American Homes 4 Rent (AMH) 2015 Q3 法說會逐字稿

Greetings, and welcome to the American Homes 4 Rent third-quarter 2015 earnings conference call. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Stephanie Heim. Please go ahead.

Good morning, and thank you for joining us for our third-quarter 2015 earnings conference call. I'm 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 the 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 6, 2015. 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 our CEO, David Singelyn.

Thank you, Stephanie, and welcome to our third quarter 2015 earnings conference call. On today's call I will provide highlights of recent results and update you on progress with regard to our key initiatives for 2015. Jack Corrigan, our Chief Operating Officer, will then review our portfolio performance in more detail. Finally, our Chief Financial Officer, Diana Laing, will discuss our operating and financial results and update you on our balance sheet and liquidity. After our prepared remarks, we will open the call to your questions.

The third quarter was a strong quarter for American Homes 4 Rent and we remain extremely excited about our business. Fundamentals continue to be supportive, driving solid demand for our homes across most of our markets, allowing us to further push occupancy and capture higher rental rates. Within this environment, we continue to add scale and implement best practices to capture strong results.

For the third quarter, we reported core FFO of $49.3 million, or $0.19 per share, representing an increase of 27% over the third quarter of 2014 on a per-share basis. And an increase of 12% over last quarter, the second quarter of 2015. Much of this growth was driven by strength in our operating portfolio.

During the third quarter, we recorded strong Same-Home revenue growth of 5.2% and Same-Home net operating income growth of 10.7% over the third quarter 2014. In addition, our strong performance is the result of the focus we continue to put on several areas of our business. First, our scale provides us with tremendous operational advantages. We never grow just for growth's sake, but there is simply no way to operate efficiently in this industry without scale.

During our first two years as a public Company, we worked diligently on growing rapidly and growing smartly, focused on newer homes in the best neighborhoods. We emphasized target markets with strong demographics and economic growth drivers to support sustainable, long-term demand growth. We entered markets in size allowing us to achieve economies of scale, not only across our national platform, that within our markets as well, and providing us with opportunities to build brand recognition and design and develop our own operational test practices.

Scale has provided us another significant, competitive advantage. That is access to a variety of extremely attractive sources of long-term capital, as we demonstrated again in the third quarter, with the completion of our fifth securitization transaction.

Second, with our portfolio largely built at fantastic prices during a truly unique period in the housing market, we slowed our acquisition pace as we entered 2015. During the third quarter, we acquired about 900 homes. With less emphasis on growing our portfolio, we are able to focus more intently on enhancing our operational best practices to drive higher and more stable operating margins, and our efforts are beginning to produce solid results.

Earlier this year, as our renovation activity slowed, we emphasized leasing to increase occupancy and provide a platform from which to drive stronger rental rate growth. Clearly, the results we are achieving, demonstrate success on this front. Total portfolio occupancy increased from 79.6% at the start of the year to 91.5% at midyear and 91.8% at the end of September. However, removing the impact of recently acquired properties still in the renovation phase, our stabilized portfolio occupancy percentage began the year at 90.5%, and increased to 94.1% in the first half of 2015 and increased another 20 basis points in the third quarter to 94.3%.

Including signed leases with an October start date, we entered the fourth quarter with a leased percentage of 95.4%. As expected, higher occupancies facilitated our ability to increase rental rates more aggressively. In the third quarter of 2015, our renewal leasing spreads were 3.3% and our releasing spreads were 5.0%. Both of these metrics were up solidly from what we reported last quarter when renewal spreads and releasing spreads were 2.4% and 4.6%, respectively.

Third, as I have mentioned on prior calls, we continue to build and enhance our maintenance and expense management platform. I'm pleased with the progress we have made during the third quarter, which has begun to provide early benefits as seen in our reduction of maintenance and turn expenses in our Same-Home pool this quarter compared to prior year. However, I remind you of our comments last quarter, when we indicated that this is not a one-quarter fix, but we expect to see steady improvement over the next six to eight quarters. Jack will provide more details on these initiatives later in the call.

Additionally, subsequent to quarter end, in October, we acquired the remaining 67% interest in two joint ventures which own a total of 377 single-family properties, for a purchase price of approximately $44.4 million. Finally, let me mention that in the third quarter we completed our fifth securitization transaction, raising another $478 million in long-term, very attractively priced capital. Diana will review this transaction in more detail, but let me emphasize that maintaining up strong balance sheet to support our growth objectives remains a strategic goal for American Homes 4 Rent.

