American Homes 4 Rent (AMH) 2014 Q3 法說會逐字稿

Welcome to American Homes 4 Rent 2014 Third-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 like to turn the call over to Stephanie Hime, Counsel at American Homes 4 Rent. Please go ahead.

Good morning. Thank you for joining us for our Third-Quarter Earnings Conference Call. I am here today with David 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 future results are described in our press release and in our filings with the SEC.

All forward-looking statements speak only as of today, November, 3, 2014. 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, Stephanie, and welcome to our third quarter 2014 earnings call. On today's earnings call I will provide a brief summary of our quarter. I will then turn the call over to Jack Corrigan to discuss the current operating environment and our progress with regard to operations and acquisitions. Finally, Diana Laing will review operating and financial results for the third quarter, and update you on our balance sheet and liquidity.

On previous calls, we outlined our vision of building the premiere Company focused on owning and operating single-family rental homes. We continued to see that vision of building a single-family rental home concept be validated. Specifically, we continued to acquire high-quality homes in attractive markets.

We continue to see high tenant demand for single-family rentals. We continue to experience high tenant retention, and we continued to have strong rental rate increases.

As of September 30, we owned 30,877 properties, an increase of 3,704 homes from the 27,173 homes owned as of June 30. The 3,704 homes acquired included 1,372 homes acquired in the Beazer pre-owned rental home portfolio that we acquired July 1.

Excluding the homes acquired in the Beazer portfolio, we acquired 2,332 homes for an investment of approximately $400 million. We expect to invest approximately $500 million in additional single-family assets in the fourth quarter.

As of September 30, we had 26,161 leased properties. This is an increase of 2,797 leased properties from June. At September 30, our occupancy percentage of our stabilized portfolio was 94.1%, comparable to the 94.7% in the second quarter.

Most impressive are the metrics we continue to see of our own assets. Our tenant retention rate was approximately 70% during the quarter, and our stabilized occupancy was 94% at quarter end. Further, we are seeing strong rental rate increases in excess of 4% on the properties re-leased, and 3% on renewals.

As I'm sure you noticed, for the third quarter our core operating margin was 57.3%, lower than margins reported in prior quarters. This is a result of higher maintenance expenses, seasonality, and operational inefficiencies. Expenses are seasonal, and in the third quarter we experienced higher seasonal maintenance costs, primarily related to air-conditioning systems, and a higher number of turns.

As we mentioned on prior calls, our turn volume in previous quarters was not at stabilized levels, and was expected to increase in the third quarter. Although our lease retention rate was approximately 70% during the third quarter, which is similar to prior quarters, we did have more move-outs during the third quarter. This resulted in more turn expenses in our operating expenses.

Although the majority of our higher operating expenses are attributed to seasonality and some operational inefficiencies, in reviewing our operations we believe our stabilized level of maintenance costs may be higher than officially projected, and as such, we have lowered our ongoing annual core net operating margin expectations to 61% to 62%. This is in line with our year-to-date core net operating margin.

With respect to capital, we continue to pursue forms of capital on a reasonable level of leverage, maintaining a strong balance sheet, with significant capacity and flexibility to finance our growth and investment strategies to allow us to be nimble as opportunities arise. Diana will provide more background on our upcoming securitization and financial details a little later.

As previously discussed, we acquired the Beazer rental home portfolio in July. In connection with this transaction, the Company expensed approximately $14 million of acquisition and transition costs, including approximately $12.6 million in fees paid to the sponsor. These costs are reported in the acquisition expense line of our income statement, and are added back for core funds from operations.

Lastly, in accordance with existing agreement, we are proceeding to have the acquisition and renovation personnel internalized into the Company in mid-December. After that time, we will be incurring on a direct basis all acquisition and renovation personnel and their related costs, and will no longer utilize the services of the sponsor for such activities.

While the future acquisition and renovation costs per property will be less, the accounting of such costs will generally be reflected as an expense. Prior to the internalization, amounts paid to the sponsor have generally been capitalized into the acquisition cost of each property. Again, the Company does add back acquisition costs in computing core funds from operations.

