Invitation Homes Inc

NYSE:INVH

Earnings Call Transcript 2019-Q4

[Operator]

Greetings and welcome to the Invitation Homes Fourth Quarter 2019 Earnings Conference Call. [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, VP of IR]

Thank you. Good morning and thank you for joining us for our fourth quarter and full year 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'd like to point everyone to our fourth quarter and full year 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'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 nonhistorical 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. To find additional information regarding these non-GAAP measures including reconciliations of these measures to the most comparable GAAP measures in our earnings release and supplemental information which are available on the Investor Relations section of our website.

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

[Dallas Tanner, President and CEO]

Thank you, Greg.

2019 was a great year for Invitation Homes marked by a 9% increase in AFFO and same-store NOI growth of 5.6%. I'm excited about our momentum heading into 2020. But before I turn to our plans for the new year, let me begin by reviewing some of our 2019 accomplishments.

In the first half of the year, we completed the integration of our Starwood Waypoint merger exceeding our synergy expectations. This work equipped our unified team with an enhanced operating platform that has provided capacity for future growth and scale and enabled us to take our quality of resident service to new heights. We are proud that the service we delivered in 2019 helped drive resident turnover to a record low of 30%.

Alongside our unified platform, we also made further ProCare enhancements which together helped drive a 3% year-over-year reduction in controllable costs in 2019. While improving our cost profile, we also remain successful in leveraging our revenue management tools and local field expertise to capture favorable supply and demand fundamentals in our top-line performance. For the full year 2019, this translated to a same-store revenue growth of 4.5%.

With respect to acquisitions and dispositions, we far exceeded our initial capital recycling goals for the year accelerating portfolio activity that should drive better long-term growth and risk-adjusted returns.

In total, we sold $900 million of homes that no longer fit our long-term strategy and use proceeds to buy approximately $650 million of homes with higher expected total returns and to repay debt. While this acceleration of capital recycling resulted in some short-term earnings dilution, we expect it to be accretive to earnings over the long term.

Our capital recycling in 2019 also included successful bulk transactions. In the first half of the year, we acquired a portfolio of 463 homes in infill submarkets of Atlanta and Las Vegas for $115 million creating incremental value by leveraging our scale and platform.

In December we completed a $210 million bulk sale in our smallest market Nashville. We made a strategic decision to exit Nashville as the size of our portfolio there did not allow for the same-scale efficiencies we are able to achieve in our other 16 markets where we average approximately 5,000 homes per market. By leveraging strong investor demand for single-family rentals in Nashville, we were able to opportunistically sell 90% of that portfolio in one efficient transaction.

Finally we had another successful year in capital markets. We opened a new financing channel by closing our first ever loan from a life insurance company, using proceeds to repay higher cost debt. We also reduced our net debt by over $700 million in 2019 bringing net debt-to-EBITDA from 9 times at the beginning of the year to 8 times at the end of the year.

As proud as I am of our team for what we accomplished together in 2019, I am even more excited as I look ahead. Several months ago we explained at our Investor Day why we feel ready to run. Industry growth fundamentals are favorable. We have a strategically located high-quality portfolio and scale that enhanced growth opportunities. We have a refined platform that is positioned better than ever to optimize execution. We have an innovative team that is committed to the resident experience. And we have a clear set of goals to run toward to drive both organic and external growth.

We are no longer just ready to run. We are now running and expect to make significant progress toward many goals in 2020 which I'd like to address in more detail. First same-store growth. In 2020, we expect to grow same-store NOI by 4.25% at the midpoint of our guidance. This expectation is supported by strong market fundamentals. Across our unique footprint, household formation rates have been running at over twice the U.S. average and many of these households have demonstrated a preference to lease.

Invitation Homes makes the opportunity to lease even more attractive by curating a leasing lifestyle that includes 24/7 professional service convenient features like Smart Home technology and family-friendly spaces and locations where residents want to live.

Furthermore, we believe our business has built-in cyclical hedges. And regardless of what happens in the broader economy, demographics should become more of a tailwind as the leading edge of the millennial cohort approaches Invitation Homes' average resident age of 40 years.

Beyond capturing positive fundamentals, we will focus on enhancing same-store growth through reduction in days resident and further improving our ProCare service efficiencies. In addition we will move the ball forward on several ancillary service initiatives. While the dollar impact of these initiatives on ancillary income in 2020 will likely be small, we are laying the foundation from more significant ancillary income growth in future years and continue to expect an incremental $15 million to $30 million of run rate NOI from ancillary services by 2022.

Moving on from internal initiatives, another 2020 priority is accretive external growth. Today we are seeing many opportunities to buy homes to enhance growth in earnings and NAV per share. In many cases, these opportunities are presenting themselves in markets where we own less than 4,000 homes today which can benefit more significantly from economies of scale as homes are added.

For example, Seattle, Denver, Las Vegas and Dallas. We also see attractive opportunities in markets of greater scale like Phoenix, Orlando and Atlanta. Should the opportunity persist as expected in 2020 to buy homes accretively relative to our cost of capital, we plan to be a net acquirer of homes.

Also on the external growth front, we will seek to expand our value-enhancing CapEx program whereby we invest in upgrades to existing homes to enhance resident loyalty, improve asset durability and increase risk-adjusted returns. I couldn't be more excited to kick off the new year and tackle these 2020 initiatives with our best-in-class portfolio platform and team. We are grateful for your support as we continue running toward another year of outstanding service for our residents and value creation for our shareholders.

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

[Charles Young, COO]

Thank you, Dallas.

We finished 2019 strong. We were pleased with our financial performance as both same-store revenue growth and NOI growth came in at the high end of their respective guidance ranges. More importantly, I'm proud of the strides we continue to make with our resident service evidenced by our resident survey scores in the fourth quarter that reached new heights.

