Greetings, welcome to the American Homes 4 Rent second quarter 2018 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. Should anyone require operator assistance during the conference, please press star zero on your telephone keypad. 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 second quarter 2018 earnings conference call. I'm here today with David Singelyn, Chief Executive Officer, John Corrigan, Chief Operating Officer, and Christopher 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, August 3rd, 2018.
We assume no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. A reconciliation to GAAP of the non-GAAP financial measures we are providing on this call is included in our earnings press release. As a note, our operating and financial results, including GAAP and non-GAAP measures, 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.amh.com. With that, I will turn the call over to our CEO, David Singelyn.
Thank you, Stephanie. Good morning, welcome to our second quarter 2018 earnings conference call. Before I begin, I'd like to acknowledge the recent departure of Diana Laing, our former CFO. Diana was a talented and dedicated partner to all of us, and I wish her well in the future. We are fortunate to have Christopher Lau step up as our new CFO, assuring a smooth transition. Congratulations, Chris, on a well-deserved promotion. Earlier this week, on Wednesday, August 1st, we celebrated five years as a public company. When we launched American Homes 4 Rent, we recognized the unique opportunity to accumulate a portfolio of single-family homes at attractive prices, take advantage of shifting household patterns that favor renting, and bring professional management and institutional capital to the asset class.
During these past five years, we have provided quality housing to tens of thousands of families and rehabilitated thousands of homes in countless neighborhoods. Today, we not only acquire, upgrade, lease, operate, and maintain our homes, but we are also pioneering the building of high-quality single-family homes for rent. As I sit here, I can honestly say that the opportunity we identified five years ago is larger than any of us realized. We have accomplished a lot, I am deeply proud of our results. The opportunity in front of us remains exciting. With only 1%-2% of the single-family rental market institutionally owned, with excellent sector fundamentals, a committed team, and a balance sheet positioned for growth, American Homes 4 Rent has significant long-term potential and will continue as a best-in-class housing provider in America. Now turning to second quarter results.
The second quarter continued our tremendous momentum from the first quarter. We continued to see strong occupancy gains in both total portfolio occupancy and same home average occupied days compared to last year. We accomplished these gains while achieving a blended rental rate spread of nearly 5%, the strongest in the last two years. As we enter the slower leasing season, we prudently moderated our increases late in the quarter. Based on results in July, I expect favorable rental rate spreads to continue through the next several quarters, translating into strong operating performance compared to the prior year. Now turning to acquisition activity. In the second quarter, we continued to acquire homes through our traditional channels. Deliveries from our development programs are ramping up as well, and early results are positive.
In total, including all channels, we now expect to invest approximately $600 million in single-family homes this year, which is at the high end of our previously communicated guidance. Jack will provide details of our acquisitions and development program later on the call. To finance this growth, we have ample capital, significant free cash flow, a fully undrawn credit facility, and proceeds we can recycle from our expanded disposition program. To that end, we have recently finalized amendments to our remaining three securitizations to allow for substitution of collateral and have updated our list of homes identified for disposition. We now expect proceeds from these sales to be between $350 million-$450 million over the next 24-36 months. In closing, as I mentioned earlier, the outlook for our future remains exceptional. Single-family rental fundamentals are healthy.
The economy is producing strong and steady demand, providing for high occupancy in virtually every market with increasing rental rates. Further, our operating platform is mature, with proven systems and processes that we continue to lever. With our strong balance sheet, augmented by proceeds from an expanded portfolio recycling program, we have ample capacity to fund our accretive growth plans this year and beyond. Now I'll turn the call over to John Corrigan, our Chief Operating Officer.
Thank you, Dave, and good morning, everyone. As Dave mentioned, our second quarter operating results were exceptional, highlighting the benefits of our earlier investments in front of the important spring leasing season. We see strength across our entire portfolio, with steady demand and rental rate growth in virtually every market, including some markets that had previously lagged. We improved our occupancy each month during the quarter, and on a same-home basis, average occupied days percentage increased by 40 basis points over last year to 95.4%. In addition to strong demand, we continue to benefit from fewer move-outs, down 90 basis points from last year, due in part to the maturation of the portfolio, continued improvement in customer satisfaction, and strong market fundamentals. We believe these improvements are sustainable.
