Invitation Homes Inc (INVH) — Q2 2018 Earnings Call Transcript

Thank you. Good morning. And thank you for joining us for our second quarter 2018 earnings conference call. On today's call from Invitation Homes are Fred Tuomi, Chief Executive Officer; Ernie Freedman, Chief Financial Officer; Charles Young, Chief Operating Officer; and Dallas Tanner, Chief Investment Officer. I'd like to point everyone to our second quarter 2018 earnings press release and supplemental information, which we may reference on today's call. This document can be found on the Investor Relations section of our website at www.invh.com. I'd also like to inform you that certain statements made during this call may include forward-looking statements relating to the future performance of our business, financial results, liquidity and capital resources and other non-historical statements, which are subject to risks and uncertainties that could cause actual outcomes or results to differ materially from those indicated in any such statements. We described some of these risks and uncertainties in our 2017 annual report on Form 10-K and other filings we make with the SEC from time to time. Invitation Homes does not update forward-looking statements and expressly disclaims any obligation to do so. During this call, we may also discuss certain non-GAAP financial measures. You can find additional information regarding these non-GAAP measures, including reconciliations of these new 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. Good morning, everyone. And welcome to our second quarter 2018 earnings conference call. Supply and demand fundamentals remain strong in our high growth markets, which enable us to achieve 4.5% year-over-year same store core revenue growth in the second quarter, a full 40 basis points better than the first quarter's growth rate of 4.1%. Same store average occupancy for the quarter of 96% was the highest achieved over the last six quarters as turnover once again declined relative to the prior year. At the same time, blended rent growth remains strong at 4.7%. This robust top-line growth helped drive year-over-year same store NOI growth of 5% and core FFO per share growth of 19.3%. Looking ahead, new housing supply remains muted and key indicators point to continued strong demand. In our select high growth markets, household formations are forecast to grow at a rate 90% greater than the U.S. average for 2018. Home prices in our markets are up almost 7% year-over-year. Higher construction costs are constraining new supply, and move-outs to home ownership continue to track lower than last year. All of these key factors point to continued strength in revenue growth for the second half of 2018, and demographics in the U.S. have only become more beneficial in the years ahead as the millennial generation continues to age. Based on year-to-date results and our expectations for the remainder of the year, we are maintaining the midpoint of our full year 2018 same-store core revenue growth guidance, while narrowing the range to 4.3% to 4.7%. We're also pleased to report that the majority of integration milestones are now complete, allowing us to estimate merger synergies with greater certainty. We now expect total run rate cost synergies to be between $50 million and $55 million, which is $5 million greater than our initial expectations. While we are excited about our revenue growth outlook and these additional long-term cost savings, property level expenses are temporarily running higher than expected. Charles will address this in greater detail. However, I’ll summarize it by saying that we were overly optimistic in how quickly we would realize service technician productivity gains from our newly integrated Repair and Maintenance management technology, and it will take longer than we initially thought to fully optimize this area. Accordingly, we are updating our full year 2018 same-store expense growth guidance to 4.6% to 5.4%. Let me be clear that we do not view these projected 2018 expense numbers as normalized nor representative of any fundamental change in the business. We would not be changing our previous 2018 same-store expense or NOI guidance if not for these temporary challenges. Given our updated revenue and expense expectations, we now forecast full year 2018 same-store NOI growth of between 3.8% and 4.8%. Importantly, we are maintaining the midpoint of our 2018 core FFO guidance and narrowing the range to $1.15 to $1.19 per share, which represents 13% growth versus last year at this midpoint. As we enter the second half of the year, we continue to focus on widening our competitive advantages in the single-family rental marketplace. The first is locations. We believe we are already in the most desirable high growth single-family rental markets and have carefully selected our homes to be located in high barrier sub-markets with proximity to employment centers, good schools, and transportation corridors. With our substantially increased market density post-merger, our investment management team is now leveraging even more robust data and analytics to further refine our locations through ongoing capital recycling. In the first half of 2018, we reallocated approximately $130 million of capital from lower rated homes and sub-markets into more attractive homes and sub-markets through acquisitions and dispositions. The second competitive advantage we are focused on is scale. With almost 5,000 homes per market on average, we expect to provide even higher quality service to a greater number of homes with the optimal number of personnel. The next phase of our integration will be focused on bringing all of that to fruition as we roll out our new unified field structure and unique operating platform to leverage our increased scale and density. The third advantage is our people and service, which we also expect to benefit from the next phase of this integration. As mentioned, we have completed the process of moving all of our field technicians and vendors onto one R&M management technology platform. In the second half of the year, we will be implementing even more advanced tools and expanding the ProCare best practices aimed at improving both the resident experience and the efficiency with which we provide it. Looking further ahead, we also see an opportunity to expand into new products and services that residents will desire and value such as our current smart home technology offering. We remain excited about the growth prospects for this business in both the near term and the long term, and are focused on continuing to leverage our competitive advantages for the benefit of our residents, associates, and shareholders. With that, Charles Young, our Chief Operating Officer, will now provide more detail on our operating results in the second quarter as well as current operating trends.

