Invitation Homes Inc (INVH) — Q4 2017 Earnings Call Transcript

Thank you. Good morning and thank you for joining us for our fourth quarter and full year 2017 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 fourth quarter and full-year 2017 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. As previously announced, Invitation Homes completed its merger with Starwood Waypoint Homes on November 16, 2017. Information presented for the fourth quarter and full-year 2017 includes the impact of the merger. Additionally, in order to provide consistent comparisons with results reported in the first three quarters of 2017, we present same-store results independently for each of the Invitation Homes same-store portfolio and the legacy Starwood Waypoint same-store portfolio. In each case, metrics have been defined consistently with historical methodologies for each of the two companies. Beginning in 2018, in order to provide the most relevant information about our operations as a combined company, we have consolidated the two same-store portfolios into one. Finally, I'd like to inform you that certain statements made during the call may include forward-looking statements relating to the future performance of our business, financial results, liquidity and capital resources and other non-historical statements, which are subject to risks and uncertainties that could cause actual outcomes or results to differ materially from those indicated in any such statements. We describe some of these risks and uncertainties in our 2016 Annual Report on Form 10-K, our merger proxy filed on October 16, 2017 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're excited to report today for the first time as one combined company the new Invitation Homes. I'm pleased to report we closed out 2017, a transformational year, with even stronger results than expected, and our merger integration is off to a great start. What a year it has been for Invitation Homes and Starwood Waypoint. Our teams produced great operating results, with same-store NOI increasing approximately 7% in 2017 for the pro forma combined company and our core NOI margin expanding to approximately 65%. Same-store revenue growth remained strong at almost 5% in 2017 while turnover was steady at approximately 35%, a testament to the value we believe residents continue to find in our first-class service in high-quality homes and highly desirable locations. Home prices in our markets appreciated over 6% in 2017, further enhancing the embedded value of our real estate. In addition to same-store NOI growth consistently among the best in the entire REIT sector, Invitation Homes and Starwood Waypoint's accomplishments in 2017 include the following: the acquisition of over 5,700 homes and sale of almost 2,800 homes, further improving our already high-quality and well-positioned portfolio of homes; the continued revitalization of communities and support of local vendors through the renovation of over 3,500 homes and over $200 million of home maintenance on behalf of our residents; over $8.5 billion of capital raised, including the second-largest REIT IPO to date and the industry's first agency financing with Fannie Mae, allowing us to push out maturities, reduce our borrowing cost and grow our unencumbered asset pool; and a transformational merger, creating the preeminent leader in the single-family rental space with $21 billion of enterprise value at over 80,000 homes. I'd like to thank all of our associates across the country for these many accomplishments and their continued dedication to earning the loyalty of our residents. Looking ahead, we expect another year of strong results in 2018. Supply and demand fundamentals remain favorable in our markets, led by approximately 70% exposure to the Western United States and the State of Florida. Leading real estate economists expect job growth in Invitation Homes markets to be over 50% higher than the national average in 2018, resulting in expected household formation growth of 1.9% compared to the national average of 1%. The fact is there's a shortage of housing to absorb this demand with housing permits in our markets less than 1% of existing stock. Furthermore, the leading edge of the millennial generation is just beginning to reach the age where the needs of their lifestyle and their life stage align with single-family homes in high-quality neighborhoods. We expect consumer preference, economics, and the value provided through our high-quality products and service to lead many of these new single-family home consumers to Invitation Homes. The bottom line is it's a very good time to be invested in single-family homes for rent. In addition to these strong macro tailwinds, we're excited to begin realizing the benefits of our merger for both investors and our residents. In line with our initial estimate, we have identified $45 million to $50 million of annualized run rate cost synergies and believe there could be additional upside as we implement best practices across the organization. After closing the merger last November, our teams immediately got to work executing an integration plan designed to deliver these synergies, and we are on track with this plan. Current and prospective residents experienced a seamless transition and are already enjoying benefits, including a new and improved resident website and the rollout of further enhancements to our unique ProCare service model. At our corporate and field offices, the go-forward leadership teams have been identified and are in place, and all key decisions on strategy and operating methodologies have been made. A plan is in place for a unified platform and operating strategy to be rolled out across our markets over the next few quarters. This strategy combines each company's strengths into one highly efficient, customer-centric operating platform, leveraging our deep talent and advanced technologies, including the ProCare service model, Smart Home technology and our proprietary Atlas property management system. As we execute our plan, we believe our combined resources will allow us to provide even higher-quality service and greater choice to our residents, making an even larger contribution to economic growth, job creation and the vitality of our local communities which we serve. In light of a strong fundamental backdrop, in 2018, we expect same-store core revenue growth between 4% and 5% and same-store NOI growth between 5% and 6%. Our operational priorities for 2018 are all about execution. First, continue to deliver strong operating results across our core portfolio. Second, execute operationally to further enhance the quality of service we provide to our residents. Third, execute on our integration plan to realize the value we indicated for residents, team members, and shareholders. Fourth, recycle capital to continue increasing the quality of our portfolio. And fifth, continue to make meaningful progress on the path to an investment-grade balance sheet. Finally, we believe in the exceptional value of our assets today and well into the future. Single-family rental homes enjoy low resident turnover and provide stable and predictable cash flows. They represent the most liquid real estate asset class in the world and provide value to both investors as well as traditional homeowners. We believe our rent growth and home price appreciation could outperform other real estate classes for years to come due to the strong supply-demand fundamentals and long-term demographic trends. Within this uniquely compelling asset class, we have purchased and renovated homes in highly desirable infill neighborhoods of high-growth markets and built an industry-leading operating platform with unmatched scale and market density. Based on guidance provided to date by companies across the real estate universe, our projected 2018 NOI growth is more than twice the current REIT average. And that is before the full impact of expected NOI synergies from our merger. Margins continue to improve as we get better at our business. Core FFO growth is projected to be double digits for Invitation Homes and more than three times the current REIT average. We are more excited than ever about our ability to create value for our residents, our team members, and our shareholders. And I thank each of our stakeholders for entrusting us to do just that. All of this makes us very proud of what we have accomplished so far, confident in our ability to deliver consistent, exceptional results, and optimistic for the future success and value of Invitation Homes. So with that, our Chief Operating Officer, Charles Young, will now provide more detail on our strong operating results in the fourth quarter, full-year, and the start to 2018.

