American Homes 4 Rent (AMH) 2017 Q4 法說會逐字稿

Greetings, and welcome to the American Homes 4 Rent Fourth Quarter and Full Year 2017 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. Please go ahead.

Good morning. Thank you for joining us for our fourth quarter and full year 2017 earnings conference call. I'm here today with Dave Singelyn, Chief Executive Officer; Jack Corrigan, Chief Operating Officer; Diana Laing, Chief Financial Officer; and Chris Lau, Executive Vice President, Finance, 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 releases and in our filings with the SEC. All forward-looking statements speak only as of today, February 23, 2018. 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.

As a note, our operating and financial results, including GAAP and non-GAAP measures as well as our 2018 guidance outlook are fully detailed in our earnings release and supplemental information package. You can find these documents as well as 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 fourth quarter and full year 2017 earnings conference call.

I would like to begin by highlighting our many notable accomplishments in 2017. During the year, we acquired nearly 4,000 homes at attractive yields while establishing a new channel of growth through our built-for-rental National Builder and AMH Development programs. We further enhanced our operating platform, capturing improved efficiencies and property management, repairs and maintenance and lower insurance cost per home.

Combined with strong rental growth for the same-home portfolio, we reported a full year Core NOI margin of 64.5%, an improvement of 130 basis points over prior year, and full year cash flow growth in our same-home portfolio in excess of 6%.

As Jack will discuss later, we have successful fourth quarter leasing results as well as a great start in 2018, exceeding our internal expectations, which puts us in a favorable position to continue to absorb remaining inventory in the upcoming strong spring leasing season. As a result, we increased same-home portfolio occupancy during the fourth quarter even as we added a significant number of newly acquired homes to our portfolio.

Turning to the balance sheet. During 2017, we raised nearly $1 billion of attractively priced permanent capital, which, along with more than $200 million of retained cash flow, allowed us to both fund our accretive acquisition program and further strengthen our already best-in-class balance sheet.

Our prudent capital plan facilitated us, obtaining the first and only corporate investment-grade rating in the single-family rental sector. We immediately saw the benefits of this rating in 2017 with our preferred stock issuance spread significantly narrowing. And earlier this year, with our debuted $500 million 10-year unsecured bond offering, which achieved the tightest BBB- debut issue and spreads since 2016.

Late last year, we hedged treasuries in anticipation of this transaction, allowing us to achieve a blended effective fixed interest rate on these bonds below 4.1%.

Turning to 2018. Operating fundamentals continue to be strong. Rental demand for our homes remain steady, driven by strong economic growth within our markets, fueled by job and wage growth and continued new household formations. Jack and Diana will provide our operating expectations for 2018. And as you will hear, the rental demand for our homes and bottom line portfolio growth remained significantly stronger than almost any other sector in the REIT space, including the multifamily sector.

On the growth front. So far in 2018, we have invested approximately $130 million of -- in new homes, primarily through our traditional channels, and we are now targeting $400 million to $600 million of acquisitions in 2018. Most of our incremental capital for the balance of this year will be allocated to our newly constructed built-for-rental product, which we believe provides the best risk-adjusted returns in the near and long terms and is consistent with our objectives to grow both strategically and accretively.

Our construction activity will include the piloting of new rental communities, and this is an exciting initiative for us and Jack will provide further details later on the call.

In summary, 2017 was a bit busy year with many accomplishments. Fundamentals remained strong, and we still have tremendous opportunities to optimize and grow cash flow organically, particularly as leasing activity picks up. Further, we have adjusted our near-term acquisition program to focus our activities on the channels that provide the best near-term and long-term returns, but we still believe in our strategy that long-term operational efficiencies and cash flow are benefited by continued and smart accretive growth in our platform.

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

Thank you, Dave, and good morning, everyone.

I'll begin with operations. As stated on our last call, our priority for the fourth quarter will focus on leasing activity and inventory absorption. As the fourth quarter is seasonally our slowest leasing quarter and faced with added inventory from our newly acquired and renovated homes, our expectation was to maintain same-home occupancy at September 30, 2017, levels.

I'm pleased to report that we exceeded our expectations and, in fact, grew same-home occupancy by 40 basis points to 94.8% at year-end. We captured new lease rate growth of 1.6% in the fourth quarter as we focused on inventory absorption. Combined with our ability to push renewal rents by 4.2%, we achieved a blended lease spread of 3.0% in the fourth quarter, equivalent to our Q4 blended spreads achieved last year at a time when we were not facing the same inventory headwinds as we did this year.

I continue to remain bullish on our ability to lease and absorb inventory into 2018, especially as we ended January at 95% occupied and 96.3% leased within our 2017 same-home portfolio.

