Q2 2022 Invitation Homes Inc Earnings Call
The popularity of pets and a rise in mortgage rates have made that leasing a home a more affordable option compared to homeownership and all of our markets today.
I also want to say a few things relating to ESG, we recognize the strength of our business is directly linked to the strength of our communities. In this regard we've led by our core values, including those of genuine care and standout citizenship.
Without these core values in many ways, including tens of thousands of company paid hours that are associated spend volunteering in their local communities each year our.
Our invitation to skill up project, which encourages and supports careers in the skilled trades and also our green spaces programs, which develop and improve outdoor community spaces and promote conservation efforts.
Call to be a standout citizen extends to our corporate governance practices as well, where we recently moved up and Green Street's annual REIT governance rankings.
From one of the top rated Reits to the highest rated REIT.
Before I wrap up I want to address the report released this morning by the House select Subcommittee on the Coronavirus crisis, while we have not had time to fully digest. Their report there are a few things I'd like to share here.
First and perhaps most importantly.
The report clearly states that we did not engage in practices that were unlawful fact that we've known quite well since we work hard to follow all the laws within our markets.
Second this report shows just a tiny fraction of the full picture of the work we did during the pandemic and we'll continue to do so today.
We are proud of how we stepped out early to halt all evictions.
To fully comprehend the impact of the pandemic and quickly move to provide flexible payment plans for our residents.
Contacted residents, who had fallen behind in order to help them with flexible payment options or assistance with with government assistance and our overall our team showed the kind of genuine care. We are proud to exhibit on a daily basis.
Through these efforts we provided help to more than 33000 residents who are in need of extra time or financial assistance for a total of nearly $175 million.
We also helped over 10000 residents obtain government assistance payments totaling more than $94 million.
These are the outcomes that matter.
At invitation homes, we believe everyone should have the choice to live in a great neighborhood when.
When they choose to lease from US we're committed to providing the highest quality resident experience possible with.
Please do a favorable supply and demand fundamentals as a tailwind for our business and we work hard to offer a best in class resident experience that allows our residents to live fire with that I'll pass it on to Charles our Chief operating officer.
Thank you Dallas I'd like to start by thanking our associates for another extraordinary quarter during one of our busiest times of the year, it's because of their efforts in providing a premier resident experience that we have achieved such strong operating results.
Out of our teams how they've done in the field and earn such strong recognition and loyalty from our residents. We see this evidenced in many ways, including a record low turnover that Dallas mentioned earlier, our sustained a plus better business Bureau rating and certification and our average length of stay approaching three years.
I'll now take a moment to review the details of our second quarter 2022 operating performance same store core revenues grew 10, 4% year over year, which is up from nine 4% year over year in the first quarter our year over year increase was primarily driven by average monthly rental rate growth of nine 4% and a 19.
<unk>, 9% increase in other income these topline results drove same store NOI growth to 12, 4% year over year in the second quarter, making four quarters in a row of double digit same store NOI growth.
This was despite same store core operating expenses being up six 2% year over year in the second quarter, our largest expense increases were in property taxes, which were up four 7% year over year in line with our expectations given the recent rise in property values.
And also on repair and maintenance expense, which was up 15, 2% year over year and includes the impact of higher labor and material costs across the marketplace.
Next I'll discuss the current leasing environment.
We continue to see strong demand through the second quarter and into July new lease growth rate accelerated throughout the second quarter with June 17, 9% result, surpassing Mays 16, 5% and April 15, 4%.
Blended rate growth was 11, 8% for the second quarter up 380 basis points from last year's strong results as we sit today leads are at or near three year highs, while our application volume remains in line with the last two years.
Markets with the strongest new lease growth continued to include Las Vegas, and Phoenix and now also include South Florida Tampa.
Orlando as well, reflecting the continued strength of the sunbelt.
Further with our new lease rate growth continuing to significantly exceed renewals we remain.
We maintain a sizable loss to lease that we estimate to be approximately 16% across the portfolio together with our historically low turnover. We believe we are well positioned for future rental growth.
While these leasing trends are notable so too our new resident incomes residents, who moved in with US for 12 months ending June 30, <unk> had an average annual household income that exceeded $131000. This.
This represented income to rent ratio of five three times, which means our new residents are spending on average less than 19% of their annual income on housing.
Leasing at home has become increasingly more affordable given rising mortgage rates and home prices. According to John Burns latest figures in all 16 of our markets. It is more affordable to lease a single family home today than it is to bye bye.
By a weighted average savings of almost $700 per month or 24%.
Our own internal data shows that the first half of this year compared to the prior year. We saw a significant decrease in the number of residents moving out to buy home.
This was the case as measured by both.
Number of move outs to buy a home, which was down 24% from prior year and also as a percentage of total move outs, which was down 300 basis points to 26% and this trend of fewer move outs to homeownership accelerated this year from the first to second quarter.
We're just over half of the year behind us I'm excited by the opportunities in the remaining part of the year to continue to improve and deliver the leasing lifestyle. Our residents desire. This includes a home that offers individuals and families. The additional space. They need is close to work and welcomed their pets and offers an easy leasing lifestyle.
That all of our associates do our best to provide each and every day.
I'll now turn the call over to Ernie our Chief Financial Officer.