Thank you, Fred. The fourth quarter of 2017 was another good quarter for us operationally, setting us up for continued strong growth in 2018. As the merger integration progresses on schedule, our field operations continue to run smoothly. Our teams are working well together, and we closed the year with strong results. That momentum has carried into the early stages of 2018. As Fred mentioned, fundamentals in our markets remained favorable, and our associates in the field are excited to leverage an even more scaled and efficient operating platform to deliver outstanding service to our loyal residents. I'll now walk you through details of our operating performance starting with the Invitation Homes same-store portfolio. In the fourth quarter of 2017, same-store NOI grew 9.3% year-over-year, and core NOI margin expanded to 66.1%. Same-store revenues grew 4.8% and same-store expenses declined 2.6%. The expense decline was driven by lower than expected real estate tax assessments and 7.4% lower controllable costs due to continued realization of savings on personnel costs, leasing, marketing costs, as well as lower repair, maintenance, and turnover expenses. I'll now turn to the legacy Starwood Waypoint same-store portfolio. Same-store core revenues grew 5.4% year-over-year in the fourth quarter. NOI grew 4.7%, a solid result considering two non-recurring items that resulted in higher than normal same-store core expense growth of 6.7% in the fourth quarter. First, the impact of our merger on real estate taxes due to California's Prop 13, which was a 50 basis point impact to NOI growth given our significant footprint in California. And second, a favorable real estate tax accrual adjustment in the fourth quarter of 2016 that impacted the year-over-year comparison. Looking at the more comparable full-year results, same-store NOI grew 6.4% in 2017 or 6.5% when adjusting for Prop 13. Core NOI margin expanded to 65.5% for the full year 2017. One final note about expenses in the quarter, repair and maintenance and turn costs were slightly higher than normal due to the prioritization of hurricane work orders in September that pushed some expenses from the third quarter into the fourth quarter. As a result, core controllable expenses were 3.2% higher year-over-year in the fourth quarter. By contrast, core controllable expenses were down 2.1% for the full-year 2017. Next, I’ll cover leasing trends for the fourth quarter. Same-store rent growth remained strong, with renewals up almost 5% for both Invitation Homes and Starwood Waypoint. Renewals represented over 60% of the leases we executed in the fourth quarter. At the same time, turnover remained low and in line with the prior year. Same-store new lease growth was 1.6% for Invitation Homes and 0.9% for Starwood Waypoint in the fourth quarter, consistent with expectations in the seasonal trend we see each year. Blended rent growth was 3.6% and 3.3% for Invitation Homes and Starwood Waypoint respectively. We are also off to a great start in 2018. For the combined 2018 same-store portfolio, January renewal growth accelerated to 5.1%. January new lease rent growth was 1%, resulting in solid blended rent growth of 3.5%. Renewal notices for March and April have been quoted in the low 5% range, and leads on our resident website remain up materially versus the prior year. Before turning it over to Ernie, I would like to take a moment to say thank you to all of our team members and vendor partners in the field. Together, you provide our communities with more choices when it comes to housing and provide our thousands of residents with the opportunity to live the lifestyle they prefer in safe neighborhoods close to their jobs and great schools. And you have continued to innovate and enhance our property management operations to provide our residents with an even more outstanding level of care and service, resulting in high resident satisfaction. I'm proud of what we have accomplished so far, and I look forward to working with all of you to take our resident experience to the next level as the new Invitation Homes. I'll 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 fourth quarter, balance sheet and capital markets activity, financial results for the fourth quarter and 2018 guidance. Total home count at the end of 2017 was 82,570 homes. Home count increased by 34,670 due to our merger with Starwood Waypoint. In addition, we continued to recycle capital in the fourth quarter, buying 290 homes for an estimated $80 million and selling 257 homes for $58 million. Our average acquisition basis was $278,000 versus our average disposition price of $225,000. I'll now turn to an update on our balance sheet and capital markets activity. As we communicated previously, both companies were committed to working toward investment-grade balance sheets prior to our merger, and that remains the case. Debt markets remain highly favorable for issuance, and we were able to take advantage with favorable pricing on two new securitizations that allowed us to refinance and extend maturities. In November, we closed the industry's first 7-year securitization loan with a principal amount of $865 million at a total cost of funds of LIBOR plus 150. We used net proceeds to repay in full two of our 2019 maturities. In February, we closed another 7-year securitization with a principal amount of $917 million at a total cost of funds of LIBOR plus 124. We used net proceeds