American Residential Properties' CEO Discusses Q2 2013 Results - Earnings Call Transcript

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 |  About: American Residential Properties (ARPI)
by: SA Transcripts

Operator

Welcome to the 2013 second quarter earnings conference call for American Residential Properties. My name is Richard and I'll be your operator for today’s call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded.

I'll now turn the call over to Mr. Shant Koumriqian. Mr. Koumriqian, you may begin.

Shant Koumriqian

Thank you. Good morning, everyone and thank you for joining us today for American Residential Properties second quarter 2013 conference call. With me this morning are two co-founders, Stephen Schmitz, our Chairman and Chief Executive Officer and Laurie Hawkes, our President and Chief Operating Officer.

On today’s call, Steve Schmitz will provide an overview of our second quarter results, Laurie Hawkes will discuss our operating platform and trends in our portfolio, and I'll review our second quarter financial results. We will then open the call up to your questions.

For your reference, the press release and financial schedules containing information we will be discussing on today’s call were filed yesterday with the SEC. You may also find this information on our website at www.americanresidentialproperties.com in the Investor Relations section.

Before we begin, please note that today's discussion may include forward-looking statements. Forward-looking statements reflect our current views regarding future events and are typically associated with the use of words such as anticipates, target, expect, estimates, believe, assume, project and should or similar words. We caution all those listening including investors not to rely on forward-looking statements. They imply risks and uncertainties and actual results may differ materially from expectations.

We encourage you to carefully consider the risks described in our filings with the SEC which may be obtained on the SEC's website. We do not undertake any obligation to update or correct any forward-looking statements if later events prove them to be inaccurate.

With that said, I would like to now turn the call over to Stephen Schmitz. Steve, please go ahead.

Stephen Schmitz

Thank you, Shant. Welcome ladies and gentlemen to our second quarter conference call. We’re very pleased with our results for this quarter as we saw a 60% increase in total revenues as well as positive core FFO driven by the continuing growth of our portfolio and strong leasing activity.

We continue to see excellent acquisition opportunities in the second quarter. Our pace of acquisitions is ahead of our expectations and we continue to enter new markets and diversify our portfolio. In the quarter we deployed $220 million acquiring 1,558 homes for a total purchase price of approximately $191 million and approximately $19 million in private mortgage investments.

We expanded our presence in key markets and made strategic investments in markets that we recently entered. Following these purchases, our portfolio in the Phoenix market represents only 30% of our total portfolio at June 30. This allows us to continue to capitalize on the extremely positive trends in home price appreciation in the Phoenix market while also diversifying our portfolio.

Our second quarter purchases brought our home ownership up to 4,089 properties in 13 states as of June 30, 2013. Including renovation and retenancy costs we had a total investment of $487 million in our portfolio as of June 30. We continue to be very active in making acquisitions during the month of July, adding another 446 single-family homes to our portfolio and contracting to acquire another 760 homes. Collectively, these purchases represent an additional 173 million in aggregate purchase price.

In July, the mix of acquisitions was similar to what we experienced in the second quarter with Texas being our most active area followed by North Carolina. These markets along with the others that we are actively targeting demonstrate economic, demographic and employment trends that are favorable to the rental market and also offer opportunities to buy existing homes at a discount to their replacement cost.

We have been able to move quickly on acquisition opportunities because we have well-defined criteria for the size of properties we want to acquire and an efficient system for identifying, evaluating and closing deals.

The vast majority of our purchases during the second quarter were individual property purchases. With individual acquisition opportunities plentiful in our identified core markets, it becomes simply a matter of determining which properties present the best investment opportunities.

While it’s well known that more institutions have entered the buy-to-rent market, we continue to see no shortage of attractive investment opportunities. The inventory of properties available at favorable prices far exceeds the amount of capital supporting the institutional players in the buy-to-rent market and the overall economics of our business remain highly attractive.

We are making excellent progress on our strategy of building scale in our existing markets. While each market is different, we believe that we need to have at least 300 to 500 homes in the market to fully leverage the efficiencies that come with critical mass. We are well on our way toward achieving this goal.