Thank you Charles today, I will discuss the following topics balance sheet and capital markets activity, followed by our financial results for the second quarter for.
Before wrapping up with our updated 2022 guidance.
I'll begin with our capital markets activity, starting with our recently announced $725 million unsecured term loan.
The seven year term loan matures in June 2029, and bears interest at adjusted Super plus 124 basis points based on our current credit ratings. This pricing includes the benefit we received for meeting certain ESG performance targets similar to our existing unsecured credit facility.
The new term loan has a delayed draw feature of that allowed us the option to receive a portion of the proceeds at closing followed by up to three additional draws over a six month period.
We elected to draw of $150 million of proceeds and our initial funding at closing in June and use the initial proceeds to voluntarily prepay a portion of our secured debt that was scheduled to mature in 2025.
As a reminder, at the start of the second quarter. We also closed a $600 million 10 year unsecured public bond offering.
For one 5% senior notes priced at the end of March and are scheduled to mature in April 2032.
Net proceeds were also used to voluntarily prepay a portion of our secured debt that was scheduled to mature in 2025.
As a result of these capital market activities, we increased our unencumbered pool to approximately 78% of our wholly owned properties and raise the portion of our total debt structure, that's unsecured to over 66% we have no debt coming due until 2025 and our weighted average maturity was five eight years at quarter end.
At the end of the second quarter, our net debt to EBITDA ratio was five nine times within our targeted range of five 5% to six times.
As of the end of the second quarter, we get nearly one 8 billion in liquidity, including approximately $273 million of cash along with the undrawn capacity of our credit facility and term loan.
I will now touch briefly on my next topic, which is our second quarter 2022 financial results core <unk> per share increased 13, 2% year over year to <unk> 42.
Primarily due to NOI growth.
<unk> per share increased 11, 9% year over year to 36.
The last thing I will cover our updated 2022 guidance as a result of strong execution and favorable supply and demand fundamentals. We've raised our full year 2022 same store core revenue growth expectations to a range of 9% to 10% up 100 basis points at the midpoint, while we're coming off two years in a row of exceptionally low expense growth of 1%.
And half of a percent respectively as expected inflationary headwinds have been strong this year and are predicted to remain.
As a result, we've revised our full year 2022 same store expense growth expectations of 6% to 7%, which is an increase of 50 basis points at the midpoint from prior guidance.
All considered a revised full year 2022 same store NOI growth guidance has been increased to a range of 10% to 11, 5% up 100 basis points at the midpoint.
Regarding investment activity, considering current and anticipated market conditions for the near term and also due to the cost of capital increasing from both the beginning of the year and more recent expectations. We now expect gross acquisitions for 2022 of approximately $1 5 billion through the end of the second quarter, we acquired approximately $800 million of homeland ban.
Alex sheet and in our joint ventures.
With regards to dispositions, we now expect approximately $200 million of proceeds for the year of which approximately $130 million of close through the end of the second quarter.
Taking these changes into account, we are increasing and tightening our guidance for core <unk> to reflect our revised outlook. We now expect full year 2020 to core <unk> of $1 66 to $1 72 per share, which represents an increase of <unk> <unk> per share at the mid point from previous guidance.
<unk> is now expected to be $1 41 to $1 47 per share or an increase of <unk> <unk> per share at the midpoint.
I'll close by echoing dialysis and Charles's comments that we continue to be pleased with the business and our team's execution.
Moreover, supply and demand fundamentals remain favorable we feel well positioned with our loss to lease and low turnover and we remain committed to delivering an exceptional level of experience that operator. Please open the line for questions.
Okay.
Thank you.
Ladies and gentlemen, we will now begin our question and answer session to ask a question. Please press Star then one on your telephone keypad do we to your question. Please press Star then two if you are using a speakerphone. Please pick up your handset before pressing the keys.
In the interest of time, we ask that participants limit themselves to one question and then re queue for pressing one for pressing star one to ask a follow up question.
Our first question comes from Austin Voice Schmidt from Keybanc capital Olson Your line is open.
Great. Thanks, everybody wanted to just hit on the guidance first specifically on revenue and earning within that revised guidance I guess, how much embedded deceleration in lease rates are you baking in for the back half of the year.
Do you expect the easier occupancy occupancy comps to be a modest tailwind moving forward.
Well two things.
On the new lease side, we do expect some seasonal slowdown, but it was certainly.
Better numbers than we've seen historically based on where we're at today, but we do expect to see some modest deceleration as we get to the later happening on new lease rates normalize we expect to see it would be a pretty pretty steady and we've been able to achieve.
Low double digits, 10% plus.
<unk> rates in the way things are shaping up and where the renewal asset gone out for the next few months, we would expect to be able to stay in the very high single digits or maybe around 10%.
Now, let's say the oxy copies the necessary, so easy, but we've been at record high occupancy for quite a period of time. So we're not anticipating that we would necessarily have a good guy that would certainly benefit us from the asset side, but it will mainly be please repeat things kind of in a steady state from where it was last year and that should get us into the middle of the range of our guidance.
Okay. Thank you.
Our next question comes from Steve <unk> from Evercore ICI, Steve Your line is open.
Yeah, great. Thanks, I was wondering if you could just maybe talk about the development opportunities and whether you see.
The opportunity to further expand that just given the housing shortage that we've got in the U S and just how you sort of see that unfolding over the next couple of years.
