American Residential Properties' CEO Discusses Q3 2013 Results - Earnings Call Transcript

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

American Residential Properties (NYSE:ARPI)

Q3 2013 Earnings Conference Call

November 12, 2013 11:00 AM ET

Executives

Shant Koumriqian - CFO and Treasurer

Stephen Schmitz - Chairman and CEO

Laurie Hawkes - President and CEO

Analysts

Haendel St. Juste - Morgan Stanley

Steve Stelmach - FBR

Dennis McGill - Zelman & Associates

Omotayo Okusanya - Jefferies

Alex Barron - Housing Research

Operator

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

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

Shant Koumriqian

Thank you. Good morning, everyone and thank you for joining us today for American Residential Properties' third 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 third quarter results, Laurie Hawkes will discuss our operating platform and trends in our portfolio, and I'll review our third 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 today 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 and welcome ladies and gentlemen, we made significant progress in executing our business plan during the third quarter, we deployed our largest amount of capital to date, 225 million while simultaneously achieving an occupancy rate of 75% on the entire portfolio and increasing our long term occupancy on homes owned six months or longer to 92%. Our solid execution resulted in funds from operations of 1.9 million or $0.06 per diluted share.

Focusing on a number of our quarterly highlights, we acquired 1,351 homes in the third quarter for a total purchase price of approximately 204 million which represents the largest dollar volume of homes purchased in a single quarter since our company's inception. Our third quarter purchases brought our home ownership up to 5,440 properties in 13 states as of September 30, 2013, which represents a 33% increase in the number of homes owned in our portfolio.

Including renovation cost, we had a total investment of 698 million in our portfolio as of September 30, resulting in a 43% increase in the cost basis of our portfolio compared to the end of the prior quarter. Of the homes acquired in the third quarter 92% or over 1,200 homes of our total acquisitions were self managed homes underscoring our emphasis to focus primarily on the build-up of our self-managed portfolio in our core markets. While there's been some compression in gross yields in a few markets our new acquisitions were underwritten with a weighted average gross yield of 11%.

In spite of increasing home prices we're pleased that overall gross rents on our self-managed portfolio, increase modestly during the third quarter from 10% to 9.9%.

In addition to our robust acquisition activity we also were pleased with our overall leasing results during the third quarter. The number of leased properties in our portfolio increased by 880 or 28% compared to the second quarter, we attained 75% occupancy on the entire portfolio in the face of a significant increase in vacant property acquisitions.

In addition, the increase from 88% to 92% occupancy for homes we owned six months or longer is further evidence that we've identified markets where rental demand is strong. We believe that our customer centric approach and commitment to ensuring that we have highly satisfied restaurants will result in lower turnover and contribute to higher occupancy rates in the future. During the third quarter of 2013 we also succeeded in negotiating rental increase for renewals averaging 3.6%, an early indication of rising rental income. Finally with the increase in the number of leased properties our total revenue reached 11.1 million in the third quarter, an increase of 32% from the prior quarter.

I'd like to make a few comments regarding our acquisition strategy. We remain focused on the core markets that we believe demonstrate economic, geographic and employment trends that are favorable to the rental market while also offering opportunities to buy existing homes at a significant discount to their replacement cost. This includes markets in Texas, North Carolina, Georgia, Florida, Tennessee and Indiana. These markets provide significant yield diversity with some markets presenting greater opportunities for higher current yields, and other markets providing greater opportunities for home price appreciation, our investment activity during the third quarter focused on a number of these key growth markets where grow yields are relatively stronger, approximately 60% of our new investment activity was concentrated in strong job markets of Houston and Dallas. While we’ve curtailed acquisition activity in Phoenix where there is greater yield compression we are very pleased with the level of investment that we have made in this market particularly given the markets recent and future potential for strong home price appreciation. Our ramp up in acquisitions and other attractive markets has broadened our geographic diversity within the portfolio such that the Phoenix market today now represents only 28% of our total portfolio.

Beyond our continued portfolio diversification, we also have shifted our emphasis back to where we started over five years ago to our single home flow business. In the first quarter, our flow business represented only 8% of our acquisitions whereas in the third quarter it is grown to 65% of our acquisition volume while we continually evaluated portfolios we’ve been selective seeking strategic opportunities as the economics of portfolio acquisitions have changed significantly from a year ago with price expectations often unrealistic. Today, we have deployed capital ahead of our expectation; however, as noted by our monthly volume including October volume of 32 million, we’re deliberately moderating our acquisition pace in the coming months commensurate with the timing of access to capital and to continue to focus on improving operational performance.

