right in our expectations. The cost are all over the place at this point and in a relatively small sample. We have stuff coming from third-parties. We have the stuff in Las Vegas that's $0.20 to $0.25 a foot. So we are -- we have homes that are coming that -- from pre-existing tenants that we had never renovated first. So, it's really hard to get a good number -- a good sense of it. But we think that our previous estimates of about $0.50 a foot are going to come and be in line.

Okay. Then last question, the decision to put a dividend out there at this point, how did you go about that? Do you need to do that, given taxable income or is this just a decision that you want to start giving investors capital back?

Yes, I think if you look at not only the fact that, now we are generating positive earnings, but you look at our projections of dividend requirements next year, those were the factors that went into making the determination. So, we don't necessarily going to have taxable income in 2013. We anticipate we will have taxable earnings in 2014. That is the reason that the payment, although of record December 15, is paid January 10. It will go against the taxable earnings of next year.

Okay, got you. Thank you.

Tayo Okusanya, Jefferies.

Let me also add my own congratulations on a very good quarter.

Couple of questions. With the line now expanded -- the preferred deal, you might do something on the securitization market. How should we really start to think about acquisition volume going forward after the recent slowdown?

Well, in the fourth quarter, we did -- I said that we estimated that we'd acquired about 2,000 homes. Really, the next real capital raise is probably somewhere in the 60 to 90 day out range. Once we see what that is, we may expand it to $150 million a month, maybe up to $250 million a month in acquisitions. So, it really depends on the success and timing of our capital raise.

Got it. Would you say near-term there is more of a focus on -- rather than buying a new home there's more of a focus on what you have in place stabilizing it, generating cash flows from that to help you have cash in hand to buy assets going forward?

No. We are very focused on operations. We have been spending the last year building the operating platform. We have spent significant time bringing third-party properties -- properties that have been managed by third-party property managers in-house where we can optimize their performance. I would say our focus is probably first and foremost, making sure that the assets that we own perform well. Because that's the basis of building the business. That, I think, is evident in this quarter's operations, where you can see the number of additional properties that have been leased. The fact that we are leasing properties today slightly above our pro forma projections when we bought the properties.

So, we first and foremost are working to make sure that what we buy, produces sound returns. Then as we continue to look at good markets and to continue buying quality assets that meet our needs. Property management being in-house has an intangible benefit that we have found. That is when you have people in your own Company that are managing the properties, they can help the acquisition group refine its neighborhoods as to what neighborhoods are leasing well and which ones are not leasing as well. So I think whole program of doing both and really focusing on property management first has some good synergistic benefits.

For the most part, on the -- really, the only major overlap between acquisitions, renovations and property management. So they are all very focused on their jobs.

Okay. That is helpful. Could you just tell us gross yields on the 2,900 homes you bought in the quarter? Could you just let -- what that number was?

The gross yield? We don't really look at it in terms of gross yield, because if you are in Texas or Florida or Illinois where there is high property taxes, if you focus on gross yield you're going to end up with a low net yield. So, really, we really only focus on net yield, so I didn't even look at that.

Got it. Okay. Then the 35 bps increase you discussed earlier on in your commentary -- about the increase in the net yield. Is that for the [6.55], is that on all 21,000 assets right now? Or is the 6.55 just on the 2,900 assets you bought in the quarter?

2,900.

Okay, perfect. Thank you.

Haendel St Juste.

So, your stock continues to trade above IPO unlike a number of your peers. So curious as to where equity issuance lies among your capital raising alternatives today?

We are looking at all types of equity issuance, preferably looking to provide leverage to the common shareholders in place today. So, we are very pleased that we are trading where we are trading, but we are exploring options other than common today. It doesn't mean that commons not going to be an option sometime in the future. But we are looking at other, more attractive capital to the capital stack today.

I know there weren't a lot of homes sold in Phoenix. But curious on the decision to sell there? Was an opportunistic sale -- someone approach you? How should we think about other such potential sales within the portfolio? What your thoughts are on potential some opportunistic sales here near-term?

We didn't sell any homes in Phoenix.

Okay. Well, that is our mistake. Then, perhaps, can you talk more about the homes you bought here in October, the 600 homes or so. Can you talk about how perhaps the markets, the net yields, the price per home. What you're seeing in the marketplace in general, any portfolio deals out there?

