Invitation Homes Inc (INVH) 2017 Q1 法說會逐字稿

Greetings, and welcome to the Invitation Homes First Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

At this time I would like to turn the conference over to Greg Van Winkle, Director of Investor Relations. Please go ahead, sir.

Thank you, Rocco. Good morning, and thank you for joining us for our first quarter 2017 earnings conference call. On today's call from Invitation Homes, are John Bartling, Chief Executive Officer; Ernie Freedman, Chief Financial Officer; Dallas Tanner, Chief Investment Officer and Bruce Lavine, Chief Operations Officer.

I'd like to point everyone to our first quarter 2017 earnings press release and supplemental information, which we made in reference on today's call. This document can be found on the Investor Relations section of our website at ir.invitationhomes.com.

Finally, I'd 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 nonhistorical 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 risk and uncertainties in our 2016 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 Investors Relation section our website.

I'll now turn the call over to our President and Chief Executive Officer, John Bartling.

Thank you, Greg, and good morning, everyone. We're up to a terrific start for 2017. Core FFO and AFFO for our first quarter as a public company were above our expectations. As we continue to push pricing, occupancy remained high, near 96% for the same-store portfolio. And turnover remained in the low 30s, reflecting the quality of our investment strategies and customer services. As a result, we achieved total portfolio NOI growth of 7.9% and same-store NOI growth of 5.7%.

We have industry-leading scale with 48,000 homes in 13 markets, with over 70% of our revenue concentrated in high-growth Western U.S. and Florida markets. Our investment strategy is simple. We invest in supply-constrained in-fill locations, near major employment centers with good schools and desirable amenities where families can thrive.

Our differentiated operating platform is driven in the market. We employ over 700 local experts in the field who buy, sell, renovate, manage our homes and serve our residents with care, as exemplified by our A+ rating with the Better Business Bureau. Given that many of our competitors are mom and pops, this commitment to 24/7 service truly differentiates our value proposition, leading to higher revenue, lower turnover and efficient maintenance of our homes through our industry-leading ProCare Program.

To drive incremental margin expansion, we are focused on the following key initiatives for 2017: First, we are working actively towards shifting more of our lease expirations into the higher demand spring and summer months. We believe that this will benefit our pricing power and lower our days to re-resident on turns.

On the cost side, we centralized and outsourced our call center in the first quarter, creating a more consistent customer service experience at a lower cost. We expect operating efficiencies to benefit from our implementation of an interactive voice response system, which should reduce unqualified call volumes. We have also automated charges to residents driving meaningful ancillary income growth to the consistent collection of fees. You'll see this in the 22% other income growth we enjoyed in the first quarter.

The tailwinds also remain at our back with respect to supply and demand fundamentals in our 13 well-selected markets, where supply is muted and job growth is above the national average. This is evidenced by our industry-leading rent growth, especially in the Western U.S. where we saw same-store blended rent growth of almost 7% in Q1. Home price appreciation, also known as HPA, continues to climb nationally. HPA in Invitation Homes' markets was up 6.5% year-over-year, 80 bps higher than the national average led by strong appreciation in the Western U.S. and Florida markets.

Lastly, the first quarter of 2017 was a period of tremendous success for our associates. I would like to thank you to -- I'd like to thank each of them for delivering a great living experience to 50,000 families, innovating and executing operationally and making our IPO possible. I'm proud not only of the financial results our team has produced, but also the positive impact our associates make every day to the communities we invest in, the residents we serve and the vendors we work with and the investors who trust us with their capital.

In conclusion, we entered the second quarter with strong 96% occupancy in April. That put us on track to achieve the 6.5% to 7.5% same-store NOI growth that we are guiding you today for 2017. Looking ahead further, the favorable demographic and macro tailwinds in our differentiated markets should provide Invitation Homes with a long runway for internal growth and margin expansion.

With that, I'll now turn the call over to Ernie Freedman, our Chief Financial Officer. Ernie?

Thank you, John. Today, I will cover the following topics: operating results for the first quarter in April; portfolio activity for the first quarter; capital markets activity specific to our IPO and related financing activity, including our recently closed Fannie Mae loan; financial results for the first quarter; balance sheet; and 2017 guidance.

The first quarter of 2017 was a strong start to the year for us operationally as we executed well in driving rent growth, growing other income and beating internal expectations around expense growth. Total portfolio NOI grew 7.9% year-over-year. We experienced this NOI growth, despite a slight decrease in average home count. For our same-store portfolio of 43,224 homes, NOI grew 5.7%. Same-store revenue growth of 4.7% was driven by average rental rate growth of 4.5% and other income growth of 22.3%, partially offset by a decline in occupancy to 95.8%.

Ancillary income items rolled out during 2016 continue to earn in as they are implemented in all renewal and new leases, and we believe we have more opportunities to come with regards to other income.

While our total same-store expenses grew 3%, controllable cost, as noted on our Supplemental Schedule 3(b), grew only 0.4%. Real estate taxes were the largest driver of total same-store expense growth increasing 7.1%. Personnel expenses were 15.9% lower year-over-year, and leasing and marketing expenses were 17.3% lower year-over-year, and we continue to see opportunities to lower these expenses going forward. We also saw a 10.7% decline in insurance expense.