The positive trends that we’re presenting were key factors in our ability to expand our credit facility with our lending syndicate during the third quarter. We were able to more than double the size of our corporate credit facility from 150 million to 340 million with an accordion features that can increase our maximum borrowing amount of 500 million. Importantly four new major banks jointed our lending syndicate, KeyBanc, Citibank, Barclays and Comerica. Including these four banks, we have now had credit and risk committees of eight and the largest banking institutions in the country evaluate the economics of our business model and determine that we’re an attractive borrower.

We believe that the success we have had in attractive major banks to our lending syndicate and expanding our overall access to capital is a strong endorsement of our business model. We were very pleased to see the successful completion of the first single family rental securitization last week. In our opinion, this is a game changer for the industry. The opening of the debt markets to SFR securitization provides strong evidence that intuitional investors have started to understand that this is an attractive long-term business not just a trade based solely on home price appreciation.

After reviewing a variety of term sheets and structures over the past year, the economics appear much more compelling than even a month ago and we now view it as an attractive funding vehicle to help reduce our cost of capital and generate a higher return on equity. As you would expect, we continue to evaluate all available financing vehicles that best fits our capital structure.

With that I now would turn the call over to Laurie Hawkes our cofounder President and Chief Operating Officer. Laurie?

Laurie Hawkes

Thank you, Steve, and good morning, everyone. We are very pleased with our third quarter results which demonstrate both the efficiency and the capacity of the platform we’ve developed to effectively operate and manage our expanding portfolio. We continue to build larger presence in our core markets and made excellent progress on executing our regional strategy. I am going to discuss the integration of our latest acquisitions, our restoration acidities, leasing and occupancy trends and our operations in general.

We continue to acquire in our core market and as indicated on previous call, we believe we need to own 300 or more homes in the market to begin leveraging the operational efficiencies that comes with critical maths. With the purchases we made in the third quarter, we now have achieved or our approaching operational efficiencies in righty eight figs with 1300 or more home in Arizona and Texas, 400 or more home in North Carolina, Indiana and Illinois and nearly 300 home in California, Georgia and Florida. More than half of our purchases in the third quarter as Steve said, we’re in the State of Texas primarily in the Houston and Dallas markets where we now have more than 1500 properties in our self-niche portfolio as well as regional office to manage the inspection, acquisitions, renovations, leasing and maintenance of those properties.

Shifting our assets back to our single home flow business which constituted roughly two third of our acquisition volume in both the second and third quarters created a significant step up in our restoration activity particularly during the third quarter and will continue to do so going forward. During the third quarter, our team completed 834 restoration projects representing a 250% increase from 235 completed in the second quarter. Despite the substantial increase in restoration activity both the average time and average cost to complete restoration project remains largely unchanged. Our restoration projects took an average of 16 days to complete in the third quarter compared with 18 days in the prior quarter and restorations were completed at an average cost of $9408 compared with $9500 in the prior quarter.

We attribute this stability in both the timing and cost of our restoration projects even with such a substantial ramp up in activity to our technology in IT processes, second our discounted supply and just disagreement with big box retailers, and third our continuous effort to train and develop relationships with an extensive network of qualified contractors in each of markets.

Turning to leasing and occupancy trends, in terms of day on market for leasing, we’re currently ranging approximately 42 days on market on average, unchanged from last quarter from the time the house has listed for rent until the time the application is approved and the lease executed. Residents typically move in within two weeks thereafter. The average does vary by market and timing clearly is impacted by seasonality, as we know will be the case as we head into these yearend holidays.

As a result of the efficiency and productivity of our systems and processes our overall occupancy statistics remained relatively stable despite the substantial number of vacant homes we added to the portfolio this quarter. The number of lease properties in our portfolio increased by 880 or 28% compared to the second quarter and we attained 75% occupancy on the entire portfolio.

Within the self-managed portfolio the overall occupancy rates declined just two percentage points to 66% as of September 30, from the end of the prior quarter even with the addition of these 812 vacant homes. For homes that have been in the portfolio for six months or longer we’re pleased that the 400 basis points from 88% to 92% occupancy is further evidenced, that we identified markets where rental demand is dynamic and the demand for product is very strong.

Gross rents on our self-managed lease properties ranged from a high of 14.4% in the Charlotte and Nashville markets to 8.7% in Phoenix on existing leases as of September 30. While we are seeing compression in gross yields in some markets which is to be expected as the housing markets across the country recovered at varying speeds, we are however increasing our scale and enhancing our operational efficiencies and this should enable us to achieve our targeted net yields.

Our leasing velocity was vigorous during the third quarter; we executed 650 total new leases included renewals. We offset approximately 763 contractual lease explorations including once a month-to-month rollovers of which 302 residents vacated, resulting in a turnover ratio of approximately 39% an increase due in large parts from tenants inherited through portfolio acquisitions.

Importantly we're able to negotiate rental increases on renewals averaging 3.6% during the quarter, with a range of 0.4% to 7.5% increase is achieved depending upon the market. We can answer specific questions as to these during the Q&A.