We achieved blended lease spread of 4.9% in the second quarter, which was 50 basis points better than the second quarter of last year. We saw strong results through the quarter, even as we intentionally moderated increases for new leases in June in front of the slower leasing season, consistent with prior years. On a same-home basis, we achieved 3.5% growth in average monthly realized rent, July continues to be strong, with blended spreads of 4.3%. We now expect average rental rate increases of 3.5%-3.75%, compared to our earlier expectation of 3.5%. Moving on to our operating expenses. As previously indicated, elevated expenditure levels experienced in the first quarter continued into April. During May and June, overall expenditure levels were consistent with the prior year.
For the full year, we now expect repairs, maintenance, turn costs, and CapEx to fall within a range of $2,050-$2,150 per home, with total property operating expense growth in the 5%-6% range. Much of this increase is due to a larger proportion of our repairs and maintenance and turnover costs being expensed rather than capitalized compared to last year, which will largely be offset by lower CapEx. Chris will provide more details related to all of these guidance adjustments later on the call. Turning to acquisitions. During the second quarter, we acquired 323 homes for a total investment of approximately $81 million, with our primary focus on the Southeast, Texas, and Western markets. Included in this, our traditional channel acquisitions totaled 108 homes for approximately $27 million, with stabilized yields remaining in the 5.5% range.
We also took delivery of 215 newly constructed homes in 11 markets for a total investment of about $54 million. 116 of these homes were from AMH Development, and 99 were from our National Builder program. Over the latter half of the year, we expect to take delivery of a sizable number of homes from our development channels that are currently under construction, and further supplement through traditional channels as we prudently recycle capital from our disposition pool. For full year 2018, we now expect to invest closer to $600 million in total from our various channels. Moving on to dispositions. During the second quarter, we sold 113 properties for approximately $18 million of net proceeds. As Dave said, we now have amended all of our securitizations to allow for substitution of collateral. As a result, we added another 430 homes to our disposition pool.
At June 30th, our portfolio of homes to be sold totals approximately 2,200 homes. These homes are currently 81% leased. We are now targeting $350 million-$450 million in disposition proceeds over the next 24 to 36 months. In summary, we had a great second quarter, and based on our highly occupied portfolio, seasoned platform, and continued fundamental tailwinds, I look forward to strong operating results in the second half of 2018 and into 2019. I will turn the call over to Christopher Lau, our Chief Financial Officer.
Thanks, Jack. Starting off, I'll begin with a quick review of our operating results. For the second quarter of 2018, net loss attributable to common shareholders was $15.2 million, or $0.05 per diluted share. This compares to a net loss of $200,000, or $0.00 per diluted share for the second quarter of 2017. For the second quarter of 2018, core FFO was $93.6 million, or $0.27 per FFO share and unit, as compared to $81.5 million or $0.26 per FFO share and unit for the same quarter last year. The growth in core FFO is attributable to our continued accretive acquisition and development activity over the last 12 months, coupled with strong operating performance in our same-home portfolio, which was partially offset by higher interest expense and a higher outstanding share count.
Adjusted FFO was $82 million in the second quarter of 2018, as compared to $71.2 million for the second quarter of 2017. On a per-share basis, adjusted FFO was $0.23 per FFO share and unit for the second quarter of 2018, unchanged from the prior year. With regards to our same-home portfolio operations, same-home core NOI after capital expenditures was $104.5 million in the second quarter of 2018. Compares to $101 million for the same quarter in 2017, an increase of 3.5%. Our growth in Same-Home core NOI after capital expenditures was driven by a 3.7% increase in core revenues and a 2.8% decrease in recurring capital expenditures, offset in part by a 5% increase in core property operating expenses. As a note, our Same-Home pool of 38,400 properties reflects this quarter's removal of approximately 400 additional homes now identified for sale that Jack discussed previously.