I'll now walk you through our fourth quarter operating results in more detail. Same-store NOI growth of 3.8% in the fourth quarter brought our full year 2019 same-store NOI growth to 5.6%. Same-store core revenues in the fourth quarter grew 4.3% year-over-year. This increase was driven by average monthly rental rate growth of 4% and a 10.8% increase in other property income net of resident recoveries.

Average occupancy was 96% for the quarter consistent with prior year. This brought our same-store revenue growth of 4.5% for the full year 2019. Same-store core expenses in the fourth quarter overall were in line with our expectations growing 5.3% year-over-year. Primary drivers of the increase were property taxes and repairs and maintenance expenses. Year-over-year increases in R&M OpEx were partially offset by decreases in R&M CapEx. Turnover spend increased more moderately than R&M spend.

Before moving on from expenses, I'd like to take a moment to expand on the drivers of the 3.3% decrease in full year controllable expenses that Dallas mentioned in his opening remarks. Efficiency initiatives beginning in the summer of 2018 prompted a quick and sustainable turnaround on repair and maintenance efficiency that helped limit the increase and cost to maintain to only 1% in 2019. This performance and cost to maintain was better than our expectation coming into the year.

In addition platform refinements helped to drive a 9% reduction in personnel costs in 2019. Finally record low turnover rates coupled with process improvements drove turnover cost down 9% and leasing and marketing costs down 6%. Next, I'll cover leasing trends in the fourth quarter of 2019 and January 2020.

Our revenue management and field teams worked well together in positioning our portfolio for the seasonally slower months of leasing. In the fourth quarter and January we prioritized maintaining higher occupancy to ensure favorable positioning heading into the upcoming peak leasing season.

Blended rent growth was 3.4% for the fourth quarter where the renewals coming in at 4.5% and new leases at 1.6%. In January which is seasonally slower for leasing blended rent growth was 3% with renewals of 4.5% and new leases of 0.3%. Occupancy increased throughout the fourth quarter in January with January averaging 96.5%. This is 20 basis points higher than last year's January occupancy and should position us well for when peak leasing season kicks off in the spring. With fundamental tailwinds at our back we are confident as we start 2020.

Our operating teams are focused not only on executing to capture positive fundamentals but also on operating more efficiently to drive down days to re-resident and offset cost inflation. I'm excited to go after these opportunities in 2020 with the best-in-class team of local partners in the field and central support and our corporate offices.

With that I'll turn the call over to our Chief Financial Officer Ernie Freedman.

[Ernest Freedman, CFO]

Thank you, Charles.

Today I will cover the following topics: one balance sheet and capital markets activity; two financial results for the fourth quarter; and three 2020 guidance. First, I'll cover balance sheet and capital markets activity.

We continue to make meaningful progress in reducing our overall quantum of debt and improving our leverage metrics as we strive to become an investment-grade company. In 2019 we reduced our overall net debt by over $700 million reduced net debt-to-EBITDA to 8x down a full turn from where we started the year. This deleveraging was accelerated in the fourth quarter through capital markets activity tied to our investment efforts.

First, we used proceeds from our Nashville bulk sale as well as other cash on hand to repay almost $200 million of secured debt in the quarter. These payments also benefited our weighted average interest rate as we directed voluntary prepayments toward higher cost debt.

Second, we raised $38 million via our ATM program during the quarter to over-equitize acquisitions. In 2020 we will continue to focus on both leverage reduction and external growth balancing the two opportunistically. I'll now cover our fourth quarter 2019 financial results.

Our FFO and AFFO per share for the fourth quarter increased 6.1% and 10.8% year-over-year to $0.32 and $0.28 respectively. This was primarily driven by higher same-store NOI lower adjusted G&A and property management expense and lower cash interest expense.

Partially offsetting the increases in core FFO and AFFO were lower non-same-store NOI resulting from disposition activity including our Nashville bulk sale and higher share count due to ATM issuance. The last thing I will cover is 2020 guidance.

As Dallas and Charles discussed we believe we have strong fundamental tailwinds at our back. We expect to grow same-store core revenue 3.75% to 4.25%. We expect same-store core expense growth in the range of 3.25% to 4.25%. We expect to sustain the efficiency gains we achieved in 2019.

As a result controllable expenses net of recoveries which are comprised of expenses such as personnel costs and the OpEx portion of cost to maintain are anticipated to grow at an inflationary rate of approximately 3% at the midpoint of our guidance.

Fixed expenses which represent about 60% of our total core expenses are expected to grow at a higher rate than controllable expenses. Anticipating a larger increase in our property insurance expense as our last property insurance renewal was in 2015. With respect to real estate taxes we expect our growth rate to moderate from 2019 levels with an anticipated increase in the 4s.

This brings our expectation for same-store NOI growth to 3.75% to 4.75%. From a timing perspective we expect same-store NOI growth to be higher in the second half of the year than in the first half. Year-over-year revenue growth comps are more challenging in the first half of 2020 and we also expect year-over-year expense growth rates to moderate over the course of 2020.

Full year 2020 core FFO per share is expected to be in the range of $1.27 to $1.35 and AFFO per share is expected to be in the range of $1.04 to $1.12. Included in this guidance is an assumption that we will be a net acquirer of homes in 2020. We will take an opportunistic approach with acquisition volume ultimately dictated by how attractive the buying opportunity is relative to our cost of capital as the year progresses.

Most recently we have been buying at a pace of approximately $200 million per quarter. We have multiple tools available with which to fund acquisitions and would expect a portion to be funded with proceeds from the sale of lower-tier homes albeit at a more moderate disposition pace than in 2019. A detailed bridge of 2019 core FFO per share to the midpoint of 2020 guidance can be found in our earnings release.

As a result of our anticipated growth in AFFO per share in 2020 we have increased our quarterly dividend by 15.4% to $0.15 per share. We continue to target a low dividend payout ratio as we prioritize deleveraging and accretive external growth.