As of June 30, we had closed to 300 and more homes into each of six states, Arizona, California, Illinois, Indiana, North Dakota, and Texas. Of the homes we acquired in the second quarter, 1,312 or 84% are self-managed homes with an average gross underwritten yield ranging from 10% to 11%. 246 of those homes or 16% are preferred operator homes subject to long-term net leases with local operators and these homes are generating net yields to us in the high 7% range.

The outlook for continuing to build our portfolio at a healthy rate is favorable. The volume of houses available at attractive prices in our core markets remains very high. We have under-levered portfolio and believe that we have access to a variety of attractive capital sources including revolving loans, term debt and a complete range of debt instruments including securitization and eventually unsecured corporate debt.

Accessing capital is nothing new for us. We were the first buy-to-rent company to obtain a credit facility and our track records speak for itself within the lending community.

While we have not made any final decisions yet on future financing, we are evaluating alternatives and we do expect to add additional leverage to fund continued growth in the second half of the year.

In closing, I want to say that we are very excited about the opportunity we see ahead for both the single-family REIT sector and for American Residential Properties in particular. We believe we are very well positioned to generate attractive returns for our shareholders. We do that in two ways, cash yield and home price appreciation, or HPA. In some markets we focus more on cash yields, while in others we focus more on HPA. Our participation in multiple markets allows us to follow the rental market and its yield diversification.

It's important to note that the market opportunity is vast. At present, one in 10 single-family homes is currently a rental home. 14 million single-family homes are currently rentals. Those homes have a value of $2 trillion. Given the trends in household formation, population growth and tight credit environment, we don't see this changing anytime soon. The opportunity to purchase attractive single-family homes far exceeds the amount of institutional capital raised.

It's also important to note there is nothing new about single-family rentals, what’s new is aggregation, professional management and access to institutional capital. As we said before acquiring assets is important but attracting and retaining residences what drives revenue.

American Residential is well positioned to do that by leveraging our 5-year operating history, our internally managed platform and our ability to renovate properties efficiently and our customer-centric approach.

With that, I'd now like to turn the call over to Laurie Hawkes, our co-founder, President, and Chief Operating Officer. Laurie, please go ahead.

Laurie Hawkes

Thank you, Steve, and good morning, everyone. We view the second quarter as a very successful one for the company. As Steve noted, we're on plan or ahead of plan [obtaining] metrics from our earlier expectations. We were very active and adding new homes to the portfolio while also continuing to execute well on what we consider to be blocking and tackling of renovating our previous acquisitions, procuring new residents quickly and keeping our existing residents satisfied so that we can minimize turnover and retenancy costs.

With five years of experience in the buy-to-rent market, we've been able to identify and refine best practices to managing our portfolio, which has helped us to achieve industry leading occupancy rates.

Speaking of our overall portfolio, occupancy on a current basis was 78% as of June 30, 2013, compared with 86% at March 31, and 76% at December 31. For homes that have been in the portfolio for six months or longer, our occupancy rate was 88% as of June 30, up from 82% at the end of prior quarter.

By business line, occupancy in our preferred operating program was 100% for the last quarter for our contracts whereas occupancy in our self-managed portfolio was 68% as of June 30, compared with 76% leased as of March 31.

The decrease in our current self-managed occupancy was due to the substantial increase in the number of individual homes acquired vacant during the second quarter compared to lease portfolio acquisitions in prior quarters.

We acquired 1,312 self-managed homes during the second quarter of which 67% were acquired vacant, compared to 292 self-managed homes acquired last quarter, of which 33% were acquired vacant.

Gross rents on our self-managed lease portfolios ranged from 14% in the Charlotte and Nashville markets to 8.7% in Phoenix as of June 30. We are seeing compression in gross yields in some markets which is to be expected as the housing markets around the country recovered at varying speeds, but our increase in scale and enhanced

operational efficiencies should enable us to achieve our targeted net yields.

During the second quarter, we executed 563 total leases including renewals. During the second quarter we also had approximately 595 contractual lease explorations including month-to-month rollovers, with a 173 residents vacated resulting in a turnover ratio of approximately 29%.

We achieved 3% rental increases on renewals on average during the quarter without concessions, with a range of 2 to 6% increases achieved dependent upon the market with Dallas in fact commanding the highest increases.

