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Greetings, and welcome to the Invitation Homes First Quarter 2018 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, Senior Director of Investor Relations. Please go ahead.
Thank you. Good morning, and thank you for joining us for our first 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 first 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 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 described some of these risks and uncertainties in our 2016 annual report on Form 10-K and other filings we make with the SEC from the time to time.
Invitation Homes does not update forward-looking statements and expressly disclaims any obligation to do so. During this call, we may also discuss certain non-GAAP financial measures. You can find additional information regarding these non-GAAP measures, including reconciliations of these new measures with the most comparable GAAP measures, in our earnings release and supplemental information, which are available on the Investor Relations section of our website.
I'll now turn the call over to our President and Chief Executive Officer, Fred Tuomi.
Thank you, Greg, and good morning, everyone. We are eager to update you on our latest results, but first, I'd like to share a few high-level observations that I think are important to understand about Invitation Homes and our ability to create long-term value for our shareholders.
First, we continue to believe the fundamentals of our business remained extremely strong. The dynamics of supply and demand remain very favorable and seem to be improving for the single-family rental business, especially across our unique, high-growth locations.
In our markets, 2018 household formation is forecasted to grow at a rate 90% rate greater than the U.S. average. And single-family home completions are forecast to be almost 30% below the historical average since 1985. We believe this helps position us to achieve same-store NOI growth of 5% to 6% and core FFO growth near the top of the REIT sector for this year.
Beyond this year, demographics in the United States should become increasingly impactful to our sector and should support strong single-family rental demand for years to come. The average age of the head of household in our homes is 39 years, meaning the millennial generation is just starting to reach the life stage where they needs align with our product. And although it is early, many believe it's possible that tax reform and rising interest rates will have a further positive impact on single-family rentals.
In fact, turnover in the first quarter of 2018 declined to 7.6% from 8.1% in the first quarter of 2017, driven primarily by our year-over-year decrease and move-outs to home ownership from 25.7% to 22%.
On the supply side, we believe that construction of new single-family homes is likely to remain muted for the foreseeable future due to the value of well-located land and the rising cost of materials and labor. We think this is especially true in our markets.
The second point I want to make is that we believe our portfolio is one of the most desirable in residential real estate. Our locations are high growth, high quality and infill. It is a unique advantage to have 70% of revenue derived from the Western United States and Florida. We have carefully selected our submarkets and homes to be in high value locations with proximity to employment centers, good schools and transportation corridors, the 3 things residents tell us are most important to their families. And with over 4,800 homes on average per market, we have unmatched scale and density that is critical to our best-in-class operating efficiencies.
Third, our business is built for all parts of the macroeconomic cycle. Single-family rental homes are well-positioned if interest rates continue to rise and the cost of homeownership increases. Relatively short-term leases allow us to quickly optimize revenue in the strong demand environment that typically coincides with rising interest rates. In addition, our homes are part of the most liquid real estate asset class in the world and represent value to both investors and traditional homeowners.
Last but not least, our people are top-notch, from our Board of Directors to our corporate teams, to our associates in the field that interact and earn the loyalty of our residents. It is our people that enable us to deliver the exceptional quality of service that we commit to our residents every day. And it is our people that will drive us to higher levels of success as we continue to discover more ways to improve the experience of our residents and further optimize our operations. I thank all of our associates for making Invitation Homes a great place to call home.
In short, families want to live in our desirable neighborhoods and homes. We think demand could increase and housing options could remain limited. We provide an opportunity which might not otherwise exist for families to thrive in a neighborhood of their choice.
With that, I'll now provide a brief update on our start to 2018. We remain on track with our plan for the year. Our unique ProCare service delivery model continues to produce high resident satisfaction survey scores and first quarter revenue growth of 4.1% was in line with our expectation.
One-time expenses contributed to higher overall expense growth in the first quarter, however, the outlook for the remainder of the remains positive. On merger integration, we remain on track with our plan to deliver the benefits we committed to our residents, associates and shareholders. Development of the systems and technology to support our new operating platform is on schedule. And we continue to expect the rollout of our unified field operating model to begin in the second half of 2018.
Our investment management team remains on track with this capital recycling plan with approximately $50 million of acquisitions and $50 million of dispositions in the first quarter. We have also ramped up investment in select value enhancing CapEx opportunities to deliver residents more of the features they desire at the same time, we enhanced our risk-adjusted returns.
On the balance sheet, we've continue progressing towards investment-grade with refinancings since SWAT transactions in the first half of 2018 to increase unencumbered assets, improve our maturity profile, lower future floating rate debt exposure and reduce our overall borrowing cost.
In summary, we have accomplished a lot already in 2018, and we continue to be excited about the growth of this business in both the near and the long term. According to Case Shiller, home prices in our markets continue to appreciate almost 7% per year. When you consider the value of already embedded in our assets today, we believe there is no more compelling way to buy a scale and high quality portfolio, single-family rental homes than through the investments in Invitation Homes.
So with that, our Chief Operating Officer, Charles Young, will now provide more detail on our operating results in the first quarter as well as the current trends.
Thank you, Fred. We continue to enjoy strong fundamentals with paveed the way for another solid quarter of growth in the first quarter of 2018. Our team is working well to keep field operations running smoothly at the same time that merger integration progresses according to plan.
