Kelly Residential & Apartment Real Estate ETF
Q4 2018 Earnings Call Transcript

Published: 27 Feb 2019

[Operator:]

Good day, ladies and gentlemen, and welcome to the Front Yard Residential Corporation Q4 and Full-Year 2018 Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. [Operator Instructions] As a reminder, this conference maybe recorded. I would now like to turn the call over to Alysia Cherry, Head of Investor Relations. Ma'am, you may begin.

[Alysia Cherry:]

Thank you, Sydney. Good morning and thank you for joining us for Front Yard's fourth quarter 2018 earnings conference call. Joining me on today's call is George Ellison, Chief Executive Officer; Robin Lowe, Chief Financial Officer; and Miles Adams, Senior Vice President of Property Operations. I'd like to guide everyone to the fourth quarter earnings slide presentation available through the Investor section of our Web site at www.frontyardresidential.com. These slides were created to accompany the company's remarks and provide additional information investors may find useful. I'd also like to inform you that our comments today may contain forward-looking statements relating to the future performance of our business, the company's financial results, capital allocation and other non-historical information. These statements may involve risks and uncertainties that could cause the company's actual results to differ materially from those discussed in the forward-looking statements. We describe some of these risks and potential differences in our earnings release as well as the company's filings with the SEC, including the 2018 Form 10-K we filed today. We may also discuss certain non-GAAP financial measures. You can find additional information on these measures, including a reconciliation to GAAP within our earnings release and earnings presentation located in the Investor section of our Web site. I will now turn the call over to George Ellison, Chief Executive Officer. George?

[George Ellison:]

Thanks, Alysia, and good morning everyone. It's been another very productive quarter and year at Front Yard Residential. The transition of 12,000 homes from two external property managers to our own platform that started in August is almost complete, and the results are starting to show. We targeted a move of some 4,000 homes from ASPS by year-end 2018, but we were able to complete this move by mid-November. Our next goal was to move the 8,000 homes being managed by MSR by year-end 2019. We then were able to move that goal up to mid-year, and now are predicting the complete transition to be executed by the end of the first quarter. As you can imagine, transferring homes from one platform to another is complex and challenging. The team has done an outstanding job in doing both the hard detailed work in the background of on-boarding 4,155 homes by year-end, and just over 10,000 homes as of today, while the whole time, not having our families be inconvenienced, and continuing to receive first-class service. When we purchased HavenBrook in August, we predicted two to three quarters of noise in our financial results. However, the results in the third quarter turned out better than expected. Despite being in the middle of such a transformational integration, the fourth quarter results were very solid as well. Rob also has great news on the funding front with the refinancing we completed in December with very attractive terms, as well as positive financial results from a sale of about 450 non-strategic homes. Today, we introduced Miles Adams, Senior Vice President of Property Operation. Miles was a member of the senior management team at HavenBrook, and we are both happy and fortunate that we are able to keep him with us after the acquisition. He and his team are doing an incredible job. And today, we have asked him to make a few comments on the transition of homes to our platform, final update performance goals from last quarter and then recap 2018 accomplishments. If you please turn to page four, we can run through the fourth quarter results. Rental revenue of $54 million, stabilized rental core NOI margin 62.5%, core FFO $0.05 per share, blended rent increases 4.3%, 94% of stabilized rentals released at year-end, and turnover for the stabilized portfolio was 6.6%, 7,300 homes were internally managed at year-end, about 13,000 today, 87% of funding was fixed or capped, and had a weighted average maturity of 5.5 years. As we mentioned on last quarter's call, we had identified about 800 homes as non-core and up for sales. Just this month, we closed the sale of about 450 of these non-core rental homes. Rob will go over the numbers, but let me just say that while pervious sales consisted primarily of legacy REOs, this sale from our rental portfolio is a good indication of the value that's embedded there. Do please to turn to page five, we show some important company data over the last several quarters. Total home count continues to go up, legacy assets are almost completely gone, blended rent increases are staying strong, and turnover remains very low; all good news Rob?

