Good morning, and welcome to the Invitation Homes third quarter 2018 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now 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 third quarter 2018 earnings conference call. On today's call from Invitation Homes are Dallas Tanner, Interim President and Chief Investment Officer, Ernie Freedman, Chief Financial Officer, and Charles Young, Chief Operating Officer. I'd like to point everyone to our third quarter 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 on Form 10-K and other filings we make with the SEC from time to time. Invitation Homes does not update forward-looking statements and expressly disclaims any obligation to do so. During this call, we may also discuss certain non-GAAP financial measures. You can find additional information regarding these non-GAAP measures, including reconciliations of these measures with the most comparable GAAP measures in our earnings release and supplemental information, which are available on the investor relations section of our website. I'll now turn the call over to our interim President and Chief Investment Officer, Dallas Tanner.
Thank you, Greg. We are pleased to report our seventh consecutive quarter of double-digit Core FFO growth, with Core FFO per share in the third quarter increasing 21% year-over-year. Trailing 12 months turnover reached its lowest level in our history as a public company at approximately 34%, as residents continue to value the high-quality living experience and service we provide. This contributed to a 50 basis point year-over-year increase in same-store occupancy to 95.5% in the third quarter. The favorable supply and demand fundamentals we are experiencing in our markets show no signs of abating, with renewal rent growth of 4.8% in the third quarter and new lease rent growth consistent with prior year. We also took a number of steps in the third quarter and October to improve the efficiency of our R&M platform.
While we still have fine-tuning to do before next peak work order season, R&M expenses for the second half of 2018 are tracking in line with our expectations we revised mid-year. However, we are experiencing some pressure on real estate taxes that we expect to impact our fourth quarter expenses unfavorably versus our prior expectations. Ernie will talk more about this later. Before we get into the details of the quarter and expectations for the rest of the year, I want to step back because it's the bigger picture that makes us really excited about this business. We continue to see a multitude of opportunities creating a long runway for growth. First is simply the fundamentals of supply and demand. In our select high-growth markets, household formations in 2019 are forecast to grow at a rate of 1.9%, which is 90% greater than the U.S. average.
There remains a shortage of housing supply to meet this demand. We expect that to remain the case near term in our markets with home prices still well below replacement cost. We think renting should continue to become increasingly attractive versus owning for single-family home seekers, with interest rates rising and home prices in our markets still increasing approximately 6.5% year-over-year. To that point, move-outs to homeownership within our portfolio continue to track lower versus last year. Looking further ahead, demographics should become even more of a tailwind. There are 67 million people in the U.S. currently aged 20 to 34. They are coming our way as they reach the life stage in which their needs change to align with our product and our service.
We continue to see many newly formed households choosing to come into Invitation Homes, where they can combine the ability to live in a high-quality, well-located, single-family home with the convenience of leasing from a professional manager that puts the resident first. That brings me to the next opportunity, service, which is the most important part of the value proposition we offer residents. We think the service we provide is best in class and the reason we experience such high resident retention. We're always looking to get better. In 2019, we'll expand our ProCare best practices to further enhance the resident experience. Longer term, we think there are more opportunities to enhance that experience that will also benefit ancillary income. One way we do that today is with our smart home technology. We can envision many more products and services that might ultimately make residents' lives more convenient.
Near term, we are focused on the final phase of merger integration. We've accomplished a tremendous amount to date, on or ahead of schedule, with more synergies than initially expected. Synergies unlocked to date total $41 million on a run rate basis, meaning we've achieved our year-end 2018 target months ahead of our previous expectations. The last step of integration is to roll out our unified operating platform to the field, which should unlock remaining synergies. Once we cross the integration finish line and have all aspects of the company working together as one, we'll look for even more ways to leverage our scale and experience to further fine-tune that efficiency. On the portfolio front, our investment management team is actively working to further enhance our location and scale advantages.
We're on track in 2018 to dispose of roughly a half a billion dollars of homes with lower long-term growth prospects and are using these proceeds to acquire homes in better locations and de-lever our balance sheet. We've purchased over $200 million of homes with higher expected IRRs, and we've reduced net debt by $150 million so far in 2018. We've also invested over $10 million in value-enhancing CapEx. Last but not least, we're excited about the abundance of new private capital coming into the single-family rental space. It's coming because others see the same fundamentals and potential for attractive risk-adjusted returns that we see. It also creates even more opportunity for us to shape our portfolio at the margins. We believe many of the private platforms are looking to build scale by acquiring homes that match the profile of what we are seeking to sell.
Case in point is the series of bulk sales we executed in September and October, which I would like to spend a little time talking about. We ran a process to dispose of a cohort of lower rent band homes that no longer fit our long-term strategies. These homes had an average in-place rent of $1,404, 25% below the rest of our portfolio, and were concentrated in Chicago, the Southeast, South Florida, and parts of Tampa. We received multiple bids on these pools of homes, and optimized value and execution by splitting it into five separate transactions, totaling 1,375 homes for gross proceeds of $214 million. The primary use of these proceeds will be to pre-pay debt. In addition to the homes sold in bulk, 147 of which closed in the third quarter, we sold another 266 homes in one-off transactions during the third quarter.