I'd like to thank our associates for their continued commitment to making 2018 a successful year with respect to both core operations and integration. It's been truly impressive to watch our teams in action, and I look forward to taking resident service to the next level when we empower them with an even more efficient, unified operating platform in the second half of 2018.
I'll now spend some time walking you through the details of our first quarter 2018 operating performance. Same-store core revenues in the first quarter grew 4.1% year-over-year, in line with our expectations. The revenue increase was driven primarily by average rental rate growth of 4% and average occupancy remained strong at 95.7%.
Same-store NOI grew 3.6%, a solid result considering one-time items that resulted in higher-than-normal same-store core and expense growth of 5.1% in the quarter. A key contributor to this expense increase was elevated repair and maintenance expense, which was atypical in nature attributable to a timing delay in completing routine non-storm-related service request in markets impacted by the September 2017 hurricane.
Service across related to hurricane damage were prioritized in the fourth quarter of 2017 pushing noncritical routine service request that otherwise would have been resolved last year into the first quarter of 2018. Harsher winter weather in the first quarter of 2018 compared to the first quarter of 2017 also contributed to higher repair and maintenance expenses.
Next, I'll cover first quarter 2018 leasing trends. Same-store rent growth remained strong in the quarter with renewals again up almost 5%. Renewals represented 2/3 of the leases we executed in the first quarter. At the same time, turnover was even lower year-over-year at 7.6%, a testament to the value we believe residents continue to find in our first-class service on high quality homes and highly desirable locations.
Same-store new lease growth was 2.5%, accelerating over the course of the first quarter as expected and blended rent growth was 4%. Western U.S. markets continue to lead the way for our growth as Northern and Southern California, Seattle and Phoenix were our strongest markets from a rent growth perspective in the first quarter.
I'm also happy to report that we're seeing great momentum as we enter peak leasing season. Average occupancy increased to 96.1% in April 2018, up 20 basis points from April 2017, which puts us in an excellent position for growth. After increasing sequentially in each month of the first quarter, new lease rent growth accelerated to 4.5% in April 2018.
Renewals also remained strong in April at 4.7%, resulting in a solid, blended rent growth of 4.6%. Main engine renewals have been quoted in the mid-5% range and we expect new lease growth to continue accelerating as we move further into peak season.
Finally, a few words on how we're enhancing our resident experience. Our team members remain committed to providing every resident with the opportunity to live the leasing lifestyle they prefer and good neighborhoods close to their jobs and great schools, and we continue to innovate and enhance our property management operations to provide residents with the even more outstanding service.
In the first quarter of 2018, we installed smart home technology in an additional 2,000 homes, bringing the total to almost 24,000. Smart home technology allows us to operate with greater efficiency and enables residents to enjoy their homes in a more convenient and energy-efficient fashion. We're also achieving high resident satisfaction scores as we continue rolling out our proprietary ProCare service model.
As field integration takes the next tape later this year, we'll roll out more enhancements to our platform that will make the leasing lifestyle we provide to residents even better. I'm proud of what we have delivered so far and I look forward to working with all of our team members to continue enhancing the experience of our residents as we move forward.
I will now turn the call over to our Chief Financial Officer, Ernie Freedman.
Thank you, Charles. Today, we'll cover the following topics, portfolio activity for the first quarter, balance sheet and capital market activity; financial results for the first quarter and changes in our supplemental disclosures. I'll start with portfolio productivity. As we continue to recycle capital to further enhance the quality of our portfolio, in the first quarter 2018, total home count decreased by 61 to 82,509 homes or approximately 4,850 on average per market. We bought 190 homes for an estimated $53 million at an average cost basis of $277,000. And we sold 251 homes for $55 million at an average disposition price of $220,000.
I'll now turn to an update on our balance sheet and capital markets activity. As previously communicated, we remain committed to working toward an investment-grade rating. Debt markets remain highly favorable for issuance, and we took advantage by refinancing approximately $2 billion of debt year-to-date to increase our unencumbered assets, improve our maturity profile and reduce borrowing costs, all on a leverage neutral basis. In February, we closed a 7-year securitization with the principal amount of $917 million at total cost of funds of LIBOR plus $124 million. We used net proceeds to repay in full all of our remaining 2019 secured debt maturities.
In May, we closed another seven-year securitization with the principal amount of $1.1 billion a total cost of funds of LIBOR plus 1 38. We used net proceeds and cash on hand to repay $1.2 billion of secured debt maturing in 2020. Pro forma this latest refinancing, our weighted average was extended to 5.0 years, and we increased the number of homes in our unencumbered pool by 10% since the beginning of the year. Net interest expense is a combined results of the February and May transactions that's expected to decrease by $14 million on an annualized run rate basis. In addition to the refinancings, we entered into $2.5 billion of forward interest rate swap agreements subsequent to quarter end. After giving effect to these swaps and based on our current capital structure, the percentage of our debt that will be fixed or swapped to fixed rate beginning in January 2019 will increase to 87%. It is between 90% and 100% for the years 2020 through our debt's final maturities.