Net effective rental growth remained strong during the quarter. First and fourth quarter rent growth is typically lower due to seasonality. Same-store blended rent growth for the first quarter of 2017 increased 4.5% year-over-year with renewal growth for the quarter at 5.3%. New lease growth improved each month from January through March. Northern California, Seattle and Phoenix were our strongest growing markets, with same-store blended rent growth between 6.5% and 8%.

April same-store results continued our sequential monthly positive trends. April average occupancy was 96.0%, with a blended rent growth of 5.1%. Renewal increases remained healthy at 5.5%, while new lease increases were 4.4%. Annualized turnover was 34.3%.

I'll now move on to our portfolio activity. In the first quarter of 2017, the total number of homes in our portfolio declined by 380 to 47,918. Inventory of homes available for purchase in our markets remains tight, but we are still finding attractive investment opportunities by leveraging our local relationships. In the first quarter, we acquired 121 homes for an estimated $31 million, which includes purchase price, closing costs and anticipated renovation expenditure.

The average nominal stabilize cap rate on acquisitions during the quarter was 5.5%. Our 3 most active acquisition markets by invested basis were South Florida, Southern California and Orlando. We sold 501 homes during the quarter for gross proceeds of $78 million at an average nominal cap rate of 3.4% based on trailing 12 months NOI. For the year, we expect acquisition and disposition activity to mostly offset keeping our total home count at approximately 48,000 homes.

Next, I'll walk through our initial public offering and related financing activity. From February 6, 2017, we closed an initial public offering of 88.55 million shares of common stock at a price of $20 per share. This resulted in net proceeds of $1.7 billion. Alongside our IPO, we also entered into a fully funded $1.5 billion term loan facility with a 5-year term, and an unfunded $1 billion revolving credit facility. With proceeds from our initial public offering and term loan, we repaid $3.1 billion of debt in February. In March, we prepaid additional debt bringing total debt repayments to $3.3 billion.

I'd also like to provide some details in our previously announced Fannie Mae securitization that we closed in April. I'd like to take a moment to thank the teams from both Fannie Mae and Wells Fargo for their tireless efforts over the last many months. We value their partnership and are committed to making it a success.

The principal amount of our loan is $1 billion, of which we have retained $55.5 million, and the fixed interest rate on the debt is 4.23%. We used the net proceeds from the transaction to repay the remainder of our 2014-1 securitization and a portion of our 2014-3 securitization.

Importantly, the Fannie Mae loan includes provisions that allow for more flexibility than our previous securitizations. We have broader substitution rights for the collateral and also have the opportunity to reduce the number of homes in the collateral pool if cash flows and asset values increase over time. I will discuss additional balance sheet information later in my remarks, but first, I would like to walk through our first quarter 2017 financial results.

Supplemental Schedule 1 provides a reconciliation from GAAP net loss to our reported Core FFO and AFFO. To calculate Core FFO and AFFO per share, we have assumed that the weighted average shares outstanding for the 2 months we were public, were actually outstanding for the entire quarter. That is, we divided our full operating results by approximately 312 million shares.

Core FFO per share was $0.25. Core FFO in the quarter totaled $78.2 million, up 21.6% from $64.3 million in the first quarter 2016. In line with NAREIT's definition for FFO, we add back depreciation and amortization of real estate assets and impairment on depreciated real estate assets and deduct gains on sale, in order to reconcile from net loss to FFO.

There are some additional adjustments that were made to arrive at Core FFO from FFO. These include: $15.1 million of noncash interest expense consisting of items such as amortization of deferred financing costs; write-off of deferred financing costs from early pay downs of credit facilities; mortgage loan discounts and the mark-to-market on our derivatives prior to their eligibility for hedge accounting on February 1; $7.6 million of operating-related expenses related to our initial public offering; and $44.2 million of share-based incentive compensation expense.

All share-based incentive compensation expense recognized during the quarter was the result of pre-IPO incentive compensation programs that apply to our time as a private company, or onetime awards payable as a direct result of our IPO. As you can see in Supplemental Schedule 6, adjusting for these onetime items in G&A and property management expense, G&A is $10.3 million, down 1.8% year-over-year; and property management expense is $7.5 million, up 3.3% year-over-year.

The year-over-year increase in Core FFO was primarily due to an increase in NOI, even despite a slight decline in home count. Lower cash interest expense also contributed to the increase in Core FFO. The increase in Core FFO as well as a decline in recurring CapEx drove a 30.4% year-over-year increase in AFFO to $69 million for the 3 months ended March 31, 2017, or $0.22 per share.

I'll now turn to an update on our balance sheet. Following our previously discussed IPO and related refinancings, and pro forma for our Fannie Mae securitization-related debt repayments, the weighted average maturity on our debt at the end of the first quarter was 4.7 years, with no maturities due before September 2019. Loan-to-value was 44% based on total enterprise value implied by our stock price at the end of the quarter and 78% of our debt was fixed or swapped to fixed rate. We have a $1 billion revolver, which has been undrawn since its closing and $192 million of unrestricted cash. In addition, 41% of our assets are unencumbered.

