Greetings, and welcome to the Invitation Homes first quarter 2018 earnings conference call. All participants are in listen-only mode at this time. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. As a reminder, this conference is being recorded. At this time, I would like to turn the conference over to Greg Van Winkle, Senior Director of Investor Relations. Please go ahead.
Thank you. Good morning, and thank you for joining us for our first quarter 2018 earnings conference call. On today's call from Invitation Homes are Fred Tuomi, Chief Executive Officer, Ernie Freedman, Chief Financial Officer, Charles Young, Chief Operating Officer, and Dallas Tanner, Chief Investment Officer. I'd like to point everyone to our first 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 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 President and Chief Executive Officer, Fred Tuomi.
Thank you, Greg, and good morning, everyone. We are eager to update you on our latest results. First, I'd like to share a few higher-level observations that I think are important to understand about Invitation Homes and our ability to create long-term value for our shareholders. First, we continue to believe the fundamentals of our business remain extremely strong. The dynamics of supply and demand remain very favorable and seem to be improving for the single-family rental business, especially across our unique high-growth locations. In our markets, 2018 household formation is forecasted to grow at a rate 90% greater than the U.S. average, and single-family home completions are forecast to be almost 30% below the historical average since 1985. We believe this helps position us to achieve same-store NOI growth of 5%-6% and core FFO growth near the top of the REIT sector for this year.
Beyond this year, demographics in the U.S. should become increasingly impactful to our sector and should support strong single-family rental demand for years to come. The average age of the head of household in our homes is 39 years, meaning the millennial generation is just starting to reach the life stage where their needs align with our product. Although it is early, many believe it's possible that tax reform and rising interest rates will have a further positive impact on the single-family rentals. In fact, turnover in the first quarter of 2018 declined to 7.6% from 8.1% in the first quarter of 2017, driven primarily by a year-over-year decrease in move-outs to homeownership from 25.7% to 22%.
On the supply side, we believe that construction of new single-family homes is likely to remain muted for the foreseeable future due to the value of relocated land and the rising cost of materials and labor. We think this is especially true in our markets. The second point I want to make is that we believe our portfolio is one of the most desirable in residential real estate. Our locations are high-growth, high-quality, and infill. It is a unique advantage to have 70% of revenue derived from the Western U.S. and Florida. We have carefully selected our submarkets and homes to be in high-barrier locations with proximity to employment centers, good schools, and transportation corridors, the three things residents tell us are most important to their families.
With over 4,800 homes on average per market, we have unmatched scale and density that is critical to our best-in-class operating efficiencies. Third, our business is built for all parts of the macroeconomic cycle. Single-family rental homes are well-positioned if interest rates continue to rise and the cost of homeownership increases. Relatively short-term leases allow us to quickly optimize revenue in the strong demand environment that typically coincides with rising interest rates. In addition, our homes are part of the most liquid real estate asset class in the world and represent value to both investors and traditional homeowners. Last but not least, our people are top-notch, from our board of directors to our corporate teams, to our associates in the field that interact and earn the loyalty of our residents.
It is our people that enable us to deliver the exceptional quality of service that we commit to our residents every day. It is our people that will drive us to higher levels of success as we continue to discover more ways to improve the experience of our residents and further optimize our operations. I thank all of our associates for making Invitation Homes a great place to call home. In short, families want to live in our desirable neighborhoods and homes. We think demand could increase, and housing options could remain limited. We provide an opportunity which might not otherwise exist for families to thrive in the neighborhoods of their choice. With that, I'll now provide a brief update on our start to 2018. We remain on track with our plan for the year.
Our unique ProCare service delivery model continues to produce high resident satisfaction survey scores, and first quarter revenue growth of 4.1% was in line with our expectation. One-time expenses contributed to higher overall expense growth in the first quarter. The outlook for the remainder of the year remains positive. On merger integration, we remain on track with our plan to deliver the benefits we committed to our residents, associates, and shareholders. Development of the systems and technology to support our new operating platform is on schedule, and we continue to expect the rollout of our unified field operating model to begin in the second half of 2018. Our investment management team remains on track with its capital recycling plan, with approximately $50 million of acquisitions and $50 million of dispositions in the first quarter.
We have also ramped up investment in select value-enhancing CapEx opportunities to deliver residents more of the features they desire. At the same time, we enhance our risk-adjusted returns. On the balance sheet, we've continued progressing towards investment grade with refinancings and swap transactions in the first half of 2018 to increase unencumbered assets, improve our maturity profile, lower future floating rate debt exposure, and reduce our overall borrowing costs. In summary, we've accomplished a lot already in 2018, and we continue to be excited about the growth of this business in both the near and the long term. According to Case-Shiller, home prices in our markets continue to appreciate almost 7% per year.
When you consider the value already embedded in our assets today, we believe there is no more compelling way to buy a scaled, high-quality portfolio of single-family rental homes than through the investment in Invitation Homes. With that, our Chief Operating Officer, Charles Young, will now provide more detail on our operating results in the first quarter, as well as the current trends.
Thank you, Fred. We continue to enjoy strong fundamentals, which paved the way for another solid quarter of growth in the first quarter of 2018. Our team is working well to keep field operations running smoothly at the same time that merger integration progresses according to plan. I'd like to thank our associates for their continued commitment to making 2018 a successful year with respect to both core operations and integration. It's been truly impressive to watch our teams in action. I look forward to taking resident service to the next level when we empower them with an even more efficient, unified operating platform in the second half of 2018. I'll now spend some time walking you through the details of our first quarter 2018 operating performance. Same-store core revenues in the first quarter grew 4.1% year-over-year, in line with our expectations.
