Invitation Homes Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 27, 2023

There are 5 speakers on the call.

Operator

Greetings, and welcome to the Invitation Homes Second Quarter 2023 Earnings Conference Call. All participants are in a listen only mode at this time. As a reminder, this conference is being recorded. At this time, I would like to turn the conference over to Scott McLaughlin, Senior Vice President of Investor Relations. Please go ahead.

Speaker 1

Good morning and welcome. I'm here today from Invitation Homes with Dallas Tanner, Chief Executive Officer Charles Young, President and Chief Operating Officer and John Olson, Executive Vice President and Chief Financial Officer. Following our prepared remarks, we'll conduct a question and answer session with our covering sell side analysts. In the interest of time, During today's call, we may reference Our Q2 2023 earnings release and supplemental information. This document was issued yesterday after the market closed and is available on the Investor Relations section of our website at www.invh.com.

Speaker 1

Certain statements we make during this call may include forward looking statements relating to the future performance of our business, Financial results, liquidity and capital resources and other non historical statements, which are subject to risks and uncertainties that could cause actual outcomes or results to differ materially from those indicated. We describe some of these risks and uncertainties in our 2022 Annual Report On Form 10 ks and other filings we make with the SEC from time to time. Invitation Homes does not update forward looking statements and expressly information regarding these non GAAP measures, including reconciliations to the most comparable GAAP measures in yesterday's earnings release. I'll now turn the call over to Dallas, our Chief Executive Officer. Good morning and thanks for joining us.

Speaker 1

These continue to be exciting times with Invitation Homes once again demonstrating our ability to deliver strong results. Fundamentals remain very favorable for our industry And in particular, for our markets, product and price points. Our teams are providing a great residents experience every day And we continue to seek and define fantastic value creation opportunities through our sound capital allocation strategy. I'd like to discuss a few of these in more detail during my First, let's begin with value creation and our recent purchase of nearly 1900 single family rental homes For approximately $650,000,000 As we've demonstrated over the last 11 years, we've approached external growth opportunities with a strategic, Disciplined and accretive focus. And I'm pleased to share with you why we believe this transaction continues in that approach.

Speaker 1

Essentially, this is a high growth portfolio of exceptionally well located homes that we bought at a pretty attractive price. We believe our purchase price represents a meaningful discount to end user market values, giving us immediate benefits of scale A value that would have been impossible to replicate through one off buying in today's environment. Further, we expect our best in class platform to help us achieve enhanced returns, starting with the year 1 yield in the mid-5s that we anticipate will grow quickly thereafter. In addition, the quality and location of the homes we acquire are right in line with the type of product we'd like to own more of. In particular, these are great homes within desirable and till neighborhoods that we believe will provide strong rent growth and value appreciation.

Speaker 1

Over 90% of these homes we purchased overlap with our existing Sunbelt footprint, including within our Florida and Texas markets, along with Las Vegas, Phoenix, Atlanta and the Carolinas. Outside of this transaction, we continue to work with our outstanding homebuilder partners across the country. During the Q2, we took delivery on 157 of these brand new homes and added an additional 173 homes to our new product pipeline. Our expected future deliveries remained at just under $900,000,000 at the end of the second quarter. Moving forward, we remain focused on smart external growth through our multi channel acquisition strategy.

Speaker 1

And as we previously announced, Scott Eisen joins us next week as our Chief Investment Officer and we're excited to add his insight as we further explore disciplined growth opportunities, Including additional bulk purchasing from smaller operators and an expansion of our homebuilder pipeline. At the same time, we will continue to keep our heads down and create more meaningful experiences for our residents, such as growing our ancillary services business And developing new ways for us to engage with our customers. The second topic I want to discuss is the ongoing fundamental tailwinds for our business. We expect these to continue to support our growth objectives for many years to come. Nearly 1 5th of the U.

Speaker 1

S. Population Almost 60,000,000 people are between the ages of 23 35 years old. We believe this to be a strong indicator Of the future demand for our business as they form families and approach our average new resident age of 38.5 years old. Demand for single family homes for lease has been further enhanced by the rising costs and the burden of homeownership. According to latest data from John Burns, Leasing a home is nearly $1,000 cheaper per month on average than buying a home in one of our markets.

Speaker 1

This is a reflection of not only an increase in mortgage rates, Also the overall lack of new housing supply. In addition, for sale inventory remains well below demand, which continued to help support home prices. This in turn aids our ability to sell non core or underperforming assets at attractive cap rates and use those proceeds for accretive capital recycling. Moving on now to my 3rd topic, which is how we continue to improve the resident experience and reinforce our commitment to resident choice and flexibility. The most recent example of this is our partnership with Isuzu.

Speaker 1

We're proud to help our residents feel good credit by offering positive credit reporting to all our residents using This is platform at no cost to our residents. This partnership helps to remove barriers to housing choice, allows our residents to improve their credit profile in order to achieve their financial goals faster. In closing, I'm excited by how we are executing and driving growth today. I would like to express my thanks to our dedicated associates for their hard work and commitment, which have been instrumental to our successes. We believe the increasing demand for single family rentals, favorable demographic trends and the flexibility and choice that we provide our residents Position us well for both sustained growth and value creation, which we will continue to relentlessly pursue.

Speaker 1

With that, I'll pass it on to Charles, our President and Chief Operating Officer.

Speaker 2

Thanks, Dallas. Once again, we were able to build on positive momentum to I'd like to thank all of our associates for their hard work through this point in peak season, including all of our outstanding leasing, maintenance and service Teams and for providing the best resident experience within the industry. We still have work to do to close out the busy summer season and to stay diligent about controlling what we can control to finish the year strong. But I'm very proud of the results we're putting up and the great execution the teams have delivered. This includes the strong effort we've made to bring on board the nearly 1900 homes from our recent portfolio acquisition.

