Greetings, and welcome to the Invitational Homes 4th Quarter 2019 Earnings Conference Call. All participants are in a listen only mode. At this time, should you need assistance, please signal a conference specialist by pressing the star key followed by 0. As a reminder, this conference is being recorded. At this time, I would like to turn the conference over to Greg Vanlinkle, Vice President of Investor Relations.
Please go ahead.
Thank you. Good morning and thank you for joining us for our Q4 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 Q4 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 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 20 Annual Report on Form 10 ks 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. Find additional information regarding these non GAAP measures, including reconciliations of these measures to the most comparable GAAP measures And 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 Chief Executive Officer, Dallas Tanner.
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 Help 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 $900,000,000 of homes that no longer fit our long term strategy and use proceeds to buy $650,000,000 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 4 63 homes in infill submarkets of Atlanta and Las Vegas for $115,000,000 Creating incremental value by leveraging our scale and platform.
In December, we completed a $210,000,000 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 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 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 $700,000,000 in 20.19, 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 enhance 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 20 fourseven professional service, Convenient features like smart home technology and family friendly spaces in 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, Demographic 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 to be 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 for More significant ancillary income growth in future years and continue to expect an incremental $15,000,000 to $30,000,000 of run rate NOI from 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 Q4 operating results.
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 4th quarter that reached new heights. I'll now walk you through our 4th quarter operating results in more detail.
Same store NOI growth of 3.8% in the 4th quarter brought our full year 2019 same store NOI growth to 5.6%. Same store core revenues in the 4th quarter grew 4.3% year over year. The 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% The quarter consistent with prior year. This brought our same store revenue growth to 4.5% for the full year 2019.
Same store core expenses in the 4th 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 and M OpEx were partially offset By decreases in R and M CapEx, turnover spend increased more moderately than R and 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 Efficiency that helped limit the increase in 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 cost Finally, record low turnover rates coupled with process improvements drove turnover costs down 9% and leasing and marketing costs down 6%. Next, I'll cover leasing trends in the Q4 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 Q4 January, we prioritized maintaining higher occupancy to ensure favorable positioning heading into the upcoming peak leasing season. Lender rent growth was 3.4% for the 4th quarter with renewals coming in at 4.5% and new leases at 1.6%.
In January, which is seasonally slower for leasing, lender rent growth was 3% with renewals of 4.5% and new leases of 0.3%. Occupancy increased throughout the Q4 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 be resident and offset cost inflation.
I'm excited to go after these opportunities in 20 20 with the best in class team of local partners in the field and central support in our corporate offices. With that, I'll turn the call over to our Chief Financial Officer, Ernie Freedman.
Thank you, Charles. Today, I will cover the following topics. 1, balance sheet and capital markets activity 2, financial results for the 4th quarter and 3, 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 7 $100,000,000 reduced net debt to EBITDA to 8 times, down a full turn from where we started the year. This deleveraging was accelerated in the Q4 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 $200,000,000 of secured debt in the quarter. These repayments also benefited our weighted average interest As we directed voluntary prepayments toward higher cost debt. 2nd, we raised $38,000,000 via our ATM program During the quarter to over equitize acquisitions.
2020, we will continue to focus on both leverage reduction and external growth, balancing the 2 opportunistically. I'll now cover our Q4 2019 financial results. Core FFO and AFFO per share for the 4th 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 and 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 percent to 4.25 percent. 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. We anticipate 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 twenty twenty. 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 $0.35 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 Our cost of capital as the year progresses.
Most recently, we have been buying at a pace of approximately $200,000,000 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 point 4% to $0.15 per share. We continue to target a low dividend payout ratio as we prioritize deleveraging in 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. Supply and 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 With that operator, would you please open up the line for questions?
Thank you. We will now begin the question and answer session. The first question today comes from Nick Joseph with Citi. Please go ahead.
Thanks. Ernie, maybe just starting on guidance. In the 4th quarter, you did 0.32 of core FFO, which annualized gets you to $1.28 so above the low end. And I recognize there is transaction activity and Some refinancing or paying down of debt, but just wondering if you can walk through the right run rate to start and any Adjustments to the Q4 number that gets you to the 2020 guidance?
