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

Q2 2018 American Homes 4 Rent Earnings Call

AGOURA HILLS Aug 16, 2018 (Thomson StreetEvents) -- Edited Transcript of American Homes 4 Rent earnings conference call or presentation Friday, August 3, 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

* Jade Joseph Rahmani

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

* 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

* Ronald Kamdem

Morgan Stanley, Research Division - Research Associate

* Ryan Christopher Gilbert

BTIG, LLC, 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 Second 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 second 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, August 3, 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 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 Chris Lau step up as our new CFO, assuring a smooth transition. Congratulations Chris, on a well-deserved promotion.

And earlier this week, on Wednesday, August 1, we celebrated 5 years as a public company. When we launched American Homes 4 Rent, we recognized a 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 5 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. And as I sit here, I can honestly say that the opportunity we identified 5 years ago is larger than any of us realized. We have accomplished a lot, and I am deeply proud of our results. But the opportunity in front of us remains exciting. With only 1% to 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 of occupancy and same-home average occupied days compared to last year. And we accomplished these gains while achieving a blended rental rate spread of nearly 5%, the strongest in the last 2 years. As we enter the slower leasing season, we prudently moderated our increases late in the quarter and, based on results in July, 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 3 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 and $450 million over the next 24 to 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. And with our strong balance sheet, augmented by proceeds from an expanded portfolio of recycling program, we have ample capacity to fund our accretive growth plans this year and beyond.

And now, I'll turn the call over to Jack Corrigan, our Chief Operating Officer.

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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.

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 a 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 intensely 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, and July continues to be strong with blended spreads of 4.3%. And we now expect average rental rate increases of 3.5% to 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. But 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 to 2,150 per home, with total property operating expense growth in the 5% to 6% range. Much of this increase is due to a larger proportion of our repairs and maintenance 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. And as a result, we added another 430 homes to our disposition pool. At June 30, our portfolio of homes to be sold totals approximately 2,200 homes. These homes are currently 81% leased. We are now targeting $350 million to $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.

Now I will turn the call over to Chris Lau, our Chief Financial Officer.

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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 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. Also, 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, which 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 marked composition or operating performance of the same-home portfolio. But for reference, like always, we have provided a historical rolling 5 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 E participating preferred shares into 10.8 million Class A common shares. We believe this was 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. And then, in June, we paid down the term loan component of our credit facility by $100 million. These debt paydowns 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 5x and debt plus preferred shares to adjusted EBITDA was 6.7x. 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 provisions 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 6 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% to 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% to 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% to 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 to $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% to 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% to 3.75%.

In addition to our same-home guidance provisions, we now expect full year G&A to be between $34.5 million and $35.5 million.

And 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.

Now, we will open the call to 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 Juan Sanabria with Bank of America Merrill Lynch.

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Juan Carlos Sanabria, BofA Merrill Lynch, Research Division - VP [2]

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I was just hoping maybe 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? And 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?

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

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Yes. This is Jack Corrigan. I'll answer the second question first. We're bullish on demand, but we want to get -- we don't want to enter the slow leasing season with a lot of inventory, which we kind of did last year. So we, kind of like the retailers do when 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 the Christmas. So that's kind of what we traditionally have done. We did it last June. And 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. But 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.

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

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And then, Juan, if it's helpful -- this is Chris. I can comment a little bit on the guidance call. And maybe starting with average occupied days, our range is 95.0% to 95.5%, midpoint of 95.25%. And if you just look at how that compares, that's on a full year. And if you look at how that compares to the first 6 months of the year, then 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, so call it 95.4% to 95.5% for the balance of the year, which represents about 60 basis points in occupancy pickup over last year. And then you add to that our revised range on average monthly realized rent growth, which is 3.5% to 3.75%, or call it 3.6% and change at the midpoint. You put the 2 of those together, and then that's how you get to the midpoint of our core revenues guidance range of 4.0% to 4.5%.

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Juan Carlos Sanabria, BofA Merrill Lynch, Research Division - VP [5]

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Great. That's helpful. And then, 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? And what's the now just pure CapEx spend guidance per home on an annual basis?

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Christopher C. Lau, American Homes 4 Rent - CFO [6]

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Yes. So I'll start by saying there is 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. And at the outset of a 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 in CapEx, and that's how we guide as well, both in terms of debt expenditure line and then, more importantly, our NOI after CapEx growth line. And so 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. And you see that reflected in part in our core property operating expense growth. But then, 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're actually pegging the bookends around by 25 basis points.

