Q3 2019 Earnings Call

Greetings and welcome to the American homes, <unk> third quarter 2019 earnings Conference call.

At this time all participants are in listen only mode. A brief question answer session will follow the formal presentation. If anyone should require operator systems. During the conference. Please press star zero on your telephone keypad.

As a reminder, this conference is being recorded it is now my pleasure to introduce your host Stephanie Heim. Please go ahead.

Good morning, Thank you for joining us for a third quarter 2019 earnings conference call I'm here today with David Singelyn, Chief Executive Officer, Jack Corrigan, Chief Investment Officer, Brian Smith, Chief Operating Officer, and Chris No Chief Financial Officer of American held for rent.

Oh that I need to advise you that this call may include forward looking statements.

All statements other than statements of historical fact included in this conference call.

These statements are subject to a number with no certainty that could cause actual results could differ materially from those projected any statement.

These risks and other factors that could adversely affect our business is your <unk> results are described in our press releases and in our filings with the FCC.

All forward looking statements speak only as of today November eight 2019.

Yeah, no obligation to update or revise any forward looking statements whether as a result in your information future events or otherwise.

A reconciliation to GAAP non-GAAP financial measures, we're providing on this call is included in our earnings correctly.

No, our operating and financial results, including GAAP to non-GAAP measures.

Detailed in our earnings release, a supplemental information package.

You can find these documents as well I think the report and the audio webcast replay of this conference call on our website at Www Dot American home run Dot com.

With that I will turn call over to our CEO David segue.

Thank you Stephanie good morning, and welcome to our third quarter 2019 earnings Conference call.

We had another excellent quarter with 5.4% growth and core FFO per share from the third quarter up last year, driven by strong demand and consistent execution.

Single family rental industry fundamentals remain strong fueled by the housing shortage over the past 10 years and the behavioral changes of individuals desired and the advantages of renting over homeownership.

As we approach the end of 2019 and look forward to 2020, we plan to accelerate or development program in a meaningful way.

We have spent the past few years, making various investments that now position us to capture significant benefit that we believe are unique to American homes for rent.

These investments start with the building out of our development platform.

The process of hiring experienced homebuilding personnel and sourcing land opportunities, it's taken us the better part of the past three years, our development commitment needs to be long term focused as it takes time to acquire land build out the horizontal infrastructure and finally construct the homes.

A key to our development initiative is to ensure that we have ready access to sufficient capital to make this long term commitment.

Let's begin with reducing our leverage from higher levels utilize when we were building the company.

Today, our investment grade profile combined with significant retained cash flow and recycle capital from asset sales provides us attractively priced capital to invest up to $750 million per year into new assets.

However, the long term growth opportunity from our development programs is far greater than this.

I believe it's important that we have access to multiple permit capital sources.

As a reminder, we have already entered into one development joint venture and continued to have constructive discussions with other interested.

The traditional investors.

A few facts about development program.

First our homes are designed with ready to wear and tear and future maintenance needs in mind.

Second the clustering homes in a single neighborhood will enable us to offer unique amenities to our residents.

And third the economics these homes are better than other acquisition opportunities afforded us.

To this last 0.2 major components of the price of a new home is marketing cost in developer profit.

When we built for own inventory, we did not incur these costs, although we do put some higher cost materials into our houses our total investment in new homes through our development program is significantly less than acquiring a comparable homes through other channels.

This year, we expect to deliver into operating inventory approximately 800 home run the A.M. age development program.

Next year I expect we will deliver three times this year's production with further increases in future years.

Another change as we go into 2020 is that we promoted Brian Smith to the role of Chief operating Officer.

Many of you have had the opportunity to meet right.

Yeah, that's part of our team for eight years working side by side with Jack and has been instrumental in building our acquisition and property management platforms.

This breadth and depth of experience in multiple aspects of our business and its keep focused on leveraging technology to enhance our platform uniquely position Sam to lead our operating platform for long term success.

We've been preparing for this transition for a long time, a long time and believe now is the right <unk> to make this change is our team's focus on their 2020 plant.

This change will enable Jack to focus more directly on aren't important growth initiatives, specifically our development program.

He will continue to serve as a trustee and chief investment officer.

As I looked at the balance of the year and into 2020 I'm excited about the long term fundamentals of our industry. We are in position to capitalize on the opportunity to provide much needed new quality housing inventory, which will drive strong topline and cash flow growth for our company.

And now I'll turn the call over to Jack.

Thank you gave and good morning, everyone.

Over the past couple of years as I have been more focused on building out our development expertise, Brian . It's so much of the operational oversight of our property management and maintenance platform.

Now it is time, perhaps pastime recognized Brian for his role at the company.

Our portfolio with some fantastic shape and I am confident passing the torched Brian .

