American Homes 4 Rent (AMH) 2016 Q3 法說會逐字稿

Greetings and welcome to the American Homes 4 Rent third quarter 2016 earnings conference call. At this time all participants are in a listen and only mode. A brief question-and-answer session will follow the former presentation.

(Operator Instructions)

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

Good morning. Thank you for joining us for our third quarter 2016 earnings conference call. I am 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 the 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.

Our forward-looking statements speak only as of today, November 4, 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. Good morning, and welcome to our third quarter 2016 earnings conference call. On today's call, I will highlight our results for the third quarter and provide our outlook for the rest of year and beyond.

Jack Corrigan, our Chief Operating Officer, will then review our portfolio performance in more detail and update you on our key operating initiatives and transaction activity. 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.

It was another great quarter for American Homes 4 Rent. Core FFO was $0.24 per share representing a 27% increase over the $0.19 per share recorded in the same period of 2015. Our adjusted FFO, or AFFO, was $0.19 per share in the third quarter, compared to $0.15 per share in the third quarter of 2015, an increase of 33% year over year.

These results are a testament to the quality of our portfolio, which continues to generate strong operational results with high occupancy rates and strong increases in revenue. More importantly, our performance reflects our success in execution, with an ongoing focus to unlock the power of scale and to control expenses through the implementation of innovative leasing and property management best practices.

These efforts continue to drive strong growth in same-home core net operating income after capital expenditures, which increased 12% in the third quarter of 2016 compared to the same period in 2015. This is the fifth straight quarter of double-digit improvement in this important measure of operational cash flow. More impressively, this was accomplished in the third quarter, which seasonally is our highest quarter for turnover and maintenance expenses.

Also, this quarter's double-digit increase was on top of a double-digit increase reported in the third quarter last year. Certainly, while we expect this growth to normalize over time, we still believe that there are opportunities for continued outsized revenue growth and for more efficient execution to continue driving operational costs even lower, resulting in higher margins and cash flow from operations as we move into 2017 and beyond. Jack will discuss our progress on this front later on the call.

Turning to our balance sheet, we continued to take steps to further enhance our balance sheet strength and broaden our capital options. During the third quarter, we entered into a new $1 billion credit agreement which provides AMH with increased borrowing capacity, lower interest costs and an extended maturity date compared to our previous secured facility.

But more importantly, this credit facility marks a milestone achievement in the evolution of our capital structure and provides us with significantly enhanced financial and operational flexibility, as it does not require individual properties to be pledged as collateral. We appreciate the strong support from our bank group and believe the new credit facility reflects their confidence in our future and the long-term potential of the single-family rental sector.

In addition, during the quarter one of our legacy investors, the Alaska Permanent Fund Corporation, sold 43.5 million shares of our Class A common stock in a registered offering at $21.75 per share. The shares were sold after significant appreciation in order to right size their asset position. AMH received no proceeds from this offering. However, we did achieve the duel benefits of enhanced market liquidity and a more diversified shareholder base. Diana will discuss these transactions in more detail later on the call.

With regard to investments, as we mentioned last quarter, we utilized the increased capacity on our balance sheet to increase our acquisition pace in the third quarter. We continued to see attractive acquisition opportunities in many of our markets and acquired 571 homes in the third quarter for approximately $116 million.

On the disposition front, we accelerated our disposition pace in the third quarter as expected. We sold 453 homes during the quarter, including approximately 300 ARP homes. We expect to continue to be an active seller of homes that do not fit our strategic objectives or quality standards, which will further improve our margins overtime.

Finally, I would like to comment on the impact of Hurricane Matthew, which occurred in early October. First and most importantly, none of our residents were hurt. The impact to our homes was significantly less than we originally feared. However, we did experience damage to about 1,000 of our homes in Florida and the Carolinas. While we continue to assess the final tally, we expect we will incur between $600,000 and $1 million in total uninsured damages and lost revenue. These costs will be reflected in our fourth-quarter results.

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

Thank you, Dave, and good morning, everyone. As Dave noted, we utilized the added capacity on our balance sheet to increase our acquisition activity in the third quarter. During the quarter, we acquired 571 homes for a total investment of approximately $116 million. About 400 of the homes were acquired through brokers or at auctions and one-off transactions, with the remaining purchases through small bulk transactions.

