Invitation Homes Inc (INVH) — Q2 2019 Earnings Call Transcript

Thank you. Good morning, and thank you for joining us for our second quarter 2019 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 would like to point everyone to our second quarter 2019 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. I would 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 2018 Annual Report 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 will now turn the call over to our President and Chief Executive Officer, Dallas Tanner.

Thank you, Greg. Our business is firing on all cylinders as we move through the midpoint of the year. Fundamental tailwinds persist, operational execution remains terrific on our fully integrated platform. We continue to create value through capital recycling and active asset management and we are making important strides with our balance sheet. I would like to elaborate on a few things in my comments. First, the drivers of our outsized growth and strong results; second, some detail on our capital recycling efforts; and third, why I'm even more excited about the future. I will start with our performance building on a great start in the first quarter of 2019. Highlights of our second quarter included over 6% same-store NOI growth, our best ever second quarter occupancy of 96.5%. At the same time, both new and renewal rent growth were above 5% and prior year levels and we achieved a reduction in controllable costs net of resident recoveries of over 7%. This performance was driven by favorable fundamentals, our differentiated portfolio and service, and outstanding execution by our teams. The facts around industry dynamics in our value proposition are simple. Household formation in our markets is robust, supply is limited, and home price appreciation continues to outpace inflation. In a market where attractive housing options can be difficult to find, we offer a solution that allows residents to live in high-quality homes in desirable neighborhoods at a fair price and enjoy the ease of leasing from a professional management company that puts the resident first. This is especially true across our unique market footprint, where household formations are expected to grow at almost twice the U.S. average in 2019. We also offer monthly leasing options that remain almost 10% below the cost to own a comparable home. In addition, our industry-leading scale with over 4,700 homes per market, on average, enables us to efficiently deliver best-in-class resident service that enhances resident satisfaction and retention. Our field teams are now delivering that service better than ever, powered by enhancements to our operating platform. With better data and tools, our revenue management team continues to strike the right balance between occupancy and rent growth. On the expense side, our efficiency initiatives continue to be effective at reducing controllable costs even during the busier summer months. On the back of this strong year-to-date execution, we are raising our 2019 same-store NOI growth guidance range to 5% to 5.5%, an increase of 75 basis points at the midpoint. Ernie will elaborate on our updated guidance later on in the call. Next, I will provide an update on our capital recycling efforts. Midway through the year, we have made excellent progress against our capital allocation plan. In the first half of 2019, we sold 1,433 homes for gross proceeds of $360 million and used these proceeds to acquire 948 homes for $273 million and to delever. In doing so, we removed many lower quality and less advantageously located homes from our portfolio and repositioned capital into the homes and locations where we have real conviction in risk-adjusted total returns. We have been able to find compelling opportunities to accomplish this because of the advantage of our local presence in markets and the diversity of channels we employed to both buy and sell homes. Just in the first half of 2019, we have bought homes through various channels including transactions, one-off transactions, MLS, auctions from home builders and through iBuying platforms. We have also sold homes both in bulk and one-off transactions, as well as directly to residents. After successful execution in the markets in the first half of 2019, we now expect to finish near or above the high end of the initial $300 million to $500 million guidance we laid out at the beginning of the year for both acquisitions and dispositions. In other words, we are enhancing our portfolio quality in 2019 even more than we had initially anticipated. In closing, I would like to talk about all the opportunities that lie in front of us. Earlier in the call, I discussed the supply and demand drivers that have underpinned our outsized growth. Looking ahead, we are even more encouraged as we have yet to enjoy the full benefit of the millennial generation that is coming our way. Over 65 million people, or one-fifth of the US population, are aged 22 to 34 years and we believe many in this cohort could choose the single-family leasing lifestyle as they form families and age toward Invitation Homes' average resident age of 39 years. We also have tremendous potential to create value beyond the organic opportunity and are shifting more attention to how we can make the resident experience even better. This includes building on the basics by refining our already best-in-class systems and processes for interacting with residents and providing genuine care, carrying out the ProCare commitment to proactive service, and more hands-on resident care at move-in and move-out that our platform is now equipped to provide to all homes in our portfolio. We are also expanding ancillary services, which we have recently brought on a dedicated team to pursue, continuing to grow and refine our value-enhancing CapEx program, and making the leasing process even more efficient to get new residents in homes quicker. Finally, from an external growth and portfolio perspective, our locations and scale provide significant competitive advantages today, but we have the opportunity to widen those advantages even further. As we move forward, scale gives us the ability to be selective and continue recycling capital to enhance the quality of our portfolio at the margins. As we have done throughout our history, we will continue to grow scale when the right opportunities arise in the appropriate markets. In summary, I am very proud of the way we are executing and driving growth today, but I am even more excited about the opportunity that lies ahead for our business to become even better. With that, I will turn it over to Charles Young, our Chief Operating Officer, to provide more detail on our second quarter operating results.

