Invitation Homes Inc (INVH) 2018 Q2 法說會逐字稿

Greetings, and welcome to the Invitation Homes Second Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. At this time, I'd like to turn the conference over to Greg Van Winkle, Senior Director of Investor Relations. Please go ahead.

Thank you. Good morning, and thank you for joining us for our second quarter 2018 earnings conference call. On today's call from Invitation Homes are Fred Tuomi, Chief Executive Officer; Ernie Freedman, Chief Financial Officer; Charles Young, Chief Operating Officer; and Dallas Tanner, Chief Investment Officer.

I'd like to point everyone to our second quarter 2018 earnings press release and supplemental information, which we may reference on today's call. This document can be found on the Investor Relations section of our website at www.invh.com. I'd also like to inform you that certain statements made during this call may include forward-looking statements relating to the future performance of our business, financial results, liquidity and capital resources and other 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 risks and uncertainties in our 2017 Annual Report on Form 10-K and other filings we make with the SEC from time to time. Invitation Homes does not update forward-looking statements and expressly disclaims any obligation to do so.

During this call, we may also discuss certain non-GAAP financial measures. You can find additional information regarding these non-GAAP measures, including reconciliations of these measures with the most comparable GAAP measures, in our earnings release and supplemental information, which are available on the Investor Relations section of our website.

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

Thank you, Greg. Good morning, everyone, and welcome to our second quarter 2018 earnings conference call.

Supply and demand fundamentals remained strong in our high-growth markets, which enabled us to achieve 4.5% year-over-year same-store core revenue growth in the second quarter, a full 40 basis points better than the first quarter's growth rate of 4.1%.

Same-store average occupancy for the quarter of 96% was the highest achieved over the last 6 quarters as turnover once again declined relative to the prior year. At the same time, blended rent growth remained strong at 4.7%. This robust top line growth helped drive year-over-year same-store NOI growth of 5% and core FFO per share growth of 19.3%.

Looking ahead, new housing supply remains muted, and key indicators point to continued strong demand. In our select high-growth markets, household formations are forecast to grow at a rate 90% greater than the U.S. average for 2018. Home prices in our markets are up almost 7% year-over-year. Higher construction costs are constraining new supply, and move-outs to home ownership continue to track lower than last year. All of these key factors point to continued strength in revenue growth for the second half of 2018, and demographics in the U.S. should only become more beneficial in the years ahead as the millennial generation continues to age.

Based on year-to-date results and our expectations for the remainder of the year, we are maintaining the midpoint of full year's 2018 same-store core revenue growth guidance while narrowing the range to 4.3% to 4.7%. We're also pleased to report that the majority of integration milestones are now complete, allowing us to estimate merger synergies with greater certainty. We now expect total run rate cost synergies to be between $50 million and $55 million, which is $5 million greater than our initial expectation. While we are excited about our revenue growth outlook and these additional long-term cost savings, property level expenses are temporarily running higher than expected. Charles will address this in greater detail. However, I'll summarize it by saying that we are overly optimistic in how quickly we would realize service technician productivity gains from our newly integrated repair and maintenance or R&M, management technology. And it will take longer than we initially thought to fully optimize this area.

Accordingly, we are updating our full year 2018 same-store expense growth guidance to 4.6% to 5.4%. Let me be clear that we do not view these projected 2018 expense numbers as normalized nor as representative of any fundamental change in the business. We would not be changing our previous 2018 same-store expense or NOI guidance if not for these temporary challenges.

Given our updated revenue and expense expectations, we now forecast full year 2018 same-store NOI growth of between 3.8% and 4.8%. Importantly, we are maintaining the midpoint of our 2018 core FFO guidance and narrowing the range to $1.15 to $1.19 per share, which represents 13% growth versus last year at this midpoint.

As we enter the second half of the year, we continue to focus on widening our competitive advantages in the single-family rental marketplace. The first is locations. We believe we are already in the most desirable high-growth, single-family rental markets and have carefully selected our homes to be closed-in, high barrier submarkets with proximity to employment centers, good schools and transportation corridors. With our substantially increased market density post merger, our investment management team is now leveraging even more robust data and analytics to further refine our locations through ongoing capital recycling.

In the first half of 2018, we reallocated approximately $130 million of capital from lower-rated homes and submarkets into more attractive homes and submarkets through acquisitions and dispositions.