Yes, I'll take it more at a high level approach, Nick, with regards For the full year and then we
can try to tie it
back to the Q4. So for the full year we laid out in the supplemental growing from where we ended $2,022.05 and walking to the midpoint of our guidance range, which is $1.31 First off, the expected NOI growth rate of 4 quarter at our midpoint of guidance, you know, adds $0.08 We have a couple of things that are acting as headwinds for us as we go from 2019 to 2021 is what we thought was a wise decision in terms of exiting the national market, but that was dilutive to us with regards to the NOI contribution that 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. That's going to cost us about a penny. And certainly in the Q4 of 2019, we basically had a full contribution from the Nashville portfolios that in the middle of December. 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 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 regards to similar to Invitation Homes did was in terms of fixing our long term cost And these 4 step up swaps, which we've disclosed in our 10 Qs and our 10 Ks over the last many years. A number of swaps expire during 20 20 just like they did in 2019 and the replacement swap is already was in place for the last few years is at a higher rate. And so that's going to cost us about a And in terms of our dilution, that's kind of spread out through the entire year. So again, a little bit of that impacts back to the Q4 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 $3 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 been closer to the higher single digits versus what we're projecting again at the midpoint Our guidance that's closer to 5%.
Thanks. That's very helpful. And then maybe just on the net acquirer comment, can you quantify that what guidance assumes for acquisitions and dispositions in 2020? Yes, sure. So, you know,
So, we're expecting to do and
we hope to do is to
be able to acquire at a similar pace that we finished out The second half of twenty nineteen and that pace was anywhere between high $100,000,000 almost $200,000,000 up to about $225,000,000 $250,000,000 So we're hopeful that we'll be able to continue at a pace similar to that in 2020. And typically what you see in our years on the acquisitions front that ramps up throughout 1st quarter typically is a little bit lighter. You see us ramp up in the 2nd quarter. We usually see some great opportunities in the 3rd quarter as peak buying season by end users winds down and there's opportunities And then it kind of slows down again in the Q4. 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 what our cost of capital is at that time. On the dispo front, I think you'll see a drop off in the amount of dispositions we've 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 dispositions more in the range of probably $250,000,000 to $400,000,000 of dispositions. A little more front weighted on that one than not, but Generally spread out across the year, but maybe a little more front weighted as you think about where the $250,000,000 to $400,000,000 proceeds may come in.
Thank you.
Thanks, Nick.
Next question comes from Shirley Wu with Bank of America. Please go ahead.
Hey, guys. Thanks for taking the questions. So my first question has to do with your 2020 guidance. So you do assume around 50 business celebration at the midpoint on revenues. So I was just curious as the building blocks of that and what you're seeing in terms of demand from a consumer?
Sure. Let me talk about the guidance and I can let Charles weigh in about we're seeing currently from a demand from the consumer. In 2019 our revenue growth you 4%. Not dissimilar 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 we'll have a similar track record in 2020 To 2019, 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 Likely at a rate that's slightly higher than our overall revenue growth, so higher than 4%. But offsetting that is 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 entered 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 Just so when you think about the numbers on a year over year basis, last year Shirley, to get to our 4.5% in the 2019 numbers, We had a 50 basis point increase in occupancy.
As I mentioned, we think that's going to be more flat this year. So you take that out, you're kind of comparing a 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. We want to make sure we came out with reasonable expectations Charles, do you want to just talk about what we are seeing demand wise right now?
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 4th quarter to make sure we are focused on 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 So we can go into peak season, to capture that strong demand that we're still seeing out there.
Got it. That's helpful. So my next question has to do with the recent announcement, whether that's the Johnson and Limb minority stake in AMH or the merger for I was curious as to your thoughts on what that means for the industry and just overall thoughts on AMH's platform?
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 Resi Amherst transaction or some of the smaller things that we see in the marketplace that happen, it's all good, generally speaking for the industry. We would 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 We'll only help the industry mature over time. So we view all of these kind of moments of consolidation as a real opportunity The
Next question comes from Drew Babin with Baird. Please go ahead.
Hey, good morning. Building on Shirley's question, it looks like blended leasing spreads for 2019 overall were about 4.6%. And you mentioned so far in January occupancy is trending ahead year over year. I guess kind of putting it all together, you'd have to be assuming a pretty significant And leasing pace early in the year, at least 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?
