Greetings, and welcome to the Invitation Homes First Quarter 2018 Earnings Conference Call. All participants are in listen only mode at this time. 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 Q1 2018 earnings conference call. On today's call from Invitation Homes are Fred Tuamey, Chief Executive Officer Ernie Freedman, Chief Financial Officer Charles Young, Chief Operating Officer and Dallas Tanner, Chief Investment Officer. I'd like to point Welcome to our Q1 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, We describe some of these risks and uncertainties in our 2017 Annual Report on Form 10 ks and other filings we make with the SEC from time to time. Invitation Homes does not update forward looking statements and expressly disclaims any obligation to do so. During this call, we may also discuss certain non GAAP financial measures. You can find additional information regarding these non GAAP measures, I'll now turn the call over to our President and Chief Executive Officer, Fred Tuamey.
Thank you, Greg, and good morning, everyone. We are eager to update you on our latest results, but 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% to 6% and core FFO growth near the top of the REIT sector for this year. Beyond this year, demographics in the United States 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.
And 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 Q1 of 2018 declined to 7.6% from 8.1% in the Q1 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 rail located 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 United States 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. And 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. 3rd, 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 home ownership 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.
And it is our people that will drive us to higher levels of success 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 1st quarter revenue growth of 4.1% was in line with our expectation. One time expenses contributed to higher overall expense growth in the Q1. However, 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 this capital recycling plan with approximately $50,000,000 of acquisitions and $50,000,000 of dispositions in the Q1. 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 twenty eighteen to increase unencumbered assets, 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 Kay Shiller, home prices in our markets continue to appreciate almost 7% per year. And 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 Q1 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 Q1 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, and I look forward to taking Resonant Service to the next level when we empower them with an even more Efficient unified operating platform in the second half of twenty eighteen.
I'll now spend some time walking you through the details of our Q1 2018 operating Same store core revenues in the Q1 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 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 Service requests related to hurricane damage were prioritized in the Q4 of 2017, pushing non critical routine service requests that otherwise would have been resolved last year into the Q1 of 2018. Harsha winter weather in the Q1 of 2018 compared to the first 2017 also contributed to higher repair and maintenance expenses. Next, I'll cover Q1 2018 leasing trends.
Same store rent growth remained strong in the quarter with renewals again up almost 5%. Renewals represented 2 thirds of the leases we executed in the first At the same time, turnover was even lower year over year at 7.6%. A testament to the value we believe residents 2.5% accelerating over the course of the Q1 as expected and blended rent growth was 4%. Western U. S.
Markets continue 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 Q1. 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 Q1, 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 June renewals have been quoted in the mid-five percent range and we expect new lease growth to continue accelerating as we move further into peak Finally, a few words on how we're enhancing our resident experience. Our team members remain committed to providing every resident with to live the leasing lifestyle they prefer in good neighborhoods close to their jobs and great schools. And we continue to innovate and enhance our property management operations to provide residents with even more outstanding service. In the Q1 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 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 Q1 balance sheet and capital markets activity Financial results for the Q1 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 Q1 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 $53,000,000 at an average cost basis of $277,000 And we sold 2 51 Homes for $55,000,000 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, and we took advantage by refinancing approximately all on a leverage neutral basis. In February, we closed a 7 year securitization with principal amount of $917,000,000 at total cost of funds of LIBOR plus 1.24. We used net proceeds to repay in full all of our remaining 2019 secondured debt maturities. In May, we closed another 7 year securitization with principal amount of $1,100,000,000 at total cost of funds of LIBOR plus 1.38. We used net proceeds and cash on hand to repay $1,200,000,000 of secured debt maturing in 2020.
Beginning of the year. Net interest expense as a combined result of the February and May transactions is expected to decrease by $14,000,000 on an annualized Run rate basis. In addition to the refinancings, we entered into $2,500,000,000 of forward interest rate swap agreements subsequent to quarter end. After giving effect to these swaps and based on our current capital structure, the percentage of our debt that will be fixed or swapped to fixed rate We had over $1,100,000,000 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 Q1 2018 financial results.