Going forward, we are committed to improving our portfolio through capital recycling and deleveraging our balance sheet with cash flow remaining after our dividend payout, continuing on a path towards an investment grade balance sheet.

The last thing I will cover is our guidance for the full year 2017. As John discussed, we are pleased with our start in 2017. We continue to have strong fundamental tailwinds at our back and we have the opportunity to augment growth through a number of strategic initiatives. As such, we expect same-store NOI growth of 6.5% to 7.5% for the full year 2017, driven by 4.75% to 5.25% same-store revenue growth and 1.5% to 2% same-store expense growth. Core FFO is expected to be $0.96 to $1.04 per share and AFFO is expected to be $0.80 to $0.88 per share.

Now I'll turn it over to John. John?

Thanks, Ernie. In summary, we feel good about the start of this year. With the IPO behind us, we couldn't be more enthusiastic about the opportunity in front of us and the macro trends that support our industry, from the demand drivers of population and employment growth to the tempered supply of new housing and a tight labor market.

We continue to see interesting investing opportunities from value-added reinvestment in our own portfolio to regular way market transactions. We are disciplined investors and professional managers who have built a platform that is uniquely positioned to drive shareholder value for the long haul.

As witnessed in our performance this quarter, our homes provide a differentiated product near where our customers work, where they desire to live, with the services they demand and the homes for which their families can thrive.

I'd like to thank everybody for your time today and continued interest in Invitation Homes. Operator, with that, I'll let you please open up the line for questions?

(Operator Instructions) And today's first question comes from David Corak of FBR.

Looking at your acquisition in the quarter, it looks like you've stayed pretty true to the strategy you guys laid out during the IPO and, Ernie, your comments reflected that in your prepared remarks. But now that we're 3 or 4 months into your life as a public company and things are certainly going as planned, is there an environment where it makes sense to really step on the pedal in terms of external growth?

David, this is Dallas. Our strategy will remain consistent, as you laid out, that we plan on being net neutral for the year. And with that said, we are very active in our markets with over 20 investment professionals that are in market, so we certainly see everything. And we're constantly developing acquisition channels and looking for ways that we can continue to maintain an edge in our buying. We are aware of some of the opportunities that are out there. We take a look at everything. And I would expect that we'll stay true to our plan, but wouldn't count us out on being strategic if something made sense.

Okay. And then on the flipside, some of the markets that you're reducing exposure to, Dallas, maybe you can give us a little color on those particular markets and assets you're selling there. Are there particular submarkets that are dictating the sales or is it more property specific kind of stuff? Yes, it's kind of interesting because some of your competitors are actually buying in some of those markets, particularly in Phoenix, so any color -- market color on that that would be helpful.

Yes. Absolutely. Yes, absolutely. Expect us to be consistent capital recyclers in all of our markets. You mentioned Phoenix, specifically. We did have a transaction that occurred in the first quarter. If you think about that transaction, we sold roughly 235 homes to a private buyer, a new entrant in the marketplace. And the rents on those homes were suboptimal relative to where our current pricing in that market is with the assets that we're buying. We sold homes, on average, that were in the $900 to $950 per month rent band. And if you look at how we're reinvesting capital in that market, we're buying much closer to $1,200 in terms of our monthly rents. I would expect that we would have that same strategy going forward in most of our markets, where you'll look at us calling some of the bottom or the suboptimal performers and reinvesting that capital in parts of the submarket that we're more interested in at this time.

And our next question today comes from Juan Sanabria of Bank of America.

I'll start out with a question from Ernie. If you could just comment on your expectations for a couple of the other line items, G&A, property management and occupancy and guidance and maybe CapEx as well?

Sure, Juan. We provided very specific guidance items within our release. I can give you some direction -- directionally some thoughts on each of those. With regards to occupancy, we feel that we're in a pretty good spot and would expect for the year to be somewhere in the high 95s to about 96% for our same-store portfolio. It's somewhat similar to where we were last year to maybe down 10 basis points or so from where we were last year. For capital expenditures, the expectation would be that we'd be approximately $1,000 per home plus or minus, which has been consistent with where we've run for the last period of time. For property management and for G&A expenses, we ran a little bit favorable in the first quarter. So I would expect that we'll have a slight increase in future quarters around that, but not a big change from where you saw those numbers were, but do expect slightly higher numbers.

Okay, great. And then in terms of guidance, it seems like there's an acceleration to the second half or into this peak leasing. Is that kind of what you guys are assuming? And any comments on kind of the start of May. I know it's still early, but any color on how rents are trending past April?

Well, I want to be cautious about providing information past April. What I can tell you is renewal increases for May, June and July went out in the 7% range. Certainly, some markets a little bit higher, some a little bit lower. And typically, we do see on renewals that we have a degradation of about 150 or so basis points from our ask as we have that negotiation. As you know, renewals tend to be a lot less volatile and more stable, and renewals are 2/3 of our business. So even though we're only halfway through May, that should give you a sense for where we may be coming out. But I wouldn't want to get in too much more detail around May results. And, Juan, just remind me, what's the other part of the question? Because I do want to make sure I address that.