to repay in full all of our remaining 2019 secured debt maturities. As a result, we have pushed our nearest term maturity to the first quarter of 2020, with the exception of $230 million of convertible notes maturing in the third quarter of 2019. In addition, our November and February refinancings are expected to decrease interest expense by approximately $9 million annually and increase our unencumbered home pool by over 5,600 homes. Approximately 80% of our debt remains fixed or swapped to fixed rate. We also had over $1.1 billion of liquidity at year-end through a combination of unrestricted cash and undrawn capacity on our credit facility. I'll now touch briefly on our fourth quarter 2017 financial results. Core FFO and AFFO for the fourth quarter increased to $0.29 and $0.24 per share, respectively, each exceeding our expectations, due in large part to better-than-expected same-store NOI growth as well as the accretive impact of our merger. Included in our fourth quarter GAAP financials, but not included in core FFO and AFFO, is an incremental $5.5 million accrual for additional homes identified in the fourth quarter that experienced hurricane damage and revised repair estimates. Supplemental Schedule 1 provides a reconciliation from GAAP net loss to our reported FFO, core FFO, and AFFO. The next thing I will cover is guidance for the full-year 2018. As Fred and Charles discussed, we believe that we continue to have strong fundamental tailwinds at our back. As such, we expect to grow same-store NOI by 5% to 6% in 2018, with same-store core revenue growth of 4% to 5% and same-store core expense growth of 2% to 3%. Full-year 2018 core FFO is expected to be $1.13 to $1.21 per share, up 13% at the midpoint from 2017. AFFO is expected to be $0.94 to $1.02 per share, up 12% at the midpoint from 2017. This forecast for continued strong growth prompted our board to increase our quarterly dividend 38% to $0.11 per share per quarter. The expected increases in core FFO and AFFO per share are primarily attributable to expected higher NOI, lower interest expense, and synergy earn-in, as detailed on the bridge in the full year 2018 guidance section of our earnings release. In line with our initial expectations, we have identified $45 million to $50 million of total cost synergies, of which we expect to realize 75% on a run rate basis by the end of 2018. The majority of these synergies in 2018 and especially those impacting NOI, are expected to be realized later in the year after the implementation of an enhanced operating platform for our field and corporate teams that combines the best of both legacy organizations. As a result, we expect synergy realization to be more impactful to earnings growth in 2019 than in 2018. In 2018, we expect synergies to add $0.03 to $0.04 per share to core FFO and AFFO, and for these synergies to be almost entirely related to property management and G&A. As of today, we have earned an approximately $20 million of synergies which includes $9 million of share-based compensation expense, mainly due to headcount synergies. Because there are some moving parts in 2018 as a result of the merger, I'd like to call attention to a handful of modeling items. First, in 2018, we will no longer provide legacy Starwood Waypoint same-store results. In order to provide what we believe to be the most relevant indicator of comparable performance year-over-year, we have modified our definition of same-store to allow us to include homes that came to Invitation Homes through the merger. As of January 1, 2018, our same-store pool consisted of approximately 72,000 homes or 88% of our total portfolio. Second, while there are minor tweaks to accounting geography to marry the two companies' reporting practices, we do not expect the organization of our financial statements or the definitions of key non-GAAP measures like NOI to change materially from the way Invitation Homes has treated them historically. Third, we will incur a number of non-recurring costs related to our integration efforts in 2018, such as severance and retention, consulting fees, and system migration costs. These costs will be recorded in GAAP G&A and property management expense and removed from core FFO and AFFO on the merger and transaction-related expenses line of our reconciliation, with the exception of severance expense, which will continue to be reflected on the severance expense line of our reconciliation. Fourth, the utility billing program that Starwood Waypoint used will be the model for Invitation Homes going forward. Residents will continue to be responsible for costs associated with their water and sewer usage and trash removal. Local providers will invoice Invitation Homes directly instead of our residents. For the next couple of years, this will result in a materially higher year-over-year utility expense in our financial statements as this rolls out across our portfolio as residents move out, offset by corresponding resident reimbursements. In presenting core revenue and core expenses results in our supplemental statements and for the basis of our guidance, we'll remove the impact of this gross-up. Before turning it over to Q&A, I'd like to reiterate how excited we are about 2018. We're off to a great start, and our teams are working enthusiastically together to keep the momentum going and further solidify Invitation Homes as the preeminent leader in the single-family rental sector.

