American Homes 4 Rent (AMH) Q2 2015 Earnings Report, Transcript and Summary

Greeting and welcome to the American Homes 4 Rent Second Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce Stephanie Heim, Senior Vice President at American Homan 4 Rent. Thank you, Ms. Heim, you may begin.

Good morning. Thank you for joining us for our second quarter 2015 earnings conference call. I'm here today with Dave Singelyn, Chief Executive Officer; Jack Corrigan, Chief Operating Officer; and Diana Laing, Chief Financial Officer of American Homes 4 Rent. At the outset, I need to advise you that this call may include forward-looking statements. All statements other than statements of historical fact included in this conference call are forward-looking statements that are subject to a number of risks and uncertainties that could cause actual results to differ materially from those projected in these statements. These risks and other factors that could adversely affect our business and future results are described in our press releases and in our filings with the SEC. All forward-looking statements speak only as of today August 7, 2015. We assume no obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. A reconciliation to GAAP of the non-GAAP financial measures we are providing on this call is included in our earnings press release. You can find our press release, SEC reports, and the audio webcast replay of this conference call on our website at www.americanhomes4rent.com. With that, I will turn the call over to our CEO, David Singelyn.

Thank you, Stephanie, and welcome to our second quarter 2015 earnings call. On today's earnings call, I will provide a brief summary of our recent results and initiatives for the balance of 2015. I will then turn the call over to Jack Corrigan who will review our portfolio performance. Diana Laing will then discuss our operating and financial results for the second quarter 2015 and update you on our balance sheet and liquidity. After that we will open the call to your questions. Let me begin by saying that we're extremely excited about our second quarter results which demonstrate the continued strength and maturation of the single-family rental market and the potential for our platform to drive strong revenue and bottom-line results. From day one, we have viewed American Homes 4 Rent as an opportunity to bring professional management and scale to the single-family rental market to create a business model that can produce sustained growth and demonstrate the long-term potential of this asset class. We took advantage of the housing downturn and weak recovery to build our portfolio and we grew smartly focusing on buying quality homes in newer middle class neighborhoods with strong demographics and amenities to attract and retain families. We never viewed this asset class as simply a trade and from the start our goal was to build a company with sufficient size and scale to create a centralized operating platform and attract long-term attractively priced capital. The fundamentals have been and continue to be supportive of building a single-family rental platform. Recently, The Wall Street Journal featured a story listing the top 10 MSAs for net domestic migration since 2010. We own a sizable portfolio in each of these markets. In addition, drivers of demand for rental housing remained strong. For example, home ownership among millennial, which are one of our prime target tenant groups, has fallen to 48-year lows. More broadly, we have seen household formations exceed new housing supply for seven straight years. Within this environment arguably the hardest task we face is to build an operating platform that has assets already in place and continues to acquire a significant number of additional assets or as others have quoted, we are building our bicycle while we are riding it. We have accomplished much to this point but we are still refining many aspects of our platform. As we have stated on past calls and we will speak today as well, we believe our results have started to show the true capabilities of our platform. With regard to the second quarter, we ended the quarter with a couple areas of focus. Operationally, we were focused on leasing up our inventory, driving occupancy higher and, to a lesser extent, higher rental rate growth. We believe our results show tremendous success in these areas. During the quarter, we leased 6,200 homes, which is a record for American Homes 4 Rent, and we drove our portfolio occupancy from 82.5% at March 31 to 91.5% at June 30. And we drove our portfolio lease percentage from 85.2% at March 31 to 93.1% at June 30. For our stabilized portfolio we increased our leased home percentage to 95.8% at June 30, 2015. With our focus on driving leasing and occupancy we did not aggressively push rental rates on renewals but our rates still increased a solid 2.4% in the second quarter. On new leases, on the other hand, we showed a very strong 4.6% over the prior in-place rate. Out of our top 10 markets the increases range from 1.2% in Indianapolis where we had significant vacant inventory at the beginning of the period to 9.1% in the Atlanta market. On quarter acquisition front, as we communicated to you last quarter, we expected our pace of acquisitions to moderate. During the second quarter, we acquired more than 900 homes including nearly 300 from other operators in consolidation transactions. As Jack will detail later on the call, the largest change in our acquisition volume was due to a significant decrease in broker transactions. As we look ahead to the balance of 2015, I want to make a few observations. First, the leasing we accomplished in the second quarter did not fully contribute to our results in the quarter. So, we expect to see further upside in the third quarter as we capture the full benefit of our increases in occupancy. Also, as Jack will expand upon, we saw further increases in occupancy in July. And second, we continue to implement and refine systems and processes to ensure maximum efficiency in our operations and management functions. I expect that we will show meaningful improvements in the coming quarters but it will take 12 to 18 months to fully implement these processes. At this time, I will turn the call over to Jack Corrigan, our Chief Operating Officer.

