Invitation Homes Inc

NYSE:INVH

Earnings Call Transcript 2019-Q2

[Operator]

Greetings and welcome to the Invitation Homes Second Quarter 2019 Earnings Conference Call. All participants are in a listen-only mode. [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, Vice President of Investor Relations. Please go ahead.

[Greg Van Winkle, Vice President of Investor Relations]

Thank you. Good morning, and thank you for joining us for our second quarter 2019 earnings conference call. On today's call from Invitation Homes are Dallas Tanner, President and Chief Executive Officer; Ernie Freedman, Chief Financial Officer; and Charles Young, Chief Operating Officer.

I would like to point everyone to our second quarter 2019 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 website at www.invh.com.

I would 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 describe some of these risks and uncertainties in our 2018 Annual Report on Form 10-K and other filings we make with the SEC from 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 measures with the most comparable GAAP measures, in our earnings release and supplemental information, which are available on the Investor Relations section of our website.

I will now turn the call over to our President and Chief Executive Officer, Dallas Tanner.

[Dallas Tanner, President and Chief Executive Officer]

Thank you, Greg. Our business is firing on all cylinders as we move through the midpoint of the year. Fundamental tailwinds persist operational execution remains terrific on our fully integrated platform. We continue to create value through capital recycling and active asset management and we are making important strides with our balance sheet.

I would like to elaborate on a few things in my comments. First, the drivers of our outsized growth and strong results second, some detail on our capital recycling efforts and third why I'm even more excited about the future.

I will start with our performance building on a great start in the first quarter of 2019 highlights of our second quarter included over 6% same-store NOI growth, our best ever second quarter occupancy of 96.5% at the same time, both new and renewal rent growth were above 5% and prior year levels and it over 7% reduction in controllable costs net of resident recoveries, this performance was driven by favorable fundamentals, our differentiated portfolio and service and outstanding execution by our teams.

The facts around industry dynamics in our value proposition are simple. Household formation in our markets is robust, supply is limited and home price appreciation continues to outpace inflation. In a market where attractive housing options can be difficult to find, we offer a solution that allows residents to live in high quality homes in desirable neighborhoods at a fair price and enjoy the ease of leasing from a professional management company that puts the resident first.

This is especially true across our unique market footprint, where household formations are expected to grow at almost twice the U.S. average in 2019. And we are the monthly cost to lease a home remains almost 10% below the cost to own a comparable home. In addition, our industry leading scale with over 4,700 homes per market, on average, enable us to efficiently deliver best in class resident service that enhances residents' satisfaction and retention.

Our field teams are now delivering that service better than ever and powered by enhancements to our operating platform. With better data and tools, our revenue management team continues to strike the right balance between occupancy and rent growth and on the expense side, our efficiency initiatives continue to be effective at reducing controllable costs even during the busier summer months.

On the back of this strong year-to-date execution we are raising our 2019 same-store NOI growth guidance range to 5% to 5.5%, an increase of 75 basis points at the midpoint. Ernie will elaborate on our updated guidance later on in the call.

Next, I will provide an update on our capital recycling efforts. Midway through the year, we have made excellent progress against our capital allocation plan. In the first half of 2019, we sold 1,433 homes for gross proceeds of $360 million and use these proceeds to acquire 948 homes for $273 million and to delever.

In doing so, we removed many lower quality and less advantageously located homes from within our portfolio and reposition capital into the homes and locations where we have real conviction in risk adjusted total returns.

We have been able to find compelling opportunities to accomplish this because of the advantage of our local presence in markets and the diversity of channels we employed to both buy and sell homes. Just in the first half of 2019, we have bought homes in both transactions, one-off transactions, the MLS at auction from home builders and through iBuying platforms.

We have also sold homes both in bulk and one-off transactions as well as directly to residents. After successful execution in the markets in the first half of 2019, we now expect to finish near or above the high end of the initial $300 million to $500 million guidance we laid out at the beginning of the year for both acquisitions and dispositions.

In other words, we are enhancing our portfolio quality in 2019 even more than we had initially anticipated. In closing, I would like to talk about all of the opportunity that lies in front of us. Earlier on the call I discussed the supply and demand drivers that have underpinned our outsized growth. Looking ahead, we are even more encouraged as we have yet to enjoy the full benefit of the millennial generation that is coming our way.

Over 65 million people or one-fifth of the US population is aged 22 to 34 years and we believe many in this cohort could choose the single-family leasing lifestyle as they form families and age toward Invitation Homes average resident age of 39 years. We also have tremendous potential to create value beyond the organic opportunity and are shifting more attention to how we can make the resident experience even better.

This includes building on the basics by refining our already best in class system and processes for interacting with residents and providing genuine care, carrying out the ProCare commitment to proactive service and more hands on resident care at move in and move out that our platform is now equipped to provide to all homes in our portfolio.

Expanding ancillary services, which we have recently brought on a dedicated team to pursue continuing to grow and refine our value enhancing CapEx program and making the leasing process even more efficient and getting new residents in home quicker. Finally from an external growth and portfolio perspective, our locations and scale are significant competitive advantage today, but we have the opportunity to widen those advantage even further.

As we move forward, scale gives us the ability to be selective and continue recycling capital to enhance the quality of our portfolio at the margins and as we have done throughout our history, we will continue to grow scale when the right opportunities arise in the right markets. In summary, I'm very proud of the way we are executing and driving growth today, but I'm even more excited about the opportunity that lies ahead for our business to become even better.

With that, I will turn it over to Charles Young, our Chief Operating Officer, to provide more detail on our second quarter operating results.

