Invitation Homes Inc (INVH) — Q4 2018 Earnings Call Transcript

Thank you. Good morning, and thank you for joining us for our fourth quarter 2018 earnings conference call. On today's call from Invitation Homes are Dallas Tanner, President and Chief Executive Officer; Ernie Freedman, Chief Financial Officer; and Charles Young, Chief Operating Officer. I'd like to point everyone to our fourth quarter 2018 earnings press release and supplemental information, which we may reference on today's call. This document can be found on the Investor Relations section of our website at www.invh.com. I'd also like to inform you that certain statements made during this call may include forward-looking statements relating to the future performance of our business, financial results, liquidity and capital resources and other non-historical statements, which are subject to risks and uncertainties that could cause actual outcomes or results to differ materially from those indicated in any such statements. We describe some of these risks and uncertainties in our 2017 annual report on Form 10-K and other filings we make with the SEC from time to time. Invitation Homes does not update forward-looking statements and expressly disclaims any obligation to do so. During this call, we may also discuss certain non-GAAP financial measures. You can find additional information regarding these non-GAAP measures including reconciliations of these measures with the most comparable GAAP measures in our earnings release and supplemental information, which are available on the Investor Relations section of our website. I'll now turn the call over to our President and Chief Executive Officer, Dallas Tanner.

Thank you, Greg. We are excited to report a strong finish to 2018 and favorable momentum into 2019. Our location, scale, and platform continue to create a best-in-class experience for our residents, evidenced by our industry-leading resident turnover rates. Blended rent growth has accelerated for each of the past three months to levels significantly higher than last year and solid occupancy positions as well to continue capturing acceleration in the 2019 peak leasing season. We are also driving better efficiency on the repairs and maintenance side of our business, which resulted in fourth quarter performance that exceeded our guidance. Our strong finish to the year brought core FFO per share growth for the full year 2018 to 14%. Before discussing what this momentum may translate to in 2019, I want to take a moment to review our performance on the 2018 operational priorities that we communicated to you at the beginning of the year. Our first objective was to deliver strong, consistent operational results across our core portfolio. We met our expectations for the top line with 4.5% same-store core revenue growth, which outpaced residential peers. However, we can execute better on the expense side of the business. After identifying opportunities to be more efficient with repairs and maintenance last summer, our teams have done a great job of starting to capture some of these opportunities. We have more work to do but are pleased with how our performance improved in the second half of 2018. Our next objective was to further enhance the quality of service we provide to our residents. The ultimate scorecard on service comes when it's time for residents to make a renewal decision and we are thrilled that our turnover rate on a trailing 12-month basis improved each quarter in 2018 to new all-time lows. Our third operational priority was to execute on our integration plan. In addition to finding an incremental $5 million of projected end-stage synergies, we also beat expectations for 2018 achievement by capturing $46 million of annualized run rate synergies in the year. With respect to investments, our priority was to continue increasing the quality of our portfolio by recycling capital. In total in 2018, we sold roughly $500 million of primarily lower rent band homes that no longer fit our long-term strategy. We recycled capital from dispositions into both the purchase of almost $300 million of homes in more attractive sub-markets with higher expected total returns and prepayments of debt. Finally, we made progress on our path to an investment grade balance sheet. We reduced net debt to adjusted EBITDA to below 9 times, compared to approximately 11 times that our IPO in early 2017. We also improved our weighted average maturity and cost of debt. Looking ahead to 2019, we are excited about our opportunity for growth. Let me address these three opportunities in particular: revenue growth, expense controls, and capital allocation. With respect to revenue growth, fundamentals are as strong as they've ever been for single-family rental. In our markets, household formation in 2019 is forecasted to grow at almost 2%, or 90% greater than the U.S. average. Construction of new single-family homes is not keeping pace with this demand and has recently slowed further. In addition, affordability has become a bigger challenge for potential homebuyers due to a combination of home price appreciation and higher mortgage rates, compared to last year. We are seeing this play out in our portfolio today with same-store move-outs to homeownership down 17% year-over-year in 2018. Leading housing economist John Burns estimates that the cost to rent a single-family home is lower than the cost to own a comparable home in 15 of our 17 markets today by an average discount of 16%. We believe our product provides an attractive solution for customers who want to live in a high-quality, single-family home without making the financial commitment of homeownership. Furthermore, we believe the location of our homes in attractive neighborhoods close to jobs and great schools and the high-touch service we provide differentiate Invitation Homes and make the choice to lease with us even more compelling. Regardless of what the broader economy may bring in the coming years, we feel that our business is well-positioned. Even if we were to experience a cooling of the economy, our portfolio could continue to benefit from demographics that are shifting more and more in our favor and from a sticky single-family resident base that would likely find homeownership incrementally less attractive under more challenging economic conditions. We are also excited about our opportunity on the expense side of the business and are focused in 2019 on adding to the progress we made in the second half of 2018. Newly implemented changes to our repairs and maintenance workflow and route optimization systems are paying dividends already. But we still have plenty of opportunity to be more efficient. We also believe the integration of our field teams and property management platform in 2019 will be a positive catalyst for expense improvement. With one team operating on one platform, we will be better positioned to find new ways to refine our business and take resident service to higher levels. With respect to capital allocation, our plan in 2019 remains focused on the dual objective of refining our portfolio and reducing leverage on our balance sheet. The markets we are in remain healthy, providing compelling opportunities on both the acquisition and disposition sides for us to achieve our capital recycling goals. Abundant capital from potential buyers and limited inventory in our markets create an attractive opportunity for us to prune our portfolio. We also have multiple uses for these proceeds including buying homes in more attractive submarkets, reinvesting in our portfolio through value-enhancing capital expenditures, and prepaying down debt. Before we move on, I want to say a few quick words about our team. It is a thrill to have the opportunity to lead the company I founded with my partners, a company that is full of talented people from top to bottom. I'm fortunate to be stepping into the CEO role with the company in an outstanding place, thanks in part to the leadership of Fred Tuomi. Fred helped to guide Invitation Homes through what has been a very successful merger and integration. This positions us to move forward better than we've ever been before. We thank Fred for his leadership and wish him the absolute best. Moving forward, we will continue to stay true to our DNA and the strategic path we've been on since day one. We'll put residents first. We'll drive organic growth and an outstanding living experience by leveraging our competitive advantage of location, scale, and high-touch service. We will be opportunistic with respect to external growth. We'll progress toward an investment-grade balance sheet, and we will do all of this with the best team in the business. I am fortunate to be surrounded by true experts and industry pioneers on our field and corporate teams as well as in our boardroom. To all of our associates, thank you for a great finish to 2018 and let's continue to build on our momentum in 2019. With that, I'll turn it over to Charles Young, our Chief Operating Officer, to provide more detail on our fourth-quarter operating results.

