American Homes 4 Rent
Q1 2018 Earnings Call Transcript

Published: 3 May 2019

[Operator:]

Greetings and welcome to the American Homes 4 Rent First Quarter 2019 earnings conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Stephanie Heim. Please go ahead.

[Stephanie Heim:]

Good morning. Thank you for joining us for our first quarter 2019 earnings conference call. I'm here today with Dave Singelyn, Chief Executive Officer; Jack Corrigan, Chief Operating Officer; and Chris Lau, Chief Financial Officer of American Homes 4 Rent. At the outset, I need to advise you that this call may include forward-looking statements. All statements other than statements of historical fact included in this conference call are forward-looking statements that are subject to a number of risks and uncertainties that could cause actual results to differ materially from those projected in those statements. These risks and other factors that could adversely affect our business and future results are described in our press releases and in our filings with the SEC. All forward-looking statements speak only as of today, May 3, 2019. We assume no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. A reconciliation to GAAP of the non-GAAP financial measures we are providing on this call is included in our earnings press release. As a note, our operating and financial results, including GAAP and non-GAAP measures, are fully detailed in our earnings release and supplemental information package. You can find these documents as well as SEC reports and the audio webcast replay of this conference call on our webcast at www.americanhomes4rent.com. With that, I will turn the call over to our CEO, Dave Singelyn.

[Dave Singelyn:]

Thank you, Stephanie. Good morning and welcome to our first quarter 2019 earnings conference call. Before I begin, I would like to read an announcement I forwarded to the American Homes 4 Rent team members this morning. B. Wayne Hughes, our founder and Chairman of the Board, will retire after next week's annual meeting. Wayne is a legend in the real estate industry. In 1972, he founded Public Storage, one of the nation's largest real estate investment trusts. He served as its CEO until his retirement in 2002 and as a trustee until 2012. Wayne also founded American Commercial Equity, a private real estate company that owns retail and office properties in California and Hawaii. Eight years in May 2011, Wayne approached me with his idea of acquiring and managing single-family rental homes. Wayne purchased the first homes in Las Vegas that May. And that concept and those homes were the beginning of what is known today as American Homes 4 Rent. Wayne's vision and leadership were instrumental in making American Homes 4 Rent a leader in the single-family rental industry. Today, we own nearly 53,000 single-family rental homes, providing quality housing to 200,000 residents, at more than $1 billion of annual revenue and are leading the industry into its next chapter with in-house development and construction of single-family homes. Tamara Gustavson, Wayne Hughes' daughter will remain a member of the Board of Trustees and will continue the Hughes family's legacy and counsel to the company. Wayne's vision, counsel, and leadership will be missed, but I'm grateful for his guidance and support during our formative years. We wish him well and continued success. Next, a couple of additional comments before we move on to our first quarter earnings. Our annual meeting and quarterly board meeting will be held next week. At those meetings, the Board of Trustees will name a new Chairman and declare and announce the first quarter distributions. Now, moving on to our earnings. I am pleased with our results in the first quarter. Our portfolio performed well, our investment programs are on track, and our balance sheet is strong. As always, I would like to thank all of our AMH team members for their hard work and focus. As I mentioned on our last call, we continued to refine and improve our operating platform and business execution. The foundation of our efforts is built on four cornerstones; operational excellence, consistent and accretive growth, financial strength and flexibility, and superior customer service. Beginning with operational excellence, we had a strong start to the year. Core FFO was $0.27 per share, up 11.6% on a per share and unit basis from the first quarter of last year. We continued to see and experience strong rental demand. Our same-home occupancy at March 31st was 96.7%. And our average occupied days for the first quarter 2019 was 95.5% compared to 94.8% for the first quarter last year. Our total cost to maintain a home, including expensed and capitalized cost was $487 per home in the first quarter of 2019, which was a less than our first quarter 2018 cost. Please note that while our costs are down year-over-year, this year's cost includes an expansion of our preventative maintenance program designed to reduce maintenance-related expenditures over the long-term and improve resident satisfaction. Driven by solid revenue growth and lower cost to maintain a home, our same-home core NOI margin of 64.5% for the first quarter this year was 70 basis points higher than last year. Jack will further discuss the details of our first quarter operations later on the call. As we head into the spring leasing season, we continued to maintain a strong same-home average occupied days for the month of April at 95.8%, up 60 basis points compared to April 2018, along with rental rate spreads of nearly 5%. Our second cornerstone is consistent and accretive growth. This begins with AMH Development, our in-house development program. We believe the opportunity to design homes for rent strategically enhances the benefits of our diversified portfolio. t a high level, we are building homes using value-engineered plans that are aesthetically pleasing and designed for durability and lower cost to maintain. And these new homes include customized features based on operational expertise and resident feedback. We are currently building in high demand areas within our existing footprint and are capturing premium yields of approximately 100 basis points for AMH Development homes and 50 basis points for homes acquired through our National Builder Program. Jack will have more information on our investment activity later on the call. Our third cornerstone is our best-in-class balance sheet. Since our formation, we have maintained a strong balance sheet, providing ample liquidity to fund our growth at the most advantageous cost. Today, we have adequate capital in place to fund this year's investment activity without the need to access the capital markets. Chris will provide more details on capital structure and recent financial activities later on the call. And our fourth cornerstone is commitment to superior customer service during the full lifecycle of the resident experience. We are seeing increased participation rates in our resident surveys with high satisfaction levels in all areas of service. For example, our in-house maintenance survey results show satisfaction levels in excess of 95%. And our Google ratings have continued to be strong and are up year-over-year. We have always invested in our team through a recurring training program. We have added team members in selected areas to provide bench strength. The benefits of these efforts are positive improvement in resident turnover and fewer escalated resident issues. Since the first quarter of 2017, we have seen over 380 basis points improvement in our trailing 12-month turnover rates. Overall, we are very pleased with our solid start to the year and believe we are well positioned for the spring leasing season. Our local management teams are fully staffed and running on all cylinders with strong leadership. We remain confident with our guidance ranges and our team's ability to execute consistently on our operational goals for the year. And now I'll turn the call over to Jack.

