Greetings, and welcome to the Invitation Homes 4th Quarter 2018 Earnings Conference Call. All participants are in listen only mode at this time. Call. As a reminder, this conference is being recorded. At this time, I would like to turn the conference over to Greg Van Winkle, Senior Director of Investor Relations.
Please go ahead, sir.
Thank you. Good morning, and thank you for joining us for our Q4 2018 earnings conference call. On today's call from Invitation Homes are Dallas Tanner, President and Chief Executive Officer Ernie Freedman, Chief Financial Officer and Charles Young, Chief Operating Officer. I'd like to point everyone to our Q4 2018 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 2017 Annual Report Form 10 ks and other filings we make with the SEC from time to time. Invitation Homes does not update forward looking statements and expressly disclaims any obligation to do so. During this call, we may and find additional information regarding these non GAAP measures, including reconciliations of these measures with the most comparable GAAP measures and our earnings release and supplemental information, which are available on the Investor Relations section of our website. I'll now turn the call over to our President and Chief Executive Officer, Dallas Tanner.
Thank you, Greg. We are excited to report a strong finish to 2018 and favorable momentum into 2019. Our location, scale and platform continue to create a best in class experience for our residents, evidenced by our industry leading resident turnover rates. Blended rent growth has accelerated for each of the past 3 months to levels significantly higher than last year and solid occupancy positions us well to continue capturing acceleration in the 2019 peak leasing season. We are also driving better efficiency on the R and M side of our business, which resulted in 4th quarter performance that exceeded our guidance.
Our strong finish to the year brought core FFO per share growth for the full year 2018 to 14%. Before discussing what this momentum may translate to in 2019, I want to take a moment to review our performance on the 2018 operational priorities that we communicated to you at the beginning of the year. Our first objective was to deliver strong consistent operational results across our core portfolio. We met our expectations for the top line with 4.5% same store core revenue growth, which outpaced residential peers. However, we can execute better on the expense side of the business.
After identifying opportunities to be more efficient with repairs and maintenance last summer, our teams have done a great job starting to capture some of these opportunities. We have more work to do, but are pleased with how our performance improved in the second half of twenty eighteen. Our next objective was to further enhance the quality of service we provide to our residents. The ultimate scorecard on service comes when it is time for residents to make a renewal decision and we are thrilled that our turnover rate on a trailing 12 month basis improved each quarter in 2018 to new all time lows. Our third operational priority was to execute on our integration plan.
In addition to finding an incremental $5,000,000 of projected end state synergies, We also beat expectations for 2018 achievement by capturing $46,000,000 of annualized run rate synergies in the year. With respect to investments, our priority was to continue increasing the quality of our portfolio by recycling capital. In total in 2018, we sold roughly $500,000,000 of primarily lower rent band homes that no longer fit our long term strategy. We recycled capital from dispositions into both the purchase of almost $300,000,000 of homes in more attractive submarkets with higher expected total returns and prepayments of debt. Finally, we made progress on our path to an investment grade balance sheet.
We reduced net debt to adjusted EBITDA to below 9 times compared to approximately 11 times at our IPO in early 2017. We also improved our weighted average maturity and cost of debt. Looking ahead to 2019, we are excited about our opportunity for growth. Let me address these three opportunities in particular, revenue growth, expense controls and capital allocation. With respect to revenue growth, fundamentals are as strong as they've ever been for single family rental.
In our markets, household formation in 2019 are forecast to grow at almost 2% or 90% greater than the U. S. Average. Construction of new single family homes is not keeping pace with this demand and has recently slowed further. In addition, affordability has become a bigger challenge for potential homebuyers due to a combination of home price appreciation and higher mortgage rates compared to last year.
We are seeing this play out in our portfolio today with same store move outs to homeownership down 17% year over year in 2018. Leading housing economist, John Burns, estimates that the cost to rent a single family home is lower than the cost to own a comparable home in 15 of our 17 markets today by an average discount of 16%. We believe our product provides an attractive solution for customers who want to live in a high quality single family home without making the financial commitment of homeownership. Furthermore, we believe the location of our homes in attractive neighborhoods, close to jobs and great schools and the high touch service we provide differentiate Invitation Homes and make the choice to lease with us even more compelling. Regardless of what the broader economy may bring in the coming years, we feel that our business is well positioned.
Even if we were to experience a cooling of the economy, Our portfolio could continue to benefit from demographics that are shifting more and more in our favor and from a sticky single family resident base that would likely find homeownership incrementally less attractive under more challenging economic conditions. We are also excited about our opportunity on the expense side of the business and are focused in 2019 on adding to the progress we made in the second half of twenty eighteen, newly implemented changes to our repairs and maintenance workflow and route optimization systems are paying dividends already. But we still have plenty of opportunity to be more efficient. We also believe the integration of our field teams and property management platform in 2019 will be a Positive Catalyst for Expense Improvement. With one team operating on one platform, we will be better positioned to find new ways to refine our business and take resident service to higher levels.
With respect to capital allocation, our plan in 2019 remains focused on the dual objective of refining our portfolio and reducing leverage on our balance sheet. The markets we are in remain healthy, providing compelling opportunities on both the acquisition and disposition sides for us to achieve our capital recycling goals. Abundant capital from potential buyers and limited inventory in our markets create an attractive opportunity for us to prune our portfolio. We also have multiple uses for these proceeds, including buying homes in more attractive submarkets, reinvesting in our portfolio through value enhancing CapEx and prepaying down debt. Before we move on, I want to say a few quick words about our team.
It is a thrill to have the opportunity to in an outstanding place, thanks in part to the leadership of Fred Tuamey. Fred helped guide Invitation Homes through what has been a very successful merger and integration. Has positioned us to move forward better than we've ever been before. We thank Fred for his leadership and wish him the absolute best. Moving forward, we will continue to stay true to our DNA and the strategic path we have been on since day 1.
We will put residents first. Will drive organic growth and an outstanding living experience by leveraging our competitive advantage of location, scale and high touch service. We will be opportunistic with respect to external growth. We will progress toward an investment grade balance sheet and we will do all of this with the best team in the business. I am fortunate to be surrounded by true experts and industry pioneers on our field and corporate teams as well as in our boardroom.
