Q3 2022 Invitation Homes Inc Earnings Call
Continued low turnover high occupancy and high resident satisfaction scores remain a testament to the outstanding efforts of our associates.
My thanks to them to providing another quarter, a premier resident service, especially those recently impacted by Hurricane and I couldnt be prouder of the quick and carrying response our team members provided in the wake of the storm as well as our role in helping the communities we serve.
Across the country, we provide housing choice and flexibility that residents desire need while the macro world. We all live in has changed quite a bit in the past year, we believe our business remains well positioned to succeed within it here's why to start we believe professionally managed single family homes release are an important part of the housing solution.
In the United States, we still face a housing supply shortage in this country by as many as several million units from some accounts today's elevated interest and mortgage rates haven't helped as seen by the pullback from builders in the last months further decline in starts for single family home.
It's also harder for those thinking of buying a home in the near term.
Recent reports have noted the monthly payments on new mortgages have increased by as much as 60% since the start of this year due to higher mortgage rates. According to last month's data from John Burns. This contributes to a cost of homeownership is over 20% higher on average than leasing across invitation homes markets.
It works out to an average difference of roughly $600 a month and savings from leasing at home.
So leasing remains the preferred choice for many families combining convenience and flexibility as well as value.
These advantages further stand the favorable tailwind of demographics, especially among millennials, who are just beginning to approach our average resident age of 39 years old.
With our expectation that these favorable supply and demand dynamics will stay with US there is a call to grow our industry, leading scale technology and experience. We consider this in tandem with our cost of capital.
Our updated acquisition assumption for the full year is $1 $1 billion and through the third quarter. We've acquired approximately $1 billion of that target. We have slowed our acquisition pace in light of the current environment, taking advantage of opportunities to recycle assets and weighing our cost of capital on balance sheet versus our joint ventures as a result.
We're continuing to explore all opportunities available to us to expand our investment management businesses and explore accretive growth while.
While at the same time operating as prudent capital Allocators, who remain nimble for what opportunities may arise.
As we have continued to learn and grow so have many of our best practices, including how we address energy and sustainability, we recently deepened our bench with the hiring of two in house experts to oversee our ESG and our energy initiatives.
We have a responsibility and a commitment to be a leader in these areas among our industry.
I'm pleased seeing she is making good progress of particular note.
We recently learned that our latest <unk> score increased over 13% year over year, a significant improvement reflects the great work by our ESG Task Force.
Before wrapping up I'd like to comment on our reported results and our updated guidance.
Our revised full year guidance for 2022 is consistent with our prior expectations for the overall business with two exceptions property taxes and bad debt property tax assessments have been impacted more quickly than we would have anticipated due to the robust home price appreciation within our markets and our bad debt is expected to stay somewhat elevated.
Compared to before the pandemic as it is taking us longer to address residents who are not current with the rents we're committed to doing our best to help manage through these items.
In closing, we believe our business remains favorably positioned within the residential and the broader REIT space and we're excited by the positive impact we are making for greater options in housing and the opportunities. We believe this brings to invitation homes and our stakeholders with that I'll pass it on to Charles <unk>, Our Chief operating officer.
Dallas I would like to begin by thanking all of our teams for their commitment to providing outstanding customer service on earning the loyalty of our residents every day.
I'm, especially proud of our associates in Florida, and the Carolinas for their hard work and genuine care following hurricane Dorian where.
Thankful to have avoided any reported injuries from the storm.
Now, let's discuss the details of our third quarter operating results. Our same store net operating income grew eight 6% year over year same store core revenue growth was eight 3% primarily driven by a nine 6% increase in average monthly rent and a 15, 5% increase in other income.
Our same store average occupancy was 97, 5% for the third quarter.
The sequential decrease from the second quarter reflects our expect to return to a more.
More normal seasonality patterns that have otherwise been absent in the past two years.
We also saw a return of elevated bad debt in the third quarter to 170 basis points.
The quarterly rate has fluctuated this year from a high of 190 basis points to as low as 70 basis points.
Rental assistant payments have been a factor in the volatility and we are seeing that many of these programs are starting to wind down.
We've been proud of our role in working with residents who need help and we will continue to seek solutions to find common ground.
Overall, our portfolio remains very healthy new resident average household incomes continued to improve climbing to over $134000 per year, representing an average income to rent ratio of five three times.
Returning to our same store results for the quarter.
Core operating expenses increased seven 6% year over year, primarily driven by a three 8% increase in fixed expenses.
15, 4% increase in repair and maintenance expense and a 15, 2% increase in turnover expenses. These.
These increases were attributable to the continued inflationary pressure pressures and a rise in the number of move outs of residents who are not current with their rent.
Our teams are working hard to leverage our procurement relationships, our scale and our technology to combat these pressures where we can.