Core FFO and AFFO per share for the Q1 increased 13.7% and 7.3% year over year, respectively, to $0.29 $0.24 The primary driver of the increase was growth in NOI in addition to lower interest expense per share. As of today, we have earned in approximately $24,000,000 of merger synergies on an annualized run rate basis, which includes $9,000,000 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 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 Our supplemental reporting provides information concerning our same store On supplemental Schedule 6, we are now providing additional detail on our total portfolio capital expenditures. You will notice 2 categories of capital expenditure that have been part of our business 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 3rd 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 It 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 and our best in class portfolio in 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. The first question comes from Juan Sanabrio 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? And was that more in the Sway portfolio just given their Texas exposure?
Sure, Actually, we weren't surprised by the 5.1 percent expense growth year over year. The net impact of the one time items that we disclosed in the supplemental was about $700,000 and actually more of that came from the IH side and from the Florida exposure with regards to the hurricane. So without those, expense growth would have been 4.5%. The other driver for the expense growth was real estate taxes. And as we disclosed in supplemental Schedule 3, Real estate taxes were up 7.3% year over year, which is a pretty high number.
And 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, but 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 the California taxes as we did not book our Prop 13 tax adjustment at Invitation Homes until the Q2 As we disclosed in last year's Q2 earnings release. So in Q1 'eighteen, we had higher California taxes from both the IPO earlier in the year As well as from Starwood Lloyd Mortgage later in the year. Without that noise from Prop 13, real estate tax growth would have been 4 point Before Prop 13, without Prop 13, our overall expense growth would have been about 150 basis points more favorable.
So expense growth would have been about 3% for the quarter year over year versus the 5.1% that we reported, taking out the impacts from the one tied items as well as Prop 13.
That's very helpful. Thank you. And then 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 And given your view of cost of capital today, what are the alternatives or how are you thinking about that?
Yes, sure. So you did see that our net debt to EBITDA went from 9.5 times in the last quarter to 9.7 times, so a modest change. And it really just came down to where Adjusted EBITDA was for the two periods. And then with the refinancing transaction in the Q1, when we actually had proceeds also that covered the financing costs. And so I fully expect by the end of the year, as we've talked about, we'll reduce those numbers by about one turn.
So we'll definitely be in the high heat to about 9 times and expect that to happen. And 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. NOI growth is still projected to be 5% to 6% adjusted EBITDA growth. Core FFO are all set to grow very strongly and with our dividend payout ratio where it is using that retained cash. And then we periodically and really on a monthly basis, we work with we look at what the opportunities are for Dallas on the capital recycling front and decide what makes the most sense with regards Capital recycling and how to use those proceeds.
And today, we've had some modest purchases here in the Q1, we talked about in the prepared remarks. And so 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 We waited in 2018 and then we'll just keep all the opportunities available to us broadly to raise capital and if it made sense, we can certainly consider that as to help improve the leverage profile.
Thank you. Thanks, Juan.
The next question comes from Drew Babin with Baird. Please go ahead.
Good morning. This is Alex Kubashek on for Drew this morning. I was wondering if we could look a little bit at what your guys' The 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.
Yes, 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, we wanted to build occupancy through Q1, and we did exactly that, and we added about 40 basis points moving us up to 95.7 And we continue to add actually in April. So we're up north of 96% where we averaged in April, which is great news overall and puts us in really good position Peak leasing season, through that 90 plus percent of our markets all added occupancy in Q1.
So We did exactly what we hoped. And because of that, again, blended rent growth came in strong, but renewals carry the day and we were just shy of 5%. In Q1, we're seeing solid continued renewal growth. They obviously are 2 thirds of all the new leases that we do. But ultimately, we're seeing the growth come in new leases and we ended April at 4.5 So we're positioned very well going into peak leasing season.
Perfect. That's really helpful. And kind of switching gears over, you guys alluded to on the 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?
And kind of just wondering what you guys see the future of that program looks like?
