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American Homes 4 Rent (NYSE:AMH)

Q3 2013 Earnings Call

November 8, 2013, 12:00 PM ET

Executives

Peter Nelson - Chief Financial Officer

David Singelyn - Chief Executive Officer

John Corrigan - Chief Operating Officer

Analysts

Steve Stelmach - FBR

Jeff Donnelly - Wells Fargo

Anthony Paolone - JPMorgan

Tayo Okusanya - Jefferies

Haendel St. Juste - Morgan Stanley

Alex Barron - Housing Research Center

Buck Horne - Raymond James

Steve Emerson - Emerson Investment

Dan Oppenheim - Credit Suisse

Dennis McGill - Zelman & Associates

Operator

Good morning. And welcome to the American Homes 4 Rent third quarter 2013 earnings conference call. (Operator Instructions) I would now like to turn the call over to Mr. Peter Nelson. Mr. Nelson, please go ahead.

Peter Nelson

Good morning. And thank you for joining us for our third quarter conference call. I am Pete Nelson, Chief Financial Officer; and I am here today with Dave Singelyn, our Chief Executive Officer; and Jack Corrigan, our Chief Operating Officer.

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 caused actual results to differ materially from those projected in these statements. These risks and other factors that could adversely affect our business and future results are described in our press releases and in our filings with the SEC.

All forward-looking statements speak only as of today November 8, 2013. And 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. You can find our press release, SEC reports and the audio webcast replay of this conference call on our website at www.americanhomes4rent.com.

With that, I'll turn the call over to David Singelyn.

David Singelyn

Thank you, Pete. Today, I'd like to make some opening comments and then turn the call over to Jack to discuss our current operating environments and progress. He will then be followed by Pete, who will discuss our third quarter operating results and other financial matters.

Yesterday, the company issued a press release announcing its earnings for the third quarter of 2013. In our press release, we reviewed our results of operations for our first full quarter, since we internalized our property management advisors operations. In earlier this morning, we issued a second press release discussing our progress toward a securitization loan facility. Before we discuss the details of these press releases, I think it would be helpful to take a step back and review our activities over the past year.

One year ago this month, American Homes 4 Rent was created when we raised $530 million in a private placement offering of common equity. Since that time, the company has, one, raised additional common equity in two additional offerings: first, a $748 million private placement of common equity in March 2013; and second, in our IPO and concurrent private placements, which raised $887 million and closed this quarter in August.

Two, in December of 2012 and February of 2013, we acquired the single-family home portfolios assembled by management. And in June 2013, the portfolio owned by joint venture with the Alaska Permanent Fund. These portfolios were acquired for an aggregate of $1.4 billion of equity securities and included more than 7,500 single-family homes.

Three, in June of 2013, the company acquired the administrative or advisory operations and the property management operations from the company sponsored group. In addition, the company has been transitioning property management from third-party property managers to company operations. Today, company personnel handle all administration functions in all aspects of our property management covering more than 90% of our properties.

Fourth, on August 1, 2013, the company's common shares began trading on the New York Stock Exchange, under the symbol AMH, a proud moment for the company, its shareholders and its employees. Fifth, we have an $800 million revolving credit facility with commercial banks. This credit facility was modified during the quarter to increase its size and its terms, providing fuel for growth in the near-term.

And finally, last month the company issued a $110 million of Series A participating perpetual preferred shares with a current pay rate of 5%. These shares maybe redeemed by the company for common shares or cash at any time between years four and seven, at a price equal to the original issued price plus a participation amount based on home price appreciation during the period. The underwriters exercised 100% of the green shoot today, providing the company an additional $16 million of proceeds.

So a little information about the current statistics of the company. Today, the company has current market capitalization assuming all operating partnership units are converted to common shares of approximately $4 billion. As of October 31, the company had approximately 21,900 properties of which approximate 15,800 were leased.

With respect to our third quarter financial operations and financial results, Jack and Pete will provide a more wholesome review in a moment. I however am very excited with our third quarter results. These results begin to demonstrate the potential of our business model. For the third quarter, we are pleased to report positive funds from operations of $20 million or $0.09 per share. This is the result of significant rental progress in the quarter.

Our revenues increased to $49.5 million for the third quarter, is up from $18.1 million in the second quarter or a 173% increase. Net results in net operating income from lease properties of $31.2 million for the quarter, 191% increase from the second quarter.