Our pace of acquisitions was in line with our expectations and we still expect to continue a quarterly acquisition pace of approximately 400 to 600 homes in the fourth quarter, not including any bulk purchases, which would be in addition to this level of activity. We also accelerated our disposition pace in the third quarter as expected. We sold 453 homes during the quarter, including 43 in one-off transactions and 410 in bulk transactions. These sales generated $56 million in net proceeds and a $12 million gain. Included in the number were approximately 300 homes acquired through the ARP merger.

Our average cost to sale is approximately 6% to 8% for one-off transactions and 1% to 2% for bulk transactions. We expect to continue to be an active seller of homes that don't fit our strategic objectives or quality standards. At September 30, we had 1238 homes held for sale, the majority of which we expect to complete over the next 12 to 18 months.

Turning to leasing. During the third quarter we signed approximately 5,500 new leases. As expected, our leasing spreads moderated in the third quarter compared to the second quarter as we move closer to the slower Fall/Winter leasing season. During the third quarter we achieved a 3.4% increase on renewals and a 5% increase on releases. We expect rental rates to increase by 3% to 4% in the fourth quarter.

Within our same-home portfolio reflecting the operational results of 25,273 homes owned and stabilized in both 2015 and 2016, we reported revenue growth of 5.5% in the third quarter. This increase was driven by 110 basis point increase in average occupancy to 95.2% and a 3.7% increase in average contractual rental rates. Same-home expenses for the third quarter decreased 2%, driven primarily by a 15% reduction in repairs, maintenance, and turnover costs, including in-house maintenance, net of tenant chargebacks, partially offset by a 7% increase in property taxes in the quarter.

For the nine months ending September 30, property taxes were up about 9%, and as we indicated last quarter, we still expect property taxes to be up 8% to 9% for 2016. We continue to challenge assessments where we can, and our third-quarter results reflect some successes in the appeal process. Over the long run, we expect property tax increases to trend roughly in line with depreciation and home values. As a result of these factors, combined with a decrease of capital expenditures for the third quarter, same-home Core NOI increased about 11% and our Core NOI after deducting capital expenditures increased more than 12%.

Our core net operating margin for the quarter was 61%, which reflects the seasonally higher expenses incurred in the higher turnover summer months. I would note that our Core NOI margin was 300 basis points higher than in the third quarter of last year, and in line with our expectations for this year. Year-to-date, our Core NOI margin was 62% and we continue to expect full-year Core NOI margins to be approximately 62%.

Moving on, I'd like to update you on our progress on the repair and maintenance front. In the third quarter we continued to drive our overall repair, maintenance, and turnover costs, including expense and capitalized costs, lower. On a same-home basis, these costs were 10% lower for the quarter and 16% lower for the first nine months of 2016.

For the rolling four-quarter period ending September 30, 2016, these costs totaled $2,084 per home compared to $2,157 per home for the rolling four quarters reported last quarter. Our national standards, better training, more transparent reporting, and centralized subject matter experts in high-cost areas of HVAC, plumbing, landscaping, and roofing have been critical to controlling these expenditures.

Further, we continue to focus on reducing downtime on turns between move out and rent ready. We have reduced this period to 10 days in Q3 2016. The benefit to AMH is higher portfolio occupancy and rental income as well as lowered carry costs for utilities and landscaping.

I also want to update you on our in-house maintenance program which has now rolled out to markets covering 88% of our homes. During the quarter, we incurred approximately $2.1 million of expenditures to structure, rollout, and operate this program. These costs are included in the total maintenance and turnover costs. We remain confident that this program will further enhance our ability to control costs, although the full benefit is not likely to be realized for another 12 to 18 months.

In addition to the financial benefit in AMH, our ability to deliver better customer service and monitor response time should accrue meaningful benefit through enhanced customer satisfaction and stronger results. As our teams on the ground gain experience, we are finding new ways to apply the strengths of our platform and we do expect to continue to show improvement in our total repair, maintenance, and turnover costs moving forward. Now I'll turn the call over to Diana Laing, our Chief Financial Officer.

Thank you, Jack. In my comments today, I will review our third-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.

Beginning with our operating results, for the third quarter of 2016 we reported total revenues of $236 million compared to $173 million in the third quarter of 2015, an increase of about 37%. The net loss attributable to common shares was $21 million, or $0.09 per share for the third quarter of 2016, compared to a net loss of $28 million, or $0.14 per share, in the third quarter of 2015. We reported core FFO of $69 million or $0.24 per share. On a per-share basis our core FFO was up about 27% from the $0.19 per share we reported in the same quarter a year ago.