To all of our associates, thank you for a great finish to 2018 and and let's continue to build on our momentum in 2019. With that, I will turn it over to Charles Young, our Chief Operating Officer to provide more detail on our 4th quarter operating results.
Thank you. As Dallas said, the Q4 of 2018 was a great one for us operationally. Our teams did a fantastic job capturing rent growth and occupancy to put us in a strong position going into 2019. Drove better R and M efficiency resulting in outperformance of our guidance in the 4th quarter. And most importantly, we continue to provide outstanding resident service.
I'll now walk you through our 4th quarter operating results in more detail. Same store core revenues in the 4th quarter grew 4 point 6% year over year. This increase was driven by average monthly rental rate growth of 3.8% and a 70 basis point increase in average Same store core expense growth in the 4th quarter was better than expected. Core controllable costs were down slightly year over year even with a tough R and M comparison versus the Q4 of 2017 due to that year's hurricanes. Property taxes increased 15.1 and year over year in line with our expectations due to the timing items discussed on last quarter's call.
As a result, overall same store expense growth of 7.4% year over year. This brought our 4th quarter 2018 same store NOI growth to 3.2%. And Company. For the full year 2018, same store NOI growth was 4.4%, 65 basis points ahead of the midpoint of guidance provided on our last Earnings Call. Importantly, we have made steady progress on improving our R and M efficiency by implementing numerous changes to systems and processes after opportunities for improvement were identified.
With these changes, we have improved how work orders are allocated between in house technicians and third parties, and the routes that technicians follow to optimize their time. In the 4th quarter, we also rolled out an important update to our technology
platform that enabled all
of our internal technicians to perform 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 material difference in the productivity of our maintenance technicians in the Q4. We still have work to do though and we'll continue implementing process improvements and ProCare enhancements in the months leading up to 2019 peak service season. Next, I'll provide an update on integration of our field teams. In November.
As of today, we have teams in 5 markets representing almost 40% of our homes functioning under our go forward structure and platform. Transitions have been smooth and feedback from the field teams have been extremely positive. We plan to roll out the platform to our remaining markets and waves over the next several months. This rollout is expected to unlock the remainder of the $50,000,000 to $55,000,000 of total run rate synergies we have guided to by mid-twenty 19. As of year end 2018, our run rate synergy achievement was 40 $6,000,000 Next, I'll cover leasing trends in the Q4 of 2018 and January 2019.
Fundamentals in our markets remain as strong as ever and we are executing well. Both renewal rent growth and new lease rent growth have increased sequentially in each of the last 3 months. Renewals averaged 4.7% in the Q4 of 2018 and new leases averaged 2.1%. Notably, new lease rent growth is now exceeding prior year levels and was a full seventy basis points ahead of last year in Q4 of 2018. This resulted in blended rent growth of 3.7% in quarter 2018, up 20 basis points year over year.
Same time, resident turnover continued to decrease, driving occupancy to 96% in the Q4 of 2018, up 70 basis points year over year. Each of these leasing metrics improved further in January. Lender rent growth averaged 4.3% in January 2019, up 90 basis points year over year and occupancy averaged 96.2% in January 2019, also up 90 basis points year over year. And Company. The fundamental tailwinds at our back and occupancy in a strong position, we are confident as we start the New Year.
Our field teams are focused on execution and are excited to leverage our integrated platform to deliver even more efficient resident service. 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 4th Quarter and 2019 guidance. First, I'll cover the balance sheet and capital markets activity where we had a very active and successful year. Let me start with a few highlights about where we started 2018 versus where we ended it. Net debt $9,100,000,000 to start the year, dollars 8,800,000,000 to end the year.
Net debt to EBITDA, 9.5 times to start the year, 8.8 times to end the year, pro form a the conversion of our 2019 convertible notes. Weighted Average Years to maturity, 4.1% to start the year, 5.5% to end the year. Unencumbered Homes, 42 percent of Homes to start the year, 48% to end the year and weighted average interest rate, 3.4% to start the year, 3.3% to end the year in a rising rate environment. We accomplished all this by prioritizing free cash flow and bulk disposition proceeds for debt prepayment and by refinancing debt in 2018 2018 with $4,200,000,000 of proceeds from our 4 new securitizations. While we remain opportunistic, we anticipate less financing activity in 2019 with no secured debt maturing in 2019 or 2020 and only $373,000,000 maturing in 2021.
However, we will continue to prioritize debt prepayments as part of our efforts to pursue an investment grade rating and have made incremental progress already with prepayment of $70,000,000 of secured debt in January. We will continue our deleveraging strategy by electing to settle conversion of our $230,000,000 of 20 19 convertible notes in common shares. We view this decision as a way to reduce net debt to EBITDA by approximately 0.25 turns, while incurring minimal incremental dilution to core FFO per share. Liquidity at quarter end was over $1,100,000,000 through a combination of unrestricted cash and undrawn capacity on our credit facility. I'll now cover our Q4 2018 financial result around the timing in which we roll
it out during the month to make sure that we're not impacting the field teams. We went through multiple rounds of testing to make sure that things were working as expected before we went in. We have great training we've learned from each of the rollouts to get better in our training and implementation has been great. The feedback from our field teams have been very positive And as I said, we expect that we'll be there by mid year. Bottom line is the teams are really excited to get on one combined platform, because they were And
Dallas, congratulations on the promotion. When you took over Interim President in August, the Board formed a special committee to work with you and the team during Fred's absence. Is that committee still in place and what's the Board's role today?
Yes. Hi. Thanks for the question and excuse me, the compliment. Yes, the Board is still functioning in a similar fashion as we were and that Executive Committee will stay in place through 2019. As you guys know, we have a very supportive Board with a ton of excellent experience behind it.
So We will continue to use that. It's been strategic for us as we have vetted out some of these things that Charles just discussed in terms of how we would integrate going forward and we thought through some of processes. So they've been very supportive in that capacity and we would anticipate them to continue doing so. Thanks.
The next question will be from Drew Babin of Baird. Please go ahead.
Hey, good morning.
Good morning, Drew.