Yesterday, as a result of the company's performance, the funds from operations generated in the third quarter and the company's outlook for 2014, the Board of Trustees initiated distributions on the common share of the company with a $0.05 distribution per share payable January 10, 2014, to shareholders of record on December 15, 2013.

In addition, we declared a distribution of approximately $0.22 per share on the company's newly issued Series A participating perpetual preferred shares. The distribution on the preferred shares is payable December 31, 2013, to shareholders of record December 15.

With respect to this morning's press release, Pete will provide additional details on the company's efforts with underwriters and rating agencies with respect to a securitization transaction.

At this time, I ask Jack Corrigan, our Chief Operating Officer, to give you an update on the company's acquisition and management activities for the third quarter.

John Corrigan

Thanks, Dave. I will first talk about acquisitions, then renovations, and finally our property operations. As described in our last investor call, we have slowed our acquisition pace, until we have more visibility to the timing and amount of our future capital raising activity.

During the third quarter, we have acquired approximately 2,900 homes for an estimated total investment of $450 million. This is about 50% of the pace of the quarter. We expect that the pace of acquisitions in the fourth quarter to be approximately 2,000 homes for an estimated total investment of approximately $300 million.

We have slows the pace down by limiting the number of MLS purchased and the number of acquisitions in our lower yielding markets. We purchased approximately 55% of our homes at trustee auctions in the third quarter.

The combination of limiting our purchases in lower yielding markets in a higher percentage of acquisitions from trustee auctions resulted in higher pro forma yields in the third quarter as compared to the second quarter by about 35 basis points. We continue to renovate at a fast pace renovating approximately 5,300 homes during the third quarter.

Now before getting into leasing and occupancy, I will first talk about our transition of third-party property management to in-house property management. We are currently internally managing 33 markets, representing more than 90% of our homes.

We plan to transition the remaining markets by the end of the year. This is significant, because of the effectiveness of our property management platforms relative to the third-party property manager platform. In addition, we are able to leverage the fixed cost of our platform over a greater number of properties.

Now, getting into leasing. We experienced a modest seasonality once the fall back-to-school season started. Despite this, our leasing numbers continue to be strong. Our active leases increased from approximately 10,200 on June 30 to 14,400 on September 30, and then to 15,800 on October 31. The pace is expected to be seasonally slower through the Thanksgiving and Christmas holidays. However, we expect to continue increasing occupancy throughout our portfolio.

Our occupancy at October 31 was approximately 72% on all properties, 85% on rent-ready homes, 90% on homes rent-ready for 30 days and 96% on homes rent-ready for 90 days or more, which we believe is a pretty strong metric for showing the demand for our product combined with the effectiveness of our leasing program.

We experienced strong tenant retention for the third quarter of about 73% with relatively modest rent increases averaging approximately 2%. I'd like to remind everyone that our tenant retentions statistics are based on a relatively small sample.

I'll now turn it over to Pete.

Peter Nelson

Thank you, Jack. I would like to review the third quarter operating results that were summarized in yesterday's press release. The company reported a net loss of $3.9 million for the third quarter on revenues of $49.5 million. As Dave mentioned, these revenues represent an increase of 173% over the second quarter, amount of $18.1 million.

Our reported net loss is primarily the result of a number of non-cash expenses. I will review these in a bit. Eliminating certain of the non-cash items in accordance with the NAREIT guidelines, the company's funds from operations for the third quarter was $19.6 million, resulting in FFO per FFO share for the quarter of $0.09.

As Jack indicated, we have 14,384 leased properties as of the end of the quarter. Revenues from leased properties in the third quarter were $48.7 million, a 177% increase from the amount reported for the second quarter. Cost of operations of leased properties was $17.6 million, resulting in net operating income of $31.2 million, a 191% increase over NOI for the second quarter.

Operating margins for leased properties improved to 64% for the quarter compared to 61% for the second quarter, in line with our expectations as we continue to reach a more efficient level of operations in many of our markets. Expenses related to unleased properties that are rent-ready are reflected in the company's operating expenses. These expenses are included as property operating expenses in the line referred to as vacant properties and other operating expenses.

As you may know, on average, it takes the company about 30 days to lease a property once it is rent-ready. Also included in this line, are some operating expenses not directly related to continuing property operations. The largest of these for the third quarter is $468,000 in one-time costs associated with fees and other costs to terminate third-party property managers in our significant and continuing efforts to internalize our property management to our own proprietary platform.

