American Homes 4 Rent (AMH) 2014 Q2 法說會逐字稿

Welcome to American Homes 4 Rent 2014 second-quarter earnings conference call. At this time, all participants are in a listen-only mode. After the Company's presentation, there will be an opportunity to ask questions.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the call over to Stephanie Hime, Counsel at American Homes 4 Rent. Ms. Hime, please go ahead.

Good morning. Thank you for joining us for our second-quarter earnings conference call. I'm here today with Dave Singelyn, Chief Executive Officer; Jack Corrigan, Chief Operating Officer; and Diana Laing, Chief Financial Officer of 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 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, August 5, 2014. We assume no obligation to update or revise any forward looking statements whether as 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'll turn the call over to Dave Singelyn.

Thank you, Stephanie, and welcome to our second-quarter 2014 earnings call.

On today's earnings call, I will review our second-quarter accomplishment. I will then turn the call over to Jack Corrigan to discuss the current operating environment and our progress with regard to operations and external acquisitions. Finally, Diana Lang will review operating and financial results for the second quarter of 2014 and update you on our balance sheet and liquidity.

As we have discussed in prior conference calls, we have outlined our vision of building the premier company focused on owning and operating single-family rental homes. The three pillars of this vision include our assets, our management, and our capital structure. Throughout 2014, and during the second-quarter specifically, we have continued to pursue this vision.

First, we continue to focus on our core business by refining and enhancing our property management platform. From day one, we realize the importance of managing our properties to provide the best service to our tenants and to control our operational platform to provide the best returns to our investors. We focused on developing a national operating platform that provides scale and advantages in execution, operating cost efficiencies, standardization of best practices, as well as brand awareness.

With a national operating platform we are able to bring structure and consistent performance to an industry historically dominated by small individual landlords. As previously mentioned, we began building our platform by managing our first property in Las Vegas in January 2012. We completed the internalization of third-party property managers seven months ago and today all properties owned by American Homes are managed and leased by our personnel.

During 2014, we have greatly enhanced our national leasing call center and our national tenant service center. We have also centralized a number of management functions in our Las Vegas property management headquarters including tenant underwriting, rate management, lease underwriting, and collections. We continue to refine our processes to provide our current tenants and our prospective tenants with the best housing experience in the single-family rental industry. Jack will highlight in detail some of the results of these initiatives in a couple of minutes.

Second, we continue to pursue attractive forms of capital and a reasonable level of leverage. Maintaining a strong balance sheet with significant capacity and flexibility to finance our growth and investment strategies will allow us to be nimble as opportunities arise.

During May we completed our first securitization transaction. We issued more than $480 million of bonds at a blended rate of LIBOR plus 1.54%. We are pleased by investor demand for our securities with subscription levels for each of our bond classes being many times over-subscribed.

This allowed us to complete our securitization with the lowest cost of capital this year in the single-family home rental industry, demonstrating both the quality of our assets and our ability to manage those assets. We are currently processing our second securitization transaction which we expect to complete late third quarter or early fourth quarter of this year.

Third, with respect to acquisitions, we continue to acquire properties through our traditional acquisition channels, mainly through trustee auctions or foreclosures. And through traditional on-market transactions focused primarily on short sale distressed listings.

We have recently expanded our acquisition channels. We announced a joint venture arrangement with a nonperforming loan, or NPL operator, and more recently capital partners where by we identify and bid on selected properties and NPO portfolios that meet our acquisition criteria without being obligated to acquire the entire NPL portfolio.

Also during the second quarter of the company sponsored a joint venture with an institutional partner to acquire single-family rental homes at prices and values above the Company's current acquisition parameters. While our initial investment in this joint venture is small compared to our overall base of deploy capital, we believe these high-end single-family rental homes represent a lucrative long-term opportunity that is complementary to our current operating business.

