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American Residential Properties, Inc. (NYSE:ARPI)

Q1 2014 Earnings Conference Call

May 13, 2014 11:00 ET

Executives

Steve Schmitz - Chairman, CEO

Laurie Hawkes - President, COO

Shant Koumriqian - CFO, Treasurer

Analysts

Greg Van Winkle - Morgan Stanley

Dennis McGill - Zelman & Associates

Steve Stelmach - FBR

Jana Galan - Bank of America

Omotayo Okusanya - Jefferies

Doug Christopher - Crowell, Weedon

Alex Barron - Housing Research Center

Operator

Welcome to the Q1 2014 Earnings Conference Call. My name is Richard, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

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

Shant Koumriqian

Thank you. Good morning, everyone and thank you for joining us today for American Residential Properties' first quarter 2014 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 first quarter results, Laurie will discuss our operating platform and trends in our portfolio and I will review our first quarter financial results. We will then open up the call up to your questions.

For your reference, the press release and financial schedules containing the information we will be discussing on our call were filed yesterday with the SEC. You may find all this information on our Web site at www.amresprop.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, estimate, 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 Web site. 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 now like to turn the call over to Stephen Schmitz. Steve, please go ahead.

Steve Schmitz

Thank you, Shant, and welcome ladies and gentlemen. We are off to a great start in 2014 and this quarter we reached an important milestone by exceeding $1 billion in total assets. We believe our first quarter results demonstrate strong execution on several fronts. We invested $109 million to acquire 689 single-family homes. The new homes acquired had a weighted average underwritten gross yield of approximately 10.8% and a net yield of approximately 5.8%. Overall, we grew our portfolio 11% to 6762 homes as to our primary target markets we now have more than 1000 homes in each of Phoenix and Houston and we just passed a 700 home market in Dallas.

In the first quarter, our revenues increased 32% to $17.5 million up from $13.2 million in the fourth quarter of 2013. We delivered core FFO of $0.07 per diluted share versus a breakeven last quarter. We believe our first quarter results are directly attributable to our disciplined execution against our strategy to achieve long-term risk adjusted returns.

On another positive note for the quarter, our key portfolio metrics showed favorable trends for higher occupancy and strong leasing activity in rent ready homes. In the first quarter, our portfolio occupancy increased to 81% from 75% in the fourth quarter and to 89% for properties owned six months or longer. The number of leased homes in our portfolio grew by 968 or 21% compared to the prior quarter and resident turnover decreased to 28% indicating a retention rate of 72%. In the quarter, we renewed 311 leases and negotiated average rental increases of 2.7% for those renewals.

Moving on to our core markets, we continue to see robust rental demand and favorable acquisition opportunity. We believe strongly that our core market strategy provides the best use of capital to achieve attractive long-term returns and is the best way to benefit from economies of scale.

Our plans to build critical mass are unfolding as expected. As I mentioned earlier Phoenix, Houston and Dallas are already well-above the critical mass and Atlanta, National, Charlotte and Orlando have that same potential. Based on the FA housing price index, the weighted average HPA in the markets where our portfolio is located was 12.2% in 2013.

As intelligent investment managers, our goal is to beat market indices not just meet them. We are seeing sustainable opportunity in our core markets driven by increased rental demand and the opportunity to acquire homes at a discount to replacement cost. In addition, we have a capital structure that supports flexibility for growth. We ended the quarter leveraged slightly less than 40% of total and depreciated assets and we intend to use leverage to grow the portfolio for the remainder of the year.

In this regard, we have the flexibility to expand the accordion feature of our current credit line and to raise debt through a securitization transaction which we previously announced. We are on target to reach $1.2 billion to $1.3 billion in assets by year end 2014, which would give us a loan to cost ratio of 48% to 52%. I should also note that we do not intend to issue equity on terms that are unfavorable.

After Shant's financial review, I will return with some perspectives on the value creation model of our business.

With that said, I would like to turn the call over to Laurie Hawkes, our President and Chief Operating Officer. Laurie?

Laurie Hawkes

Thank you, Steve, and good morning everyone.

I would like to take the next few minutes to discuss the sourcing and volume of our latest acquisitions, the restoration, and integration of these assets and trends in leasing and occupancy. Then I will spend a few moments to provide an update on our impending securitization.

First, consistent with our core acquisition strategy and in line with our objective to selectively acquire distressed properties to maximize total return in equity, we continued to purchase homes in our key market, which offer substantial HPA and/or compelling turn yields and often times both.

Our new investments continued to diversify our portfolio. Phoenix now accounts for approximately 22% of our total portfolio down from 45% in the first quarter of 2013. And our exposure to other core markets is growing materially. We deployed close to $117 million of capital for the acquisition and restoration of homes in the first quarter with approximately 35% in Texas, 20% in both Tennessee and Georgia, 10% in Indiana and the remaining 15% in three other states. Over 75% of our acquisitions were sourced through the single flow business versus 91% last quarter, 16% of selective options and 90% via portfolio purchases.

