Invitation Homes Inc

NYSE:INVH

Earnings Call Transcript 2018-Q2

[Operator]

Greetings, and welcome to the Invitation Homes Second Quarter 2018 Earnings Conference Call. All participants are in listen-only mode at this time [Operator Instructions]. As a reminder, this conference is being recorded. At this time, I would like to turn the conference over to Greg Van Winkle, Senior Director of Investor Relations. Please go ahead.

[Greg Van Winkle, Senior Director of Investor Relations]

Thank you. Good morning. And thank you for joining us for our second quarter 2018 earnings conference call. On today's call from Invitation Homes are Fred Tuomi, Chief Executive Officer; Ernie Freedman, Chief Financial Officer; Charles Young, Chief Operating Officer; and Dallas Tanner, Chief Investment Officer.

I'd like to point everyone to our second quarter 2018 earnings press release and supplemental information, which we may reference on today's call. This document can be found on the Investor Relations section of our Web site at www.invh.com.

I'd also like to inform you that certain statements made during this call may include forward-looking statements relating to the future performance of our business, financial results, liquidity and capital resources and other non-historical statements, which are subject to risks and uncertainties that could cause actual outcomes or results to differ materially from those indicated in any such statements. We described some of these risks and uncertainties in our 2017 annual report on Form 10-K and other filings we make with the SEC from the time-to-time.

Invitation Homes does not update forward-looking statements and expressly disclaims any obligation to do so. During this call, we may also discuss certain non-GAAP financial measures. You can find additional information regarding these non-GAAP measures, including reconciliations of these new measures with the most comparable GAAP measures, in our earnings release and supplemental information, which are available on the Investor Relations section of our Web site.

I'll now turn the call over to our President and Chief Executive Officer, Fred Tuomi.

[Fred Tuomi, Chief Executive Officer]

Thank you, Greg. Good morning, everyone. And welcome to our second quarter 2018 earnings conference call. Supply and demand fundamentals remain strong in our high growth markets, which enable us to achieve 4.5% year-over-year same store core revenue growth in the second quarter, a full 40 basis points better than the first quarter's growth rate of 4.1%. Same store average occupancy for the quarter of 96% was the highest achieved over the last six quarters as turnover once again declined relative to the prior year. At the same time, blended rent growth remains strong at 4.7%. This robust top-line growth help drive year-over-year same store NOI growth of 5% and core FFO per share growth of 19.3%.

Looking ahead, new housing supply remains muted and key indicators point to continued strong demand. In our select high growth markets, household formations are forecast to grow at a rate 90% greater than U.S. average for 2018. Home prices in our markets are up almost 7% year-over-year. Higher construction costs are constraining new supply and move-outs to home ownership continue to track lower than last year. All of these key factors point to continued strength and revenue growth for the second half of 2018, and demographics in the U.S. have only become more beneficial in the years ahead as the millennial generation continues to age. Based on year-to-date results and our expectations for the remainder of the year, we are maintaining the midpoint of full year’s 2018 same-store core revenue growth guidance, while narrowing the range to 4.3% to 4.7%.

We’re also pleased to report that the majority of integration milestones are now complete, allowing us to estimate merger synergies with greater certainty. We now expect total run rate cost synergies to be between $50 million and $55 million, which is $5 million greater than our initial expectations. While we are excited about our revenue growth outlook and these additional long term cost savings property level expenses are temporarily running a higher than expected. Charles will address this in greater detail. However, I’ll summarize it by saying that we were overly optimistic in how quickly we would realize service technician productivity gains from our newly integrated Repair and Maintenance or R&M management technology, and it will take longer than we initially thought to fully optimize this area.

Accordingly, we are updating our full year 2018 same-store expense growth guidance to 4.6% to 5.4%. Let me be clear that we do not view these projected 2018 expense numbers as normalized nor as representative of any fundamental change in the business. We would not be changing our previous 2018 same-store expense or NOI guidance, if not for these temporary challenges. Given our updated revenue and expense expectations, we now forecast full year 2018 same-store NOI growth of between 3.8% and 4.8%.

Importantly, we are maintaining the midpoint of our 2018 core FFO guidance and narrowing the range to $1.15 to $1.19 per share, which represents 13% growth versus last year at this midpoint. As we enter the second half of the year, we continue to focus on widening our competitive advantages in the single-family rental marketplace. The first is locations. We believe we are already in the most desirable high growth single family rental markets and have carefully selected our homes to be closed-in high barrier sub markets with proximity to employment centers, good schools and transportation corridors.

With our substantially increased market density post merger, our investment management team is now leveraging even more robust data and analytics to further refine our locations through ongoing capital recycling. In the first half of 2018, we reallocated approximately $130 million of capital from lower rated homes and sub-markets into more attractive homes and sub-markets through acquisitions and dispositions. Second competitive advantage we are focused on is scale. With almost 5,000 homes per market on average, we expect to provide even higher quality service to a greater number of homes with the optimal number of personnel.

The next phase of our integration will be focused on bringing all of that to fruition as we roll out our new unified field structure and unique operating platform to leverage our increased scale and density. The third advantage is our people and service, which we also expect to benefit from the next phase of this integration. As mentioned, we have completed the process of moving all of our field technicians and vendors on to one R&M management technology platform. In the second half of the year, we will be implementing even more advanced tools and expanding the ProCare best practices aimed at improving both the resident experience and the efficiency with which we provide it.