Our leverage remains low at 36% of total market capitalization and we now have full capacity on our line of credit. With this in mind in the third quarter, our Board of Trustees approved a $300 million common share repurchase program. During the third quarter, the Company purchased 3.4 million shares at an average cost of $15.76 per share for a total price of $53.7 million. With our acquisition pace slowing, this program provides us with an additional option for capital allocation, which we have flexibility to pursue if and when it makes sense.

And now at this time, I like to turn the call over to Jack Corrigan, our Chief Operating Officer.

Thank you, Dave, and good morning, everyone. I would like to expand on Dave's comments and provide a more complete review of our portfolio. As of September 30, 2015, we own 38,377 homes, an increase of approximately 900 homes from the end of the second quarter. Our acquisition pace in the third quarter was consistent with that of the second quarter.

Projected investment after renovation costs in the 900 homes we acquired is approximately $150 million, or $165,000 per home and $85 per foot. We expect our fourth-quarter acquisitions to be approximately 500 to 600 homes. As of September 30, we had 35,232 occupied properties. This is an increase of approximately 900 occupied homes from the end of the second quarter, and an increase of 7,700 homes since the end of last year.

To achieve this occupancy gain, we executed 4,600 new leases during the quarter. Our strong leasing case has been moderating as we moved out of peak leasing season, approximately 1400 homes leased in October. We expect that our leasing pace will slow in November and December, but we'll be able to maintain our strong occupancy levels as turnover also slows in November and December. We continue to see solid rental rate increases which were approximately 4% overall, including increases of 5% on new leases and a 3.3% on renewals. Our renewal rate was 74% in the second quarter.

I would like to address our maintenance activities. We have made progress on reducing repairs and maintenance, CapEx and turn costs, leading indicators such as September cost versus July and August costs, and the substantial reduction in maintenance calls during October are encouraging for future results. In our Same-Home properties, total repairs and maintenance of turnover cost and capital expenditures during the third quarter 2015 were 16% lower than that of the previous year.

We continue to focus on ways to achieve meaningful efficiencies in these expenditures. While we are considering many cost-reduction initiatives, we have put in place a pilot program to hire repair and maintenance specialists to perform some of the repairs, including turns, rather than using third-party vendors. While we are early in this pilot program, we are optimistic that we can perform these maintenance functions better and less expensively than third parties. And if the pilot program is successful, we plan to expand this program during 2016.

We have restructured parts of the property Management organization and revised processes related to review and approval of major expenditures. For example, we now have centralized subject matter experts who have responsibility for decisions and pricing related to major repair and replacement items. We have also redesigned our training program for field personnel, specifically in the area of scoping turn work, to prevent overimproving in the turn process while maintaining our high standards of tenant experience.

We are continually focusing on our turnover workload to maximize efficiencies and standardized material pricing to streamline processes to reduce turn times. For the third quarter, our core operating margin was 59%, primarily due to the seasonality of our move-outs and the related turn costs combined with increased property taxes. Our peak move-out months are May through August, with turn costs incurred in the ensuing 30 days.

Our completed turns for the third quarter totaled approximately 3,600 compared to 3,100 during the second quarter. We anticipate 2,700 turns during the fourth quarter and consequently lower turn costs and a resulting increase in margin. We've had some substantial price appreciation in certain markets resulting in some property tax reassessment. Our increased property tax expense reflects those reassessments.

Given the anticipated lower maintenance and turn costs in the fourth quarter, operating margins for the year of 61% to 63%, which was our previous guidance, still looks to be on target, despite the higher property taxes. Expenses on the third quarter Same-Home pool were 1.8% lower than for the same period in 2014. On the nine-month pool, they increased 1.8%. Without the 7% increase in property taxes for both pools, these reported numbers would have been a decrease of 7.2% and 2.2% for the third quarter and nine-month pools respectively.

In the combined categories of maintenance, turn costs and CapEx, we have made some progress year-over-year. In reviewing the Same-Home quarter-to-quarter results, our costs have dropped 16% from $837 per home to $702 per home. On the year-to-date pool, the improvement was 4% from $2,064 per home to $1,990 per home. There is a lot of seasonality to these numbers, therefore annualizing them will not provide you with a valid run rate.

Turn times in the third quarter continue to improve to 53 days on average between move out and move in. Those days are broken into three categories. 14 days to turn the home, 30 days to lease the home and nine days between lease signed and move-in date.