Thank you, Fred. I'd like to start by thanking our associates for their hard work and dedication. We continue to enjoy strong market fundamentals, but growth doesn't come without execution and that all starts with resident service. Our teams are providing residents with a high-quality living experience as evidenced by further improvement in the turnover rate to 34.4% on a trailing 12 months basis. Resident satisfaction scores also remain high, averaging 4.3 out of 5 over 10,000 survey responses we have received year-to-date from residents regarding the quality of services. Our dedicated field teams are committed to earning the loyalty of our residents every day. I'll now spend some time walking you through the details of our second quarter 2018 operating performance. Same store core revenues in the second quarter grew 4.5 year-over-year in line with our expectation and up from 4.1% in the first quarter. The year-over-year increase was driven primarily by average rental rate growth of 4% and a 20 basis point increase in average occupancy to 96% for the quarter. These strong top-line results drove same store NOI growth of 5% despite higher than expected expense growth of 3.6%. Non-controllable expenses were in line with expectations; however, R&M expenses were higher than expected for the quarter due primarily to overages in June, mostly concentrated in two markets. I'd like to take a few moments to discuss the primary drivers of elevated R&M expense that were identified and the steps we are taking to improve our results. There are two key issues we are facing: first, the market-specific challenges stemming from disruption to our local teams associated with integration; and second, our temporary challenges we are experiencing as we adapt to a newly implemented R&M Management Technology platform. First, I'll touch on the market-specific issues. The vast majority of our markets have seen very limited associate challenges through the integration process. However, Tampa and South Florida have experienced a higher level of personnel issues that have been detrimental to performance. These two markets alone accounted for 44% of the overall R&M miss versus our expectations in the second quarter. We responded by moving swiftly to supplement and rebuild teams in these markets. We have also committed additional national resources to these two local offices to help restore performance to expected levels. Second, I'll turn to the areas of opportunity with our new R&M Management Technology platform. The implementation of this technology was completed ahead of schedule during the second quarter and overtime we are confident that it will further increase service technician productivity. However, in retrospect, we were too optimistic in our initial expectations that we would realize those productivity gains immediately. In fact, productivity temporarily declined out of the gate. This issue was amplified by the fact that we completed the rollout at a time when work order volume was seasonally the highest. We've already taken specific actions to restore and improve service technician productivity. For example, we have updated our service call center dispatch scripts and logic that determine who is best equipped and positioned to address work orders in real time, which will improve the percentage of work orders completed in-house. In addition, we are nearing the rollout of a new version of our route optimization algorithm, which will improve the metric of daily average work orders completed per technician. As systems are fine-tuned and fully adopted, we expect to achieve even higher efficiency than in the past due to our enhanced scale, density, experience, and technology. However, we have reset our expectations to assume that it will take more time to get there. Our revised guidance assumes that the challenges we’ve been experiencing will likely persist through the second half of the year, but we are working hard to do better and faster. Next, I’ll cover second quarter 2018 recent trends. Same-store average occupancy was 96% in the second quarter, the best in the last six quarters. Same-store blended rent growth, which we define as lease-over-lease rent growth net of any concession incentive, averaged 4.7% in the second quarter, driven by a seasonal acceleration and new lease rent growth to 4.8% and continued steady strength and renewal rent growth of 4.7%. Furthermore, we saw acceleration into quarter-end with renewals increasing to 4.8% in June from 4.6% in May and new leases increasing to 5.5% in June from 4.5% in May. Western U.S. markets continue to lead the way for growth with Seattle, Phoenix, Northern California, and Southern California remaining our highest. Even with strong rent growth, turnover trends continue to be favorable, declining to 9.4% in the second quarter of 2018 from 10% in the second quarter of 2017. We believe this is a testament to the value that residents continue to find in our first-class service and high-quality homes in highly desirable locations. The strong leasing environment has continued into the third quarter. Year-over-year occupancy gains accelerated to 40 basis points in July, with average occupancy coming in at 95.4% for the month versus 95% in July 2017. Blended net effective rent growth was 4.7% in July with renewals steady at 4.8% and new leases at 4.6%, meeting our expectation as we near the end of peak leasing season. I will close by expressing my excitement for all of the opportunities in front of us operationally in the second half of the year. We remain focused every day on delivering the leasing lifestyle our residents desire while optimizing rent growth and occupancy to capture strong market fundamentals. We’re working hard to restore and ultimately further improve R&M efficiency. As integration nears the final phase, we’ll rollout more enhancements that’ll make our teams even better equipped to provide an outstanding level of service for our residents. 