We also purchased 249 homes in the quarter at an average cap rate of 5.6%. Acquisitions were focused primarily in Seattle, Denver, Phoenix, Orlando, and Atlanta. Before I turn it over to Charles, let me sum up everything I just talked about. First, although we're working through some near-term expense challenges, we feel great about overall single-family rental fundamentals today and into the future, and continue to see very strong occupancy and rent growth. Second, we feel even better about Invitation Homes' growth prospects, in particular, given the location, scale, and service advantages which we enjoy. Third, we maintain an entrepreneurial energy and focus on creating value through initiatives around merger integration, service platform optimization, ancillary income, capital recycling, value-enhancing CapEx, and balance sheet de-leveraging. Lastly, I'd like to say thank you to all of our teams in the field and our corporate offices.
I just talked about a lot of exciting things we have going on at Invitation Homes, and it's our innovative and hardworking people that turn those opportunities into realities. To those all across our company that are committed to serving residents and dreaming of ways to make the resident experience better, you will be the driving force behind the value we create for both residents and shareholders as we move forward. I thank you sincerely for your dedication to that mission. With that, I'll turn it over to Charles Young, our Chief Operating Officer, to provide more detail on our operating results in the third quarter.
Thank you. I'd like to echo Dallas' sentiment about our people. It's been a busy year, and I'm most proud of that through all the change, the commitment of our field teams to providing outstanding customer service has never wavered. Resident satisfaction remains high, as evidenced by further improvement in turnover rate to 33.9% on a trailing 12-month basis. To my partners in the field who earn the loyalty of our residents every day, thank you. I'll now walk you through the details of our third quarter 2018 operating performance. Same-store core revenues in the third quarter grew 4.4% year-over-year, in line with our expectations. The year-over-year increase was driven primarily by average monthly rental rate growth 3.8%, and a 50 basis point increase in average occupancy to 95.5% for the quarter.
These strong top-line results drove Same-store NOI growth of 4.9%, as Same-store core expense increased 3.7%. R&M expenses remain elevated in line with our expectations prior to optimization of our R&M platform. Strong home price appreciation continues to drive property tax increases. These factors were partially offset in the third quarter by year-over-year decreases in various other controllable expenses. As a reminder, we expect both R&M expenses and property taxes to accelerate higher year-over-year in the fourth quarter. Last year, service requests related to Hurricane Irma and Hurricane Harvey were prioritized in the fourth quarter of 2017, which pushed routine non-storm related service requests that normally would have been resolved in 2017 into the first quarter of 2018. This resulted in a benefit to R&M expenses in the fourth quarter of 2017, creating a difficult comparison for this year's fourth quarter.
Property taxes also face a difficult comparison in the fourth quarter of 2018, as last year's fourth quarter benefited from lower than expected real estate tax assessments that drove favorable accrual true ups. I also want to update you on our efforts to optimize our recently integrated R&M technology platform. Since the beginning of the third quarter, we have implemented many changes to our systems and processes that determine whether work orders should be addressed in-house or by third parties, how the corresponding service trips get scheduled, and the optimal routes for the technicians who make those trips. Just last week, we rolled out an important update to our technology platform that enables all of our internal technicians, regardless of legacy organization, to perform work orders on any home in our portfolio, not just the homes associated with their legacy organization.
We still have work to do though, and we'll continue implementing process improvements and ProCare enhancements in the months leading up to next peak work order season. We also think the unification of our field teams and property management platform in 2019 will be a key catalyst for unlocking efficiencies in our R&M platform. Next, I'll cover third quarter 2018 leasing trends. Fundamentals in our markets remain as strong as ever. Net effective renewal rent growth increased to 4.8% in the third quarter of 2018 from 4.7% in the second quarter 2018. New leases were 3.3% in the third quarter, in line with both the prior year and our expectations as we managed rates to ensure we exited peak leasing season with strong occupancy. This resulted in blended rent growth of 4.2% in the third quarter 2018, and an occupancy gain of 50 basis points year-over-year to 95.5%.
Western U.S. markets continue to lead the way for growth with Northern and Southern California, Seattle, and Phoenix remaining our strongest. With fundamental tailwinds at our back, we are focused on executing to finish the year strong. Our field teams are also well prepared for the rollout of our integrated operating platform, which will be piloted in our first market soon. We look forward to leveraging that platform in 2019 to deliver the leasing lifestyle our residents desire in an even more efficient manner. 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 third quarter, integration synergy update, and 2018 guidance update. I'll start with our balance sheet and capital markets activity. We remain focused on achieving an investment-grade rating and have made good progress to date. We have de-risked our maturity profile by refinancing over $3 billion of 2019 and 2020 debt maturities in the first half of this year, extending our weighted average maturity to 5.2 years, up from 4.1 at the beginning of the year. Only 11% of our debt is subject to changes in interest rates on average over the next nine years. The size of our unencumbered pool has increased by over 10% to approximately 39,000 homes, or almost half our assets.
In the third quarter and October, we prepaid another $250 million of securitized debt maturing in 2021 using proceeds from our June 2018 refinancing activity and cash on hand. We'll continue to be opportunistic in refinancing and prepaying debt as it makes sense going forward. As Dallas mentioned, separately, we have received proceeds of $214 million from bulk sales in September and October. We intend to use almost all of the proceeds from these transactions to prepaid debt, modestly improving our net debt to EBITDA ratio. 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 third quarter 2018 financial results. Core FFO and AFFO per share for the third quarter increased 21.3% and 10.2% year-over-year, respectively, to $0.29 and $0.22.