The majority of our homes currently under contract we purchased are at Atlanta, Nashville and Dallas Fort Worth. With a cumulative HPA projected by John Burns, real estate consulting ranges from 14% to 32% through 2018. We continue to see attractive opportunities to purchase homes in these markets at levels ranging from 20% to 35% below the placement cost. The competition varies depending upon the channel and the market, but it is a dynamic process.

And out of the 4 million plus homes currently in foreclosure an estimated 2 million are projected to be processed through to foreclosure and as such, we expect the future pipeline of supply will offer many accretive acquisition opportunities.

Turning to restoration, this quarter we restored 703 homes at an average cost of approximately 9000 essentially flat compared to the last quarter. Auction properties typically cost more and require more time to restore than asset purchased of the MLF and will vary as our percentage of auction towards this varies. While extreme weather conditions in the Midwest and the East during the first quarter caused logistical challenges and did affect our restoration maintenance, the utility cost, it also delayed restoration and retenancy schedules. We managed the overall average days to restore secured properties to 20 days in the first quarter versus 23 in the fourth quarter of 2013.

Focusing on leasing and occupancy trends, our team turned in a stellar performance for the quarter. In spite of typical seasonal slowdowns early in the year, the absorption of transitional properties and inclement weather, we signed 1500 total leases including 1190 new leases, which represent a 35% increase over the fourth quarter and 311 renewals.

There were approximately 1330 at contractual lease expirations and unscheduled move outs of which 376 residents actually vacated, resulting retention of 72% as Steve mentioned and a decline in our turnover to 28% down from 30% last quarter. Our properties were on the market an average of 54 days compared to 39 days in the fourth quarter in large part due to weather related issues.

We do define days on market from the time the home is listed for rent, until the time and application is approved, the lease executed and the residents take occupancy. This strong leasing performance enabled us to rebound from the fourth quarter with 800 basis points quarter-over-quarter improvement resulting in occupancy to 80% up from 72% at year end.

Our total performance, we turn to the portfolio with 81% compared to 75% in the prior quarter with strong performances in key markets such as Dallas and Houston both at 86%, Winston-Salem at 91% and 93% for Phoenix, our largest market.

To break this out further, stabilized occupancy performed owned over 6 months increased from 86% to 89% for the overall portfolio moving us close to a long-term occupancy goals to mid-90s range.

And going forward, we will provide a rent ready 90 days or longer metrics, when applied to our total portfolio including all inherited leases our occupancy, rent ready, 90 days are longer is approximately 93% for the quarter.

While we have focused predominantly on growing occupancy and reducing turnover during the quarter, we also achieved significant rent increases on renewals in most of our markets. These rents increased as average 5.5% in corporate credit facility and approximately 4% in Dallas, Orlando, Vegas and Atlanta. We also realized rent increases more than 3% in Phoenix, Riverside, Los Angeles, Indianapolis, Raleigh and Bakersfield.

Coupling our strong occupancy statistics with the trends of our resident income which typically exceed the median household average is 25% in the markets we are in and produced income to rent ratios close to 5x. We believe we are well-positioned to drive rental increases in both renewals and new leases in our strongest stabilized market beginning in the next quarter.

We attribute the progress in Phoenix, our largest market directly to the successful rollout of our in-house leasing program. While we have always established lease terms set rent levels and underwritten the resident credit centrally from our corporate headquarters, we did rely on local leasing agents and do, to list and show properties to perspective tenants.

Since we began our Phoenix pilot program late last year, occupancy declined to 93% up from 78% in the third quarter and 86% at year end. Dedicated agent focused exclusively on ARPI properties leveraging our resident-centered philosophy and approach has been extremely effective. And based on the initial success, our Phoenix program we plan to expand our dedicated leasing activities throughout our system with the next programmatic roll out in Texas, Georgia and the Carolina in the next quarter.

We see no abatement in the growing rental demand for homes in our core market. We are optimistic about the future demands for FFR due to a number of factors including the fundamentals of supply and demand that drive occupancy rate.

We see rental demand not only from a large number of people who are yet to recover from financial difficulties related to the housing crisis but also who cannot qualify for mortgage or provide a records of down payments to buy a house as well as group such as the Millennials who want flexibility to relocate a job opportunities mandate and prefer to avoid the recurring cost of ownership.

As noted in the recent Wall Street journal article based on Deutsche Bank research, the monthly cost of renting was lower than buying in 20 large metropolitan areas at year end 2013 up from 15 MFAs in 2012 most of which or many of which are in our markets.

Rising interest rates and the continuing decline in new housing starts in the phase of a growing population will only exacerbate the situation. We think boding well for the single-family rental section.

We believe well-capitalized owner operators who offer professionally managed quality rental homes with access to good school systems and premier family friendly service will actually be a catalyst for future rental demand.

On the final note, I would like to update you on our pending securitization. We are progressing as planned and are still targeting completion in the second quarter tending the final valuation of the rating agencies. Once completed we expect to have access to an excess of $300 million in medium term debt that will reduce our overall cost of capital and increase our financing flexibility.

As Steve mentioned, we intend to finance acquisitions through the balance of the year with debt. As it stands now, our leverage ratio is approximately 39%, we feel comfortable expanding that to over 50%.