We experienced lower turnover by 20 basis points compared to January 2017 and, to date, it has improved to 95.1% occupied with an expectation for continued strong activity as we move forward.

Leasing growth rates are holding steady so far in 2018 with January total portfolio new lease rate growth of 1.4% and renewal growth of 4.0% blending to 3.0% rate growth for the month. New lease growth continues to trend up in February, and we expect this to continue into March.

Turning to fourth quarter same-home results. Revenue increased 2.1%. Expenses were up 3%, primarily attributable to the timing of property tax expense, higher costs related to material and labor-related cost pressures and elevated turnover expenses associated with the temporary increases in vacant inventory.

NOI after CapEx growth was 1.5% for the quarter but remained robust for the full year at 6.2%.

I would like to highlight some added disclosure related to capital expenditures. On Pages 12 and 13 of the supplemental, you will see that we have separated recurring CapEx, largely turnover and maintenance-related from property enhancing CapEx, which is related to spending on our resilient flooring initiative.

While we have always looked at opportunities to utilize resilient flooring in our homes, primarily at acquisition, we've expanded this program recently to more widely install hard flooring on turns where it makes economic sense.

Given the growth in this program, we made the decision to provide this added disclosure. We expect this program to run for the next several years until we have the opportunity to replace all relevant flooring, primarily on turns. Resilient flooring is easier to clean and maintain and has a useful life of approximately 20 years compared to 3 to 5 years for carpet.

Turning to transaction activity. During the fourth quarter, we acquired 1,412 homes for a total investment of approximately $342 million. 1,259 homes were acquired through our traditional channels of one-off purchases with average pro forma cash flow yields, including sufficient for capital expenditures of 5.5%.

We also took delivery of 153 newly constructed homes in 9 markets for a total investment of $38 million. 147 of these homes were from our National Builder Programs and 6 were from AMH Development. Demand has been strong for this product, which generates projected stabilized yield premium of 50 to 100 plus basis points over traditional channel acquisitions in the same market.

Year-to-date 2018, we have acquired approximately 550 homes for an estimated total investment value of approximately $130 million, primarily through our traditional channels and have had an additional 90 homes in escrow for an estimated total investment value of $20 million that are expected to close in the first quarter.

As Dave mentioned, we now expect to complete $400 million to $600 million of total acquisitions in 2018 comprised of the following channels: approximately $200 million in traditional acquisitions; $200 million in -- through AMH Development; and $100 million from our National Builder Program.

In terms of pace throughout the year, we expect to acquire approximately $200 million in the first quarter, primarily from our traditional channels, which will moderate through the second, third and fourth quarters, when we'll be focused primarily on our built-for-rent product.

We believe these homes represent the best risk-adjusted returns in the near-term. And with benefits of accelerated lease up and lower maintenance and capital expenses, we believe longer-term growth rates should be superior.

Further, our built-for-rental program allows us to grow in markets where normal channels do not provide meaningful product at compelling returns currently. Our activity so far is focused in the Southeast, including Atlanta, Charlotte and Florida; the Northwest, primarily Seattle and Texas, including Austin, Dallas and San Antonio.

In addition, we expect about $150 million of this activity to occur within targeted rental communities, each consisting of 40 to 100 homes, totaling approximately 700 homes spread across 9 communities. This activity is split about 50-50 between our National Builder Program and AMH Development. We believe these neighborhoods provide several compelling advantages, including leasing and maintenance efficiencies and the potential for community-level amenities as well as the ability to control curb appeal of the neighborhood.

Finally, in terms of our operational outlook for 2018, a guidance table has been provided in both the earnings release and Page 22 of the supplemental. I will discuss some of the underlying same-home operational drivers now and Diana will cover the rest of our guidance in a few minutes. Also, as indicated in the earnings release, we have released newly defined average occupancy and rental rate metrics, which provide better clarity into our underlying leasing results and performance both historically and as we look forward to 2018.

Note that our 2018 same-home portfolio will grow by approximately 3,000 homes but still reflect a similar market mix, rental rate and occupancy profile as our 2017 pool.

For our 2018 same-home pool, average occupied days percentage for the full year of 2018 is expected to be in the 94.5% to 95.5% range. Typical expected seasonality includes lower occupied days in the second and third quarters while we process heavier volumes of move-outs and turnover. For this year, we also anticipate a gradual improvement trend throughout Q1 and Q2 as we continue to absorb the excess inventory from 2017 and early 2018 purchases.