Thank you, Dave. Good morning everyone. I'd like to expand on Dave's comments and provide a more complete review of our portfolio. As of June 30, 2015, we owned 37, 491 homes, an increase of approximately 900 homes from the 36,588 that we owned at the end of the first quarter. Our acquisition pace in the second quarter was down from that of the first but was consistent with our plan to focus on trustee auctions and bulk purchases and our expectations as announced on the first quarter earnings call. The projected investment after renovation costs of the 900 homes we acquired in the second quarter is approximately $142 million or $157,000 per home and about $81 per square foot. The 900 homes can be broken down as follows: Trustee auction, about 600; bulk and other, approximately 300. We expect our acquisition for the third quarter to be in line with that of the second quarter. We renovated 1,800 homes in the second quarter. This exceeded our vacant home acquisition activity by 1,200. We accelerated our renovation pace in December, 2014 to provide inventory for our leasing teams going into peak leasing season. This effort combined with our effort to turn homes quickly paved the road for our overall occupancy increase. As of June 30, we have 34,293 occupied properties. This was an increase of more than 4,100 occupied homes from the end of the first quarter and an increase of nearly 6,800 since the end of fourth quarter. On the rental activity side, we had an outstanding quarter executing 6,200 new leases. July continued our strong leasing pace with over 1,800 homes leased. At July 31, our occupancy had increased to 92.1% and our lease percentage was 93.8%. We continue to see solid rental rate increases which were approximately 3.3% overall including increases of 4.6% on new leases and 2.4% on renewals. Our renewal rate was 77% in the second quarter. As we mentioned on the first quarter conference call, there is a negative effect on our FFO as we accelerate our renovation pace because completed renovations increase the number of vacant homes for which expenses are recognized. We explained that this would moderate slightly in the second quarter and substantially in the third quarter. Our first-time rent-readies averaged 2,100 homes, 1,500 homes in the second quarter but we entered the third quarter with approximately 600 unoccupied first-time rent readies. For the second quarter, our core operating margin of 61% was at the low end of our guidance primarily due to seasonality of our move-outs and related turn cost. Our peak move-out months are expected to be May, June and July. Our completed turns for the second quarter totaled 3,100 compared to 2,000 during the first quarter. We anticipate 3,500 turns during the third quarter before dropping off again in the fourth quarter. One of the benefits of stabilization on the leasing side is that we can now more fully focus on developing our processes and systems relating to maintenance CapEx and turn costs. We are various stages of testing some of our initiatives designed to reduce these costs. There is some low hanging fruit but many initiatives will take longer to execute. Finally, I'd like to address our maintenance activities. While our maintenance and capital expenditures were in excess of our expectation during the first half of the year it is important to note that for our year-to-date same-home population 90% of our homes averaged approximately $420 per home combined maintenance and capital expenditures excluding turn costs. For the first six months of the year, 35% had no maintenance or capital expenditures. These are well within our expectations. The other 10% of our homes unfortunately accounted for more than $7.2 million of our maintenance and capital expenditures or almost 60% of our combined repairs, maintenance and capital expenditures. Many reasons exist for this including continued deferred renovation costs, casualty damage from fire and hailstorms and recurring maintenance requests. Same is true for our turn costs. 90% of our homes on average fall within our expectation. The causes for the higher than expected turn cost also include continued deferred renovation cost, in some cases poor tenant underwriting as well as our property managers sometimes overdoing the turn to try and make the home look perfect. We believe these items are correctable as we become more seasoned. Now I'll turn the call over Diana Laing, our Chief Financial Officer.