Yes. Overall, that program has 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. But ultimately, it's as much about the operational efficiencies that From being able to do a self show, letting our vendors in and knowing when they're in, it's the utility management when we are owning the homes and then at least To be able to reduce those costs on an ongoing basis, and 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.
Yes, Alex, this is a problem. I would just add to that. The original idea and the thesis for the smart home was And then it also to maintain control over the utility costs during the renovation and eventual turn process. Then 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 We found immediately that a very, very large proportion of people really chose and actually preferred the self showing option. So about high 70% to almost 80 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.
So there was actually demand for that. We realized that we could actually facilitate that need and that desire. So 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 we can add to it in the future. And then 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 to try to assemble these
Yes, that's very helpful. And 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 Calling the new technology on the renewals. So as the 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 are have the
The next question comes from Douglas Harter with Credit Suisse. Please go ahead.
Thanks. I was just hoping we could talk about CapEx A little bit, and your expectations there both on the R and M side and the revenue enhancing side?
Sure. So 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. So this is Ernie. I'll handle the question around the recurring CapEx. I'll let Dallas talk a little bit about the value enhancing CapEx. On the recurring CapEx, this is, we think, a real opportunity area for us where the 2 former organizations really were Different spend levels with regards to CapEx and our expectation is we kind of get to a blended number working towards a better number over time.
And so we did achieve what was closer to the blended number of about $1200,000 $1300 per door here in the Q1. So I think and we talked about in the last call, Doug, that I think For the time being, dollars 1200 to $1400 per door for recurring CapEx is probably a good number for us, but 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 Q1 because of the what we talked about earlier about the work orders from the hurricane Carrying over into the Q1 in terms of the routine type stuff. So a little bit more difficult comp because of that, but So we're taking the best of both organizations and moving forward and going to get to best practices. So I think that's where we'll probably do with And Dass, do you want to talk quickly about value enhancing CapEx, what we're thinking about that?
Yes, 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. So 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, dollars 5,000 to $6,000 per home. And 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 between a 15% 20%, call it ROI on those dollars on an unlevered basis.
And so 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 have the ability to optimize that part of their home. And for us, it's all the 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 and 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?
Yes. The priority that we had on those work orders were obviously to make sure that we were dealing with anything that was 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, and 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. So 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. So overall, maybe a slight blip, but no real material change. And our team is really focused on trying to work through these as quickly as we Really proud of what they've been able to do given the size and scale of Irma that came through Florida.
And 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 what we're 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. So 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 quarters in a more timely So 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 Offer Program, I vaguely remember you participate in that trial and 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?
Yes, absolutely. We look at the Zillow Instant Offer program as one of many. Quite frankly, we're starting to see the way customers transact Change. And it's like Uber for being in a car versus a taxi. We're starting to see people make decisions or 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 and that has now evolved into a much more robust program 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 will 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 a home lease back from us for a year or 2 while they make that next life decision. So You're spot on with it, Dennis, in terms of we're going to continue to see this change in the marketplace. And being the largest homeowner for single family, we need to have a front seat as We watched that part of the market develop and more importantly participate in
it. And in those markets where they're running the trial 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. And so we'll continue to do so and expect us to be 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. It sounds like the merger integration plans are on track. And 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, What maybe some insights or a preview of what might be coming in the second half?
Yes, 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, and we're geared up now and ready to start the implementation Throughout the field platform that will impact more of the customer lifecycle, the attraction acquisition onboarding, the ongoing service through our field organization. Yes. So the synergies that we've been discussing since the very announcement of the $45,000,000 to $50,000,000 on a run rate basis by early of 2019, Are those cost synergies that the specific identifiable cost synergies related to this, 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 This merger is our market level scale and density, which makes it not only ourselves more efficient, but our vendors more efficient as well. So we expect to share in those vendor opportunities as we get a little more have some more meetings with our vendors and suppliers in terms of procurement strategies. So we expect that will be an additional pickup. And then we also feel like the current plan is excellent and we're implementing that plan, but there's always ways to optimize it further So those are some opportunities on the procurement side. Then the revenue, we really see there is We could add more value enhancing services to our residents and we have some plans for that.