Average monthly realized rent per property is expected to grow in the 3% to 4% range over 2017, driven by continued strength in renewal rate growth and gradual recovery of re-leasing rate growth as we work through the remaining excess inventory.

Average repair and maintenance and turnover cost net of tenant reimbursements plus recurring capital expenditures, also known as our cost to maintain a home, is expected to be in the $1,950 to $2,100 range, reflecting a 4% increase at the midpoint over the full year 2017 amount of $1,949 per home. The increase is primarily driven by higher labor wages and material costs throughout most of our markets.

Note that we continue to work to offset some of the impacts from inflationary market pressures through continued development and expansion of our in-house maintenance program.

And for our property enhancing CapEx program across our whole portfolio, we expect to invest $8 million to $12 million for full year 2018, focused primarily on our resilient flooring initiative. We expect spend to be higher in the second and third quarters as we turn over more homes and replace flooring where necessary during that time.

Now I will turn the call over to Diana.

Thank you, Jack. In my comments, I'll briefly review our recent capital markets activity and balance sheet metrics, discuss our financial results for the fourth quarter and expand further on our 2018 guidance outlook.

But before I get to that, I would like to update you on a couple of items. First, our remediation efforts related to Hurricanes Harvey and Irma are progressing well. We've adjusted our damage estimates downward from our original estimate of $10 million to $8 million net of insurance proceeds.

At this time, we've nearly completed the repairs of homes that sustained minor damage during both of the hurricanes and we're about 70% complete with repairs to the 125 homes that sustained major damage. We anticipate having all homes repaired and back online by the end of the second quarter 2018.

Second, the redemption of the Series A and B participating preferred shares during the fourth quarter of 2017 resulted in a $42.4 million noncash charge, which is reflected on the income statement.

And third, with regard to the SEC subpoenas, we're cooperating fully and have no additional information or comment at this time.

Now to discuss our recent capital markets transactions in the balance sheet. During 2017, we significantly deleveraged the balance sheet by raising $965 million of permanent capital in the form of common and preferred stock. At year-end, for the trailing 12 months, net debt to adjusted EBITDA was 4.8x and fixed charge coverage was 3x.

In February of this year, we issued $500 million of 10-year 4.25% notes, this was our inaugural issuance of unsecured bonds, which priced at a spread to 10-year treasuries of 158 basis points. And including the benefit of a hedging transaction we entered in advance of this issuance, our effective interest rate is 4.08%. Proceeds were used to pay down a revolving credit facility and for other general corporate purposes, including funding our acquisition program.

Access to the high-grade unsecured debt market provides us with another attractively priced alternative for long-term flexible capital.

Turning to financial results. During the first -- I'm sorry, fourth quarter, Core FFO was $0.26 per share, unchanged from the fourth quarter of 2016. AFFO was $0.23 per share, also unchanged from the same quarter of 2016.

Fourth quarter results reflect growth in property operations, offset by the impact of significant deleveraging we completed in the last year illustrated by our net debt-to-EBITDA decreasing from 6.1x at year-end 2016 to 4.8x as of December 31, 2017.

Regarding our recent enhancement to occupancy, rental rate and capital expenditure metrics in the supplemental, we believe the newly defined terms provide more precise measurement for our underlying operational performance. We've provided historical trend data by quarter in the supplemental to provide sufficient context and background. We're committed to providing excellent disclosure, and we believe these changes and additions will enhance your ability to understand and model the business.

To expand further on our 2018 outlook, our same-home pool for the full year 2018. Core revenue growth is expected to be in the 3.5% to 4.5% range as a result of an increase in average occupied days and average monthly realized rent per property as previously discussed by Jack. Core property operating expense growth will be in the 4% to 5% range, and these revenue and expense expectations translate to a Core NOI margin target of 64% to 65%. Core NOI after recurring capital expenditure growth of 3% to 4%.

As a reminder, our NOI growth is expected to be slower in the first half of the year, reflecting the timing of the (inaudible) available end of inventory that Jack discussed and more challenging comparable quarters last year.

General and administrative expenses are expected to be in the $33.5 million to $35.5 million range, which is about 4% of revenue, which is consistent with last year.

And now we'll open the call to questions.

(Operator Instructions) Our first question comes from the line of Nick Joseph with Citigroup.

In terms of the external growth and acquisitions in 2018, what are the expected deals on development? And then if you could break down that development spend between the National Builder Program and on balance sheet development.

This is Jack. The yields will range anywhere from 5.5% to 7% depending on the markets. And the yields in -- where we're building in Seattle are more in the 5.5% range and where we're building in North Carolina, closer to 7%. The split is about 50-50 between the National Builder and the AMH program.

