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Edited Transcript of AMH earnings conference call or presentation 2-Nov-18 3:00pm GMT

Q3 2018 American Homes 4 Rent Earnings Call

AGOURA HILLS Nov 15, 2018 (Thomson StreetEvents) -- Edited Transcript of American Homes 4 Rent earnings conference call or presentation Friday, November 2, 2018 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher C. Lau

American Homes 4 Rent - CFO

* David P. Singelyn

American Homes 4 Rent - CEO & Trustee

* John E. Corrigan

American Homes 4 Rent - COO, CIO & Trustee

* Stephanie G. Heim

American Homes 4 Rent - Executive VP of Counsel & Assistant Secretary

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Conference Call Participants

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* Dennis Patrick McGill

Zelman & Associates LLC - Director of Research and Principal

* Douglas Michael Harter

Crédit Suisse AG, Research Division - Director

* Haendel Emmanuel St. Juste

Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Equity Research Analyst

* Jason Daniel Green

Evercore ISI Institutional Equities, Research Division - Analyst

* John Joseph Pawlowski

Green Street Advisors, LLC, Research Division - Senior Associate

* Juan Carlos Sanabria

BofA Merrill Lynch, Research Division - VP

* Nicholas Gregory Joseph

Citigroup Inc, Research Division - VP and Senior Analyst

* Richard Hill

Morgan Stanley, Research Division - Head of U.S. REIT Equity and Commercial Real Estate Debt Research and Head of U.S. CMBS

* Ryan Christopher Gilbert

BTIG, LLC, Research Division - Analyst

* Ryan John Tomasello

Keefe, Bruyette, & Woods, Inc., Research Division - Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to the American Homes 4 Rent Third Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Stephanie Heim. Please go ahead.

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Stephanie G. Heim, American Homes 4 Rent - Executive VP of Counsel & Assistant Secretary [2]

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Good morning. Thank you for joining us for our third quarter 2018 earnings conference call. I'm here today with Dave Singelyn, 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, November 2, 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.americanhomes4rent.com.

With that, I will turn the call over to our CEO, David Singelyn.

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David P. Singelyn, American Homes 4 Rent - CEO & Trustee [3]

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Thank you, Stephanie. Good morning, and welcome to our third quarter 2018 earnings conference call. Today, I'll begin with an overview of our business and strategy from a high level and then turn the call over to Jack and Chris to cover the details of the quarter.

The long-term fundamentals of the single-family rental industry remained strong supporting long-term operating and asset growth. The demand and supply fundamentals supporting top line growth are healthier than virtually every other real estate sector, and undersupply of housing stock and relationship to household formations and the growing desire among residents that have an institutional owner further supports demand for our homes.

On a more specific perspective, economic fundamentals of our markets continue to outperform versus the country averages. Across our portfolio, population growth and household formation are nearly double the national average.

Employment growth over the last 12 months averaged 2.4% compared to 1.6% for the U.S. as a whole. And in major markets like Orlando, Dallas, Houston, Phoenix, Las Vegas and Raleigh, employment growth exceeds 3%.

On top of this, rising home prices combined with higher interest rates and changes to the tax code are pressuring home affordability. This change in home affordability will further strengthen the already strong demand for rental homes. With more young adults reaching family milestones, they need for space increases, and single-family rental homes offer them that space and the neighborhood attributes and flexibility they value.

On a more micro basis, another indicator of strong rental home demand is our increasing inquiries from prospective residents. Website traffic per available home was up 35% year-over-year, and mobile traffic per available home was up nearly 50%.

Clearly, the fundamental thesis for our business remains intact. We believe that strong tailwinds will continue to support our growth for the foreseeable future.

Now turning to portfolio growth. It remains a key pillar of our strategy. As we have previously discussed, our acquisition channels consist of traditional MLS purchases supplemented with our built-for-rental program. The development of new purpose built homes provides superior quality homes that can be rented at higher stabilized yields in most instances.

So far, our strategic portfolio growth has been compelling. And in the third quarter, we entered into $150 million development joint venture with a high-quality institutional investor. Although our financial commitment is small at approximately $30 million, we believe the participation of an experienced institutional real estate investor demonstrates confidence in our program, our execution and the opportunity it provides.

In addition, the venture allows us to scale the business more quickly in the early years and to provide leverage our -- and to leverage our capital more efficiently through the generation of fees and the potential for promote as well.

We have ceded the venture with a handful of projects. The venture will focus on development opportunities in select markets in the Southeast. To fund future growth, we continue to utilize multiple capital options supported by the strongest balance sheet in the sector. Chris will review this in a few minutes.

In addition, we continue our portfolio of recycling activity and expect to sell $350 million to $450 million of noncore assets over the next 2 to 3 years, providing additional capital for our growth strategies.

In closing, sector fundamentals remain robust, producing steady demand for our homes across our national portfolio. As always, the market presents new challenges, and our teams continue to find solutions that keep our residents happy while continuing to enhance time and cost efficiencies.