Next I'll cover our third quarter leasing trends.
New lease rates grew 15, 6% and renewal rates grew 10, 2%.
This resulted in blended rent growth of 11, 6% or 100 basis points higher than the third quarter of 2021.
That we're nearing the end of the year I'll also touch on how things are shaping up for October we expect new lease rate growth for the for this month to come in at 9% or better and renewal increases to come in at 10% or better.
We've sent out renewals for November and December and the mid 10% range. All told these strong increases that we believe underscore the current health of the single family fundamentals.
Looking ahead, we remain focused on ways, we can better utilize technology to lower cost and improve resident experience.
One example of how we've done this with our mobile maintenance at <unk>.
We launched an app a bit over a year ago and it's now been downloaded over 110000 times with an average app score rating in the high fours.
Our residents are submitting about 40% of total work orders through the App today.
These submissions include a high rate of photos and videos, reducing our need for return trips and making the experience a lot more convenient for our residents.
Since the launch of the mobile App, we have also reduced the proportion of our overall maintenance requests that are received by our call center by nearly a third.
Once again I'm proud of our teams who rose to the challenges of a hurricane high bar prior year comps and significant inflation to deliver a solid result for the third quarter. We remained laser focused on executing and plan to finish the year strong.
Now I'll turn the call over to Ernie our Chief Financial Officer. Thank you Charles.
Today I will discuss the following topics first our balance sheet.
Second our financial results for the third quarter.
And third our revised 2022 guidance.
I'll begin with my first topic, our balance sheet.
Leave our solid investment grade rated balance sheet positions us well as we navigate the current environment.
To recap, 99% of our debt is fixed.
First were swapped to fixed at a weighted average interest rate of three 6%.
Approximately two thirds of our debt being unsecured.
We've also made significant progress in <unk> our debt maturities.
No debt due until 2025.
Our net debt to EBITDA ratio is now five seven times solidly within our target range of five five to six times.
As of the end of the third quarter, our liquidity totaled nearly $1 9 billion through a combination of unrestricted cash and undrawn capacity on our revolving credit facility and term loan.
Turning now to my second topic, our third quarter financial results.
Core <unk> increased nine 5% year over year to <unk> 42 per share.
Primarily due to an increase in NOI.
Driven by strong rent growth and demand for our homes.
This drove an eight 2% year over year increase in <unk> 34 per share.
I'd like to point out the following two nonrecurring items included in our third quarter reconciliation of reported <unk> to core <unk>.
The first is our estimated financial impact of Hurricane Sandy.
Our third quarter net casualty losses, and our core <unk> reconciliation, including $19 million accrual for estimated losses and damages related to the storm.
Based on our prior experience it is possible that additional damage may be identified over the coming months.
And if needed we will adjust our estimates.
Additionally, a small portion of the losses may be recoverable through our insurance policies that provide coverage for wind flood and business interruption.
Subject to deductibles in womens.
The second nonrecurring item isn't an approximate $7 $5 million global settlement as a multistate alleged class action.
Guarding resonant late fees.
The settlement covers claims initially asserted in may of 2018.
And involve allegations similar to what others in the residential sector have based or are still facing.
While we strongly believe that the allegations are without merit.
And we do not admit any liability in the settlement.
We believe it was in the best interest of the business to settle the case in order to save time and expense associated with the litigation.
Settlement remains subject to court approval.
The last thing I will cover is our updated guidance for the full year.
Included in last Night's release are the details of these updates which reflect our revised expectations for same store results and core <unk> and <unk> per share.
As Dallas mentioned, the majority of the change in our updated same store core operating expense guidance is due to our revised expectations for real estate taxes.
Home price depreciation has been very strong in our markets for much of 2021 and 2022.
Historically, we have seen that local investors might take longer to reflect current fair values in their assessments and that millage rate resets might be impactful to partially offset increasing assessments.
Although we have not yet received all final tax bills.
Just on the information available to US we believe our growth in real estate taxes will now be 7% to 8% for 2022 or about 300 basis points higher than previous expectations.
This increase is primarily due to significantly higher assessments and anticipated tax bills for our homes in Florida and Georgia.
Partially offset by favorable expectations in other jurisdictions.
Assessments in Florida, and Georgia were up on average almost 30% from prior year.
We plan to appeal, a much higher proportion of these assessments compared to prior years.
There will be a timing difference between when we appeal and when any rebates are received.
Less impactful as the change in our outlook for same store core revenue growth.
We have reduced our expectations as we now expect bad debt to remain somewhat elevated relative to pre pandemic historical norms as it continues to take longer to address residents who are not current with their rents.
In conclusion, it has clearly been a dynamic year to date, mark with favorable supply and demand fundamentals.
Strong performance from our associates and business.