Hey. This is Ronald Kamdem on for Richard Hill. First one, kind of going back to the new lease rent growth. Obviously, I appreciate that there's some seasonality in the fourth quarter and it's seasonally a little bit weaker. But I was just wondering if there's any color why there was, if I compare the 1.6% versus what you did in the fourth quarter of the previous year, was there any additional color into why there may have been potential weakness there? That would be helpful.

Yes. This is Charles. Thanks for the question. I'll give you a couple of comments. As you mentioned, seasonality is definitely part of the new lease impact in fourth quarter and first quarter. But we're always trying to balance rent growth – new lease rent growth and occupancy during those periods. And what I'd point out is the Invitation Homes portfolio actually gained 20 basis points in occupancy during the period. So if you listen back to the last call, there was actually a conscious effort to go into the quarter making sure that we're strong on occupancy and balance that out. The other thing I would say is, with the hurricanes that were out there, there's a little bit of hangover in terms of getting those homes back in line, a pause in some of the leasing efforts, and days to re-resident increased. And we wanted to push the occupancy back up in the Florida markets. And that's really more of an impact, Florida specifically on the Invitation Homes portfolio. On the Starwood Waypoint side, a little bit of a similar experience, but we had a bit more turnover in the summer months, mostly driven by the expiration of the multi-year leases that had limited 3% bumps. And those extra 2,000 expirations pushed up our occupancy. And we were making sure we're catching up, so we gave up a little bit of new lease growth. So the top-line results were good overall, but we were trying to balance off the occupancy, which is driving revenues overall.

Great. That’s helpful. And then just going back to, I think you provided some of the renewals and the new lease rent growth numbers for January and so forth, which is helpful. Second question really is, as you're looking at, thinking about kind of first quarter and kind of the rest of 2018, I was just curious if you can comment on the outlook for what the job growth versus rent growth and how that's going to be driving?

Yes. So overall, look what I'll say is, as we look forward and we just talked about trying to drive our occupancy. What I'll talk about with our portfolio is today, January and February have been off to great starts. We're well occupied in most of our markets. We're exactly where we want to be. And what we're able to see now from even the January numbers I gave you is real acceleration of our renewal rent growth going into the end of the quarter here. And as we look into second quarter, I could see what's happened in the past is those renewals – the new rent growth starts to catch and/or surpass renewal rent growth. As we talked about, we’ve been quoting north of 5, some markets close to 6 on renewals. So we’re seeing a lot of good momentum in the portfolio in the way we have it positioned today.

Yes, Ron. This is Fred. I would just add to that. On a macro level, you're right, job growth is a great indicator of future demand for housing units and, in particular, rental housing of all types. And if you look at how the U.S. economy is doing – has been doing recently and is doing now and predicted in the near-term future, the outlook is very positive. So there's a lot of stimulants to job growth. The headline numbers have been very favorable. The unemployment rate is near very low points historically. And all of that just creates more household formation, more mobility across the economy as people go to where those jobs are being created, and just more wage growth, et cetera. And all of that are just great indicators for our business going forward. Especially looking at our market footprint, but we're in the high-growth markets, and these are the markets that people are moving to versus from and where these jobs are being created. So we feel very confident that the fundamentals that we've enjoyed in the last couple of years will continue for the near-term future is just placed on the macro outlook, all things considered.

Great, my last question, if I may, would just be on leverage. Just if you can just walk us through, how you’re thinking about it. Obviously, you've talked about wanting to get to that investment-grade type balance sheet. Just understanding, is there – should we think about maybe reducing it by a turn over each year? Like how are you guys thinking about the leverage levels and getting to where you want to be?