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 second quarter; balance sheet and capital markets activity; financial results for the second quarter; integration update; and 2018 guidance update. I’ll start with portfolio activity. As we continue to recycle capital to further enhance the quality of our portfolio, total home count decreased by 85,000 to 82,424 homes. We bought 263 homes for an estimated $80 million and sold 348 homes for $77 million, keeping us on track for our full year plan of acquisitions and dispositions each in the range of $300 million to $500 million. The average cap rate on homes we acquired was 5.5%. Net investment was focused in the Western U.S. and to a lesser extent the Southeast, funded by net dispositions primarily in Chicago, South Florida, and Houston. I'll now turn to an update of our balance sheet and capital markets activity. Debt markets continue to provide attractive refinancing opportunities in the second quarter. We took advantage by completing two seven-year securitizations: one in May, with a principal amount of $1.1 billion at LIBOR plus 138; and one in June, with a principal amount of $1.3 billion at LIBOR plus 142. Net proceeds and cash on hand were used to prepay $2.3 billion of floating rate securitizations maturing in 2020 and $200 million of floating rate securitization debt maturing in 2021. Since the beginning of the year, our weighted average maturity has increased to 5.4 years from 4.1 years and our unencumbered pool of assets has grown by over 10% to approximately 38,600 homes. We also entered into additional forward interest rate swaps to extend the duration of our hedges to match the extended duration of our maturities. We've added schedule 2D to our supplemental to provide additional detail related to expected changes in our weighted average cost of debt over time based on our current debt and interest rate swaps in place. And finally, our liquidity at quarter end was almost $1.2 billion through a combination of unrestricted cash and undrawn capacity on our credit facility. I'll now touch briefly on our second quarter 2018 financial results. Core FFO and AFFO per share for the second quarter increased 19.3% and 14.5% year-over-year respectively to $0.29 and $0.24. The primary drivers of the increases were growth in NOI per share in addition to lower adjusted G&A and lower cash interest expense per share. Supplemental schedule one provides reconciliation from GAAP net loss to our reported FFO, core FFO, and AFFO. I'll next provide an update on our merger integration. We are ahead of schedule on most major elements of the integration. Office space in 15 of our 17 local markets has now been consolidated. Implementation of our new R&M technology is complete and our new accounting platform was launched on August 1st. As a result, the pace of synergy achievement is also running ahead of schedule by approximately $10 million versus where we had expected to be at this point. As of today, we have earned approximately $34 million of synergies on an annualized run rate basis, almost entirely related to G&A and property management. Implementation of our unified operating platform and field configuration that combines the best of both legacy organizations is our final remaining major milestone. Work under systems and technology to support this unified platform continues to progress and roll out to the field is expected to begin in the fourth quarter of 2018. The last thing I will cover is updated 2018 guidance. For the same store portfolio, we are narrowing our core revenue growth guidance to 4.3% to 4.7%, unchanged at the midpoint as fundamentals in our markets continue to be favorable. Our same-store NOI guidance is now 3.8% to 4.8% due to an increase in our same-store core expense guidance to 4.6% to 5.4%. I'll give some additional detail to help bridge the increase in our same-store expense guidance. Our initial 2% to 3% same-store operating expense guidance for 2018 assumed R&M costs would be lower in 2018 than they were in 2017 due to anticipated productivity gains. As Charles described, though, productivity instead declined out of the gate and is expected to take more time to optimize. For this reason alone, we now expect property level expenses excluding taxes to be up 3.5% year-over-year versus down 1% in our initial guidance. Real estate taxes are still expected to increase about 6.5% this year consistent with our initial guidance. 3.5% growth on non-tax expenses and 6.5% growth in real estate expenses lead to 5% overall expense growth, which is the midpoint of our revised guidance range. And remember, we have a material increase in our property taxes in 2018 from one-time Crop 13 related reassessments in California due to our merger. Without that increase, our new 5% same store expense growth expectation would instead be 4.25%. As Fred mentioned, we've also raised our expectation for total annual run-rate synergies to between $50 million and $55 million. This is $5 million higher than our initial projection, primarily due to incremental cost savings we've been able to drive in the areas of vendor and subscription services within G&A. Taking into account our revised expectations for same store results and synergy attainment, we are maintaining the midpoint of our full year 2018 core FFO guidance and narrowing its range to $1.15 and $1.19 per share. Additional favorable changes in our forecast include lower expected interest expense and G&A. In summary, our full year core FFO and AFFO guidance at their midpoints imply growth rate of 13% and 10% respectively from the prior year. I'll close by reiterating that our teams are energized and excited for the second half of 2018. Big picture fundamentals remain very strong and we are making great progress on the priorities we laid out at the beginning of the year. With that operator, would you please open up the line for questions?