At this time, I am going to turn the call over to Jack Corrigan, our Chief Operating Officer, to provide more details on our acquisition, renovating, and operating activities for the third quarter.

Thank you, Dave. I'll first give a little color on acquisitions and renovations, and then on property operations for the third quarter. For Q3 2014, we acquired approximately 3,700 homes, including approximately 1,400 in the Beazer acquisition. Of the 2,300 properties acquired in our traditional channels, we acquired approximately 40% at trustee auction. We anticipate we will acquire approximately 2,900 homes in the fourth quarter.

We continue to execute on our renovation program. We renovated approximately 1,900 homes in the third quarter, excluding turns. We expect to increase that pace to keep on track with our acquisition activity.

We continue to pursue object non-performing loan strategy, and as of September 30 have invested approximately $30 million in NPL investments, including $4.2 million that have been resolved. Of that $4.2 million, it includes approximately 22 which resulted in us acquiring title. The balance remains invested in loans in process of being resolved.

With respect to our third-quarter operations, our leasing activity continues to be strong, including renewal and releasing activities. For the quarter, we leased a total of approximately 3,800 homes, not including renewals, but including approximately 1,900 second-generation leases. This is a slightly slower leasing pace than the first half of the year.

Lower available inventory and higher credit standards, combined with us pushing rental rates, had some effect on our leasing activities. We continue to push our program of increasing rents on second-generation leases.

During the third quarter we increased rents on re-leasing in excess of 4%. We expect some seasonal slow-down in leasing in the latter half of the fourth quarter.

We continue to see strong tenant retention at approximately 70%, with rental rate increases in the 3% range on renewals. Despite strong tenant retention, we had our largest number of move-outs this quarter. This resulted in higher move-out cost. It should be noted that our turn cost net of charge facts per completed turn was in line with our expectations.

I want to further address expenses, which were high during the third quarter, partially as a result of seasonality, and partially as a result of logistical inefficiencies. The summer brought approximately $1.2 million in air-conditioning repairs, as many of our homes were facing their first summer as a rental.

In addition, transferring the obligation for utilities and lawn mowing has been a logistical challenge for us, resulting in our absorbing costs that should have been the tenant's responsibility. We are working on these issues, and believe we have solutions that over the next four quarters will minimize the problems and related costs. With that, I'd like to turn the call over to Diana.

Thank you, Jack. I'll review the third-quarter financial results that were detailed in today's press release, and in the supplemental information package that we posted earlier this morning on our website under the For Investors tab.

To better present our operating performance without the effect of certain items, we've defined a measurement that we call core funds from operations. The definition of core funds from operations is outlined on Page 7 of the supplemental information package. For the third quarter, our core FFO was $38.4 million, an 8.7% increase from the $35.2 million for the quarter ended June 30, and an 85.7% increase over the prior-year period. On a per-share basis, core FFO per share was $0.15, flat with the second quarter, and a 50% increase over the third quarter of 2013.

On Page 4 of the supplemental information package, we calculate net operating income and operating margins for our leased portfolio. For the third quarter of 2014, NOI from our leased properties was $60.1 million, an increase of 5.3% from the $57.1 million reported in the second quarter, and a 90.3% increase over the prior-year period. Revenues were $110 million for the quarter, an increase of 17.2% over revenues reported in the second quarter.

Please note that the captioned titled Leased Property Operating Expenses includes expenses that relate to properties that are leased and properties that have been previously leased, whether or not they are currently leased. Turn costs and other expenses for properties that have previously been renovated and leased are a component of expense in this category, and are deducted from our NOI.

You will note that we calculate a core net operating margin, in which we eliminate from both revenues and expenses the amounts that we bill back to tenants for reimbursement by them. For the third quarter of 2014, our core net operating margin was 57.3%, compared with 63.6% during the second quarter. As Dave and Jack mentioned, we experienced higher leased property operating expenses, which affected this quarter's margin. Also as previously mentioned, we expect our annual core NOI margin to be in the 61% to 62% range. However, this will vary quarter to quarter with seasonal changes.