[Robin Lowe:]

Thank you, George. As we said last quarter, our fourth quarter 2018 numbers continue to be impacted by the integration of our new property manager and the transition of our rental portfolio from external property managers. Having said that, we are seeing solid underlying performance; GAAP net loss for the quarter was $34.2 million, was a 29% improvement over the prior quarter, and included a number of one-time items. First, acquisition and integration cost of $7.6 million include a one-time $5.25 million transition services fees to MSR, our remaining external property manager as we transfer nearly 8,000 homes away from them to our internal property manager. Other acquisition and integration cost of $2.4 million represent expenses incurred to ramp up internal property manager resources, while at the same time paying the ongoing property management fees to our external property managers. We expect these costs to further reduce in the first quarter of 2019, and substantially cease by the second quarter of 2019. Second, fourth quarter 2018 interest expense includes $1.7 million of non-recurring debt extinguishment costs related to our refinancing of the MSL loan agreement during the quarter. I'll talk more about this later, but with this refinancing we reduced the credit spread by 148.5 basis points of spread or approximately $7.5 million annually. Third, G&A expense included about $1.5 million of non-ordinary course, legal, professional, and other expenses that we expect to reduce going forward. Finally, fourth quarter turn costs were around $600,000 higher than average as we accelerated efforts to maximize the number of properties available for rents as we start the leasing season. Results so far are very encouraging with stabilized occupancy for mid-February at 95%. During the continued integration and transition impact, core NOI margin for the quarter held up at 62.5%, essentially flat to last quarter, and core FFO increased by 16% to $5.04 from $4.06 last quarter. So, how will we get from the core FFO numbers we are reporting today to the targets for the end of 2019 that we're showing on slide seven? I'll briefly go through the key items. As discussed earlier, there are some expense items included in our fourth quarter numbers that we expect to substantially go away. We should see an approximate $0.03 per quarter reduction in the cost of maintaining legacy assets as we continue to divest them and interest savings from the refinancing, not already included in the fourth quarter should be around $0.02 per quarter. Further, we expect to drive at least $0.01 per quarter of efficiency in ordinary cost, G&A costs in 2019 as we continue to integrate the HavenBrook and Front Yard infrastructures. At the operating level, a 3% to 4% annualized rent increase in 2019 would equate to $0.03 to $0.04 additional core FFO per quarter and a 1% to 2% increase in occupancy will be $0.01 to $0.02. We're targeting $0.04 to $0.05 per quarter of operating efficiencies that will drive NOI back to 65% to 66%. And finally, every 500 new homes that we acquire should contribute around $0.01 of core FFO per quarter. In total, we expect all of these items to drive an increase in core FFO in the range of $0.17 to $0.20 per quarter by the end of 2019, over the $0.05 that we are reporting today for the fourth quarter of 2018. We've also made further progress on strengthening our balance sheet. In the fourth quarter, we refinanced the $489 million MSL loan agreement with Morgan Stanley, we refinance the same collateral at a 70% advanced rate for loan proceeds of $505 million compared to the MSR loan of $489 million at a 75% advanced rate further the credit spreads was reduced from 328.5 basis points on the MSR loan to 180 basis points under the new loan, a saving of nearly 150 basis points or approximately $7.5 million annually. We purchased the LIBOR capital on the new loan at a strike of 2.5%, meaning that the maximum rate on this loan is kept at 4.3%. Additionally, during the quarter, we kept the LIBOR rate on the home SFR2 and home SFR3 loan agreements for the duration of the loans at 2.3%, meaning that the maximum rate on these loans will be 4.4%, should credit spread narrow, we have an option to refinance these loans after November 2019. Approximately 87% of our debt is now fixed or capped with a weighted average maturity of 5.1 years. The fact that we were able to achieve higher loan proceeds at a lower advanced rate on the Morgan Stanley loan evidences an approximate 10% increase and the value of the homes or about 5% annualized. We're also able to realize about a 14% increase or approximately 5% on an annualized and the collateral value for the existing homes on our books that were included in the Freddie Mac loan that we closed in the third quarter. We believe that along with the independent valuation by Duff & Phelps in June 2018. This is strong evidence that supports the valuation of our portfolio at or around the NAV, the Slide 19 and 20 in the earnings debt imply. Finally, earlier this month, we sold 444 non-core homes that did not fit our rental criteria, 402 homes that we recently purchased as part of the HavenBrook acquisition. Sale proceeds were approximately $102.9 million, giving a $4.8 million gain of a gap carrying value. We applied the entire cash proceeds to paying down debt on our Credit Suisse warehouse line, resulting in a reduction of overall leverage by about 1.5%.