Just hoping if we could talk a little bit about same store revenue. The guidance implies a modest reacceleration at the midpoint in the second half. Are you comfortable at the midpoint and what's driving that uptick in the second half? Is that driven by occupancy and the rate as part of that how should we think about the impact of the hurricanes last year?

As you saw, we accelerated our revenue growth from the first quarter to the second quarter from a 4.1% growth rate to a 4.5% growth rate. As you look at the second half of the year and as we've talked about in the past, we do have easier comps regarding occupancy. And in fact, in the month of July alone, we're 40 basis points higher year-over-year. So we get a little more benefit out of occupancy regarding having easier comps. We expect to have a good rental growth rate as well in the second half. But with the easier occupancy comp, we do believe that we will get to that 4.3% to 4.7% range regarding our revenue for the full year.

And the hurricanes, does that make the comps easier in the fourth quarter, or how should we think about that last year?

So the bottom line is part of the occupancy bottom line that Ernie talked about is that it's a little lower in the fourth quarter. That will give us a little bit of a lift as we comp against it. So the hurricane pickup really started to come back in occupancy in the first part of this year. We had some slowdown in leasing because of the hurricane in both Houston and Florida. So that’s some of the comp benefit that we have.

And then on the expense side, you talked about sounds like higher employee turnover in Florida. Is there anything you can attribute that to? Is it just people moving for higher wages? And do you expect more wage pressure going forward?

No, it really wasn’t about wage pressure. As a reminder, as we said in the opening remarks, 15 of our 17 offices have already combined, and we’re really operating great across the majority of our markets. The Florida issues are truly isolated, specifically the two markets in Tampa and South Florida. It was around associate turnover, not really about wage, and it was more around the integration. So we had a few unexpected early departures in a couple of key roles that created a distraction for us. And at the time that it happened, it was during the peak work order volume that was part of the impact. The good news is though, we’ve backfilled quickly, we’re supporting the teams with national resources, and we expect to get back on track for the second half of the year.

Can you remind us of your guidance for the second half regarding the pace of addressing those two markets? Also, help us understand the potential impact of those improvements on what 2019 could look like.

I understand when we have challenges in R&M, most of our R&M activity happens in the peak season, in the peak summer season. Our opportunity to improve becomes smaller and smaller as we get to the end of the year. So it’s less work orders coming through the system, that’s across all of our markets. We do expect that these markets will get better by the end of the year, but it won’t have as meaningful an impact as we would like, because there are work orders spread out evenly throughout the second half of the year. Our guidance does assume we continue to have challenges during the peak leasing season, and of course in the peak service season. Of course, we’ll try to do better than that. But I want to make clear we talked about in the prepared remarks that our expectations around that are that baked into our guidance is those issues will get resolved, but it’s going to take well into the end of the year to make sure, and then we’re going to do our best to see if we can do better than that.

Ernie, regarding the refinancing you completed in the second quarter, do you have any other debt that could also provide similar savings considering the current state of the financing markets?

We have managed to get ahead of some refinancing for maturities that were due in 2019, and our capital markets team executed exceptionally well. We also have maturities in 2020 and 2021, which are a couple of years away. These may present good opportunities for refinancing in the latter half of this year or early next year, where we might see some spread compression. We remain optimistic and are satisfied with our current balance sheet. We are glad to have extended our weighted average maturity and are committed to achieving an investment-grade balance sheet. In summary, we might take some actions in the second half of the year, but for now, we are quite pleased with what we have achieved so far.

Just wanted to circle back on same-store expenses. It looks like looking at your guidance and what you did for the first half of the year that you do expect some slight acceleration in same-store expenses in the back half of the year. I was wondering if that's more to the fact that there is more R&M spending in Q3 versus the other quarters, or if there are some other factors there?

Yes, the two things regarding our guidance. First is, as we did say that in the third quarter, we'll have the most spend of between the two quarters, and certainly this happened in the past so we expect that again. The other thing is remember we had a more difficult comp in the fourth quarter. Recall we had some things that met over into the first quarter this year regarding R&M from some of those markets that were impacted by the hurricanes. Most of the R&M activity that was occurring in the fourth quarter in those markets was related to hurricane cleanup, and was not rolled into R&M. So we actually had a lighter R&M number in the fourth quarter of 2017 because of that, creating a slightly more difficult comp for us in 2018. Hence you're exactly right. If you look at our guidance, year-to-date, we're at 4.3%, but our guidance for the full year is 4.6 to 5.4%. So that's why you see that trend as we go into the second half of the year.

And then on the renewal front, renewals are obviously still strong, but they're down 60 basis points year-over-year. If you could compare the difference in pushback with tenants this time around versus last year and what might be driving any of the pushback, that would be helpful.