Thanks, Jack. In my comments today, I'll review our second quarter 2015 financial results and comment on our balance sheet and liquidity. As a note, our second quarter results are fully detailed in yesterday's press release and our supplemental information package both of which have been posted on our website under the For Investors tab. These documents in addition to our SEC filings provide further information on our financial results and relevant definitions of non-GAAP financial measures that we'll discuss on the call today. For the second quarter of 2015, we reported core FFO of $45.3 million or $0.17 per share. On a per share basis, our core FFO was up 13% from the $0.15 per share we reported in the second quarter of 2014. It was driven by higher property net operating income from our same-home pool and the other properties leased within the past year partially offset by higher G&A cost, higher dividends on preferred shares and higher interest expense. Our general and administrative expenses for the second quarter were approximately $6.3 million, which on an annualized basis represents 38 basis points on total assets. This compares with G&A expense of $5.7 million for the second quarter of 2014, which on an annualized basis was 46 basis points on total assets. As we've mentioned in the past, we recently internalized our acquisition and renovation personnel and, therefore, incur acquisition and renovation costs directly. While this has resulted in a reduction of our total acquisition related expenditures these costs are now predominantly expensed rather than partially capitalized into acquisition cost. In the second quarter, we added back $4.2 million in acquisition costs when we calculated core FFO. On Page 13 of the supplemental we present same-home operating comparison for the second quarter 2015 compared with the second quarter 2014. Our same-home property pool for the quarter consists of 17,332 homes which represent the homes that were stabilized for both periods presented. Occupancy at the end of the second quarter of 2015 was 95.2%, a 2.3 percentage point increase from the 92.9% at June 30, 2014. With respect to same-home operation, our revenues increased 4.6% year-over-year driven by modestly improved average occupancy combined with rental rate increases as well as higher fees and lower bad debt. Property operating expenses for the same-home portfolio increased 8.8% in the second quarter primarily driven by higher repair and maintenance cost due to increased numbers of turn in 2015 compared with 2014. Our same-home pool NOI increased 2% compared to the second quarter of 2014. For the quarter, capital expenditures for the same-home pool were $5.2 million for the second quarter of 2015 compared with $4.8 million in the second quarter of 2014. On a per home basis same-home capital expenditures averaged $301 per home compared to $277 per home in the prior year. On a year-to-date basis including results for the 13,443 homes that were stabilized for both periods, our same-home NOI for the first half of 2015 increased 3% compared to the first half of 2014. Moving on to our balance sheet and liquidity, as of June 30, 2015, we have total debt outstanding of $2.3 billion with an average interest rate of 3.7%. The majority of our debt is fixed rate and we have very little refinancing risk in the near term. In total, our outstanding debt represents about 32.7% of our total market capitalization and at quarter-end we had about $90 million of unrestricted cash and about $177 million outstanding on our $800 million line of credit. As we move forward, it remains a strategic goal of the company to maintain a strong balance sheet with sufficient capacity and flexibility to support growth objectives providing us multiple capital option and ensuring the most attractive cost of capital within our sector. With that, we'll open the call to your questions. Operator?

[Operator Instructions]. And our first question comes from the line of Jade Rahmani with KBW. Please go ahead with your question.

Thanks for taking my question. Regarding the acquisitions outlook, can you just comment on what you're seeing there in terms of slow bulk portfolios? And if the size range runs the gamut of if they're focused on several hundred home portfolios available that you acquired this quarter?