And lastly with respect to acquisition opportunities, on July 1 we completed the acquisition of Beazer pre-owned rental homes. This portfolio of 1372 homes complements our portfolio as its property attributes are similar to our investment parameters and expands our presence in four of our key states. The portfolio is 90% leased and benefits our operating cash flow. As mentioned, this transaction closed in the third quarter and, therefore, is not reflected in our second-quarter financial statements.

I know many of you have asked for financial details of this transaction. Those details will be made available shortly through a Form 8-K filing after outside auditors have completed their review of Beazer's operations.

Moving on to the statistical highlights of the quarter. I am pleased with our continued growth in property operations and funds from operations generated for our investors.

Core funds from operations for the second quarter of 2014 were $35.3 million, or $0.15 per share. This represents a 25% increase over the $0.12 per share reported in the first quarter. Net operating income from leased properties for the quarter ended June 30, 2014, was $57.1 million, a 20% increase from the $47.7 million reported for the first quarter ending March 31, 2014.

Our portfolio increased 1668 homes during the quarter resulting in a portfolio of 27,173 single-family rental homes at June 30. As of June 30, 2014, the Company had 23,364 leased properties, an increase of 2698 from March 31, 2014. Our portfolio continues to demonstrate strong occupancy with 95% of our properties leased that have been initially leased or initially rent ready for more than 90 days. Total portfolio occupancy was 86% at June 30, 2014.

As mentioned, subsequent to year-end the Company completed the acquisition of Beazer pre-owned rental homes. Including this acquisition of 1372 homes, the Company acquired over 2000 single-family properties in July, increasing the total portfolio to over 29,200 homes. Again, including the leased homes from the Beazer portfolio, leased properties increased by more than 2000 homes in July bringing overall portfolio occupancy at July 31 to over 87%.

At this time, I'll turn the call over to Jack Corrigan, our Chief Operating Officer, to provide more details on our acquisition and operating activities for the second quarter.

Thank you, Dave. I will give a little color on acquisitions, renovations, and property operations for the second quarter, and include an update on our July 2014 activities.

For second quarter 2014, we acquired approximately 1700 homes, including approximately 1000 at trustee auctions or about 60%. Average net economic yields are estimated to be approximately 6.4% on a pro forma basis. We anticipate we will acquire approximately 3300 homes in the third quarter, including those acquired in the Beazer transaction.

We continue to execute on our renovation program. We renovated approximately 2100 homes in the second quarter, excluding turns, and we expect that pace to continue.

Our internalized property management platform continues to become more efficient each quarter and is paying tangible dividends. Our centralized leasing and service center, tenant underwriting, and collection functions provide real-time information to allow us to actively manage our operations and continue to refine our business in a more profitable manner.

Our leasing pace continues to be strong and in the second quarter we saw strong leasing and renewal activity throughout the quarter. For the quarter, we leased a total of approximately 4600 homes, not including renewals, including 1900 second-generation leases. This is up from approximately 4300 new leases in the first quarter. July leasing was also strong with a total of approximately 1350 homes leased.

Our pace of leasing has slowed somewhat in July partially due to decreasing overall inventory combined with an increased focus on pushing rates. We continue to lease our portfolio going from 56% to 86% over the past four quarters. Occupancy now stands at 87% as of July 31, 2014.

We continue to maintain approximately 95% occupancy on our stabilized portfolio which we define as all homes initially leased or initially rent ready for over 90 days. We continue to see strong tenant retention between 70% and 75%, with rental rate increases in the 3% range on renewals.

The second quarter market first quarter with the significant number of tenant turns with approximately 1900 homes re-leased. We continue to expand our program of pushing rates on new leasing going from a 3.2% rate of increase in April to just over 4% in June. The average over the last three months was about 3.6%.

Of our top 20 markets, all four Texas markets in Atlanta saw the strongest rate of increase at over 5%. Our turn costs met our expectations at just under $0.50 per square foot net of application of deposit. And then, finally, we reduced our turn times to approximately 58 days but believe there is still ample opportunity to tighten our days to turn further.