Now, before I turn the call to Jack, a quick comment on operations. Once again, we experienced turmoil and damage caused by 2 large hurricanes in the Southeast. Our team's coordinated preparation, residents' safety and recovery for hundreds of our homes. The damage to our homes and the time these homes were offline for leasing purposes was kept to a minimum. Jack and Chris will provide more details on the operational and financial impact, but I would like to sincerely thank all our operations' team members for their efforts during and after these storms.

I will now turn the call over to Jack.

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John E. Corrigan, American Homes 4 Rent - COO, CIO & Trustee [4]

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Thank you, Dave, and good morning, everyone.

During the quarter, as Dave mentioned, we continue to see strong demand for our homes across most of our markets, which drove strong year-over-year improvements and occupancy for the quarter. On a total portfolio basis, we achieved a 94.3% average occupied days percentage and ended the quarter at 95.2% leased.

For our same-home portfolio, reflecting the results for 38,168 homes or about 76% of our total portfolio, excluding homes to be disposed, we achieved a 95.2% average occupied days percentage of 110 basis points from the third quarter of 2017. At September 30, our same-home portfolio was 96.2% leased compared to 95.2% 12 months earlier. On a same-home basis, our average monthly realized rent was up 3.4%, and we continue to capture meaningful positive leasing spreads, with rents up 4.1% on renewals and 4.2% on releases.

Year-over-year improvements in occupancy continue to be strong for the quarter. However, as we've mentioned previously, our September leasing activity was modestly impacted by Hurricane Florence as we took all available inventory in the Carolinas offline for approximately 7 days to prepare for the storm and then inspect homes after landfall.

As an update, we are happy to report that post-Florence leasing and absorption in the Carolinas has been strong and that ending October occupancy for all of the Carolinas has returned to approximately 95%.

Aside from Florence, towards the end of the quarter, in September, we started to experience leasing delays in certain markets as the downstream result from temporary operational issues created by recent field personnel turnover that I'll discuss further in a couple of minutes.

Although the fundamental demand for single-family rentals remains unchanged and as our tenant retention continues to trend positively, our temporary operational issues are creating a deterioration in occupancy in a handful of otherwise strong markets, resulting in an October same-home average occupied days percentage of 94.6%, which is 80 points -- 80 basis points higher than October of prior year but lower than originally forecast.

Given fourth quarter inventory to be absorbed, we have moderated rental rate growth to simulate leasing activity during this slow time of the year. Preliminary blended October spreads are approximately 3.5%, generally in; line with prior year.

Collectively, these factors are impacting our expectations for fourth quarter occupancy and rate growth. As such, we are now targeting same-home core revenues growth in the range of 3.75% to 4.45%. Chris will provide more details on our updated outlook later on in the call.

Moving on to operating expenses for our same-home portfolio. Consistent with our mid-quarter update, we expect repairs, maintenance, turn costs and CapEx to come in at the high end of our range. And in turn, we now expect core property operating expenses growth near the top end of the range.

Several factors contributed to this update. First, we experienced about $300,000 of minor repair costs in the third quarter related to Hurricane Florence. And in the fourth quarter, we expect to incur a similar level of damage due to Hurricane Michael.

Second, high temperatures in the summer months for an extended period of time in several markets resulted in elevated levels of HVAC repair and replacement costs. While the number of HVAC requests was higher than in prior years, the cost of maintenance calls was mitigated by our HVAC certified trained specialists.

Third, the personnel turnover I previously mentioned resulting from a poaching of some of our experienced field team members by competitors looking to acquire institutional and operational knowledge has created inefficiencies in our ability to execute on our maintenance operations in certain markets.

Given our best-in-class team, this elevated level of personnel turnover is expected to continue to confront us in the short term.

Turning to acquisitions. During the third quarter, we added 569 homes for a total investment of approximately $150 million, with our primary focus on the Southeast, including Atlanta, Charlotte and Jacksonville and the Texas and Western markets, including Denver, Phoenix and Seattle. This includes delivery of 168 newly constructed homes in 12 markets for a total investment of $45 million. 22 of these homes were from AMH Development and 146 were from our National Builder Program.

We are broadening the geographic scope of our wholly-owned development activity through opening new Western markets within our existing footprint.

Year-to-date, we have added a total of 1,538 homes for approximately $400 million, and we continue to see attractive investment opportunities across all channels. We remain on track to achieve our full year target for aggregate, capital deployment of approximately $600 million.

Moving on to dispositions. During the third quarter, we sold 95 properties for approximately $17 million of net proceeds. Our marketing efforts are going well. In October, we closed a bulk sale of 107 homes in Columbia, South Carolina and currently have interest in other potential bulk sales. One-off sales continue as homes vacate. We expect to generate $350 million to $450 million in disposition proceeds over the next 2 to 3 years.

In summary, we had a solid third quarter. And even as we worked through several short-term operational and storm-related challenges, we have a great portfolio and a great team and remain confident in the long-term prospects of the single-family rental home business.

Now I will turn the call over to Chris.