As it pertains to AFFO guidance, I was wondering if you could talk about the direction of recurring CapEx Extra Home in 2019 understanding that in 2018 with the Starwood Waypoint merger, there might have been a little bit of noise there. Can you just give us a little color on the trends in that number, as well as how you think about revenue enhancing CapEx this year?
Sure. Drew, I'll take this. This is Ernie. With regards specifically to our recurring CapEx, we expect overall net cost to maintain, which is both our operating expenses associated with repairs and maintenance as well as turnover as well as the capital associated with it and that would be our recurring CapEx. I think that's going to be up approximately about 3% year over We definitely have some easier comps to go up against and we certainly have had some improvements, but as we talked about in the prepared remarks, we're not fully optimized today.
And of course, we want to be cautious before we get into peak leasing season, before getting too far ahead of ourselves of where things may end up. But where we sit today and where we're at with progress we made. And we feel like we're back to a more normal type growth rate with the opportunity maybe to do better as we go forward. So I would expect a plus or minus in the 3% range for net cost Maintain to Grow. And Drew, remind me what the second part of your question was?
Revenue enhancing CapEx, whether we can expect any kind of directional change from last year there?
Hey, Drew, this is Dallas. I'll answer this. We'll continue expect our focus to continue to find ways to These assets on a like for like basis as they turn. Now some of that allows us these opportunities with revenue enhancing CapEx. I would expect that program to continue to develop, If not, maybe be a little bit more active as we spread into some of our West Coast markets.
We certainly see a number of different opportunities outside of just the smart home functionality with which we are continually adding into the portfolio today. We are finding that our customers They're sticky by nature, but what's been really interesting over the past year as we've piloted revenue enhancing CapEx and gotten better at how we implement that process is How many times our customers on a renewal or on a new lease want to actually pay up to optimize parts or sections of their house. This is a win for both us and the customer because we're able to harden the asset in theory and also get a better risk adjusted return on the revenue increase and that's outside of the way we would normally underwrite a property. So expect us to do more of it. We're looking and getting smarter.
Charles and his team have done Terrific job on the procurement side to find ways that we can continually enhance that experience for the customer.
Thank you. That's helpful. And then lastly, just on the guidance expectations. Non cash interest and share based comp, I was hoping you could kind of give us those numbers, just given the accounting, How those play into the core FFO calculation?
Yes, Drew. We have not provided guidance for those in the past. And so let me think about what we can do and get out there for folks to help with modeling, but don't have anything I can share with that with you today.
Okay. We can follow-up on that. That is all for me. Thank you.
The next question will be from Douglas Harter of Credit Suisse. Please go ahead.
About the home count as we move through 2019.
Yes. Hi, Doug. This is Dallas. We've been pretty vocal about Our desire to continually refine and optimize the portfolio. And the nice thing about the merger is we've had enough time and distance.
We knew there were some homes initially both with which we wanted to sell and also some areas where we wanted to scale up and could find and drive greater efficiencies in the portfolio by acquiring. Expect us to do more of the same. We had a pretty busy year in terms of what we were selling and it comes in a variety of shapes and sizes to why we sold. We certainly were active in parts of Florida where we now on a combined basis had over 25,000 homes post merger. Expect us to continually look for areas like that where we can continue to refine the portfolio, create efficiencies for the operating teams and build on the scale and density that we have in those markets.
In addition, we also have outlier locations or geographies where we will at times or seasons look for ways to refine and improve the way that those parts of the portfolio is behaving. And lastly, I'd just add, There are occasions and we're starting to see this a little bit in some of our West Coast properties where if a home just becomes too valuable and ultimately we think it's better suited for an end user, We will sell that home and take those gains and recycle capital into parts of markets where we see still significant opportunities for good risk adjusted return.
This is Dels. Just following up on that. What are the markets where you see the best opportunities to kind of recycle capital into?
Well, funny enough, we were pretty active in 2018 and still a lot of West Coast markets. We've been pretty vocal about the fact that we love Seattle. We love the growth that's going on there. It's evidenced in some of the new lease and renewal rates that we're seeing in the business today. We also still are finding really good opportunities in the Southeast.
And And if we could, we'd buy more in California and markets if those opportunities were available to us. We just see limited supply in today's environment. As we've stated, Household formation in our markets today is almost 2 times that the national average and we're feeling that in the parts of our business specifically around new lease growth and renewals. But generally speaking, you've seen that we've been getting out of parts of the Midwest over time and we've continued to recycle coastal where the majority of our footprints
will be from Shirley Wu of Bank of America Merrill Lynch. Please go ahead.
Hi guys. Thanks for taking the questions. So in your expense guidance of percent. Do you think you could break out like different pockets in terms of growth for personnel or R and M for 2019?
Yes, Shirley, what we're comfortable providing today is because taxes are almost half of our expense number, I can provide some guidance around what we think would happen with tax What's going to happen for everything else, which is really roughly the other half. I think as everyone knows, home price appreciation continues to be pretty strong in our markets and it has run over 6% Across the board on a weighted average basis across our markets. And with that, we do expect that property taxes in 2019 will be up somewhere in the 5s for us. And of course, Prop 13 in California helps mute that a little bit for us with having 20% of our portfolio in California. And so the real estate tax is being up, We think somewhere in the fives.
We think everything else will be less than 3% to get to our at the midpoint to get to our guidance range of 3.5% to 4.5%. And then as the year plays out and different things earned in, we'll see some things flow through on those other expense items. But from a guidance perspective, we're comfortable providing guidance in that way, Shirley.
That's helpful. So also recently mortgage rates have really pulled back, especially in the last couple of months, but your move outs to home buying has still has continued to trend down. Is that something that you are concerned about or moving forward, how do you think about that?
We are certainly not concerned about it because it's been fairly consistent over the past couple of years. Less than 10% of our overall portfolio on an annual basis moves out of our business to go buy a home, at least that's what we have seen over the 1st few years as a public company. We look at it a couple of ways. I mentioned it in my earlier comments. We are Seeing a real shift in terms of affordability to your point and we are picking up some of the net benefit of that quite frankly in our business today.