The revenue increase was driven primarily by average rental rate growth of 4%, and average occupancy remained strong at 95.7%. Same-store NOI grew 3.6%, a solid result considering one-time items that resulted in higher than normal same-store core expense growth of 5.1% in the quarter. A key contributor to this expense increase was elevated repair and maintenance expense, which was atypical in nature, attributable to a timing delay in completing routine non-storm related service requests in markets impacted by the September 2017 hurricane. Service requests related to hurricane damage were prioritized in the fourth quarter of 2017, pushing non-critical routine service requests that otherwise would have been resolved last year into the first quarter of 2018. Harsher winter weather in the first quarter of 2018 compared to the first quarter of 2017 also contributed to higher repair and maintenance expenses. Next, I'll cover first quarter 2018 leasing trends.
Same-store rent growth remained strong in the quarter, with renewals again up almost 5%. Renewals represented two-thirds of the leases we executed in the first quarter. At the same time, turnover was even lower year-over-year at 7.6%. A testament to the value we believe residents continue to find in our first-class service and high-quality homes in highly desirable locations. Same-store new lease growth was 2.5%, accelerating over the course of the first quarter as expected, and blended rent growth was 4%. Western U.S. markets continued to lead the way for our growth as Northern and Southern California, Seattle, and Phoenix were our strongest markets from a rent growth perspective in the first quarter. I'm also happy to report that we're seeing great momentum as we enter peak leasing season.
Average occupancy increased to 96.1% in April 2018, up 20 basis points from April 2017, which puts us in an excellent position for growth. After increasing sequentially in each month of the first quarter, new lease rent growth accelerated to 4.5% in April 2018. Renewals also remained strong in April at 4.7%, resulting in a solid blended rent growth of 4.6%. May and June renewals have been quoted in the mid 5% range, and we expect new lease growth to continue accelerating as we move further into peak season. Finally, a few words on how we're enhancing our resident experience. Our team members remain committed to providing every resident with the opportunity to live the leasing lifestyle they prefer in good neighborhoods, close to their jobs and great schools. We continue to innovate and enhance our property management operations to provide residents with an even more outstanding service.
In the first quarter of 2018, we installed smart home technology in an additional 2,000 homes, bringing the total to almost 24,000. Smart home technology allows us to operate with greater efficiency and enables residents to enjoy their homes in a more convenient and energy-efficient fashion. We're also achieving high resident satisfaction scores as we continue rolling out our proprietary ProCare service model. As field integration takes the next step later this year, we'll roll out more enhancements to our platform that will make the leasing lifestyle we provide to residents even better. I'm proud of what we have delivered so far, and I look forward to working with all of our team members to continue enhancing the experience of our residents as we move forward.
I will now turn the call over to our Chief Financial Officer, Ernie Freedman.
Thank you, Charles. Today I will cover the following topics: portfolio activity for the first quarter, balance sheet and capital markets activity, financial results for the first quarter, and changes in our supplemental disclosures. I'll start with portfolio activity. As we continue to recycle capital to further enhance the quality of our portfolio, in the first quarter 2018, total home count decreased by 61 to 82,509 homes, or approximately 4,850 homes on average per market. We bought 190 homes for an estimated $53 million at an average cost basis of $277,000, and we sold 251 homes for $55 million at an average disposition price of $220,000. I'll now turn to an update on our balance sheet and capital markets activity. As previously communicated, we remain committed to working toward an investment-grade rating.
Debt markets remain highly favorable for issuance. We took advantage by refinancing approximately $2 billion of debt year-to-date to increase unencumbered assets, improve our maturity profile, and reduce borrowing costs, all on a leverage neutral basis. In February, we closed a seven-year securitization with principal amount of $917 million at total cost of funds of LIBOR plus 124. We used net proceeds to repay in full all of our remaining 2019 secured debt maturities. In May, we closed another seven-year securitization with a principal amount of $1.1 billion at total cost of funds of LIBOR plus 138. We used net proceeds and cash on hand to repay $1.2 billion of secured debt maturing in 2020. Pro forma this latest refinancing, our weighted average maturity was extended to 5.0 years, and we increased the number of homes in our unencumbered pool by 10% since the beginning of the year.
Net interest expense as a combined result of the February and May transactions is expected to decrease by $14 million on an annualized run rate basis. In addition to the refinancings, we entered into $2.5 billion of forward interest rate swap agreements subsequent to quarter end. After giving effect to these swaps, based on our current capital structure, the percentage of our debt that will be fixed or swapped to fixed rate beginning in January 2019 will increase to 87% and is between 90% and 100% for the years 2020 through our debt's final maturities. We had over $1.1 billion of liquidity at quarter end through a combination of unrestricted cash and undrawn capacity on our credit facility. I'll now touch briefly on our first quarter 2018 financial results.
Core FFO and AFFO per share for the first quarter increased 13.7% and 7.3% year-over-year, respectively, to $0.29 and $0.24. The primary driver of the increase was growth in NOI in addition to lower interest expense per share. Supplemental Schedule 1 provides a reconciliation from GAAP net loss to our reported FFO, core FFO, and AFFO. As of today, we have earned in approximately $24 million of merger synergies on an annualized run rate basis, which includes $9 million of share-based compensation expense, mainly due to duplicate cost synergies. We continue to expect the majority of NOI-related synergies to be realized later this year after the implementation of an enhanced operating platform for our field and corporate teams that combines the best of both legacy organizations. Therefore, we do not expect our achievement amount to increase materially during the next 90 days.