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Christopher C. Lau, American Homes 4 Rent - CFO [5]

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Thanks, Jack. Starting off, I'll begin with a brief summary of our operating results. For the third quarter of 2018, we generated net income attributable to common shareholders of $15.2 million or $0.05 per diluted share. This compares to net income of $1.5 million or 0 cents per diluted share for the third quarter of 2017.

Also, for the third quarter of 2018, core FFO was $94.6 million or $0.27 per FFO share and unit as compared to $79.4 million or $0.25 per FFO share and unit for the same quarter last year. The growth in core FFO is primarily attributable to our continued accretive acquisition and development activity over the last 12 months, along with continued cash flow growth in our same-home portfolio.

Adjusted FFO was $79.4 million in the third quarter of 2018 as compared to $67.1 million for the third quarter of 2017. On a per share basis, adjusted FFO was $0.23 per FFO share and unit for the third quarter of 2018, up 9.5% from $0.21 per FFO share and unit for the third quarter of 2017.

Next, I'll provide you with a bit more color on the financial impact of the recent Southeast hurricanes. In general, the strength of Hurricane Florence in the Carolinas was much less severe than originally forecasted, and our physical losses were limited to fewer than 5 major damaged homes and approximately 500 homes with minor damages. The estimated total cost to remediate minor damages is approximately $500,000 and considering the relatively minor nature have been included in this quarter's results. In particular, approximately $300,000 of these remediation costs remain in our third quarter same-home operations, representing approximately $8 of this quarter's repairs and maintenance expenses per property.

Also, subsequent to quarter end, in October, Hurricane Michael made landfall in the Florida Panhandle but fortunately missed the majority of our major Southeast markets. We did, however, experience minor exterior damages to approximately 500 homes in Atlanta and the Carolinas, and expect to incur about $500,000 of remediation costs in the fourth quarter, $300,000 of which we expect to be included in same-home operations.

Continuing on with our same-home portfolio operations for the third quarter, same-home core NOI after capital expenditures was $100.1 million in the third quarter of 2018, which compares to $96.8 million for the same quarter in 2017, an increase of 3.4%. Our growth in same-home core NOI after capital expenditures was driven by a 4.4% increase in core revenues, offset by a 5.4% increase in core property operating expenses and an 8.3% increase in recurring capital expenditures.

Next, turning to our balance sheet and recent capital markets activity. As previously announced, in September, we issued 4.6 million shares of 6.25% Series H perpetual preferred stock, raising gross proceeds of $115 million, which we used to fund the repayment of our exchangeable senior notes in cash, which come due in November 2018. This recent preferred transaction was a great execution for us and a well-sized piece of leverage capital to fund our upcoming maturity needs.

Going forward, I'll remind you that we remain committed to optimizing our capital structure and maximizing our flexibility for an unsecured financing strategy, including the use of unsecured bonds.

And speaking of the strength of our balance sheet, our debt metrics remain very strong. At the end of the third quarter, for the trailing 12 months, net debt to adjusted EBITDA was 4.7x and debt plus preferred shares to adjusted EBITDA was 6.7x. We have approximately $2.7 billion of total debt, with a weighted average interest rate of 4.2% and a weighted average term to maturity of 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 ongoing disposition program, we are well positioned to fund our growth objectives.

Finally, I would like to provide you with some additional color on how our operational updates, that Jack discussed previously, had translated into guidance revisions that are detailed on Page 22 of the supplemental.

When we updated you in our September investor presentation, our expectation was that full year same-home average occupied days and core revenues growth were likely trending below the midpoint of our guidance range as a result of modest hurricane disruption to our third quarter leasing activity. Now in light of the expected fourth quarter leasing slowdown in certain markets as a result of recent personnel turnover, we have lowered the midpoints of our average occupied days in core revenues growth guidance to the bottom end of our previously communicated ranges.

Specifically, our full year average occupied days percentage range has been revised to 94.75% to 95.25%, and core revenues growth has been revised to 3.75% to 4.25%.

Moving onto expenses. Including remediation costs for both Hurricane Florence and Michael, we now expect full year R&M turnover and CapEx costs per property to be at the upper end of our previously communicated range of $2,050 to $2,150. In turn, we now also expect full year core property operating expense growth to be at the upper end of our previously communicated range of 5% to 6%.

Finally, tying together our revised range for core revenue growth and affirmed upper end of core property operating expenses, we have revised our Core NOI after Capital Expenditures growth range to 2.5% to 3.0%.

And before we open the call to your questions, I would like to share with you a quick reminder surrounding our continued bullishness on both our business and the single-family rental space as a whole.

As Dave shared with you in his remarks, demand for single-family rentals have never been stronger, and we have every reason to believe that rising home ownership costs, coupled with the shifting consumer preferences towards rentership will continue to support, if not even further strengthen the demand fundamentals of our asset class. Additionally, as we think about our longer-term operational trajectory in the years ahead, we still see tremendous opportunities to optimize nearly all facets of how we operate our business, and we remind you that we've come a long way in a short amount of time, but we still have a long runway to continue optimizing our operations ahead.