We believe our seasoned team and time tested platform are well prepared to continue to execute and deliver solid results with that operator. Please open the line for questions.
Thank you if you'd like to ask a question. Please press star one on your telephone keypad. If you wish to withdraw your question. Please press star two.
Our first question today comes from Derek Johnston from Deutsche Bank. Please go ahead.
Okay.
Hi, everyone. Thank you.
Can you discuss the supply growth.
We're shrinkage.
So far homes available for sale. So what is the number of homes you were tracking on the MLS or Zillow and I am looking for supply growth of single family listings.
And more importantly, the measure of change in that metric over the past few months.
Hi, Derek this is Dallas, it's a good question and I think it's something that obviously, we spent quite a bit of time looking at over the years and paying even maybe more attention to.
In light of recent volatility around mortgage rates in some of the home price appreciation metrics that are out there today and I would say, it's so far kind of acting and behaving for the most part in our markets fairly cyclical.
Obviously being impacted by the fact that mortgage rates are kind of data have taken off to new highs, we're not seeing anything that suggests.
Wholesale change as of yet in fact, we had some people in our offices. This week, who are a bit more experts on the matter. We spent some time looking at resale supply across call. It invitation homes' markets and funny enough. It's pretty early we are actually seeing a drop in new listings that you would typically see at this time of the year as sort of makes sense.
You start to think about where mortgage debt in the country is vast majority of the country has mortgage rates in place today that are quite favorable relative to where you could currently go out and price. So as much as I think the near term headlines had been that maybe we'd start to see some opportunities in terms of additional supply to be able to buy on the.
<unk> sale side that just hasnt been the case, thus far so far it feels like months of supplier doing kind of their normal cyclical creep a little bit late in the year, but when you start to really dive down and look at less than 60 days on the market. That's when youre seeing actual new listings decline and the majority of invitation homes markets.
Our next question comes from Nicholas Joseph from Citi. Please go ahead.
Thank you maybe just on external growth.
It seems like Youre pulling back on acquisitions at least currently and I recognize business was born out of dislocation in the housing market and so what are you looking for in terms of re entering or what kind of.
Kind of dislocation would you need to see to go with large scale on.
On the acquisition mode, and then as you think about funding that how.
How do you think about GBS versus increasing leverage from here.
Hi, Nick this is Dallas.
Question, I think going back to our call that we had in May we talked about the fact that we had started to pull back on our acquisitions in terms of kind of level setting and we wanted to get a view on what the market was going to feel like towards the back part of this year.
That being said, we've seen a little bit of softening, what I would say in kind of normalized cap rate today, it feels like call. It in that kind of product and in the parts of the markets, where we typically invest capital those prices feel kind of in the mid fives to kind of the the call. It five in a quarter in terms of where current pricing is today.
<unk>.
We would like to probably be measured in our approach and just making sure that we feel like we.
We're not trying to call a bottom, but I think we'd want to averaging over time. If there are new valuations that could give us on a risk adjusted basis, a much better return profile as you think about how we're going to grow the book.
The portfolio over time, we obviously have the use of JV we have.
The liquidity that Ernie talked about in our opening remarks, and then obviously we've talked over the last couple of years about the need to expand our investment management businesses. Because we look at that is extremely accretive growth when at times, maybe the reach cost of capital isn't as good as we'd hope it would be and certainly right now we're not thrilled about where the equity prices are today, so with that.
So I think we'll continue to use our partnerships and JV will find ways to meaningfully invest we generated really good amount of what I would call outperformance through our fee structures and are in our management business around those joint ventures, and we've got partners who have been <unk>.
Extremely reliable and that are also I think looking at the potential environment as you mentioned, Nick as being quite appealing. So we actually are being.
Being measured I would say in the near term, but cautiously.
I think preparing ourselves for maybe some good opportunities to continue to expand our external growth opportunities in relation to what the market allows for going forward.
Our next question is from Jeff Spector of Bank of America. Please go ahead.
Good morning, if it's okay, just two parts on the real estate.
Texas and assessments.
You guys provide an update in September I guess first if you can just describe.
The process.
Ernie you said that based on information available today.
That clearly the market has surprised by this update.
When did this come to life and then second I guess can you just talk about the normal appeal process or historically in Florida, Georgia.
The likelihood of our success <unk> seen in the past just to give us a feel for what may happen in the coming months. Thank you.
Yes, sure Jeff So with regards to real estate taxes, there's really two key components to the real estate tax Bill one is the assessment and one is millage rates, we do start to see preliminary views on assessments during the third quarter in both Florida and Georgia. The challenges, we don't see millage rate information until in some cases.