Our ability to minimize turnover and increased rental rates is directly attributable for a resident centric approach to managing the portfolio. And the heart of our approach is our resident retention program with our early outreach program targeting residents up to renewal within 90 days with a goal of 120 days or longer to firm up lease trends, as well as our resident call center, which is now managed by a former Nordstrom professional, who's experience in a high touch also responsive approach to customer service.

Our resident call center is the first point of entry for all issues or questions that our residents have and it's proven to be a highly efficient means, for quickly solving problems and keeping our residents pleased with their housing choice.

While call volume varied by time of the month and seasonality in the last week alone, our customer service assistants actually fielded nearly 1000 calls. By centralizing this function and our resident call center, we not only personalize our service, but also reduce our response time in addressing issues.

Thereby freeing up our

frontline staff to focus on their primary functions.

In terms of days on markets for leasing, we're currently experiencing approximately 42 days on market on average from the time a home is listed for rent until the time an application is approved and a lease executed.

Residents typically take occupancy and move in within two weeks thereafter. This average can vary by market, we've actually experienced much shorter time periods to lease during different times of the year.

I'm also pleased to report that our acquisition cash flow has been in line with our underwriting expectations. On average our restoration projects are taking approximately 18 days to complete, including the time required to turn the utilities on, evaluate, bid and award the project, complete the restoration work and inspect and sign off on the final work product.

Our restoration projects averaged approximately $9,500 per project during the last quarter. Our retenancy projects averaged approximately $4,100 during the second quarter.

We continue to experience efficiencies from our retail [big] box and tent purchasing programs which provides cost savings on materials. As we can see the scale in all our markets we continue to expand our bench of qualified contractors, based on referrals, interviews, track record and experience.

On an average our retenancy projects are taking 11 days to complete from the time the prior residence vacates the home to when a home is available for rent. The time spent depends upon the level of work required which can range from our routine clean up in minor refreshing work to more expensive restoration activity such as replacing flooring or major paints and patch work.

On the final note, we're in the process of expanding our regional staff for inspections leasing and maintenance as we

achieve critical mass in each of our markets with the particular focus on Texas this quarter.

Given the current pace of acquisition activity and the scale we're building in more of our core markets, we anticipate expanding our network of regional offices over the next three to six months.

I’d like to turn now to Shant Koumriqian, our Chief Financial Officer who will discuss our financial results for the quarter, Shant.

Shant Koumriqian

Thank you, Laurie. I'll start with the discussion of our statement of operations and then turn to our balance sheet. Total revenue for the second quarter of 2013 increased to $8.4 million compared to the $5.2 million for the first quarter of 2013, and was comprised of $5 million of self-managed revenue, $2 million of preferred operator revenue, $110,000 of management services revenue and $1.3 million of interest income and other income and other income.

The sequential increase in revenue is primarily due to the increase in a number of leased properties and the increase in our mortgage loan investments during the quarter. Portfolio operating expenses for the quarter totaled $2.9 million which include property operating and maintenance expense, real estate taxes and home owners' association fees. This compares to $1.6 million in the first quarter of 2013. The primary driver of the increase was the higher number of properties owned quarter-over-quarter.

For the second quarter our total revenues of $8.4 million plus portfolio operating expenses of $2.9 million was a positive $5.5 million for the quarter. This compares with $3.8 million in the prior quarter or 45% quarter-over-quarter increase.

In addition to property operating expenses for the quarter, we incurred $1.7 million in acquisition expenses related to properties that we acquired with existing leases in place compared to $1.8 million last quarter.

Depreciation and amortization expense was approximately $4.6 million for the quarter, which includes $1.4 million and amortization expense for in-place lease value. This compares to the $3.1 million in depreciation and amortization expense last quarter.

We incurred $682,000 in interest expense during the second quarter compared to $371,000 last quarter, the increase in interest expense was a result of higher average borrowings outstanding on our revolver during the first half of the second quarter. We utilized net proceeds from the IPO to repay $109 million in borrowings outstanding on our revolver in mid May.

General and administrative expenses for the quarter were $6.7 million, compared with $2.5 last quarter, the increase was due to $4.1 million in non-recurring compensation charges related to divesting of 262,000 LTIP units and the payment of $1 million in contractual cash bonuses to members of senior management upon consummation of the IPO in accordance with their employment agreements.

