American Homes 4 Rent (AMH) 2016 Q2 法說會逐字稿

Welcome to the American Homes 4 Rent second-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. Please, go ahead.

Good morning. Thank you for joining us for our second-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 could cause actual results to differ materially from those projected in these statements.

These risks and other factors that could adversely affect our business and future results are described in our press release and in our filings with the SEC. All forward-looking statements speak only as of today, August 5, 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 with 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. Welcome to our second-quarter 2016 earnings conference call. On today's call, I will highlight our results for the quarter, review our operating performance, including the progress we're making on expense controls and discuss our recent efforts to enhance our balance sheet significantly.

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

Without a doubt, the second quarter of 2016 was our strongest quarter yet. I am extremely excited about the progress we are making on all fronts. Our efforts over the past several quarters and years to put in place operating systems and management enhancements are yielding exceptional results, as we drive growth on our stabilized legacy portfolio, improve efficiency and maintenance, turn costs and capital expenditures.

With high occupancy and strong demand across our platform, we remain well-positioned to continue driving revenue growth and combined with our intense focus on controlling and reducing expenditures, to realize further upside in bottom-line results. Turning to our second-quarter 2016 results.

We reported core FFO of $0.25 per share, representing a 47% increase over the $0.17 per share reported in the same period of 2015. Our adjusted FFO or AFFO was $0.21 per share in the second quarter compared to $0.12 per share in the second quarter of 2015, an increase of 76% year-over-year. We generated a 15% improvement in net operating income after capital expenditures from our same-home portfolio compared to the second quarter 2015.

This is the fourth consecutive quarter that we have achieved a 10% or greater improvement in this measurement. The improvement in same-home results was generated by revenue growth, driven by strong rental rate increases and lower operating expenses, primarily related to a reduction in our maintenance expenditures. As a result, we continue to see improvement in our margins on a year-over-year basis.

I would like to spend a few minutes discussing our progress on expense controls, primarily in maintenance and management expenses. We have been talking about these initiatives for some time and continue to make great headway as evident by our second-quarter results. One clear advantage of scale in this business is on the cost side and the progress we are making is demonstrating, without a doubt, the long-term viability of single-family rentals as an operating business.

First, with respect to maintenance. For this discussion, maintenance expenditures are the sum of repairs, maintenance expenditures, turnover expenses and capital expenditures net of maintenance-related tenant charge-backs. For the second quarter, same-home maintenance expenditures were $518 per home, down 24% from $682 per home in the same quarter of 2015.

I would also note the costs in the current quarter include approximately $29 per home of in-house maintenance costs, resulting from the roll-out of this initiative. Jack will discuss our in-house maintenance program in more detail later in the call. Over the past four quarters, maintenance expenditures totaled $2,157 per home.

Moving ahead, we expect our maintenance expenditures will continue to trend down as we further refine our initiatives and we continue the roll-out of our in-house maintenance program. Second, with regard to management efficiencies. For this discussion, management cost is the sum of all overhead expenses incurred in operating the organization including property management expenses, leasing cost and G&A.

For the second quarter 2016, these costs amounted to 12.7% of revenues, excluding tenant charge-backs. This represents a substantial improvement from the 15.1% incurred in the second quarter of 2015 and 14.3% incurred last quarter. We are focused on managing the Company in an efficient manner, while continuing to deliver a quality home and superior service to our tenants.

Moving on, I would like to discuss our balance sheet and recent capital markets activity. Our strategic goal since day one has been to maintain a balance sheet and capital structure to support our operational and growth strategies. We have provided a long-term target debt level of 30% to 40% of market capitalization.

Earlier this year, we acquired American Residential Properties and assumed their debt, pushing our debt level to the higher end of our target range. In the second quarter, we issued nearly $500 million of perpetual preferred stock in two series using proceeds to pay down our credit facility and fund acquisitions. We are extremely pleased with the execution of these transactions, which provide several benefits to AMH including: adding additional permanent capital, which is favorable to our existing shareholders; reducing the Company's debt to the lower-end of our targeted range; reducing refinancing and interest rate risk; and creating additional financial flexibility and capacity to take advantage of future growth opportunities.

We continue to focus on optimizing our capital [stat] to reduce risk and our cost of capital. Diana will discuss these transactions in more detail later on the call. As a result, we have capacity to increase our acquisition pace in the third quarter.

We still see very attractive acquisition opportunities in many of our markets. You should expect to see more acquisitions in the third and fourth quarters. Bear in mind, as we on-board more homes, we will likely see a small negative impact on total portfolio occupancy, as the acquired properties are renovated and prepared for initial lease.

In summary, our second-quarter results were strong across the board. We continue to be well-positioned to maintain strong occupancies and rental rate growth, as we complete the final months of this leasing season. Due to our focus on maintenance expenditures and efficiencies, we demonstrated meaningful progress on reducing costs and expect to show further improvement in the coming quarters.