As we mentioned before, 15 of our 17 markets based on the research that we look at and follow are now more affordable to lease in, call it, an entry level product than it is to buy in today's environment. So we think interest rates Than it is to buy in today's environment. So we think interest rates there actually maybe push people into a longer term lease with us or maybe offer for an opportunity for consideration to choose a leasing lifestyle. And there are some markets to your point that are a A bit more dislocated. I mean in Seattle, Washington for example, that differential can be as high as 30%.
And so we look at that as also an opportunity to make sure that we are providing a in class service and an experience that people are willing to pay for. We look at that as an opportunity.
Got it. Thanks for the color guys.
The next question will be from Derek Johnston of Deutsche Bank. Please go ahead.
Hi, everybody. Can you discuss how turn times trended in 4Q and where you'd like to see them in 2019? And really if the new R and M platform drives any benefit there? Yes.
So this is Charles. Turn times have been kind of mid platforms. As we get all into one platform, as we talked about and finalized that integration at the first half of the year here. I think we'll be in a much better shape to bring those times down. As we think around turn, it really is the quality and location of our homes and we make sure that we are delivering a high quality product.
That delivery of product were related to the R and M in terms of any work orders that may come afterwards. Part of what we want to implement in 2018 that's important is our ProCare service. And that's a follow on after the turn when the resident moves in to make sure that they understand their responsibility, But also we bundle some of those work orders to a 45 day visit that will allow us to kind of manage that process with the resident on the R and M side. So that's where the overlap in the transition happens, but ultimately they're 2 separate portions of the business. And as I said, we'd like to bring those turn times down and we expect that we'll start getting into the low teens as we get
Consolidation. Great. And last one for me. How many customers are now subscribed to the Smart Tech Technology and what other ancillary income drivers have you guys identified?
Yes. So, right now, we have about a third of our homes Have the smart home installed, so a little over 30,000, about half of those are paying customers. And that builds every time that we move a resident in, 80% of those residents are opting into the service, which is great adoption rate. In terms of other ancillary, with The integration we've really been focusing on finalizing that. But once we get through the integration, we see there's opportunities, whether and moving services or pet services, pest control items that we can think around, filters.
There are a number of items that we want to attack, Right now, we're focused in on making sure that we finalize the integration.
Good stuff. Thanks.
The next question will be from Richard Hill of Morgan Stanley. Please go ahead.
Hey, guys. I wanted to just ask Maybe a couple of questions about how you think about 2019 where you didn't give guidance. You had some success with bulk sales. So Dallas, I'm wondering if you can give us any sort of color around those bulk sales, cap rates, breadth of buyers. And then do you think that's going to continue in 2019?
How are we supposed to think about that going forward?
Sure. Thanks, Rich. A number of things that as I mentioned earlier in my comments, we still see quite a bit of demand in the marketplace for stabilized product being sold from an institutional operator like ourselves. So I would expect that we'll still explore some bulk opportunities this year and really quite frankly any year where Our scale and density allow us to facilitate those types of transactions. In terms of what we did in 2018, we sold homes on average that were much cheaper than the homes that we are acquiring.
I think if you look at the 4th quarter as an example. In the 1600 plus homes we sold in Q4, we had, call it, an average price per home around 175 1,000. We were recycling that money into homes that were well north of $300,000 on a per property basis. So as you think about what those cap rates are, you Certainly, when you're selling cheaper product generally on a pro form a basis, you're going to see cap rates that are a little bit higher, just because your denominator being so low in terms of your asset Pricing. And so what we sold over the majority of 'eighteen were homes that were closer to 6 cap and recycling the homes that were well within the mid-5s.
Now that doesn't tell you the whole As you think about the way we've recycled in terms of what we bought and what we sold, on average, we're buying homes that we're renting for about $500 more or less more than the homes that we were selling. So that additional $6,000 in revenue is a really smart way to operate on the long term when you think about all the incremental costs that can go into this
That's great detail. Hey guys, you guys put up a really impressive margin number this quarter. So how are we thinking about that sort of near term and long term? So I guess the question is, is that 65% plus margin, Is that sustainable near term and do you think you can still get that into the high 60s? I'm going to push it to 70 area.
What are you thinking about there?
Yes, Rich. I think the answer is it really all depends on how things move forward with some capital allocation and other things. As you know, 4th quarter and first quarter we are our highest margin quarters, but for the entire year of 2018 and a year where we certainly had some challenges, we put up a 64.5% margin, which we're pleased to do even with the challenge And as we continue to refine the portfolio from a capital allocation perspective, importantly, as Charles continues to refine what he's doing on an operating standpoint, and our guidance implies that margins will be pretty similar from 2018 to 2019 based on what we put out there for a midpoint of revenue expense and NOI guidance. We think there's opportunity for that to continue to increase, somewhere certainly in the higher 60s. We do have, I think, a half dozen markets today that are in the 70s.
And certainly as Dallas looks to do some things on the capital allocation side and especially the homes we're selling out of in some of the markets where we've been disproportionately selling, Those markets do have lower margins. So you could certainly see you could force your way to a 70% type margin. But I think for where we're at, where We want to have our homes in the portfolio. I think increasing it by a few hundred basis points from where it is now into the higher 60s is certainly a very achievable goal over the next period of time.
Great. Thank you. And just one final question. Dallas, going back to your prepared remarks on affordability. When you think about affordability, are you sort of doing apples to apples rent to mortgage payment or do you guys think about affordability relative to the cost of owning a home differently?
Yes. I think we like to look at it a couple of different ways. I think the way to really look at it so that you keep everything constant is you got About housing costs as not only your mortgage, but also some ongoing maintenance expense that a normal homeowner would incur over ordinary course. And that's the way Burns and a number of other economists We've looked at a couple of different pieces. We've done some of our own research obviously with the data that we have and you're certainly seeing that dislocation we talked about earlier.
Now there's There's a time and season where that's your friend and there's a time and season where maybe it isn't. But right now, it certainly feels like we're positioned to capture some of that affordability demand that people are looking for some relief, specifically in the West Coast where we're seeing rising home price days as well as the rising rate environment not helping the homeownership story.
Perfect. Thanks guys. That's it.
Thanks Richard.
The next question will be from Jason Green of Evercore. Please go ahead.
Good morning. On the deceleration in same store revenue growth that your guidance implies, is that kind of due to conservatism on occupancy, Slowing rent growth or a combination of the 2?