Our general and administrative expenses for the third quarter were $5.3 million, which is a slight decrease from the $5.7 million we incurred in the second quarter.

As Dave mentioned, it's our goal to opportunistically raise capital and to continue to execute on our growth strategy. As a result, in September 2014 we raised approximately $488 million in gross proceeds through an asset-backed securitization of a loan secured by 4,487 homes. This is a ten-year loan, and it has a duration-weighted fixed rate of 4.42%. As of September 30, we had in place two securitization transactions totaling approximately $1 billion, and we have an $800-million line of credit, of which $82 million was drawn at September 30.

Total outstanding debt at September 30 is approximately 19% of the carrying value of our total assets. We've submitted our third securitization transaction to the rating agencies, with the goal of completing it in the fourth quarter. With that, we'll open up the call to your questions. Operator?

Thank you.

(Operator Instructions)

Jade Rahmani, KBW.

Hi, good morning, and thanks for taking the questions. Regarding the upcoming securitization, can you say what kind of term you're expecting to look at, and whether it would be a fixed or a floating-rate deal?

Yes, we -- this is Dave. Good morning, Jade. We, on our last deal, did a fixed-rate, ten-year deal. We are evaluating doing another fixed-rate term, and we will make the final call as we're going to market, based on where the market is for both fixed-rate and variable-rate transactions. But we do have a preference to finance long-term assets with long-term capital. We're more inclined to be longer term than shorter term.

Great. Thanks for that. Turning to expenses, I was wondering if you could tell us what percentage of turnover cost and repair and maintenance are being capitalized versus directly expensed, and where each are running on a per-property basis?

You want to deal with the expense versus capitalization?

Generally we expense turnover costs unless it is truly a replacement of an item in a home. The repairs and maintenance and turnover costs are generally expensed. Obviously, during renovation we are capitalizing renovation costs and replacements.

Okay, and on a per-property basis, can you provide any color on where those are running?

Yes, the turnover costs are in line on a per-property basis, with where we think we will be on a per-year basis. We don't see any significant difference there. We had originally guided people to approximately $0.25 per annum. We're in that zip code today.

With respect to expenses, as we mentioned, our expenses are running a little bit higher than we anticipated. Therefore, we are lowering our projected yields on the properties on an annual basis a couple of points -- 61%, 62%.

Yes. That's projected margin, not necessarily yield.

The margin, I'm sorry.

The rents are going up faster than the expenses.

Okay. On a per-property or per-square foot basis, where are you seeing those cost run?

On repairs and maintenance?

Yes.

In terms of recurring repairs and maintenance, I think we'll be in -- somewhere in the $600 per property range, per year.

Okay. Thanks for taking the questions.

Yes.

Jane Wong, Bank of America.

Thank you, good morning. I was wondering if you could comment on the bad debt in the quarter, any trends that you're seeing there? When will we anniversary when all of the leases that have been underwritten were by AMH?

Every quarter we have a higher percentage during the third quarter of our rents. I think approximately $60 million were centrally underwritten, versus $44 million or $46 million that were underwritten by others, or not centrally by us. It's not an apples-and-apples comparison, because it's not the same age, but about $300,000 of the $2 million in expenses were related to centrally underwritten, and the other $1.7 million was related to other historical underwriting.

We think -- I mean, we are pretty certain that over time that number is going to come way down. I think I've given guidance at about 1%, and that's where I think it will end up.

Thank you. I think historically you have provided current occupancy for the portfolio. Can you give an update as of today or end of October?

Yes. Typically we have had a little more time between the end of the month and the conference call to make sure we scrub down the numbers accurately. We did this call and our earnings release a little earlier to cater to being able to answer questions at NAREIT, so we don't have the October 31 numbers at this point.

Thank you.

Jack Micenko, SIG.