Thank you, Dallas. Once again, we were able to build on positive momentum to drive another great quarter operationally on both the revenue and cost side. I'm especially proud of our team's success this quarter because it came during a seasonally busier time of year, managing through peak season for leases, turns, and maintenance. The quality of our resident service has not wavered. This is most evident in our turnover numbers, which achieved another record low of 30.1% on a trailing twelve-month basis. We still have work to do and we remain in the midst of peak season, but I couldn't be more thankful for how our teams have executed thus far. I will now walk you through our second quarter operating results in more detail. With outstanding fundamentals in our markets and excellent execution, same-store NOI increased 6.1% year-over-year in the second quarter; same-store revenues in the second quarter grew 4.2% year-over-year. This increase was driven by an average monthly rental rate growth of 4% and a 40 basis point increase in average occupancy to 96% for the quarter. Same-store core expenses in the second quarter increased 0.6% year-over-year. Controllable costs performed better than expected, down 7.2% year-over-year net of resident recoveries. The primary drivers of this improvement were lower turn volume and efficiency enhancements through our integrated operating platform that drove lower repairs and maintenance and personnel costs. Offsetting the significant improvement in controllable costs was a 7% increase in property taxes. We do not expect to achieve the same degree of improvement in controllable costs in the second half of 2019 as we did in the first half, as prior year comparisons become less favorable. That said, we still see upside in cost efficiency. In addition to the benefit of constant refinements to our systems and processes going forward, we expect our full ProCare rollout to bear fruit over the next several years. ProCare is our unique proactive way we serve our residents from move-in to move-out, including post-movement orientations, proactive service trips, and pre-move-out visits. To be clear, ProCare implementation has rolled out in all of our markets, but the benefits will materialize over time as proactive visits create opportunities for savings in both repairs and maintenance and turnover results. Next, I will cover leasing trends in the second quarter. Both renewal and new lease rent growth were higher in the second quarter of 2019 than in the second quarter of 2018. Renewals increased 70 basis points to 5.4% and new leases increased 40 basis points to 5.2%. This drove blended rent growth of 5.3% or 60 basis points higher year-over-year. At the same time, average occupancy remained 96.5% in the second quarter of 2019, showcasing that we are well-positioned moving forward. However, we are also approaching a point in the calendar year where new leasing activity begins to flow seasonally, making it prudent to become slightly more conservative in balancing rent growth and occupancy. We feel great about our playbook for maintaining healthy occupancy through the off-season, and our lease expiration curve is set up to help us achieve this as well. After a great first half of 2019, we are excited to keep the momentum going and remain focused on delivering outstanding service to our residents and outstanding results to our shareholders. With that, I will turn the call over to our Chief Financial Officer, Ernie Freedman.