Looking further ahead, we also see an opportunity to expand into new products and services that residents will desire and value such as our current smart home technology offering. We remain excited about the growth prospects with this business in both the near term and the long term, and are focused on continuing to leverage our competitive advantages for the benefit of our residents, associates and shareholders.

With that, Charles Young, our Chief Operating Officer, will now provide more detail on our operating results in the second quarter as well as current operating trends.

[Charles Young, Chief Operating Officer]

Thank you, Fred. I’d like to start by thanking our associates for their hard work and dedication. We continue to enjoy strong market fundamentals but growth doesn't come without execution and that all starts with resident service. Our teams are providing residents with a high quality living experience as evidenced by further improvement in turnover rate to 34.4% on a trailing 12 months basis. Resident satisfactions scores also remain high, averaging 4.3 out of 5 over 10,000 survey responses we have received year-to-date on residents regarding quality of services. Our dedicated field teams are committed to earnings the loyalty of our residents every day.

I'll now spend some time walking you through the details of our second quarter 2018 operating performance. Same store core revenues in the second quarter grew 4.5 year-over-year in line with our expectation and up from 4.1% in the first quarter. The year-over-year increase was driven primarily by average rental rate growth of 4% and 20 basis points in average occupancy to 96% for the quarter. These strong top-line results drove same store NOI growth of 5% despite higher than expected expense growth of 3.6%. Non-controllable expenses were in line with expectations. However, R&M expenses were higher than expected for the quarter due primarily to overages in June, mostly concentrated in two markets.

I'd like to take a few moments to discuss the primary drivers of elevated R&M expense that were identified and the steps we are taking to improve our results. There are two key issues we are facing; first, the markets specific challenges stemming from disruption to our local teams associated with integration; and second, our temporary challenges we are experiences as we adapt to a newly implemented R&M Management Technology platform. First, I'll touch on the market specific issues.

The vast majority of our markets have seen very limited associate challenges through the integration process. However, Tampa and South Florida have experienced the higher level of personnel issues that have been detrimental to performance. These two markets alone accounted for 44% of the overall R&M miss versus our expectations in the second quarter. We have responded by moving swiftly to supplement and rebuild teams in these markets. We have also committed additional national resources to these two local offices to help restore performance to expected levels.

Second, I'll turn to the areas of opportunity with our new R&M Management Technology platform. The implementation of this technology was completed ahead of schedule during the second quarter and overtime we are confident that we'll further increase service technical productivity. However, in retrospect we were too optimistic in our initial expectations and assuming we would realize those productivity gains immediately. In fact, productivity temporarily declined out of the gate. This issue was amplified by the fact that we completed the rollout at a time when work order volume was seasonally the highest.

We've already taken specific actions to restore and improve service technician productivity. For example, we have updated our service call center dispatch scripts and logic that determine who is best equipped and position to address work orders in real time, which will improve the percentage of work orders completed in house. In addition, we are nearing the rollout of a new version of our route optimization algorithm, which will improve the metric of daily average work orders completed per technician.

As systems are fine-tuned and fully adopted, we expect to achieve even higher efficiency than in the past due to our enhanced scale, density, experience and technology. However, we have reset our expectations to assume that it will take longer -- take more time to get there. Our revised guidance assumes that the challenges we’ve been experiencing will likely persist through the second half of the year, but we are working hard to do better and faster.

Next, I’ll cover second quarter 2018 recent trends. Same-store average occupancy was 96% in the second quarter, best in the last six quarters. Same-store blended rent growth, which we define as lease-over-lease rent growth net of any concession incentive averaged 4.7% in the second quarter, driven by a seasonal acceleration and new lease rent growth to 4.8% and continued steady strength and renewal rent growth of 4.7%.

Furthermore, we saw acceleration into quarter end with renewals increasing to 4.8% in June from 4.6% in May and new leases increasing the 5.5% in June from 4.5% in May. Western U.S. markets continue to lead the way for growth with Seattle, Phoenix, Northern and Southern California remaining our highest. Even with strong rent growth, turnover trends continue to be favorable, declining to 9.4% in the second quarter 2018 from 10% in the second quarter 2017. We believe this is a testament to the value that residents continue to find in our first class service and high quality homes and highly desirable locations. And the strong leasing environment has continued into the third quarter.

The year-over-year occupancy gains accelerated to 40 basis points in July with average occupancy coming in at 95.4% for the month versus 95% in July 2017. Blended net effective rent growth was 4.7% in July with renewal steady at 4.8% and new leases of 4.6% meeting our expectation as we near the end of peak leasing season.

I will close by expressing my excitement for all of the opportunities in front of us operationally in the second half of the year. We remain focused everyday on delivering the leasing lifestyle our residents desire while optimizing rent growth and occupancy to capture strong market fundamentals. We’re working hard to restore and ultimately further improve R&M efficiency. And as integration nears the final phase, we’ll rollout more enhancements that’ll make our teams even better equipped to provide an outstanding level service for our residents.

I’ll now turn the call over to our Chief Financial Officer, Ernie Freedman.

[Ernie Freedman, Chief Financial Officer]

Thank you, Charles. Today, I will cover the following topics; portfolio activity for the second order; balance sheet and capital markets activity; financial results for the second quarter; integration update; and 2018 guidance update. I’ll start with portfolio activity. As we continue to recycle capital to further enhance the quality of our portfolio, total home count decreased by 85,000 to 82,424 homes. We bought 263 homes for an estimated $80 million and sold 348 homes for $77 million, keeping us on track for our full year plan of acquisitions and dispositions each in the range of $300 million to $500 million. The average cap rate on homes we acquired was 5.5%. Net investment was focused in the Western U.S. into a lesser extent the Southeast, funded by net dispositions primarily in Chicago, South Florida and Houston.