Our revenue centric approach to managing the portfolio with emphasis on customer service, building relationships and customer royalty continues to evolve, we have been particularly successful with our early renewal outreach program in which we contact residents 90 days to 120 days prior to their lease expiration.

Due to the high level of resident satisfaction, we’re actually finding a strong willingness to find early lease renewals even at these higher rental rates. From an overall standpoint we believe we made good progress on all of our key initiatives during this third quarter. We were able to build scale in our targeted markets. We completed a tremendous increase in restorations rapidly and cost effectively.

We generated higher occupancy rates for property zones six months or longer and we successfully secured meaningful rental increases upon renewal. This is a testament to the robust in house property management capabilities we have developed during our past five years in the buy to rent market and our commitment to continuously improving upon our systems and service as a means to achieving an optimum level of operational effectiveness.

Over the near term, our primary focus will be driven -- will be driving further improvement in our occupancy rates, increasing our operational effectiveness and expanding our regional office network. As Steve mentioned, the credit risk communities of eight of the large banking intuitions of the country evaluated not only the economics of our business model but also our operations, systems and processes in granular detail.

We believe the success we've had in attracting major banks to our lending syndicates and expanding our overall access to capital is not only a strong endorsement of our business model but also validation of our operational expertise and platform and this will serve us considerably well when we enter the capital markets for additional funding in the near future.

I would like to turn the call over to Shant, our Chief Financial Officer who will discuss our financial results for the quarter. Shant.

Shant Koumriqian

Thank you Laurie. I will start with the discussion of our statement of operations and then turn to our balance sheet. Total revenue for the third quarter of 2013 increased 32% to 11.1 million compared to 8.4 million for the second quarter of 2013 and was comprised of 7.5 million of self-managed revenue 1.9 million of prepared operator revenue, 113,000 of management services revenue and 1.5 million of interests and income.

The sequential quarter increase since total revenues primarily attributable to rental income generated from new leases on an additional 880 homes quarter-over-quarter. Off note self-managed revenue increased by 52% quarter-over-quarter to 7.5 million from 5 million, while the number of leased self-managed properties increased by 773 homes or 40% quarter-over-quarter.

Our preferred operator revenue was basically flat quarter-over-quarter, subsequent to quarter end we entered into an agreement to terminate the leases with one of our preferred operator covering 280 homes including 138 homes located in Florida 131 located in Atlanta Georgia and 11 homes located in Charlotte, North Carolina. We have taken operational control of these company owned properties which the preferred operator had been operating previously pursuant to the leases and are in the process of transitioning these homes into our self-managed portfolio. In connection with this termination we recorded a bad debt reserve of $375,000 which includes a $150,000 associated with non-cash differed rent receivable. As a result of this termination agreement the property is no longer subject to a termination payment calculated as a portion of net sales proceeds in excess of our initial purchase price payable to the preferred operator if we were to sell the property during the lease term.

Portfolio operating expenses for the quarter totaled $4.5 million which include property operating and maintenance expense, real estate taxes and home owners' association fees. This compares to $2.9 million in the second quarter of 2013. The increase in the expenses was driven by a combination of the significant increase in our portfolio quarter-over-quarter and an increase in the proportion of vacant home acquisitions over the last two quarters as compared to earlier in the year where a larger proportion of our acquisitions were of leased homes.

Our self-managed portfolio increased by 1244 homes or 44% quarter-over-quarter, while the cost basis on our self-managed portfolio increased by $200 million or 51% quarter-over-quarter. It is important to note that when a home is acquired vacant we incur carry cost and so the home is leased including real estate taxes, HOA fees, insurance expense, utilities and maintenance with no corresponding offsetting revenue.

The current quarter also includes approximately $250,000 in accrued property taxes associated with the termination of the preferred operator leases on 280 properties in Florida, Georgia and North Carolina. For these reasons, as we build our portfolio the percentage growth in operating expenses can exceed our percentage growth in revenue in any one particular quarter. But over the long-term we are making good progress on realizing leverage in our operations.

For the third quarter our total revenues of $11.1 million less portfolio operating expenses of $4.5 million was a positive $6.6 million for the quarter, compared with $5.5 million in the prior quarter. In addition to our portfolio operating expenses, we incurred $301,000 million in acquisition expenses related to properties that we acquired with existing leases in place compared to $1.7 million last quarter. This decrease is a result of acquiring a higher proportion of our vacant self-managed homes and a reduction in preferred operator home purchases compared to prior quarter.

Depreciation and amortization expense is approximately $6.6 million for the quarter, including $1.2 million in amortization expense for in-place lease value. This compares with $4.6 million in depreciation and amortization expense last quarter. We also incurred $1.2 million interest expense during the quarter compared to $682,000 in interest expense last quarter. The increase was a result of higher average borrowings outstanding on our revolving credit facility during the third quarter.

