Q4 2022 Invitation Homes Inc Earnings Call
Greetings and welcome to the invitation homes fourth quarter 2020, cheap earnings conference call.
Well watch it so I guess you only made at this time.
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At this time I would like to turn the conference over to Scott Mclaughlin, Vice President of Investor Relations.
Please go ahead, good morning, and welcome today, we'll hear remarks from Dallas, Cheddar, President and Chief Executive Officer.
<unk> Young Chief operating officer, and Ernie Freedman Chief Financial Officer.
Following these remarks, we will conduct a question and answer session with our covering sell side analysts in.
In the interest of time, we ask that you limit yourself to one question and then re queue, if you'd like to ask a follow up question.
During today's call, we may reference our fourth quarter 2022 earnings release and supplemental information.
This document was issued yesterday after the market closed and is available on the Investor Relations section of our website at Www Dot I N V H Dot com.
Certain statements we make during this call may include forward looking statements relating to the future performance of our business.
Financial results liquidity and capital resources and other non historical statements, which are subject to risks and uncertainties that could cause actual outcomes or results to differ materially from those indicated.
We describe some of these risks and uncertainties in our 2021 annual report on Form 10-K, and other filings, we make with the SEC from time to time.
Invitation homes does not update forward looking statements and expressly disclaims any obligation to do so.
We may also discuss certain non-GAAP financial measures during the call.
You can find additional information regarding these non-GAAP measures, including reconciliations to the most comparable GAAP measures in Yesterdays earnings release.
I'll now turn the call over to Dallas.
Thanks for joining us this morning, I'd like to start by thanking all of our teams for their hard work last year yesterday, we posted 2022 year over year core <unk> growth of 11, 6% and same store NOI growth of nine 1%.
Strong demand for our business continued throughout the year.
And despite some headwinds from inflation and an evolving regulatory environment. We believe our business continues to stand on solid footing.
As you all know Ernie recently announced they will be stepping down as CFO in a few months I'd like to thank him for his extraordinary vision and strategic insight over the past seven years and I look forward to celebrating his achievements later this year.
At the same time I'm excited for John Olson, who joins US here in the room. This morning to lead our finance team beginning in June Johnson part of invitation homes from the beginning with deep involvement in all of our strategic and financial activities.
We expect this to be a seamless transition.
Before turning it over to Charles and Ernie to provide more details about our 2022 performance and our expectations for 2023.
I wanted to take a few moments to discuss the current housing environment in the United States.
We believe invitation homes is well positioned to help support the country's housing needs.
It has been reported that the U S needs to add more than 13 million housing units over the next seven years in order to accommodate new household formation and address the under supply of the past decade.
Today however.
It's challenging to deliver new supply in desirable locations because of state and local restriction as.
As well as labor and material shortages.
In addition, today's macroeconomic environment of higher inflation and higher interest rates, they discourage investment in new supply.
On top of these supply pressures the largest demographic group. The millennial generation is now aging their life stage of needing more space to accommodate their families and their lifestyles.
And all of that the increased flexibility of many to work part time or full time from home and we believe demand for single family housing should remain strong for many years to come.
At the core of our business is a straightforward yet critical goal, we seek to be a meaningful part of the solution for high quality and flexible housing options.
<unk> quality else release in desirable locations with access to great schools and employment centers.
We offer best in class service, allowing residents to focus on their lives.
And we're proud that we partner with a 150 public housing authorities and serving thousands of our residents who participate in the housing assistance program, including hubs housing choice voucher program.
And we're delivering new homes to marketplace through our previously announced builder relationships.
Today that builder pipeline exceeds 2300 homes that we expect to deliver over the next few years and our plans are to continue investing in new construction in the future.
As a reminder, our approach to bringing new housing to the marketplace keeps development risk off of our balance sheet and avoid getting related G&A burden.
Also allowed us to partner with some of the best Homebuilders in the business and selected by new homes and great locations.
We think this approach is a real differentiator and it allows us to maximize flexibility and optionality, while remaining opportunistic and minimizing risk.
All of this is important because of the lack of available supply of single family housing and the strong demand from those who wish to live in a single family home.
I've made homeownership much more expensive today.
The supply and demand imbalances further aggravated by inflation and elevated interest rates.
Leading to the widest dislocation we've seen between the cost of home ownership and the cost of leasing since starting this business.
We are therefore very proud to provide our residents the opportunity to live in neighborhoods and school districts that might not otherwise be accessible at a cost that is often significantly more affordable than any other housing option.
Let me pull that string a little bit further based on the Jamba is December data leasing at home costs, nearly $900 less each month than owning a home across our markets.
This means that leasing at home can save a family nearly 30% a month on their housing costs on average.
Savings are even more compelling on a per square foot basis, where single family rental homes currently come out as the most cost effective housing option compared to not only homeownership costs, but also apartment rent.
That being the case, we believe today's macroeconomic environment.
And the current supply and demand fundamentals make the invitation home's value proposition compelling for both our residents and our shareholders.
This is on top of several differentiators of our business that we have noticed in the past.
For residents. These benefits include a recently renovated refreshed or newly built home and a desirable location.
Pro care, which is our resident service model that provides for consistent interactions with our residents throughout their time with us.
Best in class technology tools of the most recent example, being our mobile maintenance app offering residents and even more efficient process to submit service request.
And a growing list of resident services designed to elevate their living experience.
For our shareholders. We believe there are numerous absolute and relative advantages to the single family rental industry, including <unk>.
Single family homes are the most liquid real estate sector within the United States.
There is typically much lower turnover and single family rental and multifamily with residents often staying much longer.
And there's a long track record of rent growth within S fr even during recessionary periods with.
So not again to the Burbs data National average single family rent growth has never had a meaningful decline in nearly 40 years of tracking that data.
Lastly, we believe there are numerous advantages to the invitation homes way.