Now, I will turn the call over to Jack Corrigan, our Chief Operating Officer.

Thank you, Dave. Good morning, everyone.

Beginning with our transaction activity, during the second quarter, we acquired 152 homes through one-off transactions, for a total investment of approximately $25 million. This is a little lighter than the pace of acquisitions over the last few quarters, however, with the expanded capacity on our balance sheet, we expect ramp up our buying in the second half of the year and expect to be back to a quarterly acquisition pace of approximately 500 to 600 homes by the fourth quarter of 2016.

Any bulk purchases we may acquire will be in addition to these targeted levels. On the disposition front, we sold 67 homes in the second quarter for net proceeds of $7.8 million, bringing our total year-to-date net sales proceeds to $15.5 million. In July and August, based on transactions closed and under contract, we expect to complete sales of approximately 300 homes for $20 million to $25 million.

Turning to leasing, during the second quarter, we signed a total of approximately 5,600 leases. On average, we achieved a healthy 4.1% increase on renewals and an even stronger 7.5% average increase for re-leasing. Our early results in the third quarter give us optimism that we will continue to capture strong re-leasing and renewal spreads.

However, as we close out the busy spring to early fall leasing season, we expect re-leasing spreads to moderate to the 4% to 6% range and renewal spreads to the 3% to 4% range. Turning to our second-quarter same-home portfolio results, which reflect the performance of 25,288 homes, we reported revenue growth of 5.4%. This improvement was driven by 130 basis point increase in average occupancy to 95.7% and an increase in average contractual rental rate, as well as lower bad debt.

Same-home expenses decreased 0.4%, driven primarily by an 18% reduction in repairs, maintenance and turnover costs net of tenant charge-backs, including costs related to our in-house maintenance program, partially offset by a 10% increase in property taxes in the quarter. As we discussed last quarter, higher property taxes correlate with higher home values. While we are actively challenging assessments whenever we can, we now expect our full-year property taxes will be up 8% to 9% during 2016.

Over the long run, property tax increases should trend with appreciation in home values. As a result of these factors, our same-home core NOI increased 9.2% and our core NOI after deducting capital expenditures increased by 14.8%. As Dave mentioned, this marks four straight quarters in which core NOI, after deducting capital expenditures, has increased in excess of 10%.

Our core net operating margin was 62.2%, in line with the first quarter and 220 basis points better than we achieved in the second quarter last year. Despite the 8% to 9% increase in property taxes that we anticipate, we expect full-year core NOI margins to be approximately 62%, which compares favorably to the 60.6% margin we achieved in 2015. Regarding the fully-integrated ARPI portfolio, we are experiencing the operational synergies we expected having achieved a 60.1% core NOI margin in the second quarter on the 7,582 former ARPI operating homes.

As more of these leases roll over the next 12 to 18 months, we believe we will achieve higher rental rates to drive overall operating metrics in these homes closer to our legacy AMH portfolio. Also recall that we identified certain homes in ARPI's portfolio that were not up to AMH standards. We are implementing repairs and improvements; however, it will take some time to complete these projects, as most require the home to be vacant. I would also note that now that this work is underway, it appears that the cost to complete this work may be less than originally anticipated.

Moving on, I would like to address several of the maintenance initiatives that we have discussed on recent calls and provide some color to help you understand how they are contributing to our cost reductions and efficiency gains. As Dave noted, we continue to drive our overall repair, maintenance and turnover costs, including expense and capitalized cost, lower. Through national standards, better training and more transparent reporting, our field personnel are better able to discern whether a repair or replacement is the appropriate solution.

Our enhanced training and processes have also focused on reduced days from move-out to rent ready during turns. We have reduced this period from 21 days in Q2 2015 to nine days in Q2 2016. This reduces our cost of utilities and landscaping by approximately $100 per turn, as well as enhancing our occupancy.

In addition, we have added centralized subject matter experts in our high cost areas of HVAC, plumbing, landscaping and roofing. These experts have years of training and experience in their fields. They improve troubleshooting, diagnosis, training and costing throughout the country through a centralized function.

Finally, we continue to build out our in-house maintenance capabilities. During the quarter, we incurred approximately $1.4 million of expenditures, as we are still in the process of building infrastructure and growing the department. While we saw some benefits of this program during the second quarter, we expect that the benefits of this investment will not be fully realized for several quarters.

We are confident that this program will further enhance our ability to control costs; however, maybe the most significant impact will be the enhancement it brings to customer service through better response time, controlled professionalism and more comprehensive servicing of the tenant and the home. Now, I will turn the call over to Diana Laing, our Chief Financial Officer.

Thanks, Jack. In my comments today, I will review our second-quarter 2016 financial results and discuss our balance sheet and liquidity, including our recent capital markets transactions that Dave mentioned. As of 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.