Again, with the density, with 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.
Okay. Thanks for that. And then I guess another question on the same store expense side. Ernie, you had outlined sort of a maybe a core same store expense growth of 3% ex the one time items and some of the tax implications. But 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.
It does seem like if you take the average of the Sway portfolio plus the implementation portfolio that the comparisons do get a little bit tougher in the second and third quarters. And I was just curious if there's anything else that we should be aware of that might be helping keep those costs Down?
Yes, sure. So for instance, with Prop 13, I alluded to the fact that we had a difficult comp in the Q1 because we didn't book Prop 13, an invitation to homes last year in Q1, we doubled up in the Q2 last year. So Prop 13 should be more manageable for us in the Q2 and make real estate taxes a little Easier, because that's one example. And another example is we do expect to get some NOI synergies in the second half of the year, mainly as we get into the 4th And 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.
So those 2 items specifically help make the rest of the year That said, like with anything, there's risk and opportunities with any guidance numbers. And I'd say the opportunity areas for us are to continue pushing on the that Fred just talked about with regards to the synergy. And as well as we're getting smarter in how we run the businesses, as we learned how each of the companies previously ran their businesses and take the best of both. And 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 and 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. And at this point, we've only received just a handful of notices back From California with regards to some of the various things that we the reassessment events we've had.
So there's an opportunity for it to be better than we on real estate taxes, but of course, there's an opportunity for it to go in the wrong direction for us too. So we still have a wide range at 2% to 3%. We see a path for us to fall within that range and
The next question comes from Jade Rahmani with KBW. Please go ahead.
Thanks. Can you elaborate on the initiatives 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?
Yes. 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 People could choose to have 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 It becomes more and more probable. So that's a couple of other things. And then in Dallas as well in terms of the Rev X, 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, Leasing payment profile versus 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 provide again value added, efficient, desirable, good services and products to our residents.
Thanks very much. Just wanted to ask separately about the Denver core NOI margin, which improved Shirley, is the main difference and reason for the high margin in that market property taxes primarily? Or is there some other attributes?
Yes. So Jay, 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 Q1 around real estate tax So we were over accrued for real estate taxes based on where assessments came in early this year, and that also then allows us to set the assessment For 2018 to a lower level as well. So real estate taxes, that's one of the reasons why we had outperformance in real estate taxes notwithstanding what I talked about earlier.
In general, Denver performs very well for a lot of 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's going to 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 and 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 of years that we developed this business and stabilized the business, optimize this business. The numbers have been very consistent. And I would say that they're consistent with the numbers that we've been telling and forecasting The last couple of years, we've always said that that total cost to maintain would be between $26,200 per home per year. And that's exactly where we continue to see it over the long run.
So 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. So I don't think you're going to see 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. So that's what we're dealing with here as we explained.
Does your long term cost to maintain estimate include some Type of average severe weather reserve concept?
It's based on just the each component of the home, whether it's HVAC, roof, Foundations, interior, exterior, the cost for those and then the typical useful life.
Okay. I mean, 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. So I guess how much What 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 the pushing of the routine work orders from 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, Normal levels. So and then happy to report in April, same thing back to normal expected levels or slightly better. So that was a our characterization of that was a one time event based on that event, which was 2 hurricanes, 2 major areas Now, could we say that hurricanes will never happen again? No.
But do they happen every year? Of course not. So 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 We would not build a business plan based on anticipation of a major hurricane going through the state of Florida.
And then last one for 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've seen historically from both, call it, 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 concentration for us is less than 6.5% of our revenue.
So it's not a key focus. Our story really is West Coast And if you look at kind of that type of growth, John, I think that's a little bit of a no brainer. But 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.
Yes. I'll just add, Chicago, operationally, we've really seen a nice movement. We End of the quarter at 95% or slightly above and into April, we're north of 96%. And with that, when you look at Blended rank 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. So, we're operationally feel good about it and with our scale and combined portfolio, we feel like we're in good shape to
And 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 3 quarters that You can apply the next time the portfolio experiences a severe weather event.