Thank you, Charles. Today, I will cover the following topics. One, balance sheet and capital markets activity; two, financial results for the second quarter; and three, updated 2019 guidance. First, I will cover capital markets activity where we opportunistically refinanced one of our near-term maturities and continued to delever. In June, we further diversified our capital sources by closing our first-ever term loan from a life insurance company. The loan has a 12-year term and a principal amount of $403 million. The total cost of funds is fixed at 3.59% for the first eleven years and floats at LIBOR plus 147 basis points in the twelfth year. Structural features of the loan also provide for more flexibility in collateral release and substitution rights than our other secured financings to date. With the proceeds from this loan and other cash on hand, we repaid $529 million of higher-cost secured debt in the second quarter, which leaves us with no debt maturing prior to 2022. In July, we voluntarily prepaid an additional $50 million of secured debt. Also in July, we completed settling conversions of our 2019 convertible notes with common shares, bringing net debt to EBITDA to 8.4 times, down from 9 times at the end of 2018. As we move forward, we will continue to prioritize debt prepayments in pursuit of an investment grade rating. Our liquidity at quarter end was approximately $1.1 billion through a combination of unrestricted cash and undrawn capacity on our credit facility. Moving on to our second quarter 2019 financial results, core FFO per share increased 5.2% year-over-year to $0.31 primarily due to an increase in NOI and lower cash interest expense. AFFO per share increased 4.1% year-over-year to $0.25. The last thing I will cover is our updated 2019 guidance. After maintaining strong execution through the first stage of our peak leasing and service season and with supply and demand remaining favorable, we are tightening and increasing our full-year 2019 same-store NOI growth guidance to 5% to 5.5%, up from 4% to 5% previously. This is driven by same-store core revenue expectations of 4% to 4.5%, up from 3.8% to 4.4% previously, and same-store core expense expectations of 2% to 3%, down from 3% to 4% previously. We are also increasing our guidance for core FFO and AFFO in tandem with our same-store NOI guidance increase. We now expect full-year 2019 core FFO of $1.23 to $1.29 per share versus $1.21 to $1.29 previously. AFFO is expected to be $1.01 to $1.07 per share versus $0.99 to $1.07 previously. Lastly on guidance, I want to remind everyone of two things that will impact our results in the back half of the year from a timing perspective. First, given the progression of occupancy in 2018, occupancy comparisons will not be as favorable in the second half of 2019 as they were in the first half. Second, the year-over-year increase in real estate taxes is expected to be lower in the fourth quarter of 2019 than in the first three quarters. I will wrap up by reiterating Dallas' enthusiasm for the future. Fundamentals remain favorable, which we expect to continue driving strong revenue growth while enhancing expense controls. Furthermore, we believe that our business is well positioned to succeed in all parts of the cycle. We are excited to begin creating more value in addition to organic growth as we ramp up our focus on enhancing the resident experience with ancillary services, value-enhancing CapEx, and other initiatives. Last but not least, we remain active with our best-in-class investing platform to recycle capital, widen location and scale advantages within our portfolio, and grow opportunistically in the right markets at the right time. With that, Operator, would you please open up the line for questions.

Thanks. Dallas, you touched on this a little bit, but given the attractive return characteristics you are seeing in the supply-demand, can you talk about your appetite for increasing the external growth opportunities and where those might be most attractive?

Thanks, Doug. Yes, happy to. As I already mentioned, we are going to look for some of these opportunities in the right places at the right time. We are certainly seeing a bit more opportunity in the last couple of quarters in terms of grinding our incremental buying through our platform. I mentioned in my comments that we still see through a variety of channels, opportunities that have a pretty attractive return profile. I would expect that we will maintain an opportunistic approach; if and when we see an opportunity that makes sense, we could then consider meaningfully adding to our portfolio. One of the benefits of being local is that we do get to see a lot of things off-market and opportunities that are brought to us in advance of public sales. For us, we are going to continue to look for those opportunities.

Great, and just which markets are you finding most attractive today?

If you look at the balance of where we are having some of our greatest expansion in terms of rate growth and home price appreciation, certainly our West Coast markets are outperforming. A market like Phoenix is a good example of this, where over the last three months in a row we have been north of 10% from a new lease growth perspective. We are seeing some interesting opportunities in that market. We have been able to do some things like buy directly from some boutique homebuilders in that market in Q2 and if you look to do the same in markets like Seattle. I would expect our mix to be relatively consistent with what we have done over the past couple of years, which is continue to find higher barrier to entry submarkets in the West and Southeast that will continue to lend themselves to that outperformance.