I'll now turn to an update of our balance sheet and capital markets activity. Debt markets continue to provide attractive refinancing opportunities in the second quarter. We took advantage by completing two seven-year securitizations; one in May, with principal amount of $1.1 billion at LIBOR plus 138; and one in June, with principal amount of $1.3 billion at LIBOR plus 142. Net proceeds and cash on hand were used to prepay $2.3 billion of floating rate securitizations maturing in 2020 and $200 million of floating rate securitization debt maturing in 2021.

Since the beginning of the year, our weighted average maturity has increased to 5.4 years from 4.1 years and our unencumbered pool of assets has grown by over 10% to approximately 38,600 homes. We also entered into additional forward interest rate swaps to extend the duration of our hedges to match the extended duration of our maturities. We've added schedule 2D to our supplemental to provide additional detail related to expected changes in our weighted average cost of debt over time based on our current debt and interest rate swaps in place. And finally, our liquidity at quarter end was almost $1.2 billion through a combination of unrestricted cash and undrawn capacity on our credit facility.

I'll now touch briefly on our second quarter 2018 financial results. Core FFO and AFFO per share for the second quarter increased 19.3% and 14.5% year-over-year respectively to $0.29 and $0.24. The primary drivers of the increases were growth in NOI per share in addition to lower adjusted G&A and lower cash interest expense per share. Supplemental schedule one provides reconciliation from GAAP net loss to our reported FFO, core FFO and AFFO.

I'll next provide an update on our merger integration. We are ahead of schedule on most major elements of the integration. Office space in 15 of our 17 local markets has now been consolidated. Implementation of our new R&M technology is complete and our new accounting platform was launched on August 1st. As a result, the pace of synergy achievement is also running ahead of schedule by approximately $10 million versus where we had expected to be at this point.

As of today, we have earned an approximately $34 million of synergies on an annualized run rate basis, almost entirely related to G&A and property management. Implementation of our unified operating platform and field configuration that combines the best of both legacy organizations is our final remaining major milestone. Work under systems and technology to support this unified platform continues to progress and roll out to the field is expected to begin in the fourth quarter of 2018.

The last thing I will cover is updated 2018 guidance. For the same store portfolio, we are narrowing our core revenue growth guidance to 4.3% to 4.7%, unchanged at the midpoint as fundamentals in our markets continue to be favorable. Our same-store NOI guidance is now 3.8% to 4.8% due to an increase in our same-store core expense guidance to 4.6% to 5.4%. I'll give some additional detail to help bridge the increase in our same-store expense guidance. Our initial 2% to 3% same-store operating expense guidance for 2018 assumed R&M costs would be lower in 2018 than they were in 2017 due to anticipated productivity gains. As Charles described though productivity instead declined out of the gate and is expected to take more time to optimize. For this reason alone, we now expect property level expenses excluding taxes to be up 3.5% year-over-year versus down 1% in our initial guidance.

Real estate taxes are still expected to increase about 6.5% this year consistent with our initial guidance. 3.5% growth on non-tax expenses and 6.5% growth in real estate expenses leads to 5% overall expense growth, which is the midpoint of our revised guidance range. And remember, we have a material increase in our property taxes in 2018 from onetime Crop 13 related reassessments in California due to our merger. Without that increase our new 5% same store expense growth expectation would instead be 4.25%. As Fred mentioned, we've also raised our expectation for total annual run-rate synergies to between $50 million and $55 million. This is $5 million higher than our initial projection primarily due to incremental cost savings we've been able to drive in the areas of vendor and subscription services within G&A.

Taking into account our revised expectations for same store results and synergy obtainment, we are maintaining the midpoint of our full year 2018 core FFO guidance and narrowing its range to $1.15 and $1.19 per share. Additional favorable changes in our forecast include lower expected interest expense and G&A. In summary, our full year core FFO and AFFO guidance at their midpoints imply growth rate of 13% and 10% respectively from prior year. I'll close by reiterating that our teams are energized and excited for the second half of 2018. Big picture fundamentals remain very strong and we are making great progress on the priorities we laid out at the beginning of the year.

With that operator, would you please open up the line for questions?

[Operator]

We will now begin the question-and-answer session [Operator Instructions]. And today's first question will come from Juan Sanabria with Bank of America. Please go ahead.

[Juan Sanabria, Bank of America]

Just hoping if we could talk a little bit about same store revenue. The guidance implies a modest reacceleration at the midpoint in the second half. Are you comfortable at the midpoint and what's driving that uptick in the second half? Is that driven by occupancy and the rate as part of that how should we think about the impact of the hurricanes last year?

[Ernie Freedman, Chief Financial Officer]

As you saw, we accelerated our revenue growth from the first quarter to the second quarter from 4.1% growth rate of 4.5% growth rate. As you look at the second half of the year and as we've talked about in the past, we do have easier comps with regards to occupancy. And in fact in the month of July alone, we're 40 bps higher year-over-year. So we get a little more benefit out of occupancy with regards to having easier comp. And we expect to have good rental growth rate as well in the second half. But with the easier occupancy comp, we do believe that we will get to that 4.3% to 4.7% range with regards to our revenue for the full year.

[Juan Sanabria, Bank of America]

And the hurricanes, does that make the comps easier in the fourth quarter, or how should we think about that last year?