And then in terms of the repurchase program, both in terms of the common and for the preferreds. Can you talk broadly about kind of thoughts on executing and also have you executed at all, I guess, in February or since the program has been in place?

Yes. No, this is Dave. The repurchase programs, we had a repurchase program in place on the common, a little bit of housekeeping at year-end. We refreshed those programs. And I look at the repurchase programs like any investment program, we look at all different investment opportunities. And where it is accretive and it's appropriate, we'll be utilizing it. But at this point, no, we haven't utilized any in the month -- in the first quarter to date. We just announced it, obviously, yesterday. Refresh...

And just finally, I appreciate the additional disclosure and the formal guidance in the supplemental. Just curious why not provide FFO guidance.

We -- it's never been our program to provide FFO guidance. We -- what we are doing is we're formalizing what we have been doing on earnings calls before and putting it in print. So I think we're formalizing what we have been doing previously in an informal way. And so it's now there for everybody to have and see.

Our next question is from the line of Juan Sanabria with Bank of America.

Just hoping you could go into the same-store expense guidance and just clarify if that includes any of the resistant flooring that is popping up in some of your costs. I just wanted to make sure if that is or is not included in the same-store expense guidance.

It's not included.

So could you give us a little bit of color on what's driving those expense -- that expense projection in '18? Is it real estate taxes that's kind of towards the high end? And if you could just give us a sense on that.

Yes. I mean, they're all pretty close to -- in the 4% to 5% range. All of the expenses are trending up in the repair and maintenance. In turn cost area, it's construction workers and materials are in higher demand, and the wages and material costs are going up about of that percentage. We're trying to offset that by more efficiencies in our program. But that's what we expect for the year. Property taxes, the midpoint is 4%. And property management costs are up about 4% to 6%, depending on -- partly because, again, wage inflation and partly because the cost of leasing up the new inventory is included in our overall cost of property management. Vacant inventory cost more to manage than occupied inventory.

Juan, just to recap that, you have the components. At the midpoint, that 4% growth in property tax, about 3% to 4%, insurance and HOAs; as Jack mentioned 4% in R&M and turn; and then about 4% to 6% in property management. And that'll blend you out to the 4% to 5% overall guide.

Okay. And then on the Series C preferred, what are you guys assuming in guidance in terms of just the optionality there? Are you assuming debt or equity or how are you guys thinking about that?

I don't think we've provided any guidance on how we look to treat that optionality. Just that option does come available April 1. We have 3 years to either redeem or to convert it into common. And as that window opens, we will look at what the best alternative is at the appropriate time, considering the different alternatives that are there, but it's not in the guidance.

And can you give us a sense of your cost of unsecured debt today if you went that route?

Well, I think the best indicator is the spread that was mentioned, I think, it's 150...

158.

158 basis points over the 10-year. So…

Okay. And last question for me. Just on the lower acquisition guidance. If you could just delve a little deeper into what has changed there. Is it that the home price depreciation on the typical traditional channels has expanded to where that doesn't really make sense? Or is it -- or just the balance sheet flexibility that you wanted to maintain encases a larger portfolio that you can transact on? Just hoping for a little bit more color on what's changed from kind of late last year when you are targeting a much bigger external acquisition number.

Yes. No, I think it's a blend of all the factors. We have mentioned previously on these telephone calls that we will buy when it's accretive and it's beneficial to the platform, so both the tangible and intangible benefit. We are continuing to do that, and we are gearing our acquisitions to those channels where we find it to be the most accretive. And so that is -- it's really a function of the sum of all of the things that you mentioned, not any one in particular.

Our next question comes from the line of Haendel St. Juste with Mizuho.

So I guess the math is clear. The implied cap on your stock being about 6, well above the 5 on acquisitions, which are, I guess, closer to a 4 if you consider a little bit of renovation and leasing downtime when you first buy the homes. And I applaud your balance sheet management for being in the position to buy back stock today while companies and other sectors looking out to buybacks, that's clearly depending on asset sales first. So I guess my question is, how aggressive should we expect you to be? Could we expect you to perhaps see -- could you be maybe more front-end loaded this year given your balance sheet flexibility liquidity? And then how should we think about buybacks in the context of leverage? How much would you be willing to lever up for buybacks?

At this point, we just got it approved. I'm not in a position to give guidance on to exactly how much we're going to repurchase at any given time. But it is, obviously, a tool in the tool belt. We know where that stock price is, and -- but how much we are going to utilize it, we'll announce it as we use it.

Okay. Any thoughts on leverage? Should we expect it to remain here in the 5-ish range? Is that the expectation?