The quality of our tenants continues to improve as we continue to roll off tenants underwritten by our third-party managers as well as tenants underwritten by us prior to tightening our own underwriting discipline and standards. Bad debt expense dropped to just over 1% during the quarter. We also believe the tougher standards will have the effect of lowering our turn costs. Turn costs on average are approximately 50% higher for evicted tenants.

With that, I'd like to turn the call over to Diana.

Thanks, Jack. I'll review the second-quarter financial results that were detailed in yesterday's press release and also in the supplemental information package that we posted last night on our website under the For Investors tab. To better present our operating performance without the effect of certain items, we define a measurement that we call core funds from operations which is defined on page 7 of the supplemental information.

For the second quarter, our core FFO was $35.3 million or $0.15 per share which is a 25% increase from the $28.1 million or $0.12 per share for the quarter ended March 31. On page 4 of the supplemental information package, we calculate net operating income and operating margins for our leased portfolio. For the second quarter of 2014, net operating income from the leased properties was $57.1 million which increased 20% from the $47.7 million reported in the first quarter. Revenues were $94.3 million, an increase of 22% over revenues reported in the first quarter.

Please note that the caption title leased property operating expenses includes expenses related to properties that are rent ready and have previously been leased whether or not they're currently leased. So, turn costs and other expenses for properties that have previously been renovated at leased will remain in this category of expense and be deducted from our NOI.

You'll note that we calculate a core net operating margin in which we eliminate from both revenues and expenses the amounts that we build back to tenants for reimbursement by them. For the second quarter of 2014, our core net operating margin was 63.6% compared to 64.8% during the first quarter. As the portfolio stabilizes and we experience more lease turnover, this metric may fluctuate but it has remained consistently between 62% and 65% for the past five quarters.

Also on page 4 of the supplemental financial information that we've disclosed our annualized general and administrative expense as a percentage of total assets. For the second quarter, annualized G&A was 0.46% of the book value of our total assets, roughly flat with the 0.45% for the first quarter of 2014. Our quarterly G&A for the second quarter of $5.7 million represents a 12% increase over the first quarter.

We've experienced an increase in state and local taxes and public company costs. We believe the second quarter G&A level represents a reasonable run rate for the future.

In May 2014 we raised more than $480 million in gross proceeds through an asset-backed securitization of a loan secured by 3852 homes. The loan has a weighted average interest rate of LIBOR plus 154 basis points and a term of two years with three 1-year extensions available at our option.

As of June 30 we had approximately $481 million outstanding on our credit facility leaving available capacity of $319 million. Our line best interest at LIBOR plus 2.75%.

And now I'll turn the call back over to Dave for closing remarks.

Thanks, Diana.

In closing, we are excited about the opportunities we have at American Homes 4 Rent. We own a large and growing platform of high-quality homes in selected growing markets and through our select financing are laying the groundwork to continue to grow and scale this tremendous business. We have begun to see and experience the benefits of our fully internalized platform and look forward to continuing to enhance these efficiencies as we continue to grow in 2014 and beyond.

And, with that, we will open the call for your questions. Operator, do you want to take over?

(Operator Instructions)

Thank you. We'd like to start with the first question and this comes from the line of Anthony Paolone with JPMorgan. Please proceed with your question.

Thanks. I was wondering if you could talk about the Beazer deal a little bit more and how you think about the economics of that because if we just do the basic math on your rents and your margins it seems like a 5%-ish return and you talked about your acquisitions, pro forma being decently north of 6%, and so just wondering how you thought about the underwriting there and getting something that was already leased and you didn't necessarily have sort of the auction risk and things like that?