Since our formation eight years ago, we have identified and pursue the best opportunities available at each stage of the cycle to drive accretive growth from auctions.

My last purchases to new homes built by National builders and some portfolio acquisition.

Now we believe that our development program is the best risk adjusted opportunities each day to drive growth, both cash flow and value. It's truly a game changer in terms of controlling our pace of growth driving superior results over the long term.

We have spent the last few years evaluating a testing this program Irene staff.

Building, our in house expertise and refining our approach as we launch.

Well work, we've done has allowed us to formulate a blueprint for an optimal rental.

Better economics than homes purchase through acquisitions based on actual data and we saw.

These homes are high quality and durable offering lower maintenance capex.

Designed with renters in mind.

With designer finishes and color was open floor plan.

Pet friendly features.

In the last year, we have rolled this program out across our platform to select existing submarkets in neighborhoods, primarily in the southeast and western markets.

With the ability to create neighborhoods and concentrate assets. We are opening up new avenues to efficiently servicer residents and further revolutionize single family rental business.

Well, it's also had been excellent and we're ready to take our development program to the next one.

Hi, controlling our own pipeline will create a path to sustainable long term accretive growth without dependence on housing market condition.

Over the long term our development program allows us to control our own growth in terms of product quality location and overall Wally.

Oh economic cycle.

Of course, our confidence in expanding this program is based on the continued strength in market fundamentals.

On the demand side population in employment growth or vibrant.

I don't think formations remain robot.

For am H. in particular population growth and household formations within our markets are nearly doubled the national average.

Over the last 12 month employment growth in our markets, that's more than 40% greater than the national average.

In summary, today, we are well positioned to capitalize on our growth opportunities.

Look forward to realizing with significant benefits of our prior investment.

As Dave indicated for 2019 are on track to take delivery.

Proximately 800 homes from our MH development program.

What should expand significantly in 2020.

Beyond.

Now I will turn the call over to Brian .

Thanks, Jack I would like to start by thanking you and Dave for your support and Mentorship over the past eight years.

Her to assume this leadership role and I appreciate the confidence that you and our board of showing.

Most importantly, I look forward to continuing to build on our success.

The portfolios in great shape, and our platform is strong.

We're well positioned for the future.

The third quarter the portfolio continued to perform well as we exited the busy leasing and good luck season.

Our consistency of execution and focus on the resident experience continued to drive strong results.

On the revenue side average monthly realize rat within our sample cool increased 3.6% and occupancy remains strong.

One thing and an increase in core revenues of 3.9% when compared to the third quarter of last year.

Our positive top line performance continued into October well, we maintain same home average occupied days of 95% and.

And blended leasing spreads a 3.5%.

Which represents a 30 basis points improvement over last year.

We're especially proud of our team's performance toward the end of RBC.

During a period that was mark with some severe weather, we were able to continued to deliver an excellent customer experience.

Our disaster response to Hurricane Dorian tropical storm and all that is a perfect example, the strength of our platform.

With a little bit of locked in a lot of preparation we were able to avoid significant damage to our own the effective mark.

He is back to back stores in September affected more than 14000 homes in our portfolio.

Including approximately 5000 homes that were in areas under mandatory evacuations.

We work for past experiences and our teams in the South Eastern Texas did a great job and preparing for potential issues and then getting our operations at home is back on.

Our streamline response enabled us to minimize storm related costs to approximately $1 million and sample.

For the quarter samples for property operating expenses were up 6.3% compared to last year, mainly due to a 7.5% increase in property taxes.

The 12.2% increase repairs and maintenance a turnover costs.

Chris will discuss property taxes later on the call.

Excluding storm related damage repairs and maintenance and turnover costs increased approximately 7.9%.

Slightly higher than our 4% to 5% inflationary expectations.

Primarily due to exterior maintenance expenses related to our each away cleanup.

Even excluding these items our year to date core property operating expenses.

Excluding property taxes are up 3.5%.

Which is in line with the range that we communicated that started the year.

Recurring capital expenditures were up 7.2% quarter over quarter, which is in line with our expectation and largely driven by the plant expansion of our preventative maintenance program.

We will continue doing that in this program and believed that it will reduce maintenance expenses in the long term.

I'm pleased with how our platform continues to have all driving consistent predictable operating results.

So I think we have a lot of opportunity yet.

On the outside our operating philosophy has centered around data driven decisions our strategy to own and control key processes has allowed us to develop proprietary systems the capture tremendous amounts of data.

Among other things we use this data to evaluate our asset the mark.

Strategic pruning of our portfolio allows us to recycle capital opportunities with better long term returns.

During the third quarter, we sold 341 homes, which brings our year to date disposition volume to 954 homes.

Yeah as of September Thirtyth.

We had approximately 1400 homes held for sale.

To close I'm thrilled with the opportunity for us and I look forward to continue our momentum through the other than a year and into 2000 at one.