[Charles Young, Chief Operating Officer]

So bottom line is part of the occupancy bottom line that Ernie talked about is that it's a little lower in the fourth quarter. And that will give us a little bit of a lift as we comp against it. So the hurricane pickup really started to come back in occupancy in the first part of this year. And we had some slowdown in leasing because of the hurricane in both Houston and Florida. So that’s some of the comp benefit that we have.

[Juan Sanabria, Bank of America]

And then on the expense side, you talked about sounds like higher employee turnover in Florida. Is there anything you can attribute that to? Is it just people moving for higher wages? And do you expect more wage pressure going forward?

[Charles Young, Chief Operating Officer]

No, it really wasn’t about wage pressure. As a reminder, as we said in the opening remarks, 15 of our 17 offices have already combined and we’re really operating great across the majority of our markets. The Florida issues are truly isolated, specifically the two markets in Tampa and South Florida. And was around associate turnover, not really about wage and it was more around the integration. So we had a few unexpected early departures and a couple of key roles that created a distraction for us. And at the time that it happened at the peak work order volume that was part of the impact. The good news is though, we’ve backfilled quickly, we’re supporting the teams with national resources and we expect to get back on track for the second half of the year.

[Operator]

Next question comes from Douglas Harter with Credit Suisse. Please go ahead.

[Douglas Harter, Credit Suisse]

Just on correcting those two markets, can you just remind us what is in your guidance for the back half, as far as pace of addressing those markets and then just help us think about the potential magnitude of -- as you get those address what 2019 could look like with that improvement?

[Ernie Freedman, Chief Financial Officer]

I understand when we have challenges in R&M, most of our R&M activity happens in the peak season, in the peak summer season. And so our opportunity to improve becomes smaller and smaller and it get to the end of the year. So it’s less work orders coming through the system, that’s across all of our markets. And so we do expect that these markets will get better by the end of the year, but it won’t have as meaningful impact as we would like, because there’s work orders on spread out evenly throughout the second half of the year.

So our guidance does assume we continue to have challenges during the peak leasing season -- of course in peak service season, of course we’ll try to do better than that. But I want to make clear we talked about in the prepared remarks that our expectations around that is that baked into our are guidance is those issues will get resolved but it’s going to take well into the end of the year to make sure and then we’re into our best to see if we can do better than that.

[Douglas Harter, Credit Suisse]

And then Ernie, the refinancing that you did in the second quarter, and I guess do you have any other debt that -- where you could see comparable savings given where the financing markets are today?

[Ernie Freedman, Chief Financial Officer]

We do have -- we’re able to get ahead of some of our refinancing activity for maturities that were coming up in 2019, and the capital markets team here did a fantastic job executing for us. We do have 2020 and 2021 maturities there couple years out. But those could be good opportunities for us to consider some refinancing activity as against the latter half of this year or the beginning of next year where we could see some spread compression there as well. So we’ll be optimistic like we’ve been. We’re pleased before the balance sheet is at. We’re pleased with the fact that we’ve been able to extend our weighted average maturity. But we’re very committed to getting to where we want to as investment great balance sheet. And so the answer is -- and we could do some stuff here in the second half of the year. But at this point, we’re pretty pleased with what we’ve accomplished thus far, Doug.

[Operator]

Next question comes from Jason Green with Evercore. Please go ahead.

[Jason Green, Evercore ISI]

Just wanted to circle back on same-store expenses, it looks like looking at your guidance and what you did for the first half of the year that you do expect some slight acceleration in same-store expenses in the back half of the year. And I was wondering if that's more to the fact that there is more R&M spending, Q3 versus the other quarters, or if there's some other factors there?

[Ernie Freedman, Chief Financial Officer]

Yes, the two things with regards of our guidance. First is what we did say that in the third quarter, we'll have the most spend of between the two quarters and certainly this happened in the past so we'd expect that again. And the other thing is remember we had a more difficult comp in the fourth quarter. And you recall we had some things meet over to the first quarter this year with regards to R&M from some of those markets that were impacted by the hurricanes.

Most of the R&M activity that was occurring in the fourth quarter in those markets was related to hurricane cleanup, and was not pull into R&M. So we actually had a lighter R&M number in the fourth quarter 2017 because of that creating a slightly more difficult comp for us in 2018. Hence you're exactly right. If you look at our guidance, year-to-date, we're at 4.3% but our guidance for the full year is 4.6 to 5.4. So that's why you see that trend as we go into the second half of the year.

[Jason Green, Evercore ISI]

And then on the renewal front, renewals are obviously still strong but they're down 60 basis points year-over-year. And I guess if you could compare the difference in push back with tenants this time around versus last year and what might be driving any of the pushback that would be helpful?

[Fred Tuomi, Chief Executive Officer]

It's not as much about, this Charles -- it's not as much around pushback from tenants. Pricing power remained strong, supply and demand fundamentals are favorable and our demographics long-term are going to be tailwind to us. As we look at rent growth and it being slightly lower year-over-year, it's less about fundamentals and more really around the seasoning of our portfolio. If we did the bulk of our buying early on, we were focused on getting the homes leased. In the last couple of years, Dallas and team have done a wonderful job of optimizing. And we're really seeing more of a true up to market, which contributed to early on higher rents. But where we are now, we're stabilizing and we've been very consistent at 4.8 to 5. And we think that's reflective of where we are in market fundamentals for each of our markets across the country.

[Operator]

Next question comes from Drew Babin with Baird. Please go ahead.

