Greetings. Welcome to the Invitation Homes first 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 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 first 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 first 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, 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. Let me start by saying this is a very exciting time for our business right now. With 18% AFFO growth in the first quarter, we are off to a great start to 2019, hitting our stride with merger integration in the rear view mirror. We are thrilled to go into peak season with everyone on a singular, unified platform that features better tools than we've ever had before. Cost efficiency initiatives have also been more impactful than expected so far in 2019, enabling us to increase our NOI, core FFO, and AFFO guidance, which Ernie will discuss in more detail. We are continuing to get more efficient, we're not stopping. In my comments, I'd like to touch on three things. First, our strong start to the year. Second, the work our teams have done to wrap up merger integration.
Third, an update on our capital recycling efforts. I hope everyone had a chance to review the results we reported last night. Highlights of our first quarter performance included 7.3% same-store NOI growth, our best ever first quarter average occupancy of 96.5%, new and renewal rent growth that outpaced prior year, and a 9% decrease in net cost to maintain. Let me add some color on what is driving these results. In short, it comes down to three things: favorable market fundamentals, our unique competitive advantages, and strong execution. Fundamentals are fantastic. New single-family supply is not keeping pace with demand, especially in Invitation Homes markets, where household formations in 2019 are expected to grow at almost 2%, or 90% greater than the U.S. average.
With the millennial generation aging toward our average resident age of 40 years old, we are convinced more and more people will continue choosing the convenience of a professionally managed single-family leasing lifestyle. The affordability of leasing a home versus buying a home also continues to work in our favor. What makes Invitation Homes unique is our locations. Residents are able to enjoy the affordable and convenient single-family leasing lifestyle I just described, while also living in attractive neighborhoods close to their jobs and great schools. Our scale also enables us to deliver a high-quality service to our residents at a more efficient cost and provides us with a large amount of unique data that our best-in-class revenue management system can digest to give us a clear picture of the market. On that note, we continue to get better and better at execution.
Our revenue management team and field teams have worked together to develop and refine the data and process for achieving the right balance between rental rate and occupancy. On the expense side, the simplification of our organization and systems are driving better results with the integration now behind us. Newly implemented repairs and maintenance initiatives are also making us more efficient, and we see additional opportunity to improve as we roll out ProCare more fully across our portfolio. All of that came together to drive first quarter results that we were very pleased with. We still have work to do. The most important part of the year lies ahead as leasing activity and service requests pick up in the spring and summer months.
We are optimistic given the momentum we are carrying into peak season, but recognize that it takes even more diligence to maintain operational excellence during this period. Our teams are well-prepared and energized for this task ahead. Next, I want to commend and thank our teams across the country for the superb job they have done with the final piece of merger integration. Our unified operating platform has now been implemented in each of our 17 markets. With one team operating on one platform, our teams are excited to be equipped with better systems and fewer distractions to do what they do best, focus on the resident and deliver world-class service every day.
We also continue to innovate and take the opportunity to identify additional areas for platform and process improvements as we start moving on from the integration. Finally, we continue to refine our portfolio and have made significant strides already in 2019 towards our capital recycling goals for the year. In the first quarter, we sold 654 homes with lower long-term growth prospects for gross proceeds of $155 million. In addition to de-leveraging, we used proceeds from these sales to acquire 208 homes with better quality and location for $62 million of investment. In April, we acquired 463 homes in infield submarkets of Atlanta and Las Vegas in a bulk acquisition for $115 million. 99% of these homes are occupied, with average in-place rents of $1,554 per month, which we believe is well below current market rates.
In addition, we expect to achieve higher operating margins by bringing these homes into our platform with greater economies of scale. I'll wrap up by reiterating how enthusiastic I am about the future of Invitation Homes. It's exciting to see everything we have worked hard on for the last 18 months of integration fall into place. Our operating teams continue to get more efficient. Our asset management teams continue to enhance the portfolio, and our capital markets teams continue to reduce leverage on our balance sheet. I believe we are better equipped more than ever to drive growth and deliver an outstanding living experience for our residents. With that, I'll turn it over to Charles Young, our Chief Operating Officer, to provide more detail on our first quarter operating results.
Thank you, Dallas. Our teams carried the momentum from the end of 2018 into another strong quarter to kick off 2019. I'm proud of the results we put on the board and the progress we made on controllable expenses. At the same time, we navigated through platform integration in the field. Most of all, I'm proud that the quality of our resident service continues to achieve new heights, evidenced by further declines in resident turnover. The occupancy in our portfolio and the enthusiasm of our teams are showing towards resident service put us in a great position for the upcoming peak season, and we're excited to tackle it together on one platform. I'll now walk you through the first quarter operating results in more detail. With outstanding fundamentals in our markets and excellent execution from our teams, same-store NOI increased by 7.3% in the first quarter.
Same-store core revenues in the first quarter grew 4.7% year-over-year. This increase was driven by average monthly rental rate growth of 4.1% and an 80 basis point increase in average occupancy to 96.5% for the quarter. Same-store core expenses in the first quarter were down 0.1% year-over-year. Controllable costs were better than expected, down 10.2% year-over-year net of resident recoveries. A portion of this improvement is attributable to a favorable comparison to the first quarter of 2018, when repairs and maintenance work order volume was higher than normal. However, the majority of our outperformance versus our expectation for the first quarter was due to great execution from our teams. In particular, I'll point to three things our teams accomplished that contributed to the results. First, we had success continuing to drive system and process improvements for repairs, maintenance, and turns.