We had over $1.1 billion of liquidity at quarter end through a combination of unrestricted cash and undrawn capacity on our credit facility. I'll now touch briefly on our first quarter 2018 financial results. Core FFO and AFFO per share for the first quarter increased 13.7% and 7.3% year-over-year, respectively, to $0.29 and $0.24. The primary driver of the increase was growth in NOI in addition to lower interest expense per share. Supplemental Schedule 1 provides a reconciliation from GAAP net loss to our reported FFO, core FFO and AFFO. As of today, we have earned an approximately $24 million of merger synergies on an annualized run rate basis, which includes $9 million of share-based compensation expense, mainly due to duplicate cost synergies. We continue to expect the majority of NOI related synergies to be realized later this year after the implementation of an enhanced operating platform for our field and corporate teams that combines the best of both legacy organizations. Therefore, we do not expect our achievement amount to increase materially during the next 90 days.
The last thing I will cover is changes in our supplemental disclosures. As we noted in our last call, we updated our definition of same-store to consider homes that were required as part of our merger with Starwood Waypoint. Our supplemental reporting provides information concerning our same-store pool of 72,109 homes as of March 31, 2018. On Supplemental Schedule 6, we are providing additional detail on our total portfolio capital expenditures. You will notice two categories of capital expenditure that have been part of our business and subscription for the initial renovation CapEx that we invest in homes upon acquisition to bring them up to our standards and recurring CapEx of the to invest in our ongoing basis to maintain the quality of our homes. We are also providing detail on the third bucket, value enhancing CapEx, which we've more recently introduced. Value enhancing CapEx is investment we make in stabilized homes to enhance risk-adjusted returns. For example, we might see an opportunity to upgraded kitchen to a higher and fit and finish or expand an upward living area in an allocation data tells us residents will pay a premium for these types of amenities.
Recurring CapEx is the only portion of our CapEx that we deduct from core FFO to arrive at AFFO. It is the component of CapEx included in total cost to maintain. I'll close by reiterating what Fred mentioned in his opening remarks, that we've accomplished much already in 2018, thanks to our top-notch team of associates and the energy they bring every day, and we are excited for the future. Fundamentals remained strong and our best-in-class portfolio and resident service continue to be an advantage, making us confident and excited as our teams move forward in 2018, seeking to further elevate the value of Invitation Homes to both shareholders and residents. With that, operator, would you please open up the line for questions?
[Operator Instructions]. The first question comes from Juan Sanabria from Bank of America.
Ernie, I was just hoping on the cost side for the same-store expenses that would be higher than you expected. Can you help us quantify that? And was that more in the sway portfolio just given their taxes exposure?
Sure, China, I'm happy to provide some clarification and actually, we weren't surprised by the 5.1% expense growth year-over-year. The net impact of the one-time items we disclosed in the supplemental was about $700,000. And actually, more that came from the IH aside from the Fort exposure with regards to the hurricane. So without of those expense growth would have been 4.5%. The other driver for the expense growth was real estate taxes. And we disclosed in Supplemental Schedule. Real estate Texas are up 7.3% year-over-year, which is a pretty high number, and Prop 13 in California wasn't the culprit behind it. The good news of Prop 13, as you know that going forward, will state tax increases are statutorily is 32%, which is great for almost 13,000 homes that we own in California. But both our IPO in February 2017 and the merger with Starwood Waypoint late in the year were triggering events for valuation reassessments.
And Q1 was a specially difficult comp for this California taxes and if you could not book our Prop 13 tax adjustment in Invitation Homes until the second quarter last year as we disclosed in last year's second quarter earnings release. So in Q1 '18, we had higher California taxes from both the IPO early in the year as well as from Starwood Waypoint merger later in the year.
Without that noise from Prop 13, real estate tax growth would have been 4.5% year-over-year for the quarter, Juan, it's better than the 5% expectation for the year for taxes prior to the impact of Prop 13. So actually, we had a good result in real estate taxes before Prop 13.
Without Prop 13, our overall expense growth would have been about 150 basis points more favorable. So expense growth would have been about 3% for the quarter year-over-year versus the 51 that we reported you want to take it impacts from the one-time items as well as Prop 13.
That's very helpful. And then just switching gears to the balance sheet, another one for you, Ernie. Leverage ticked up to a bit quarter-over-quarter. What drove that? And how do you think about the tools to reduce leverage outside of retained cash flow and given your view of cost of capital today, what are the alternatives or how you're thinking about that?
Yes, sure. So you did see that our net debt-to-EBITDA went from 9.5x in the last quarter - 9.7, modest change. That really just come down to where adjusted EBITDA was for the two periods, ad there was refinancing transaction in the first quarter when we actually proceeds also that cover the financing costs. And so, fully expect by the end of the year, as we've talked about, we'll reduce that as numbers by about one turns. So we'll definitely be in the high 8 so about 9x and expect that to happen. And in terms of tools that are available to us, John, certainly the most important one is what you point out was the retain cash flow and our NOI still projected to be 5% to 6%, adjusted EBITDA growth, [indiscernible] start to grow very strongly and with our dividend payout ratio, where it is, using that retained cash. And then we periodically, you're here on a monthly basis, we look out with opportunities are for Dallas on the capital recycling front and decide what makes them regards to capital recycling how to use those proceeds. And today, we've had some modest purchases here in the first quarter. We talked about in the prepared remarks. And so we do give consideration whether we want to pivot from there or not. But we're very pleased with our plan and continue to stay on track with regards to acquisitions and dispositions about being equally weighted in 2018. And then what's keep all our opportunities available to us broadly to raise capital and if it made sense, the considerably consider that as well to help improve the leverage profile.