Speaker 2

Through our existing scale, the dedication and professionalism of our teams and our established playbook for buying larger portfolios, We expect this to be a smooth transition. In accordance with our mission, we're making a house a home for thousands of new residents who have just joined our Invitation We're pleased to offer them the very best genuine care and outstanding service that all of our residents have come to expect from us. Moving on to our Q2 operating results, same store NOI grew by 3.6% year over year. This is driven by same store core revenue growth of 5.9% and same store core expense growth of 11.2%. The main drivers of our 2nd quarter same store core revenue growth were 7.4% increase in average monthly rental rate 7.3% increase in other income.

Speaker 2

Notably, we continue to make great progress on working through our lease compliance backlog this year. Same store bad debt in the Q2 was 150 basis points of gross rental revenue, making us a sequential improvement of about 50 basis points since the Q1 2023. We believe this improvement should continue as more of our markets return to pre COVID performance. Returning to our year over year results. Same store core expense growth in the Q2 was primarily the results of expected increase And property taxes, along with higher turnover and property administration costs, mostly driven by progress we're making in our lease compliance backlog.

Speaker 2

Our expense growth was partially offset during the Q2 by a favorable 6% decrease in R and M expenses on greater cost controls and lower inflation. Next, I'll cover same store leasing trends in the Q2. Lease rates on renewals grew 6.9% year over year, While new lease rates grew 7.3% year over year, this drove 2nd quarter blended rent growth of 7% year over year. In addition, average occupancy remained strong in the 2nd quarter at 97.6%, during which is traditionally the biggest move out season for our business. We're pleased with the balance we struck so far this year between rate and occupancy.

Speaker 2

This includes optimizing for the healthy demand we're seeing at this point in our peak and move out season, especially considering the progress I mentioned earlier on our lease compliance backlog. While this is creating additional pressure on turnover Along with some expected moderation in occupancy through the back end of peak season, we believe we're well positioned for the future With demand for our homes and the quality of our new applicants remaining strong. In particular, the average household income for new residents who have moved in with us over the Past 12 months now exceeds $138,000 a year, resulting in an average income to rent ratio of 5.1 times. In summary, following a great first half of twenty twenty three, we're focused on maintaining our momentum going into the second half of the year. Our teams are working hard to ensure we control costs where we can and continue to provide the best leasing lifestyle in the industry for our residents.

Speaker 2

We remain focused on delivering outstanding service and strong results. I'll now turn the call over to John Olson, our Chief Financial Officer. Thanks, Charles. Today, I'll cover the following topics. First, an update on our investment grade rated balance sheet, along with a few additional details regarding our recent portfolio acquisition.

Speaker 2

2nd, financial results for the 2nd quarter. And lastly, updated 2023 full year guidance. I'll start with our balance sheet. At the end of the quarter, we had over $1,400,000,000 in available liquidity through a combination of unrestricted cash and undrawn capacity on our revolving credit facility. Our net debt to EBITDA ratio was 5.3 times as of the end of the second quarter, down from 5.7 times at the end of 2022.

Speaker 2

Just under 3 quarters of our total debt is unsecured and over 99% of our debt is fixed rate or swapped to fixed rate. We've often emphasized how we believe our strong balance sheet positions us well for desirable growth opportunities should they arise. Our acquisition last I speak of nearly 1900 homes for approximately $650,000,000 offers an example. With an average cost per home of $346,000 The acquisition reflects a meaningful discount to market value. This attractive entry point is underscored by the portfolio's outstanding quality and location, which are typically the 2 best indicators of potential future growth.

Speaker 2

In addition, the acquisition further enhances our significant scale in many of our premier Sunbelt locations, which we believe has the potential to drive even greater efficiencies and higher margins over time. We funded the acquisition primarily using cash on hand, including dry powder we accumulated through outsized dispositions In the first half of this year at an average stabilized cap rate of 3.8%. The remainder was funded by our revolver. Pro form a for the acquisition, our net debt to EBITDA ratio at June 30 remains comfortably within our targeted 5.5 to 6 times range. We expect this portfolio acquisition to have an immaterial effect on AFFO per share for the remainder of this year and to be accretive to AFFO per share in Next, I'll touch briefly on our Q2 2023 financial results.

Speaker 2

2nd quarter core FFO increased 5.3% year over year to $0.44 per share, primarily due to an increase in NOI. 2nd quarter AFFO increased 6.8% year over year to $0.38 per share. The last thing I'll cover is our updated 2023 full year guidance. After maintaining strong execution through much of our peak season And with favorable fundamentals expected to remain in place, we are increasing our full year 2023 same store NOI growth guidance To a range of 4.5% to 5.5% or an increase of 25 basis points versus the midpoint of our prior guidance. This is driven by increased same store core revenue growth guidance of 5.75% to 6.75% And increased same store core expense growth guidance of 8.5% to 9.5%, both of which are up 50 basis points at the midpoint from our prior guidance.

Speaker 2

The increase to core revenue guidance is primarily due to outperformance in rent growth and occupancy in the first half of this year, Balanced against our expectation that turnover will trend higher in the second half, resulting in some moderation to occupancy. As a reminder, this is primarily the result of us continuing to make good progress and working through our lease compliance backlog, which has the near term impact of higher expected turnover and property administrative expenses, but also the longer term benefits of releasing the homes To stronger credit residents and improving revenue over time. We're pleased with the progress we've made so far this year and as a result, our expectations Full year bad debt have improved by 50 basis points at the midpoint to a new full year range of between 125 and 175 basis points. Our updated guidance also narrows the range and increases the midpoints of our ranges of expected core FFO and AFFO per share. We now expect full year 2023 core FFO in a range of $1.75 to $1.81 per share, Which is an increase of $0.01 per share at the midpoint.