And with that, we'll now open the call to your questions. Operator?

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Questions and Answers

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Operator [1]

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

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - VP and Senior Analyst [2]

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You mentioned the impact of higher mortgage rates on affordability and the benefits for demand for single-family rentals. How do you think about the impact on the HPA going forward?

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John E. Corrigan, American Homes 4 Rent - COO, CIO & Trustee [3]

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I think HPA, for a short period of time, is probably going to be more flat than we've seen it in the past, but typically rising interest rates also lead to inflation. And I think over time, HPA will get back on track. But if it does have an impact on demand for new homes, it will probably slow it down for a short period of time.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - VP and Senior Analyst [4]

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And then just in terms of capital deployment, given the stock's recent underperformance and attractive valuation versus the acquisition cap rates, what's your uptake for additional share repurchases?

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John E. Corrigan, American Homes 4 Rent - COO, CIO & Trustee [5]

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We have a repurchase program in place, so we have used it from time to time opportunistically, and we will evaluate it based on where share prices are at any given time. And yes, we are aware that they are down a little bit lower and are aware that the program's in place. So it is one of the tools that we've used in the past, and I'm not going to -- I'm not saying that we are using it or not going to use it, but it is a tool that we do use from time to time.

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Operator [6]

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Our next question comes from the line of Juan Sanabria with Bank of America Merrill Lynch.

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Juan Carlos Sanabria, BofA Merrill Lynch, Research Division - VP [7]

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I was just hoping you could comment a little bit on a go forward cost trends. Seems like wage pressure's finally picking up here. Obviously, a tough job market to keep people and you've had some turnover issues and at our view, hotter weather's probably the new norm, so we may have seen more storms and/or more HVAC costs. So how do you think about it as we start to look towards 2019 cost growth across the major buckets?

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John E. Corrigan, American Homes 4 Rent - COO, CIO & Trustee [8]

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I can't opine on the weather. This is Jack -- but -- because that's not my expertise. But I think this year was the second hottest summer ever in Texas. So -- and we have -- we have a lot of properties there, so it did affect us. But as far as costs in general, I think that we definitely see wage pressure. We are constantly evaluating our compensation structure and what would be best to retain people. I think we're also in a business where new competition for people has come in, through not only people growing in this business but Zillow's got a platform now, that they're rehabbing homes and selling them as does Redfin, and a number of others that aren't quite in the rental home business but are competing for some of our people. So we probably have more competition than others.

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Juan Carlos Sanabria, BofA Merrill Lynch, Research Division - VP [9]

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Okay. And then just on the transaction side, some of your private peers are looking to potentially monetize some portfolios. What's your appetite there? And conversely, given HPA may slow down, any intention to maybe speed up the dispositions that you've talked about over the next 12 to 24 months?

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John E. Corrigan, American Homes 4 Rent - COO, CIO & Trustee [10]

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Well, we're -- we're continuing along our program. We haven't really seen a slowdown in the one-off dispositions. We market homes for basically retail sale once they become vacant and we market for bulk sale when they're occupied and we really haven't seen a slowdown in demand yet and I'm not sure whether cutting prices right away, just because there might be a slowdown in HPA, is the right thing, but we're -- I think we'll just probably continue along our current strategy.

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David P. Singelyn, American Homes 4 Rent - CEO & Trustee [11]

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Juan, this is Dave. As Jack indicated in his prepared remarks, bulk sales are a little bit lumpy. Didn't have any in the third quarter, but we've already closed one in the fourth quarter, have a number of them in the pipeline right now in the bulk sale process that are going through due diligence. And to this point, we haven't seen any change in prices on the downside of our inventory. So we're still in the process of moving the inventory that we had talked about through the pipeline.

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Juan Carlos Sanabria, BofA Merrill Lynch, Research Division - VP [12]

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And the appetite for you guys to buy portfolios at this point?

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John E. Corrigan, American Homes 4 Rent - COO, CIO & Trustee [13]

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At the right price. We're always evaluating portfolio deals from relatively small to large, but at the right price, we're willing buyers.

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Operator [14]

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

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Ryan Christopher Gilbert, BTIG, LLC, Research Division - Analyst [15]

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Appreciate the commentary around affordability strengthening, or I guess potentially strengthening demand for single-family rental product, and I would say that on the for sale side over the past couple of months, we have seen a real slowdown in demand for both new and resell homes. And it seems like to the extent that it's being driven by affordability, there would be a lift in demand for your product. But looking at the September and October rent numbers, it seems like under -- appreciating that they're impacted somewhat by the hurricanes, but it seems like there was relatively normal seasonality. So stripping out the impact of the hurricanes, how was demand in September and October relative to expectations? Was it -- did it follow typical seasonal patterns? Or did you see any improvement or deterioration as the quarter progressed?

