Welcome to the Invitation Homes second quarter 2019 earnings conference call. All participants are in listen-only mode at this time. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. 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.
Thank you. Good morning, and thank you for joining us for our second quarter 2019 earnings conference call. On today's call from Invitation Homes are Dallas Tanner, President and Chief Executive Officer, Ernie Freedman, Chief Financial Officer, and Charles Young, Chief Operating Officer. I'd like to point everyone to our second quarter 2019 earnings press release and supplemental information, which we may reference on today's call. This document can be found on the investor relations section of our website at www.invh.com. I'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 2018 annual report on Form 10-K and other filings we make with the SEC from time to time. Invitation Homes does not update forward-looking statements and expressly disclaims any obligation to do so. During this call, we may also discuss certain non-GAAP financial measures. You can find additional information regarding these non-GAAP measures, including reconciliations of these measures with the most comparable GAAP measures in our earnings release and supplemental information, which are available on the investor relations section of our website. I'll now turn the call over to our President and Chief Executive Officer, Dallas Tanner.
Thank you, Greg. Our business is firing on all cylinders as we move through the midpoint of the year. Fundamental tailwinds persist. Operational execution remains terrific on our fully integrated platform. We continue to create value through capital recycling and active asset management, and we are making important strides with our balance sheet. I'd like to elaborate on a few things in my comments. First, the drivers of our outsized growth and strong results. Second, some detail on our capital recycling efforts, and third, why I'm even more excited about the future. I'll start with our performance. Building on a great start in the first quarter of 2019, highlights of our second quarter included over 6% same-store NOI growth, our best-ever second quarter occupancy of 96.5%.
At the same time, both new and renewal rent growth were above 5% and prior-year levels, and an over 7% reduction in controllable costs, net of resident recoveries. This performance was driven by favorable fundamentals, our differentiated portfolio and service, and outstanding execution by our teams. The facts around industry dynamics and our value proposition are simple. Household formation in our markets is robust, supply is limited, and home price appreciation continues to outpace inflation. In a market where attractive housing options can be difficult to find, we offer a solution that allows residents to live in high-quality homes in desirable neighborhoods at a fair price and enjoy the ease of leasing from a professional management company that puts the resident first.
This is especially true across our unique market footprint, where household formations are expected to grow at almost twice the U.S. average in 2019 and where the monthly cost to lease a home remains almost 10% below the cost to own a comparable home. In addition, our industry-leading scale, with over 4,700 homes per market on average, enable us to efficiently deliver best-in-class resident service that enhances resident satisfaction and retention. Our field teams are now delivering that service better than ever, empowered by enhancements to our operating platform. With better data and tools, our revenue management team continues to strike the right balance between occupancy and rent growth. On the expense side, our efficiency initiatives continue to be effective at reducing controllable costs, even during the busier summer months.
On the back of this strong year-to-date execution, we are raising our 2019 same-store NOI growth guidance range to 5%-5.5%, an increase of 75 basis points at the midpoint. Ernie will elaborate on our updated guidance later on in the call. Next, I'll provide an update on our capital recycling efforts. Midway through the year, we have made excellent progress against our capital allocation plan. In the first half of 2019, we sold 1,433 homes for gross proceeds of $360 million and used these proceeds to acquire 948 homes for $273 million and to de-lever. In doing so, we removed many lower quality and less advantageously located homes from within our portfolio and repositioned capital into homes and locations where we have real conviction in risk-adjusted total returns.
We have been able to find compelling opportunities to accomplish this because of the advantage of our local presence in markets and the diversity of channels we employ to both buy and sell homes. Just in the first half of 2019, we have bought homes in bulk transactions, one-off transactions, the MLS, at auction, from home builders and through iBuying platforms. We've also sold homes both in bulk and one-off transactions, as well as directly to residents. After successful execution in the markets in the first half of 2019, we now expect to finish near or above the high end of the initial $300 million-$500 million guidance we laid out at the beginning of the year for both acquisitions and dispositions. In other words, we are enhancing our portfolio quality in 2019 even more than we had initially anticipated.
In closing, I'd like to talk about all the opportunity that lies in front of us. Earlier on the call, I discussed the supply and demand drivers that have underpinned our outsized growth. Looking ahead, we are even more encouraged as we have yet to enjoy the full benefit of the millennial generation that is coming our way. Over 65 million people, or one-fifth of the U.S. population, is aged 20 to 34 years. We believe many in this cohort could choose the single-family leasing lifestyle as they form families and age toward Invitation Homes' average resident age of 39 years. We also have tremendous potential to create value beyond the organic opportunity and are shifting more attention to how we can make the resident experience even better.
This includes building on the basics by refining our already best-in-class system and processes for interacting with residents and providing genuine care. Carrying out the ProCare commitment to proactive service and more hands-on resident care at move-in and move-out that our platform is now equipped to provide to all homes in our portfolio. Expanding ancillary services, which we have recently brought on a dedicated team to pursue. Continuing to grow and refine our value-enhancing CapEx program, and making the leasing process even more efficient at getting new residents in the home quicker. Finally, from an external growth and portfolio perspective, our locations and scale are a significant competitive advantage today. We have the opportunity to widen those advantage even further. As we move forward, scale gives us the ability to be selective and continue recycling capital to enhance the quality of our portfolio at the margins.