Including our hallmark scale location and iron markets overseen by the best operators in the space as evidenced by our 46, 6% cumulative same store NOI growth rate from 2017 to 2020 to.
Nearly 2500 basis points greater than the average of our residential peers.
Our strong balance sheet with no debt coming due until 2026.
And our builder partner growth pipeline that maximizes flexibility and contributes to new housing supply, while also avoiding big investments in land and a large G&A load.
In closing we couldn't be more excited about our real estate our teams and the underlying fundamentals here in 2023, a year with some uncertainty and also a year. We believe full of opportunity to continue delivering a premier resident experience to anyone who chooses to live a more flexible and worry free lifestyle with that I'll pass it on to Charles.
Our chief operating officer.
Good morning, everyone as Dallas mentioned earlier 2022 was a solid year for US. We believe our results are a reflection of the service we offer our residents and our performance and providing an exceptional leasing experience.
This is an ongoing journey that we look forward to continuing in 2023. So thank you to all of our associates for your constant commitment to genuine care.
I'll now walk you through our operating results in more detail same store core revenues grew seven 6% year over year in the fourth quarter.
This increase was driven by average monthly rental rate growth of nine 4% and a 16% increase in other property income net of resident recoveries.
Same store average occupancy was 97, 3% in the fourth quarter down 80 basis points year over year as a result of higher vacancy due to increased turnover for the full year of 2022, our same store revenue grew by 9%.
Same store core expenses grew 16, 3% year over year in the fourth quarter. The main driver of this growth growth was at 18, 3% increase in property tax expense.
As indicated a few months ago. This increase was anticipated to be outsized due to a catch up to our property tax accrual in the fourth quarter, primarily related to higher property tax bills and our homes in Florida and Georgia.
For full year 2022, including this fourth quarter catch up property tax expense grew by seven 8% while core operating expense for the full year 2022 were up eight 6%.
Outside of property taxes, the inflationary environment was the largest contributor to the higher growth in core operating expenses. Following two years in a row of virtually no expense growth year over year, our expectation that we will see some of last year's inflationary pressure continue into 2023.
Finishing up with our same store operating results, we reported fourth quarter NOI growth of three 7%, which brought our full year 2020 to NOI growth of nine 1%.
Next I'll cover leasing trends in the fourth quarter of 2022 in January 2023.
Same store blended rent growth was nine 1% in the fourth quarter, which is comprised of renewal rent growth of nine 9% and new lease rent growth of seven 4%.
In January 2023, same store blended rent growth was seven 4% with renewals coming in at eight 7% and new leases at four 9%.
Store occupancy in January was 97, 7% an increase of 40 basis points from our fourth quarter results.
As we anticipated bad debt was a stronger headwind in the fourth quarter than in the third quarter, representing 2% of gross rental revenues.
<unk> and more specifically southern California continued to experience outsized bad debt within our portfolio approximately 40% of our southern California homes are located within Los Angeles County, where ordinances continued to restrict residential lease compliance options.
For the remainder of our portfolio, we are seeing some markets return to more regular procedures for addressing delinquency.
Though it's a slower process now than it has been historically in some of our markets.
Across all our markets, we're proud to offer a desirable housing option and worry free lifestyle to our residents and our most recent resident surveys we heard that the need for more space and desirable location of our homes were once again the top two reasons why new residents choose to lease from us in the fourth quarter.
80% of new resident surveys indicated it's important to have a home office or bonus room, where nearly half stating they work from home at least two days a week.
In addition, our average household income for new residents. During 2022 remains healthy at approximately $134000, representing an income to rent ratio of five two times.
Finally, our residents continued to demonstrate high satisfaction with our service our teams are providing as evidenced by our high occupancy low turnover average length of stay of nearly three years and strong resident satisfaction scores I extend my thanks to our teams who have helped to make this all possible.
And I challenge our associates have continued to raise the bar here in 2023.
I'll now turn the call over to Ernie our Chief Financial Officer.
Thank you Charles this morning, I will cover the following topics one.
Balance sheet and capital markets activity, two financial results for the fourth quarter and three our 'twenty to 'twenty three guidance, which we introduced in yesterday's earnings release.
Since our IPO in 2017, we have been focused on reducing our overall leverage improving our maturity ladder, achieving an investment grade rating and transitioning to a balance sheet that is capitalized mostly with unsecured debt at fixed rates.
We've made significant progress across all of these objectives at year end 2022, net debt to adjusted EBITDA stood at five seven times.
Our weighted average maturity was five six years.
And when considering available extension options, we have no debt coming due until 2026.
Over 99% of our debt was fixed rate or swapped to fixed rate.
We achieved our investment grade rating in the spring of 2021 and at year end 2020 to over 83% of our homes were unencumbered and 73, 7% of our debt was unsecured with secured debt representing less than 10% of gross book value of our real estate.
As previously announced during the fourth quarter, we prepaid the remaining portion of our IH 2018 dash one securitization using.
Using the delayed draw feature of our seven year unsecured term loan that closed in June 2022.
We ended the year with $1 $3 billion of liquidity from both our undrawn revolver and unrestricted cash.
I'll now cover our fourth quarter and full year 2022 financial results.
Core <unk> for the fourth quarter increased 10, 6% year over year to 43 cents per share and <unk> increased nine 2% to 36 per share.
For the full year 2022 core <unk> per share increased 11, 6% and 10, 2% to $1 67, and $1.41, respectively, each exceeding the midpoint of our guidance.
Included in our earnings release, we provided a bridge from 2022 core <unk> per share to the midpoint of 2023 core <unk> per share guidance.
With regards to our same store operating metrics, we expect same store core revenue growth in a range of $5 two 5% to $6 two 5%.
Embedded in our guidance are the following assumptions first slightly lower average occupancy versus 2022 due to anticipated higher turnover.
And second elevated bad debt of $25 to 75 basis points higher than 2022.