With respect to G&A. On June 10, 2013, the company internalized both its administrative and its property management functions. With respect to G&A expenses, through June 10, the company directly paid administrative expenses excluding payroll costs and a 1.75% annual fee based on the equity as a company. That fee is no longer paid, so the company is now responsible for all administrative expenses, including those that were previously paid by the company's advisor.

For the third quarter, our general and administrative expenses were $2.7 million. This compares to $4.4 million of expenses reported in the second quarter for the combination of advisory fee and administrative expenses.

As I previously mentioned, there are number of non-cash expense items that are generally non operational in nature. I will review these here. The largest of these is depreciation and amortization. For the third quarter the company reported $24 million in depreciation and amortization expense. In addition to depreciation of operating assets, this also includes amortization of deferred leasing commissions and certain intangibles relating to the acquisition of the Alaska Property and the internalization transaction in June.

Acquisition fees and costs incurred in the acquisition of properties are generally capitalized as a component of the acquisition cost of the asset required. However, if the property is leased when it's acquired, GAAP requires such cost to be expensed. During the third quarter, we incurred $496,000 of these costs, and that are shown as an expense in our income statement.

The company has also been left with some ongoing non-cash accounting related to the re-measuring of the value of the Series E units, issued in connection with the internalization transaction. Those Series E units are shown as a liability on our balance sheet. The change in value each period is estimated and is shown as an adjustment in our income statement each quarter. This year it's shown as an expense.

This together with non-cash stock compensation expenses associated with grants of stock options resulting approximately $600,000 of non-cash expenses during this quarter. Going forward, we expect to have a non-cash adjustment like these on a quarterly basis.

Now, let's take a look at our balance sheet as of September 30. As Dave previously mentioned, we've been very active over the past year raising equity capital. This equity capital is presented on our balance sheet as Class A or B common shares issued at the company level. We also have non-controlling interest, which is equity issued at the operating partnership level.

As of September 30, the company's book value capital was approximately $3.5 billion and its market cap is approximately $4 billion. During the third quarter, the company modified its credit facility. The modifications added an additional lender, extended the maturity date of the facility to September 2018 or five years from the date of the modification; and increased the size of the facility from $500 million to $800 million.

As of September 30, $238 million was outstanding on this facility. This outstanding balance was partially repaid with the proceeds of the participating preferred stock offering in October.

As Dave previously indicated, the company has been working with banks, underwriters and rating agencies to evaluate various credits structures for the company, including securitization and institutional term loans. As you are aware, the rating agencies has been evaluating the issues and concerns surrounding credit facility structures with the single-family rental industry for the past few years.

During this recent period, we have met with each of the rating agencies and each rating agency has already made field visits to our offices in connection with the due diligence of the company. The company continues to work closely with the rating agencies to finalize the appropriate structure and terms of a securitization financing transaction and expected to be in the market in the next 90 days.

That's the end of our prepared comments. Operator, you may open up the line for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) At this time we would like start with the first question and this comes from Steve Stelmach with FBR.

Steve Stelmach - FBR

Guys can you repeat maybe, it was good color around sort of your progress on sort of the financing side. Can you just give us an update on where you feel comfortable with your leverage going forward? I know you guys tend to be a little bit more on the conservative side, but just any more recent or updated thoughts on where you feel that going?

David Singelyn

Well, we look at leverage on anything that provides benefits to the common, both preferred and in debt structures. We have increased our revolver to $800 million. As Pete, indicated we have been working with the rating agencies and underwriters on looking at not only the securitization, but term-loans and look to do a pretty sizeable transaction here over the next 90 days. I don't think our guidance is any difference than it's been. We've talked in that 30% to 35%, 40% range combined, maybe a little bit higher as we go on, but we're going to take it in bite size pieces.

Steve Stelmach - FBR

Jack, you talked about acquisition pace. You reminded us that was supposed to slowdown in the third quarter, which it did. And that was more a reflection of available capital. It sounds like guidance now on terms of acquisition is more of a yield focus. Is that the right inference I took away from that? And if so could you give us a little bit more color on that?

John Corrigan

No. I wouldn't say that. I think that we get our best deals at the trustee auctions, so when we cut back on acquisitions, we cut back on the MLS purchases, even though we get good deals on the MLS purchases, just not as good. So the effect of that is to raise the yields, but it's not strictly a focus on yield.