I'll wrap up by reiterating that we are excited to run towards the 2020 priorities that Dallas discussed in his opening remarks. The client demand fundamentals are in our favor and we're in position to capitalize on these fundamentals with the strategic locations and scale we've assembled within our portfolio. We are prepared to execute efficiently with our refined platform and our entire team is focused on widening our lead by pursuing strategic initiatives to drive both organic and external growth.

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

[Operator]

[Operator Instructions] The first question today comes from Nick Joseph with Citi. Please go ahead.

[Nick Joseph, Citi]

Ernie maybe just starting on guidance. In the fourth quarter you did $0.32 of core FFO which annualized gets you to $1.28 so above the low end. And I recognize there's transaction activity and some refinancing or paying down debt. But just wondering if you can walk through the right run rate to start and any adjustments to the fourth quarter number that gets you to the 2020 guidance?

[Ernest Freedman, CFO]

Yes. And I'll take it more at a high level approach in it with regards to for the full year and then we can try to tie it back to the fourth quarter. So for the full year we laid out in the supplemental growing from where we ended 2020 at $1.25 and walking to the midpoint of our guidance range which is $1.31.

First off, the expected NOI growth rate of 4.25 at our midpoint of guidance adds $0.08. We have a couple of things that are acting as headwinds for us as we go from 2019 to 2021 as we thought it was a wise decision in terms of exiting the Nashville market. But that was dilutive to us with regards to the NOI contribution that we gave up compared to the use of proceeds which I think was a good use of proceeds for us to delever the balance sheet further. But that's going to cost us about $0.01.

And certainly in the fourth quarter of 2020 - 2019 excuse me, we basically had a full contribution from the Nashville portfolio as we sold that in the middle of December. So there's certainly a little bit of noise from that.

Secondly, when you look at one of the items, we pointed out in that walk was the fact that financing costs are going to be a $0.03 drag I addressed. About half of that comes from just what we have in place today in terms of our forward step-up swaps. Those were put in place a few years ago by the company we merged with, with regards to similar when Invitation Homes it was still fixing our long-term cost and these four step-up swaps which we've disclosed in our 10-Qs and our 10-Ks over the last many years.

A number of swaps expired during 2020 just like they did in 2019. And the replacement swap - was in place for the last few years is at a higher rate. And so, that's going to cost us about $0.015 in terms of our dilution that's kind of spread out through the entire year. So again a little that, that impacts back to fourth quarter number and that number that you pointed out as well, when you factor that in and then our expectations around being a net acquirer this year which we hope to do.

That also - that's the other part of the $0.03 I talked about there. Those are kind of the big drivers that take us from $1.25 to $1.31. If we didn't have that dilution if we didn't have a little bit of noise from the cost of funds you would have seen an FFO growth rate that would have be closer to the higher single-digits versus what we were projecting again at the midpoint of our guidance that's closer to 5%.

[Nick Joseph, Citi]

And then maybe just on the net acquirer comment can you quantify that what guidance assumes for acquisitions and dispositions in 2020?

[Ernest Freedman, CFO]

Yes sure, so we were expecting to do - and we hope to do is to be able to acquire a similar pace that we finished out the second half of 2019. And that pace was anywhere between high $100 million almost $200 million up to about $225 million, $250 million. So we're hopeful that we'll be able to continue at a pace similar to that in 2020. And typically what you've seen in our years on the acquisition front that ramps up throughout the year. The first quarter typically is a little bit lighter.

You see us ramp up in the second quarter, we usually see some great opportunities in the third quarter as peak buying season by end users winds down there's opportunities for us to jump in. And then it kind of slows down again in the fourth quarter. So it wouldn't be ratable across the year. So, we'll see if we can maintain that pace. It all depends on what the market conditions are and where our cost of capital is at that time.

On the dispo front - that you'll see a drop-off in the amount of dispositions we've done relative to what you saw in 2019. The guidance certainly doesn't consider any bulk sales or any market exits like you saw in Nashville. And the guidance assumes that we're going to have a disposition is more in the range of probably $250 million to $400 million of dispositions. A little more front-weighted on that one than notch, but generally spread out across the year but maybe a little more front-weighted as you think about where the $250 million to $400 million proceeds may come in.

[Operator]

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

[Shirley Wu, Bank of America]

So my first question has to do with your 2020 guidance. So you do assume of around 50 bps acceleration at the midpoint on revenues. So I'm just curious as the building blocks of that and what you're seeing in terms of demand from a consumer?

[Ernest Freedman, CFO]

Sure yes sure. Let me talk about the guidance and I can let Charles weigh in about what we're seeing currently from a demand from the consumer. In 2019, our revenue growth came in at a high-end of the guidance. And I'm pleased with where that came in at 4.5%. At the midpoint of our guidance as you pointed out for 2020, we're assuming 4%. Not just similar to what we did last year. Last year our midpoint of guidance I think was 4.1% and we ended at 4.5%.

So we're certainly hopeful of it its similar track record in 2020 compared to 2019, but we'll just have to see how it plays out. But embedded in that assumption at the midpoint of guidance of 4% we're assuming occupancy stays relatively flat compared to the prior year. We're assuming that other income improves a little bit relative to the other year in terms of the other income growth rate and likely at a rate that's slightly higher than our overall revenue growth so higher than 4%.

But offsetting that as we are expecting that from a rate perspective that will decelerate a little bit from what you saw in 2019. We had a similar thought as we enter 2019 and it turned out we were able to do a little bit better and that's what got us to where we did with a 4.5% growth rate. Just as you think about the numbers on a year-over-year basis last year Shirley and to get to a 4.5% in 2019 numbers. We had 50 basis point increase in occupancy. As I mentioned we think that's going to be more flattish this year.

So you take that out you're kind of comparing the 4 to 4. We hope to do a little bit better maybe a little bit better on occupancy maybe a little bit better on rate that's built into our numbers. We certainly see the opportunity for that, but we want to make sure we came out with reasonable expectations to start the year. Charles, do you want to talk about what we're seeing demand lies right now?

