Earnings Call: Q1 2019

May 3, 2019

Greetings, and welcome to the American Homes to Rent First Quarter 2019 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. 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 Q1 2019 earnings conference call. I'm here today with Dave Singelin, Chief Executive Officer Jack Corrigan, Chief Operating Officer and Chris Lau, 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, May 3, 2019. 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, 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 Singleton. Thank you, Stephanie. Good morning and welcome to our Q1 2019 earnings conference call. Before I begin, I would like to read an announcement And I forwarded to the American Homes 4 Rent team members this morning. B. Wayne Hughes, our Founder and Chairman of the Board We'll retire after next week's annual meeting. Wayne is a legend in the real estate industry. In 1972, he founded Public Storage, one of the nation's Largest Real Estate Investment Trust. He served as its CEO until his retirement in 2002 and as a trustee until 2012. Wayne also founded American Commercial Equity, a private real estate company that owns retail 8 years ago in May 2011, Wayne approached With his idea of acquiring and managing single family rental homes. Wayne purchased the first homes in Las Vegas that May. And that concept in those homes were the beginning of what is known today as American Homes 4 Rent. Wayne's vision and leadership were instrumental in making American Homes 4 Rent A leader in the single family rental industry. Today, we own nearly 53,000 single family rental homes, providing quality housing To 200,000 residents have more than $1,000,000,000 of annual revenue and are leading the industry into its next chapter With in house development and construction of single family homes. Tamara Gustafson, Wayne Hughes' daughter will remain a member of the Board of Trustees and The Hughes family legacy and counsel to the company. Wayne's vision, counsel and leadership will be missed, But I'm grateful for his guidance and support during our formative years. We wish him well and continued success. Next, a couple of additional comments before we move on to our Q1 earnings. Our annual meeting and quarterly board meeting will be held next week. At those meetings, the Board of Trustees will name a new Chairman and declare and announce the Q1 distributions. Now moving on to our earnings. I am pleased with our results in the Q1. Our portfolio performed well. Our investment programs are on track and our balance sheet is strong. As always, I would like to thank all of our AMH team members for their hard work and focus. As I mentioned on our last call, we continue to refine and improve our operating platform and business execution. The foundation of our efforts is built on 4 cornerstones operational excellence, consistent and accretive growth, Financial strength and flexibility and superior customer service. Beginning with operational excellence, We had a strong start to the year. Core FFO was $0.27 per share, up 11.6 percent on a per share and unit basis From the Q1 of last year, we continue to see and experience strong rental demand. Our same home occupancy at March 31 was 96.7 percent and our average occupied days for the Q1 2019 was 95.5% Compared to 94.8 percent for the Q1 last year, our total cost to maintain a home, Including expense and capitalized cost was $4.87 per home in the Q1 of 2019, which was less than our Q1 2018 cost. Please note that while our costs are down year over year, This year's cost includes an expansion of our preventative maintenance program designed to reduce maintenance related expenditures over the long term And improved resident satisfaction. Driven by solid revenue growth and lower cost to maintain a home, our same home core NOI margin Of 64.5 percent for the Q1 of this year was 70 basis points higher than last year. Jack will further discuss the details of our Q1 operations later on the call. As we head into the spring leasing season, We continue to maintain a strong same home average occupied days for the month of April at 95.8%, up 60 basis points compared to April 2018, along with rental rate spreads of nearly 5%. Our second cornerstone is consistent and accretive growth. This begins with AMH Development, our in house development program. We believe the opportunity to design homes for rent strategically enhances the benefits of our diversified portfolio. At a high level, we are building homes using value engineered plans that are aesthetically pleasing and designed for durability and lower cost to maintain. These new homes include customized features based on our operational expertise and resident feedback. We are currently building in high demand areas within our existing footprint and are capturing premium yields of approximately 100 basis points For AMH Development Homes and 50 basis points for homes acquired through our National Builder Program. Jack will have more information on our investment activity later on the call. Our 3rd cornerstone is our best in