Hey, Tony. This is Jack. We thought about the Beazer transaction in a number of ways. One is it added scale to certain markets that we've not been able to acquire in for quite some time, and so the marginal cost of managing those properties was lower. We were -- we bought them at what we think, -- I wouldn't call it bargain-basement, but at a decent price. My understanding from talking to the KKR guys is we were not the highest better and by giving them stock that had traded up was good for the transaction. They were expecting us, over time, to be the highest bidder.

So, I think -- and then in addition to that, it basically gave us about 1400 properties that we can stick into the next -- maybe not the exact [mix] securitization but a recent securitization. So, all of those factors combined with -- I don't think we could replace those assets at the price we bought them for was kind of the impetus for doing the transaction.

And so you guys have talked a lot in the past about just this consolidation trend heating up, so should we take your comments as being would you look at some incremental deals that things like your current margin are not necessarily the arbiter of how the yield should look because you're really looking at the incremental because you have the scale? Is that kind of how to think about it?

No, I would say this was the one transaction we've seen so far and we've done one book deal in three years where the seller had a reasonable price expectation and we could get a deal done. We've had a number of deals that we've turned down because we just can't get to the number. This was one we could. We're buying assets we can't replace for the price that we paid for them.

Okay. And then just my last question -- I don't recall the mechanics of it but I think at the end of this year you can bring in the external acquisition and renovation vehicle. And I was wondering if you could give us any color on the plans there or if we should start to think about that as likely happening or not?

This is Dave. I think as the terms of that agreement expire at the end of this year, those individuals that are necessary for acquisition and renovation program will become employees of the REIT. The accounting for those will be a little different than they are when they are in a third party and you'll see some of those costs going through the income statement under our acquisition line item, but that plan is still in motion. It's a December transaction, so it really has an impact to 2015, not 2014.

Okay. Does a material amount of G&A come in at that point or do we have to think about that structure, cost structure, changing?

No, it's not going to be G&A. It's going to be acquisition personnel that will go into our acquisition line item that we currently have, so the accounting for that is they get capitalized if they're a third party and they get expensed if they are in-house, but we do add it back for our core FFO.

Okay. Got you. Thank you.

Our next question is coming from the line of Steve Stelmach with FBR Capital Markets. Please proceed with your question.

Hi. Dave, wonder if you could touch a little bit on the MPL strategy. Obviously it hasn't been a large emphasis for you guys in the past, but following the launch of a second fund here, just wondering if that thought process has evolved a little bit over the past 12 months or so and what are your latest thoughts there?

Yes, I don't think you should interpret the announcement of a second fund as being an expansion. It's just a continuation of the development of our plan that we had put in place. The plan essentially is to acquire NPO portfolios in a bifurcated way, those that we desire to own that we acquire those and those that we don't we put into our rapid resolution fund and that second capital -- that capital source that was announced is really part of that rapid resolution fund. We have a very small interest in that side. We do have an interest in that piece and between us and our joint venture operating partner, we manage those platforms. And so I don't see it as changing in any way what our initial plan was with respect to NPOs. We've ramped it up a little bit, Steve.

For the operating portfolio or what we call Fund One, it's designed to go into the REIT as a rental property. We acquired about $20 million worth of assets to date, not through June 30 but to date. And then for the rapid resolution fund it's about $30 million of the $75 million fund that's been deployed.

Okay. Thanks; that's good color. On the Beazer, just going back to that real quick. Can you give us sort of some texture around the competition for that asset? Are there that many folks out there that are willing and able to bring down that size of a portfolio? You mentioned that you guys weren't the largest bidder. Just sort of surprised that there would be many more besides you and maybe one or two others?

I'm relatively certain Colony and Way Point and Invitation Homes or Blackstone could take it down. I'm not sure about any of the others, but those would be three that would come to mind that could have been competitors and maybe one or two other private companies.

Last one and maybe I'll hop back in queue, but you talked about property level expenses coming in line with expectations for the most part. Any sort of exceptions there? It seems like property level expenses are inching up a little bit relative to the rent bumps that you're getting. Any color on that would be helpful.