Now I'll turn call over to Chris.

Thanks, Brian in my comments today I'll provide some additional color on our third quarter operating results, including an update on 2019 property taxes update you on our balance sheet and conclude with a review of our revised 2019 guidance.

Turning off with our operating results for the third quarter of 2019.

We generated net income attributable to common shareholders of $23.5 million or eight cents per diluted share.

This compares to net income a $15.2 million or five cents per diluted share for the third quarter 2018.

Also for the third quarter of 2019 core FFO was $97.4 million or 28 cents, Oh sharing unit as compared to $92.2 million or 26 cents, Oh, sorry unit for the same quarter last year.

Adjusted though with $83.9 billion in the third quarter of 2019 as compared to $79.4 million for the third quarter of 2018 on a per share basis adjusted.

24 cents.

Sure in unit for the third quarter of 2019 compared to 23 cents.

Shared unit for the third quarter of 2018.

Next I'd like to give you an update on property taxes now that were three quarters through the calendar year.

I would never see assessed property tax values for the majority of our portfolio and continued to see valuation increases across numerous jurisdictions that are higher than our initial estimates at the started a year.

Additionally, consistent with our update last quarter. We've now filed over 23000 individual property tax value Appeals and are happy to report every we proceed responses on approximately 18000 of these appeals with a nearly 60% success rate.

However, although we've had a very impressive success rate based on the number of appeals filed due to this year's outside initial assessment increases the reduction in about you have not been as great as we expected.

And as a result, we now expect full year property tax expenses to increase in the mid 6% range, which will tie into our revised full year guidance expectations in just a moment.

However, first I'd like to give you a quick update on our balance sheet at the ended the quarter, we had approximately $2.9 billion. The total debt with a weighted average interest rate of 4.4% in a weighted average term to maturing a 13.4 years, our net debt to adjusted EBITDA is now 4.6 times, providing us with debt cups.

The headroom to our internal leverage target of five and a half times, which is consistent with the rating agency expectations for investment grade credit.

Also as a reminder, you don't have any debt maturities other than regular principal amortization until 2022.

As David Jack covered earlier, we're extremely bullish on the external growth opportunity ahead of us and our proud of our flexible and best in class balance sheet uniquely positions us to unlock long term value creation from our image development program.

More specifically at the end of the third quarter, we had $171 million unrestricted cash cash equivalents and our 800 billion dollar revolving credit facility was fully undrawn currently generates approximately $275 million annual retained cash flow and we're also actively recycling capital out of.

Strategically identified noncore and underperforming assets year to date, our disposition program has generated $179 million recycle capital and at the end of the third quarter. We had approximately 1400 additional homes identified for disposition, then we expect to generate between 275 and 325 million.

Mental recycle capital throughout the fourth quarter in into Two Q2 020, 2021.

Finally, I'd like to provide you with some additional color on our full year 2019 guidance ranges, which were revised in last evening's release.

Starting off with our same home portfolio, we've been very pleased with our operating performance this year, including great strength in occupancy and top line performance and accordingly are tightening in raising our expectation for same home core revenues growth to 3.8% to 4.2% versus our prior range of 3.2% to 4.2%.

Next I mentioned previously that our current expectation for full year same home property tax expense growth is now in the mid 6% range. It's important to note. However that our current full year growth expectation for all non property tax related expenses, including all weather and storm costs remained at 3% to 4%.

Consistent with our expectations at the started the year.

However, on a combined basis with property taxes, we now expect full your core property operating expense growth to be 4.7% to 5.1% versus our prior range of 3.5% to 45%.

Lastly on the same home portfolio, the midpoint of our expectations for core NOI growth in core in Hawaii. After capital expenditures remained unchanged at 3.5% and 3.1% respectively.

And finally with respect to our overall portfolio, we continue to be very pleased but our operational performance in particular, the leasing thrift, we've seen in our properties outside the same home portfolio and as a result, we're tightening and increasing our expectations for full year core FFO per share unit growth to $1.10 cents to $1.12 cents per share.

Third unit compared to our prior range of one dollar and six cents to $1.14 cents per share and unit.

Before we open the call to your questions I'd like to reminding that as we begin to think about 2020, we couldn't be in a better position. We've worked hard to cultivate our investment grade balance sheet, which took years to accomplish and because of the flexibility of our balance sheet, we've been able to invest into and create the only single family rental home development program up its combined.

Which is now probably for meaningful increases in production levels and expected to be an exciting growth driver crossed into 2020 and beyond.

With that well now open the call to your questions, but we'd like to make you aware for Jack is joining us remotely today, if he recovers from a recent knee surgery operator.