Our operational improvements are showing up in the Same-Home portfolio as revenues jump 5% for both pools and core net operating income increased 11% and 7% for the three months and year-to-date pools respectively despite substantial property tax increases.

Finally, I'd like to address the effects of recent flooding in southern Texas and the Carolinas. We have been very fortunate in both areas with just about 250 homes affected, but minimal damage to any of these homes, averaging less than $1,000 per home.

Now, I will turn the call over to Diana Laing, our Chief Financial Officer.

Thanks, Jack. In my comments today, I'll review our third-quarter 2015 financial results and comment on our balance sheet and liquidity. As a note, our results are fully detailed in yesterday's Press Release and our supplemental information package, both of which have been posted on our website in the for investors tab. These documents, in addition to our SEC filings, provide further information on our financial results and relevant definitions of non- GAAP financial measures that we'll discuss on the call today.

For the third quarter of 2015, we reported core FFO of $49.3 million or $0.19 per share. On a per-share basis, our core FFO was up 12% from the $0.17 per share we reported in the second quarter of this year, and it was up 27% from the $0.15 per share we reported in the third quarter of 2014. The increase in core FFO per share was driven by higher property net operating income from our Same-Home pool, and also the contribution from other homes that were leased in the past year. And these are partially offset by higher interest expense and G& A costs.

Our G& A expenses for the third quarter were approximately $6.1 million, which, on an annualized basis, represents 35 basis points on total assets. This compares with G&A expense of $5.3 million for the third quarter of last year, which, annualized, was 38 basis points on total assets. As we've mentioned in the past, we add back acquisition-related expenses to calculate our core FFO. In the third quarter, those acquisition expenses were $4.2 million.

To look at the operating results from our Same-Home property portfolio, on page 14 of the supplemental, this pool included 20,963 homes which were stabilized for the full third quarter 2015 and the third quarter of 2014. Occupancy during the third quarter of 2015 averaged 94.6%, which is 150 basis points over the 93.1% of a year earlier. Average monthly rent as of the end of the quarter also increased by 2.3%, compared with the previous year.

These improvements, along with increase in fee revenues and the reduction in bad-debt expense, resulted in a 5.2% increase in revenues from the Same-Home portfolio. Overall, property operating expenses were down 1.8% and, as a result, we captured a 10.7% increase in Same-Home NOI in the third quarter 2015, compared to the third quarter of 2014. For the nine months ending September 30, 2015, there were 13,440 homes that we owned in both the current and prior-year comparable period. Our Same-Home portfolio revenue increased 4.9%, property operating expenses increased 1.8%, and NOI was at 7.1% for the first three quarters of 2015, compared with 2014.

Moving on to our balance sheet and liquidity, as of September 30, 2015, we had total debt outstanding of approximately $2.6 billion, with an average interest rate of 3.85%. Approximately 82% of this debt is fixed rate with no maturities on the fixed-rate debt until 2024. In total, our outstanding debt represents about 35.6% of our total market cap, and at quarter end, we had $240 million of unrestricted cash and full availability on our $800 million line of credit.

Our financing strategy remains unchanged, as we continue to maintain a strong balance sheet with sufficient capacity and flexibility to support our growth objectives. During the third quarter, we closed on our fifth securitization transaction, which was a $478 million loan with a 30-year term and an interest rate of 4.36%. The interest rate is fixed for the first 10 years, at which time we anticipate repayment. Again, this is extremely well priced, long-term capital, and we're pleased with our execution.

As Dave mentioned, during September, our Board authorized a $300 million common share repurchase program. During the third quarter, we spent $54 million to repurchase 3.4 million shares at an average cost of $15.76 per share. As we move forward, we may consider incremental repurchases under this program, depending on market valuations and alternative investment opportunities.

And lastly, subsequent to quarter end, we acquired the remaining 67% outside interest in two previously consolidated joint ventures. And they owned a total of 377 single family properties. Our purchase price was approximately $44 million.

With that, we'll open up the call to your questions. Operator? Operator?

Thank you. We will now be conducting a question-and-answer session.

(Operator Instructions)

Our first question comes from Tony Paolone with JPMorgan.

Thanks and good morning. On the margins, it sounds like you're still comfortable for the full year being at that 60% or so but the third quarter was low. So it sounds like it's seasonality. Can you maybe tell us, on a normalized basis, if we were to think about what this might look like in 2016, where margins should run in the first, second, third and fourth quarters so we can try to get the seasonality a little better?