Good morning. When we think about the securitization for the fourth quarter, size-wise should we be thinking about that $400 million to $500 million number, or could that be higher?

Well it could be higher, but I think we've seen pretty good execution of our prior securitizations in that $500 million range. If you look at the execution that we have had in that dollar range, we have been very pleased with the demand that we've seen, the ability to build a solid book when we're out there, and it's reflected in the rates we have been able to get. I think that's a good size for the market place to get good execution.

Okay, great. On the Beazer acquisition, you got fairly large in Phoenix. Is that a core market for you now? Do you think you could see some divestitures down the road from that slug of homes? How do you think about the dynamics of the market change when you overlay that acquisition?

Yes, Phoenix has always been a core market for us. We just -- the prices got higher, and we had other opportunities to deploy our limited capital, so we went to other markets. But Phoenix is a core market. I don't anticipate selling in near future any of the homes that we bought in Phoenix.

We are selling a couple that Beazer owned that were in rent-restricted areas. I would say that will be less than 10 of the 1,372.

Okay, and while I have you, just one more real quick one. 70% retention, obviously good number, indicative of the asset class relative to apartments. Any intel on where the 30% are going -- specifically, other rentals on the single side? Any color you can give, any trends or broader themes you noticed over the summer, as you had a large amount of turnovers from a numbers standpoint?

Yes. We don't have -- a lot of the reasons they give are other when we do the survey. It's probably not totally discernible. Some are buying homes, and some are just -- have life changes. They get divorced. Their kids get out of school. Whatever. We get a lot of life changes and other, and buying a house.

And moving out of market.

Okay. All right, thank you.

Haendel St. Juste, Morgan Stanley.

To follow up on the last question, I want to make sure or clarify -- and I know it's early in your year life cycle as a Company, but are you specifically tracking the reasons for say, moving out to buy a home, to perhaps move to another market? Do you have those numbers perhaps for this quarter versus prior quarters?

We have numbers. I'm not sure at this point we're ready to publish them because I am not convinced they're 100% reliable.

Okay.

But we do ask the questions, and we are getting better at discerning the feedback. But a lot of people are more private in their answers than you would think.

Okay, fair enough. To get into the degradation of the margin a bit more, it looks like the degradation came from higher turnover, higher R&M. Can you talk a bit more, help us understand how much of this was due to seasonality pushing rent too hard, and how much was related to the inefficiencies you referred to?

I would like to get some actually specifics on what those inefficiencies are, and how do you anticipate addressing them? Some color or perhaps some perspective on reasons for the higher turnover R&M, and then some more specifics on the inefficiencies and how you plan to address them?

Yes, I will talk first about the higher turnover. I think that we cater to families, and families will typically stay through the school year. If they are going to move they are going to move in the summer. I think you're going to see probably annually a kick-up in move-outs during the summer.

As far as the operational inefficiencies, utilities is an example. It's really a timing issue. We have security deposits that by most state laws we have deadlines in order to reconcile the security deposit. In some cases it's 14 days. Then we find out after we've reconciled the security deposit that the guy hasn't paid their last utility bill or their last two utility bills.

That's their responsibility in most cases to pay, and the utility company should go after them. But if the utility company says well, I am going to turn off all the utilities on all your houses if you don't pay it, we end up paying it.

What we're working through, and we've done experiments in two markets, two different systems of solving that. Basically, we have to get control of the utility bills so that we know who is not paying, and we address it earlier. That's what we're working on.

In order to do that, we have to change the language in the lease. It's going to take some time to fully roll that out -- a year to fully roll that out. That's what we're working on, in terms of utilities.

In terms of landscaping, we just -- I expected about 600 move-outs a month. I thought I staffed good enough handle that. We didn't. We had a higher number of turns, and pretty much overwhelmed our staff.

In some cases, we didn't like turn off the mowing service. There's just a couple of break-downs in things where we failed to turn off the mowing service when somebody moved in. We're just getting better at those cut-off issues.