Beginning with our operating results, for the second quarter of 2016, we reported core FFO of $73.5 million or $0.25 per share. On a per-share basis, our core FFO was up 46.8% from the $0.17 per share we reported in the same quarter one year ago. This increase was driven by higher net operating income from both our same-home pool and the other homes acquired and/or leased in the past year.

Our adjusted FFO for the quarter was $62.6 million compared to $32.1 million in the second quarter of 2015. On a per-share basis, our AFFO was $0.21, an increase of 76.5% from the $0.12 per share reported in the second quarter of 2015. In calculating AFFO, we deduct recurring capital expenditures and leasing costs paid from core FFO.

Recurring capital expenditures and leasing costs both declined during the second quarter of 2016 compared with the second quarter of 2015, which combined with the increase in core FFO resulted in our significant increase in adjusted FFO. The computation for each of our FFO measures is shown on page 9 of the supplemental.

Moving on to our balance sheet and capital activity. During the second quarter, we issued two new series of perpetual preferred equity. In May, we sold 10.75 million shares of 6.5% Series D perpetual preferred shares, raising gross proceeds of more than $268 million including shares sold concurrently in a private placement and the full exercise of the underwriters over-allotment.

In June, we sold 9.2 million shares of 6.35% Series E perpetual preferred shares, raising gross proceeds of $230 million including the full exercise of the underwriters over-allotment. Both of these transactions were well-subscribed permitting the pricing of each offering to be tightened, while the size of each offering was significantly upsized. Proceeds from both of these offerings were used to pay down the balance outstanding on our credit facility to fund acquisitions and for general corporate purposes.

We are extremely pleased with the execution of both of these offerings, which provide permanent capital to us as very attractive coupons. They increase our capital financing flexibility and our capacity for future growth. Early in the second quarter, we repurchased and retired nearly 1.3 million shares of common stock at an average price of $15.59 per share.

At quarter end, our balance sheet and liquidity remains strong. We have total debt of $3.2 billion, with no maturities until 2018. Nearly 70% of this debt is fixed rate, with a weighted average interest rate of 4.26% and a weighted average term to maturity of more than 17 years. We had $270 million of unrestricted cash and cash equivalents on our balance sheet at June 30, 2016 and just $142 million outstanding on our $800 million credit facility, which was repaid at the beginning of the third quarter.

As we move ahead, we will continue to look for opportunities to strengthen our balance sheet and to further expand our capital flexibility. We're looking at ways to optimize our credit facility and to increase our unencumbered pool with an eye toward managing credit and refinancing risk. Additionally, the steps we are taking can put us on a path toward greater capital capability options at the most advantageous pricing.

Now, I will turn the call back to Dave.

Before we open the call to your questions, I would like to report two changes to Our Board of Trustees since our last call. First, Lynn Swann, a Trustee from the inception of the Company accepted the position of Athletic Director at the University of Southern California. Due to the requirements of this new opportunity, concurrent with the commencement of his new position on July 1, 2016, Lynn resigned his position as Trustee of the Company.

Second, earlier this week, the Board of Trustees appointed Tamara Gustavson to be a Trustee of the Company. Tamara is the daughter of B. Wayne Hughes, the Company's Chairman. Tamara is a real estate investor and philanthropist. In addition, she currently sits on the Boards of Public Storage, the University of Southern California and the William Lawrence and Blanche Hughes Foundation, a cancer research organization.

I have known Tamara for more than 25 years and am excited to have her input as we continue to grow, improve and enhance American Homes 4 Rent. With that, I will ask the operator to open the call for your questions.

(Operator Instructions)

Juan Sanabria, Bank of America.

I was just hoping you could talk a little bit about the CapEx per home, it was down obviously pretty significantly. How do you see that normalizing over time? Maybe the slope of that deceleration or a target that you would like to get to?

We expect it to continue to go down. The way we look at it is the combination of maintenance, CapEx, turn costs and our in-home maintenance team. The reason we looked at it like that is, most of the cost that you are incurring, especially over this larger portfolio, to me, if it's spent on repairs or spent on replacement, it's a cost that detracts from the yield.

We expect, I think, we're -- Dave said, we were at $2,157 in total on those costs over the last four quarters. I think we can drive that down into the $2,000 to $2,100 range for this year. I think there's still room, maybe 10% to 20% room to drive it down further in the future, but that could take a little more time as we perfect the in-house maintenance group.

Okay, great. On the balance sheet, you guys talked about having a debt to total market cap in the preferreds giving you more capacity. But do you have any leverage targets that maybe aren't pinned to market capitalization? That would be inclusive of preferreds just from an equity point of view. It depends on who you talk to, but a lot of people consider the preferreds as debt.