It depends on balance sheet. It depends on other acquisition opportunities, and it depends on the opportunity to repurchase stock. It depends on all of it combined.

All right. On the builder partnerships, the builders you have agreements with. I guess, we're hearing labor constraints, rising costs. Are you seeing any delays in delivery of homes and pressure on yields?

We see some delays, not a lot, and not really with the National Builder Program. They seem to be delivering pretty close to on time, but we're still learning in the AMH Development and putting together all our vendors and contractors and subcontractors. So we probably see a few more delays in what we're building than what we're seeing from the National Builders.

Can you perhaps share how many relationships you have there, early indication? It sounds like things are off to a pretty good start. And then maybe, any change in your thinking towards perhaps expanding these partnerships? I heard you mentioned, I think, 50-50, which is more than what you're considering a year ago. Curious to perhaps some of the early success or any change in mindset toward -- to this type of arrangement, perhaps doing a bit more.

Well, I think what we guided to this year is about the right amount, about $100 million of the -- we have a number of relationships, some have worked out better than others and we'll probably expand the relationships with the ones that are working out better and decrease the ones that aren't working out as well. And I think our number of relationships is somewhere between 6 and 10 and some are kind of bigger and some are smaller.

Okay. And then within that, it sounds like you're committed to still pursuing your own platform as part of this. There's still a firm commitment on doing it some with partners, but also keeping some of that in-house.

Yes.

Our next question comes from the line of Richard Hill with Morgan Stanley.

This is Ronald Kamdem in for Richard Hill. The first quick question I have was on just looking at the same-store Core NOI margin, looks like, essentially, margins are going to be flat versus 2017. One, just can you comment on that? But secondly, as we're thinking about maybe the out years, are there still opportunities for potential margin gains in that portfolio?

Yes, there are potential for gains. I mean, obviously, you have to have your revenues increase at a better pace than your expenses increase. And we think once we get through lease up, and I think that will help us drive down property management costs again and then also push rates. It's one of the side benefits of cutting back on the acquisition program.

Great. And then maybe digging back into the same-store expense guidance, maybe asking the question a different way, to the extent that the portfolio continues to grow and scale and so forth, how should we think about that same-store number going forward? Is that something that could get back down to 3% -- 2% to 3%? How are you guys thinking about that?

Are you talking about the expense growth? The 2% to 3%...

That's right.

Yes, I think that's going to depend somewhat on the economy and wage and material growth, but I think we can get that back down to 2% to 3%. We're always pushing to get better, and I certainly hope that we can achieve that.

And then looking at the portfolio, just can you comment on which markets maybe you're seeing the most job growth, your most constructive on and which markets may be more challenged?

Well, we're seeing an incredible demand in Florida, particularly Orlando and Tampa, but also Jacksonville. And we're seeing a lot of demand in the West, Phoenix, Las Vegas, Salt Lake City, Boise and Seattle. So I would say Atlanta is also booming so all of those are probably our best markets. I think Austin is now starting to see quite a bit of demand, although it doesn't show up in these numbers. When you get to through January, we move from 94.6% occupied at the end of December to almost 97% occupied at the end of January. Demand in Austin has picked up quite a bit.

Great. And last one for me, not to beat a dead horse on the FFO guidance, but is that something that you can envision in the future maybe providing to the Street? Because it just seems like you've done all the work and you have provided the operating metrics, why not just put that number out there if you already presumably -- or you've crunched it?

Yes, that's not currently in our plans, but we'll take it under advisement.

Our next question comes from the line of Jade Rahmani with KBW.

I just wanted to see if you can comment on what drove the lower total average occupied days percentage and the lower same-store average occupied days percentage.

Yes, we started the quarter kind of in a little bit in the hole because as we discussed last quarter, the hurricane kind of brought leasing to a halt in some of the markets. And so we started in a hole in -- at the end of September, and that flowed through October in terms of occupied days. The leasing activity definitely picked up in terms of absorption in November and December. It picked up in October, too, but it didn't really show in occupied days until November. So you just have October kind of weighting the whole thing down.

Yes, Jade, this is Chris. I think probably the better way to think about the quarter in terms of trend line and leasing activity is looking at the end of period percentages. And there, you can see the improvement in activity where occupancy went from 94.4% at the end of the third quarter to 94.8% at the end of the fourth quarter and then further moved up into the 95% range into January and the beginning of February.

And what about the impact of 3Q acquisition activity on those numbers? Was the hurricane impact more significant?

Q3 acquisition activity had some influence in some of the markets where we put in heavy inventory. Charlotte is probably the one that comes to mind the most, which has been more affected by the acquisition activity than hurricane. But yes, both of those had its effect. Nashville will be another one that was affected by acquisition activity.