[Jack Corrigan:]

Thank you, Dave and good morning everyone. Beginning with revenue growth, As Dave mentioned, we are off to a strong start for 2019. For our same-home portfolio during the first quarter, we achieved a 95.5% average occupied days percentage, up 70 basis points from the first quarter of 2018. Average monthly realized rent was up 3.2%, resulting in quarter-over-quarter increase in same-home core revenues of 4.2%. Turning to operating expenses. First quarter 2019 core property operating expenses were up 2.1% year-over-year, largely driven by a 4.8% increase in property taxes, which was in line with our expectations offset in part by decreases in R&M turnover and property management expenses. Our first quarter 2019 cost to maintain a home, including R&M and turnover cost plus recurring capital expenditures, totaled $487, down slightly from last year. Although we continue to see inflationary pressures, this decrease was driven by improved retention and reduced vacant home inventory and combined with last year's above-average expenditure levels. As a reminder, this year's cost to maintain a home includes higher cost related to preventative maintenance as our program has expanded year-over-year. In summary, it was a strong operational start of the year. We are on track with the expectations we laid last quarter. We're carrying positive momentum into the spring leasing season with strong April same-home average occupied days of 95.8%, up 60 basis points compared to last year, and blended rental rate spreads for April of 4.9%, an increase of approximately 20 basis points compared to last year. Turning to growth, As Dave mentioned, we have increased our focus on our built-for-rent programs as the best risk-adjusted opportunity for accretive growth. This initiative adds new assets that are in demand and provides for better near- and long-term economics. During the first quarter of 2019, we added 320 homes for a total investment, including renovations, of approximately $85 million. 101 of these homes totaling $26 million were added through our built-for-rent programs. For 2019, we remain on track to take $300 million to $500 million of homes into inventory, with about 80% expected to be from our built-for-rent pipeline and the rest from our other channels. We expect these additions to be weighted towards the back half of 2019. Further, as previously noted, we expect to invest an additional $200 million to $400 million into our development pipeline for future year delivery. Turning to dispositions, we continued to strategically prune our portfolio where it makes sense for operational reasons and recycle capital into opportunities with better long-term returns. At the end of the first quarter, we had approximately 1,800 homes held for sale, which we expect to generate between $350 million and $400 million of net proceeds over the course of this year and next. During the first quarter, we sold 180 homes for net proceeds of $33 million. Now I will turn the call over to Chris.