Yes, Steve This is Dallas great question.
It certainly been by design that we wanted to have a structure in place where we could work with some of the nation's best builders to develop a pipeline that we believe over time becomes very influential today, we've got about 2300 homes in that pipeline.
With our national builder partners, and I would say your inclinations, right, where we probably have an even greater opportunity to bring additional supply into the fold.
The nice thing about these structures as you know us we're under the Hood early with our partners and we can influence things like floor plans fit and finish standards, even sometimes community layouts and thats been a really advantageous position with us, but being very balance sheet sensitive and so we would expect that if there is a little bit of a slowdown.
Those partnership opportunities should be that much more appealing both to our partners and to us and I would expect for us.
Both in how we think about growth.
And also how we think about shaping the portfolio to have our builder structures play a major part in that over the coming years, there's no doubt about it.
Our next question comes from Nicholas Joseph from Citi. Nicholas Your line is open.
Thank you just maybe an acquisition guidance coming down a bit is that more a reflection of your cost of capital or is that opportunity set and then how are you thinking about funding that growth in the back half of the year.
It's a little bit of everything Nick first of all we don't love, where our cost of capital is today it would be fair on balance sheet, but we've done a nice job of building out our investment management business over the last couple of years. So we think that will lend itself to additional opportunities in the future.
In terms of the market and pricing changing with particular assets. It's still a little early I think we've taken a little bit of a cautious approach through summer wanted to see where supply could shake out because we're certainly long investors. So it's.
Candidly impossible to be perfect in terms of how you buy an asset every every day, but we do want to see where the some of these submarkets start to settle out we think there could be some even better buying opportunities towards the end of year. So we have been methodical in our approach.
To address the question around capital. So we do anticipate the 1 billion five and these are year to date numbers, Nick that you'll end up with about $700 million of our balance sheet acquisitions for the year and about $800 million be funded through our joint ventures.
With that we do have capital available to do more whether it's on balance sheet or on the joint ventures without raising any more capital this year without increasing leverage and we're actually end the year with more cash than we would've thought because we're bringing the guidance down a little bit. So if we do see the market changed in a way that is favorable for us we can take advantage of that with capital either in our joint ventures or some balance sheet capital.
<unk>.
And of course of our cost of capital change that that would also be in another way.
Thank you.
Thank you. Our next question comes from Brad Heffern from RBC capital Brad Your line is open.
Hey, everybody. Thanks for taking my question.
Are you getting more calls from your homebuilder partners looking to offload supply and how do you look at the attractiveness of that versus the traditional MLS channel right now.
Every on the one off opportunities most definitely over the last month that feels like a lot of our partners have been calling us because they've had some cancellations I think you've seen some of that even in the news releases that are out there. So yes, I would say.
Almost call it two fed raises ago when they when they moved it to 75 basis points. The first time. It felt like we had a lot of cancellations and communities that we were active in and we're able to take some advantage of that.
Think wholesale programmatic things no I think the pipeline takes a little bit of time to develop but we would expect that we might see more opportunities towards the latter part of the year.
Thank you. Our next question comes from Adam Kramer from Morgan Stanley Adam Your line is open.
Hey, guys. Thanks for thanks for the question.
What are your core NOI margins.
<unk>.
Kind of a disbursement Parker fees right. So western U S is at 75% or so, Texas and the Midwest are a little bit below 60% just wondering what drives the differences in margins across those regions are there kind of structural differences there.
<unk> in Texas, and the Midwest be raised over time I'm, just wondering kind of about the about the I guess kind of the dispersion. The margins is kind of the sustainability of those margins kind of given given the kind of record low turnover that we have.
Yes, it's a good question, we certainly think across all our markets are going to be opportunities for us to improve margins still but really the reason you see that the wide difference across our portfolio are because of our fixed expenses in certain states property taxes run much higher than in other states and thats, mainly because of whether there is an income tax in those states are not so for instance in the state of Florida and the state of <unk>.
Theres not a personal income tax but funds are raised by local jurisdictions by hiring profile, having higher property taxes and maybe in other states. The other item that has a wide dispersion across our portfolio would be in the insurance costs and so for instance, any any of our markets that have exposure to wind storm. So again in the Florida market as well as Houston, specifically and in the Texas market.
We're going to have significantly higher property insurance rates and current cost versus other markets and then just the cost to operate as a third item, but thats much lesser so and so that's why you see markets like Phoenix and at low insurance rate at lower property taxes in a market like California, even though it has higher insurance because earthquake lower property taxes because of prop 13.
You see that wide range of NOI margins that will certainly continue to exist in the portfolio, but over time, there's opportunities across the portfolio as I said to hopefully improve margins in each of our markets.
Yeah.
Thank you. Our next question comes from Anthony Powell from Barclays. Anthony Your line is open.
Hi, Good morning question on renewals versus new lease spreads yeah, maybe <unk>.
<unk> been in the past few quarters I know you wouldn't be prudent in terms of pushing rate on renewals that said is there more of an opportunity to maybe get more aggressive there given the overall dynamics.
And rental housing and construction markets.
Yes, as we said from the beginning this is Charles here, we've been really thoughtful on renewals as you can see we've been pushing up almost every quarter every month for the last year or so.
Breaking into the low 10, 10% here.
Ernie mentioned it.