[Charles Young, Chief Operating Officer]

Thank you. Dallas. Once again, we were able to build on positive momentum to drive another great quarter operationally on both the revenue and cost side. I'm even proud of our team's success this quarter because it came in a seasonally busier time of year.

Managing through peak season for leases, turns and maintenance. The quality of our resident service is not wavered. This is most evident in our turnover numbers, which achieved yet another record-low of 30.1% on a trailing 12 month basis.

We still have work to do and we remain in the midst of peak season, but I couldn't be more thankful for how our teams have executed thus far. I will now walk you through our second quarter operating results in more detail.

With outstanding fundamentals in our markets and excellent execution, same-store NOI increased 6.1% year-over-year in the second quarter, same-store revenues in the second quarter grew 4.2% year-over-year.

This increase was driven by an average monthly rental rate growth of 4% and a 40 basis point increase in average occupancy to 96% for the quarter. Same-store core expense in the second quarter increased 0.6% year-over-year. Controllable costs were better than expected, down 7.2% year-over-year net of resident recoveries.

The primary drivers of this improvement were lower turn volume and efficiency enhancements through our integrative operating platform that drove lower R&M and personnel costs, offsetting a significant improvement in controllable costs was a 7% increase in property taxes.

We do not expect to achieve the same degree of improvement in controllable costs in the second half of 2019 as we did in the first half as prior year comps become less favorable. That said, we still see upside the cost efficiency. In addition to the benefit of constant refinements to our systems and processes going forward, we expect our full ProCare roll out to bear fruit over the next several years.

ProCare is our unique proactive way we serve our residents from move-in to move-out including post-movement orientations, proactive service trips and pre-move out visits. To be clear, ProCare implementation has been rolled out in all of our markets. However, the benefits to materialize over time as proactive visits drive opportunities for savings in both R&M and turn results.

Next, I will cover leasing trends in the second quarter. Both renewal and new lease rent growth were higher in the second quarter of 2019 than in the second quarter of 2018. Renewals increased 70 basis points to 5.4% and new leases increased 40 basis points to 5.2%. This drove blended rent growth of 5.3% or 60 basis points higher year-over-year.

At the same time, average occupancy remained 96.5% in the second quarter of 2019 in line with first quarter and 40 basis points higher year-over-year. We feel very well positioned for the second half of 2019 with occupancy better than it has ever been at this point of the year.

However, we are also approaching the point in the calendar year where new leasing activity begins to flow seasonally making it prudent to turn slightly more conservative and balancing rent growth and occupancy.

We feel great about our playbook for carrying healthy occupancy through the all season and our lease expiration curve is set up to help us achieve this as well. After a great first half of 2019, we are excited to keep the momentum going and remain focused on delivering outstanding service to our residents and outstanding results to our shareholders.

With that, I will 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. One, balance sheet and capital markets activity, two financial results for the second quarter and three, updated 2019 guidance.

First, I will cover capital markets activity where we opportunistically refinanced one of our near-term maturities and continue to delever. In June, we further diversified our capital sources by closing our first ever term loan from a life insurance company. Loan has a 12-year term and principal amount of $403 million.

Total cost of funds is fixed at 3.59% for the first 11 years and floats at LIBOR plus 147 basis points in the 12th year. Structural features of the loan also provide for more flexibility in collateral release and substitution rights than our other secured financings to-date.

With the proceeds from this loan and other cash on hand, we repaid $529 million of higher cost secured debt in the second quarter, now leaves us with no debt maturing prior to 2022. In July, we voluntarily prepaid an additional $50 million of secured debt. Also in July, we completed settling conversions of our 2019 convertible notes with common shares bringing net debt to EBITDA to 8.4 times, down from 9 times at the end of 2018.

As we go forward, we will continue to prioritize debt prepayments in pursuit of an investment grade rating. Our liquidity at quarter end was approximately $1.1 billion through a combination of unrestricted cash and undrawn capacity on our credit facility. Moving on to our second quarter 2019 financial results, core FFO per share increased 5.2% year-over-year to $0.31 primarily due to an increase in NOI and lower cash interest expense.

AFFO per share increased 4.1% year-over-year to $0.25. The last thing I will cover is our updated 2019 guidance. After maintaining strong execution through the first stage of our peak leasing and service season and with supply and demand remaining favorable, we are tightening and increasing our full-year 2019 same-store NOI growth guidance to 5% to 5.5% versus 4% to 5% previously.

This is driven by same-store core revenue expectations of 4% to 4.5% up from 3.8% to 4.4% previously and same-store core expense expectations of 2% to 3%, down from 3% to 4% previously. We are also increasing our guidance for core FFO and AFFO in step with our same-store NOI guidance increase. We now expect full year 2019 core FFO of $1.23 to $1.29 per share versus $1.21 to $1.29 previously.

AFFO is expected to be $1.01 to $1.07 per share versus $0.99 to $1.07 previously. Lastly on guidance, I want to remind everyone of 2 things that will impact our results in the back half of the year from a timing perspective. First, given the progression of occupancy in 2018, occupancy comps will not be as favorable in the second half of 2019 as they were in the first half of 2019.

Second, the year-over-year increase in real estate taxes is expected to be lower in the fourth quarter of 2019 than in the first three quarters of 2019. I will wrap up by reiterating Dallas' enthusiasm for the future. Fundamentals remain favorable, which we expect to continue driving strong revenue growth at the same time we enhance expense controls.

Furthermore, we believe that our business is well positioned to succeed in all parts of the cycle. We are excited to begin creating more value in addition to organic growth as we ramp up our focus on enhancing the resident experience with ancillary services, value enhancing CapEx and other initiatives and last but not least, we remain active with our best-in-class investing platform to recycle capital, widen location and scale advantages within our portfolio and grow opportunistically in the right markets at the right time.