Thank you will now be conducting a question answer session and the interest of time, we ask that you. Please limit yourself to one question and one follow up if he would like to ask a question. Please press star one on your telephone keypad confirmation telling will indicate your line is in the question Q. You May proceed start to if you'd like some of your question from the Q for participants you think.

Speaker equipment, maybe necessary to pick up your handset for pressing the star Keith one moment, please we pull for questions.

Our first question comes from the line of Nick Joseph with Citi. Please proceed with your question.

Thanks, maybe just start on development you mentioned that 800 homes. This year. So I wonder if you can give more color Dallas in terms of delivery timing versus expectations. The cost hobbies, Siemens gone I'm just.

As you've started to ramp up how things are trending so far.

Yeah. We're growing this was our I think our third year of ER.

Being in this business of developing new homes and the platform is growing so but the cadence of deliveries is is gonna be growing we we delivered about twice as many in the third quarter as we delivered in the second quarter expect you know another 50% increase in the fourth quarter.

And that increase should continue into.

2020.

Where we expect to deliver approximately Oh you know.

2400 homes so.

The cadence is going to increase or where we haven't finalized our guidance for two.

2020, yet but in terms of.

Or or projections in terms of exact deliveries in each quarter.

But.

That should give you an idea.

Thanks, I guess, but I guess in terms of.

On the left or right or the cost coming in month inline with expectations are there any.

Feldman delays, how long does it take into Lisa home persons at home that you're just turning from your same store portfolio. It any color on the actual deliveries would be helpful. Yeah. The in terms of leasing their leasing faster than we expected on average.

And at a slightly better than what our pro forma.

Rents work.

In terms of costs.

There's there's been some delays some as we open up new markets. You have you have to learn the the various planning.

Departments of the various municipalities and we've had some delays as a as it relates to that and then some weather delays, but I think as we were now in 15 markets that we're developing and you know we opened a a big chunk of them.

In 2019, and I think we've gotten through most of those type of delays and the weather.

It's the other major factor and and that's you know.

Pretty variable.

Thanks, Andrew or a net net let me supplement this is Dave <unk>, let me have Bryant supplement a little bit on that leasing your leasing aspect.

The deliveries of the new homes as it's been really a great for our pre leasing efforts, we've been able to do you have estimated completion dates and delivery dates.

And really pushing these homes before completion, so we've been able to reduce the time on market.

The demand has been fantastic for it but we really see that pre leasing effort is being a true benefit to the development program as we go forward.

And we've seen some really good traction support yeah.

Thanks, that's helpful. Just as you continue to ramp up the development pipeline you mentioned, maybe additional jvs.

What size or what percentage the pipeline would you be comfortable with their own either fully or or be JV.

Yeah. This is Dave Nick good morning, not the the way I would look at that maybe is not as much as a percentage, but as we indicated we have a about 700 $800 million of capital that each and every year from increased debt capacity as our EBIT dog Rosen routine.

Cash and so weve first and foremost want to get that are deployed.

But the opportunity is greater than that so as the program scales up we do need more capital and we have a small joint venture today that was.

Really to get the joint venture model out there to test the demand in the marketplace, which is very very strong port. So it there I am looking that will probably need one next year I'm because the demand the capacity and the expected deliveries will exceed that capacity that we.

Have we have a couple of options. We can do jvs, we can do common and we'll make that called as we go get a little closer but I think the as we go from 2019 to 20, and then further to 2021 or the need for additional capital will be great are greater than it is today.

And Jvs are good option for that.

Thank you.

Thanks, that's it. Thank you. Our next question comes from the line of Jason Green with Evercore ISI. Please proceed with your question.

Good morning, just a question on the property taxes as we look forward over the next two to three years I've noticed that are really difficult number to predict but is there anything that should give us confidence at the property tax expense growth was started to celebrate or should we be thinking about kind of the 6% to 7% tax expense growth over the next few years.

[laughter] mortgages as Chris I think you started the question correctly and that it is difficult to predict its all be cautious in terms of what I'd say here because none of us have a crystal ball, but I will say you know for this year in particular like we've been talking about you know really year to date here.

This year does it feel fairly outside a it was higher than what our expectations were at the start of your so you know we're optimistic that this represents kind of a a high watermark that we should hopefully be able to see some benefit also but it's really difficult to predict the other piece I'll put out. There. This is just under four per factual referenced because it's very early.

But I'm sure you and others are probably aware that Texas recently passed some new property tax reform and again will be careful here because it's it's still somewhat unclear in terms of how the mechanics honest forget a work.

But at the Texas level, there's there's two new bills that are in effect now I will then.

Covering county city in special districts or taxes, providing essentially a cap on the total property tax revenue dollars. They can be collected by whatever the respective jurisdiction is it 3.5% on a year over year basis.

And then.