As we've done throughout our history, we will continue to grow scale when the right opportunities arise in the right markets. In summary, I'm very proud of the way we are executing and driving growth today. I'm even more excited about the opportunity that lies ahead for our business to become even better. With that, I'll turn it over to Charles Young, our Chief Operating Officer, to provide more detail on our second quarter operating results.
Thank you, Dallas. Once again, we were able to build on positive momentum to drive another great quarter operationally on both the revenue and cost side. I'm even proud of our team's success this quarter because it came in a seasonally busier time of year. Managing through peak season for leases, turns, and maintenance, the quality of our resident service has not wavered. This is most evident in our turnover numbers, which achieved yet another record low of 30.1% on a trailing 12-month basis. We still have work to do, and we remain in the midst of peak season, but I couldn't be more thankful for how our teams have executed thus far. I'll now walk you through our second quarter operating results in more detail. With outstanding fundamentals in our markets and excellent execution, same-store NOI increased 6.1% year-over-year in the second quarter.
Same-store revenues in the second quarter grew 4.2% year-over-year. This increase was driven by an average monthly rental rate growth of 4% and a 40 basis point increase in average occupancy to 96.5% for the quarter. Same-store core expense in the second quarter increased 0.6% year-over-year. Controllable costs were better than expected, down 7.2% year-over-year net of resident recoveries. The primary drivers of this improvement were lower turn volume and efficiency enhancements to our integrative operating platform that drove lower R&M and personnel costs. Offsetting the significant improvement in controllable costs was a 7% increase in property taxes. We do not expect to achieve the same degree of improvement in controllable costs in the second half of 2019 as we did in the first half, as prior year comps become less favorable. That said, we still see upside to cost efficiency.
In addition to the benefit of constant refinements to our systems and processes going forward, we expect our full ProCare rollout to bear fruit over the next several years. ProCare is our unique, proactive way we serve our residents from move-in to move-out, including post-move-in orientations, proactive service trips, and pre-move-out visits. To be clear, ProCare implementation has been rolled out in all of our markets. However, the benefits should materialize over time as proactive visits drive opportunities for savings in both R&M and turn results. Next, I'll cover leasing trends in the second quarter. Both renewal and new lease rent growth were higher in the second quarter of 2019 than in the second quarter of 2018. Renewals increased 70 basis points to 5.4%, and new leases increased 40 basis points to 5.2%. This drove blended rent growth to 5.3%, or 60 basis points higher year-over-year.
At the same time, average occupancy remained 96.5% in the second quarter of 2019, in line with first quarter and 40 basis points higher year-over-year. We feel very well positioned for the second half of 2019, with occupancy better than it has ever been at this point of year. However, we are also approaching the point in the calendar year where new leasing activity begins to slow seasonally, making it prudent to turn slightly more conservative in balancing rent growth and occupancy.
We feel great about our playbook for carrying healthy occupancy through the off-season, and our lease expiration curve is set up to help us achieve this as well. After a great first half of 2019, we're excited to keep the momentum going and remain focused on delivering outstanding service to our residents and outstanding results to our shareholders. With that, I'll turn the call over to our Chief Financial Officer, Ernie Freedman.
Thank you, Charles. Today, I will cover the following topics. One, balance sheet and capital markets activity. Two, financial results for the second quarter. Three, updated 2019 guidance. First, I'll cover capital markets activity, where we opportunistically refinanced one of our nearer-term maturities and continued to de-lever. In June, we further diversified our capital sources by closing our first-ever term loan from a life insurance company. The loan has a 12-year term and principal amount of $403 million. Total cost of funds is fixed at 3.59% for the first 11 years and floats at LIBOR plus 147 basis points in the 12th year. Structural features of the loan also provide for more flexibility in collateral release and substitution rights than our other secured financings to date. With the proceeds from this loan and other cash on hand, we repaid $529 million of higher-cost secured debt in the second quarter.
Now leaves us with no debt maturing prior to 2022. In July, we voluntarily prepaid an additional $50 million of secured debt. Also, in July, we completed settling conversions of our 2019 convertible notes with common shares, bringing net debt to EBITDA to 8.4x, down from 9x at the end of 2018. As we go forward, we will continue to prioritize debt prepayments in pursuit of an investment-grade rating. Our liquidity at quarter-end was approximately $1.1 billion through a combination of unrestricted cash and undrawn capacity on our credit facility. Moving on to our second quarter 2019 financial results, core FFO per share increased 5.2% year-over-year to $0.31, primarily due to an increase in NOI and lower cash interest expense. AFFO per share increased 4.1% year-over-year to $0.25. The last thing I will cover is our updated 2019 guidance.
After maintaining strong execution through the first stage of our peak leasing and service season, and with supply and demand remaining favorable, we are tightening and increasing our full-year 2019 same-store NOI growth guidance to 5%-5.5%, versus 4%-5% previously. This is driven by same-store core revenue expectations of 4%-4.5%, up from 3.8%-4.4% previously, and same-store core expense expectations of 2%-3%, down from 3%-4% previously. We are also increasing our guidance for core FFO and AFFO in step with our same-store NOI guidance increase. We now expect full-year 2019 core FFO of $1.23-$1.29 per share, versus $1.21-$1.29 previously. AFFO is expected to be $1.01-$1.07 per share, versus $0.99-$1.07 previously.
