American Homes 4 Rent (AMH) Q3 2016 Earnings Report, Transcript and Summary

Greetings and welcome to the American Homes 4 Rent Third Quarter 2016 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. 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'm here today with Dave Singelyn, Chief Executive Officer; Jack Corrigan, Chief Operating Officer; and Diana Laing, Chief Financial Officer of American Homes 4 Rent. At the outset, I need to advise you that this call may include forward-looking statements. All statements, other than statements of historical fact included in this conference call, are forward-looking statements that are subject to a number of risks and uncertainties that could cause actual results to differ materially from those projected in these statements. These risks and other factors that could adversely affect our business and future results are described in our press release and in our filings with the SEC. All forward-looking statements speak only as of today, 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 with the non-GAAP financial measures we're 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 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 the 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 testament to the quality of our portfolio which continues to generate strong operational results with high occupancy rates and strong increases in revenue. But 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 in 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 out-sized revenue growth and for more efficient execution to continue driving operational cost 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 continue 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 cost and an extended maturity date compared to our previous secured facility. But more importantly, this credit facility marks the 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 prosperities to be pledged this 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 dual 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 utilize the increased capacity on our balance sheet to increase our acquisition pace in the third quarter. We continue 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 over time. 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 utilize the added capacity on our balance sheet to increase our acquisition activity in the third quarter. During the quarter, we require 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 with -- 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 quarters, including 43 in one-off transactions and 410 in bulk transaction. 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 of sales approximately 6% to 8% for one-off transactions and 1% to 2% percent for bulk transactions. We expect continued to be an active seller of homes that don't fit our strategic objectives or quality standards. At September 30, we had 1,238 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 re-leases. 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 3.7% increase in average contractual rental rate. 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 charge backs, partially offset by 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 trends roughly in line with the appreciation in 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 here. 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 continue to drive our overall repair, maintenance and turnover costs including expensed and capitalized cost lower. On the 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 lower carry cost for utilities and landscaping. I also want to update you on our in-house maintenance program which is 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 cost. 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 to AMH, our ability to deliver a 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're finding new ways to apply the strength of our platform, and we do expect to continue the show improvement in our total repair, maintenance and turnover cost moving forward. Now, I will turn the call over to Diana Laing, our Chief Financial Officer.

Thank you, Jack. In my comments today I'll 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 capitalize leasing costs paid from core FFO. The increases in both core FFO and AFFO were driven by higher net operating income from both are 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 onto 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 there's interested 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 increase the number of uninsured -- 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 and overhang for the company created by their large position. It also provided AMH's 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 remained 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 30th 2016 and $675 million available on our $1 billion credit facility. Thus far in 2016 we've made significant progress in our goal to increase our balance sheet capacity and flexibility. We've enjoyed great execution as our industry has continued to mature and we 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 will open the call to your questions. Operator?

Thank You. [Operator Instructions] Our first question today is coming from Jade Rahmani of KBW. Please proceed with your question.

Good morning. Thanks for taking my questions. Looks like a very solid quarter performance trend. I wanted to ask you about turnover, could you discuss what you're seeing in terms of turnover? We've seen some elevated turnover ratios in certain securitization transactions, maybe you could talk to your long-term expectation and perhaps share any information on what percentage of move-outs are going to home purchases, are single-family rentals in the same area or relocation than other situations?

Yeah, this is Jack Corrigan. I'll take that question. On turns or turnover rate as we refer to, it's very seasonal, so you will likely see elevated levels May, June and July, 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 or because I don't -- I think silver base said it was about 15% to 20%, but I think our tenant profile is probably -- our rents are higher, so our 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?

Yeah, I'm saying an annual basis.

About 35%.

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

I haven't, but…

Okay.

It was certainly increased -- it certainly increase the turn cost, so it wouldn't be good for them, but I don't think it would definitely impact.

Yeah, 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 turnover increase into that 45% on a theoretical basis would have an impact -- an increased impact to the turnover expenses, the maintenance expenses to refresh the properties.

That that would be partially offset. We're not as aggressive at raising rents on renewals, so on the re-leasing that would, you know, 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 the property management field level, or do you have IT overlay certain red flags in your database that helps identify such properties?

The bulk is that we've disposed 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. It's 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 we will have trouble with homeowners associations that are changing, making homeowners associations rent restrictive and really they battle that or just decided that we'll just sell that house and take our battle elsewhere.

Jade, I mean, a little more color on that. With respect to the legacy homes that we do end up selling, we have operational analytics group. We have two financial analysis groups. We have one operational analytics group that works directly with Bryan Smith and Jack on a number of fronts, rental rates, management, but one -- is one, but one of them is also how the homes are performing and to identify opportunities for improvement 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?