The last thing I will cover is changes in our supplemental disclosures. As we noted on our last call, we updated our definition of same store to consider homes that were acquired as part of our merger with Starwood Waypoint. Our supplemental reporting provides information concerning our same-store pool of 72,109 homes as of March 31st, 2018. On Supplemental Schedule 6, we are now providing additional detail on our total portfolio capital expenditures. You will notice two categories of capital expenditure that have been part of our business since inception. Initial renovation CapEx that we invest in homes upon acquisition to bring them up to our standards, and recurring CapEx that we invest on an ongoing basis to maintain the quality of our homes. We are also providing detail on a third bucket, value-enhancing CapEx, which we've more recently introduced.
Value-enhancing CapEx is investment we make in stabilized homes to enhance risk-adjusted returns. For example, we might see an opportunity to upgrade a kitchen to a higher-end fit and finish or expand an outdoor living area in a location where data tells us residents will pay a premium for these types of amenities. Recurring CapEx is the only portion of our CapEx that we deduct from core FFO to arrive at AFFO and is the component of CapEx included in total cost to maintain. I'll close by reiterating what Fred mentioned in his opening remarks, that we've accomplished much already in 2018, thanks to our top-notch team of associates and the energy they bring every day, and we are excited for the future.
Fundamentals remain strong. Our best-in-class portfolio and resident service continue to be an advantage, making us confident and excited as our teams move forward in 2018, seeking to further elevate the value of Invitation Homes to both shareholders and residents. 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 can press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. I'd like to ask that you please limit your questions to two per time in the queue. At this time, we will pause momentarily to assemble our roster. The first question comes from Juan Sanabria with Bank of America. Please go ahead.
Hi. Thanks for the time. Ernie, I was just hoping on the cost side for the same store expenses that were a bit higher than you expected, can you help us quantify that? Was that more in the Sway portfolio, just given their Texas exposure?
Sure, Juan. Happy to provide some clarification. Actually, we weren't surprised by the 5.1% expense growth year-over-year. The net impact of the one-time items we disclosed in the supplemental was about $700,000. Actually, more of that came from the IH side, from the Florida exposure with regards to the hurricane. Without those, expense growth would've been 4.5%. The other driver for the expense growth was real estate taxes. As we disclosed in supplemental Schedule three, real estate taxes were up 7.3% year-over-year, which is a pretty high number. Prop 13 in California was the culprit behind it. The good news with Prop 13, as you know, is that, going forward, real estate tax increases are statutorily set to 2%, which is great for almost 13,000 homes that we own in California.
Both our IPO in February 2017 and the merger with Starwood Waypoint late in the year were triggering events for valuation reassessments, and Q1 was an especially difficult comp for those California taxes, as we did not book our Prop 13 tax adjustment in Invitation Homes until the second quarter last year, as we disclosed in last year's second quarter earnings release. In Q1 2018, we had higher California taxes from both the IPO earlier in the year, as well as from Starwood Waypoint mergers later in the year. Without that noise from Prop 13, real estate tax growth would've been 4.5% year-over-year for the quarter one, better than the 5% expectation for the year for taxes prior to the impact of Prop 13. Actually, we had a good result in real estate taxes before Prop 13.
Without Proposition 13, our overall expense growth would've been about 150 basis points more favorable. Expense growth would've been about 3% for the quarter year-over-year versus the 5.1 that we reported, when taking out the impacts from the one-time items as well as Proposition 13.
That's very helpful. Thank you. Just switching gears to the balance sheet, another one for you, Ernie. Leverage ticked up a bit quarter-over-quarter. What drove that, and how do you think about the tools to reduce leverage outside of retained cash flow, and given your view of cost to capital today, what are the alternatives, or how are you thinking about that?
Yeah, sure. You did see that our net debt to EBITDA went from 9.5 times in the last quarter to 9.7. A modest change, that really just came down to where adjusted EBITDA was for the two periods. With the refinancing transaction in the first quarter, when we actually had proceeds also that covered the financing costs. Fully expect by the end of the year, as we've talked about, we'll reduce those numbers by about one turn. We'll definitely be in the high eights to about nine times, and expect that to happen. In terms of tools that are available to us, Juan, certainly the most important one is what you pointed out, was the retained cash flow. Our NOI growth is still projected to be 5%-6% adjusted EBITDA growth.
Core FFO is set to grow very strongly, with our dividend payout ratio where it is, using that retained cash. We periodically, really on a monthly basis, we look at what the opportunities are for Dallas on the capital recycling front and decide what makes the most sense with regards to capital recycling and how to use those proceeds. To date, we've had some modest purchases here in the first quarter, we talked about in the prepared remarks. We do give consideration whether we want to pivot from there or not, but we're very pleased with that plan and continue to plan on staying on track with regards to acquisitions and dispositions about being equally weighted in 2018.
We'll just keep all our opportunities available to us broadly to raise capital, and if it made sense, we'd certainly consider that as well to help improve the leverage profile.
Thank you.
Thanks, Juan.
The next question comes from Andrew Babin with Baird. Please go ahead.
Good morning. This is Alexander Kubicek on for Drew this morning. I was wondering if we could look a little bit at what your guys' occupancy expectations were going into this strong peak season. It looks like Nashville came up a little short. Wondering if any other markets kind of came below where you guys would expect internally, and where you guys saw a lot of great occupancy strength.