Thank you. As Dallas said, the fourth quarter of 2018 was a great one for us operationally. Our teams did a fantastic job capturing rent growth and occupancy to put us in a strong position going into 2019, driving better R&M efficiency resulting in outperformance of our guidance in the fourth quarter. And most importantly, we continue to provide outstanding resident service. I'll now walk you through our fourth quarter operating results in more detail. Same-store core revenues in the fourth quarter grew 4.6% year-over-year. This increase was driven by average monthly rental rate growth of 3.8% and a 70 basis point increase in average occupancy to 96% for the quarter. Same-store core expense growth in the fourth quarter was better than expected. Core controllable costs are down slightly year-over-year even with a tough R&M comparison versus the fourth quarter of 2017 due to that year's hurricanes. Property taxes increased 15.1% year-over-year in line with our expectations due to the timing items discussed on last quarter's call. As a result, overall same-store expense growth was 7.4% year-over-year. This brought our fourth quarter 2018 same-store growth to 3.2%. For the full year 2018, same-store NOI growth was 4.4%, 66 basis points ahead of the midpoint of guidance provided on our last earnings call. Importantly, we have made steady progress on improving our R&M efficiency by implementing numerous changes to systems and processes after opportunities for improvement were identified. With these changes, we have improved how work orders are allocated between in-house technicians and third parties. Our corresponding service trips are scheduled and the routes that technicians follow to optimize their time. In the fourth quarter, we also rolled out an important update to our technology platform that enabled all of our internal technicians to perform work on any home in our portfolio, not just the homes associated with our legacy organization. This made a material difference in the productivity of our maintenance technicians in the fourth quarter. We still have work to do, though, and we'll continue implementing process improvements and ProCare enhancements in the months leading up to the 2019 peak service season. Next, I'll provide an update on the integration of our field teams. After successful results in the testing phase, we began market implementation of our unified operating platform in November. As of today, we have teams in five markets, representing almost 40% of our homes functioning under our go-forward structure and platform. Transitions have been smooth, and feedback from the field teams has been extremely positive. We plan to roll out the platform to our remaining markets in waves over the next several months. This rollout is expected to unlock the remainder of the $50 million to $55 million of total run-rate synergies we have guided to by mid-2019. As of year-end 2018, our run-rate synergy achievement was $46 million. Next, I'll cover leasing trends in the fourth quarter of 2018 and January 2019. Fundamentals in our markets remain as strong as ever, and we're executing well. Both renewal rent growth and new lease rent growth have increased sequentially in each of the last three months. Renewals averaged 4.7% in the fourth quarter of 2018, and new leases averaged 2.1%. Notably, new lease rent growth is now exceeding prior year levels and was a full 70 basis points ahead of last year in the fourth quarter of 2018. This resulted in blended rent growth of 3.7% in the fourth quarter of 2018, up 20 basis points year-over-year. Same-time resident turnover continues to decrease, driving occupancy to 96% in the fourth quarter of 2018, up 70 basis points year-over-year. Each of these leasing metrics improved further in January. Blended rent growth averaged 4.3% in January 2019, up 90 basis points year-over-year, and occupancy averaged 96.2% in January 2019, also up 90 basis points year-over-year. The fundamental tailwinds that are back in occupancy put us in a strong position as we start the new year. Our field teams are focused on execution and are excited to leverage our integrated platform to deliver even more efficient resident service. With that, I'll turn the call over to our Chief Financial Officer, Ernie Freedman.