General and administrative expenses for the quarter were $3.1 million compared with $6.7 million last quarter. The reduction is primarily attributable to $4.1 million in non-recurring compensation expense that we recorded in the second quarter. Excluding this non-recurring expense, our G&A increased to support the growth in the size of our portfolio on operations. General and administrative expenses for the quarter also includes $486,000 in non-cash stock compensation expense.

For the quarter our net loss attributable to common stockholders was $4.6 million or $0.14 per common share and funds from operations or FFO attributable to common stockholders was negative $1.9 million or $0.06 per diluted share. This compares with the net loss of $8.1 million or $0.31 per common share and negative FFO of $3.6 million or a negative $0.14 per share last quarter. Core FFO, which excludes the impact of $301,000 in acquisition expenses was $2.2 million for the third quarter compared to core FFO of $2.2 million for the second quarter which excludes the impact of $4.1 million in non-recurring IPO related compensation charges and acquisition expenses of $1.7 million incurred in the second quarter of 2013.

Now turning to our balance sheet. As of September 30, we owned 5,440 single family homes for total investment of approximately $698 million, which is included in gross investment and real estate and deferred leasing cost and leasing tangibles net on our balance sheet. Our portfolio is 75% leased and was comprised of 4,077 self-managed homes that were 66% leased to residential tenants, and 1,363 homes subject to long-term net leases to preferred operators for terms of five to 10 years.

As was previously mentioned during the quarter we acquired 1,351 homes and incurred restoration and re-tenancy costs for total investment of approximately $211 million. During the third quarter we also funded $15 million in short-term private mortgage loans and received $13 million on payoffs, bringing our total portfolio of private mortgage loans to $38 million as of September 30. This portfolio generated an average annualize yields of 11.9% with the remaining weighted average term of 106 days.

As of September 30, we had approximately $24 million in cash and cash equivalents, and had an outstanding balance of $170 million on our senior secured revolving credit facility. Our available liquidity as of June 30 was approximately $194 million, comprised of $24 million in net cash and our $170 million in available borrowing capacity on our $340 million revolving credit facility subject to borrowing base limitations. We believe our revolving credit facility and other financing alternatives available to us including term loans, securitization as well as other securities that can be issued in the capital markets would allow us to continue to expand the size of our portfolio selectively in the near-term without having to access the equity capital markets. Our goal would be to utilize debt in a prudent manner. Utilization of the full debt capacity to us under our credit facility excluding accordion would represent only 35% loan to cost on a portfolio of assets that has experienced meaningful appreciation over our cost basis and could support additional leverage.

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

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Haendel St. Juste from Morgan Stanley. Please go ahead.

Haendel St. Juste - Morgan Stanley

My first question I guess has to do with capital sourcing alternatives. Can you talk a bit more on how you view the capital sourcing alternatives available to you today as you consider your stock price, the available debt capital sources in the marketplace as well as your long term leveraging capital structure goals? I guess my core question is how do you tend to fund your growth going forward if your stock price continues to trade in the range that it does?

Laurie Hawkes

Relative to what we think is capital access and I’ll focus first on the debt side and following up on Sean’s comments relative to our debt sources, I mean we’re extraordinarily pleased with our revolving credit facility which you know is now eight players. The vast majority of those players are all independently capable and have expressed interest in funding portfolios independent of the credit facility in addition to should we look to do a separate portfolio acquisition which we view very positively.

Our credit facility by itself we’re extremely pleased with because it is a corporate credit facility convention corporate credit facility which means that that it has the ability to go up and down in terms of size and scale unlike many of the program which are securitization only which are lines intended to take product out and have tip ups in terms of increased pricing if you don’t utilize securitization over period of time. That’s number one. Number two, we have and are entertaining a number of term loan proposals they range anywhere from three to five years and the sourcing of them are anywhere from funds, pension funds and insurance companies. We are of coursing balancing this against the securitization vehicle which as everyone is aware successfully was launched and priced by Deutsche Bank and team and credit -- excuse me, JPMorgan and Credit Suisse last week we were delight with that pricing and probably moved that alternative up considerably we have looked at a variety of alternatives as well structures as far as in last year including even combination with our own fund.

We think it’s interesting we’d like to take it to a little longer term but we see that could anywhere from two to five years or even longer we think that’s one that given our background particularly at Salomon Brothers and Steve's at FFCA we’re very familiar with the structure, we’re very -- and acutely aware and conscious of the benefits of those structures and we think it’s one that will be readily available particularly to those operators who've been in business for a period of time such as ourselves.