The next question comes from Drew Berdin with Baird.
This is Alex on for Drew this morning. I was wondering if you could look a little bit what you guys are convinced expectations were going into the strong peak season. It looks like national, a little short wondering if any markets kind of gamble are you would you guys expect to internal and where you guys so a lot of great occupancy strengths?
Yes, this is Charles, thanks for the question. We actually did exactly what we wanted to do in Q1. In the last call, we mentioned that we were up a little behind on where we wanted to be at the end of the quarter, want to build and occupancy through Q1. And we did exactly that. And we added about 40 basis points moving us up to 95 7. And we continue to add actually in April so we're up north of 96% where the average in April, which is great news overall. It puts us in a really good position for peak leasing season. Through that 90% plus percent of our markets all added occupancy in Q1. So we did is actually what we hoped. And because that, again, blended rent growth came in stronger but renewals carry that they, and we were just shy of 5%. In Q1, we're seeing solid, continued renewal growth. They obviously are 2/3 of all the new leases that we do. But ultimately, we're seeing the growth come in new leases, and we ended April at 4.5%. So we're position very well going into peak leasing season.
Perfect, that's really helpful. And kind of switching over. You guys alluded to on a continued growth in the smart home technology. program. Wondering how you guys think about internal the ROI you guys get from that? Are there cost savings? Can you charge higher premiums on the rents? And kind of just wondering what you see the future of that program looks like?
Yes, overall, our program is really been great for us. It's not only the ability that we can actually charge additional fees. There's ancillary revenue that we're able to charge and gain some revenue. But ultimately, it's as much about the operational efficiencies that we get from being able to do as self-show, letting our vendors and in knowing when they're in. It's in the utility management when we're owning the homes and they're not least to be able to reduce those costs on an ongoing basis. And our residents really enjoy the convenience of the self-show and the ability to have the efficiencies for them and their families to be able to let people are on their home and to control their utilities while they're living at least in lifestyle in our homes.
Yes, this is Fred. In the original idea of the thesis for the smart home was to take care of some operational challenges that we have in single-family rental, namely key control, access to the home by vendors, by our field employees, et cetera. And then, it also to maintain control over the utility costs during the renovation and eventual return process. Then, that the idea of allowing our prospects to interact with the system so they could choose if they wanted to have our shelf showing experience. And we found in the DVD was a very, very large proportion of people really chose preferred the shelf showing options. So about 570 to almost to 80% of our prospects are choosing that. If they want to have a guided tour the leasing professional they can certainly do that as well. And then with the just, just the ads for the smart from that sweeping the nation, was of us know either have them or are considering adding smart home capabilities to our homes. So there's actually demand for that. We realized that they can actually facilitate in that need and that desire. So we make it optional for our residents if they so choose, they're going to have to control to the same system of that front door of that thermostat and then we have other ideas that things that we can add to it in the future. Then if they do, there's a cost of that we believe is a rental cost at lower, lower cost all in and much more convenient of implementation try to assemble these parts and gadget themselves.
Yes, that's very helpful. And is that 2000 quarter kind of what you guys are targeting now going forward or is it kind of opportunistic where you guys see for?
At that's typical where we're trying to go. We're installing the new technology on the hill renewals. So as the house returns, we'll put it in and then it becomes part of the pool to help us with leasing and ultimately, we'd be able to upsell to our residents if they choose to do it. What's great is nearly 80% of our new leases that are - payout of the smartphone opportunity are taken advantage of it. It's been great for us.
The next question comes from Douglas Harter with Credit Suisse.
I was just hoping we can talk about CapEx a little bit and your expectations there both on the R&M side and the revenue enhancing side.
Sure. So what specifically is your question, Doug?
Just, I guess, the outlook for 2018. Look like the year-over-year growth in CapEx in 1Q was fairly high. Just wondering if that was just a tougher comparison or if that's the level we should be expecting.
Sure. This is Ernie. I'll handle the question around the current CapEx [indiscernible] talk about the value enhancing CapEx. On the recurring CapEx, we think is a real opportunity for us where the two formal organizations really different spend levels with regards to CapEx and our expectation be kind to get to a blended number of working toward a better number over time. And so we did achieved what was closer to the blended number of about $1,200, $1,300 per door here in our first quarter so I think and we talked about in the last quarter, the, I think for the time, $1,200 to $1,400 is probably a good number for us there was the opportunity to do better on that we can been better and that in the past. In addition, the number is a little bit higher in the first quarter because of the - what we talked about earlier about the work orders from the hurricane carrying over into the first quarter in terms of the routine type stuff. So a little bit more difficult comp because of that, but also we're taking the best of both organizations and moving forward and going to get to best practices. So I think that's where I'm not on recurring CapEx. You want to quickly talk about value enhancing CapEx and what we're thinking about that?
