American Homes 4 Rent (AMH) 2016 Q1 法說會逐字稿

Greetings and welcome to the American Homes 4 Rent first-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Stephanie Heim. Thank you, you may begin.

Good morning. Thank you for joining us for our first-quarter 2016 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 can 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, May 6, 2016. 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 first-quarter 2016 earnings conference call. On today's call, I will highlight our operating performance and results for the quarter, including an update on our acquisition of American Residential Properties, which was completed on February 29.

Jack Corrigan, our Chief Operating Officer will then discuss our portfolio performance in more detail, and review our key operating initiatives. Finally, our Chief Financial Officer, Diana Laing, will review our operating and financial results and update you on our balance sheet, capital activity, and liquidity. After our prepared remarks, we will open the call to your questions.

We are extremely pleased with our results to kick off 2016, as we generated another quarter of strong operating performance. When we spoke to you earlier this year, we indicated that 2016 would be an important year for AMH as we drive growth on our stabilized legacy portfolio, work to improve service and efficiency and maintenance and turn cost, and overlaying our operating, leasing and management best practices on the acquired portfolio of homes.

We had an exceptional start to the year in every area, and are on track with accomplishing our goals. During the quarter, we saw a very strong leasing market, enabling us to drive occupancy and rental rates across our portfolio. In addition, we continue to realize improvements from our operating systems and enhancements. The result is our third consecutive quarter with an increase in our same-home net operating income after capital expenditures of more than 10%.

Before I discuss our operations, I would like to briefly address our acquisition of ARP. During the quarter, integration of ARP's portfolio was completed, and it truly could not have gone any better. This was our largest portfolio acquisition to date, and demonstrates the quality and experience of our team members, and of our systems, which permits us to efficiently acquire and integrate portfolios of this size. I want to thank all of my AMH team members for their extraordinary effort.

Turning to our first-quarter 2016 results. We reported core FFO of $63.6 million or $0.23 per share, representing a 47.1% increase over the $0.16 per share recorded in the same period in 2015. Our adjusted FFO or AFFO was $0.20 per share in the first quarter, up more than $0.70 from the $0.12 per share in the first quarter of 2015.

AFFO is a new metric we are providing this quarter. Diana will describe this in more detail later on the call.

Growth in our bottom line results was driven by gains in occupancy and rental rates across the portfolio. At March 31, total portfolio occupancy, not including assets held for sale, was 94.7% and our portfolio was 95.9% leased. Each of these metrics was up 190 basis points from the 92.8% and 94.0%, respectively, at December 31, 2015, demonstrating our continued absorption of vacant units in our portfolio.

And now with our portfolio essentially full, we are in a very strong position to capture higher rental rate increases. During the quarter, renewal rate increases averaged 4.1%, and releasing rate increases averaged 4.7%. But more importantly, we saw acceleration through the quarter as we hit the vibrant spring leasing season with substantially less available inventory. Jack will comment more on these trends later in the call. And driven by these metrics, our same-home portfolio, including 25,361 homes, owned and stabilized during both the current prior years, achieved revenue growth of 6.6% and NOI growth of 4.9%.

Moving on, I'd like to provide a detailed update on our acquisition of American Residential Properties. One year ago, we spoke about slowing our acquisition pace and focusing more intently on stabilizing our portfolio. We also mentioned that we expected to see an increase in M&A as larger operators continued to build scale to drive margin, and smaller and midsize platforms without the scale realized that operating performance would always lag. The larger mergers completed in the past several months, including ours, are accelerating the transformation of the industry. Our acquisition of ARP was the result of nearly a year of discussion, culminating with our announcement of a merger in December 2015. The transaction added approximately 8,900 homes, including 7,600 homes that are of high quality and meet our locational criteria. The remaining 1,300 homes do not conform to AMH quality standards, and will likely be sold.

As we discussed in March, this merger solidifies our position as the largest publicly-traded owner operator of single-family rental homes in the country. With approximately 48,000 homes in 22 states, we now have unmatched potential to benefit from scale efficiencies, and as we have said, in this asset class, scale is king. In addition, ARP's portfolio was strategically aligned with our target markets, allowing us to overlay all of their homes directly onto our operating platform, with only modest incremental overhead and infrastructure cost.