We’re also looking in a number of the capital markets alternatives including preferred as well as the convertible structures and we think those would be in addition to asset backed into sting alternatives. These are all vehicles that are available today and the more single family knowledge that is in the market with our institutional investors and he know our emphasis on education. We think it is becoming clear that both the credit spreads, the availability and the advanced level will be to our advantage and we see that literally being able to finance ourselves not only through this quarter but through the quarters in the first year to come coupled with looking at moderating our acquisitions accordingly until the equity markets returns.

Shant I don’t know if you’d add to that.

Shant Koumriqian

I guess I would just reiterate that as we’ve seen with significant increase and interest in this asset class over the last several years first starting with investors and most recently with various lender groups, we believe over time there will be more attractive options available to us. In terms of overall leverage goals I think long term stabilized leverage probably would want to operate somewhere between 30% to 50% of enterprise value, loan to value at least on a near term basis if we were to add $500 million to $600 million of debt you’d be at 45%-50% loan to cost on assets that have appreciated meaningfully since we’ve acquired them and over time you’ll have natural deleveraging from those assets.

So again with adding additional leverage capacity we think we have some runway to continue to grow our portfolio prudently and continue to monitor the capital markets to determine what the best allocation of capital sources are for the organization as we continue to grow.

Laurie Hawkes

As an add-on to then Haendel, we also are considering and have looked at in some debt joint venture alternatives and opportunities out of which I think would be an adjunct to our expansion as well.

Haendel St. Juste - Morgan Stanley

And I guess this is a follow up, would you care to comment on potential asset sales as a potential source of capital and would you consider I guess selling assets within markets that have run where yours have compressed the most?

Stephen Schmitz

Well, we would consider that and Phoenix is a great case in point where we have some fabulous assets in Phoenix, it’s difficult to buy here right now for reasons we all know about so it may make sense to recycle that capital. So, yes, we do intend to look at that. Obviously it's subject to [indiscernible] however in terms of how long we need to hold assets.

Haendel St. Juste - Morgan Stanley

Second question, I guess can you give some more color on the preferred operator assets taken over during the quarter? Was it an operator issue, were they not able to pay the rent anymore issues that currently on your radar screen within your preferred operator partnership program.

Stephen Schmitz

It’s important to note Haendel why we started that program to begin with because a year and half ago when we formed the [reed] and we began our national expansion, so preferred operator program was really away to enter markets quickly with large chunks of capital where we had not yet build up the property management expertise but our experience with third party property managers was not good and so we devised this arrangement where the preferred operator was generally aligned with us. We did it with the full intention of expanding our self-manage portfolio which you’ve seen from the numbers, we’ve done that and so this was an opportunity where like happens often times with certain property managers whereby these folks weren’t living up to our standards, it made sense for us to separate and go our separate ways and so we signed an agreement to do so and we’re having great success bringing those properties in house as we speak.

Shant Koumriqian

Yes, to give you a little bit color, three different markets in total it’s about $16.8 million of cost basis which represents approximately 2% of our total assets about 2.4% of our total investment in real estate and different markets had different reasons for bringing them in house and I'll touch up on each of them quickly, for the assets did have some CapEx requirements where the preferred operator was utilizing cash flow to maintain the assets and was having the come out of pocket and when we look at the economics it didn’t make sense to continue.

The North Carolina assets, there are only 11 homes and as we shifted our strategy to acquiring self-managed homes in North Carolina again it really didn’t make sense to have an 11 home preferred operator portfolio in North Carolina and as we look at those two quite frankly it ultimately didn’t make sense to just have a small portfolio in Georgia. So, Florida was really the driving reason for looking at bringing those in house again North Carolina really didn’t have a lot of scale and then once we went down that path it just made natural sense to bring the other one in house.

And to give you some general stats, North Carolina 11 homes of $101,000 mostly newer assets, very similar in size to our self-managed portfolio, gross yields in the 13% range that compares to about 10.2% in our self-managed portfolio. In Florida, 138 homes, smaller asset size under $50,000 a home gross yield in the 15% range, younger homes nine years and again that compares to our self-managed portfolio of about 1,600 square foot home and 11% gross yield and a 16 year on average home. And then finally in Georgia, 131 homes, 1,500 square feet on average compared about an 1,800 square foot on average self-managed portfolio is very similar to our self-managed portfolio, gross yield in the 15% range slightly higher than our self-managed portfolio.

So, like I said when the process of transitioning those assets into our self-managed portfolio will be up to report on the results in future quarters.

Haendel St. Juste - Morgan Stanley

One last follow up on that, I guess giving your recent experience here with some of the operators, it is just impact or change your view on using the preferred operator partnerships going forward. And also I guess given the rich yields available in buying some of these homes back and we have great is that opportunity should we -- how should we think about the acquisition potentially of these preferred operator assets going forward.