For the quarter our net loss attributable to common stockholders was $8.1 million or $0.31 per common share and funds from operations or FFO attributable to common stockholders was negative $3.6 million or minus $0.14 per share. This compares to the loss of $4 million or $0.22 per common share and FFO of negative $948,000 or a negative $0.05 per share last quarter. Core FFO, which excludes the impact of the previously mentioned 4.1 million in non-recurring IPO related compensation charges and acquisition expenses of 1.7 million was a positive 2.2 million for the second quarter compared to core FFO of a positive 800,000 for the first quarter of 2013, which excludes the impact of 1.8 million in acquisition expenses.

Now turning to our balance sheet. As of June 30, we owned 4,089 single family homes for a total investment of approximately $487 million, which is included in our gross investment of real estate and deferred leasing cost and leasing tangibles on our balance sheet. Our portfolio is 78% leased and was comprised of 2,833 self managed homes that were 68% leased to residential tenants generally for a term of one-year and a 1,256 homes subject to long-term net leases to preferred operators for terms of five to 10 years.

During the quarter, we acquired 1,558 homes and incurred restoration and retenancy costs for a total investment of approximately 194 million. As of June 30, we owned 36.4 million in private mortgage loans which generated an average annualize yields of 12.2% with the remaining weighted average term of 125 days, an increase of 11.4 million from March 31, 2013.

As of June 30, we had approximately 58.5 million in cash and cash equivalents, and we had no borrowings outstanding under our 150 million senior secured revolving credit facility. Our available liquidity as of June 30 was approximately 208 million, comprised of 58 million in cash and our undrawn 150 million revolving credit facility. In addition, as a reminder, the credit facility has an accordion features that allows us under certain terms of conditions to borrow upto 300 million. We are currently evaluating various financing options available to us and expect to execute one or more of these options in the second half of the year.

This concludes our prepared remarks. I will now turn the call over to the operator, who will open the floor for questions. Operator?

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. (Operator Instructions). Our first question online comes from Jana Galan from Bank of America. Please go ahead.

Unidentified Analyst

Hi this is Jane for Jana. I am sorry if I missed this, but my question is on restoration cost, just wanted to check on the homes acquired in Q2. I think you had mentioned that they are mostly vacant. Are we close in reading that you have not spent much on those restorations yet?

Shant Koumriqian

Yes, for a number of the homes that were acquired vacant, those were acquired during the quarter, we had a pretty large June in terms of acquisitions specifically of vacant homes. So renovation cost for those homes will be incurred in the second quarter.

Unidentified Analyst

Okay. And what are you expecting in terms of trends for renovation costs. Are you still thinking somewhere to what you incurred in 2Q of that 9500 per home?

Stephen Schmitz

Go ahead Shant.

Shant Koumriqian

Yeah I think in general somewhere in that range, may be trending a little bit higher because as we acquire vacant homes the actual renovation cost in the vacant homes are little bit higher, compared to portfolios. When you acquire portfolio there is a certain amount of existing renovation cost that have been incurred by the seller. What we expect is when you turn homes that were acquired via portfolios your initial turn cost are going to be higher than our routine retenancy cost will be somewhere between a retenancy and a new renovation cost and a newly acquired home. So our expectation is that the renovation cost probably trend up higher than the $9,500 that we have incurred in the current quarter.

Laurie Hawkes

And somewhat we offset on that is the average age of the portfolio as you know that we have gone from 13 to 11 years and the younger the property typically the less it requires so that’s an offset.

Unidentified Analyst

Thank you, and just one last quick question. For the homes that underwent retenancy in second quarter you mentioned 4,100 per home, but I was curious that some of these homes had not yet undergone restoration if you had acquired them leased or that they had early previously undergone the first round of restoration?

Laurie Hawkes

Yeah and that’s a great distinction because essentially while portfolios that are leased that we acquired do in fact benefit us from the deferring the initial CapEx, we do find that the first turn will cost more than a typical retenancy and often are not at ARP standards because we didn’t do at the outset. So that is why it trends up what has been more typically a $2,500 or so retenancy cost if it’s a pure retenancy. We don’t expect any surprise to go away from that.