Yes, we are actively looking at portfolio deals -- so far they either have been overpriced or they have more product that isn't American Homes 4 Rent product then the stuff that fit our criteria. So we've, so far, refrained from any portfolio purchases. Although, we see more and more all the time. Eventually, I think we will find one that works. We are also evaluating -- we have about 5% of the homes in our portfolio that are $1,000 rent and under. We're looking at the profitability of those homes relative to the higher priced ones or higher rent homes. If we see that is a good area to be in, we may expand our criteria. But at this point, that hasn't proven itself out.

Okay. I just want to go back and clarify something on Phoenix again. Maybe it is a definitional item. But looking here, it said on July 1, you had 1,005 properties in the MSA. But at quarter end, you had 962. So again, maybe it is something we're missing here. But just curious if perhaps it's something we're missing?

The only thing I can think of is that we misclassified some Tucson stuff into Phoenix or vice versa. You know what I would ask?

We can talk offline about it.

Can you call Pete afterwards and have him clarify that for you.

Will do.

I'll follow-up with you Haendel.

Will do. Thank you.

Alex Barron, Housing Research Center.

I wanted to ask you regarding your SG&A rates. This quarter you got about 6.9%. Do you think that is sustainable? Or can it improve from here going forward? Or should it be higher? What should we expect as we move forward?

Okay. You're thinking of as percentage of revenue?

Yes.

Yes. We typically look at it based on asset size or gross assets or market cap. We're running at about 28 basis points of market cap, which we're actually fairly proud of that level that we have achieved such scale on a very efficient G&A base. I think you will not, I think we will only become more efficient. How quickly that will happen, it remains to be seen. But I think it will only become much more efficient. Considering we went through substantial growth, it's hard work to get through an IPO. We have done all that. Now we're on the other side of that, with a pretty stable infrastructure here.

The 28, this is points per quarter?

That's an annual -- I annualized it. 28.

Okay. As far as -- we have seen a general slowdown in the market for new home sales. Lots of builders sell homes at a discount at year end. Have you guys looked into buying new homes for rent purposes?

We have. We haven't for probably a little over a year, we have not bought any new homes. We bought some builder close-outs when some of the builders were little more cash desperate. But we haven't bought any for quite some time.

Are the economics on those pretty similar to the stuff you buy on existing or foreclosure type homes?

No. One of the main things that we look at, one of the three main criteria is buying below replacement costs. New homebuilder are probably not going to sell it to you at below replacement costs.

The volume we have done cumulative is very insignificant.

Okay. What about the -- I guess the existing home market is also starting to show more inventory recently. So other than the fact that you're waiting for more capital, have you seen that the yields on properties today are better than say six months ago?

No. The prices have gone up over the last six months. I think that the price increases for homes have stabilized, but they are still going up, not as much as they were earlier. Rents maybe going up a little bit too. I would say they are really right in line with what they have been if we were acquiring 2,000 homes a month I think we would be back in the 6.2 range again. Okay, thanks a lot.

Got it. Okay, thanks a lot.

Thank you.

Buck Horne, Raymond James.

I was wondering -- I guess following-up to Alex's thought process. Can you give us a little color on which markets look or may be the least attractive now for new investment? Or seen the greatest yield compression in your metrics? Conversely, which markets are you seeing the strongest potential for rent increases?

The biggest yield compression is California, Phoenix and Las Vegas, and the Pacific Northwest; Seattle and Portland. That is where we have seen the biggest yield compression. In terms of, where we are seeing the best yields, really it is the markets where there is no institutional competition, we'll see pretty good yields. I probably don't really want to get into that one. We might end up costing ourselves some competition. (laughter)

Fair enough. Can you maybe give us a little data on your recently signed new leases? What the rent income ratios for your tenants looks like?

Yes, we are seeing on average about 4.6 times coverage.

Okay. Thank you. One last one, just on Haendel's question, said another way, have you sold any homes in the portfolio recently?

We are selling a small number of homes. I think we sold seven in the third quarter because we bought them at trustee auctions and they ended up -- either after we bought them become -- they made the community rent restricted, which means they can only rent a certain number of houses in the Homeowners Association. So rather than fight back, we decided to sell them. I think there was a small gain on those even with the transaction costs. Some we may have bought without knowing they were in a rent restricted zone. So that is really the primary reason we sell houses.

But you are not selling any properties in those yields compressed markets, as a strategic decision?

No.

All right. Thank you.

Steve Emerson, Emerson Investment.