No, you hit on it. That's perfect.

Okay.

And our next question comes from Anthony Paolone of JP Morgan.

Just following up on the last one. Can you talk about how revenue management is coming along and how that is playing into your approach on occupancy and pushing rents?

Yes. Absolutely, Tony. We're excited with the progress we've made on revenue management. But at the same time, revenue management isn't new for us. It's something we've been very focused on and had some pretty good systems in place over the last many years. What we're really trying to do is automate more and have better access to better data through some proprietary partnerships that we have with third parties. And that's allowing our folks in the field to more efficiently and more quickly pull comparable information, work with our folks in our national office to make sure we're strategically where we want to be with price and importantly, getting out there with an aggressive price, but also understanding that as inventory does age, and it does from time to time, that we make the appropriate price adjustments. I think the other important thing about revenue management that we've talked about with folks in the past is work we're trying to do around our lease expiration schedule. And we actually had some modest success in that, even this early part in the year. Previously, going into this year, our lease expiration schedule is spread out pretty evenly across our 4 quarters, almost 25% each quarter. We actually now, going forward, have about a 21% exposure in the fourth quarter, which we're pleased to see that we're moving in that direction. This will be, Tony, probably a 2- to 3-year initiative at least to continue to try to roll our leases into their appropriate periods for expiration, but we're pleased with our initial movements on it. We set out targets for each of our markets as to what we want to try to get done. Some markets are more seasonal than others, and so we're taking that into consideration. And so we're hopeful to be able to continue to talk about modest improvements each time we meet with you on a quarterly basis.

Okay. And then if I look at your other income, was up a lot. Was that all sort of the chargebacks? Or was -- are you all doing the utility -- putting utilities in your names or changing over to that sort of a system? Just trying to understand kind of like what drove that top line so much?

Sure. The other income number is actually all internal and not having to do with chargebacks. You'll see in our resident recovery number that it does look like we have additional chargebacks going through, but we actually had similar amounts year-over-year. It was more a classification issue and how we were looking at the last year numbers. And so the increases you're seeing in other income, Tony, are coming from steps that we took in 2016 to roll out consistent fees and the application of those fees in our national standardized lease. It took all through 2016 into early 2017 for that to get into all of our leases as we turn leases. And so things like pet rent are up 300% year-over-year. Now it's off a small base. It's off a base of less than $0.5 million, but we had over $1.5 million of pet rent in the first quarter, for instance. That was a big driver of our increase. We're also more consistently in automating many of these fees to make sure they're being charged appropriately so they're not at the discretion of our local folks, but go through the process automatically. That also saw that about $0.5 million increase for us year-over-year. So the approximate $2 million increase you see in other income is being driven by our success of consistently charging pet rents and consistently charging our other fees to our residents as outlined in their leases.

And so do you think that number, that 22% up, is kind of where this year is going to look? Or can that even accelerate? Or how should we think about that? Because it seemed to have a pretty meaningful contribution. It seemed to be like, I don't know, 50 to 100 basis points of contribution to top line growth, which kind of offset any diminution in year-over-year occupancy.

Sure. And I think what you'll see, Tony, is that -- I wish I could say with what we have in place today, we can continue to grow at 22% each quarter. That's not likely. It'll probably be more in the high teens raise. But importantly, we're kind of at the early stages of what we're trying to get accomplished with other income. And so the initiatives that are in front of us, and that we rolled out last year, there will be an earn-in to those and those will slow down. But we expect those to be replaced over time by new initiatives as we look to improve the types of services we can provide to our residents around bundling services, around things like landscaping which they're responsible for, but we can certainly work with local landscapers to find the right partner for our residents. So as those roll in over maybe the second half of 2017, but certainly in the future years, we have the opportunity for significant outsized growth in other income that should outpace rental growth for quite a while. I can't promise you 20% type numbers forever, but I can tell you we have a long runway to continue have outsized growth in other income.

Okay. And then you mentioned outsourcing, I think, the call centers. And so can you give us a little color on how you thought through that process and any other functions in the organization? Because if we go back a few years when this all started, most of the platforms were outsourcing things. And then over the last few years, it seems like that shifted to bringing lots of functions in-house. So it's interesting to hear about you kind of go to an outsourcing on that function?

Sure, Tony. I'll provide a little bit color on that. You've pointed an important thing that what differentiated Invitation Homes from the get-go is everything was done locally by our in-house teams, whether it was our acquisitions, our property management, or how we're running our back office. As we continue to progress as an organization and mature as an organization, first and foremost, we want to provide the best level of service to our residents and making sure they're getting a consistent service, a unique service. And if there's the opportunity to do it more cost efficiently, that's just a win-win for everyone as well. With something like call center, we have outsourced it, but it's being managed by Invitation Homes' folks. And so we have Invitation Homes' management embedded with our folks at the outsource center to make sure it is a high-quality Invitation Homes' experience that they're having. So in effect, we did take folks that were working for Invitation Homes. We're now using a partner to help us with our call center. But what I would say is that, because it's being managed actively by us in their center from our corporate office, it's just a natural maturation of how we can provide better service to our residents and how we can provide a more cost-efficient solution to the organization.