[Miles Adams:]

Thank you, Robin, and good morning everyone. I would like to start by recognizing our operations team. It was an extremely busy quarter filled with growth and new challenges. I'm very proud of the results our team has achieved and of all the new team members that we've assembled. The team steadfast dedication to our residence and our great company is truly inspiring and has laid a solid foundation for our future success. I thank you all for each contribution you've made towards achieving our company's goals. We began the quarter with three primary operating objectives. First, to successfully transition all of the ASPS homes on to our management company platform with minimal disruption to our residence; second, to expand our footprint and assemble a team capable of operating 15,000 properties at best-in-class metrics. Lastly, we challenge ourselves to avoid any decline in the company's key operating metrics during this transition period and where possible to improvement. As George mentioned, as of December 31, 2018, we had transitioned all of the approximately 4,000 homes from ASPS onto our internal platform ahead of schedule and had a total of 7,300 homes under management. Since then, we have transferred approximately 6000 homes from MSR and are currently managing approximately 12,900 homes. We expect to be substantially complete with the remaining property transitions onto our internal platform by the end of Q1 2019 well ahead of schedule. This transition has resulted in expansion of our platform to the Carolinas, Tennessee, Texas, and parts of the Midwest. We've opened offices in Indianapolis, Charlotte, Houston, Dallas, Tampa, and Memphis. When we began the transition process, our management company was comprised of approximately 80 people. This team has been expanded to include approximately 175 team members. As of today, we strongly believe in finding the best local resources to manage our homes and service our residents. We are confident our growing team will continue to deliver superior customer service to our residents as well as best-in-class in operating results. We are truly excited about the team we have built and we are well positioned for the upcoming peak leasing season. Even with the challenges of transitioning homes to our management and building our platform. We remain very focused on maintaining and improving our overall occupancy during Q4 and beyond. In addition to maintaining strong service levels for our existing residents, turning and leasing homes was a primary focus of our team during the transition. In fact, we completed approximately 350 unit turns from the various days of transition to December 31, 2018 for the homes under transition, which is approximately 66% above what we would consider a normal turnover rate for this subset of homes. As a result of accelerating turns to boost leasing velocity, our portfolio stabilized least percentage of 94.2% was an improvement of 30 basis points from September 30, 2018. This metric was further improved to 95% as of mid-February, given the challenges of transition and on-boarding of a new team and allowing for Q4 seasonality. We are very pleased with achieving this increase in occupancy. We believe improvement in the occupancy metric demonstrates that our team members have hit the ground running and are poised to achieve the targets that have an outline for 2019. In addition to the improving occupancy, we achieve stabilize rental growth of 4.3% comprises of renewal rent growth of 4.1%, and release rent growth of 4.5%. The Q4 renewal rate of 71% represents an improvement of 500 basis points over the 66% rate of Q3 2018. The Q4 turnover rate of 6.6% represents a 60-basis point improvement, other than Q3 turnover rate of 7.2%. In summary, it was a very solid quarter with many significant accomplishments. We are on track to complete the build out of our property management platform. We will complete the transition away from external property managers about the end of Q1 2019 ahead of schedule and our occupancy is on the rise. We are very pleased with the operations team we have assembled our portfolio and the markets in which we own homes. We look forward to challenging ourselves with our goals for 2019 and continuing to position our company to take advantage of future opportunities. I will now turn the call back over to George.

[George Ellison:]