Second, we incurred lower resident turnover. Third, we realized property-level merger synergies as a result of our integration efforts. Partially offsetting the significant reduction in our controllable costs was a 4.8% increase in same-store property taxes. Next, I'd like to expand on one of the main drivers of our strong quarter that I just mentioned. Our efficiency gains with repair and maintenance or an R&M. On last quarter's call, I talked about the fourth quarter rollout of an important update to our technology platform that enabled all of our internal technicians to perform work on any home in our portfolio, not just the homes associated with our legacy organization. This made a significant difference in the productivity of our maintenance technicians and resulted in an uptick in the percentage of service requests addressed in-house rather than by third parties.
We are pleased with the impact that had on our first quarter results, but we are not celebrating yet. Maintenance volume increases significantly in the spring and summer months, demanding even stronger execution from our teams. In line with normal seasonal trends, we don't expect to see the same level of in-house completion percentage in peak season that we saw in the first quarter. That said, I believe we are well-positioned for the task ahead now that integration is behind us and with all of the R&M systems and process improvements we've made over the last nine months. I'll now provide an update on the integration of our field teams. As Dallas mentioned, we have implemented our unified operating platform in every market. This is an important milestone for our company. It will allow our field teams to operate in a much simpler environment with better tools at their disposal.
It also allows our teams to get back to basics and devote all of their attention to providing exceptional resident service and operational execution. Feedback from our field teams have been extremely positive, and they're excited to enter peak season all together on one system. I'm also happy to report we accomplished this integration in the field ahead of schedule and with more synergies than the midpoint of our guidance. Integration efforts had unlocked $54 million of synergies on an annualized run rate basis as of March 31st, 2019. This compares to guidance in the $50 million-$55 million range of synergy achievement by the end of the second quarter 2019. In addition, we'll be better positioned to push for more procurement savings going forward and to take the next step in fully rolling out our ProCare service model across our portfolio.
Finally, I'll cover leasing trends in the first quarter and April 2019. Both renewal and new lease rent growth were higher in the first quarter 2019 than they were in the first quarter 2018.
Renewals increased 30 basis points to 5.2%, and new leases increased 110 basis points to 3.6%. This drove blended rent growth to 4.7%, or 70 basis points higher year-over-year. At the same time, resident turnover continued to decrease, reaching an all-time low of 31% on a trailing 12-month basis. As a result, average occupancy in the first quarter of 2019 increased 80 basis points year-over-year to 96.5%. Rent growth and occupancy trends remained very encouraging in April as well. Blended rent growth in April averaged 5.5%, up 100 basis points year-over-year, and occupancy averaged 96.6%, up 40 basis points year-over-year. With fundamental tailwinds at our back and occupancy in a strong position, we are confident as we enter peak leasing and maintenance season.
I'd like to send a huge thank you to our teams for putting us in this position by focusing on resident service and operational excellence, while also working diligently to complete the integration of our platform. 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: balance sheet and capital markets activity, financial results for the first quarter, and updated 2019 guidance. First, I'll cover balance sheet and capital markets activity, where we continued to build on the progress we made in 2018 by deleveraging further. In the first quarter in April of 2019, we prepaid $250 million of secured debt using cash generated from operations and dispositions. The debt we prepaid carried a weighted average interest rate of LIBOR plus 255 basis points. Our first quarter activity brings net debt to EBITDA to 8.6 times, down from nine times at the end of 2018. Pro forma the conversion of our 2019 convertible notes, net debt to EBITDA was 8.4 times at the end of the first quarter.
Outside of $370 million of secured debt maturing in 2021, we have no other secured debt coming due until 2023. As such, we continue to anticipate less refinancing activity in 2019 than in 2018. However, we will remain opportunistic if attractive refinancing opportunities present themselves, and we will continue to prioritize debt prepayments as part of our efforts to pursue an investment-grade rating. Our liquidity at quarter end was over $1.1 billion through a combination of unrestricted cash and undrawn capacity on our credit facility. I'll now cover our first quarter 2019 financial results. Core FFO per share increased 14.4% year-over-year to $0.33, primarily due to an increase in NOI and lower cash interest expense. AFFO increased 17.6% year-over-year to $0.28. The last thing I will cover is 2019 guidance.
As Dallas and Charles discussed, we had a great first quarter and are positioned well going into peak season. While we are optimistic that we will continue to perform well through peak season, we are not taking it for granted. As such, we are raising our full year 2019 same store NOI growth guidance by 50 basis points to 4%-5%, driven by a 50 basis point reduction in same store core expense growth guidance to 3%-4%. We are maintaining our same store core revenue growth guidance of 3.8%-4.4% in 2019. We are also raising our full year 2019 core FFO per share and AFFO per share expectations by $0.01 to $1.21-$1.29 for core FFO and $0.99-$1.07 for AFFO.
From a timing perspective, I want to remind everyone that occupancy comps were easier at the start of 2019 than they will become as the year progresses. Regarding expenses, our efforts in the fourth quarter of 2018 and first quarter of 2019 provided greater impact than was contemplated in our initial guidance. We were hopeful that we could perform better than the expectations that we laid out and are pleased that for the last two quarters, we have. At the same time, I want to caution everyone that maintenance and turn volumes are typically lower in the first and fourth quarters, and we would expect a seasonal pickup in the spring and summer. From a big picture perspective, we believe there is a long runway for growth ahead of us.
We are not surprised with our revenue performance to start the year, as fundamentals continue to favor single-family rental, and our portfolio locations and scale provide us a differentiated advantage. We also look forward to other opportunities to create value in our business. We are excited about the rollout of ProCare across all of our markets, which should drive better resident service and additional expense efficiency. We'll also continue to stay active in recycling capital, investing in value-enhancing CapEx projects, and beginning to pursue ancillary service offerings to enhance our residents' experience. As Dallas mentioned at the start of our call, it's a very exciting time for Invitation Homes. 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, 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. Our first question comes from Drew Babin with Baird. Please go ahead.