The third thing that hit us surprised me, but probably shouldn't have, is we have probably -- and I don't know the exact number, we're getting inventory on that now -- but we have a number of houses that do not have timed sprinklers. When somebody moved out, and in the middle of the summer you get lawns that if they're not watered every three or four days, don't last very long.

We lost a few lawns and had to replace some landscaping. That was a cost that won't happen again. We'll invest in time sprinklers for -- or put in desert landscaping in those homes that don't already have it.

Okay. I appreciate that response. Curious, last quarter the number of days to turn was 56, I believe. What was it this quarter?

It was 58. I kind of misspoke last quarter. We were 58 to signed lease, and then there's a 10-day period between -- on average, a 10-day period between a signed lease and somebody moving in and paying rent. It's really 68 days.

It's down to 55. We've made a 13-day improvement over the quarter. That's from money producing to money producing.

Got it. One last one. Just wanted some additional color on the transaction mark. You put a $500-million target out there for 4Q acquisitions. Just curious on what you're seeing out there in terms of opportunity that meets your underwriting guidelines, the competitive set, the growth net yield -- any changes there? Just curious on the acquisition opportunity?

Acquisition opportunities are good. We're seeing more modest price increases throughout the country, and the rent growth has more than made up for that. We think for the foreseeable future we have a good path towards -- for our acquisition team.

Gross yields still in the -- call it 10, 12 -- net in the six-ish range?

I never even look at gross yields, because to me it's somewhat not relevant. I look -- because if you have a property tax of 2.4%, it's way different requirement than someplace that has a 1% property tax rate. I'm probably -- I don't really think like that. I think of the net yield, and I think we're going to be in the low 6%s on average.

Okay, thank you.

A low 6% return yield.

Steve Stelmach, FBR.

Hi. Good morning, everyone. Just to get back on the core NOI discussion, 57 going to your guidance of 61 to 62. To ask the question maybe a little different way, what needs to happen to get there? Is it -- do you need to actually execute on reconciling those operating inefficiencies, or is it simply a matter of just getting beyond the seasonal weaker period? Maybe sort of size the low-hanging fruit on getting the NOI margin back up?

Yes. I think that we'll get it back up relatively quickly, and that we'll have -- I expect we'll have some other surprises that come and hit us at some point. But we're getting -- we're three years into this now, and hopefully most of the surprises are behind us. We're -- I would expect that the seasonal stuff is going to go away. We may have higher than 61 to 62 in the fourth quarter, because our move outs in the fourth quarter are traditionally our lightest, and then it may go back down.

You say in our weaker periods, it's not really our weaker periods. The second and third quarter are our strongest leasing periods. They may be the period where most of the move-outs occur so it looks weaker on an expense level. But they're definitely our strongest leasing periods.

People tend to move, and we tend to get a lot of business during that time. In the fourth quarter we'll have far fewer move-outs during the Thanksgiving through New Year's time frame. We'll have a lot less expenses, but leasing will be weaker.

Our margins are really impacted by the seasonality of expenses, but we are on a very consistent basis seeing strong leasing. We maintained a 95% stabilized occupancy period after period after period, and maintained strong renewals and retention of tenants.

The expenses season by season are going to be different in character and different in dollar amount. We're kind of looking at this as an average, what is the margin for the year, and that's what we've provided guidance. But there will be variability quarter by quarter.

Should we look towards that lease expiration, the [FFO's] that you provided in the supplement to gauge when NOI margin's going to suffer a little bit more, and when it's going to benefit a little bit more from a lease expiration perspective? Is that a decent way to think about the seasonality?

Yes, we're thinking about how we should present it. Really our turn costs occur ratably over time. It's just that they are not paid for or expensed that way. Maybe if we can -- we're thinking about trying to smooth them out in terms of our core FFO by accruing for them on a ratable basis based on what we expect to happen, but we haven't finalized that. We're just noodling around with it to make it easier to understand.

Okay. On the renewal side, 68.4 for the quarter in the [middle] which is a transitional period for a lot of people's lifestyles. It was 73% in the similar quarter last year. Anything going on there of note as to why it was sort of weaker year over year? Maybe put that in the context of your discussion about higher rent bumps?