Next same store core expense growth, which we expect in the range of seven 5% to nine 5% <unk>.
Included in this guidance is the assumption that real estate taxes will increase between six 5% to seven 5% an improvement from 2022.
We also expect to see pressure on turnover operating and capital expense due mainly to our assumption of higher turnover in 2023.
Along with our assumption around ongoing inflationary pressures.
As Charles mentioned, our real estate tax expense in 2022 was under accrued for the first three quarters of 2022 so.
So we recorded an outsized catch up in the fourth quarter 2022.
As a result, we anticipate 2023 same store core expense growth in the mid teens for the first quarter of 2023.
Followed by sequential improvement during the remainder of the year, resulting in the expected range for the full year 2023.
Taken together this brings our expectation for same store NOI growth to 4.0 to five 5%.
We also expect full year 2023, <unk> per share to be in the range of $1 73 to $1 81.
And <unk> per share in the range of $1 43 to $1 51.
As a result of this anticipated growth in <unk> per share in 2023, our board of directors has authorized an increase in our quarterly dividend by 18, 2% to 26 cents per share.
Our guidance assumes that our 2023 acquisitions will be modest. This includes our initial expectation for on balance sheet acquisitions of $250 million to $300 million from our builder partners.
Which we plan to fund through free cash flow and disposition proceeds.
It also includes our expectation for acquisitions in our joint ventures of $100 million to $300 million.
Outside of this guidance assumption, our actual acquisition activity will be based on how attractive the buying opportunities are relative to our cost of capital as the year progresses.
But our balance sheet in excellent shape, our ample liquidity, providing us with plenty of dry powder and our joint ventures offering us access to additional capital we are well positioned with the flexibility to maintain an opportunistic approach to external growth this year.
I'll wrap up by ethylene Dallas and Charles is gratitude to our associates. They continually work hard to deliver strong results into respectfully care for our residents in our homes as.
As we look ahead, we are confident in our continued success based on favorable supply and demand fundamentals are healthy balance sheet.
Our unwavering commitment to outstanding resident service, our strong team and our desire to remain the premier choice in home leasing with that operator. Please open the line for questions.
Thank you.
We will now begin the question and answer session.
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Funny My question.
One moment, please while we poll for questions.
Yeah.
Okay.
You have to ask a question on the sidelines from.
Just going to need a bank.
America.
Please go ahead.
Yeah, Hey, guys. Thanks for the question.
Just kind of thinking about your assets. So midpoint guide for that fulfill midpoint guide it looks like it's kind of an 83% of vessel. So.
It was 84% for 2022 actuals.
What it.
It looks like before that it was kind of running a smaller gap kind of what's driving that but maybe but it would've shrunk given lower turned over the last few years.
Yes, Josh this is Ernie, whereas we are seen as Charles talked about and alluded to it with regards to inflationary pressures on turnover expenses and so the difference between <unk> prices will be our capital replacement spending we are seeing a little more pressure on the capital side on both our repairs and maintenance expenses as well as on our turn expenses and we wanted to make sure you're at the.
Beginning of the year, we had the right amount of caution built into our numbers. So we can hopefully set ourselves up for it we would hope to have a good performance later in the year off of that that's why you've seen over the last couple of years, where that that's changed a bit.
We're basically running quotas closer to flattish net cost to maintain on the Opex and Capex combined for the last couple of years, but for 2022 and what we're projecting for 2023 is certainly a higher increase from an inflationary pressures and specifically of turnover. We do expect to have tighter a little bit higher turnover in 2023 versus 2022, maybe as we get out into 2024 and 2000.
Twenty-five you'll see numbers of our back to what you saw in the past for us in terms of the differences between core Epiphone Amazon.
Thanks Art I appreciate it.
Thanks, Josh.
We now have Nicholas Joseph with Citi. Your line is open.
Thank you I was hoping you can elaborate a bit more on the trends youre seeing in the acquisition market in terms of cap rates and available.
<unk> you know what.
Are you hearing from your JV partners on their appetite to deploy capital in this current acquisition environment.
Yeah, Hi, Nick Dallas.
Let me ask answer your second question first and then I'll talk about a little bit of what we're seeing real time, I think there's plenty of appetite with our JV partners to continue to grow and find compelling ways to invest capital I think that the well I know that to be the case I think what I would add from a supply perspective things are still relatively tight if you go back to a year ago.
So we were kind of buying in that kind of low to mid fives from a cap rate perspective, I think we've seen that move on the ground in the resale environment, maybe 20 or 30 basis points is kind of a mid fives ish kind of market 55556 for our kind of like kind product.
Now that being said, there's also the least amount of resale supply inventory in the market that we've seen in the last three years to four years. So it's a really interesting moment the newer build stuff that seems to be coming online both things that we're taking from a delivery perspective conversations we're having with builders I think the return profiles a little bit.
Better, but those are going to be fewer not fewer and far between but theres just going to be I think more angst on the builder side.
To lean out and sort of an uncertain environment, given where interest rates and things are so all things being equal plenty of capital interested in investing not a tremendous amount of opportunity real time, but we'd expect that to kind of moderate throughout the year I think we got to see what happens with mortgage rates. I think you know that as of yesterday. There were a 30 year was closer to like a <unk>.
Seven five number and I think builders have been able to basically buy down mortgage rates to stay pretty competitive in the near term, let's see what happens there I think we may have more of an opportunity hopefully over the year. If if if mortgage rates creep up and then we're definitely gonna watch retail supply and how that's impacted by the labor market.
Operator, Thank you operator next question.
We now have the next question from Austin, Washington, with Keybanc capital market.
Hey, good morning, everybody I was just curious if you could provide a little bit of an update of sort of what youre seeing on the ground in and whether theres anything giving you pause in any of your markets that kind of has you taking a more conservative outlook.
Through the balance of this year and then just maybe a quick update on how market rents have trended from kind of late last year into the early part of this year.