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John E. Corrigan, American Homes 4 Rent - COO, CIO & Trustee [16]

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Definitely, we saw a deterioration in September. October has picked right back up. It's -- and it follows seasonal patterns, but there was kind of exaggerated seasonal patterns for September. So as an example, I think we leased 1,800 or so homes in August and only 1,300 in September and back up to 1,650 in October. And the fourth quarter's always our slowest quarter because -- especially November and December. So we're just -- we're very optimistic about the space. The number of phone calls are there, it's just when you take a big number of your homes offline and you reposition people for the storms, it slows down your turn times, which in effect makes homes not ready for rent -- or makes them ready for rent slower, and then it's just -- as the leasing season slows down, it's hard to absorb that impact in the fourth quarter. But I'm really confident that we'll absorb some of it in the fourth quarter and the rest in the first quarter.

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Ryan Christopher Gilbert, BTIG, LLC, Research Division - Analyst [17]

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Okay. Understood. And then has there been any change in demand over the past couple of months from third-party builders who are interested in selling you homes or participating in your National Builder Program?

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John E. Corrigan, American Homes 4 Rent - COO, CIO & Trustee [18]

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It seems like they're more willing to give us the discounts that we were asking for.

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Operator [19]

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The next question comes from the line of Jason Green with Evercore.

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Jason Daniel Green, Evercore ISI Institutional Equities, Research Division - Analyst [20]

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You guys mentioned previously the personnel turnover issues are short term in nature. And I was just curious in light of the tight labor market and the large amount of capital coming into the space, what gives you the confidence that this is a short-term problem and not a longer-term problem?

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John E. Corrigan, American Homes 4 Rent - COO, CIO & Trustee [21]

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Well, I think we're going to continue to face pressures. And short term to me is 1 year to 1.5 years. Long term is a systemic issue. I don't think it's a systemic issue. I think we've typically had really good retention of our key people, and I don't think we're going to have problems retaining people. I think this is a great place to work, and people like working here. It's just occasionally, we get outbid for people.

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Jason Daniel Green, Evercore ISI Institutional Equities, Research Division - Analyst [22]

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And I guess kind of moving forward, like, what changes if the institutional guys coming in say, we're willing for an extended period of time to pay more on the maintenance and then field personnel level. What changes for you guys? Are you going to hire a lot more people? Are you going to pay a lot more to employees kind of -- how should we think about that moving forward?

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John E. Corrigan, American Homes 4 Rent - COO, CIO & Trustee [23]

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I think we're going to have to evaluate our compensation structure in that area. But one of -- Indianapolis, I'll just give you an example. We had one of the team leaders leave, and then he went and recruited his whole team. And so we ended up with no turn people in Indianapolis for a period of about a month. We rehired. We actually think we have a better team now, and we've cut back up on occupancy. So it's not all bad. Sometimes change is good.

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Jason Daniel Green, Evercore ISI Institutional Equities, Research Division - Analyst [24]

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And then I guess just so -- last question for me, so I understand a little bit better. Who is it exactly that you're losing that's driving the occupancy down? Is it guys that were taking care of the leasing? Or is it the fact that you have less R&M and turnover people, and that's causing the average days vacant on the homes to jump up and have less occupancy during the quarter?

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John E. Corrigan, American Homes 4 Rent - COO, CIO & Trustee [25]

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It's principally the turn people at this point.

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Operator [26]

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The next question is from the line of Haendel St. Juste with Mizuho.

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Haendel Emmanuel St. Juste, Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Equity Research Analyst [27]

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A couple of questions. I guess first on the new Southeast home development JV. Curious what the valuation of the, I think you said $30 million worth of homes you're ceding to the JV. So I'm curious what type of value is your JV -- your new JV partner applying to those homes. And then anything else you could tell us about that JV? Is it exclusive perhaps to the region, targeted yields or IRR expectations, life of the JV?

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John E. Corrigan, American Homes 4 Rent - COO, CIO & Trustee [28]

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There was a lot of questions there, Haendel. The joint venture is $156 million. We're putting in 20%. They're putting in 80%. We ceded it with some homes in general at cost plus a construction fee. And we expect the life to be 5 to 7 years. I don't remember any of the other questions.

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David P. Singelyn, American Homes 4 Rent - CEO & Trustee [29]

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Yes, yes. Haendel, on the ceding, these are principally land that we are just starting the development process. And so there is -- they were transferred in at our cost plus all our carried cost and a fee as was indicated.

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John E. Corrigan, American Homes 4 Rent - COO, CIO & Trustee [30]

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But there were some completed homes but not substantial.

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Haendel Emmanuel St. Juste, Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Equity Research Analyst [31]

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Got it. Got it. Do you have any targeted return expectations or anything on that front you can share?

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David P. Singelyn, American Homes 4 Rent - CEO & Trustee [32]

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Yes. The JV is a typical JV with a promote on the back end. It's going to be a levered deal. But the thing I would also remind you is that it's very, very small, and it's really done just to get some institutional confidence or institutional input into the process.

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Haendel Emmanuel St. Juste, Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Equity Research Analyst [33]

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Okay. And then on the bulk portfolio or mini portfolio interest you were -- you indicated, curious what type of pricing you're seeing on that. And then any comment on maybe embedded gains or IRR from the homes you're looking to perhaps harvest?