Speaker 2

AFFO was also increased by a $0.01 per share at the midpoint to a revised range of 1.45 to $1.51 per share. Updated assumptions regarding full year acquisitions and dispositions are included in the guidance section of last night's earnings release. I'll wrap up by restating our excitement for what lies ahead in the second half of this year and beyond. We will continue to focus on our strategic priorities, Deliver exceptional service to our residents and drive sustainable growth and value creation for our shareholders. With that, operator, please open the line for questions.

Operator

We will now begin our question and answer session. Our first question comes from Josh Dennerlein from Bank of America. Please go ahead. Your line is open.

Speaker 2

Hey, guys. Thanks for the time. Just wanted to touch base on the portfolio acquired. I guess, how long will it take to kind of integrate into your portfolio? And is there any capital recycling that you're planning off the bat?

Speaker 1

Hi, this is Dallas. Thanks for the question. As far as integrating the portfolio, I'll yield to Charles here on the operational side. It's typically pretty easy. We don't have any market that has say more than 3 50 units and we have pretty good history of doing that.

Speaker 1

I think on the capital recycling piece, Look, we've been active on the disposition side and trying to do accretive capital recycling. And I think The market not having enough overall supply in the resale space has allowed us to when we decide to sell homes, Get really good, what I would call kind of end user sales prices and to be able to recycle into a high quality portfolio that that flies is something that We are reviewed pretty bullishly. I'll hand it over to Charles who can speak a minute just on how we integrate any new product when it comes to scale Hi, Andrew. Marcus?

Speaker 2

Yes. Dallas said it well. We've been through this before. This one happens to be a little bigger and across multiple markets. But On an individual basis, we've been able to take in portfolios like this in Vegas and Phoenix and other markets.

Speaker 2

And it's just more of the same for us. We have a great team centrally That manages how we roll it into our systems. We get eyes on assets. We make sure that we're providing genuine care to the residents. As it Turns out now we just we roll them in on kind of an immediate basis and we're getting out there and we're working with them is where they are in their process.

Speaker 2

Some of them are in lease, some of them are moving in soon. We just pick it up from there and then we communicate with them well. So it's kind of an ongoing process. No real timeline because the homes are in different positions. But I'm proud of how the teams are taking it on and it's we're in the middle of it right now.

Speaker 2

It's exciting.

Operator

From Eric Wolf from Citi. Please go ahead. Your line is open.

Speaker 3

Thanks. Just to follow-up on Josh's question there. If I look at SREIT's website, it looks like the occupancy of their SFR portfolios are in the sort of the 90 2% to 93% range on average. Just curious for the sort of occupancy of the portfolio you bought, if there's an opportunity to get that higher expand margins, Where the yield on acquisition go and then I know this is a long question, but is this sort of representative of the type of opportunities that you're looking at Across other portfolios.

Speaker 1

I'll start with what you mentioned last. We talked about this at NAREIT. We talked about this in some of the NDRs we've done through the spring and kind of early summer. And look, there's sort of this moment in the marketplace right now where Smaller kind of mid scale operators, I think are sort of having the high class debate with themselves about what do they do going forward. There's not a lot of visibility obviously for some folks in terms of what the capital markets are going to allow for.

Speaker 1

And I think as you look at our business and scale and platform and the operating efficiencies that we run with, we have a pretty good history Of creating really efficient margin profile in the markets where we have scale. And so I think that there is going to be some compelling opportunities For companies like ours, as we've sort of exhibited in this trade that we did this month to create additional margin expansion. With this particular portfolio, look, we think there is upside in terms of how we can operate it. We can add to call it the existing margin profile in our markets. There's reasons for doing these.

Speaker 1

One example is Texas is a market that we want to grow in. We've got, call it plus or minus Close to 500 homes that are going to go into our Dallas and Houston portfolios here. While we think we can operate these, with greater, call it efficiencies and Some embedded growth there. It actually helps our existing portfolios, because as we scale up relative to the things that we own, we should see additional opportunities for margin enhancement. So look, it's not one size fits all out there in terms of where and what portfolio opportunities may be available from professional management companies, But we certainly want to be ready.

Speaker 1

And I think in this situation, we're ready. We really like the real estate. It's real estate that we are familiar with over time. And it's going to make a lot of sense for our business over the long haul.

Operator

Our next question comes from Jamie Feldman from Wells Fargo. Please go ahead. Your line

Speaker 4

Thank you. Last quarter's call, you talked a lot about the lease compliance backlog. Can you just give us an update in terms of How large it is? What's the major markets are? Where it's still having an impact?

Speaker 4

And I guess even more importantly, what's the upside to kind of normalized occupancy in a regular turnover rate as you work through and kind of complete that backlog?

Speaker 2

Craig, this is Charles. Thanks for the question. Yes. We as we said, we thought that we were going to see a little heavier work in the 1st part of the year in regards to lease compliance backlog. I think As we look back at Q1, it was a little quieter.

Speaker 2

Things started to pick up in Q2, and we've made good progress. And you could see it in our numbers going down 50 basis points Quarter over quarter. The major markets are where we wanted to see the movement. And so we see this as a positive sign. That's SoCal, Atlanta, Vegas has made some nice progress, and so has NorCal.

Speaker 2

And the flip side of that is that we're getting a little bit of a spike in turnover, but that's expected. It was hard to know when it was going to come through, but the good news is the backlog is breaking with the courts and all that. And So that allows us to kind of move these homes through. And you'll see some pressure, as I mentioned in my comments on occupancy towards the That half of peak season, but the good news is demand is still really strong. And so we are able to re lease quickly.

Speaker 2

Teams are executing well. So we're turning homes quickly. Phase 3 residents are in a healthy place. So all that is good. This is signs Are positive.

Speaker 2

We still have things to work through. We're not there all the way yet, but we like where we're going. Ultimately, we ended Q2 here at mid-ninety seven percent s, I expect that will come down to the low-ninety seven percent s in Q3. We'll see where we end up. But with this demand, I think we're going to roll back up and we're going to be in the mid-97s overall for the year.