It's not primarily about pushback from tenants. Pricing power remains strong, supply and demand fundamentals are favorable, and our long-term demographics will support us. When considering rent growth, the slight decrease year-over-year is less related to fundamentals and more about the seasoning of our portfolio. Since we did most of our purchasing early on, our focus was on getting the homes leased. In the last couple of years, Dallas and the team have excelled in optimizing. We are witnessing a true-up to market that initially led to higher rents. Now, we are stabilizing, maintaining consistency at 4.8 to 5. We believe this is reflective of our market fundamentals across the country.

I was hoping to talk about the difference in the revisions to FFO and AFFO guidance. It looks like there are probably increased recurring CapEx expenses in there. I was curious why that is, are those higher materials costs? Does that have anything to do with the same factors that drove repair and maintenance costs higher in the second quarter?

Drew, it's actually the latter of what you described. A lot of the impacts we see in repairs was OpEx where we're seeing the same challenges and that carries over to repairs in maintenance CapEx. We're not seeing a material change in our costs or anything like that in turn. But we are seeing that for the similar reasons with some of the challenges in those couple markets that Charles talked about that we're seeing that pressure on our CapEx, and wanted to make sure we reflected that in our guidance going forward specific for our capital replacement spending, which impacts AFFO.

And then also too I was hoping you could clarify what markets are now unencumbered by debt and the potential to possibly sell a market to a private bidder either later this year and next year to repay debt? Can you comment on what those markets are and what the prospects are for something like that?

Drew, no market is unencumbered completely by debt, but some markets certainly have a lower proportion of unencumbered debt than others, and that generally is an issue for us when we go to sell assets. With regards to all of our securitizations, almost all of them only have a one year lockout where we have to pay yield maintenance on the floating rate securitizations. There are a couple that are two years, but they're almost at the point in time where they expire. We have substitution rights in all those deals too, so we also have that flexibility there. Similarly, we do have flexibility with our Fannie Mae transaction as well for substitution rates. If we did want to sell a market, that wouldn't be a hindrance for us regarding how our debt is structured; we'd have the ability to do that.

And then just a related question. How would you view the bid right now for portfolio transactions in this business?

Drew, this is Dallas. We’re currently experiencing significant demand in the marketplace, even with the limited number of sales we've made this year. There are many new players looking to gain scale, which is quite challenging in today's environment. The straightforward observation is that the mark-to-market situation is quite tight. If we were to introduce a solid opportunity to the market, it would depend on the quality of the assets and the rents being generated from those homes. This year, our disposition activity shows that we have been more active in selling assets in areas where growth is slower. We anticipate this approach will remain consistent with our strategy moving forward.

So Fred or Charles maybe this one is for you, a question again on the expense, the hike in the guidance, which is a surprise to many of us. I recall chatting with you guys at NAREIT and we focused quite a bit on the strong rental growth that was going on, and how you felt good about your 2018 guidance. So I guess I'm curious if you want to wear these integration and expense headwinds at that time. And if so, maybe why wasn't that more of a mention of it?

At NAREIT, we had good insight into April and May. However, June surprised us. We completed the integration into the R&M maintenance technology platform and realized that we had underestimated our in-house tech utilization. We quickly adjusted our approach. The timing of the year posed challenges due to high volumes, which affected our outcomes. That explains why we didn’t see it earlier. We are currently making the necessary changes and believe we will navigate through this successfully. By the end of the year, we expect to be in a strong position heading into 2019.

I just wanted to follow up on the dispositions, as I didn't catch a cap rate. I believe you mentioned it was around 5.5. Could you provide the cap rate for that and if there are any specific markets?

So I can answer that for you Haendel. In terms of cap rate, it was 0.7%. All of our sales in the second quarter were through the end user retail channel where the home typically we vacate for a month to two months, maybe a little longer sometimes. You typically see a much lower cap rate when we sell those homes. If we were to start selling some more homes to the bulk channel, you’ll see a cap rate to be at a certainly higher number and more in line with where they’re buying homes. In the second quarter, it's at 0.7%. And with the number of homes that we sold, we did not exit any markets. Dallas could talk about where we concentrated some of those sales.

We've had a number of sales in Houston throughout this year and also Chicago. We're really in line with some of the guidance we laid out early in the year in terms of where we want to be selling. Ernie talked about it earlier on the call. We anticipate we’ll sell somewhere between $400 million and $500 million worth of homes this year, and we're on target to achieve those targets.

Can you provide details about what's happening in Houston, particularly since you mentioned it has been one of the weaker markets for revenue growth?