Steve Stelmach - FBR

All right, the last one and then maybe I'll hop back in the queue. Can you just give a little more color around the JV? The Johnson Capital JV that's been pretty interesting acquisition channel for you guys. Should that change your sort of make-up or profile of what you're acquiring or maybe the volume of what you expect out of that channel, would be helpful?

John Corrigan

Right now it's in infancy. We are in the process of bidding on our first packaged, it's a relatively small package that we'd like to kind of experiment a little bit and make sure we know exactly what we're doing before we ramp it up. So it has the potential to be something significant, but at this point I would say that's three to six months away.

Operator

Our next question is from Jeff Donnelly at Wells Fargo.

Jeff Donnelly - Wells Fargo

Pete, I saw the announcement, you're looking to engage an advisor to explore that securitization. What are you guys thinking from the size perspective? Something along the lines that we saw that just maybe would mirror Invitation Homes?

David Singelyn

I think that's a good proxy for our first transaction, yes.

Peter Nelson

I think it leads to a successful execution if we keep the size in that range.

Jeff Donnelly - Wells Fargo

I guess it is the bigger thinking that you mentioned the overall leverage of around, say 30% to 40%. Is the logic here maybe that you're going to try and use one of these securitizations to maybe put higher loan-to-value leverage on a place of your portfolio, but it keeps a good chunk of your assets unencumbered, so maybe you can progress to an unsecured rating?

David Singelyn

That is one of the thoughts of keeping flexibility and allowing us to do things in the future, keeping some of our assets unencumbered for potential other transactions.

Jeff Donnelly - Wells Fargo

I'll hop back in the queue in a sec, but just on rollovers, Jack, I think I missed your numbers on rollovers. Are you able to repeat those for what retention rates were and the average rent increases? And then I guess as maybe just a follow-up, did you see any rent declines in any markets or regions? And I'm just I'm curious, how did you guys go about determining the rent increase you did pass through?

David Singelyn

The numbers were 73% retention and approximately 2% rent increases. We didn't see any decreases. I won't say on any individual house we may have had a decrease, but regionally we didn't see any decreases. But we're really still in the process of training our people to get the increases. I think there is a lot more room to move in and this is pretty small sample of the portfolio. So I would expect that that number will go up in the future, but time will tell.

Operator

Our next question is from Anthony Paolone with JPMorgan.

Anthony Paolone - JPMorgan

I guess first as an aside, just my condolences on your former colleague Harvey Lenkin and his passing. On the securitization, I was just wondering if you can comment on durations. I know in the past, maybe it's been somewhat tongue-in-cheek, but you guys have said, you're not so much debt adverse, as you are just maturity adverse. And it seemed like the Invitation Homes deal was about five years. So just wondering how you think about that kind of duration as you form out the capital structure?

David Singelyn

I think we're looking at both five and ten year structures at this point.

Anthony Paolone - JPMorgan

And then Jack, on the yield, you mentioned just up 35 bps, but can you just remind us of what the starting point was there?

John Corrigan

We were I believe 62 bps in the second quarter on pro forma basis. And in the third quarter we're up 35 basis points from that.

Anthony Paolone - JPMorgan

Is that before or after CapEx number?

Peter Nelson

That was including a reserve for CapEx and vacancy in the numbers. That's an economic yield.

Anthony Paolone - JPMorgan

And then just a couple of additional questions on the turnover. Any statistics relating to the non-renewals and how much down time you're experiencing to get a new tenant in there? What those new rents look like relative to the prior one?

Peter Nelson

The new ramps are roughly the same about 2%. The downtime in markets where we're managing and is right in our expectations that the costs are all over the place at this point and in a relatively small sample. We have stuff coming from third-parties and we have stuff in Las Vegas that's $0.25 to $0.25 a foot. And we have homes that are coming from pre-existing tenants that we had never renovated first. So it's really hard to get a good number or good sense of it, but we think that our previous estimates of about $0.50 a foot are going to come in and be in line.

Anthony Paolone - JPMorgan

And then a last question. The decision to put a dividend out there at this point, how did you go about that? Do you need to do that, given where taxable income or is this just a decision that you want to start giving investors capital back?

David Singelyn

I think if you look at not only the fact that now we're generating positive earnings, when you look at our projections of dividend requirements next year, those were the factors that went into making the determinations. So we don't necessarily going to have taxable income in 2013. We anticipate we will have taxable earnings in 2014. And that is the reason that the payment, although of record December 15 is paid on January 10. It will go against the taxable earnings of next year.

Operator

Our next question is from Tayo Okusanya with Jefferies.