class balance sheet. Since our formation, we have maintained a strong balance sheet, providing ample liquidity to fund our growth at the most advantageous cost. Today, we have adequate capital in place to fund this year's investment activity without the need to access the capital markets. Chris will provide more details on capital structure and recent financial activities later on the call. And our 4th cornerstone is our commitment to superior customer service during the full life cycle of the resident experience. We are seeing increased participation rates in our resident surveys with high satisfaction levels in all areas of service. For example, our in house maintenance survey results show satisfaction levels in excess of 95%, And our Google ratings have continued to be strong and are up year over year. We have always invested in our team through a recurring training program. We have added team members in selected areas to provide bench strength. The benefits of these efforts are positive improvements in resident turnover And fewer escalated resident issues. Since the Q1 of 2017, we have seen over 380 basis point improvement in our trailing 12 month turnover rates. Overall, we are very pleased with our solid start to the year and believe that we are well positioned for the spring leasing season. Our local management teams are fully staffed and running on all cylinders with strong leadership. We remain confident with our guidance ranges and the team's ability to execute consistently on our operational goals for the year. And now I'll turn the call over to Jack. Thank you, Dave, and good morning, everyone. Beginning with revenue growth, as Dave mentioned, we are off to a Strong start for 2019. For our same home portfolio, during the Q1, we achieved a 95.5% Average occupied days percentage, up 70 basis points from the Q1 of 2018. Average monthly realized rent was up 3 point 2%, resulting in a quarter over quarter increase in same home core revenues of 4.2%. Turning to operating expenses. 1st quarter 2019 core property operating expenses were up 2.1% Year over year, largely driven by a 4.8% increase in property taxes, which was in line with our expectations, offset in part by decreases in R and M, turnover and property management expenses. Our Q1 2019 cost to maintain a home, including R and M and turnover costs, plus recurring capital expenditures, Total $4.87 down slightly from last year. Although we continue to see inflationary pressures, This decrease was driven by improved retention and reduced vacant home inventory combined with last year's above average expenditure levels. As a reminder, this year's cost to maintain a home includes higher costs related to preventative maintenance as our program has expanded year over year. In summary, it was a strong operational start to the year. We are on track with the expectations we laid out last quarter. We are carrying positive momentum into the spring leasing season with strong April same home average occupied days of 95.8%, up 60 basis points compared to last year and blended rental rate spreads for April of 4.9%, An increase of approximately 20 basis points compared to last year. Turning to growth. As Dave mentioned, we have increased our focus on our build for rent programs as the best risk adjusted opportunity for accretive growth. This initiative adds new assets that are in demand and provides better near and long term economics. During the Q1 of 2019, we added 3 20 homes for a total investment, including renovations of approximately $85,000,000 101 of these homes, totaling $26,000,000 were added through our built for rent programs. For 2019, we remain on track to take $300,000,000 to $500,000,000 of homes into inventory, With about 80% expected to be from our build for rent pipeline and the rest from our other channels. We expect these additions to be weighted toward the back half of twenty nineteen. Further, as previously noted, we expect to invest an additional 200 to $400,000,000 into our development pipeline for future year deliveries. Turning to dispositions. We continue to strategically prune our portfolio where it makes sense for operational reasons and recycle capital into opportunities with better long term returns. At the end of the Q1, we had approximately 1800 homes held for sale, which we expect to generate between $350,000,000 $400,000,000 of net proceeds over the course of this year and next. During the Q1, we sold 180 homes for net proceeds of $33,000,000 Now, I will turn the call over to Chris. Thanks, Jack. In my comments today, I'll briefly touch on our Q1 operating results, update you on our balance sheet and capital markets activities, and finally, provide you with our current view on 2019 guidance. However, before we get into our operating results, I'd like to bring you up to speed on a few GAAP disclosure changes in connection with the new lease accounting standard. As we discussed last quarter and consistent with the rest of the real estate industry, we adopted a new lease accounting standard at the beginning of this year. As a reminder, the