Lastly, on guidance, I want to remind everyone of two things that will impact our results in the back half of the year from a timing perspective. First, given the progression of occupancy in 2018, occupancy comps will not be as favorable in the second half of 2019 as they were in the first half of 2019. Second, the year-over-year increase in real estate taxes is expected to be lower in the fourth quarter of 2019 than in the first three quarters of 2019. I'll wrap up by reiterating Dallas' enthusiasm for the future. Fundamentals remain favorable, which we expect to continue driving strong revenue growth at the same time we enhance expense controls. Furthermore, we believe that our business is well-positioned to succeed in all parts of the cycle.
We are excited to begin creating more value in addition to organic growth as we ramp up our focus on enhancing the resident experience with ancillary services, value-enhancing CapEx, and other initiatives. Last but not least, we remain active with our best-in-class investing platform to recycle capital, widen the location and scale advantages within our portfolio, and grow opportunistically in the right markets at the right time. With that, operator, would you please open up the line for questions?
We will now begin the question and answer session. To ask a question, please press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. I'd ask that you please limit your questions to two per time in the queue. At this time, we will pause momentarily to assemble our roster. The first question comes from Douglas Harter of Credit Suisse. Please go ahead.
Thanks. Dallas, you touched on this a little bit, but kind of given the attractive return characteristics you're seeing in the supply-demand, can you talk about your appetite for kind of increasing the external growth opportunities and kind of what markets those might be most attractive?
Thanks, Doug. Yes, happy to. As Ernie mentioned, we want to look for some of these opportunities in the right places at the right time as well. We're certainly seeing a bit more opportunity in the last couple of quarters in terms of grinding out incremental buying through our platform. I mentioned in my comments that we still see through a variety of channels, opportunities that are at pretty attractive return profiles. I would expect that we'll maintain an opportunistic approach that if and when we see opportunity that makes sense, we could then look for meaningful ways to add to our portfolio. I think one of the benefits of being local is that we do get to see a lot of stuff off market and things that are brought to us in advance of maybe a public sale.
For us, we are going to continue to look for those opportunities.
Great. Just which markets are you finding most attractive today?
If you look at the balance of where we're having some of our greatest expansion in terms of rate growth and home price appreciation, certainly our West Coast markets are outperforming. A market like Phoenix is a good example of this, where over the last three months in a row, we've been north of 10% from a new lease growth perspective. We're seeing some interesting opportunities in that market. We've been able to do some things like buy directly from some boutique home builders in that market in Q2, and have looked to do the same in markets like Seattle.
I would expect our mix to be relatively consistent with what we've done over the past couple of years, which is continue to find higher barrier to entry sub-markets in parts of the West and parts of the Southeast that will continue to lend itself to that outperformance. Great. Thank you.
The next question comes from Rich Hill of Morgan Stanley. Please go ahead.
Hey, good morning, guys. Congrats on a good quarter. I want to just maybe focus on revenue and expenses. Revenue met our expectations, but was maybe a little bit lower than where it's trended in the past, and I think the guide implies some deceleration. I'm wondering if you can maybe just comment on that real quickly and if there's anything driving that seasonally or otherwise.
Sure, Rich. Hey, this is Ernie. So far revenue's played out a little better than we expected at the beginning of the year, and hence why we were able to increase guidance here with the second quarter release. We had mentioned at the beginning of the year, we expected that rent growth, rental rate growth would be about 4%, and we're actually doing a little better than that. We're pretty much right there. What we talked about at the beginning of the year, and it's holding true, is that in the first quarter, I think we had an 80 basis points year-over-year increase in occupancy. Second quarter was 40 basis points year-over-year. We're not going to continue to see those types of numbers, Rich, in the second half of the year.
Embedded in our guidance, we expect occupancy to be flat to just slightly up in the second half of the year to where it was last year. You take a roughly 4% rental increase, roughly flat occupancy, and then other income for us has been trending a little bit lower from a growth rate perspective than rental rate. That math gets you to a second half of the year that's going to be not quite as robust as the first half, but still very strong relative to where else you can see, and puts us in a good spot for our 4.5% guidance for the year.
Got it. On the expense side of the equation, you've obviously had an impressive start to the year in terms of expense growth. Looks like there's going to be some pretty hefty implied expense growth in the second half of the year. I think I heard that taxes are going to be down, though. Maybe you could help us just square that a little bit.
Yeah, sure. Again, expenses, we've had some good surprises for the first half of the year. I'll remind everyone that we're still in the middle of peak season when it comes to work orders. July books aren't quite closed yet. Of course, August and September are still warm months for us when you look at our footprint. We still want to be cautious as we think about expenses, just as we were earlier this year, both with our first set of guidance and our second set of guidance that we've just set here. That said, Rich, real estate taxes are trending sort of exactly where we expected them to trend. We said at the beginning of the year, we thought for the year, taxes would be up in the fives, somewhere between 5% and 6%.