Thanks, Miles, and great work. As you see on page seven, we are reiterating our 2019 run rate projections. First, let me restate some of the assumptions that went into these numbers. Home count of 16,000, rental increases of 3% or 4%, occupancy 95% to 96%. So here you see on an annualized basis, we are still projecting between $240 million and $250 million in revenue, a 66% NOI margin which results in a $158 million to $165 million in net operating income. After interest expense and G&A we are still projecting between $47 million and $54 million in annualized core funds from operations or $0.22 to $0.25 per share, per quarter, annualized AFFO of between $27 million and $34 million resulting in $0.13 to $0.16 per share, per quarter to be reached in the fourth quarter of this year as we stated before you can appreciate there are many variables that go into these targets. However, our track record of repeatedly reaching our stated goals and the fact that the internalization of property management will be completed ahead of schedule should give confidence that we will do so again. Let's recap 2018 on page eight, most importantly we internalized property management with the acquisition HavenBrook homes and coincident with this acquisition we began winding down our relationships with both of our outside property management vendors. ASPS was done at year-end and main street renewal will be done by the end of the first quarter. As we said earlier, we are increasing our property management platform from 3,000 to 15,000 homes. This is tough meticulous work that must be down quickly but carefully and requires close attention by all of us. The legacy non-core assets both loans and REOs are effectively gone, 448 non-core homes were sold in 2018 reducing drag on our P&L and freeing up capital and to this almost 450 homes which we sold just this month above our mark. On the financing liquidity front, we secured a $500 million 10-year loan from Freddie Mac in August as well as refinance another $500 million with a five year loan from Morgan Stanley. We also lowered the effective rate on our line with Credit Suisse and restructured our line with Nomura. As we stated earlier, these transactions resulted in average debt maturity being pushed out to over five years with 87% of our debt fixed or capped. Our rental portfolio grew 21% from just under 12,000 to 14,544 homes reinforcing Front Yard Residential position as the leader in the affordable single-family rental housing segment. Revenue increased 48% from $124 million to $183 million year-over-year, we targeted $0.15 per share of stabilized rental core AFFO, a mid-60s NOI margin we're committed to grow whole company FFO and reach critical scale on home cap all targets we hit or exceeded. On the bottom of page eight, we restate our goals for 2019. All in all it was a transformational year at Front Yard Residential with solid results and a long list of accomplishments but the real story is the groundwork that was laid, the foundation that sets us up for a strong 2019 and it's already starting to be evident in the numbers. Keeping an eye on the right acquisition, while being prudent with our leverage, pruning non-core assets being opportunistic in unlocking value from our balance sheet maintaining strong operating metrics and covering our dividend are the focus for this year. Now as a transition of homes to our platform is almost complete, the financial results are starting to show up in the first quarter and will continue to improve as well as become more and more predictable. We have continued to state goals publicly and then achieve them, 2019 will be no different. I will turn it back to you Sydney.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Douglas Harter with Credit Suisse. Your line is now open.

[Douglas Harter:]

Thanks. I know you kind of walk through the numbers quickly, Robin, but just kind of wanted to again get an expectation of when the size and the timing of the synergies kind of as you are able to -- as the internalization of property management is completed, when we should start to see the margin benefits from that?

[Robin Lowe:]

Yes, thanks, Doug. So somewhere it's going to come sooner rather than later obviously. So as I said in my remarks, as I said last quarter, one of the things we have been obviously dealing with is ramping up our internal property managers to take all the homes away from our external properties, at the same time still paying all those fees to the external property managers. So with -- as we said, we are still going through that this quarter. First quarter with the MSL we got about 2,000 homes left to go, we are going to do that, we have made great progress. But you are still going to see a lot of noise in the first quarter, although less obviously than the fourth quarter. So I expect things to improve in the first quarter, and then get significantly better in the second quarter. And then some of this stuff you see will just come as during the course of the year as Miles and his team and us continues to drive out expenses and realize the efficiencies that are embedded in our new structure.

[Douglas Harter:]

Great. And then on your slide four for run rate, run rate FFO and AFFO, I guess can you just talk -- the interest expense line item is the same despite the substantial savings that you got in December refinancing. I guess the 3Q number kind of already contemplated that level of refinancing, or if you could just help on that, Robin?

[Robin Lowe:]

Yes. We are trying to be quite conservative in these numbers, Doug. So we've got 475 as the annualized assume rate. Today as you will see in our 10-K, our weighted average interest rate at the end of the year was 453. So there could be some opportunity there. Some of our loans are still LIBOR-based, and so that could go against us, although it's not a big amount after the debt pay down from the sale in February. So I am being slightly conservative there is the answer.

[Douglas Harter:]

Okay. Thank you, Robin.

[Robin Lowe:]

Thanks, Doug.

[Operator:]

Thank you. And our following question comes from Anthony Paolone with JPMorgan. Your line is now open.

[Anthony Paolone:]

Okay, thanks. Good morning. First question on the $100 million some odd of dispositions that you just did, what was the NOI on that group of assets that we have to think about for now and then [indiscernible]?

[Robin Lowe:]

The NOI was quite low in most of those homes in South Florida that we acquired from HavenBrook, and we said last quarter we put those on the CS Line, Tony, with a view to selling them. So both the NOI and the yields were kind of lower on that, and Tony I think it was you that asked me last quarter, do we expect to sort of be able to sell those and recycle into something more accretive? And the answer is yes. So we sold stuff that's lower yield, and we are going to reinvest in high yield asset.