With that Operator, would you please open up the line for questions.

[Operator]

[Operator Instructions]. The first question comes from Douglas Harter of Credit Suisse. Please go ahead.

[Douglas Harter, Credit Suisse]

Thanks. Dallas, you touched on this a little bit, but given the attractive return characteristics you are seeing the supply demand, can you talk about your appetite for kind of increasing the kind of the external growth opportunities and kind of where, what markets those might be most attractive.

[Dallas Tanner, President and Chief Executive Officer]

Thanks, Doug. Yes, happy to. As I already mentioned, we are going to look for some of these opportunities in the right places at the right time as well and we are certainly seeing a bit more opportunity in the last couple of quarters in terms of grinding our incremental buying through our platform. I mentioned in my comments that we still see through a variety of channels, opportunities that are at pretty attractive return profile.

So, I would expect that will maintain an opportunistic approach that if and when we see opportunity to make sense we could then look for meaningfully ways to add to our portfolio. I think one of the benefits of being local is that we do get to see a lot of stuff off market and things that are brought to us in advance of maybe a public sale and so for us, we are going to continue to look for those opportunities.

[Douglas Harter, Credit Suisse]

Great and just which markets are you finding most attractive today.

[Dallas Tanner, President and Chief Executive Officer]

No. If you look at the balance of where we are having some of our greatest expansion in terms of rate growth and home price appreciation, certainly our West Coast markets are outperforming. A market like Phoenix is a good example of this, where over the last three months in a row we have been north of 10% from a new lease growth perspective.

We are seeing some interesting opportunities in that market. We have been able to do some things like buy directly from some boutique homebuilders in that market in Q2 and if look to do the same in markets like Seattle.

I would expect our mix to be relatively consistent with what we have done over the past couple of years, which is continue to find higher barrier to entry submarkets and parts of the West and parts of the Southeast that will continue to lend itself to that outperformance

[Operator]

The next question comes from Rich Hill of Morgan Stanley. Please go ahead.

[Rich Hill, Morgan Stanley]

Hey, good morning guys, congrats on a good quarter. I want to just maybe focus on revenue and expenses. Revenue met our expectations, but was maybe a little bit lower than where it's trended in the past and I think the guide implies some deceleration. So I'm wondering if you could maybe just comment on that real quickly and if there is anything driving that seasonally or otherwise.

[Ernie Freedman, Chief Financial Officer]

Hey Rich, this is Ernie. So far revenues put out a little better than we expected at the beginning of the year and hence why we are able to increase guidance here with the second quarter release. We had mentioned at the beginning is we expected that rents grow, your rental rate growth would be about 4% and we are actually doing a little better than that performance right there and then we talked about at the beginning of year and it's holding true is that in the beginning - in the first quarter, I think we had 80 basis point year-over-year increase in occupancy, second quarter was 40 basis point year-over-year.

We are not going to continue to see those types of numbers reaching in the second half of the year. We think - embedded in our guidance, we expect arches to be flat to just slightly up in the second half of the year to where it was last year and so you take a roughly 4% rental increase, roughly flat occupancy and then other income for us has been trending a little bit lower from a growth rate perspective then rental rate.

That math gets you to the second half of the year that is going to be not quite as robust as the first half is still very strong relative to where else you can see and puts us in a good spot for our 4.5% guidance for the year.

[Rich Hill, Morgan Stanley]

Got it and on the expense side of the equation, you have obviously had an impressive start to the year in terms of expense growth. It looks like there is going to be some pretty hefty implied expense growth in the second half of the year. I think I heard that taxes are going to be down, though. So maybe you could help us to square that a little bit.

[Ernie Freedman, Chief Financial Officer]

Yes, sure. So again expenses, we have had some good surprises for the first half of the year and we will remind everyone that we are still in the middle of peak season when it comes to work orders, July books aren't quite closed yet.

And of course, August and September are still war months for us when you look at our footprint. So, we still want to be cautious as we think about expenses, just as we were earlier this year, both with our first set of guidance and our second set of guidance that we just set here.

That said, Rich, real estate taxes are trending sort of exactly where we expected them to trend. We said at the beginning of the year, we thought for the year taxes would be up in the 5s, somewhere between 5% and 6% year-to-date, they are 5.9% and we have mentioned a couple of times that the fourth quarter is an easier comp for us in real estate taxes. We had a big adjustment that we had a book last year in the fourth quarter.

So we are kind of right on pace for where we thought we would be at real estate taxes, as where we really have the outperformance and the team has done a phenomenal job, is around repairs and maintenance turn, all the work that is being done in ProCare that Charles talked about in our learnings and getting better and we are hopeful to see that carry through for the second half of the year and we will do our best to try to beat the numbers that we have laid out there, but again, we just want to make sure we are being cautious about where we set our guidance for the year and put ourselves in a position to hopefully exceed expectations, but we will see how the rest of the year plays out.

[Rich Hill, Morgan Stanley]

Thank you very much, I appreciate it.

[Ernie Freedman, Chief Financial Officer]

Thanks, Rich.

[Operator]

The next question comes from Shirley Wu of Bank of America. Please go ahead.

[Shirley Wu, Bank of America Merrill Lynch]

Good morning, guys, thanks for taking the question. It was exciting when you guys mentioned that you just hired a new ancillary income team, so could you talk about some of the initiatives they seeing there that is driving the growth that we see and maybe some of the initiatives going for 2020, perhaps the smart home adoption as well.