[Charles Young, COO]

Yes high level, hey Shirley. Overall fundamentals are strong. Supply demand remains a significant tailwind as we look across the markets. As I said in my opening comments, we took the fourth quarter to make sure we're focused on occupancy. And in January we're in good shape. We're year-over-year above where we were last year trying to hold that occupancy in Q1 so we can go in the peak season to capture that strong demand that we're still seeing out there.

[Shirley Wu, Bank of America]

So my next question has to do with the recent announcements whether that's the Johnson eliminating niche, or the merger with FrontYard. I was curious as to your thoughts on what that means for the industry and just overall thoughts on a major platform?

[Dallas Tanner, President and CEO]

Shirley this is Dallas. I'm happy to talk high level from an industry perspective. I prefer not to get into specifics about any competitors on this call. From an industry perspective though as you look at the consolidation that you see happening whether it's with the recently announced [indiscernible] transaction or some of the smaller things that we see in the marketplace that happened it’s all good generally speaking for the industry.

We would expect that this industry over time and some distance will have many operators with considerable scale. We look at it as a good thing for the space in terms of ancillary companies’ other opportunities things that will develop around the industry. As well as the ability to offer quality experience for residents which will only help the industry mature over time. So, we view all of these kind of moments of consolidation as a real opportunity for the companies that are involved in the industry as a whole.

[Operator]

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

[Drew Babin, Baird]

Building on Shirley's question it looks like one of the leasing spreads for 2019 overall were about 4.6%. And you mentioned so far in January occupancies trending ahead year-over-year. I guess kind of putting it all together you'd have to be assuming a pretty significant deceleration in the leasing pace early in the year at least to hit the very low end of guidance?

And so I guess - filtering that down is there anything that you're actually seeing on the ground anywhere that would point to this deceleration in blending leasing spreads? Or is it just - a product of it being early in the year and kind of just waiting to see how things come together as peak leasing season approaches?

[Ernest Freedman, CFO]

Yes Drew, I think it's definitely much, much more the latter. Yes remember this guidance when we provide a range. And you're right to point out when you factor in and understand that. A lot of our revenue is sort of baked in already based on the leases we signed in 2019 it would take a significant deceleration for us to get the low end. And we certainly hope just not see that. I'll also caution that both the fourth quarter of 2019 and the first quarter of 2020 are light leasing months for us.

The brunt of the year in terms of - we need to achieve for 2020. Leasing activity will occur in the second quarter and the third quarter as it does across all the residential space. So I'm always cautious not to draw too much to get too excited - its December or January early your numbers are great and also not get too worried if they're not where you might want to be because you're not doing a whole lot of leasing activity at that time of the year.

We want to provide a range for guidance as to what are our possibilities but it certainly, we feel good where we're starting the year we feel where things are at. And we certainly see a path that could play out similar what we saw in 2019 that we're able to later in the year as peak season did well in 2019 if we had that opportunity in 2020 to increase guidance as we go.

[Drew Babin, Baird]

And on the expense side you talked about real estate tax growth kind of moderating to somewhere in the 4s which is obviously good news. And I know there's a lot of work that goes into the thousands of appeals that you need to do. I guess how much wood is there left to chop as far as appeals that will impact this year both the assessments and millage rates, legislation and tax is changing with municipal revenue guidelines?

And then I guess is there anything on the variable expense side R&M or anything like that where you could see maybe a little bit of extra benefit as the year goes on but I like the revenue guide it might just be a little too early to predict?

[Ernest Freedman, CFO]

Yes on the real estate tax you said it right Drew there's always a lot of wood to chop when it comes to appeals. And our guidance does not assume a whole lot of success and appeal. So if we have - continued to have better and better years and we had a pretty good year in 2019. There's an opportunity to potentially perform to the upside there. We do expect some success. But again it's moderate levels. But in states like Texas its normal course to appeal basically everything.

We still have a number of outstanding appeals in Georgia that we got our fingers crossed on. And hopefully we have some good news on it and of course if you go across different jurisdictions. You see different opportunities in Florida is always a big one for us. One of the nice things we're seeing is again with our exposure to California and the fact that real estate taxes are locked in at a 2% growth rate there because of Prop 13 that certainly helps over time moderate our real estate tax exposure.

And so again we're confident that we're going to do something in the 4s as we discussed in the prepared remarks. And again, we'll see opportunities potentially to do a little bit better than that. Across the broader expense environment you're also right Drew and that it's early days. January was a good month for us. January came in - meeting our expectations with regard to expenses in doing slightly better than what we might have expected on the revenue side but not enough to get too excited about. But also, it's one month and we'll see how the year plays out with regards to how things go there.

We certainly built in some level of contingency in our expense numbers. In some years you need it. In some years you don't. And unfortunately some years you might not have built in enough and we do our best to try to factor that into our guidance. And similarly last year we had a big outperformance in expenses as the year went through and we'll hope to do the same this year but it's too early to give with any confidence where that may hit.

[Operator]

The next question comes from Jason Green with Evercore. Please go ahead.

[Jason Green, Evercore]

On the rental rate growth side I understand these numbers can bounce around but just curious what you're seeing given both new and renewal leases showed a slight deceleration in the quarter year-over-year. Is that kind of product mix? Or is there less room today to push rate?

[Charles Young, COO]

Jason this is Charles. Thanks for the question. As I said fundamentals are strong in the markets. And we're seeing it on the ground supply and demand still a tailwind. When you step back and you look 2019 in aggregate, we had a great year on occupancy and rate growth both were up year-over-year. And we had our best peak leasing season ever.

In retrospect it's as we look back though it's clear that we may have held the new lease rate maybe a little too long into the season. And it started to slow down our leasing velocity in Q4. And as we talked about Q4 Q1 are slowing leasing seasons and we wanted to focus on occupancy. And so what you're seeing across the markets. In some of the markets we had to push a little bit down on rates to get back to occupancy and we got to 96 in Q4. And in January we're running north of 96 which is great. We're above where we were last year and we're keeping that momentum going in.