The debt to me -- this is Dave, good morning, Juan. The preferred is permanent capital and does reduce refinancing risk. It also gives you more capacity for debt if necessary. Yes, we obviously are well-focused on what our balance sheet looks like. We have focused on our EBITDA to debt as well, a metric that is now down into the six times ratio, which is more in line with traditional REITs.

But overall, we are still a growth Company. We are looking for the most attractive capital that we have for the current day, but more importantly, for the long-term to continue to reduce our cost to capital in the future. So, we're focused on all those measurements.

Okay. Then, sticking to the balance sheet, you have seen a nice rally in your share price this year. What is your capacity to grow the acquisitions? You talked about that ramping up into the fourth quarter without having to look at the equity market? How do you feel about issuing equity at these current levels?

As I think Diana mentioned, we are sitting with a little bit of cash. We have a fully available credit facility of $800 million. We do retain a fair amount of cash flow from operations. All of those will permit us to continue to grow this Company.

I think as we mentioned, we continue to see attractive opportunities out there, both on the one-offs. We are always in discussions with our peers about potential opportunities there.

Thank you very much.

Thank you, Juan.

Dave Bragg, Green Street.

Is it correct in that my interpretation of your comments is that, your increased appetite for acquisitions is driven by solely the acquisition landscape as you see it? Or is it also a reaction to your improved cost of capital?

Dave, I think from day one, it's been a combination of both. You have to keep those in balance, as we've been growing there's always been a little bit of tension back and forth. We basically look at acquisition opportunities in light of the cost of our capital. Today, we believe there is acquisition activities. We know there is acquisition activities out there that are favorable to our cost of capital and favorable to our shareholders in the long-term.

Okay. Now that you've integrated the American Residential portfolio in a fashion that seems to have been pretty smooth, can you talk about the scalability of your platform? What size of a portfolio would be too large for you to handle in one fell swoop?

I would tell you that the experience that we had with American Residential -- first, we had done some smaller acquisitions prior to that. A couple that we have announced in a portfolio we call Beazer in Ellington. They were good practice for us to make sure that we had our steps in place.

You appropriately commented that the transaction with American Residential was extremely smooth. We were able to integrate the portfolios, both from a physical and personnel standpoint, as well as system standpoint, pretty much seamlessly.

I think it's the benefit -- we have the benefit of having very strong centralized systems, allows us to scale up pretty quickly in our call centers. Any opportunity that is available out there, I'm confident that we can acquire and bring into our platform with relative ease or very, very little disruption to our current operations.

Okay. Last question, as it relates to potential acquisitions, can you tell us a little bit more about what you're seeing or expect to see with your purchases in the second half of the year, in terms of pricing, both from a gross yield and a net yield perspective?

I don't even look at it in terms of gross yield. But in the markets that we are currently -- because property taxes have such an influence on gross yields, you have to be able to make it up on the revenue side. So we are basically buying in the southeast. Most of them are low -- lower property tax states, but Florida is still a pretty high property tax state. The net yields are right around 6%, all in, on average.

Okay. Yes, thank you.

Thank you, Dave.

Dennis McGill, Zelman & Associates.

First question just had to do with turnover. I think you reported over the last year, turnover's been about 40%. Our industry numbers in some of the other players would probably closer to one-third.

Do look at that as being structurally higher because of your price point? Or is it market mix? Or is there anything that you are seeing that would cause the variance? Then maybe you could just talk to whether you think there's opportunity to drive that number lower as you move forward?

Yes. I think there's opportunity to drive it lower. I think 35% to 40% is probably where we are. We did have a number of move outs in the second quarter as school was getting out. You tend to have -- that's your peak leasing season but it's also your peak move-out season, especially of month-to-month.

But in terms of -- I would expect that it will go down over time. If you look at the people that have stayed in our houses two years or more, they're more likely to renew than people that have stayed one year. So over time, that should build on itself and reduce your turns.

The part that probably is different than people that are in the lower tier of the rental housing -- we are probably seeing more -- I heard Silver Bay, on their call, talk about 15% to 17% of, I think that's what they said, of move-outs due to people buying new homes. We are probably in the 25% to 30% range. That might account for some of the difference.

Okay, That's helpful. Then, Dave, can you just maybe update us on how your thinking about the sustainable operating margin going forward? I think it was about two years ago where you guiding down your longer-term expectations, but since then you've done an incredible job of improving some of the maintenance costs that I think drove that initial guide down.

So, just curious as to how you think about that now? Maybe more so than core NOI margin, sort of net of CapEx, all in, how you would think about the sustainable opportunity?

Today, we are -- our systems are firing on all cylinders, as you've seen, some significant rental rate increases, we expect that to continue. Our systems still have capacity to reduce expenses. Our in-house maintenance program, we are in the middle of rolling that out. Once that is rolled out, it will take some time to optimize it. We have seen that time period necessary to optimize some of our other systems. You get it rolled out and the process is, roll it out, analyze it, refine it and repeat the circle. We will be doing that again with the in-house.