Yes, Drew, I think it's definitely much, much more the latter. Yes, remember, this is guidance when we provide a range. And you're right to point out, 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 Acceleration for us to get to the low end and we certainly hope to not see that. I'll also caution that both the Q4 of 2019 and the The brunt of the year in terms of we need to achieve for 2020 leasing activity will occur in the Q2 and the Q3 it does across all the residential space. So I'm always cautious to draw too much, to get too excited if December, January early year numbers are great And also not get you worried if they're not where you might want to be, because you're not doing a lot of leasing activity that time of year.
We want to provide a range for guidance as to what are our possibilities, but Certainly, we feel good where we're starting the year, we feel good where things are at and we certainly see a path that could play out similar to what we saw in 2019 That we're able to later in the year as peak season did well in 2019 if we have that opportunity in 2020 to increase guidance as we go. Okay.
Appreciate that color. 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. 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 through assessments and millage rates, legislation in tax Changing with municipal revenue guidelines. And then I guess is there anything on the variable expense side, R and M or anything like that where you could see maybe a little bit of extra benefit as the year goes on, but like the revenue guides, it might just be a little too early to predict?
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 and continue 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, it's normal course to appeal basically everything. We still have a number of outstanding in Georgia that we got our fingers crossed on and hopefully we have some good news on and of course as you go across different jurisdictions you see different opportunities And 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 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 I 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, in that it's early days.
January was a good month for us. January came in Meeting our expectations with regards to expenses and is doing slightly better than we might have expected on the revenue side, but not enough to get too excited about. But also it's 1 month and we'll see how the year plays out with regards to how things go there. We certainly build in some level of contingency in our expense In some years you need it and some years you don't. And unfortunately some years you might not have built in enough.
We do our best to try to factor that into our guidance. 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.
Great. Appreciate the thoughts. That's all for me.
Thanks, Drew.
The next question comes from Jason Green with Evercore. Please go ahead.
Good morning. On the rental rate growth side, understand these numbers can bounce 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?
Hey Jason, this is Charles. Thanks for the question. As I said fundamentals are strong The markets and we are seeing it on the ground supply demand still a tailwind. When you step back and you look at 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.
So what you are seeing across the markets and some of the markets we had to push a little bit down on rate 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 moment 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.
Got it. And then I know you guys had
talked about hoping to do, call it, dollars 200,000,000 per 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 Pricing perspective?
Well, I mean, again, this is Dallas. Good question. I think as we think about growth and we think about acquisitions And we said this, Ernie mentioned this in his earliest comment in the Q and A. We feel that that $200,000,000 per quarter run rate is 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 Somewhere between $175,000,000 $250,000,000 a quarter feels pretty doable in today's environment and we certainly look for more opportunity to come in front of us.
Got it. Thank you very much.
The next question comes from Hardik Goel with Zelman and Associates. Please go ahead.
Hey, guys. Thanks for taking my question. I guess just to round out sources and uses of capital, can you give us an update on where you expect Leverage to be at the end of the year?
Yes, absolutely. And a lot will depend on our capital activity that we do with regards to acquisitions But we expect that we will continue to be able to bring our I'm assuming to improve our net debt to EBITDA numbers. And based on Our guidance is and where we see EBITDA coming in and our plans around capital allocation, I would expect net debt to EBITDA to be somewhere between 7.5x By the end of the year.
Got it. Thank you. That's all for me.
Okay.
The next question comes from Richard Hill with Morgan Stanley. Please go ahead.
You got Ronald Kamdem on for Richard. 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, whether the markets are going to be mostly targeted for dispositions that we should be thinking about?
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 non performers, geographic outliers, parts of the portfolio that aren't just making a ton of sense for us over the long 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 Look and review some of the assets that are on our questionable list and things that we're thinking about. But I wouldn't expect anything outside of norm from a market mix perspective than what we've done in the past.
Great. And just a quick follow-up, going back to the total 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 and M growing above that And some of the other line items may be growing below that and getting us to that average or are they sort of all uniformly distributed? Any other color there would be helpful.
Yes. So when we talk about R and M, I'd let Ron and Ronald just talk about the overall cost to maintain. It's the OpEx side of it. It's the CapEx side of it as well. This year, interestingly, we do expect both OpEx and capital to book in similar amounts.