primary difference under the new lease accounting standard is that a larger proportion of our internal leasing costs Are now included within property management expense rather than capitalized. As we indicated last quarter, applicable prior year non GAAP metrics Within the supplemental information package have been presented on a conformed basis to comparably reflect the new lease accounting standard. Additionally, as part of the new lease accounting standard, there are 2 notable changes to our existing GAAP disclosures that I would like to make you aware of. First, our previous revenue line items of rents from single family properties, fees from single family properties and tenant charge backs Will now be presented as a single line item labeled rents and other single family property revenues. This change will apply to both current and prior year periods within our GAAP income statement. 2nd, bad debt expense, which was previously included within property operating expenses for GAAP purposes, Will now be included within our new revenue line item, rents and other single family property revenues. Please note that our computation of bad debt expense remains completely unchanged and that the GAAP financial statement line item reclassification only applies to the current period. To clarify, within our GAAP financial statements for 2019, bad debt expense will be presented within rents and other single family property revenues, whereas for 2018 bad debt expense will remain in property operating expenses. Of note, however, these two changes do not have any impact Our supplemental disclosures or existing non GAAP financial metrics. Consistent with prior disclosures, our supplemental information package We'll continue to provide the breakout of our revenue components and bad debt expense with applicable reconciliations to our new GAAP metrics in the back of the document. With that, I'll move on to our operating results. For the Q1 of 2019, we generated net income attributable to common shareholders of $16,300,000 or $0.05 per diluted share. This compares to net income of $5,800,000 or $0.02 per diluted share Q1 of 2018. Also for the Q1 of 2019, core FFO was $95,700,000 or $0.27 per FFO share and unit as compared to $83,200,000 or $0.24 per FFO share and unit for the same quarter last year On a pro form a basis for the new lease accounting standard, adjusted FFO was $86,900,000 in the Q1 of 2019 As compared to $74,700,000 for the Q1 of 2018, on a per share basis, adjusted FFO was $0.25 per FFO share and unit for the Q1 of 2019 compared to $0.22 per FFO share and unit for the Q1 of 2018. Next, I'll provide you with a quick update on our balance sheet and recent capital markets activity. In January, we completed our 2nd unsecured bond offering, Raising $400,000,000 of 4.9 percent senior unsecured notes, which are due in 20.29. The net proceeds were used in part to repay $250,000,000 that was outstanding on our revolving credit facility, leaving approximately $150,000,000 Remaining net proceeds to fund a portion of our 2019 acquisitions and development program as well as general corporate purposes. At the end of the Q1, we had $3,000,000,000 of total debt with a weighted average interest rate of 4.3% and a weighted average term to maturity of 13.5 years. Our net debt to adjusted EBITDA was 4.9 times and debt of preferred shares to adjusted EBITDA was 6.9 times. And as a reminder, we don't have any debt maturities other than regular principal and amortization for the next 3 years. In terms of liquidity and funding sources going forward, at the end of the Q1, we had $155,000,000 of unrestricted cash on the balance sheet And our $800,000,000 revolving credit facility was fully undrawn. We generate approximately $250,000,000 of annual retained cash flow And we anticipate that our disposition program will generate about $200,000,000 of recyclable capital this year, all of which translate into an extremely solid foundation Finally, turning to our guidance. The Q1 was well executed on nearly all operational fronts, leaving our view on full year 2019 results Unchanged. As our key leasing and turnover seasons are still ahead of us, we are maintaining our previously communicated full year 2019 guidance ranges for both core FFO and same home portfolio performance, which are detailed on Page 20 of the supplemental, and we'll continue to provide you with updates as we progress throughout the year. And with that, that concludes our prepared remarks and we'll now open the call to your questions. Operator? Thank you. We will now be conducting a question and answer A confirmation tone will indicate your line is in the question Our first question comes from the line of Jason Green with Evercore. Please proceed with your question. Good morning. A question for you on development. Of the 80% Of acquisitions that you guys say is going to be development, how much of that is on balance sheet AMH Development versus in partnership with homebuilders? I would say of the approximate 1200 homes that we expect to come through our new build, 1,000 