The primary drivers of the increases were growth in NOI per share, in addition to lower adjusted G&A and lower cash interest expense per share. Supplemental Schedule 1 provides a reconciliation from GAAP net income to our reported FFO, Core FFO and AFFO. I'll next provide an update on our merger integration. We continue to expect $50 million-$55 million of synergies from our merger. On a run rate basis, we have achieved $41 million to date, outpacing our previous expectation for 75% achievement by year-end 2018. $36 million of those synergies achieved to date relate to G&A and property management costs. $4 million are NOI synergies, and the remaining $1 million is CapEx. Of the synergies remaining to be achieved, we expect about two-thirds to relate to NOI. The last thing I will cover is updated 2018 guidance.
The primary change to our same-store guidance is related to expenses and due almost entirely to revised property tax expectations. Charles mentioned already that we have a difficult comparison in the fourth quarter on real estate taxes due to lower than expected assessments in last year's fourth quarter that drove favorable accrual true-ups. This year we are experiencing the opposite. Property tax reassessments received in October 2018 have trended higher than expected, especially in Florida, and for Proposition 13 related reassessments in California triggered by our IPO. We will appeal reassessments in cases where we feel it is appropriate. However, property taxes, which make up almost 50% of our overall operating expenses, are likely to be higher in the fourth quarter of 2018 than what was contemplated in previous guidance.
Excluding real estate taxes, all other operating expenses are expected to fall within the previous range of guidance expectations, but some are trending toward the higher end of that previous range. However, repairs and maintenance expenses are on track for the midpoint of what was contemplated in previous guidance. As a result, we now expect 2018 same-store core operating expense growth of 5.4%-6%. For core revenue growth, we are narrowing our guidance range to 4.4%-4.5%, resulting in revised Same-Store NOI guidance of 3.5%-4%. Taking into account our revised expectations for same-store results and other items, we are updating our 2018 Core FFO guidance range to $1.16-$1.18 per share and our AFFO guidance range to $0.93-$0.95 per share. The midpoints of these ranges imply growth of 13% and 7.4% respectively, versus prior year.
Stepping back, I'd like to finish our prepared remarks with three thoughts. First, expense growth has surprised us from our initial expectations at the beginning of the year. Our growth in real estate taxes is due to the values of our homes increasing, and in addition, outsized increases above our expectations in the reassessments of our homes due to our IPO in early 2017. We are very focused on improving results and other expenses. Charles has provided a number of details on the steps and the progress we are making relative to repairs and maintenance challenges.
Second, our revenue growth is tracking to our original expectations. Rate growth is solid. Turnover continues to trend favorably, and as a result, average occupancy has improved. We like how we are positioned as we close out the year. Third, importantly, the overall fundamentals of our industry are strong. Macroeconomic supply, demand, and demographic factors are favorable. For those that might be considering owning a home versus leasing, it's becoming increasingly more difficult for them to do so. When you consider the various external and internal opportunities for continued growth, as well as improvement to our portfolio and balance sheet, we believe we are still in the early innings of value creation. 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, you may press star, then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. Our first question will come from Douglas Harter of Credit Suisse.
Hi. Thanks. Can you talk about any pressures you're seeing on employee retention in the field?
Yes. This is Charles. Look, we've seen very little, actually, turnover in the field. Nothing extraordinary. As we pay attention to what's happened in the business, there are new entrants in the space, are also new ventures that are in the peripheral of the space. We have talented people, and they're naturally going to look at those people. However, no material loss, and just a handful of one-offs in a couple of markets. Last thing I'll add with that is, part of what helps us retain our employees is they're enthusiastic about our position in the space as a best-in-class leader, take pride in our mission, and enjoy our dynamic and high-energy culture. We think all this helps us retain our talent. We haven't seen much employee turnover.
I guess following up on that, have you seen any incremental sort of cost to retain, or you haven't really seen the pressure on that to this point?
Nothing material. As individual circumstances come up, like I said, there's been a few. We've addressed them and haven't had to make any across-the-board changes.
Great. Thank you, Charles.
The next question comes from Juan Sanabria of Bank of America Merrill Lynch.
Hi, this is actually Shirley Wu with Juan Sanabria. Thanks for your time. For your revenue guidance, you're implying acceleration in 4Q. What's the benefit from occupancy, and when do you expect that to normalize from the hurricane?
A couple things there, Shirley. One, we're very pleased with how things are playing out for the rest of the year, and specifically for October. Just to give those results as well, we've had a 60 basis point increase year-over-year. Our October average of daily occupancy was 95.8%. Last year it was 95.2%, and we've seen good strength from renewal increases at 4.7%, which is about 20 basis points off of last year, but we've seen new lease accelerate to 1.8%, which is 40 basis points better than we had last year. The blend came in very similarly. We expect to continue to see better year-over-year occupancy results like we saw in the third quarter.
That's certainly helping us, we're seeing rate activity right now, which is consistent or slightly better than what we had last year, especially when you look in September and October.
Just so you're not expecting any benefit from the hurricanes from last year or?
No. Go ahead, Charles, you want to talk to that.
Yeah, just minimal on occupancy in the Florida markets. Outside of that, nothing across the board.
We didn't see a big degradation in occupancy from them, so we wouldn't expect that. Yes, they're an easy comp relative to occupancy.