Really it's around supply challenges related to our owned and other product from post-Harvey coming back online. Occupancies stepped up temporarily when there was a void of housing as those homes were being rehabbed. We had around 130 come back in the first and second quarter. So it creates a little bit of a supply issue for us, and then other homes coming in as well as we’re trying to compete against that. This puts some pressure on our new lease growth, and we’ll continue to have a little bit of that as we absorb. Going into the second half of the year, we expect we’ll catch back up now that volume is at peak season.

So at NAREIT with three weeks to go in the quarter, R&M and personnel related issues pop-up. If R&M costs are up 15% for the quarter suggests they’re massively in the last three weeks of the quarter. So I guess how do you get comfortable that with that little visibility with three weeks left to a quarter? How do you get comfortable with personnel-related issues, or call center queue scripts aren’t going to pop-up in September or October?

We have to react to the information that's in front of us and we reacted quickly. On the R&M side, specifically, the call scripts are just part of what we are reacting to. Part of the issue is the volume of work that’s coming through that time of year and our ability to make those pivots. July also is a high volume month, it’s actually the highest volume. August is high and then we start to step down. Some part of the challenges when you make the adjustments take some minutes to get through the system. We have further enhancements that we’re going to do. Ultimately, we talked about the in-house tech utilization, the call scripts are a big part of that. As we go through the remaining field office consolidations, we’re going to unlock more of that strength. The maintenance tech productivity is another one that we’re going to roll in here shortly with the route optimization algorithms. That will help get the number of work orders that our in-house tech can do each day. As we go through these adjustments, we think we’re going to see improvements.

The actual implementation and a lot of the integration at the field level are going to happen in the back half of ‘18 and early ‘19. So are you comfortable that the personnel in the field are safer than the Tampa and South Florida markets were the past month? How do you get comfortable with that?

As mentioned, 15 out of 17 offices are already consolidated. The go-forward leaders in place, and we’re working well with things across all those. Like we said, we were isolated to a couple of markets that had impact. Since these teams are working well together and the fact that we’ve already implemented the maintenance technology platform, the rollout on the second half of the year should be much smoother. We’re going to be very thoughtful about how we do it in terms of implementing measured rollout and looking at the slower seasonality of Q4 and Q1, and conducting multiple rounds of testing. We had much of our training materials in place, so we really feel confident. Frankly, the teams are ready. They’re excited and they’re ready to get to the new platform. We think it’ll be a much cleaner and smoother rollout of the final integration.

Last one from me Charles, on the wildfires in California. I know some are popping up around the periphery of your portfolio. Do you have any initial estimate on how many homes either, one, could be damaged or two, benefit from displaced renters in the area?

We're watching it closely. We know those fires move fast. We've identified about 105 homes that are in the vicinity, and we're working closely to notify and pay attention. We don't know more than that right now but we're watching it very closely.

Just wanted to maybe get an update from if you could on trends in July and early August, particularly on the revenue side. I think you've done a pretty good job of trying to address the expense side. But what are you seeing on any trends that you can give us since the quarter end? I think maybe renewals or anything…

So I think we highlighted in our script, the blended rental for July came in at 4.7%, renewals stayed steady at about 4.8%. New lease growth of 4.6%. June was strong in new lease growth. As we go into the end of the peak season, we want to make sure we maintain our occupancy, and we did that. We moved up to 40 basis points relative to ’17 in July. So we're paying attention to ensure we keep our occupancy, and we still have strong demand now. We want to maintain that through the rest of the year.

And so as you think about occupancy versus pushing rate, you mentioned focusing on occupancy. Some of your multifamily second and third cousins, if you will, have talked about maybe starting to push rate a little bit given where we are in the cycle and feeling a little bit more confident. Are you still prioritizing rate and occupancy the same way as previously, or you’re thinking about the change and how you're approaching that?

Well, we're always trying to find the right optimization between occupancy and rate. As we talked about, renewals are pretty steady throughout the year. It's new lease growth that we try to take advantage of in the summer months to maximize. We've been through these cycles before, and we're trying to pay attention to go into the slower leasing cycle fully occupied, which should allow us to keep some top line power in the slower months. Ultimately, every quarter it's a balance of trying to find the right optimization between new lease growth and renewals.

So your updated thoughts on Costa-Hawkins, where you think that's going to go and although it's hard to predict if it was repealed, how you would react?