Yeah, this is Charles. Thanks for the question. We actually did exactly what we wanted to do in Q1. On the last call, we mentioned that we were a little behind on where we wanted to be at the end of the quarter and wanted to build occupancy through Q1, and we did exactly that. We added about 40 basis points, moving us up to 95.7. We continued to add actually in April. We're up north of 96%, where we averaged in April, which is great news overall and puts us in a really good position for peak leasing season. Through that, 90-plus % of our markets all added occupancy in Q1. We did exactly what we hoped, and because of that, again, blended rent growth came in strong, but renewals carried the day, and we were just shy of 5% in Q1.
We're seeing solid continued renewal growth. They obviously are two-thirds of all the new leases that we do. Ultimately, we're seeing the growth come in new leases, and we ended April at 4.5%. We're positioned very well going into peak leasing season.
Perfect. That's really helpful. Kind of switching gears, you guys alluded to continued growth in the smart home technology program. Wondering how you guys think about internally the ROI you guys get from that. Are there cost savings? Can you charge a higher premium on rent? Kind of just wondering what you guys see the future of that program looks like.
Yeah. Overall, that program's really been great for us. It's not only the ability that we can actually charge additional
fees. There's ancillary revenue that we're able to charge and gain some revenue. Ultimately, it's as much about the operational efficiencies that we get from being able to do a self-show, letting our vendors in, and knowing when they're in. It's the utility management of when we are owning the homes, and they're not leased, to be able to reduce those costs on an ongoing basis. Our residents really enjoy the convenience of the self-show and the ability to have the efficiencies for them and their families to be able to let people in the home and/or control their utilities, while they're living a leasing lifestyle in our homes.
Yeah, Alex, this is Fred. I would just add to that, is the original idea and the thesis for the smart home was to take care of some operational challenges that we have in single-family rental. Namely, key control, access to the home by vendors, by our field employees, et cetera. Also to maintain control over the utility costs during the renovation and eventual turn process. We had the idea of allowing our prospects to interact with the system so they could choose, if they wanted to have a self-showing experience. What we found immediately was that a very large proportion of people really chose and actually preferred the self-showing option. About high 70% to almost 80% of our prospects now are choosing that. If they want to have a guided tour with a leasing professional, they can certainly do that as well.
With just the advent of the smart home craze that's sweeping the nation, most of us now either have them or are considering adding smart home capabilities to our homes. There was actually demand for that. We realized that we could actually facilitate that need and that desire. We make it optional for our residents, if they so choose, they can have control through the same system of that front door, of that thermostat, and then we have other ideas of things that we can add to it in the future. If they do, there's a cost of that we believe is a rental cost at lower cost all in and much more convenient implementation than try to assemble these parts and gadgets themselves.
That's very helpful. Is that 2,000 a quarter kind of what you guys are targeting now going forward, or is it kind of opportunistic where you guys see fit?
That's typical of where we're trying to go. We're installing the new technology on the renewals. As a house turns, we'll put it in, and then it becomes part of the pool to help us with leasing and ultimately be able to upsell to a resident if they choose to do it. What's great is nearly 80% of our new leases that have the smart home opportunity are taking advantage of it. It's been great for us.
Perfect. Thanks for the time, guys.
Thank you.
The next question comes from Douglas Harter with Credit Suisse. Please go ahead.
Thanks. Was just hoping we could talk about CapEx a little bit, and your expectations there, both on the R&M side and the revenue-enhancing side.
Sure. What specifically is your question, Doug?
Just, I guess, the outlook for 2018 looked like the year-over-year growth in CapEx in 1Q was fairly high. Just wondering if that was just a tougher comparison or if that's a level we should be expecting.
Sure. This is Ernie. I'll handle the question around the recurring CapEx. I'll let Dallas talk a little about the value-enhancing CapEx. On the recurring CapEx, this is, we think, a real opportunity area for us, where the two former organizations really were at different spend levels with regards to CapEx. Our expectation is we kind of get to a blended number working toward the better number over time. We did achieve what was closer to the blended number of about $1,200, $1,300 per door here in the first quarter. I think, we talked about on the last call, Doug, that I think for the time being, $1,200-$1,400 per door for recurring CapEx is probably a good number for us. We see opportunity to do better on that because we've done better on that in the past.
In addition, the number is a little bit higher in the first quarter because of what we talked about earlier, about the work orders from the hurricane carrying over into the first quarter, in terms of the routine type stuff. A little bit more difficult comp because of that, but also, we're taking the best of both organizations and moving forward, and going to get to best practices. I think that's where we'll probably be with recurring CapEx. Dallas, you want to just talk quickly about value-enhancing CapEx and what we're thinking about that?
Yeah, sure. As we look for ways to optimize the customer experience going forward, one of the things that we found to be very effective as we rolled out in pilot, we've talked a little bit about this last year, is this revenue-enhancing CapEx idea where we allow the customers to help make decisions around the home that not only harden the asset, but they're willing to pay for it. I'll give you an example. We did, last month in Orlando, 30-plus types of these projects where on average we're spending call it $5,000-$6,000 per home. The incremental, call it bump on rents that our customers are willing to pay, that's an opt-in decision on their part, would put us somewhere between a 15%-20% call it ROI on those dollars on an unlevered basis.