Well, I'd say two things. One, that primarily we are focused on smaller portfolios, because we're acquiring those for cash, which is available. The larger portfolios, for the most part, would be acquired with some level of common stock and we would have to buy those homes at a bigger discount than our stock is training at relative to what we believe the intrinsic value is.

And in terms of just the flow of incoming calls or has it been picking up? And you are getting more calls about larger portfolios, despite your stocks trading?

Well, we get calls regularly and we evaluate portfolios regularly. And I wouldn't say it's picked up or decreased, it's just kind of a normal flow.

Okay. And then just turning to the commentary around deferred renovation cost and R&M, I think a peer of viewers said something similar that 10% of the portfolio is accounting for an outsize proportion. Regarding the deferred renovation piece, is that due to your own, your strategic decisions around initial CapEx? Or is this due to third parties prior to internalizing those markets having done renovation work that was below what you currently expect?

There is a lot of factors, including in some cases -- especially early on we experimented with putting in a limited amount of renovations into homes, and then as those turn now we bring them up to standard. And in some cases you look at carpet, it looks like it can last one turn and you let it last one turn and then you replace it. Whereas other homes you replace it right away. And then when we typically replace carpet in areas of the home that have a lot of traffic, we'll replace it with more expensive, with more durable flooring either tile or something that is more resilient.

And [indiscernible] pre-existing tenants.

And then --

Yes. And then occasionally there are some tenants that -- when we acquired the house at auction there was a tenant in the house and we never had a chance to fully renovate it then, we renovated then upon the term.

And then finally, on the -- across the portfolio do you have an estimate for how much a cumulative preferred renovation costs remain or what percentage of the portfolio and over what time period you'd expect those costs to play out?

I do not. But it will play out over as long as there are tenants in houses from that period. So I would expect for that to fully play out over 5 to 10 years, but mostly play out over the next four to eight quarters.

Okay. Well, thanks for taking my questions.

Thank you. Our next question comes from the line of Dan Oppenheim with Zelman and Associates. Please go ahead with your question.

Thanks very much. Was wondering in terms of the turnover where you talked about the expecting 3,500 homes turnover in the third quarter, which I guess would be about 10% of the 34,903 leases or 40% annualized, wondering what you're doing in terms of efforts to minimize that obviously, knowing that someone is going to be just seasonal, but also what you are doing in terms of just trying to really clamp down on some of the spending on turnover where you mentioned that there is some overall improvement that’s taking place with higher turnover?

Yes. I mean we have some training going on in the field to -- some offices do a tremendous job and are well below our turn cost budgets and we have other offices that are not as good and just takes some time to get them trained as to what we expect. And so we're continuously working on that. In fact, I plan to be traveling several of the next few weeks ensuring that we're getting that done. As far as reducing our turns, we are -- when we get notice that somebody is going to leave, we have our leasing people call to see if there is a reasonable way of keeping them besides reducing the rent to zero. And so we are working on that. It's just a natural fundamental of our business that most of our tenants are families that when school ends and before the next school year begins there is going to be some transition, and that's what happens. One other thing I'd like to point out, because I think it's important to note is on the same-home quarterly comparisons there it's mostly comparable, but if you're looking at the repairs and maintenance and turnover cost of 18.8%, if you look at the portfolio in 2014, a good portion of those homes had tenants in them that were never eligible to turn. So you're going to have far few returns in this period in 2014, compared to 2015. And just is an example, we had about 1,500 turns in the larger -- the larger pool, we had about 1,500 turns in 2014 -- homes with turn cost in 2014 versus 2,400 homes with turn cost in 2015, which represents actually more than the increase in that whole line item. So it looks like our costs are ballooning out of control, but it's really not the case.

Great. Thanks very much.

Thank you. And our next question comes from the line of Greg Van Winkle with Morgan Stanley. Please go ahead with your questions.