Speaker 2

We started the year strong. We'll work through this backlog. One thing I will mention is, I think we work through most of the markets this year. That's the goal and hope. But there could be some bleed into next year in markets like Southern California And we'll see how we do in the others.

Speaker 2

Atlanta has a lot of work to do. Those are our 2 biggest markets. If you roll into your question, the biggest markets that have the Largest impact in our portfolio due to size and due to the backlog are Atlanta and Southern California.

Operator

Our next question comes from Steve Sakwa from Evercore ISI. Please go ahead. Your line is open.

Speaker 1

Yes, great. Thanks. Charles, I was just wondering if you could talk about kind of where the leasing spreads are in the Q3? Where did renewals go out, say, for July August. And I guess what are your expectations for Q3 and for the back half of the year?

Speaker 2

Yes. Thanks for the question. In terms of we're out our most recent renewal requests go out September October and we're actually in the low 8s to mid 8s. So we see it really as being healthy. We're not done with July yet, so can't give final numbers, but we're seeing more of the same healthy performance, Where new leases are in the low 7s, renewals in the high 8s high 6s, if you will.

Speaker 2

We'll see where the blend settles out. But this is typical of what we expected for the summer, new lease above renewals. And we'll see how it moderates and when it does. But right now, we're Still seeing good demand and we like that given my answer to the question earlier, we're getting a little bit more turnover and we get a chance to Re lease these homes and what I failed to mention before is we're putting really good healthy residents in there with an average household income of 138,000 So we're in a good shape. We've tightened up our screening criteria.

Speaker 2

We're still seeing good demand across the board. So we expect that we'll see more of The same in Q3, but we'll see how it moderates as we get towards the back half of peak season here.

Operator

Our next question comes from John Pawlowski from Green Street. Please go ahead. Your line is open.

Speaker 3

Hey, thanks for the time. I just have a follow-up on the portfolio acquisition. Dallas, I'd just like to hear how you weighed purchasing this portfolio versus Deploying capital into your own stock, which at least earlier this year was it felt like it was at an even larger discount to private market values?

Speaker 1

Yes. John, thanks for the question. It's certainly something we think about and what would move the needle over time and distance. And while we have events and things that happen inside of the quarter, we really do try to have a long view in terms of how we want to create Meaningful external growth and also what I would say is better quality cash flows for the company over time, which we would view as call it Have far more of an impact, in the things we want to do strategically with the business and maybe some near term Stock buybacks, which we've never done as an organization. We've certainly talked about it.

Speaker 1

With this particular portfolio, look, we think with inside of a year ish Kind of time period, we're going to be in the 6s in terms of call it a yield on cost that doesn't take into consideration things like ancillary and some of the other things that we can do. And then it also is part of our consistent process around capital recycling. I think you look at the things that we're selling, Kind of it's called a 4 ish cap rate. On average, you'd be able to recycle into something that's pretty high quality, getting us to a 6 pretty quick. It's an area where we want to continue to Probably lean in if anything, try to find ways to create better kind of long term growth for our current shareholders.

Speaker 1

So we will consider everything, But we're managing with a long view here.

Operator

Our next question comes from Austin Wurschmidt from KeyBanc Capital Markets. Please go ahead. Your line is open.

Speaker 3

Great. Thanks. On the portfolio acquisition, what rent growth did you underwrite in year 1 to achieve that mid five Percent cap rate that you quoted. And I know you have the revolver availability to fund a portion of the deal, but what are sort of the plans to permanently finance the transaction?

Speaker 2

Hey Austin, it's John. It's a good question. So we funded this acquisition Primarily with cash on hand, so it's about $495,000,000 of cash and a $150,000,000 draw on our revolver. Of that $495,000,000 of cash, dollars 30,000,000 of that was funded in upfront deposits prior to the end of the second quarter. So I think from our perspective, the actual revolver draw is fairly small.

Speaker 2

I think as we Consider permanent capital, what I'll tell you is sort of what we always say because it's how we always approach things. 1, We're very fortunate that we don't have any near term maturities. So there's no sort of ticking clock that would force us to do something at a disadvantageous time. But secondly, we are constantly monitoring the market and we're always working in the background to be prepared so that we can take advantage of opportunities if Circumstances and market conditions warrant it.

Operator

Our next question comes from Brad Heffern from RBC Capital Markets, please go ahead. Your line is open.

Speaker 3

Yes. Thanks, Maria, everybody. Can you talk about Property taxes and how the information you have now compares with the original guide. And if you could comment on the impact of the Texas legislation as well, that would be great.

Speaker 2

Sure. So, in the Q2, property tax was up a little over 11% year over year. This was expected and we talked about this on the last call, Primarily because we recorded a large catch up entry in the Q4 of last year due to the fact that we'd been under accrued in the 1st 3 quarters. So as a result, we'll see elevated year over year property tax increases again in the Q3 and then we'll see some moderation in the Q4. I would remind you that Our 3 largest contributors to our total tax bill are California, Georgia and Florida, which represent about 70% of the total.

Speaker 2

Well, California is largely known. For Florida and Georgia, we won't know how millage rates change until we start receiving those tax bills in the Q4. So I would say big picture at this point, we haven't yet seen anything that would cause us to revise our full year property tax guidance up or down. With respect to Texas, a couple of things there. Thus far, the legislation calls for a 10 point 0.07 dollars decrease in tax bill per $100 of assessed value.

Speaker 2

And then there's some additional compression available that's going to fluctuate by Based on how the redistribution under the Robinhood laws work for school tax funding. But I would also point out that Texas isn't a big state for us. And so I would expect that while this is certainly beneficial, I don't think in the grand scheme, it's going to move the needle too much.

Operator

Our next question comes from Daniel Chukarico from Scotiabank. Please go ahead. Your line is open.

Speaker 3

Thanks. John or Charles, can you break down the components

Operator

of the 50 basis point increase to same store revenue, rents, occupancy and bad debt and maybe how that bad debt And Q2 compares to expectations for the rest of the year?