Good morning. This is Alex on for Drew. Looking at April leasing spreads, what markets are outperforming or, on the other side, underperforming your expectations as you guys kind of get that first sneak peek at your leasing season? Generally, at what rate are you guys sending out renewal notices today?
Hi, this is Charles. The West Coast has really been driving our results. If you look from Seattle into California and over to Phoenix, we've had increases in Q1 on occupancy across the board and our year-over-year renewal and new lease rates, blender rent growth is up. All positive signs. Where we've been really excited, in addition to the West, Tampa and Texas have shown really good results in both occupancy and rates. Denver has had some really good occupancy pushes as well. We're out in the low sixes in terms of our renewal ask, there's usually a spread from the ask to actually achieve.
Understood. Follow up for Charles. On the expense front, it looks like HOA fees have trended upward pretty significantly after being stable last year. I'm sure bumps weren't up 20% across the board, can you speak a little color on what's going on in that line?
Good question. Look, as we finalized the integration, we realized that there was some improvement we could do in the HOA management process. As a result of that, our accrual was off on the HOA expense line. This is really attributable to the merger. It shouldn't be considered recurring. We expect this short-term true-up to be resolved by the end of Q2. The great news is, today, after being done with the integration and having the right process in place, we have the right personnel, and we're confident that we're well-positioned to manage the HOA responsibilities smoothly like we did pre-merger.
Perfect. One last quick one for Ernie. Last quarter, you talked about recurring CapEx being up about 3% this year. After a really strong one Q, and obviously I know the timing's different. Curious if we could just get a little more color on what the cadence of CapEx spend looks like, and if that 3% number is still holding true.
Sure. Yeah. We had talked about the total net cost to maintain, which is both OpEx and CapEx. We thought it would be up about 3% year-over-year. The great outperformance by the team in the first quarter actually has allowed us to revise those expectations that we'd expect to be more in the less than 3% increase range. Definitely it should be a little bit better than we talked about a little bit earlier this year.
Great. Thanks for taking my questions.
Our next question comes from Nick Joseph with Citi. Please go ahead.
Thanks. Ernie, just in terms of full-year core FFO guidance, if you take the run rate from the first quarter, I think you get to around $1.30, so slightly above the high end. You've walked through the difficult comps in terms of occupancy on same-store revenue and some of the same-store expense side, are there any other line items that make 1Q not a good run rate for the remainder of the year?
Yeah, there's a few things, Nick. I appreciate you asking the question. For one, we'll see interest expense tick up for the remainder of the year. As we disclose in our quarterly 10-Qs, a number of the swaps that we inherited in the merger were step-up swaps, where instead of having one rate for the entire swap period, it started with a lower rate and progressed to a higher rate over the three, five, seven-year term of the swap. A number of those swaps reset in the first half of the year. We do expect, on a full-year basis, if you were to annualize, that 1.30, I would reduce that by about $0.02 just for those step-up swaps, Nick. In addition, we've talked about this, and there's some footnotes in our supplemental around it.
Currently, the convertible notes that we have that come due July 1st, those will convert to shares at that point. We're treating those, though, at this point, still as debt because we're still paying interest expense on those. That is slightly diluted when they convert to shares in the second half of the year. That's going to cost us roughly a half penny on the $1.30 that you mentioned. Those two items alone bring us down to more like 1.27, 1.28. The other two things I'd point out is that the business is a little seasonal. We do see expenses ramp up and margins decline in the third quarter. That's our peak, certainly, season for work orders, mainly around HVAC. Typically third quarter, and you'll see that historically, we'll have a little bit lower of a margin.
To annualize the first quarter for NOI would be slightly off from that. Finally, teams are generally pretty conservative with their G&A spend in the first half of the year to save up some money for the second half of the year. You'll see G&A ramp up a bit as we go into the second, third, and fourth quarter. All those things combined would bring you down from the 1.30 number that you mentioned to something that's more toward the midpoint of our guidance range.
That's very helpful. Thanks. Then just on the cap rate for the bulk acquisition, what was that? I know you mentioned it was 99% occupied, but that you saw some upside for putting the homes on the Invitation Homes platform. What's a stabilized cap rate for that bulk acquisition as well?
Yeah. Hi, Nick. This is Dallas. On the in-place in terms of just pricing day one, it's kind of like a 5.7%-5.8%, depending on renewals and things that are going on near term. Then I'd say that the way to think about that is we've modeled that we'll turn about a third of that portfolio every year, and we'd see that, call it spot cap rate, get into the low sixes over the next couple of years.
Thanks.
Thanks, Nick.
Our next question comes from Shirley Wu with Bank of America Merrill Lynch. Please go ahead.
Good morning, guys. On the transaction side, a little bit more on the bulk acquisition in 2Q. Could you give us a little bit more color in terms of how you sourced that and what your expectations are for the rest of 2019, whether you're going to continue to do more bulk acquisitions or maybe like the one-off instead?
Well, we're certainly off to a really good start in terms of meeting our capital allocation goals for 2019. In terms of bulk, we maintain a pretty steady approach. You'd seen that in the last quarter, fourth quarter of 2018, we were really active on the disposition side, where we had sold a number of bulk portfolios. If and when those opportunities present themselves to us, we certainly will take a look, both from a buy or a sell perspective. In this particular circumstance
It was a portfolio we've been familiar with for a number of years, and is a competitor of ours in the market. We definitely liked the footprints of both Las Vegas and Atlanta in terms of the assets that we bought. I would expect for us, Shirley, through the remainder of the year, kind of maintain our normal guidance. I think we talked about being in somewhere between $300 million-$500 million of both buying and selling this year with a kind of a net neutral focus. We'll definitely pay attention to what comes in front of us during the summer months. There are a few smaller opportunities out there, but nothing of real scale right now that would lead us to change our perspective.