Year to date, they're at 5.9%, and we have mentioned a couple times that the fourth quarter is an easier comp for us in real estate taxes, because we had a big adjustment that we had to book last year in the fourth quarter. We're kind of right on pace for where we thought we'd be with real estate taxes. Where we really have the outperformance, and the team has done a phenomenal job, is around repairs and maintenance, turn, all the work that's being done in ProCare that Charles talked about in our learnings and getting better. We're hopeful to see that carry through for the second half of the year, and we'll do our best to try to beat the numbers that we've laid out there.
Again, we just want to make sure we're being cautious about where we set our guidance for the year and put ourselves in a position to hopefully exceed expectations. We'll see how the rest of the year plays out.
Thank you very much. I appreciate it.
You got it, Rich.
The next question comes from Shirley Wu of Bank of America. Please go ahead.
Good morning, guys. Thanks for taking the question. It sounds exciting when you guys mentioned that you just hired a new ancillary income team. Could you talk about some initiatives that you're seeing there that's driving the growth that we see, and maybe some of the initiatives going for 2020, perhaps the smart home adoption as well?
Sure. Hi, Shirley. Thanks. This is Dallas. We are excited. We talk about our business really in two buckets, and the first piece being kind of the real estate ops piece, which Ernie and I answered on in previous questions. The second bucket is really this customer experience side of our business, and we're really focused on making sure that we can deliver a best-in-class experience for our customers, which we believe will lend itself to better performance in some of those ancillary targets and other income opportunities.
Specifically, as a company, we've rolled out things around smart home, and have piloted a couple of smaller initiatives historically. Where we think there's room to improve specifically is around the smart home offerings and some of the added features that we can add to that package. Remember, our adoption rate has historically been between 75% and 80% on something like that. We are experimenting with pricing and some different offerings that we think will lend itself to even better performance, hopefully in that category. The other part of what we think could drive a stickier experience for our customers may center around pets, insurances, some different offerings. We're working with some national partners.
We're researching a bunch of kind of interesting and what we think are fun initiatives that will not only lend itself to some other ancillary, but probably make the overall experience better, which we think could potentially have a benefit to even better retention. If we do it right, and we continue to deliver, and we deliver that in a way that it feels meaningful, personal, and creates a connection between our customers and the property, we think it will have a lot of impact to our business.
Thanks for the color. Back to the synergies from the merger. Previously, you mentioned that potentially there might be more on the procurement side. Have you seen more of those conversations happen throughout this year? What do you think is the possible impact of potentially margin improvement for next year?
Yeah. Shirley, what I'd say is, like any business, you're always looking to do things better and improve, and procurement is certainly a great example. We continue to see good opportunities to leverage our scale, both on a national basis and a regional basis. At some point, we would be doing that whether there's a merger or not. That's why we've kind of stopped tracking merger synergies at this point, as we put the merger and the integration behind us about a quarter ago. That said, we have a dedicated team, and they're working hard at that. I think it's one of the many things that can help us in terms as we continue to have margin expansion going forward, as we can leverage our buying power.
Importantly, on the procurement side, it's not just on the operating expense side that would impact our NOI margins, but very importantly, it's on the capital side. Things around the appliance packages that we put in, as an example, as a capital item. There's some great opportunities there, too. I think it's just going contract by contract, working our way down from the national to the regional, all the way to the local levels, where we continue to hope to find some more opportunity and some more nuggets for us to slowly but continually improve our margins.
Great. Thanks for the color.
The next question comes from Nick Joseph of Citi. Please go ahead.
Thanks. Dallas, you talked about the transaction activity. How many more non-core homes are left to sell in the near and medium term?
Well, without giving any real specific guidance, because we can't really do that here. We certainly are looking to rightsize the portfolio post-merger in terms of just making sure we have the right allocations in sub-markets and at the market level. You saw that we were pretty active through the first two quarters of this year in markets like South Florida and Chicago. Just by way of just making sure that I'm really clear, we will always be looking at the bottom performing parts of our portfolio. That'll be ordinary course for us. I would bet that our activity for this year stays pretty consistent, but I wouldn't expect that we have a whole lot more to cull, generally speaking.
Thanks. As you think about kind of the more exciting opportunities you're seeing on the external growth front, and if the non-core asset sales maybe start to slow a little, so you become more of a net acquirer, how do you think about funding larger scale external growth? Leverage is obviously ticked down, but still is higher than where you'd like. How do you think about the ability to fund any kind of net acquisition growth going forward?
Well, I think we want to look at anything that makes sense, right? I think at that point, we'd have to look at whatever the best available cost of capital that's in line with our general strategy would be. We could have a number of tools. We have a revolver that's available if we needed something in a moment's notice. We could always use a tool of issuing if we thought it made sense, or we could just continue to recycle and make smart investments.
Yeah, Nick, we're still very committed to where we want to go from a balance sheet perspective. We'd balance out what the cost of capital does available for us on the various tools about the opportunity for external growth.
Thanks.
The next questioner comes from Jade Rahmani of KBW. Please go ahead.
Thanks very much. On the amenities and ancillary services front, are there specific vendors you've identified that are offering best-in-class services, perhaps in the multifamily sector that could be exported to single-family rental? Such things as, I believe, for example, resident e-commerce amenities. Also in terms of improved operations, I think RealPage, for example, just rolled out AI tenant screening, which really expedites the tenant vetting process. Just wondering if there's anything you're seeing on that front.