Sure. This is Ernie. Thanks for the question. First and foremost, we have a very safe balance sheet today, but we do want to progress to having a balance sheet that will garner investment-grade ratings sometime in the future. And we're committed to do it on that path by using cash flow from operations, the low dividend payout ratio, even with our increased dividend that we announced a little bit earlier this year, and use excess cash flow to help bring leverage down. And of course, we've got the great tailwinds of this best-in-class NOI growth and FFO growth that's expected for the single-family sector and what we provide out in the guidance. So through the growth of the bottom line as well as excess cash flow, we would expect to be able to bring our leverage – our net debt-to-EBITDA numbers down about a turn a year over the next period of time. And if there are other opportunities for us to find ways to accelerate that further, we'll certainly give that due consideration.

Great. Congrats on a great quarter. That’s all from me.

Hi, thanks for the time. Just hoping you could talk a little bit about the integration process, kind of what the key benchmarks and timing of initiatives you guys have outlined or planned for that we should be looking out for. And more specifically on customer service, Starwood Waypoint had a lower customer rating than in INVH. And how do you hope to make that gap up between the two portfolios?

Well, thank you for the question. This is Fred. I’ll take the first part of it. As we mentioned in our prepared remarks, the integration is going very smoothly and according to plan. We feel very confident with the plan that we have in place. And now we're deep into the execution phase, which we've all been waiting for. As we mentioned when we first announced the merger, this is a very large undertaking, but we have the team, we have the experience, we have the resources to attack it properly. So we laid out the timeline initially being about 18 months for merger close, which was November 16, 2017. And the first few months will be just the planning and enabling work, a few months after that more enabling work and setup and testing and then several months of the full deployment into the field operation. So we're right on track on that schedule. We hope to be able to accelerate it. But we're not going to be anxious to really speed this thing up. We want to do it right. Basically, we're going to measure twice or maybe measure three times and cut once. So this is a great opportunity to blend two large, successful productive companies that were pretty well stabilized, had some very – a lot of similarities, as we mentioned before. They're very almost identical in some aspects but had unique features in others. So we're blending the best of the two companies. But then, we're not stopping there. We're also looking for new inventions, new innovations, new ways to create the best platform going forward, given 80,000 homes with a very dense market footprint, which we haven't had before. So we're inventing some new concepts along the way versus just putting the two together. We could have done it faster if we put the two together, but we want to build the ultimate platform for future growth and future functionality. So therefore, it's going to take us a little bit longer. But again, we're still right exactly on plan that we have laid out from the beginning. So more to report with each quarter, as Ernie mentioned in his remarks, and we indicated early on that the – most of the earn-in of the synergies that impact NOI versus G&A are going to come later this year and will be fully realized in the early part of 2019. And I'll let Charles talk about our customer service and resident loyalty initiatives.

Yes, great. Thanks, Fred. So in terms of resident experience, as we're melding these two organizations, we see this as really another great opportunity to take the best of both firms in terms of process, technology, and people. Both firms were utilizing surveys to ensure high-quality and professional service. And we both continued to have and continue to have high customer service scores. However, as we all know, customer service is a journey, and we as a leadership team are committed to continue to build a resident-centric culture. The Invitation Homes vision is to continuously enhance the resident living experience, and our new scale will allow us to get to that vision quicker. We have many thousands of families in our homes. And now we can provide even more expanded housing options and choices. We're going to lean in heavily on the ProCare service and proactive maintenance approach. We're increasing the level of self-performance with our in-house maintenance teams, the ability to utilize the home – the Smart Home technology. We're providing more options. And what's most important is the team out in the field, who I mentioned in my comments, we have our local teams, hundreds of associates in the markets that take great care and pride and provide high-quality service for our residents. So as we continue to survey and iterate and get better and take the best of all that Fred just talked about and build our platform, we see a great opportunity to just get better and better at the customer service culture we want to build.

Yes, Ron, this is Fred. I would just add to that is that we have literally thousands and thousands of completed surveys from our actual residents living in our homes. And most of these surveys are as a result of direct experiences with our maintenance teams in providing customer services upon their request. And 99.8% of those respondents rate us favorably, a rating of 3, 4 or 5 on a 1 to 5 scale. And our average between the two companies which was identical before and now combined, is a 4.3. So our real customers in the field getting real interactions with our real people on the ground, things are going extraordinarily well. So anybody that does not have a great experience, we're going to take seriously and we're committed to fix, but we're doing a good job now, and it will only get better.

And just on the revenue side of the business, for lease optimization, that was a focus for Invitation Homes at that portfolio. Where are you? And is there any benefit that's accruing in 2018 in your guidance? Or is that – would that be a benefit over and above where your guidance is set out at?