Yes, I would say the biggest line item that surprised -- probably shouldn't have surprised me, but surprised me in terms of size, was HVAC repair and sometimes replacement. I guess going into the first heat waves that we have in each of our markets, that's probably not unusual and probably see that next year at this time of year, too. But I think we'll probably -- I'm not sure we controlled our vendors as best we could in that line item either, so I think there's probably some controllable costs and some non-controllable costs in there.

Great. Thanks for the color, guys

Thanks, Steve

Thank you. The next question comes from line of [Jack Nasinko] with SIG. Please proceed with your question.

Hey, good morning. Looking at the pipeline of acquisitions, kind of bouncing between -- I guess high watermark was about 2750 in the first quarter, kind of between 1500 to 2000. I'm just trying to get a sense of where you think that -- I know you said about 3300 for the third quarter including the acquisition. I guess the question is, is 1500 to 2000 a month the right number or is 2500 to 3000 organic not including sort of portfolio?

How should we think about that over the next couple quarters? It looks like it has come down a little bit, but you've layered in some acquisitions, so just trying to get a sense of how we should think about the run rate of sort of normal purchases going forward the next couple quarters?

Yes, I would say normal purchases, we're buying between 300 and 400 a month at auction. I think that will continue. What we toggle on and off of depending on availability of capital or certainty of availability of capital is how many MLS purchases we do and so if we raise a lot of capital, you'll probably see that go up.

If we don't, you'll probably see that stay or possibly even go to -- I don't see us, at least in the near future, dropping below the 300 to 400 a month we're buying at auction, but -- we can't -- the Argentina debt crisis we didn't predict and so you can't really predict when you're going to raise the capital until you actually have it in hand and so we're fairly cautious in that regard.

Okay, fair. And then for the next securitization, should we think about the same general size, the 3800, 4000 home type size? I know you got to get to a certain level before that transaction makes sense economically. Is that the right range to think about for our models?

That's in the right neighborhood for size. And as we said, we are currently processing a transaction and expect to have one done here shortly.

Okay, great. And just one last one. I think you said 58 days turn time on the renewals. Is that from move out to move in? Is that from notice to re-rent? Frame that out for me.

That's from rent-paying tenant to rent-paying tenant, so it's basically when we last generated income to when we next generate income.

Okay. Great. Thank you.

Thank you. The next question is coming from the line of Dennis McGill with Zelman & Associates. Please proceed with your question.

Thank you. I think you mentioned that the renewal pace was strengthened through the quarter. Did I hear you say that it was about three-ish in April and then that got to over four-ish in June?

On renewals it strengthened slightly from about 2.2% to 3% from first quarter to this quarter. For releasing of space that went vacant and then we released it, we went from 3.2% last quarter to just over 4% -- I think it was 4.1% -- for June and we started pushing rates in February. We didn't push them during the -- we had a lot of vacancies going into the year but we saw leasing really picking up in January so we started pushing rates in February and it's borne some fruit. We started in some test markets and we saw very little price resistance, so we expanded it and expanded it, and so far it's held and we will probably continue to push it until it doesn't hold.

Okay. So no impact that you've seen even at short term on the turnover rates on the renewal side?

No. We send letters out 90 days in advance with the renewal rates, so even if we started in February, the first we'd see it would be May. So, we will see some of it -- we'll see more of it in the third quarter than we saw in the second quarter.

Okay. And then can you differentiate whether the overall market is pushing rents to a similar degree versus you perhaps being more conservative a year ago or six months ago with your inventory position and you're catching up?

Yes, I don't know what everybody else is doing. I looked at a number of portfolios; some are priced under us, some are priced right at where we are. I haven't seen any that were significant -- priced significantly above us in terms of rental rates.

Okay. And then separately on the acquisition side, can you just talk generally what you're seeing with respect to competition at both auction and then on the MLS?