The removal of these homes did not have a material impact on market composition or operating performance of the Same-Home portfolio. For reference, like always, we have provided a historical rolling five quarters of operating performance and metrics for the current pool on pages 13 and 14 of the supplemental. Turning to our balance sheet and recent capital markets activity. As previously announced, in April, we converted all 7.6 million Series C participating preferred shares into 10.8 million Class A common shares. We believe this is a great execution for us as it eliminated a financing instrument with a 9% annual cost and further improved the capacity of our balance sheet. Additionally, in May, we paid off a $48.4 million note, which was secured by 572 homes. In June, we paid down the term loan component of our credit facility by $100 million.
These debt pay-downs were made using cash from our balance sheet, reducing earnings drag from idle cash going forward, while further strengthening the flexibility of our balance sheet and increasing borrowing capacity. Our debt metrics continue to improve. At the end of the quarter, for the trailing 12 months, net debt to adjusted EBITDA was five times, and debt plus preferred shares to adjusted EBITDA was 6.7 times. We have approximately $2.7 billion of debt with a weighted average interest rate of 4.2% and a weighted average term to maturity of over 14 years. Our $800 million revolving credit facility remains fully undrawn and coupled with annual retained cash flow of approximately $250 million and recycled capital from our expanded disposition program, we are well-positioned to fund our growth objectives.
Finally, I would like to provide you with some additional color on our guidance revisions that are detailed on page 22 of the supplemental. Starting with our Same-Home expectations. As a result of our tremendous leasing activity through the first six months of the year and our expectation for continued strong demand fundamentals, we are tightening our full year average occupied days guidance to 95.0%-95.5%, which represents the upper end of our previously communicated range. Coupled with our increased expectation for average monthly realized rent growth between 3.5% and 3.75%, we now expect our full year core revenues growth to be between 4.0% and 4.5%, also representing the upper end of our previously communicated range.
Turning to expenses, our property tax savings, primarily from successful appeals, are exceeding our initial expectations, and we now expect full year property tax expense growth to be in the range of 2.75%-3.75%. With respect to property management, as a result of our successful strengthening of occupancy earlier in the year than originally expected, we've been able to efficiently manage our operational overhead and have lowered our expectations for property management expense growth to 3.0%-4.0% for the full year. As Jack mentioned previously, we now expect full year R&M turnover and CapEx costs per property to be in the range of $2,050-$2,150, with a larger proportion of these costs being expensed rather than capitalized compared to last year.
As a result, we now expect full year core property operating expense growth to be in the range of 5.0%-6.0%, which will be offset in part by lower growth in recurring CapEx. Taking all of this into consideration, we are affirming the 3.5% midpoint of our previous full year core NOI after CapEx growth expectations and tightening the respective range to 3.25%-3.75%. In addition to our Same-Home guidance revisions, we now expect full year G&A to be between $34.5 million and $35.5 million. Finally, as Jack already covered, we now expect our full year acquisition and development volume to be nearer to $600 million, which represents the high end of our previously communicated range. We will open the call to questions. Operator?
Thank you. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Juan Sanabria with Bank of America Merrill Lynch. Please proceed with your question.
Hi. Good morning. I was just hoping if we could spend a little time on the revised same-store revenue guidance range. Just what are the puts and takes at this point for the high end versus the low end, and any sense of where you feel more comfortable? If you could comment on the decision to moderate rate growth into June. What drove that, particularly given how bullish you seem on fundamentals and demand?
Yeah. This is John Corrigan. I'll answer the second question first. We're bullish on demand, but we don't want to enter the slow leasing season with a lot of inventory, which we kind of did last year. We.
Kind of like the retailers do just before Christmas, they still have a lot of people going through the stores, but they start cutting prices because they don't want to have a lot of inventory coming in after Christmas. That's what we traditionally have done. We did it last June. We'll continue to moderate a little bit in July. I think we saw on re-leasing about 5% increase in July, maybe slightly better. We're in a much better position going into the slower months than we were last year. I don't think we'll have to reduce our asking rates like we did last year, and probably, we won't have to do as much in the way of concessions that we did in the fourth quarter of last year.