[Dallas Tanner, President and Chief Executive Officer]

Sure. Hi Shirley, thanks this is Dallas. We are excited, we talk about our business really in two buckets. In the first piece being kind of the real estate ops piece which Ernie and I answered in previous questions. The second bucket is really this customer experience side of our business and we are really focused on making sure that we can deliver a best-in-class experience for our customers, which we believe will lend itself to better performance in some of those ancillary targets and other income opportunities.

Specifically, as a company, we have rolled out things around Smart home and have piloted a couple of smaller initiatives historically. Where we think there is room to improve, specifically, is around the smart home offerings and some of the added features that we can add to that package. Remember, our adoption rate has historically been between 75% and 80% and something like that.

So we are experimenting with pricing and some different offerings that we think will lend itself to even better performance hopefully in that category. The other part of what we think could drive a stickier experience for our customers may set around pets, insurances.

Some different offers working with some national partners, we are researching a bunch of kind of interesting and what we think are fine initiatives that will not only lend itself to some other ancillary, but probably make the overall experience better, which we think could potentially have a benefit to even better retention.

So if we do it right and we continue to deliver and we deliver that in a way that it feels meaningful, personal and creates connection between our customers and the property, we think it will have a lot of impact to our business.

[Shirley Wu, Bank of America Merrill Lynch]

Thanks for the color. And so back to the synergies from the merger. Previously, you mentioned that potentially there might be more on the procurement side, have you seen more of those conversations happened throughout this year and what do you think is the possible impact of potentially margin improvement for next year?

[Dallas Tanner, President and Chief Executive Officer]

Yes, so Shirley. Well, I would say it's like any business, you are always looking to do things better and improve. The procurements are certainly a great example. We continue to see good opportunities to leverage our scale, both on a national basis and a regional basis. At some point, we would be doing that whether there is a merger or not. That is how we kind of stop tracking merger synergy to this point, as we put the merger and integration behind us about a quarter ago.

That said, we have a dedicated team and they are working hard at that and I think it's one of the many things that can help us in terms as we continue to have margin expansion going forward, as we can leverage our buying power and importantly on the procurement side, it's not just on the operating expense side that would impact our NOI margins but certainly very importantly is on the capital side.

So now things around are the appliance packages we put in, as an example, is a capital item. There is some great opportunities there too, so I think it's just going to contract by contract, working our way down from the national to the regional, all the way to local levels we are continuing to see - hoping to find some more opportunities and some more nuggets for us do slowly, but continually improve our margins.

[Shirley Wu, Bank of America Merrill Lynch]

Great, thanks for the color.

[Operator]

Our next question comes from Nick Joseph of Citi. Please go ahead.

[Nick Joseph, Citi]

Thanks. Dallas you talked about the transaction activity. How many more non-core homes are left to sell in the near-and medium term?

[Dallas Tanner, President and Chief Executive Officer]

Well, without giving any real specific guidance, because we can't really do that here. We certainly are looking to right size the portfolio post merger in terms of just making sure we have the right allocations and submarkets and at the market level.

You saw that we are pretty active through the first two quarters of this year in markets like South Florida and Chicago, and by way of just making sure that I'm really clear here, we will always be looking at the bottom performing parts of our portfolio, that will be ordinary course for us. I would bet that our activity for this year stays pretty consistent, but I wouldn't expect that we have a whole lot more to coal generally speaking.

[Nick Joseph, Citi]

Thanks. So as you think about kind of the more exciting opportunities you are seeing on the external growth front, and if the non-core asset sales maybe start to swell a little so you become more of a net acquirer. How do you think about funding larger scale external growth. Leverage is obviously ticked down but still is higher than where you would like, how do you think about the ability to fund any kind of net acquisition growth going forward?

[Dallas Tanner, President and Chief Executive Officer]

I think we want to look at anything that makes sense right. And I think at that point, we would have to look at whatever the best available cost of capital. that is in line with our general strategy would be. And so we could have a number of tools. We have a revolver that is available if we needed something in a moment's notice, we could always use a tool of issuing if we thought it makes sense or we can just continue to recycle and make smart investments.

[Charles Young, Chief Operating Officer]

And we are still very committed to where we want to go from a balance sheet perspective, so we balance out what the cost of capital that is available for us on under various tools about the opportunity for external growth.

[Nick Joseph, Citi]

Thanks.

[Operator]

The next question comes from Jade Rahmani of KBW. Please go ahead.

[Jade Rahmani, KBW]

Thanks very much. On the amenities and ancillary services front, are there specific vendors you have identified that are offering best-in-class services, perhaps in the multifamily sector that could be exported to single family build, such things as I believe for example resident e-commerce amenities, but also in terms of improved operations. I think RealPage for example just rolled out AI tenant screening, which really expedites the tenant bidding process. Just wondering if there is any anything you are seeing on that front.

[Charles Young, Chief Operating Officer]

We are certainly talking to a number of groups that are doing work on both the single-family and the multifamily space. So you are right in that there are a lot of roll-ups occurring in the call for real estate tech space. To-date, I would say that there are also differentiated opportunities that kind of exist a little bit more in single-family or vice versa.

It could be duplicitous. It's a little bit different in terms of the nature of how long our resident stays with us, so there are, I think, additional opportunities available to us. RealPage, a number of those companies are rolling up different AI platforms and things that will help you around customer service.

We have met with a number of those types of companies and have looked at some of their products, haven't felt necessarily that any of it was yet ready for primetime for our business, but we are going to continue to maintain an opportunistic approach in terms of making sure we are getting anything that is out there.