So there is opportunities still left on the table to improve revenues on an outsized basis to the inflation market. There is opportunities to continue to drive maintenance expenditures lower. As Jack just indicated, we are in the mid $2,100 range, $2,100 to $2,200. We expect to see that overall with -- including our capital expenditures come down into the $2,000 ZIP Code by the end of the year. I guess that is a long way of saying, by definition the margins will continue to expand a little bit between now and into the future.

Maybe just putting some numbers around, in the past you've had ranges that have been 61% to 64% on the core side, kind of guiding lower at some points and then adjusting that at others. Do you feel like the lower bound is now higher? Is at the higher end of that potential range? Has it gone up with some of the efforts you may have made over the six-month?

Absolutely, they've gone up. Remember -- when we talk about margins, we talk about on a 12-month basis. It is a seasonal business. I think you've seen with the ARP merger, you've seen with our management expenses coming down significantly as a percent of our revenues. All of that is leading to expansion.

We saw a 200 basis points improvement year-over-year. I think, you take the guidance that we gave you at the beginning of the year and increase it to 150 or so basis points and that's where we would expect to see it, 62% to 63%, 64% range in the near-term, maybe even a little bit greater than that in the much longer term.

Got it. That's helpful. Thanks guys. Good luck.

Jade Rahmani, KBW.

Has the increase in stock prices accelerated the volume of conversations around larger scale M&A?

We are always having discussions with parties and we don't typically comment on those. It took a long time to pull American Residential together. When it's appropriate and if there's something to be announced, we will announce it.

Okay. What about on the bulk portfolio sales from private holders, several hundred unit type size range? Have you seen a pickup in those inquiries?

Yes. I wouldn't say that they are focused on as much on what our stock price is, but we are, in terms of what our cost of capital and what we can pay for a portfolio. So I wouldn't say that the inquiries coming in are more, but we're taking the inquiries more seriously because I think we can pay a more competitive price than we were willing to when our stock was lower.

Are you seeing any increased willingness of those types of entities to hold OP units?

Not on the small --

Except small OP units?

Yes, not on the smaller transactions because a lot of people just really don't understand them. They are then filing tax returns in 18 different states. So, it's a tool for a more sophisticated seller.

Do you view that as attractive, sharing OP units?

Yes.

On the a ARPI acquisition, I guess if it was operating at your existing platform level with efficiency, would you say that -- could you quantify the level of accretion that would have been above your reported core FFO?

I would tell you -- if you look in our supplement, we breakout our properties in four or five different categories. Same-homes and stabilized homes, we do have the ARP portfolio in there. You'll see that the margin is slightly below the margin of our same-home portfolio.

As those leases continue to turn and some of the deferred maintenance, which we actually believe is less than what we anticipated when we underwrote the portfolio. When all of that has come through, I expect the ARP properties to have very, very similar metrics and margins to the same-home portfolio that we have today.

When you look at our administrative expenses, you see from first to second quarter some nice improvement there. Some of that is the synergies coming through of the ARP transaction.

In terms of the seasonality and analyzed this quarter, was that -- it sounds like it was better than your expectation. Could you say what drove that?

I don't know if it was better than our expectation but it was better than The Street obviously. We are now at a point where we have -- really, the only vacancy we have in our system is the frictional vacancy, not only for us but for the industry.

I think that combined with a couple of years of getting systems continually to refine them, enhancing the ability to get our turns done in a very, very timely manner has allowed us to maintain a very, very strong occupancy in the mid 90%. You couple all of that and you also have pricing power. All of that leads to really, the proof of what we've been talking about from day one, that there is an opportunity to move the pricing of this industry -- the rents of this industry to be a little bit more in-line with multi-family.

In terms of CapEx, how much duration do you think there is left in the non-stabilized CapEx? How much longer is that going to last? Maybe, if you could distinguish between the ARPI portfolio and your own portfolio.

I'm not sure I understand.

Yes, I'm not sure I understand, as long as we're continue to acquire, we're going to have renovation costs coming through on that. Are you referring to renovation costs on portfolio acquisitions such as ARPI? (multiple speakers) What's your question about on non-stabilized?

Are you incurring any improvement CapEx on your existing portfolio?

There's zero dollars (multiple speakers)

Maybe in the earlier days, you were renovating things to different standard.

We probably are incurring some improvement costs, but we don't make an effort to segregate it in terms of our same-home pool between -- so all of the CapEx that's reported in the same-home pool that's spent.

Jade, I might be a little bit confused here, but the capital expenditures on our same-home does not include the initial renovation. That occurred before we put the property initially into lease.

The costs that we are incurring will be your standard maintenance-related capital improvements, which may be a replacement of an appliance here or there, a replacement of an air conditioning system here or there. But the initial renovation is prior to the property going into service. Those properties, by definition, are not in our same-home pool.