Juan, if it's helpful, this is Chris, I can comment a little bit more on the guidance. On maybe starting with average occupied days. Our range is 95.0 to 95.5, midpoint of 95.25. If you just look at how that compares, that's on a full year. If you look at how that compares to the first six months of the year that we're at 95.1, that indicates that we think about the balance of the year being roughly kind of flattish, with where we ended the second quarter. Call it 95.4%-95.5% for the balance of the year, which represents about 60 basis points in occupancy pickup over last year. You add to that our revised range on average monthly realized rent growth, which is 3.5%-3.75%, or call it 3.6% and change at the midpoint.
You put the two of those together, and then that's how you get to the midpoint of our core revenues guidance range of 4.0%-4.5%.
Great. That's helpful. Just on the CapEx versus expense or capitalizing versus expense, what drove the change there? Any view on the length of life of what you're spending on? What's the now just pure CapEx spend guidance per home on an annual basis?
Yeah. I'll start by saying there's no real fundamental change in what it is that we're spending. As you know, there's a pretty gray line for accounting purposes between what gets expensed and capitalized. At the outset of the year, it's pretty difficult to predict for accounting purposes where those dollars will fall, which is why we focus on both for projection and quite frankly, management purposes, the total dollars going out the door on a combined basis being R&M turn and CapEx. That's how we guide as well, both in terms of that expenditure line and then more importantly, our NOI after CapEx growth line. What we're seeing so far this year is a slightly higher proportion of those dollars being expensed versus capitalized compared to last year for accounting purposes.
You see that reflected in part in our core property operating expense growth. As I mentioned in my prepared comments, the offset to that in part will be slightly lesser CapEx growth, all coming out in the wash to the same midpoint of our NOI after CapEx growth range of 3.5% that we actually tightened the bookends around by 25 basis points.
Okay, just one last quick one for me. I saw some of the Sun Belt markets saw a dip in occupancy year-over-year, like Charleston, Greenville, Raleigh, Charlotte. Any trends there or rationale that you guys are seeing? Is it people leaving to buy homes? Anything you could provide in terms of color?
No, I think that all those markets are reasonably strong. I would expect to pick up that occupancy over the next three to six months, pick it back up.
Thank you.
Thanks, Juan.
Thank you. Our next question comes from the line of Buck Horne. Please proceed with your question.
Thanks. Just coming back to the expensed and capitalized cost per home. Is $2,050-$2,150 the right run rate to think about going forward, or is there a reason why next year it would go back down to the initial projection?
Well, we did have higher than what I would consider normal turn costs in the first quarter. Probably have a pretty good comparison in the first quarter of next year and maybe into the second quarter next year. We'll have normal inflation. I don't know if you saw the print on unemployment. It was 3.9%. We're seeing that some of our wages are going up and some of our vendors are going up. You'll see some normal inflation of 3%-5%, and that'll be offset somewhat by some efficiencies and the higher costs in the first quarter than we typically would have.
Thanks. Just on developments, are you seeing any difference between the AMH-developed homes and the National Builder Program homes in terms of demand or yields? What's the overall yield for those delivered homes?
Yeah. The yields for the delivered homes will vary depending on a couple of items. How good a deal we got on the land. We're seeing probably 20% better yields. Depending on market, that could be anywhere from 6% to 6.5% to as high as 7% on those yields. On the purchase from the developers, it's closer to the yields that we get on our traditional purchases. The demand is really strong on both, I think it has something to do with the newer homes and something to do with the markets that we're building and acquiring in.
Thanks.
Thank you. Our next question comes from the line of Jason Green with Evercore ISI. Please proceed with your question.
Good morning. I just wanted to circle back on, slowdown might be the wrong word, the renting in June and kind of how the increases in June compared to April and May year-over-year.
Do you have the June advice sheet?
June advice sheet. No, but it is roughly similar to this June.
Yeah. I believe the blended rate was slightly better this year than last year. The re-leasing rate was, I think, slightly lower, but pretty comparable June to June relative to June is a tough month because it's really when you have a big chunk of your turns, June and July. If you misprice June and you end up with a lot of inventory going into July, you're kind of stuck. We may have cut it a little too low, but I'd rather be a little safe and keep the occupancy high.