[Chris Lau:]

Thanks Jack. In my comments today, I'll briefly touch on our first quarter operating results, update you on our balance sheet and capital markets activities, and finally provide you with our current view on 2019 guidance. However, before we get into our operating results, I'd like to bring you up to speed on a few GAAP disclosure changes in connection with the new lease accounting standard. As we discussed last quarter, in consistent with our rest of the real estate industry, we adopted the new lease accounting standard at the beginning of this year. As a reminder, the primary difference under the new lease accounting standard is that a larger proportion of our internal leasing costs are primarily included within property management expense rather than capitalized. As we indicated last quarter, applicable prior year non-GAAP metrics in the supplemental information package have been presented on a conformed basis to comparably reflect the new lease accounting standards. Additionally, as part of the new lease accounting standard, there are two notable changes to our existing GAAP disclosures that I'd like to make you aware of. First, our previous revenue line items of rents from single-family properties, fees from single-family properties and tenant chargebacks will now be presented as a single line item labeled rents and other single-family property revenues. This change will apply in current and prior year periods within our GAAP income statement. Second, bad debt expense, which was previously included within property operating expenses for GAAP purposes, will now be included within our new revenue line item, rents and other single-family property revenues. Please note that our computation of bad debt expense remains completely unchanged and that the GAAP financial statement line item reclassification only applies to the current period. To clarify, within our GAAP financial statements for 2019, bad debt expense will be presented within rents and other single-family property revenues, whereas for 2018, bad debt expense will remain in property operating expenses. Of note, however, these two changes did not have any impact on our supplemental disclosures or existing non-GAAP financial metrics. Consistent with prior disclosures, our supplemental information package will continue to provide the breakout on the revenue components and bad debt expense with applicable reconciliations to our new GAAP metrics in the back of the document. With that, I'll move on to our operating results. For the first quarter of 2019, we generated net income attributable to common shareholders of $16.3 million or $0.05 per diluted share. This compares to net income of $5.8 million or $0.02 per diluted share for the first quarter of 2018. Also for the first quarter of 2019, core FFO was $95.7 million or $0.27 per FFO share and unit as compared to $83.2 million or $0.24 per FFO share and unit for the same quarter last year on a pro forma basis with the new lease accounting standard. Adjusted FFO was $86.9 million in the first quarter of 2019 as compared to $74.7 million for the first quarter of 2018. On a per share basis, adjusted FFO was $0.25 per FFO share and unit for the first quarter of 2019 compared to $0.22 per FFO share and unit for the first quarter of 2018. Next, I'll provide you with a quick update on our balance sheet and recent capital markets activity. In January, we completed our second unsecured bond offering raising $400 million of 4.9% senior unsecured notes, which are due in 2029. The net proceeds were used in part to repay $250 million that was outstanding under our revolving credit facility, leaving approximately $150 million of remaining net proceeds to fund a portion of our 2019 acquisitions and development program as well as general corporate purposes. At the end of the first quarter, we had $3 billion of total debt with a weighted average interest rate of 4.3% and a weighted average term to maturity of 13.5 years. Our net debt to adjusted EBITDA was 4.9 times, and debt to preferred shares to adjusted EBITDA was 6.9 times. And as a reminder, we don't have any debt maturities other than regular principal and amortization for the next three years. In terms of liquidity and funding sources going forward, at the end of the first quarter, we had $155 million of unrestricted cash on the balance sheet, and our $800 million revolving credit facility was fully undrawn. We generate approximately $250 million of annual retained cash flow. And we anticipate that our distribution program would generate about $200 million of recyclable capital this year, all of which translates into an extremely solid foundation to continue accretively grow our platform and portfolio, notably without the need for any additional external capital in 2019. Finally, turning to our guidance, the first quarter was well executed on nearly all operational fronts, leaving our view on full year 2019 results unchanged. As our key leasing and turnover seasons are still ahead of us, we are maintaining our previously communicated full year 2019 guidance ranges for both core FFO and same-home portfolio performance, which are detailed on page 20 of the supplemental. And we'll continue to provide you with updates as we progress throughout the year. And with that, that concludes our prepared remarks, and we'll now open the call to your questions. Operator?

[Operator:]

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Jason Green with Evercore. Please proceed with your question.

[Jason Green:]

Good morning. A question for you on development. Out of the 80% of acquisitions you guys say are in development, how much of that is on-balance sheet development versus in partnership with homebuilders?

[Jack Corrigan:]

I would say of the approximate 1,200 homes that we expect to come through are newbuild. 1,000 of them will be through our balance sheet AMH Development.

[Jason Green:]

Okay. And then geographically, are you able to expand on what markets the build to rent is focused on?