On school district related taxes, applying a cap at 2.5% revenue growth year over year, So again, a little bit unclear at this point in terms of how the mechanics and that will work, but we're optimistic that that should be a little bit of I help for us going forward you know for some context about 30% of our property taxes are in the state of Texas.

And to give you a little bit of context in terms of this year.

Now that we're through you know the majority of the calendar year with assessment, an appeals in hand, I can tell you that this year's property taxes in Texas, we're right around 7% and so a meaningful component of what we've seen a tuck in property taxes. This year so far.

Got it and then I guess I'd just on the total expenses side and I know taxes are big influence this year and I appreciate that but you ran at 5.8% expense same store expense growth last year. Your midpoint. This years for nine is a mid to high for numbers just the same store expense growth expectation for the next few years.

Well I mean, it would take I think it's let's go back to some of the comments we had in our prepared remarks, and we exclude property taxes on a full year basis, and you look at everything else combined our expectations. There is 3% to 4% overall, there's a couple of different pieces in there you know I think the underlying inflationary.

In order to turn is probably a little bit above that we started the you're talking about the 45% context, just because of of wage and labor inflation, but I think you know again I would it be careful here, but I'm, not saying anything to forward looking or or anything 2020 guidance related but I think it's helpful that you look at everything on a combined basis this year.

Recognize that excluding property taxes were expecting 3% to 4% growth, which is where we started the year.

And is where we're tracking towards right now.

And Jason it's Dave keep in mind, and <unk> and you had this in your question, but keep in mind property taxes were about 50% of the expense level.

Yeah I got it thank you very much.

Thanks.

Thank you. Our next question comes from the line of surely will with Bank of America. Please proceed with your question [noise].

Hey, good morning, Guy So I want to go back to.

And so you must have come in your good day and it seems as if there's about five came appeals that are still going to come in so in your expectation of call. It six packs that how much like stuff I anticipate that may not get people.

[noise] I mentioned this this is Chris I mentioned this in my prepared remarks, so far.

Seen about a 60% success rate on our appeals that we receive responses back on so far which is 75% or so.

In the balance of the appeals, we're assuming actually probably little bit lower than that I, just because the 60% quite frankly outperformed our expectations a little bit in terms of number of successful appeals, but I would say for the balance of those appeals, we're assuming kind of similar to or a little.

A bit lower than the success, we've we've experienced so far year to date, we feel pretty good about where property taxes are where our estimates on property taxes are for this year because again, we really do have the majority of our data points collected at this point.

Got it that's helpful and so also on other start when you're talking about storm expenses. So the 1 million and three kill was that a bucket and your initial expectations for startup cost for the year.

Yes, timberlands are and you know that's that's a good topic because you know I think whether is one of those things that we've we've been that we talk regularly about and I think a you know is as time has shown us is a recurring part of the business in accordingly, we budget for.

It in forecast for it and included in our guidance expectations.

And if we all the backup to to the started the year when we initiated our guidance. We all know that we provided for a contingency in our expectations. This year and that that has turned out to be a very prudent decision and we've had a number of weather events throughout the year.

We had a you know some winter storm events in the first quarter Halen tornadoes in the second quarter and now we have two pretty significant weather events this quarter, Dorian and Imelda and you take all of that on a year to date basis and it all you know, it's a very comfortably within the.

The provision we included in our initial annual guidance it at the started here.

Yes, really this is Brian .

I think it's important to note when we're talking about weather.

The the change in operations a change in disaster response, that's evolved within our company within our platform. We were able to quickly respond to prepare for these homes and get these homes back online much quicker than we were able to on the path, which limits the expense side and also protect us on occupancy going forward.

So we're really proud of the with the teams executed this year I think it's a it's a difference between storm events of the past.

Hi, Thanks, guys.

Thank you. Our next question comes from the line of Rich Hill with Morgan Stanley . Please proceed with your question.

Hey, guys. Good morning promise I'm not going to lead off with a question about taxes I want to come back [laughter], sorry, sorry, Chris.

You know that I do want to come back to maybe something that no. One else has asked about thus far and it seemed like it was a big driver of your revenue which was fees.

So can you remind us what percentage of total revenues driven by fees and maybe where you think you can go without over the medium to long term.

Hi, Rich this is Brian I'll start by talking about kind of the improvements in the fee line. This year I'm wondering what it means for next year will this year, we added a couple of different.

See items to the up to the program.

Probably the most significant was standardizing the way, we treat our pets season, and and pet deposits.

We expect that to continue as it rolls out to the entire portfolio in the next year.

Beyond beyond Apache is looking to the future are there other opportunities that we see what I think one of the most unique opportunities is what the rental communities on the ancillary revenue side.

When we have these communities that are that are collected a geographically we're able to explore some other offerings, namely smart home landscaping services, we see real real upside with that but in the short term the made a major effect on the fee line item is that the standardization about revenue.