And then we think all that line item is going to be right around that same inflationary increase. Thank you.
The next question comes from Jade Rahmani with KBW. Please go ahead.
Thanks very much. With about 50% of revenue coming from California and Florida, I wanted to ask about how an issue like Climate change factors 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?
Thanks Jade. I'll take the first question and I'll let Ernie talk about the insurance Question on 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 there. 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 long term, you want to be sensitive around things like floodplain and things where you could have potential Which also goes into 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 I would call early work to try to get smarter 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 certainly something we're focused on. We want to be an environmentally friendly company.
There's things we do already, whether it's around hardscape landscaping and things like that, They 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 focus for us right now.
On the expense side, certainly we're very cognizant of it. Even on the investment side, as we think about risk adjusted returns across our entire portfolio, Very focused on thinking about putting the correct premiums that would be required because of that. From a California perspective, Jade, 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 been very fortunate to date. But based Based on where we are, where our geographies are, the wildfires, the power outages that have been impacting California really haven't impacted us.
So when you take that to an insurance perspective, really the risk we're insuring In California is quake, which is separate from separate risk from climate change. With Florida, we've been very specific to make sure where we're investing in Florida that we're not exposed Exactly to the coast, we are 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 $100,000,000 single asset in one location that could be impacted very significantly by something bad happening from So there's a little bit more dispersion of a risk, but clearly anyone who's exposed 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're probably putting us in a little bit better position relative to other residential and commercial real estate because of the nature of our asset type.
Thanks for that. 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% 5 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 5 years out. How far are you underwriting in terms of your investment criteria?
It's a great question, Jade, and you're spot on. I mean, 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 We look at obviously, ingoing yields and what the cash flow is going to look like, but we really care about what's going to happen around the asset And so our models are typically anywhere between 3 5 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. I mean, we care as much about what our year 3 NOI yield is going to look like as much as we do our year 1 and Coupling that with where we think we're going to see that outperformance in growth. And if you look at where we have been active, specifically in 2019, I mean, you'll notice that the majority of The 2,000 plus acquisitions we made last year were in 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 Q4 and we had blended lease rates of 7% which Really, really strong and it really reemphasizes 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, how we think 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 and markets where we already have Like Phoenix and Orlando, those are great markets for us going forward.
Thanks for taking the questions.
The next question comes from Douglas Harter with Credit Suisse. Please go ahead.
Hi. This is actually Sam Cho on for Just going back to Jade's question about climate. I mean, we've had a milder winter This year compared to the historical average. So when we are thinking about maintenance strategy, how does weather impact When to make the CapEx spending to kind of maintain the rental portfolio?
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 Stuff like that and our smart home technology helps us with that. And in 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 That we're making sure we're maintaining the homes that are vacant and occupied by our residents.
Got it. On a similar one, I mean, you guys talked about The lowering of days to re resident, how smart home, other techs kind of impact that. Just curious how that has changed compared to Not on last year and how we should expect that going forward?
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, it's a real focus is to try to take 2 or 3 days off that, in 2020. As you mentioned, there's a lot that goes into it, looking at turn times, utilizing technology, 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 30s. 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.
Perfect. Thank you.
The next question comes from John Pawlowski with Green Street Advisors. Please go ahead.
Thanks. 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
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 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 If you 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.
I guess how much overlap between your tenant base and a condo occupier is there? Is that 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?
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 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 to your point, it's not typical, but in that market, it's kind of unique and it's showing up.
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 The natural aging of homes and that impact on the total cost to maintain versus pretty robust above inflation growth We're seeing on the labor side and 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?
Yes, John, I don't want to speak off the top of my head and give you an answer. We'll need to think through that a little bit. It is hard to disentangle those types of things. We It has to impact the fact that we are pivoting to external growth, which means we will be bringing more homes on that we will get that initial upfront renovation relative to what we have seen in the last Unfortunately, it's not an answer I can give you spot on as we're sitting here, but let's give it some thought and we can get back to you.
All right, understood. Thanks.
The next question comes from Haendel St. Juste with Mizuho. Please go ahead.
Thank you, operator. That was spot on. Good morning out there.
Is that the first time handout? Probably.
Hey, 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 3 large private platforms looking to grow and 1 public peer. So I guess, I want to get at how large or how attractive are the opportunities today versus say a year or 2 ago That meet your quality and market requirement? And more importantly, are you seeing more competition for the deals you're looking at?