For example a loan to cost ratio is 50% to 60% would produce an additional $200 million to $500 million in debt proceeds to acquire single family homes in core markets throughout the rest of the year.

The recent securitizations by our peers is a positive affirmation that the institutional single-family rental model is establishing credibility with capital markets which is a game changer for our entire sector. And we expect the latest securitization which will price later today and we understand there has been a tightening in the market with the first launch being priced at a low LIBOR plus 100 significantly tighter than those already in the market.

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

Shant Koumriqian

Thank you, Laurie.

I will start with a discussion on our statement of operations and then turn to over balance sheet. Total revenue for the first quarter of 2014 increased 32% to $17.5 million from $13.2 million the prior quarter, the increase is primarily due to rental income generated from net new leases on an additional 974 homes.

Portfolio operating expenses which include property operating and maintenance expense real estate taxes and home owners' association fees increased 30% to $7.7 million in the first quarter compared to $6.8 million in the prior quarter.

The primary driver of the increase was the growth in our portfolio as well as carrying cost on vacant homes that became rent ready during the quarter. We also incurred higher cost on vacant properties due to unusually cold weather in some parts of the country.

Our self-managed portfolio increased by 674 homes or 12% quarter-over-quarter, while total investment in our self-managed portfolio increased by $105 million or 14% over the same time period. Net operating income for the first quarter of 2014 increased 51% to $9.7 million from $6.4 million in the fourth quarter of 2013, while our NOI margin improved to 55% in the current quarter.

As a reminder, over 90% of our property acquisitions over the last few quarters were vacant homes. On vacant homes, we incurred carrying cost such as real estate taxes, HOA fees, insurance, utilities and maintenance in total homes that are leased.

Interest expense is $4.2 million compared to $2.9 million last quarter; the increase was due to higher average borrowings outstanding on our revolving credit facility and a full quarter's impact of our exchangeable notes offering from late November 2013.

First quarter, interest expense also included 664,000 in non-cash bonds discount amortization related to the exchangeable notes.

General and administrative expense for the quarter decreased to $3.7 million from $4.1 million in the prior quarter, the prior quarter included 431,000 in one-time severance related charges. Excluding these charges first quarter G&A was relatively flat to the prior quarter.

G&A for the current quarter also include 667,000 in non-cash stock compensation expense. Core FFO which excludes the impact of acquisition expenses severance charges and non-cash bond discount amortization was $2.2 million or $0.07 per diluted share for the first quarter, this compares to the breakeven core FFO for the fourth quarter of 2013.

Now turning to our balance sheet, as of March 31st, we own 6762 single family homes for a total investment of $921 million. During the quarter, we acquired 689 homes and incurred restoration and retenancy cost of approximately $117 million.

Our portfolio was 81% leased and was comprised of 6172 self-managed homes that were 80% leased and 610 homes subject to long-term net leases for terms of 5 to 10 years.

As of March 31st, we had approximately $51 million in cash and cash equivalents and an outstanding balance of $303 million on our revolving credit facility. Our ratio of debt to undepreciated assets was approximately 39% as of March 31, 2014 and the assets that secure the line have clearly appreciated since we started after acquiring them.

Our available liquidity as of March 31st, was approximately $128 million, this was comprised of $51 million in cash and $77 million in available borrowing capacity under our credit facility.

As to additional near term liquidity, our credit facility has an accordion feature which allows to increase the capacity to $500 million subject to meeting certain criteria and would provide us with an incremental $120 million in capacity.

We also continue to make progress towards completing securitization transaction which will have lower cost intermediate term debt to our capital stack and will allow us to increase leverage on a specific pool of stabilized assets.

Now, I will turn the call back to Steve for some additional insights. Steve, please go ahead.

Steve Schmitz

Thank you, Shant. Before we open the door to Q&A, I would like to comment on one of the key questions we get from investors, which is how do you calculate the creation of value?

Essentially, we look at three factors, first, at these prices single family homes offer a significantly upside with very limited downside. The downside is limited by the fact that people need these homes to live in. As Laurie noted, rental demand remain strong in all of our markets and we are purchasing homes significantly below replacement cost.

Second, the main yield on rentals is in the 5% to 6% range with outside through rent growth as we all know rental increases flow through directly to create FFO growth. And third there is HPA growth. We strive not just to meet but to beat the various indices which are generally a compilation of all purchases in each market. We do this by buying selectively in good subdivision with school systems were families live. When you add together net rental yields plus HPA each in the 5% to 6% range, the sum results in low double-digit return in an unlevered basis.

Total leverage to work and return to get exciting especially when risk-adjusted and this analysis gives no credit for value creation through reflective inefficient restoration.

In summary, we believe, we have a sustainable value proportion that balances strong economic and rental fundamentals as well as HPA potential all with very limited downside risk. But because we are in a new sector that the market does not understand our stock is trading far below the fair market value of the homes we own, but the value we had as an experienced operator. There in ladies and gentlemen lies a tremendous investment opportunity.