Hey, good morning, guys. Congrats on a good quarter. I want to focus on revenue and expenses. Revenue met our expectations but was lower than where it has trended in the past, and I think the guide implies some deceleration. So I'm wondering if you could comment on that real quickly and if there is anything driving that seasonally or otherwise.

Hey, Rich, this is Ernie. So far revenues have performed a little better than we expected at the beginning of the year, and hence why we are able to increase guidance here with the second quarter release. We had mentioned at the beginning we expected that rental rate growth would be about 4%, and we are actually doing a little better than that performance right there. We talked about at the beginning of the year that in the first quarter, I think we had an 80 basis point year-over-year increase in occupancy, with the second quarter being a 40 basis point year-over-year increase. We are not expecting to continue to see those types of numbers in the second half of the year. We think embedded in our guidance, we expect occupancy to be flat to just slightly up in the second half of the year compared to last year. You take a roughly 4% rental increase and a roughly flat occupancy, and then the other income for us has been trending a little lower in growth rate perspective than rental rate. That math gets you to the second half of the year being not quite as robust as the first half, but still very strong relative to where else you can see.

Got it. On the expense side, you have had an impressive start to the year. It looks like there is going to be some hefty implied expense growth in the second half of the year. I think I heard that taxes are going to be down though, so maybe you could help us square that a little bit.

Yes, sure. So again, we have had some good surprises for the first half of the year regarding expenses. We will remind everyone that we are still in the middle of peak season when it comes to work orders, July books aren't quite closed yet. And of course, August and September are still warm months for us when you look at our footprint. We still want to be cautious as we consider expenses, just as we were earlier this year, both in our first set of guidance and our second set of guidance that we just provided. That said, Rich, real estate taxes are trending sort of exactly where we expected them to trend. We said at the beginning of the year that we thought taxes would be up in the 5s, somewhere between 5% and 6%, and year-to-date they are at 5.9%. We mentioned previously that the fourth quarter presents easier comparisons for us in terms of real estate taxes, as we had a significant adjustment that we had to account for last year in the fourth quarter. So we are on pace with where we expected our real estate taxes to be, and where we have really excelled here is in repairs and maintenance costs due to all the work that is being done in ProCare that Charles talked about. We are hopeful to see that carry through for the second half of the year as well.

Thank you very much; I appreciate it.

Thanks, Rich.

Good morning, guys. Thanks for taking the question. It was exciting when you all mentioned that you just hired a new ancillary income team. Could you talk about some of the initiatives they are seeing that are driving the growth that we see and maybe some initiatives going forward for 2020, perhaps around smart home adoption as well?

Sure. Hi, Shirley, thanks. We are excited to discuss our business which we really look at in two main buckets. The first piece is the real estate operations aspect which Ernie and I addressed in the previous questions. The second bucket focuses on the customer experience side of our business, and we are centered around ensuring that we deliver a best-in-class experience for our customers, which we believe will lead to better performance in some of those ancillary targets and other income opportunities. Specifically, as a company, we have rolled out initiatives around smart home technology and have piloted a couple of smaller initiatives historically. I believe there is great room to improve, specifically around the smart home offerings and the additional features we can add to that package. Remember, our adoption rate has historically been between 75% and 80%. We are experimenting with pricing and different offerings that we believe will lead to improved performance in that category. Another area that could drive a stickier experience for our customers could surround pet insurance and various offers working with some national partners. We are researching a variety of engaging initiatives that we think will create some additional ancillary revenue while simultaneously enhancing the overall customer experience, which could in turn improve retention. If we execute effectively and deliver in a manner that feels meaningful, personal, and creates a connection between our customers and the properties, we believe this will have a substantial positive impact on our business.