Actually most cases they are released in mid October and in some cases, Jack we still haven't seen final numbers on millage rates at this point, we don't see those through the tax bills that come out here in the next few weeks. So the challenges in the past, we've seen assessments and millage rates do some in some different things in terms of when assessments go up off the millage rates will come down, but we don't have the full picture in the full understanding.
Any of that until we get towards the end of October So that's why as we.
Around engaging with folks in August September we do not have clarity as to where the real real estate tax bills may be going and wanted to make sure. We have full information before making a final judgment on what that would be and hence that's why we had the adjustment that we had here as we think about our fourth quarter numbers, you'll you'll see in our numbers that they are they are not even reflected in the third quarter. Because we didn't have all the information on our third quarter numbers.
We do have that today with regards to appeal it really varies jurisdiction by jurisdiction, Jeff It can be as quick as three to six months in some cases in other cases it can take as many as nine to 18 months and so we really wont have a good sense for our success rate on appeals until well into 2023.
Most of them will have an opportunity to get a sense for where its heading in 2023 and there will be a small handful that may take into early 2024 tab final results on the appeals. We are optimistic that we are seeing assessments as high as they want.
That will have better opportunity we've had in the past to fight and we're certainly going to do that we're gonna appeal more than we ever have in the past, especially in those two states and we'll just have to see how that plays out.
Okay.
Our next question is from handles induced from Mizuho. Please go ahead.
Hey, guys good morning out there.
So you delivered a very solid operating results for the third quarter and better stability in rent can be seen in multifamily, but obviously cutting guidance latent here was a bit of a surprise. So I was hoping you could help us understand a bit more what's going on at least what the same store revenue reduction you mentioned, a few times that bad debt is taking longer to get.
So I'm curious why is it taking so much longer and is that mostly focused in a particular region, perhaps California and do you think bad debt overall can become a tailwind into next year.
And Charles Thanks for the question.
Let me just step back and kind of context around the environment as we've talked about on prior calls and it's early in the pandemic, we were very conscious and working with residents that face hardship and help thousands of residents with flexible payment plans and the like but in.
In 2022, we purposely and we're focused in on getting back to our typical enforcement of the lease.
We legally.
But what we're seeing in the process and that has been working is what we're seeing in the process. Now however, as the states are taking.
And it varies by state, taking two or three times longer.
Process non payers through the system and to your question in California, Southern California, specifically is the most difficult area and in Norcal, Illinois and Georgia.
That being said.
At the same time rental assistance has been a big part of what we've done to help or support our residents and today. We've supported over 12000 residents secure rental assistance and in 2022 alone we've secured over $57 million to help them.
And we knew that that rental assistance would slow down towards the back half of the year.
But that acceleration in Q3 was a little faster than we thought it would be.
The good news is and then acceleration has come we have gotten better at being able to collect rent on normal non rental assistance and that are.
Our residents are also seeing that and we're starting to see them step up in terms of <unk>.
Recognizing that kind of perverse incentives that they were waiting on that rental assistance show up that they need to pay now so.
It is kind of across the board with the rental assistance, but we saw the biggest slowdown in the California markets as well and that's where the biggest delay is and we've talked about this before in La County.
And I'll, let city or some of the more kind of <unk>.
Slower to move off of the being able to go through the normal legal process. So we're moving through it and just kind of be a little bit of a transition as we work through it over the next few quarters.
Our next question is from Brad Heffern RBC capital markets. Please go ahead.
Hey, Thanks, good morning, everybody.
A follow up on the property taxes. So typically when you have one elevated expense quarter, you get three more of them as it sort of flows through obviously, you're not giving 2023 guidance, but I'm curious should we expect to see some sort of.
Teens.
Operating expense growth in the first few quarters of 2023 has increased property tax level flow through.
No actually Brian I'm glad you're asking that so we can clarify that it is going to be the opposite we have to do a catch up because we didn't accrue enough in the first three quarters of 2022. So we're going to have a very elevated growth rate for real estate taxes in the fourth quarter here, because we up the increase but it's because we were under accrued in hindsight without having all the information available to us so you're going to see it.
Very elevated growth during the fourth quarter, but then as we think about our year over year comps.
Youll see some reset at a higher level youll see it slightly elevated in the first part of the year than the fourth quarter of course would be an easier comp if things played out at the same but it shouldnt be at the same level that you are seeing here in the fourth quarter.
Our next question is from Juan Sanabria from BMO capital markets. Please go ahead.
Hi.
Just going back to an earlier question with regards to some of the for sale product coming back to the market.
What's going on with that is that being moved to four rental and is there.
Kind of a shadow supply in the single family rental space.
Packaging, whether it's occupancy or churn rate.
Could speak to across your portfolio.
Yes.
Geography wise.
Hi, Juan no actually I would sort of say the opposite.
All things being equal I think if you look at our blended rate growth this quarter.