[Anthony Paolone:]

Okay. So I mean it's something like 3%, 4%, what's the order of magnitude do you think?

[Robin Lowe:]

I don't have the number in front of me, but I think ballpark you are probably in the right region there, yes.

[Anthony Paolone:]

Okay. And then in terms of what's remaining when I look at your held for sales it seem like about, I don't know, $50 million, $60 million less. Do you plan on adding to that over the course of the year as you talked about refining the footprint a bit, or what's the order of magnitude, what could be behind the $100 over the balance of 2019?

[Robin Lowe:]

Yes, definitely we plan to keep going on that. We think it's a discipline that we should be sort of doing constantly in terms of reviewing and refining our portfolio. So, the ones that we sort of identified already are kind of the more obvious ones in these sorts of outlying areas where we really don't want to be, and we are never going to build critical mass. So obviously that's first on the list, but then as we go forward we are going to continue to review and refine.

[Anthony Paolone:]

Okay. And then on the portfolio, is there much of a spread between the least rate and the occupied rate as we think about just the actual economics in any given quarter, some of our peers report both -- and they're some times there is a gap, I want to understand what the number is?

[Robin Lowe:]

I am sorry. I am not sure I understand the question.

[Miles Adams:]

This is Miles. So the question is whether there is a gap between the lease percentage or the occupied percentage, and generally what we see on a stabilized portfolio that's running right around the 100 basis points.

[Anthony Paolone:]

Okay.

[Robin Lowe:]

Does that answer your question, Tony? Sorry, I didn't understand.

[Anthony Paolone:]

Yes, no, that's exactly what I needed, just wanted to understand. And then I am just trying to bridge with your page seven, so if your leased rate was about 94%, suggest your occupied was about 93 then, and your goal is 95% to 96% occupied. Just want to make sure, I am getting sort of the bridge right?

[Robin Lowe:]

Yes. That's an occupied number. So as I said, we have already sort of improved 80 basis points since year-end. We were 94.2% at year-end. So we are already 95% starting February. So I think we feel pretty optimistic right now about getting to at least 95% if not high by year-end.

[Anthony Paolone:]

Right. And then again I just want to make sure that's comparable to an occupancy rate in the fourth quarter that was closer to 93, so that's 250 bps pick up?

[Robin Lowe:]

No, that's the 94.

[Anthony Paolone:]

Right the 94.2% versus 93.9%. So yes, there was 30 basis pick up from Q3 2018?

[Robin Lowe:]

[Indiscernible] again. So I am saying it's the occupancy -- it's the occupied number.

[Anthony Paolone:]

Right. Okay. And then, can you give a sense as to if we think about the bridge and the goal for year-end 2019, where you see leverage at that point is around your net debt to EBIDTA or debt to -- probably want to think about it.

[Robin Lowe:]

Yes, I think book leverage is going to be sort of low 70s, you know, 71%, 72% something like that with the step pay down reduced to 70 makes it a little bit as we plan the right asset, so low 70s. The book -- sorry, the debt to fair value, if you like, NAV is actually probably around 60 right now. So that's where I expect to be a barrel slightly higher by year-end.

[Anthony Paolone:]

Okay, great. Thank you.

[Robin Lowe:]

Thanks, Tony.

[Operator:]

Thank you. And our following question comes from Jade Rahmani with KBW. Your line is open.

[Jade Rahmani:]

Thanks very much. Of the 440 homes that sold, were those all in Florida? I think I saw that Amherst residential renewal acquired about 212 of those homes.

[George Ellison:]

Yes, that was picked up by counties where the sales happened. I think Brevard [ph] maybe Dade, but that was only -- so that store that hit on that real estate piece in Florida was -- it just picked on the counties where those were closed. I think 400 were Florida, and so the other 50 were spread around other places. So the bulk of it was higher priced comps in South Florida, 400 of the 450.

[Jade Rahmani:]

What was the cap rate on the sale?