Yeah. I guess what I'm getting at, and I think you kind of answered it there, is it seemed like April and May were stronger year-over-year and indicated some real strength in that renting market. It seems like in June, you guys brought it down just to make sure there was occupancy, but potentially you could have raised it and filled some of those homes. Is that right?
Yeah, I think that's right.
Year-over-year, they're comparable.
Yeah. Year-over-year, it's comparable. We do the same thing every year because your really first big chunk of move-outs for June really come at the beginning of June, you're turning them as fast you can, you want to rent them as fast as you can to keep your occupancy there. The last two years, I think we've had a decline in occupancy May to June. I didn't want to end up in the same place. This year, we had positive absorption on a same home basis, not by a lot, by about 27 homes. With how well we're occupied, that's pretty good.
Yeah. The trend lines year-over-year are very comparable. The rental rate trajectory in each month is about the same. We're just seeing in each month in 2018, a positive spread to 2017. The same occurrence occurred last year with a slight moderation in June.
Got it. Just with some of the stabilization of home prices nationwide, have you seen more willing sellers in the marketplace or more willing kind of portfolio owners willing to get rid of their portfolio at this point?
Not really. I think most portfolio owners are seeing similar things that we're seeing, really strong demand and pretty strong cash flow, as well as price appreciation. They don't know where to put the money that they can get the same return.
Got it. Thank you.
Thanks, Jason.
Thank you. Our next question comes from line of Jade Rahmani with KBW. Please proceed with your question.
Thanks very much. Are you seeing any new entrants in the single-family rental space? In addition, are you seeing any competition from some new types of platforms such as Zillow, which I think is operating in Atlanta, for example? Just want to hear about the competitive environment.
Yeah. As far as Zillow goes, they're, I think, basically flipping houses. They're taking away supply and putting out supply, and they're not that big yet. I didn't know they were in Atlanta. I thought they were in Phoenix. I hear they're coming to Vegas, and maybe they did get started in Atlanta. As far as other competitors, I don't think we're seeing new ones, but we're seeing expanded platforms of older competitors. I saw Tricon did a joint venture, and they expect to acquire about $2 billion worth of houses, and we just see the same people kind of keep acquiring.
Are you guys interested in exploring any additional avenues of growth, such as joint ventures or potentially expanding into new demographics such as seniors housing?
We did a small test on the senior housing thing in 2012, I think, it didn't rent very well. I'm a little hesitant to make another foray into that. We constantly look at different avenues of capital raising. I think that's more Dave's and Chris's
I mean, both of your questions, we discussed those items. We've looked at the items, if it's appropriate, we will launch into that and make an announcement at the time. Yeah, there's a number of things that are continually being evaluated, not only markets, but capital-raising avenues. We are seeing a little bit of a change in the private equity demand recently, so we're aware of that.
Just lastly, could you give the CapEx portion of the R&M turn and CapEx guidance?
Well, we don't break it out that granularly. If you wanted something for modeling purposes, if you took the rough split of what we're seeing year to date this year, on a six-month basis, I think about 67%-68% of that spend is being expensed and the balance being capitalized. You can get that math from page 12 of the supplemental and apply that percentage to our guidance. That would be my best advice at this point. Like I said at the start, it's very difficult to predict that, which is why we guide it on a combined basis and then NOI after CapEx.
Thanks for taking the question.
Thanks, Jade.
Thank you. Our next question comes from the line of Haendel St. Juste with Mizuho Securities. Please proceed with your question.
Hey, good morning.
Good morning.
It looks like the yields on your recently completed single-family home developments have been pretty good, pretty consistent, and not showing any impact of the construction cost inflation we've been hearing of. I'm curious about the current underwriting of homes, though, in the current pipeline. How do the yields there compare? Are rising costs perhaps having an impact on your underwriting of those yields? Then perhaps some thoughts on how much of a rise in construction costs, maybe degradation in yield, could maybe cause a rethink or pullback in single-family rental activity, development activity.
There has been some inflation in the costs. It seems to be moderating more recently. While the costs are going up, so are the rents. The yields are hanging in pretty close to where we were underwriting them and still are. We're still finding good deals that pencil out and acquiring lots that we intend to build on. The development activity is not like buying houses one-off. It's more a 2-3 year plan versus we can accelerate the traditional activity much quicker and cut it back much quicker.