In terms of the broader narrative around American Homes 4 Rent, I think there seems to be a perception that the geographic mix versus your largest other peer is less exposed to higher rent growth markets. And secondly, that there's this headwind of the seasoning issue in the portfolio because the properties are younger in age, that will drive expense creep over time. So what do you have say about those 2 factors?

Well, I do agree that California has outsized rent growth and they're more exposed to California than we are. Other than that, I wouldn't say that. But those things move in cycles. We've had Phoenix, Tampa, Atlanta go flat for a while and then boom. And so like, what's good now may not be good a year from now. So I like our diversification and our markets. But clearly, at this point in time, California -- I mean, our -- we don't have a very big portfolio in Southern California, Northern California, but it's about 99% occupied and the rate growth is really strong. So it just doesn't affect as much because it's such a small part. And what was the second part of your question?

In terms of the seasoning of the portfolio with expense growth projected to exceed revenue growth, how much of that do you think relates to just the aging of the portfolio and that inevitably resulting in higher costs? You did attribute a lot of it to labor and materials inflation, but just wondering if the actual cost to operate is going up.

Yes. I mean, we're -- one of the benefits of putting in new properties is just to kind of balance that out, but we don't see a tremendous difference between properties or -- the average age of our properties, I think, is built in 2002 or 2003, but we have properties from 1992 and on that we acquired and we don't see a dramatic difference between the '92 acquisitions and the 2002 acquisitions.

And just lastly, what percentage of work orders are you doing with internal staff?

Roughly 30%.

Is there a plan to get that to above 50%?

I wouldn't say we have a plan to get it there. We plan to increase the percentage, but I'm not sure we'll get to 50%. The issue really is we have a seasonal drive where the maintenance costs come in and we really staff for the lightest part of the season and augment for -- with external vendors for the busy part of the season.

Our next question is from the line of David Corak with B. Riley FBR.

Going back to the leverage and the buyback opportunity, would there be any issue with the ratings agency if you utilize the whole common$300 million today at the current share price, assuming you financed that all on the line?

The rating agency is one concern, whether that $300 million trips it, I don't think so. But I'm not 100% sure.

Okay. And then I apologize if I missed this, but were there material changes to the same-store pool for '18 and from '17? And then what was the impact on the same-store guidance, if any, from those additionals?

No, David. This is Chris. We're expecting we'll probably add just about 3,000 properties to the same-store pool. But in terms of market mix and composition, it'll look pretty similar to the 2017 pool. So I don't think the guidance would be any different, whether you're looking at '17 or '18 pool. And then I think what you've seen for 2017 is pretty representative of what you'll see for the prior year comp set when we get into 2018.

Okay, that's helpful. And then last one. When you look down the road into 2019, assuming a pretty constant market condition and the continued growth and the success of the development platforms, do you essentially just stop traditional acquisitions and focus 100% on development? Or are you opportunistic a little bit? I mean, how do we think about that longer term?

Yes, I would say we're still in the pilot phase of our own development. And if it works out as well as I think it'll work out, it's possible that, that's our only investment avenue. But at this point, I wouldn't say that.

Our next question is from the line of John Pawlowski with Green Street Advisors.

Given the shift of the external growth strategy, I guess at current share prices, are you out of the bidding tent for large portfolio deals?

It's a function. Every transaction is negotiated. We were able to acquire American Residential when our share price was significantly -- it was below where it is today and it's just a function of the pricing between what you get and what you give up. And so I can't say we're out of that game, no.

Outside of the stock-for-stock deal, cash, are you out of the bidding tent?

Well, there's other avenues of capital as well. And again, it's going to be a function of looking at all investment opportunities that we have, whether it's portfolio, it's the one-off homes through the traditional channels in the home building. And we're going to allocate capital to where we believe it has the best impact. And the large portfolios, they take time to negotiate. We've said that before. I would see at this point, bid and ask is -- it has widened a little bit, but this is -- we're kind of an in a timing -- a time of change. So at some point, those will come back. And I think there's opportunities in the future. So I'm not going to foreclose it that of that we don't have that opportunity. But no, all the -- you've appropriately identified one of the factors, but there's a number of factors there.

Okay, got it. And then on this, the SEC subpoena around the trading of Silver Bay, I know you can't give us much, but can you at least tell us whether they're investigating AMH, the entity trading in stock or individual employees trading in some of their stock?

As you indicated, there's not a lot we can say at this point. We're very, very early in the process, and I don't think we have clarity to your question at this point. It's more an information gatherings standpoint at this point.