Our adjusted FFO, or AFFO, for the quarter was $57 million, compared to $39 million in the third quarter of 2015. On a per share basis, our FFO was $0.19, an increase of 33% from the $0.15 reported in the third quarter of last year.

As a note, in calculating AFFO, we deduct recurring capital expenditures and capitalized leasing costs paid from core FFO. The increases in both core FFO and AFFO were driven by higher net operating income from both our same-home pool and the other homes acquired and/or leased in the past year. The computation for each of our FFO measures is shown on page 10 of the supplemental.

Moving on to the balance sheet and capital activity, during the third quarter we entered into a new $1 billion credit agreement providing for a $650 million revolving credit facility and a $350 million term loan facility. Including all borrower extension options, the revolving credit facility matures in 2020 and the term loan facility matures in 2021. This credit agreement replaces our prior $800 million secured facility.

Based on our current credit profile, the revolving portion of the new facility bears interest at LIBOR plus 1.85% and the term loan portion of the facility currently bears interest at LIBOR plus 1.8%. We were extremely pleased with our ability to secure this new financing, which provides us with significantly enhanced financial and operational flexibility.

In September, we used a portion of the term loan component and cash on hand to repay in full the outstanding ARPI securitization notes for approximately $342 million. The ARPI securitization had been assumed in our merger earlier this year and was repaid without penalty at the earliest possible date. This increased the number of unencumbered assets in our portfolio, which increases our flexibility for future capital transactions.

In addition, as Dave mentioned, the Alaska Permanent Fund sold 43.5 million common shares in a registered offering at $21.75 per share, for gross proceeds of approximately $946 million. We issued no new shares in the offering and received no proceeds. This transaction eliminated an overhang for the Company created by their large position.

It also provided AMH enhanced market liquidity and it allowed us to develop a more diversified shareholder base. The Alaska permanent fund initially invested in AMH as a joint venture partner and acquired additional shares as part of our IPO. They retained 1.7 million shares of common stock after this transaction.

At quarter end, our balance sheet and liquidity remains strong and supportive of our operational and growth objectives. We had total debt of $3 billion with no maturities until 2018. Nearly 75% of this debt is fixed rate, with a weighted average interest rate of 4.26%. We had $106 million of unrestricted cash and cash equivalents on our balance sheet at September 30, 2016, and $675 million available on our $1 billion credit facility.

Thus far in 2016, we have made significant progress in our goal to increase our balance sheet capacity and flexibility. We have enjoyed great execution as our industry has continued to mature and we will look for opportunities to further optimize our capital structure and enhance our balance sheet flexibility to support our operational and growth objectives.

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

Thank you. The floor is now open for questions.

(Operator Instructions)

Our first question today is coming from Jade Rahmani of KBW. Please proceed with your questions.

Good morning. Thanks for taking my questions. Looked like a very solid quarter performance trends.

I wanted to ask you about turnover. Could you discuss what you're seeing in terms of turnover? We have seen some elevated turnover ratios in certain securitization transactions. Make you could talk to your long-term expectation and perhaps share any information on what percentage of move-outs are going to home purchases, other single-family rentals in the same area, or relocations in other situations?

Yes. This is Jack Corrigan. I will take that question. On turns or turnover, as we refer to them, it's very seasonal. So you will likely see elevated levels May, June, and July are our biggest months for turns. And also our biggest months for leasing, because it's right near the end of the school year and people are making their decisions and getting ready for school.

As far as people leaving to buy houses, that's been a little more than it has been in the past. I think last quarter I said it was about 30%. I think it's closer to 35% of our move-outs are related to somebody buying a house, and that might be higher than some of our peers because I think Silver Bay said it was about 15% to 20%. But I think our tenant profile is probably -- our rents are higher, so our tenant profile is likely more able to move and buy houses.

And what kind of ratio do you think is a long-term expectation of yours?

Turnover ratio?

Yes. On an annual basis.

About 35%.

In terms of -- have you looked at a scenario in which turnover runs at, say, 45%, and that would do to, say, NOI margins on an annual basis?

I haven't.

Okay.

It would certainly -- it would certainly increase the turn costs. So it wouldn't be good for them, but I don't think it would (multiple speakers) impact it.

Yes, I think the impact to our operations is, where Jack indicated it's going to be a little bit higher turnover expense. We are seeing significant demand for our product. We had our turnover this quarter, and we were able to maintain 95% occupancy.