Appreciate the thoughts there. The other question I had was on your dispositions comments, looking at $350 million-$450 million over the next 2-3 years. How much of that is pruning the portfolio versus perhaps exiting certain markets? Should we assume that capital gets redeployed into acquisitions and development? Any color on yield spreads and potential, maybe even portfolio buyers? Could we see you maybe accelerate the dispositions? Should there be any portfolio interest? Then maybe some comments on if there is any current, if you see any current portfolio buyer interest in the market today.
Let me take the first part. If you in page 21 of the supplement, you will see the number of properties held for sale in each of our markets. It's pretty easy. It's sorted by largest to smallest. Look at the top, those are markets that we're exiting, then the balance is the one-offs for a variety of reasons that we may be looking at. With respect to disposition channels, Jack, if you want to tell them what you're seeing at this point. I mean, our basic philosophy on dispositions is to try to dispose, in bulk, occupied homes, and then once they become unoccupied, then to sell them to the retail buyers. We've been relatively successful doing that. It's primarily to smaller bulk buyers, 50, 60, 80 homes. We definitely have interest in most of our markets that we're exiting from buyers.
These deals take time to percolate, we're still working on them.
Haendel, this is Chris. If I can just add one thing about the market exits. You'll see Chicago towards the top of the list. That's not a market exit. That is pruning of specific assets out of that market. The five or so markets that are actual exits, just for reference, are Oklahoma City, Corpus Christi, Augusta, Central Valley, and Columbia, South Carolina.
Thank you for that. Then last one, I'm sorry if I might have missed it, what was the blended rate growth for July last year? I'm curious where the 4.3% blended for this July compares to last year. Thank you.
July of last year was a 4.2, which compares to our 4.3 of this year.
Okay. Thank you.
Sure.
Thank you. Our next question comes from the line of Richard Hill with Morgan Stanley. Please proceed with your question.
This is Ronald Kamdem for Richard. If I could just go back to the same-store expense guidance. Just a little bit of clarity and color here. When I look at that 100 basis points rise, obviously, I appreciate that items are being expensed versus capitalized, but maybe can you help us understand how much of the rise is driven by the change in expense and capitalized versus how much is an actual increase in cost and dollars going out the door?
It's difficult to give you the exact number.
Just the high level.
Yeah. Probably close to fairly equal weighting. There are other components to the expense guidance revision, let me just walk you through those, because there are puts and takes all the way down, which is why I can't give you just an easy split between the two of those off the top of my head. As I mentioned, the revised range on property tax growth is 2.75%-3.75%.
Right.
R&M turn CapEx is 2.05%-2.15%, with a larger proportion being expensed. Property management is 3%-4%. Then on insurance and HOAs, if you look at the two of those combined, HOAs are running They're small line items in the grand scheme of things. HOAs are running a little bit higher. If you blend the two of those, it's like a 5%-6% for the two of those combined, and that all washes out into our 5%-6% on core OpEx. There are more pieces to it, I guess is my point, in getting to that 5% to 6% range.
Got it. That's helpful. Then back to the same-store revenues. Are there any markets or any regions to call out that maybe have an outsized impact on driving the upside here or is it sort of strength across the board?
It's pretty much strength across the board.
Got it. My last one would just be on the acquisitions. Obviously coming in near the high end of the guidance range. Just trying to get a sense, is this sort of a run rate that feels right, feels sustainable, something we can think about going forward? Or is this sort of based on the demand that you're seeing, maybe for some of the build-to-rent products?
Yeah, I think it's a pretty good run rate. It could be higher, it could be slightly lower. We retain $250 million or so of cash this year, probably more than that next year. When you put a little bit of leverage on that and some of the disposition program, you're there without having to raise equity. That's kind of what we're looking at.
Great. That's it for me. Thanks so much.
Thanks, Ronald.
Thank you. Our next question comes from the line of John Pawlowski with Green Street Advisors. Please proceed with your question.
Thanks. Chris, are you having any active conversations with Fannie or Freddie on doing a GSE-backed securitization?