And our next question today comes from Doug Harter of Crédit Suisse.

Ernie, you talked a little bit about kind of being on the path towards investment grade. Can you talk about kind of what other steps you think you need to ultimately get there and what the balance sheet needs to look like?

Yes, sure. I appreciate you asking, Doug. It's going to be a long path for us based on where we're at today. I think, first and foremost, when I'm thinking about the balance sheet, I want to make sure we're liquid, that we're safe, that we are in a good spot and can provide the opportunity for the company to do what it needs to do. Getting to investment grade would certainly open up another capital source for us, which is very exciting. But, of course, we're excited about the more recent capital source that opened up to us with Fannie Mae. That said, with investment grade, certainly, there's been a marker that's been placed for the industry based on what one of our peers accomplished, which was a fantastic accomplishment, and I'm very excited for them and very excited for the industry that they were able to do that. But we all do have different balance sheet strategies. And so our balance sheet strategy is a little bit different than that peer. But I would expect, Doug, that we need to have a net debt-to-EBITDA number that is lower than we are today at 9.9x, probably -- definitely, at many turns lower for us to be there. I think we're in a pretty good spot with our loan-to-value. We're getting to a better spot with our unencumbered pool. Our unencumbered pool is about 41% of our assets. I think, traditionally, you would see investment-grade companies at 7x or less. You would see investment-grade companies with unencumbered pools more in the 60% to 80% range. Those things aren't too far off from us. They're not a year away, but they're a few years away. And we're on a path to try to get there by using excess cash flow after our dividend payout, to continue to delever the company like we've done here in first 90 days or so that we've been a public company.

And then on the completing on the Fannie Mae deal. Is that something that you guys would expect would you be able to replicate into additional deals? How do you view that process going forward?

We'll have to see. This is certainly a pilot program for Fannie Mae, and we're very excited that they've done this for the industry. It's not just good for Invitation Homes; it's good for the Invitation more broadly. Of course, there's another agency out there that may have some interest at some point as well. And so we'll keep all our options open. I can't speak for them as to what their goals may be with regards to how large a pipeline they'll have and how much this financing they'll do on an annual basis. But we'll certainly keep it as a tool in our toolkit. We think it's a great product. We're very excited about it. I think it's very complimentary to everything else that we're trying to accomplish. And if there's something that may happen at some point, later in the future, we'll keep that as an option for us.

And our next question comes from Rich Hill of Morgan Stanley.

Ernie, it's Richard Hill. I had 2 questions. First of all, I was hoping you could give us maybe a little bit of a -- some views on how we should think about margin trajectory going forward. It looks like you had some nice progress this quarter. But how should we think about that maybe for the rest of the year?

Sure. And I think on a year-over-year basis, Richard, we have a continued opportunity to improve our margins through the cost efficiency-type initiatives that we're looking at on the expense side as well as continued outsize revenue growth, whether it's from rent or whether it's through our other income. And we feel very good about the opportunity to continue to push margins and improve on those. And even today, we're at margins that are consistent and competitive and actually, in some cases, better than multifamily. And I think we have a little bit more of a runway with regards to improvement ideas as we're all kind of still in our early stages of putting together initiatives that can help improve those further.

Got it. And so as you sort of think about getting margin into the high 60s, maybe just over the next several years, what do you think the biggest drivers of that are? Is it -- you obviously have some really nice expense controls this quarter. Is it going to continue to be there? Is it going to be the operating leverage? How should we think about that?

Well, you said the number of high 60s. I just want to make sure of that. But I can certainly see a path for us to get there, Richard, but I want to be careful about providing very specific guidance. We certainly see a path to that. That said, I think it's all the above that you said. We've been running this business now for about 5 years. And the first 2.5 to 3 years was very focused on acquiring homes, renovating them, getting residents in there and generating positive cash flows and we're very successful at that. The last couple of years, it's been very focused on how can we operate better. And now we're very focused on building the brand and saying what can we provide service-wise and an internal growth perspective to make our residents experience better when they're living with us. And what's exciting about those opportunities is not only does it provide a better living experience for our residents, they tend to be high-margin type items too. So it's kind of a double win-win from that perspective. With our platform in the markets that we're in, it's important to understand that margins are influenced by the markets where you're investing, because as you can certainly see in our disclosures and others, not all markets are created equal when it comes to operating margin. But also, importantly, not all markets are created equal when it comes to growth opportunities. And we're, first and foremost, focused on growth opportunities and overall return. That said, if those markets also have better margins, we like that as well. But the other -- those first parts are more important. But I think, it's a combination of being smarter in how we run our homes, run the business and continue to be able to push for leading renewal growth as well as fantastic other operating growth, will translate to a number that you said with regards to overall margins for our portfolio.

Got it. Got it. And then on the leverage side, it looks like you -- obviously, that's been a big focus of yours, and it looks like you made some really nice progress in the first quarter. Are you willing to give any extra guidance for the year and where you expect leverage to be by the end of the year? Or is that still too premature at this point?