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

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Okay. And then just one last quick one from me. I saw some of the Sunbelt 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.

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

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No, I think, that all those markets are reasonably strong. And I would expect to pick up that occupancy over the next 3 to 6 months -- pick it back up.

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Operator [9]

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Our next question comes from the line of Nick Joseph with Citi.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - VP and Senior Analyst [10]

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Just coming back to the expensed and capitalized cost per home. Is $2,050 to $2,150 the rate -- run rate to think about going forward? Or is there a reason why next year it would go back down to the initial projection?

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John E. Corrigan, American Homes 4 Rent - COO, CIO & Trustee [11]

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Well, we did have higher than what I would consider normal turn costs in the first quarter. So we'll probably have a pretty good comparison in the first quarter of next year and maybe into the second quarter next year. So we'll have normal inflation. I don't know if you saw the print on unemployment was 3.9%. So we're seeing that some of our wages are going up and some of our vendors are going up. So you see some normal inflation of 3% to 5% and that will be offset somewhat by some efficiencies and the higher costs in the first quarter than we typically would have.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - VP and Senior Analyst [12]

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And then 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? And then what's the overall yield for those delivered homes?

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

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The yields for the delivered homes will vary depending on a couple of items, how good a deal we got on the land and -- but we're seeing probably 20% better yields, and depending on market, that could be anywhere from 6% to 6.5% to as high as 7% on those yields. On the purchased from the developers, it's closer to what -- closer to the yields that we get on our traditional purchases. The demand is really strong on both. And I think it has something to do with the newer homes and something to do with the markets that we're building and acquiring them in.

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Operator [14]

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

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Jason Daniel Green, Evercore ISI Institutional Equities, Research Division - Analyst [15]

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I just wanted to circle back on -- slowdown might be the wrong word, but the renting in June, and kind of how the increases in June compared to April and May year-over-year?

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

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Do you have the -- June of last year?

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Christopher C. Lau, American Homes 4 Rent - CFO [17]

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June of last year? No, but it is roughly similar to this June.

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

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Yes, 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 most -- a big chunk of your turns, June and July. So if you misprice June and you end up with a lot of inventory going into July, you're kind of stuck. So we may have cut it a little too low, but I'd rather be a little safe and keep the occupancy high.

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Jason Daniel Green, Evercore ISI Institutional Equities, Research Division - Analyst [19]

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Got it. I guess, what I'm getting at, and I think, you kind of answered it there, is it seems like April and May were stronger year-over-year and indicated some real strength in that rental 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?

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John E. Corrigan, American Homes 4 Rent - COO, CIO & Trustee [20]

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Yes, I think that's right. And --

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David P. Singelyn, American Homes 4 Rent - CEO & Trustee [21]

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Year-over-year, they're comparable.

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John E. Corrigan, American Homes 4 Rent - COO, CIO & Trustee [22]

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Yes, year-over-year, it's comparable, but 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, and you're turning them as fast as you can, and you want to run them as fast as you can to keep your occupancy there. The last 2 years, I think, we've had a decline in occupancy May to June. So 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, but with how well we're occupied, that's pretty good.

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David P. Singelyn, American Homes 4 Rent - CEO & Trustee [23]

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Yes, the trend lines year-over-year are very comparable. So 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. But the same occurrence occurred last year with a slight moderation in June.

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

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Got it. And then just with some of the stabilization of home prices nationwide, have you seen more willing sellers in the marketplace? Or are more willing kind of portfolio owners willing to get rid of their portfolio at this point?

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

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Not really. I think most portfolio owners are seeing similar things that we're seeing, a really strong demand and pretty strong cash flow and -- as well as price appreciation. So they're not -- they don't know where to put the money that they can get the same return.

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Operator [26]

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Our next question comes from the line of Jade Rahmani with KBW.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [27]

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Are you seeing any new entrants in the single-family rental space? And 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? I just want to hear about the competitive environment.

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

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Yes, as far as Zillow goes, I mean, they're, I think, basically flipping houses. So 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, but 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 expect to acquire about $2 billion worth of houses. And we just see the same people kind of keep acquiring.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [29]

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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?