Okay. So, once you've done the initial renovation and the property is in the same-home pool, will you report a stabilized CapEx as the entirety of the CapEx that you're incurring?

Yes.

Yes.

Okay. (multiple speakers ) Some of the other companies are incurring capital improvement expenditures on homes that either were previously renovated but by someone else or to a different standard or homes that were acquired with in-place leases that were not renovated. So there is a different for at least some of the other companies. But thanks for taking my question.

Wait. We aren't putting those homes at this point into our same-home portfolio. So those homes are broken out separately in bulk acquisitions and in our supplemental, I believe and others, yes. But in the same-home, those are ones that we've renovated and -- we may put in a fence in an unfenced yard, that technically is an improvement. But we don't take that out of the CapEx when we report it.

That's included in our CapEx numbers. If we do any enhancements to the property of a same-home property.

Thanks very much.

Thank you, Jade.

(Operator Instructions)

Patrick Kealey, FBR.

Just first off, talking about the decrease in turn times here, obviously pretty impressive year-over-year. Is this where we should think about obviously a fair turn time running -- or going forward? Or do you think there's going to be opportunity with -- as you bring on in-house maintenance, et cetera, that you might be able to squeeze a few additional days out of it?

I think -- first I want to be clear on what's in there. That's not the total -- what I talked about was not the total turn time. It was the time between a move-out and a home becoming rent ready.

Then you have marketing time, which is the time between the house becoming rent ready and a lease being signed. Then you have, usually there is a period of three to 14 days sit between a lease signed and somebody moving into the house and starting to pay rent. So, those are really the three categories.

The one that we focus on is getting the house rent ready. The marketing is really -- the marketing time is really a function of how aggressively you're pricing your rents. We could get that down to nothing if we priced it low enough. We can expand it to infinity if we priced it too high.

Then the other is just practically for most tenants, the day they sign the lease they are not quite ready to move-in yet, so there is a little bit a period of usually until the weekend or the weekend after that.

Patrick, I think as we become a more mature industry and -- when we're early in our days, we focused on all the detail. Today, we monitor and I think the focus needs to be on where our rental rates are and our occupancy. We will continue to drive to have occupancies in the mid to upper end of the 90% range.

Some of those factors are adjustable based on how we look at, as probably the primary one, as Jack said, rental rates. But we were very, very pleased with maintaining occupancy in the highest turnover quarter in the mid 90%s and expect that -- our ability to continue to do that, we don't see a problem with.

But we can -- the one area we can improve on is the -- we have direct control over it, is the period of time between move-out and rent ready. We've gotten that down to nine days. I think we can get it lower, but maybe just a few days lower.

Okay, great. No, that's very helpful. Then when thinking about acquisitions, I guess, maybe more thinking about it geographically. Obviously looking at your portfolio today, there's a couple markets I think that stand out on the rental growth side. So, when you're allocating capital here over the next few quarters and even few years, should we expect maybe deeper penetration into your existing markets as the way to play it? Or is there potential you think for certain markets out there that maybe you don't have either scale in or aren't in entirely that could help diversify the portfolio and broaden your footprint?

I think only to the extent that we bought a bulk transaction where they already had scale in a market. We are not really looking at other markets right now. We are looking at building out our existing ones.

In other words, our one-off transactions will focus on our existing markets.

Okay, great. Thank you.

Richard Hill, Morgan Stanley.

A couple -- actually three questions on my end. First of all, earlier in the call, I think you mentioned property taxes being up maybe around 9% or so. If I recall correctly, that's up from maybe 5%, what you were previously estimating. Is my understanding correct to begin with?

It is. After the first quarter, we were estimating 5% to 6% increases this year. We've now increased that estimate to 8% to 9%. That is based solely on information we have received about where assessed values are ending up. So we've had to increase our expectations of the increase for this year. We've got two states where we have several of our largest markets that have had double-digit increases in assessed values.

This is a little bit of the result of the significant home price appreciation we saw in the last couple of years. Assessments tend to follow that, not necessarily correlating exactly. The timing is not exactly the same. But they do tend to correlate with home price appreciation.

Yes. No, understood. Obviously, it's a good problem to have. What gives you confidence that 9% is right? Is there any chance that it might be higher, given some of the things that we are seeing in the homeownership market?

We can't be absolutely certain that we are right because we don't have actual tax bills. We don't know exactly what the tax rates are going to be. But for the most part, we've gotten, I think, strong indications of where assessments or assessed valuations are going to be. So, this is our best estimate. We think it's conservative about where property tax expenses will end up for the year.

Got it. Thank you. So, just thinking about the rise in property valuations in context with some of your securitizations that are outstanding. I think a few of them have maturity dates that are forthcoming here. Or at least initial maturity dates, I recognize there are some extension options there.