Well I'd say, Richard, it's consistent with what we said earlier this year, that we will improve -- we would expect to improve and we believe we'll improve our net debt-to-EBITDA number by about a turn each year, a little bit more than a turn. So we're a quarter of the way through the year. So that certainly would hope would put us in a position that on annualizing fourth quarter numbers, that we be more in the low 9s, where today we're in the high 9s. And we're able to do that by having a lower dividend payout ratio and focusing that extra cash flow on deleveraging. In addition, HPA continues to grow, so we would hope that our LTV stats would also improve from a leverage perspective as well.

Got it. And I said 2 questions, but just one more, if that's okay. You had mentioned HPA at the beginning, and I very much see the same trends you're seeing. But any updates on move out to home purchase trends or is it sort of consistent with what you've seen in the past?

First quarter is always a seasonally slower quarter. So it was actually a lower number than we've seen in the last few quarters. For the last 5 quarters, that number for us has trended between 23% and 30%, and you see the 30% number in the summer months. This quarter, I think it was around 25%, 26%. And so, no, we're not seeing a widely -- a wild swing for that for a reason that people are moving out.

And ladies and gentlemen, our next question today comes from Jade Rahmani of KBW.

Can you comment on why rent growth and renewals is tracking above re-leases? Especially in the spring lease-up season I would expect the reverse to the case.

Jade, spring lease-up season is just starting here and we've always consistently been strong at pushing renewals, and that's our first and foremost focus. We do that 60 to 90 days out before a lease expires. And going back the last 15, 16 months if you include April, we're consistently in kind of that 5.2% up to 6% range for renewals. But new lease, we're continuing to see upward trajectory. Our April numbers are stronger than our March numbers, which were stronger than February, which were stronger than January. And so I think what we'll -- I don't want to predict what's going to happen in May, June, July, but you're absolutely right that from a seasonal perspective, you do -- you will sometimes see new lease rates get to where renewals are or slightly higher. So we'll just have to see how the rest of the spring and summer plays out for us.

Can you comment on April traffic trends and just overall level of demand, level of inquiries on home showings?

Yes. I don't have that exactly at our hands, Jade, we'll have to -- we can certainly follow up with you afterwards and talk about that specifically.

And our next question comes from John Pawlowski of Green Street Advisors.

Ernie, what are the new and renewal assumptions for full year '17 that underpin the midpoint of revenue?

No. John, we're not providing that specific level of guidance for folks with regards to what our specific renewal and new lease. What I can tell you is that renewal tends to run in the 5s for us. We've seen that for a long period time, so you can certainly suppose that that's what we'd be considering. But I'd say we're focused more on -- I can give you at a high-level perspective, we expect that occupancy will be about the same as it was in 2016, maybe down 10 to 15 basis points. We talked about where other income is going to be, certainly, in the higher teens range from a growth perspective. And you can then kind of do the math to see what that means for rental growth and where we need to go. And, of course, as you know, John, mostly or more than half of our growth from leases is already baked into our numbers from the leases we signed last year and what we've signed here in the first quarter and also through April.

Okay, great. A question for Bruce. When I'm looking through the markets and the occupancy year-over-year fluctuations seem wide relative to some other property types. So questions are, one, is this -- do you think this is status quo for this property type, 200 bps swings or 100 bps swings year-over-year in occupancy? And two, did the 60 bp year-over-year decline surprise you guys at all to the downside?

I think that we were very, very pleased with the 2016 number of 96.4%. That was exceptional for us. So the decline relative to that strong performance, and we feel comfortable at 95.8%, is still a very strong number. As Ernie mentioned earlier, we do have lease expiration management opportunities and we did have markets where we had more product available at the beginning of the year due to some of the disconnects on a few expiration management markets. So I do not think it's inherent, it's not a part and parcel of how we would expect the operations to be. And we do anticipate that as we make the progress in realigning our lease expirations, that we'll see less of a decline in some of the markets that you mentioned.

Okay. And last one from me. Dallas, I appreciate your comments on the game plan being net neutral in external growth in '17. Just curious, what would that hypothetical strategic portfolio look like for you guys to go and take -- to go acquire it in '17? What would it have to look like?

Well, I'm not going to speculate. I mean, obviously, you want to get it for free and it needs to have a lot of rent. But what I will say is you know that we're bullish on coastal markets that are high barrier to entry where we can continue to operate with higher gross economic rent. That's been our model. So if a said opportunity were to present itself in markets that you know and we've made really clear we're bullish on, expect us to continue to look strategically at those opportunities. We see things that come across our -- the desk all the time. We haven't seen anything to date that has caused us to make a move. But we're always looking for opportunities to create shareholder value.

And our next question comes from Neil Malkin of RBC Capital Markets.

Bruce, one for you, as kind of piggybacking off a question asked just recently. Can you just talk about the type of demand or maybe from a qualitative standpoint that you're seeing early into peak leasing? You guys have a different demographic than the traditional multifamily. I'm wondering if you're seeing any strength in one particular cohort, be it people transferring for work, new families moving to your areas, anything like that would be helpful.