[Jack Corrigan:]

It's focused on several markets, most of the ones we've been growing in on the West Coast, Seattle, Salt Lake City, Boise, Las Vegas. I might be leaving out one. And then on the East Coast, Charlotte, Atlanta, Nashville Jacksonville, all the Florida market. So, I think that covers it.

[Jason Green:]

Okay. And then last one for me. You said you're getting 100 basis point premium on the developments. Given the additional strong jobs report this morning, what are construction costs doing to that number?

[Jack Corrigan:]

Construction costs of materials have actually come down over the last six to nine months. The number spiked for a while and then now has come back down. In terms of labor costs, they are increasing probably in the 4% to 5% range.

[Jason Green:]

Okay. Thank you.

[Dave Singelyn:]

Thanks Jason.

[Operator:]

Thank you. Our next question comes from the line of Nick Joseph with Citi. Please proceed with your question.

[Nick Joseph:]

Thanks. Maybe just following up on that. I know a lot of the deliveries are back-end loaded, but how's the build-out going so far in terms of expectations, in terms of overall cost -- versus budget and the delivery timing?

[Jack Corrigan:]

Yes. In terms of the direct cost of the vertical build and horizontal build, we're right in line with what we originally budgeted. We probably underestimated [technical difficulty] being allocated over a smaller number as we grow the platform and grow the number of houses that we're building, then a long-term issue. So, we're running probably at about 4% and 4.5% soft costs. And I think once we're at the right cadence of deliveries, we'll be somewhere in the 2.5% to 3%.

[Nick Joseph:]

Thanks. And delivery timing expected so far?

[Jack Corrigan:]

Yes, a little slower because of some of the rain, but pretty close to what we expected.

[Nick Joseph:]

Thanks. And you walked through the yields. From a resident demand perspective, how's the lease-up going from the ones that are already delivered versus the rest of your stabilized portfolio? In other words, you talked about the premium yield. Is it more cost-driven? Or is it more rent and margin-driven?

[Jack Corrigan:]

It's both, but in general, we're leasing on at or slightly above our pro forma rents, but we're not really pushing the rents in initial rent up. So, I think we'll have some room for it moving up in the future.

[Nick Joseph:]

Thanks.

[Operator:]

Thank you. Our next question comes from the line of Shirley Wu of Bank of America Merrill Lynch. Please proceed with your question.

[Shirley Wu:]

Good morning guys. Thanks for taking the question. So on cost, you mentioned slightly higher cost for preventative measures. Could you give us a little bit on how much is incremental this year and what's being done for the home?

[Jack Corrigan:]

Well, I'll talk about the program. I'll let Chris give the numbers. Back in late 2017, we initiated what I call Phase 2 of our in-house maintenance program. And that really is exterior maintenance of the homes, which we can do when the house is occupied or unoccupied. And that's basically, I would say, 60% to 70% of it is exterior painting and trim, including staining decks and that type of thing. There's some landscaping involved and just other exterior maintenance.

[Chris Lau:]

This is Chris. Probably the best quantification I could give you, if you go back to some of our comments on last quarter, on just kind of a regular way cost to maintain increase, we're expecting kind of a full year basis of 4% to 5% increase. And then if we talk about last quarter, the majority of our preventative maintenance program is going to be going into the CapEx line item. And on a full year basis, we see that running kind of close to 9% or so. So, you can squeeze the difference and see components as related to preventative maintenance program.

[Shirley Wu:]

Got it. And so build for rent, so it's been a few quarters since you started that program. Could you talk a little about the things you've learned since inception? And has there been any change in economics, perhaps efficiencies?

[Jack Corrigan:]

So, we've certainly gotten more efficient as far as we learned a few things. One, we're building with wider staircases. And because people are moving in and out of houses, you have less damage if they're moving through a little wider staircase. We put more sturdy doors into the walk-in closets. And keeping all the water hookups on the ground floor, so that if there is an issue with water, that it doesn't hurt the whole house.

[Dave Singelyn:]

Shirley, its Dave. I think the things we have learned are going to have more benefits in reducing our future cost to maintain, than they do in the immediate reduction in current construction costs. So, the things that Jack is mentioning are going to allow us to turn the properties quicker and more efficiently and have less maintenance. So, the wider doors, the different quality materials all really will benefit in the future.

[Shirley Wu:]

Got it. Thanks for the color.

[Operator:]

Thank you. Our next question comes from the line of John Pawlowski of Green Street Advisors. Please proceed with your question.