There was a brief slowdown in leasing.
Okay. On real estate taxes, how many of those valuations are you appealing? Historically, how many of those appeals have you actually won?
Sure. It varies by state by state, and we're sorting through those as they come in. As we talked about in October, a big chunk started to come in from Florida. We haven't made a final determination yet as to how many we will appeal. We have some time. In the past, it's varied by market. We have a valuation team that goes specifically and says which ones we think we have the best opportunity to make a win on. We don't appeal everything en masse. I know some folks consider doing that, but we take a very thoughtful approach to it, and then we look to try to negotiate as well as appeal with the local jurisdiction. It's early days to be able to say, Shirley, exactly how many we'll do. In the past, we've had certain success in some states more than others.
Generally, because we're more selective on what we choose to appeal, our appeal win percentage is pretty good, but it varies from year to year.
Okay. Thanks, guys.
Thanks, Shirley.
The next question will come from Nick Joseph of Citi.
Thanks. Does update guidance assume any level of success on real estate appeals this year?
It does not, Nick. We won't get results from those from anywhere from a minimum nine months to sometimes it takes two to three years. Unless we have some appeals from a year or two ago that we expected to get, and in general, we don't guide to that because they can be a bit uncertain. We wouldn't expect any upside from appeals. We're hopeful for the rest of this year.
Thanks. Just other than the real estate taxes, what other expense line items are trending towards the high end of the guidance range?
Yeah, sure. We talked about real estate taxes. R&M, as we talked about importantly before, we feel pretty good about in terms of where that's coming in. I would expect that we'll see leasing and marketing come in, even though it's been doing well favorably year-over-year, will probably come in a little bit higher than we anticipated as we continue to see the strong market and opportunity for us to push forward and gain occupancy. Personnel and other looks pretty good. Utilities, Nick, tends to be a little bit of a wild card. I bake in a little conservatism into the utilities. We may see that come in a little bit on the higher side as well. We talked about repairs and maintenance.
Turnover is trending very similarly to that, but maybe it'll be slightly more toward the higher end of the range that we had before relative where R&M's coming more to the midpoint of what we thought before.
Thanks.
Thanks, Nick.
Our next question comes from Haendel St. Juste of Mizuho.
Hey, good morning.
Hey, Haendel.
I guess a question on some of the acquisitions and dispositions here. I'm curious how the pricing on what you're looking to potentially buy here compare on the mid-fives on what you're selling. I guess I'm more curious on what the IRRs of what's coming in versus what's going out on the portfolio look like. Any color on sort of who's buying here. Is it private equity and maybe some of the underwriting that they're doing?
Yep. Hi, Haendel. I'll answer it a couple of ways. We're still seeing really good fundamentals in the mid-fives in terms of the types of properties we can buy. You'll notice on the buy side for us in the third quarter, we're very active in Seattle, Phoenix, and Orlando, all markets that lend themselves to better performance on a risk-adjusted basis in terms of where we're seeing growth. On the sell side, cap rates can vary, and it just depends on why you're trying to get out of a particular asset. For us, and we mentioned this in the release, we went into a series of bulk transactions because we were looking for ways to improve our portfolio on the margin. This has been ordinary course for us for a couple of years. We've done this consistently.
Our focus specifically with these sales was to get out of some of the lower rent band properties in and around geographies where we already had considerable amount of scale and where we saw potentially future CapEx or R&M risk. For us, those sales were in the higher fives pushing towards a six, but they were strategic in a sense in that they were about $350 on a per rent band level lower than what our average rents in the portfolio are today. In terms of the new capital that's coming into the space, we spend a lot of time talking to some of this capital and these operators as they come in and are looking for different ways to grow their own portfolio. We're cognizant of what opportunities might be out there for us from a disposition standpoint.
Can't speak specifically to what their IRRs are that they're seeking. We tend to be at a little bit higher price point, a little bit higher rent band than most of our peers, which creates a really good environment for us when we want to sell on the margin on some of our lower rent band or kind of mixed geography parts of our portfolio.
Got it. Thank you. That's helpful. I guess a question or two for you, Charles, on the ops side. I guess, curious how the traffic demand trended there in the third quarter, especially with the uptick in rates and what you're hearing or feeling on that front. How do you think about pricing power, given some of the comments you guys provided in your prepared remarks about the expected benefit from millennials and the demographic factors, and also obviously helped by what could be affordability being stretched here, hearing obviously that U.S. home sales are slowing. Just curious on how the traffic and demand materialized over the quarter and how you're feeling and thinking about the implications for the business of rising rates into next year.
Gotcha. That was a mouthful, but we appreciate the question. I think you're talking on top line demand. Overall, we've seen a good demand in the third quarter. You could see that with our 50 basis points increase in occupancy. Rates have been solid in what we expected seasonal for the quarter. Ernie gave you the October numbers, which are real good. We're really proud of, especially the new lease growth acceleration to 1.8% versus 1.4 last year at this time. We're seeing good demand. Website stats are up, and our occupancy is going into this fourth quarter right where we want it to be, which was part of our plan in the third quarter.
Okay, I guess last one from me. I'm just curious. Was a little surprised, maybe encouraged to hear your comments about labor availability and, I guess, cost inflation on the labor side. I'm curious, have you seen or are you anticipating any impact to turn times in the general shortage of labor? Is that impacting your business at all, or did you see an increase in turn times? Did that impact your ability to make homes ready for lease and any impact on your metrics?