Speaker 2

Sure. So I think it's we've seen maybe Marginal improvement from our mid single digit rate growth assumption that we talked about on the last call, as well as sort of A faster pace of improvement with respect to our bad debt experience, which is absolutely something that we're very encouraged to see. As we look at the back part of the year though, we do have to balance those positive trends against the fact that we're anticipating Continued higher turnover here for the next few months and that is going to have an impact on occupancy over time. And as Charles has talked about in the past, we're also very cognizant of the fact that there is a balance to be struck between rate and occupancy. And so we want to make sure that we're Being mindful of all of those facts when we think about guidance.

Operator

Our next question comes from Haendel St. Juste from Mizuho. Please go ahead. Your line is open.

Speaker 4

Hey, good morning out there. Just a couple more on the portfolio. So what does that mid-five percent cap rate translate into on an IR basis? Then curious just more broadly what you're seeing out there portfolio wise with pricing getting more in line with the mid-five percent that you targeted in your Capacity or perhaps interest in doing more portfolio deals. Thanks.

Speaker 1

Hey, Haendel. Last question, I would say, Look, I think there's going to be opportunities to talk to other operators in the space over the next year. I think a lot of those conversations will be dependent on what kind of the capital markets is allowing for. In terms of how we view, obviously, the Turn profile of any trade that we make, it's 2 part, right? It's 1 part, call it going in yield on cost.

Speaker 1

The piece on a risk adjusted basis, we'd take into considerations our expectations around HPA and things like that. This was obviously so far an unlevered Transaction, if you look at it in a binary way, we would expect healthy home price appreciation. So I'd call it, on an unlevered basis, we'd probably see this in like the high single digits, But it just depends and it's a mixture of markets and things like that. So, yes.

Operator

Our next question comes from Kegan Karl from Wolfe Research. Please go ahead. Your line is open.

Speaker 3

Yes. Thanks for the time guys. So both in the press release, Commentary you called out increased turnover expense is a pretty big driver of your same store OpEx going higher on a year over year basis. I'm just curious, 1, how this is trending versus your initial And then what your outlook is for the rest of the year on turnover? And then do you think where 2023 ends would be a good run rate going forward on turnover?

Speaker 2

This is Charles. I'll start and see if John wants to add anything. Look, we knew we're going to have a little higher turnover this year given the lease compliance backlog. We're still running historically really low on turnover, which is great. It was really difficult to as we kind of look Forward through the year is predicting when it was going to happen.

Speaker 2

It was a little slower than expected in Q1 and really picked up here in the second Q2 and we think that will maintain into Q3. The thought here is that it will start to moderate Towards the back end of the year, hard to say exactly if that's going to be our run rate, just given what I talked about earlier around some of the markets and How quickly we're going to get to the end of this in the like say Southern California or Atlanta where we have the biggest impact. The thing to think about with that turnover is it has to Some of this on the lease compliance lease turns take a little longer, cost a little bit more and that's some of the impact you're seeing in our expenses. But the good news is we're able to work through this and we see this as transitory. And it's not going to we'll work through it as much as we can as fast as we can this year and that's what's in our numbers.

Speaker 2

I think that gives us some optimism as we think we look forward to next year.

Operator

Our next question comes from Dennis McGill from Zelman and Associates. Please go ahead. Your line is open.

Speaker 4

Hi. Thank you all. I guess my question to Alex would be on just thinking about Home price appreciation, if you're sitting here a year ago, I think everyone would have expected there to be more pressure in the market than maybe there's been. And that's obviously impacting the ability to buy on the MLS. Just wanted to hear how you're thinking about that.

Speaker 4

And to the degree, There remains a disconnect between what you can sell at and where these portfolios are trading. Is there a reason why the portfolio of sellers wouldn't just go to the MLS and sell at a much More attractive yield, does that impact the ability to do some of these in the future?

Speaker 1

That is a good question, Dennis. Look, on the last part of your question, I think it's fair to assume that the frictional cost when you're doing anything at scale is really hard. And I think we're as good as anyone in this in terms of selling one off in the end user market. And Even when we sell those kind of high threes, low fours, we have some frictional costs that are associated with those sales. If you're not doing it all the time, I think it can be A little bit more difficult to just say, hey, could I sell 1,000 homes tomorrow and what would my how would I think about that cost structure?

Speaker 1

Look, I think home prices have largely been buoyed up because of the lock in effect that there's a lot of really attractive mortgages in place That I think both home current homeowners or people that are owning real estate in the single family space It's actually an asset. It's a liability on the balance sheet of the home. But the reality is it's an asset and there's a lot of And we've talked about this on some of our other calls, mortgage rates, call it inside of 80% of U. S. Mortgages are inside of 5%, which is Really, I think what's keeping the market supported and that lack of volume is creating Really still a feeding frenzy sort of mentality when somebody is selling a home.

Speaker 1

And we view that as an asset for our business when we want to call and sell homes. And we've talked about that, You might see us be a little bit more aggressive selling some homes this year. But by and large, the market feels really healthy. I agree with you. We have not seen a degradation in home prices Within our portfolio, and I think when we have these opportunities where we can take advantage of that sort of bid ask spread being a buyer, We're long we have a long view on owning great single family residential and we want to own it with scale in the markets we operate in.

Speaker 1

So When those opportunities for themselves like this one, expect us to try to figure out how to do that transaction, if it makes sense.

Operator

Our next question comes from Adam Kramer from Morgan Stanley. Please go ahead. Your line is open. Hi.

Speaker 3

This is Derek Metzler on for Adam Kramer. I was wondering if you could talk a little bit about market rent trends across your portfolio and give an update on loss to lease today.