Got it. As the 30-year mortgage rate has come down more recently, do you expect that to affect your move out to home buying, especially in the spring leasing season when people start to consider buying a home?
No. In fact, it's been pretty consistent. We've seen some small rate volatility over the past couple of years, but more or less, home ownership rate's been pretty constant between 64% and 65% for the better part of the past last couple of years. Where we see some bigger shifts is in really affordability, and that that option to be able to lease is much more attractive than it is perhaps to own in many of our markets today. Roughly 15 of our 17 markets have pretty good dislocation in terms of the affordability factor, pushing maybe customers preferably into a leasing decision versus ownership.
Great. Thanks. No problem.
Our next question comes from Derek Johnston with Deutsche Bank. Please go ahead.
Hi, everyone. How are you doing? Are you planning to push rents even more aggressively in the busy spring and summer leasing season, given your high level of occupancy? As you guys were planning, did you consider raising revenue guidance with the other measures, and why did you decide to keep it unchanged?
Hi. This is Charles, I'm going to answer the first question. The way that we have set our lease expiration curve is the high demand season is Q2, Q3, as families are moving. We really set our rents based on the market and demand that's out there. Our expirations kind of match to that. What you'll see is higher new lease growth in that high demand season, and that renewals will kind of stay steady, and both have been really strong for us. Really proud of what the teams have been doing. It's just great performance overall, given the integration as well. That's kind of how we see the demand come through the summer on the new lease side.
Derek, regarding guidance. First quarter on the revenue line came in where we expected, maybe slightly ahead of expectations. We had signaled that the first quarter was going to be our easiest quarter from an occupancy comp perspective. We're not going to continue to maintain an 80 basis point increase year-over-year in occupancy like we did in the first quarter. We had mentioned that we thought rental rate would be up around 4% plus or minus, and occupancy will be a little bit better, and that was how you'd get to our guidance range of 3.8 to 4.4. With that said, if Charles and the team kept executing as well as they are on rate as they did in the first quarter, as they did in April, he went over the April numbers.
That would certainly give us the opportunity to do at the midpoint or slightly better with the revenue. We just thought it was a little bit too early in the year yet to make an adjustment on that based on where we're at currently. We'll keep an eye on it, and we'll see how things play out during the second quarter.
That makes sense. Just secondly on turn and churn. Can you discuss how the turn times trended in the first quarter, and then how do you see churn shaking out for the rest of 2019?
This is Charles. In terms of the actual turning of our homes in terms of construction and rehab, we were in 15 days in Q1. What you'll see, though, that's a little bit of a seasonal metric as demand gets a little higher in Q2, Q3. It's trending up a little bit in April, that's typical. 15 days is where we want to be, and we're always looking for efficiency to bring that down. In terms of churn, I think you're referring to days every resident, from move out to move in. We're about where we were last year in Q1, we're seeing good trends down in April that's very positive.
Derek, it's really hard for us to make a bold prediction on whether turnover will continue to be down year-over-year like it's been overall. As we mentioned in the prepared remarks, it's at 31% on a trailing 12-month basis. That's the lowest we've seen. It's certainly hard to predict that it'd go lower still. Certainly, there's that opportunity. We're not in a position to make a prediction on where that may go over the next few quarters. We feel really good where it's at right now and the way that we're delivering service. We certainly see the opportunity to keep turnover on the low end of the scale.
Thanks, everyone. Great stuff.
Yes, sir.
Thanks.
Our next question comes from Jason Green with Evercore. Please go ahead.
Good morning. Just wanted to touch on turnover a little bit more. Turnover came in very low this quarter. I was wondering if there's anything unique about the homes that were turning over this quarter or anything that you're seeing out there that would suggest that turnover will continue to reduce as we head into the peak leasing season.
Hi. Thanks for the question. This is Charles. Nothing special about the homes that turned. I think, as we said, the tailwind at our back is helpful for the industry in general. We think turnover is low because of the quality of our resident service and the quality of our homes. Teams, as I said, are really executing well now that we're on one platform. It's working in our favor. Dallas mentioned earlier, affordability is also a factor. We're really focused on what we can control, and that's putting out great service and quality homes.
I guess in same store expenses coming in flat, can you quantify how much of that is really due to the fact that 1,000 less homes turned this quarter versus the comparable quarter, and how much of it is really due to increased efficiency in operations?
Just off the top of my head, Jason, 1,000 less turns. Our turns typically run about $1,000 of operating expense. Excuse me, about $1,500 of operating expense.
I'd say that certainly about a point and a half may have come from that. Most of it's come from the fact that the teams are just performing better. The things that Charles talked about came through for us in spades with regards to what we're trying to do on the R&M. Lower turnover certainly was a portion of it, but not the majority of it.
Got it. Thank you.
Our next question comes from Rich Hill with Morgan Stanley. Please go ahead.
Hey, good morning, guys. Wanted to just follow up with you on property taxes. Late last year, there was obviously a lot of discussion about property taxes and how those would be controllable going forward, as the 2018 increases were one time driven by M&A. I wonder if you could put the 4.8% increase that we saw in 1Q in context and really what drove that.
Sure. We had signaled, Rich, that we expected taxes to be up in the fives for the year.
Yep.
Because we've had good home price appreciation. We also mentioned that we thought the fourth quarter would be our best quarter because we had the tough comp. We actually came in a little better than expectations at the 4.8. What drove that was the State of Washington actually put out some legislation that limited millage rate increases, and we weren't anticipating that. State of Washington, where we're unique, where we have a portfolio of about 3,500 homes in Seattle, was a bigger good guy than we would've anticipated, and that will carry through for the rest of the year. That helped us. I will caution everyone that Washington's one of the few states that comes out early. Texas does as well.