Yes. Well, if you look on Page 23 of our earnings release, Jason, I think it will help guide what happened in 'twenty eight and give you a sense for what we think is going to happen with regards to 2019. You'll see in 2018, our revenue growth of 4.5% was made up of 3.9% in rental rate growth, 50 bps increase in occupancy and then other income was a little bit better than those. And so that's how you get to a 5. To get to the midpoint of our 4.1 percent revenue growth, we think we're going to have similar rental type growth, maybe a tick lower than that at the midpoint, Very similar.
As you recall, we have accelerating rent growth here starting in the Q4 of 'eighteen and we saw that in January, as Charles talked about. For the 1st three quarters of 2018, it was a deceleration year over year, so we need to earn that in. And then on occupancy growth, we do expect occupancy to be better than it was in 2019 versus 2018, but not necessarily 50 bps better. Now that said, Charles is off to a really good start in January, up 90 basis points and we're off to a good start on rental rate as well. And so when you factor that in, that's why we don't think we quite get to 4.5% with regards to our the midpoint of our guidance, but there's Certainly path for us to do better than that, certainly seeing how well we started off the year with January.
Got it.
And then the synergies that you guys had mentioned from merger. Are those factored into same store guidance or do those represent additional upside?
No, those are factored into our guidance. And so about 90% of the Synergies that hit the field hit same store, the rest hit the total portfolio, because about 90% of our homes in same store. So those are factored in. So in regards to getting to numbers, we expect From an expense perspective, it's taking into account the synergies that we earned in 2018 as well as what we anticipate the timing on those synergies. And to be clear, those synergies aren't all going to earn in on January As Charles talked about, it's going to be until mid year and we got the whole portfolio rolled out.
And as we do that, it's about 60 days After that, where we get to that final number, because we want to have some overlap period to make sure things are working right in the field. And so those take a little while to earn here in 2019, but that's all factored in to our guidance.
Got it. And then last one from me. Total cost to maintain came in for the year at about $3,200 per home. You're talking about that increasing potentially around 3% in 2019. Previously, you had said the long term rate is probably somewhere between 2,600 $2,800.
So I guess, first, is that still the long term rate that you guys feel will be necessary for total cost to maintain the homes? And then how long does it take for you guys to get there?
And So we came in I think closer to 3,100 and 3,200, I think it's 3,109 for the year. But notwithstanding, when we first came out with our IPO way back a couple Years ago, we did say adjusting for inflation, we expect to be at 2,600 to 2,800. So those numbers are going to move on us, those guideposts, There's inflation in the RM world and we've actually seen probably more inflation in that than in other areas just on what's been going on with broader products and services. You always need to reset that. That said, we're not quite where we think we're going to be in getting back on that track.
And as we further optimize and get things rolled out on the R and M side, and we've talked about in the prepared remarks, We had a good Q4. It came in stronger than we thought. We're excited about that with regards to what happened with R and M to bring us down to that $3,100 number came in for the year. We want to be cautious as we come out this year and make sure things are going as we expect and move forward. I think once we're fully optimized, everyone's working on the same platform, that's We had the real opportunity to get back to numbers that were more like where we thought we would end up with regards to the longer term, growing for inflation where we thought cost to maintain would be.
Got it. Thank you. All right. Thanks.
The next question will be from Jade Rahmani of KBW. Please go ahead.
Thanks very much. Are you seeing a pickup in interest from homebuilders in partnering with you?
Hi, Jade. This is Dallas. It's interesting. We've certainly had a number of discussions around opportunities and we're looking at a couple of different things. As I've mentioned before, we really are channel agnostic and we just want to make sure that we are focused on the right locations.
So we are interested. We like the fact that I think homebuilders are getting more and more comfortable with the idea of single family owners Being in their neighborhoods and buying product, I certainly could see it becoming more and more of an opportunity for us going forward. I don't think we have to take on any of that development risk ourselves. I've been we've been pretty clear about that, but we certainly want to look for strategic partners that we can then be a potential buyer for. We think that there's definitely opportunity for us there to grow.
And what's your view toward master plan communities that feature apartments and standalone single family rental Communities with High Amenities Targeted Toward Millennials.
Well, it's an interesting concept that continues to evolve. We certainly know some of the operators and the owners that are building that product today. I think it's kind of a shift quite frankly. I think it plays into some of the same demographics that we have been talking about. There is this 65,000,000 person cohort between the ages of 20 35 that are coming our way that want quality of choice and it's no different than the business we run today.
I think where you got to be careful though Jade in some of those opportunities is you got to still stay location in terms of where you want to invest capital. Now if that's a small boutique opportunity in an infill location with really good rents and that the square footages are similar to what we would normally own, it would be something we look at. What I've seen across a broad spectrum of some of that product is it's typically been much smaller footprints between 81300 Square Feet and that's not really our sweet spot more or less. But if we saw an opportunity that was infill That makes sense. We certainly want to look at it and we're encouraged by the fact that people are recognizing that leasing is a real choice right now for people.
And just on the influence of iBuyers on the market, are you competing directly with them with respect to acquisitions? Are they Distorting pricing or impacting the market in any way. And is there a potential opportunity to enter into joint ventures to provide Centralized Property Management Services since they are active in many of your markets.
Let me answer kind of those in part. And I think you are thinking about the world the right way, Jade, in terms of being an entrepreneur. This is an interesting moment in time with these iBuyers. There certainly feels like there is new company popping up every day. Who knows what will actually stick or last or who will be the kingpins in the long term, but we This is public record.
We have been supportive of companies like Opendoor and Offerpad and Zillow that are out there making the home buying and selling experience much easier for the customer. Now, 5,500,000 transactions in the U. S. Occur every year. So as you think about that, I mean there is plenty of space for both brokers, iBuyers and individual investors to be buying and selling homes in the U.
S. We certainly want to look for strategic partners that we can partner with to help grow our footprint in our portfolio. We get the question a lot about would you want to do 3rd party management. You can certainly see a day where that could be interesting. But now for us, it's just not really our focus.