Thanks for the color. And so back to the synergies from the merger. Previously, you mentioned that there might be more on the procurement side. Have you seen more of those conversations happen throughout this year, and what do you think is the possible impact of potentially margin improvement for next year?

Yes, so Shirley. Well, I would say it's like any business, you are always looking to do things better and improve. The procurements are certainly a great example. We continue to see good opportunities to leverage our scale, both on a national basis and a regional basis. Regardless of the merger, we would be pursuing procurement possibilities to streamline operations. We were tracking merger synergies until recently when we put the merger and its integration behind us a quarter ago. That said, we have a dedicated team and they are working hard on optimizing our product procurement. I believe it is one of the many factors that can help facilitate margin expansion going forward as we keep leveraging our buying power, particularly on the capital side. So now with items like appliance packages, as an example, there are considerable opportunities. It's really a matter of contract by contract, continuing to work from the national down to the regional, to local levels, to seek out and find favorable deals that make sense.

Great, thanks for the color.

Thanks. Dallas, you talked about the transaction activity. How many more non-core homes are left to sell in the near to medium term?

Well, without giving any real specific guidance, because we can't really do that here, we are looking to right-size the portfolio post-merger in terms of ensuring we have the right allocations and submarkets at the market level. You saw that we were quite active through the first two quarters of this year in markets like South Florida and Chicago. To clarify, we will always examine the lower-performing parts of our portfolio in our regular process, and I would bet that our activity for this year remains consistent, but I wouldn't expect that we have a significant amount more to sell in general.

Thanks. So as you think about the more exciting opportunities you are seeing on the external growth front, if the non-core asset sales start to accelerate, will you become more of a net acquirer? How do you perceive funding larger-scale external growth? Leverage is obviously ticking down but still is higher than where you would like. How do you think about the ability to fund any kind of net acquisition growth going forward?

I think we want to assess anything that makes sense, right? We would have to evaluate what the best available cost of capital is that aligns with our general strategy. So we have several tools available. We have a revolver at our disposal if we need something promptly. We have the option of issuance if it makes sense in a given scenario, or we can continue to recycle and make strategic investments.

And we remain committed to our balance sheet goals, ensuring we weigh the cost of capital against the opportunities for external growth we come across.

Thanks.

Thanks very much. On the amenities and ancillary services front, are there specific vendors you have identified that are offering best-in-class services, perhaps in the multifamily sector that could be exported to single-family builds, such as resident e-commerce amenities or improved operations? I understand RealPage just rolled out AI tenant screening, which expedites the tenant bidding process. I am wondering if you see any of that on the front lines.

We are certainly in discussions with various groups doing work in both the single-family and multifamily sectors. You are right; a lot of roll-ups are occurring in the real estate tech space. To date, there are also differentiated opportunities that exist uniquely in single-family. It could be a bit duplicative. The nature of how long our residents stay with us is significantly different. There are additional opportunities present. RealPage and similar firms are developing AI platforms that enhance customer service. We have met with a number of those companies and evaluated their products, but we have not yet seen anything that is ready for implementation within our business. Yet, we will keep a vigilant approach of capturing anything relevant as it arises.

Thanks. I find that interesting, especially concerning the more extended tenure in single-family living. This would seem to indicate greater opportunities for ancillary revenues. Moving on to the build-to-rent front; another public homebuilder announced a joint venture considering Bryce Blair as Chairman of both IH and Pulte Group. You probably have unique insight; could you share your updated thoughts on the build-to-rent sector?

Well, I think my thoughts on build-to-rent have been pretty consistent, and our team feels the same way. We want to explore every sensible channel without compromising our location strategy. If something is in the right location, we can consider any channel. Build-to-rent is intriguing because there are two key dynamics at play. There is more of a garden-style approach which involves smaller plots and usually has a different financing method, and then there are communities built with the fit-and-finish standards that align with single-family neighborhoods. We receive many inquiries about opportunities; we are open-minded about acquiring in scale from builders, but the locations and the quality of finishes must align with our criteria. Specific to pricing, it serves as an excellent point of differentiation between the two companies, offering insights into homebuilding.