Thank you, Charles. Today, I will cover the following topics: balance sheet and capital markets activity, financial results for the fourth quarter, and 2019 guidance. First, I'll cover the balance sheet and capital markets activity where we had a very active and successful year. Let me start with a few highlights about where we started 2018 versus where we ended it. Net debt was $9.1 billion at the start of the year and $8.8 billion at the end of the year. Net debt to EBITDA was 9.5 times at the start of the year and 8.8 times at the end of the year, pro forma for the conversion of our 2019 convertible notes. Weighted average years to maturity were 4.1 at the start of the year and 5.5 at the end of the year. Unencumbered homes increased from 42% of homes at the start of the year to 48% at the end of the year, and our weighted average interest rate decreased from 3.4% to 3.3% in a rising rate environment. We accomplished all this by prioritizing free cash flow in both disposition proceeds for debt prepayment and by refinancing debt in 2018 with $4.2 billion of proceeds from our four new securitizations. While we remain opportunistic, we anticipate less refinancing activity in 2019, with no secured debt maturing in 2019 or 2020 and only $373 million maturing in 2021. However, we will continue to prioritize debt prepayments as part of our efforts to pursue an investment-grade rating and have made incremental progress already with the prepayment of $70 million of secured debt in January. We will continue our deleveraging strategy by electing to settle conversions of our $230 million of 2019 convertible notes in common shares. We view this decision as a way to reduce net debt to EBITDA by approximately 0.25 turns while incurring minimal incremental dilution to core FFO per share. Our liquidity at quarter-end was over $1.1 billion, through a combination of unrestricted cash and undrawn capacity on our credit facility. I'll now cover our fourth-quarter 2018 financial results. Core FFO and AFFO per share for the fourth quarter increased year-over-year to $0.30 and $0.25, respectively. Primary drivers of the increases were growth in NOI and lower cash interest expense per share. For the full year of 2018, core FFO and AFFO per share increased 13.7% and 8.1%, respectively. As a result of our anticipated growth in AFFO per share in 2019, we've increased our quarterly dividend to $0.13 from $0.11 per share. We continue to target a low dividend payout ratio as we believe a beneficial use of cash is to further pay down debt. The last thing I will cover is 2019 guidance. As Dallas and Charles discussed, we believe that we continue to have strong fundamental tailwinds at our back and entered the year from a strong occupancy position with accelerating rate growth. As such, we expect to grow same-store revenue by 3.8% to 4.4% in 2019. Home price appreciation in our markets over the last year or two suggests that growth in real estate taxes in 2019 is likely to remain elevated, albeit lower than the growth we saw in 2018. As a result, we expect overall same-store core expense growth to moderate from 2018 levels to 3.5% to 4.5% in 2019. Core controllable expenses are likely to grow less than that as we believe we have positioned ourselves to better control R&M costs in 2019, but we still have work to do. This brings our expectation for same-store NOI growth to 3.5% to 4.5%. Full year 2019 core FFO per share is expected to be $1.20 to $1.28, and AFFO per share is expected to be $0.98 to $1.06, representing year-over-year increases of greater than 5% and 7% at the midpoints respectively. Primary drivers of these expected increases are growth in same-store NOI, lower property management and G&A expenses, and lower interest expense are also expected to contribute to growth. A detailed bridge of our 2018 core FFO per share to the midpoint of 2019 core FFO per share guidance can be found in our earnings release. There are a handful of items likely to impact the progression of same-store growth in core FFO and AFFO growth from a timing perspective over the course of the year. With respect to revenue growth, occupancy comps are easier at the start of the year compared to later. Regarding expenses, core expense growth is likely to be highest in the first quarter. While we have made great progress addressing items related to our integrated R&M system that drove inefficiency in 2018, we still have work to complete as part of our plan. We do not expect to be fully optimized in the first quarter of 2019. Second, as we discussed last year, other income and resident recoveries in the first quarter of 2018 were higher than normal as a result of post-merger alignment of the resident utility bill-back timing across the two legacy companies. This will create a more difficult comparison for core expense growth in the first quarter of 2019. These two items are expected to more than offset the favorable impact of comparing against a period in the first quarter of 2018 with higher-than-normal work order volume as a result of 2017's hurricanes. Also regarding expenses, the year-over-year increase in real estate taxes is likely to be materially lower in the fourth quarter of 2019 than in the first three quarters of the year. As discussed previously, we booked an unfavorable real estate tax catch-up in the fourth quarter of 2018 for tax assessments that came in higher than expected; this creates an easier comp for the fourth quarter of 2019. Finally, the 2019 convertible notes are expected to convert to common shares on July 1 of 2019. This will impact the interest expense and share count used to calculate core FFO and AFFO per share by treating the notes as debt for the first half of 2019 and as equity for the second half of 2019, assuming that the notes convert as expected. I'll wrap up by reiterating how much we are looking forward to 2019. Fundamentals are in our favor, and we have multiple levers we believe we can pull to create value. We're excited to move on to one platform across the entire organization and to execute on that platform to deliver outstanding results to both our residents and our shareholders. With that, operator, would you please open up the line for questions.

As you roll up the unified operating platform across the portfolio, what lessons have you learned from the process and are you making any adjustments for the other markets based on them?

This is Charles. We've made really good progress in implementing the combined portfolio rollout. We've, as I said in my remarks, we've implemented about five markets, which equals about 40% of our total homes. We've been really thoughtful based on what we learned in 2018 that we've taken a measured pace in how we roll it out. We expect to be done around 2019. We made a decision to implement in the slower time of the year, which is working in our favor. We're also more careful around the timing and how we roll it out during the month to ensure that we're not impacting the field teams. We went through multiple rounds of testing to make sure that things were working as expected before we went in. We have great training; we've learned from each of the rollouts to get better in our training and implementation has been excellent. The feedback from our field teams has been very positive. As I've said, we expect that we'll be there by mid-year. Bottom line, the teams are really excited to get one combined platform because they were working in multiple systems before, so we see this as a really positive step.

And Dallas, congratulations on the promotion. When you took over as Interim President in August, the board formed a special committee to work with you and the team during Fred's absence. Is that committee still in place, and what's the board's role today?

Thanks for the question and for the compliment. Yeah. The board is still functioning in a similar fashion as we were in that executive committee and will stay in place through 2019. As you guys know, we have a very supportive board with a ton of excellent experience behind it, so we’ll continue to use that. It's been strategic for us as we've embedded some of these things that Charles just discussed in terms of how we would integrate going forward, and we've talked through some of the processes. They've been very supportive in that capacity and we would anticipate them to continue doing so.

As it pertains to AFFO guidance, can you talk about the direction of recurring CapEx per home in 2019, understanding that in 2018 with the Starwood Waypoint merger there might have been a little bit of noise there? Can you just give us a little more color on the trends in that number, as well as how you think about revenue-enhancing CapEx this year?