Speaker 2

Yes, this is Charles. We're seeing what's historically been really strong new lease and renewal rates through the summer Take out the COVID kind of anomaly, when we're in that blend of 7 In Q2, it's really strong. That's maintaining here as we get into Q3. New lease side, the markets that are leading have been kind of markets that have been out in front for the last year or so, it's our Florida markets with Orlando, Q2 north of 9% and we have 5, 6 markets in 8, mid to high 8s, Tampa, South Florida, Southern California, Atlanta, Carolina. Good news is, as we talked about earlier, as we're cleaning up the backlogs and we're able to release these homes because of the demand, And it's been great.

Speaker 2

Renewals are holding steady. We're kind of stabilizing here in that kind of high 6s and we think that will be steady Through the year, if not, we'll see where we end. You saw I mentioned earlier that we went out in September October in the low 8s. So I think that's real positive as we think through on that side. And some of this will be a balance between occupancy and rate as John talked about when we're talking working through this backlog, but that turnover impact isn't in all markets.

Speaker 2

It's in certain markets where we have a backlog Highlighted by Atlanta, Vegas and SoCal, other markets in Q2 actually turnover went down year over year. So, it really is market specific and we're seeing Good demand across the board. The only softness that we're seeing is a little bit in Vegas. Some of it is because of lease compliance backlog. Some of it is there's some competition in the market and a little bit of a slowdown in that market in general, so we're paying attention to it.

Speaker 2

So overall, we're seeing really good healthy positive trends and we're excited about trying to finish off peak season Strong and finish off the year really Sean.

Operator

Our next question comes from Anthony Powell from Barclays. Please go ahead. Your line is open.

Speaker 2

Hi, good morning. A question on the builder pipeline. We've seen homebuilders have good success in selling New homes to new homeowners, are they showing less interest in some homes to you and others and that's a far space or do they continue to see guys give partners a good outlet for certain of their homes?

Speaker 1

Well, I think we mentioned on the script that we're continually adding to our pipeline. I'd say Sort of the opposite. I think most companies would envy the position the public builders are in, they're lowly levered. They're taking a much larger share of overall home sales As it relates to call it U. S.

Speaker 1

Housing stock and it's because they're one of the few groups out there that can go out and build and create. Now that being said, I think the playbook that we've built with Pulte is sort of our beginning sponsor partner is now actually started work its way through with several different relationships for us. I actually think it's sort of caught on that this is a really nice way for An operator of for sale homebuilding business to be able to align some interest with professional management companies that want to be a natural Buyer of some of this product over long periods of time. And so I actually expect that side of our business to grow. I think our teams, Largely led by Peter Dellello and now Scott Eisen coming in, have done a really nice job of starting to build up frequency there.

Speaker 1

I think the nice part about it is we are able to get under the hood early and really talk about our strategy as a company with these partners and helping them understand where we want to grow our footprint. And then I think over time, it also allows us to get under the hood and have influence on things like portfolio composition and design In neighborhood fit and feel, which is an important part of our overall value factor for the customer as they're thinking about choice. And I think what it is still too early for us to really have a strong view on this, but I think the customer coming in to brand new product really does view That move in experience is their home. And my instincts, I can't prove this yet with any data, but I think they'll prove an even stickier customer over time As we bring out some of this newer product that has a little bit more of a focus to it. And lastly, the thing we love about it, which I can't emphasize enough is we are very G and A light in this program.

Speaker 1

So we don't have a lot of our balance sheet tied up in dirt or other kind of potential riskier parts of that business. We'd rather just continue to partner with proven operators in the space And be a good planning partner for them. That strategy is really working for us at this point in time.

Operator

Our next question comes from Juan Sanabria from BMO Capital Markets. Please go ahead. Your line is open.

Speaker 3

Hi. A couple of questions, I'm assuming we're towards the end. I guess, and apologize if I missed this, on the same store expense guide, the increase, What drove that? I mean, it seems like the bad debt is lower. The churn is picked up, but albeit temporarily and set to decrease into year end and taxes, it's too early to tell and No change in expectations.

Speaker 3

Just curious on what drove the expense increase in guide? And then the second part is just on the renewals. Why is that decelerated or the pace of increases slowed? And has the September, October numbers that Are there you put out there the in the 8th, does that imply a reacceleration or is there some give back that would kind of keep that number steady for September October expected?

Speaker 2

Hey, Juan, it's John. I'll take the first part of your question and hand it off to Charles for the second part. I think it's a couple of things. On the expense side, what we're seeing as Charles noted is that the turnover has come. There was a little bit of a delay in terms of when it really started to show up in the portfolio.

Speaker 2

I would also say that turnover Increased each month since the end of Q1. So it is more concentrated. As we started to see kind of the flow through impacts on a whole variety of different line items in the P and L, what we're seeing Sort of suggested that moving the goalpost on the expense guide did make sense. Now to be clear, I want to remind everyone that we think working through this backlog is just fundamentally healthy for our business long term, right? It's something that It's going to allow us to put stronger credit tenants back into those homes, get them back in service, get them back cash flowing, But there is short term pressure on expenses and I think it's important that we acknowledge that and that's what we've done here.

Speaker 2

This is Charles. I'll just add on the renewal side. As you think through kind of portfolio mix and kind of the cohorts that come through For renewal in the summer or in the peak season, if you will, or off season in Q1 or Q4, we've historically really been strong at pushing out trying to capture as much of that market that's out there. And you think about the last couple of years on the new lease side, we've been in that high mid teens, also on the renewal side. So when these summer renewals come through, They're coming off a pretty high base.

Speaker 2

So we're just realistic on kind of what we can do. And as you get into the back half, while we still have good demand, There's an opportunity to capture where market is that we didn't go out as high in those shoulder seasons, if you will. So That's some of what you're seeing. I think we can see how it all plays out and what it implies, but implies that generally we're still seeing good strong demand and we're Going to do what we can to kind of capture where market is for these homes and that portfolio when it comes through of homes at the time.

Operator

Our next question comes from Tyler Batory from Oppenheimer. Please go ahead. Your line is open.