Yes, Juan, this is Dallas. In terms of the revenue management systems, both companies had really good systems in place that we're starting with from day one. As you're aware, on the Invitation Homes side, we've done some tweaking last year in terms of the lease expiration curve. And we're in a pretty good shape going into 2018 in terms of where expirations currently occur. Expect us to do a little bit more work in that regard. But we've got a little bit of tweaking to do, but it's really at the sub-market level, and just finding better ways to optimize and create better synergies across how the portfolio is going to behave in terms of those expiration counts.

Okay. And last quick one for me on churn. Have you guys seen any pickup, we’ve seen some of the homeownership stats pop up particularly for the first homebuyers. Any signs there that that's filtering through to your business and may create higher expenses as a result of the churn?

Juan, we're not seeing that today. Turnovers have been consistent year-over-year reason for move-out, the home purchases remains the top reason. But actually, on a year-over-year basis, it's down from where it was last year. Not enough to say I'd call it a trend. But it's held steady for the portfolio at about 25%, so we are not seeing any negative consequences from that.

Thank you.

Thanks. I appreciate the bridge from 2017 result to 2018. But if you take the fourth quarter core FFO, $0.29, and I recognize there's some seasonality and tax accruals involved in that, but it only includes kind of the partial impact from the SFR deal. It's missing some of the synergies that are expected to earn in through 2018 and the interest expense savings that you spoke about earlier. You get to $1.16 on an annualized basis. So just trying to understand kind of what's assumed in guidance kind of above and beyond the fourth quarter run rate.

Sure. So Nick, you kind of laid out the reasons why you can’t take the $0.29 multiplied by four. Specifically in the fourth quarter, we had some favorable gains in real estate taxes on the Invitation Homes portfolio that added $0.01 to the $0.29. And that was because at the end of the day, we had over-accrued for real estate tax expectations in Florida and Georgia. Both of those jurisdictions don't send out their bills until November and December. And in hindsight, we were overly conservative as to where we thought those would come out. So $0.29 would actually be $0.28 in the fourth quarter if it weren't for that. You also have to take out another $0.01 to $0.015 because the fourth quarter is always the highest margin quarter for us for two reasons. One, it's one of our lowest turnover quarters; and two, it's not HVAC season. HVAC season for the second quarter and the third quarter in turnover drives those margins higher. So take another $0.01 to $0.015 for that, you're really at a number for the fourth quarter that, if we were trying to annualize for run rate purposes, is closer to $0.26 to $0.026. And multiply that out, that gets you out to kind of like a $1.06, $1.07, $1.08, that range. And then you have the things you see on our bridge that gets there. So a couple of favorable things have happened in the fourth quarter, and the fourth quarter is always going to be seasonally one of our strongest quarters from a margin perspective.

Thanks. I appreciate that. And then you mentioned the additional upside from best practices, are there any assumed in guidance? And what would you expect the timing to be?

Yes. I think with regard to the best practices, the things that we're starting to give some thought to are things not assumed in the guidance. And one – a good example would be around procurement. We are spending a lot of time working with some of our national vendors and regional vendors to see if we can lower our cost to obtain goods and services. And so we've talked about, and Fred mentioned, the NOI synergies that we're talking about are really baked into the second half of the year and towards the second half of the second half of the year around personnel synergies. The good news is with things like procurement, we can earn those in a little bit earlier if we get those contracts renegotiated. So we like – we're optimistic there's some upside that we provided and maybe some of that upside comes in a little bit earlier. But it's a little bit early in the year for us to change our thoughts and provide any further upside than what we provide at this point. But as we progress through the year, we're hopeful we'll have good news to report on that front.

Thanks. And just finally, for same-store revenue for 2018. I know it will be the combined portfolios for that 4% to 5%. Are you expecting any differences between the legacy SFR versus the legacy Invitation Homes portfolio?

No, Nick, we're really running them as one portfolio, and they're right on top of each other. 83% of the homes, great concentration in the Western U.S. and Florida, the markets we want to be in. And so we haven't, Nick, prepared our budgets that way to say, well, how the legacy portfolio is looking nor are we trying to report it that way. But because the overlap is as much as it is, I think it's fair to assume that there would be very similar expectations.

Thanks.

Hey. Good morning, guys. Ernie, what sort of external growth is built into the FFO guidance? Maybe you can talk a little bit about kind of the go-forward strategy in general. And then, Dallas, if you can comment on what you're seeing in the market. If anything has kind of changed in your world in the past few months.