[George Ellison:]

The way I look at it, the way we look at it when we are buying and selling is sort of a very objective metric growth yield. So rent divided by -- rent times 12 divided by price of the house, that's how usually buyers and sellers speak to one another. So, that number ranges when you buying and selling from probably you selling the nine and you buy high 11s to low 12s. So the reason why I speak in that definition, Jade, is that cuts out how you run them differently than I run them, buyers and sellers and NOI, somebody buying them might think that they can run it at a higher NOI. So if you want to assume an NOI, a cash NOI, I would say in the 50s, that would imply times gross yield of something in the high 4s is where we sold them, to answer your question directly.

[Jade Rahmani:]

Okay. What's the identifiable pool of non-core homes?

[George Ellison:]

You mean that we're still speaking of selling?

[Jade Rahmani:]

Yes.

[George Ellison:]

Yes, I mean, it's lot of things. So that list right there was a yield issue, yields were low and as we were chatting with Tony, the NOIs were low, but there is also as you know still a legacy issue of small number of homes in places that we were born out of the NPL purchasing algorithm. So we'll always be cleaning up places that previously were bought because loan distribution was pretty flat across the country. So there's still a handful of places where we got to get out of twos and fours and sixes and 10s. So it'll be a constant as Rob said, culling of things that go up in price, and maybe you can sell a home for 250 and buy two 125s. So that'll be part of it. Strategic places that are too small that we don't want to grow. What else would drive selling?

[Robin Lowe:]

Yes. So if you look on slide 12 of our earnings deck, Jade, we showed 901 homes that are identified for sale including the legacy REOs and including the 444 that we just sold. So that's the currently identified pool that George is saying as we go forward, there's going to be more.

[Jade Rahmani:]

Okay. Can you give an update on AAMC and I guess, more to the point, RESI's plan to optimize G&A? I think Annualized G&A is running at $31.5 million including RESI's G&A, the AAMC management fee and stock compensation costs. So what's the annual target? Just looking at the numbers relative to assets, it's about 1.4% and relative to equity and market cap it's about 5% to 5.5%. I think that a triple net lease REIT, for example, NNN is the ticker. They've got about $35 million of annual G&A, you know, and market cap is in the billions. So I think they've got an $8.5 million market cap. So I think optimizing G&A should be one f the top priorities for management.

[George Ellison:]

I'll start that, and then Rob, you can take it. The third quarter call beginning in November, we stated that the December cycle of board meetings would move the AMA discussion between the two companies would be high on the agenda of those two board meetings and they were. So that conversation and that negotiation has begun. Obviously, we can't talk about that, but also it's between two independent boards and so to the extent we'll be asked for data or analysis will be part of that, but the real discussion is between the two boards. So all I'll say on that is it has begun and just like everything else we've, I think, stated that we will work on, we have. So it has begun. So that's all we'll say on that. As it relates to more specifics, you know, obviously we agree with that comment we stated in the past that as we grow we have to drive our total real G&A to levels that are comparable to people in the space and other people the G&A mentioned. So Rob why don't you take the rest of that, please?

[Robin Lowe:]

Yes, I'd say a couple of things. First of all, as I said in my prepared remarks, there's something like $1.5 million of non-ordinary costs, legal and professional and other costs that we expect to go away during the course of the year. We also expect to be able to realize some further efficiencies, maybe another $0.5 million or something like that. The other thing I would say Jade when you start comparing us to other REITs or whatever is you got to look at our scale compared to everyone else, right, and so our G&A lows as a percentage of total gross rental asset, I don't think is very much different than our peers were when they were our size. And so this just speaks to the whole issue that we need scale. Scale is important to us, because yes, G&A while I think it's particularly outsized compared to where our gross rental assets were, our sizes today clearly as we grow that G&A won't grow with us. And so when we get to sort of 50,000 homes for example, our G&A low will be comparable with our peers. But scale is very important, clearly.

[George Ellison:]

So I would just wrap it up with this issue that you're on. We talked about this in the past on these calls. So we agree with you that that is -- making sure that G&A divided by real estate assets or any other way you want to look at it has to be controlled and has to be driven down, but to Rob's point, that will happen as we grow and I can guarantee you that whatever comes out of that assuming that a new contract is constructed, this very issue that you're on will be addressed. And if we're able to get something done, if the two companies are, we'll be crystal clear about how that number is going to work and how it's going to go down over time. We're completely aware of that.

[Jade Rahmani:]

Okay. Just looking at your 2019 target, the 95% to 96% occupancy, is that net of bad debt expense? Where does bad debt expense flow through in your assumptions?