Tayo Okusanya - Jefferies

Couple of questions. With the line now expanded, is it the preferred deal? You might do something on the securitization market. How should we really start to think about acquisition volume going forward after the recent slowdown?

John Corrigan

In the fourth quarter, we did, I had said that we estimated that we've acquired about 2,000 homes, really the next real capital raise is probably somewhere in the 60 to 90 day out range, once we see what that is, and we may expand it to $150 million or maybe up to $200 million a month in acquisitions. So it really depends on the successful timing of our capital rates.

Tayo Okusanya - Jefferies

Would you say that near-term there is more of a focus on, rather than buying a new home, there is more of a focus on what you have in place stabilizing it, generating cash flows from that to help you kind of have cash in hand to buy assets going forward?

John Corrigan

We are very, very focused on operations. We have been spending the last year, building the operating platform. We have spent significant time, bringing third-party properties that have been managed by third-party property managers in-house, where we can optimize their performance. I would say our focus is probably first and foremost making sure that the assets that we own perform well, because that's the basis of building the business.

And that I think is evident in this quarter's operations, where you can see the number of additional properties that have been leased and the fact that we are leasing properties today slightly above our pro forma projections, when we bough the properties. So we first and foremost are working to make sure that what we buy produces sound returns and then else we continue to look at good markets and to continue buying quality assets that meet our need.

Property management being in-house has a intangible benefit that we have found. And that is when you have people in your own company, they are managing the properties, they can help the acquisition group refine its neighborhood, as to what neighborhoods are leasing well and which ones are not leasing as well. And so I think the whole program of doing both and really focusing on property and management first have some synergistic benefits.

David Singelyn

For the most part, I'm really the only major overlap between acquisitions, renovations and property management. So they're are all very focused on their jobs.

Tayo Okusanya - Jefferies

Could you just tell us the gross yields on the 2,900 homes you bought in the quarter? Could you just tell what that number was?

Peter Nelson

Gross yield, we don't really look at it in terms of gross yield, because if you're in Texas or Florida or Illinois, where there is high property taxes; if you focus on gross yield, you're going to end up with a low net yield, so we really only focus on net yields. I didn't even look at that.

Tayo Okusanya - Jefferies

And then the 35 bps increase you discussed earlier in your commentary about the increase in the net yield. Is that for the 6.55, is that on all 21,000 assets right now? Or is the 6.55 just on the 2,900 assets you bought in the quarter?

David Singelyn

2,900.

Operator

Our next question is from Haendel St. Juste.

Haendel St. Juste - Morgan Stanley

So your stock continue to trade above IPO unlike a number of your peers. So curious as to where equity issuance lies among your capital raising alternatives today?

David Singelyn

Well, we are looking at all types of equity issuance, preferably looking to provide leverage to the common shareholders in place today. So we are very, very pleased that we are trading where we're trading. But we're exploring options other than common today. It doesn't mean that common is not going to be an option some time in the future, but we're looking at other more attractive capital to the capital stack today.

Haendel St. Juste - Morgan Stanley

I know there weren't a lot of homes sold in Phoenix, but curious on the decision to sell there was an opportunistic sale someone approach you? And how should we think about other such potential sales within the portfolio? What your thoughts are on potentially some opportunistic sales here near-term?

John Corrigan

We didn't sell any homes in Phoenix.

Haendel St. Juste - Morgan Stanley

Then, perhaps, can you talk more about the homes you bought here in October, the 600 homes or so. Can you talk about ow perhaps the markets, the net yields, the price per home? And what you're seeing in the marketplace in general? Any portfolio deals out there?

John Corrigan

We are actively looking at portfolio deals. So far they either have been over priced or they have more products that isn't American Homes 4 Rent product then the stuff that fit our criteria. So far we're framed from any portfolio purchases, although we see more and more all the time and eventually I think we'll find one that works.

And we are also evaluating, we have about 5% of the homes in our portfolio that are a $1,000 rent and under. And we're looking at profitability of those homes relative to the higher price ones or higher rent homes. And if we see the best, a good area to be in, we may expand our criteria. But at this point that hasn't proven itself out.

Haendel St. Juste - Morgan Stanley

And I just want to go back and clarify something on Phoenix again, and maybe it's a definitional item. But looking here, it said it on July 1, you had 1,005 properties in the MSA. But at quarter end, you had 962. So again, maybe it is something we're missing here, but just curious if perhaps something we're missing?