Speaker 3

Good morning. Thank you. Few follow ups on the acquisition conversation here. What do cap rates look like on the MLS channel? Where are you bidding?

Speaker 3

Where are deals clearing the market? And Dallas, just given some of the commentary on portfolio deals, some of the scale, you can build pretty quickly on those Some of the attractive pricing with your builder relationships, does it make more sense to hold off on the MLS As an acquisition channel, perhaps can serve some of your capital for some of these other opportunities. I mean, traditionally channel Agnostic, location specific has been a big part of the strategy, but wondering if maybe that might change just given some of the opportunities that are out there?

Speaker 1

It's great questions. I think you're basically just looking for color in that question of what we're seeing real time MLS and how do we view that relative to some of these things. So, Look, painting a broad stroke on kind of the market, we've hit this in a couple of different ways. In our markets, In the 16 markets that we operate, if we were active in the MLS today and really buying some scale, it would be in the low fives, if not close to probably, Maybe a couple of markets might touch mid-five once in a while, but not really. So for us, we haven't been very active to be clear.

Speaker 1

Really the last 4 quarters, we've not bought very much, if any, MLS property in the resale space. We've been really just taking deliveries Through our new product pipeline and our merchant build program and then spending time talking to other operators around some of these kind of bigger opportunities where we can integrate scale much quicker. I do think that there is a bid ask spread between Where portfolios need to trade today and where the scale one off stance would occur. And I think that's kind of below fives as I mentioned before, If not inside of a 5 in some of these, but Las Vegas for example, you can't buy a home at a 5 cap, it's just next to impossible. It's all sub 5.

Speaker 1

Look, I don't view the MLS as a channel for us. It will be one thing we always looking at. We write hundreds of offers every week At price points that we'd be willing to transact at and we're striking out quite a bit because that spreads so wide. I love the entry points that we're seeing in kind of the new builder stuff. Most of our pipeline that we're reviewing and putting in play right now is a little bit closer to a 6 cap, albeit the deliveries are expected, You know, call it a year to 18 months out on any new product that we're putting in contract.

Speaker 1

So yes, it just feels like there's some dislocation. This should be when it's beneficial to be a REIT. We're lowly levered. We have access to capital. We still feel really good about our access to capital from a liquidity perspective.

Speaker 1

And we've got A platform that can handle chunks of growth like this and digest it very easily And build it right into our normal operating procedure where we can bring in the ancillary services and everything else. So it's a good moment, a good chapter for us to see this kind of growth In today's market, but I expect that we'll keep our nose down and keep trying to find other ways to create additional scale in the markets we operate.

Operator

From Linda Tsai from Jefferies. Please go ahead. Your line is open.

Speaker 3

Hi. Thanks for taking my question. For your new portfolio, what's the average rent you charge for these homes? And how does that compare to the current rent of your existing portfolio? And then just in terms of margin enhancement from integrating, can you give us a little more color on what initiatives you're thinking about?

Speaker 1

So on your first question, basically in place rents, as we took these homes are around $2,200 which For the markets that these are comprised of, it's about 10% greater than where our current average rents in these markets are. So all accretive In terms of that, but we do see the same embedded loss to lease in this opportunity as we do in our own portfolio, somewhere between call it 8% 10% upside In our book. So and I'm sorry, I didn't get her last question. The last question, 3rd part of the question.

Speaker 3

In terms of margin enhancement from integrating into your same portfolio, just a little more color on what initiatives you're thinking about?

Speaker 1

It's too early to tell, but like our Texas markets, We would basically grow the portfolio by 10% and we wouldn't need to bring on really any headcount there. So we would see additional expansion kind of in those two markets. But in terms of like ancillary, that will be a slow process because what we typically do is bring some of those services into play as leases revolve And renew. And so as Charles mentioned earlier on the call, as we get into the book and as we're actually operating it and updating leases and lease agreements And updating our renewal pricing, that's when those ancillary services will be able to come in. And so that will integrate in over time.

Operator

Our next question comes from John Pawlowski from Green Street. Please go ahead. Your line is open.

Speaker 3

Thanks for taking the follow-up. Charles, I was hoping you could expand on the weakness in pricing power and the new lease growth rates in Vegas you alluded to. What do you think Driving that specifically. And then maybe on a somewhat related topic, are you seeing notable increase in shadow supply from conversions of Short term rentals, Airbnbs to traditional rentals in a Las Vegas or other vacation heavy destinations?

Speaker 2

Yes. I'll take your first question your last question first. Not really much impact on the shadow Keith, it's out there. Frankly, it's always been there. I think it's a fair question given the low interest rates and how homeowners may be approaching Whether they want to sell or lease a home, but we've always been competing against the market and that's mostly driven by mom and pops.

Speaker 2

Again, we're just kind of operating within that dynamic. Going back to Vegas, each market has its own dynamics. There's a couple of things going on. 1, We've had a real spike in turnover as I talked about trying to get through the lease compliance. The good news is the courts have really come Sorry to open up and move faster.

Speaker 2

And so we're competing against some of our own supply to be honest with you. So that's put some pressure. But we're not the only ones operating in that market. So Other supply that are going through the same backlog. And so that puts some extra supply in the market temporarily.

Speaker 2

We saw some of this in Phoenix last year and Work through it pretty quickly in a month or 2. What we will see over time is trying to figure out what if there's any kind of Demographic change with Vegas in terms of people moving out of the market. It's hard for us to get a good vision of that right now, but right now it's more around the supply that exists in our own book and with others. But we don't see it as right now a long term trend. We'll work through this and we'll see how it plays out over time.

Operator

Our next question comes from Jade Rahmani from KBW. Please go ahead. Your line is open.

Speaker 4

Hi. This is Jason Saptron on for Jade. Can you please comment on the outlook for property insurance? And do you see a captive insurer as a potential solution for some of

Speaker 3

the rate increases that we've been seeing?