Yes, I would say at the auction, the institutional auction, the institutional competition is less but has not gone away. MLS is definitely far less. I mean, we've cut back and I think most of the larger players have cut back.

Because the availability is not as strong there or different reasons?

Part of it is availability. I think part of it is I think figuring out how to operate the current portfolio. For us, it's availability of capital. So, may be the same for them. I don't know every individual's issue.

Yes, I was asking specific to you, but for you, for the capital you have the auction is a better return right now?

Yes, I'd say we get probably 30 to 40 basis points higher on average at the auctions.

Okay. Perfect. Thank you, guys. Good luck.

Thank you. The next question is coming from the line of Haendel St. Juste with Morgan Stanley. Please proceed with your question.

Hey, good morning out there. Thanks for taking my question. Wanted to follow up on a earlier turn-time question. I think you mentioned you got it down to 56 or maybe 58 days. Can you add more on how you've been able to drive that figure lower and how much lower do you think you can drive it? And then also what other opportunities of low-hanging fruit have you identified to drive operating costs lower in your portfolio?

Well, I don't know if any of it's that low hanging, but on the days there's a number of things we can do, just we need -- we've been developing better systems. And one way you develop better systems is go through a period where the systems weren't working perfectly and so developing better systems of identifying when -- in passing the ball off more smoothly from the guys that are doing the move-outs to the guys who are doing the work on the turn, and then passing it back off to the leasing people when it's ready. So, all those things require scheduling and efficiency.

Just for an example, if you have a turn that's $300, they're sending a guy out -- if they're sending a guy out to check the work that got done before they'll let it go to lease, then that's a mistake. We should be marketing that before that $300 of work is done and then get it done in the meantime. So, just cutting those little things off makes a big difference in when the turn times happen.

Part of it is also we're experimenting with pushing rates. If you push rates, it generally will extend the time that it takes to lease, although we haven't really seen that. In Dallas when we pushed rates it went from 13 to 14 days, so that seems still pretty good to me. But I think we can start -- when we really get it down, we'll be marketing this stuff as soon as we get notice from the tenant that they're not going to lease. We're not at that pace there. And we do need to go check the work when it's $1,000 or $2,000 but maybe not when it's only $300 to turn the property.

Okay. Fair enough. Appreciate that color, Jack. Dave, maybe one for you. Curious if the new JVs, the high-end JV, the NPL JV, are perhaps a signal or statement about the waning HP outlook or return expectations for the deals you're seeing in the conventional single-family rental transaction market. Are you finding it more difficult to source conventional acquisitions that meet your return targets or should we just read that these new deals are purely opportunistic? These new JVs are purely opportunistic in nature?

I would look at entirely the second way. It's an untapped market. It is -- it complements our current program. It doesn't have any implication on our belief that the current program is waning. It's just an untapped market that we believe has potential to be a complement to our current program. We started American Homes with testing it through a joint venture very similar to what we're doing on the high-end homes and we are basically evaluating the depth of that market and some of the mechanics of that market through this joint venture.

And over the next couple of months or maybe couple of quarters, more realistically, we will conclude as to the depth of that market and how we should proceed, but in no way should it be interpreted as a signal of any type to the core business of American Homes.

Okay. And maybe at a high level can you discuss perhaps the current gross net yield opportunity in the marketplace today versus perhaps a year ago and have you or would you consider lowering your return requirements given the run-up in home prices here?

I'll take that. We haven't seen significant -- well, in terms of yield we haven't seen a significant decrease in yield in what we're buying properties at in the markets where we continue to buy properties. If you look at some of the West Coast markets, we're not buying right now because the yield has gone to a level that, for the most part, we're not interested in participating. But at our current capital availability, I would buy more in Vegas and Phoenix and Seattle and Portland if we had unlimited capital, but we don't.