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

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

This is Dave. I think we kind of outline 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 all -- at an all-time low of about 2,000 -- between $2,000, $2,100 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. And the in-house maintenance will go through a lifecycle similar to other systems that we rollout. 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 out-size revenue growth similar to what we've seen in the past year. Out-size at least to, you know, the long term and what we see another residential opportunity. So, I think the growth story is still -- we're still in the early innings of it. I think it'll 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.

And I think you mentioned $2.1 million of cost to bring in stuff in-house, is that included in that $2,000 to $2,100 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, you know, 80, 90 -- probably 90% of our properties. That doesn't -- there's 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 organizational cost line to a benefit line.

And that was all on the third quarter the $2.1 million.

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

Okay. And then you talk to you 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 a quantum, if you do so, what the margins would look like?

Yeah, 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 the Same-Home stabilized, but not Same-Home ARPI properties and then we have a column for other and held-for-sale.

Got you. Okay. Thank you.

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 kind of your sense of how 2017 should play out kind of maybe just a range for the maybe newer renewals whatever you feel comfortable talking about, as we look forward to kind of the next step in the evolution in the company?

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

And, Juan, remember there's a little bit of seasonality more in the re-leasing line than the renewal line, but that -- you'll see more of that in the second and third quarter will be at the higher end and lower ends probably first quarter.

Okay. And just lastly we've got 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 -- anymore scale to take advantage of 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. As 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 you retain capital. Doesn't mean that it's not accruing to the benefit to the shareholders, in fact it's probably accruing better to the shareholders by retaining and growing the company. Taxes don't have to be paid et cetera, on the dividends. So, at this point while we're still in growth, we're looking to retain it. When the growth opportunities slow, we will look at the dividend rate to 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 are opportunities are. But right now, there's 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 port -- real small portfolio acquisitions last quarter, so a number of homes acquired during that -- through that channel.

Thank you.

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

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

Well, we have a minimum of three to one rent coverage for income and the -- 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 margin, but I don't think it will have any significant impact on our business, at least in 2017.

That's helpful. And I'm just curious on Houston, occupancy was down along the quarter and year-to-date, I'm not sure you can delineate this finally. But do you think that may be a result of some of the energy market issues materializing your demand for units or maybe is that instead of function of the supply that's coming into that market just 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 run 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 renter's that are in that industry.

And I apologize if I missed this. But just a couple of questions on some expense items. On, 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? Do you think it will more revert to at typical sort of inflationary type increase?

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're 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% as we're running. We were very successful in the third quarter on appeals -- and in a second I am going to ask Diana -- 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 and other sectors of real estate. So there will be over long term some cycles that we go through, but they are long-term cycles. Right now, I would look at 2017 being a favorable year on insurance. I wouldn't look at it as being in a risk point for us next year increases. So -- but with that said, Diana do you want to go through what we've been doing on property taxes?

Sure. Just a few statistics about them, how we dealt with property tax increases this year. We actually -- sorry -- we filed appeal 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 work very hard to try to reduce assessed valuations as they come along. Most of those reductions came in Texas where we had the highest increases in our assessed value.

That's great. And just one last question in a similar area like repair and turnover cost, net of chargebacks also down significantly in the quarter. Just -- I forgot if you mentioned that, but is that timing related? Does that better chargebacks or is lower 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. And we've been able to reduce that further. We've hired some subject matter experts, for example, in HVAC, so they -- we have somebody on our side that speaks the same language as the vendors and can tell when, you know, maybe a replacement isn't needed or maybe a smaller repair is in order. So we've done that in all our high cost areas, brought in some subject matter experts that really helped 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 to 2017 or maybe a trend because I don't want to put you in a position where you're giving guidance at this point? But maybe more -- 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 -- our types of home. So, we're currently buying primarily in the Southeast Florida, Georgia, South Carolina and North Carolina. And we did buy a small bulk portfolio in Seattle which we really like that. And we look at, you know, where rents are growing and factor all that in. But we could change markets depending on how demand goes.

Sure. And some of the supply that we're seeing in the multifamily 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 two products?

We have not seen an impact on our demand. I think it is probably a different renter base than, you know, somebody with a couple kids is 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 your -- 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 mention 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 on this market and being able to access whatever is most attractive at the time?

I think the answer is, we look at all areas and we are -- we try to remain nimble and be position to take advantage of whatever the best capital is to match the assets we're acquiring. Specifically with respect to debt, the -- our new credit facility, the pricing of that new credit facility is compelling compared for us compared to securitization. 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 securitization and you also have pricing benefits moving away. And so where we are in our lifecycle I believe that the line of credit and other forms of debt today probably will take precedent over securitizations.

Got it. That make sense. Thank you. I get back in the queue for the questions.

Thank you, Rich.

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

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

No. When we acquired ARPI, they had a program called preferred operator program and in the house is acquired through those programs were generally lower quality than our standard and they had about 400 in Indianapolis and 500 in Chicago. So we've been trying to sell those either as small portfolios and we've had some success that way, a large portfolio deal would be nice. And then as they become vacant we will also put them on the market. So those are the kind of the three ways we've been selling in Chicago, and indeed do have a significant number of the homes for sale.