Got you got it and so you look there's been some discussion in the market that maybe over the medium term single family rentals can get to.

Other income if you will closer to apartments. So is it fair to say you're around two to three right now and maybe you could get seven to 10 over the medium term or is it just sort of twoq too early to think about that but.

Which I'll, let Brian comment on his view going forward, but but right now that fees aren't even two percentage of revenues are probably closer to 1% to 1.5%.

Got it yeah, I think over the long term Ah Theres a lot of opportunity on smart home offerings, not only just for the communities, but for the entire portfolio, it's not quite there yet but in the interim we're happy with the improvements we made a with pet policies and there's a couple of other smaller ones that are going to be rolled out shortly.

Got it got it and I do want to ask just quickly about the appeals process, but my sense is that in a property taxes are property taxes are and you can't really can't really control them. So what you can't control is the appeals process.

Are you guys are you guys using technology data attach it to maybe becoming better in terms of how your appealing.

Property tax increases.

Oh, absolutely rich that's great question and honestly, we are very very active and strategic on the appeal side.

We are using not just state, but as we know.

In particular.

Yeah.

Very local like a process and so we have cultivated it very large network of in market property tax professionals. They both help advise and represent us throughout that process.

I I, probably little bit of broken record here just in terms of some of the statistics, but on average each year, we're filing over 23000 individual property tax Appeals. This year, we filed over 23000, a similar numbers last year end the year before and so we're very active.

And we're also proud of our property texting and you're right. It you can't go both ways, it's a little bit difficult to predict ahead of time, but what I would remind everyone.

Yeah, you know prior to two this year you know, we've actually had favorable outcomes in the opposite direction. If we take back to overall property tax expense growth.

Last year, we were 3.6% and that was largely driven by the success of Rpls program. The year before that if we go back and Paul you know prior year financials, you'll see that property taxes were up 2.2% and again, that's a function of the success of our fuel program that I think we do a great job on it and we'll continue to be it.

Very large focus of ours going forward.

Great. Thanks, guys I'll see you next week.

Correct.

Thank you. Our next question comes from a lot of John Polasky with Green Street Advisors. Please proceed with your question.

Hey, Thanks, Dan for Jack up for the 2400 homes, you'll be delivering happened to build the Red channel next year could you give us a sense for what percentage of the budgeted cost or are locked in or bought out right now.

[laughter].

Yeah, I'll take that the percentage that are locked in and I would say is Ah you know probably in 60% to 80%.

Oh, you know we're we're through.

At least for the first half of the year, we're through the horizontal development.

Phase of it and obviously land is kind of fixed in there. So ER and then the vertical vertical costs are we haven't really exceeded our vertical cost by any significant degree in the past that I wouldn't expect a exceed them.

In the future.

Unless we do stuff, sometimes we added basement that we didnt budget for we're at an amenity but.

In general we'd been hitting our costs pretty pretty close other than a carrying costs in that case of delays.

Okay, and then on on the delay fraud I believe during the fall Conference Circuit you you referenced that thousand homes were expected to be delivered this year and now. It's it's 800 is that a is that delta driven solely by weather or what else on the ground is going on there that caused the delay this year.

Like I said I think.

The local planning offices it takes a while to learn exactly what what they want and then once we get our floor plans approved it's much easier to get the next.

Set a floor plans reviewed because what are the same.

I'm in the next development. So you know we've opened we've opened up in.

15 markets, so far as far as.

Development in about a half of them. We're done this year and you know we go through the learning process I mean every locality I'm, so that [laughter] other side of the delay.

Okay. Thank you.

Thank you. Our next question comes from the line of handle same just with Mizuho. Please proceed with your question.

Hey, good morning out there.

Wanted to handle.

Well I appreciate the color on the single family rental development I was hoping for a few more numbers, though you mentioned 800 million of deliveries next year, what should we be thinking about next year, a similar cost per home ballpark and maybe could add some color on the yield you expect to achieve on 800 million this year and can they really thoughts on the.

Crop for next year.

Yeah, I'm not sure. We said 800 million I think we set a seven day 800 million so 2400.

Divided by that you know right now we're developing I'm on average at about a 250000.

Dollar per home.

Rate and.

No, we're not changing dramatically anything weren't doing so it might go up a little bit because we'll be more active in the west Atlantic cost and the watts or a little more so I would say somewhere in that 250 to 75 range on average.

Okay and in the yield but you guys. Great you yield is approximately it'll be in the low sixes.

Yeah handle it looks like I said in my prepared remarks, a there was a little bit of a reconciliation for you on this.

You look at the cost of a new home that we developed a we don't incur the marketing costs. There's no developer profit our ability to acquire a and produce a home to put into our inventory is a better home at a more attractive prices we did.

Hello, and it really comes from the economies of the development process and that all translate says it reduced a investment costs, you're getting a better home in the same market equal or better returns for a.