I'd like to update you on several issues which we addressed on our last call. First, the integration of ARP's portfolio could not have gone smoother. All homes were transitioned to our systems with no issues, and we have onboarded and trained all necessary new employees, mostly in our in-house maintenance program, which is in its rollout phase. Again, I want to thank all of our associates who helped make this integration successful.

Second, as we mentioned on our March call, we identified certain homes in ARP's portfolio that were not up to AMH standards. We're underway in implementing repairs and improvements. However, it will take some time to complete all these projects, as most if not all require vacancy to complete, As such, these costs will continue to be incurred primarily during the next 24 months as these homes turn. We have segmented these homes in our supplemental, so you can see the progress we're making. Longer-term, our investments to bring these homes to our standards should reduce the cost of maintaining these properties.

Third, ARP's bad debt experience was higher than ours historically has been. At this time, we have resolved virtually all of these delinquencies. While we did incur some necessary turnover at these properties due to the timing within the strong spring leasing season, this issue should have little impact on us going forward.

Fourth, with regard to the preferred operator programs that are delinquent under their master leases that we mentioned on our last call, this month in May, we took over the day-to-day management of more than 500 of these homes, leaving approximately 80 homes still managed under the master leases with the preferred operators. And finally, as we previously discussed, about 1,300 homes acquired in the ARP transaction that have been originally purchased through ARP 's preferred operator programs, in general these homes are substandard in quality to the homes ARP acquired and operated directly for its own portfolio and of course, our quality standards. While some of these homes will be renovated to our standards, frankly, most will be sold. Jack will update you on our disposition progress shortly.

In summary, we are extremely pleased with our progress so far in 2016. With respect to our 2016 initiatives outlined on our last call, the integration of ARP portfolio is complete and well under way on achieving the operational synergies we expected. Second, while we continue to build out our in-house maintenance program and execute on our other management initiatives, we are truly beginning to see the fruits of these platform improvements in our bottom-line results. And third, we have made significant progress on the disposition of non-core assets.

Further, our strong balance sheet provides appropriate capacity and flexibility to accomplish our growth in operating initiatives. We will be prudent moving forward with our capital allocation. Diana will discuss our balance sheet and recent capital activity later in the call. At this time, I will turn the call over to Jack Corrigan, our Chief Operating Officer.

Thank you, Dave, and good morning, everyone. I'd like to expand on Dave's comments and provide a more complete review of our portfolio. In the first quarter, we acquired approximately 300 homes through one-off transactions, for a total investment of approximately $50 million. With the homes added through our ARP acquisition completed in February, we ended the first quarter with approximately 48,000 homes. These homes are broken down in several categories to better show our operating performance and progress on key initiatives. These categories are detailed on pages 6 and 9 of our enhanced supplemental.

As a result of our efforts to stabilize our portfolio in the past year, we entered 2016 with few vacancies and a historically high lease percentage. This put us in a tremendous position to drive rates on new leases in the spring leasing season, and we have aggressively pursued this opportunity. Releasing rental rate increases during the quarter were a healthy 4.7%, with rental rate spreads increasing each month sequentially to a high of 6.5% in March. Average rental rates were up 4.1% on renewal leases. We achieved this renewal increase while maintaining a 68% retention rate. We have seen continued leasing strength in April.

Turning to our portfolio results, which reflects the performance of 25,361 homes in our same-home portfolio, in the first quarter, we reported revenue growth of 6.6%, driven by 140-basis-point increase in occupancy to 95.8% at quarter end, a 3% increase in average contractual rents, higher fees and lower bad debt. Same-home expenses were up, primarily due to property taxes, but we expect this to normalize in the coming quarters. Our NOI increase was 4.9%, however, I would note that our NOI, after deducting recurring capital expenditures increased in excess of 10%. This marks the third consecutive quarter in which our NOI after deducting recurring CapEx has increased in excess of 10%. Our core net operating margin was 62.2%, down 100 basis points from last year, due to the higher expenses I noted.