[Drew Babin, Robert W. Baird]

I was hoping to talk about the difference in the revisions to FFO and AFFO guidance it looks like there is probably increased recurring CapEx expenses in there. And I was curious why that is, is that higher materials cost? Does that have anything to do with the same factors that drove repair and maintenance costs higher in the second quarter?

[Ernie Freedman, Chief Financial Officer]

Drew, it's actually the latter of what you described. A lot of the impacts we see in repairs was OpEx where we're seeing the same challenge than as it carries over to repairs in maintenance CapEx. So we're not seeing a material change in our costs or anything like that in turn. But we are seeing that for the similar reasons with some of the challenges in those couple markets that Charles talk about that we're seeing that pressure on our CapEx, and wanted to make sure we reflected that in our guidance going forward specific for our capital replacement spending, which impacts to AFFO.

[Drew Babin, Robert W. Baird]

And then also too I was hoping you could clarify what markets are now unencumbered by debt and the potential to possibly sell a market to a private bidder either later this year and next year potentially to repay debt? And I was just hoping you can comment on what those markets are and what the prospects are for something like that?

[Ernie Freedman, Chief Financial Officer]

Drew, no market is unencumbered completely by debt, but some markets certainly have a lower proportion of unencumbered debt than others, and that generally is an issue for us when we go to sell assets. With regards to all of us securitizations, almost all of them only have a one year lockout where there we have to pay yield maintenance on the floating rate securitizations. There is a couple of that two year, but they're almost at their point in time at where they expire. So other than our most recent refinancing activity that won’t be a difference to us and we have substitution rights in all those deals too. So we also have that flexibility there. Similarly, we do have flexibility with our Fannie Mae transaction as well for substitution rates. So if we did want to sale market that wouldn't a hindrance for us with regards to how our debt as far as to have the ability to do that.

[Drew Babin, Robert W. Baird]

And then just a related question. How would you view the bid right now for portfolio transactions in this business?

[Dallas Tanner, Chief Investment Officer]

Drew, this is Dallas. Generally, we're seeing a ton of demand in marketplace when we -- even on the limited amount of dispositions we've done this year taking something out. You'll find that there are lot of new entrants into the space today that are looking to try to acquire scale, it's pretty difficult given today's environment. So the simple answer would be that we see that mark-to-market pretty tight it’s some over to come to market with a decent opportunity. It's just also dependent upon asset quality and the types of rents you're getting out of those homes today. So for us you look at some of our disposition activity this year, we've certainly been more active selling assets and parts of markets where we're not seeing as much growth. Now we expect that to stay consistent with our strategy going forward.

[Operator]

And next question comes from Haendel St. Juste with Mizuho. Please go ahead.

[Haendel St. Juste]

So Fred or Charles maybe this one is for you, a question again on the expense, the hike in the guidance, which is a surprise to many of us. I recall chatting with you guys at NAREIT and we focused quite a bit on the strong rental growth that was going on, and how you felt good about your 2018 guidance. So I guess I'm curious if you want to wear these integration and expense headwinds at that time. And if so maybe why wasn't that more of a mention of it?

[Charles Young, Chief Operating Officer]

So NAREIT we had visibility into April and May at the time. June is really where we had the surprise. We have finished the integration into the R&M maintenance technology platform. And that's where we quickly saw that there was -- we were offering our in house tech utilization. So we quickly made the pivot as we talked about. And part of the challenge is that time of year its high volume and it's had an impact. So that's why we didn't see it there and ultimately we're making the pivot and we think we're going to work our way through this at the end of the year, we'll be in good shape going into '19.

[Haendel St. Juste]

And then just a follow up on the dispositions, I didn't catch a cap rate. I think you mentioned 5.5 on what you thought. So maybe can you tell me the cap rate there and any markets -- is there any markets?

[Ernie Freedman, Chief Financial Officer]

So I can answer that for you Haendel. So in terms of cap rate it was 0.7%, all of our sales in the second quarter were through the end user retail channel where the home typically we vacate for a month to two months, maybe a little longer sometimes. So that's why you typically see a much lower cap rate when we sale those homes. If we were to start selling some more homes to the bulk channel, you'll see a cap rate to be at a certainly higher number and more in line with where they’re buying homes, in the second quarter it's 0.7%. And with the number of homes that we sold, we did not exit any markets. But Dallas could talk about where we concentrated some of those sales.

[Dallas Tanner, Chief Investment Officer]

We've had a number of sales in Huston throughout this year and also Chicago. And we're really in line with some of the guidance we laid out early in the year in terms of where we want to be selling. Ernie talked about it earlier on the call. We anticipate we'll sale somewhere between $400 million and $500 million with the homes this year, and we're on target to achieve those targets.

[Haendel St. Juste]

A quick one on Houston since you mentioned that was one of the weaker revenue growth markets. Anything in particular you want to note that's going on there lingering impacts of -- well, I'll let you explain. But can you give us a sense as to what's going on in Houston?

[Charles Young, Chief Operating Officer]

Really it's around supply challenges related to our owned and other product from post-Harvey coming back online. Occupancies stepped up temporarily when there was a void of housing as those homes were being rehab. We had around 130 come-in in the first and second quarter back online. So it creates a little bit of a supply issue for us and then other homes coming in as well as we’re trying to compete against that. So put some pressure on our new lease growth and we’ll continue to have a little bit of that as we absorb. Going into the second half of the year, we expect we’ll catch back-up now that volume is at peak season.

[Operator]

Next question comes from John Pawlowski with Green Street Advisors. Please go ahead.