For September and October were out in the mid 10 to 10 510, four and so I expect that we're going to stay steady there.
And what you'll see is we're kind of really nice new lease spreads.
Accelerating from Q2 to Q3 naturally we will see that stay high in Q3, but as we move into Q4, you'll see some seasonal slowdown and I think those spreads will start to between a new lease and renewal start to converge a bit.
And given our loss to lease that I mentioned earlier, we think that those renewals are going to stay steady for a little while as we try to catch up and clean up there. So.
We've been thoughtful low turnover is a good thing for this business.
We look at it in terms of our markets and where we think market is but on an individual home or a sub market. Our local teams are really thoughtful around are we pushing our rent too much. We're not we don't have any really hard cap. Some of them were required in California, but we are thoughtful about how we do that and where we go and you can see we're still steadily pushing that number up so we're going to.
We're going to keep finding that right balance and I think we're putting up good numbers overall.
Thank you. Our next question comes from Hendel, St Juste from Mizuho.
Handle your line is open.
Thank you good morning, guys.
I guess, maybe you could help us understand what's going on with the collection stats.
Why have revenues collected in the same month.
It remained so low versus pre COVID-19 levels net bad debt improve I think 100 basis points to 70 basis points.
Believe but there was no real movement in the better collections in the month I understand that rental assistance has helped but what happens when that runs out with bad debt move up again, so maybe you could help us understand what's going on here.
Yeah, and Alex certainly where it has been a new experience for all of us dealing with collections in a pandemic period.
And it certainly in hindsight it has not been as predictable as we would hope it would be youre right to point out that we've been pretty consistent in terms of collecting current rents historically, we collected about 96% of our rents current and then people were catching up for the next three and change the list. So the gastro low 99% collection rate in the past what we've seen over.
For the last many quarters as we kind of been steady around 90, 192% in terms of current rent being paid.
And then we have some volatility around the past rents being paid in terms of people cashing up sometimes with the help of rental assistance, sometimes without just people getting the opportunity to catch up and we were surprised in the first quarter with where our results came out to the bat with regards to what happened with collections, we had a bigger bad debt number than we expected, but then we were surprised to the good and the second.
Offsetting it so so year to date, we're still a bit off from where we thought we would be but over the longer six months period, its kind of closer to where we thought things would be yes, I suspect that it certainly could be some timing issues with regards to what happens to bad debt over the next period of time here in Dallas as rent expenses will drop off and the new applications are not being accepted but our applications are still being processed.
We received the rent assistance in July and will it certainly likely receive some rent assistance in August but we are also seeing some some good things happening with regards to people getting more current.
<unk> moved past the pandemic period and it is we've been able to work continue to work with us. So it could mean there is some noise in the second half of the year round bad debt in terms of it coming out at a number that's more like what it was for the average.
In the first half of the year versus what you saw in the second quarter and it's kind of we're not too far off from what we thought we said at the beginning of the year that we don't expect to get to our historical numbers here in 2022 and sitting here today now seven months into the year. We certainly feel very strongly about that statement that we will not get to our historical bad debt numbers and collection numbers before the end of this year and will likely take some time into into two.
<unk> thousand 23, before we get closer to that.
Thank you.
Our next question comes from Sam <unk> from Credit Suisse.
Your line is open.
Hi, guys I, just wanted to focus a little bit on the operating expense side.
How much of the R&M increase.
Once do too.
The seasonal turnover quarter over quarter versus the inflationary pressures and then also on utilities, what led to that uptick quarter over quarter.
Yes, so Sam we would certainly look at it more year over year basis versus sequentially because of the seasonality of that business quarter over quarter Youre always we always do see a big increase in repairs and maintenance costs from the first quarter. The second quarter. They stay elevated in the third quarter and Thats really around HVAC season air conditioning.
And as we all know it's been a pretty.
The hot summer. So, we're certainly seeing a little bit more of that this year than we did last year, so a little bit of that but the majority of the year over year difference. It is around inflation. We had a couple of years in a row. Our total net cost to maintain and R&M costs were really under control in terms of modest increases, but the environment. We've been in now for almost 12 months really kind of start.
Towards the end of talent in the third quarter certainly grew in the fourth quarter and continue to grow in the first and second quarter of this year as we're in a pretty significant inflationary environment on the R&M side. So that's certainly been.
A challenge for a lot of companies across the board now, we're not immune to that and any throw a hot summer on top of that as well, we're seeing the elevated R&M costs. I mean do you expect those to continue for the remainder of the year and our guidance with regards to utilities and others.
There's a few other items that we group in that as well. So I think the bigger challenge there is a bunch of different items associated with that and so utility costs are definitely up across the board we're responsible for utilities, while the homes are vacant.
And so because of that we're seeing increases and we're not immune to what's happening in the market with regard with regards to utility costs.
Thank you. Our next question comes from Jade Rahmani from K B W. J. Your line is open.
Thank you very much on the investment side capital deployment side, how are you seeing the market. Jeff currently are you seeing cap rates move.
In any material way are you seeing investors slowed down their purchases.
And SaaS their cost of capital.
What are you seeing in terms of those trends I know it will eventually be probably a big.
Opportunity for invitation homes, considering its institutionalization.
Strong balance sheet, but in the current market what are you seeing thanks very much.