of them will be Through our balance sheet and AMH Development. Okay. And then geographically, are you able to expand on what markets The build to rent is focused on? It's focused on Several markets, most of the ones we've been growing in, on the West Coast, Seattle, Salt Lake City, Boise, Las Vegas, I might be leaving out one. And then on the East Coast, Charlotte, Atlanta, Nashville, Jacksonville, Jacksonville, all the Florida markets. So that I think covers it. Okay. And then last one from me. You said you're getting a 100 basis point premium on the developments. Given the additional strong job sprint this morning, what are construction costs doing to that number? Construction costs, materials have Will you come down over the last 6 to 9 months? Lumber went spiked for a while and then now it's come back down. In terms of labor costs, they are increasing probably in the 4% to 5% range. Okay. Thank you. Thanks, Jason. Thank you. Our next question comes from the line of Nick Joseph with Citi. Please proceed with your question. Thanks. Maybe just following up on that. I know a lot of the deliveries are back end loaded, but how's the build out going so far versus expectations in terms of overall cost and then budget or versus Yes. In terms of the direct cost of the vertical Build and horizontal build, we're right in line with what we originally budgeted. We probably underestimated a little bit All the soft costs being allocated over a smaller number as we grow the platform and Grow the number of houses that we're building, then a long term issue. We're running probably at about 4% 4.5% soft costs. And I think once we're at The right cadence of deliveries will be somewhere in the 2.5% to 3%. Thanks. And then the delivery timing is as expected so far? Yes, a little slower because of some of the rain, but pretty close to what we expected. Thanks. You walked through the yields. But from a resident demand perspective, how is the lease up going for the ones that have already delivered Versus the rest of your stabilized portfolio. In other words, you talked about the premium yield. Is it more cost driven or is it rent and margin driven? It's both. But in general, we're leasing them at or slightly above our pro form a rents, But we're not really pushing the rents on the initial rent up. So I think we'll have some room for It's moving up in the future. Thanks. Thanks, Nick. Thank you. Our next Question comes from the line of Shirley Wu with Bank of America Merrill Lynch. Please proceed with your question. Good morning, guys. Thanks for taking the question. So on R and M and churn costs, you mentioned slightly higher costs for preventative measures. So could you Give us a little bit on how much that incremental is for this year and what's being done for the home? Well, I'll talk about the program. I'll let Chris give the numbers. Back in late We initiated what I call Phase 2 of our in house maintenance program, And that really is exterior maintenance of the homes, which we can do when the house is occupied or unoccupied. And it's basically, I would say 60% to 70% of it is exterior painting and trim, including staining decks and that type of thing. There's some landscaping involved And just other exterior maintenance. And then Shirley, this is Chris. Probably the best quantification that I could give you, If you go back to some of our comments from last quarter, on just kind of a regular way, cost to maintain increase, we're expecting kind of on a full year basis 4% to 5% increase. And then as we talked about last quarter, the majority of our preventative maintenance program is going to be going into the CapEx line item. And on a full year basis, we see that running kind of close to 9% or so. And so you can squeeze the difference there and see the component that's related to the preventative maintenance program. Got it. And so also on your build for rent, so it's been a few quarters since you started that program. Could you talk a little about About the things that you've learned since inception and has there been any changes in economics from maybe perhaps efficiencies? Well, we've definitely gotten more efficient. As far as we've learned A few things. One, we're building with wider staircases and Because people are moving in and out of houses and you have less damage if they're moving through a Little wider staircase. We've put more sturdy doors into the walk in closets and keeping All the water hookups on the ground floor, so that if there is an issue with water, But it doesn't hurt the whole house. Shirley, it's Dave. I think the things that we have learned are going to have more benefits In reducing our future cost to maintain than they do in the immediate reduction in current construction costs. So the things that Jack is mentioning are going to allow us to turn the properties quicker And more efficiently and have less maintenance. So the wider doors, the better the different quality materials all really will Benefits in the future. Got it. Thanks for the color. Thank you. Our next On the build to rent over a longer