Rental income, it's improving our return significantly over other options.

Sure sure. Okay. Jack I think you also mentioned 15 total market, you're developing and I'm curious is that their new markets I'm not sure what the prior number might have been earlier this year, but I'm curious if you're entering more market. The next year.

Entering new markets next year and if so were.

Oh, we currently.

Only plan to open up a one new market next year.

Maybe just the.

Aside market, that's you know an hour outside the <unk>.

Another market, but were principally in the southeast and Oh, and West and we May open up another market and in the Midwest.

Got it okay.

Good question your peer invitation homes at Investor Day about a month ago outline 25 to 50 million of NOI incremental opportunity. The next two to three years from.

Ancillary income and lowering its days to to re resident curious if you guys bought the exercise of you quantified that opportunity and if so any any color you could share on that thank you.

I handle this is Brian .

Speaking to the to the reducing the turn times the caskets turn times, that's been a a goal of ours for a long time, if you look at the improvement over the years and both our speed to prepare the home and our marketing costs, you've seen a reduction and turnover times down into.

The low fortys for the third quarter, we do see some opportunity there a there's opportunity there by increasing our pre marketing efforts there's opportunity there by performing more of the work in house. So my expectation operationally is that we'll see we'll see improvements on that side with our portfolio size a reduction of one day.

An average turn times for the year, that's roughly a million dollars of cash flow.

In terms of quantifying the ancillary revenue opportunities, we have some expectations for the near term over the long term probably the greatest opportunities on the smart home offerings and some other things were going to wrap into our rental communities and we're just not quite ready to to estimate those because there are a little bit further out.

Fair enough. Thank you.

Thank you. Our next question comes from the line of Hardy goal with Zelman and Associates. Please proceed with your question [laughter].

[noise] Hi, guys. Thanks for taking my question.

I look at your same store pool.

The sequential decline in occupancy.

And to be probably the highest for the third quarter, if I look across your history.

And I realize it nor have that many years, but it's still still stands out.

How does it look up your same store results overall growth appears to be.

Pushed down because of that and I'm wondering how much of this occupancy declines because you're completing brand new homes in markets alongside your same store pool.

And that is negatively our just that deflating. Those results is there a deflationary effect on your same store pool because of your new homes.

And Arctic this is Brian that's a good question I think.

Part by talking about the effects of some higher than expected move outs in July on occupancy.

And then we can talk about what it looks like in October , but specifically as to whether we're getting some serious headwinds from the new product, we haven't seen that yet the demand metrics that we follow in terms of showings per rent ready and the the web site traffic or really shows that the.

The demand is there if we saw some some real effects of the new homes being delivered would probably be higher incidence of move outs to buy homes and our resident surveys aren't showing that that either I think the occupancy pressures for the third quarter really surrounding higher than expected move outs in July .

On a little bit higher in August if you look at our turnover or prior to this quarter. We had 10 consecutive quarters on a trip on a trailing 12 month basis of improvement. This quarter was flat with July and August being up that means September recovered and we continue that a positive recovery into October .

So if you look at the third quarter in isolation, yes.

It's a little bit different in the past, but what are our rate management and the way that we manage through September a position that's much better through October where we have average occupied days of 95.0 as opposed to a 95 or 94.7, a 30 basis point improvement over last year.

Yes, no hard if this is Chris and if I can just add.

Brian's comments around those July move outs, you know really consistent with the mid quarter update we provided a is probably a month month and a half ago and you know I think ending the quarter I had a full quarter, 95.1% average I keep my days really.

Demonstrates the strength to the finished the quarter.

And then just to emphasize Brian's comments around October coming in at 95%, which is which is strong as well right on top of what our expectations were and job for additional context as Brian kind of was alluding to that 95% is 30 40 basis points ahead of October of last year [noise].

Got it thank you and.

[noise] just congratulations overall I'm going to keeping your NOI guidance, even though your taxes comprised of the downside that's pretty impressive.

Thanks, Kartik I think that that's a great point a than we'd like to underscore as well.

Thank you. Our next question comes from the line of Sam Choe with Credit Suisse. Please proceed with your question.

Hi, guys I believe it's Brian who touched on the tenant improvements are coming from like process oriented things and internalization <unk> I guess I'm curious to hear an update on just the shouldn't you gains from Doug technology infrastructure, you guys put in and where more gains can come from.

That.

Hi, Sam this is Brian .

Give me a relevant example that weve touched on my prepared remarks, not surrounding the way we're processing Asia ways.

Our technology platform has always been designed for scale and efficiency and its away was one of the last pieces that we automated or if you remember last year, we had some deficiencies in our processing that created some outsized increases nature way line item.

Last year, we began the the automation of the process. The male intake LCR recognition in routing to responsible party for remediation.