Drew, this is Ernie. With regards specifically to our recurring CapEx, we expect overall net costs to maintain, which include both our operating expenses associated with repairs and maintenance, as well as turnover activities, would be our recurring CapEx, to be up approximately about 3% year-over-year. We definitely have some easier comps to go up against and we certainly had some improvements. But as we talked about in the prepared remarks, we're not fully optimized today. Of course, we want to be cautious before we get into the peak leasing season, before we get too far ahead of ourselves. We feel like we're back to a more normal type growth rate with the opportunity to maybe do better as we go forward. So, you know, I would expect plus or minus in the 3% range for net costs to maintain to grow. And Drew, remind me what the second part of your question was?

As revenue-enhancing CapEx, whether we can expect any kind of directional change from last year there?

Drew, this is Dallas. I'll answer this. We will continue to expect our focus to be on finding ways to optimize these assets on a like-for-like basis as they turn. That allows us these opportunities with revenue-enhancing CapEx. I would expect that program to continue to develop, if not be a little bit more active as we spread into some more West Coast markets. We certainly see a number of different opportunities outside of just the smart home functionality. Some of our West Coast markets have shown a number of different opportunities. What's been really interesting over the past year as we've piloted revenue-enhancing CapEx and gotten better at how we implement that process is how many times our customers on a renewal or on a new lease want to actually pay up to upgrade parts or sections of their house. This is a win for both us and the customer because we're able to enhance the asset in the area and also get a better risk-adjusted return on the revenue increase that is outside of the way we would normally underwrite a property. So expect us to do more of it, we're looking at getting smarter. Charles and the team have done a terrific job on the procurement side to find ways that we can continually enhance that experience for the customer.

And then lastly, just on the guidance expectations for non-cash interest and share-based compensation, I was hoping you kind of give us those numbers just given the accounting kind of how those play into the core FFO calculation.

Drew, we have not provided guidance for those in the past. So, let me think about what we can do and get something out there for folks to help with modeling, but I don't have anything I can share with that with you today.

I was just hoping you could talk about where you are in the process of optimizing the portfolio and kind of how you think about the home count as we move through 2019.

We've been pretty vocal about our desire to continually refine and optimize the portfolio. The nice thing about the merger is we've had enough time and distance. We knew there were some homes initially both which we wanted to sell and also some areas where we wanted to scale up and could find and drive greater efficiencies in the portfolio by acquiring, we expect to do more of the same. We had a pretty busy year in terms of what we were selling and it comes in a variety of shapes and sizes to why we sold. We were certainly active in parts of Florida where we now have over 25,000 homes on a combined basis post-merger. Expect us to continually look for areas where we can refine the portfolio, create efficiencies for the operating teams, and build on the scale and density that we have in those markets. In addition, we also had outlier locations or geographies where we'll, at times or seasons, look for ways to refine and improve the performance of those parts of the portfolio. Lastly, I just add there are occasions and we're starting to see this a little bit in some of our West Coast properties where if a home just becomes too valuable, and ultimately, we think it's better suited for an end user, we'll sell that home and take those gains and recycle capital into higher-return parts of markets.

Just following up on that, what are the markets where you see the best opportunities to recycle capital into?

We were pretty active in 2018 and still see a lot of opportunities in West Coast markets. We've been vocal about the fact that we love Seattle and the growth that's going on there, which is evidenced in some of the new lease and renewal rates that we're seeing in the business today. We're also still finding good opportunities in the southeast. If we could, we’d buy more in California and other markets if those opportunities were available to us. We just see limited supply in today's environment. As we've stated, household formation in our markets today is almost two times the national average, and we're feeling that in the parts of our business, specifically around new lease growth and renewals. Generally speaking, we've been getting out of parts of the Midwest over time and have continued to recycle in coastal markets where the majority of our footprints are today.

So in your expense guidance of 4%, do you think you could break out different pockets in terms of growth for personnel or R&M for 2019?

Yes. Really what we're comfortable providing today is because taxes are almost half of our expense number, I can provide guidance around what we think is going to happen with taxes and what's going to happen for everything else, which is the other half. I think as everyone knows, home price appreciation continues to be pretty strong in our markets and it has run over 6% across the board on a weighted average basis. We expect that property taxes in 2019 will be up somewhere in the 5%s for us, and of course, Prop 13 in California helps to mute that a bit for us, given that we have 20% of our portfolio in California. With real estate taxes being up, we think somewhere in the 5%s, while everything else will be less than 3% to reach our midpoint guidance of 3.5% to 4.5%. As the year plays out, we’ll see some different things flow through on those other expense items. But from a guidance perspective, that's what we're comfortable providing.

So, recently mortgage rates have really pulled back, especially in the last couple of months. But your move-out to home buying has still continued to shut down. Is that something that you're concerned about? Moving forward, how do you think about that?

We're certainly not concerned about it because it's been fairly consistent over the past couple of years. Less than 10% of our overall portfolio on an annual basis moves out of our business to go buy a home, at least that's what we've seen over the first few years as a public company. We look at it a couple of ways. As I mentioned in my earlier comments, we are seeing a real shift in terms of affordability. We're picking up some of the net benefit of that quite frankly in our business today. As we mentioned before, 15 of our 17 markets, based on the research that we look at and follow, are now more affordable to lease than to buy in today's environment. So we're optimistic that interest rates may actually push people into a longer-term lease with us, offering an opportunity for consideration to choose the leasing lifestyle. Some markets can have a differential, as high as 30% when it comes to homeownership costs versus leasing. We view this as an opportunity to ensure that we're providing a best-in-class service and an experience that people are willing to pay for.

Can you discuss how turn times trended in the fourth quarter, and where would you like to see them in 2019? And really, does the R&M platform drive any benefit there?