Yes. This is Charles Thanks for the question Yeah, we like what we're seeing on the ground right now.
Q4 results showed a bit of the seasonality that we saw towards the middle of last year and as expected, we kind of got back to that normal curve. During COVID-19. It was kind of 98% across the board and really high rent rolls, So where we're seeing more seasonality, but with what the reality of it is it still really strong.
Given the time of year, so looking at Q4 at 97 three occupancy.
That increased throughout the quarter. So we ended December at 97, four and came into January at $97, seven so showing real strong demand that we're seeing on the ground.
As we look at rates in Q4, our blended nine one renewal at 99 and new at seven four.
As you would expect with seasonality January and December will be a little lower but given that a $4 nine new lease rent growth in January is really strong historically cup.
Couple that with the $97 seven occupancy and $8 seven on the renewal side. We think the portfolio is really well positioned going into peak season, which typically starts right here after the Super Bowl.
And we're seeing some acceleration in February on the on the new lease side. So.
Across the board is looking good there is more seasonality in the colder markets, Denver, and Chicago and the like but we're still seeing a lot of strength in our Florida markets.
Arizona had a bit of a slowdown with the seasonality, but it's starting to show some real momentum.
We're seeing some good stuff across the board and we're leaning in and feel good about where the portfolio structure.
Yeah.
Thank you.
We now have the next question from Brad Heffron RBC capital markets.
Thanks Alan.
Hey, good morning, everyone Ernie could you walk through the buildup to the revenue guidance as far as earn and loss to lease occupancy all the sort of moving pieces that gets you there.
Yeah sure so Brad we talked about in our in the prepared remarks as well as in the earnings release. There are couple of items, one with Ark and I'll talk about kind of the midpoint of the guidance range Brad at the midpoint of guidance, we do expect occupancy down a little bit year over year. They were in 2022 were at 97 and 797 eight I would think that's when it come down a little bit it has to do mostly with the fact.
We think turnover is going to be a little bit higher and we talked about that as well in terms of as we're able to finally make some more progress on residents who haven't been keeping current with our rents we do expect turnover to pick up some and that's why you'll see occupancy come down the other thing the other material mover on the negative side for us with regards to for growth on.
Revenues is going to be bad debt.
And we're we're certainly facing a lot of the challenges that other folks are out there with exposure to southern California, We do expect that bad debt is going to be up anywhere between 25, and 75 basis points from where it was in 2022, so roughly the midpoint about 2% where are we I mean it came in at about a one 5% for the year for 2022.
We do think that's going to be elevated a little bit more in the first half of 2023, and we do we see a path that work and start getting a little bit better for us in the second half of the year the.
The last thing I'd say the other two pieces that are important with our other income other income is going to be up again low double digits similar to it was last year as we continue to make progress on our ancillary income items.
And finally when rates are Ernie and we talked about on our last call earn in as we got into the year, we expect it to be about 4% from the activity that was done in 2022 and that didn't change in the fourth quarter.
We did see the loss to lease shrink significantly from where it was at the end of the third quarter to where it was at the end of the fourth quarter loss to lease going into the year is about 1% to 2%. We saw that decrease for a couple of reasons Brad one.
It's just the leasing activity, we started to catch up to that but two in Charles talked about typical seasonal patterns for folks in the residential business and we're no different than single family is that you actually you know in a typical seasonal year, you'll see some sequential declines month over month in rental rate now we didn't see that in 2021, we really didn't see much of that in 2020, but in 2022 it did come back.
And so we did see some sequential declines as we went from September to October and November to December with regards to our overall rate wasn't so that's why the combination of those two things that Rob brought master lease down if you take that all into consideration in our expectations around what leasing activities and it looked like for real in new and in this year in 2023, you get to our guidance range.
That we had provided with regards to where we thought the core same store core revenues will go out we feel optimistic that we have an opportunity maybe do a little bit better and we're certainly going to try hard to do that but we wanted to make sure. We set the ground the right way at the beginning of the year and hopefully we have a year like we've had in the past where we would have.
Under promise and over deliver but we'll just have to see how that plays out.
Yeah.
Thank you.
We now have.
I'm Joe credits.
Thanks.
Hi, guys.
Just was wondering.
If you could provide an update on your general thoughts on utilizing concessions and what that might look like during peak leasing season.
Yes, we have no concessions running at all I think we talked about on our last call. We had a short term kind of small concessions going into the holiday to trying to push up on the occupancy as we saw seasonality come back. That's typical that we run in that time of year, given the seasonal curve, but as of December we had no.
<unk> concessions that we don't see any need to do it given our current occupancy and the demand that we're seeing right now.
Yes.
Okay.
Thank you.
Steve <unk> with Evercore ISI.
Yeah. Thanks, Good morning, Dallas I was just wondering if you could comment a little bit more on some of the build the relationships and given the challenges that they're facing in an actual.
Home sales I just didn't know if if bulk sales in in a bigger commitment from you to them to take down homes was more on the offering here and how those discussions that maybe unfolded.
Hi, Steve So first of all our pipeline today sits at about 2300 homes that we havent contract.
With with our different builder partners and we're working right now with 5% to 10 filter builders kind of nationally and regionally across a variety of opportunities, obviously everybody's familiar with our strategic structure with pulte, we'd like to build as many homes with them they've been a terrific terrific partner and they are a great team.
You know it's interesting Steve we we sort of there's a lot of unknowns going into summer last year around kind of volatility and what was going to happen with rate I think what we've seen most builders you know as I mentioned before do really well is is kind of navigate the mortgage in the payment side of things without having to discount pricing too much.
Theres, certainly kind of quarter and stuff, where we've had some small opportunities, but I think time will tell and it's largely dependent on what happens with the labor market. If things continue to slow down I would view that as a very good opportunity for invitation homes.
In terms of building out a much.