Examples of this are, as Ernie mentioned earlier in the call, upgrading kitchens, hardwood flooring, other ways that we can actually harden the asset through call it customer choice, which is a win-win for obviously the customer. We get a stickier customer that wants to be with us longer because they feel like they had the ability to optimize that part of their home. For us, it's all better because we have a customer that's willing to stay and participate in that leasing lifestyle that Charles laid out earlier.
Great. Thank you.
Thanks, Doug.
The next question comes from Dennis McGill with Zelman & Associates. Please go ahead.
Hi, good morning, everybody. First question just has to do with the work orders that were kicked out from the hurricane in those markets. I know you guys do a lot of surveys of the residents after work orders are done. Has there been any impact to the happiness of the resident on the work order having to wait to get some of this stuff done?
Yeah. The priority that we had on those work orders were obviously to make sure that we were dealing with anything that was an emergency or habitability issues, and we felt like those priorities were the right approach. Some of the ones that were delayed were more routine work orders around fencing, maybe some landscaping. There was a little delay there, obviously, and we do track after every interaction with the resident. The scores came down slightly, but not materially, and we built them back real quickly as soon as we were able to service those homes. Part of what you're seeing is not only the timing, but also the billing timing of where they're coming through, and they hit in Q1.
Overall, maybe a slight blip, but no real material change, and our team's really focused on trying to work through these as quickly as we could. Really proud of what they've been able to do given the size and scale of Irma that came through Florida.
Given what you've learned in hindsight, would you change the way you structure sort of the repair and maintenance efforts in the event of a significant weather event again?
Well, part of the opportunity that we have with combining the best of both worlds is we've already started on that path. Using the technology platform for maintenance will allow us to work through the work orders quicker, and we think that will be a real answer going forward. This is just one example of many, where we're able to look across the organization and pick what we think is best, and the technology platform allows us to get more vendors into the platform, use our in-house vendors as well as bill and move through the work orders in a more timely fashion. We're really proud of what we're able to do there, and we're implementing that as we speak.
Okay, great. Separate question probably for Dallas. On the Zillow Instant Offers program, I vaguely remember you participate in that trial. With them expanding that and looking to take that to more markets, can you maybe just talk about that as a channel for you guys if you are looking to participate with them or similar opportunities elsewhere in the market?
Yeah, absolutely. We look at the Zillow Instant Offers program as one of many, quite frankly, where we're starting to see the way customers transact change. It's like Uber for being in a car versus a taxi. We're starting to see people make decisions where maybe they want to go outside of ordinary, call it, broker channels to buy and sell homes. We did pilot and created the Instant Offer program with Zillow last year, that has now evolved into a much more robust program like you're seeing with Opendoor and some of these other companies. We look at these as one of many channels that will provide opportunities for companies like Invitation Homes to be able to acquire assets and, more importantly, customers.
We also think there'll be added benefit perhaps to some other programs like sale leaseback, where somebody could ultimately sell their home to a company like Invitation and then have an option there and lease back from us for a year or two while they make that next life decision. You're spot on with it, Dennis, in terms of we're going to continue to see this change in the marketplace. Being the largest homeowner of single family, we need to have a front seat as we watch that part of the market develop and, more importantly, participate in it.
In those markets where they're running the trial in Phoenix and Las Vegas, I guess maybe more Phoenix for you, are you seeing every offer that comes through? Are you part of that program?
We're definitely part of the programs in pilot, and we have been, and we've worked with not only Zillow, but other companies to find ways to help optimize that lead funnel. We'll continue to do so and expect us to be active in that space.
Great. Appreciate it, guys. Thank you.
The next question comes from Vincent Chao with Deutsche Bank. Please go ahead.
Hey, everyone. I just want to go back to the integration part of the conversation here. Sounds like the merger integration plans are on track. You guys have alluded to, a couple of times, some pickup in the back half of the year as you integrate the platforms, put together best practices. I was just curious if you could share some of the learning so far, maybe some insights or preview of what might be coming in the second half.
Vincent, thank you. This is Fred. The integration, as we had said in our prepared remarks, is going according to plan, and we're really pleased with the performance of our team and everyone working on this integration. Most of the enabling work is coming to the completion phase. That was the first phase of the project, obviously. We're geared up now and ready to start the implementation in the field throughout the field platform that will impact more of the customer life cycle, the attraction, acquisition, onboarding, and the ongoing service through our field organization. The synergies that we've been discussing since the very announcement of the $45 million-$50 million on a run rate basis by early of 2019 are those cost synergies, the specific identifiable cost synergies related to the implementation of this combined platform, both corporate and field.
There are other potential synergies that we've alluded to, some of them still on the cost side. We're seeing more opportunity on procurement. When you look at another benefit of this merger is our market level, scale, and density, which makes not only ourselves more efficient, but our vendors more efficient as well. We expect to share in those vendor opportunities as we have some more meetings with our vendors and suppliers in terms of procurement strategies. We expect that'll be an additional pickup. We also feel like the current plan is excellent, and we're implementing that plan, but there's always ways to optimize it further once we establish it, get to the field, and get up and running. Those are some opportunities on the procurement side. The revenue, we really see we could add more value-enhancing services to our residents.
We have some plans for that. With this, again, with the density, with the scale, we have more opportunities to provide additional goods and services to our residents that will add to the value of their experience. There'll be a revenue opportunity for us going forward.