A broader question of that being, has -- does AMH in the past or has AMH in the past bought REIT securities and do you currently own any REIT securities?

Well, as indicated in our filings, we -- while we were looking at Silver Bay, we did acquire $10 million of their securities and have a $3 million gain on that.

Our next question comes from the line of Douglas Harter with Credit Suisse.

All my questions have been asked and answered.

Our next question comes from the line of Drew Babin with Robert W. Baird.

First question would be on the 70% margin on your stabilized non same-store assets being about 500 basis points higher than your same-store margin. I guess, is this a product of acquiring properties that are kind of already in your target markets that already have an expense infrastructure around them? And does this necessarily kind of create a feeder into margin growth as these properties are under in the same-store pool?

No. This is Chris. I wouldn't read into that too much. It's a function of 2 things. One, it's a little bit of market mix where we have slightly lower property tax markets in states represented in a stabilized non-same-store pool. But probably more importantly, because those properties are more recently acquired and renovated and leased, they're majority still in their first lease cycle, so they don't have a full burden of turnover volume and costs into them, which is translating into the higher margin. Once those properties season a little bit further, they get out of the first lease cycle and they mature their way into the same-store pool, other than the slight property tax differential, the expenditure profile on them should look very similar to the same-home pool.

That's very helpful. And one question on Chicago. Looks like the Chicago metro area has been the primary source of dispositions. But at the same time, your exposure to the market really hasn't changed much, so we've seen an additional -- additional acquisitions going on as well. I was hoping you could just give some color about the strategy in that market and kind of what is behind that.

Yes. The -- when we acquired ARPI, they had about 1,500 homes mostly acquired through their preferred operators (inaudible) that were not -- I mean, some of them are $20,000, $30,000, $40,000-homes, so they're not our typical product. And those were identified for sale right at the time of the acquisition, and we've been proceeding kind of in an orderly fashion, getting rid of them. I think we have a couple of 100 left out of the 1,500 to sell.

And in the acquisitions side, it would look like there's some redeployment going on. Would that be correct?

I don't think we've been acquiring in Chicago.

Yes. No, not in a meaningful way.

I can't think of an acquisition in Chicago in the last couple of years. So I'm not sure...

Okay, that might be disclosed separately. Okay.

Our next question comes from the line of Dennis McGill with Zelman & Associates.

First question just has to do with thinking about, the renewal bump that you got in the fourth quarter were notably above the fourth quarter than the prior year and you did it without driving more turnover and yet, you're struggling with occupancy rates in some of these markets. So I just wanted to maybe triangulate that a little bit and maybe come back to the idea, is it really just a timing of the supply that you'd say is undermining occupancy or are there other things going on within that?

Yes, I would say it's more timing. And like I said, we probably -- I mean, our calculations are we lost 400 to 500 leases during that hurricane season and then the timing of putting in acquisitions, I think we've placed somewhere around 1,400 homes into service in the fourth quarter. And when you count what was put into service late in the third quarter, it just -- it caused our occupancy to go down. And I'm not sure what you're looking at as far as that same-home or total portfolio, some of the homes' net total portfolio aren't even renovated and rent-ready yet, so it's going to drag down occupancy.

And I looked at the disclosure, I think they're for the total portfolio. But I guess looking at it a different way, if you look at the renewal strength in ahead of a year ago, do you feel like that's a reflection of the demand environment in general? Or are you approaching renewals in a different way?

We're not -- I think our renewals last year were right in the 4% range.

Fourth quarter was 3.3%.

3.3%. Typically, the fourth quarter has higher renewal rates because you've leased things in at a lower rate the year before than what you're leasing them at in spring and summer. So that's probably the primary driver, but we haven't changed the way we look at renewals. It could be market mix, too, on what's renewed.

Okay. Maybe some follow-up. And then second question, just on the same-store expenses, the different buckets, as you ticked your own, Chris, it seems like those are fairly close to what I expect to be market rates. And just wondering as you think about just the evolution of the business and all the different efforts you have to drive costs down, it doesn't feel like there's a whole lot embedded within that as far as operational improvements. Can you maybe talk to some of the things that would be in the numbers or maybe opportunities that aren't in the numbers?

He's talking about operational improvement opportunities and expense numbers.

I'm sorry. I was thinking about the last question and I wasn't paying attention to the next one. So...

You're going to get in trouble. The -- I guess the question ultimately comes down to the expense growth guidance, and it seems like it's fairly pervasive is in a range that you'd consider to be pretty market driven, 4% to 6% on management, the property taxes, 4% return on repairs and turns. It doesn't feel like there's a lot of operational offsets, but maybe there are. And I was wondering if you could walk through them.