At roughly I think 11, six we went back and looked at call it pre pandemic.
The numbers from the third quarter of <unk> 19 were at like four 5%. So we're still seeing.
Call it accelerated demand and appreciating that.
And between the balance of home price appreciation and the amount of demand for product our occupancy still elevated in the mid 90 Sevens and so as you think about that on a historical basis over the last 10 or 11 years as we run the business, we're actually seeing more demand for this time of year than we would typically see in a normal year. So I wouldn't say so now.
Certainly there are other operators out there that are.
That probably have and are digesting new product as it comes into the marketplace and some of your Sun belt markets, you might see maybe a little bit of additional more supply, but we're not seeing anything in our numbers and Charles can speak to this as well that would suggest that we're having any change in top of funnel or our ability to execute on leases now all things being equal this tends to be.
In a normal year the slower part of the year from a leasing perspective. So it is good to keep that perspective that as you get into the last quarter of the year and kind of early call. It January that is where we have generally always have had our lowest leasing velocity.
Outside of the two what I would call. It 2021 pandemic yours. So that those last two kind of fall months into the winter has not behaved as normal as what we are seeing probably a little bit more. So this year. So we're not seeing any other supply front at the end of the day, that's causing us really any concern. It's just more about how can we execute the business fight the inflationary cost.
Pressures and continue to maximize efficiencies within our platform.
Our next question comes from Adam Kramer Morgan Stanley . Please go ahead go ahead.
Hey, guys I appreciate it.
Asking about bad debt.
Recognize that there may have been some kind of rental assistance impacts in the quarter, but clearly kind of less than prior quarters. So I'm. Just wondering if you are you going to quantify the rental assistance received in the quarter relative to kind of the 170 bps.
During the quarter.
Recognizing kind of pre COVID-19 normal ways of maybe 30 to 40 bps.
Kind of the process from getting from here to there.
It won't be at that pace. It would there could be kind of just structurally or maybe regulatory changes that you, maybe we never kind of get back to that kind of 30 to 40 basis points.
Let me walk through the first part of the question Adam with regards to the impact of rental assistance and how that's dropped off a little bit here from the second quarter third quarter I'll turn it over to Charles about how we think where we go next with bad debt. So from the second quarter to the third quarter, we saw rent assistance payments dropped for us by $9 million from $23 million of <unk>.
Million.
Bad debt went up $5 million from the second quarter to third quarter. So one might have thought that if we're going to lose $9 million of rent assistance bad debt would have been up $9 million was only up five and thats because as what Charles talked about people are getting they understand that rent assistance and it won't be available for them anymore and people are starting to get back on.
I'd say, what we saw pre pandemic in terms of keeping more current with their rents. So we would expect going forward and maybe a similar type thing where you see rent assistance, you'll continue to drop off and fade away and likely be gone as we and maybe a little bit trickles into the first quarter of 2023 were not accounting on very much there at all but for the last couple of quarters, we've seen better behavior in terms of people than making up for.
The fact that we've had a little bit of a drop off there.
Yes.
An earlier question the flexibility that we were showing while we were waiting and supporting our residents with rental assistance.
And how we've been tightening this year, we're just going to continue to do that as residents recognize that the rental assistance is going away. The partial payments on all of that stuff, we're going really back to where we were before and as Ernie just mentioned, we are seeing improvement in terms of how.
Residents are paying a lot of it is just the psychology affected them getting back to understanding we are at our normal way in which we enforced elyse.
And we will continue to do that to execute while the rental assistance.
And we're starting to see good improvement and we will continue to push and it'll be like I said, a little bit of a transition period as we work through back to normal eventually.
The next question is from Keegan call at Wolfe Research. Please go ahead.
Hey, guys. Thanks for the time, maybe just wanted to clarify some things just kind of curious what percentage of your leases are month to month, rather than annual and how does this compare to pre pandemic levels.
Yes, so on the month to month side.
We're at about six 8%.
Okay.
Yes.
California is really where we see the majority of the.
Month to month leases other than that we haven't really seen any change to the number.
The California numbers are increasing just because of the.
The CPI plus 5% that are happening on the renewals and the numbers are close to each other in terms of doing a renewal or a new lease and sometimes they just choose to go month to month, we're not seeing any change in terms of retention or renewal rates. It's just around the month to month itself.
Okay.
Our next question is from Chad mainly from from Goldman Sachs. Please go ahead go ahead.
Hi, Thank you for taking my question. So you guys laid out taxes for next year, but how should we think of that other line items within expenses going into 2023.
Repair and maintenance utilities.
Insurance all of those line items piece.
Yes, Sean this is ernie and to be clear with real estate taxes at the question was pretty specific around just what's happening with the fourth quarter here and what things may look like on a year over year comp basis, I want to make very clear, we do not provide any guidance for what we thought 2020 of our real estate taxes would be.