Thanks for that. I guess, another question on the same sort of expense side. Ernie, you had outlined sort of maybe a core same-store expense growth of 3% ex the one-time items and some of the tax implications. I'm just curious, if you look at the guidance for the rest of the year, it does imply something below that 3% level for the balance of the year, and it does seem like, if you take the average of the Sway portfolio plus the Invitation portfolio, that the comparisons do get a little bit tougher in the second and third quarters. I'm just curious if there's anything else that we should be aware of that might be helping keep those costs down.
Yeah, sure. For instance, with Proposition 13, I alluded to the fact that we had a difficult comp in the first quarter because we didn't book Proposition 13 or Invitation Homes last year in the first quarter. We doubled up in the second quarter last year. Proposition 13 should be more manageable for us in the second quarter and make real estate taxes a little bit easier because of that. That's one example. Another example is we do expect to get some NOI synergies in the second half of the year, mainly as we get into the fourth quarter. We haven't been specific about what those would be other than speaking generally, and we'll speak more specifically to those as we get to the end of the second quarter on our next earnings call.
That's certainly a little bit of a tailwind that we expect to have some modest help from as well. Those two items specifically help make the rest of the year a little bit easier for us. With that said, like with anything, there's risk and opportunities with any guidance numbers. I'd say the opportunity areas for us are to continue pushing on the things that Fred just talked about with regards to the synergy. As well as, we're getting smarter in how we run the business, as we learned how each of the companies previously ran their businesses and take the best of both. I'd say the risk item for us is around property taxes.
Notwithstanding what I talked about around property taxes earlier, we're very early in the year, most real estate tax assessments come in in the second half of the year, and often in the second half of the second half of the year. At this point, we've only received just a handful of notices back from California with regards to some of the various things, the reassessment events we've had. There's an opportunity for it to be better than we anticipated on real estate taxes, but of course, there's an opportunity for it to go in the wrong direction for us, too. We still have a wide range at 2%-3%. We see a path for us to fall within that range and feel good about it. We'll certainly know better in 90 days.
Okay. Thank you.
The next question comes from Bose George with KBW. Please go ahead.
Thanks. Can you elaborate on the initiatives to introduce other revenues, products that you could charge tenants for that enhance their lifestyle but would produce revenues for Invitation Homes? Maybe give some examples.
Yeah. One example is adding on to our smart home capability. We have the hubs in place, which gives you a lot of optionality in the future. The base system that we offer now is simply the lock and the thermostat, which is very important. Those are the primary features of a smart home, but there are other features as well. So people could choose if they wanted to have video monitoring of either their exterior or interior space. People could choose to implement home security systems, either just the intrusion alarm or a full monitored system. We could get into landscaping. With the density of our portfolio, the ability to offer landscaping at a very cost-effective basis becomes more and more probable. So those are a couple other things. And then in Dallas' world, in terms of the RevX, offering customized interiors, offer customized upgrades.
We want to make the lifestyle so easy so that people can step into a lifestyle that meets their needs, meets their desires, have some optionality, so they have influence in designing of their own experience, all for a leasing payment profile versus it coming out of pocket. There's other goods and services. We're talking to a lot of other large-scale vendors in terms of doing some joint marketing campaigns to provide, again, value-added, efficient, desirable goods, services, and products to our residents.
Thanks very much. Just wanted to ask separately about the Denver core NOI margin, which improved on a same-store basis pretty robustly. Could you give any color on the improvement? Also, structurally, is the main difference and reason for the high margin in that market property taxes primarily, or is there some other attributes?
Yeah. Bose, Denver always performs at a pretty high number for us. In fact, it's been the highest, typically in the mid to high 70s. We had outsized NOI margin in the first quarter around real estate tax accruals. We were over-accrued for real estate taxes based on where assessments came in early this year. That also then allowed us to set the assessment for 2018 to a lower level as well. Real estate taxes, that was one of the reasons why we had outperformed to real estate taxes, notwithstanding what I talked about earlier. In general, Denver performs very well for a lot of the reasons similar to Phoenix as well as Las Vegas. Cost to maintain tends to be a little bit lower. Real estate taxes are reasonable.
You factor those in, and it'll likely continue to be one of our highest margin markets in the portfolio.
Thanks very much.
The next question comes from John Pawlowski with Green Street Advisors. Please go ahead.
Thanks. Fred, I'll ask you to put your apartment operations hat back on for a minute. Over the long run, will investors have to live with much greater volatility in the R&M line in this asset class versus apartments, given the nature of the footprint?
Absolutely not. I think you've seen us over the last couple years that we developed this business and stabilized the business and optimized this business. The numbers have been very consistent. I would say that they're consistent with the numbers that we've been telling and forecasting for the last couple of years. We've always said that that total cost to maintain would be between $2,600, $2,800 per home per year, and that's exactly where we continue to see it over the long run. The way we built that estimate was based on mathematics and looking at the useful life, remaining useful life, typical useful life, and cost of all the components of a single-family home. I don't think you're going to see any volatility going forward. We had one-time events this quarter.
From time to time, you may have one-time events in any product type, residential or non-residential, apartment or single-family. That's what we're dealing with here, as we explained.
All right. Does your long-term cost to maintain estimate include some type of average severe weather reserve concept?
It's based on just each component of the home, whether it's HVAC, roof, foundations, interior, exterior, the cost for those, and then the typical useful life.
Okay. We keep using the term one-time in nature. The skeptical analyst in me says we're going to keep having one-time cost spikes because weather can be unpredictable given the nature of this footprint, the disparate nature of the homes. I guess, how much confidence do you have that these type of events are really one-time in nature?