Lighter and longer pipeline across purpose built construction that will come into our portfolio. We are now coming out of the ground with some of our first kind of full.
Full communities, we're touring one last week in Atlanta in fact, very pleased with the.
Not only quality of the product, but the return profile and the demand as Charles mentioned top of funnel is really healthy so steve or our approach going into 'twenty three would be that we're gonna look opportunistically to enhance and grow that pipeline and also those relationships find ways to do things more programmatically with our preferred partners.
And obviously, if things slow down that would be I think viewed as a good thing for us. So far now it will depend on how we pay for those things going forward, but we've got plenty of as I mentioned before third party capital that wed like to look at these opportunities with us and we'd also like to invest accretively as we can on the balance sheet.
Thank you we now have Joanne February now from BMO capital markets.
Your line is open.
Hi, Thanks, just maybe a question I guess for Ernie just on.
The right side of the same store revenue equation for twice the guidance got it.
Curious if you can comment on a few market rent growth across your portfolio in 'twenty, three and maybe how you should how we should expect renewals to trend.
Given the moderating loss to lease do you think they can stay pretty sticky around the high single digits for the course of 'twenty, three or should we expect that to moderate as well.
Yeah and implicit in our guidance.
When I walk through the pieces wanted it is that we're looking at are for growth and raised blended rate to be kind of in the mid single digits. I think honestly, that's probably where the best upside opportunity for with regard to our revenue and with where we are gonna be able to cautious of is on the bad debt side, we got burned a little bit by that last year I think we've built into our guidance that we're probably okay. There but.
I don't want to be cautious there and balance those two so I do think on the renewal side, we certainly have the opportunity to continue to stay at elevated levels, but it's hard to say that I would say at the high digits for the entire year.
So I would be cautious to say, we always knew that would be more towards the high end of our guidance range or even a little bit higher we feel very good about having some strong renewal growth throughout the rest of the year, but we put up some strong numbers here in January and I wouldn't extrapolate that for the rest of the year, but it's certainly possible if the market.
The signs we're seeing in the market is pretty strong and theres a possibility that could happen.
I think if you do the math and how things would play out and taking consideration the number two year leases that we have now you'd solve to a number that gets to kind of the the mid single digits for blended growth rate for 2023.
Thank you.
Adam Chrono.
With Morgan Stanley . Please go ahead.
Hey, I just wanted to follow up on an earlier question around JV fees.
I think there has been some kind of news in the press last kind of number of months about maybe J P. As being more of an Avenue that you guys would pursue certainly youre going to be a challenging environment for acquisitions in 2023 overall, so wondering just kind of the.
The willingness or desire to maybe go that route obviously, you can pick up a little bit of fee income it changes the economics, a little bit in the model. So yes, I guess, just kind of generally around willingness to kind of go further down the JV path.
Hi, as Dallas, I mean look we've we've shown a willingness we've in the last couple of years have raised a couple of ventures.
Both with rock point as a as a strategic partner.
Eight you're exactly right that it does have a lot of value add to the REIT.
In both terms of call. It our returns on our cost of capital off balance sheet, and then also the fee generation and kind of additional service opportunities. It creates as we build out a little bit more robust manager and so I.
I would expect the joint venture capital will always be something that we look at on a relative basis to where our current cost of capital is from a balance sheet perspective, telling me wrong, we would love to invest as much capital on balance sheet as we can obviously at todays prices and the way that the.
The book's been discounted in the public markets that cost of capital is not very attractive and so I think using third party avenues or having longer term partners that we can continually deploy capital with is a very good thing for our business and for our shareholders. We generate outsized returns. It also allows us to be a little bit more particular niche across maybe a <unk>.
A different areas and we think that that will also give the company and its strategic thinking a lot more flexibility over time, so I would expect us to continue to explore and use.
Venues like joint ventures over time, but never at a way that it would impact our ability to grow on balance sheet and always trying to find that right balance.
Yeah.
Thank you.
Your next question comes from.
John Guinee.
With Goldman Sachs. Please go ahead.
Hi, Good morning, Thank you for taking my question.
I wanted to talk about property taxes, a little bit your guidance assume assumes real estate taxes increased 7% and that's an improvement from 2022, what's the driver behind this expectation of improvement in the growth rate are there certain markets are you know that.
Makes you think that.
Basically tax growth will moderate.
Anything going on more specific or more idiosyncratic anywhere would love your thoughts there.
Yeah, Hey, Sean it's already happy to talk about that real estate taxes.
As a reminder, everyone on the call for US when you think about real estate taxes, you want us to think about our three largest markets, where we pay the most taxes, which are Florida.
California, and Georgia, and we talked about that in the last quarter, California, and we can kind of take off the table because of prop 13. So that's always going be it at a lower rate year over year there'll be some noise around appeals and things like that even within California.
For Florida, we're not in.
I know we were wrong last year, but we're not anticipating another year of tax bills being up 20% now they are about.
About 14% last year with assessments being up almost 30% last year and a similar story with Georgia, we're not expecting a second back to back year with it as high as it was before.
In Florida, there is some relief for folks as to how much can get pushed through in one year. So there are some caps on two thirds of your tax Bill said another way because assessments were so high it will probably bump up against those caps again in Florida for that two thirds piece, but when you when you kind of do the math on Florida, California, and Georgia, We think we'll be in a better position than we were in two.
2022, and those three combined are about 70% of our tax Bill we do have some other areas that we do think we will have some significant increases from prior year.
But again, because they're smaller tax bills for us, it's not as impactful Mecklenburg County, and Charlotte would be an example, where we will see some pressure there because of evaluations happen are not on an annual basis, but a multi year basis you'd say the same thing about Denver, where we'll have that challenge as well, but again the tax bills in Colorado as well as the tax bills.