Hi guys. Just hoping to dive a little bit more into this same store expense and margin issue relative to the guidance you guys have given in the past. It looks like annualized R&M plus CapEx cost were -- my number is $2,789 per home in second quarter, which is up a lot from $2,126 in the first quarter. I think your guidance is for something closer to what you saw on 1Q. I know you guys talked about some of the issues you had with the higher seasonal turnover in the quarter. Can you just talk about what your updated thoughts are, if there are any, on the appropriate normalized number we should think about?

I haven't changed my guidance on that. I think the higher level of turn combined with coming out a winter and some issues with landscaping and stuff that you have to deal with, including tree trimming et cetera, I think it's a mistake to annualize these costs. So I wouldn't do it, but…

Okay. And then it's kind of a follow-up. What were your days to lease in the second quarter on the homes that did turnover? And can you talk about the progress you're making in brining that number down?

Yes. If look in terms of total days to lease, it was from money earning to money earning it was 56 days, but that's a little misleading because it -- we brought in into the year about 800 homes that were 90 days or more. And at the end of -- well, at the end of July, we're are down to 60 homes with 90 days or more. So those all that averaged into that. If you look at what -- for homes that were rent ready, made rent ready in 2015 are days where approximately 48. And if you look at stuff that was made rent ready in the quarter it was about 42. So, it's definitely coming down.

Okay. And the last one here. Just want you to address how your platform is positioned to deal with the big volume of turns you got coming in Q3 this year? I know last year you guys had some issues where your platform was a little bit unprepared to deal with the volumes of turns you had in the third quarter and you saw a pretty big drop in margins. Can you talk about how you're prepared for that this year?

Yes. We are very focused on it. We actually had about 1,300 turns in June. We got through them with an average of 14 days and had them rent ready. We expect another 1,300 in July and then August will start dropping off. So we have been getting through it and getting them leased as we could tell when I gave you the July occupancy rate had increased from I think it was 91.5% to 92.1% and the lease percentage is up to 93.8%.

Okay. And so the NOI margin in third quarter, we should expect to be materially better than we saw last year? Is there any kind of guidance you can give you that directionally relative to maybe last year's third quarter or the second quarter we just had?

Yes. I think it will be better.

Okay. That's it for me. Thanks guys.

Thank you. And our next question comes from the line of [Ty Okosun] with Jefferies. Please go ahead with your questions.

Hi, good morning everyone. Just a quick question on rent renewals. I mean in the overall sectors when compared to the multifamily guys and if you look at all the multifamily guys, they have all kind of raising the rents on existing tenants 5%, 6% in some market 8%, 9%, but in the single family for rent space just kind of 2% to 4% type increases. Could you just talk a little bit about why the rent increases on existing tenants is not more aggressive?

Well, it was choice we made. We are in a little different position than the multifamily. We have a combination of factors going on including some that are maybe more government oriented people are giving us more scrutiny about raising rents on families and we also have been bringing in more inventory than the multifamily guys had been I think if you looked when they were initially bringing in a bunch of inventory they wanted raising rents and rentals that is quite as hard either. So I would say could we get more? I'm certain that we could get more. It is really a question of our turns costs more. So pressing people out of the house is probably not a good idea but where that balance is we have not quite figured out yet.

Okay. But you would expect if occupancy continuously to kind of go up and you guys kind of do you hit stabilization you might get a little bit more aggressive with it?

Yes, I think and we are more aggressive with that in areas where we have basically zero vacancy we are definitely are more aggressive with it.

Thank you. [Operator Instructions]. Our next question come from the line of Patrick Keeley with FBR. Please go ahead with your question.

Good morning everyone. Thanks for having me on. So the first question we just like your thoughts on kind of the competitive landscape for rents across this phase. So you mentioned last quarter and singled out a competitor in the Midwest kind of cutting rates and offering concession. So we like to know what you saw here in the second quarter and maybe how that affects your thoughts on growth for maybe the next 12 months.

Yes, that was in Indianapolis and I went out there right after the earnings call and drove and it looked like they had been principally at least in the markets that were in principally absorbed and our leasing activity picked up right away. We're leased on average about 150 homes a month in that market over the last four months and we are over 90% raised in Indianapolis.