The majority of what we'll find out about real estate taxes will start hitting in September and October, especially our bigger states like Florida, Georgia. We've got a ways to go. At least the first quarter put us on a path to be about where we expected with regards to real estate taxes.
Got it. That's helpful. Thank you. Maybe just going back to the expenses. Obviously, the guide implies, I think 4.75% for the rest of the year. Are you just trying to take a little bit of a conservative approach, as you had mentioned, 2Q starts to be in the higher cost portion of the year? How should we be thinking about that?
Yeah, I think that's probably the right way to think about it, Rich. We're happy with how things have happened, but this will be our first time going through peak work order season on the new systems. We want to be cautious and appropriately so when setting our guidance. Your math's the correct math. It certainly implies that the numbers want to go up. Let's be perfectly clear with everyone, we do not expect flat growth for the rest of the year. If we did, we would revise guidance even further still. We still want to make sure we're being smart about how we're looking at it, and things happen. We want to make sure we're trying to leave some room for that as well. We feel good about the numbers. We're certainly pleased with how the first quarter came in.
We're hoping to set ourselves up to have a successful remainder of the year with regards to expense control.
Great. Thanks, Ernie. Congrats on a really well-executed quarter.
Thank you.
Thanks, Rich.
Our next question comes from Hardik Goel with Zelman & Associates. Please go ahead.
Hey, guys. Great quarter. Congratulations. Maybe this one's for Charles, I guess. The turnover decline year-over-year was pretty significant, and I'm just wondering how much of that was intentional from you guys moving leases over the last year into the peak leasing season, to give you better pricing, and how much was just organic decline?
Yeah, I think a little bit of both. As we put the portfolios together, we're being thoughtful around that lease expiration curve. That had some help. Look, demand is healthy. We're executing well. We got to the single platform ahead of schedule, and it's paying dividends. We'll continue to provide high-quality service, and we think over the long haul, it'll help us. You put all that together, the teams are really doing the best they can do out there. I can't thank them enough. Really best in class. It's a lot of execution in the field.
Just one quick follow-up on personnel costs. There was some really good expense leverage there. What are the drivers of that? Is that as seasonal as other costs? How would you think about that? Because it hasn't been in the past.
Yeah, Hardik, this is Ernie. That's almost entirely due to the merger and the integration, where last year, staffing this time of year was full, with regards to the platform. We started seeing savings with regards to personal and other as we rolled further into 2018. As we got into 2019, with the integration being completed, we're just about at our final staffing level. It's really the staffing levels that drove that from the integration.
Got it. Thanks. That's all for me.
Thanks, Hardik.
Our next question comes from Haendel St. Juste with Mizuho. Please go ahead.
Hey, good morning out there.
Hey, Haendel.
I guess first, kudos on the great expense results in the first quarter. Charles, I guess maybe for you, I'm curious, just thinking more broadly longer term, beyond some of the recent benefits from the improved systems and efficiencies and the merger synergies, what do you think now the long-term expense run rate for your platform is after the merger synergies run out, after you get the systems kind of to where you want them?
Thanks, Haendel. We're really focused in on the execution that we did in Q4 and Q1. Teams put up great cost controls with a lot of the systems that we discussed that we implemented late last year. It's added real benefit. I think what's left for us to do is the implementation of ProCare, to roll that out as we finish the integration and train everybody on it and get that kind of internal system and partnership with the resident going. We also have in the future, fleet management that's coming out that's going to have some benefit. It's hard to quantify exactly what that's going to be. We've put up good numbers. We're going to continue to execute. As Ernie said, peak season is the litmus test, and that's upcoming here.
Hard to predict, but we're doing what we're supposed to and what we said we were going to do, and we're executing well, and we're going to continue to focus.
Got it. Not to press too much on what's certainly a difficult question to answer, but I guess a few years back, we used to think about the expense growth side of this business as more or less being inflationary. Some operational hiccups last year forced a rethink of that, and so there was fears of a higher expense projection coming into this year, and certainly the guidance is reflecting some of the incremental costs. Is it still the view that this is inflationary and that there are factors between the clustering of your portfolio and the systems that could support that? Or should we be thinking about this as an inflation plus maybe a 3%-4% expense growth business over the long term?
Yeah. I'll take a swing at it. This is Ernie. I think two components. We've talked about it before. I think we're not going to be much different broadly than general residential. If people have the view that residential is going to be inflationary plus, we probably fall down that. They think it's going to be inflationary, we're probably there. If they think it's going to be inflationary minus. I think there's two, though, important differentiators for us, where we are as an industry and as a company versus the broader residential community, which I talk about the multifamily. One is real estate taxes are a bigger component of our expenses than they are in residential, because we're not a commercial product, we're a residential product.
We're close to 50% of our expenses come from real estate taxes, and we're in the best markets when it comes to home price appreciation. That may lend you to think it may be maybe a little more inflationary plus because of that. Offsetting that, I think, at least for the nearer term, is that we're still in early stages of running as an industry and as a business. There's opportunities for efficiency. Charles mentioned a couple of those around fleet management, around ProCare, things like that. At least for the nearer term, you'd hope to have some things there that would help offset that. I think overall, this business has been around for hundreds and hundreds of years. It's only been institutionalized for the last few years.
It's worked for folks for the last hundreds and hundreds of years to be able to operate single-family homes. I'd like to think we can do it a little bit better with the scale that we have and the expertise that we have and the technology capabilities we have that others that don't. Hopefully that all washes out to be a very similar profile that you would see in the broader residential world.
Thank you for that. Ernie, a quick one while I have you. Can you talk a bit about some of the ancillary service initiatives you're pursuing here, potential impact and potential timing on revenue?
I'm going to pass that over to Dallas, as it's certainly been one of his big focuses where he's sitting now.
Thanks, Ernie. Hi, Haendel.