Shant Koumriqian

Well, recognized kind of the we always have owned these assets and continue to own them. They were just leased to the preferred operators and as a part of that trade by the way, they were in titled to 15% of any gain if and when we sell the properties and as result of this termination they didn’t no longer get that. So, that flows back to us. But going forward I think the best way to look at it is we never have a lot of preferred operators, I think four or five may be and we have some that are doing very, very well and like always we continue to review everybody that's out there, it is a unique program but again recognize that we’ve selected a certain number of markets where we really want to go deep in those markets where we operate in those markets and don’t really need the preferred operator structure like we did a year ago.

So, I wouldn’t anticipate that we would be bringing on any additional once clearly not under that structure.

Operator

Our next question comes from Steve Stelmach from FBR. Please go ahead.

Steve Stelmach - FBR

Steve, you’ve talked in the past about the yield diversification, you also deployed a lot of capital in the quarter mentioning Houston and Dallas in particular, can you give some color around expectations for net yields on the capital deployed this quarter versus maybe sometime last year on the same time, maybe in different markets? Are you sort of getting to the same spot just using the yield diversification method?

Stephen Schmitz

Well, Shant I will walk you through those numbers from a big picture standpoint. When we talk about yield diversification what we also talk about is the fact that, some markets have higher yield but maybe less HPA potential, other markets maybe have lower yield but stronger HPA potential. So for example Indianapolis we like a lot, the yields are good there it’s a very-very solid employment base. Will we see a lot of HPA there, who knows? Atlanta happens to have both and has very high yield potential, a very high yield and very high HPA potential and so when we talk about that diversification early returning diversification that we balanced between yield and HPA. But Shant are you want to touch on how it translates through?

Shant Koumriqian

Yes, I think it’s probably easier to look at the last three quarters per se and going back to first quarter and we’ve had a change in mix as we’ve been acquiring assets away from Phoenix, but the gross underwritten yields of kind of have been creeping up from call it the mid-10s in acquisitions call it in the fourth quarter of 2012 and I have been working their way up slightly to almost 11% on a weighted average basis for the current quarter, that ranges from under 8% and markets like Arizona to kind of the mid-13s and markets like Indianapolis; and then in terms of net yields, we have seen at least from an underwritten perspective and granted we’ve acquired a lot of vacant homes the last couple of quarter.

So we will be able to report on our actual results. But in terms of underwritten yields, we have seen the underwritten that yields creep up a little bit as well so in the latest quarter I’d say probably underwritten yields in the mid-5% range and again there is wide range depending on market, I mean, in some markets we think we’ve been generating that yields in the 7% range obviously lower than that in another markets.

Steve Stelmach - FBR

Okay, thanks for that. You’ve talked about that the Phoenix market it’s been a great market for you guys in terms of this embedded home price appreciation, as it appears institutional capital has sort of taken their foot off the gas in terms of acquisition there, any expectation that yield begin to improve as for a supply of rental properties sort of begin to get little muffed up?

Laurie Hawkes

It’s interesting we’ve often -- I have often talked about Phoenix, this is one where we’re seeing per my comments on an average 3.6% rental bumps on our renewals. We are receiving 3% on our leases that are renewing in Phoenix. So we are seeing the rent growth and we aren’t pushing hard on the rent growth, but we are getting 3% bumps. So to you question as we move up in terms of the occupancy levels and the desire to stay of course in HOAs and the master planned communities with the schools that they are, we think that you will have the ability to push those yields and the returns in terms of the renewal rents even more which would translate in to higher monthly rental.

Steve Stelmach - FBR

And Shant, just one point. The termination of preferred operator lease you gave some numbers around that. Was that a 3Q P&L impact or will that hit 4Q?

Shant Koumriqian

We took some -- we reserved some amounts in the third quarter. I think kind of in the fourth quarter and in the first quarter there might be some transitional expenses as well but we believe we took hopefully a majority of charges in the third quarter and then like any other asset that we would acquire on self-managed basis, we will continue to operate it to the extent that there is deferred maintenance or issues like that I think it will be kind of temporary transitional issue.

Steve Stelmach - FBR

Okay. Got it but largely behind you at this point?

Shant Koumriqian

Yes, that’s our expectation.

Operator

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

Dennis McGill - Zelman & Associates

First question would just be on the pace of acquisitions. I think, Laurie, you kind of talked to just the pipeline of capital that you do have on the debt side and on top of that. The ability to leverage and you’re talking about getting good deals today, good discounts to replacement value. Why play all that capital as quickly as you can and then see where you are six months down the road? Maybe there’s better capital, maybe there's not. Getting the capital in sooner would be better.