Okay. And then when you talk about leasing trends, would you be able to maybe give us a kind of a picture of what the look like in the second quarter by month? I know you talked about how you did not get the full benefit this quarter of the strong leasing trend. So maybe trying to get a sense of maybe how backend loaded that was toward June.

Yes, I would say it was probably pretty linear from March to June and if you look at where our occupancy was at March of 82% where we were at the end of June at 91%, you come out with a average occupancy for the period of 87% for the average on the period. So you can see if you just maintain your 91%, 92% where we are today, little over 92% today, you have a little pickup from the average occupancy of the second quarter.

Great. Thank you guys.

Thank you. Our next question comes from the line of Tony Paolone with JP Morgan. Please go ahead with your question.

Thanks, and good morning. I am trying to synthesis all the puts and takes you guys have been talking about through the portfolio maybe you just help more directly to the second half of the year. Same-store NOI growth can be better or worse than what it was in the first half?

Better.

And do you think that is from the expense component coming down or what do you think that look so like?

Both the expense component and the revenue component, if you look at where we are occupancy at the end of the period on the same-home portfolio versus a year ago were higher going into the period and I do not expect to lose that. Secondly, I think that one of the things that happened last year was because we weren't ready as I mentioned for the number of turns, a lot of our terms in June got pushed, the cost cut pushed into the third quarter. This year, we observed in the second quarter. So by speeding up the turns we kind of push forward the cost.

Okay. And then the size of that same-store report as think about the first quarter like 13,000 homes and then you had ramped about 17,000. Is that about the ramp as we get to the back half of the year so it will be significantly more representative of company?

It would be except that leasing is not linear by quarter. So it will go up by the number of new rent readies that were leased. That being said, the – and I haven't really talked to anybody about this but, my feeling is that we should keep the pool closer to where it is now, because it isn't really representative or comparable in terms of turn cost, because the pool last year, like I said, didn't have all this property eligible for return and this year it is. So it's always going to look to keep adding properties that weren't eligible. It's always going to look like your costs are higher.

So what we chosen to do, we have actually two pages and if you see the second quarter page, we do have the properties quarter by quarter and you'll see an increase in the third quarter, not much in the fourth quarter, but little bit. But year-to-date page, we're keeping static at 13,000. So you can see what's going on a year-to-date basis in a static pool. And that’s kind of addressing Jack's comment there.

[Operator Instructions]. Our next question comes from the line of Dave Bragg with Green Street. Please go ahead with your question.

Given the challenges with expense is in CapEx coupled with where the stock is trading, to what extent have you considered slowing down acquisitions even more dramatically focusing on operations and perhaps prioritizing share repurchases over new acquisitions?

Yes. So I think what you've seen is the number of acquisitions on a daily basis has been moderated significantly. This period we are down at 600. We did have some portfolios or occupied properties we acquired from other come in. But I think what you have seen in the quarter is that slow down has allowed us to really focus on the various disappointment. And this goes back to building the bicycle while you're riding it theory, but what we've seen is that we've been able to tackle things in pieces. And we're building a very large platform in a very short period of time. And we've seen our delinquencies, we've seen our occupancy to a lesser extent towards the end of the period we've seen rental rates especially in the re-leasing rates significantly increased primarily in the markets that had more stabilization than the ones that did not have high occupancies going into the second period. And as we go into the balance of this year, we have many, many initiatives that are earned in process with respect to the expense controls. The acquisition page from where it is decreasing at any more. And I don't think it's going to have any impact to accelerate those initiatives. But those initiatives are going to have a little bit longer tail on them to see the effects due to the fact that some of the initiatives that you put in place, you see the benefits when the property turns next time, which is the year from now or even potentially many years for now. And so much longer tail on the improvement of the expense side, then it is on moving the revenue line. With that said, there is a lot and I think Jack mentioned that there is a lot of low-hanging fruits that were tempting to push through on a shorter term basis. And some of those programs have been pushed out over the last quarter, some of them are still in test or some of them need a little time to mature. And so I'm not sure the acquisition page from where we're at slowing it down anymore is going to have a significant benefit to the operation side. Further, it's not a discipline both acquisition and renovations that you can shut down today and then pick up three months later, because otherwise you have people just sitting around doing nothing for three months and vendors that you have relationship. You don't lose interest in you and so it's in the market that you intend to continue to acquire it's – I think for continuity purposes, a good idea to continue as long as you intend to acquire in that market.