[John Pawlowski:]

Thanks. On the build to rent over a longer period, is the $600 million to $800 million aggregate investment still the target?

[Dave Singelyn:]

This is Dave. Yes, that is correct. To make sure that we have clarity as to what that is, that is really split into two components. So, we'll have deliveries this year of $400 million to $500 million and we're going to have some investment into construction in process that will be delivered in future years of 400 -- $200 million to $300 million. But the -- those numbers, $600 million to $800 million is still the target range.

[Chris Lau:]

Okay. And again over that $600 million to $800 million, is it still accurate that all the land parcels are already entitled?

[Dave Singelyn:]

Jack?

[Jack Corrigan:]

By the time they're acquired, they're entitled. So, we may go under contract and -- but won't close on land until it's entitled.

[Dave Singelyn:]

Everything on our balance sheet is entitled.

[John Pawlowski:]

Okay. And of that $600 million to $800 million, what percentage of that are you laying roads, cultivating land, laying sewer lines, and doing the land development part of it?

[Dave Singelyn:]

Probably -- I don't know that number exactly, but my best guess would be somewhere in the two-thirds.

[John Pawlowski:]

Okay. Last one for me, turning to operations. Given the issues last year with employee retention in the field as the leasing season unfolds, how are turn times going to unfold versus a year ago?

[Jack Corrigan:]

Well, I would expect them to improve. One of the things we've done is built in some redundancy, so that we have what we call spot teams that if we do have turnover in one area, we have the ability to send the team out to take over until it's stabilized again.

[John Pawlowski:]

Thank you.

[Dave Singelyn:]

And John, the other thing that's going to benefit turn times is just the fact we have a strong occupancy. We have continued better retention statistics leading to less turns. And we should be in very good shape for the leasing season.

[John Pawlowski:]

Okay. Thanks.

[Operator:]

Thank you. Our next question comes from the line of Hardik Goel with Zelman & Associates. Please proceed with your question.

[Hardik Goel:]

Hey guys. Thanks for taking my question. I just had one on the cadence of the investment that you guys are doing in your own. The in-house investment specifically on build to rent, how difficult or easy are you finding it to acquire the kind of land that's attractive to your underwriting? And how do you compete with builders in those markets that have probably cost efficiencies that developed over many, many years? How does your underwriting compete with theirs? If you could please give some color on that, I'd appreciate it.

[Jack Corrigan:]

Yes, I mean were -- and I think the builders are having harder times finding developed lots, although that's gotten easier over the last six months or so. As far as efficiencies, we actually think we're more efficient because -- we don't have change orders. It's -- the building is per our spec, and our specs aren't changing. They don't have owners coming in saying; we want this flooring or this wall or this other option. So we think we're actually more efficient as a builder than the national homebuilders.

[Dave Singelyn:]

Hardik, its Dave. Let me add a couple of things. One is today, and this is -- goes through cycles. Today, we're actually seeing more finished lots being available to us from homebuilders as we don't have some of the same economic considerations that they do with the exit side of the business. We know who's going to own the property and that's not a variable for us. On the economics, one of the things we have as a benefit over the homebuilders, we have no sales and marketing component in our cost structure. So, our costs are more favorable than theirs for a finished product because we don't have all the cost component that they do.

[Hardik Goel:]

No, that's helpful and I appreciate that. Would you also say that you have a cost of capital advantage?

[Dave Singelyn:]

Yes, I would. But I think the way the question was outlined on the completion of the cost of building; I still think we have an advantage there as well. Our cost of capital, with our investment-grade and the fact that most of our assets are revenue-producing assets, yes. It is a very, very different risk profile than a homebuilder.

[Hardik Goel:]

Got it. Yes, I mean the original question on operations, you answered my question there.

[Dave Singelyn:]

Thank you, Hardik.

[Operator:]

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

[Ryan Gilbert:]

Hey thanks guys. Just on the 2019 same store revenue guidance. I think it makes sense to hold off on making any changes before the spring leasing season. But as you said today, the first quarter number came in at the high end of the range April leasing statistics looks strong. So, I guess what would you need to see in the market over the course of 2019 that would get you to the low end of the guide or even to the midpoint of the guide where you sit today? So, what would you need to see in the market? Or are there any changes in the composition of the same store portfolio that we should be thinking about?