Yes. We're finding that -- it's interesting that reading recently about the movement of millennials out of the home. The cohorts that moved in years ago are moving out now. And so we're seeing demand coming from those -- pent-up demand in that group moving to home-buying. We have not seen any great shift in the demand. It continues to be a part of what you mentioned, job relocation, but nothing unique, nothing that's edging out any other demand factor that I could say at this point.

Okay, great. And then I guess for Dallas. Are there any markets that you're currently in that you're seeing more opportunity? And are there potential markets that you guys have kind of identified maybe loosely like in Denver or something or another market within California you could get more exposure to that kind of meet your criteria?

It's a good question. We're really comfortable with the markets we've had, we've made that point pretty clear over the past year. Supply generally is really tight as Ernie mentioned earlier. You have to be local to really find unique opportunities to buy right now and we have done a good job of doing that historically and we'll continue to do that going forward. We think there's opportunity in the markets that we're in. You just got to be there every day and you've got to look at everything and you know you're to lose out on a lot of properties due to pricing. But as long as you stay consistent, we've been able to find a way to keep buying good product at really good marks. So you can do the hypotheticals on markets and where you wish you were or where you weren't. But if you look at the markets that we're in, the growth speaks for itself with the revenue side of things on the West Coast and also with some of the HPA and the way that Bruce and his team are operating on renewals. We're seeing really good growth in the West Coast. Continue to see us focus there. And we'll do parts of Florida, as Ernie mentioned earlier. I mean, I think the top 3 markets where we invested in Q1, it will be synonymous with how we think about the year going forward.

And our next question comes from Vincent Chao of Deutsche Bank.

A lot of my questions have been answered here, but just wondering if we can get a little bit more color on those Florida markets. The average occupancies there were some of the biggest declines that we saw and the leasing spreads were a little bit lower there as you know. I know some of it may be the expiration optimization things that are going on, but just curious if there's anything else you're seeing in any of the Florida market that is notable?

We're comfortable with Tampa and Orlando. I think that the 2 markets that you're referencing that would concern us as well would be Jacksonville, where, frankly, we underperformed. That is a market where our lease expiration management hurt us going into the year. That market is bouncing back. It's 95.4% as of today and we're starting to see our rate growth were up 50 bps in March from earlier in the year as well, so feeling comfortable about the bounce back there. South Florida, we saw our rate slip, but we still see ourselves competitive in what's happening in the market there. That is a market that's experienced a little tougher -- a bit of softness, actually. The condo market has softened somewhat. We've seen a spike in permits that are now deliveries in multifamily. And we've also had some additional competition in that market. But there are good things happening in the economy there. We're seeing that the market is beginning to stabilize and I feel that it will recover well.

That shadow inventory, I should just note, is pretty much getting filled up now. We've seen the concessions go out of the market for the most part. So it's -- we're feeling like we've turned the corner in South Florida.

And has that softness at all opened up the invest markets in those -- in South Florida or Jacksonville? Are you seeing better pricing there?

It depends on which submarkets you're talking about. In South Florida specifically, you got to be a little bit careful because you can run into some trouble with different HOA issues and there are some neighborhoods you want to be careful in and around. We like that market. We like certain parts of that market, without getting too specific. It's a market where we've actually invested. We bought 25 homes in the first quarter, it's -- of the 121 that we closed. So it's a market that we'll continue to invest in and we're seeing favorable cap rates and things that make sense.

And our next question comes from Ivy Zelman of Zelman & Associates.

A lot of attention, obviously, on the balance sheet and appreciating the strategy and ability to grow NOI, FFO. Can you talk a little bit more about some of the headwinds that the construction industry is seeing related to labor constraints? You did a great job of reducing expenses related to CapEx and repair and maintenance, and recognizing is that sustainable because we see a lot of pressure, upward pressure on inflation on labor. So maybe stop there and answer that and then we'll go to next question please.

Ivy, it's John. Good to hear from you. You're clearly right that skilled labor is under demand and we are seeing a very tight labor market. That being said, I think the 2 benefits that we have, one is, you can have career at Invitation Homes. You can -- our maintenance techs can work their way up to supervisors, et cetera, and it's just not spot work. So that's very attractive with health care benefits. So we still have -- we're an attractive employer, if you will, which allows us to stabilize much of that cost. The efficiencies also offset some of the labor pressure around there as we continue to drive better efficiencies in how we do everything from route optimization to how we harden our assets, or said differently, to improve the quality of our homes and how many times we have to visit those homes. You continue to get efficiencies that offset some of that labor cost offset. But it is an issue in the industry. It is something that we're watching closely. And to the extent that it's a challenge with our vendors, the other benefit we have is we know our vendors very well. We have one in Atlanta, for instance, D.D. Unlimited, who we've been with from the very beginning. They started with 5 employees, they've got 30 now, and they support us. You'll see many of those dedicated vendors. And that's, in large part, because of our local presence and our local market expertise.