So I don't think it's going to have a significant impact to the revenue line. But a turnover increase into that 45% on a theoretical basis would have an impact, increased impact to the turnover expenses, the maintenance expenses, to refresh the properties.

That would be partially offset, as we're are not as aggressive at raising rents on renewals. So on the re-leasing that would probably be offset by future revenues somewhat.

Okay. And can you just talk to the portfolio management process you go through in terms of identifying non-core homes? How does the process work? Is it on property management field level, or do you have IT overlay certain red flags in your database that helps identify such properties?

The bulk that we've disposed of in the past has been related to acquisitions where we knew when we bought the portfolio that there were going to be a certain number of these houses when we did the due diligence, that we were going to sell over time, and it's usually age or area related or bad School Districts. Just houses that don't meet our typical criteria.

We also review houses that sit on the market for any length of time, been on the market over 90 days especially through the busy leasing season. We review that to see if it's a good rental house. And then we also occasionally will have trouble with homeowners associations that are changing, making homeowners associations rent restrictive, and we'll either battle that or just decide that we'll just sell that house and take our battles elsewhere.

Jade, a little more color on that. With respect to the legacy homes that we do end up selling, we have an operational analytics group. We have two financial analysis groups.

We have one operational analytics group that works directly with Brian Smith and Jack on a number of fronts. Rental rates, management is one. One of them is also how the homes are performing and to identify opportunities for improvements in many areas. One is pruning and culling assets that we may not desire to have in our portfolio.

And finally, can you just touch on the elevated bad debt expense in the quarter? Which of that?

The bad debt, I mean, it's a little bit elevated, but I think if you look, it's a seasonal impact. As you have more turnover occur, which third quarter is seasonally your largest turn quarter, some of the bad debt ends upcoming from lack of security deposits to charge back on items that the tenant is responsible for. And we attempt to go after the tenants in those cases as appropriate, but some of that bad debt is really a reflection of just the fact that there is more turns and it's the residual cost resulting from the turns.

Thanks for your time. Appreciate it.

Thanks, Jade.

Thank you. Our next question is coming from Juan Sanabria of Bank of America Merrill Lynch. Please proceed with your question.

Hi. Good morning, guys. Just hoping you could talk about the margins post [our nam turn] CapEx cost, kind of what you're thinking about how that should trend into 2017, and maybe if you could elaborate on the set-up costs to reduce those over time year-to-date and maybe what to expect in 2017 to help us think of a clean run rate?

Yes. This is Dave. I think we kind of outlined some of that.

For this year we're looking at 62% NOI margins. We have been bringing down our maintenance expenses period after period over the last probably two years. As we continue to implement and improve our standards and our training, et cetera, and today those expenses are, for us, at an all-time low of about $2000, between $2000, $2100 per home if you look at the last four quarters to eliminate seasonality.

As Jack indicated, we are still working on those programs, but we have just rolled out the in-house maintenance. The in-house maintenance will go through a life cycle similar to other systems that we roll out. It will start providing some benefits, but those benefits will continue to improve over time as we learn and our field techs learn and are better trained and more experienced.

And so I'm sure as time goes on we will get better at some of the logistical aspects and we will probably end up restocking the trucks slightly different a year from now than the way they are as we understand exactly where the high demand items are a little bit better. And all of those will have a small improvement on our expenses.

I think the margins, the potential of margin expansion probably is more focused on the opportunity of revenues. We still believe we have the ability to obtain outsized revenue growth, similar to what we have seen in the past year. Outsized at least to, you know, the long-term and what we see in other residential opportunities.

So I think the growth story is still -- we're still in the early innings of it. I think it will be probably not as significant reductions in expenses, but there will still be reductions in expenses, but the revenue line will still be strong going into the future.

I think you mentioned $2.1 million of costs to bring stuff in house. Is that included in that $2000 to $2100 per home?

It is, and that's really start up cost. That's just the cost of getting the concept rolled out into the markets that cover 80%, probably 90% of our properties.

There is not a lot of benefit from the program. That's really getting the trucks out there, the people hired and trained. So we look forward to having the in-house maintenance go from an organizational cost line to a benefit line.

And that was all in the third quarter, the $2.1 million?

That $2.1 million is the third quarter impact. That's correct.

You talked to separately a drag on your margins from assets that are held for sale. Can you help us quantify that impact or give us any sense of the quantum? If -- if you do so, what the margins would look like?

Yes. Hold on, Juan. I am pulling out the supplement right now.