Yes, I think it's going to run probably -- I would give the same guidance for annual of 61% to 63%. I would probably go up except for property taxes seem to be going up. And I would say that you are probably going to run 58% to 59% in the second and third quarters and somewhere in the 63% to 64%, maybe as high as 65% in the fourth and first quarters.

Okay. Thanks. And then, the R&M and turnover costs in the same-store pool on page 14, you show that net of tenant chargebacks and it was down a lot year-over-year. How much of that decline is from just operating this better or managing that better versus passing it on to tenants? And also do you have that number on a gross basis?

I don't have it handy on a gross basis, but I would say we do a little bit better job of passing stuff on to tenants, but not materially different than last year. I think it's primarily been better focused on our operations versus the leasing.

Okay. And then, just last question, the early terminations in the quarter, if I just kind of annualized that, seems to be over 10% of your leases would basically not go to term. Just wondering if that is normally or if you think that's how the business is going to run going forward? It seems like a high number ostensibly.

It is; it's also seasonal. If you think about our tenant base, it's primarily families. And so when do they move? They move in the summer, even if they may be contractually obligated. Now what happens with those is we have -- I would say in almost all cases, we charge a two-month premium for them to move out early and our turn times are 53 days. So we think that pretty much gets us whole and if we charge too much more, we probably don't get any, so we're focused on that.

We also have in there, included in early terminations, probably 10% of those are people who move from one of our houses to another one of our houses, either due to job transfer or they want to move up.

What portion of that is, like, skipping effect versus where you're getting paid or they move or something like that?

I don't have the exact percentage, but I can give you a gut feel. It's about 50/50 where we actually collect the termination fee.

And, Tony, if you think about our skips and defects which would all factor into our bad debt expense the bad debt expense which you can actually see in our core FFO connotations the dollar amount has significantly come down and we're running about I believe 1.2% or 1.3% of revenue.

Okay. Got it. Thank you.

Jade Rahmani, KBW.

Hi, thanks for taking the question. I just want to ask you on the M&A environment, is combining with one of the existing platforms, one of the public companies or larger private companies attractive, leaving aside valuation? And at your size level, (inaudible) existing G&A efficiency, are there additional scale benefits at the property level to be realized through large combinations? Or are you really more focused on bulk leased-up portfolios in specific markets?

I mean, there's always benefits of adding scale and more scale to your Company. It's a little bit of a diminishing return, you don't get the same benefit going from 5,000 to 10,000 you do from 30,000 to 35,000, or et cetera, but there is always benefits.

On the acquisition front, I think, as I mentioned, we do look to grow in a responsible and reasonable way, not to grow just for growth's purposes but to grow for -- that is attractive and accretive to our overall platform. And we do consider the synergistic benefits in that evaluation.

And is another potential compelling rationale components of the platform that one Company doing something in their platform better than what you do, for example, and the weight points, you know, Colony merger, we're definitely seeing upticking of various components of the platform to build a better integrated operating Company.

If you would combine with another operator, you would, of course, evaluate both sides and take the better of the two. I think, first and foremost, you look at the quality of the assets and the valuation. I know you said putting valuation aside, but I don't think you can do that. But that is one of the components when you do a combination transaction is looking at their practices, their systems and utilizing what you can. We had a little bit of that benefit when we did the Beazer transaction about a year ago.

And then switching to moveouts, do you track or do you have any statistics you can share on the percentage that go to buy a home and how that's trending? If you're seeing any pickup in home ownership or home acquisitions? And if they don't go to buy a home, is the alternative to another single-family rental?

Well, we try to get -- we do a survey when people leave and we try to get as good as answers as we can. So I can't tell you for sure that these statistics are correct because they are not 100% of the tenants, but it's about 37% that leave to buy a home. And of the surveys that we have back, that's the biggest reason for people leaving. I think it's like 10% or 11% are unhappy with our service, of the people that leave, and 15% are unhappy with the rental rate increase we proposed.

Okay.

Those are the biggest reasons.

Thanks. And then just on recurring CapEx on the aggregate portfolio, I think -- do you guys track how much recurring CapEx takes place on maintenance calls versus how much is incurred on turnover? And can you just give a sense for how much discretion you have with that? Just looking for some color basically on your overall approach to managing the recurring CapEx decisions?

Well, how we're managing it currently versus how we plan to manage it are probably two different things. I would say 70% to 80% of the CapEx is done on turns. I don't expect that over the long term to be what we do.