Yes. We're -- I mean, I don't think we've counted in any operational offsets until we achieve them. So hopefully, we'll be lower than that. But that's -- it's primarily the result of either inflation or we had to staff up to get through our vacant inventory.

Okay. And then just one quick one. Chris, why would the same-store pool not be going up more especially when you've got the ARP portfolio that's been around for a while?

There are -- good question. Of the 3,000 properties that are coming in, it's going to be about half ARP, half non-ARP. The way that we're going to be treating it is these are still a very large number of the ARP homes that have not turned yet. And so we haven't had the chance to get inside of the homes and make sure that they are at the level that they should be included into the same-store pool. And so we're basically going to be treating the ARP homes similar to the way that we bring other properties into the stabilized bucket, except for trigger the stabilization criteria after their first turn. So what's moving into the same-store pool for 2018 are ARP properties that essentially turned before the beginning of 2017, so we know that we have a clean and comparable comp for year-over-year.

Our next question comes from the line of Ryan Gilbert with BTIG.

Just a question on the acquisition volume guidance. I think since the third quarter and maybe when you talked about $1.2 billion in acquisitions, I think we've seen a what would just be described as an anti-seasonally positive improvement in home buyer demand and the home purchase market, both in new and resale, which is driving prices up and inventory down. Has that impacted your deal flow at all in 2018 in both -- through either the traditional or National Builder Program channels?

No. I mean, it probably knocked some candidates out, but there's plenty of properties to buy. There's plenty of opportunities to buy. It's more just a decision to, as Dave said, manage our balance sheet appropriately.

Okay. Understood. And then in terms of your development pipeline, what percent of the lots that you're developing on are finished versus raw lots that will require horizontal development work? And then what's the cycle time from start to stabilization on the single family rental development?

The vacant developed lots percentage...

Hang on.

I think the vacant developed lots are about 50% of what we have. Some are -- most of those are either small clusters of lots or just one-offs here and there that we've acquired, the 40 to 100 home rental. And those don't -- I mean, those don't take that long to build. Maybe 120 days and then a 30-day lease up. The rental home communities and areas where we're doing horizontal development are going to -- can take a year to 2.5 years to bring up and you're going to phase those homes coming out of the ground and rent them up as they come out. So I'm not sure if that answers all your questions, but...

It does. So I guess within the $200 million that you're going to spend on development in 2018, what percent of that will actually be cash flow -- cash flow in 2018 versus 2019 or 2020?

I would say probably 50% would be cash flowing this year and the rest probably early 2019.

Our next question comes from the line of Buck Horne with Raymond James.

I just wanted to maybe expound upon the strategy of building the communities out entirely just investing in these kind of build-to-suit rental communities. What are you -- it's a bit of a change in the narrative from the traditional acquisition channels out there and, of course, building large positive of rental homes together has some positives and negatives associated with that. Maybe just explain us some of the logic behind that strategic thinking now.

Yes. I would say that it's -- right now, it's a pilot program. We think that it's a good program in what we've researched. We think that we can excel at it. But we get 9 or 10 of these in the ground. And they work, we'll do more. If they don't work, we won't do as many.

How do you plan to manage any of the -- how you guys -- sometimes, there's been concern about communities to be branded as rental communities and not attracting the same quality of tenant that you would typically be accustomed to. How do you plan to manage that kind of marketing aspect of it?

Yes. I would say they're going to be similar tenants to what we have. The nice thing about the clusters of homes is you can provide the front yard landscaping to make sure that the community always looks good from a curb appeal standpoint. All the air-conditioners are the same. The maintenance is pretty standardized. You get kind of some of the benefits on maintenance that apartment or multifamily has. And I would look at it as kind of a hybrid apartment-like amenities, really nice apartment-like amenities but with single-family homes so that families can enjoy that type of community.

Okay. And I'll just do a quick follow-up. I don't know if Chris or anyone else might have. Just maybe some incremental data points on-demand through the springtime January or February in terms of whether you got call center volumetrics that you might be able to share or just home showings or lease application, any sort of activity with how demand seems to be building year-over-year, month-over-month, something like that.

Yes. I don't have that data handy, but demand for leasing has really picked up in January and February over November and December, which were probably our strongest Novembers and Decembers we've ever had. So January and February, I think we'll have close to 1,000 home net absorption, which was beyond what I was expecting and the calls keep coming in even though our inventory level is dropping.

That concludes our question-and-answer session. I will now turn the call back to management for closing comments.

Thank you again for joining us today. We're excited about 2018 and look forward to speaking with you on our next quarterly call. Have a good day.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.