Moving on, I would like to address several of our leasing and maintenance initiatives that we have discussed on recent calls and provide an update on where we are at. One, we've implemented enhanced tenant screening and underwriting criteria and have increased our security deposit requirement by 25%, which will continue to benefit us with decreases in bad debt and turn costs. We continue to adopt national standards for turn costs to apply best practices throughout our portfolio. With better training and better execution, we have reduced the time for move out to rent-ready from 27 days to 11 days for comparable quarters across our portfolio, which allows us to return inventory more quickly to the market. The enhanced training and procedures we have implemented has allowed us to reduce recurring capital expenditures by 44% across the same-home portfolio for comparable quarters. While our reported repair and maintenance expenses increased, our combined cost of repairs and maintenance, turn cost, in-house maintenance, and recurring CapEx, decreased. On a combined basis, within our same-home portfolio, these costs were $446 per home in the first quarter of 2016 compared to $503 per home in the first quarter of 2015, a decrease of 11.4%. Further, we completed approximately 8% more turns this quarter compared to last year, as our pace of completing turns has improved significantly.

Before I turn the call over to Diana, I would like to expand on Dave's comments on our key initiatives. First, we continue to build out our in-house maintenance capabilities. During the quarter, we incurred approximately $800,000 of costs, of which the majority was the cost of building infrastructure and growing the department. We believe the Company will see the benefits of this progress over the second half of the year.

Second, with regard to dispositions, we have completed the sale of 37 homes from the ARP portfolio, and are in discussion with potential buyers for most of the remaining homes that we intend to sell. We are pleased with our progress on this front and will update you in the future as activity continues. Now, I will turn the call over to Diana Laing, our Chief Financial Officer.

Thanks, Jack. In my comments today, I will review our first-quarter 2016 financial results and discuss our balance sheet and liquidity. As a note, our results are fully-detailed in yesterday's press release and in our supplemental information package, both of which have been posted on our website in the For Investors section. I'd like to highlight that we've made several enhancements to our supplemental package this quarter, including computations of adjusted EBITDA and AFFO, and our definitions for these and other metrics are provided in the supplemental. I will refer to some of these added disclosures in my comments.

Beginning with our operating results, for the first quarter of 2016, we reported core FFO of $63.6 million or $0.23 per share. On a per-share basis, our core FFO was up 47.1% from the $0.16 per share we reported in the first quarter of 2015. This increase was driven by higher property net operating income from both our same-home pool and the other homes we leased in the past year, which is partially offset by higher interest expense and slightly higher G&A cost. Our adjusted FFO for the quarter was $55.6 million, compared to $31.7 million in the first quarter of 2015. On a per-share basis, our AFFO was $0.20, an increase of more than 70% from the $0.12 of the first quarter of 2015. In calculating AFFO, we have deducted leasing costs paid and recurring CapEx from core FFO. The computation of all of our FFO measures is shown on page 8 of the supplemental.

We have added some disclosure on page 9 of the supplemental to classify our core NOI from our same-home properties, other stabilized properties, ARP properties, and then others separately, so you will be able to monitor each of those categories going forward. With regard to the ARP portfolio, as Dave mentioned, our first-quarter results included just one quarter of contribution from the ARP properties. Also, ARP's margins don't fully reflect expenses that we may incur to operate and improve these properties, so you can't simply extrapolate the first-quarter results forward to estimate the impact of the ARP properties. As we've said, we expect the ARP portfolio margins to migrate toward our margins, but this will take some time. It's also important to note that while our first-quarter results were strong, we expect our results in the next two quarters to be impacted by typical seasonality in our leasing and turnover which results in higher costs that impact our bottom line.

Turning to the same-home property portfolio, NOI from the same-home portfolio for the first quarter of 2016 increased 4.9% from the first quarter of 2015. Total revenues increased 6.6%, while expenses increased 9.5%. We saw increases of 10.7% in property taxes in the first quarter, but based on our current estimates, we expect the full-year property tax expense to increase only about 5% to 6% over 2015.

Jack mentioned the increase in repairs and maintenance turn costs and in-house maintenance expenses and the decrease in CapEx from the same-home pool. When these items are combined, we have an 11% decrease this quarter compared to last year's first quarter. We show this computation on page 10 of the supplemental.

Also on page 10, we show five quarters of sequential quarterly results from the same-home portfolio. This demonstrates the seasonality that we mentioned earlier. And another note here is that our property management expense as a percentage of revenues for the trailing four quarters has averaged 8.8%. During the first quarter of 2016, that percentage was also 8.8%. This is indicative of the fact that we've been continuing to build out the platform during this period of stabilization of the entire portfolio and increasing portfolio occupancy in revenues.