Hey, Dallas.
A couple of things we're working on. As you know, we've done a really good job with our smart home implementation and adoption rates. Those adoption rates today are somewhere between ±75%, and we're looking to enhance some of those offerings. In fact, working on some of this stuff, I wouldn't expect a lot of it to be 2019, but more 2020 type of events as you start to think about the way that we could see other income grow within our business. There's certainly a number of other areas that would fall into kind of two buckets. One would be things we're currently doing, like smart home, that we can do better. We see an opportunity in our structure around pets and some of the things that we're doing there for our residents currently.
We know that roughly 50%-60% of our residents have pets, and we think there's other offerings and things that fit into those that we're now trying to work through and to see what kind of experience we can provide that centers around some of that. We believe that that's also an emotional factor for the leasing lifestyle in terms of keeping our customers longer and providing an experience that feels stickier. There are other things that we're working on outside of that are maybe newer from an ancillary perspective. Are there other ways that we can perhaps make the experience as we onboard a new resident better by using things like deposit insurance versus deposits? There's revenue streams that are associated with those types of things. Those are a few of the examples of things that we're working on.
They are near and dear to us, kind of post-merger integration, so that we can start to roll these out on a unified system. The delivery mechanisms for that, how we do that is really important. We are focused on it.
Got it. Thanks, Dallas. I appreciate that, and certainly, we're looking intently on the rollout. Thank you.
Great.
Our next question comes from Buck Horne with Raymond James. Please go ahead.
Hey, thanks. Good morning. Just kind of bigger picture here. With the share price starting to afford you a little bit more reasonable cost of capital here, how do you think or has your thought process around de-leveraging or accelerating de-leveraging changed at all with better cost of capital here? Are you also potentially thinking of accelerating your external growth activities? Is that a possibility as well? How do you think about kind of using your cost of capital more efficiently?
Yeah. Thanks, Buck. We've always talked about we'd be opportunistic when it comes to if we have opportunities to de-lever or opportunities to externally grow. Certainly, with the share price behaving better, that may give us some more opportunities. Where the share price is today, it's still significantly under consensus NAV and where we think NAV is as well. To use the shares or equity to de-lever when we're at that level is a difficult decision to make and probably one we wouldn't want to make. We'd want to see some better performance there. We'll always leave all options on the table. With regards to the external growth, we've been successful and been able to fund that through capital recycling.
Certainly, again, as the share price behaves, it opens up some more avenues to us, and then it's just a question of finding the right opportunities. We're very cognizant with that. We talk to the board often about that. We're pleased with where things have headed. We'll just have to see where things play out as we go forward.
Okay. That's great. Going back to the acquisition here in the second quarter. As you're dropping in these new houses into the existing Atlanta and Vegas footprint, this is kind of conceptually, obviously you're going to expect to improve the margin performance of that portfolio over time. Does it also leverage your costs for the existing homes in the portfolio? Can you improve the existing performance of the portfolio by adding these new homes and making the markets denser?
Yeah, great question. Fundamentally, you nailed it in terms of the things that we think about in terms of growing our footprint and trying to find the right size and scale. You hear us say this over and over when we see you guys at conferences and other things, scale really matters in this business. The Las Vegas example is one that we can talk about here briefly for a moment. As you think about our footprint there, with that acquisition, it took our Las Vegas footprint to about 2,700 homes. Prior to the merger, Invitation Homes was, plus or minus, I want to say 1,100, 1,200 homes in the Las Vegas market. We think about the growth and the margin expansion with Las Vegas, similar to what we saw in other markets like Phoenix.
When we started these businesses, Phoenix was a market for us that was in the kind of the low to mid-60s. In our world today, Phoenix is a low 70s type market, and that comes through a couple of things. One is scale and footprint, because we get more efficient. Charles and his team do a fabulous job in terms of creating efficiencies around those pods, those groups that manage a portfolio for us. About 2,700-2,800 homes is about the perfect size for us right now for a pod. That makes us extremely efficient. There shouldn't be additional G&A additions with an acquisition like that. Furthermore, your question around how does that leverage the other parts of your portfolio?
Well, as Charles and the team look at efficiencies around route optimization for our maintenance techs, or the way that we stock our vans with the certain types of supplies and things like that. Certainly, our work order and our maintenance efficiencies get much more enhanced. To add to that on the revenue side, anytime we have another mark in the portfolio or in the book in a market, it makes us that much more competitive to understand what our rates are doing relative to our peers.
Great. Thanks, guys. Good job.
Our next question comes from Douglas Harter with Credit Suisse. Please go ahead.
Hi, guys. This is actually Sam Cho filling in for Doug. We talked a lot about the turns, and I know that turns will pick up during peak season. If the turnover rate stays at the current lows, could you see occupancy pushing past 97% for the portfolio on the whole?
I think longer term, Sam, the math would tell you that would be the case, that if you could bring your days to re-resident down further, and we've done that in April. It's about two or three days better this year than last year. Turnover stays low. You can do a quick math exercise and say that absolutely, that on a stabilized basis, low 97% type occupancy over the course of a year is achievable. In April, we ended up at 96.6. I would agree with that.
Got it. All right. Thank you so much.
Our next question is a follow-up from Nick Joseph with Citi. Please go ahead.
Hey, it's Michael Bilerman. Ernie, the $1.5 million of offering related expenses on page 10 in the supplemental that you're adding back for core FFO, I guess why is Invitation paying that when Blackstone sold $1 billion? What's that in regards to?