[Robin Lowe:]

Yes, it's nice, Jade.

[Jade Rahmani:]

So bad debt expense is what, 1.5%?

[Robin Lowe:]

It's about 1%.

[Jade Rahmani:]

Okay. So you would be expecting at the midpoint 96.5% of occupancy and 1% bad debt expense?

[Robin Lowe:]

Yes. Right, Jade. As I said look our occupancy ready in mid-February is 95%, so I think these targets are very achievable.

[Jade Rahmani:]

Do you have an estimate of what you would expect FFO to total for the year? I think that the core FFO and AFFO numbers you gave are quarterly and that's the target by year-end. So there'll be a buildup to that. Do you just have a range of those two items for full-year FFO and AFFO?

[Robin Lowe:]

Yes, we haven't given that guidance at this point, Jade. We can see how we can helpful to you on that…

[Jade Rahmani:]

Okay. Do you expect to cover the dividend by year-end?

[Robin Lowe:]

Yes, we expect to see that run rate. Yes, so that's the AFFO target that we're showing. That's the $0.13 to $0.16 annualized buy by year-end, that's what we're seeing.

[Jade Rahmani:]

Okay. And then there's some cost to own that I would hope to get some clarity on, the 350 units that turned, what was the amount of expenditure, the turn cost on average for those for each unit? How much are you spending per turn?

[Miles Adams:]

Yes, so -- this is Miles. Total gross cost to maintain a running in that 2,300 to 2,400 to 2,700 a range, on a gross basis, on a net basis -- I'm sorry, on a gross basis about 2,700 on a net basis 2,300 to 2,400. And the split we're seeing between OpEx and CapEx inclusive of turns is about 1,600 on the OpEx side and about 1,000 to 1,100 on the CapEx side.

[Jade Rahmani:]

What do you think explains -- that's several hundred dollars lower than invitation homes. What do you think explains the difference? Is it -- there could be a couple of factors. One, is the low turnover ratio in the portfolio is maybe delaying the recognition of certain CapEx items. Two, as the portfolio is less seasoned, there's less expenditure. That's something I've seen covering this industry for five years. The longer you own homes, the more there is expense recognition. And then third could be something to do with the way G&A is allocated inclusive of property expense. So what would you say explains the difference between those numbers that are several hundred dollars below invitation homes?

[George Ellison:]

Yes, so the first thing that you referenced was the turnover rate. Certainly, our turnover rate of 27.5 is lower and that does help considerably. The second thing we would point to is that our home size on an overall basis on average is smaller or much smaller than invitation. And so that helps considerably with the cost to maintain. So I think those two factors are the key factors in driving that difference.

[Jade Rahmani:]

Okay. And then just -- sorry, leasing commissions and marketing expense, where is that flowing through on the income statement? Are those items expensed fully or are you capitalizing those?

[George Ellison:]

Yes, those costs are capitalized. We're paying those commissions when we incur them to third parties. And so, they would be capitalized.

[Robin Lowe:]

[Indiscernible]

[Jade Rahmani:]

What was the last comment, Robin, I didn't catch that?

[Robin Lowe:]

I'm just saying that we have more in-house as we go forward and all that was before, but you know as we bring up the title box you imagine some of that activities we can have…

[Jade Rahmani:]

And so that'll be expensed when it's in-house?

[Robin Lowe:]

It's all expensed. It's expensed, yes.

[Jade Rahmani:]

Okay. And then I guess, slides 19 and 20, do you have an update of the NAV estimate what do you trying to imply with those slides is that confirm?

[Robin Lowe:]

17.50.

[Jade Rahmani:]

Sorry. Say again.

[Robin Lowe:]

17.50

[Jade Rahmani:]

Okay.

[Robin Lowe:]

That's a few index carrying value basis right plus the cost purchase plus any CapEx and then index by the MSE indices that we've shown on the slide right. If you apply a kind of classic full NAV discounted you are going to come up with a high number than that obviously dependent on the cover they use but this to me is the baseline.

[Jade Rahmani:]

Is that what lenders are using to decide advance rates?

[Robin Lowe:]

Lenders tend to use PTOs if you use PTOs you come up with quite a similar number to what we're showing on these two slides.

[Jade Rahmani:]

Great, thanks for taking the question.

[Robin Lowe:]

Thanks, Jade.