That's very helpful, John. And just to sort of continue on the labor and I can sneak in another one. There's right now Assembly Bill 199 in California that is a headwind to the construction industry that's really focused on remodel or redevelopment. And I believe the single-family rental industry might be inclusive in that. Sort of wondering what that could mean, an impact to the prevailing wages for union labor, what that would mean for your business and how you guys are thinking about it as a risk?

Well, I may be mistaken, Ivy, but I think they've postponed that bill for next year. But you're right, the prevailing wage law is something that California, along with rent control and some other things that are out there that are headwinds for the industry, multifamily more so than us, but clearly, there are some headwinds there. What I would say is California continues to be one of our most desirable markets. It's a great market from a quality of life standpoint. It's a great market in terms of limited new supply. Even they continue to put more expenses into the system, but it just limits the new supply that comes on and that is really the issue in California. It's a new supply issue, not a wage issue. So not a very concise answer, but I don't -- we are watching it. I don't think it's an immediate risk to us, just given the way we operate our business. But there, along with other legislative efforts, we do think that it will continue to curtail the new supply that comes in the market, continuing to make that an attractive investment market for us.

Okay. We could talk about that more off-line. I guess just shifting lastly to thinking about the strength that you're seeing in the West Coast markets and renewal rates is, obviously, impressive. And one of the questions, I guess, becomes affordability, especially as you're seeing the mortgage market becoming more open to consumers and there's more of a perception as consumers recognize they can afford to lock in at a fixed rate that's very attractive. Where are you guys in the ability, if we look at rent versus buy, for a like asset? Is there a level where you're capped out to the very tenant you are now serving that might say, "You know what, I've had enough, I'm not going to pay another 5%, 6%, 7% increase in my rent and I'm going to see, obviously, an opportunity to go buy." So how should we think about where there is a runway for further rent inflation? And where do you get capped where you still really start to push the tenant to have to reevaluate their fixed cost versus variable cost risk?

The only problem I have with the question, Ivy, is it assumes that people don't make a choice about leasing lifestyle. What we're finding today is there's secular change where millennials, in particular, and others -- and you follow the industry better than anyone, so you can correct me. But the one thing I would say is we're continuing to see, especially in high-barrier markets like California where you might have 50% of residents in California are renters, many by choice, not necessity. And they are -- they'll walk into and decide where they want to live, when they want to buy and I think that continues to be a strong part of our business -- our value proposition. As for where those breakpoints are, I think it's hard for us to sit here and say that there's one breakpoint over another one. We continue to see a lot of opportunity to provide high-quality service in great locations with a fantastic product.

And our next question comes from Buck Horne of Raymond James.

I just want to get a little bit more color on the resident recoveries line and just how sustainable and kind of what's driving the resident recoveries. I think you mentioned it's separate from the gains in other income. So just help us understand that and if there's any quarterly seasonality to that line item.

Sure, Buck. This is Ernie. So year-over-year, most of that number is utility reimbursements. We do have some utilities we keep in our name that's required in local jurisdictions and that's about $2.4 million of that number, and that's a consistent number year-over-year. In the first quarter of this year, we started tracking very specifically in our general ledger other recoveries we're getting for damages, cleaning, things like that, things that would pop up during the security deposit. That was about $1 million in the first quarter of 2017. Last year, Buck, unfortunately, we weren't tracking that consistently throughout. And so we weren't comfortable in providing a resident recovery number for that. We were getting some of those things last year, and those are in other income like they are in this year, but we do want to break out the reimbursement numbers and as we think about a core margin versus a regular style margin, so we can be more comparable to our peers. I would expect that you would continue to see improvement in our numbers that we're reporting for the recovery portion for cleaning and damages, other things that our residents have done throughout the rest of this year and you'll see a stabilized comparison between '17 and '18 going forward.

Okay. That's helpful. And on repairs and maintenance turns/CapEx costs for the remainder of the year, do you think they'll remain fairly consistent with the recent trends? Or do you see any opportunities to lower or do you think there are, likewise, any needs to add more dollars to that line?

Sure. I think, Buck, importantly with the first quarter is the seasonally low number. So I certainly wouldn't want folks to take the first quarter number and to annualize that. And that's one of the reasons why we provide disclosure over the trailing 5 quarters for that number. Our plan and our expectations for the year was that our costs to maintain a home, from an OpEx and CapEx perspective, would be about $2,500. And we're right on that path with regards to our first quarter results. We also have an expectation, as I said earlier, that the CapEx portion of that would be about $1,000. We do still see some noise from quarter-to-quarter in terms of the split between OpEx and CapEx, Buck, so I wouldn't want to take the first quarter numbers and assume we'll have that similar split for the rest of the year. Instead, I'd ask folks to kind of focus on the numbers I just provided for the expectations, understanding there might be a little volatility from quarter-to-quarter, but those are our expectations for the entire year.

And, ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to John Bartling for any closing remarks.

Thank you, Rocco. Again, thank you everybody for joining us today. We appreciate your interest in Invitation Homes. We look forward to seeing you at the upcoming NAREIT conference and speaking again next quarter on the success of the business. Operator, this concludes our call.

And thank you, sir. Today's conference has now concluded, and we thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.