Moving onto our balance sheet and capital activity, during the first quarter of 2016, as part of the ARP acquisition, we issued 38 million common shares and units of American Homes 4 Rent, and we assumed $800 million of debt. During the first quarter, we continue to repurchase our shares opportunistically within a volatile period in the market, and we acquired approximately 4.9 million shares at an average price of $15.40 per share, for a total of about $76 million. In April, we purchased approximately 1.3 million shares at an average price of $15.59, for a total of about $20 million.

Our financing strategy remains unchanged, and we continue to maintain a strong balance sheet with sufficient capacity and flexibility to support our capital needs. At March 31, 2016, we had total debt outstanding of approximately $3.5 billion, with an average interest rate of 3.65%. About 64% of our debt is fixed rate, with no significant fixed maturities until 2018.

At quarter end, we had $438 million outstanding on our $800-million line of credit. With that, we will open the call to your questions. Operator?

Thank you. Ladies and gentlemen, we will now be conducting our question-and-answer session.

(Operator Instructions)

Jana Galan from Bank of America Merrill Lynch.

(Technical difficulties) behave differently and I guess I'm most curious about what you saw in Houston.

I'm sorry, Jana, that you were cut off for most of that question. Can you repeat it?

Sure. I was curious on the releasing, did you see that sequential improvement in most of your core markets? And also, I'm asking for Houston, in particular.

Yes. In almost all of our core markets. And Houston, we saw more move outs than we'd seen previously in Houston, as a percentage of occupied homes, but we've been able to release most of those fairly quickly.

The rate of change in releasing is lower than the rest of our portfolio, so there definitely is some effect in Houston. We are working on it and we've maintained pretty strong occupancy there.

This is Dave. If you look at page 15 of the supplemental, you'll see statistics by market. While there is a little impact, the market remains strong, 94% occupied, and the rental rate increase, as Jack indicated, are below the average of our system, but still positive and relatively strong.

Thank you. And then on the real estate taxes. I understand you expect those to moderate for the Same-Store, but curious what you think will happen with the ARPI homes.

Well, we think overall, property taxes will go up somewhere between 5% and 6%. And they are in similar markets, so I don't see any reason to do that. I think it's important to note that on property taxes, we don't get the bills at the beginning of the year and are able to accrue the actual amount.

We have to make estimates, especially near the beginning of the year on how much they are going to increase. So, last year, I don't think we were as conservative as we were this year in making our estimates, which caused a high fluctuation between quarters.

Thank you.

Jade Rahmani from KBW.

Thanks for taking my question. Wanted to ask if you could remind us your per-home assumptions for R&M turn costs and CapEx?

Well, last year, I think I said we would do about $2400 for the total, and I think we are slightly under that on Same-Home. I think we should be able to achieve at least a 10% reduction in 2016, so, $2150 sounds like a pretty good target on a combined basis.

What would you identify as the main drivers of that reduction?

Well, there are several reasons. I would say, probably, the biggest reason is in looking at what we were doing on turns, we were doing too many full repaints and replacements, and now we're doing more repairs and touch ups. The recurring CapEx drops, but the turn expense may move up but by a much smaller amount.

So, the combined number will get smaller. We have better subject matter experts, particularly in HVAC, which gives us better control of our vendors, and then there is some effect, not a full effect by any means of our in-house capabilities.

And I would add one more, and that is the shortening of the turn cycle means that there is less holding cost, utilities, that we pay during the turn, and so, the shortening of the turn cycle has some impact. To me, it's all Jack and Brian's improvements are starting to show results with the better standardization, better training, and better execution throughout the system, and as we rollout in-house you will continue to see more of those improvements.

In terms of your overall portfolio, have you stratified the portfolio by age of home and looked at the performance of, say, older homes versus younger homes on CapEx? And I guess, could you -- the main point is, could you address whether you think a couple of years from now, given the young age of your homes, you are likely to see a potential step function uptick in CapEx as a result of that?

Well, we have stratified it, and there is slightly more maintenance and CapEx. I haven't looked at it probably in six to nine months, but in the stuff built in the early 90s, we do see a little more CapEx and repairs.

But, I guess, would you be worried about a step function higher in CapEx trends, based on the age of the home?