[John Pawlowski, Green Street Advisors]

So at NAREIT with three weeks to go in the quarter, R&M and personnel related issues pop-up. So if R&M costs are up 15% for the quarter suggests they’re massively in last three weeks of the quarter. So I guess how do you get comfortable that with that little visibility with three weeks left to a quarter. How do you get comfortable with personnel related issues, or call center queue scripts aren’t going to pop-up in September or October?

[Ernie Freedman, Chief Financial Officer]

We have to react to the information as in front of us and we reacted quickly. On the R&M side, specifically, the call scripts are just part of what we are reacting to. And part of the issue is it’s the volume of work that’s coming through that time of year and our ability to make those pivot. So July also is high volume, it’s actually the highest volume. August is high and then we start to step down. So some part of the challenges when you make the adjustments it takes some minutes to get through the system. And we have further enhancements that we’re going to do. Ultimately, we talked about the in-house tech utilization, the call scripts is a big part of that. As we go through the remaining field office consolidations, we’re going to unlock more of that strength.

The maintenance tech productivity is another one that we’re going to roll in here shortly with the route optimization algorithms. So that’ll get the number of work orders that our in-house tech can do each day will help. And then ProCare, its part of what’s not in the system right now, huge part, very beneficial. But one of the main benefits is the bundling of work orders that we do in that post 45-day move-in, that’s not only convenient for the resident but it’s sufficient for our tech and our ability. So there’s more to be worked in. Ultimately, as you put the systems together we made the initial step but we think we’re going to see more benefits long-term.

[John Pawlowski, Green Street Advisors]

The actual implementation and a lot of the integration in the field level is going to happen in the back half of ‘18 and early ‘19. So are you comfortable that the personnel in the field are safer than the Tampa and South Florida markets were the past month? How do you get comfortable with that?

[Charles Young, Chief Operating Officer]

As mentioned, 15 out of 17 offices are already consolidated. The go forward leaders in place we’re working well with things across all those. Like we said, we were isolated to a couple of markets that had impact. And since these teams are working well together and the fact that we’ve already implemented the maintenance technology platform, the rollout on the second half of the year should be much smoother. We’re going to be very thoughtful about how we do it in terms of implementing measured rollout and look slower seasonality season of Q4 and Q1, both the multiple rounds of testing. And we had much of our training materials in place. So we really feel confident -- and frankly, the teams are ready. They’re excited and they’re ready to get to the new platform. So we think it’ll be a much cleaner and smoother rollout of the final integration.

[John Pawlowski, Green Street Advisors]

Last one from me Charles, on the wildfires in California. I know some are popping up around the periphery of your portfolio. Do you have any initial estimate on how many homes either, one, could be damaged or two, benefit from displaced renters in the area?

[Charles Young, Chief Operating Officer]

We're watching it closely. We know those fires move fast. We've identified about 105 homes that are in the vicinity and we're working closely to notify and pay attention. We don't know more than that right now but we're watching it very closely.

[Operator]

Next question comes from Rich Hill with Morgan Stanley. Please go ahead.

[Rich Hill, Morgan Stanley]

Just wanted to maybe get an update from, if you could, on trends in July and early August, particularly on the revenue side, I think you've done a pretty good job of trying to address the expense side. But what are you seeing on the -- any trends that you can give us since the quarter end? I think maybe renewals or anything…

[Ernie Freedman, Chief Financial Officer]

So I think we highlighted in our script, the blended rental for July came in at 4.7%, renewals stayed steady about 4.8%. New leads growth of 4.6%, June was strong in new lease growth. But as we go into the end of the peak season, we want to make sure we maintain our occupancy and we did that. We moved up to 40 basis points relative to ’17 in July. And so we're paying attention to make sure we keep our occupancy and we still have strong demand now. And we want to maintain that through the rest of the year.

[Rich Hill, Morgan Stanley]

And so as you think about occupancy versus pushing rate, you mentioned focusing on occupancy. Some of your multifamily second third cousins, if you will, have talked about maybe starting to push rate a little bit given where we are in the cycle and feeling a little bit more confident. Are you still prioritizing rate and occupancy the same way as previously, or you’re thinking about the change and how you're approaching that?

[Ernie Freedman, Chief Financial Officer]

Well, we're always trying to find the right optimization the balance of occupancy and rate. As we talked about, renewals are pretty steady throughout the year. It's a new lease growth that we try to take advantage of the summer months to maximize. But we've been through these cycles before and we're trying to pay attention to go into the slower leasing cycle fully occupied, which should allow us to keep some top line power in the slower months. But ultimately every quarter it's a balance of trying to find the right optimization between new lease growth and renewals.

[Operator]

Next question comes from Jade Rahmani with KBW. Please go ahead.

[Jade Rahmani, KBW]

So your updated thoughts on Costa-Hawkins, where you think that's going to go and although it's hard to predict if it was repealed, how you would react?

[FredTuomi]

So Costa-Hawkins, I don't know how familiar people are. But that's the potential repeal of the Costa-Hawkins, which is a pretty -- additional new rent control laws in the State of California. And just stepping back almost every economist or housing policy expert across the country or perhaps even across the globe agree and have written many research studies that shows that the legal solution to a lack of affordable housing is not rent control but is to build more housing. We just need more supply when it's needed and most importantly where it's needed and the price points that it's needed.