In North Carolina aren't as material to US and then finally, we did see large tax bills in Texas as well, but again for US, Texas is not a material player yeah I wouldn't be surprised if Texas has another rough year in 2023, but again for us because of our exposure is so small and it's not to have any impact on us than it might have on others. So overall, that's why we basically come in and eat with ear shiny.
But things can be pretty similar to what last year last year was as you pointed out it was seven 8%. This year, we're guiding six five to seven 5%. So those are still historically really high numbers for us, but we do see a path that things might get a little bit better and then importantly with taxes.
Okay. Thank people are thinking about it we really havent baked in very much in terms of appeal wins. So if we do see some material appeal wins that could help us get us to the lower end of our range, but we'll just have to see how that plays out those are certainly very hard to predict but we don't need to have material appeal wins to get to the range that we provided in our guidance.
Yeah.
Thank you.
Now have kegan call with Wolfe Research your line is open.
Hey, Thanks, guys. So I know you gave the person breakout as far as you know shares go but I'm. Just curious if you could give us a little bit more breakout on your growth expectations between both property management and G&A for 'twenty three.
Yes, we noted on the if.
If you look at our supplemental schedule, we gave a walk of of <unk>.
From 2022 to the midpoint of our guidance in 2023, and we have pointed out that we thought that property management G&A expense combined will grow about the <unk>. So.
So for US that's about 17 $18 million a lot of that is the continued investment in our technology platform part of that is the continued growth of our joint venture. So as we get more joint income from our joint ventures with regards to property management fees, we need to have we have property management expense offsetting that because the number of homes and then on top of that we just have some inflationary pressures. We also ran.
And little bit understaffed in the first part of 2022.
I think a lot of organizations were challenged with filling positions and we're assuming a more full head count in 2023, we'll see how that comes to play but those are the main factors in terms of with regards to that and then specifically on our P&L.
Do break out property management separate from G&A, and we'll see a little bit more of that growth on the property management side, but it will be more proportionate. This year. If you look at 'twenty two to 'twenty, one G&A was relatively flat and most of the growth. We had in those combined items came from property management. This year in 2023 compared to 2022, it's going to be closer to being even growth, but a little bit more on the property management side.
Versus the G&A line.
Yes.
Thank you.
<unk> tried to have a choice.
Your line is now open.
Good morning. Thank you. So just on the operating cost side of things I really just wanted to tie the loop on this on this topic I mean ex property taxes. When we look at same store Opex I just want to be clear on the drivers of that quite a bit of growth there.
Much of that is due to higher turnover how much of that was due to just general cost inflation and really what I'm trying to get at.
Has there been a structural change in terms of the cost structure. I think there was always a concern with your business model that it would be difficult to scale. So I'm not sure if perhaps this outlook here.
You know what indication that maybe some diseconomies of scale creeping into your business model just given your size and the age of some of your homes.
It's Alex here and I appreciate you asking it because if you have that concern other people might have that concern as well and the answer is no. We're not seeing any concerns with the.
Yeah.
Having dis synergies or from the size of the organization I think that that is helping us because when they walk through some of the details, but you're right to point out that guide in real estate taxes to be up about 7% at the midpoint, but we're guiding overall, which is a little bit more than half of our overall expenses.
Every overall, we're guiding to a number that's about eight 5% at the midpoint. So that means everything else is gone up a little bit more so I think most of that and I'll walk you through the details that we believe are more transitory.
Adams based on the circumstances that we're at right now in the marketplace.
I'll just go through some of the the more material items in there one was insurance costs I don't think anyone's surprise in the apartment hearing about others. The property insurance rates are certainly going to go up.
We will finish our renewal here in about three weeks. So we don't have the final numbers on that.
But in the last two years, our property insurance only went up a combined about three or 4% of zero percent one year about seven or 8%. The next year. So we did much better than the broader residential space, but with the cost of reinsurance treaty is going way up this year.
So of course, we had events that happened in 2022.
Insurance costs are going to go up we don't think Thats a permanent issue, but we think that's a one time issue and wouldn't be surprised if property insurance rates go up as much as 20% to 25%, which would bring our overall insurance cost up somewhere into the low double digits because of the good news on other insurance lines were not seeing those kind of increases.
The ones that are more material for us Tyler really move around turnover.
And a couple of things with turnover one there are inflationary pressures, we do think those will subside as we get later into 2023 and 2024, but we're still in an inflationary environment there.
The other items that really pointed out with turnover or two of the important things. When we do think turnover is going to go up.
That's a good thing turnover is going to it because we think we have a better opportunity in 2023 than we had in 2022 for residents who had been delinquent and making rental payments not paying the rent we expect to see more and more activity. There in people moving out of homes and so we do think turnover is going to go up for that reason, we think that's more of a transitory item and work itself out as.
We get later into 2023, and maybe a little bit of hangover in 2024, because of southern California. The other item, though as those residence I just alluded to they typically been in our houses longer oftentimes they don't allow us to come in to do repair and maintenance work. They don't calling service requests as often as our residents who are keeping current in their rent and so when we go in to do the terms on those homes those turns are materially.
More expensive than a regular way turns sometimes as much as 40% to 50% more on average than our regular way turn so as we're dealing with those residents Tyler that are.
And then treating the houses the way they have in it have not been paying the rents. We again think that it's more of a 2023 event. It goes away in 2024 in terms of our cost per ton and having a much more.
A higher growth rate than we've seen in the past. So we don't think that's an issue with the if you think about the long term thoughts about what expense growth is going to be so summarizing real quickly. We think this is more of a specific 23 issue. We think property taxes will revert back to more normalized growth rates as we get into 'twenty, four and going forward, we think turnover.
We will certainly go up over the next period of time to get to a more normalized rate for us going forward and then the cost per ton, which I just alluded to should actually see some deflationary pressures over time because of the type of turns that we're gonna be doing and that should all put us back on a path that you saw from us for a very long time, where.
Where we had expense growth that was within inflation or a little bit less than inflation.
Yeah.