[Dave Singelyn:]

Ryan its Dave. I think you've kind of answered the question almost within the question. It is early in the year. We had a very good first quarter. We, as Jack and I indicated, April is continuing that same trajectory. But our guidance is not a number, it's a range. And we're very comfortable with those ranges. And we have a lot of leasing season left in 2019 and we'll continue to review it. And as we get a little further down the -- into the year, we'll be making comments on guidance, but today, we're maintaining the ranges.

[Chris Lau:]

And Ryan it's Chris, just to point out one other thing on the quarter. As you think about the composition of our 1Q revenue growth, bear in mind that 70 basis points of that is occupancy pickup on lower average occupied days of -- in one quarter of last year, which will begin to more normalize out as we move throughout the year. So, keep that in mind on a quarterly basis as well.

[Ryan Gilbert:]

Sure, of course. Although your April average occupied days were up 60 basis points as well, which is very strong result.

[Chris Lau:]

You're right.

[Ryan Gilbert:]

Was -- did that turnover continue to decline in April?

[Jack Corrigan:]

It was slightly lower than last year, but not materially.

[Ryan Gilbert:]

Okay. And then just one more on the repairs and maintenance and property management reductions. Is there any way you can quantify or weigh how much of the decline in those numbers was due to lower turnover and higher occupancy, versus just lapping some elevated expenses in the first quarter of last year?

[Chris Lau:]

It's tough to bifurcate out how much of it is due to the turn effect this year. I can tell you, I can point you back to some of the numbers we talked about last quarter in that we know we had about $2 million or so in cosmetic investment last year, kind of in the first call it 4 months of the year that ran through April. So, you can use that kind of directionally back in the numbers, but it's not a perfect amount.

[Jack Corrigan:]

Ryan, just I mean just to reiterate what you had said. We've had nine quarters where our turnovers were coming down. And turnover is a benefit; not only to the revenue line, but you hit it right on. It is a benefit to our expense line because you don't have to refresh the homes. And so -- that's a very, very important trend that we are seeing and that should benefit us on both the top and -- topline as well as expense controls going forward.

[Ryan Gilbert:]

Okay, great. Thanks very much.

[Dave Singelyn:]

Thanks Ryan.

[Operator:]

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

[Douglas Harter:]

Thanks. Just touching on the occupancy improvement that you've seen in April, can you just talk about how you're balancing occupancy versus pushing for more rent at this point?

[Jack Corrigan:]

Yes, I think we have a pretty good balance. We're -- in terms of renewals; we're maybe slightly above inflation and right in the 12% range. And then, we try to get market rents when we re-lease something that's been vacant. We haven't seen a material decline in the marketing period. So, I think we're kind of just taking it right. But we're also moving into the period where we can raise rates a little bit more because of the demand. So, I would expect something similar to prior years in terms of re-leasing rates. And renewal rates are still very strong at about 4%.

[Dave Singelyn:]

And Doug, it's Dave. Let me just add one thing. We mentioned April; we're in the 5% area. But as Jack indicated and as I indicated earlier, there's a balance between retention and getting these things leased and because it impacts both the topline and the expense line. And we are getting higher than inflationary numbers now. And we are pushing a little bit more than we did at the first quarter as evidenced by the 5%. But we are going to be very measured as in our rate management, not the impact negatively the retention that may impact -- will impact revenues and expenses.

[Douglas Harter:]

Great. Thank you for that answer.

[Operator:]

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

[Jade Rahmani:]

Thanks very much. I wanted to see if you can comment home purchase trends. Has there been any change in demand or retention rates based on slowdown in home sales? if you could you comment on move-outs bias that's lower than a year ago?

[Dave Singelyn:]

Jack, you want to take?

[Jack Corrigan:]

Yes, the -- it appears to be slightly lower than a year ago. I think we got as high as, at one point, as high as 30%, maybe even up to 40% of our move-outs were related to buying a house. It's closer to 30% now. So, that may be helping with retention. I would think that it is. Repeat the rest of your question.

[Jade Rahmani:]

No, I think that was it. If you're seeing demand trends, any acceleration or strengthening in demand based on the slowdown in the housing market and the home purchase market that we've seen.

[Jack Corrigan:]

Yes, but on the other hand, we're disposing of houses, and they're selling pretty fast. So -- and a lot of them at list or better. I'm not sure that the demand for housing on the buy side or the rent side has really subsided.