So they also agreed that rent control has proven to further just dampen the construction of new housing and the further investment of existing housing. So proposition tenant in California that potentially repeal this Costa-Hawkins legislation that's been in place since 1995 is just the wrong answer for California’s growing and long running and long developed housing shortage as it would likely make the situation worse, not only in the short run but over the long run. So it’s just bad policy, however, it's on the balance. And that the poles that we see they've been constantly testing the likely voter opinion on this are showing mixed results. So the November ballot is going to be close for sure but the industry and those on both sides of the issue will continue to make their case to the citizen of California. If it does pass, it doesn't mean that you're going to have statewide rent control.

All that means is that the prohibition on rent control will be listed. So the jurisdictions that had rent control in the past will be able to update it and those that do not have it at all could choose to implement it. So it's going to be -- it will take a little long time for this to really reconcile. Each local jurisdiction is going to have to decide do they want to have rent control or not, and many of them will decide not to. And if they do, what's the flavor of it, what's going to look like, how is it going to be implemented. So if its top position tenant is defeated I think our industry will then take a step back and look we have to solve this problem together in cooperation with the legislature and try to find meaningful rational ways to just improve the situation in California that's taken many, many decades to develop.

So when we look at our portfolio of homes across the state we're in Northern California and Southern California, we're not in really the hot beds of the rent control areas. We're not in the city of San Francisco or close by, we're not in Berkley, we're not in Santa Cruz, we're not in Santa Monica. So when we look at our portfolio, we think a very small proportion of our homes would be potentially egregiously affected and a very small portion of the Company's overall revenue. So we're just going to have to continue to watch it, see what happens in November and then we're prepared to react either way.

[Jade Rahmani, KBW]

And just on the final point you made. Can you give any percentages perhaps of those select markets where your homes could be impacted if it was repealed?

[FredTuomi]

We looked at that and again, it's just a theoretical assessment of likelihood of certain areas. There’s been some research some article on that. We think at the most it’s going to be around 15% of our portfolio might be impacted and again in California -- of the California homes, which is 12,000 homes total in California. And then there is no way of really estimating at this point to see revenue impact. Near term there really be none, I don't think that any areas will be rolling rents backwards mandating that. So it’d be a gradual shift.

And then the other nice thing about single family rentals is that the if we had to, if long term prospects were such that there is a value diminution, one of the consequences of rent control is that existing home prices will be -- could to go up, because there is going to be another shortage of housing. There will be a lack of building of housing generally. So we could -- single family has the option of selling homes to homeowners on a one off prices if we choose to at very good pricing.

[Jade Rahmani, KBW]

And just in terms of broader demand trends, do you have any statistics you could share on the percentage of move outs to buy. I noticed an improvement in internal ratio, which we've seen in the industry and also home sales have declined. So do you think it’s a function of home sales declining in the market and some affordability constraints or anything else?

[FredTuomi]

Jade, similar to the first quarter, we've seen a year-over-year decline and the reason for move out around home purchases. Last year in the second quarter, it's about 27% of our move outs. This year it was 25.7%. So we’ve seen that trend now for two quarters in a row. And I think it's a little bit of all the above. But I think most importantly we have reason -- we also see our turnover going up, because residents are satisfied with the service that they're receiving from us. They like the homes that they're in. They're well located. They're convenient. And they’re seeing that in today’s economic environment, it’s even a better opportunity for maybe a better answer for them to stay in our homes.

[Operator]

Next question comes from Ryan Gilbert with BTIG. Please go ahead.

[Ryan Gilbert, BTIG]

Just I guess following up on the last question, it seems like demand trends have stayed strong in July. I think we are seeing an increase in resell inventory in some markets, particularly in higher price point or higher home price appreciation markets. And I’m wondering if that -- if you’re seeing that impacting your ability to raise either new or re-leased rents or if it’s impacted your traffic or rental interest at all?

[Dallas Tanner, Chief Investment Officer]

In terms of demand, we haven’t seen any real change in the fundamentals. As Charles mentioned earlier, we’ve been able to go out to market at rates that are pretty aggressive, especially parts of the country where we own real estate. If you look at some of our numbers, for example, in the West Coast in quarter two and we had blended average rate growth of 6.5%, most of those markets are less than two months of supply on the MLS. And then as you start to look at some of the macro data in terms of price points and affordability with housing, in general, builders are developing much less inventory at 1,800 square feet or less in their current pipeline. It’s down somewhere from 33% in the late 90s to like 22% today. That is all favorable fundamentals for us in terms of how we think about the supply and demand factors benefiting our business. So we haven’t seen some of that necessarily in the markets that we’re in, because as a proxy for that growth we’re seeing it in the rents that we’re achieving. And Charles earlier point turnovers remain consistent at around 70% -- 30%.

[Fred Tuomi, Chief Executive Officer]

I think you maybe referring to Seattle as an example of very tight inventory, very high home price appreciation over the last several years. I think this got to a price point where people just couldn’t pursue homeownership in same numbers. But if you look at our portfolio in Seattle, the move outs for home purchasing actually is one of the markets that fell year-over-year. So again, it’s not impacting our level of the market, not impacting our demographic and people really enjoy the leasing lifestyle.

[Ryan Gilbert, BTIG]

And then I guess regarding service tech productivity. Are you seeing a productivity improvement, I guess, quarter-to-date in the third quarter? And then it sounds like you’re expecting productivity to be back to levels that you expected going into the year by the end of 2018. I guess, what do you think the timeline is for achieving your initial productivity forecasts?