period, is The $600,000,000 to $800,000,000 aggregate investment still the target? Yes. This is Dave. Yes, that is correct. Just to make sure that we have clarity as to what that is, that's really Into 2 components. We'll have deliveries this year of $400,000,000 to $500,000,000 and we're going to have Some investment into construction and process that will be delivered in future years of a couple of 100 200,000,000 to 300,000,000 But the those numbers $600,000,000 to $800,000,000 are still the target range. Okay. And again, over that $600,000,000 to $800,000,000 Is it still accurate that all the land parcels are already entitled? By the time they're acquired, they're entitled. So we may go under contract But won't close on the land until it's entitled? Everything on our balance sheet is entitled. Okay. And of that $600,000,000 to $800,000,000 what percentage of that are you Lane, roads, cultivating land, laying sewer lines and doing the land development part of it? Probably, and I don't know that number exactly, but my best guess would be somewhere in the 2 thirds. Okay. Last one for me, turning to operations. Given the issues last year with Employee retention in the field, as peak leasing season unfolds, how are turn times going to unfold versus a year ago? Well, I would expect them to improve. One of the things that we've done is built in some redundancy, so that We have what we call spot teams that if we do have turnover in one area, we have Ability to send the team out to take over until it's stabilized again. Yes. Thank you. And John, the other thing that's going to benefit turn times is just the fact that we have strong occupancy. We have continued Better retention statistics leading to less turns and we should be in very good shape for the Leasing season. Okay. Thanks. Yes. Thank you. Our next question comes from the line of Hardik Go with Zelman and Associates, please proceed with your question. Hey, guys. Thanks for taking my question. I just had one on the cadence of the investment that you guys are doing in your own, the in house investment specifically on built to rent. How difficult or easy are you finding it to acquire the kind of land that's attractive to your underwriting? And how do you compete with builders in those markets that have probably cost efficiencies they've developed over many, many years? How does your underwriting compete with theirs? If you could give me some color on that, I'd appreciate it. Yes. I mean, we're and I think the Builders are having harder times finding developed lots, although That's gotten easier over the last 6 months or so. As far as Efficiencies, we actually think we're more efficient because we don't have change orders. They're building Per our spec, and our specs aren't changing. They don't have owners coming in and saying we want this flooring or this wall or this Other options. So we think we're actually more efficient as a builder than the National Home Builders. Hardik, it's Dave. Let me add just a couple of things. One is we are today and this is goes through cycles. Today, we're actually seeing more finished lots being available to us from homebuilders, as we don't have some of the same Economic considerations that they do with the exit side of the business. We know who's going to own the property and that's not a variable for us. On the economics, one of the things that we have as a benefit over the homebuilders is we have no sales and marketing component in our cost structure. So, Our costs are more favorable than theirs for a finished product because we don't have all the costs components that they do. No, that's helpful and I appreciate that. Would you also say that you have a cost of capital advantage? Yes, I would. But I think the way the question was outlined is on the completion of the cost of building. I still think we have an advantage there as well that our cost of capital with our investment grade and the fact that most of our assets Our revenue producing assets, yes, it is a very, very different risk profile than a homebuilder. Got it. Yes, I meant the original question on operations, so you answered my question there. Thank you. Thank you, Hardik. Thank you. Our next question comes from the line of Ryan Gilbert with BTIG. Please proceed with your question. Hey, thanks guys. Just on the 2019 same store revenue guidance, I think it makes sense to hold off on making any changes We get to the spring leasing season, but just as you sit today, the Q1 number came in at the high end of the range. April leasing statistics Look strong. So I guess, what would you need to see in the market over the course of 2019 That would get you to the low end of the guide or even to the midpoint of the guide from where you sit today. So what would you need to see in the market? Or are there any changes In the composition of the same store portfolio that we should be thinking about? Ryan, it's Dave. I think you kind of answered the question almost for me in the question. It is early in the year. We had a very good Q1. We as Jack and I indicated April is continuing