Yes, I think -- the base reason is the seasonality. People is going to stay. The summer is going to be their cut-off for moving. It effects us positively on the leasing side, negatively on the move-out side. I don't know how else to say it. I would expect our retention in the fourth quarter to be substantially higher.

Okay. All right, guys. Thanks a lot.

Buck Horne, Raymond James.

Good morning. I want to go back to the change to the structural margin guidance longer term for the Company. I was wondering if you could be a little bit more specific. What particular line items or assumptions you think are needing to be changed to lower that long-term margin guidance?

Yes, our estimate at one point was that $300 per year per house was the anticipated repairs and maintenance expense. We have had enough history now where we think it's higher than that. It's going to be closer to $600 per house. That's really the driver.

Mainly R&M, but is anything with -- I mean, is that air conditioning expense, or is that just the landscaping and lawn care that you mentioned? Is there one particular driver that's more important?

Not really. We probably have a little more -- and I would say some of it is self-insurance costs. You have the big repairs and maintenance that we have are usually caused by water damage that most homeowners would send to their insurance. We're at $125,000 deductible, so it runs through our repairs and maintenance.

It's -- those kind of things really drive up the cost per house. But we're having -- and it may be that it's first year or two of operation where you have -- we have a lot of dishwashers and things that go out, and we just got to replace them.

Okay. I was also curious -- just a follow-up on a earlier question -- just trying to understand how you plan to strike the balance between pricing and occupancy? How do you think about managing the portfolio in terms of a stabilized occupancy rate? What do you think the long-term occupancy rate ought to be targeted at?

Basically, another thought is are you seeing any competitor actions right now in terms of the industry at large? Are you seeing competitors also raising prices, or are you seeing any signs of incentives or concessions this time of year?

We are seeing all of the above. Some are more aggressive in raising prices. Some of -- especially the private guys are, especially this time of year, trying to get heads in beds going into the winter, especially in the colder markets. We see some pretty heavy -- not really rate reducing, but pretty heavy concessions by some of our competitors in certain markets. But not all of the competitors, and not in all markets.

Would you characterize them as large competitors or the small mom-and-pop variety?

At least the one I'm thinking of, it's pushing the concessions pretty heavily, owns about 5,000 homes.

Okay, great. Thank you.

Anthony Paolone, JPMorgan.

Thanks, good morning. Jack, if I recall correctly, I thought like dishwashers, refrigerators, floors, the whole variety of things that you guys have in homes has been under warranty, and you guys had cut some different deals on those warranties. Just wondering how that ties to the R&M numbers you guys talked about?

How --

So the $300 going to $600 is that net of what warranties and such cover? I am just wondering --

Yes, that's net. That's net of charge-backs related to general repairs and maintenance. Again, one of the things that we find is in the first 30 to 60 days, we have our most significant number of calls on homes that have been renovated because a lot of them haven't been lived in for a while. That number, it may be overstated. I don't think it's understated.

We're working to reduce it and get it where we thought it was going to be at $300. But at this point, after three years of operating this business and looking at what our recurring costs are, we think it's closer to $600 than the $300.

Again, I guess what I'm trying to figure out is, I'm presuming that a variety of these warranties expire before the end of the useful life on a lot of these things. If the warranties were to burn off, would there be another step-up in what you guys are on the hook for, for R&M?

I don't think -- the appliances aren't a significant number in repairs and maintenance. There is a little bit. Most of the cost in repairs and maintenance you're going to see in your plumbing and your air conditioning. As we mentioned, there's some inefficiencies that were in there with respect to utilities and landscaping. But I don't think the appliances and the warranty is the significant component of what we're talking about here.

Okay. On this question about the bad debt. I guess just didn't catch why is that running a little closer? It seems like you average a little closer to two points, and you're talking about it coming down to one point. What was the driver to that?