No, we're not. We're aware of their existence and kind of some of the commentary out there about their interest in the space. We're not having any active discussions currently. It's great to know that that market is potentially growing. Great for the sector as a whole. For us in particular, at least in terms of debt financing, as I'm sure you're aware, we successfully completed our debut unsecured bond deal at the beginning of this year and see unsecured debt financing as really kind of the optimal debt vehicle for us for the foreseeable future, just given the efficiency of it, and probably most importantly, the flexibility of the structure for us, given how granular our assets are and the ability to freely asset manage them and move them around the portfolio as we need.
For term debt, economics are more favorable to us on the unsecured when you take into account not only the current coupon rate but also the origination cost of a secured financing and BPOs and other costs. When you amortize that through, it's more efficient for us to be unsecured today.
Okay. Makes sense. Turning to some of the re-leasing spreads on page 15 within the same-store pool, there's some high single-digit growth rates and 11% on the page. Outside of the demand and supply backdrop in any of these very hot markets, was there a conscious decision heading into this year, within the revenue management system, to push harder on rate? Is it fair to say that some of these homes were under-rented in previous years?
What page was it?
It's on page 15. It's at the top. I think there's a couple of things going on. The market is very strong today for residential rentals. We went into the second quarter. The benefits of what our first quarter
Created was a very strong occupancy, a little bit of limitation on supply, that enabled us to push rents in many of these markets in the second quarter.
Market rent growth in Phoenix right now is 11%?
I would say that it's probably not 11%, but it's high singles. Our philosophy is not to push as hard on renewals. As our re-leasing rate will probably be higher than our renewal rates on average other than in the fourth quarter. It's also a good time of the year for us to push re-leasing rates because the demand's so high and the number of phone calls and people moving. We're not going to get [11.1%] for 12 months. We got it for the second quarter, which is one of our peak-
Yeah
peak quarters for pushing rate on re-leasing.
Keep in mind, John, the seasonality of the business still comes into play. Strong markets are strong markets, but they're going to be stronger in the second quarter than the fourth quarter. This is not projected to be averages for the year. This is the demand in the second quarter.
Got it. Thank you.
Thanks, John.
Thank you. Our next question comes from the line of Douglas Harter with Credit Suisse. Please proceed with your question.
Thanks. Chris, did I hear you during your prepared remarks saying that move-out rates had declined in the quarter?
I didn't say that in my prepared remarks, but you are correct.
Okay.
Yeah. If you look at our turnover rate on a same-store basis that you can get on page 12 of the supplemental, you'll see that our turnover rate is down 90 basis points for this quarter compared to last year.
I guess, what is your belief as what were the causes of that? Do you think you can kind of push average duration of stay longer?
Yeah. Well, I think that there's a few things that contribute. One, I mentioned that it's the maturation of our portfolio. If you look at people who move out in the first couple of years, it's a much higher percentage than if they've stayed three or four years, the move-out percentage is much lower. As the portfolio matures, I think we'll see an average longer stay. Because if 5% stay 20 years, that 5% keeps building on itself. That's part of it. Part of it is we've had now our in-house maintenance group in place for two to three years, we're seeing the customer service surveys coming back very strong on that, I think that contributes to it.
Then we've implemented a renewal group of specialists that if somebody gives us notice that they're moving, we react right away and talk to them and try to figure out if we can save them. I think the combination of those three things really add.
Great. Thank you.
Thanks, Doug.
Thank you. Our next question comes from the line of Dennis McGill with Zelman & Associates. Please proceed with your question.
Hello. Thanks for taking my question. I guess first one just has to do with the build-to-rent program. One of the things that's been challenging for builders, despite strong demand, is just getting communities open and getting product out there to the market. I'm wondering if you guys are experiencing any of that. As you look at what you're trying to deploy into the market this year, maybe next year being below what you thought initially, does that play into that at all? Would you do more if you could do more?
I think we're experiencing delays. First, we're fairly new to this business, we see delays as a result of inexperience. We've got some experienced guys doing it, but our senior guys aren't, including myself, aren't as versed at pushing them as we could be. We see some delays there, we're seeing delays with municipalities and permits and that type of thing similar to what I think the home builders see.