Probably the biggest exception to that would be HVAC, because when that goes out, it goes out, and that's a maintenance call. But, what we have been doing is the exterior CapEx or maintenance at the turn and I think the long-term plan would be to do it on a more scheduled basis. It's not something you have to coordinate with the tenant because it's exterior to the home and can probably be done a lot cheaper if we're doing a bunch of tree trimming instead of one specific properties.

Finally, in terms the total cash operating costs of the properties, what percentage at this point is expensed versus capitalized? One of your competitors said roughly two-thirds, one-third. Not sure where that stands for you guys?

I would say that that's not too far. I think for the nine months we're at somewhere around $800 or $900 per house on -- no, we're -- I'm not -- I'll have to get back to you. I don't have that number handy.

Thanks for taking my questions.

Haendal St. Juste, Morgan Stanley.

Hello, guys. So question here on the buyback. So you've already exhausted, looks like, almost 20% of the plan you announced on the last weeks of the quarter, September 21. I'm curious on your overall buyback appetite. Have you been active since the end of third-quarter? How active could we see you on that front near-term, given where the stock is? And then how do you view that opportunity today versus buying homes?

The appetite for buyback is going to be a function of where our stock price is. And so you see where we repurchased on an average price in the $15.75, $15.76 range. So at that price, I think, we find that to be a very attractive and undervalued security there and something worth buying. It is not a replacement for buying homes. It is to be thought of as a complement to buying homes. It is obviously a capital allocation that we do have to monitor. We all have finite resources, but we find at the $15.76 price, that was a very attractive place to be buying shares.

Okay, fair enough. And then in terms of capital allocation, where does an increased dividend fit into your thoughts here? At least in terms of trying to just provide a bit of a sweetener to your existing current shareholders who, I guess, aren't getting much of a return on the improved valuation on the stock. So just curious how that plays into your current thinking as well?

Dividends and distributions are just another capital allocation in my mind and we do monitor that. We have chosen to defer that decision to next year and we'll review at the beginning of next year, both our capital needs, capital allocation, as well as our taxable income projections.

But it is a topic that we do discuss each and every Board meeting and it will be a topic that will get discussed beginning of next year for setting next year's rates. So at this point, I don't have any guidance on that.

Okay, fair enough. And one more, if I may, Jack, maybe for you on the operations. Third quarter 2015 operating results were better than third-quarter 2014. So I'm curious how you think you handled the seasonally higher turnover this year, this third quarter, versus your own expectations? And also compared to the third quarter of last year when you obviously had some issues. And as part of that, I would love to hear some of the specific improvements in your process you've made to where you still can get better?

Okay, in terms of speed we've done a few things. One, we're better at marketing the property 30 days prior to moveout so that we'll put a sign in the yard, we'll have it on our website, it says coming soon, so we can get a feel for the demand for the property early. We don't price it at that point, but then when it's ready, people -- we contact the people that have called on the home and we have kind of a lineup of demand already, so that's one of the areas where we've done better.

Our workflows are better in terms of just the coordination between the field supervisors who are moving people in and out and the vendors and our people in terms of who's responsible for supervising that work. So those things have gone a lot smoother. I think that can be seen in the days between -- the turn days going down to 53 days, and that's with pushing rents 5% on new leases. So I think that's a pretty good way to look at it.

Haendal, let me maybe add a little bit to that. I look at it -- there's three areas in this area. It's time, it is how much renovation work we do and it's obviously controlling the expenses. And time is very important, as Jack indicated. There's just cost of having a longer renovation or turn time, whether it's landscaping, utilities, et cetera, that are on.

With respect to the scope, I think it's one of the things that we, as an industry, are all dealing with is making sure that you adequately turn the property in an efficient time without doing unnecessary work. And that's really just getting a consistency and training and expectations throughout the system. And we've spent time on that, we've made improvements in both of those areas and there's a lot more that needs to be done. Jack and Brian, Director of Property Management, spent a significant amount of their time this last six months in establishing standards as well as training programs and showing all the field managers their expectations so we get a consistent delivery across the country.

And there's some benefit that we've seen. You've seen some of the expense reductions there, but there is more that can and needs to be done. And the last piece is controlling the expenses. And that's part getting some better national programs, but also maybe changing the mix a little bit and bringing some of the services, not all of them, but just some of the day-to-day services in- house that we can do more efficiently as we walk through. And I think that was discussed last earnings call. And some of those programs are in place, but it's in place in a very small way and I think there's some more benefit that can be happening there as well.