Yes, sure. As we look for ways to optimize the customer expense going forward, one of the things that be found to be very effective as we roll out and pilot, we've talked a little bit about last year is in this revenue enhancing CapEx idea, where we allow the customers help make decisions on the home, but not only hardened the asset but they're willing to pay for it. So will give you an example. With it, last month Orlando, 30 plus types of these projects were on average rate spending call it $5,000, $6,000 per home and the incremental call it bump on rents that our customers are willing to pay, that's an opt in negotiation on their part, would put us somewhere between a 15% and 20%, call it, ROI on those dollars on an unlevered basis. And so examples of this, as Ernie mentioned in the call, upgrading kitchens, hardwood flooring, other ways that we can actually had in the asset to call the customer choice, which is a win-win for our obviously the customer will get a stickier customer that wants to be with us longer because of the feel like they have the ability optimize a part their home and for us it's all better because the customer that's willing to stay and participate in that leasing, as Charles laid out early.
The next question comes from Dennis McGill with Zelman & Associates.
First question just has to do with the work orders that were kicked out from the hurricane in those markets. I know you guys do a lot of surveys of the residence after the reporters are done. Has there been any impact to the happiness of the resident on the work order having to wait to get some of the stuff done?
Yes, the priority that we had on those work orders were obviously to make sure that we were dealing with anything that was an emergency or habitability issues. And we felt like those priorities were the right approach. Some of the ones that regulate for more routine work orders around fencing, maybe some landscaping, there was a little delay there, obviously. And we do track after every interaction with the residents. And the scores came down slightly, but not materially. And we built them back real quickly as soon as we were able to service of those homes. So part of what you're seeing is not only the timing, but also the building timing of where they're coming through and they had in Q1. So overall, maybe a slight blip but no real material change in our teams really focus on trying to work through these as quickly as we could, really proud of what they've been able to do given the size and scale of the amount that came through Florida.
And given what you learned in hindsight, would you change the way you structure sort of the repair and maintenance efforts in the event of a significant weather event again?
Well, part of where the opportunity that we have with combining the best of both worlds is we've already started on that path using the technology platform for the maintenance will allow us to work through the work orders quicker. And we think that will be a real answer going forward. So this is just one example of many where we're able to look across the organization and we keep what we think is best and the technology platform allows us to get more vendors into the platform, use our in-house vendors as well as a bull and move through the quarters in a more timely fashion. So we're really proud of what we've been able to do there and we're implementing that, as we speak is paid great.
Separate question probably for Dallas on Brazil an offer Program. I remember you participate in that trial and expanding that and looking to take that more market. And you maybe talk about that as the channel for you dollars if you're looking to participate with them are similar opportunities elsewhere in the market?
Yes, absolutely. We look at the silence and offer program as one of many, quite frankly, where we're starting to see the rate customers transact change. And it's like Uber for being in a car versus a taxi. We're starting people make decision or maybe do want to go outside of ordinary call it, broker channels, to buy and sell homes. Rated pilot and created in the instant app program with Zillow night last year and that has now evolved into a much more robust program like you're seeing with Opendoor and some of it with our companies. We look at this as one of many chalices that will provide opportunities for comments like Invitation Homes to be able to acquire and assets and more importantly, customers. We also think there will be added benefit perhaps, to some other programs, like sale-leaseback, where somebody can ultimately sell their home to a company like Invitation and then have an option there, lease back from us from year to when they make their next life decision. So you're spot on it, Dennis in terms of where are you going to see to continue this market and being the largest owner of the single-family we need to have a front seat as we watch that part of the market develop and more importantly participate in it.
And in those markets were in the trial Phoenix Las Vegas and this maybe more Phoenix free. Are you seeing every offer that comes through? Are you part of that program?
You're definitely part of the programs in public, and we have been. And we've worked with that, not only Zillow, but other companies to find ways to help optimize that lead funnel. And so will continue to do so and expect us to be active in that space.
Next question comes from Vincent Chao with Deutsche Bank.
Just wanted to go back to the integration part of the conversation it sounds like the merger integration plans are on track. And you guys have alluded to a couple of times some pickup in the back half of the year is integrate the platforms, but together best practices I was just curious if you could share the learning so far. What maybe some insights or preview of what might be coming in the second half?
Yes, Vincent. This is Fred. The integration, as we said in our prepared remarks, is working according to plan. And we're really pleased with the performance of our team, everyone working on this integration. Most of the enabling work is coming to the completion phase, that was the first phase of the project, obviously. And we're geared up now and ready to start the implementation in the field throughout the field platform that will impact more of the customer life cycle, the attraction, acquisition onboarding, the ongoing service to our field organization. So the synergies that we've been discussing since the very announcement of the $45 million to $50 million on a run rate basis by in early of 2019, are those cost synergies that the specific identify cost synergies related to this implementation of this combined platform both corporate and field. So there are other potential synergies that we've alluded to. Sometime still on the cost side.
We're seeing more opportunity on procurement. And when you cut another benefit of this merger has our market level, scale and density, which makes it, not only our sales more efficient, but our vendors more efficient as well. So we expect to share those vendor opportunities as we get a little more - we have to have some meetings with more vendors and suppliers in terms of procurement strategies. So we expect that will be an additional pick up. And then we also feel like the current plan is excellent and we're implementing that plan, but there's always way to optimize it further once we establish it, get to the field and get up and running. So those are some opportunities on the procurement side. Then the revenue, we really see there is - I mean, we can add more value enhancing services to our residents of than we have some plans for that, which is again with a density, where the scale. And we have more opportunities to provide additional goods and services to our residents that will add to the value of their expenses. There will be a revenue opportunity for us going forward.