Thanks, Jade this is Dallas, we certainly feel equally as confident about our.
Capabilities, if the opportunities present themselves I think I think so so far we haven't seen much movement in pricing in fact, it's still been a relatively active home buying season across the board for both buyers and sellers as well as maybe investors through summer I think the case Shiller index through the end of March early April in our markets is still like 23.
A percent so we're still seeing significant home price appreciation depreciation, albeit is starting to moderate to some degree so the backdrop of not having enough supply.
Is it going to turn on big changes in cap rates overnight.
And there still is.
A buyer in the marketplace, even even with a higher cost of mortgage given the amount of.
Pressure, but with that being said.
We would expect that as you get into Q3 Q4 later in the year is typically a little bit slower season, you might see some opportunities start to develop and I think it's really hard to forecast beyond that we just got to see how the economy is what's happening with the consumer.
Builders I would imagine are going to start to be a little bit more careful in terms of deliveries and things like that as well so it could lead to like any.
And extended.
Supply constrained environment truthfully, so that may offset any potential cap rate gains or things that you would hope that you might be able to see in the marketplace, but still generally pretty healthy right now I think a quarter ago. If you had asked me Jade about if we are if we're making an offer on a one off property, we're probably competing with 8% to 10 other buyers in the market today it feels like you.
Might be competing with three to four.
Just given where rates have gone and things like that so that's really kind of the current color on the ground.
Thank you. Our next question comes from Keegan call from Baron back capital.
Your line is open.
Hey, guys. Thanks for taking the questions.
We think about same store occupancy declining 40 basis points in the quarter. What were the main drivers of that you see any more pushback on elevated rate increases, causing new boats.
No. We really haven't I think we're just getting back to a normal environment as you think about last year.
With Covid and kind of where we were in that environment. We now see people starting to move again and.
We're getting back to our kind of normal kind of seasonal curve that we've seen in.
If you look at our quarter at 98% accuracy is still very good.
And so I think this is just kind of getting back to a natural.
Area and we're doing that also by making sure that we're capturing the new lease rate that's out there as we start to push renewals. So.
I wouldn't have no disappointment and a 98% occupancy is very strong you look back at 98, three that's not naturally where we are typically much lower than that in Q2 and Q3, because that's the time when people move out.
As Theyre looking for schools for their kids and all of that but I would pay attention to our low turnover number.
Thats sub 22% and 21% of its just really healthy.
And that just shows that we have homes in the right areas and we're providing the right service and people like what we're doing including our extra ancillary services and the like so 98% feels really good I would think in Q3, you might see it come down or stay right around there maybe a little bit and then youll start to see it go back up in Q4 Thats the seasonal curve, we typically see and I think we're getting back to that.
Normal curve.
Thank you. Our next question comes from Tyler <unk> from Oppenheimer Tyler Your line is open.
Good morning. Thank you a follow up question on turnover.
Included in the guide in terms of turnover for the second half of this year, you expect that metric to remain pretty low just given some of the challenges for affordability out there.
Are you expecting that to pick up a little bit and I guess I'd be broke above the guidance.
Turnover continues to move lower or perhaps stays where it is right now.
A little bit of a tailwind through the guidance that you provided.
Yes.
We are seeing a month comparing month to month year over year that.
Turnover is lower this year than last year, and we tend to expect to see that for the foreseeable future as we finish out the year. So we think we have turnover numbers will continue to stay in that low range of Charles just talked about better than we saw last year in turn more favorable in terms of the little bit lower and most of that to see whether we can even better still or it goes slightly other.
But we think we have room with our range to cover that.
Yeah.
Thank you. Our next question comes from John <unk> from Green Street, John Your line is open.
Hey, thanks for the time.
With turnover, continuing going down and length of stay increasing Ernie or Charles could you take a stab at quantifying just how much deferred.
Total cost to maintain is in the portfolio right now we might see come through the system once turnover starts to normalize.
Yes, John we certainly had seen as people are staying longer in the portfolio. We're seeing that our cost of term is increasing and increasing a little bit faster than inflationary.
To give you a number off the top of our head here wouldn't be appropriate at this point.
But certainly as people have been there longer you would you expect those costs to rise a little bit but also remember we have our pro care maintenance and then when we go out to the home once if not twice a year to make sure things are in a good spot because the opportunity to.
To make sure things are in a place where they need to be so we don't expect there to be a material change to put some pressure on the cost to turn that might be a little bit more of an inflationary pressure, but not not meaningfully different.
Thank you. Our next question comes from Neil Malkin from capital one Neil Your line is open.
Thank you and good morning.
Charles question for you on.
The operating.
Syed.
Right.
It is very important.
In terms of.
Resident relationships and expectations that you have the regional excuse me regional manager a regional team that are.
Well versed well trained well equipped to handle.
A variety of problems that can occur just again this is someone's home so.
They probably have a sense of urgency and emotional connection.
Connection. So can you just maybe generally talk about how you guys go about training and sort of doing the continuing education or improvement to have your your.
Your regional managers of your people facing.
Staff.
Ready to handle question, maybe people stay as high.
As enjoyable.
Reflects well on the company and maybe if you can give something like an average.
Maintenance request average time to being fixed or something is just another way to kind of help.
Help us understand how all those things work. Thank you.
Yes, no great question look we're really proud of our approach and what we do in the field we've been doing this for a while now and.