It's Steve Emerson here. My apologies, I had to jump off a second. Many shareholder friendly REITs give an estimate of actual market value of their assets. Such names such as Colony and others. Perhaps you can help us give a range for what some kind of market based asset value would be? Or any steps that would help us get there?

Steve, it is Dave. One of the things that we are doing this quarter, which I don't know if it got mentioned, I think it is in the press release, is there will be a supplemental information package. I believe it is already posted up as of this morning on our website. It has a number of different analyses in that package. One of those analyses is the HPA by market of where we own our properties. We also list next to it, how many properties we own. It is not necessarily an HPA based on our specific properties. It is based on the MSA in general as published by the FHFA, but it should give you a proxy for evaluating that.

Okay, well I certainly would suggest that you feature some number as your competitors do -- or broader REIT competitors in and feature it because obviously, that is one of the main attractions for owning your REIT. So thank you very much.

Thank you, Steve.

Dan Oppenheim, Credit Suisse.

I was wondering if you could talk a little more it in terms of just the acquisition policy and the focus on yields. The comments about some of the yield compression in West Coast market is interesting in that, as an owner of properties yield compression is your friend. In some of the markets like Indianapolis and such are markets where over time, there isn't as much price appreciation. So, just wondering how you are balancing that in terms of thinking about yields, but also thinking about the appreciating potential of the homes?

Well we are looking at where we can get the best discounts currently to market. In general, if there is less institutional competition at the auctions, you are getting the properties with a built-in appreciation because you are buying them at substantial discounts to market. So we do look at that. We also look in areas where we know we can rent it. Everybody asks the question -- or we get the question quite frequently, is this a business or a trade? We are operating this as a business. So, where the demand for product and where we can get the prices at the best biggest discounts to both replacement costs and current value is really where we are focused.

Okay. Thanks. Then in terms of the comments in terms of maximum investment yield and looking at different homes and such. Have you seen anything in terms of the yields you're getting on different sized homes? Maybe that is also addressed on by your comment earlier in terms of homes at lower rent levels. But wondering -- clearly, some of the homes are much larger than what others have been buying. How are you seeing the yields on the different sizes of homes?

It is really not size dependent as much as value dependent. You don't get the same correlation of rents going up per dollar value that a home goes up. So, that is why rarely do we buy a house for more than $300,000 or $350,000 because at that point, you see the rents level off and you don't get the same value.

On the down side, the lower priced homes --

Yes. On the lower price homes -- again, we are analyzing our portfolio. We have, like I said, about 5% that I would consider -- I'd consider $1000 and under in rent to be lower-priced homes. We are evaluating what the turnover costs are on those relative to -- and the quality of tenants in those, relative to the rest of our portfolio. It really is going to be important to us to determine -- we are probably one of the likely consolidators of the industry. We needed to figure out whether we want to be in that lower-priced business.

Okay, thank you.

(Operator Instructions)

Dennis McGill, Zelman & Associates.

First question would just be more big picture. Having been at this a year, I was wondering if you could maybe talk about what you've found to be maybe the biggest surprises? Whether that be upside opportunities? Or challenges that you address from this point forward?

I don't know if there is one thing. I can tell you that over the last two years that we have been doing this, it has been a continual learning process. We have found through that process, I guess maybe if you want to say one of the largest ones, is the significant difference in the execution abilities of property management between what we have been able to achieve and what we were achieving when using third-party property managers in a number of our markets.

There were a few that were very good, but for the most part, we saw significant improvements when we brought management in. We have continually been learning through the property management process. I think we have got a very good structure in place. We have got our call centers in place over the last four to six months. So the Company as it goes through a growth process is going to always be learning. I think we have been doing just that over the last two years. But I would probably say if I had to pick one, that would probably be the one.

I'm sorry if I missed this, but have you quantified that financial benefit of bringing the management in-house?

We have -- on some of our road shows, we have provided some of this. I think it was also in our S-11s. But we have seen in markets where third-party property managers were leasing 15 to 20 a month. Our inventory was growing from one month to two months of inventory all the way up to four, five and six months. We have been able to bring that in-house and within a month, we are now leasing about 100 and being able to bring our inventory down to less than one months worth of inventory in the marketplace.

That is enabled us to basically execute on the fact that we are leasing properties on average within 30 days of being rent-ready. We have been able to do that at rents that are equal -- in many cases, at rent levels that are higher than what we were getting from the third-party property managers. So, the quantification's more in the quality of execution than the timing of getting these things rented. Having them rented inside 30 days, as opposed to inside 120 days once being rent-ready.