And then, I guess, another question on the same-store expense side. Ernie, you've outlined sort of maybe a core same-store expense growth of 3% ex one-time items and some of the tax implications. I'm just curious if you look at the guidance for the rest of the year, does imply something below that 3% level for the balance of the year. And it does seem like if you take the average of the sway portfolio plus the Invitation portfolio, that the comparisons do a little tougher in the second and third quarters and I was just curious if there's anything else that we should be aware of that, that might be helping and keep those cost down.
Yes, sure. So for instance, with Prop 13, I alluded to the fact that we have a difficult comp in the first quarter because we didn't book Prop 13 in Invitation Homes last year the first quarter. We doubled up in the second quarter last year. So Prop 13 should be more manageable for us in the second quarter, make real estate taxes a little bit easier because that's one example. And another example is we do expect to get some NOI synergies in the second half of the year mainly as we get into the fourth quarter. And we haven't been specific about what those would be other than speaking generally and we're speaking more specifically to those we get into the second quarter on our earnings alliance call. That's all bit of talent that we expect to have some modest help from as well. So days made there is a little bit easier for that but ship risk and opportunities with any guidance and numbers and I'd say the opportunity areas for us are continue pushing other things that Fred just talked about with regard to the synergy as well as we're getting smarter and how we're in the business as we learn how to use the previously run their businesses and take the best of both and I said there is adding for us is on property taxes.
Notwithstanding what I talked about on our property taxes early, we're very early in the year and most real estate tax assessments, and the second half of the year and often in the second half of the second half of the year. And at this point, we've only received and full of notices back from California with regards to some of the various things - the reassessments of events we've had. So there's opportunity for us to be better-than-expected I will say? Taxes but of course, there's an opportunity for us to be in the right direction for us to do. So we still have a wide range of 2% to 3%. We see a path for us to in that range until good about it, and we'll certainly no better in 90 days.
The next question comes from Jade Rahmani with KBW.
Can you elaborate on the initiatives to introduce other revenues, products that you could charge tenants for that enhance their lifestyle but with produced revenues for Invitation Homes? And mean can you give some examples?
Yes, one example is adding on to our smart home capability. We have hubs ups in place in which gives you a lot of optionality in the future. The basis system that we offer now is simply the lock and the thermostat, which is very important. Those are the primary features of a smart home. But there are other features as well. People could use if they wanted to have video monitoring either exterior or interior space. People could choose to have implement home security systems, either just the intrusion alarm or a full monitored system. We could get into a landscaping with the density of our portfolio, the ability to offer landscaping at a very cost-effective basis becomes more and more probable. So that's a couple of other things. And then analysis in terms of the rev X, offering customized interiors, offer our customer base upgrades, we want to make their lifestyle so easy so that people can step into a lifestyle that meets their needs, meets their desires, have some optionalities, they have influence in designing their own expense all for a leasing payment profile versus coming out of pocket. There's other products and services we're talking a lot of other large-scale vendors in terms of doing some joint marketing campaigns, which provide again our value-added, efficient this durable good services and products to our residents.
Just wanted to ask separately about the Denver core NOI margin, which improved on a same-store basis pretty robustly. Could you give any color on the improvements and also, structurally, is the main difference and reason for the high-margin in that market property taxes primarily? Or is there some other attributes?
Yes so Jade Denver always perform pretty high for us in fact, it's mid- to high 70s where outed NOI margin in the first quarter are around while it state tax growth so we were over accrued will say taxes based on where some sense came in earlier this year and then also allow us to set their assessment for next 2018 to a lower level as well as the real estate taxes that's one of the reasons were in our outperformance real estate taxes notwithstanding what I talked about earlier. In general, then we'll perform very well similar to phoenix as well as Las Vegas. Cost to maintain tend to be a bit lower a real estate taxes are reasonable. In fact, those in the sort of likely continue to be one of our areas highest margin markets in the portfolio.
The next question comes from John Pawlowski with Green Street Advisors.
Fred, I'll ask you to put your department operations have back on for a minute. Over the long run, we'll investors have to live with much greater volatility in the R&M wide this asset class versus a province given the nature of the footprint?
Absolutely not. I think you've seen us over the last couple of years, we develop this business. It's a place of the business and optimizes business. The numbers have been very consistent. And there are, I would say that they're consistent with the numbers that we've been telling and forecasting for the last couple of years. We've always said that, that total cost of maintaining would be between $2,600, $2,800 per home per year and that's exactly where we continue to see it over the long run because that we rebuild to that estimate was based on mathematics. Looking at the useful life, remaining useful life, typically useful life and cost, all the components of a single-family home. So I don't think you're going to see volatility going forward. We have one-time events this quarter. From time to time, you may have one-time events in any product type, residential or non-residential, apartment or single-family. So that's what we're dealing with here as we explained.
Dos your long-term cost to maintain estimate include some type of average severe weather reserve concept?
It's based on just the each component of the home, whether it's HVAC, roof, foundations, exterior, interior, the cost for those and then the typical useful life.
Okay. I mean, we keep using the term one-time in nature. The skeptical analyst in me says we're going to keep having one-time cost spikes because weather can be unpredictable given in the nature of this footprint, the disparate nature of the homes. So I guess, how much confidence do you have with this type of events are really one-time in nature.