Part of what is special about US is all of the talented team members that we have in our markets that are we break them into pods and groups that are focused on homes and those residents.
And as they are either turning those homes are dealing with work orders and when you take a step back we do over 500000 work orders a year.
And we survey our residents and their overall experience on every interaction whether its a work order or a work order from our vendor and the law.
Mike.
And I think the vast majority of our residents are just really happy with what we're doing and in my mind, they vote with their with their feet and their wallet to 98% occupancy our low turnover or 79% renewal rate.
BBB things the rating that I talked about Google, Google and Yelp scores over 4%.
We measure them, we measure ourselves and we use that when we track as to your question on how we train and make sure that our residents. Our associates are up to speed to provide a great experience for our residents. Our brand really is about that experience. It's the quality of the homes the location of the homes and then how responsive.
We are to those residents do we get it right 100% of time now there are some things in hundreds of moving parts in our house and any business youre going to have a couple of instances, but generally we really like what we're doing and we continually get better and we make sure that we train our teams we do national things that come out of the central team and we do things locally to make sure.
Our people are trained.
We also have as we bring new employees on we're making sure that they are up to speed and thats kind of an ongoing effort we need to do your last question is around response time.
Let's be clear there are multiple avenues in which someone can request.
Maintenance requests so it could be through our new maintenance mobile app. It can be on our website, so online portal or they can call our $24 7 million.
Call Center and when we do that there is the request all go through the same criteria and we really break it down in terms of what's an emergency requests.
What's urgent and what's kind of a normal fixed that might be taken care of in our broker service or done or scheduled on the timing of when the resident wants to let us in again, we don't have permission to enter so we have to schedule along with the resident the thing I want to be clear about is if there is an emergency where there within 24 hours and thats, what really matters for us to make.
Sure that we're getting those and thats about 20% of the work orders that come through so when you take an average of how long it takes us to respond it's really an average between whether it's urgent whether it's a normal course or something that may need to be coordinated.
And then the last thing I would add is historically about 75% of our work orders are handled on that first visit so that's a big thing for our residents they want us to come in and be done sometimes theres follow up and we will come back, but generally we're responding quickly, we're showing up and finishing that job within that first.
Unless there is.
Some follow on that needs to be done.
Bottom line is we're proud of what we've been doing and we continuously improve and use that as trading opportunities for our teams.
Thank you. Our next question comes from Dennis Mcgill from Zelman and Associates Dennis Your line is open.
Hi, Thank you.
Ernie just going back to the bad debt.
Different numbers I guess as we talk about the collections and the reserve and rental assistance and so forth can you maybe just peel apart the 0.7% number that we see on the P&L between what the gross reserve was in the quarter and then the puts and takes that get us down to that the rental assistance and so forth.
Dennis we really analyze it unfortunately.
On that number.
Certainly youre going to have some netting.
Netting against that as some stuff becomes due and then we have run assistant that comes in that goes up against it.
That's how we would disclose on how we talked about and I'd, rather not confuse the issue more by throwing other metrics out there that I think.
What the bad debt.
So 70 bps.
Thank you. Our next question comes from Juan Sanabria from BMO capital one your.
Your line is open.
Okay.
Im just wondering if you can talk a little bit about expectations with regards to capex.
For home.
Given the inflationary environment.
The rough numbers or.
Remodeling now that Youre factoring in as you buy homes as part of that normal process.
Just to think about kind of the go forward run rate.
And one year for the last few years, we have had our recurring maintenance Capex reserve, which took into account and work that we did for repairs and maintenance as well as terms for the last many years ahead of this year. It was running at mandated ran it because its only about $500 per home. So again thats. The capex side of our net cost to maintain there was really no.
Increase we were able to offset any inflationary increases that we had during those periods of times granted when inflation was much lower than it was today through productivity through being able to get better contracts in place for procurement and then we'd certainly lower turnover helped somewhat and that that number as well we are certainly trending toward a higher number this year that could be as much as 20% or more.
Higher than what would that was in the past that you take the $500 of probably China is something that is going to be closer to $2800. This year going forward. We'll just have to see we do anticipate at some point inflation is going to come down very hard to predict when that's going to be and we get to more of a more normalized environment is certainly in a lot of cases, we're seeing less pressure on the supply chain and.
And if we're going to have some economic uncertainty uncertainty it's possible, we're going to see less pressure on the labor side going forward as well that could that could help us out. So I think over the long term. One we would expect that increases would be close to closer inflation, it's hard to fight inflation with the opportunity through our scale and our size and what we do to maybe do a little bit better than that but.
Certainly in this environment, especially coming off a few years, where things are more challenging or excuse me that were more favorable to us with constant cut creates a more challenging comparison for us. This year. So I think thats why youre seeing the outsized growth.
Thank you. Our next question comes from <unk> <unk> from Goldman Sachs. Your line is open.
Hi, This is John Lee. Thank you for taking my question could you give us an update on where things stand on the legal front I believe your arguments are fine.
Just last week.
Could you give us an update there and whats the next step in that process. Thank you.
Yes.
Yes, Hi, this is Dallas I think youre asking about the qui Tam.
Suite that we're dealing with from an kit in the state of California.
No real update outside of that we had published I think in mid July our response.