[Jade Rahmani:]

Okay. And just wanted a comment or ask about strategically how you consider M&A, and if you're increased build-to-rent strategy changes that calculation. Obviously, most of the large portfolios are older on average than yours. There's company Front Yard Residential that has an activist in the stock calling for strategic changes. So, just wondering if how you consider M&A relative to build to rent.

[Dave Singelyn:]

Jade, it's Dave. I don't think the build-to-rent plays into the calculus. If it's the right opportunity at the right price, no different than a year ago, two years ago, we will consider it. But as we have mentioned in the past, we do have a target tenant that we are looking for, which takes us to a target type of property. And there are portfolios out there match it, and some that are a little more challenging for us to acquire. But the built-for-rent component is just a growth channel for us. It's one of many. And I don't think the -- that has an impact as to whether we would entertain M&A. M&A is a quality of assets price and really where our capital is trading at a given time.

[Jade Rahmani:]

As a follow-up could you give color on the NOI margin differential between the newer homes and your existing portfolio?

[Jack Corrigan:]

The newer homes will have probably a little higher NOI margin. That really depends on property tax rate in the national. But if you're talking about homes in the same area, same property tax rate, it should have a higher margin. Because your maintenance expenses in the first 10 years are going to be lower than you would on a house that we bought.

[Dave Singelyn:]

Yes. The margins are driven higher. It is higher. It's driven by a little bit of premium rent and definitely lower maintenance cost. The rest of the line items are pretty consistent.

[Jade Rahmani:]

Thanks very much.

[Operator:]

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

[Ronald Kamdem:]

Hey thanks for the time. Just a couple of quick ones. The first one was just maybe could you talk about maybe the ancillary revenue opportunity for the company in terms of how you guys are thinking about it with the low-hanging fruit? And should we be thinking about that as something to look forward to coming through?

[Dave Singelyn:]

On the ancillary revenue, there is a few pieces. There is a couple of things that are running through. We -- our rent today, there's some additional test opportunities. We're getting additional revenue that we haven't seen before. And so the ancillary revenue there's a little bit out there, but it's not going to be the driver of the year revenue line. It's still going to be -- rent is the driver. That's the primary component. That's -- the lion's share of the revenue line is going to be your annuity of rent.

[Ronald Kamdem:]

That's great, that's helpful. And then maybe on the technology front. Maybe can you just talk a little bit about I think you guys are piling a little bit more sort of mobile apps or the self-guided tours. How is that progressing? Are there any sort of technological efficiencies that you can see for the company?

[Jack Corrigan:]

Yes, technology is a key to our success. It has been from day one. You cannot manage 53,000 homes in the -- with the infrastructure and the number of personnel as we have unless you're leveraging technology. We are continually enhancing the technology. We have technology improvements over the last year and during 2019. In the logistics side, improving our in-house maintenance programs and intake processes or maintenance calls coming in. So, that leads to better execution, a more efficient execution on maintenance. With respect to homebuilding, which was still relatively new for us, there is continued enhancements in that area that should benefit us in 2020 and later years and making that process more efficient as well.

[Ronald Kamdem:]

Great. Last question for me was just if you could take it back. And if I look at market performance so far year-to-date, maybe is there any market that are maybe perform better than you would have expected, or any markets that are lagging? And sort of a follow-up would be what are some of the markets that if you could, you're trying to get more presence in? And what are some of the markets where you may be looking to reduce? Thanks.

[Jack Corrigan:]

Yes, this is Jack. A lot of the western markets are outperforming. Phoenix, we're getting really strong re-leasing rates In Las Vegas, and they stay very highly occupied. Salt Lake City, Boise, Seattle, all developed markets where we're acquiring land and planning to build them and grow. And as far as markets that we are getting out of, we've really only gotten out of tertiary markets, the ones with -- I think the biggest market we're getting out of is Oklahoma City with I think we had about 400 homes there.

[Chris Lau:]

And Ron, if you want the detail of the market we're exiting out of, or the properties in general we're disposing of, you can get that on page 18 of the supplemental. there are a couple of small markets behind Oklahoma City that we're exiting out of would be Corpus Christi, Augusta, Georgia, and the Central Valley of California. But you can see it all on Page 18 of the supplementary.

[Ronald Kamdem:]

Thanks so much guys.

[Operator:]

Thank you. Our next question comes from the line of Buck Horne with Raymond James. Please proceed with your question.