And so, it's the number one focus that we have. And I am going to reiterate what I said is this is not a one-quarter fix, it's unfortunately probably a year fit. But there's benefits every quarter.

And the last piece where we've got a lot of benefit, and our telephone calls on maintenance are starting to show and really more, unfortunately, in the fourth quarter, so you don't see them in the numbers, but they're there, and that is the move-in process, the quality of the move-in process is going to dictate the initial telephone calls. And we're seeing a drop in our maintenance telephone calls on a per- property basis this year versus last year. And that's very, very encouraging as well for the future.

And I would say one other operational thing that we did about a year ago, one of the delays in turning a home had been turning on utilities and we've left utilities in our name on a permanent basis and that means we don't have to turn utilities on or off during the turn process.

I appreciate that. And a follow-up, if I may. I think I heard you say earlier that your average turn times in the quarter were 53 days, which would be better than, I think, the 56 from last quarter. But at the midpoint of the 45-to-60-day sort of range that you talked about previously, so I'm curious if you think 45 is still ultimately the right target and when you think you can get there? And if maybe you can do better than 45?

Well, I think we can do better than 45, but the target right now is 45 and the target will change when I get to 45. You look at the three components and the days to turn the property can easily come down -- well, I won't say anything is easy, but we can bring that down.

As we, as our universe of properties to lease comes down, we'll be -- I think the marketing time may or may not come down, but I think it will come down and then as we -- especially in the more competitive markets, right now we have a maximum of 14 days between lease sign and move in. We can squeeze that to seven or less, especially like in Portland or Denver, some of the hot markets, you don't really need to give too much time for people between lease and move-in.

You think 45 is achievable next year? The first half, second half?

I would say -- we were at 40 in August so -- or 40 in September, so that was our best month ever. Can I keep it at 40? I don't know. That was just a really good month, but it's achievable in any one specific month, which tells me it's achievable on a long-term basis.

Great, guys. Thank you.

Thank you, Haendal.

Buck Home (sic), with Raymond James & Associates.

Thanks. Close enough. Guys, can we talk maybe about potential disposition activity? One of your peers recently sold out of the Houston market. And do you feel like at this point with the acquisition pace slowing and scale being important, are you spread across too many markets? Are there any markets you are thinking about exiting? And would a portfolio sale give you best value versus doing kind of one-by-one retail transactions?

I'll take it. I don't think we are spread too thin. The markets that where we have our smallest number of properties are actually operating very well and have very low vacancy and maintenance is not difficult. So I don't think that that's the case.

In terms of do we evaluate to sell properties? We're constantly evaluating. We look at -- I have, at least quarterly, our divisional managers go through any inventory that's sat for 90 days or more and either have a plan to get it rented or if it's not rentable, let's sell it. And so that's a regular calling of stuff that's just difficult for our property management team. But I think executionwise it's probably -- if you can get reasonable value, it would probably better to do a bulk than one by one. But it's also dependent on somebody paying you the right number for it.

With respect to Houston, you might --

With respect to Houston, I've read a number of reports that people are having trouble in Houston in various types of real estate. But our portfolio, on a stabilized basis, was at 92.2% occupied at the end of June and went to 93% at the end of September and rents are up 5.3% on new leases during that time. So we don't see a slackening of demand very much. I think our rents were up 7% last quarter, so maybe they're down a hair.

That's very helpful. And also wanted to just -- one item that jumped out to me was the tenant chargebacks and the ability to recover. I think you had almost $20 million this quarter alone out of tenant chargebacks. Maybe just help explain what you guys are doing differently? Either upon lease signup or how you're able to recover that much? How should we think about your ability to recover in future quarters? And how does that relate to kind of the amount of deposit escrows you have on the balance sheet right now?

That really is -- the growth in tenant chargebacks over the last year is really the rollout of our taking utilities back into our name and charging the tenants for the utility bills. So that's really -- utility chargebacks is really the growth in that number.

Okay.

Which is a monthly charge to the tenant.

Okay. All right, that's helpful. Thank you, guys.

Dave Bragg, Green Street Advisors.

Thank you. Good morning. First question is on your leverage targets. Can you please review what those are?

Yes, we haven't changed them. We have mentioned that it's in that 30% to 40% range. As we're growing I think the higher end is going to be something that, if we have opportunities, we need to look at, where right now we're right in the middle of that range. So we still have some capacity. We also are sitting with some cash, so we do have some dry powder right now for future growth.