We're certainly talking to a number of groups that are doing work on both the single family and the multifamily space. You're right in that there are a lot of roll-ups occurring in, call it, the real estate tech space. To date, I would say that there are also differentiated opportunities that kind of exist a little bit more in single family, or vice versa. It could be duplicitous. It's a little bit different in terms of the nature of how long our resident stays with us. There are, I think, additional opportunities available to us. RealPage and a number of those companies are rolling up different AI platforms and things that will help you around customer service. We've met with a number of those types of companies and have looked at some of their products.
Haven't felt necessarily that any of it was yet ready for prime time for our business. We're going to continue to maintain an opportunistic approach in terms of making sure we're vetting anything that's out there.
Thanks. I think that's an interesting point about the longer length of stay in single family, which would seem to suggest potential greater opportunities for ancillary revenues. Turning to the build-to-rent. Today, another public home builder announced a joint venture. Considering Bryce Blair is chairman of both IH as well as PulteGroup, you probably have unique insights. Wondering if you could share your updated thoughts on the build-to-rent sector.
Well, I think my thoughts on build-to-rent have been pretty consistent. I think as a team, we feel the same way. We want to implore every channel to make sense. We never want to compromise our approach to location. For us, if something is in the right location, we're agnostic of necessarily which channel it comes through. Now, build-to-rent's really interesting because there's a couple of things that are going on. There's more of a garden-style apartment approach, which are smaller plats, smaller square footages, which are typically done on HUD financing. People are calling it build-to-rent. There's communities that are being built with fit and finishes and square footage standards that line up with a single-family neighborhood that are usually much more synonymous with the product that we would own.
We certainly get approached by a lot of different angles in terms of opportunities. We get calls all the time on that. We're open-minded to looking at buying in scale from builders, but the locations have to be in the right spots, and then also the fit-finish standards, the types of sizing around square footage, and what the overall amenities in that neighborhood's going to have to it could weigh into our decisions. Specifically on your question around Bryce, I think Bryce does a really nice job of separating church and state between the two companies. He's been terrific in terms of insight and what he's seeing in the home building space, like the other members of our board who are close to a lot of different types of real estate.
We certainly are going to continue to look at those opportunities, and we've made some good strides, I think, with local builders and markets and have been able to review a lot of opportunity.
Thanks very much.
Thanks.
The next question comes from Drew Babin of Baird. Please go ahead.
Hey, good morning. Question on recurring CapEx. Year to date for the total portfolio up about 5%. Was glad to see the AFFO growth guidance range increased in tandem with FFO. Can we assume about the same kind of year-over-year increase in recurring CapEx in the second half of the year? Given the easy comp in the third quarter, might we even see a decline?
Geez, Drew. You're trying to answer the question yourself there with the way you led that. What I'd say is we haven't provided specific level of guidance for that. I will say is we're actually performing a little bit better than expectations on the CapEx side and much better than expectations on the OpEx side when it comes to recurring costs in total around the net cost to maintain. Part of the reason why we were confident in being able to raise our AFFO range as well as our FFO range is because of that behavior.
Not in a position to provide specific guidance as to how it may look relative to the first half of the year, but on an overall basis, on a net cost to maintain perspective where at the beginning of the year, Drew, we had said we thought it would be flat to up 3%. We feel pretty confident at this point that flat will be the high end of the range now in terms of where it would be, and maybe actually be slightly down year-over-year for us.
Great. That's very helpful. One more from me, just to follow up on Nick's question about markets. South Florida, I noticed the new leasing spreads went negative in the second quarter. I noticed also there's really been nothing acquired this year. It's been a source of funds under this disposition side. I guess how do you feel about that market short term, long term? Is it a market that you still would like to be one of your top markets? Do you think that's going to continue to be a source?
Yeah. Thank you, Drew. It's Charles here. We're a fan of South Florida. If you look at our performance in Q2, overall occupancy actually went up to 95.5% from 95.3%. Blended rent growth 2.8% versus 3.2%. It did go down slightly. Renewal rates were actually up year-over-year. To your point, the new lease rent growth, we saw some impact in certain sub-markets. With that softening, we've worked very closely, the field teams with asset management to really look at the field markets, at those sub-markets and make smart kind of pruning decisions as you're seeing some of the homes that we've been selling out of there. You'll see a little bit more relative sales out of South Florida. It's a large market. We have 25,000 homes in Florida overall, and it's a very large market in South Florida also.
We can really be smart around what markets we want to be in and optimize that by pruning. Long term, we're a fan of South Florida, but we're looking to try to optimize the portfolio short term.
Great. Thanks, Charles. That's all for me.
The next question comes from Hardik Goel of Zelman & Associates. Please go ahead.
Hey, guys. Thanks for taking my question. Just focusing on taxes since it's such a big item on expenses. The run rate this year you've kind of outlined of just looking ahead and you look across your markets where appeals have come through and tax rates have been decided. What do you see going into the future as far as how much that line can kind of grow, and how are the different pieces if you look at your regions, which ones are kind of overburdening you?