So the whole idea here is to set ourselves up for peak leasing season where all the action happens Q1 Q4 things are a little slower. We want to capture the peak leasing season to make sure that we can have our best foot forward.

[Jason Green, Evercore]

Got it. And then I know you guys had talked about hoping to do call it $200 million per quarter in acquisitions. But in today's market with today's pricing are you able to quantify the total dollar amount of potential acquisitions you see in the marketplace today that makes sense from a pricing perspective?

[Dallas Tanner, President and CEO]

Well I mean and again this is Dallas. Good question. I think as we look think about growth and we think about acquisitions. And we said this Ernie mentioned this in his earliest comment in the Q&A. We feel that that $200 million per quarter run rate's pretty achievable in today's environment given where the supply and demand kind of meet each other in the markets that we're really focused in.

If we saw more opportunity we would certainly try to lean in and find a bit more external growth while we weigh out everything including what our cost of capital at that point is. It's hard to quantify everything that you're missing on top of what you're acquiring. But at the end of the day we feel pretty good about those estimates that somewhere between $175 million and $250 million a quarter feels pretty doable in today's environment and we'd certainly look for more opportunity to come in front of us.

[Operator]

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

[Hardik Goel, Zelman & Associates]

I guess just to round out sources and uses of the capital. Can you give us an update on where you expect leverage to be at the end of the year?

[Ernest Freedman, CFO]

Yes absolutely. And a lot will depend on our capital activity that we do with regards to acquisitions and dispositions. But we expect that we'll continue to be able to bring our improved our net debt-to-EBITDA numbers. And based on kind of where our guidance is and where we see EBITDA coming in and our plans around capital allocation, I would expect net debt to EBIT to be somewhere between 7x and 7.5x by the end of the year.

[Operator]

The next question comes from Richard Hill with Morgan Stanley.

[Ronald Kamdem, Morgan Stanley]

Ronald Kamdem on for Richard. Just a couple of quick ones from me. The first is just on going back to sort of the market exit. Any other markets that could potentially we could see down the road as an exit opportunity? And if not, what are the markets that are going to be mostly targeted for dispositions that we should be thinking about?

[Dallas Tanner, President and CEO]

Yes in terms of how we look at the portfolio as a whole from an asset management perspective we're always going to be measuring ourselves against performance and some of the other macro factors that we see in markets. So as Ernie mentioned in his guidance comments at the beginning for the year we're not pricing in any bulk sales or market exits in any of our plans for 2020.

I think that our selling will center around traditionally what we've always looked at which are nonperformers geographic outliers’ parts of the portfolio that aren't just making a ton of sense for us over the long term. And as we weigh that out in terms of our global view of where we can find the best risk-adjusted returns that's where we're typically selling on the margin.

And you see that we're a little bit more active in the middle part of the year as we're turning more properties and having the ability to look and review some of the assets that are on our questionable lists and things that we're thinking about. But I wouldn't expect anything outside the norm from a market mix perspective than what we've done in the past.

[Ronald Kamdem, Morgan Stanley]

Great. And just a quick follow-up. Going back to the control of expense question just digging in a little bit. I think about the 3% growth that you're targeting is it fair to think about maybe R&M growing above that and some of the other line items maybe growing below that and getting us to that average? Or are they sort of all uniformly distribute it? Any other color there would be helpful.

[Ernest Freedman, CFO]

Yes. So when we talk about R&M I brought it on and just talk about the overall cost to maintain. It is the OpEx side of it. It's the CapEx side of it as well. This year interest we do expect both OpEx and capital scope in similar amounts. And we think all that line item is being right around that same inflationary increase.

[Operator]

The next question comes from Jade Rahmani with KBW.

[Jade Rahmani, KBW]

With about 50% of revenue coming from California and Florida I wanted to ask about how an issue like climate change into your thinking and considerations thinking about the current asset base as well as when you're making new investments? And just in terms of a practical import, when do you think an issue like climate change would start to affect insurance costs and other operating factors? How far ahead are you looking at this issue?

[Dallas Tanner, President and CEO]

Thanks Jay. I'll take the first question. I'll let Ernie talk about the insurance question your second comment question. In terms of how we think about climate change and you referenced California and Florida. Obviously both very warm weather markets for us high growth lots of things going on in those markets. We're focused on a couple here.

So first of all as you start to look at the portfolio as a whole and which assets you want to own and why for the launch you want to be sensitive around things like flood plain and things where you could have potential exposure which also doves in your pricing on your insurance question which Ernie can comment on.

And then we're also doing some things. We've actually got we're doing some what I call early work to try to get smart around what opportunities are available to us around things that fall into the ESG buckets such as solar and things like that. Now are those sustainable strategies for us for the long haul.

We're not in a position today where we feel that we've got that completely figured out but it's certainly something we're focused on. We want to be an environmentally-friendly company. There's things we do already whether it's around hard scape landscaping and things like that. That can add to that narrative. And that mission which is part of being active in our community. But there's still a lot of room to grow and things are changing consistently.

So I think making sure that from a risk profile we're being smart around which assets where and why. And then also from a service perspective what are the things that we can do to enhance that experience and also be environmentally-friendly along the way are all focused for us right now.

[Ernest Freedman, CFO]

On the expense side it's certainly something we're very cognizant and even the investment side as we think about risk-adjusted returns across our entire portfolio. We're very focused on thinking about putting the correct premiums that would be required because of that.

From a California perspective Jay the risk for us from a climate perspective would be around wildfires. And we've been very specific about where we're investing in California and had been very fortunate to date based on where we are where our geographies are the wildfires the power outages are impacting California really haven't impacted us.

So when you take that to an insurance perspective really the risk, we're insuring for in California is quake which is a separate risk from climate change. In Florida we've been very specific to make sure where we're investing in Florida that we're not exposed exactly to the coast or very careful on flood plains.

And what insurers like about our risk compared to other residential is that our risk is spread out across thousands of assets across many, many miles. We don't have a $100 million single asset in one location that could be impacted very significantly by something that happening from a storm perspective.