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John E. Corrigan, American Homes 4 Rent - COO, CIO & Trustee [34]

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Are you talking what we're disposing of or what we're buying?

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Haendel Emmanuel St. Juste, Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Equity Research Analyst [35]

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Yes. What you're -- okay, yes.

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John E. Corrigan, American Homes 4 Rent - COO, CIO & Trustee [36]

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Well, it depends on the market. There's certain markets who've not had that much HPA or rent growth that we've had, and those of the ones we're targeting primarily for dispositions. So if there's some level of gain, but it's not -- I mean, if I sold Las Vegas, I'd have huge gains. Selling Columbia, South Carolina, I don't expect a huge gain.

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Haendel Emmanuel St. Juste, Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Equity Research Analyst [37]

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Okay. And then I guess overall, just thinking more bigger picture on sort of where we are in this industry's life cycle. Clearly, you, Dave, outlined a lot of the favorable demand, the backdrop for the space here. But with the expenses, I guess the operations continue to be somewhat of a challenge. I guess my question is do you get the sense that perhaps we're peaking here in terms of the margins for the business, for your platform, maybe in the 63%, 64% range? And then how we should be thinking about expense pressure in the next year? Should we -- are you thinking perhaps that next year, we could see less inflation, perhaps a positive inflection on the expense front?

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David P. Singelyn, American Homes 4 Rent - CEO & Trustee [38]

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I think the margin story is not going always be linear. I do believe that there is still a lot of potential in the demand side of this business that were disclosed in prepared remarks and as well as a couple of the other prior callers. And some of that will be seen over the next many months, and some of it's going to be in the longer term. But the revenue side of this equation is very, very strong. On the expense side, we're still -- we're 6 years into this. It's better than year 1, but we're still early, and there are some things that we are experiencing. But again, on the expenses, in the long term, we're confident that there is merchant potential in this business -- growing potential in this business, and there's also the ability to acquire assets today and in the future through our development program that are going to be accretive to the bottom line. And so we're still very bullish on the overall story.

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John E. Corrigan, American Homes 4 Rent - COO, CIO & Trustee [39]

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And I would add to that, Haendel, we're -- our resilient floor program will eventually kick in. We haven't had that many turns with where we've put that in, but we're putting in procedures, including building new houses that are maintenance resistant that should cause the -- ultimately, the expense line, forgetting about inflation, push it down and -- but inflation should also push our rents up. So I think we'll see some inflation of costs, but I think there's still some things that will mitigate the costs down, probably less than inflation.

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Haendel Emmanuel St. Juste, Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Equity Research Analyst [40]

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Okay. But putting it all together, it sounds like they're -- you're still expecting some inflation in the expense number next year. There could be some positive benefits. But overall, it sounds like they will remain above the recent trend, not this year, but just -- I guess, directionally, it sounds like we won't see too much relief on the expense part next year.

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David P. Singelyn, American Homes 4 Rent - CEO & Trustee [41]

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Yes. Do keep in mind, Haendel, that in the first quarter this year, we did have some accelerated costs coming into the year 2 to get the inventory from 2017 leased up. So you'll see some favorability there, but there is some of the cost pressures that Jack's referred to, will be there as well. So it is both.

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Operator [42]

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The next question is from the line of Jade Rahmani with KBW.

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Ryan John Tomasello, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [43]

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This is actually Ryan Tomasello on for Jade. Now that you've had a few quarters of the built-to-rent product out in the market, can you quantify the difference you're seeing in terms of maybe the average R&M and turn cost per home? I know you've quantify the target yield benefit, but just wondering if we can dig more into the numbers in the expense side.

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John E. Corrigan, American Homes 4 Rent - COO, CIO & Trustee [44]

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Yes, it's too early because -- but our oldest homes in the built-to-rent are about 16 to 18 months, and the first year is under warranty. So you're -- really, it's almost nothing in the maintenance part of those houses at this point. There might be minor turn costs, but for anything, that was leased and then turned. But it's too early to see a total pattern.

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Ryan John Tomasello, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [45]

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Okay. And regarding the for sale housing constraints on supply and affordability, have you seen any noticeable change in the percentage of move outs to buy in markets where those constraints are perhaps more pronounced?

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John E. Corrigan, American Homes 4 Rent - COO, CIO & Trustee [46]

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Again, I think that's too early. We -- it's still our biggest reason for people moving out of our houses. But at one point, it was 40%. I think it's closer to 30% now of our move outs or for someone to go buy a house. So maybe it's dropped slightly.

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Ryan John Tomasello, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [47]

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It looks like the turnover overall for the portfolio year-to-date has, in fact, trended downward. So would it be reasonable to assume that, that trend continues into next year given that these affordability constraints are accelerating?

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John E. Corrigan, American Homes 4 Rent - COO, CIO & Trustee [48]

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I'm optimistic that it will for that reason as well as we have a growing number of tenants that have been with us over 4 years, and the move out rate for people who've been in our homes for 4 years is substantially lower than those that have been in 1 to 2 years. So as our tenant base matures, I think we'll gradually see higher retention.