On page 11 of the supplemental package we break out the sources of Core NOI and the resulting margins into same-home stabilized but not same-home ARPI properties. And then we have a column for other and held for sale, the NOI margin for that group was about 57% compared to 61% for the entire Company.

Okay. And then you talked about opportunities on the revenue side. If you could just help us think about your sense of how 2017 should play out, maybe just a range for newer renewals, whatever you feel comfortable talking about as we look forward to the next step in the evolution of the Company?

Yes. I would say on renewals, it will -- we have been in the 3% to 4% range for quite some time. I would expect that to continue. On re-leasing, I think 4% to 5% is a reasonable target.

Juan, remember there is a little bit of seasonality more in the releasing line than the renewal line, but you will see more of that in the second and third quarter. We will be at the higher ends and lower ends probably first quarter.

Okay. And just lastly, we have gotten some questions on the dividend and payout ratio. Any sense of how people should be thinking about that? I know you're still looking at ramping up and getting more scale to take advantage of some synergies, but just how long term you guys are thinking about the payout ratio?

Well, I think you hit it on the head. We are still in a growth phase right now. We talked about our acquisition plans of 400, 500, 600 homes a quarter, and then on top of that, more than that with bulk purchases, and your cheapest capital is your retained capital.

It doesn't mean that it's not accruing to the benefit of the shareholders. In fact, it is probably accruing better to the shareholders by retaining it and growing the Company. Taxes don't have to be paid, et cetera, on the dividends.

So at this point, while we are still in growth, we are looking to retain it. When the growth opportunities slow, we will look at the dividend rate some more.

The reality is, the Board does look at it and we do have a discussion every single quarter about the dividend rate and what our opportunities are, but right now there is a lot of growth opportunities out there. Jack mentioned the one-offs are still very strong, but so are the portfolio acquisitions. We had a number of real small portfolio acquisitions last quarter. So a number of homes acquired through that channel.

Thank you.

Thank you. Our next question is coming from Jeff Donnelly of Wells Fargo. Please proceed with your question.

Good morning, folks. You know, I guess maybe for Dave or for Jack, we keep hearing about the Affordable Care Act putting more pressure on consumer wallets potentially in 2017. Have you thought about how that might affect affordability either of home purchases or rental affordability for consumers?

Well, we have a minimum of three to one rent coverage for income. But our average is five to one. So I don't think it's going to dramatically affect the affordability of our homes on average. Might see some on the margins, but I don't think it will have any significant impact on our business, at least in 2017.

That's helpful. And I am just curious, on Houston, occupancy was down a little in the quarter and year-to-date. I am not sure you can delineate this finely, but do you think this that's maybe a result of some of the energy market issues materializing in your demand for units, or instead of function of the supply that's coming into that market that is providing a little more competition?

I don't think it's affecting the demand as much as you're seeing people who are losing jobs and you're having a little more forced turnover in that market than you see in others. And so your turnover gets a little higher and then you got to rent out more homes than you normally would. So I don't think it's significantly affecting the demand, but it definitely is affecting people who are in that industry, and we have our share of renters that are in that industry.

And I apologize if I missed this, but just a couple of questions on some expense items. For example, taxes and insurance. Insurance has been moving steadily lower, taxes a little bit higher. Do you think that pace of change is going to be sustained for those in Q4, and I guess how should we think about it maybe in 2017? Do you think they can maintain that pace? Or do you think it will more revert to a typical sort of inflationary type increase?

Well, let me comment on property taxes first. Property taxes are -- to me, is the opposite side of the coin of HPA. Maybe a little bit delayed timing-wise.

Property taxes are based on assessed values, assessed values in most jurisdictions have a direct correlation to values. And so we -- what you are going to see in the property taxes is some relationship to home price appreciation. Probably one year or so on a delayed basis.

So we are -- we do have a significant increase this year, 9% is where we're running. We were very successful in the third quarter on appeals. In a second I am going to ask Diana to go through the appeal information that we have.

But you will continue to see increases in property taxes, and you can kind of correlate it to home price appreciation probably the prior year. Insurance -- there are a lot of benefits to this business to have scale, and one of them is in the efficiency of the insurance process. And so we have seen those continued benefits, the insurance markets are cyclical, as we all know from our days in other sectors of real estate.

So there will be over long term, some cycles that we go through, but they're long-term cycles. Right now I would look at 2017 being a favorable year on insurance. I wouldn't look at it as being a risk point for us next year in increases.

With that said, Diana, do you want to go through what we have been doing on property taxes?