So it's a little bit more dispersion of risk. But clearly anyone who's exposure to Florida and we have exposure to Florida has seen pressure on cost when it comes to insurance but we have some good mitigants offsetting that they probably put us in a little bit better position relative to other residential and commercial real estate because of the nature of our asset type.

[Jade Rahmani, KBW]

Just turning to the investment outlook and acquisitions. How far are you looking out in terms of cap rates? Because it can make a big difference based on your growth assumptions. For example buying at a 5% cap might seem attractive but if the market is only growing at a 2% same-store organic rent growth rate that gets to about 5.5% five years out. But buying at a 4.5% cap with the market growing 5% 6% similar to where say Phoenix and Vegas are growing gets to 6% or higher five years out. So how far are you underwriting in terms of your investment criteria?

[Dallas Tanner, President and CEO]

It's a great question Jamie. And you're spot on. And going in cap rate doesn't tell you the whole story on any acquisition. So we would agree. And remember we're total return investors. So to really emphasize the point you made we look at obviously ingoing yields and what the cash flow's going to look like but we really care about what's going to happen around the asset over the long haul.

And so our models are typically anywhere between three and five years as we look at markets. And there's a couple of ways we do it looking at kind of different return profiles. But we completely agree. And we care as much about what our year three NOI yield is going to look like as much as we do our year one and coupling that with where we think we're going to see that outperformance and growth. And if you look at where we have been active specifically in 2019, I mean you'll notice that the majority of the 2000-plus acquisitions we made last year were on the West Coast.

And that's indicative of the type of growth we're seeing. It's evidenced in the renewal rates the new lease growth that Charles has talked about. I mean you see markets like Phoenix for example in the fourth quarter and we had blended lease rates of 7% and which are really, really strong. And it really emphasizes the types of growth you're seeing in those parts of the market.

So we would agree it's all relative. It's all important as it goes into our models and how we think about growth. And as we mentioned earlier in the call and in my opening remarks we are as focused on trying to grow accretively through external measures in markets where we already have significant scale like Phoenix and Orlando those are great markets for us going forward.

[Operator]

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

[Unidentified Analyst]

This is actually [Sam Chau] on for Doug today. Just going back to Jay's question about climate. I mean we've had a milder winter this year compared to the historical average. So when we're thinking about maintenance strategy how does weather impact when to make the CapEx spending to kind of maintain the rental portfolio?

[Charles Young, COO]

Yes. I mean we have a couple of cold weather markets in Denver and Chicago. We've been operating there for a while and we're always conscious of how we treat the homes especially when they're vacant to make sure that we're being conscious of any freezing pipes and stuff like that. And our smart home technology helps us with that and being highly occupied is another benefit.

So we try to pay attention to that. The reality is it has been a little more mild but there's seasonality that comes with it. Our experience and talent on the ground that's why we're local. We have eyes on assets that gives us a good comfort that we're making sure we're maintaining the homes that are vacant and occupied by our residents.

[Unidentified Analyst]

Got it. On a similar note I mean you guys talked about the lowering of days to re-resident how smart home other tech kind of impact that. Just curious how that has changed compared to on last year and how we should expect that going forward?

[Charles Young, COO]

Yes. Well the last couple of years we really haven't moved down this metric as much as we want. We're in the mid-40s right now. And our goal this year is a real focus is to try to take two or three days all that in 2020. As you mentioned there's a lot that goes into it looking at turn times utilizing technology to try to lease better and faster and just having an overall focus is the real cross-functional metric that we're looking at. So there's no reason long-term that we'd like to get that number down into the re. We have several markets that are there right now. And so we're going to continue to push. There's real benefit in getting that economic occupancy down.

[Operator]

The next question comes from John Pawlowski with Green Stride Advisors. Please go ahead.

[John Pawlowski, Green Stride Advisors]

Charles curious for your thoughts on a few of your Florida markets which saw outsized revenue deceleration take South Florida for instance which comps weren't all that difficult and you still saw outsized pressure on the new leases. So on the demand side what are you seeing in terms of employment shifts? And then or is it more of a supply issue with single-family construction starting to add pricing power?

[Charles Young, COO]

Yes good question on South Florida. It's really more of a supply issue and it's not necessarily the new single-family supply specifically but there's a lot of condo vacancy a lot of options for the consumer to choose from. And given that and it's really happening in certain submarkets where we're seeing the supply impact. And our field teams and asset management teams have done a really good job of selectively pruning out of those submarkets.

So we'll think we'll be in good shape long term. But because of that we've been focused on occupancy. If you look at - look back over the year we actually went up in occupancy to 95.4 versus 95.2 in 2018. And we'll take that same approach in 2020. With a little bit of supply out there you may see some pressure on rates but we've been able to maintain occupancy and we'll focus there until we can start to get some pricing power.

[John Pawlowski, Green Stride Advisors]

I guess how much overlap between your tenant base and a condo occupier? Is there is - I wouldn't assume there's a ripple effect in terms of your tenant base maybe a bit lower credit quality versus a mom and pop that would occupy a condo?

[Charles Young, COO]

Yes there typically is not. South Florida is a very unique market. And I think it really comes down to just having lots of options for the consumer in a market like that. Our rents are a little higher in South Florida. Condos are out there. If people are trying to move them it just gives options. So it's - to your point it's not typical but in that market it's kind of unique and it's showing up.

[John Pawlowski, Green Stride Advisors]

Okay. And then last one for me Ernie or Charles hoping you could humor a hypothetical. I'm trying to disentangle in terms of the next few years the natural aging of homes and the impact on the total cost to maintain versus pretty robust above inflation growth we're seeing on the labor side and the material side. So if labor costs and material costs literally printed 0% growth over the next few years what's a reasonable cadence of total cost to maintain we should expect as your homes just naturally age?