Operator

Thank you. Our next question comes from Mr. Dennis McGill from Zelman & Associates. Please go ahead.

Dennis McGill - Zelman & Associates

First question would just be on you mentioned needing 300 to 500 homes in a market to gain the ultimate scale you are looking for. Can you just review the areas where you see the best expense leverage and then I got a follow up on that?

Laurie Hawkes

In terms of the markets that we are focusing and we are trying to go for a core markets where as you well know we have heavy disclosure both in Arizona and Texas and we are looking actually to expand in North Carolina among others and we are looking at a 300 to 500 house for market as a critical looking to get to a potentially a thousands for a house. Shan do you want to add something.

Shant Koumriqian

So Dennis, in terms of what line items are more leverageable, obviously as you gain a little bit more scale you have more control over your contractors, you have the ability to provide them with more R&M work, restoration work and retentive work. So kind of the first area that you can really start to leverage all your local contractors and you also have the ability to start to lever things like your leasing program by putting eventually certain resources in local market that can help you with renewals and monitoring your leasing relationships and then a number of other areas, in terms of things like inspections, move-ins, move-outs. So are kind of the three primary areas where you start to get the 200 and 300 homes and it could be somewhere in the 200 to 300 range especially, if you are planning on growing within a particular market. You can start to leverage some of those specific functions that I talked about.

Laurie Hawkes

And I’d say on the maintenance side, you get the incredible efficiencies because on our only maintenance people we can then literally setup almost like a UPS type of schedule in the morning, just go out and see the different properties in our markets on a 2 to 3 hour schedule in terms of moving people around our principal sites.

Dennis McGill - Zelman & Associates

All right, would you [hazard] to guess what the difference in margin would be between somebody that owns 200 homes versus 500 or a 1000?

Shant Koumriqian

What the margin differential would be? No probably wouldn't

Laurie Hawkes

I think the differential Dennis would probably more relevant, if you look at people who are using third party property managers versus our own, and that as we well know has been anywhere from 200 to 300 basis points in terms of in-house versus out-house even before you put people on the ground on a regional basis.

Shant Koumriqian

I think the bigger aspect, Dennis as oppose to specifically margin is execution. So time to improve, time to cash flow in terms of days on market, in terms of being able to push your contractors to better perform locally. So I think that's one of the bigger things that we’ll see as oppose to specific margin improvement.

Dennis McGill - Zelman & Associates

Okay. Second question just had to do with the turnaround number you’ve provided Laurie. I think you said 29% for the quarter. Are all those residents that were acquired within placed leases?

Shant Koumriqian

The majority of them were yes.

Laurie Hawkes

Predominantly.

Dennis McGill - Zelman & Associates

Okay. Maybe it's a smaller sample for those that are original ARP tenants, but are you seeing any difference in turnover between those two buckets?

Shant Koumriqian

I think the sample size Dennis at this point is small, I mean remember within the REIT we acquired our first homes in June. So we're really not seeing those turns yet, a lot of the turnover stats that we disposed in the last several quarters have been related to tenants that we acquired.

Laurie Hawkes

What we do think is it's inline certainly with our fund experience which has gone far longer, close to five years now and we’d say that we think this is certainly an opportunity to continue to tighten the turnover levels as a result overtime and it's our in-consistence.

Dennis McGill - Zelman & Associates

Okay. And then just last question, on the acquisition pace of a 190 million of capital deployed in the capital. As you look to the second half of the year, do you expect that you can maintain that pace? Is there any seasonality to think about as far as getting in to the solar parts of the season? Any context around what you think about the pace would be helpful?

Stephen Schmitz

We think we can maintain it and we also think we can increase it because one of the benefits you get in this business is as you build acquisition machinery, there are in fact efficiencies of the acquisition machinery where once it's built, it's easier to go faster.

Operator

Our next question comes from Buck Horne from Raymond James.