Our focus is on growing our own footprint. We see plenty of opportunity within our own book of business where we can continue to grow the Invitation Homes product along with the Invitation Homes fit and finish standards as well as the service levels that those that our customers are wanting to expect. So it's not in our near term horizon by any stretch. Thanks so
much. Thanks, Dave.
The next question will be from Wes Golladay of RBC Capital Markets. Please go
ahead. Hey, good morning guys. I can appreciate that there's a lot of moving parts last year on the expense side, Volatility to the upside and the downside. But this year, you have a 1% range on your same store expenses. Should we take that as a sense that all the moving parts are behind us It'd be more of a normal environment this year.
Yes, Wes. We certainly think so. We want to be cautious and want to set a range that we thought was appropriate. At the end of the day, we feel a lot better sitting today with the lessons learned over the last 12 months. You recall last year at this time where we provided guidance.
The merger just closed about 60 days ahead of that and actually closed ahead of schedule. We all thought that it would actually close in early January, but fortunately we're able to get done quicker. We're bringing 2 companies together. We run on the same platform. We're learning how each of the companies were doing things.
And in hindsight, we got a lot of things right, but a couple We definitely feel much more confident. But again, we're not 100% of the way there as we've talked about in a couple of other things, but Certainly so much further along than we were. So we are feeling better for sure than we were last year and certainly as the year progressed.
Okay. And then you made the comment
about the earn in being
a little bit lower from the leasing from early last year. But looking at this year, what are your Expectations for blended rent growth for each of the quarters, not by quarter, but just in general, do you expect to continue to modestly accelerate throughout the year based on the supply and demand you're seeing?
Yes, we want to be careful with that. I did mention it in the prepared remarks. The occupancy comp does get harder throughout the year, so I just want to make sure people realize that. That means you're likely to see higher revenue growth earlier in the year, because we won't have an easy and occupancy comp later in the year. We'll just have to see how it plays out.
It's January, it's early in the year. We make our hay starting in mid March. That's kind of when peak season starts for us and goes through end of July or early August. So certainly, when we're talking to you guys in about 90 days about quarter results. We'll have a much better feel for whether we've seen that acceleration continue at the pace it did in January or not.
Okay. That's all for me. Thanks for taking the questions. Thanks.
The next question will be from Hardik Goel of Zelman and Associates. Please go ahead.
Hey, guys. Thanks for taking my question. As I look across the guidance range, my first question is, would you consider The low end of guidance to be as likely as the high end of guidance. And as a follow-up to that, what are the components guidance that you look to as being drivers of potential downside to guidance to the midpoint and drivers of potential upside as well.
Sure. Artie, I think by definition, we think it's equally likely as we put out our guidance that the low side We'll certainly be optimistic that we think we can do better, but that's the point of the range is we think In terms of looking to influence our ability to have upside to that or not, again peak leasing season on the revenue side will be and we're real pleased with how January came out, for sure. And so I think that that's going to be what will swing us in terms of rental rate achievement and then we're always rate focused first, but we've been able to have been successful, especially with lower turnover. We saw the lowest we've As we looked at the 4th quarter, that certainly helped on the occupancy side. On the expense side, I think it's probably the obvious.
It's just we know We had some struggles last year with repairs and maintenance and the cost to maintain. We were feeling better about it than we have, but we're not 100% there in terms of having everything optimized and running. And the proof will be in the pudding just like it is on the revenue side for peak leasing season will become the summertime when we hit the majority of our work orders that have to do around the HVAC season. We'll be better prepared for that this year by leaps and bounds than we were last year. But I think that will be the true test for us on the expense side as we get into Peak work quarter season.
How are we doing? Are the teams optimized? Or is everything working the way we expect it to? And we're pleased with the path we're on right now. And by midway through the year, come that August call, the late July August call, we'll have a pretty good sense, I think, of how the year is playing out on the expense side.
Thanks. And just one quick one, if you'll indulge me. The move outs to buy, were they a big driver of turnover being lower? Did you see them trend lower year over year or what was the trend there?
Year over year they trended slightly lower. They've actually been a little bit more lower in the previous quarters and You should know Hardik, so it's I don't know how to draw a lot of conclusions from the 4th quarter, but we did see it lower quarter over quarter like we did every other quarter this year. And so that certainly did help turnover number.
Thanks Ernie.
Yes.
The next question will be from Alan Wai of Goldman Sachs. Please go ahead.
Good morning. I had a question on G and A. Is your 4Q number a good run rate? And How should we think about incremental synergy savings realized mid quarters as well as potential seasonality?
Sure. So we provided a walk in our earnings release Show how you get from where we ended up for 2018 for core FFO and then to the midpoint of our guidance for 2019. And within that walk, we did call out the fact that for both property management expense and G and A combined, We expect to be about a penny better, and it's not quite a penny, it rounds up to a penny. And so we are going to do a little bit better, more so in G and A than in property management expense, but both numbers and that's mainly from the earn in of the synergies that's still to go as well as the ones that happened in 2018. There's not much to go still on the G and A and PMA numbers.
So it's mainly the earn in from 2018, but then understand there's some cost inflation baked into there too. Costs don't remain static in terms of what's happening with compensation costs for the organization and other costs. And so you have a synergy good guy that more than offsets an inflationary increase in those costs for 2019.
That's helpful. And I was wondering in terms of seasonality and G and A, how should I think of that?
Yes, there's really not a lot of seasonality in The only thing that potentially would do that would be around our bonus accruals. We try to do a good job throughout the year anticipating where those will come out. So you should see that be pretty steady each quarter throughout the year.
Thank you very much.
Welcome.
The next question will be from John Pawlowski Key of Green Street Advisors. Please go ahead.
Thanks. Dallas or Ernie, could you provide the acquisition and disposition volume targets for this year?
Yes. Hi, John. We are going to give early guidance around numbers that feel pretty similar to last year. We think we will buy somewhere between $300,000,000 $500,000,000 of assets On our base case scenario, we'll probably sell somewhere between $300,000,000 $500,000,000 in assets.
Okay. And then Ernie, I understand you're not giving repair and maintenance expenses. I guess I'm still having trouble understanding where the easy comps Are going on middle of the year, you guys increased expense guidance, pretty meaningfully that implied over $10,000,000 of what was described as transitory costs. I know you're not completely refined, but it still seems like a very, very easy comp that doesn't seem to be baked into guidance. So I am hoping you can provide a little bit more of a walk.