And how do you think about the opportunity to sell assets and use that capital to either pay down debt or buy back stock which is priced at a significant discount to the value of your assets?

Well, I think I would concur a little bit with your theory in that stock buyback is something we need to look at. We did pass a resolution and announce a program in September, and so we didn't have much time in the quarter and did take advantage of it. And we took advantage of it, as I think I mentioned on a previous question, due to the fact that we believe what you just said is that there is some value in buying our stock back.

Selling assets, that's a whole different equation than the decision to invest. It is not only deleveraging, but it's also reducing the benefits of scale. And as we talked about earlier, there is benefits, maybe not as much benefit, of acquiring assets, but there is benefit of acquiring more assets to your scale, while the inverse is also true. So you reduce scale, it is going to increase certain costs that have to be allocated over the pool. So it doesn't mean that we shouldn't sell properties, but we should sell properties because the decision is that they're not properties that should be part of our mix.

Or another reason could be because they're worth so much more on the private market than in the public market. To what extent is the organization positioned to conduct significant asset sales if that is the right thing for shareholders? Can you talk about the asset management function and just that optionality that you might have?

As Jack indicated, there's two pieces to that. The evaluation and the execution. And the execution in bulk to -- we've done this in -- not only larger pools but also in a little bit of small pools that we don't really talk about, of leased properties to other operators. To sell large amounts on single transactions probably requires many to be vacant or go to the existing parties.

We have sold properties to a number of our competitors for a variety of reasons. Either we're not going to have the scale we have chosen, that we think the values or the asset qualities are not what we would desire. And out of the names that you know about, we have sold product to a handful of them, three, four, five of them.

Thank you.

Dan Oppenheimer, Zalman and Associates.

Thanks very much. Was wondering if you can talk a little bit more in terms of the real estate taxes? You mentioned that a few times and just curious if some of that was prospective in terms of some of the expenses you think will still be coming through or if a lot of that is already factored in in terms of the run rate of expenses here from this quarter?

Yes, so property taxes are -- obviously each and every state is a little bit different, but in generalities they are somewhat tied for most part to market valuations. There are caps in certain states, et cetera. The numbers in this quarter reflect really the run rates that we would expect based on all the reassessments that we have seen for 2015.

And I think most of them are in. It doesn't mean that there won't be more in 2016. And it's tied to a limited number of states, probably the primary two are Texas and Florida. And we have large pools of properties there. They've been reassessed.

I think that's -- basically that means those properties have been reset and I don't expect further significant increases in those properties in the near future. But property taxes are just a piece of real estate that doesn't matter what sector you're in, we deal with. And we have a number of them under appeal. We've been successful more in one state than the other state, but we do try to control those expenses through management of appeals, et cetera. But they will go up.

Great. And I was wondering in terms of the overall turn time with that component in terms of the time to lease. You talked about the efforts to put signs up in advance and get engaging demand early. Is that something where you think there can be a meaningful decrease in that 30-day time needed to lease? Obviously understanding there is seasonality, and so first and fourth quarter may take longer than what we see in the second and third quarter, but do you think that what you're seeing now is something where you can end up bringing that down?

It's kind of a balance between pushing rates and bringing that number down. We typically will go out with a somewhat aggressive rate initially and see what the activity is and then adjust down if the activity isn't what we wanted it to be. So if we limited our rent increases, then we can cut the marketing time down, but I think we've got a pretty good balance right there on between rent increases and marketing time.

Great, thank you.

Jeff Donnelly, Wells Fargo.

Good morning, guys. If maybe I could build upon Dave Bragg's earlier line of questioning. I'm curious, what do you think holds back your valuation? Because according to the HPA index that you shared, markets you are operating in are up about 25% in the last three years and you've leverage the Company over the same period, but the stock price hasn't really moved very much from its IPO levels.

Do you think the HPA index is a good indicator of the value change in your own homes or do you think there's something else that's maybe kind of holding you guys back?

I think it in the public and capital markets, its first and foremost operations and cash flow from the properties allowing our portfolio to stabilize and as we continue to focus more on the operations and get that to where I think it can get to. I think that's the primary thing that's probably holding us back. We've got to basically deliver on the cash flow.

And we're seeing the improvements in that, as we've talked about on the call quarter over quarter and we've also indicated that we think there's opportunities to improve it from here on through some additional initiatives we have going. But at the end of the day, securities trade on the operations and multiples of cash flow and that's part of, I think, what's holding it back right now is just getting the confidence and the fact that these are sustainable cash flows.