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Operator [49]

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The next question is from the line of Rich Hill with Morgan Stanley.

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Richard Hill, Morgan Stanley, Research Division - Head of U.S. REIT Equity and Commercial Real Estate Debt Research and Head of U.S. CMBS [50]

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I wanted to come back to maybe some of the personnel turnover costs and what was -- maybe you've responded to it in a prior question. I think you said you had more competition than maybe others, and you had mentioned iBuying, I think. Are you suggesting your portfolio specifically given where your position has more competition or you're broadly speaking about the single-family rental business?

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John E. Corrigan, American Homes 4 Rent - COO, CIO & Trustee [51]

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I'm speaking primarily about single-family, not just rental business, but the single-family home business. And I think that we probably have as much -- maybe Invitation Homes has as much as we do, I don't know. But people look at us as having as much institutional knowledge as anybody. And if you look at our cost per home for maintenance, it probably would go after us that faster than they'd go after anybody else.

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Richard Hill, Morgan Stanley, Research Division - Head of U.S. REIT Equity and Commercial Real Estate Debt Research and Head of U.S. CMBS [52]

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Got it. Got it. And do you think those pressures -- I know you said this was over the near term, but do you think those pressures can persist over, call it, a longer period of time? So said in other words, do you think iBuying's -- yes.

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David P. Singelyn, American Homes 4 Rent - CEO & Trustee [53]

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So Rich, this is Dave. I think what you have here is we have a number of new entrants into the space recently. A little bit in the single-family rental space, but as Jack indicated, more in the single-family -- larger single-family area. And they are building out their initial staffing. And we're always going to have a little bit -- we've had a little bit from day 1 of people looking at our people with the knowledge that they have with our better systems. And we're a little bit further down the road than most companies in building out systems, so they're looking for the institutional knowledge. The impact that we have seen recently is more to the fact that there's a number of additional companies that have come into the space, and they're building out their initial staffing. And once that's done, it will revert back to more normalized levels. And whether that's 3 months, 6 months or a year, we -- I'm not exactly sure. But it is a short-term problem, not a long-term problem at the elevated levels that we're seeing right now.

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Richard Hill, Morgan Stanley, Research Division - Head of U.S. REIT Equity and Commercial Real Estate Debt Research and Head of U.S. CMBS [54]

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Got it. And going back to your JV, we've talked about this before, and I certainly am supportive of the built-to-rent model. How scalable do you think that can be? And when you do a built-to-rent program, do you think the product's different than your traditional single-family rental? Said another way, do you think it's maybe a little bit more dense? Can you drive down costs? How are you thinking about that?

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John E. Corrigan, American Homes 4 Rent - COO, CIO & Trustee [55]

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Well, it's -- I wouldn't say it's different other than we are doing the single build-to-rent business in a number of ways. We're buying one-off lots, 10 lots, 13 lot deals, 20 lot deals, and then we also have some that are 40, 50, 80, 135. So to me, the 135 lot deals are going to be a little more challenging for us because we -- we're good at renting. Our current marketing system is set up for renting the one-offs, and we have to think more like almost an apartment, a new apartment complex, in the larger development. So there are some challenges. But I -- if we can figure out how to rent the 53,000 single-family homes across the country scattered around, then I'm pretty sure we'll figure this out. But the actual product, other than the maintenance resistance aspect, is very similar. I think that it will be easier to manage on the 135-unit type deals because you've got all the same air conditioners, you've got all the same things to maintain there. And it just should be a more efficient -- on the margins, it should be more efficient to manage.

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Operator [56]

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

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John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Senior Associate [57]

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I understand all the macro backdrop is firmly -- said another way, I understand there's plenty of macro tailwinds at your back, but it doesn't really matter if your operating platform can't capture this excess demand. And I understand mobile app traffic and website hits are up. But Jack, what are you going to do specifically different heading into next year to make sure your operating platform can capture this excess demand?

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John E. Corrigan, American Homes 4 Rent - COO, CIO & Trustee [58]

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Well, I think we did -- I mean, year-over-year, rents are up more than they were the prior year. We were more occupied than we were the prior year, so we have improved this year versus last year, and I expect we'll continue to improve. Are we perfect yet? No, but we're -- we get better every year. What specifically am I going to do? I hope there's not a hurricane in September in our markets. We're going to -- we hire the best people. We train them the best we can and try to keep them.

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John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Senior Associate [59]

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Jack, you own a $12 billion portfolio in storm front markets, I mean, it's your job to navigate this, so I need a better answer. I mean, the top line growth is very quickly looking like apartment-like growth. Is the board happy with the operating performance?

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John E. Corrigan, American Homes 4 Rent - COO, CIO & Trustee [60]

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I think they're reasonably happy with the top line growth, yes. The -- and they -- we were all very happy with leasing up through September, so it's just going to have an effect on the fourth quarter. I don't know. I mean, we have 4.4% same-home revenue growth. I think that's pretty good.