With that operator, please open the line to questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Our first question in line comes from Greg Van Winkle from Morgan Stanley. Please go ahead.

Greg Van Winkle - Morgan Stanley

Hi. Good morning guys.

Steve Schmitz

Good morning.

Greg Van Winkle - Morgan Stanley

Just a couple from me. First, how much leverage did you guys say you're comfortable with long-term and you mentioned you guys are probably going to get around 50% or maybe even more by at the end of this year. But, I'm wondering what level of leverage you guys think is appropriate today versus when things stabilize. And how and like that views changed if at all since your IPO

Shant Koumriqian

Sure. I think on a near term basis we are comfortable with higher leverage than what – most in the industry are accustomed to in terms of REIT. I mean, we are buying assets at discounts replacement cost, the assets are appreciating. You have the ability to delever both your home price appreciation and cash flow growth.

So on a near term basis, as Laurie said, we are comfortable at pushing leverage above 50. As we continue to deploy that leverage we will reassess how much leverage we are willing to put on.

On a longer term basis, once the portfolio stabilizes, we will make a determination but at this point, we are looking at where the assets are valued today and the ability of the assets to delever over time on a near term basis. We are willing to put additional leverage on.

Greg Van Winkle - Morgan Stanley

Got you. It makes sense.

Laurie Hawkes

Greg and that is an asset class that is traditionally had higher leverage in terms of the single-family sector as you know.

Greg Van Winkle - Morgan Stanley

Sure, sure. Yes. That makes sense. I mean you guys, Steve just walked through the value proposition, you guys see – your stock is still trading at a significant discount to your portfolio by our math, despite you guys continuing to do what you said you are going to do, and execute on your story.

Have you considered any different kinds of strategic actions you could do to try to close the valuation gap like dispositions of home and share buybacks for example?

Steve Schmitz

Do you know that's a fabulous question? The short answer is yes to all of the above. We continue to look at and evaluate ways in which we can enhance value for our shareholders. And I think we all know that the part of this is because it's a new asset class, it's a new sector and the world doesn't quite understand it yet from evaluation standpoint. But, again, there in lies a tremendous opportunity.

Greg Van Winkle - Morgan Stanley

Okay. And nothing for now, you guys are thinking you do or at least willing to discuss in more detail, you would be willing to do to drive some of that evaluation like buybacks?

Steve Schmitz

Nothing to announce publicly at the moment.

Greg Van Winkle - Morgan Stanley

Okay. Got you. All right. That's it. And thank you guys.

Operator

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

Dennis McGill - Zelman & Associates

Thank you. Steve, I think you mentioned on the homes you bought in the quarter that the underwritten net yield was 5.8. Can you just confirm that range is, broadly talk about what you are seeing as far as competition goes whether its on the MLS or at auction today and how that's kind of trended over the last couple of quarters?

Steve Schmitz

Sure. I can't confirm that that's 5.8. It varies; the competition varies market-by-market and depending on what other players are doing in the sector. And so we have historically made certain that we were proficient in buying all channels whether it would be the MLS, whether it would be the courthouse steps or whether it would be privately negotiated portfolios.

And so what we are seeing right now is a lot of less competition at the auction, so we have been in several auctions selectively. But I should note that we have really built the basis of our acquisition machinery around the – we used to call it the high speed cherry picking one at a time MLS if you will and we have got kind of probably 250 brokers around the country feeding those deals into us.

And so, again, it's just a matter of what's going on each market and what makes sense in Atlanta might not make sense in Orlando or vice versa.

Dennis McGill - Zelman & Associates

So are you seeing the opportunities shift at all as far as you mentioned cherry picking, you have to cherry pick more or less than you have been?

Steve Schmitz

Well, I don't know. I mean we have gotten really, really good at it. And so we like it and we like that predictability of it. And so that's how it's out there. Portfolios, we think they are going to start to come back a little bit. There were a lot of portfolio sales in 2012, early 2013 and some of those went away. I think those people are working their way through sticker shock and some of those will see again.

And so again, it varies down so much by market that we think as long as we have our to eyes and ears to the market and we are proficient in all the channels, we won't miss an opportunity.

Shant Koumriqian

Dennis, this is Shant. One thing I wanted to clarify on our net yields. Our net yield of 5.8 includes what we believe is a reasonable set of assumptions for R&M turnover in CapEx. So our 5.8 is probably a little bit more conservative and some of the other ones that you hear out there. So point being is that the 5.8 as the ability to improve, it can be – it can range up to like 6.2 if we reduce some of our R&M and CapEx assumptions.

Laurie Hawkes

And Dennis, I might add to Steve's comments, in terms of selectivity starting late – actually the third quarter of the last year, we did taking up our metrics considerably in terms of our criteria at least all the pace in terms of acquisition moderated. So in fact, we have become more selective over time in terms of our single asset flow business.

And as Steve mentioned on the portfolio, there is a certain level of unrealistic expectations by some of the smaller aggregators and I think that will wane over time. But we did by two portfolios in the last quarter as well – in the first quarter I should say in both Houston and Dallas, and they were 19 and 44 home portfolios respectively. They were well-priced, well-located and they supplemented our already core focus on those markets. So we are as always being extremely selective will find that the supply of good quality product does exceed the capital.