Yes, this is Charles. Turn times have been in the mid-teens for us, and we'd like to bring that down. Again, we've been consolidating the teams and the offices and the platforms as we get all into one system, as we finalize that integration in the first half of the year, we think we'll be in much better shape to bring those times down. When we think about turn, that really relates to the quality and location of our homes, and we have to ensure that we are delivering a high-quality product. That delivery of the product will relate to the R&M in terms of any work orders that may come afterwards. Part of what we want to implement in 2018 that's important is our ProCare service, a follow-on after the turn when the resident moves in to make sure that they understand their responsibility, but also bundle some of those work orders in a 45-day visit to manage that process with the resident on the R&M side. We'd like to bring those turn times down and expect to get into the low teens as we consolidate further.

And last one for me. How many customers are now subscribed to the Smart Tech technology, and what other ancillary income drivers have you identified?

Right now, we have about a third of our homes with Smart Home installed, so a little over 30,000. About half of those are paying customers, and that builds every time we move a resident in. Seventy to eighty percent of those residents are opting into the service, which is a great adoption rate. In terms of other ancillary opportunities, with the integration, we've been focusing on finalizing that. Once we get through the integration, we see opportunities in moving services, pet services, pest control, and items such as filters. There are many items we want to attack, but right now we're concentrated on finishing the integration.

I wanted to ask a couple of questions about how you think about 2019 where you didn't give guidance; you had success with bulk sales. Dallas, I'm wondering if you can give us any sort of color around those bulk sales, cap rates, lack of buyers? Do you think that's going to continue in 2019, or how should we think about that going forward?

A number of things. As I mentioned earlier in my comments, we still see quite a bit of demand in the marketplace for stabilized products being sold from an institutional operator like ourselves. So I would expect that we'll still explore some bulk opportunities this year and really, quite frankly, any year where our scale and density allow us to facilitate those types of transactions. In 2018, we sold homes on average that were much cheaper than the homes that we were acquiring. For example, if you look at the fourth quarter, in the 1,600 plus homes we sold in Q4, we had an average price per home around $175,000. We are recycling that money into homes that were well north of $300,000 on a per property basis. So if you think about what those cap rates are, when selling cheaper product—generally on a pro forma basis—you’re going to see cap rates that are a little bit higher just because your denominator is so low in terms of your asset pricing. Over the majority of 2018, we were selling homes close to a six-cap and recycling those into homes in the mid-fives. When you think about the way we recycled in terms of what we bought and what we sold on average, we're buying homes that are renting for about $500 more than the homes that we sold. So that additional $6,000 in revenue is a really smart way to operate long-term when considering all the incremental costs that can go into this business.

You guys put up a really impressive margin number this quarter. So how are we thinking about that sort of near-term and long-term? Is that 65% plus margin sustainable near-term, and do you think you can still push it to the high 60s? What are you thinking about there?

I think the answer is that it really all depends on how things move forward with some capital allocation and other factors. As you know, the fourth-quarter and first-quarter typically are our highest margin quarters. For the entire year of 2018, we faced several challenges. We posted a 64.5% margin, which we were pleased with, given those challenges. As we continue to refine the portfolio from a capital allocation perspective, importantly, and as Charles continues to refine what he's doing on an operating standpoint, our guidance implies that the margins will be pretty similar from 2018 to 2019 based on the midpoint of revenue, expense, and NOI guidance. We think there's an opportunity for that to continue to increase, some certainly in the higher 60s. We have about six markets today that are in the 70s. Given our current capital allocation strategies, especially regarding the homes we're selling and some of the markets we've disproportionately sold in, you could see margins pushed to a 70% type figure. But I think for where we want our homes in the portfolio, increasing by a few hundred basis points from where they are now into the higher 60s is certainly a very achievable goal over the next period of time.

And just one final question, Dallas, going back to your prepared remarks on affordability. When you think about affordability, are you doing an apples-to-apples rent-to-mortgage payment comparison or do you think about affordability relative to the cost of lending to your home differently?

I think we like to look at it a couple of different ways. I think the way to really look at it is to keep everything constant and think about housing costs as not only your mortgage but also some ongoing maintenance expenses that a normal homeowner would incur in the ordinary course. That's the way Burns and a number of other economists tend to look at it. We look at a couple of different pieces; we've done some of our own research, obviously with the data that we have. You're certainly seeing that dislocation we've talked about earlier. There’s a time and season for that, but right now it certainly feels like we’re positioned to capture some of the affordability demand that people are looking for some relief. We've observed that particularly in the West Coast where we’re seeing rising home prices as well as the rising rate environment, both of which are not helping the homeownership story.

On the deceleration in the same-store revenue growth that your guidance implies, is that due to conservatism on occupancy, slowing rent growth, or a combination of the two?

If you look on page 23 of our earnings release, Jason, I think it will help guide what happened in 2018 and give you a sense for what we think is going to happen in - with regards to 2019. You see in 2018, your revenue growth of 4.5% was made up of 3.9% in rental rate growth, a 50 basis point increase in occupancy, and other income was a little bit better than those. That’s how you get to 4.5%. At the midpoint of our guidance, we think we're at similar rental type growth, maybe a tick lower than that, but very similar. As you recall, we have accelerated rent growth here starting in the fourth quarter of 2018, as Charles has talked about. But for the first three quarters of 2018, it was a deceleration year-over-year, so we need to earn that in. We do expect occupancy to be better than it was in 2019 versus 2018, but not necessarily 50 bps better. Now that said, Charles is off to a great start in January, up 90 basis points, and we're off to a good start on rental rate growth as well. When you factor that in, that's why we don't think we probably get to 4.5%. But there's certainly a path for us to do better than that, especially seeing how well we started off the year in January.