Yes. I'm happy to address the first part of that, and I'll turn it over to Dallas for the second. In terms of what we're thinking for capital allocation more broadly, including external growth, we think it will be kind of a net neutral year for us. And you could probably see us buy a few hundred million to $0.5 billion – a few hundred million dollars' worth of homes and maybe a few hundred million to about $0.5 billion worth of sales on a net basis kind of gets you back to that same number. So that's where we're going to start out the year. But you know this team can be very opportunistic, and we look at every opportunity that comes up. And if the right opportunity pops up, you could see us pivot from that, like we did in 2017, when the two organizations came together. We think this will be more of a quieter year, where we can self-fund that capital allocation activity by selling – culling the portfolio and selling some of our weaker assets and using those proceeds to either delever or to buy better assets. And Dallas will have all the tools and the toolkit to do that. But on a net basis, that activity has very little impact to FFO and AFFO. They kind of cancel each other out from an accretion perspective.

Yes, thanks, David, for the question. I agree with everything that Ernie just laid out in terms of strategy going forward. Generally is, I think most people on the call understand the market is still really tight. We're seeing a lot of activity in the space from not only, call it, single-family rental companies, but there are a lot of end users that are still out there trying to buy homes. So generally speaking, if you look at the markets that we’re in and one area of emphasis for us continues to be in higher barrier to entry sub-markets and parts of markets we're going to see outperformance in terms of growth. And so as you look at markets like Seattle, we've seen many of our sub-markets, 9% to 10% home price appreciation in the past year. We're seeing rent growth, as Charles laid out earlier in the call, north of 6%, and so we’re pretty bullish in terms of the fundamentals of the markets that we're in, but we recognize that it is still a little bit tight. So we have to – fortunately, we have people on the ground in our asset management investment teams, and so we're very local and we do get the opportunity to look at opportunities here and there in kind of a unique fashion. But generally speaking, the market is healthy, very tight, and we like the fundamentals of the markets that we're in.

Are there any markets in the portfolio now that are kind of underperformers that you would expect to see a drastic improvement in 2018 or vice versa?

Yes, I mean look, we’d love to see a little bit more growth out of our Midwest concentration. Generally speaking, we haven’t seen the home price appreciation or a lot of the rent growth that you want to see the market push away. We are seeing better gains in occupancy. And Charles and his team are doing a terrific job there. I think we are excited about some of the markets that came in because of the merger, markets like Denver, Dallas, and Asheville all feel like they're very high-growth profile markets for the coming years. And so you could expect us to maybe at some point, once we get through the integration, some of those things find ways to grow and expand those portfolios.

Fair enough. And the last quick one for me just going back to the timing of the synergies and the fact that kind of back-end weighted, to some extent, and the NOI won't hit until 2019. Just given some of the moving pieces there, could you give us an actual dollar amount of NOI benefit that you would expect to see in 2019 versus 2018? I mean, we can kind of back into a range certainly, but just trying to get a sense of what OpEx looks like in 2019 versus 2018?

Yes, sure, David. We've given our guidance that we expect synergies overall to be about $45 million to $50 million over the life as we roll these in. And about a third of those are going to come from NOI, and very little of that is going to hit, really hit, really, on an actual basis in 2018. So you take a third of the roughly $48 million, the midpoint that I gave, that's about $16 million, and the majority of that is going to hit on a run rate basis in 2019. So I'd say $14 million to $15 million on the size of our same-store portfolio, that's about 150 bps of NOI growth for next year. Without providing that guidance, that's the math.

Thanks a lot. All right, thanks, guys.

Thanks. Can you comment on what you anticipate for full-year same-store CapEx per property in 2018 and it looks like it's a negative $0.01 decrement to AFFO?

Sure. We think our CapEx for the two portfolios run at slightly different levels. As we combine them, we think we'll get to a blend, Jade. So it will probably going to be – and I would guess, in the $1,200 to $1,400 per home range for CapEx. We think total cost to maintain is going to run kind of consistent to where they have with the two portfolios in the kind of mid-2s to the $2,800 type range. So that's cost to maintain, and that's where we think CapEx will be.

And just from a broader perspective, what do you see as the main challenges from a portfolio management point of view in terms of this larger, local and enterprise scale? Is it to do with juggling centralization, how much centralization to have across the organization or maintaining adequacy of staffing and capacity or is it really the data collection side, I guess, in terms of the challenges of managing a larger portfolio?

Well, thanks for the question. Yes, this is Fred. That's what we wrestle with every day, and that's really with early in this business, it was undefined. And when I first started this business, gosh, it's been almost five years ago now. There was no roadmap. But over time, necessity is the mother of invention, and there was a lot of necessity back then. But I think we've struck a great balance now and we have designed our platform to achieve the right balance in terms of how do you operate a large-scale portfolio across multiple markets, but maintain consistency, maintain accuracy and timely reporting and all the things that you want when you're running a large-scale, long-term sustainable business. And that’s what our platform is designed for from the ground up. A lot of that didn't exist in the single-family rental space. We invented it. We created it. And now we're enjoying the benefits of it. But we'll always be continually innovating it and making it better. And this merger gives us a tremendous opportunity, a big leg up of running 80,000 homes in large concentration markets with 90% of our markets having – the average of 4,800 per market and 90% having 2,000 or more. So that gives us a great opportunity to continue to refine it, which we're doing. In terms of centralized versus decentralized, most of our control center is centralized, and we continue through this merger of identifying the best practices between the two companies. And in most cases, we're increasing the amount of administrative support and consistency and kind of defining the methodologies from a centralized basis. And then the people in the field are dedicated solely to customer interaction, the customer life cycle, that being attraction, acquisition onboarding, and ongoing service. So they're focused on providing customer service and not have to be bothered with the administrative work that's being done by people in the central office.