We're not providing guidance at this time for any 2023 items. So unfortunately went to decline to answer that.
<unk>.
Our next question is from Brian <unk> from Evercore ISI. Please go ahead go ahead.
Hi, Thanks.
I might have missed this but could you talk about where the loss to leases today at the portfolio and just your expectations and capturing that today and then also.
What the earn it looks like for next year, just given the activity year to date.
Yes lots of lease right now is tracking to be right around 10%.
Where we currently stand in terms of where market rents are and if you were to just look at where we think rents and out for the remainder of the year and where the year is at this point relative to what our average rents were for the year. Our earn in is it'll be almost right at 4%, it's just a hair under 4%.
In terms of just from a rate perspective of course, that's taken iteration. What we think is going to come with occupancy rates next year as well as bad debts to get to a fuller picture for rental growth our revenue growth excuse me.
Our next question is from Neil Malkin from capital one. Please go ahead.
Thanks, Good morning.
Question on.
The homebuilding.
<unk>.
I guess you could say, it's a two parter first.
Just given the reduction in mortgage application then homebuilder sentiment.
Are you seeing are you getting more inbound calls and what kind of momentum.
Our capital allocation priorities.
Are you are you.
Kind of dedicating.
Toward.
Buying more of those.
Assets homes through the homebuilder relationships and then secondly.
What's your what's your thought about potentially buying a regional homebuilder.
Just to kind of give yourself an embedded.
Growth pipeline when the acquisition market isn't as advantageous.
Hi, This is Dallas.
We definitely would want to stay opportunistic with any opportunities that come to us vis vis homebuilders. There is certainly a lot of chatter out there I think right now it's sort of the early stages of what our homebuilders thinking with their future pipelines and call it active inventory and things like that.
To say, we've gotten a lot of phone calls.
Assuming a lot of our peers are getting the same phone calls.
It doesn't really change our strategy in terms of having a large desire to continue to stay until by.
<unk> that exceed extremely accretive over the long haul and put structures in place that would protect us score from further downside risk that could happen in the marketplace. So I still feel like it's pretty early in terms of kind of where some of this is shaking out I think builders have done a nice job of trying to move some of their call. It current sitting inventory.
Also we have some tools in their tool belt from what I'm hearing on the kind of just conversations around buying down mortgage rates and things like that so I imagine a lot of the near term inventory can get taken care of through kind of the use of buying down right.
Obviously selling scattered sites to operators like ourselves we have done some of that I think over the last couple of years, we've picked up a couple of hundred homes that way. So we're going to continue to invest and it's part of our thesis we have over 2000 homes in our pipeline that are that we're doing with pulte and other partners and we would view this as a very opportunistic moment for us.
Say over the next year or two where we should be able to lean in and be a good partner with.
Not only our current partners, but maybe future partners down the road so from our vantage point, we've seen this once a four wall. While my current belief is that we're not going to see housing.
Move backwards like we did in <unk>, seven and eight I think it could be a great opportunity for invitation homes over time to make additional meaningful investments.
That will add to our already what I would call industry, leading scale and performance. So we're viewing the next call. It couple of years is great opportunity for growth.
Our next question comes from Jade Rahmani from <unk>. Please go ahead.
Hi, This is actually Jason <unk> on speaking on behalf of Jade.
There's a lot of chatter about multifamily demand slowing driven by a slowdown in housing information.
Do you view single family rental as a substitute product for multi and do you expect this sector to behave similarly.
So the short answer is we would expect <unk> to be pretty resilient in a down cycle I think we exhibited that quite frankly over the last two and a half years during the pandemic.
We had tremendous performance in 2021.
In addition to that a couple of things you got to keep in mind one the customer is in exactly the same customer while our businesses operate very similarly, if you look at them from a P&L or balance sheet perspective customers are typically different.
The other advantage of single family typically has is that on a rent per square foot basis, it's much more efficient with a single family.
For rent product.
And then lastly, I would also add that.
And an opportunity where square footage may matter or people are looking at how can I have kind of call. It the best and greatest use of $9 <unk> is going to provide a better bank for your box. So we would expect our business to hold up pretty well given any of the down cycle. Some of the embedded loss at least the early talked about and the overall limitations around supply you have to take.
You step back and these moments and also remember on a fundamental basis, we don't have enough housing units in this country. Specifically if you look at our portfolio, where we're lined up you're still going to have household formation and demographic growth. Its almost two five times. The U S. Average. So we would expect a lot of near and medium term demand for our product and then we talked about it earlier in our call.
That millennial cohort of 65 million people between say the ages of 25 to 38 are just coming into our business right. Now. So we're actually quite bullish in terms of what I would call natural tailwind that should feed into the <unk> value proposition.