Yeah. Hardik, I'll talk a little bit what's happened so far this year and then without giving guidance, give you some thoughts about how we see things going in the future. This year, we talked about it last quarter, we had a significant good guy in the state of Washington, specifically with Seattle. I understand the multifamily guys are seeing that as well, just around some legislation changes that happened there. We're not surprised to see that Texas came in hot for us this year in terms of coming in high, but we've had more appeal success than we would've anticipated so far in what that's gone through the process here in Texas. Georgia is also running a little bit on the high side, but we haven't seen millage rates, and we're in the appeal process there, so we'll have to see where Georgia plays out.
Of course, importantly for us, our real estate tax bill really comes down to the state of Florida. We'll have better information on Florida in the next month or two when assessments are finalized and the millage rates come out kind of in the October, November timeframe for Florida. As a reminder, Florida is about 40% of our tax bill.
That said, looking to the future, I think one important differentiator is for us, and we'll get some more stability in the real estate tax line, really for two reasons. One is 20% of our portfolio is in California. We've talked about in the past, and it was a little bit of a sore spot for us last year, that reassessments are allowed upon corporate events and/or sale activity in California, and we were dealing with four different of those events over the last two years, when you look at the merged companies. Most of that noise has run through our numbers at this point. There's still a few more to come through, but the vast majority of that stuff is in at this point. California is going to reset to kind of just that normal 2% growth you see under Prop 13.
That's an important differentiator for us in terms of thinking about real estate taxes. Part of the reason why we're seeing some external growth opportunity as well is that we are seeing home price appreciation continue to be positive and continue to grow, but not at the rates that we've seen in the last couple of years. That usually earns in a year or two later in the assessment process. Longer term, Hardik, I think real estate taxes are still at risk to probably grow higher than inflation, with the exception of California, but certainly not at the rates that we've seen the last couple of years as home price appreciation has been so strong. This year we think real estate taxes will be somewhere in the 5%-6% range, as I stated earlier.
There seems to be a momentum that would allow for that to start coming in a little bit more over the next few years without providing specific guidance for specific years going forward.
That's great. Thanks for the color. Just one quick follow-up, if you'll indulge me. If Florida is flat, let's say Florida doesn't change, what is the % growth rate in your tax rate on the same store pool, roughly? Like, could you speculate on a range?
Well, Florida, we assumed a relatively healthy assumption in terms of the growth rate within our numbers. I don't want to get into the specifics on that. It's certainly not flat.
On 2020, I mean, let's assume hypothetically 2020 Florida taxes don't increase. What does the full portfolio tax growth rate then become if Florida is 0% growth?
Sure. Well, if Florida's 0%, which is 40%, I'm doing some math on the fly here. California's 2%, which is at another 20%. Assume for the rest of the portfolio, something certainly higher than inflation. We'd only give guidance for specific markets, but if 40% of your number is 0, you're going to be at a really good starting place in terms of where that would be. To be clear to everyone, we're not saying if we think Florida is going to be 0% in 2020.
Right.
That's just Hardik's presumption here, just in the thinking out process.
Just thinking through it.
Yeah. No, I don't want anyone to read the transcript later and be confused, Hardik, about what we're talking about here.
Sorry for creating problems for you, Ernie. Thanks.
All right. Thanks.
The next question comes from John Pawlowski of Green Street Advisors. Please go ahead.
Thanks. I have a follow-up on Rich's second half of 2019 expense question. Ernie or Charles, I guess I'm scratching my head on Charles' prepared remarks on the comps in the back half on controllable costs get tougher. In 3Q repair and maintenance costs in 3Q18 were up 13%, in 4Q repair and maintenance were up 10%. You had a pop in turnover in 3Q. So can you help me understand that prepared remark comment?
Yeah, I can give you some context for that, John. Certainly in the third quarter, real estate taxes are a more difficult comp for us. In the fourth quarter, they're an easier comp for us. With regards to other line items that you see, we did start to earn it into some merger synergies starting in the second half of last year. I don't expect we'll see as strong a performance in personnel and other services, but we'll still see good performance and favorable performance relative to last year. On the R&M and turn side, we've seen some great results with the round turnover with regards to turnover keeps trending down further and further.
We're cautious to bake that continued trend of it continuing getting to record lows into the second half of the year, but there's certainly that possibility because we've started to over the last seven, eight quarters, it keeps coming down. That could potentially be an upside for us, so maybe that's causing part of the head scratching for you. On our R&M side, we're still in the middle of peak season, and so we want to try to avoid surprises, and we just want to be, as we've been all year, and I know some analysts have appropriately called out earlier in the year that maybe we'd do better than our numbers. So far, we've been happy to prove those folks right, and we'll just have to see how the rest of the year plays out.
We just want to have a right level of where we see things moving and have definitive answers to and where things can sometimes be a touch out of your control. Make sure we have the right level of caution in there as to how we see the second half of the year.
Okay. Is any one line item surprising you guys meaningfully to the upside right now?
Well, we certainly would have said guidance is where it now looks as conservative as it was around R&M and turn. We did not anticipate turn to be down hundreds of basis points, a couple of hundred basis points from where it was last year. That certainly helped us out. On the RM side, we had expectations that we could do better, that we had laid out, and we certainly were striving for that, but the teams just executed really well, and don't want to take that for granted too early. I would say we're pleased, and we thought we had the opportunity to do better in R&M, but we're thrilled to see that it's even a little more than even in our best cases we might have thought.