that same trajectory. But our guidance is not a number, it's a range And we're very comfortable with those ranges. And we have a lot of leasing season left in 2019. And we'll continue to review it. And as we get a little further down the into the year, We'll be making comments on guidance, but today we're maintaining the ranges. And Ryan, it's Chris. Just to point out one other thing on the quarter. As you think about the composition of our 1Q revenue growth, bear in mind that 70 basis points of that is occupancy pickup On lower average occupied days in 1 quarter of last year, which will begin to more normalize out as we move throughout the year. So just Sure, of course. Although your April average occupied days were up 60 basis points as well, which is a very strong result. Nope. You're right. Did turnover continue to decline in April? It was Slightly lower than last year, but not materially. Okay. And then just one more on the repairs and maintenance and Property management reductions, is there any way you can quantify or kind of weight how much of the decline And those numbers was due to lower turnover and higher occupancy versus just lapping some elevated expenses in the Q1 of last year? It's tough to bifurcate out how much of it is due to the turn effect This year, I can tell you, I can point you back to some of the numbers that we talked about last quarter, in that we know that we had about $2,000,000 or so In cosmetic investment last year kind of in the 1st call it 4 months of the year, that ran through April. So you can use that to kind of directionally back into the numbers, but it's not kind of perfect math. Ryan, just I mean, just to reiterate what you had said, just to we've had 9 quarters where our turnovers were Coming down and turnover is a benefit not only to the revenue line, but you hit it right on. It is a benefit to our expense line As you don't have to refresh the homes and that's a very, very important trend that we are seeing and that should Benefit is on both the top line as well as expense controls going forward. Okay, great. Thanks very much. Thanks, Fred. Thank you. Our next question comes from the line of Douglas Harter with Credit Suisse. Please proceed with your question. Thanks. Just touching on the Strong occupancy improvement that you've seen in April. Can you just talk about how you're balancing occupancy versus Pushing for more rent at this point? Yes. I think we have a pretty good balance. We're In terms of renewals, we're maybe slightly above inflation and right in the 4% range. And then we try to get market rents when we Release something that's been vacant. We haven't Seeing a material decline in the marketing period. So I think we're kind of just hitting it right, But we're also moving into the period where we can raise rates a little bit more because of the demand. And So I would expect something similar to prior years in terms of re leasing rates And renewal rates are still very strong at about 4%. And Doug, it's David. Let me just add one thing. We mentioned April, we're in the 5% area. But As Jack indicated, the and as I indicated earlier, there's a balance between retention and In getting these things leased, because it impacts both the top line and the expense line. And we are getting higher than inflationary numbers now. And maybe and we are pushing a little bit more than we did Q1 as evidenced by the 5%, but we are going to be very Measured is in our rate management not to impact negatively the retention That may impact will impact revenues and expenses. Great. Thank you for that answer. Thank you. Our next question comes from the line of Jade Rahmani with KBW. Please proceed with your question. Thanks very much. Wanted to see if you can comment on home purchase trends. Has there been any change in demand or retention rates based on the slowdown in home sales? And also if you could comment on move outs to buy if that's lower than a year ago? Jack, do you want to take it? Yes. It appears to be slightly lower than a year ago. I think we got as high at one point as the high 30%, maybe even up to 40% of our move outs were related to buying a house. It's closer to 30% now, so that may be helping With retention, I would think that it is. So we'll repeat the rest of your question. No, I think that was it. I mean, if you're seeing any change in demand trends, any acceleration or strengthening in demand based on the slowdown in the housing market, in the home purchase Yes. But on the other hand, we're disposing of houses and they're selling Pretty fast, so and a lot of them at list or better. So I'm not sure that The demand for housing on the buy side or the rental side has really subsided. Okay. And just wanted to comment or ask about strategically how you consider M and A and if your increased Build to rent strategy changes that calculation. Obviously, most of the large portfolios are older on average than yours. There is a company Front Yard Residential that has an activist in their stock calling for strategic changes. So just wondering if How you consider M and A relative