Dennis McGill - Zelman & Associates

That's great. And then just last question, as it relates to Phoenix, there has been deceleration, home pricing as well as order activity on the home building side. And I was just curious your guys perspective on what you are seeing with respect to both underlying demand and maybe supply more broadly if you were to include both rental and for sale inventory?

Steve Schmitz

You know, its interesting because as always sitting here in Phoenix, it’s easy for us to see that what's in the press really lags what's going in the market. I mean its no secret Phoenix got a big run up in price in each of the last two years particularly 2013. We benefited from that tremendously because 20% of our portfolio is in Phoenix and obviously we have been very active here.

We continue to see very, very strong rental demand here. We have almost no vacancy here in Phoenix. And of note, you will recall Dennis that before we created the REIT we have something called ARP Phoenix Fund 1, which was our first fund of 609 homes, 90% of which it was in Phoenix that we started in 2010, we are starting to liquidate some of those homes right now at tremendous gains.

With very, very few days on market, and so again, whether it's for rent or to purchase demand remains very, very high here. It got frothy for a little while, so if you follow the popular press that have you believe it's falling off a cliff and we are here to say that's clearly not the case. It's a very dynamic market.

Laurie Hawkes

And Dennis to those specifics, we have started selling as Steve mentioned that we have sold now to-date out of the portfolio roughly 40 homes, 10 of which actually were purchased at or after or concurrent with the REIT formation because there were commitments that we had actually made at about the time when we committed to do the REIT.

And out of those, those 10 have averaged to 32% increase in value appreciation during that time. So that's just to give you a [bird by luck] (ph). We have multiple bids on those properties and as noted we are now at 93% in the REIT portfolio with 3% rent increases on our bumps. So I think just to say a well located good quality product, you have to separate the generics of media and median household reports from actual details.

Dennis McGill - Zelman & Associates

Okay. Helpful. Thank you both. Good luck.

Steve Schmitz

Sure.

Operator

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

Steve Stelmach - FBR

Hi. Good morning, everyone. Laurie thanks for the 90-day rent ready number that's good to see.

Laurie Hawkes

You are welcome.

Steve Stelmach - FBR

Just turning to the operation side of it for a second, obviously, pretty important component what you guys do, but also pretty important component seems to be in terms of driving down the cost of securitized financing. So the question, how do you guys plan to talk to fixed income divestitures, their rating agencies to sort of true up the distinction between what you guys have invested in operations versus some of the competitors may wanted to invested there. Or even guys who can turn a lot of money in operations but lagged your operational history to know kind of where to invest. Might be tough to answer in the Q&A format but any color there will be helpful?

Laurie Hawkes

In terms of the response from the rating agencies which again were just anecdotal but the response is very, very strong that we are actually answering questions based on actual details and data and operating experience. And it does go back with six years as you know that we have operated the businesses. I think there were less concern with the dollar spend and the product produced.

Steve Schmitz

Right.

Laurie Hawkes

And in terms of our IT systems, the metrics, the ability to pull information in a myriad of ways depending upon how they are asking for and they are asking for more detail be there no mistake, we think they will continue to become more sophisticated in their request than their search for data.

The ability provide that and to move that thoughtfully and carefully forward, I think one of the big impact on the sector and I think it bodes well for those of us who have been doing this for a longer period of time.

Steve Stelmach - FBR

Great. And then on the – you mentioned acquisitions and portfolios but on build-to-rent any update there, is there something still sort of looking at from a fall or getting close to doing something in that respect?

Laurie Hawkes

We actually are moving forward on a small program, pilot program that we are starting for 100 properties. We expect to delivery this summer and later. And we are very pleased with the prospects. They are scattered sites we are doing in field locations with assets that are four to five bedroom homes in the Atlanta area.

Steve Stelmach - FBR

Great. Okay. And then, I'm sorry, if you touched on this, but rent bumps renewals versus sort of new occupants, how that's trending versus one another?

Laurie Hawkes

I'm sorry. Could you repeat that?

Steve Stelmach - FBR

Are you getting better rent bumps on a newly occupied – on a new occupant in that home when it turns or are you getting better bumps on the renewals keeping someone in place and maybe how those are different?

Laurie Hawkes

Statistically I don't think it’s significantly different from our renewals because the number of our portfolios as you recall were also bought with that we consider to be under market rents. And so measuring those, we have to separate out, but we feel in terms of both when offered in the second generation as well as renewals we are able to move the rent. So we haven't had to provide concessions and we haven't had to turn in terms of trends down. And I think flat will be pretty rare.

So we will mark that in terms of additional detail and we are hoping to put out a supplemental package shortly as well and in the future we will try to break those out. I think given the amount of portfolios that we acquired between 2012 and we are still moving some of those north, it would be early to break it out separately but be there no mistake starting in the next quarter given the success we have had particularly with renewals and now our improved occupancy across the board we are very optimistic about being able to move both.

Steve Stelmach - FBR

Great. Thanks guys.