Yeah, no, that's exactly what it is we had to file three shelves, one for Blackstone selling its shares, one for Starwood Waypoint, or excuse me, Starwood Capital in case they want to do some shares, and then the company has a shelf as well. Really, those costs spread across all three of those. We aren't using our shelf today, but it is out there if we did want to issue common equity. That's just normal course, with regards to how the shareholder agreements and things are written. So it's about a third of a penny, in terms of cost, is a one-time cost associated with this. As Blackstone does further transactions, the only cost that would be associated with those, Mike, would be comfort letters and things like that in a much more smaller amount of legal costs associated with future offerings.
It's standard course for the first time when you get it set up for the company to pick that up.
You didn't want to put that into G&A, it's just normal course of business. There's always stuff as a public company that you have.
Yeah, that's right, Michael, yeah.
You can just wipe back it out of core FFO. I know it's a small number, but just from a methodology perspective, it just seems that we go down this road of having alternative definitions of earnings.
Yeah, I can understand that, Michael. You kind of said what it was. It was a small amount. We wanted to call it out so people could see it very specifically. It's one time and a little more expensive than usual because three shelves had to be filed versus one this company would do in the future, and then shelves you do every few years. It's fair feedback, Michael. We wanted to give more disclosure and let people do with it what they thought.
The prospectus on page S9 had $1.4 million. Is that just a different amount or is it relating to something else?
No, they should be pretty consistent, Michael. I'd have to check to see why we might end up with an extra tens of thousands of dollars that might have rolled in separate from that were also on the line. I don't have an accounting for that off the top of my head.
Your comment on NAV, you made the comment that street consensus NAVs are, I think you said significantly or much, but it was indicating that it was a lot higher than where the stock's trading. SNL's got your NAV at $24.34, and FactSet's got it at $25.64. The stock's at $25.20. I guess it's in the range of where the street sort of thinks it's worth. I just wanted you to sort of follow up a little bit on that comment about using your equity to accelerate a deleveraging program or to fund external growth.
Yeah. I'm pleased to hear that it's doing so well this morning. We've been preparing for the call, I haven't been paying attention to the fact, I guess it's gone up some this morning, that's good to see. I'd say, Michael, when we actually pulled the analyst models, and I don't think everyone reports into those numbers, we get to a number that's closer to 26.5% for what the analysts have out there. Calling that consensus, understanding other people do different consensus numbers. Regardless, we have a different view on where NAV is, and we haven't disclosed NAV since our IPO. Yeah, it's just like any other public company. We will use that as a source for capital for us. On the de-leveraging side, we have a very safe balance sheet today.
We would like to get to investment grade faster if we could. We were not going to do that by diluting current shareholders. We don't have that need, that requirement, but we certainly, it's a like. It's a preference to get to investment grade as fast as we can. We'll keep that option open for us if the stock price continues to perform and do better. Regardless, Dallas and Charles come from very acquisitive backgrounds. They've both worked in the private world, and you've seen what they were able to build in their predecessor companies and what we've done here. We'll certainly look very carefully at what our best cost of capital for us is if we found the right external growth opportunities, Michael.
I'd like to think management and everyone in our Board is aligned with all of our shareholders, and what we want to get accomplished there.
Just remind me in terms of process, if Blackstone came and wanted to do another secondary offering of their shares, and you could tag along with that in terms of issuing primary, do you have the ability to knock the amount down? Is it just like a pure negotiation with them about what the right sizing of a total offering is? Let's say they came and said, "We want to do $1 billion." You don't think you can put $1 billion into the market. You want to do $500. Is it preset in terms of methodology or it has to be negotiated?
I'd say it's different things. Anytime that the company is thinking about issuing equity, Michael, it's a decision of our Board. Management will go to the Board of Directors and say, whatever reason, whether Blackstone is potentially selling at that point, Starwood's selling at that point, or anyone else. If we think there's an opportunity for us to issue equity then or at other times, we'd engage in discussion with our Board before what we thought was right for the company. Blackstone, you'd have to ask Blackstone, with regards to how they're choosing to set how much they want to sell, when they want to sell, and things like that. We certainly aren't privy to that.
If there's an opportunity for us to be efficient and do it all at the same time, then we would get together and do what makes the most sense for the shareholders to get that accomplished. Blackstone, first and foremost, is focused on what makes sense for the shareholders. They certainly have made their intentions known on what they want to do. They also have, as you know, Michael, a lot of shares to sell, and they want to make sure they're doing that in the smartest way they've demonstrated with other platform companies. To date, they've demonstrated with Invitation Homes. I'd expect nothing less than that going forward.
Okay. Thanks for all the color, Ernie. Appreciate it.
Yeah, Michael. Thank you.
Our next question comes from John Pawlowski with Green Street Advisors. Please go ahead.
Thanks. Dallas, on the dispositions in this quarter and in recent quarters, could you share what NOI growth for these homes, these lower quality homes, would look like over the next several years if you still operated them?
Yeah. It's a little bit of a tricky question, John, in terms of what we've sold. I have to go back and look and where you saw. The NOI growth probably more or less is kind of along the lines of what you'd see from the company, maybe a little bit less, and that's one of the reasons why we might be selling some of these homes. Remember, we do sell for reasons. Obviously, NOI growth is key and something that we focus on. We want to make sure that the homes in our portfolio long term are ones that are going to provide some of the best risk-adjusted returns to shareholders.
What we've typically been doing so far through the first four months of the year, and much of like what you saw in fourth quarter, is we've been selling homes that are either, A, an outlier geography or parts of the portfolio that just are really inefficient for us to manage. B, homes that are either suboptimal in nature because of fit finish, potential CapEx risk down the road. Or C, we've been selling homes that have been a bit bigger, too. We have homes in our footprints that are too big from a square footage standpoint. If you look at the types of homes that we're typically buying, our sweet spot's kind of between 1,600 and 2,200 square feet, 2,300 square feet.
For those variety of reasons, we might be a net seller, and typically, we see lower growth coming out of some of those homes.