[Charles Young, Chief Operating Officer]

We expect to get back to our normal levels of productivity over the second half of the year here. We’re confident because both companies operated at that level before. But what also makes us excited is the combined power of our scale, density, the technology that we’re implementing and our experience, it’s a real advantage. What happens in the peak season here as we have the highest work order volume is, the productivity of the techs is not always at its highest and we’re at a place where we’re still as we put the technology and unlock all that and get the proximity and density advantages, that’s where we’ll have shorter distance between our homes for our techs to be able to do more work orders. So as I talked about before as we think about the route optimization software as we get to a unified operating platform second half of the year, that’s where we’ll start to see the real advantages to get back to our prior levels and possibly overachieve as we go into 2019.

[Ryan Gilbert, BTIG]

And I guess just to follow-up. As you work on this on this issue, have you started seeing an improvement in the third quarter? Or do you think that's going to -- do you think the improvement of productivity is going to happen later in the third quarter and into the fourth?

[Charles Young, Chief Operating Officer]

We've already started to see the improvement with the changes that we made. But we know there's more that we're going to do and it's going to get even better.

[Fred Tuomi, Chief Executive Officer]

I would just add to that this platform is in place. We completed the implementation and integration across all of our markets, so that part is done. And when we initially noticed in June that the productivity measures on a daily basis we're starting to trend down instead of up, we were able to make some adjustments to the technology platform immediately. So Charles was able to get the team together, tweak some of the dispatch logic scripts and literally in the next day we could start seeing some improvement. So we're seeing gradual improvements but they have already begun. It's not that we have to retool, it’s just to adjust some of the parameters on this platform that impact things such as in-house dispatch, and then the route optimization certainly helps the other metrics of productivity such as the number of homes, the number of work order per tech per day.

[Operator]

Next question comes from Ivy Zelman with Zelman & Associates. Please go ahead.

[Ivy Zelman]

I just had a couple. One was could you share what the year-over-year increase in repair and maintenance expenses was by month, so we can get a sense for the cadence and how much you end up in June?

[Ernie Freedman, Chief Financial Officer]

We're not going to provide monthly financial results, there is noise between months. Accruals get caught up, don't get caught up. So we're not prepared to provide that.

[Ivy Zelman]

On the inventory side just in terms of supply and just taking a step back and looking across your portfolio. Are there any markets where you anticipate supply over the next couple of years to pressure your pricing power, in particular some markets that you find less attractive than others?

[Dallas Tanner, Chief Investment Officer]

As I mentioned earlier certainly, not in our West Coast markets where we see really just incredible amount of demand for our products and very limited new supply. And the important part to remember is that you want to be higher barrier to entry, so that’s difficult for called new supply to enter into those sub-markets and parts of the market where we invest. It's in line with our -- price point around average rents being north of $1,700, those are typically properties that are located much higher barrier-to-entry. So in our markets, we don't see some of that. I'd be more concerned if we had massive exposure in Midwest and some of those areas, parts of the country where you have lower barrier to entries for, call it, new entrants and new development. But we don't have much of that in our portfolio, a little to none. So we’re pretty bullish in terms of the areas we’re in and being a bit insulated from some of those supply constraints.

The only other thing I'll add is if you look at the macros in the U.S., we’re only developing about $1.35 million new units per year right now. And we need somewhere around $1.5 million to $1.6 million. So the next 12 to 18 months feel free safe as we look forward to the supply demand fundamentals generally.

[Ivy Zelman]

We're totally with you on that. Thanks for answering my questions. You guys have a good weekend.

[Operator]

And the question comes from Wes Golladay with RBC Capital Markets. Please go ahead.

[Wes Golladay, RBC Capital Markets]

Could we go back to the repair and maintenance issues, just curious if it had impact on your same-store revenue guide? Did you have a longer days the term of unit and maybe you could provide an update on how long it does take to turn a unit versus your expectations?

[Charles Young, Chief Operating Officer]

Repair and maintenance is really on occupied homes. So on our turns we haven't really seen any impact, and this time of year is a high turn volume. And we typically range in 10 to 12 days to turn a house, which is about where we are. It steps up a little bit because of the seasonality and the volume coming in this time a year, but we're on pace with where we were last year and been pretty consistent.

[Fred Tuomi, Chief Executive Officer]

And one metric we track is the days that we resident the downtime and between occupancy and vacancy. And quarter-over-over year ago were exactly the same number.

[Wes Golladay, RBC Capital Markets]

And when we do these initiatives in the back half, I think you said you're going to do a more methodical I mean those words you used. Are you going to do it by maybe one market at a time, or is it just going to be a more methodical process, in general?

[Charles Young, Chief Operating Officer]

Well, we're going to work through the exact rollout plan but it really depends on speed of how many homes you can put on the platform at once. But the idea for now is this couple of markets that we've piloted unified operating platform and then we roll by week being really thoughtful. When I say methodical, being really thoughtful around the time and month that we do it, so it's not during the early rent paying side. And then how much can our teams take on in terms of training, getting them ready, being thoughtful and then rolling it out. So we have a plan in place and we expect to start in the fourth quarter of this year. And based on all that we've done to-date in terms of our Web site, revenue management has been working on one platform, this is really the last piece and we think it will roll pretty smoothly.

[Operator]

At this time, this will conclude today's question-and-answer session. I'd like to turn the conference back over to management for any closing remarks.

[Greg Van Winkle, Senior Director of Investor Relations]

Okay, great. This is Greg Van again. Thank you all very much for your time today and your questions. We appreciate your interest as always and we look forward to seeing many of you at the upcoming September conferences. Thank you.

[Operator]

The conference has now concluded. We want to thank you for attending today's presentation. You may now disconnect.