And then the synergies that you guys had mentioned from the merger, are those factored in the same-store guidance, or do those represent additional upside?

No. Those are factored into our guidance. About 90% of the synergies that hit the field also hit same-store, while the rest hit the total portfolio with about 90% of our homes in the same store. So, those are factored in. Regarding getting to our expectations, we’re considering the timing of the synergies we earned in 2018 as well as when we expect to earn them. They’re not all of course going to earn in on January 1. As Charles discussed, this won't be until mid-year when we have the whole portfolio rolled out. When we do that, it's about 60 days afterward where we get to those final numbers, and there’s some overlap period to ensure things are working correctly in the field. So those will take a little while to earn here in 2019, but that’s all factored into our guidance.

And then last one for me. Total costs to maintain came in for the year at about $3,200 per home. You're talking about that increasing potentially around 3% in 2019. Previously you'd said the long-term rate is probably somewhere between $2,600 and $2,800. So, I guess first, is that still the long-term rate that you feel will be necessary for total costs to maintain homes? And then how long does it take for you to get there?

We came in close to $3,100 and $3,200, at $3,109 for the year. But notwithstanding, we first came out with our IPO way back a couple of years, we did say adjusting for inflation, we expect to be at $2,600 to $2,800. Those numbers are going to move; those guideposts will shift if there is inflation in the R&M world. We've seen probably more inflation in that area than other areas in general, just with what's been going on with broader products and services, so that you always need to reset that. With that said, we’re not quite where we think we’ll end up getting back on track. As we further optimize and get things rolling out on the R&M side, we talked about in prepared remarks, we had a good fourth quarter, it came in stronger than we thought, and we’re excited about that regarding R&M. We want to move today cautiously as we come out this year; we want to make sure things are happening as we expect and continues moving forward too. I think once we're fully optimized and everyone is working on the same platform, that’s where we have the real opportunity to get back to the numbers we thought we would hit regarding longer-term growth with inflation where we thought cost to maintain would be.

Are you seeing a pickup in interest from home builders in partnering with you?

Hi, Jade. This is Dallas. It’s interesting; we’ve certainly had a number of discussions around opportunities and we’re looking at a couple of different things. As I’ve mentioned before, we really are channel agnostic, and we just want to make sure that we’re focused on the right locations. We’re interested; we like the fact that I think homebuilders are getting more and more comfortable with the idea of single-family owners being in their neighborhoods and buying product. I could see it becoming more and more of an opportunity for us going forward. I don’t think we have to take on any of that development risk ourselves. We’ve been clear about that, but we certainly want to look for strategic partners that we can be a potential buyer for. We think there’s definitely opportunity for us there to grow.

What’s your view toward master plan communities that feature apartments and standalone single-family rental communities with high amenities targeted toward millennials?

Well, it's an interesting concept that continues to evolve. We certainly know some of the operators and the owners that are building that product today. I think it's a shift, quite frankly; it plays into some of the same demographics we've been talking about. This is the 65 million person cohort between the ages of 20 and 35 that are coming our way wanting quality choices. This is the same as the business we run today. Where you need to be careful, though, Jade, is to stay location-specific in terms of where you want to invest capital. If it's a small boutique opportunity in an infill location with really good rents and square footage similar to what we would normally own, it would be something we’d consider. What I’ve seen across a broad spectrum of some of that product is that it’s typically been a much smaller footprint, between 800 square feet and 1,300 square feet, and that’s not really our sweet spot. But if we saw an opportunity that was infill and made sense, it certainly is something we wanna look at, and we’re encouraged that people recognize leasing as a real choice right now.

Just on the influence of i-buyers in the market. Are you competing directly with them with respect to acquisitions? Are they distorting pricing or impacting the market in any way, and is there a potential opportunity to enter into joint ventures to provide centralized property management services since they are active in many of your markets?

Let me answer that in parts. I think you're thinking about the world the right way, Jade, in terms of being an entrepreneur. This is an interesting moment in time with these i-buyers. There is certainly a new company popping up every day; who knows what will actually stick or last or who will be the major players in the long-term. This is not a public record, but we’ve been supportive of companies like OpenDoor, OfferPad, and Zillow, which are making the home buying and selling experience much easier for the customer. So, with 5.5 million transactions in the U.S. occurring every year, there's plenty of space for brokers, i-buyers, and individual investors to buy and sell homes. We certainly want to look for strategic partners that we can collaborate with. While we get the question often about third-party management, that could be interesting to us down the line. For now, it's just not really our focus; our goal is growing our own footprint. We still see plenty of opportunity within our own book of business to continue to grow the Invitation Homes product and the service levels our customers expect. So it's not in our near horizon by any stretch.

I understand that there are a lot of moving parts last year on the expense side, volatility to the upside and the downside. But this year you have a 1% range on your same-store expenses. Should we take that as a sense that all the moving parts are behind us and that this year will be more of a normal environment?

Wes, we certainly think so. We want to be cautious and want to set a range that we think is appropriate. At the end of the day, we feel a lot better today with the lessons learned over the last 12 months. Recall last year at this time, we provided guidance as the merger had just closed about 60 days ahead of that. It actually closed ahead of schedule. We were bringing the two companies together, learning how each of those companies were doing things. In hindsight, we got many things right, but a couple of things we did caused some noise. We definitely feel much more confident and, as the year progresses, we are much further along than we were, so we are feeling better for sure than we were last year.

You made a comment about R&M being a little lower from leasing compared to last year, but looking at this year, what are your expectations for blended rent growth for each quarter? Not by quarter, but generally, do you expect to continue to modestly accelerate throughout the year based on the supply and demand you’re seeing?