[Ernest Freedman, CFO]

Yes John I don't want to speak off the top of my head and give you an answer. Let me to think through that a little bit because it is hard to disentangle those types of things. We also take - have the impact the fact that we're pivoting to external growth which means we'll be bringing more homes on that will get that initial upfront renovation relative to what we've seen in the last few years. So unfortunately, it's not an answer I can give you spot on as I was sitting here but let's give us some thought and get back to you.

[Operator]

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

[Haendel St. Juste, Mizuho]

Thank you, operator. That was spot on.

[Ernest Freedman, CFO]

Is that the first time Haendel?

[Haendel St. Juste, Mizuho]

Probably. A question I guess going back to external growth for a second. I guess I want to get more of a sense of the competitive dynamic you're seeing out there. By our account there's at least three large private platforms looking to grow with one public peer. So I guess I want to get at how large or how attractive are the opportunities today versus say a year or two ago that meet your quality and market requirement? And more importantly are you seeing more competition for the deals you're looking at?

[Dallas Tanner, President and CEO]

Yes, it's a great question. So I think your first question encompasses really just demand right? Like what's the demand feel like out there. And I'd say if you look at any of the new homebuilder data if you look at any of the resale data it all kind of point to the same direction in the first quarter this year which is resale supply is really tight. Consumers are buying homes leasing homes really quickly in the market. We just generally talk about the supply is underserved. And so we would see that the same way. Now to your specific question around what do we see specifically in our space with our competitors.

I think we got to be honest with ourselves and taking a step back and just remind ourselves there's no more than probably 400000 homes that are professionally managed in the U.S. today which would represent less than 2% of the overall single-family rental detached population. So even amongst our peers whether they're public or private we represent a very small cohort of the people that are actively out acquiring single-family homes either for ownership or for rental.

So we play in the same sandbox so to speak with the end users with other consumers new capital coming into the space what have you. And so as I look at it this market has been really tight for the past three or four years. There hasn't been a ton of new supply. And then you go back to what I think is a differentiator for our business which is we generally earn a much tighter location band than most of our peers that we pay attention to in the single-family rental space. And that's indicative of where our rent values are today. I think we're approaching almost 18 50.

And if you look at the price points of our homes whether it be what we're buying or selling generally a much higher price point which means much closer in and which lends itself to some of those overwhelming demand kind of factors that come into play. So the demand side of it and that feels really active. There's not a bunch of homes sitting on market and a company like Invitation Homes can just go in.

But when you're local when you're looking at everything all the time when you're active in the space both on the buy and the sell side it lends itself to opportunities. We talked about that in our opening remarks. We had an excellent bulk transaction in the first quarter on the buy side. We had a really efficient sale on the book side in Q4.

So I would expect us to keep kind of running the same offense that we are which is being opportunistic not compromising location and I would expect that we can put up that $200 million per quarter number hopefully unless we see something different.

[Haendel St. Juste, Mizuho]

Great. And I guess a follow-up. Given those comments especially the low new supply dynamic. I'm wondering if there's been any rethink on your view on perhaps building out a development platform now that you're especially ready to run and grow?

[Dallas Tanner, President and CEO]

No not really. In terms of taking on balance sheet risk and being a builder that's not something we're focused on today. I think being the best buyer of single-family homes in the country that's what we are focused on today. So if that's buying from a builder or buying from boutique builders and markets, we'll look at that. But we don't want to compromise my earlier point on location for the sake of growth. It's just it's a dump.

If you buy further out if you're willing to chase what are - what I would call paper yields you can get yourself in trouble. If you are diligent and disciplined around sticking to what you know how to do which for our business has been paying up the curve and buying assets that are better located, they're going to have some of those demand factors we talked about we believe that's a winning formula for us going forward.

[Haendel St. Juste, Mizuho]

One more if I could. A question on Dallas the market. Occupancy there is just about looks like 89% well below your portfolio average and down like over 300 basis points year-over-year. Curious if that's some type of temporary dip perhaps seeing some supplier move out to the home buying there. So curious what's going on your Dallas portfolio.

And then more broadly as we step back and think about where you can deploy redeploy some of your national capital. How high in your list are Dallas in Houston today? In both markets where you have under 5000 homes and what are the current yields or IRR is broadly speaking in those markets today?

[Dallas Tanner, President and CEO]

That's like three or four questions in. Charles?

[Charles Young, COO]

I'll take the first part then I'm going to turn it over to Dallas to talk about the redeployment. As I hear your question, I think you may be looking at the total portfolio versus same-store portfolio to get the occupancy.

Focusing on same-store for Dallas and looking at the year-over-year we actually had a really good year. Occupancy is up to 95.5 again below kind of our average but it was up from 94.3 the year before. So we made nice progress so good strides there. We made some more changes in late 2018 and performance has responded well based on that.

And we were actually up on rate year-over-year in Dallas as well. So, I think as those markets continue to grow, we got a great team on the ground right now. We're going to add more assets to it. We get some even larger scale. We'll continue to focus on occupancy and continue to grow the rate over time. I'll turn it over to Dallas do you want to talk about the redeployment of Nashville?

[Dallas Tanner, President and CEO]

Yes sure. So Haendel, we've been pretty clear about this probably in the last year and a half. We really want to grow in markets like Dallas and Denver and you'll see that in our 2019 numbers for Dallas I think we bought 175 homes and we only sold I think less than 40. So we grew by 130 assets. So that market itself we've put a lot of thought into specifically where we want to grow what types of submarkets making sure that we're staffed up the right way.

We've actually kind of built out both of those teams both Dallas and Denver in the last year. So really good about where we are heading into 2020. And I would expect that your total portfolio vacancy will be a little bit lower as we're on-boarding those new units over the next couple of years.

[Operator]

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

[Ryan Gilbert, BTIG]

Had a question on turnover and Charles you said that you might have held rate just a little bit longer than you had might - have liked in the second half of this year. And I'm wondering if that contributed to the tick up in turnover that we saw in the fourth quarter on a year-over-year basis? Or if there's been an increase in move-outs to home purchase or anything else that might have driven the turnover rate higher?