Operator

Our next question online comes from Jana Galan from Bank of America. Please go ahead.

Jana Galan - Bank of America

Thank you. Good morning. I also like to thank you for the 90-day rent ready metric. But I was curious, can you provide with current portfolio occupancy is and also for the six month or longer portfolio?

Laurie Hawkes

Yes. We actually did give that but I will repeat that for you. In terms of the – let me just pull up this…

Shant Koumriqian

It's 81% for the total of portfolio occupancy and then 89% for the six months.

Laurie Hawkes

Exactly.

Jana Galan - Bank of America

But that was that March 31st, or is that end of April or current?

Shant Koumriqian

As of March 31st.

Jana Galan - Bank of America

Okay. Do you have any update for April leasing?

Shant Koumriqian

No. We haven't put out a number for April.

Jana Galan - Bank of America

Thank you. And then just looking at your markets, you had very impressive gains in occupancy in Dallas and your other Texas market, I was just curious, if there was something different, was it below the more in-house leasing or any kind of changes in demands there?

Laurie Hawkes

No. Steve, do you want to answer?

Steve Schmitz

Yes. I think what it shows, some time ago, we adopted a strategy of really diving deep in select markets rather than going wide in other markets. And like so many things in our business, the more we can focus on critical mass in the market generally, the better the numbers turn out to be.

Laurie Hawkes

And in fact because we are moving our leasing in-house pilot program to Texas as well I would expect those to continue to improve.

Jana Galan - Bank of America

And thank you. And Atlanta occupancy in the six months portfolio continues to lag a little bit, or have you been increasing your exposure there, is that kind of the situation where you just need to have a little bit over large base?

Shant Koumriqian

It's a combination of two things, number one increasing exposure both on this; I mean your question is on the six month. But I will address the total portfolio as well but part of the six month issue is, our homes that we assumed last quarter that used to be previously preferred operator the slower occupancy in those assets were in the process stabilizing those. That its affecting the six month table primarily and then in the total portfolio, we have increased our focus on Atlanta we are acquiring homes at auction and all of the homes we have acquired in Atlanta for the current quarter which were 130 were all acquired vacant. So there is a timeframe to get those stabilized so that's what you are seeing in total portfolio occupancy percentage for Atlanta.

Laurie Hawkes

Which we would expect in our fastest growing market to where literally still accumulating particularly as it relates to the whole of the denominator in Atlanta.

Jana Galan - Bank of America

Thank you. And then just one last kind of a little bit picture question on news today for Fannie Freddie using loan buybacks and how that could potentially impact your operations whether its more competition on the acquisition side or more potential renters using home ownership?

Laurie Hawkes

Number one, I think there is such a vast volume of properties available, we do not see that is having an impact whatsoever the government programs that had a little to no impact on anything we have done is because we tend to do higher quality assets as well. And number two, in terms of the demand, I think as I pointed out it is very difficult with the limited credit availability, the inability for people to provide the requisite down payments. And we don't see some major changes in those programs occurring, rising interest rates as I mentioned will only exacerbate that. But we do not see that is having a impact of note on anything that we talked about going forward.

Jana Galan - Bank of America

Thank you.

Operator

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

Omotayo Okusanya - Jefferies

Hi. And good morning, everyone.

Steve Schmitz

Good morning.

Omotayo Okusanya - Jefferies

Hello. Couple of questions for me. The gross yields for the quarter down about 20 basis points about 10.2% and then a net yield on the acquisition was about 5.8, which seems on the lower end of the range, just wondering whether its just all the HPA that's been going on in your market are starting to put pressure on the yields or whether that's something else going on?

Steve Schmitz

I think Shant can walk you through it again, the way we calculated, the gross or net. But it’s not HPA because we have not been buying in Phoenix because of the HPA growth because of the yield compression.

Shant Koumriqian

Yes. I think Omotayo; the biggest component of it quiet frankly is mix. So its mix of assets that are getting leased up in terms of going from a 10:4 to 10:2 at least on the gross yield question.

Omotayo Okusanya - Jefferies

Okay.

Shant Koumriqian

Then in terms of the net yields, again, its mix I mean, we have been buying in certain markets that have lower net yields the way we underwrite. But also have more home price appreciation, so we have been buying in Atlanta and Florida and certain markets. So that's also a shift in needle.

And like I said previously, in terms of our net yield, I mean, we are assuming a healthy amount for R&M CapEx and you have seen other people's underwriting, I mean it’s out there. So you can compare our underwriting to others and what you will see I think we are a little bit more conservative in terms of the amount of CapEx that we are assuming in that stabilized yield that Steve disclosed 5.8.

Omotayo Okusanya - Jefferies

Okay. That is very helpful. And then from a securitization perspective, I'm kind of curious again, just timing wise, the whole process of kind of putting it together all the paper work, doing all the marketing. From your perspective, how soon do you guys think you could have something else?