Laurie Hawkes

I think we’re – when we say we’re slowing as you can see it’s not stopping the way a number of other players maybe stopping and so we are looking to continue to enhance quality both in terms of assets and returns. So we’re deploying it’s still a fairly rapid clip relatively to what we see, but given timing we want to be moderate and we want to be measured and we want to be disciplined, Dennis. Some of the executions may take a little longer than we think, securitizations certainly but the others are available now. So we will just gauge and balance what we buy and when we buy it as the opportunities present themselves. And we are certainly open to different structures including financing on a separate portfolio basis and or JV in addition to the vehicles that we can access today.

Shant Koumriqian

Part of it too Dennis as we mentioned, we've made a deliberate shift really since the beginning of the year away from portfolios and more toward our traditional flow business and that's easier to shut on and off. And as we also mentioned, a lot of the -- we purchased a lot of portfolios last year, a lot of the portfolios we see today tend to be overpriced.

And so to the extent that we see portfolios that we like, obviously we'll still buy them and that will still be a component of our business, it's just more difficult to predict when they hit, whereas the flow business is much more predictable.

Dennis McGill - Zelman & Associates

Does the pace at what you buy impact the operational side, either on the expense side or the ability to lease?

Laurie Hawkes

Well actually it did, the reason I spent the time I did on the comment about restorations was pointed, we actually saw an enormous uptick in the number of vacant houses that we took on and in effect showed no operational inability to move those houses through the system and as noted it was a minimal impact on our occupancy and no impact on our days to process those houses or on the cost, which we're extraordinarily pleased with. So from an operational point of view we’re delighted and a slowing of that will only help because the numbers didn't change and were not impacted negatively even with an almost 300% increase to our entire restoration team.

Dennis McGill - Zelman & Associates

I appreciate that. One quick on the preferred operative program, what are those going to come into the portfolio as far as the underlying leases -- underlying occupancy?

Stephen Schmitz

In terms of the underlying occupancy, the North Carolina assets I think there is two vacant homes, the Florida assets are in the mid-90s and then the Georgia assets are in the mid I believe mid to higher 80%. So if you are to pro forma that at 930, I think our self-managed occupancy would go from 66% to 68% and our total occupancy would drop slightly from 75% to 74% on a pro forma basis.

Dennis McGill - Zelman & Associates

And then Laurie sorry if I missed this, but can you just review the turnover numbers and then also if you could talk about just the cost of turns and maintenance what you saw during the quarter?

Laurie Hawkes

Our turnover numbers this term, well actually it's not meaningful enough, so the first we haven't generated an number for you, it's a in between number right now. Our turnover looks as if it went up to 39%. The reason for that was a fairly high turnover due to our tenants that we inherited through portfolios, and that was predominantly Phoenix, which is why you see Phoenix as not as robust as we'd like, but as we say, the good news from buying portfolios is that you have no immediate CapEx for the most part, you have no down time and you have no leasing commissions.

The bad news is you don't get to underwrite the individual tenants. So what we're doing is recycling through those tenants and what happens is that has had its impact on Phoenix and as a result our first turns even though they should be considered re-tenancy are really more like an initial restoration. So it's not as high as an initial restoration we have found but it’s not as low as a typical re-tenancy and we thought it was so insignificant somewhere in the 7% or 11% range that we decided not to publish those as a real reliable number for the whole as we expect that our turnover going forward will continue to improve as it has in the mast.

The good news is those portfolios are performing well, for those properties that have not had turnover and we expect that it will just move through on a recycling basis and will pass through the next quarter.

Dennis McGill - Zelman & Associates

You gave earlier Laurie about 312 number of leases expired I think.

Stephen Schmitz

302 tenants vacated I think 736 expirations and then 302 tenants vacated and as Laurie mentioned previously the majority of those or most of those are tenants that we acquired and portfolio last year or earlier in the year in the first quarter.

Laurie Hawkes

And what we’re excited is the fact that even with that particularly with some of those portfolios and one in Phoenix that we bought there were 275 houses did you recall in December. The fact that we could then still show a 400 basis point increase from 88% to 92% on the six month occupancy is a big positive.

Operator

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

Omotayo Okusanya - Jefferies

First of all just congrats on a very solid quarter, it was pretty nice to see results and especially putting metrics. Out of curiosity apart from Phoenix are there any other markets where you have seen a rapid decline in the gross rends, our fundaments just seem to be changing very quickly, it doesn't make sense for you to keep acquiring assets?

Stephen Schmitz

Not really. I mean the markets we are in, we spend a lot of analytical time on and wouldn’t go to a market that has declining rents. So I mean obviously Phoenix, we have been here for a long time and we’ve reaped the benefit, of a lot of the good things about Phoenix is just in a leveling off period right now. And who knows, rents may very well catch up.

Laurie Hawkes

Well, it varies a lot by market and by product on tail, I mean our executed leases for new leases, our average spend has actually moved up. And that’s the reason we’re focusing on the growth core markets that we are and we are curtailing as Steve noted, in Phoenix.