We want to be careful with that. I mentioned in the prepared remarks, as comp gets harder throughout the year, it means you’re likely to see higher revenue growth earlier because we don’t have leasing later in the year. We'll see how it all plays out; it’s January, and it’s early in the year. Our peak season starts around mid-March and goes through the end of July or early August. Certainly, when we’re talking to you guys in about 90 days about first-quarter results, we’ll have a much better feel for whether we’ve seen that acceleration continue at the pace we did in January.

As I look across the guidance range, my first question is, would you consider the low-end of guidance to be as likely as the high-end of guidance? And as a follow-up to that, what are the components of guidance that you look to as being drivers of potential downside to the midpoint and drivers of potential upside as well?

Sure. Hardik, I think by definition we think it’s equally likely at low-side guidance could be hit as well as the high-side. We’re certainly optimistic that we can perform better, but that’s the point of the range. We think that there are kind of equal weights, and we certainly are excited about how January came out, and we’ll do our best to get more towards the high-end of those ranges. Regarding upside potential, peak leasing season on the revenue side would be key. We’re pleased with how January came out; that will really swing us in terms of rent-rate achievement. Lower turnover has helped with the occupancy side. We saw the lowest turnover we’ve ever seen in the fourth quarter, which is really helpful. On the expense side, the obvious is we know that we faced challenges last year with repairs and maintenance costs. We’re feeling better about it, but we’re not 100% there in terms of everything being optimized and running well. The proof will be in the pudding; just like it is on the revenue side for peak leasing season, we’ll see in the summer when we hit a majority of our reports that surround HVAC season. We’ll be much better prepared than we were last year, but that will be the true test on the expense side. We should have a pretty good sense come the August call about how the year is playing out on costs.

Just one quick one, if you will indulge me. Were move-outs to buy a big driver of turnover being lower? Do you see them trending lower year-over-year, or what was the trend there?

Year-over-year, they trended slightly lower. They’ve actually been lower than previous quarters. For the year, they were definitely lower, and I think it’s more broadly that people are pleased with the services they’re getting and are staying longer. The fourth quarter had less activity as you know, so it’s hard to draw many conclusions, but we did see a little lower quarter-over-quarter like we did every other quarter this year. Overall, that certainly did help with the turnover number.

I had a question on G&A—is your 4Q number a good run rate, and how should we think about incremental synergies savings real life mid-quarters, as well as general seasonality?

So we're right at a walk in our earnings release that showed how you get from where we ended up for 2018 for core FFO to the midpoint of our guidance for 2019. Within that walk, we did call out that growth in property management expense and G&A combined, we expect this to be about a penny better, not quite a penny rounding up to that. Both numbers should be down year-over-year from where they were in 2018, and that's mainly from earning the synergies that's still to go and those that happened in 2018. There's not much left to go on the G&A and P&A numbers, so it’s mainly earning from 2018. But understand there are some cost inflation baked into there too, so costs will remain static in terms of what's happening with compensation costs for the organization and other costs. You have the synergy good guy that more than offsets an inflationary increase in those costs for 2019.

And I was wondering in terms of seasonality G&A, how should I think of that?

There's really not a lot of seasonality in G&A. The only thing that might affect this would be around our bonus accruals, but we try to do a good job throughout the year anticipating where those will come out. You should see that number be pretty steady each quarter throughout the year.

Dallas and Ernie, could you provide the acquisition and disposition volume targets for this year?

John, we're going to give early guidance around numbers that feel pretty similar to last year; we think we'll buy somewhere between $300 million and $500 million of assets and will probably sell somewhere between $300 million and $500 million in assets.

And then Ernie, I understand you're not giving repair and maintenance expenses. I guess I'm still having trouble understanding where the easy comps are going, and in the middle of the year, you guys increased expense guidance pretty meaningfully that implied over $10 million of what was described as transitory costs. I know you're not completely refined, but it still seems like a very, very easy comp that doesn't seem to be baked into the guidance, so I'm hoping you can provide a little bit more of a walk.

John, I saw what you published back in December where you broke things out from the different line items. Overall, we do expect net cost to maintain to be up about 3%. We had some good guidance, and we had some tough items that helped us with a comparable perspective, and we have taken into account where we think cost inflation is going on a year-over-year basis. It might be best for us to talk offline to give you more information to bridge that gap, but we feel we set ourselves up for an achievable number across all expenses and we’ll do our best to try and better areas where we had negative one-timers last year.

A follow-up on Wes's question around expense variability. I’m less concerned about what happened in 2018 and 2019, but trying to figure out this business over the next three to five years, using 4Q 2018 as a case study. Full-year 2018 expenses came in well below the revised guidance range, and 50% of your expenses actually hit your expectation with two months left in the year. That implies huge variability for the rest of the line items. I know I’ve asked this question in the past, but it seems that this business model is going to have a lot more variability on expenses versus multifamily. Do you believe that to be the case, and any color there would be great?

Yes. John, what I would tell you is I can speak for us; I don’t want to speak broadly for the business. There are public companies in this line of business, and the other company does a great job with what they do. Just to talk about Invitation Homes: We went through a big merger in 2018, and while many things went well for us, we were caught off guard on some issues on the R&M side. As we were wrapping up the third quarter, we decided it was appropriate to revise our guidance to avoid any mistakes. Looking back, we overshot, which is something I would rather do than not. As it turns out, the work being led by Charles and Tim Lobner has moved things forward faster than expected. Not everything is fully on one platform, and the proof will be in the pudding over time. As for whether this business will be more variable than multifamily, I’d ask you to reflect on the experience during the 1990s when multifamily companies merged. You'll see that variability in expenses when they brought those smaller companies together. I suspect that they had similar variability, and over time this residential business should be more predictable than others; it could be comparable to multifamily. It’s tough when we are in the moment, but we’re trending much better today than we were a year ago, and we all want to see less variability in expenses and think we’ll continue to earn into less variability.