[Operator:]

Thank you. And our following question comes from Mike Grondahl with Northland Securities. Your line is open.

[Mike Grondahl:]

Hey, guys, thanks. Just on slide seven and it relates to 16,000 homes that kind of drive some of those numbers you guys or maybe 1,500 or a 1000 below that what sort of your outlook for getting to that 16,000 homes?

[George Ellison:]

Good morning, Mike. We have probably enough capital to go after that amount 500 to 1500 maybe there is smaller a little bit large size. Rob used the proceeds of that sale to paydown some debt. So that's the best opportunity at this point, but there is probably at least two nice pulls out there that we've been looking at for a couple of weeks. And so obviously the sooner we could buy those if they fit then we can get the right price it makes these numbers better that's why we gave you a range. So I think if we're able to get something done it should be in the second quarter and by that I mean -- we are having some pricing out there but these things take a few weeks to negotiate and then the team will have to do diligence. And so, I think if we are able to get something done quickly here in the next few weeks we could hopefully get something done by the end of the second quarter. And obviously as I said the sooner we buy things in the year the better the 13 to 16 will look, if I take too long buying then we'll be at the lower end of that range. So that sort of why we gave ranges.

[Mike Grondahl:]

Sure, sure okay and hey just the internalization is obviously well ahead of schedule. Do you feel like the synergy and the value for doing that - how do you feel about that now that you're 90% done with it do you feel, still feel really good about it?

[George Ellison:]

I'd say couple of things -- just a business level internalizing creates -- this is complete different dynamic. So where you're waiting for data you're waiting for results from outside vendors so both did great job it's not yours and you really can't control it and you wait for the results to come to you. So just at a sort of blocking attacking level having HavenBrook inside this is phenomenally better. And we said when we purchased them it also allows us to directly touch the consumer which is he who keeps that consumer the happiest is going to win this game. And so dealing through a person who is touching the consumer can't get to them we can't get to them. So just at a macro level then on top of that if you look and we went over the numbers HavenBrook at a tremendous platform with some of best numbers in the business, but they were being held back for the last couple years because they were trying - the company was going to be sold. And so they won't allow to grow. So this team has been just chopping at a bit to get going. They were enormously excitedly when we showed up that they are dilute because they saw it going from 3000 to 15,000 and obviously miles is growing the team. So he and Joe - who is here with us as well have been just crushing it and the team is enormously excited about it. As we said, we thought this wasn't going to get done until the end of '19. We've obviously just like these numbers imply the sooner we get the transition done, the better these numbers get on Page 7. So Miles and his team responded to that. So how I feel about it? I feel -- we're just getting started and we're incredibly -- I'm incredibly pleased with the job he and his team have done and now we start the creative business of getting better and better and using technology to get better. So it's - I don't give out in front of ourselves but it's - we're incredibly pleased with it. We were very happy when we met them and we're excited to get together and it has -- it's turned out very well; early days, very early days, but this thing could have gone poorly and that would have been a bad thing, it's going tremendously well and we're very, very pleased.

[Mike Grondahl:]

And then lastly, George, how do you know that you're getting enough rent? You've consistently had 4% rent increases give or take a little bit. How do you know you're asking for enough? What insight do you have there?

[Miles Adams:]

So, this is Miles, I'll take this. So, in our process we start before the home is available for rent with marking the home. And we're pretty aggressive on an individual home basis, we're trying to get as much as the market will bear and we're been very successful with achieving what I would say a pretty impressive growth rates. Particularly in Q4 if you look at the Slide in the deck there that has a breakdown for our markets, 7.5% in release growth in Atlanta during Q4 is indicative of a very, very strong demand in our key market. And then if you look at Charlotte, we're in double-digits at 13.4%. So the market tells us whether we have the home priced right or not. If it leases before the home is available then - and we've been pretty aggressive, then it's a validation. If it does not then we have to adjust our pricing once it's available to meet the markets, where the market is saying it's worth. And we don't let homes age because we want them to the occupied. And a vacant home always sets a negative margin. So, we're very, very cognizant of days on market and driving the greatest blend between growing rents and maintaining occupancy levels and improving them as we've demonstrated.

[Operator:]

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back to the company for closing remarks.

[Robin Lowe:]

Thank you.

[George Ellison:]

Thanks, everyone.

[Miles Adams:]

Thank you very much.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone have a great day.