Okay. If NOI growth is not maybe a bit lower, could you share how much higher the all-in cost to maintain is?
It would vary. It would vary, again, to my earlier points around square footages and geographies. We have different fit and finish standards. For example, in a home like Seattle where we might put down vinyl plank flooring every time. If a home were coming through our asset management review in that market, we would certainly take into consideration some of those longer-term CapEx needs that home might need. Whereas, maybe a home in one of our warmer Southwest markets may have a little bit different CapEx approach, and our margins may be better. We may be inclined to keep that home a bit longer. It all goes into kind of the cycle of how we do our rebuy analysis on a home-by-home basis.
Okay. On the portfolio acquisition, I understand the margin benefits. Could you share how far below you think the rents were versus market?
Yeah. I think to just high single digits from a rent perspective, in terms of where we think there's an immediate turn on these rents as they renew. Also our kind of going-in price, as I mentioned earlier, being kind of 5.7%, 5.8% on an in-place cap rate is much higher than we typically are able to see in that marketplace. Vegas is a hard market to buy into. We're actually thrilled with our ability to buy this type of a portfolio.
Yeah, John, I'd say if you look at our supplementals, you've seen Vegas has really ramped up in terms of new lease growth rates in the last year for us, and the vast proportion of the portfolio was in Vegas. Just the embedded loss to lease in the portfolio is higher than we would typically see in our portfolio. Between that and then the fact that they were running at a very high occupancy, so we don't think they were pushing as much as we might have chosen to do. Maybe they were choosing to run the business a little bit differently. It gives us confidence that we've got potentially an opportunity for some rent bumps on that portfolio as leases turn.
Okay. One final one from me. Charles, could you share the bad debt trends year-over-year and any notable outliers by markets, either downward or upward inflection points in bad debt?
Yeah. I'll answer that one, John, sorry. We've actually seen bad debt trends are consistent year-over-year within a few basis points, and we haven't seen any outliers in any markets, positive or negative. It's all been relatively consistent on a year-over-year basis.
Okay. Thanks for taking all the questions.
Thanks, John.
Thanks, John.
Our next question is from Jade Rahmani with KBW. Please go ahead.
Thanks very much. Just thinking about the cadence of turnover and new lease activity, do you expect occupancy to dip in June sequentially?
Typically, we'll see occupancy go down in Q2, Q3, as we talked about with the turnover volume. We do think that April, while we came in high, as we go deeper into the summer, we're going to see that occupancy number trend down.
Thank you. Secondly, have you sold any assets to iBuyers such as Zillow or Opendoor? If so, could you quantify the percentage?
Today, we really haven't sold much through the iBuyer platforms. It's something we certainly consider, Jade. It's a good question. We've been more of an acquirer of properties, I should say, through the iBuyer platforms. We certainly look at it as another form for us to be able to transact. As they develop, their systems get a bit more robust and a bit more user-friendly, you could certainly anticipate a day where, especially on some of our vacant or end-user sales, that we might choose to sell through some of those platforms.
Just lastly, in terms of home purchase trends, are you seeing any change in the percentage of move-outs to buy? Has that declined notably on a year-over-year basis?
On a year-over-year basis, just up just a bit. Not much more than anything that's been normal. It's typically been between 22% and 25% of our move-outs, and it's still kind of right in that range, depending on the month and the quarter.
Thanks very much.
Thanks, Jade.
Thanks, Jade.
Our next question comes from Wes Golladay with RBC Capital Markets. Please go ahead.
Hi, guys. A quick question on the renewals. It looks like supply and demand is quite favorable, especially compared to last year. Is there anything holding you back from pushing more on the renewals? Do you have any internal governor?
Really, like we said before, really set by market, we look at a number of factors that determine what that price will be. We'll go out with healthy asks, as we talked about in the low sixes, we want to find that right balance between keeping occupancy and minimizing turnover. Our revenue management teams working with the field teams do a great job of finding that right balance. Market sets it, also it's our performance on the resident customer service that we're providing, and do they want to stay with us. We've been doing better and better as our teams are really focused on making sure we create a great resident experience. Demand has been good for us.
Okay. One quick one on the acquisition, the bulk acquisition. You mentioned about the rental uplift, do you imagine there's quite a bit of a difference on the margin between your existing portfolio in the market and what you bought? Do you know that offhand, would you expect to close most of that in the first year by just plugging it into your platform?
When we underwrote what we expected the revenues to be, we didn't really dig into the expense history so much on their side. When we model a bulk acquisition, we'll look to see what's happening from an R&M perspective on that portfolio, we'll run it through our model, Wes, with regards to where we expect margins to be. That said, based on where the cap rate came out for us, we think it was a win-win. We think it was a win for the sellers for where they could run the portfolio. I think they got a fair price, they were clearly pleased with it, otherwise we wouldn't have moved forward.
On the flip side, I think it's a win for us because we have a little bit of a different model in terms of how we want to run the revenue side, what we would do on the expense side. Whether we have an uplift or not from where they are, we're comfortable that we'll get this to our margins. As we talked about earlier, especially in a market like Vegas, where we increased our footprint by almost 10%, allow us to run even more efficiently across the entire footprint of Las Vegas.
Not so much with Atlanta, with only about 100 homes we bought in Atlanta, with 12,000, it won't have much of a difference there, certainly allows us in one of the best markets today, in one of the fastest-growing markets today, Vegas, to increase our footprint and improve margins across the whole portfolio in Vegas.
Great. Thank you very much.
This concludes our question and answer session. I would now like to turn the conference back over to Dallas Tanner for any closing remarks.
Thanks for joining us today. We appreciate everyone's interest in Invitation Homes. We're excited about where we are today with our business and the opportunities in front of us, and we look forward to seeing everyone, hopefully at Nareit in June. Thank you.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.