Thank you, we now have John Pawlowski with Green Street.
Thanks, maybe just continuing that line of thought.
It just feels like you're baking in a lot of inflation on the expense line items and not a lot of inflation on rents because some of these costs are going to push up the cost of ownership. So I guess Charles what markets on the ground are you seeing as potential Canary in the coal mine for new lease growth going bad whatever 3%, which seems to be implied in the guidance.
Where are you seeing cracks in demand.
Yeah as we are.
<unk> talked about earlier, you know occupancy is real strong.
Historically looking at last year, Florida has been really strong for us where we started to see when the seasonality came back was.
A bit of a slowdown in our traditional colder markets like the Denver's.
The Chicago's.
But it's in minute Minnesota's, but again they are not material to us and generally we are still seeing good demand in two earnings point.
There is an opportunity our upside here on the newly side given kind of the structure of the portfolio today, our occupancy is running really high for January historically, and we like the acceleration that we're seeing so.
I don't see any market that have concern I see markets that have been really performing well Phoenix slowed down there was a lot of supply there for short period, but we're seeing that bounce back quickly. So.
So I'm not seeing anything that has us concerned I think we're getting back to our historical rates. If you go back to pre COVID-19, you're going to see seasonally the summer where there is turnover in high demand, we're going to see that's where new lease is going to push up and I think it will be across the board some markets will perform a little better than others.
And then you get into Q1, and Q4 and you get that seasonal slowdown where on the renewal side. We think is going to be pretty steady we're at in.
In the <unk> in Q4 and were holding steady here in January we do think it's going to moderate a little bit as you get further out given the loss to lease scenario laid out by Ernie.
I think the renewal side will be more steady and we'll get to tip, a little seasonality on the on the newly side.
That's great for us given our historical kind of footprint in our 16 markets. It's a nice balance.
Okay.
Thank you now have Dennis Mcgill Zelman.
Your line is now open.
Thank you.
Ernie I was just hoping you can go back to that last at least comment I think you said it was one to two and last quarter I think it was maybe 10 and there is a couple of factors. There you mentioned you realizing some of it and then some of it's just what's going on with seasonality or market rents just given that there's not as much turnover in the fourth quarter. I was wondering if you can maybe split out how much do you think of that is market versus what you've realized.
Alright.
Yeah, and rough rough I think about when we looked at it is I would say about probably about a third of it Dennis was we were able to continue to earn into what's happening with leasing activity, but we did see.
Rob off and where market rate was in August September of 2022 to where it ended up in December and we've certainly seen that already starting to work its way back up.
We typically do in season, you know Charles talked about our season starts a little bit sooner.
Rough rough was probably one third two thirds Dennis in terms of what we were able to earn into versus.
Where we saw some market declines from where they were at.
Stronger numbers in the third quarter.
And is that 1% to 2% numbers at end of year as at end of January .
That would be December 31st.
Okay. Thank you. Thank you yep.
Uh huh.
Thank you.
Anthony Powell of Barclays.
Your line is I think he's going to hopefully you're lucky.
Yeah.
Yeah.
Hello, Anthony could you. Please check your mute like cleaning up from the line.
You need one to the next questionnaire.
We now have Jade rahmani with K B W.
Thank you very much can you comment on what Youre seeing in terms of the new supply generally speaking I think you made some comments about Phoenix, having bounce back, but they're still pretty record levels of both multifamily supply expected as well as build to rent with nearly every homebuilder.
They're allocating maybe 5% to 10% of their production toward single family for rent.
Are you expecting from new supply and I know you are generally concentrated in infill locations.
Mainly sourced prop.
Properties from the existing home market, but your thoughts there would be helpful. Thank you.
Yes, Thanks Jade.
Charles can feel free to add anything to this I think on the multifamily side, you're right. I think there is going to be some multifamily pressure in kind of a few different markets, but I think you've seen and I think we even in our release, we talked about the differential on a per square foot basis in terms of how much more attractive as far rents are likely than multifamily. The only thing I would just add.
And just some of the data that we follow have actually seen kind of a pick up of new lease growth across called the 99 FSFR market to grow about according to Burns. It was like six 5% in 2022.
A little bit you know most people are forecasting a little bit of a deceleration to Charles' point on the seasonality.
Seasonality side, but but look I hope the takeaway here from a conversation and what Charles and Ernie of share is we've been pleasantly surprised so far with the January numbers, and where demand seems to be picking up there were markets that had a little bit of pressure going into summer last year, but we are not seeing anything in our markets.
It's suggesting that a multifamily proposition is outweighing somebody's decision then to kill it so far on the build to rent side of it it's been really interesting to watch that market evolve Jade.
I toured a bunch of this last week in Phoenix and some of this stuff is a little bit further out than what you would think of our portfolio. If you spent some time in the car with us.
And it's different it comes in all shapes and sizes. Some of it is more of your kind of stack product or kind of share a common wall Gemini type of kind of split for plans, where you have town homes and a few other things and then some of it is also the.
<unk>, So I think you know.
As far as cash piece I worry less about from a value proposition perspective, with townhome and amenities, we are paying attention to see if there's a value additive or a premium that is expected with those types of deliveries. So far we're not seeing anything that is directly impacting our business and lastly, I just as a reminder.
We've built the portfolio from a purpose build perspective, you know going back 11 years ago to make sure that we made a much bigger focus on being infill and living amongst our neighbors and a lot of fee simple homeownership that is carried the day for US I think both on a perspective of how we've been able to make sure that we are tracking some of the best.
Right in the marketplace, but also the duration and length of stay I've been most impressed lately with our you know some of this probably gets a little bit of a COVID-19 tailwind to it but our length of stay is now over almost three years and all of our markets, California, We're seeing it pushed close to four years people are just staying a lot longer than I think it speaks to both the product location.
I think the value proposition of a for lease experience with a good business.
We now have next question from <unk>, St Juste of Mizuho.