Second competitive advantage we are focused on is scale. With almost 5,000 homes per market on average, we expect to provide even higher-quality service to a greater number of homes with the optimal number of personnel. The next phase of our integration will be focused on bringing all of that to fruition as we roll out our new unified field structure and unique operating platform to leverage our increased scale and density.

The third advantage is our people and service, which we also expect to benefit from the next phase of this integration. As mentioned, we have completed the process of moving all of our field technicians and vendors on to one R&M management technology platform.

In the second half of the year, we will be implementing even more advanced tools and expanding the ProCare, best practices and that are improving both the resident experience and the efficiency with which we provide them. Looking further ahead, we also see an opportunity to expand into new products and services that residents will desire and value such as our current Smart Home technology offering.

We remain excited about the growth prospects for this business in both the near term and the long term and are focused on continuing to leverage our competitive advantages for the benefit of our residents, associates and shareholders.

With that, Charles Young, our Chief Operating Officer, will now provide more detail on our operating results in the second quarter as well as current operating trends.

Thank you, Fred. I'd like to start by thanking our associates for their hard work and dedication. We continue to enjoy strong market fundamentals, but growth doesn't come without execution, and that all starts with resident service.

Our teams are providing residents with a high-quality living experience as evidenced by further improvement in turnover rate of 34.4% on a trailing 12-month basis. Resident satisfaction scores also remain high, averaging 4.3 out of 5 over 10,000 survey responses we have received year-to-date from residents regarding quality of service. Our dedicated field teams are committed to earning the loyalty of our residents every day.

I'll now spend some time walking you through the details of our second quarter 2018 operating performance.

Same-store core revenues in the second quarter grew 4.5% year-over-year, in line with our expectation, and up from 4.1% in the first quarter. The year-over-year increase was driven primarily by average rental rate growth of 4% and a 20 basis point increase in average occupancy to 96% for the quarter. These strong top line results drove same-store NOI growth of 5% despite higher-than-expected expense growth in 3.6%. Noncontrollable expenses were in line with expectations. However, R&M expenses were higher-than-expected for the quarter due primarily to overages in June, mostly concentrated in 2 markets.

I'd like to take a few moments to discuss the primary drivers of elevated R&M expense that were identified and the steps we are taking to improve our results.

There are 2 key issues we are facing: first, the market-specific challenges stemming from disruption to our local teams associated with integration; and second, our temporary challenges with our -- we are experiencing as we adapt to a newly implemented R&M management technology platform.

First, I'll touch on the market-specific issues. The vast majority of our markets have seen very limited associate challenges through the integration process. However, Tampa and South Florida have experienced a higher level of personnel issues that have been detrimental to performance. These 2 markets alone accounted for 44% of the overall R&M miss versus our expectations in the second quarter. We have responded by moving swiftly to supplement and rebuild teams in these markets. We have also committed additional national resources to these 2 local offices to help restore performance to expected levels.

Second, I'll turn to the areas of opportunity with our new R&M management technology platform. The implementation of this technology was completed ahead of schedule during the second quarter. And over time, we are confident it will further increase service technician productivity. However, in retrospect, we were too optimistic in our initial expectations in assuming we would realize these -- those productivity gains immediately. In fact, productivity temporarily declined out of the gate. This issue was amplified by the fact that we completed the rollout at a time when work order volume was seasonally the highest. We have already taken specific actions to restore and improve service technician productivity. For example, we have updated our service call center dispatch scripts and logic that determine who is best equipped and positioned to address work orders in realtime, which will improve the percentage of work orders completed in-house. In addition, we are nearing the rollout of a new version of our route optimization algorithm, which will improve the metric of daily average work orders completed per technician.

As systems are fine-tuned and fully adopted, we expect to achieve even higher efficiency than in the past due to our enhanced scale, density, experience and technology. However, we have reset our expectations to assume that it will take longer -- take more time to get there. Our revised guidance assumes that the challenges we have been experiencing will likely persist to the second half of the year. But we are working hard to do better and faster.

Next, I'll cover second quarter 2018 leasing trends. Same-store average occupancy was 96% in the second quarter, best in the last 6 quarters. Same-store blended rent growth, which we define as lease over lease rent growth net of any concession incentives, averaged 4.7% in the second quarter, driven by a seasonal acceleration and new lease rent growth of 4.8% and continued steady strength in renewal rent growth of 4.7%.