to build to rent? Jade, it's Dave. I don't think the build to rent Plays into the calculus. If it's the right opportunity at the right price, no different than a year ago, 2 years ago, We will consider it. But as we have mentioned in the past, there we do have A target tenant that we are looking for, which takes us to a target type of property And there are portfolios out there that match it and some that are a little more challenging for us to acquire. But the build for rent component is just a growth channel for us. It's one of many. And I don't think that has an impact as to whether we would Entertain M and A. M and A is quality of assets, price and really where our capital is trading at the given time. As a follow-up, can you give a little color on the NOI margin differential between the newer homes and your existing portfolio? The newer homes will have probably a little higher NOI margin. That really depends on The property tax rate in the but if you're talking about homes in the same area, Same property tax rate, you should have a higher margin because your maintenance expenses in the first 10 years are going to be lower than you would on a house that we bought. Yes. The margin is really driven higher. It is higher. It's driven by a little bit of premium rent and definitely lower maintenance costs. The rest of the line items are pretty consistent. Thanks very much. Yes. Thank you. Our next question comes from the line of Ronald Kamdem with Morgan Stanley. Please proceed with your question. Hey, thanks for the time. Just a couple of quick ones. The first one was just maybe can you talk about a little bit maybe the ancillary revenue for the company in terms of how you guys are thinking about it, what's the low hanging fruit and when should we think about that as something to look forward On the ancillary revenue, there is a few There's a couple of things that are running through. We our rent today, there's some additional pet not pet, But pet opportunities, we're getting additional pet revenue that we hadn't seen before. And so the ancillary revenue, there's a little bit out there, but it's not going to be the driver of Your revenue line, it's still going to be rent as the driver. That's the primary component. That's The lion's share of the revenue line is going to be your annuity of rent. That's great. That's helpful. And then maybe on the technology front, maybe can you just talk a little bit about, I think, you guys are piloting a little bit more of some of the mobile apps or the Self guided Tohors. How is that progressing? And is there any other sort of technological efficiencies that you could see for the company? Technology is a key to our success. It has been from day 1. You cannot manage 53,000 homes in the with the infrastructure that we have and the number of personnel that we Unless you're leveraging technology, we are continually enhancing the technology. We have technology improvements over the last year and during 2019. In the logistics side, that's improving our in house maintenance programs and intake processes or maintenance calls coming in. So that leads to better execution and more efficient execution on maintenance. With respect to homebuilding, which is still relatively new for us, There is continued enhancements in that area that should benefit us into 2020 and later years And making that process more efficient as well. Great. The last question for me was just If I look at the market performance so far year to date, maybe is there any markets that are Maybe perform better than you would have expected or any markets that are lagging? And sort of a follow-up to that would be, what are some of the markets that, if you could, You're trying to get more presence in and maybe what are some of the markets where you may be looking to reduce? Thanks. Yes, this is Jack. A lot of the Western markets are outperforming. At Phoenix, we're getting really strong re leasing rates in Las Vegas, and they both stay very highly occupied. Salt Lake City, Boise, Seattle, all they're all markets where we're Acquiring land and planning to build and grow in, as far as markets that we're getting out of, We've really only gotten out of tertiary markets, the ones with I think the biggest market that we're getting out of is Oklahoma City, with I think we had about 400 homes there. And Ron, if you want the detail of the markets that we're looking to exit out of or just the properties in general that we're disposing of, you can get that on page 18 of the supplemental. The couple of smaller markets behind Oklahoma City that we're exiting out of would be Corpus Christi, Augusta, Georgia and then the Central Valley of California. You can see it all on Page 18 in the sub. Great. Thanks so much, guys. Thank you. Our next question comes from the line of Buck Horne with Raymond James. Please proceed with your question. Hey, thanks. Good morning. On the AMH developments, I just want the last one here. On locations, how would you characterize the locations you're building in, Maybe whether it's average distance from the