Buck Horne - Raymond James

Following up on may be that last question or the answer. I guess the acquisition machinery is speeding up and you guys are going a little bit faster than planned at this point. We're kind of accelerating the timeline, at which point you may need to raise the new equity capital. How do you evaluate I guess your alternatives given where the stock is currently trading? I mean, you continue to go forward and accelerate the plans. Do you dial it back down? Do you start selling some of your older houses that may have got more appreciation? What's the alternatives if, or how do you think about the relative discounts the stock is trading at to NAV order book value?

Laurie Hawkes

Great question. We're very sensitive to not raising equity, that’s dilutive, that’s in terms of to our existing shareholders. We're looking at all the capital stack alternatives and we're very active and have not had problems as you all know on the debt side. And so we're looking at not only our revolvers but our term loans and all the other capital instruments, including securitization that is available to us.

Interesting enough that we have had a very responsive lender markets and we expect that that will continue to expand as people become more familiar with the sector. As you know we raised our first debt capital in 2010 and we’ve been very successful continuing that, and we don’t see that changing, Buck. So we are mindful of what’s in best interest of our shareholders and we continue to behave accordingly.

Buck Horne - Raymond James

Okay. Appreciate that. I guess, lastly, I mean, thinking about, I know you stepped up the purchases of kind of the individual one-off houses, but are you starting to see more portfolio deals out there from smaller aggregators, how is the industry evolving at this point? Are there better worst opportunities available in that space and how do you go about evaluating portfolio deals when they come up?

Stephen Schmitz

That’s a great question, Buck. We see both actually and we started the company five years ago based on one at a time acquisitions. And so we’ve got all the analytical machinery to do that and we continue to emphasize that business. With portfolios obviously you can invest a lot of capital all at once, you even get a footprint all at once.

But on the other hand, you are subject to somebody else’s underwriting, and so that’s the trade-off. But to answer your question, we still see portfolios out there and as comes primarily from smaller aggregators, they either haven’t achieved critical mass from a management standpoint or realize that they don’t really have the ability to raise capital.

Buck Horne - Raymond James

Okay. Are there still available at prices that I guess are attractive to you guys in terms of either yields or replacement costs or are they asking too much do you think?

Stephen Schmitz

Well we're still seeing them I mean it's like --

Laurie Hawkes

They always ask too much

Stephen Schmitz

It's like anything else I mean the ask is the ask right. And so it so in some markets we've seen some upward pressure but we continue to be very selective so it's not something that's gotten in our way at all.

Buck Horne - Raymond James

I know, I heard everything --

Laurie Hawkes

I think Buck, as you know, our average cost per square foot is still well below replacement cost. So and in fact even though we're seeing some increases by market the fact is that I understand replacement cost is moving up, I think it's probably 5% to 6% on a general basis and it could be as high as 10% depending upon the market. So even with increasing prices we were able to maintain not only or find attractive purchases but to find that it works very well for our net yields as well.

Buck Horne - Raymond James

Perfect. Thanks.

Operator

Thank you. Our next question online comes from Mr. Steve Stelmach from FBR. Please go ahead.

Steve Stelmach - FBR Capital Markets

If we look at your occupancy for the self-managed, the six months plus bucket that continues and move pretty nicely, can you give some color around what's the improvement do you see just in that natural maturation of the portfolio, the [seasoning] of the portfolio versus your own internal leasing capability from expanding over the past year or so? And then secondly to that do you guys have a number of occupied units owned for greater than 90 days and what that number looks like?

Laurie Hawkes

Well I'll address first the comment we think that the increased occupancy for properties owned for a six months or longer certainly been helped by our resident retention programs we are aggressively reaching out to all of our residents and we now are out 90 days, we'd love to be on a 120 if we can get out of 180 it would be great.

But essentially it's one that the longer we or the more we reach out, more responsive we are, and as we commented it on the resident call center, it's had a remarkable impact in terms of people feeling that it is not only user friendly, but the responsiveness as to you increases when we asked them has been remarkable, we're very pleased with our rental renewal increases.

And I think because of our service orientation it's made a big difference, we think there's a lot of room to improve and that is a big part of our focus, and I think that whole industry could benefit accordingly.

Shant Koumriqian

And Steve, I think in terms of, we don't have a 90 day or greater stat out there, as we look to the latter half of the year what we, we're evaluating one additional metrics to put out there, I think one item of distinction. Our six month stats, now remember we're buying both vacant homes and homes that come within placed leases, unlike some of our peers and those in-place leases have remaining weighted average lease terms typically about six months at the time we acquire them.