Our next question is from Adam Hamilton at Credit Suisse. Please go ahead go ahead.
Good morning, gentlemen, thanks for your time.
Really appreciate all the color around the bad debt the tailwind.
And when you just spoke about in terms of the housing tailwind. So I was wondering if you could provide.
Some specifics around the geographical concentration of some of that bad debt and whether or not you guys are seeing any price sensitivity associated with that going forward. Thanks.
Yes. This is Charles Thanks for the question as I mentioned.
Geographically, California, Southern California, specifically is where we're seeing both the kind of slowdown and rental assistance as well as the slowdown in the court systems, where historically it might've been 60 90 days.
And thinking of 180 to over 200 days.
And that's in Southern California, Norcal Hunter.
120 to 180 days the other markets that we're seeing a little bit of a change again this isn't necessarily behavior of the residents, but it's around <unk>.
Our process to move non payers through our in Georgia, where it used to be 90 days to 150 days plus in Vegas was surprisingly it used to be very quick as 150 days. So.
And then where we have la county in La City, where Youre still were not even able to file that's going to show up next year as we work through some of this so there's going to be a little bit of a tail in the California markets as we deal with this.
But all the markets again, as we work through the legal enforcement.
We're getting there and the residents are responding as theyre seeing the rental assistance go away in Florida.
I'll just step back on one question.
<unk> had asked earlier around month to month, I overstated, a number where its worried about three 5% month to month. So just wanted to make sure we got the number of precise.
Our next question is from Dennis Mcgill Zelman <unk> Associates. Please go ahead.
Hi, good morning, Thanks, guys.
Ernie could you just maybe walk through a little bit more beyond property taxes. If we look at the full year guidance for expense growth back into something for fourth quarter. It seems like other categories as well we'd have to show. Some notable acceleration from where you were in the third quarter, which were already pretty elevated unless I'm doing something wrong.
Yes, Dennis we continue to have an inflationary pressures on both the.
With regards to repairs and maintenance and on terms with turns I would call out. We also do expect turnover to be maybe slightly higher than last year, but the bigger issue of turnover is as we are having some success as Charles talked about in dealing with partners, who are paying rent those terms tend to be more expensive than when someone comes out so you've got the cost pressures as well on our average cost per turn.
Is going up a little bit more as well because of that but no you're absolutely right. It's been a challenging year for us across the board. When you take a look what we think what's going to happen with the real estate taxes. We would continue to expect to see continued pressures on repairs and maintenance as well as churn and those are the categories that are really driving it based on what our guidance is youre trying to interpolate with fourth quarter as we don't like.
Certainly the highest number we've seen all year, mainly driven by real estate taxes, but also because some of the other issues.
Our next question is from Austin <unk> from Keybanc. Please go ahead.
Great. Thanks. Good morning can you guys just remind us how you calculate loss to lease and how changes in home prices impact that calculation. I believe you said the loss to lease is 10% and then Dallas I think earlier on the call you referenced a 20% average difference between the cost to own versus rent in your markets. So can you just talk about the interplay of those various variables.
Yes, I would I would tell you they don't really relate necessarily directly from a pricing perspective.
The cost to rent the value again for running relative to what it cost to provide price at home is not how the pricing mechanism works for us with regards to and how do we price our leases were pricing our leases based on what the market will bear and sometimes the market bears more and sometimes the market mirrors less specific than to how do we calculate our loss to lease in which is today at about 10% of each month.
We price anywhere between 5% to 10% of our portfolio because of what's coming due from a renewal and new lease perspective.
It's a pretty good proxy of what we think the entire where the entire portfolio at price. We understand we have a very homogeneous product and each house. It is very different we don't go each month and say.
80000 homes in our portfolio reprice, we'll use that as a proxy to where market rents are and we're running that through our revenue management system and then we take that and on a weighted average basis, then put that across our entire portfolio to calculate we think estimated market rent is today and again, it's not going to tie into affordability metric for buying a house versus necessarily.
Renting renting in our markets, they're really they're really two distinct things, but thats, how we come up with our loss to lease.
Okay.
Our next question is from Linda Tsai from Jefferies. Please go ahead.
Hi to the extent there is concern over the economy slowing do you have a sense of how your rents compare to the market rents are single family homes across your different markets.
We price to market.
We have an in general across the very broad rental space, we're at a little bit higher and relative to other rentals that are out there and thats pretty consistent market to market, but in terms of where the types of homes. We have the size of the homes you had in terms of where they are in regenerate.
We think we're very much at the market for those who are trying to do a little bit better because of the professionally managed but we think we're kind of in that same space and I think importantly, when you look at our affordability metrics.
Coming in at almost $134000 for average income $5.