No, I don't think it will materially alter that.

And finally, can you address the difference between stabilized recurring CapEx and total CapEx? What the main differences relate to?

The main difference is if we are actually improving the house, so if we -- one that comes to mind, because we have done it a number of times in Florida when I walked aged homes, is sometimes the home will age because they back up to a retention pond and its slopes towards a retention pond and we have put in a fence so that kids won't fall into alligator-infested retention ponds. So, that we would say, would be nonrecurring. In addition, if we have never renovated a house and we bought it leased, that would be nonrecurring.

And then I would throw one other component in there. There's a number of homes, specially and the Salt Lake City area, where we have done improvements, building out basements, improving and enhancing the house, which allows us to get higher rents in the future.

Thanks for taking my questions.

Greg Van Winkle from Morgan Stanley.

Hi, guys. On the ARPI dispositions you have left to go, what do you think the opportunity is for doing a portfolio sale with some of those assets versus just doing one-offs?

I think the majority will be sold through portfolio sales. We are in touch with a number of different buyers for those, mostly smaller operators.

Okay. And so, now you've had a little more time with the homes and presumably started working through some of the deferred repairs and maintenance. Is there any change to that $8 million to $10 million that you are initially underwrote for that? I may have missed this, but did you give a number for how much you spent on that in the first quarter?

It would have been minimal. We only had one month, and I'm sure there is some in there but not very much.

I wouldn't change the estimate at this point. We don't have enough history to change that estimate, but I don't think it will be higher.

And then last one here on buybacks, last quarter, you guys said you were pretty comfortable with your leverage, even though it's a bit above your long-term target, and you seemed more inclined to buy back shares and pay down debt, which you did during the quarter. Are you still thinking about it the same way, or what is your appetite now for share repurchases?

I think, Greg, share repurchase is one of those things that is opportunistic. We look at where the share prices, we do keep in mind what our capital stack looks like at all times, but when you have that opportunity, you need to take it when it presents itself.

It's a statement I believe that we believe that where we were buying our shares back, it was in the mid-15s, it was a good opportunity and it was a good acquisition investment for the Company to make at that time.

Got it, thank you, guys.

Dave Bragg from Green Street Advisors.

Thank you, good morning. The rent growth trends are encouraging, perhaps to provide us with a bit of a sense for the long-term outlook. Can you please talk about the rent-to-income ratios that you are observing for the tenants that are moving in?

The rent-to-income ratios are in the high 4%s, somewhere in the 4.8% range, on average. We have a minimum of 3%, but on average we are at 4.8%.

So, that is income to rent. You're inversing this answer, right?

Right.

High 4%s, okay, thank you. And then on the assets that you are selling, can you please talk a little bit about why the quality standards, the ones that you are selling are different? What share of the 1600 units held for sale are actually AMH legacy homes, and please, share a little bit about whether or not you plan to sell them occupied or unoccupied, and what you think that cost might be.

Yes, for the most part, we plan to sell them occupied, but on the quality issue, the way ARPI acquired homes was really two different ways. One was to partner with what they called a preferred operating partner, and have them acquire the homes, and then master-lease them back for -- from -- the preferred operator would acquire the homes for ARPI and then master-lease them back and operate them.

In order to achieve the master-lease rate, they couldn't buy higher-quality homes, because the higher-quality homes have lower, ostensibly lower yields. We don't believe that over time that actually works, but by formula, it will show that the lower-quality homes have a higher yield.

And so, they bought primarily cheap homes, cheap older homes that we don't typically, in neighborhoods we don't typically operate in, and there were about 1300 of those that makes up the bulk of what we are selling out of ARPI, and on the legacy homes, it really depends on the reason we are selling. If we can group them, a significant amount in a -- in an area and the yields are pretty good, but then we will try to sell them in bulk most of the ARPI stuff we'll sell, because some operators like that, especially the smaller ones.

And then, if we are selling other homes primarily because of rental restrictions or it is a non-core market, we usually sell them as they become vacant, and then we will sell them in one-off transactions, and the cost of those sales are about 6%.

On the one-offs.

On the one-offs.

Dave, just to summarize the ARP portfolio as Jack mentioned, the homes that ARP bought, those 7900 that we are keeping, are very comparable age-wise and value-wise, and that's $170,000 original purchase area, the homes that do not fit it are substantially older, probably in the $100,000 area and below in some cases.