So when you look at our six months stats, you have some of those leases that we acquired back in June that turned in May or June or in the process of going through the retenancy and [renewal] process as well. So as opposed to some other operators out there that are not acquiring these many leased homes, I think that's more differential when you look at our six months stats, compared to some others so.

Steve Stelmach - FBR Capital Markets

Okay, and then just from the preferred operating program, can you just give us some (inaudible) how that's going in terms of demand for that offering is that demand increasing as the housing market recovers or is it declining in this sort of state of play there?

Stephen Schmitz

Well, it's been a great program for us and we view it not so much is driven by demand as by the availability of top flight operators, because it's a program where we tend to be very, very selective about who we want to do business with and become a preferred operator. And today, we've had we've teamed up with some very, very good people like the folks in Chicago, [Matt Thebolt] and we're having some conversations with some others out there. And so, that's been a very, very good program.

Will that increase as a percentage of our deployed capital? Probably not.

Laurie Hawkes

But you have to enjoy the fact that we're in the high 7%, net yields on those programs. So that's certainly an advantage.

Operator

Thank you. (Operator Instructions) Our next question on the line comes from Mr. Alex Barron from Housing Research. Please go ahead

Alex Barron - Housing Research

Hey, good morning guys. I wanted, Steve if you could comment a little bit on your thoughts of continuing to grow the company aggressively versus focusing on I guess getting to some high occupancy rates, I guess some of your peers have reported last week, they seemed to switch some, so I'm kind of wondering how you guys are thinking about it?

Laurie Hawkes

Well, I think we've been successful not only, growing the company, but also achieving high occupancy rates. So I think that we are moving in the right direction on both counts. Again it required certainly a significant amount of infrastructure and we are building that out, but effectively, we're quite pleased with our certainly with our six months or longer at 88% and even our current absolute occupancy at 78%.

As long as we see, the opportunities, are still certainly accretive plus the fact that we know [HPA] is happening in all of these markets and getting in as early as possible is certainly a plus for the company. We see it as an advantage continue on course.

Stephen Schmitz

We don't view those two objectives as mutually exclusive either. We have programs in place working on both.

Alex Barron - Housing Research

Okay, but I guess in terms of funding that growth given that I guess it implies you guys are going to have to get in to debt, that's not an issue from your perspective and also another quick question on how are you guys accounting for the retenancy expenses, that goes through the income statement or the balance sheet?

Shant Koumriqian

To answer your second question first, the retenancy expenses, a portion of them goes through the income statement and a portion of them go through the balance sheet. I mean quite frankly, at this point we haven't had a lot of retenancies. The majority of the CapEx at this point are initial turns or initial restoration either when we acquire home vacant or when we're acquiring a home within in- place lease but depending on the nature of the expense, if you're replacing an HVAC unit, it's got a long-term life you capitalize it, if you're doing a touch and paint and cleaning that gets expense, it really depends on what type of disbursement you're talking about and it just follows our capitalization policy.

Laurie Hawkes

And relative to your first question relative to capital, I would harking back to my earlier comments that as of June 30, we're totally un-levered and we will be accessing and are accessing our credit facility as well as evaluating all the various alternatives from term loans to other capital market, debt instrument as well as capital instruments available to us and we feel it’s prudent for us from a capital stack point of view to in fact lever the portfolio as it will increase the returns to the shareholders.

Operator

Our next question online comes from Omotayo Okusanya from Jefferies. Please go ahead.

Omotayo Okusanya - Jefferies and Company

Couple of questions, first of all, net yields I think there were some earlier comments carried that there were some markets where there was much more pressure on that yields, could you just give us a sense what those markets are?

Laurie Hawkes

I don’t think there is pressure on the net yield, I think we are seeing some compression as you Tayo in for instance Phoenix, which we had experience for some time. But we quite like the fact that we are well positioned with about 30% of portfolio in Phoenix to enjoy the potential home price depreciation which could be in terms of next four years close to double-digit if not more depending upon the projections assumed.