Okay, back to the portfolio management side and pruning out of Chicago, one of the markets that has been a big source of funds. Has a full exit from Chicago been debated, and could that be in the cards in the coming years?
No, we've been pretty consistent that we wanted to right-size Chicago, and post-merger, we actually grew. I think the team's done a really nice job of putting that portfolio in much better shape. If you look at, we're starting to see a little bit better renewal growth, a little bit better new lease growth, teams executing at a much better rate. We're seeing cost to maintain get a bit better in that market, and I think we've gotten out of assets that have been a bit more troublesome. In terms of total revenue, the Midwest is still right around 5% of our overall revenue, and it's not part of our growth story.
To be totally clear, we do want to invest capital in the West Coast and in parts of markets in the Southeast that make the most sense. We'll look at anything that makes sense for shareholders, at the end of the day. If there were an opportunity that we thought was accretive to shareholder value, we'd look at it, just like we would in terms of where we wanted to play dollars. I wouldn't say, John, that it's completely top of mind, but we'd certainly look at anything that was ever opportunistic for our shareholders.
Okay. Thank you.
The next question comes from Ryan Gilbert of BTIG. Please go ahead.
Hey, thanks guys. Just a couple of regional questions. First, in Texas, nice improvement in blended rent growth. Can you talk about how much of that is just demand improvement in those markets versus any initiatives you're taking to improve performance?
Yeah. Thank you, Ryan. It's Charles. Both Dallas and Houston have really had a really healthy growth over the last quarter-over-quarter. Dallas specifically, where we see this as a growth market for ourselves. We're a fan. Occupancy has really moved towards where we want it to be in the mid-95s. We want to keep moving up from there. We were at 94.5% last year. Blended rent growth, because of that occupancy, we're starting to see some increase there. It's a little bit of a combination of the market is solid, but as we mentioned on previous calls, we have a new leader in the market who's executing well, building a great team around her and doing a wonderful job. Houston, we've been solid over the last little while. Occupancy in Q2 is 97.3%. That's up over 200 basis points.
We've done a lot to try to right-size that portfolio, as I talked about looking at sub-markets, pruning out of there a little bit and getting it to the right size. Because we have that occupancy, we're getting a little bit of rent growth out of that, which we haven't had in a while. We were over 3% blended rent growth in Q2. We'll see how that goes through peak season. You do get some seasonality in these markets, depending on when school starts. Right now, we're happy with where our Texas portfolio sits.
Okay, thanks. I guess you've talked broadly about rent growth tracking, home price appreciation, and in Seattle, Case-Shiller is showing a year-over-year decline in home price appreciation, but the blended rent growth is still strong there. I'm wondering if you can talk about your expectations for Seattle in the kind of near medium term, and then also how declining home price appreciation influences your investment decisions in that market. Thanks.
No, great question. Let me be really clear. We love Seattle. We love the market. We love the fundamentals around it. We love the job growth, all the positive demographics. People are moving there. There's really good activity in that market. We have seen a little dip in home prices, which to Ernie's point earlier, has allowed a little bit of more of a buying window for us, which we see as in the long-term being very accretive. I think in Seattle today, we're over 3,000 homes. We'd love to see that market get bigger over time. We've seen this as we built out our portfolios. All of our western markets, quite frankly, are great examples for this.
As we grow from 2,000 to 5,000 to 7,000 units, our margin enhancement gets much more robust and our ability to optimize the operating piece of our business gets much more efficient. We're definitely going to monitor it. If you saw negative growth or something like that, maybe you'd pause and watch and see what's going on. We don't see that happening. We are getting now towards the kind of the, it had quite a bit of appreciation over the last couple of years, and you expect it to probably cool a little bit. In terms of the demand that we're seeing, on a blended basis, we're still 8%-9% in the quarter on rate. Talks a lot about what's happening in terms of ability to find quality housing, so we don't see that as an issue.
Great. Thank you.
The next question comes from Derek Johnston of Deutsche. Please go ahead.
Hi, everyone. How are you doing? Just quickly on the real estate taxes. I just wanted to make sure I clarified this. I'm assuming that you look at every single assessment and work with a third party to basically fight it. Is that correct?
We do look at every assessment. We deal with third party, Derek, who helps us out. We don't necessarily fight every single one that comes through. In some jurisdictions, you have to pay a fee to fight on a home-by-home basis. We don't want to take on that expense if we don't think we have a legitimate opportunity to win. In California, which is 20% of our portfolio, we have falling home prices. There's really not much to do there.
Okay, got it. Just with the dispo mix, what % is represented by sales to residents right now? Is this a quickly growing sub-segment? How does the process typically work with tenants?
Yeah. It's a great question. We started what we call our Resident First Look Program almost two years ago, really in pilot, to try to figure out the demand that was there. We have a little bit of data on our move-outs and why people are moving and for what reasons. Typically, that number's been really small in terms of reason to move to home ownership. We know that there, as I mentioned earlier, there's an emotional connection to a lot of these properties for our residents. So when we make a decision from an asset management perspective to sell a home, a majority of the time, we will approach the resident first in those one-off scenarios. We probably have done about 150 to date through that pilot.
It's something that we look at from a perspective of not only building goodwill with our customer base, but just making sure that we're sensitive to the needs that families may or may not have. A lot of these families.