Peter Nelson

The only thing I can think of is that we misclassified some Tucson stuff into Phoenix or vice versa.

Operator

Our next question is from Alex Barron with Housing Research Center.

Alex Barron - Housing Research Center

I wanted to ask you regarding your SG&A rates. So this quarter you got about 6.9%. Do you think that that's sustainable or can it improve from here going forward or should it be higher? What should we expect as we move forward?

Peter Nelson

You're thinking that as a percentage of revenue?

Alex Barron - Housing Research Center

Yes.

Peter Nelson

Yes, we typically look at it based on asset size or gross assets or market cap. We're running at about 28 basis points of market cap, which we're actually fairly proud of that level that we've achieved such scale on a very efficient G&A base. And I think we'll only become more efficient. How quickly that will happen, it remain to be same. But I think it will only become much more efficient. Concerning, we went through substantial growth. It's hard work to get through the IPO, we've done all that and now we're on the other side of that with a pretty stable infrastructure here.

Alex Barron - Housing Research Center

And the 28 basis point is for quarter?

Peter Nelson

That's an annual, I annualized it.

Alex Barron - Housing Research Center

We've seen just a general slowdown in the market for new home sales and lots of builders sell homes at a discount at yearend. Have you guys looked into buying new homes for rent purposes?

Peter Nelson

We haven't for probably a little over a year, we have not bought any new homes. We bought some builder closeouts when some of the builders were a little more cash desperate, but we haven't bought any for quite some time.

Alex Barron - Housing Research Center

Are the economics on those pretty similar to the stuff you buy on existing or foreclosure type homes?

Peter Nelson

No. One of the main things that we look at, one of the three main criteria's, buying below replacement cost and new homebuilders probably are not going to sell it to you at the low replacement cost.

John Corrigan

So the volume we've done cumulatively is very, very insignificant.

Alex Barron - Housing Research Center

I guess the existing home market has also started to show more inventory recently. So other than the fact that you're waiting for more capital, have you seen that the yields on properties today are better than say six months ago?

David Singelyn

No. The prices have gone up over the last six months. I think that the price increases for homes has stabilized, but there is still going up not as much as they were earlier. And rents maybe going up a little bit too. So I would say they're really right in line with what they have been and we're acquiring 2,000 homes a month. I think we'd be back in the 6-2 range again.

Operator

Our next question is from Buck Horne with Raymond James.

Buck Horne - Raymond James

I was wondering, I guess, following-on to Alex's thought process. Can you give us a little color on which markets look or may be they're least attractive now for new investment or seen a greatest yield compression in your metrics? And conversely, which markets are you seeing the strongest potential for rent increases?

Peter Nelson

The biggest yield compression is California, Phoenix and Las Vegas and the Pacific Northwest, Seattle and Portland. That's where we've seen the biggest yield compression. And in terms of where we're seeing the best yields, really it's the markets where there is no institutional competition. We're seeing pretty good yields. And I'm sorry, I don't really want to get into that. We might end up costing ourselves some competition.

Buck Horne - Raymond James

Can you maybe give us a little data on your recently signed new leases? What the rent income ratios for your tenants looks like?

Peter Nelson

We're seeing on average about 4.6x coverage.

Buck Horne - Raymond James

One last one, just on Haendel's question, said another way, have you sold any homes in the portfolio recently?

Peter Nelson

We're selling a small number of homes. I think we sold seven in the third quarter, because we bought them at trustee auctions and they ended up either after we bought them, they've made the community or rent restricted, which means they can only rent a certain number of houses in the homeowners association and so rather than fight back, we decided to sold them. I think there was a small gain on those even with the transaction cost. And some we may have bought without knowing they were in a rent-restricted zone. So that's really the primary reason we sell houses.

Buck Horne - Raymond James

But you're not selling any properties in those yields compressed markets, as a strategic decision?

David Singelyn

No.

Operator

Our next question is from Steve Emerson with Emerson Investment.

Steve Emerson - Emerson Investment

My apologies, I had to jump off a second. Many shareholder friendly REITs give an estimate of actual market value of their assets, such names such as Colony and others. Perhaps you can help us give a range for what some kind of market-based asset value would be? Or any steps that would help us get there?

David Singelyn

One of the things that we are doing this quarter, which I don't know I've got mentioned, I think it's in the press release, is there will be a supplemental information package. And I believe it's already posted up as of this morning, on our website. And it has a number of different analyses in that package. One of those analyses is the HPA buy market where we own our properties and we also lift next to it how many properties we own. And it's not necessarily an HPA based on our specific properties that based on the MSA in general as published by the FHFA, but it's but it should give you a proxy for evaluating that.