So we think that we are looking at some price, we are looking price appreciation in various markets it varies around the country, but our net yields in fact are managed by combination of operational efficiencies, purchasing programs, and the likes. So from a net perspective we’ve not seen much variation in spite of that compression on portfolio basis.

Shant Koumriqian

Yeah and Tayo I would say so far for the first couple of quarters, where we’ve acquired at a gross yield basis is in line with what we end modeled, so obviously as prices appreciate going forward there will be some pressure on the gross yields, but as already said we continue to implement measures in place that can hopefully help us manage to the bottom line of that yield.

Omotayo Okusanya - Jefferies and Company

That’s helpful. And then just second question, it sounds like you are going to be accelerating the opining of a couple of regional offices in the back half of this year since you are growing so quickly. Is that stuff that’s just already built into your budget or should we be thinking about that as additional cost in the back half of the year?

Laurie Hawkes

No it’s not only built since the budget in fact it’s more efficient, because what we will do is we justify our opening of regional presence based on savings, because if we use independent outsourcing for whatever purposes we felt that in fact by using for instance maintenance people that are on staff, it cuts out the $20 per trip per house for instance, it makes a difference. So in fact your numbers already included from the G&A.

Omotayo Okusanya - Jefferies and Company

And then lastly just home ownership associations are you seeing anything different in regards to their overall behavior? We have been reading some news that they are getting little bit more aggressive in regards to changing buy laws so that becomes harder for other single families for rents cause to buy a home that are under HOA?

Laurie Hawkes

It’s an interesting comment; we actually have a disproportion amount of our homes owned in HOAs. We like it because they happen to take good care of the homes on subdivision basis, and when you buy [master plan] communities and newer homes such as we on our master I mean and they are self managed, it’s a double edge sword. But in effect we are a growing presence in many of these HOAs and we are I think in close to 900 HOAs right now. And the bigger we become in some of those, we actually have increased if you will increased influence in terms of some of the policies and procedures that are implemented and the more we move them towards, for instance, electronic kinds of communication etcetera, we found that it’s exactly been to our advantage. It doesn’t mean that we occasionally don’t have some of the negatives that you are pointing to which is pressure related to behavior for investors.

Overall though we say that the HOAs have actually enjoyed our coming in because for many of the HOAs we’ve started to pay the bills, we’ve started to maintain the homes, we’ve started to in fact clear up any signs, and it literally allowed and we are now being able to get longer term leases as a result with a number of these HOAs. So I think the disruption is minimal and in fact the positives to the HOAs are overwhelmingly investments [plus homes].

Operator

(Operator Instructions) we have a follow up question from Mr. Alex Barron from Housing Research. Please go ahead.

Alex Barron - Housing Research

In terms of the depreciation expense, are you guys still using like the 27 year type average timeframe to compute that or how is that playing out, the number was a little higher I guess on average expense?

Shant Koumriqian

So when we file our Q, you can take a look at the, there is just two things in depreciation amortization, one is in-place reselling, so when you acquire a lease home, you have to sign some value to the in-place leases and that’s amortized over the remaining lease terms which often time is less than one year. So in the quarter there was about 1.4 million of amortization associated with that assets, so it’s affectively an asset that’s amortized within affectively less a year, then the remaining component to depreciation is amortized over a 27.5 year life for the original acquisition. There is a component that is [land] and that’s not amortized obviously and then the remaining portion is 27.5 years and then improvements range anywhere I think from 5 to 10 years or 5 to 7 years, depending on the type of improvement that we put in.

Alex Barron - Housing Research

Okay, and I think you guys mentioned you are looking in to some type of debt financings, are those going to be kind of securitizations or what are you guess, what are you using, more like a term loan or what are you guys thinking there?

Laurie Hawkes

It is literally of the entire spectrum. We have a number of options in front of us and given all of our backgrounds and our financial expertise we are weighing all the options and see what's most cost effective and what's also proving relative to creating what we consider to be a evolving capital stack that you would expect a well operating, well run REIT to have on its balance sheet.

Operator

We have no further questions at this time.

Stephen Schmitz

Well, we'd like to thank you ladies and gentlemen for joining us and participating in our call and we certainly do appreciate your support.

Operator

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

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