Furthermore, we saw acceleration into quarter end, with renewals increasing to 4.8% in June from 4.6% in May and new leases increasing to 5.5% in June from 4.5% in May. Western U.S. markets continue to lead the way for growth with Seattle, Phoenix, Northern and Southern California remaining our highest.

Even with strong rent growth, turnover trends continue to be favorable, declining to 9.4% in the second quarter 2018 from 10% in the second quarter 2017. We believe this is a testament to the value that residents continue to find in our first-class service and high-quality homes and highly desirable locations.

And the strong leasing environment has continued into the third quarter. The year-over-year occupancy gain accelerated to 40 basis points in July with average occupancy coming in at 95.4% for the month versus 95% in July 2017. Blended net effective rent growth was 4.7% in July with renewals steady at 4.8%, and new leases of 4.6% meeting our expectation as we near the end of peak leasing season.

I will close by stressing my excitement for all the opportunities in front of us operationally in the second half of the year. We remain focused every day on delivering the leasing lifestyle our residents desire while optimizing rent growth and occupancy to capture strong market fundamentals. We're working hard to restore and ultimately further improve R&M efficiency. And as integration nears the final phase, we'll roll out more enhancements that will make our teams even better equipped to provide an outstanding level of service for our residents.

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

Thank you, Charles. Today, I will cover the following topics: portfolio activity for the second quarter, balance sheet and capital markets activity, financial results for the second quarter, integration update and 2018 guidance update. I'll start with portfolio activity.

As we continue to recycle capital to further enhance the quality of our portfolio, total home count decreased by 85 to 82,424 homes. We bought 263 homes for an estimated $80 million and sold 348 homes for $77 million, keeping us on track for our full year plan of acquisitions and dispositions each in the range of $300 million to $500 million.

The average cap rate on homes we acquired was 5.5%. That investment was focused in the Western U.S. and to a lesser extent, the Southeast, funded by net dispositions primarily in Chicago, South Florida and Houston.

I'll now turn to an update of our balance sheet and capital markets activity.

Debt markets continue to provide attractive refinancing opportunities in the second quarter. We took advantage by completing 2 7-year securitizations: one in May, with a principal amount of $1.1 billion at LIBOR plus 1 38; and one in June, with principal amount of $1.3 billion at LIBOR plus 1 42. Net proceeds and cash on hand were used to prepay $2.3 billion of floating rate securitizations maturing in 2020 and $200 million of floating rate securitization debt maturing in 2021.

Since the beginning of the year, our weighted average maturity has increased to 5.4 years from 4.1 years, and our unencumbered pool of assets has grown by over 10% to approximately 38,600 homes. We also entered into additional forward interest rate swaps to extend the duration of our hedges to match the extended duration of our maturities. We have added scheduled 2D to our supplemental to provide additional detail related to expected changes in our weighted average cost of debt over time based on our current debt and interest rate swaps in place. And finally, our liquidity at quarter end was almost $1.2 billion through a combination of unrestricted cash and undrawn capacity on our credit facility.

I'll now touch briefly on our second quarter 2018 financial results.

Core FFO and AFFO per share for the second quarter increased 19.3% and 14.5% year-over-year, respectively, to $0.29 and $0.24. The primary drivers of the increases were growth in NOI per share in addition to lower adjusted G&A and lower cash interest expense per share. Supplemental Schedule 1 provides a reconciliation from GAAP net loss to our reported FFO, core FFO and AFFO.

I'll next provide an update on our merger integration. We are ahead of schedule on most major elements of the integration. Office space in 15 of our 17 local markets has now been consolidated. Implementation of our new R&M technology is complete, and our new accounting platform was launched on August 1. As a result, the pace of synergy achievement is also running ahead of schedule by approximately $10 million versus where we had expected to be at this point. As of today, we have earned an approximately $34 million of synergies on an annualized run rate basis, almost entirely related to G&A and property management. Implementation of our unified operating platform and field configuration that combines the best of both legacy organizations is our final remaining major milestone. Work on the systems and technology to support this unified platform continues to progress and rollout to the field is expected to begin in the fourth quarter of 2018.