They are concentrated, and we do have a lot of interest in these homes to sell them in bulk. I think we closed on 50 or so, 45 or 50 to date, but we have a lot of interest in many of the homes to be sold as a portfolio.

Thank you, that was very insightful. I appreciate all of that detail.

One last question. We know that you don't provide formal guidance, but as it relates to the 5% core NOI growth you achieved in the first quarter, what is the outlook for the rest of the year relative to that 5% figure?

I think the outlook is good for the rest of the year.

The 5% is a fair betting line for the rest of the year?

Yes, I think at last quarter, I got cornered into answering that question, and they asked if 5% to 6% was a good target, and I said I think it's a good target, but I'd prefer 4% to 5%. It is easier to hit.

All right, thank you.

Patrick Healey from FBR.

Thanks for taking my question. First question, I was hoping you guys could give us some insight into the acquisition market, obviously, you had talked about -- there is demand for portfolios with what you are selling. Have you seen, maybe, more or less volume of portfolios out in the market after the two large transactions that we have seen with you and your competitor, and maybe what the overall opportunities that looks like, maybe, compared to a year ago?

This is Dave. The market is probably about the same as it was previously. Large transactions if you are looking at both ours as well as a couple of the others, are a long time in the making.

As I mentioned in our prepared remarks, we negotiated with ARP for more than a year before we announced the transaction. There's a lot of negotiating and both parties have to be ready. I think there is multiple markets out there. There is the markets of the large operators.

There is different markets based on quality. And all of them have activity. Most of the activity, though, is in the smaller portfolios that people don't see.

They are not flashed across ticker tapes and things like that. So, there is some activity going on every day, but in the large transactions, there's not that many large transactions to be had at this point. But I think all of the parties, all the major players do have discussions frequently with all of their peers, and time will tell.

Okay, thank you, that was helpful. And then you also mentioned building out your in-house maintenance platform, there was about $800,000-worth of expenses this quarter. How much more expenses can we expect from that build out over the next few quarters understanding that the difference in cost per ticket is much lower for an in-house versus your traditional means?

We're kind of rolling this out in several phases. The first phase is to roll out techs that will go out and do maintenance and interact with the tenant at occupied homes.

And in addition, we have ones that are doing it in turn homes. We've got it in several markets, but we are probably going to double that number of techs and trucks over the next quarter or so.

And then the next phase of the rollout will be other services that we want to do, which is like bulking up exterior services, tree trimming, that type of thing, power washing, that kind of thing that costs a lot to do in one-off, just on the turn, and you don't really have to schedule it with tenants. So, you can just bulk it up, notice it on the turn, put it in the notes, and then do it all at once, it's a lot cheaper to do.

We are not sure we are going to do that ourselves or hire vendors, but we will need somebody to manage that process. So, those are the first two items we are moving towards, and then we have some other plans that I won't get into at this point. But the bulk of the costs are setting up the schedulers and getting the software and all that stuff set up, and hiring the people, that's where the bulk of the infrastructure costs come in.

Okay, great, thank you.

Buck Horne from Raymond James.

Hi, good morning, guys. Going back to the ARPI portfolio, and I will caveat this question, just knowing that you've only got one month of data broken out here. But the margin here, the NOI margin reported is 64%, that's a pretty big step. Is there any big change or lever that you guys were able to identify within the ARPI homes that allowed you to improve that NOI margin so quickly?

Buck, I think the main consideration here is that in the first month of our ownership, we just haven't had an opportunity to incur a lot of expense. So, I don't think that this margin is realistic on an ongoing basis.

I would change that. I think it's realistic on an ongoing basis. Once we are -- once we have fully integrated the portfolio into our plan, it will approximate our margins, which we expect to be in the low 60s.

Okay, how do we think about the next couple of quarters as it progresses through the year? I guess we will have a little bit of cost to incur before you get to stabilization, so how does that flow for the rest of the year?

I thought Diana was going to answer that. I think we have done a fantastic job of integrating the portfolio, and I think some of the costs that will come in that will be more bad debt expense than is in this quarter for ARPI.