But given the rise in property valuations that we've seen, how are you guys thinking about that? Would you consider potentially refinancing these into a new deal, particularly given some of the strength that we've seen in the securitization market over the past couple months?

I think the capital discussion is probably bigger than just refinancing back into another securitization. You have seen -- over the lifecycle of American Homes have looked at all forms of capital. As we continue to move forward, we look to optimize our capital structure the best way possible to drive cost of capital down.

We are seeing more and more ability for us to obtain unsecured debt, relieving the burden of a securitization. But it doesn't mean that we don't look at securitizations. They are attractive. They are administratively somewhat burdensome but we will look at all forms.

Diana had mentioned, we don't have any maturities coming up until 2018. What she didn't mentioned is, if you look at our supplement and look at our debt, the maturities that come up in 2018 are a pretty small percentage of our entire capital stack. So I think we are well-positioned to manage all of our maturity risks that we have.

Great. That's helpful. Look, understood. So, one quick thing, just up from a macro standpoint. Are you seeing any sort of changes on the demand side for renting your houses?

We keep hearing about Millennials coming in and maybe Millennials might not be the natural fit for all of your homes. So, I'm curious if you're seeing any new trends developing on the demand side of the equation?

The demand has been very robust, really for the last two or three years. It was probably like that before. We were using third-party managers, so we didn't necessarily feel it. But the volume of calls per available home is as strong as ever.

Yes, No, No, I'm not making a comment on the strength of the demand, I'm making -- I'm asking a question on the type of demand, are you seeing a different type of renter. Look to rent the house, or is it pretty consistent?

The demographics have been pretty consistent.

Okay. Thank you.

Buck Horne, Raymond James.

I promise I will limit myself to just a couple. The R&M and the gains in the CapEx, just the improvement there have been truly impressive. So, congratulations on that. I think maybe there's going to be a skeptical argument that says that are those numbers truly sustainable over the long term, are you investing enough into the houses? So maybe if you can address that one?

Then I guess, as a corollary to that, tenant charge-backs. Can you explain to us a little more about how you have been so successful in collecting tenant charge-backs and reducing your -- those costs with the collections? The other option around that is just how -- are you feeling like the tenants are getting frustrated with the level of tenant charge-backs?

No. I think, actually, we probably under charge-back still. We are very sensitive to the tenants especially on occupied maintenance charge-backs. A very minimal part of that -- part of the charge-backs is occupied maintenance charge-backs.

Most of it occurs on the turn and we try to give them as much opportunity to clean the house and leave it in good condition as we can. We give them names of approved cleaners and coupons for discounts and all that stuff.

So, we try to minimize it actually as much as possible because that helps us in the turn times. It's strictly a cost reimbursement, so we're not making money.

But the bulk of our charge-backs that you see on the balance sheet are utility charge-backs. We pay for most of our home's utilities all year round 100% of the time and charge it back, when it's occupied to the tenant. That program --

That program, the charge-backs on utilities is a significant benefit to our tenants. It makes the move-in process much easier. It's a huge convenience factor to the tenant. So as Jack indicated, the majority of that line that you see, although, it appears to be relatively large, the lion's share is utility.

Jack and our operating team are pretty effective in charging back work on move outs primarily. It gets back to having good systems and having documentation and having a very -- having the tenant understand the leasing process. So it's educating all parties as to the process.

A big key to improving that over time is we were pretty strong about documenting the condition of the house when they move in. So when we charge them back we have pictures and everything to show them what they got and what they gave back and that's why you owe it.

That's awesome. Thank you, guys. One quick one on big picture. How do you see the industry's evolution and maybe consolidation in terms of what stage we are at and the addressable market opportunities. What do you maybe see the optimal size of your portfolio ultimately being -- where do you envision this thing going longer term?

On optimal size, I would say that it is necessary to have a minimum size. Scale is very, very important. On the upper end, I think there is no upper end. It's a function of capacity of your systems and I think we are well aware of that and have invested significantly in the system in response to one of our earlier questions, we are comfortable with any acquisition we can take today. We will continue to monitor that.

Where do I think we are in the lifecycle of this industry? I think we're still very, very early. Recall that there are 16 million homes -- single-family homes that are today rentals. We own under 50,000. You do the math and it comes out in decimal places.

As an institutional industry, we've been doing this for three or four years in volume. We are still very, very early. We own as an industry like 1%. Compare that to other real estate sectors that were institutional -- the ownership of institutionally. You're going to find that to be in the double-digit range.

So we, to catch up would have a long ways to go. Not saying we will get there, but there is a lot of opportunity between here and any finish line that we could ever imagine.

Thanks, guys. Congratulations.

Thank you.

Anthony Paolone, JPMorgan.

First, on the balance sheet, I think your floating rate to total is like 30%. What's the long-term view on where you want floating rate debt to be?