So, we are continuing to buy at the places where we get the best yields. We think that they have a significant opportunity to appreciate and we are not seeing a level yet where we have to make tough choices as to reducing our yield because we got enough markets with the capital level that we have that we can buy the stuff we want at the yields we want.

To expand upon that, we are driving our current acquisition program based on capital availability. In the future, do we lower our yields a little bit? Well, we'll cross that bridge when we get there, but we essentially take a view that, and again Management is a significant shareholder in this Company, is that we will continue to acquire assets as long as that process is accretive to the Company in the bigger picture. And so -- but today that decision doesn't have to be made.

There are significant opportunities at very consistent yields to what we've been buying at for all of 2014. The yields are pretty consistent quarter in and quarter out, month in and month out. And if they go up 5% and rents go up 5%, your yields are going to stay pretty close to the same or even expand.

And one last one, if I may, on the Beazer. Just curious if you could talk about or characterize the opportunity in the marketplace today with these types of portfolio, this 1000- to maybe 2000-home-size portfolios. Are you seeing more today, more of these opportunities in the market? Are the smaller private guys more inclined to sell? Have their pricing expectations changed? Just curious if you're sensing a change in the marketplace post not only securitization but also post this Beazer preowned deal.

We talked more where the price expectations has come down significantly. I don't see that as much. I think the price expectation is still pretty high. At some point I expect that it'll get a little more reasonable. I think Beazer was reasonable. We've talked to others that are closer to reasonable than they were in the past but still not where we need them to be. There's a lot of discussion going on and there's been a number of groups that we have talked to more than once where expectations have narrowed a little bit, but the bid and ask is still wide on those transactions.

Thank you, guys.

Thank you.

(Operator Instructions)

Our next question is coming from the line of Jade Rahmani with KBW. Please proceed with your question.

Great. Hi. Thanks for taking the questions. I wanted to ask, do you expect overall occupancy to dip as you acquire more homes or do you expect leasing activity to outpace acquisitions relative to the 87% that you gave for July?

I would expect the 87% to continue to increase until we get to what we think -- currently our stabilized occupancy is 95%, so whether it will hold at 95% or 94% or go to 96%, I don't know. But I think somewhere in the 90%-plus range is where we'll stabilize.

Jade, if you look at last quarter, the second quarter, you look at third quarter to date July, new leases or initial leases of homes is essentially keeping pace with the acquisition pace and if you continue to do that, your occupancy is going to continue to increase for the portfolio as a whole.

Okay. The sequential decline in core NOI margin and total NOI margin, can you discuss what drove that? And also if you expect core NOI margins to remain at these levels or if there's any improvement you anticipate in the back half or for potential decline?

I would -- I mean, people call me an optimist, but I would say that it's likely to go up. We have absorbed, I think, normal level of turns which we hadn't in the past which I think the turn costs are for the driver down and I think that the HVAC costs were another driver of the rate down. There's a number of things that we're doing to control costs which I think will drive things back up and I don't think we'll have high HVAC costs every quarter. I think that's a one-off thing.

And then the other piece of the margins, on the revenue side, by shaving down the 58 days by a day, two days, seven days, all of those will help the revenue line as well as the program of raising rents. And, as Jack said, there is quite a tale on raising rents because you initiate that program and you don't really see the results of your initiation for 90 days. So each time we look to increase or modify that program, takes about 90 days to work through the system as it -- we have 90-day renewal processes here in sending out letters to renewal date.

Okay. Just on the effective interest cost of the securitization, what do you think is reasonable to assume above the actual interest cost? In other words, adding hedging costs and issuance costs and amortizing it over the expected life? Should we increase the interest cost by 75 basis points or something around that level?

It's, I think, closer to the 50 basis points. You can run the numbers, because I think there is disclosure in the queue on the total cost of that securitization. And so you can compute the effective interest rate but -- $14 million -- I don't have the queue in front of me, Jade, but my recollection is there was $14 million of offering cost related to that securitization.