[Jade Rahmani, KBW]

Thanks. I think that is an interesting point about the longer length of stay and single-family, which would seem to suggest potential greater opportunities for ancillary revenues. Just turning to the build-to-rent front today another public home builder announced joint venture considering Bryce Blair is Chairman of both IH as well as Pulte Group, you probably have unique insight. So, I'm wondering if you could share your updated thoughts on the built-to-rent sector.

[Dallas Tanner, President and Chief Executive Officer]

Well, I think my thoughts on build-to-rent have been pretty consistent and I think as a team, we feel the same way. We want to implore every channel to make sense, but we never want to compromise our approach to location. And so for us, if something is in the right location, we are agnostic of necessarily which channel comes through.

Now built to rent is really interesting because there is a couple of things that are going on. There is more of a garden-style apartment approach, which are smaller plots, smaller square footages which are typically done on hut financing and people are calling it build to rent and then there is communities that are being built with fit and finishes and square footage standards that line up with a single-family neighborhood that are usually much more synonymous with the product that we would own.

And we certainly get approached by a lot of different angles, in terms of opportunities. We get calls all the time on that. We are open- minded to looking at buying in scale from builders, but the locations have to be in the right spots and then also the fit-finish standards, the types of sizing around square footage and what the overall amenities in that neighborhood is going to have to it good way into our decisions.

Specific on your question around price, I think price does a nice job of separating church and state between the two companies. It has been terrific in terms of inside and what you are seeing in the homebuilding space, like the other members of our Board, who are close to a lot of different types of real estate. So, we certainly are going to continue to look at those opportunities and we have made some good strides, I think, with local builders and markets and have been able to review a lot of opportunity.

[Jade Rahmani, KBW]

Thanks very much.

[Dallas Tanner, President and Chief Executive Officer]

Thanks.

[Operator]

The next question comes from Drew Babin of Baird. Please go ahead.

[Drew Babin, Baird]

Hey, good morning. Question on recurring CapEx, year-to-date for the total portfolio, up about 5%. I was glad to see the AFFO growth guidance range increased in tandem with FFO, can we assume about the same kind of year-over-year increase in recurring CapEx in the second half of the year and given the easy comp in the third quarter, might we even see a decline.

[Dallas Tanner, President and Chief Executive Officer]

Please Drew, [indiscernible] try and answer the question yourself there with the way you led that. Right, we haven't provided specific level of guidance for that, I will say is, we are actually performing a little bit better than expectations on the CapEx side and much better than expectations on the OpEx side when it to recurring cost in total around and net cost to maintain.

Part of the reason why we are confident in being able to raise AFFO range as well as FFO range is because of that behavior. So, not in a position to provide specific guidance as to how it may look relative to the first half of the year, but on overall basis, on a net cost to maintain perspective where we at the beginning of the year through we had said we thought it would be flat to up 3% and we feel pretty confident at this point that flat would be the high end of the range now in terms of where would be and maybe actually slightly down year-over-year for us.

[Drew Babin, Baird]

Great, that is very helpful and one more from me, just to follow-up on next question about markets, South Florida, I noticed in this new leasing spreads went negative in the second quarter. I noticed also there is really been nothing acquired this year. It's been a source of funds on the disposition side. So, I guess how do you feel about that market short term, long-term, is it a market that you still would like to be one of your top markets, do you think that is going to continue to be a source.

[Charles Young, Chief Operating Officer]

Yes. Thank you Drew. This is Charles here. We are a fan of South Florida. If you look at our performance in Q2, overall occupancy actually went up to 95.5 from 95.3, went to rent growth 2.8 versus 3.2. So, we did go down slightly, renewal rates were actually up year-over-year and to your point, the new lease rent growth, we saw some impact in certain submarkets and so with that softening, we have worked very closely.

The field teams or asset management really looked at the field markets at those submarkets and make smart kind of pruning decisions as you are seeing some of the homes that we have been selling out there, you will see a little bit more relative sales out of South Florida and it's a large market.

We have 25,000 homes in Florida overall, and it's a very large market in South Florida, also. So we can really be smart around what markets we want to be in and optimize that by pruning. So, long term, we are a fan of South Florida, but we are looking to try to optimize the portfolio short-term.

[Drew Babin, Baird]

Great, thanks Charles. That is all from me.

[Operator]

The next question comes from Hardik Goel of Zelman & Associates. Please go ahead.

[Hardik Goel, Zelman & Associates]

Hey guys, thanks for taking my question. Just focusing on taxes and such a big item on expenses, the run rate this year you have kind of outlined, just looking ahead and you look across your markets where appeals have come through and tax rates have been decided, what do you see going into the future as far as how much that line can kind of grow and how are the different pieces, if you look at your regions, which ones are kind of overburden.

[Dallas Tanner, President and Chief Executive Officer]

Yes, already I talked a little bit what has happened so far this year and without giving guidance, give you some thoughts about how we see things going in the future. This year, we talked about it last quarter. We had a significant good guy in the State of Washington, specifically with Seattle. I understand the multifamily guys are seeing that as well to surround some legislation changes that happened there.

We were pleasantly surprised - we are not surprised to see that Texas came in hot for us this year in terms of coming in high. We have had more field success than we would have anticipated so far and what we have gone - that is gone through the process here in Texas.

Georgia is also running a little bit on the high side, but we haven't seen millage rate were in the appeal process there, so want to see what Georgia plays out and of course, importantly for us, our real estate tax bill really comes down in the State of Florida and we will have better information on Florida in the next month or two. When the assessments are finalized, the millage rates come out kind of in the October, November timeframe for Florida.