The last thing I will cover is updated 2018 guidance. For the same-store portfolio, we are narrowing our core revenue growth guidance to 4.3% to 4.7%, unchanged at the midpoint as fundamentals in our markets continue to be favorable. Our same-store NOI guidance is now 3.8% to 4.8% due to an increase in our same-store core expense guidance to 4.6% to 5.4%.

I'll give some additional detail to help bridge the increase in our same-store expense guidance.

Our initial 2% to 3% same-store operating expense guidance for 2018 assumed R&M cost would be lower in 2018 than they were in 2017 due to anticipated productivity gains. As Charles described, though, productivity instead declined out of the gate and is expected to take more time to optimize. For this reason alone, we now expect property level expenses, excluding taxes, to be up 3.5% year-over-year versus down 1% in our initial guidance. Real estate taxes are still expected to increase about 6.5% this year, consistent with our initial guidance. 3.5% growth in non-tax expenses and 6.5% growth in real estate taxes leads to 5% overall expense growth, which is the midpoint of our revised guidance range. And remember, we have a material increase in our property taxes in 2018 from one-time Prop 13-related reassessments in California due to our merger. Without that increase, our new 5% same-store expense growth expectation would instead be 4.25%.

As Fred mentioned, we have also raised our expectation for total annual run rate synergies to between $50 million and $55 million. This is $5 million higher than our initial projection, primarily due to incremental cost savings we have been able to drive in the areas of vendor and subscription services within G&A.

Taking into account our revised expectations for same-store results and synergy obtainment, we are maintaining the midpoint of our full year 2018 core FFO guidance and narrowing its range to $1.15 to $1.19 per share. Additional favorable changes in our forecast includes lower expected interest expense and G&A.

In summary, our full year core FFO and AFFO guidance at their midpoints imply a growth rate of 13% and 10%, respectively, from prior year.

I'll close by reiterating that our teams are energized and excited for the second half of 2018. Big picture, fundamentals remain very strong, and we are making great progress on the priorities we laid out at the beginning of the year.

With that, operator, would you please open up the line for questions?

(Operator Instructions) And today's first question will come from Juan Sanabria with Bank of America.

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

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

And the hurricanes. Is the -- it makes the comps easier in the fourth quarter? Or how should we think about that last year?

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

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

It really wasn't about wage pressure. As a reminder, as we said on the opening remarks, 15 of our 17 offices have already combined, and we're really operating great across the majority of our markets. The Florida issues were truly isolated, specifically to 2 markets in Tampa and South Florida. And it was around associate turnover, not really about wage, and it was more around the integration. So we had a few unexpected early departures in a couple of key roles that created a distraction for us. And at the time that it happened, at the peak work order volume, that was part of the impact. The good news is though, we backfilled quickly. We're supporting the teams with national resources. And we expect to get back on track for the second half of the year.

Next question comes from Douglas Harter with Credit Suisse.

Just on correcting those 2 markets. Can you just remind us kind of what is in your guidance for the back half as far as pace of kind of addressing those markets? And then just kind of help us think about the potential magnitude of -- as you get those addressed, what 2019 could look like with that improvement?

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

And then, Ernie, the refinancings that you did in the second quarter. And I guess, do you have any other debt that -- where you could see comparable savings kind of given where the financing markets are today?

Yes, we do have -- we're able to get ahead of some of our refinancing activity for maturities that were coming up in 2019, and the capital markets team here did a fantastic job executing for us. We do have 2020 and 2021 maturities. They're a couple of years out, but those could be good opportunities for us to consider some refinancing activity as we get into the latter half of this year or the beginning of next year where we could see some spread compression there as well. So we'll be opportunistic like we've been. We're pleased with where the balance sheet is at. We're pleased with the fact that we've been able to extend our weighted average maturity. But we're very committed to getting to where we want to, that investment-grade balance sheet. And so the answer is, we could do some stuff here in the second half of the year. But at this point, we're pretty pleased with what we've accomplished so far, Doug.

Next question comes from Jason Green with Evercore.