Laurie Hawkes

Shant will always limit based on our confidentiality. But it's the 144a; we cannot divulge a lot of details. Timing wise we are moving very, very well through the process. I mention the IT systems and our ability to respond rapidly to request for a reason. We actually been able to provide a lot of information very quickly and we intend to do so. And as you know our lead banker happens to be very active in the market and we are watching carefully the timing of everybody else's in the market. And I think we will be able to move as scheduled and planned by the end of the second quarter.

Omotayo Okusanya - Jefferies

Okay. I think that's helpful. And then just one more from me from an operational perspective, could you talk a little bit just about some of the other statistics that you have guys have historically track to how you're doing on that. For example that the amount of time it takes from buying a home renovating it and getting the first tenant into it whether that time has lengthened out or whether it shortened.

Can you talk a little bit also about how many of your tenants have started re-signing leases once the leases have expired and some comments just what bad debt expense looks like?

Steve Schmitz

Omotayo, I think in terms of your first question is kind of time to cash flow and in general, we think we are getting things leased within 120 days and you will see that in the 90 day statistic that we are going to put out. We are buying more at auction now. So that does lengthen the time of cash flow buying of the MLS you can secure the property a little bit faster, so we are getting a change in mix, where we are acquiring assets.

But I think all in all, the time to cash flow has been consistent. Some of the individual metrics in between they one way or the other. And if you go back and read our prepared remarks, I mean, she covered some of those. In terms of retention ratios, I mean we are at 28%, I'm sorry, turnover is 28% this quarter and 72% was the retention ratio.

And again, if you go back a lapse of a quarter, its kind of hovered in the 30% range, some quarters a little bit higher, some quarters a little bit lower. So its been relatively consistent. We would hope and expected that number could come down over time. We are not projecting that at this point. But we acquired a lot of homes and had leases in place. And our expectation is, that you should have a higher percentage of turn in those because we do not underwrite the tenant. So we did not restore those homes. But despite that fact, we have been under – what we have been modeling of 33% turn over.

Laurie Hawkes

That is one of the most significant metrics I think for the sector that has been under appreciated. But, when you compare it against multiple family at 55% or higher depending upon the project. We are looking at an increased stickiness that the single family rental sector hasn't been able to really enjoy families if they are pleased with where they live, the services are provided, the full systems upgrade, their likelihood to move in on the small children is very low.

And I think its compelling to think to go from 33% in the 20s or mid-20s is something that I think the sector still have in front of it. And potentially it is a very powerful in fact for more valuable than even rental increases. So that is something that over time, we will watch and things like days on the market due to weather will continue throughout. But, I think that is something that will be a major improvement for the professionally managed owner operators.

Omotayo Okusanya - Jefferies

Got it. That's helpful. Thank you very much.

Operator

Our next question online comes from Mr. Doug Christopher from Crowell Weedon. Please go ahead.

Doug Christopher - Crowell Weedon

Hi. Thank you very much. I have three just quick questions. First, could you provide a little bit more color on the recharacterized homes, the 828 homes where there might be opportunity in the near term and mentioned last quarter, it has an average bases of about 57,000. I missed wondering what your thoughts are on the opportunity or is in those reclassified home?

Laurie Hawkes

When you say opportunity, in terms of – if you could clarify that…

Doug Christopher - Crowell Weedon

Yes. Sure. You brought them back into the full self-managed versus the preferred operator, I'm just wondering if you see with your expertise and your care if there is some type of ability to raise rents to increase the occupancy, if that's happening?

Steve Schmitz

Yes. In terms of that portfolio, it was primarily concentrated in four markets, Florida, Georgia, Arizona and Indiana. The Florida markets are about 84% leased at this point, when we absorbed them and they were lowering that when the process are stabilizing those and improving those. The Arizona portfolio is currently about 92% leased. And again, we continue to stabilize as we get homes back. We're going through a renovation process to our standard, so we think we got the ability to improve results on some of those assets.

The one portfolio where we do have some challenges is the Indianapolis portfolio and that's currently about 63% leased, but over the last couple of quarters, we've been in the process of taking back making homes and we've been in the process to stabilizing those. So that lower occupancy is reflected in the results for the quarter, so we would expect the opportunity to push occupancy and improved results on those assets.

Laurie Hawkes

And out of that, specifically in the Indianapolis, we have restored a completion store 55 of properties out of those vacant even though the 35 in process and the balance we're looking at substantially recycle opportunities. So up from where we discussed it at the beginning or the end of last year, in fact, we made progress in dealing with all of those in Indianapolis market.

Doug Christopher - Crowell Weedon

That's very helpful. Thank you. And then, just could you maybe estimate markets where you believe that you really reached scale?

Steve Schmitz

I mean we clearly have in Phoenix, in Houston, in Dallas, I mean different ways of viewing scale and we set some closer to thousand homes per market in the next year and 500 homes per market. So we'll be looking at National closing in on that. We'd be looking at Charlotte closing in on that.

Laurie Hawkes

And intentionally, we'd look at getting any market that we really (Technical Difficulty)

Shant Koumriqian

Homes would be Phoenix, Houston and Dallas, those are all either at 1000 homes or above or over 700 homes. And a couple of other markets where we're closing in on the 500 mark, which is a near-term goal to get to would be Nashville, Atlanta and some of our markets in North Carolina like Charlotte, Raleigh.