As a matter, Florida is about 40% of our tax bill. That said, looking to the future, I think one important differentiators for us and we will get some more stability in the real estate tax line are really for two reasons, one is 20% of our portfolio is in California and we have talked about in the past and it was a little bit of a sore spot for us last year that reassessments are allowed upon corporate events and-or sale activity in California, and we were dealing with four different of those events over the last two years, when you look at the merged companies. Most of that noise is run through our numbers at this point, there is still a few more to come through, but the vast majority of that stuff is in at this point.

So, California is going to reset to kind of just that normal 2% growth you see under prop 13 . So that is an important differentiator for us in terms of thinking about real estate taxes. And then we are in part of the reason why we are seeing some external growth opportunity as well is that we are seeing home price appreciation continued to be positive and continue to grow, but not at the rates that we have seen in the last couple of years that usually earns in a year or two later in the assessment process.

So longer term I think real estate taxes are stored risk to probably grow higher than inflation with the exception of California, but certainly not at the rates that we have seen in the last couple of years as home price appreciation has been so strong. So, this year we think real estate taxes will be somewhere in the 5% to 6% range as I stated earlier. There seems to be a momentum that would allow for that is start coming in a little bit more over the next few years without providing specific guidance for specific years going forward.

[Hardik Goel, Zelman & Associates]

That is great, thanks for the color. Just one quick follow-up, if you will, indulge me. If Florida is flat. Let's say Florida doesn't change. What is the percentage growth rate in your tax rate on the same-store pool roughly like to give to speculate on a range.

[Dallas Tanner, President and Chief Executive Officer]

Well, we have, Florida we assumed a relatively healthy assumption in terms of the growth rate, it within our numbers and I don't want to give you the specifics on that, but certainly not flat.

[Hardik Goel, Zelman & Associates]

On 2020 I mean. Let's assume hypothetically 2020 Florida taxes don't increase, what are the full portfolio tax growth rate then become if Florida is 0% growth.

[Dallas Tanner, President and Chief Executive Officer]

Sure. Well, as Florida 0% which is 40%. I'm doing some math on the fly here. California is 2%, which is at another 20%, assume for the rest of the portfolio certainly higher than inflation without we only give guidance for specific markets, but if it's 40%, your number is zero, you are going to be at a really good starting place in terms of where that would be and it needs to be clear to everyone. We are not saying, if we think Florida is going to be 0% plenty of that just presumption here just and I think you throw it.

[Charles Young, Chief Operating Officer]

Yes, no, I want you to read the transcript later and be confused Hardik about out we are talking about here.

[Hardik Goel, Zelman & Associates]

Sorry for creating problems for your Ernie. Thanks.

[Operator]

The next question comes from John Pawlowski of Green Street Advisors. Please go ahead.

[John Pawlowski, Green Street Advisors]

Thanks. I will follow-up on Rich's second half of 2019 expense question and Ernie or Charles. I guess I am scratching my head on Charles prepared remarks on the comps in the back half on controllable costs get tougher in 3Q repair and maintenance costs in 3Q 18 were up 13%, in 4Q repair and maintenances were up 10%. You had a pop in turnover in 3Q. So can you help me understand that prepared remarks comment.

[Charles Young, Chief Operating Officer]

Yes, I can give you some context for that, John. Certainly, in the third quarter real estate taxes are more difficult comp for us and the fourth quarter they are an easier comp for us. With regards to other line items that you see, we did start to earn it into some merger synergies starting in the second half of last year. Assume I don't expect we will see a stronger performance in personnel and other

services, but we still see good performance and favorable performance relative to last year. And then on the R&M and turn side, we have seen some great, results with around turnover with regards to turnover keeps trending down further and further, we were cautious to make that continued trend of a continue to getting to record lows in the second half of the year, but it's certainly a possibility as we sensed over the last 7 to 8 quarters it keeps coming down.

So that could potentially be an upside for us, so maybe that is causing part of the head-scratching for you and then on R&M side, we just, we are still in the middle peak season. And so we just want to try and avoid surprises and we just want to be, as we have been all year and I know some analysts appropriately called out earlier in the year that maybe we do better than our numbers, and so far we have been happy to prove those folks right and we will just have to see how the rest of the year plays out.

We just want to have a right level of where we see things moving and have definitive answers to it and where things are, can sometimes be a touch out of your control, make sure we have the right level of caution in there as to how we see the second half of the year.

[John Pawlowski, Green Street Advisors]

Okay, but is there any one line item surprising you guys meaningfully upside right now.

[Charles Young, Chief Operating Officer]

Well, we certainly wouldn't say [indiscernible] now looks as conservative as it was around R&M and turn. We did not anticipate turn to be down 100 of basis points, couple of hundred basis points where it was last year. So that certainly helped us out and on R&M side we had expectations that we can do better than we had laid out.

And we certainly we are striving for that, but the teams have executed really, really well and I don't want to take that for granted too early. So I would say we are pleased and we thought we had the opportunity to better R&M, but not necessarily, we are thrilled to see that even a little more than with them even in our best cases we might have thought.

[John Pawlowski, Green Street Advisors]

Okay and back to the portfolio management side and pruning out of Chicago, one of the markets has been a big source of funds, has a full exit from Chicago been debated and could that be in the cards in the coming years.

[Charles Young, Chief Operating Officer]

No, we have been pretty consistent that we want to right size, Chicago and post merger, we actually grew. I think the team has done a really nice job of putting that portfolio in much better shape. I mean if you look at, we are starting to see a little bit better renewal growth, a little bit better new lease growth, teams executing at a much better rate, we are seeing cost to maintain get a bit better in that market. I think we have gotten out of assets that have been a bit more troublesome.