Well, for example, this quarter. We saw the work order spike starting very early in January, and then obviously looked into those quickly and saw that the cause was just the pushing of the routine work orders from the Q4 prioritized for the hurricane into January. The number came down in February, continued to come down in March, and by late March was back to normal levels. Happy to report in April, same thing, back to normal expected levels or slightly better. Our characterization of that was a one-time event based on that event, which was two hurricanes, two major areas impacting lots of different businesses, including ours. Could we say that hurricanes will never happen again? No. Do they happen every year? Of course not.
It's going to be these more infrequent, one time, hard to predict, hard to forecast, hard to budget, hard to guide into those types of activities. We would not build a business plan based on anticipation of a major hurricane going through the state of Florida.
Okay. Makes sense. Last one from me, Dallas. I know Chicago home price appreciation has been lackluster at best. Within your Chicago portfolio, are you actually seeing absolute declines in home prices in any pockets of your portfolio?
No. Well, maybe I wouldn't say in any pockets, and we're seeing kind of slow, steady growth out of Chicago. Fortunately, I think from an operational standpoint, we've gotten much better there from an occupancy standpoint, and we're starting to see a little bit more renewal growth than we'd seen historically from both legacy portfolios. What we'll continue to do there is optimize and put the portfolio in a position where it can be the most successful. We've talked about this in the past, that Midwest, the concentration for us is less than 6.5% of our revenue. It's not a key focus. Our story really is West Coast and Southeast. If you look at that type of growth, John, I think that's a little bit of a no-brainer. We don't disagree. We'd like to see more growth out of Chicago. We'd like to see better efficiencies.
Just haven't seen a lot of it in terms of HPA, but we are seeing a little bit of it.
Yeah. I'll just add, Chicago, operationally, we've really seen a nice movement. We ended the quarter at 95% or slightly above, into April, we're north of 96%. With that, when you look at blended rent growth year-over-year, it's actually starting to accelerate, where we moved up into the positive 2s and then expanding into April to north of 2. Operationally, we feel good about it, with our scale and combined portfolio, we feel like we're in good shape to continue to push forward.
Case-Shiller has Chicago market January, February of 2.7% home price appreciation.
Okay, thanks very much.
The next question comes from Ryan Gilbert with BTIG. Please go ahead.
Hi. Thanks, guys. I was wondering if you can describe any of the best practices you've taken away from your hurricane response over the past three quarters that you can apply the next time the portfolio experiences a severe weather event.
Yes. Thank you. This is Charles. On the Sway side, having gone through two last year, both Harvey which hit Houston and Irma that came through Florida, and on the IH side, both of us going through the Florida storms. We learned a lot in terms of preparation, getting out ahead, working with vendors. Harvey specifically was more really heavy water, not as much wind. We were able to have anticipation with our vendors to have fans and dehumidifiers and extra vendors ready to be kind of first responders. In some instances, we're on the ground before many of the other first responders. One of the best practices we did between both sides was to be thoughtful around the displacement of our residents. We stopped leasing our homes and allowed our residents to have first choice of moving to any of our homes. We learned from that.
Are there other things we can do? I think what we talked about from an operational side is just comparing those notes. I also mentioned earlier on the call that our technology platform was a big help on the Sway side. As we implement that on the cross-portfolio, I think we'll be in better position to respond faster than we did in this instance. A lot to learn, and we'll continue to compare notes if we, God forbid, something would happen again.
Okay, thanks. On renewal rents, it looks like over the past five quarters, your Western markets have been averaging mid to high sixes, the rest of the portfolio closer to four, mid-fours. Wondering if you're seeing an opportunity to bring the renewal growth rate in the rest of your portfolio closer to where your Western markets are trending, or if that's just a function of the
High HPA, low supply infill locations of your Western portfolio.
Yeah. You kind of answered the question for us. That Western exposure allows us to kind of optimize some of the renewal growth out there. If you look across the portfolios, historically, we've been really at that kind of high fours consistently on renewals. Regardless of seasonality, that's where renewals are consistent. They ultimately are two-thirds of our leases. You're going to get based on supply and demand and some of the HPA growth, the Western markets are going to push, but you still see good renewal growth out of some of our other markets. When you take a blended portfolio like this, we think that high fours, low fives is where we're going to settle.
Okay, great. Thank you.
The next question comes from Richard Camden with Morgan Stanley. Please go ahead.
Hey, thanks for taking my question. Just going back to the opening comments about the average age and the impact of the Millennial generation. Just curious, is that consistent across both the legacy Starwood Homes as well as Invitation Homes, and is there any noticeable trends about that generation that you could point to?
Yeah. Interesting question. We've talked a lot about that. On a large scale basis, just look at the demographics of this country. Demographics are undeniable. It doesn't really matter what else is going on in the economy, people still get older every year. When you look at the Millennial cohort, which is actually larger than the Baby Boom cohort, it's going to have a massive impact on the nation's economy for the next 10 years or more. The impact to our business is they're coming to that age now. The leading edge of this Millennial cohort is getting to the age and the life stage where the behaviors are going to begin to change.
Instead of living by themselves or living with roommates in the urban setting, some of them, many of them over the next decade, are going to be moving into the part of life where they're going to have relationships, start forming more traditional family situations. Their needs and desires change from the urban core to a more of a neighborhood with schools, with safety, with access to transportation, et cetera. We think that demand is going to bode well for single-family, both purchase and rental. With the Millennials, a lot of the research says or speculation says, is they'll continue to want to stream their lifestyle in lots of areas. Be asset-light and experience-focused. With that comes the desire to lease the lifestyle they can live and actually afford to lease a better lifestyle through leasing their home versus purchasing.