Steve Emerson - Emerson Investment

Well I certainly would suggest that you feature some number as your competitors do or broader REIT competitors in and feature it because obviously, that is one of the main attractions for owning your REIT.

Operator

Your next question is from Dan Oppenheim with Credit Suisse.

Dan Oppenheim - Credit Suisse

I was wondering, if you can talk a little bit more in terms of just the acquisition policy and the focus on yields. The comments about some of the yields compression in the West Coast market, such is interesting in that, as an owner of properties yields compression is your friend. And in some of the markets like Indianapolis and such are markets where over time, there isn't as much price appreciation. So just wondering how you're balancing that in terms of thinking about yields, but also thinking about the appreciating potential of the homes?

John Corrigan

Well, we're looking at where we can get the best discounts currently to market, and in general if there is less institutional competition at the auctions, you're getting the properties with the built-in appreciation, because you're buying them at substantial discounts to market. So we do look at that and we also look at areas where we know we can ran it. As everybody ask the question or we get the question quite frequently, is this is a business or a trade? We're operating this is a business. And so where the demand for product and where we can get prices at the biggest discounts to both replacement costs and current value is really where we're focused.

Dan Oppenheim - Credit Suisse

And then, in terms of the comments, in terms of maximizing yields and so looking at different homes and such. Have you seen anything in terms of the yields you're getting on different sized homes? Maybe that is also addressed by your comment earlier in terms of the homes at lower rent levels. But wondering, clearly, some of the homes are much larger than what others have been buying. How are you seeing the yields on the different sizes of homes?

David Singelyn

It's really not size-dependent as much as value-dependent. You don't get the same correlation of ramps going up per dollar value that a home goes up. So that's why rarely do we buy a house for more than $300,000 or $350,000, because at that point you see the ramps kind of level off and you don't get the same value. On the lower price terms, and again, we're analyzing our portfolio.

We have like I said about 5% of that, I consider 1,000 and underwritten in rents kind of the lower price homes, and so we're evaluating what the turnover costs are on those relative to and the quality of tenants in those relative to the rest of our portfolio. I mean really is going to be important to us to determine, we're probably one other likely consolidators of the industry and we need to figure out whether we want to be to in that lower priced business.

Operator

And our next question is from Dennis McGill at Zelman & Associates.

Dennis McGill - Zelman & Associates

First question would just be more big picture. Having been at this a year, I was wondering if you could maybe talk about what you've found to be maybe the biggest surprises? Whether that'd to be upside opportunities or challenges that you address from this point forward?

David Singelyn

I don't know, but there is one thing I can tell you that over the last two years that we've been doing this is it's been a continual learning process. We have found through that process, I guess maybe if you want to say one of the largest ones is the significant difference in the execution abilities of property management between what we've been able to achieve and what we're achieving even using third-party property managers in a number of our markets, they were a few that were very, very good, but for the most part, we saw significant improvements when we brought management in.

We have continually been learning through the property management process. I think we've got a very, very good structure in place. We've got our call centers in place over the last four to six month. So the company as it goes through a growth process, it's going to always be learning. And I think we've been doing just that over the last two, but I would probably say if I had a pick one, that would probably the one.

Dennis McGill - Zelman & Associates

Sorry if I missed this, but have you quantified that financial benefit of bringing the management in-house?

Peter Nelson

On some of our road shows we've provided, some of this I think was also in our S11s, but we have seen in markets where third-party property managers, were leasing 15 to 20 a month and our inventory was growing from one month to two months of inventory all the way up to four, five and six months. And we've been able to bring that in-house, and within a month we're now leasing about 100 and being able to bring our inventory down to less than one month worth of inventory in the marketplace. And that's enabled us to basically execute some of the fact that we are leasing properties on average within 30 days of being rent-ready.

And we've been able to do that at rents that are equal and in many cases that rent levels are higher than what we were getting from the third-party property manager. So the quantification's more in the quality of execution than the timing of getting these things rented. And having a rented inside 30 days as opposed supposed inside a 120 days once being rent-ready.

John Corrigan

Dennis, I mean, have you quantified branding, the consistency of execution, leveraging a call center, velocity of leasing as Dave mentioned. We figured out earlier on when we did this, this is the way to go and I think it has really shown in our performance to date.