And Jade, I just would add, I think that your question really, I look at it as the power and the benefit of the scale and the efficiency that we're able to create. As Fred mentioned, you get the best practices that we can use centrally to standardize. But locally, we have our teams on the ground to be able to give that great experience to our customers and our residents. But specifically, the overlap and efficiency of minimizing windshield time, being able to self-perform at higher levels and getting to the homes to service the homes and create convenience for our residents is where the benefit comes from the larger scale. So we're trying to find our right balance between centralization and standardization as well as giving that high-touch experience on the ground.

And just lastly in terms of maintenance work orders, what percentage are you targeting to perform with internal personnel?

Yes, with the combined portfolio, we think we'll be in the 50% to 60% range of self-performance with optimization, and using technology, we hope to push to the higher end of that range. And then, we'll see where we go after we settle in. But that's around where Invitation Homes was before, and that's an increase from where the Starwood Waypoint portfolio was. So we see this as being a benefit overall.

Thanks for taking the questions.

Thanks, Jade.

Hi, thank you, guys. Ernie, first question on the revenue guidance, the 4% to 5%. How would you break that down between expectations around rent, occupancy, and then the other income?

Yes, sure. It's going to be, I think, somewhat similar to what you saw in 2017 with regards to what we're going to do for rental rate achievement on new and renewal leases, which for the portfolio was in the low 4s on a blended basis. And we expect it sort of to be similar there. We expect maybe a slight uptick in occupancy. And then you'll see other income growth start to slow down from where it's been in the past when you take out the noise from the utility reimbursement program that's being rolled out across both portfolios. And that's how you kind of get to a midpoint of about – our midpoint of 4.5% in our guidance range.

Okay. When I look at the markets across the two portfolios, most of them on the fourth quarter pricing power seem to be pretty well aligned. Two, so that would be Atlanta and Charlotte, I guess, that were stronger in the SFR side. What was the driver or what is the driver of the difference in performance in those two portfolios?

Yes. So Atlanta, some of it is pricing between the portfolios, kind of the level. But today, they're both performing really well. I think you get some periods where a quarter will be up or down. But where we look at it today, and we combine them or add 96% in that portfolio puts us in great position going forward. The Charlotte portfolio, a little bit of seasonality that happens we on the SFR side had more of the challenge as we were trying to scale that market and grow, half of our homes were purchased in 2017, and we're digesting that. When you put the two portfolios together, over 4,000 homes, it's now a very strong market and occupancy north of or right around 95% on the combined portfolio. So both of them, although they had a little bit of a slower fourth quarter, as I said, January and February have been off to great starts, and both markets are looking really strong now.

Okay. And then in Atlanta, when you said pricing, did you mean different price points in Atlanta or just the price levels?

Yes. So as you take such a large portfolio and put it together, there are certain different demands on price points and how quickly you get there. When you put now the combined together, working with Dallas and his team to try to optimize that portfolio, we can really keep in and focus on the best of the best.

Yes. I'm happy to address the first part of that, and I'll turn it over to Dallas for the second. In terms of what we're thinking for capital allocation more broadly, including external growth, we think it will be kind of a net neutral year for us. And you could probably see us buy a few hundred million to $0.5 billion – a few hundred million dollars' worth of homes and maybe a few hundred million to about $0.5 billion worth of sales on a net basis kind of gets you back to that same number. So that's where we're going to start out the year. But you know this team can be very opportunistic, and we look at every opportunity that comes up. And if the right opportunity pops up, you could see us pivot from that, like we did in 2017, when the two organizations came together. We think this will be more of a quieter year, where we can self-fund that capital allocation activity by selling – culling the portfolio and selling some of our weaker assets and using those proceeds to either delever or to buy better assets. And Dallas will have all the tools and the toolkit to do that. But on a net basis, that activity has very little impact to FFO and AFFO. They kind of cancel each other out from an accretion perspective.

Great. Yes, I want to thank everybody for joining us here today. We appreciate your interest in Invitation Homes and we’ll see many of you at the upcoming conference season that progresses through the year. Thank you.