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

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We did a small test on the senior housing thing in 2012, I think. And it just didn't -- it didn't rent very well, and so I'm a little hesitant to make another foray into that. But we constantly look at different avenues of capital raising. I think that's more Dave's and Chris', I mean, area. Both of your questions are -- we discuss those items, we look at the items and if it's appropriate, then we will launch into that and make an announcement at the time. But yes, there's a number of things that are continually being evaluated, not only markets, but capital raising avenues. And we are seeing a little bit of a change in the private equity demand recently. So we're aware of that.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [31]

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And just lastly, could you give the CapEx portion of the R&M turn in CapEx guidance?

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Christopher C. Lau, American Homes 4 Rent - CFO [32]

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Well, we don't break it out that granularly. But 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 6-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. But 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.

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Operator [33]

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Our next question comes from the line of Haendel St. Juste with Mizuho Securities.

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Haendel Emmanuel St. Juste, Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Equity Research Analyst [34]

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So it looks like the yields on your recently completed single-family home developments have been pretty good, pretty consistent and not showing an 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? And then perhaps some thoughts on if -- how much of a rise in construction costs, maybe degradation in yield, could maybe cause a rethink or pullback in single-family rental activity and development activity?

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John E. Corrigan, American Homes 4 Rent - COO, CIO & Trustee [35]

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Yes, there has been some inflation in the costs, although it seems to be moderating more recently. The -- while the costs are going up, so are the rents. So 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 -- it's not like buying houses one-off, it's more a 2- to 3-year plan versus -- we can accelerate the traditional activity much quicker and cut it back much quicker.

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Haendel Emmanuel St. Juste, Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Equity Research Analyst [36]

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Okay. I appreciate the thoughts there. The other question I had was on your dispositions comments, looking at $350 million to $450 million over the next 2 to 3 years. How much of that is pruning the portfolio versus perhaps exiting certain markets? And would -- should we assume that capital gets redeployed into acquisitions and development? And 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? And then maybe some comments on if there is any current -- if you see any current portfolio buyer interest in the market today.

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David P. Singelyn, American Homes 4 Rent - CEO & Trustee [37]

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Yes. Let me take the first part. And 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. So look at the top. Those are markets that we're exiting and the balance is the one-offs for a variety of reasons that we may be looking at. With respect to disposition channels, Jack, do you want to tell them what you're seeing at this point?

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John E. Corrigan, American Homes 4 Rent - COO, CIO & Trustee [38]

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Yes, 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. Our -- and we've been relatively successful doing that. But 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. But these deals take time to percolate. So we're still working on them.

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Christopher C. Lau, American Homes 4 Rent - CFO [39]

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And -- Haendel, this is Chris. If I can just add one thing about the market exit. 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 5 or so markets that are actual exits, just for reference, are Oklahoma City, Corpus Christi, Augusta, Central Valley and Columbia, South Carolina.

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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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And then the last one. I'm sorry if I might have missed it. But 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.

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Christopher C. Lau, American Homes 4 Rent - CFO [41]

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July of last year was a 4.2%, which compares to our 4.3% of this year.

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Operator [42]

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Our next question comes from the line of Richard Hill with Morgan Stanley.

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Ronald Kamdem, Morgan Stanley, Research Division - Research Associate [43]

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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. So, 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 it an actual increase in costs and dollars going out the door?

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Christopher C. Lau, American Homes 4 Rent - CFO [44]

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Without -- it's difficult to give you the exact number.

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Ronald Kamdem, Morgan Stanley, Research Division - Research Associate [45]

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At just a high level.

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Christopher C. Lau, American Homes 4 Rent - CFO [46]

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Yes. Probably close to fairly equal weighting. But there are other components to the expense guidance revision. And 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 2 of those off the top of my head. So as I mentioned, the revised range on property tax growth is 2.75% to 3.75%. Our internal CapEx is $2,050 to $2,150 with a larger proportion being expensed. Property management is 3% to 4%. And then on insurance and HOAs, if you look at the 2 of those combined, HOAs are running -- they're small line items in the grand scheme of things. HOAs are running a little bit higher, so if you blended the 2 of those, it's like a 5% to 6% for the 2 of those combined. And that all washes out into our 5% to 6% on core OpEx. So there are more pieces to it, I guess, is my point, in getting to that 5% to 6% range.

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Ronald Kamdem, Morgan Stanley, Research Division - Research Associate [47]

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Got it. That's helpful. And then just on -- and then back to the same-store revenues. Is there -- 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?