Sure. A few statistics with how we dealt with property tax increases this year. We actually -- sorry. We filed appeals on about 22,000 homes, and about 8,000 of those appeals resulted in decreases in property tax -- or assessed values for property tax calculation purposes. We still have about 4,000 of those appeals pending and about 10,000 of them didn't result in any benefit.

So we worked very hard to try to reduce assessed valuations as they come along. Most of those reductions came in Texas, where we had the highest increase in our assessed values.

That's great. And just one last question in a similar area like repair and turnover costs and other chargebacks are also down in significantly in the quarter. I forget if you mentioned it. Is that timing related? Is that better charge backs or low repair experience? I am just curious if that's sort of an anomaly or sort of a little bit of a continuing trend?

I would say that it's a continuing trend. We have done a better job of training our people out in the field on what needs to be done on the turn and what doesn't. We have been able to reduce that. Further, we have hired some subject matter experts, for example, in HVAC.

So we have somebody on our side that speaks the same language as the vendors and can tell when maybe a replacement isn't needed or maybe a smaller repair is in order. So we have done that in all of our high-cost areas. Brought in some subject matter experts that really help us out.

That's great. Thanks.

Thank you. Our next question is coming from Rich Hill of Morgan Stanley. Please proceed with your question.

Thanks. So I had some questions on the acquisition side of the business. It looks like acquisitions have been at a pretty steady clip. So, two-part question. How should we think about acquisitions going into 2017 or maybe a trend, because I don't want to put you in a position where you are giving guidance at this point. But maybe as importantly, when you think about acquisitions, what markets are you seeing the biggest opportunity for acquisitions, and is it something specific to the way you're managing your homes or is it really supply versus demand dynamic?

Well, it's where we can get a yield that's attractive to us and by our types of homes. So we're currently buying primarily in the Southeast, Florida, Georgia, South Carolina, North Carolina.

We did buy a small bulk portfolio in Seattle, which we really like that area. And we look at where rents are growing, and factor all that in. But we could change markets depending how demand goes.

Sure. And some of the supply that we're seeing in the multi-family space, particularly starting to transition to secondary and suburban markets, particularly in the sun belt, are you seeing that have any sort of impact on your demand, or is it really a different type of that renter base between the two products?

We have not seen an impact on our demand. I think it is probably a different renter base than somebody with a couple kids. Probably less likely to rent an apartment than a house.

Got it. Understood. That makes sense.

So just on the financing side of the equation, I noted on the last call that you made a comment that you were maybe looking to diversify away from securitization market or less rely on the securitization market, and certainly your activity this quarter supports that. And you had mentioned the new line gives you a substantial amount of flexibility going forward with capital raising needs.

How should we think about that going forward? Is there any sort of preferred route that you might be focused on one over another, or is it really just being nimble in this market and being able to access whatever is most attractive at the time?

Yes. No. I think the answer is, we look at all areas and we try to remain nimble and be positioned to take advantage of whatever the best capital is to match the assets we're acquiring. Specifically with respect to debt, our new credit facility, the pricing of that new credit facility is compelling compared, for us, compared to securitizations. It's more attractive.

But more importantly than the attractiveness of the pricing, which it is more attractive, is the fact that securitizations are administratively expensive, complicated, and they tie up your assets through mortgages. And so you lose the flexibility of right-sizing and dealing with your assets in manners that you would desire.

With respect to the line of credit, the individual assets are not pledged, and so that's the primary difference. So you have two, you have structural benefits in the moving -- for us, moving away from the securitizations, and you also have pricing benefits moving away. And so where we are in our life cycle, I believe that the line of credit and other forms of debt today probably will take precedence over securitizations.

Got it. That makes sense. Thank you. I will get back in the queue for other questions.

Thank you, Rich.

Thank you. Our next question is coming from Buck Horne of Raymond James. Please proceed with your questions.

Hello. Good morning. I wanted to ask you about your disposition strategy in terms of just timing and how we're thinking about which markets you might be considering leaving. I just noted there is a large number this quarter that came out of Indianapolis and Chicago. Are you thinking about exiting those areas in larger size?

No. When we acquired ARPI, they had a program called preferred operator programs, and the houses acquired through those programs were generally lower quality than our standard and they had about 400 in Indianapolis and 500 in Chicago. So we have been trying to sell those either as small portfolios, and we had some success that way.

A large portfolio deal would be nice. And then as they become vacant, we'll also put them on the market. So those are the kind of the three ways we have been selling, and Chicago and Indy, do have a significant number of homes for sale.