Yes, John, I saw what you had published back in December where you broke things out a little more specifically about expectations from sort of different expense line items. And as I mentioned earlier, for net cost to maintain overall, we do expect to be up about 3%. And I know you had a number out there that I think was down 4%. And With our better 4th quarter performance, I think that number adjusts to something that's probably closer to down 2%. So is there certainly a disconnect from what you thought we would be With what was happening in the repairs and maintenance world versus where our guidance has come out, it might be best for us just to try to talk offline to give you more information comparable perspective.
We also have to take into account where we think cost inflation is going on a year over year basis if none of that was happening. And we We don't need to get a discussion on it, I would say, what your assumption was there versus what ours was. But overall, we think we've set ourselves up for a number that is achievable on all of the expenses, where we can And of course, we're going to do our best to try to do better and with some areas where we had some negative one timers last year and Hopefully that sets us up to do a little bit better, but also lesson learned from last year, we want to go out and make sure we're we put out numbers that are achievable and we feel good about and that we're confident in.
Okay. A follow-up on Wes' question around expense variability. And I'm less concerned about what happened in 2018 2019, But just trying to figure out this business over the next 3 to 5 years. But using 4Q 'eighteen as a case study to do that, So full year 2018 expenses come in well below the revised guidance range and 50% of your expenses actually hit your expectation. With 2 months left to the year, that implies huge variability for the rest of the line items.
I know I've asked this question in the past, but it seems that this business model is going to be a lot more variability, have a lot more variability on expenses versus Multifamily. Do you believe that to be the case? And a little bit of color there would be great.
Yes. No, John, what I would tell you is, and I can Speak for us. I don't want to speak broadly for the business. There's 2 companies that are public companies and the other company does a great job with what they do and they can speak to So just talk about Invitation Homes. We went through a big merger in 2018 and it was a little bit of where so many things went Well, for us, it was a little bit of surprise and caught us off guard about having some issues on the R and M side.
And as we were wrapping up the Q3 and Preparing for the Q3 call and felt that it was appropriate to revise our guidance. We wanted to do it in a way that we were confident we wouldn't miss. And there is still more to go. And so I don't want to draw too much conclusion, John, just from 1 quarter. And you said the right thing, let's look over the long term.
Over the long term and how many of these companies I've been in public for a long time and certainly Invitation Homes was before our merger, you didn't see that variability. So I think the majority of the variability is specific to some of the things that pop up when you bring 2 very large companies together that were doing things a little bit differently and how to get it on, still not completely all in one platform. The proof will be in the pudding over the next couple of years. Will this business be a little bit more variable than multifamily? I guess I'd ask you to look back in the 90s when the multifamily companies were doing mergers, When you saw that kind of activity and go back and see what the variability was in their expenses, when they were bringing putting much smaller companies together, I suspect that They had similar variability.
And I think over time, it's a residential business that should be more predictable than other businesses. It's kind of long term and we feel a lot better where we are today than we were a year ago for sure. And we're all hoping, we want to see less variability in the dispensers Going on and we think we're going to continue to earn into that less variability as we continue to move forward.
That's fair. Thanks Ernie.
Got it.
The next question will be from Ryan Gilbert of BTIG. Please go ahead.
Hi. Thanks guys. Understand that The demand for single family rental product looks strong on an overall basis, but are there any markets in particular where you're seeing elevated move outs to buy or maybe just lower than expected traffic from potential renters?
No, this is Charles. We really haven't seen a demand, as we said, has really been strong across the board. Our turnover has been low, which has been great. Affordability is working in our favor. You can see our occupancy grow in Q4 and continue into January.
In addition Our rent growth in January was up across almost all of our markets on a blended basis. So We're really we're optimistic on how we're going into the year. There's always a few markets that we can see improvement and we've already started to See that in January, and clearly, we're being led with a lot of the West Coast markets and the demand that's out there.
Okay, good. Thanks. And then how does the labor market feel for your field repairs and maintenance Property Technicians. I understand it was pretty tight last year. Has there been any change in your ability to source labor either positively or negatively.
Yes, the markets are tight, but we haven't seen any impact to our business Ship has been here, our scale that we have. If we do lose somebody, we have a deep bench of talent that we can pull from. And ultimately, our employees Enjoy our high dynamic environment and our mission of serving our residents. So we know that's been a conversation over summer and we're watching it closely, but we haven't seen any material impact to our techs.
Okay, great. Thanks very much.
The next question will be from Haendel St. Juste of Mizuho. Please go ahead. Hey,
I guess good morning out there.
Hi, Ed. Alta.
First, Alex, I guess congratulations. I'm curious if there is perhaps anything where your view may differ at all from your predecessor, like say Perhaps doing single family rental development in house, maybe more meaningful changes on the geographic footprint, target leverage or anything else of that nature.
It's a good question, fair question. Thank you for the congratulations. Look, I think If Fred were here, I were here, quite frankly, any of the other leadership that have been a part of Invitation Homes, our mission has been pretty consistent In terms of making sure that we had scaled density and high touch, high quality service and good location. I think what Fred brought my predecessor brought to the table was this eye single towards some of the tech enhancements that were available to us. And so Charles and Fred were cutting edge in terms of smart home capabilities, some of those things They're doing really well.
We've obviously adopted that. I think as you think through what we believe kind of butters the bread, so to speak, is just that consistent pragmatic approach to how you run your business. And so that won't change. And what I talked earlier in my prepared remarks about staying true to our DNA, our DNA And you guys probably get sick of hearing it, but I would rather pay for the right locations and make sure that we have infill dynamics happening around our portfolio then look for scale and growth opportunities where I have got to be outside of, call it, infill locations. And so I think we don't differ all that much and the good news is, as we have taken the best from both organizations on the path forward.
Charles and I worked very well together. Ernie and and I have worked together now for 3 plus years. We've got a nice energy amongst management team and so we're excited to really push forward. I think Some of the earlier questions around what are the opportunities for growth, we certainly see quite a bit of organic growth inside of our portfolio today that we can We'll go capture. Charles was right when he said that we want to focus on making sure we finish the integration, but we've got playbook of things that we're thinking about that we want to try to roll out over the next couple of years that we think will not only enhance the value of the real estate and the rents, but make the customer stickier.