Thanks very much.

Thanks.

Hey, good morning. I have a question on recurring CapEx. Year-to-date for the total portfolio is up about 5%. I was glad to see the AFFO growth guidance range increased in tandem with FFO. Can we assume about the same kind of year-over-year increase in recurring CapEx in the second half of the year? Given the easier comp in the third quarter, might we even see a decline?

Please, Drew, try to answer the question yourself based on how you led that. We haven't provided specific guidance for that, but I will say we are actually performing a bit better than expectations on the CapEx side and much better on the OpEx side regarding recurring costs. Part of the reason we are confident in raising our AFFO range, as well as the FFO range, is due to that performance. We are not in a position to provide specific guidance on how it may compare to the first half, but overall, we think we will be flat to slightly up or even down year-over-year concerning net costs to maintain.

Great, that is very helpful. And one more from me. Just to follow up on the previous question about markets, specifically in South Florida, I noticed that in this new leasing spread went negative in the second quarter. There has been virtually no acquisitions this year, which seems to continue to be a source of funds on the disposition side. How do you feel about that market short term and long-term? Is it still one of your top markets, or do you think this will continue to be a source?

Yes. Thank you, Drew. This is Charles here. We are fans of South Florida. If you look at our performance in Q2, overall occupancy actually increased to 95.5% from 95.3%, and new lease growth decreased to 2.8% from 3.2%. So we did decline slightly, but renewal rates were actually up year-over-year. To your point, the new lease rent growth has experienced some negative impact in certain submarkets, which is why our field teams are closely monitoring the performance and making prudent decisions for pruning the portfolio as we're liquidating some homes in South Florida. As a reminder, we have 25,000 homes statewide, so it's vast in South Florida. Long term, we remain optimistic and will continue trying to optimize our short-term positioning.

Great, thanks, Charles. That is all from me.

Hey, guys, thanks for taking my question. Just focusing on taxes and such a big item on expenses; given the run rate this year you have outlined, looking ahead across your markets where appeals have come through and tax rates have been decided, what do you see in the future as far as how much that line can grow? Which regions are kind of overburdened?

Yes, Hardik, I talked a little bit about what has happened so far this year. Without giving guidance, I will share some thoughts on future projections. This year, we discussed experiencing a significant increase in the State of Washington, specifically in Seattle. Our expectations were not influenced when we saw the Texas market heat up in terms of high assessments. We have had more success in the appeals process than we anticipated so far in Texas. Georgia is also seeing higher rates, but we have yet to experience a significant volume of appeals there. Importantly, our real estate tax bill is significantly impacted by assessments in Florida, which constitutes about 40% of our total tax obligations. We expect further clarity regarding Florida's assessments in the month or two ahead, as the millage rates will be finalized around October and November. Looking ahead, I believe the underlying factors show that real estate taxes might rise at a rate exceeding inflation, except for California. However, it is certainly not at the speeds we have witnessed over the last couple of years due to strong appreciation of home prices. For this year, we believe real estate taxes will fall within the 5% to 6% range. We see a trend that indicates there could be moderate increases in taxes as home price appreciation stabilizes over the next few years.

That is great, thanks for the color. Just one quick follow-up, if you will indulge me. If Florida goes flat, how would that impact the same-store pool on a tax growth rate basis?

Well, certainly if Florida is flat to 0%, that would account for 40% of your overall taxes. Understanding that we are not suggesting Florida will necessarily remain flat, I would say the resulting impact would still leave you in a relatively stable position from the perspective of overall tax performance for 2020, generally as a guide. But that is purely a hypothetical scenario we are exploring here.

Yes, no need to get confused about the hypotheticals, just keep that in mind.

Sorry for creating problems for you, Ernie. Thanks.