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

Yes, 2 things there with regards of our guidance. First is what you did say that, in the third quarter, what happened to the most spend between the 2 quarters. And certainly, that half has happened in the past, so we'd expect that again. The other thing is -- to remember, we have a more difficult comp in the fourth quarter. You'll recall, we had some things lead over into the first quarter this year with regards to R&M from some of those markets that were impacted by the hurricanes. Most of the R&M activity that was occurring in the fourth quarter in those markets was related to hurricane cleanup and was not falling to R&M. So we actually had a lighter R&M number in the fourth quarter 2017 because of that, creating a slightly more difficult comp for us in 2018. Hence, you're exactly right. If you look at our guidance, year-to-date, we're at 4.3%, but our guidance for the full year is 4.6% to 5.4%. So that's why you see that trend as we go into the second half of the year.

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

Yes. It's not as much about -- this is Charles, by the way. It's not as much around pushback from tenants. Pricing power remains strong. Supply and demand fundamentals are favorable. And our demographics long-term are going to be a tailwind to us. As we look at rent growth and it being slightly lower year-over-year, it's less about fundamentals and more really around the seasoning of our portfolio. As we did the bulk of our buying early on, we were focused on getting the homes leased. In the last couple of years, Dallas and team have done a wonderful job of optimizing, and we're really seeing more of a true-up to market, which contributed to, early on, higher rents. But where we are now, we're kind of stabilizing in, and we've been very consistent at 4.8 to 5, and we think that's reflective of kind of where we are in market fundamentals for each of our markets across the country.

Next question comes from Drew Babin with Baird.

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

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

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

Yes. Drew, no market is unencumbered completely by debt, but some markets certainly have a lower proportion of encumbered debt than others. That generally isn't an issue for us when we go to sell assets. With regards to all of our securitizations, almost all of them only have a 1-year lockout where we would have to pay yield maintenance on the floating rate securitizations. There's a couple of that 2-year, but they're almost at their point times -- the point in time where they've expired. So other than our most recent refinancing activity, that won't be a hindrance to us, and we have substitution rights in all those deals too, so we also have that flexibility there. Similarly, we do have flexibility with our Fannie Mae transactions well for substitution rights. So if we did want to sell a market, that wouldn't be a hindrance for us with regards to how our debt is, so that's for us to have the ability to do that.

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

Drew, this is Dallas. Well, generally, we're seeing a ton of demand in marketplace when we -- even on the limited amount of dispositions we've done this year, taking something out. You'll find that there are a lot of new entrants into this space today that are looking to try to acquire scale. It's pretty difficult, given today's environment. So the simple answer would be that we see that mark-to-market pretty tight if someone were to come to market with a decent opportunity. It's just also dependent upon asset quality and the types of rents you're getting out of those homes today. So for us, if you look at some of our disposition activity this year, we've certainly been more active selling assets in parts of markets where we're not seeing as much growth. And I would expect that to stay consistent with our strategy going forward.

The next question comes from Haendel St. Juste with Mizuho.

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

Yes. So NAREIT, we were -- we had visibility into April and May at the time. June is really where we had the surprise. We had finished the integration into the R&M maintenance technology platform, and that's where we quickly saw that there was a -- we were off on our in-house tech utilization. So we quickly made the pivot as we talked about. And part of the challenge is that time of year, it's high-volume, and it's had an impact. So that's why we didn't see it then. And ultimately, we're making the pivot, and we think we're going to work our way through this. At the end of the year, we'll be in good shape going into '19.

Okay. And then just a follow-up on the dispositions. I didn't catch a cap rate. I think you mentioned 5.5 on what you bought. So maybe can you tell me the cap rate there in any markets -- is there any markets?

So yes, I can answer that for you, Haendel. In terms of the cap rate, it was 0.7%. Now all of our sales in the second quarter were through the end-user retail channel where the home, typically, we make it for 1-month to 2 months, maybe a little longer sometimes. And that's why you typically see a much lower cap rate when we sell those homes. If we were to start selling some more homes to the bulk channel, you'll see a cap rate that be at certainly a higher number, more in line with where we've buying those. In the second quarter, 0.7%. And with the number of homes that we sold, we did not exit any markets. But Dallas can talk about where we concentrate some of those sales.

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

Quick one on Houston since you mentioned it, that was one of the weaker revenue growth markets. Anything in particular you want to note that's going on there, lingering impacts of -- well, I'll let you explain. But can you give us a sense as to what's going on in Houston?

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

Next question comes from John Pawlowski with Green Street Advisors.