As part of the process and now the judge has it in their hands on the motion to dismiss and we've been told that they can take anywhere from three to six months to get a ruling on that and then.
What happens beyond that is indicative of where we stand there.
Thank you. Our next question comes from Joshua Ben on the line from Bank of America. Joshua Your line is open.
Yes, hey, everyone.
Just kind of curious on the expense, Brian I know theres been kind of record heat rates across the country.
And then thinking about potential for higher AC repair needs.
Is there something youre seeing or.
On the menu and Saturday.
Yes look we always know in the summer as it heats up that this is going to be a higher expense period, so that's baked into our numbers but.
You can never tell kind of how hard it is going to be and where there are some regions.
This summer that are just hotter than we've seen and so that's starting to show up in the numbers a little bit this quarter and I expect our Q2, and we will expect to see through a bit of Q3. So we always know that thats there and we tried to get out ahead of it to make sure that we have our vendors on call. We think about any preventative maintenance, we can do with our <unk>.
<unk> service.
But ultimately we have to show up when there is any challenge and.
We treat it always the same where we go in and evaluate whether it's a repair or replace based on what's going on and when you have this type of heat.
Need to be ready our teams have been responding well.
And when there are any instances as I've talked about before from a customer service, we're going to be really thoughtful around how we support our residents through that so.
This is normal course, maybe a little hotter than normal and we'll see how it all plays out hopefully it will cool off a little bit.
Thank you.
Our next question comes from Linda Tsai from Jefferies.
Your line is open.
Thank you in terms of the loss to lease at 16% across the portfolio can you discuss regional differences and how that's trending.
So Linda is there any we do look at that more on an overall basis. There is no really markets that stick out too much with.
Possibly the exception of California, because of the rules associated what we can do on the renewal side. So we do see in California. The loss to lease is bigger than the other parts of the country, which would make sense.
Certainly are seeing it in markets, where we're seeing more.
More recent higher activity like Florida, certainly a Florida has really taken off in the last six to eight months where.
Some of our markets like Phoenix, and Las Vegas have been great for the last 15 to 18 months. So Florida is certainly leaning toward being more of an outperformer.
Then on the on the on the weaker side would be the markets, where we generally are you seeing.
Again on a relative basis, but the weaker activity markets like in the Midwest Chicago Minneapolis.
Like Houston, but <unk>.
<unk>.
Of our sunbelt markets, and especially Florida, when we would have a disproportionate higher.
<unk> of loss to lease relative to the other markets.
Yeah.
Thank you.
The next question is a follow up question from Nicholas Joseph from Citi. Nicholas Your line is open.
Okay.
Michael Bilerman here with Nick I, just had two follow ups.
One just Dallas is just on the lawsuit.
I assume not only when you're spending a lot of time, but you are spending some money in defending the company. So maybe just outline how much capital was spent in the second quarter and if there's any expectation that at least in guidance for what you may spend the rest of the year and then I just had a follow up on a separate topic.
Michael Hey, it's Ernie.
Really been pretty diminishment minutes on the loss of it at this point because as you've seen we've just filed briefs, we certainly got a lot of work internally.
I understand where we're at.
But it's in the low tens to hundreds of thousands of dollars. It's not a it's not a big number but it is slow specifically, what we're spending on a lot of any specific loss or any legal activity, but it's not something that's material nor do we expect it to become material.
At this stage and as we think about our guidance and we'll just have to see how this plays out over the next period of time, and what may or may not be required depending on the judge's ruling.
Thank you.
Our next follow up question comes from John Pawlowski from Green Street, John Your line is open.
Thanks, just to follow up on the qui Tam complain I know, we have to wait for the legal process to play out but curious Dallas.
And your own internal review.
Have you seen anything that makes you change your opinion I think you've always said that Citi conference, where you feel good about the facts and if we're wrong and we don't think we are if we're wrong the financial impact would be pretty de Minimis is there anything you've seen the change that view.
No nothing nothing from our viewpoint has changed we feel good about the facts we have.
Charles and the whole operating team do a really good job of running not only the right processes, but the right checks and balances, but again, we've got to let these are the kind of the unfortunate things about being a public company you can pick down from time to time and I'm not sure the motives.
Always pure in terms of why companies have to deal with some of the stuff, but we'll just deal with it no change in terms of our internal view.
Thank you.
Another follow up question comes from Nicholas Joseph from Citi. Nicholas Your line is open.
Come back.
Line gets muted after you ask.
Prefer not to go on a whole diatribe and get into a little bit of a conversation, but the two questions.
One was just going off in the lawsuit is there anything that we should read into from the Washington Post article where they brought in Charlotte and Orlando effectively trying to highlight that this may not just be a California issue. The second topic I wanted to follow up on was earning on your comment about.
He said, we don't love our cost of capital and just to drill in both from an equity and debt perspective, obviously, you did the debt earlier in the spring.
Those bonds are yielding about 5% today for me.
That perspective.
And your equities and a low four cap.
While you are not at the mid Forty's, where you peaked from a stock price perspective, you're you're high 30% at this point I'm just trying to understand your sort of.
Is it the debt tied to the equity side is it both and where does that capital that you get comfortable with in terms of issuing it for external purposes.
Hey, This is Charles I'll start on the first part of your question around the Washington Post article.
Two dallas's comments around the qui Tam.