Thanks. I would like to follow up on Rich's comments regarding the second half of 2019 expense predictions. Charles or Ernie, I am puzzled about your prepared remarks regarding controllable cost comparisons toughening in Q3. Repair and maintenance costs in Q3 18 were up 13%, and in Q4, they were up 10%. You had a peak in turnover in Q3. Can you help me understand your prepared remarks?

Yes, I can give you some context on that, John. Certainly in Q3, real estate taxes are a more challenging comp for us, while Q4 represents an easier comp. Additionally, we've identified several merger synergies emerging in the second half of last year. While we do not anticipate stronger performance across personnel or other service components, we do expect to maintain good performance relative to the past year. We have consistently seen improvements in turnover metrics, and as turnover has steadily decreased over the last several quarters, that also presents further potential for upside. We want to ensure that we don't overlook the additional gains that may still emerge as we are still in peak season. We want to be cautious in addressing expectations and avoid surprises as we navigate the second half of the year.

Okay, but is there any one line item where you see significant upside right now?

We want to maintain a level of conservatism regarding repairs and maintenance forecasts. However, we have seen improvements that we did not anticipate in turnover metrics, so that is encouraging. Our R&M expectation saw an uptick, which is promising. We are striving for improved results that will hopefully continue into the second half of the year, but it's all about executing well and not committing too early.

Okay, and back to portfolio management and pruning in Chicago. Have you debated a full exit from Chicago, and is that in the cards in the coming years?

No, we are clear with our intent to optimize Chicago. Post-merger, we have actually made attempts to improve that portfolio considerably. If you look, we are starting to see some improvement in renewal growth, new lease growth, and overall cost management in that market. We have cut out troublesome assets, and while the Midwest generates around 5% of overall revenue, it is not central to our growth story going forward. To be clear, we want to enhance our capital investments regarding the West Coast and regions within the Southeast. We will evaluate opportunities that would benefit shareholder value should they arise.

Okay, thank you.

Hey, thanks, guys. Just a couple of questions regarding regions. First, in Texas, you demonstrated significant improvement in blended rent growth. Can you talk about how much of that is demand improvement in those markets versus any initiatives you've implemented?

Yes. Thank you, Ryan, this is Charles. Both Dallas and Houston have seen really impressive growth. Dallas specifically is a growth market for us; occupancy is nearing mid-95s and we’d ideally like to keep increasing from there. Last year, we were at 94.5%. Blended rent growth reflects that occupancy growth, yielding rent increases. It's a combination of robust market conditions, alongside the efforts of our new local leader who is building a strong team and executing well. In Houston, we've been stable and achieving occupancy rates of 97.3%, which is over a 200 basis point improvement. We have been defining submarkets thoughtfully and pruning where needed to optimize our portfolio. We have also posted over 3% blended rent growth in Q2. We are optimistic about how things will continue during peak season, but there will be seasonality in these markets as school terms approach, but we are pleased with our results to date.

Okay, thanks. You also discussed your rent growth tracking home price appreciation in Seattle, where the Case-Shiller index demonstrates year-over-year diminishing home price appreciation. However, you have maintained strong blended rent growth there. Can you summarize your expectations for Seattle in the near to medium term and how declining home price growth influences your investment strategies in the market?

Great question. Let me clarify: We love Seattle. We admire the market's fundamentals, including robust job growth, favorable demographics, and the influx of residents. While slight dips in home prices have created a buying window for us, we see potential for long-term value creation. Today, we hold over 3,000 homes in Seattle and are keen to further develop that market. We find that margin enhancement improves significantly as we scale our Western markets and hence, we continue to monitor developments as they unfold. If substantial declines occur, we might pause to understand market implications, but we don't anticipate that happening. We're still seeing blended rates grow by 8% to 9% quarter-over-quarter, highlighting persistent demand for quality housing.

Great, thank you.

Hi, everyone. How are you doing? Regarding real estate taxes, I want to make sure I clarify that you could evaluate every single assessment and work with a third party for appeals, is that correct?