existing portfolio or some other metric. And what are the challenges or synergies with managing those new locations versus the existing portfolio? We're not going on the outskirts of the city. We're building right in our footprint. So really, the only Difficulties that we've seen is when we've built larger developments and Having the right cadence of deliveries for absorption and kind of it's kind of at least for the initial fill up, It's kind of a hybrid between a large apartment complex and our regular marketing. So we've Had to adapt a little bit there, but I think we've kind of figured that out now and our larger developments are leasing up. We need probably a better cadence on and that's what we're doing, planning our cadence on deliveries, so that They get absorbed as they're delivered. Buck, it's Dave. We're in our core markets. We're not going into new markets Inside our footprint and many of them are inside the area where we're finding small developments On the new developments, they may be right at the edge of the market, but they're contiguous to other homes that we have recently purchased That are doing very, very well. So they are really in our markets. So we're not building in any new areas from that standpoint. Great. That's very helpful. Thank you. And on the homes in the disposition pipeline, what are you seeing in terms of Portfolio buyer interests, are these home are the buyers here looking at them on a stabilized cap rate basis? How are they pricing those assets? And what kind of buyer interest are you seeing in the market? We're saying We're marketing to bulk buyers when they're occupied. And then as they become vacant through natural attrition, then We market just through the traditional MLS channels. And we definitely are seeing Small portfolio buyers and I think our biggest one that we Have under contract is about 200 homes. And are they looking is there a cap rate range that those Is it more of a price per unit kind of thing? It's a combination of cap rate and market value. All right. Thanks guys. Thanks, Buck. Thank you. Our next question comes from the line of Drew Babin with Robert W. Baird and Company. Please proceed with your question. Good morning. This is Alex on for Drew. Our renewal notices today being sent out of that 4% -ish rate bump, you quoted a few questions back. And Just curious, generally, how much pushback are you receiving from tenants? Well, we get some pushback or questioning, and we have pretty good renewal agents that explain that Property values are increasing at greater than that level and property tax rates are going up. And So overall, we're able to achieve that. We'd probably go out slightly higher than 4% and back off if we need to a little bit. Got it. That's pretty helpful. And then on the expense side, it looks like HOA fees have continued to trend upward quite I'm curious if that's being driven by certain markets or is that more of a broader industry trend? As you develop and are buying homes in newer, nicer neighborhood, should we expect HOA growth to kind of continue? Yes. I'm going to I was expecting that question a little earlier, so I kind of prepared an answer. We've experienced some inefficiencies in our HOA process. It's been a very manual process. We deal with 12,000 different homeowners associations that have different ways of communicating. And it's been very anyway, our prior process was fairly inefficient, Resulting in above normal levels of late fees and penalties, it's not a material component of our cost structure, And we're in the process of addressing the issue through the automation of the process. We expect to see some continued impact Through 2019, but once the process is fully automated and we're through reconciling all the accounts, We expect it to be much more efficient going into 2020. Drew, it's Dave. This guidance goes back to a prior question on This is one of the areas that technology is going to assist us in. The costs are admittedly a little higher than they should be right now. And we would see that as that technology rolls out throughout the year to we would see significant benefits from that Technology as it rolls out later this year. So that's where we are on that. Understood. And then one last question for Chris on the balance sheet. Where does 6.9 times leverage today when you Your line is open. J. Rice:] You know, obviously, you're really well capitalized, but is that a 7 ish times a good run rate going forward where you guys feel comfortable? Very much so. As we've laid out before, kind of the 2 internal targets that we have is 1 on a net debt to EBITDA basis and 1 on a debt Including preferred shares basis. On a net debt to EBITDA, our kind of comfort zone is 5.5 times or below. And then on a debt, Including preferred, it's kind of at a 7.5 times or below, so we're comfortably within the range that we like to see. Great. Thanks for taking my questions. Thank you. We have reached the end of the question and answer session as well as the conclusion of today's call. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.