No, we haven't seen any of that. Reality is, we have great vendors from both portfolios, and we've done a good job of managing those vendors and keeping our turn times down. We obviously and always want to do better, but we haven't seen any impact across the board. There may be some one-off in certain markets, but nothing material.
What were the turn times in 3Q?
We were at about 15, 17 days, which is typically higher than where we want to be, but volume was high in Q3, and so that's typical. It'll start to come down now that we're in Q4, and we'll get faster and faster and get down into 10-12 days, which we expect.
Okay. Thank you.
This is just for the physical turn of the asset.
Right. I got it. Thank you.
The next question comes from Dennis McGill of Zelman & Associates.
Hi, good morning. Thank you, guys. First question probably for you, Dallas, on the transactions in the quarter and mentioning some of this was at lower price bands. I guess kind of a two-part question, but related. When you look at the difference in rent growth, some of that's impacted by just the geography of the portfolio and understanding different mixes within markets. Can you just elaborate a little bit more on how you think about the sale being price point driven versus market driven? Is there a skew in what you did in the third quarter and thus far in the fourth quarter? Are all of these homes generally on the lower band?
Kind of wrapping into that, if it is the lower band, it would be the area of the demand market where you think would be most impacted by higher rates and qualifications. Just want to understand how you think about the interplay there.
Yeah. Happy to give a little bit more color there. There's a variety of reasons. Typically, we are looking for a bit more of a higher rent band home in terms of what we're purchasing in all 17 markets that we're in today. In terms of what we sold, there's a variety of reasons in there and why we sold what we sold. It certainly centers around lower price points, generally speaking, across these markets. We sold 425 homes, for example, in Chicago. We've mentioned that on a couple of previous calls that we were going to look to thin our exposure in parts of the Midwest and be smart in terms of how we were going to try to continue to shape that portfolio.
We also sold a couple of hundred homes in South Florida and Tampa, as well as some homes in Dallas, which is a market that we're currently buying in. For us, on the margin, it's just about getting the portfolio right. Nine times out of 10, it has to do with where we're seeing the best risk-adjusted growth in that market, and then trying to prune our portfolio out of the parts of that market where we're seeing less growth, generally speaking. That tends to be sometimes in those lower rent band type of areas. I'll give you a flip side example of that, would be if you were to sell homes in Palm Beach County, for example.
They may be some of our more expensive homes in our portfolio, but we're just not seeing the same type of growth we're seeing in other parts of Dade and Broward County. It can depend. On the margin, it's just important that you just have to make sure that you're getting the right parts of the portfolio sold at the most opportune prices.
Would you look at it almost as the lower end of the entry-level price point is where you're struggling with growth more so than the upper end of the entry level? Are you stretching into the move up to where you see the most strength in growth?
No, I would say that the fairway is typically in the middle, and even sometimes at those lower price points is where you can see some of the best opportunities for growth, quite frankly. It's just, we also sell homes for a variety of reasons around maintenance and future CapEx risk. We've managed a lot of these homes now for six or seven years, and we have a pretty good sense of a home health scorecard, so to speak, on a home. We can start to do some predictive thinking around where we probably want to limit some exposure in the future.
Okay. Got it. Then, Ernie, just a follow-up on the property tax side. The pressure in the fourth quarter, the difference in the fourth quarter versus guidance, would you attribute that more to just a true-up relative to where you thought the year would be starting 2018? Does that leave you with more pressure into 2019 than you would've been assuming before as well?
Dennis, it's the former of the two that you said. It's the pressure of that we were under-accrued, specifically in Florida. We had assumed that real estate taxes would be up about 6% in Florida, and that's what we had been accruing to all year. We thought that was a reasonable assumption, and it wasn't that far off from where it was last year. When assessments and millage rates finally came out in October, and actually, the tax bills have just been dropping over the last week, which shows you the finalized millage rates, looks like that Florida's going to come in closer to 7.5%, maybe even up to 8%. That's where most of the pressure is. Almost 40% of our real estate taxes go to the state of Florida. As you know, we own about a third of our homes there, and it's a higher tax regime.
It's definitely that we thought we were accruing at the appropriate rate, and sometimes you get it right, and sometimes you get it wrong. In this case, we got it a little bit wrong, unfortunately.
I guess, as you think about that 7.5% rate, and you go into next year now, is that a pressure that essentially continues into next year at that elevated level?
We'll make that judgment as we work with the experts who help us with our real estate projections. It'd be a little bit early to provide any thought on a market-by-market basis as what we think is going to happen with real estate taxes. Overall, Dennis, with home price appreciation still being pretty strong and driving the value of our portfolio, it's certainly likely that real estate taxes will be a pressure point relative to inflation. Again, with the important exception for us with 20% of our portfolio in California where you do have a cap with Proposition 13.
Right. Okay, that's helpful. Thank you, guys.
Thanks.
Thanks.
Next we have a question from John Pawlowski of Green Street Advisors.
Thanks. Charles, appreciate the comments on turnover and pressures on the payroll costs. You're not seeing the pressure now. Next year, in 2020, do you have to pay your repair and maintenance field personnel significantly higher than you are today?