The ARPI homes, we made an effort to get rid of most of those in February that were bad, and we will have a little bit of extra turn cost in the second quarter, because as we got rid of the ones that were bad, got to put in the turn, and get them ready, but I think by the third quarter we should be coming along pretty good with them.

On the positive side, the rental rates on their portfolio, we are getting pretty sizable increases from what we underwrote and from what they had, so north of 5% on increases on the ARPI portfolio, thus far.

That's great. And speaking of rental increases, can you give us some information on -- now that you are basically effectively full, what your renewal offers on leases are going out for, say, June, July, and August, in terms of rent increase?

We don't push our renewal rates that hard. So, it's going to be in the 2.5% to 4% range, we probably push it little harder earlier in the year than we do later in the year, because if they do leave, it is easier to fill them up in May, June, and July. So, as we get towards June, July, August, we tap on the brakes a hair on the renewal rates.

Okay, thanks, guys.

Thank you. Our next question comes from Brock Vandervliet from Nomura Securities. Please go ahead.

Good morning, thanks for taking my question. I was just referring to the 8.8%, your management fee percentage of total revs. Over a longer-term period of time, say, a year or two out, what kind of flex do you think you have in that ratio? Number two, in your most concentrated markets, like Dallas for example, how does that ratio look? Thanks.

If you look at the historical numbers, that percentage has continually come down. Right now, I think the first quarter and second quarter, we've got some additional people in there as part of the acquisition, but also it's going into the prime leasing season.

We are continually making efficiency improvements throughout our system. I think the in-house, the rollout of the in-house maintenance will also have benefits. We don't necessarily peg numbers, but I would tell you I have confidence that number will continue, the percentage as percent of revenues will continue to trend downwards.

And how differentiated is that in the most concentrated markets, where you do have the highest number of homes?

That's a hard question to answer because of the way that we are -- we operate. We have a significant amount of our operations centralized.

Whether it is call center or maintenance supervision, it is all centralized in Las Vegas. There is some benefits, obviously, to scale, but not as much as you would think, due to the fact that we have the efficiencies in the centralized operations.

Got it. Okay, thank you.

Dennis McGill from Zelman & Associates.

Hello, thanks for taking my questions. First one just has to do with, when you look at your current tenants, and think about them relative to your current underwriting criteria, if you will, how do you feel about the quality of those tenants, and thinking about it from the aspect of turnover? Do you feel like there is any type of turnover issue you've had in the past, and may be exclude ARPI residents from this, but are you in a position today where you feel comfortable with the quality of the tenants?

We feel very comfortable with the quality of our tenants, I think the improvement over the last couple of years in terms of bad debt kind of demonstrates that once we went away from third-party managers and underwrote, got control of the underwriting, and centralized the underwriting, we've made some big improvements. And the tenants from the third-party managers, we fully integrated that in December of 2013, so I don't think there is a ton of them left.

When you think about turnover, which had been running higher than maybe industry stats, would you suspect that going forward you will be more normalized relative to historical numbers for the industry?

You know it is hard to say the biggest reason for people turning is buying a new house, which is about 30%, and the next biggest is price, which I think is about 12% to 15%, and I don't think we are going to cut into the number of people buying houses unless house prices get too high.

I just don't know, I think maybe having the higher-quality tenants may lead to more of our tenants buying houses. But that's the only thing I can think of that would do that, and I don't think I want to go down in quality of tenant just to get a couple extra points in tenant retention.

Separately, on the property taxes, you mentioned essentially you are accruing today, not having known the full increases across the country. What do you have accrued for the full year as the percentage increased?

It is 5% to 6%

Our current expectations are that relative to the full-year 2015, we will experience 5% to 6% increases.

Perfect. What is, with respect to the AFFO adjustment, the lease cost, what lease costs are not expensed immediately?

We capitalize and amortize over the period of the lease, the leasing costs. Broker fees and so forth.

Okay, and that's it, that's true for every lease?

Yes.

Okay, got it, thank you, guys.

And not because we want to, it is because our auditors tell us we have to.

Appreciate it, thanks, guys.

Ladies and gentlemen, that does now conclude our question-and-answer session. I would now like to turn the call back over to Mr. Dave Singelyn for closing comments.

Thank you again for joining us today, and we look forward to speaking with you on our next quarterly-earnings call. Have a good day.

Thank you ladies and gentlemen. This does conclude our teleconference for today.

You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.