[Charles Young, COO]

Yes great, great question. So taking your last part first, we haven't seen any uptick in move-out around purchase. It's been pretty flat throughout the year. And in regards to turnover look the number is still really low and it tick0ed up a little bit but 30% is a number we like. And a lot of that is a testament to our teams and what they're able to do and the customer service that we're providing. It's hard to say where they're holding that rate was really an uptick.

That's really on the new lease side - so those homes are already turned over. And they stayed a little vacant longer than we wanted and that's why we had to give up on rate a bit. So I don't think that contributed to it or maybe had a mild contribution. But overall, we're still really pleased with where we are in our trailing 12 turnover rate 30% is really strong.

[Ryan Gilbert, BTIG]

And then just two quick ones. What do you think you can - earn from an operating cash flow perspective in 2020?

[Charles Young, COO]

I’ll make sure I understand the question what will we earn from an operating cash flow?

[Ryan Gilbert, BTIG]

Sorry earn is not right word. What do you think your operating cash flow will be in 2020? It looks like it’s around $700 million in 2019?

[Ernest Freedman, CFO]

So well I just want to think about how you're defining operating cash flow with regards are you looking at core FFO or are you looking at AFFO after - recurring CapEx?

[Ryan Gilbert, BTIG]

Just cash flow from operations on your cash flow statement?

[Ernest Freedman, CFO]

Ryan, we’ll get back to you on that after the call. So I don't want to answer it incorrectly with this many people on the line.

[Ryan Gilbert, BTIG]

And then just how have initial NOI yields trended on acquisitions?

[Dallas Tanner, President and CEO]

Well ingoing cap rates for us for the most part have been kind of in the mid-5s in terms of what we're seeing. Is that am I answering your question right?

[Ryan Gilbert, BTIG]

Yes. No real change in acquisition cap rates then?

[Dallas Tanner, President and CEO]

On today's environment no.

[Operator]

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

[Buck Horne, Raymond James]

Not quite but well close enough, Appreciate you guys. Now that we're in an election year I did want to circle back on the rent control topic and thoughts about just your California homes and given that there's just more rumblings for possibilities of enhanced rent control measures out there that could affect single-family rentals whether they're owned by corporations or others? How do you balance that into your equation of capital allocation and your thoughts about California investments going forward?

[Dallas Tanner, President and CEO]

Yes you stay active on it is the short answer. You make sure that you're part of the discussion that you're involved. We work with a number of different organizations specifically in California to keep a surprise of anything that's going on. And on top of that we participate at the state level with the governor's office and the housing authorities that are involved with the state of California.

We have - Buck we have actually in our 2020 guidance baked in that we think will be active in terms of making sure that we're getting the right messaging out and being focused on no on Prop 10 what they call Prop 10 2.0. Now I think it's a little disappointing because I think the Governor and the House and the Senate done a nice job in trying to create some alignment around the rent cap measure that went in place last year.

We are also very realistic in our understanding that every two years or so this is going to be an election type of topic. And so we've got to stay active on it. We believe that Costa-Hawkins will or what they're calling Prop 10 2.0 will have the similar effect that it did two years ago which was resoundingly defeated I think by a measure of 2 to 1. We believe that it's not good for the state of California to limit new development in rooftop formation and things that the state quite frankly needs.

My understanding is that the Governor's on board with that approach and that that is generally widely seen as one that will pass. In terms of being focused on other markets as well where some of those conversations coming up, we're very active through the NHRC through some of the other efforts that we participate in to make sure that we're in the early stages involved with any discussions that are going on around rent control or anything like it.

Fortunately it doesn't feel like as of yet in any of our other markets that there's anything of real substance moving through any floors whether it be at the state level or local levels. And so California is always a little trickier. It's one of the benefits of our portfolio as Ernie mentioned before it's a great market with high demand but you get to inherit some of the fun governmental type of stuff that can come up as being an active owner of real estate in those markets.

And you got to participate in the process. So for us we'll continue to stay active. We believe that we're in a good position and we'll continue to support causes to get the meshing out.

[Buck Horne, Raymond James]

Awesome, thank you. And my last quick one is going back to your comments about how many smaller private whether they're mom-and-pop investors out there that are buying up homes and the amount of capital that's getting invested in the single-family rental. Those percentages seem to have increased and that's one of the reasons resell inventory seems to be so tight. So how do you think about that going into leasing season?

Do you think that the increased investor activity creates a near-term supply headwind as they're trying to get those homes turned and leased? Or does it - really just is it a function of that the overall housing market is just still supply-demand imbalance in your favor? How do you think about that going in leasing season?

[Dallas Tanner, President and CEO]

Your last comment spot on overall the housing supply imbalance is definitely in the favor of anyone in the single-family business whether you have home available for sale or homes available for lease. We don't see that changing. And I think it is important to remember the differentiation and I'll let Charles speak this as well. But the macros on our industry whether we come into a market with 150 new homes in a given year or don't doesn't really change the macros particularly of that market.

In terms of how much overall product could be available for lease. To your point, we may have a little bit better visibility in what some of our maybe bigger institutional peers are doing because of their marketing and things like that. But I'll let Charles speak to that.

[Charles Young, COO]

Yes macro - Dallas is spot on. I think we will see in certain markets where there's a real focus on great fundamental markets like Orlando where the competitors came in and bought up some product and put it on the market all at once that you may have a short-term blip. We saw that in Orlando in Q4. It's starting to moderate as you work through the product. And if you look at our numbers our results in occupancy have rebounded immediately.

So, if there is it's kind of a short-term thing and then we get back to the fundamentals of the market that play out. And that - most of all of our markets are in our favor.

[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 CEO]

We'd like to thank everyone for joining us today. We appreciate your interest in Invitation Homes and the team looks forward to seeing many of you in March. Operator with that we'll conclude our call.

[Operator]

This conference has now concluded. You may now disconnect.