[Buck Horne:]

Hey thanks. Good morning. On the AMH Development, last one here. On locations, how would you characterize the locations you're building in? Maybe whether it's average distance from the existing portfolio or some other metric. Kind of what are the challenges or synergies with managing those new locations versus the existing portfolio?

[Jack Corrigan:]

We're not going on the outskirts of the city. We're building right into our footprint. So really, the only difficulties that we've seen is when we built larger developments and having the right cadence of deliveries for absorption. And it's kind of at least for the initial sale up; it's kind of a hybrid between a large apartment complex and our regular marketing. So, we had to adapt a little bit there, but I think we've figured that out now and our larger developments are leasing up. We probably have a better cadence on and that's what we're doing, planning our cadence on deliveries so that they get absorbed as their delivered.

[Dave Singelyn:]

It's Dave. We're in our core markets. We're not going into new markets inside our footprint. And many of them are inside the area where you are finding small developments on the new developments. They may be right at the edge of the market, but contiguous to homes that we have recently purchased that are doing very, very well. So, they are really in our markets. So, we're not building in any new areas from that standpoint.

[Buck Horne:]

Great, that's very helpful. Thank you. And on the homes in the disposition pipeline, what are you seeing in terms of portfolio by your interest? Are these homes -- are the buyers here looking at them on a stabilized cap rate basis? How are they pricing those assets? What kind of buyer interest are you seeing in the market?

[Jack Corrigan:]

We're seeing -- we're marketing to buyers when they're occupied. And then as they become vacant through natural attrition, then we market just through those traditional MLS channels. And we definitely are seeing a small portfolio of buyers. And I think our biggest one that we have under contract is about 200 homes.

[Buck Horne:]

And are they looking -- is there a cap rate range price? Or is it more of a price per unit kind of thing?

[Jack Corrigan:]

It's a combination of cap rate and market value.

[Buck Horne:]

All right. Thanks guys.

[Dave Singelyn:]

Thanks Buck.

[Operator:]

Thank you. Our next question comes from the line of Drew Babin with Robert W. Baird & Company. Please proceed with your question.

[Unidentified Analyst:]

Good morning This is Alex on for Drew. Are renewal notices being sent out today about that 4%-ish rate bonds? You quoted a few questions back and just curious generally how much pushback are you receiving from tenants?

[Jack Corrigan:]

Well, we get some pushback or questioning. And we have pretty good renewal agents that explain property values are increasing at greater than that level, and property tax rates are going up. So, overall, we're able to achieve that. We'll probably go out slightly higher than 4% and back off if we need to a little bit.

[Unidentified Analyst:]

Got it, that's helpful. On the expense side, it looks like HOA fees all please continue to trend upward quite significantly. Curious if that's being driven by certain markets? Or is that more of a broader industry trend? As you develop and are buying homes in newer, nicer neighborhood, should we expect growth to kind of continue?

[Jack Corrigan:]

Yes, I was expecting that question a little earlier. I kind of prepared an answer. We've experienced some inefficiencies in our HOA process. That's been a very manual process. We have -- we deal with 12,000 different homeowner associations that have different ways of communicating. And it's been very -- anyway, our prior process was fairly inefficient, resulting in an above normal levels of late fees and penalties. It's not a material component of our cost structure. And we're in the process of addressing the issue through the automation of the process. We expect to see some continued impact through 2019, but once the process is automated and we're through reconciling all of the accounts, we expect it to be much more efficient going into 2020.

[Dave Singelyn:]

Yes, Drew, it's Dave. It goes back to prior question on technology. It's one of the area technology assists us in. The costs are admittedly a little higher than they should be right now. And we would see that if that technology rolls out throughout the year to -- we would see significant benefits from that technology as it rolls out to later this year. So, that's where we are on that.

[Unidentified Analyst:]

Understood. And then one last question for Chris on the balance sheet. Where does 6.9 times leverage today when you include preferred land on your guys range? Obviously, you're well-capitalized. But is that seven-ish times a good run rate going forward? Are you guys comfortable?

[Chris Lau:]

Very much so. As we're laid out before, kind of the two internal targets we have is one on a net debt to EBITDA basis and one on a debt including preferred shares basis. On a net debt to EBITDA, our kind of comfort zone is five and a half times or below. And then on a debt including preferred, it's kind of seven and a half times or below. So, we're comfortably within the range that we like to see.

[Unidentified Analyst:]

Great. Thanks for taking my questions.

[Operator:]

Thank you. We have reached the end of the question-and-answer session as well as the conclusion of today's call. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.