We're not seeing any material pricing in terms of how we need to pay our internal teams. There'll be normal kind of merit cycle that we go through. That being said, we're keeping an eye on the labor markets. We understand they're tight, and there could be some inflation in the labor cost, but not really seeing anything that's not going to be manageable in terms of how we're predicting our numbers.
John, as I remember that, we've drawn a lot of our people in that sector from the general housing industry. I think a lot of that will be answered by what's happening in the broader housing industry around home building, and what's going to happen there.
Okay. I understand the comments about new capital flooding the space. That's been going on for about a year or so, or even longer. Did anything else specifically change in recent months from your lens to ramp dispositions and delever a little bit quicker?
No, not at all. As you take a step back, we've been pretty clear about our intentions to get our balance sheet to investment grade. When we laid out guidance at the beginning of the year, we said we would sell somewhere between $300 million-$500 million of homes in 2018. We anticipate that we're going to be pretty close to that number, that $500 million number. Our acquisition pace has been kind of well aligned the same way. I think it's just been fortuitous, quite frankly. Again, we've done bulk sales for a number of years, but it definitely feels like there's a good market today for us if we want to be a seller.
In the transaction that we just recently did, we were at what we perceive market value to be on these homes with very minimal frictional costs because we can run that process internally. For us, we look at it as a win, John. It's just a good time in the market to be a seller on some of these homes that don't fit your portfolio perfectly.
Okay. I guess more bluntly, has the rapid sell-off in your share price changed your capital allocation plan heading into 2019?
I wouldn't say so. We're mission-focused in terms of working towards investment grade. We clearly pay attention to where the share price is, on a given week or month. We're focused at the task at hand, which is finishing the merger integration, rolling out our field integration process through the fourth quarter and early parts of the first quarter of next year, getting on one system so that we can optimize. We feel really good about where we are, as Charles mentioned, on the occupancy points. We feel like right now we're in a good spot. We just need to continue to execute.
Okay. Thanks, guys.
Thanks, John.
Thanks, John.
The next question will come from Richard Hill of Morgan Stanley.
Hey, guys. I want to maybe circle back and focus on the revenue side of the equation for a moment. Obviously, rising home prices is good on one hand, but it also makes it more challenging to buy homes. I was wondering if maybe you could balance out external growth versus internal growth, and maybe give some examples as to if you're considering external growth, and if not, what are your primary drivers of internal growth at this point?
Yeah. I'll start with that. First and foremost, we're focused on getting to that investment-grade balance sheet, as we've said before. With that being said, we would certainly look at any opportunity if it were opportunistic. However, we're mission-focused in terms of just executing on our business and being a kind of a net capital recycle maybe to a net seller side on a small basis. Outside of that, as you look at where we're finding that growth, both externally or organically, we see a lot of opportunities in front of us. We talked about that at the beginning of the call, and that we still see a lot of ways that we can enhance the overall customer experience while you lease from Invitation Homes. We see that in a myriad of ways that both Charles and I are working on to enhance the overall customer experience.
That will include outside services beyond just the smart home technology, which is one of the few things we offer today. In our opinion, we see a lot of blue sky in that arena, in that bucket that we're going to try to continue to work on as a business and a brand, will be to enhance that overall experience so that our customer stays with us longer. More importantly, that we can make that leasing lifestyle that much more attractive.
Got it. Just to be clear so I can understand, it sounds like most of the drivers of revenue are going to be on the internal side. At this point, you're not seeing any sort of ceiling in terms of where rents can go, in terms of where maybe your renters are willing to pay.
Well, we certainly have our own expectations for where we believe rent growth will be at any given time. As Ernie mentioned before, we're not in a position where we're going to give any guidance for 2019. With that being said, we feel very comfortable, as Charles laid out, where we sit occupancy-wise today at 95.8%. That's a really good number at the end of October. We see a lot of that growth coming obviously through the top-line piece of the business. In addition, we think there's a lot of ancillary revenue opportunities that are in front of us for our business today.
Got it. Thank you, guys. I appreciate it.
Thanks.
Next we have a question from Steve Sakwa of Evercore ISI.
Thanks. Good morning. Ernie, I think on your guidance assumptions, you did take down the AFFO number by a couple of pennies. I'm just wondering, A, if you could talk about CapEx, then where you see kind of R&M turnover and CapEx cost per home for the year, and how you see that trending going forward.
Yeah. No, you're absolutely right, Steve. We laid out in the last call, we've had challenges on our R&M side, both on the OpEx and on the CapEx side. Where R&M has come in at the higher expectations we'd expected for the rest of the year, we continue to see some challenges there on the CapEx side. We are going to come in on a number higher than we've talked about in the past for our total cost to maintain, which includes both OpEx and CapEx. You can see we lay that out in one of our supplemental schedules, the supplemental Schedule 6, where we show all the different components of R&M and turn both OpEx and CapEx wise. We're certainly trending to a number that will be over $3,000 for the year.
We feel long term that $2,600-$2,800 number is the right number. With the challenges that we've had this year and the steps that Charles has talked about very specifically on what we're doing to go after that, and we're confident that we certainly see that get better as we go into the future. For this year, it's going to be an elevated number, unfortunately. We feel like we've got the plan in place to get that better as we go forward.