Well, for example, this quarter, okay, we saw the work spike starting very early in January. And then, obviously, looked into this quickly and saw that the cost was just - the pushing of the routine work orders from that Q4 prioritize for the hurricane into January below the number came down in February, continue to come down in March. And by the way, March was back to normal, normal levels. So and they're happy to report in April, same thing, back to normal expected levels or a slightly better. So that was our characterization. That was a one-time event based on that event, which was two hurricanes, two major areas impacting lots of different businesses, including ours. Now could we say that hurricanes will never happen again? No. But do they happen every year? Of course, not. So it's going to be these more in frequent one-time hard to predict, hard to forecast, hard to budget, hard to guide into those types of activities. We would not build a business plan based on anticipation of a major hurricane going to the state of Florida.
Okay make sense. And then last one for me, dollars, I know Chicago home price appreciation has been lackluster at best. Within your Chicago portfolio, are you actually seeing absolute decline at the home prices in any pockets of your portfolio?
No. Well, maybe I wouldn't say in any pockets. We're seeing kind of slow steady growth out of Chicago. Fortunately, I think from an operational standpoint, we've gotten much better than from an occupancy standpoint we starting to see a little more renewal growth and leasing. From both cold legacy portfolio but we will continue to do there is optimize and part of the portfolio in position where it can be the most successful. We've talked about this in the past, but Midwest concentration versus less than 6.5% of our menu so it's not a key focus. Our story release West Coast and Southeast. If you look at the end of that type of growth, John, I think that's a little bit of a no-brainer but we don't disagree. We like to see more growth out of Chicago we like to see better efficiencies just having to see a lot of it in terms of HBI, but we're seeing a little bit of it.
I'll just add, Chicago operationally, we've really seen a nice movement. We ended the quarter at 95% or slightly above. And into April, we're north of 96%. And with that, when you look at blended rank growth year-over-year, it's actually starting to accelerate where we moved up into the positive 2s and then expanding into April to North of 2. So we're - operationally feel good about it, and with our scale and combined portfolio, we feel like we're in good shape to continue to push forward.
Right. And Case Shiller has a Chicago market January and February of about 2.7% home price appreciation.
The next question comes from Ryan Gilbert with BTIG.
I was wondering if you can describe any of the best practices you've taken away from your hurricane response over the past three quarters that you can apply the next time the portfolio expenses if you're rather event?
Yes, thank you. This is Charles. On the sway side, having gone through to last year, both Harvey, which hit Houston and Irma that came to Florida and on the IH site, both of us going through the Florida storms. We learned a lot in terms of preparation, getting out ahead, working with the vendors. Harvey, specifically was more really water, not as much wind. So we were able to have anticipation with our vendors to have fans and dehumidifiers and extra vendors ready to be kind of first responders to some instances we're on the ground before. Many of the other first responders and one of the best practices we did between both sides was to be thoughtful around the displacement of our residents. We stopped leasing our homes and allowed that residents to be - have first choice of moving to any of our homes. So we learn from that. Are there other things we can do? I think what we talked about from an operational side is just comparing those notes. I also mentioned earlier and the call that our technology platform was a big help on the sway side as we implemented that on the cross portfolio. I think will be in better position to respond faster than we did in this instance. So a lot to learn. And we'll continue to compare notes if we, God forbid, something would happen again.
And then on renewal rents, it looks like over the past five quarters, you're western markets has been averaging mid to high 6s, the rest of the portfolio closer to four, mid 4s us. Wondering if you're seeing an opportunity to bring the year annual growth rate in the rest of your portfolio closer to where your Western markets are trading or that's just a function of the high HPA, low supply until locations of your Western portfolio?
Yes, you kind of answered the question for us. That resin exposure allows us to kind of optimize some of the renewal growth out there. But if you look across the portfolios, historically, we've been really at that kind of high 4s consistently on renewals. Regardless of seasonality, that's where renewals are consistent. There's ultimately 2/3 of our releases. So you're going to get, based on supply-demand in some of the HPA growth, that Western markets are going to push, but you'll still see good renewal growth out of some of our other markets. And when you take a blended portfolio like this, we think that high 4s and low 5s is where we're going to settle.
The next question comes from Donald Camden with Morgan Stanley.
Just going back to the opening comments about the average age and the impact of the lower generation. Just cares, so that - is that consistent across both the legacies Starwood homes as well as Invitation Homes? And is there any noticeable trend about that generation and that you could point to?
Yes interesting question. We've talked a lot about that on a large-scale basis, just look at the demographics of this country. Demographics are undeniable. Doesn't really what house is for the economy, people still get older every year. So when you look at the millennial cohort, which is actually larger, and the baby boom cohort, it's going to have a massive impact of the nation's economy for the next 10 years or more. So the impact to our business is there coming to age, not the leading edge of this million dollars year quarter. It's getting to the age and the life stage for the behaviors are going to begin to change. And so fleet living by themselves living with roommates in the urban setting. Some of them or many of them over the next decade are going to be moving into the part thereof, rather going to have relationship start from a more traditional family decisions and their needs and desires in open court or more of schools, with a safety, with the excess or transportation, et cetera. So we think that, that demand is going to be bode well for single family of, both purchase and rental. Then with the millennials, a lot of the research says or speculations us continue to want to stream their lifestyle a loss of years, the asset light and experience focus. And with that, comes to the desire to please the lifestyle they can live. actually opportunity so that better lifestyle through leasing their home versus purchasing. So a lot of demographic and psychographic reasons why we think this is going to be are very bullish lien for us in terms for the next decade or more steady demand from this cohort.