Want to purchase the Invitation Homes that they've been in. For us, it's been a great program. There's a process where we have a dedicated team that reaches out, walks through the process that we are working through some asset management decisions, and we think that potentially this home could be sold, and if you have any interest, we'd love to figure out how you can make this house your home. We don't offer any financing or anything like that. We truly are just a seller. We can typically have pretty good title relationships and things where we can help them find opportunities in market if they're looking for those types of things.
All right, great. Good stuff, guys.
Thanks, sir.
The next question comes from Buck Horne of Raymond James. Please go ahead.
Hey, guys. Ernie, I was just wondering if you could provide a little bit of extra guidance around your expectations on G&A trends for the rest of the year. Looks like you've had some strong benefits year to date. Just wondering what we should expect on the G&A line.
Usually, teams will kind of save up a little extra for the end of the year just in case, but we actually got a little ahead on some of our G&A spend in some areas. I think it's going to be pretty ratable for the rest of the year. What you've seen in the first half of the year around G&A, Buck Horne, expect a kind of a similar run rate. It may have a little noise quarter-to-quarter, but not materially different as you get into the second half of the year. On the property management side, there, I think it's kind of a similar story. You won't see a materially different change in the second half of the year with what we spend in property management expense versus the first half of the year.
Awesome. Perfect. Just going to resident turnover trends and just how low it seems to be trending, I'm just wondering if you've been able to discern any significant shifts in the reasons that people are moving out and/or where people are coming in from in terms of what their prior living situation used to be, and just wondering if there's any trends that you're determining on these move out or move in reasons.
For the move in reasons, we don't track that formally. We do know in the field people ask that question from time to time, but we don't have a formal mechanism to capture where someone's coming from as they're moving into an Invitation Homes house. On the move outs, again, consistently the two reasons are to purchase a home and because of the life transition. Interestingly enough, this is the first quarter where we've seen life transition was just a little bit more than purchasing a home for the reason for move out. We did see this quarter again that the reason to move out for being to purchase a home is down year-over-year. At every quarter but one in the last 10, that's been the case. In the one quarter it was, and it was basically flat.
We continue to see reason to buy a home to trend down. This is the first time, just barely, we saw the life transition be the number 1 reason why someone's moved out versus buying a home.
Cool. Very helpful. Thank you, guys.
The last question will come from Wes Golladay of RBC Capital Markets. Please go ahead.
Hey. Good morning, everyone. Are you finding more success in looking at top tier assets and top sub-markets now that international money has pulled back and your cost of capital has improved?
I want to quantify what you mean by top tier, Wes. I'll take a stab at it, but I would say, for us, we've always had a little bit higher price point asset than most of our peers. That's been delivered by design. Very early in this business, we figured out that the cost to replace a HVAC unit is, for the most part, the same on a $1,200 or $1,300 rental as it is on an $1,800 or $1,900 rental. There is some longevity in terms of that approach as you think about total risk-adjusted return and weighing out that expense factor in your numbers.
I think you're right in that as the market softens, as maybe there's less international buyers coming into places like Southern California, Seattle, parts of the West Coast that specifically have had a lot of pressure from foreign buyers, that could be helpful to us in terms of an opportunity. I would agree with you there. I think we are seeing some of that in some of those markets where we're seeing a bit more supply. Let's be clear, we're not seeing 6 to 8 or 9 months of supply in still a lot of these markets. We're seeing healthier numbers like three, four, five months of supply. For us, we hope that will lend itself to some additional opportunity.
Yeah, that was what I was looking for. Good school district, well located at the freeway, near job growth. Along that line of thought, do you see much dispersion in your rent growth in markets? We just see the big rolled-up number. Just looking at maybe some of your best located assets, are they outpacing meaningfully maybe your secondary assets in a sub-market or in a market such as Seattle, Southern California, Northern California?
Yeah, let me answer that two ways because I want to make sure I answer your question. Generally, across markets, our West Coast markets are through, call it year-to-date, are performing at much greater levels in terms of rate growth. I would agree with you there. I mean, we're seeing north of 7% year-to-date, almost 8% quarter-to-date in our West Coast markets. The rest of our markets are generally pretty healthy, between anywhere from 3%-4.5%. At the sub-market level, absolutely, and these are the things that Charles and I talk about all the time across our asset management process is we have broken our portfolio into a couple hundred different sub-markets. We look at that on a week-to-week, month-to-month, quarter-to-quarter, year-over-year basis.
More importantly, all of that data feeds into our revenue management model and our growth models. So as we're making decisions around culling or selling assets like Charles mentioned earlier in South Florida, we're making very deliberate decisions based on where we think our portfolio will lend itself to the greatest performance and are there any issues or preventative decisions we can make now around risks, around asset type or costs in the future, preventative cost decisions. That all weaves into both what we would like to sell and where we would like to allocate capital going forward. Did that answer your question?
Yeah, definitely was looking more towards the granular look into the sub-markets, much like multifamily does. Yeah, perfect. Thank you.
Thank you.
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 just want to thank everyone for joining us again today. We appreciate everyone's interest in Invitation Homes. We look forward to seeing many of you at our upcoming conferences and our Investor Day in October. Operator, this concludes our call.
The conference has now concluded. You may now disconnect.