Yes. Thank you. This is Charles. For on the Sway side, having gone through 2 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 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.
So 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. And 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 be have first choice of moving to any of our homes. So 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. So, lots to learn, and we'll continue to compare notes if We, God forbid, something would happen again.
Okay. Thanks. And then on Renewal rents, it looks like over the past 5 quarters, your Western markets have been averaging mid to high fixes, The rest of the portfolio closer to 4, mid-4s. Wondering if you're seeing an opportunity 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 High HPA, low supply infill locations of your Western portfolio.
Yes, you kind of answered the question for us. Western exposure allows us to kind of optimize Some of the renewal growth out there, but if you look across the portfolios, historically, we've been really at that kind of high 4s consistently On renewals, regardless of seasonality, that's where renewals are consistent. They ultimately are 2 thirds of our leases. So 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'll see you still see good renewal growth out of
The
The next question comes from Donald 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 model generation, just curious is that consistent across both The legacy Starwood Homes as well as Annotation Homes and is there any noticeable trends about that generation that you could point to?
Yes, interesting question. We've talked a lot about that. And on a large scale basis, just look at the demographics of this Demographics are undeniable. It doesn't really matter what else is going on in the economy, people still get older every year. So when you look at the millennial cohort, which is Larger baby boom cohort, it's going to have a massive impact on the nation's economy for the next 10 years or more.
So 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 and 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 and their needs and desires change from the urban core to a more of A neighborhood with schools, with safety, with access to transportation, etcetera. So we think that that demand is going to be bode well for And then with the millennials, a lot of the research says or speculation says that they'll continue to want to stream their lifestyle In lots of areas, the asset life and experience focused. And with that comes the desire to lease the lifestyle they can live Actually afford to lease a better lifestyle through leasing their home versus purchasing.
So a lot of demographic and psychographic reasons why we think this is going to be a very bullish theme for us in terms for the next decade or more and steady demand from this cohort.
Great. And then 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 is that Could that be 20,000 homes, 40,000 homes? Just trying to get a sense of the opportunity there.
Yes, 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 $15,000,000 $20,000,000 a year in But time will tell. I mean 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. They can be moving in, moving out. There's a lot of different ways that we can optimize growth for this business. So I would say that it's still
The
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 2 years where you see competitive supply pressure And competitive defined as will pressure your submarket and your price point?
Yes. I mean, again, this is Dallas. Without a doubt, the markets are tight. Fred talked about this a second ago, but we're going to have 12,500,000 new households formed over the next decade and we're not building enough supply today to just keep up with normal household formation. So 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.
So Without a doubt, we would anticipate that we've lived in a normal market for the last couple of years. We've had only between 2 3 months of home supply in any of the 17 markets that we're in Across Invitation Homes, we don't see that changing in the foreseeable future. We see, in fact, if anything, that may tighten a bit. And 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 products specifically. So we are not building a forecast for the next 3 years where we're going to see a lot of supply.
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. And 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.
Yes, that's an interesting concept. We've been asked to consider that, but we have no interest at this time of 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 and 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 JPMorgan. Please go ahead.
Yes, 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.
Yes, sure. No problem. Well, I mean, you know that we have scale in California and Seattle, starting in the West Coast specifically. I mean, 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 5% depending on the market or submarket that you're Typically 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 Home and type of neighborhood. So it varies in large degree and it varies by the amount of, call it, available supply that you can actually buy.
But generally speaking, I mean, we're very bullish post merger and 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 the household formation will continue to occur.
Okay. And then just 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, so let me get back But certainly, we're going to 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 in market spreads today. Spreads have come down quite a bit since these original financings Done 2, 3, 4 years ago. So you're going to have 2 natural offsets, but I can get you talk to you offline and help you to point you to where you can see in our disclosures where you can get a sense for That will change based on the current debt profile and the current swaps, but 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 Tuolme for any closing remarks.
All right. Thank you, everybody. Thank you again for joining us today. We appreciate your interest as always And we look forward to seeing many of you at the upcoming NAREIT in June in New York. Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.