Laurie Hawkes

Next question?

Operator

Thank you. Our next question comes from Alex Barron from Housing Research Center. Please go ahead.

Alex Barron - Housing Research Center

Hey, good morning guys.

Steve Schmitz

Good morning.

Alex Barron - Housing Research Center

I wanted to ask you regarding your interest expense. What's the average rate that you guys are paying on the line of credit? And what are the plans with the amount on the line of credit once you do the securitization? And how do you expect the cost on that securitization to compare versus the line of credit?

Steve Schmitz

Sure. So the line of credit is currently at LIBOR plus 250. So call it about a 2.75 all in rate that spread increases up to 325 as we increase leverage. In terms of securitization, we would initially use excess proceeds to pay down the line and then obviously use the line of continue to acquire assets. Where a securitization could potentially come out and we can look at the two deals that have occurred already Invitation Homes and Colony and there is another deal in the market that is supposed to be pricing today.

The spreads on the two deals that occurred where in the 165 to 178 range on LIBOR all in, we're hearing the spread on the deal that could close today, it could be inside of that. So you're looking at an L Plus like I said 165 to 170. And then, you've got cost and expenses which can range anywhere between 2.5% to 3% depending on the size of the deal that you would amortize over either at three or five-year period depending on the type of deal which you did. So that's what a securitization would look like and the credit facilities have been L Plus 250.

Alex Barron - Housing Research Center

Got it. And, thank you. And then, regarding your depreciation rate, what's the average I guess number of years that you guys are depreciating the homes?

Steve Schmitz

The actual original cost basis of the homes are over 27.5 years. So when you buy the home, you allocate a portion of land which is not depreciated. The remainder of your acquisition price is over 27.5 years. And then improvements can range from five to seven years depending on the category of the improvement.

Alex Barron - Housing Research Center

Got it. Thanks.

Operator

We have a follow-up question again from Mr. Omotayo Okusanya from Jefferies. Please go ahead.

Omotayo Okusanya - Jefferies

Yes. Thanks for taking my follow-on. Laurie, I may have missed some of your comments at the very beginning. Did you actually talk about what you estimate your net asset value to be at this point?

Laurie Hawkes

No, you didn't miss those comments, I hope. We didn't discuss that. We did focus on our FA evaluation that you look at our blended portfolio for the past year. And we do carefully watch replacement cost and we had some significant help from one group of our bankers and in terms of our calculations and going forward, we'll continue to watch and try to give additional information relative to what we think. The underlying appreciation is in the portfolio and it is way understated that you might have heard in Steve's comments in terms of where we're trading relative to its actual value.

Omotayo Okusanya - Jefferies

Got it. And would you care to share what you think that discount is at this point?

Laurie Hawkes

Not on this call Tayo.

Omotayo Okusanya - Jefferies

All right. Fair enough. Thank you very much.

Laurie Hawkes

Thank you.

Operator

Our next question comes from Doug Christopher from Crowell, Weedon. Please proceed.

Doug Christopher - Crowell, Weedon

Hi, this is Doug again. We got cut off last time, I don't know what happened, but I do have a question on the current average prices of the homes, I see it in $155,000 to $160,000 area versus the average rents all across the board of about 11.38. Can you just discuss kind of think about that how, is there a level of home price that you won't go above?

And then it's just a follow-up to the last question. I suppose it since you're buying the newer homes in that $155,000 to $160,000 area that you're believing that the net asset value is significantly above that still?

Steve Schmitz

Well, yes, all those things are correct. I mean we look at the yield being a limiter and in each market, there tends to be obviously a market rent for any particular type of home. We've always gravitated toward what's been referred to as entry-level homes or popularly priced homes because that's the largest part of the market, which adds to liquidity. And so, the rent seems to generally put us in that direction.

That 140,000 to 160,000 range, again, that covers all markets, so for example Dallas will be more expensive than Houston or Phoenix. But again, we're comparing that against market rent. And yes, we do believe that there is a great HPA potential in that price category, again because those are the most affordable homes. And, so when prices go up, one of the things that drives that is the share affordability of the working population.

Laurie Hawkes

What also affects the decision Doug is really how you're managing your expenses because the higher prices, the higher the prices go in the markets is important but it's also rent growth which we discussed earlier coupled with managing the bottom-line. And so, growth to net can vary by market considerably depending upon some of the costs that Steve touched on, but also taxes, insurance et cetera. And if you can in fact take advantage as we do of our National Purchasing programs, we find that we continue to drive down the cost of delivering a services that we do and we aren't just guided by the growth, it's really what can you do with the net in the markets you're in.

Doug Christopher - Crowell, Weedon

Thank you very much.

Operator

We have no further questions at this time. I would now like to turn the call over to Mr. Steve Schmitz for closing remarks.

Steve Schmitz

Well, I'd like to say thank you, ladies and gentlemen, for your participation in the call today and for your support. Hopefully, we've answered all your questions. And, if you have need for additional follow-up, please feel free to call us. And we look forward to updating you next quarter.

Operator

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

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