So Costa-Hawkins, I don't know how familiar people are, but that's the potential repeal of the Costa-Hawkins legislation, which is a pretty significant issue with additional new rent control laws in the State of California. Just stepping back, almost every economist or housing policy expert across the country or perhaps even across the globe agree and have written many research studies that show that the legal solution to a lack of affordable housing is not rent control but is to build more housing. We just need more supply when it's needed and most importantly where it's needed and at the price points that it's needed. They also agreed that rent control has proven to further dampen the construction of new housing and the further investment of existing housing. Proposition 10 in California, that potentially repeals this Costa-Hawkins legislation that's been in place since 1995 is just the wrong answer for California’s growing and long-running housing shortage as it would likely make the situation worse, not only in the short run but over the long run. It’s just bad policy; however, it’s on the balance. The polls that we see have been constantly testing the likely voter opinion on this are showing mixed results. The November ballot is going to be close for sure, but the industry and those on both sides of the issue will continue to make their case to the citizens of California. If it does pass, it doesn't mean that you're going to have statewide rent control. All that means is that the prohibition on rent control will be lifted. Jurisdictions that had rent control in the past will be able to update it, and those that do not have it at all could choose to implement it. This process will likely take a while to reconcile. Each local jurisdiction is going to have to decide if they want to have rent control or not, and many of them will decide not to. If they do, it will be interesting to see what the flavor of it is and how it's going to be implemented. So, if the proposition 10 is defeated, I think our industry will then need to take a step back and see what we have to do to solve this problem together in cooperation with the legislature to find meaningful ways to improve the situation in California that has taken many decades to develop. Looking at our portfolio of homes across the state, we're in Northern California and Southern California. We’re not in really the hotbeds of the rent control areas. We’re not in the city of San Francisco or close by, we’re not in Berkeley, we’re not in Santa Cruz, we’re not in Santa Monica. When we look at our portfolio, we think a very small proportion of our homes would potentially be egregiously affected and a very small portion of the company's overall revenue. We’re going to have to continue to watch it, see what happens in November, and then we’re prepared to react either way.

And just on the final point you made. Can you give any percentages perhaps of those select markets where your homes could be impacted if it was repealed?

We evaluated the situation and it's primarily a theoretical analysis regarding the likelihood of certain areas being affected. Some research and articles have been published on this topic. We estimate that at most, about 15% of our portfolio might be influenced, particularly concerning the 12,000 homes we have in California. Currently, it's difficult to predict any revenue impact. In the short term, we don't foresee any areas reversing rent increases. Changes will occur gradually. Additionally, one advantage of single-family rentals is that if the long-term outlook suggests a decline in value, rent control may lead to an increase in existing home prices due to a housing shortage and a general lack of new construction. Consequently, we have the flexibility to sell homes to individual buyers at favorable prices if we decide to do so.

And just in terms of broader demand trends, do you have any statistics you could share on the percentage of move-outs to buy? I noticed an improvement in internal ratio, which we've seen in the industry and also home sales have declined. Do you think it’s a function of home sales declining in the market and some affordability constraints or anything else?

Jade, similar to the first quarter, we've seen a year-over-year decline in the reason for move-outs around home purchases. Last year in the second quarter it was about 27% of our move-outs. This year it was 25.7%. We’ve seen that trend now for two quarters in a row. I think it's a little bit of all the above, but I think most importantly, we also see our turnover going down because residents are satisfied with the service that they're receiving from us. They like the homes that they're in. They're well-located. They're convenient. In today’s economic environment, it's a better opportunity for a better answer for them to stay in our homes.

Following up on the last question, demand trends have remained strong in July. We are noticing an increase in resell inventory in certain markets, especially those with higher price points or significant home price appreciation. I'm curious if this is affecting your ability to raise rents, whether for new leases or renewals, and if it's having any impact on your traffic or rental interest.

In terms of demand, we haven’t seen any real change in the fundamentals. As Charles mentioned earlier, we’ve been able to go out to market at rates that are pretty aggressive, especially in parts of the country where we own real estate. If you look at some of our numbers, for example, on the West Coast in quarter two, we had blended average rate growth of 6.5%. Most of those markets are less than two months of supply on the MLS. As you start to look at some of the macro data in terms of price points and affordability with housing in general, builders are developing much less inventory at 1,800 square feet or less in their current pipeline. It’s down somewhere from 33% in the late 90s to like 22% today. That is all favorable fundamentals for us in terms of how we think about the supply and demand factors benefiting our business. We haven’t seen some of that necessarily in the markets that we’re in because, as a proxy for that growth, we’re seeing it in the rents that we’re achieving. And speaking to Charles’ earlier point, turnovers remain consistent at around 30%.

I think you may be referring to Seattle as an example of very tight inventory and very high home price appreciation over the last several years. This got to a price point where people just couldn’t pursue homeownership in the same numbers. But if you look at our portfolio in Seattle, the move-outs for home purchasing actually is one of the markets that fell year-over-year. Again, it’s not impacting our level of the market and not impacting our demographics, and people really enjoy the leasing lifestyle.

And then I guess regarding service tech productivity. Are you seeing a productivity improvement, I guess, quarter-to-date in the third quarter? And then it sounds like you’re expecting productivity to be back to levels that you expected going into the year by the end of 2018. I guess, what do you think the timeline is for achieving your initial productivity forecasts?