Okay. And of the -- 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 maybe also what you got 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 yield?

I think they all could be sold in bulk transactions, unless the reasons we're selling them is that they become rent restricted and then we generally -- selling to other people who want to rent them, so those who 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 and I think we said -- we got we would sell them in 12 to 24 months. My best guess would be the straight line it.

Okay. That's helpful. And then one last one. On the repairs and maintenance turn cost, you guys have noted $2,000 a home annualized is kind of being a long-term goal. Is that something that's within reach for fiscal 2017?

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

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

Sounds good. Thanks guys. Congratulation.

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. Mostly just follow-ups. The first, Dave, on property tax, as 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're 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 out-size increase in the short run and how long do you think it'll be or you still have that type of impact where it's running about price inflation?

Yeah, I think there's two things, Dennis. One is, the timing of home prices to increases in property taxes, there's a lag. And so you don't look at the home price appreciation this year. The other impact that you have on -- it has a small impact to the numbers, is when you first acquire a property you inherit the prior owners' situation. In many cases they are receiving homeowner's exemptions and those homeowner exemptions get the 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 homeowner's exemptions.

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

Yeah I think there you'll see some improvement, but don't look for dramatic improvement down into the twos and threes, it's not going to be there. Remember the way property taxes works as state driven. Some states reassess on an annual basis, some are biannually and some are triennially. So some -- that's reason that you have some delays in some of the recognition of increases.

Okay. The second question I 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 and certainly higher than we've seen any point you've owned homes. And so I would imagine it would have been the most strenuous example you could have for HVAC on the maintenance side. So just I was 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 that you've got underway or some way to triangulate those two things, because it seem like you managed it well on what was a pretty tough environment?

Yeah, we -- in our in-house capabilities, we have a HVAC techs that are licensed and taking care of that. So I think that helped a lot on the cost. 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, they don't have a HVAC. But…

Did you have more maintenance request for HVAC this third quarter than last year third quarter on per home basis?

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

And then 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 would be around 35% and I think over the last year, it’s closer to 40%. What would you attribute that difference to in the short run?

Last time looked, it was at 35% for rolling four quarters.

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

No, I was just going off of the same -- may be I am looking at the wrong thing, here in the supplement you had turnover over TTM at 40.7.

Okay. On the Same-Home I have to look at that. I didn't know it was that high.

Okay. We will follow-up on. Thanks, guys.

Thanks, Dennis.

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

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

We have not 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 a former preferred operator program houses. So I would say that's a reasonable calculation.

Okay. Yeah, it'd be great to look into that and understand it. Perhaps -- how much more vulnerable the top quartile of the portfolio is to that risk. At the market level and what markets are you seeing the most move-out to buy home activity?

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

Okay. And next question just back to the bulk purchase opportunities. 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's not that many in the 500 or 1,000 and greater, there's a lot in the hundred 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've had three of those and all of those have taken, you know, a year or so to cultivate. And so we are in discussions with a number of them. I have nothing to announce that, you know, we've got any done. We may not get any done. We may get a number of them done. But they -- 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 the way the process goes. And so we -- as I said last quarter, in the prior quarter and probably say next quarter, we're 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've taken out the exposure to floating rate debt from 18% to 26% and I would just appreciate your thoughts on what the appropriate level of exposure is to floating given the nature of your assets and cash flows?

So we're comfortable with where we are presently, I would say, first of all. And a piece of the floating rate debt is one of ours securitizations which is cap, so we have capped our interest rate risk there. And I think over time, you'll see us replace floating rate debt with fixed rate alternatives. But as I said we're comfortable with where we are and we're 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 JP Morgan. Please proceed with your question.

All right. Thanks. I only have just one. If I look at the $2,084 in the last 12 months sort of R and M and turn and so forth. 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's no changes to renewal versus the actual homes that get turned?

Are you talking just maintenance of occupied homes versus the turned costs?

That you had $2,084 I guess the blend of homes where nothing really changed, the resident renewed and there's just, you know, the normal repairs and things that might occur over the course of the year, and then the actual turns of the homes that actually turned?

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

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

Okay. $1,100 to $1,184.

No. I mean the house where there is no change -- I guess you taking the turn cost, you dividing it across all the homes whether it turned or not, I am trying to just understand like what is actually cost turn house?

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

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

Okay. Yeah, our turn net of chargebacks are running about $1,200 to $1,300. What I'm also not factoring in is the CapEx. The CapEx -- the maintenance cost of $800 are just 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 our question-and-answer session. I will now turn the call over to Mr. Singelyn for closing comments.

Well, thank you for your interest in American Homes. I will see many of you later this month at Mary REIT. And 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.