On acquisitions today, do think that you are buying assets at discount market?

Yes. Absolutely.

Roughly what account?

It ranges, but we see very little competition at the trustee auctions anymore from any of our competitors. So it's probably in the 15% to 20%discount and if you look at our average cost per house, we're not buying lower quality houses. It's actually come down.

And David, what are your thoughts on selling more assets at market and repurchasing your shares at a large discount?

At this point we're still focusing on building the core business and maintaining some discipline around our capital and our leverage level. We have been selling assets right now. I think we have sold assets, we have sold assets on the fringes that we believe are not good quality homes in our portfolio. But today, we are building this business as long-term business and we think our assets are good long-term assets and unless there is a operational reason to sell it, I don't think we are into selling asset to liquidate down the company.

One last question just looking at page 16 on the supplemental, you touched down renewals earlier, but new move in rent growth is significantly better. So what do you attribute that? Is that in part due to the fact that you are improving the assets in between tenants and getting paid for that on the new move in or is it a reluctance to push harder on renewals and create the vacancy or maybe something else?

Well, we made an effort to push rent on releasing starting with the leasing season in March, but we did not re-price up anything that was existing inventory, we only put it. But the stuff that came on the market. So if you look at, I think April was 3.8%, May was 4.6% and I think we were 5.2% in June and July continued that trend at about 5.4%. As we exit the leasing season, we may not be as aggressive with releasing spreads.

And our next question comes from the line of Haendel St. Juste with Morgan Stanley. Please go ahead with your questions.

I wanted to follow up on back on a question that Greg I think asked earlier. And I understand your riding the bike while you're building it or is it building while you're riding it. I'm not sure what the adage is, but I think its important question on the third quarter NOI margin not only for investor confidence in your platform, but for the single-family rental industry in general. So I was hoping you'll give us a bit more color on the better. What's specifically can you point to that should give us confidence that your 3Q NOI margins will be better? And I think it will be helpful if you could also give us a broad sense of perhaps a range of expectations for third quarter margin?

Well, I'll attempt to do that. One of the things I already talked about is that we pushed our turns to complete quicker and expense quicker. So a lot of the heavy turned months of May and June got – almost all of that got expensed and in the second quarter last year, because we weren’t staffed to turn the houses as quickly it ended up in the third quarter. So I think that that will in it result in better margin. As far as property taxes, I think that 7.1% is probably high. I think we had adjustments both in last year and this year that push that up a little bit, but I think that will probably be closer to the 4% range in terms of increase year-over-year. So I think overall our margin – our rents are going up. Property management expenses are not going up. And so there are going to be allocated over a higher dollar value of rent. So I think overall that it will be higher. Well, you know I think our range that we gave previously of 61% to 63% on an average basis maybe its 61% to 64%, but that’s the range that I think we'll see overall on average.

And that’s on average over the year. Remember it's a little bit – we're seeing seasonality where the turns are really higher in the second and third quarter that means that's where the expenses are going to be concentrated much better margins in the fourth and first quarters. So the guidance that we give is over a 12-month period and as Jack did mention, I think we will see significant – we'll see improvement over 2014 Q3 as we've been able to affectively turn properties faster and get them done more in the second quarter than differing the quarter.

You mentioned staffing as part of your response there. Are you at the moment of appropriately staffed or should we be expecting more cost, more personnel being added on that part?

I don’t really like to talk about staffing over the air, but I think we are reasonably – we are adequately staffed, probably overstaffed in some areas and a little understaffed in other areas. And we are overall about 900 employees and are expected to go up or down significantly.