I understand that demand for single-family rental product looks strong on an overall basis, but are there any markets in particular where you're seeing elevated move-outs to buy or maybe just lower than expected traffic from potential renters?

No. This is Charles. We really haven't seen a demand drop; our turnover has been low, which is great. Affordability is working in our favor. Our occupancy has grown in Q4, and continues into January. In addition, our rent growth in January was up across almost all of our markets on a blended basis. We're really optimistic on how we're going into the year. There are always a few markets that we can see improvement. We've already started to see that in January, led by many of the West Coast markets and the demand out there.

First, Alex, congratulations. I’m curious if there’s anything where your view may differ at all from your predecessor? Such as perhaps doing single-family rental development in-house, more meaningful changes on the geographic footprint, target leverage, or anything else of that nature?

It's a good question, a fair question. Thank you for the congratulations. If you look at Fred or myself or anyone from the other leadership who have been a part of Invitation Homes, our mission has been pretty consistent: ensuring we have scale, density, high-touch service, and good locations. My predecessor brought to the table several tech enhancements available to us. Charles and Fred were cutting edge in terms of smart home capabilities and those things are being done extremely well, which we've adopted. You must also think through what we believe to be the driving force of our business. I’d rather pay for the right locations, ensuring we have infill dynamics around our portfolio, than look for scaling and growth opportunities in less desirable locations. We don’t differ that much, and the good news is we've taken the best from both organizations moving forward. Charles and I work well, as do Ernie and I, and we’ve got a good synergy amongst the management team; we're excited to really push forward. As earlier questions hinted, there are opportunities for growth where we currently see organic growth inside our portfolio where we can still drive value. Charles was right when he said that we want to focus on finishing the integration; however, we’ve got a playbook for the next couple of years that we believe will enhance our real estate value and rents while also reinforcing that customer stickiness. If we execute this part well, we won’t be talking about the history of Invitation; we’ll be defining our path forward.

Another question I guess on the same-store expense outlook. I’m curious how much asset sales might be helping that line item, and confirm if the assets that you’re contemplating selling are included in the same-store pool and in that same-store expense right?

I would say that the assets we have sold over the last period of time had a neutral impact on our results. The things that came from the bulk dispositions saw the numbers look similar before and after and really didn’t have a material impact on our expectations for 2018 and 2019. There are homes we’ve identified for sale and have vacated; those are taken out of same-store because those are specifically attempting to sell to end users, not through an overarching disposition. If homes are identified for sale that could go through a bulk disposition, they remain occupied and keep their same-store status until we get to the point where we have them under contract and a hard deposit in place making the transaction highly certain. Over the year, you’ll see some homes move out of same-store as we go through the process of identifying and selling, so the answer would be a little bit of both.

And lastly, you've mentioned Seattle and California as some of your better markets; I'm curious where are the more challenging markets, and what type of delta are you projecting in terms of revenue between the upper and lower end of your portfolio?

This is Charles; I’ll jump in on the markets where we see opportunity. In our results, Dallas, Denver, and Houston saw occupancy below where we wanted; we’ve made a strong trajectory in all three markets. Dallas has moved up to the 95% range, and we’ve seen blended rent growth increase in January, maintaining that occupancy. Denver experienced a nice upward move, finishing January with an occupancy above 95%, and we expect continued growth in February. Houston has maintained occupancy to about 95% with rent growth slightly flat, which we see improving throughout the year. Looking back over 2018, we made significant gains in our Florida markets, particularly Orlando, which has performed strongly all year, while Tampa and South Florida are coming along as well. We’re excited about balancing the portfolio, and we aim to have improved operation across our West Coast and Orlando markets.

Just to quickly follow-up on Tampa; I recall there being issues last year with personnel. Can you quickly update us on how that stands? Are regional or local property management teams fully operational now?

We’re in really good shape in Tampa. A lot of the noise you discussed was early in the year, and we were able to address it quickly. Part of that is showing up in our results in Q4, both on the top and bottom lines. We feel really good about where Tampa stands for us.

So, thanks for the disposition and acquisition guidance nets to zero. How do you think about that versus reducing or producing leverage faster?

Well, that’s a great question. We have to have a base case scenario and feel comfortable, given Ernie’s earlier points on guidance, about what we think we can acquire creatively, somewhere between $300 million and $500 million. We also think we can recycle easily between $300 million and $500 million on the sales side. If we encounter something opportunistic, we could look at selling or buying more. I would say that our base case pushes us to get to investment grade; we know that by calling and selling lower-performing parts of the portfolio helps in recycling capital and prepaying debt lets us focus on that investment-grade balance sheet we ultimately want. Ernie, do you want to add to that?

You talked a lot about rates, occupancy, and those drivers to the same-store revenue picture. Is there anything appreciable to think about through either revenue management or other income that might contribute or not in 2019?

Yes. We think other income will probably grow at a slower pace than it did in 2018, but not significantly so. That said, that’s our base case for getting to our midpoint guidance. From the revenue management perspective overall, the team's doing a great job under Dallas and Charles' leadership to optimize performance. We’ve been feeling confident heading into the fourth quarter, and our numbers have reflected that indicating a strong start into 2019. We are in a good position to optimize as we enter peak leasing season. It’s inappropriate to say we should be more aggressive on any front relative to the data we’re seeing.

This is Charles. Absolutely. That was one of the first parts of the combined company that we put together. Once we got it all under the hood, we were able to borrow best practices from both. By the second half of the year, we had some strong results, and it’s continuing into 2019.

Thank you again for joining us today. We appreciate your interest, and the team looks forward to seeing many of you in March. Operator, this concludes our call.