David Singelyn

It also gives you a much higher insight into your business when you're operating it yourself as we have seen and it's assisted in our acquisition program, as I mentioned before.

Dennis McGill - Zelman & Associates

The point being, it's beyond just the management expense itself?

David Singelyn

Absolutely. So it has a tremendous benefiting accelerating rentals and improving the topline, but the management expenses are not insignificant. We were paying on average 10% to 11% combined leasing and property management fees. And we expect this to level out at somewhere between 7% and 8%. And in addition to the 10% to 11% we were paying, we were paying for a team of accountants to reconcile the monthly reports into our books. Our own property tax people, the 7% to 8% is going to include all of the accounting and the property tax component and HOA component. So I think that the cost saving is going to be very significant.

Dennis McGill - Zelman & Associates

And then, just last question. From a supply perspective, if you adjust for the seasonal slower time in the fourth quarter or currently, how would you describe supply of single-family rentals available today as you look across your markets?

Peter Nelson

For acquisition or for leasing?

Dennis McGill - Zelman & Associates

For leasing.

John Corrigan

Its market specific and it comes in a way, as we've seen couple of markets get flooded. We have a rental supply, Phoenix and Tampa were the two, where we actually have significant competition for leasing. We believe our program is better than anybody else's. So we're still able to lease through that, but really in other markets where there is no institutional competition. We haven't really seen any significant oversupply in rental houses. And even in those markets at all, it all cleared up after about two or three months.

Operator

Our next question is from Jeff Donnelly of Wells Fargo.

Jeff Donnelly - Wells Fargo

I just wanted to come back to just one or two questions. Someone was asking me before about the opportunity for portfolio transactions. I am just curious about helping us set our own expectations. Do think just because of the, I guess I'll say, the high-quality standard that you guys have around your homes, do you think there is much opportunity for you to acquire peers that maybe never got scale?

Peter Nelson

If we find out that the lower-priced homes is a profitable business, we could acquire more competitors. But I would look for something similar to what we're doing in the NPL program, where we figure out a way to bifurcate portfolios and we acquire a portion, somebody else acquires the other portion.

Jeff Donnelly - Wells Fargo

I guess you had also talked earlier in your remarks about the process of internalizing a lot of your regional offices. And I think there is still more to go. Are there any costs, I guess I'm talking about one-time nature maybe in your operating expense or G&A this quarter or are you anticipating fourth quarter just from that process?

John Corrigan

There are costs. I think Pete mentioned we have $480,000 in one-time cost. It's probably a little higher than that, if you take in the cost of our people going out totally filing all the books, but those are the costs actually paid directly to third parties to cancel the contract.

David Singelyn

And it's varied in the operating expenses and vacants and other cost.

Jeff Donnelly - Wells Fargo

And just a last one was on margins. I think, Pete, you had mentioned in your remarks that stabilized margins were 64% in the quarter.

Peter Nelson

I wouldn't call it stabilized. I mean we're on the road to stabilization. We always expect that to be 67%, 68%, as we get there. Because remember, we have operating properties in market that would have just a couple hundred leased properties, at this point. That's still pretty inefficient.

John Corrigan

We think 500 homes is a stabilized level.

Jeff Donnelly - Wells Fargo

I think that answers my question. I was curious how are you calculating that? Is that just by a market you deemed stabilize, regardless of whether it includes home that are not or is it just an average for all the homes that you.

David Singelyn

It's not that simple average. But we go market-by-market and look at the people that are spread between market. Obviously, we pickup the direct expenses that are in there for sure. And then, we just have allocation assets that we use based on each market that make sense kind of like not as high in part, but it's along those lines.

John Corrigan

When you're looking at properties are going to be vastly different, depending on property taxes, really the biggest variable. So you're margin maybe 60% in Texas and Florida and Illinois, and 70% in Arizona and Las Vegas and other areas where property tax rates are relatively low.

Peter Nelson

And there is nothing wrong with either one of or any of them.

David Singelyn

And Jack mentioned, I'll just reiterate. That's the reason we focus on net yields more than gross yields, because its at the end of the day the net yield that matters and expense structures do vary market-by-market.

Operator

At this time, there are no other questions. I will turn the call back to Mr. Nelson for any closing comments.

Peter Nelson

Thank you everyone for their interest. And we look forward to seeing some of you in San Francisco next week.

Operator

This concludes today's conference call. You may now disconnect.

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