I know there's no guarantees, but in the past, as you guys have ramped, it's been some quarters have been choppy. Do you expect that maybe 2016, just because you have a few more years under your belt and the portfolio's more mature, is going to be -- I guess we'll call it a little less choppy than maybe we've seen in terms of margins or rent comps?

Well, I don't know what -- I mean, choppy there's a couple things that's inferring to me, but the seasonality isn't going to go away. This is a more seasonal business than a traditional long-term lease business is, like office or commercial. And the fact that the turns of these annual leases, and it's the 30% or so that turn are where the expenses are generated.

Our expenses are really generated from two items, and they are both really second- and third-quarter events, and that's either the turns or even on the recurring maintenance, whether it's the air-conditioners or the landscaping which are the primary two, they're really summer- oriented items. So there is still going to be significant seasonality. Are the unexpected events going to slow? I hope so. I expect so. That's part of building the business and the growth story, but we do have a lot more experience.

We had seen in 2014-2015 the ability to manage the high level of moveouts that we had in the third quarter of 2014. We did much better in 2015. Doesn't mean that there's not improvement left to be had, there is. But every year is going to get better, but it's not going to eliminate the seasonality, meaning that your margins are going to be different quarter to quarter.

That's helpful, thank you. And I'm curious just where do you see -- and I know it's going to vary by market, but maybe in broad strokes, where do you see cap rates on acquisitions today out there?

It can be as low as 4% in California to as high as 7% in Memphis.

And how does that compare to maybe six months or 12 months ago? Have you seen any kind of discernible change?

I think that rents, for the most part, have risen as pretty much as much as value. So I don't see a change -- too much of a change. But where I see the biggest change -- well, California hasn't really monitored that much, but I know rents are up and I know values are up. But the biggest change I've seen is where we used to get really good deals and a lot of property at the trustee auctions, there's much fewer available today that meet our criteria than there were a year ago, or especially two years ago. So we can still buy properties below market, it's just a lot fewer of them. And just one last question is does your outlook for interest rates affect the timing or volume for home purchases that you guys think about?

I don't know -- we take the acquisitions that are good acquisitions when they are available to us. I think that's a little bit of a strategy built on investment and on capital. And you've got to do the best you can. We have an outlook on increased interest rates, but we've had an outlook on increased interest rates for a significant period of time.

To run your entire life around a forecast, I think you do the best you can where you are. I suspect there will be an increase, but there's no guarantees there will and to hold off and plan your life around it, I think you can miss a lot of opportunities.

Thanks, guys.

Jana Galan, Bank of America Merrill Lynch.

Thank you. Dave, can you provide more detail on the decision to acquire your joint venture partners interest and was this the higher-end home joint venture?

No, it was not. Very early on, before even the REIT was formed when we were in our early days, our first capital source was we did two small joint ventures. And when the REIT then basically succeeded to the business of the original sponsor of the company they acquired, essentially the managers' interest of this, it was some of the very first homes we purchased.

They were consolidated in our numbers, so you're not going to see in increase in the number of properties in our system as a result of that acquisition. What you're going to see is a reduction in the minority interest. It's a very, very small reduction in the minority interests. It gives us now wholly-owned properties in our system. It takes away a little bit of administrative burden. All of these things are very, very small benefits due to the fact that the transaction itself is very small. It's just cleaning up from our early, early days of initial capital formation.

Okay, thanks. So it doesn't factor into the 500 to 600 home run rate that Jack provided for the fourth quarter?

That's correct. That's a very good point, that's -- these are properties that are already in our system so, no, they don't have any impact to those numbers.

Great. Thank you.

Jade Rahmani, KBW.

Hi, just a small follow-up. I was wondering if you could give the average -- or the turned cost per home on the 3,600 homes that I think you said turned in the quarter?

You know what, Jade, I would tell you to follow up with -- call in and ask Chris and Diana on that after the call.

All right. Thanks very much.

We don't have it at our fingertips, no.

Thanks a lot.

Thank you.

That concludes our question-and-answer session. I will turn the call back over to Management for closing remarks.

Thank you very much. As we indicated, we're very pleased with this quarter and our outlook for the next -- for the future and look forward to talking to you at the end of the year when we report year-end numbers. Have a good day and we'll see some of you at [NAREIT]. Take care. Bye-bye.

This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.