We expect to get back to our normal levels of productivity over the second half of the year here. We’re confident because both companies operated at that level before. But what also makes us excited is the combined power of our scale, density, the technology we’re implementing, and our experience. It’s a real advantage. What happens in the peak season here is that we have the highest work order volume, and the productivity of the technicians is not always at its highest. We’re still at a place where we’re putting the technology out there and unlocking all that, and getting the proximity and density advantages. That’s where we'll have shorter distances between our homes for our technicians to be able to do more work orders. As I talked about before, as we think about the route optimization software, as we get to a unified operating platform in the second half of the year, that’s where we’ll start to see the real advantages to get back to our prior levels, and possibly overachieve as we go into 2019.

And I guess just to follow-up. As you work on this issue, have you started seeing an improvement in the third quarter? Or do you think that improvement in productivity is going to happen later in the third quarter and into the fourth?

We've already started to see the improvement with the changes that we made. But we know there's more that we're going to do, and it's going to get even better.

I'd just add to that this platform is in place. We completed the implementation and integration across all of our markets, so that part is done. When we initially noticed in June that the productivity measures on a daily basis were starting to trend down instead of up, we were able to make some adjustments to the technology platform immediately. So Charles was able to get the team together, tweak some of the dispatch logic scripts, and literally in the next day we could start seeing some improvement. We’re seeing gradual improvements, but they have already begun. It's not that we have to retool; it’s just to adjust some of the parameters on this platform that impact things such as in-house dispatch, and then the route optimization certainly helps with the other metrics of productivity such as the number of homes and the number of work orders per tech per day.

I just had a couple. One was could you share what the year-over-year increase in repair and maintenance expenses was by month, so we can get a sense for the cadence and how much you end up in June?

We're not going to provide monthly financial results; there is noise between months. Accruals get caught up, don't get caught up. So we're not prepared to provide that.

On the inventory side just in terms of supply and just taking a step back and looking across your portfolio. Are there any markets where you anticipate supply over the next couple of years to pressure your pricing power, in particular some markets that you find less attractive than others?

As I mentioned earlier, certainly, not in our West Coast markets where we see really just an incredible amount of demand for our products and very limited new supply. The important part to remember is that you want to be in higher barrier to entry, so that's difficult for new supply to enter into those sub-markets and parts of the market where we invest. It's in line with our price point around average rents being north of $1,700; those are typically properties located in much higher barrier-to-entry. So in our markets, we don't see some of that. I'd be more concerned if we had massive exposure in the Midwest and in some of those areas, parts of the country where you have lower barriers to entry for new entrants and new development. But we don't have much of that in our portfolio, a little to none. So we’re pretty bullish in terms of the areas we’re in and being a bit insulated from some of those supply constraints. The only other thing I'll add is if you look at the macro factors in the U.S., we’re only developing about 1.35 million new units per year right now. We need somewhere around 1.5 million to 1.6 million. So the next 12 to 18 months feel pretty safe as we look forward to the supply-demand fundamentals generally.

We're totally with you on that. Thanks for answering my questions. You guys have a good weekend.

Could we go back to the repair and maintenance issues, just curious if it had an impact on your same-store revenue guide? Did you have a longer turn on the unit, and maybe you could provide an update on how long it does take to turn a unit versus your expectations?

Repair and maintenance is really for occupied homes. So on our turns, we haven't really seen any impact, and this time of year is a high turn volume. We typically range in 10 to 12 days to turn a house, which is about where we are. It steps up a little bit because of the seasonality and the volume coming in this time of year, but we're on pace with where we were last year and have been pretty consistent.

One metric we track is the days that we resident experience the downtime between occupancy and vacancy. Quarter-over-quarter, we're exactly the same number.

And when we do these initiatives in the back half, I think you said you're going to do a more methodical approach, those were the words you used. Are you going to do it by maybe one market at a time, or is it just going to be a more methodical process in general?

We’re going to work through the exact rollout plan, but it really depends on the speed of how many homes you can put on the platform at once. But the idea for now is a couple of markets that we've piloted unified operating platform and then we roll by week, being really thoughtful. When I say methodical, being really thoughtful around the timing and month that we do it, so it's not during the early rent paying side. And then how much can our teams take on in terms of training, getting them ready, being thoughtful, and then rolling it out. We have a plan in place, and we expect to start in the fourth quarter of this year. Based on all that we've done to date in terms of our website, revenue management has been working on one platform; this is really the last piece, and we think it will roll pretty smoothly.

Okay, great. This is Greg Van again. Thank you all very much for your time today and your questions. We appreciate your interest as always and we look forward to seeing many of you at the upcoming September conferences. Thank you.