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

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It's pretty much strength across-the-board.

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Ronald Kamdem, Morgan Stanley, Research Division - Research Associate [49]

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Got it. So 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 it -- 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 built-for-rental product?

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John E. Corrigan, American Homes 4 Rent - COO, CIO & Trustee [50]

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Yes, 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 and probably more than that next year, and you put a little bit of leverage on that and some of the disposition program, you're there without having to raise equity. So that's kind of what we're looking at.

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Operator [51]

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Our next question comes 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 [52]

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Chris, are you having any active conversations with Fannie or Freddie or doing a GSE-backed securitization?

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Christopher C. Lau, American Homes 4 Rent - CFO [53]

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No, we're not. We're aware of their existence and kind of some of the commentary out there about their interest in this 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. But for us in particular, at least in terms of debt financing, and as I'm sure you're aware, we successfully completed our debut unsecured bond yield 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.

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David P. Singelyn, American Homes 4 Rent - CEO & Trustee [54]

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And 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 costs of a secured financing and BPOs and other costs, when you amortize that through, it's more efficient for us to be unsecured today.

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John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Senior Associate [55]

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Okay. It makes sense. And turning to some of the re-leasing spreads on Page 15, within the same-store pool, i.e., there's some high single-digit growth rate, an 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 to push to -- and 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?

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John E. Corrigan, American Homes 4 Rent - COO, CIO & Trustee [56]

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What page was it?

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David P. Singelyn, American Homes 4 Rent - CEO & Trustee [57]

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It's on Page 15 and it's at the top. No, I think there's a couple of things going on. The market is very, very strong today for residential rentals. And then we went into the second quarter -- the benefits of what our first quarter created was a very strong occupancy and a little bit of limitation on supply. And that enabled us to push rents in many of these markets in the second quarter.

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John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Senior Associate [58]

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So market rent growth in Phoenix right now is at 11%?

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John E. Corrigan, American Homes 4 Rent - COO, CIO & Trustee [59]

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No, I would say that it's probably not 11%, but it's high singles. We have been -- our philosophy is not to push as hard on renewals. And so as our re-leasing rate will probably be higher than our renewal rates, on average, other than in the fourth quarter, and it's also a good time of the year for us to push re-leasing rates, because the demand is so high and the number of phone calls and people moving. So we're not going to get 11.1% for 12 months. We got it for the second quarter, which is one of our peak -- this is peak quarters for pushing rate on re-leasing.

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David P. Singelyn, American Homes 4 Rent - CEO & Trustee [60]

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Keep in mind, John, the seasonality of the business still comes into play. So strong markets are strong markets, but they're going to be stronger in the second quarter than fourth quarter. So this is not projected to be averages for the year, it's projected -- this is the demand in the second quarter.

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Operator [61]

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Our next question comes from the line of Douglas Harter with Crédit Suisse.

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Douglas Michael Harter, Crédit Suisse AG, Research Division - Director [62]

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Chris, did I hear you during your prepared remarks saying that move-out rates had declined in the quarter?

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Christopher C. Lau, American Homes 4 Rent - CFO [63]

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I didn't say that in my prepared remarks, but you are correct. Yes. So 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.

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Douglas Michael Harter, Crédit Suisse AG, Research Division - Director [64]

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I guess what is your belief as to what were the causes of that? And do you think you can kind of push average duration of stay longer?

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

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Yes, I -- well, I think that there's a few things that contribute. One, and 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 stayed 3 or 4 years, the move-out percentage is much lower. So 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. So that's part of it. Part of it is we've had now our in-house maintenance group in place for 2 to 3 years. And we're seeing the customer service surveys coming back very strong on that. And I think that contributes to it. And 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. So I think the combination of those 3 things really add.

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Operator [66]

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Your 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 [67]

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I guess the first one just has to do with the built-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. And I'm wondering if you guys are experiencing any of that? And 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? Could you -- would you do more if you could do more?

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John E. Corrigan, American Homes 4 Rent - COO, CIO & Trustee [68]

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Yes, I think we're experiencing delays. First, we're fairly new to this business, so we see delays as a result of inexperience, or I mean, we've got some experienced guys doing it. But it's -- our senior guys aren't, including myself, aren't as versed at pushing them as we could be. So we see some delays there. And then we're seeing delays with the municipalities in permits and that type of thing, similar to what I think the homebuilders see.