I'm not sure I have a target for floating rate. I think it's more focused on the overall structure and maturities. 30%, that's a number of total debt. You look at the amount of total debt as a percentage of capitalization, that percentage comes way down.

The inference I think is on interest rate risks. I don't think we have tremendous amount of interest rate risk. At that level for where we are in being a five-year Company, we're pretty comfortable with that number.

Okay, Then Jack, I think you mentioned all in yields on deals that you're looking at in the low 6s. What's all in as it relates to CapEx and property management? Are those included in that? At what level?

Yes, they are included at our targeted level of CapEx turns, maintenance and on property management. We are probably overstating what we're -- what it's really costing us because to add at one property or 10 properties or 20 properties to a market doesn't cost us what we're paying currently. The marginal cost is lower, but we burden it with the full-property management costs that we are currently experiencing.

So if I look at the percentage of revenue -- property management as a percent of revenue, that's what you are assuming that was 6s?

Yes.

Then CapEx, what's the -- is that $500 or the $700, $800, you've run in the last whole month?

We grouped the categories, so it's somewhere in the -- this is going by recollection on the pro forma. It's somewhere in the $1,800 to $2,000 range for maintenance CapEx and turns.

Okay. If you had to think about that versus -- this number and maybe normalized for some of these assumptions versus what you guys were doing say three years ago, when you were in the thick of it, what's been, for the lack of a better term, the cap rate compression or net change?

The cap rate compression -- I don't think it's happened as much as people think because rents have risen, some more than prices. I think we were buying probably in the low 6s and now we are at 6. I really don't think it's that much different in the markets we continue to purchase in. If we were talking California or Las Vegas or Phoenix, I would have a different answer.

Okay. On the acquisition pace, I guess, you implied about $100 million a quarter and returning to that pace later this year. How much debt do you think is coming from investor to investor versus like MLS type transactions?

I would say probably 50% of it is coming through auctions -- foreclosure auctions. The other 50% is primarily going to be MLS transactions, buying from owner-users.

Bulk transactions will be on top of that, they're primarily your investor to investor.

Okay. Then in terms of on the sales side, can you give us a pace or just a dollar amount on the sales side? Is it held for sale stuff? Or is there more we could potentially see there?

It's primarily the held for sale stuff. But we -- occasionally, you will have homeowners associations that change the rule, so that you can't lease in them. So those will obviously move into for sale. We constantly monitor our 90-day and older inventory to see if maybe it's not a good rental for us. Fortunately, I think we're down to only 23 homes in that category. So it's not very hard to monitor.

Okay, great. That's all it got. Thank you.

Thank you, Tony.

Dave Bragg, Green Street Advisors.

I would just like to revisit an answer you gave, which suggested that you're spending more time evaluating the unsecured market. Could you please elaborate on that? Just talk a little bit more about what your long-term outlook is for the composition of the balance sheet?

I think the composition in long, long term, we want to make sure that we have a good blend of permanent capital and attractively priced debt. As we have -- when we started in this industry, we had only one form of capital. In each and every period, we have been able to develop additional forms. As we become more and more mature as an industry and the Company's capital position becomes stronger, more opportunities are opening up for us.

We are at that point where there's now availability of unsecured debt. It has a number of benefits to us including unencumbering assets on our balance sheet. It's just a process. We, today, are fairly well down through that process. I would hope that we have some more attractive unsecured debt in the near future that's attractively priced. But every step that we have taken has been with a view and a thought to the long-term reducing of capital.

Some of that is needing to put some capital that maybe a little bit more expensive than existing debt onto our balance sheet because it's permanent capital. It's a process to right-size the balance sheet. In the long-term, it's going to have significant benefits to the Company in reduced cost to capital. I think we are at the -- looking at unsecured debt for the first time as a viable alternative and viable option to finance the Company.

Okay. Thank you for that. One other question, can you please provide the percentage change in renewals and new leases for 2Q on a same-store basis?

We don't have that information right -- (multiple speakers)

We are looking quickly to see if we have in our room, but --

My gut feel is that it's very similar to what we have overall.

Okay. Because our question was that we were wondering if the integration of the ARPI portfolio into your portfolio, given the fact that you're a significantly better operator, is allowing for much higher results in that pool of assets than in your legacy pool? You are saying that's not the case.

Just the number of properties that we have in the ARP pool compared to our same-home pool and stabilized pool, ARP is 14%, 15% of our total property count. If it influences it at all, it's not going to be a material influence. The total numbers are more driven by our legacy portfolio than ARP.

I would say that our overall increases on ARP are probably a couple of percentage points higher on re-leasing than on -- than the overall AMH legacy. But it doesn't -- there's not that many of them to significantly influence the overall rates.

Understood. Thank you.

Thank you, Dave.

Thank you. Ladies and gentlemen, we have reached the end of our question-and-answer session and today's conference. You may disconnect your lines at this time. Thank you for your participation.