Speaker 2

Thanks for the question. I will say that, similar to what we talked about on our last call, While we don't love the extent to which our property tax sorry, our insurance bill went up year over year, I think we were very fortunate relative to what we've heard from some of the other REITs. And I think that's down to a couple of things. One, we have a very favorable loss history. Our insurers have never lost money on Invitation Homes.

Speaker 2

The worst year they ever had was last year when they broke even. Secondly, I would say this is the geographic dispersion and the granularity of the assets compared to traditional commercial real estate, which are big and chunky, Certainly, it's a benefit in terms of risk mitigation. And lastly, I would say we're not coastal. So I think if you put all that together, we feel really good about where we landed. I think for the 3rd Q4, as we talked about on the last call, you should expect to see quarterly year over year increases in the neighborhood of 20% With the full year insurance expense line item being up a little over 16%.

Speaker 2

As far as captives and other things of that nature, Look, we are going into next year's renewal. We're going to be evaluating a whole host of different alternatives, because I think This is not a one and done type of situation. We've seen a lot of capacity leave the market. And I think we've seen a lot of Carriers who are trying to recoup fairly painful loss histories over the last several years. So I think it's something to stay tuned to, but I can't give you Any particular insight into what our strategy is going to be for next year just yet.

Operator

Our next question comes from Daniel Tropekar from Scotiabank.

Speaker 3

So going back to Austin's question earlier, John, where do you think you could raise unsecured debt today? And credit spreads have come in recently and you talked about your leverage being lower than your longer term target. So do you view this as a good time to raise that kind of capital or are dispositions I'm going to state a preference.

Speaker 2

Well, a couple of observations. Thanks for the question. Dispositions have been Our most attractive cost of capital thus far this year, we have sold homes year to date at an average stabilized cap rate of Under 4%. And then we've been able to put that cash in the bank and earn 5% plus. And then in the case of this portfolio trade, Redeploy that capital into something with an even higher yield.

Speaker 2

So we think that the prospects for accretive capital recycling Driven by strategic dispositions, that has worked out pretty well for us. With respect to the unsecured markets, yes, it certainly does seem as though Credit spreads have ground a little bit tighter with the GDP report this morning. I think the 10 year is probably gapping out as we speak a little bit. We're going to continue to monitor the market. We are constantly sort of keeping track of where we think a new deal might go off At a variety of different tenors, it's just part of how we run the business regular way is we want to keep a very close eye on what The opportunity set looks like.

Speaker 2

So, we're always doing the work in the background to be in a position to move quickly if we think it makes sense to do so. And

Operator

Our next question comes from Jamie Feldman from Wells Fargo. Please go ahead. Your line is open.

Speaker 4

Great. Thanks. Just two quick follow ups. 1, Dallas, you had mentioned it's a great time to be a REIT. Part of being a REIT is being able to issue I just want to get your thoughts on equity as a source of capital today.

Speaker 4

And then secondly, as you're it Seems like the winds are kind of shifting and where the opportunities are. What are your latest thoughts on expanding outside the U. S, whether Canada or anywhere else in the world? Thank you.

Speaker 1

Hey, great question. I think in terms of expansion, we're pretty consistent with saying this like We run 12,000 or 13,000 units in Atlanta as easy as we run 3,800 in Seattle. And so I think we'd love to see all of our markets get closer to 8000, 10000 units, we see margin expansion, we see ability to offer different services, we can be our ProCare systems can all Run a heck of a lot more efficient and we get better granularity and efficiency with scale in those markets. So I would expect our first choice would be Subject to an opportunity set, I guess, would be to just continue to build scale and density in the markets we operate. And we've also been on the record that We would like to own in some other markets over time and we see that there's a little bit of Nashville in this trade And there are markets like Austin and San Antonio and Salt Lake City that we all find very appealing for a variety of reasons.

Speaker 1

I think internationally, it's It's a fun question to speculate on, but the reality is most of these countries probably have more restrictive housing policies. And Unless there were a real strategic opportunity or a reason to get in, I don't know why we wouldn't just stay in this great country that we have and amazing space for housing and we Build it, we can buy it, we can improve it. It's just it's a very good place to operate and be a REIT. In terms of equity and John just answered this as with how we think about the capital markets. Look, we think about our cost of capital daily in this business and we try to hold ourselves accountable To being smart stewards of capital.

Speaker 1

I think we've gotten fairly good marks over time of being smart capital allocators. I like that we're disposing of homes They're non core or in parts of the country that may be a little harder to operate at kind of a 4 or sub 4 cap, reinvesting that capital Kind of in the mid fives pushing to a 6 on the new construction. That's a winning strategy right now while the world is sort of funky. It's been nice to see that our call it our share price has gotten a little bit better, but it's not in a zip code that we're really thrilled about. And for kind of a variety of reasons, when we look at where kind of home prices are actually trading.

Speaker 1

And so, I think to John's point, You'll probably watch the capital markets over time, see how those evolve. We'd certainly love to see good performance, but we have our stock price even further. But we're comfortable recycling capital and being smart. And as I said before, we're not going to be afraid to do this stuff off balance sheet With partners that want access to SFR. And so we have current availability in our second Rockpoint measure of about 700,000,000 expect we'll start to deploy some of that over the coming year.

Speaker 1

We have an untapped revolver and we're going to still continue to generate good free cash flow in this business. So Between dispositions and all that I just remind, I think we've got ample dry powder to go look at some of these opportunities and continue to try to grow the business.

Operator

This completes our question and answer session. I would now like to turn the conference back over to Dallas Tanner for any closing remarks.

Speaker 1

We appreciate everyone's support, everyone being on the call. We hope everyone has a safe rest of summer and look forward to seeing some of you in the fall.

Operator

The conference has now concluded. You may now disconnect.

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Earnings Conference Call
Invitation Homes Q2 2023
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