Look, we like and understand exactly what's going on here.
We know that we do that we do this thing the right way.
We disagree with the post premise that they laid out there and we recognize we're in a bit of a moment and I think it's time to kind of step back and think about our business and our approaches as we our business plan and when we target an acquisition it's typically.
Slight improvement that we're going after about 10% of the purchase price $25 $35000 and we try to avoid properties that need.
Heavy work or really require permits and when we look at our numbers.
80% of what we do with cosmetic.
Hey, cosmetic, let's think about that its paint.
Flooring, it's cleaning its landscaping, maybe some cabinet work a little bit of countertops. Some lighting interior exterior that's 80% of what we do and typically would not require any permits at all.
So this is how our business we've been doing this for a while and we brought kind of broken that down and looked even further if you think about what might need permits it's really only about 6% of our spend which would be like a roof replacement or a large HVAC replacement or something like that and that remaining 10 or 14% are would be offense or.
On the municipality.
We'd be unlikely to require permit the point of all that is.
We know what we're doing here our teams or do a great job, we work with contractors locally.
Our license they know the local laws.
And we rely and we make sure that we hold them accountable in terms of the applicable laws and what they need to do on permit so.
As we look at this.
We see no other kind of risk out there that's going to make a big difference.
Michael its earnings to address your second part of your question with regards to our cost of capital and when we look at the components very specifically on the debt side.
We're able to raise the unsecured term loan at so for adjusted software plus 124. So we certainly like that cost of capital, we've drawn $150 million of that to pay down one of our one other piece of secured debt.
And within the range of where we want to be from leverage right. Now. So if we saw a really good buying opportunity. We certainly can consider using some of the unfunded unfunded proceeds that remained about $575 million due some some modest buying on the balance sheet. We thought so because that certainly would be a good cost of capital to do that is we want to balance those two things that said overall, we are not looking to really increase our <unk>.
Leverage much from where it is if at all because we are within our range.
We certainly have the capability to use some leverage and to your point leverage, especially we just recently raised would certainly be favorable for that from an equity perspective stock prices certainly been extremely volatile for all the companies out there over this last period of time, it's really hard to time something exactly.
Around that but we are and we're not so much focus on where we were at Michael.
That's history I wanted to focus on what our opportunity is at hand, and compare that to how we can deploy that capital would that be accretive for shareholders, whether it's on an NPV basis, whether it's on an earnings basis.
<unk> trading in the <unk> based on how we view evaluation, we would certainly say that would not be accretive as we get closer.
Potential increases in gets somewhere higher than where it's been the last many months it certainly potentially as potentially more of an option for us, but then again, we've got want to marry that up against where we can buy and see where cap rates are down stocks about early ultimately kind of land over this next period of time for homes, whether we're buying them from our builder partners, whether we are buying them off the MLS like we.
We do so we will certainly stay nimble and the nice thing is we buy homes about 350 to $400000 at a time. So it certainly gives us more optionality to other people might not have in terms of the size of the capital it needs to be raised to be able to fund future growth and we'll be prepared to do that but we think we're in a favorable position both in terms of the buying opportunity in the capital opportunity.
Thank you.
Our last follow up question comes from Jade Rahmani from K B W. J. Your line is open.
Okay.
Have you talked about on this call and I apologize if I missed it.
Under a modest recession scenario, where you think occupancy.
The trend just curious as to what you think.
The risks sensitivities are that we should be focused on and also if you think that rent growth would still.
They'll remain positive.
Centering the constrained supply environment. Thank you.
Jade This is Dallas good question.
Look I think our business is really well positioned as a recessionary hedge quite frankly, I think we've seen it a little bit.
And turnover ratio say in the last 90 days have you seen mortgage rates and a few things maybe impact people's thinking in a time when we would traditionally see more volatility.
In our leasing program, because we have more people moving out to homeownership and doing some things like that so I think we're insulated and one of the things that I've loved about this business and have almost been doing this now close to 20 years is how resilient <unk> is over time and over distance in a previous life. We had about 1000 rentals I shared with some of you.
In Phoenix.
In the last crisis of 2007, and eight and while you get a little bit more muted on your rent growth. It just more of like a CPI type of number.
Our occupancy stayed really steady through the great recession, and that kind of 96 to 96, 5% range. So I feel really good about and by the way we didn't have the tools the resources of the platform.
Which invitation homes is now.
I think we've developed a really good track record with our current customers.
It's evidenced in the retention rates and in the renewals that we're seeing and I also think our service levels are getting that much better. So I think in a recessionary environment as people have got to make a decision about where they want to live and how they want to spend their own capital.
We're really in a position of strength coupled with the fact that right now our rent to income ratios are approaching five three times, the customer spending somewhere around 17 or 18% of their monthly rent with us. So I just think we're really well positioned we are in the right markets for us.
A recessionary environment.
We've got product that quite frankly has already pointed out.
People want and need in the right areas. So I think we're well positioned for this for this next chapter.
Thank you ladies and gentlemen, currently we have no further questions. Therefore, I would like to hand back to Mr. Dallas Tanner for any closing remarks.
We just want to thank everyone for their support of the company and we look forward to seeing you all either in person or on our next earnings call. Thank you.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for being with US today have a lovely day ahead you may disconnect your lines now.
Okay.
Okay.
Yeah.