In terms of total revenue, the Midwest is stialright around 5% of our overall revenue and it's not part of our growth story. And to be totally clear, we do want to invest capital in the West Coast and in parts of markets in the Southeast that make the most sense. We will look at anything that makes sense for shareholders.

At the end of the day if there were an opportunity that we thought was accretive to shareholder value, we would look at it just like we would in terms of where we wanted to play dollars. So, I wouldn't say, John, that it's completely top of mind, but it would certainly look at anything that was ever opportunistic for our shareholders.

[John Pawlowski, Green Street Advisors]

Okay, thank you.

[Operator]

The next question comes from Ryan Gilbert of BTIG. Please go ahead.

[Ryan Gilbert, BTIG]

Hey, thanks guys, just a couple of regional questions, first in Texas nice improvement in blended rent growth. Can you talk about how much of that is just demand improvement in those markets versus any initiatives you are taking to improve performance.

[Charles Young, Chief Operating Officer]

Yes. Thank you, Ryan, this is Charles. Both Dallas and Houston have really had really healthy growth over the last quarter-over-quarter. Dallas specifically where we see this as a growth market for ourselves, we are fan. Occupancy has really moved toward where we want it to be in the mid-95. You want to keep, moving up from there.

We were at 94.5 last year. Blended rent growth because of that occupancy we are starting to see some increase there. So it's a little bit of a combination of the market is solid, but as we mentioned on previous calls, we have a new leader in the market, who is executing well, building a great team around her and doing a wonderful job.

Houston, we have been solid over the last little while. Occupancy in Q2 is 97.3, that is up over 200 basis points. We have done a lot to try to right size our portfolio, as I talked about looking at submarkets pruning out of there a little bit and getting it to the right size and because we are starting, we have that occupancy we are getting a little bit of rent growth out of that which we haven't had in a while.

So, we were over 3% blended rent growth in Q2. So we will see how that goes through peak season, you do get some seasonality in these markets depending when school starts, but right now we are happy with where our Texas portfolio sits.

[Ryan Gilbert, BTIG]

Okay, thanks. And then I guess you have talked broadly about rent growth tracking home price appreciation and in Seattle, Case Shiller showing a year-over-year decline in home price appreciation, but the blended rent growth is still strong there. So I'm wondering if you can talk about your expectations for Seattle and then in the near medium term, and then also how declining home price appreciation influences your investment decisions in that market. Thanks.

[Charles Young, Chief Operating Officer]

Great question. And let me be really clear, we love Seattle. We love the market. We love the fundamentals around it. We love the job growth, all the positive demographics, people are moving there, there is really good activity in that market. We have seen a little dip in home prices which to earnings point earlier, has a lot of a little bit of a more of a buying window for us, which we see is in the long-term being very accretive.

I think in Seattle today we are over 3,000 homes, we would love to see that market get bigger over time and we just think and we have seen this as we have built out our portfolios, all of our Western markets quite frankly are great examples for this as we grow from 2,000 to 5,000 to 7,000 units.

Our margin enhancement gets much more robust and our ability to optimize the operating piece of our business gets much more efficient and so we are definitely going to monitor and if you saw negative growth or something like that, maybe you would pause and watch and see what is going on, but we don't see that happening.

We are getting now toward the kind of, that you had quite a bit of appreciation over the last couple of years and you expect it to probably call a little bit, but in terms of the demand that we are seeing, I mean on a blended basis, we are still 8% to 9% in the quarter on rate talks a lot about what is happening in terms of ability to find quality housing. So we don't see that as an issue.

[Ryan Gilbert, BTIG]

Great, thank you.

[Operator]

Your next question comes from Derek Johnston of Deutsche. Please go ahead.

[Derek Johnston]

Hi, everyone. How are you doing. Just quickly on the real estate taxes and I just wanted to make sure I clarify this, I'm assuming that you, could look at every single assessment and work with a third party to basically fight it. Is that correct.

[Dallas Tanner, President and Chief Executive Officer]

If you look at every assessment, we deal with third party, Derek, who helps us out, but we don't necessarily fight every single one that comes through. In some jurisdictions, you have to pay a fee to fight on a home by home basis and so we don't want to take on that expense, we don't think we have a legitimate opportunity to win, and then in California, which again is 20% of our portfolio, there is less, we have falling home prices, there is really not much to do there.

[Derek Johnston]

Okay, got it. And just with the dispo mix, what percent is represented by sales to residents right now and is this a quickly growing sub segment and how does the process typically work with tenants.

[Ernie Freedman, Chief Financial Officer]

Yes, that is great question and you know we started, what we call our resident first look program almost two years ago, really in pilot to try to figure out the demand that was there and we have a little bit of data on our move-outs and why people are moving and for what reasons, and typically that number has been really small in terms of reason for home to move to home ownership.

But we know that as I mentioned earlier, there is an emotional connection to a lot of these properties for our residents and so when we make a decision from an asset management perspective to sell a home, majority of the time we will approach the resident first in those one-off scenarios and we probably have done about 150 to-date through the pilot and it's something that we look at from a perspective of not only building goodwill with our customer base, but just making sure that we are sensitive to the needs of families may or may not have and a lot of these families do want to purchase the Invitation Home that they have been in and so for us, it's been a great program.

There is a process where we have a dedicated team that reaches out, walks through the process that we are working through some asset management decisions and we think that potentially some could be sold and if you have any interest we would love to figure out how you can make this house your home and we don't offer any financing or anything like that.