And I think if we get really good at that piece of our business, We are not going to be talking about the history of Invitation Homes, it's about where are we going.
Helpful, helpful. Thank you. Another question, I guess, on the same store expense outlook. I'm curious how much Asset sales might be helping that line item. And then if you'd confirm if the assets that you're contemplating selling are included and the same store pool and in that same store expense guide.
Sure. So I would say the assets that we have sold over the last period of time has been kind of neutral to our results. As things came out from the bulk dispositions, we saw what the numbers looked like before and after, it really didn't have Impact with regards to what our numbers would have been for 2018. And then for 2019, Haendel, there are homes Homes that we've identified for sale and we vacated them, that's when we take them out of same store, because those would specifically be homes we're trying to sell to end users, not through a bulk disposition. If there's homes that were identified for sale that we think might go through a bulk disposition and they remain occupied, those we will keep in same store until we get to the point where we have them under contract, we have a hard deposit and it's highly certain that the transaction is going to happen.
So what will happen is throughout the year, you will see some homes move out of same As they kind of go through the process and identify for sale, so the answer is a little bit of both. Some of them are out of same store today, but there will be some that we sell today that are currently in same
store. Okay. Okay. Thanks. And last one for me.
You've mentioned Seattle and California being some of your better markets. I'm curious What are the more challenging markets? And then what are the what type of delta are you projecting in terms of revenue between the upper and lower end of your portfolio in terms of revenue.
So this is Charles. I'll jump in on the markets where we see opportunity. If you look in the results we put out, Dallas, Denver, Houston, occupancy was below where we wanted. We've seen a really nice trajectory in all three markets. Dallas has moved up into the 95s and we've seen really good blended rent growth increase in January as well.
We've sustained that occupancy. Denver is on a really nice move. We finished January above 95%, 95.2% and February continues to rise with blended rent growth also going. Houston, we've maintained our occupancy up to 95, rent growth kind of flat. So we see those as markets that will If you look back over 2018, we made really good progress on our Florida markets and with such a large presence there, Orlando has been strong for us all year, but Tantan and South Florida have really come along.
So we're excited about getting the whole portfolio balanced and operating similar to what we've seen out
and quickly on Tampa, I recall there being the issue last year with some of the personnel. Just Can you quickly update us on that, where that stands? Personnel back in place, regional or local property management teams fully operating and Everything is, I guess, back to where you want it there or can you maybe give some color on that?
Yes. We're in really good shape in A lot of the noise you just discussed was early in the year. We were able to address it quickly as we talked about and part of that is showing up in our results in quarter on both the top line and the bottom line. So we feel really good around where Tampa stands for us.
Thank you.
Thanks, Haendel.
The final question today will be from Anthony Paolone of JPMorgan. Please go ahead.
Thanks, headliner. So thanks for the disposition and acquisition guidance, nets 0. How do you think about that versus maybe just reducing leverage a little bit faster?
Well, it's a great question. We have to have a base case scenario and we feel very comfortable to Ernie's earlier points on guidance with the guidance we're putting out. We think we can acquire accretively somewhere between $300,000,000 $500,000,000 We think we can also recycle easily between $300,000,000 $500,000,000 on the sales side. Certainly, if there's something opportunistic where we look at a situation, that it might make sense, we can look at selling or buying more. But I would say that will help us the base case scenario that we laid out will help us achieve our goals.
We want to make sure that we have kind of an eye focus single to getting to investment grade and we know that by calling and selling the parts of the portfolio where we're seeing underperformance, either recycling that capital or pre And debt will put us on that path to that investment grade balance sheet that we ultimately want. Ernie, I don't know if you want to add anything to that, but I think that's generally how we feel about anything.
Okay, thanks. And then, you talked a lot about rate and occupancy and those drivers to the same store revenue picture. Is there anything appreciable to think about through either revenue management or other income that might contribute or not in 2019?
Yes, we think other income will probably grow at a little bit less of a pace than it did in 2018, but not significantly so. But again, that's our base case to get to our guidance. From a revenue management perspective overall, the team is doing a great job with both on Dallas and Charles' leadership Trying to optimize it and what we've seen, especially we talked about it going into the 4th quarter, we felt really good going into the off season being Highly Occupied and then Charles talked about where the January numbers are. It's really putting us in a position to be more offensive than we've been in the last couple of years We're just really pleased with where we're at the Avianca Bay and we can And so the team is doing a nice job there. And again, it's another year of knowledge of both portfolios, the team is working together.
So that sets us up. We're set up well for what we need to start accomplishing as we get to March, April and May.
So you think that the revenue management has actually been part of the driver to kind of the strong occupancy and some of this rate growth.
Yes, this is Charles. Absolutely. That was one of the first parts of the combined company that we put together and once we got under the hood, we were able to take best practices of This is a both and it showed up early in the year, but by the second half of the year, we really hit our stride and it's showing up well in Q4 and continues into 2019.
Okay, thanks. And then last question just on G and A, you kind of talked about that, but just on non cash comp, any
Yes, there will be because a lot of that non cash comp that came from the IPO finished its vesting in the early part of 2019. So the majority of that expense was recognized in 2017 2018. So the non cash comp around share based comp does come down materially. Let me We had a question about that earlier too, Tony. Let me just think about how we can get something out there so folks can get more comfortable about modeling equity.
It doesn't come into our core FFO number because it's been so volatile. Going forward, it will be much less volatile, but now that we're past the 2 year point, there was a vesting period on the equity grants associated with the IPO for those folks who had Invitation We'll get to much more than what I call normalized run rate of share based comp. But like Garg and I put our heads together and we'll try to figure out a way It provides some more help there for folks.
Okay, great. Thank you.
And ladies and gentlemen, this will conclude our question and answer session. I would like to hand the conference back over to Dallas Tanner for his closing remarks.
Thank you again for joining us today. We appreciate your interest and the team looks forward to seeing many of you in March. Operator, this concludes our call.
Thank you, sir. Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. At this time, you may disconnect your lines.