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David P. Singelyn, American Homes 4 Rent - CEO & Trustee [69]

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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 has been a couple of delays there. And then 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. And so 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. But for the ramping up of the program, we're very comfortable and happy with where we are.

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John E. Corrigan, American Homes 4 Rent - COO, CIO & Trustee [70]

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But we would like to be further along always.

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Dennis Patrick McGill, Zelman & Associates LLC - Director of Research and Principal [71]

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Okay. And 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 to $400 million, and that would be over a 2- to 3-year period?

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David P. Singelyn, American Homes 4 Rent - CEO & Trustee [72]

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Yes, I think it was $350 million to $450 million, but -- that's correct.

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John E. Corrigan, American Homes 4 Rent - COO, CIO & Trustee [73]

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It could be -- it's -- we estimate most of it will be done in 2 to 3 years. We look at what we did with the ARPI homes that we identified, which was about 1,400 or 1,500, and it's now been 2.5 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, we need that -- the proceeds from that house for a 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. So we wait until it naturally vacates to put it in retail. Otherwise, we'll sell it to another investor, if that's possible.

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Dennis Patrick McGill, Zelman & Associates LLC - Director of Research and Principal [74]

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Okay. So the time line really just has to do with that, getting the homes vacated, essentially. Once they are vacated...

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John E. Corrigan, American Homes 4 Rent - COO, CIO & Trustee [75]

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Right. Or sold in bulk.

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Dennis Patrick McGill, Zelman & Associates LLC - Director of Research and Principal [76]

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Right. And once they are vacated, what's your typical turn time of getting them sold?

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John E. Corrigan, American Homes 4 Rent - COO, CIO & Trustee [77]

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It's -- I mean, it depends on the time of year. And in spring, summer, it's probably 3 months. If you're listing it in October, November, it could be 6 months.

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Dennis Patrick McGill, Zelman & Associates LLC - Director of Research and Principal [78]

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Okay. And then just one last one. That $350 million to $450 million of proceeds, that's a direct comparison to the $285 million of cost basis?

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Christopher C. Lau, American Homes 4 Rent - CFO [79]

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There is -- oh, did you get the $285 million off the balance sheet? The $285 million on the balance sheet is -- as you're probably aware, there are 2 categories of our disposition property. There is held-for-sale and then identified for future sale. It's kind of an accounting terminology on the held-for-sale if it gets classified on the balance sheet. So that is what you see in the $285 million. And then there is incremental cost basis on the identified for future sale that's not in held-for-sale yet. But I would expect it to move into held-for-sale in the third quarter.

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Dennis Patrick McGill, Zelman & Associates LLC - Director of Research and Principal [80]

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How much is cost?

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John E. Corrigan, American Homes 4 Rent - COO, CIO & Trustee [81]

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Yes, 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. And so you can...

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Christopher C. Lau, American Homes 4 Rent - CFO [82]

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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.

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Operator [83]

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

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Ryan Christopher Gilbert, BTIG, LLC, Research Division - Analyst [84]

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So we've seen a increase in homes developable 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 in -- or accelerate rent growth in June and July?

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John E. Corrigan, American Homes 4 Rent - COO, CIO & Trustee [85]

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I don't believe it's affected it at all. Actually, we -- 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. And I think maybe the rate's increasing. I don't know what's causing rates and price, probably the effect of affordability. But I think wages are also going up. So I'm not sure how it all blends together.

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Ryan Christopher Gilbert, BTIG, LLC, Research Division - Analyst [86]

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Okay. And so limited competition from available-for-sale, you've got 120-basis-point improvement in occupancy at the end of the period, and your turnover's 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? Or how should I think about blended rent growth over the second half of 2018?

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John E. Corrigan, American Homes 4 Rent - COO, CIO & Trustee [87]

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Well, we'll moderate rent growth on re-leasing just because of the level of demand. You want to make sure you're at least leasing up what turns. But it will be more aggressive than it was last year, because last year, we had a lot more inventory.

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Ryan Christopher Gilbert, BTIG, LLC, Research Division - Analyst [88]

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So you think the blended rent spread in 3Q and 4Q '18 will be positive relative to the third and fourth quarter of last year?

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John E. Corrigan, American Homes 4 Rent - COO, CIO & Trustee [89]

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Yes.

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Operator [90]

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This concludes our Q&A session, and with that, our conference today. Thank you for your participation. You may now disconnect your lines.