We truly are just a seller, but we can typically have pretty good title relationships and things where we can help them find opportunities in market, if they are looking for those types of things.

[Derek Johnston]

Alright, great. Good stuff, guys.

[Operator]

The next question comes from Buck Horne of Raymond James. Please go ahead.

[Buck Horne, Raymond James]

Hey, guys. Ernie, I was just wondering if you could provide a little bit of extra guidance around your expectations on G&A trends for the rest of the year, it looks like you have had some strong benefits year-to-date. Just wondering what we should expect on the G&A line.

[Ernie Freedman, Chief Financial Officer]

Yes, usually teams will kind of save up a little extra for the end of the year, just in case. So we actually got a little ahead on some of our G&A spend in some areas. So I think it's pretty ratable for the rest of the year. So we have seen in the first half of the year on G&A buck out, expect kind of a similar run rate. It may have a little noise quarter to quarter, but not materially different as you get into the second half of the year.

And then on the property management side there, I think it's kind of a similar story. You will see a materially different change in the second half of the year we spend and property management expense versus the first half of the year.

[Buck Horne, Raymond James]

Awesome. Perfect. And just going to like resident turnover trends and just how low it seems to be trending. I was just wondering if you have been able to discern any significant shifts in the reasons that people are moving out and/or where you are getting - where people are coming in from in terms of what their prior living situation used to be. Just wondering if there is any trends in determining on these move out or move in reasons.

[Ernie Freedman, Chief Financial Officer]

Yes, for the move in reasons we don't track that formally, so we do note in the field people ask that question from time to time, we will have a formal mechanism to capture where someone is coming from and moving into in Invitation Homes house.

But on the move-outs, again consistently that the two reasons are to purchase a home in search of a life transition, interestingly enough this is the first quarter we have seen life transition was just a little bit more than purchasing home for the reason for move-out and we did see this quarter again that the reason to move out being a purchase of homes is down year-over-year.

So at every quarter but 1 in the last 10 that is been the case and in the one quarter it wasn't, it was basically flat. So we continue to see a reason to buy a home to trend down and then this is the first time just barely we saw the Life transition to be the number one reason why someone has moved out versus buying a home.

[Buck Horne, Raymond James]

Thank you, guys.

[Operator]

And the last question will come from Wes Golladay of RBC Capital Markets. Please go ahead.

[Wes Golladay, RBC Capital Markets]

Good morning, everyone. Are you finding more success in looking at top tier assets and top submarkets now that international money has pooled back and your cost of capital has improved?

[Charles Young, Chief Operating Officer]

I want to quantify what you mean by top tier was, I think what you know and I will take a stab at it. But I would say for us, we have always had a little bit higher price point asset than most of our peers and that is been delivered by design.

Every early in this business we figured out that the cost to replace a HVAC unit is for the most part, the same on a $1200 or $1300 rental as it is on $1800 or $1900 rental and so there is some longevity in terms of that approach as you think about total risk adjusted return laying out that expense factor in your numbers.

I think you are right in that as the market softens as maybe there is less international buyers coming into places like Southern California, Seattle, parts of the West Coast that specifically have had a lot of pressure from foreign buyers that could be helpful to us in terms of an opportunity.

So I would agree with you there and I think we are seeing some of that in some of those markets where we are seeing a bit more supply. Let's be clear, we are not seeing six to eight or nine months of supply in still a lot of these markets, we are seeing healthier numbers like 3, 4, or 5 months of supply and so for us, we hope that will lend itself to some additional opportunity.

[Wes Golladay, RBC Capital Markets]

Yes. That was what I was looking for, good school district, well located at the freeway, new job growth and along that line of thought, do you see much dispersion in your rent growth in markets we just see that they rolled up number, but just looking at maybe some of your best located assets are they outpacing meaningfully the maybe your secondary assets in the submarket or in a markets such as Seattle, Southern California, Northern California.

[Ernie Freedman, Chief Financial Officer]

Yes, I mean, let me answer that two ways. I kind of want to make sure I answer your question. Generally across markets, in our West Coast markets are through the - call it year-to-date are performing at much greater levels in terms of rate growth. I would agree with you there and we are seeing north of 7% year to-date, almost 8% quarter-to-date in our West Coast markets.

The rest of our markets are generally pretty healthy between anywhere from 3% to 4.5% at the submarket level absolutely and these are the things that Charles and I talk about all the time across our asset management processes.

We have broken our portfolio into a couple of hundred different submarkets and we look at that on a week-to-week, month to month, quarter-to-quarter, year-over-year basis and more importantly all of that data feeds into our revenue management model and our growth models and so as we are making decisions around calling or selling assets like Charles mentioned earlier in South Florida.

We are making very deliberate decisions based on where we think our portfolio will lend itself to the greatest performance, and are there any issues or preventative decisions we can make now around risk around asset type for costs in the future, preventative cost decisions that always into both what we would like to sell and where we would like to allocate capital going forward.

Does that answer your question?

[Wes Golladay, RBC Capital Markets]

Yes, no that is exactly - yes, definitely I was looking more toward the granular look into the submarkets, much like multifamily does so yes, perfect, thank you.

[Ernie Freedman, Chief Financial Officer]

Thank you.

[Operator]

This concludes our question-and-answer session. I would now like to turn the conference back over to Dallas Tanner for any closing remarks.

[Dallas Tanner, President and Chief Executive Officer]

I just want to thank everyone for joining us again today, we appreciate everyone's interest in Invitation Homes. We look forward to seeing many of you at our upcoming conferences and our Investor Day in October. Operator, this concludes our call.

[Operator]

The conference has now concluded. You may now disconnect.