And over the -- you know, what you guys have held for sale right now, is there a reasonable, just for modeling purposes, pace that we could expect you to sell per quarter? And also of what you guys held for sale, what percentage do you think could be sold in bulk transactions versus having to pay up for the commission expense on one-off deals?

I think they all could be sold in bulk transactions unless the reason we're selling them is that they have become rent restricted and then generally, we are selling to other people who would want to rent them. So those will need to be sold individually. But they all can be sold, and I think that the majority will be sold in bulk transactions. And because they are sold in bulk transactions, predicting the volume each quarter, I think we said we thought we'd sell them in 12 to 24 months. My best guess would be straight line it.

Okay. That's helpful. And one last one. On the repairs and maintenance turn costs, you guys have noted $2,000 a home annualized as kind of being a long-term goal. Is that something that's within reach for FY17?

Yes. We are at $2,084 on a rolling four quarters, and I do think there will be some more improvement in 2017. So my target is lower than $2,000, but I think that's a reasonable estimate.

Buck, we haven't seen the benefit of in-house maintenance yet in any meaningful way. There is a little bit maybe, but not in any meaningful way. So I think the $2,000 is easily attainable.

Sounds good. Thanks, guys. Congratulations.

Thank you.

(Operator Instructions)

Our next question is coming from Dennis McGill of Zelman & Associates. Please proceed with your question.

Hello, everybody, and thanks for taking a few here. I mostly just have follow-ups.

The first Dave, on property taxes, you made the comment on over the longer term it will line up with home prices, which makes sense, but over the last year or so that 8% to 9% increase is obviously higher than what we are seeing in home prices nationally. And I think even if we did a market weighting, it would be that way for you guys. What would you attribute the outside increase in the short run, and how long do you think it will be where you still have that type of impact where it's running above home price inflation?

Yes. I think there is two things, Dennis. One is the timing of home prices to increases in property taxes, there is a lag and so you don't look at the home price appreciation this year.

The other impact that you have, it has a small impact to the numbers, is when you first acquire a property, you inherit the prior owner's situation. In many cases, they are receiving homeowners exemptions, and those homeowners exemptions get eliminated and removed on the next assessment when it's an investor owning the home. So in many of our jurisdictions we see some small adjustments, which are one-time for the homeowners exemptions.

As you get further from the most robust price appreciation, which would have been in 2012 and 2013 and with the pace of acquisition having slowed of late, would you think as you get into 2017 that that rate of increase can be improved from the 8% to 9% that you've seen so far this year?

I think you will see some improvement, but don't look for dramatic improvement down into the 2s and 3s. It's not going to be there. Remember the way property taxes works is state driven. Some states reassess on an annual basis, some are biannually and some are tri annually. That's the reason why you have some delays in some of the recognition of increases.

Okay. The second question had to do with around sort of the maintenance side, particularly on the HVAC. Third quarter was a quarter where I think almost across the country there were record temperatures, certainly higher than we have seen at any point you have owned homes. So I imagine it would have been the most strenuous example you could have for HVACs on the maintenance side.

So I was just wondering if you could piece out in any way whether you saw an increase in HVAC maintenance visits but yet still were able to have lower costs because of all the initiatives you have underway or some way to triangulate those two things? It seems like you managed it well in what was a pretty tough environment.

Yes. In our in-house capabilities, we have HVAC techs that are licensed in taking care of that. So I think that helped a lot on the costs. And we did see, every summer though, we see a lot of HVAC calls. It's one of the reasons we really like Seattle and Portland, is they don't have HVAC. But --

You get more maintenance requests for HVAC this third quarter than last third quarter on a per-home basis?

I think it was pretty close to the same. I don't think it was higher.

And the last one was just going back to the turnover question. I think you said you feel like sustainable turnover for your portfolio and price point could be around 35%. I think over the last year it's closer to 40%. What would you attribute that difference to in the short run?

Last I looked it was at 35% for a rolling four quarters.

Dennis, remember there is seasonality. First and fourth, there is very little turnover compared to second and third. So don't look at the last two quarters and trend them.

I was just going off of the same -- maybe I am looking at the wrong thing here, but in the supplement you had turnover over the TTM at 40.7%.

Oh, okay. On the same-home? I would have to look at that. I didn't know it was that high.

Okay. We will follow up on it. All right. Thanks, guys.

Thanks, Dennis.