Dennis, how do you quantify branding? The consistency of execution? Leveraging a call center? Velocity of leasing, as Dave mentioned. We figured out early on, when we did this, this is the way to go. I think, it has really shown in our performance to date.

It also gives you a much higher insight into your business when you are operating it yourself, as we have seen. It's assisted in our acquisition program, as I mentioned before.

The point being, it is beyond just the management expense itself?

Absolutely. It has a tremendous benefit in accelerating rentals and improving the top line.

But the management expense is not insignificant.

No.

We were paying on average, 10% to 11% combined leasing and property management fees. We expect this to level out at somewhere between 7% and 8%. In addition, to the 10% to 11% we were paying, we were paying for a team of accountants to reconcile the monthly reports into our books, our own property tax people. The 7% to 8% is going to include all of the accounting and the property tax component and HOA component. So, I think that the cost savings is going to be very significant.

Okay. Then just last question. From a supply perspective, if you adjust for the seasonal slower time in the fourth quarter currently, how would you describe supply of single-family rentals available today as you look across your markets?

For acquisition or for leasing?

I am sorry, for leasing.

It is market specific. It comes in waves. We have seen a couple markets get flooded. We have a rental supply Phoenix and Tampa, were the two where we actually had significant competition for leasing. We believe our program is better than anybody else's. We were still able to lease through that. But really, in other markets where there is no institutional competition, we haven't really seen any significant oversupply of rental houses. Even in those markets, it all cleared up after about two or three months.

Got it. All right. Great. Have a nice weekend guys.

Thank you, Dennis.

Jeff Donnelly, Wells Fargo.

I just wanted to come back to just one or two questions. Someone was asking you before about the opportunity for portfolio transactions. I am just curious about helping us set our own expectations. Do think just because of the, I guess I'll say, the high quality standard that you guys have around your homes, do you think there is much opportunity for you to acquire peers that maybe never got scale?

I would look, if we find out that the lower-priced homes is a profitable business, we could acquire whole competitors. But I would look for something similar to what we are doing in the [NPL] program where we'd figure out a way to bifurcate portfolios and we acquire a portion and somebody else acquires the other portion.

That is helpful. I guess you had also talked earlier in your remarks about the process of internalizing a lot of your regional offices. I think there's still some more to go. Are there any costs -- I'm guess I'm talking about a one-time nature maybe in your operating expense or G&A this quarter? Or are you anticipating in fourth quarter just from that process?

Yes.

There are costs. I think Pete mentioned, we have $480,000 in one-time costs. It's probably a little higher than that, if you take in the cost of our people going out and reconciling all the books. But those the costs actually paid directly to the third-parties to cancel the contracts.

It is buried in the operating expenses in vacants and other costs.

Okay. Sorry I missed that. Just a last one was on margins. I think, Pete, you had mentioned in your remarks that stabilized margins were 64% in the quarter. I'm just curious --

I wouldn't even call it stabilized, I mean, we're on the road to stabilization. We always expect them to be at 67%, 68% as we get there. Because remember, we have operating properties in the markets that are -- that have just a couple 100 leased properties at this point. That's still pretty inefficient. We think 500 homes is a stabilized level.

I think that answers my question. I was curious how are you calculating that? Is that just by a market you deemed stabilized regardless of whether that includes home that are not? Or is it just an average for all the homes that you --

No, it's not a simple average. But we go market by market and look at the people that are spread between markets. Obviously, we pick up the direct expenses that are in there for sure. Then we just have allocation methods that we use, based on each market that makes sense. Kind of like not a time card, but it's along those lines.

Okay.

Yes. Margins are -- when you're looking at properties are going to be vastly different depending on -- property taxes is really the biggest variable. So your margin may be 60% in Texas and Florida and Illinois and 70% in Arizona and Las Vegas and other areas where property tax rates are relatively low.

There is nothing wrong with either one or any of them.

Right. As Jack mentioned, I will just reiterate. That's the reason we focus on net yields more than gross yields. Because at the end of the day, it's the net yield that matters. Expense structures do vary market by market.

Great guys, I will see you next week. Thanks.

We thank you, Jeff.

At this time there are no other questions. I will turn the call back to Mr Nelson for any closing comments.

All right. I would just thank everyone for their interest. We look forward to seeing some of you in San Francisco next week.

This concludes today's conference call. You may now disconnect.