The driver was the -- if you look at our rents for the quarter, and I don't have it in front of me, but it was somewhere around -- our base rents were somewhere around $104 million to $105 million. We had approximately $58 million from essentially underwritten tenants, which was $300,000 of bad debt -- a little more than $300,000.

The remaining $1.7 million was on the $46 million of underwritten, either by our field people before we centralized it, or by the third-party guys that we engaged. We feel comfortable that number is going to scale down as more and more of our tenants are centrally underwritten, and every quarter that number goes up.

Our experience this quarter as well as to date has been that the -- and for this quarter the numbers are about three to four times higher in bad debt as a percent of revenue for those that were underwritten pre-January 1. Compare those underwritten after January 1. That's essentially the date that we fully internalized our operations. And centralized.

Okay. That's all I have left. Thanks.

Dave Bragg, Green Street Advisors.

Thank you, good morning. Just revisiting the topic of turnover. We understand that seasonality plays a big role if the third quarter. But on a year-over-year basis, turnover increased 500 basis points. Can you talk about that? Would it have been less if you pushed renewals less than you did?

It might have been less. But I don't think it would be -- would have been significantly less. I think what you have is you have people who expired in April. They go month to month until June or July until their kids finish the school year.

Then you just have a higher number of move-outs. We have seen the number decline in September and October. We think that it had more to do with just when people move than anything else.

Okay. Thanks for the additional disclosure on lease expirations on Page 16 of the supplemental. You do say that you have 1,000 units on month-to-month leases. What level of a premium do you garner for that optionality?

In general, about 10%.

Okay, great. As it relates to the markets, it's noticeable that the occupancy on both a 30-day and 90-day basis is a bit weaker in the Midwest markets of Indianapolis, Chicago, and Cincinnati. Is there something fundamentally different about operating in those markets as compared to the Sun Belt?

Well, no. I don't think so. I think that we have some markets that -- and it's hard to identify. We have had a high level of inventory in Indianapolis and in some of the midwestern markets. But then you look at Columbus and it's doing great.

There is probably -- Chicago has probably more operational inefficiencies, just because of how spread out it is. But the rest of the markets are just -- we had more move-outs in Indianapolis. I can't figure out why at this point, but it just happened.

The Midwest tends to be, from what I can see -- and again, we've been doing this about three years -- to be more traditional in their time frames. You're going to see a higher percentage in the Midwest move out in the summer, and a lower percentage move out between Thanksgiving and Christmas. I don't know if that's their general traditional values, or what it is.

Or weather.

Or weather. That's just kind of what we see.

Okay, thank you. The last question is on consolidation opportunities. What's the pipeline for potential Beazer deals over the next six months or so?

We're constantly talking to other operators. It's still -- it's just rare that you get to a price and a section of homes or that fit our criteria. We're pretty selective in what we bought. Others may not have been, or maybe they were selective and just bought a different thing than we were buying.

We've seen our turn costs be a little higher in the lower rent type stuff. So we're not really at this point anxious to take on a lot more of that.

We continue to be in discussions with a number of parties. A number of those parties have reinitiated discussions that we have started a long time ago and broke off. They have reinitiated those. But to sit here and give you a forecast is very difficult.

It's a bid-ask spread difference, and each one is a negotiated transaction. When you get to the finish line, you get to the finish line, and you close. We continue to be in discussions, but it's very difficult to give any accurate forecast of what we are going to be able to accomplish there.

Understandable. You've spoken about the bid-ask spread in the past, and it sounds like that might be narrowing?

With some yes, and some no.

Okay, thank you.

Dennis McGill, Zelman and Associates.

Hi, good morning. Thank you. Just as it relates to the CapEx assumptions below the line, can you review how you've thought about that in establishing that reserve, and in the discussion of the R&M expenses going higher this quarter, whether that's impacted your thought process there at all?

Yes. Today, and in the next foreseeable future, for the next few years, there will be some minor CapEx in there. We fully renovated all of these properties over the last three years. The expectation is that there won't be any significant items, probably, for the next five or six years in there. We will have a couple hundred dollars, probably, per property per year on average, but nothing of significance this time.