I know you're not giving 2019 guidance, but just given some of the challenges you had this year, and those seem to be getting corrected, is it higher likelihood that that number could drift down lower next year, or are there higher CapEx costs that are potentially keeping that number elevated next year?
We want to be careful we getting too specific as we continue to work through the plan, Steve. I would expect the first part of the year will be more challenging than the second part of the year next year because as we're working through these, we want to make sure they're working. To be able to say what will offset versus what should be higher, we'll get into those kind of details on our next call when we're prepared to talk about guidance. It'll be a little premature right now.
Just lastly on the balance sheet management, anything that we should be thinking about in terms of other prepayments or kind of just straight debt pay downs as we think about kind of the mix of debt changing over the next 12 months?
Dallas talked about the fact that in closing these bulk sales that we have, and most of those closed in October, as we disclosed in the release, there will be opportunity for a prepayment. No prepayment penalty is associated with that. That will be occurring. Then, folks may know we're in the market. We priced a securitization last week, scheduled to close this week. We'll provide the details on that once that closes. That's a refinancing activity to take out some debt that's maturing in the near term and extending to much longer term.
Again, we'll provide the details on that once the closing happens later this week. Generally, we'll just continue to look for using excess cash flow, and if we end up being a net seller, using those proceeds, Steve, to further delever the balance sheet, similar to what we've done here for the last two years.
Okay, thanks a lot. That's it for me.
Thanks, Steve.
Our next question comes from Jade Rahmani of KBW.
Just to follow up on the CapEx question. What drove the spike in the recurring CapEx year-over-year?
Well, it's seasonal, Jade. We certainly saw it goes up in the third quarter. Typically, it starts to go up in the second quarter. You see the number certainly is typically at its highest as you get into the third quarter, as you're catching up from activity you started in June, then of course, July and August are big turnover months. It's really more a seasonality thing than anything else that drove the higher numbers that you've seen throughout the year this year.
Have you looked at it on a same-store basis on a year-over-year basis to see what the specific drivers are?
Well, Jade, it's really more broadly around the challenges we've talked about in the past around R&M. The fact that it wasn't until later into the summer, late June into July, where we saw those challenges and started addressing those. On a same-store basis, whether we're looking at where the asset came from portfolio or not is just generally across the board because of the challenges we've talked about before.
Can you just remind me what the challenges are?
Yes.
Okay. Specifically as you can.
I think, Jade, we've gone through those in excruciating detail. I'll let Charles talk about it here some more in terms of what we're doing to address those. Let me turn it over to him.
Yeah. As we mentioned on our Q2 call, it was really around our in-house tech utilization and trying to get that number up where we expect it to be. As I talked about on the opening remarks, that we've implemented a number of recent enhancements that will further improve and fine-tune the platform. I'll highlight three things. One is our internal tech scheduling and route optimization program. This looks to optimize the in-house tech routing to minimize drive time. We think that's going to add to our efficiency of our in-house techs. The second is the vendor management program. We call this our vendor scorecard. This will improve the vendor accountability by tracking their overall performance, cost efficiency, and customer service. Overall, we think this will easily compare performance of all vendors and identify the strongest performers, and this is a real win for the resident.
Lastly, most importantly, I brought this up on the comments as well, is we're getting to a consolidated instance of the R&M platform. This starts to unlock our scale and density and gives us real benefits. Simplifying the management of the maintenance operations work through a single platform, unifies reporting, so we can see the field teams can easily report under a single umbrella. As we talked about where our goal here is to up the in-house tech utilization, so our efficiency gets better, by having that one platform where we can see the visibility our management teams can work from, take advantage of the home density that we have. You couple that with the routing optimization, we get some real benefits there. Lastly, that same benefit is applied to our vendors. That'll allow us to be more efficient with our vendors.
That's what we're doing, what we just recently enhanced and put in place. What's next? We have more to come as we get to the consolidated instance of the platform as Dallas talked about, and we're going to further expand on our ProCare offerings, which will be a benefit in 2019 as well.
Are there specific cost categories that have been an outsized driver of the increased CapEx?
Jade, we're not going to get any more details than what we have at this point. Happy to talk to you offline if you want to talk about it some more. I think we've addressed, both on our previous call and certainly through this call and through previous questions, items with regards to the R&M side.
Okay. Lastly, American Homes 4 Rent recently announced a joint venture with the increased institutional interest in the single-family rental space and a lot of new entrants in the iBuyer space. Is that something you might be looking to do? Also, could you comment on interest from home builders, whether there's increased desire to partner with them?
Good question, Jade. We're always having conversations with home builders around specific opportunities. We've mentioned a number of times that we're really channel agnostic. We'll look for opportunities where they're meaningful, but we care about being location specific at the end of the day. We really want to be focused on being infill, higher barrier to entry parts of the sub-markets where we know there's some of that enhanced demand like we're seeing in our numbers today. For us, it's really about being more in the right locations. We've certainly seen some of those opportunities, and we're open-minded to potential partnerships if they present themselves in parts of markets where we have an intention to invest.
Thanks very much.
Thanks.
The next question comes from Derek Johnston of Deutsche Bank.
Good afternoon. Since your West Coast markets have been strong, do you mind giving us another update on Costa-Hawkins ahead of the vote, and if there are any steps you can take on a municipal level if it gets repealed, and if so, how would your game plan change in California?