And last one from me. Just curious on some color on what you're seeing in Houston is one of your top 10 markets. Are you given concessions there or you're given concessions in any of the markets. Some[indiscernible] in your portfolio.

There is no concessions in any of the markets. There maybe concessions on individual properties that has sat for a while, but like I mentioned we're down to 60 properties overall that had been on the market 90 days or more than a whole portfolios. I don't see any significant amount of concessions going through in Houston or any place else.

Houston in fact has been very strong for us.

Yes with good rental rate growth and good occupancy.

Thank you and our next question comes from the line of Jade Rahmani with KBW. Please go ahead with your question.

I just wanted to ask if you could comment on what cap rates you're targeting on acquisition and if you've changed any of your underwriting criteria with respect to some of the operating experience you've had over the last, say year.

We underwrite relative to what we think that the expenses are going to be on a long-term basis and the rent that we expect to get, we have better data on both. So we do adjust it – I don’t adjust it daily, because it will be confusion for acquisition guys, but we do adjust it periodically. And we are targeting similar yields that we have had been targeting in the past and primarily at auction. We are probably getting a little bigger discount than we got one. We had more of a mix of MLS transactions.

And are those yields in the 6.5% range or have they created a little higher?

It depends on the market, but I will say 6% to 7%, probably on average 6.25%.

Thank you. And our next question comes from Buck Horne with Raymond James. Please go ahead with your questions.

Hey. Thanks. Good morning. I guess I'm just a little concerned or wondering about the systems and procedures that you guys are still working on at this point. I think there is a comment made earlier that I guess it may take as long as 12 to 18 months to implement some of them. I guess I'm just wondering what are we working on near-term in terms of controlling the cost? And maybe a little more color on what these longer-term or longer tailed systems and procedures, why it take another 18 months to get those fully -- get the benefits of those fully rolling?

Well, I'll tell you one thing that we're doing is we are -- we have experimented in two markets with in-house maintenance staff rather than having vendors go out to each when we have a maintenance call. And the average ticket price when we use our own guy is about a $120 and its $440 when we use an outside vendor. And we trust what our in-house guys are saying more. But we haven't rolled that out yet, it's a big program to rollout, you need scheduling software. And so it will take some time to rollout over the whole portfolio. And then there is other processes that I don't want to get too much into, because this a public call. But you may have to change your lease for to implement and that would take leases rolling over time to get fully implemented and so that could take 12 to 18 months for that to get done. It's very similar to what we did with our utilities. We experimented with it, we saw that our new process work better but we have to change leases in order to fully effected.

Okay. And on the demand side, I was just wondering if you -- couple of follow-ups here. If you could give some indication of how are call center volumes track in terms of inbound calls, is there any change to that pattern seasonally? Are you still seeing just a very high level of inbound inquiries? And separately on the balance sheet, what do you think near-term is the appropriate leverage target for the balance sheet?

I will only answer the first one. We're seeing tremendous phone call volumes, especially if you look at it there is a multiple houses available for rent. We entered the year with about 3,000 available and we are down to about 1200. And the leasing call volume call hasn't dropped off very much. So it's still very strong. I would expect it if it's similar to years past at about a week before Labor Day, we'll see a drop off and then October will pick back up and then November and December will be a little slow, but that's what we're hoping to be pretty much fully leased going into the fourth quarter.

With respect to on about to the leverage target were currently in the low 30s, I think we're in 32% or 33%, as I recall today. And I don't think our target have changed that much from what we have mentioned in prior call and that we're comfortable in the -- somewhere in the 30% to 40% range. So that gives us still some significant capacity to add to the capital of the company through debt.

Okay. Thank you guys.

Thank you. That concludes our question and answer session. I would now like to turn the call back to management for closing remarks.

Thank you very much. And we thank all of you for your interest in the company and attending today. And look forward to talking to you next quarter or at various conferences. Have a good day.

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. And thank you for your participation.