Omotayo Okusanya - Jefferies

And then could you also talk about home price depreciation in some of your key markets and if you guys are starting to look at the net asset value of your portfolio and if you could actually share that number if you could kind of try to estimate what the net asset value of the portfolio is?

Laurie Hawkes

What we will be doing and we have the numbers, most recent were actually published as of June and we’re going to be updating them, using some FHFA metrics as of September and we will have it available on our website Tayo but in terms of where we see most of the HPA potential, certainly Phoenix has had. It received a lot of press and it's still receiving a positive forward clearly on the HPA. We also see that Chicago as well as California are in the double digits as well. We also look to the North Carolina and Atlanta Georgia as being substantially higher HPA. Shant, you may want to comment on the FHFA metrics that we are working on.

Shant Koumriqian

Yes, Tayo, I think to answer your first question, I mean yes, as we’re looking at how to get NAV out there and we’re still kind of thinking through that. We are not comfortable putting something out there yet now. But you know when you look at the housing price index of the FHFA and you look at year-over-year changes from Q2 2013 to Q2 2012. And I will focus on some of the markets that we were in early. So for example Phoenix is up 23% year-over-year, Atlanta is up 14% year-over-year, Inland Empire is up 22% year-over-year. Our other assets and the markets that we’re in California which we call other California is up 16% year-over-year, vacancy is up 26% year-over-year. So we've seen meaningful on-price appreciation and the FHFA index obviously is a backward looking index and doesn’t fully reflect all the HPA that we believe we have experienced in our portfolio. But our expectation is that it will put more of that type of data out there in the near term and then like I said we’re still thinking through what type of metrics to put out so people could get a better understanding of our NAV.

Operator

Our next question and final question comes from Alex Barron from Housing Research, please go ahead.

Alex Barron - Housing Research

I was hoping to I guess get a better handle on your SG&A as we look forward. So you have 3.1 million this quarter. Is there like a seasonal component at the end of the year due to like bonuses and is the 3.1 like a good run rate for next year? How should we think about that?

Stephen Schmitz

It's in terms of bonuses -- I mean anything like a bonus would be accrued. In terms of a run rate for next year, I mean we would anticipate that our G&A would grow some over the next several quarters as we go into our first full year as a public Company and implement things like Sarbanes-Oxley compliance. Our thoughts were kind of expectations on G&A for next year, we'll put out later -- probably on the next call when we provide you with an update on what we think is going to happen next year.

Alex Barron - Housing Research Center

Okay. And then in terms of the way the preferred operator program works, the average price for the homes that I calculated is about 80,000 compared to I guess significantly more for the ones that are on balance or the ones that are self-managed which was closer to, I don’t know, 140,000 or so. Is there like -- is that the actual investment you have in the homes or are these portfolio operators still owning part of the home? Or how does the accounting or the economics work? Or are they just cheaper homes?

Stephen Schmitz

So the homes if you look, the homes are smaller homes on average, they also tend to be older homes as well compared to our self-managed portfolio, our self-managed tends to be 10 years old on average, about 1,800 square feet on average. Newer homes more infill locations whereas the preferred operator homes tend to be smaller homes and smaller dollar priced homes. And in terms of our investment, we own the homes outright and we have to lease them to a third party operator under a net lease or under a master lease. So we own the homes. The balance that you see are in the tables is our cost basis investment in those assets.

Alex Barron - Housing Research Center

Okay. And in terms of the private mortgage portfolios, I noticed you guys said you deployed about 15 million this quarter, but I thought the balance was pretty similar to last quarter, so is there basically just a lot of turn or are you guys not trying to grow the portfolio much there?

Stephen Schmitz

No, we've also had turns. I mean in my prepared remarks I said 15 million of new loans and we have 30 million in pay-offs. So net balance grew by $2 million. So we had some turn loans that were issued earlier in the year half now paid off, so it’s just kind of normal term.

Alex Barron - Housing Research

And is that a business where you guys are seeing more opportunity or is there not that much demand anymore from people who borrow from you guys?

Stephen Schmitz

No there is, that’s very much a business that we intent to grow. In fact one of the track of things about it is not just the yield that flows through to the bottom line but because of the fact that their short term six months notes it’s easy to manage the balances up or down.

Alex Barron - Housing Research

Yes, so it seems like a really good business, what’s the average down team that you guys get on those homes from the people who borrow?

Stephen Schmitz

Well, it varies per borrower and how you calculate. A good way to look it is probably 20%.

Operator

Thank you. We have no further question at this time.

Stephen Schmitz

Well, in that case we'd like to thank everybody for joining us. We appreciate your interest and your participation.

Operator

Thank you and thank you, ladies and gentlemen. This concluded today’s conference. Thank you for participating. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!