The rent ratios, where I think most rental companies across the board there are minimum requirements are at three to one.
We feel like we're in a pretty good spot, especially we're also having on average two <unk> in each of our homes.
Our next question is from Alan Peterson at Green Street. Please go ahead go ahead.
Thanks for the time.
Charles you noticed on your website that you're now offering concessions in select markets.
A question on concession usage is this meant to build up occupancy from.
From here or is the decision to use concessions based on the view that occupancy could continue to decline if you werent to use them.
Yes, no great question look we <unk>.
<unk> 97, and a half and ended Q3 really strong we know that in Q4 as Dallas mentioned that.
We're seeing the seasonality returned to the market that wasn't there. The last couple of years and so this is typical as we go into Q4 and it's a push for the holiday so.
We're running limited concessions on select homes as really a push before Thanksgiving just as secure and make sure that we keep occupancy at a healthy rate, which it is 97 plus for this time of year is amazing we're seeing good demand and healthy rent growth with the numbers that I gave you blended rent growth with the strength of renewals are really strong. So this is really just making sure.
Here, we go into the slow period highly occupied.
As we can and then set us up well for 2023.
Our next question is from Anthony Powell from Barclays. Please go ahead.
Hi, just a quick question on the on the bad debt I wanted to confirm that it was all due to I guess pulled it there are tenants who were paying versus newly delinquent tenants that may be.
It may be finding some current issues given the economy.
The growing kind of bad debt number the historical those that are COVID-19 out of it that are working through the courts. If there is somebody who is new where again, we're going through our enforcement of the lease.
And that process is.
Is creating a lot of new but again you end up with the courts that are slower so theres a little bit of a mixed bag in there.
But the big numbers are really based on the historical and lot of the California, Southern California residents as we've talked about.
Our next question is from Juan Sanabria from BMO capital markets. Please go ahead.
I just wanted to follow up on.
The poultry relationship.
Relationship with other homebuilders, where you're taking out the product upon completion is the.
Pricing on that preset once you give them. The go ahead to builder.
Or how should we think about the mechanics of.
Kind of changing the take up price given the higher debt costs and cost of capital in today's environment environment.
Well the structure is pretty.
Easy to follow we basically away anytime we look at a project.
We decide on basically given a range of where we think we could execute on pricing with them and then we have callers to kind of protect them and us generally speaking on both sides. So that if they have cost creep. Then there is another discussion beyond a certain limit we have the ability more or less to walk away, if theyre savings, meaning costs come down or there is some market changes there.
We have another discussion.
Bye bye.
By and large we're pretty well protected with pretty limited.
I would call earnest money upfront and a lot of these projects tend to be in flight with updates along the way so that general structures have collars to protect both pulte and us.
And then we have we take those deliveries and different tranches over call. It longer periods of time. So that we can have market dynamics come into that as well. So all I think generally I can say very favorable from a structure perspective, and obviously as we go forward.
As we look at new opportunities. We're also going to spend more time looking at just call it price volatility and how it could relate to the overall markets over the next year or two so everybody is going to be eyes wide open on new opportunities to make sure that not only are we locking in great assets good locations, but that will be it pricing that is either favorable to.
To call it current market the conditions or future. So.
While I hope that answer your question.
Our final question comes from Jade Rahmani from <unk>. Please go ahead.
Hi.
Wanted to follow up quickly.
So is.
The shortfall in home purchase demand directly benefiting <unk>.
Single family rental new lease demand or is the impact not material at this point.
In other words are you seeing notable percentage of applications from people, who otherwise we'd be looking to buy a home.
No our top of funnel is felt pretty consistent in terms of.
Call it the type of customer coming into our business today and it lines up with things that we generally would see in normal years.
This time of the year.
That being said I think it's important to emphasize.
We're not seeing anything that's suggesting wholesale changes in the housing market right now outside of maybe new listings coming into the space of decelerating, which should support home prices.
In the near term.
That being said I think we're also early in where the impact of mortgage rates are and what that could mean for our business. Both in how we capture existing demand in the marketplace. Because one could obviously argue if the cost of it at home is 60% higher today than it was in January of earlier. This year, that's a net windfall to single family rental one would assume.
Not seeing anything on the supply side that is suggesting that we're going to have a tremendous amount of inbound inbound to put pressure on our existing supply. So we view the the overall landscape is quite favorable but we're also being realistic that it's still pretty early in terms of where mortgage rates are providing impact, but we'll obviously keep everybody updated on our thoughts as we go forward.
This concludes the Q&A session I will hand, the call back to Dallas.
We appreciate everyone's participation today, we look forward to seeing everyone at upcoming conferences. Thanks.
Thank you all for joining today's conference call. You May now disconnect. Your lines disconnect your lines.
Yeah.
Okay.