Let us to become very efficient and quick with moving violations too to where they needed to get to to be remediated immediately and that that clean up and and change technology changes implemented at the beginning of the year and we work through that that entire system and expected to be much more efficient going forward.

Or other areas that we see for potential offer technical improvements are really surrounding the way that we communicate whats with our residents.

We pioneered the self showing aspect on the on the leasing front end, there's still some small improvements that we expect rollout in that next year, but the next big game changer for US is gonna be really having the right communication portals with our residents to so to make the ER that make it really easy.

To order maintenance and communicate with property management team.

Great. This is helpful. Another one on I guess occupancy I mean, you guys made it a point to build out a position of strength, but I mean, we're still seeing some markets operate a sub 94% on the occupied days percentage. So just curious to hear.

Whether there are idiosyncrasies in that area or operational issues contributing to that and whether they'll local fundamentals helped drive the occupancy higher overtime.

Yes, I think if you look at specific markets, you're going to see variability month month.

The occupancy the markets that are performing up to our.

Expectations individual markets are really characterized by ones that have higher than expected move outs in July .

And you start to exit the busy season, it's just more difficult to recover from there. So it takes a little bit longer to get them back after the the right occupancy position.

Well, we made a number of changes last year operationally that that pay dividends this year, driving consistency and art and operational consistency in our turns.

So I don't think it's it's attributable to anything other than expected variability across across markets.

Okay. Thank you so much.

Thank you. Our next question comes from the line of Ryan Gilbert with BTG. Please proceed with your question.

Hi, Thanks, guys I'm just one more on the development program. You know I think you should have over the years worth of data for a number of units at this point can you tell me what are the average initial or your one yields that you're achieving and in that units that have already delivered.

Yeah, I'll talk a little bit if Brian wants to talk a little bit about it says this is Jack.

It's really hard to cuts or the yields are gonna be higher than you would expect isn't in the first year, because sometimes it takes a year or two for them to adjust property taxes, and they really have any maintenance or or turns so I'd be misleading if I gave you.

You know a real high.

The real high net yield the rents are are slightly higher.

And.

Then what we anticipated and the occupancy at slightly higher than anticipated and they they appear to be staying longer than.

At least in the first couple of years, then than our traditional houses.

Okay, Great and then on blended rent growth you know be pad two quarters now.

As spread compression on blended rent like October improve do you think that you'll be positive in the fourth quarter on on a blended rent spread basis.

Hi, Ryan this is Brian .

We really look at it we're looking to maximize the total revenue and if you look at the rate difference between this quarter in last quarter it ties into little bit through our performance into into October Oh, we were on the releasing front, we moderated our asking rates a little bit drive some improvements occupancy.

Over here.

For me to go I predict all the way through the fourth quarter I think it's little bit premature.

Okay understood. Thank you.

Thank you once you are.

Thank you. Our final question comes from the line of Jade Rahmani with KBW. Please ask your question.

Hi, everyone. This is Ryan Thomas Allen on for Jade I'm, just stopping tailing off of the earlier questions on ancillary fees. Realizing it just it's small it's small today, but can you remind us if there are any asset management economics on the current built around JV and if.

That if asset manage if that asset management model is something that you think could meaningfully benefit the earnings profile of the company in future years as you target entering more of these jvs.

Yeah, Great question, it's Dave.

So the joint ventures are structured with no preferences or to the investors. A there is a series of fees for property management and overhead <unk>, but the the real driver in the real benefit is as you alluded to is as certain hurdles are met our.

Percentage participation in the future cash flows after a baseline or greater than our investment percentage. So there is a promote structure and the joint ventures and there is no preference or subordination and they are joint ventures.

And can you remind us your long term targets for the cost to maintain line as well at the all in cost to maintain expense fine, including I guess for this year.

Considering that the built around product will increasingly become a greater portion of the portfolio is that changing how you're thinking about that number over the next few years.

I'll take that at the beginning here. So that you really is you indicate I think you got it right you got really kind of bifurcate the two portfolios.

So one of the benefits of the the.

The build to rent portfolio is it is being built with a future maintenance in mind and therefore, the maintenance costs going forward should be less and will be less not only in the short term, but in the long term or they're built with resilient debt deck says it.

Posed to would deck that need be maintained as a simple example, so those the the long term aspect of the bill to rent program is gonna be very very good for the maintenance line on the existing portfolio.

We spent a number of years, bringing that cost down into the current 23 2400 dollar line, though we do have preventative maintenance programs in place. So we don't have any clips that we are going to incur but that will increase as time goes on.

For inflationary reasons.

<unk>.

Thanks for taking the questions.

Thanks, Rob Thank you.

Thank you we have reached the end of our question and answer session and the conclusion of today's call. Thank you for your participation. You may now disconnect your lines and have a wonderful day.

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