A follow-on to Haendel's first question there. So at NAREIT, with 3 weeks to go in the quarter, R&M and personnel-related issues pop up. So if R&M costs were up 15% for the quarter, it suggests they were up massively in the last 3 weeks of the quarter. So I guess how do you get comfortable that -- with that little visibility, with 3 weeks left of the quarter, how do you get comfortable with personnel-related issues, or call center cue scripts aren't going to pop up in September or October?

Yes. I mean, look, we have to react to the information that's in front of us. And we reacted quickly. On the R&M side specifically, the call scripts are just part of what we're reacting to. And part of the issue is it's the volume of work that's coming through that time of year and our ability to make those pivots. So July also is high-volume. It's not -- it's actually the highest volume. August is high, then we start to step down. So part of the challenges, when you make the adjustment, it takes a minute to get through the system. And we have further enhancements that we're going to do. Ultimately, we talked about the in-house tech utilization. The call scripts is a big part of that. As we go through the remaining field office consolidations, we're going to unlock more of that strength. The maintenance tech productivity is another one that we're going to roll in here shortly with the route optimization algorithms. So that will get the number of work orders that our in-house tech can do each day will help. And then ProCare is part of what's not in the system right now. Huge part, very beneficial, but one of the main benefits is the bundling of work orders that we do in that post 45-day movement. That's not only convenient for the resident, but it is sufficient for our techs and our ability. So there's more to be worked in ultimately as you put these systems together. We made the initial step, but we think we're going to see more benefits long term.

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

Yes, yes. Absolutely, as mentioned, 15 and 17 offices are already consolidated. The go forward leader's in place. We're working well with teams across all those. Like we said, we were isolated to a couple of markets that had impact. And since these teams are working well together and the fact that we've already implemented the maintenance technology platform, the rollout on the second half of the year should be much smoother. We're going to be very thoughtful about how we do it in terms of implementing measured rollout in looks slower seasonality season of Q4 and Q1, both the multiple rounds of testing. And we have much of our training materials in place. So we really feel confident that -- and frankly, the teams are ready. They're excited, and they're ready to get to the new platform. So we think it'll be a much cleaner and smoother rollout of the final integration.

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

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

Next question comes from Rich Hill with Morgan Stanley.

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

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

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

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

Next question comes from Jade Rahmani with KBW.

Can you share your updated thoughts on Costa Hawkins? Where you think that's going to go. And although it's hard to predict, if it was repealed, how you would react?

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

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

Yes, we looked at that, and it's -- again, it's just a theoretical assessment of the likelihood of certain areas. There's been some research, some article on that. So we think at the most, it's going to be around -- 15-ish percent of our portfolio might be impacted. And again, in California, of the California homes, which is 12,000 homes total in California. And then there's no way of really estimating at this point the revenue impact. Near term, there'd really be none. I don't think any areas would be rolling rents backwards mandating that. So it'll be a gradual kind of shift. And then the other nice thing about single-family rental is that if we had to, long-term prospects are such that there's a value diminution, I believe the -- one of the consequences of rent control is that existing home prices will be -- could go up because there's going to be another shortage of housing. There will be a lack of building of housing generally. So we could -- single-family, we have the option of selling homes to homeowners on a one-off basis if we choose to at very good pricing.

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

Jade, similar to the first quarter, we've seen a year-over-year decline and the reason for move out around home purchases. Last year, in the second quarter, it's about 27% of our move outs, this year, it was 25.7%. So we've seen that trend now for 2 quarters in a row. And I think it's a bit -- a little bit of all of the above. But I think, most importantly, we have -- we also see our turnover going down because residents are satisfied with the services they're receiving from us. They like the homes that they're in. They're well-located. They're convenient. And they're seeing that in today's economic environment, it's even a better opportunity for them and maybe a better answer for them at this day in our homes.

Next question comes from Ryan Gilbert with BTIG.

Just, I guess, following up on the last question. It seems like demand trends have stayed strong in July. I think we are seeing an increase in resell inventory in some markets, particularly in higher price point or higher home price appreciation markets. I'm wondering if that -- if you're seeing that impacting your ability to raise either new or re-lease rent or if it's impacted your traffic or rental interest at all.