A lot of demographic and psychographic reasons why we think this is going to be a very bullish theme for us for the next decade or more, steady demand from this cohort.
Great. The other question I had, just circling back to the revenue-enhancing CapEx discussion. I'm just trying to understand what the opportunity is there. Is that something that, obviously, you're doing it as homes are rolling, but could that be 20,000 homes, 40,000 homes? Just trying to get a sense of the opportunity there.
Yeah, I'll take that. This is Dallas. It's still early days in terms of how much absorption we can have, call it in a given year. We've laid out that we think we can be across kind of the myriad of call it revenue-generating opportunities and kind of CapEx spend between $15 million and $20 million a year in this type of program right now. Time will tell. Fred laid out and talked about some of the services that are available. We also believe that this leasing lifestyle doesn't only behold itself to when they're in our home. It can be moving in, moving out. There's a lot of different ways that we can optimize growth for this business.
I would say that it's still too early to say what that capture rate will be while they're in our home, we certainly are bullish about the opportunity that's in front of us.
Got it. Thanks so much.
Thank you.
The next question comes from Wes Golladay with RBC Capital Markets. Please go ahead.
Hi, guys. Looking at the supply outlook, are there any markets that stand out maybe for the next two years where you see competitive supply pressure and competitive defined as will pressure your sub-market and your price point?
Yeah, again, this is Dallas. Without a doubt, the markets are tight. We're going to have 12 and a half million new households formed over the next decade, and we're not building enough supply today to just keep up with normal household formation. As you start to think through that, you know that it's going to put an imbalance of pressure on, call it new home pricing or current pricing in these higher barrier to entry markets. Without a doubt, we would anticipate that we've lived in a normal market for the last couple of years, and we've had only between two and three months of home supply in any of the 17 markets that we're in today across Invitation Homes. We don't see that changing in the foreseeable future.
We see, in fact, if anything, that may tighten a bit with some of the choices and decisions being delayed, like getting married, some of these other things that Fred talked about. It puts us in a unique advantage to have probably the right type of demand function on our product specifically. We are not building a forecast for the next 3 years where we're going to see a lot of supply. Actually, quite the contrary. We're trying to make sure that we optimize the way that we can for those external growth opportunities, living in a low supply environment going forward.
Okay. Then you had mentioned new entities such as Zillow and Opendoor changing the way homes that are bought. I'm wondering if there's at some point, an opportunity for Invitation Homes to have a third-party management use your scale. I imagine that they have a big risk would be holding inventory, and that's where you could probably help them out.
Yeah, that's an interesting concept. We've been asked to consider that. We have no interest at this time of pursuing that strategy. We've got a big integration in front of us. We have a lot of things to accomplish for our own portfolio, for our owned assets, for our shareholders. You never say never, but it's certainly not in our near-term playbook. The platform that we have developed and continue to develop through further innovations and additions, I think has a lot of intrinsic value. Maybe someday in the future, we'll look at ways of how to leverage that differently.
Okay. Thanks a lot.
The next question comes from Anthony Paolone with J.P. Morgan. Please go ahead.
Yeah, thanks. I guess for Dallas, can you walk through some of your major markets and talk about where yields are on acquisitions for product in your buy box?
Yeah, sure. No problem. Well, you know that we have scale in California and Seattle. Let's start on the West Coast specifically. Those are markets where, I'll give you an example, like in California, you could be buying between, call it an NOI cap rate, somewhere between 4.5 and a 5, depending on the market or sub-market that you're specifically trying to invest in. Whereas we can be in still solid suburbs and markets in the Southeast, where we can buy between a 5.5 and a 6 cap, depending on the type of home and type of neighborhood. It varies in large degree, and it varies by the amount of call it available supply that you can actually buy.
Generally speaking, we're very bullish post-merger in expanding our footprint in markets like Denver and Dallas, and we'll find ways to continue to grow the portfolio where all the fundamentals are saying we want to be, because it's where people want to be. It's where the job growth and household formation will continue to occur.
Okay. Just a second question for Ernie. Schedule 2B, if I look at your weighted average interest rate of 3.5%, can you roll that forward like you did with kind of the description of fixed versus floating debt when you kind of move through all the swaps and look ahead?
I can't do that off the top of my head, Tony, let me get back to you on that. Certainly, we have a couple of things that are going to go against each other as we go forward. With the current debt that we have in place, its cost will likely go up a little bit because our future swaps are a little bit more expensive when the more current ones roll off. Offsetting that is we have spreads today embedded in a lot of these instruments that are not market spreads today. Spreads have come down quite a bit since these original financings were done two, three, four years ago. You're going to have two natural offsets.
I can talk to you offline and point you to where you can see in our disclosures, where you can get a sense for how that will change based on the current debt profile and the current swaps. We feel very optimistic that we have a chance to offset those increasing costs with tighter spreads as we continue to think about refinancing activity for the rest of this year.
Okay. Thank you.
This concludes our question and answer session. I would now like to turn the conference back over to Fred Tuomi for any closing remarks.
All right. Thank you, everybody. Thank you again for joining us today. We appreciate your interest, as always, in Invitation Homes, and we look forward to seeing many of you at the upcoming Nareit in June in New York. Thank you.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.