Yes, Derek, we can look at every assessment and we indeed partner with a third party. However, we don’t fight every single assessment due to associated fees with home-by-home basis appeals, as we wouldn't want to incur expenses unless we feel we have a legitimate claim. In California, which makes up 20% of our portfolio, reassessments are permitted following corporate events, so we have navigated several of those over the last two years, touching on merged companies.

Got it. And with the disposition mix, what percentage is represented by sales to residents right now? Is this a quickly growing sub-segment, and how does the process typically work with tenants?

Yes, that is a great question. We initiated our resident first look program almost two years ago as a pilot to gauge the demand. While we have some data on move-outs, our research suggests that the number of people wanting to shift from renting to buying is relatively small. Nonetheless, we are aware that many of residents develop an emotional connection with their homes, thus when we decide to sell an asset, we often approach the resident first in those one-off scenarios. We have facilitated around 150 of these transactions to date. This program aims to build goodwill with our customers while remaining sensitive to family needs in these transitions. A dedicated team also reaches out to residents to guide them regarding asset management strategies while exploring their interest in purchasing their home.

Alright, great. Good insights, guys.

Hey, guys. Ernie, could you provide additional guidance on your expectations regarding G&A trends for the rest of the year? It looks like you have experienced strong benefits year-to-date.

Yes, teams often save up a little extra for the year-end just in case. So, we have slightly accelerated our G&A expenses across some areas. I expect a similar run rate for G&A for the rest of the year. We may experience a little noise quarter-to-quarter, but it should not differ materially from the first half of the year.

Perfect, thank you. Additionally, regarding resident turnover trends, how has your experience shifted in understanding why people are choosing to move out or where incoming residents are coming from, in terms of their prior living situations?

Yes, regarding move-in reasons, we do not formally track that data. While our field teams tend to inquire about these on occasion, we don't have strict mechanisms to capture where tenants come from when they're moving into an Invitation Home. On move-outs, we consistently observe two reasons: purchasing a home and life transitions. Interestingly, this is the first quarter we have noticed 'life transition' being slightly more prevalent than purchasing a home as a rationale for moving out. Moreover, we also observe a downward trend in the reasons for residents moving out to purchase homes, as this has been consistent in all but one of the past ten quarters, where it had flattened out.

Thank you, guys.

Good morning, everyone. Are you finding more success in focusing on top-tier assets and top submarkets now that international money has pooled back and your cost of capital has improved?

I want to clarify what you mean by top-tier. I will take a stab at it. For us, we have always procured higher-end assets than many peers by design. Early on, we recognized that the cost of replacing an HVAC unit is similar for both $1,200 and $1,800 rentals, providing a longer-term approach to risk-adjusted return and expense considerations. As the market softens and international buyers retreat, particularly from regions like Southern California and Seattle, it could open up more favorable opportunities for us. We are indeed seeing some of that where supply levels are more favorable, albeit not to an extent of eight or nine months of supply - it's more around three to five-month terms. We hope these dynamics lend themselves to advantageous opportunities.

That was my focus more on well-located assets, but do you notice significant disparities in your rent growth among markets? For instance, are your best-located assets seeing meaningfully higher growth than your secondary assets in various markets like Seattle or Southern California?

Yes, let me address that in two ways to ensure I answer your question. Generally, our West Coast markets are significantly outperforming, with year-to-date growth rates surpassing 7%. The remaining markets present robust rental growth too, usually rangingbetween 3% to 4.5% at a submarket level. Charles and I conduct continuous discussions regarding asset management processes, evaluating upwards of two hundred distinct submarkets on a regular basis. This extensive data informs our revenue management models and growth strategies for decisions concerning asset sales, letting us make deliberate decisions based on potential performance. We actively consider any issues or preventative measures to manage risks associated with asset types and costs going forward, which influence our calls on where capital should be allocated.

Yes, I was looking for insights related to that granular perspective as seen in multifamily, but thank you for that clarity.

Thank you.

I just want to thank everyone for joining us again today. We appreciate everyone's interest in Invitation Homes. We look forward to seeing many of you at our upcoming conferences and our Investor Day in October. Operator, this concludes our call.