I think in the big picture, Dennis, the demand for our product that when we deliver it, we have no constraints on what the demand for our product is. A little bit of it is just growing each market, getting the vendors in place. That does take some time as you go into some of the new markets. Some markets, we've been a little bit more efficient than others, but there's been a couple of delays there. The typical construction delays that you see in any industry. It doesn't matter whether it's residential or commercial. You will have permitting differences, jurisdiction to jurisdiction. Many of our, and probably most of our programs to date have been relatively on track. I know one that was a little bit delayed by permitting issues.
With the ramping up of the program, we're very comfortable and happy with where we are. We would like to be further along. Always.
Okay. Just to clarify, on the disposition side, I didn't catch these numbers exactly, but did you say that the proceeds of what you have in the held for sale bucket today would be $350 million-$400 million, and that would be over a two to three-year period?
Yeah, I think it was $350 million-$450 million, but no, that's correct. We estimate most of it'll be done in two to three years. We look at what we did with the ARPI homes that we identified, which was about 14 or 1,500, and it's now been two and a half years, and we still have a handful of those left. We kind of expect the same kind of pace. One of the things that we sell as a rental company to our potential tenants is, you can rent from mom and pop, and they can wake up one day and say, "Oh, we need the proceeds from that house for our retirement," and they sell the house out from under you. We're a rental company, and so we tell them, we're not going to do that.
We wait till it naturally vacates to put it in retail. Otherwise, we'll sell it to another investor if that's possible.
Okay. The timeline really just has to do with that, getting the homes vacated, essentially.
Right. It's sold in bulk.
Right. Once they are vacated, what's your typical turn time of getting them sold?
It depends on time of year. In spring, summer, it's probably three months. If you're listing it in October, November, it could be six months.
Okay. Just one last one. That $350 to $450 of proceeds, that's a direct comparison to the $285 million of cost basis?
Did you get the $285 off the balance sheet?
Yeah.
The $285 on the balance sheet is, as you're probably aware, there are 2 categories of our disposition property. There's held for sale and then identified for future sale. It's kind of an accounting terminology on the held for sale that gets classified on the balance sheet. That is what you see in the $285. There is incremental cost basis on the identified for future sale that's not in held for sale yet. I would expect it to move into held for sale in the third quarter.
Yeah.
How much is that cost basis?
Yeah, Dennis, if you look at page 21, you'll see the majority of the homes, 1,800 are held for sale. 300 to 400 are identified for future sale.
Dennis, I don't know the exact number off the top of my head, but if you use a per property average from the held for sale bucket and applied it to the identified for future sale, it'd be pretty close.
Yep.
Okay. Got it. Thank you, guys.
Sure.
Thank you. Our next question comes from the line of Ryan Gilbert with BTIG. Please proceed with your question.
Hi. Thanks, guys. We've seen a increase in homes available for sale in the resale market over the past couple of months, and I'm wondering if that's impacted your ability to raise rents or accelerate rent growth in June and July.
I don't believe it's affected it at all.
Okay.
Actually, probably the opposite. We've seen a lowering of, not dramatically, but a lowering of the percentage of people who move out, moving out to buy properties. I think maybe rates increasing. I don't know what's causing it, rates and price, probably affect affordability, but I think wages are also going up, so I'm not sure how it all blends together.
Okay. Limited competition from available for sale. You've got 120 basis point improvement in occupancy at the end of the period. Your turnover is down 90 basis points. I guess, is the strategy on rent growth over the rest of the year, you're going to moderate rent growth to keep occupancy up to make room for the significant acquisition volume that's hitting in the second half? How should I think about blended rent growth over the second half of 2018?
Well, we'll moderate rent growth on re-leasing, just because the level of demand, you want to make sure you're at least leasing up what turns. But it'll be more aggressive than it was last year, because last year we had a lot more inventory.
You think that the blended rent spread in 3Q and 4Q 2018 will be positive relative to the third and fourth quarter of last year?
Yes.
Great. Thank you very much.
Thank you. This concludes our Q&A session. With that, our conference today. Thank you for your participation. You may now disconnect your lines.