Great. And then the other question I had, just circling back to the revenue enhancing CapEx discussion. I'm just trying to understand what the opportunity is there. Is that something that obviously you're doing as homes are rolling. But is that - could that be 20,000 homes, 40,000 homes? Just trying to get a sense of the opportunity there.
Yes, I'll take that. This is Dallas. It's still early days in terms of how much absorption we can have call it in a given year. We've laid out that we think we can be across kind of them married of call it revenue generating opportunities and kind of CapEx spend between $15 million and $20 million a year in this type of program right now over time will tell I mean, Fred laid out in talked about some of the purse that are available. We also believe that this living lesson doesn't only hold itself to win their interim they could be moving in, bring out. There's a lot of different reasons that we can optimize growth for this business. So I would say that it's still too early to say what that capture rate will be while their home. But we're certainly are bullish about what the opportunity that's in front of us.
The next question comes from Wes Golladay with RBC Capital Markets.
Looking at the supply outlook, are there any markets that stand out maybe for the next two years, where you see competitive supply pressure and competitive defined as will pressure your submarket and your price point?
Yes, I mean, again, this is Dallas. Without a doubt, the markets are type Fred just talked about this a second ago we're going to have 12.5 million in your household forms over the next decade, and we're not building supply today to just keep up with a normal household formation so as you start to think through that you know that's going to put an imbalance of pressure on call it new home pricing or current pricing in this higher barrier-to-entry markets or without a date, we would anticipate that we lived in a normal market per the last couple of recent we've had only between two and three months of home supply in any of the 17 markets that we're in today across Invitation Homes. We see that changing in the foreseeable future. We see that come if anything, that may tighten a bit and with some of the choices and decisions being delayed like getting married, some of these other things that we're talked about, it puts us in a unique advantage to have probably the right type of demand function on our product specifically. So we are not building a forecast for the next three years, where we're going to see a lot of supply. Actually, quite the contrary. We're trying to make sure that we optimize the way that we can for those external growth opportunities, living in our supply environments going forward.
Okay. And you mentioned an entity such as Zillow on Opendoor changing the way home so that are bought. I wondered if there is some point had an opportunity for joining homes to have a third-party management use your scale. Imagine that they have a big risk would be hold an inventory, and that's where you could probably help them out.
Yes, that's an interesting concept. We've been asked to consider that. But we have no interest at this time of pursuing that strategy. We've got a big integration in front of us. We have a lot of things to accomplish of our own portfolio, for our owned assets of our shareholders. You never say never. But it certainly not in our near-term playbook. But the platform that we have developed and continue to develop to further innovations and additions I think have a lot of intrinsic value. Maybe someday in the future, we look at ways on how to leverage that differently.
The next question comes from Anthony Paolone with JPMorgan.
I guess, for Dallas, can. You walk through some of your major markets and talk about where yields are on acquisitions for a product in your bio box?
Yes. Sure, no problem. Well, I mean, you know that we have scale in California and Seattle. Let's start in the West Coast specifically. I mean, those are markets, where I'll give you an example like in California you could be buying between call it an NOI cap rate, somewhere between 4.5 and a 5, depending on the market or submarket at that you're specifically trying to invest in. As we can be instilled solid suburbs in markets in the Southeast really can buy between the 5.5 and 6 capital depending on type of home and type of neighborhood. So it varies a large degree and it varies by the amount of call it available supply that you can actually by but generally speaking, I mean, we're very bullish postmerger and expanding our footprint in markets like Denver and Dallas. And we'll find ways to continue to grow the portfolio were all the fundamentals are saying, we want to be because it's more people want to be. It's rarely job growth and household formation will continue to occur.
Okay. And then just second question for Ernie. scheduled 2b, if I look at your weighted average interest rate of 3.5%, can you roll that forward like you did with kind of the description of fixed versus putting debt when you kind of move through all the swaps and look ahead?
Oh, I can't do that off the top of my head, Tony so let me get back on you that. But certainly, we have a couple things that are going to go against each other as we go forward by the current debt that we have in place, it's cost will likely go up a little bit because of our futures reps are a little bit more expensive than in the market Kirkland's roll off. Offsetting that is we have spreads today embedded in a lot of these instruments that are not market spreads today. Experts have come down quite a bit since the original financing were down two, three, four years ago so you're going to have international offsets. But I can talk to you off-line and how - point to you what you can see in our discussion we can have a sense of how that will change based on the current debt profile of the controversy, but we're still very optimistic that we have chance to offset those who increase in cost and tighter spread as we continue to about refinancing activity for the rest of this year.
This concludes our question-and-answer session. I would now like to turn the conference back over to Fred Tuomi for any closing remarks.
All right. Thank you, everybody. Thank you again for joining us today. We appreciate your interest, as always, in Invitation Homes. And we look forward to many of the with the upcoming NAREIT in June in Europe.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.