Okay. And will the -- the variable interest rate, will that be hedged at all?

Yes, so it's not hedged but it is capped, but it's a cap that's required by the rating industries as part of the process. It's a cap that is significantly out of the money for us, so the actual protection is probably very, very minimal. But it caps the interest rate about 160 basis points higher than where it is today.

Okay. Thanks. Just lastly, can you tell us the number of properties or what percentage of leased properties had some kind of service call in the quarter?

The answer is no, I can't tell you off the top of my head. I can get that information. But there's a number of calls that don't require service calls, so I would say we probably had 100% of properties that were leased or close to 100% of properties that were leased in the quarter, as we get the majority of the calls in the first 30 to 60 days talking about where's the GFI switch, where is this, how do I work that? And as well as -- our guys can walk people through the house, sometimes the homeowner doesn't remember. You walk the wife through the house and the husband is the one home when something goes wrong, so there's a number of calls that we get that we just walk them through over the phone.

Okay. Yes, I think that information would be helpful just in terms of beyond the first 30 to 60 days, the actual seasoned homes, what the incidence rate is. I think Way Point at one point decided 28% of leased homes experienced a work order, which is like one every three to four months or something. So, just trying to get a feel for that, but thanks very much for the color.

Okay. Thank you.

Thank you. The next question is coming from the line of Buck Horne with Raymond James. Please proceed with your question.

Hi, good morning. I wanted to go back to the Texas markets. I believe you mentioned those were some of your strongest markets in terms of where you're seeing, I guess both new and renewal lease rates. And it seems like Texas is one of the markets where the single-family home buying activity is still probably holding up relatively more strongly than other places in the country. And I guess there's fewer barriers to home buying in Texas, so I'm wondering about the dynamic you're seeing in Texas right now and how much more pricing power do you think is available in those markets?

Well, in Texas there's two things. It's a super Tuesday state, so the auctions are very chaotic and you have to be very organized to take advantage of the pricing at the auctions. We get some of our best deals at the auctions in Texas. Secondly, they have a number of people moving into the state and want to have rental housing. And they're not building, at least they are starting to build somewhat in Houston, but I haven't seen a lot of building going on in Austin, San Antonio, or Dallas, so there's demand and not enough product.

Well, okay. Maybe bigger picture. Going back to your comment about the lack of new supply being added to the single-family housing stock, particularly at these targeted price points you're going after, if you compare that dynamic to your experience with the self-storage sector or other REIT sectors, do you think the single-family rental industry -- is this a valid proxy to something like the self-storage sector where you got this lack of new supply and this consolidation opportunity? And ultimately what I'm getting at is do you think the core NOI growth potential of this property type could be similar to what we've seen with other sectors like whether it's apartments or self-storage?

I can take that. I think we're still very early in this industry. If you compare us to some historical industries out there, whether it be self-storage or multi-family, they went through an extended period of time of consolidation and enhancements to their systems and enhancements to their NOI. And so, yes, I do believe that there's an opportunity to look at those as parallels and I do believe that we're on that track. We completed one transaction. They're not going to happen on a weekly basis, but we do see more chatter or hear more chatter around the consolidation front. But the bid and ask, although maybe narrowing slightly, is still wider than it needs -- it has to be to get a transaction completed.

On the NOI margins, every day this industry is becoming not only more mature but systems are getting better, both computer-wise as well as process-wise. And so I do see this -- we're still in the -- maybe not the first inning but the early innings of this program.

Okay. That's all I had. Thank you.

Thank you, Buck.

Thank you. There appears to be no further questions at this time. I would now like to turn the floor back to Management for any closing remarks.

Well, thank you again for joining us today. We look forward to updating you next quarter on our quarterly earnings call. And, with that, I'll turn it back to the operator to conclude. Operator?

Thank you, ladies and gentlemen. This does conclude today's teleconference. We thank you for your participation and you may now disconnect.