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David P. Singelyn, American Homes 4 Rent - CEO & Trustee [61]

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Hey, John, with that said -- this is Dave. The board was focused a lot this week on operations in total. It's not just the top line. It's all the lines. And there was a lot -- there's been a lot of talk about the various issues and a lot of discussion with Jack and Bryan and team about some of the options that may be available, not to go into any of that on this call. But yes, the board is aware, and they're looking at all the lines.

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Operator [62]

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

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Dennis Patrick McGill, Zelman & Associates LLC - Director of Research and Principal [63]

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First question just has to do with, as you think about next year in setting guidance, the initial guidance, not so much the amounts or the specific numbers, but can you just walk through your process of how you build it up? Is it top-down or bottom-up or both? And will you approach any differently heading into '19 than you have the last couple of years?

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Christopher C. Lau, American Homes 4 Rent - CFO [64]

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I'll start and then Jack can supplement. Dennis, this is Chris. As you can imagine, we really look at it both ways. It starts with kind of a top-down macro view both from an overall portfolio and then down more granularly to a markets perspective. And then that is used to influence essentially a bottoms-up build from a property-by-property basis, and we're looking at things all the way from lease rolls to expected trends and move outs to process and expected times to influence days on market and turn times and between tenants' view on rental rates, and then we take a good hard look at our maintenance turn and CapEx programs, what's going on in the labor markets, what we know about physical condition of homes, et cetera, to form a view on property level expenditures and then of course, there are things like property taxes that we're a little bit less informed on but we take our best educated view based on what we think is going on in the assessment valuation environment and then take our best stab at what we think is going on from a local rates perspective as well. So it is a very robust process. Like I said, it starts top-down, but it's ultimately built from the bottoms-up. But I would also say that it is an evolving process. We are -- we're 5 to 6 years into this as a business, and it gets better each year. And we're constantly capturing more and more data, using that data to influence and inform our budgeting and decision-making process. And each year, it gets better. But it is a very robust process that we think we'll continue to improve over time as well.

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John E. Corrigan, American Homes 4 Rent - COO, CIO & Trustee [65]

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Yes. And I would just say this, I used to be a CFO a while back of an office industrial REIT, and it was much more specific there. Okay, we're going to repair this parking lot this year. We're going to put a roof on this building this year, and you budget it up from the bottom. This is more of the law of averages. You expect to spend per house this amount of money. We do, do detailed budgeting at the property management company level in each office and all that. But for the repairs and maintenance and CapEx, it's really -- you're kind of looking at what the average spend was last year, what you think is going on inflation wise, aging of portfolio wise, if anything, and trying to come up with a range that makes sense.

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Dennis Patrick McGill, Zelman & Associates LLC - Director of Research and Principal [66]

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And as you consider the hurricanes or weather type events that are somewhat unpredictable, would you anticipate next year creating a bit more of a buffer for those types of costs, embed those type of costs into the outlook and just consider it an upside if they don't happen? Or would you sort of assume those are onetime and start from the assumption that they won't happen?

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John E. Corrigan, American Homes 4 Rent - COO, CIO & Trustee [67]

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Well, in the past, I think we've excluded the effects of the hurricanes out of the same-home analysis. This year, because it was relatively small, we included it. So it's -- whether you're giving a -- I didn't consider including hurricane costs in the same-home maintenance. I actually don't even look at it as maintenance. I look at it as part of the costs of being self-insured.

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Dennis Patrick McGill, Zelman & Associates LLC - Director of Research and Principal [68]

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I think that's fair. But also, it sounds like the impact has always been more than just costs, it's disruptive to the business and the leasing activity as well?

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John E. Corrigan, American Homes 4 Rent - COO, CIO & Trustee [69]

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It has, but it's hard to predict where and when.

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Dennis Patrick McGill, Zelman & Associates LLC - Director of Research and Principal [70]

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All right. So I guess my only question is would you consider being more conservative knowing that it is hard to predict?

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John E. Corrigan, American Homes 4 Rent - COO, CIO & Trustee [71]

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Yes, I think we'll consider being more conservative.

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Operator [72]

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The next question is from the line of Douglas Harter with Credit Suisse.

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Douglas Michael Harter, Crédit Suisse AG, Research Division - Director [73]

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Just on rental growth. I mean, I know you've highlighted some of the markets where you've had the personnel troubles but -- and the hurricane impacted areas, but sort of stripping that out in the other market, I guess how would you compare rental growth kind of in October versus kind of where it was trending in the third quarter?

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John E. Corrigan, American Homes 4 Rent - COO, CIO & Trustee [74]

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Yes, I would -- our business is seasonal, and we typically have a falloff in rent growth -- rental rate growth on new leases in the fourth quarter. So I would compare it to last year's fourth quarter, and I think it will be slightly favorable or right in line.

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Operator [75]

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This concludes our question-and-answer session. Now would the management like to make any final remarks? Thank you. Our conference has concluded. Thank you for participating today. You may now disconnect your lines at this time, and have a wonderful day.