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 Q1 of this year, which is resale supply is really tight, Consumers are buying homes, leasing homes really quickly in the market, which just generally talks about that 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 400,000 homes that are professionally managed in 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 Coming into the space, what have you. And so as I look at it, this market has been really tight for the past 3 or 4 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 are in 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, which So the demand side of it, Haendel feels really active.
There's not a bunch of homes sitting on the 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 Given 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 book transaction in 1st quarter on the buy side, we had a really efficient sale on the bulk 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 $200,000,000 per quarter number hopefully unless we see something different.
Great. Thank you for that, Dallas. 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?
No, not really. In terms of 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 doom If you buy further out, if you're willing to chase what I would call paper yields, you can get yourself into trouble. If you're diligent and disciplined around 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 talk about, believe that's a winning formula for us going forward.
Great. Thank you. 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, it looks like over 300 basis points year over year.
Curious if that's some type of temporary dip, perhaps Seeing some supply or move out to home buying there. So curious what's going on in 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 on your list are Dallas and Houston today, both markets where you have under 5,000 Holmes, and what are the current yields or IRRs broadly speaking in those markets today?
That's like 3 or 4 questions.
So I'll take the first part, then I'm going to turn it over to Dallas to talk about As I hear your question, I think you may be looking at the total portfolio versus same store portfolio, to get the 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 So we made nice progress. So good strides there. We made some more changes in late 2018 and performance has responded well based 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 are going to add more assets to it. We get some even larger scale. We will continue To focus on occupancy and continue to grow the rate over time. I'll turn it over to Dallas, if you want to talk about the redeployment of
Phil? Yes, sure. So, Andale, we've been pretty clear about this probably 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 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, feel 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 onboarding those new units over the next couple of years.
Got it. Got it. Thank you, guys.
The next question comes from Ryan Gilbert with BTIG. Please go ahead.
Hey, thanks guys. I had a question on turnover. 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 The tick up in turnover that we saw in the Q4 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
Great question. So taking your last part first, we haven't seen any uptick in move out from Purchases been pretty flat throughout the year. And in regards to turnover, look, the number is still really low and It ticked 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 are able to do and the customer service that we are providing. It's hard to say where they are holding that rate was really an uptick. That's really on the new lease side.
Those homes are already turned over, and they stay 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 are still really pleased with Where we are in our trailing 12 turnover rate, 30% is really strong.
Okay, got it. And then just Two quick ones. What do you think you can earn from an operating cash flow perspective in 2020?
I'll make sure I understand the question. What can we earn from an operating cash flow?
Sorry, earn is not the right word. What do you think your operating cash It looks like it was around $700,000,000 in 2019.
Well, I just want to think about how you're defining operating cash flow, Are you looking at core FFO or are you looking at AFFO after CapEx recurring CapEx?
Just cash flow from operations on your cash flow statement.
Brian, let me get up let's get back to you on that after the call. I don't want to answer it incorrectly with this many people on the line.
Okay, understood. And then just how have initial NOI yields trended on acquisitions?
Well, in going 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 my answer to your question right?
Yes.
So no real change in acquisition cap rates then?
Not in today's environment, no.
Got it. Thank you.
The next question comes from Buck Home with Raymond James. Please go ahead.
Not quite, but we'll close enough. Tom, appreciate it 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.
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 us apprised 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 They're 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 one Prop 10, what they're calling Prop 10 2.0. Now I think it's a little disappointing because I think the Governor and the House and the Senate have 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 2 years or so this is going to be an election type 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 similar effect that it did 2 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 new development in rooftop formation and things that the state quite frankly need. My understanding is that the Governor is on board with that approach and that that Generally widely seen as one that won't pass. In terms of being focused on other markets as well where some of this conversation We're very active through the NRHC, 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 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
And my last 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 Resale 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 imbalanced in your favor. How do you think about that going
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 Homes 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 to 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.
Yes, macro Dallas is spot on. I think we will see in certain markets Where there is 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. Very helpful guys. Thanks.
Thanks, Buck.
This concludes our question and answer session. I would now like to turn the conference back over to Dallas Tanner for any closing remarks.
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.
This conference is now concluded. You may now disconnect.