Thank you. Our next question is coming from Dave Bragg of Green Street Advisors. Please proceed with your question.

Good morning. I wanted to follow up with some more insight on the demographics you have shared. Regarding the 35% move-out to buy rate, given the fact that you have the income data on your residents, can you talk about whether or not it's pronounced amongst the higher income residents in your portfolio?

We haven't analyzed that totally, but that's a logical conclusion, and we have our average income of our tenants is in the $90,000 to $100,000 range, excluding the former preferred operator program houses. So I would say that's a reasonable calculation.

Okay. Yes. It would be great to look into that and understand if perhaps -- how much more vulnerable the top quartile of the portfolio is to that risk. At the market level, in what markets are you seeing the most move-out to buy home activity?

It's pretty much across the board. There is no market that we see more than others.

Okay. And next question. Just back to the bulk purchase opportunity set. Can you talk about the opportunity over the near term and intermediate term to buy portfolios of 500 homes and greater? How active are those conversations?

Well, those conversations have always been going. There is not that many in the 500 or 1,000 and greater. There is a lot in the 100 and greater, which you saw that we did execute small bulks, but they were under 500 this quarter.

We do announce those that are 1,000 or greater. We have had three of those, and all of those have taken a year or so to cultivate. And so we are in discussions with a number of them.

I have nothing to announce that we have got any done. We may not get any done, we may get a number of them done. When they do come to happen, they come to happen in a very short period of time, although the time to cultivate them is a very long period of time.

So it's not a real definitive answer, Dave. I know that. But unfortunately it's the way the process goes. And so we have -- as I said last quarter and the prior quarter and will probably say next quarter, we are always in discussions with all of our peers about opportunities.

Okay. That's fine, thank you. Last question for Diana. Over the last year you have taken up the exposure to floating rate debt from 18% to 26%. I would appreciate your thoughts on what the appropriate level of exposure is to floating given the nature of your assets and cash flows?

We are comfortable with where we are presently, I'll say first of all. And a piece of the floating rate debt is one of our securitizations, which is capped, so we have capped our interest rate risk there.

And I think over time you will see us replace floating rate debt with fixed-rate alternatives. But as I said, we are comfortable with where we are, and we are also comfortable with taking advantage of some of the additional capacity we have on the line.

Great. Thank you.

Thanks, Dave.

Thank you. Our next question is coming from Anthony Paolone of JPMorgan. Please proceed with your question.

Thanks. I just have one. The $2,084 in the last 12 months sort of R&M and turn and so forth, what was it -- like how do you break that out? What's the cost for just the house that the tenants just continuing to live their life and there is no change, just a renewal versus the actual homes that get turned?

You're talking just maintenance of occupied homes versus turn costs?

Yes. That $2,084 I guess is a blend of homes where nothing really changed. The resident renewed and there is just the normal repairs and things that might occur over the course of a year, and then the actual turns of the homes that actually turned.

Yes. I can't give you exact numbers because our in-house people do both turns and maintenance. But roughly $800 to $900 on maintenance of occupied homes, and then $1,000 to $1,100 on turns.

Wouldn't those have to blend to the $2,084?

Okay. $1,100 to $1,184. (laughter)

No. I mean, the house where there is no change. I guess you're taking the turn cost and you're dividing it across all the homes, whether it turned or not. I am trying to understand what it actually costs to turn a house.

Okay. One thing I am not factoring in there also is when we have a turn, then us, as the landlord, are now responsible for landscaping and utilities. And so those costs would also be factored into that $2,084.

But is it like $800 or $1,000 for a house that doesn't turn over the course of the year, and the homes that do turn is like $5,000 for those homes, or something that blends to the $2,084? That's what I'm trying to get a sense of.

Okay. Yes. Our turns, net of chargebacks, are running about $1,200, $1,200 to $1,300. What I'm also not factoring in is the CapEx. The CapEx, the maintenance costs of $800 are just the one-off maintenance costs, but replacing HVAC, roofs, and all that on average would probably be the difference that we're talking about.

Okay. Thanks.

Thank you. This brings us to the end of the our question-and-answer session. I will now turn the all over to Mr. Singelyn for closing comments.

Well thank you for your interest in American Homes. I will see many you have later this month at NAREIT. We will be back in February to review our full year 2016 results. Thank you all. Have a good day. Bye-bye.

Ladies and gentlemen, thank you for your participation. This concludes today's teleconference. You may disconnect your lines at this time, and have a wonderful day.