Hi, thanks for the question. We're not going to get too much into it given that today's the voting day in California. Tomorrow, excuse me. Let's see how that plays out. We've commented on it a number of times. We're obviously supportive of being no on Proposition 10 for a variety of different reasons, but we'd hate to comment on it today being so close.
Okay. How about the low turnover in the portfolio this quarter? Given the market backdrop with higher rates, do you anticipate this developing into more of a favorable turnover trend, or is it more of a one-off or seasonality driven event?
Yeah. This is Charles. I won't jump into what's going to happen in 2019. As we look at this, our residents continue to enjoy our well-located homes and quality service. We've had a good year on turnover. A lot of it's just been around the consolidation of our offices and using best practices from both organizations. As we continue to mature and constantly improve, we expect the residents are going to want to stay with us longer. I don't want to put specific numbers on it. We like the trend, and we're going to keep working hard to keep it as low as possible.
Okay. Lastly from me, is there any update on the rollout of the smart home technology in 3Q? You guys have been at it for a while now.
Yeah. We've had good results. We've been rolling it across both portfolios. About a third of our portfolio has the smart home technology installed. Again, it gives us benefits in terms of operating efficiencies, in terms of vendors being able to get in the home, and self-showing options for our residents. The ability to create ancillary revenue, about 14,000 of our residents are paying about $18 a month for the service. As Dallas said, we look at adding on additional services in the future, whether that's in regards to cameras, security, and other items that we think we can grow. At a baseline, though, we just want to roll out the smart home that has the lock and the thermostat that we have now, we're making good inroads in terms of getting it across the portfolio.
Thank you.
The next question comes from Ryan Gilbert of BTIG.
Hi. Thanks, guys. Has the recent increase in resale inventory impacted or pressured your ability to drive rent growth? I'm just kind of trying to reconcile your positive commentary around demand with the negative spread in blended rent in the quarter.
I'm not sure I'm following the end of your question, but I'll just comment quickly on your question around months of supply. Current months of supply on a national basis is right around four and a quarter in terms of months, current months that are on market. We have not seen, and we know that there's been a little bit of slowdown in some of the home building numbers, and certainly in transaction counts on a resale basis. As we've looked back on a look-back basis across our portfolio in terms of home price appreciation, as well as how that's tied into our blended rent growth, we're still seeing really strong numbers. In Seattle, for example, we're seeing over 12% in terms of home price appreciation. Las Vegas has also been around 12%-13%. We haven't seen that slowdown in terms of what that's doing for demand.
I'll let Ernie comment a bit more on rate. Generally speaking, we recognize that we're in a seasonally slower period in terms of new home purchasing. It typically slows down after Labor Day for a couple of months. We look at that as a good opportunity for us on the margin to be a buyer, but it hasn't affected demand. In fact, otherwise, we're at some of the best occupancy we've been at to date.
Yeah. Dallas is absolutely right. We certainly have seen year-over-year that last year our blended rent achievement was higher than this year, but that gap's narrowed all throughout the year. Actually, September is the narrowest it's been, where it's only 20 basis points different. We talked about in October how it's actually flattened out. I don't want to project what that means for November, December or to early part of the year. Basically, what that tells us is it's a very similar fundamental backdrop for us to be able to operate in. As we operate more and more effectively, residents are staying with us longer, turnover is down. We've been able to hit the market and achieve rental rates that we think are pretty good.
We feel good where things are at, and we think the background from a fundamental perspective should allow us to continue to do well.
Maybe the negative spread here is more leaning into occupancy than focusing on driving rate in 2018?
I guess I'm not following the question. Occupancy is certainly up year-over-year, and we've again narrowed the spreads from last. It's not a new story over the last many quarters where the year before was a little bit higher. I think the difference is we're actually seeing that spread narrow at the same time be able to from an occupancy perspective. I'm not following quite what your question is.
No, I think that makes sense. Thanks.
Okay.
On repairs and maintenance, do you have the % of work orders that went to internal techs versus third-party vendors in the third quarter? Maybe how that compares to the second quarter.
Yeah. We're trending in the low 40% of in-house tech utilization today. That's up from where we were based on the adjustments we made in Q2 when we consolidated onto one platform. These recent enhancements that I described, we expect to start to bring that number up into the mid and upper parts of the 40s, but it's early, and we're going to have to track it. We just implemented these enhancements, and we want to try to get as close to 50% as we can, but it's a process, and it's going to take time. The real test is going to be how do we do next year in peak season. This is seasonal too. As you get to peak season, there is some up and down.
It's hard to go and quote just a number right now because it does go up and down based on demand and turnover and the seasonality that comes with the warm weather. Yeah. We don't staff to necessarily hit all the things that we need to do in peak season because then we'd be inefficient during non-peak season. Charles is exactly right that if you're just trying to compare one quarter to the next, it may provide a false indication of what the trend is. You've really got to look at it over longer periods, as Charles talked about.
Okay. Do you have how that compares to the third quarter of last year maybe then? We can try and back out-
Two different companies last year. We weren't even merged last year at this time, so that comparison, we're not able to do. We had different staffing levels on the number of in-house techs that we had, so it was really difficult to create that comparison.
All right. Fair enough. Thank you.
This concludes our question and answer session. I would like to turn the conference back over to Dallas Tanner for any closing remarks.
We appreciate everybody's support, and we look forward to talking to everyone over the next couple of days. Thank you.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.