How would you think about that on a more normalized basis as the property seasoned a bit?

Well, over -- there's a lot of variability's in there. The majority of those items are -- that need to be replaced will be more than ten years out, whether they be roofs or air conditioning systems. Those are the primary two items that require capital expenditure dollars.

We will look at how we're going to deal with that as we get closer. There could be opportunities to rotate some inventory. But at this point over the next five or six years, I don't see that happening. There may be one or two here and there that we need to replace, but it's not going to be a large-scale item.

Okay, so in the short run the HVAC items you talked about are more service requests, as opposed to actually replacing the units?

There is some replacement going on. But the primary amount is service.

All right, thank you, guys.

Thank you.

(Operator Instructions)

Jade Rahmani, KBW.

Thanks for taking the follow-up. Just wanted to ask on property management. If you could give where those costs were running as a percent of revenue in the quarter?

Yes. For the quarter we are -- the property management costs are running between -- within the leased properties between 9% and 10% of revenue. Again, as we continue to acquire scale those costs are coming down.

Okay. Did you give the bad debt expense as a percentage of revenue, as well?

I believe it was about 1.7%.

Okay. Thanks a lot.

Haendel St. Juste, Morgan Stanley.

Hi, just a couple quick follow-ups here. Dave, I wanted to go back one last time to the margin issue. I just wondered if there is anything at all about the experience that suggests perhaps that you guys are getting close to a maximum natural size or efficiency as a Company, or perhaps that you might have acquired too much too quickly the last couple quarters?

I am curious as to what message perhaps you would like to convey to your core investor base and those who remain a bit skeptical on the long-term inefficiencies or efficiencies of the single-family rental business?

I don't think you should read into anything that's happened this quarter that there is a capping off of scale. On the inefficiency side, I would tell you that we probably were a little bit short in our staffing and our preparation for the number of turns that we did have in a couple of our markets. But as we continue to add additional properties into our system, what we are going to see is better efficiencies in our property management area.

For the most part, we have a very scalable system throughout the country. I don't think we have -- I don't think there is anything in this quarter that should indicate that the management platform can't handle additional properties. We will continue to acquire properties so long as we believe the returns off those properties is accretive and attractive in relationship to the capital that we're utilizing to acquire those properties.

Haendel, I would look at it this way. When we first started acquiring back in mid-2011, we weren't that good at it, and it took us six to nine months to get really good at it. Then we did renovations and we struggled with that for a while and then we got really good at that. Then leasing, we struggled with that for a while and then we got really good at that. I would say this is just the next evolution of things that we need to get really good at, and we're going to get there.

Okay. One last one. You guys are working now on our third securitization. Blackstone I think is working on its fourth. We are hearing talk of multi-bar securitizations out there working their way through the pipeline,

Curious on how you would assess the demands in paper? Seeing any signs of stress in the system, demand waning? Anything on that front would be appreciated.

The demand does vary as you work throughout the year, and also as to what type of securitization you are processing. We have seen in the latter part of this year there has been a lot of paper that has been in the variable rate market, the ABS market, putting a little bit of pressure on those rates. We aren't to market yet on our third securitization.

If you looked at it today, the fixed rate market is a little bit more attractive -- less paper, less supply coming out in fixed-rate components in the ten-year. I'm encouraged that, that would be an attractive place to be issuing paper. But it does move up and down. We have seen the base interest rates move up and down.

There's a lot going on in this world that influences those items. Part of it is timing and part of it's structure.

Thank you.

Thank you. We have reached the end of our question-and-answer session. I would now like to turn the floor back over to Mr. Singelyn for any additional concluding comments.

We would like to thank all of you for getting up early this morning and joining us today. We will see some of you at NAREIT, and we look forward to speaking with you next quarter on our year-end conference call. Thank you very much.

Thank you. This does conclude today's conference call. We thank you for your participation, and you may now disconnect your lines.