Ryan, this is Dallas Tanner. I'll take this call -- I'll take that question. In terms of demand, no, we haven't seen any real change in the fundamentals. As Charles mentioned earlier, we've been able to go out to market at rates that are pretty aggressive, especially parts of the country where we own real estate. If you look at some of our numbers, for example, on the West Coast, in quarter 2, we had blended average rate growth of 6.5%. Most of those markets are less than 2 months of supply on the MOS. And then as you start to look at some of the macro data in terms of price points and affordabilities with housing in general, builders are developing much less inventory at 1,800 square feet or less in their current pipelines. It's down somewhere from 33% in the late '90s to like 22% today. That is all favorable fundamentals for us in terms of how we think about the supply and demand factors benefiting our business. So we haven't seen some of that necessarily in the markets that we're in because as a proxy for that growth, we're seeing it in the rents that we're achieving. And to Charles' earlier point, turnovers remain consistent at around 70% -- 30%, excuse me.

Yes. This is [Frederick]. Just to add to that. I think you may be referring to Seattle, as an example. Very tight inventory. Very high home price appreciation over the last several years. I think this got to a price point where people just couldn't pursue home ownership at insane numbers. But if you look at our portfolio in Seattle, the move-outs for home purchasing actually was one of the markets that fell year-over-year. So again, it's not impacting our level of the market, not impacting our demographic, and people really enjoy the leasing lifestyle.

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

Yes, Ryan, this is Charles. We expect to get back to our normal levels of productivity over the second half of the year here. We're confident because both companies are operated at that level before. But what also makes us excited is the combined power of our scale, density, the technology that we're implementing and our experience. It's a real advantage. What happens in the peak season here, as we have our highest work order volume, is the productivity of the techs is not always at its highest. And we're at a place where we're still, as we put the technology and unlock all that and get the proximity and density advantages, that's where we'll have shorter distance between our homes for our techs to be able to do more work orders. So as I talked about before, as we think about the route optimization software, as we get to a unified operating platform the second half of the year, that's where we'll start to see the real advantages, to get back to our prior levels and, possibly, overachieve as we go into '19.

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

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

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

Next question comes from Hardik Goel with Zelman & Associates.

I just had a couple. One was could you share what the year-over-year increase in your

[primaries] and expenses was by month, so we can get a sense for the cadence, how much it went up in June.

Yes, we're not going to provide monthly financial results. There's noise between months. Accruals get caught up, don't get caught up. So we're not prepared nor will we provide that.

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

Good question, Hardik. Thank you. This is Dallas. As I mentioned earlier, certainly not in our West Coast markets, where we see really just an incredible amount of demand for our product and very limited new supply. And the important part to remember is that you want to be higher barrier-to-entry. So it's difficult for, call it, new supply to enter into those -- some markets and parts of the market where we invest. It's in line with our price point around average rents being north of $1,700. Those are typically properties that are located much higher barrier-to-entry. So in our markets, we don't see a ton of that. I'd be more concerned if we had massive exposure in the Midwest. In some of those areas, parts of the country where you have lower barrier to entries for, call it, new entrants, new development. But we don't have much of that in our portfolio. Little to none. So we're pretty bullish in terms of the areas we're in and being a bit insulated from some of those supply constraints. The only other thing I'll add is, if you look at the macros in the U.S., we're only developing about 1.3 million, 1.35 million new units per year right now. And we need somewhere around 1.5 million to 1.6 million. So the next 12 to 18 months feel pretty safe as we look forward to the supply-demand fundamentals generally.

Our next question comes from Wes Golladay with RBC Capital Markets.

Yes. It's Wes Golladay. Can we go back to the repair and maintenance issues? I was just curious if it had a impact on your same-store revenue guide. Did you have longer days to turn a unit? And maybe you could provide an update on how long it does take to turn a unit versus your expectations.

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

And one metric we track is the days to [re-res], the downtime between occupancies and vacancy. And quarter-over-quarter, a year ago, we're exactly the same number.

Okay. And then when you do initiatives in the back half, I think you said you're going to do it more methodical. Maybe that was the word you used. Are you going to do it by maybe one market at a time, or is it just going to be just a more methodical process in general?

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

At this time, this will conclude today's question-and-answer session. I'd like to turn the conference back over to management for any closing remarks.

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

The conference has now concluded. We want to thank you for attending today's presentation. You may now disconnect.