Please go ahead.
Okay.
Hey, guys, it's barely on for Hendel St. Just thanks for taking my question.
I just had a quick question on the appeal process for Georgia, and Florida are you seeing any likelihood of success or material recoveries in those markets.
Oh, there's definitely is there and there's any likelihood of having some success. We just have to see whether it will be material or not.
The Georgia process can take a look at both process can actually take a little bit of while as a reminder, we appealed more than we ever have in Georgia, Florida. We appealed a similar to we've done in past years, maybe a little bit more of Florida.
Relatively fair regime, when it comes to doing assessments.
So there's not that we didn't put in a material number of appeals, but it may have a material success rate in terms of what happened in Florida. So I think the bigger opportunity for us.
Certainly where we've appealed more especially based on where we saw assessments came out.
Going to be in Georgia, which is our third largest state so what would have to wait and see in terms of how that plays out.
Yes.
Okay.
Thank you.
The next question from Michael Gorman of Z P. I G. Please go ahead.
Yeah. Thanks, Good morning, Ernie can I just spend another minute on the bad debt side of the equation I think you mentioned exposure to southern California is that the only market that's driving the 70 $525 to 75 basis points or are there other geographies and then how much of that is related to potential softening on the economic side versus regulatory.
Lori pressures, that's making it harder to deal with those tenants, who do get behind on their rent.
Yeah. Good question. The majority the vast majority of the increase is because of southern California. We certainly have other markets that arent performing where we want them to be in a higher where they've been historically, but we expect those markets to actually do about the same or improve from where they were in 2022, because we've been in most of the other markets were a little bit further along and be able to deal with things so other than the.
Juruti of of the concern is coming from from Southern California, but it is sprinkled in some other places as well.
It's almost all if not entirely due to the regulatory environment and working with the local courts working with you know in some markets. We're also showed a propensity to change we're not seeing anything it sit in today's numbers anything in the last 12 months, an opportunity or anything for that would tell us we need to do something different or more from a bad debt perspective with regards to just the overall environment.
And where things are at.
Okay.
Thank you we now have Linda Tsai of Jefferies. Your line is now open.
Hi.
Unemployment expectation do you assume for the base case of 'twenty three guidance is it flat with today or are you forecasting deterioration.
Yeah, we're not we're not where we are.
I'd tell you for it with island is we're assuming it's going be an environment is kind of similar what we've seen for the last 12 months. So we're not expecting a significant improvement it would be hard to improve where the unemployment numbers are for where they are today that is are so low. We're also not forecasting at the midpoint of our guidance of degradation or is that a material degradation from where they are and of course in our guidance ranges do capture the fact that if you know if we arent able to.
Bush rate as much as we want or we have some occupancy challenges because of the labor market.
Did that get captured somewhat in our numbers with regards to the lower end of our range, but you know as Charles talked about.
Early days, but we're feeling pretty good with where occupancy is and we're starting to see an opportunity to do.
Well on rates and maybe a little better than our guidance implies but overall, we're kind of assuming it's going to be it's kind of an overall similar type market, whether it's unemployment whether you know in all of the other macros that were looking at right now.
Okay.
Yeah.
Thank you.
Can you provide with J P. Morgan. Please go ahead. Thank you Ricky.
Thank you.
You've talked in the past that you built invitation homes to run materially more than the 83000 homes. You currently owned and so I'm just wondering what are the what's the biggest gating factor to turn external growth back on in a more meaningful way like is it like is it really your capital cost is.
The selectivity of what you want to buy or do you just think prices are going to come down and you don't want to be in front of that.
It's not the latter I mean, I think last year was more of the latter Tony in terms of when we start to slow down or buying in April or may significantly because we were worried you know theres a lot of unknowns when the fed started moving rate as fast as it did now I think we're all happy to say nine months later, we haven't seen a degradation in home prices that that debt would.
Suggests that there is huge.
Huge doom and gloom on the horizon, it's really the opportunity set.
Remember, we were able just to build really significant scale over time in an environment, where you had years of resale supply on the market.
And a cost of capital that was.
Pretty attractive.
In today's environment, we have less supply.
We see kind of an uncertainty in how we'd even do you kind of our own balance sheet capital right. Now, we're not pleased with where the stocks currently trading at and lastly, we see builders being a little more cautious in their local regulatory restriction now all of that sounds negative it's actually a really good thing for the demand side of our business as you guys know we.
We are not seeing any degradation in top of funnel effect to earnings point to what Charles said earlier, we're really bullish on the prospects of both the quality of the rest of it we've seen a tremendous.
Increase in call it the underwriting standards of our resin over the last couple of years and the amount of demand we have for the product. We obviously want to grow we would love to grow I think we've gotten pretty good marks of being a prudent capital allocator over time and I think we got it right in large part by being in the markets that we are with the type of scale that we have Tony we are going to we're going to continue to fine.
Ways to build new product and to bring more product into the marketplace. We made that commitment about 18 24 months ago, We've got over $1 billion billion billion and a half of our current pipeline and we're going to find ways to continue to build and and create strategic ventures with partners that are on the homebuilding side. So that we can start to ramp that up over.
The coming years.
But we also want to continue to be opportunistic and buy in a one off nature of the one thing that I think will be interesting and we're keeping an eye on is over the next couple of years with interest rate costs being where they are I think there are going to be some opportunities for additional M&A with small to midsized portfolios as operators consider their options around recapping or not and I hope that.
We will get an opportunity to look at some of those types of opportunities and I would expect it in the sector, we will still see opportunities for consolidation.
Invitation homes, a day is the combination of.
Four or five different companies as it currently sits and I would expect that there'll be opportunities to buy additional businesses or portfolios.
In the coming years, so expect us to kind of continue to keep an eye towards growth as we always have but it's been a little bit of a weird year in terms of uncertainty and candidly just the limited amount of supply in the marketplace.
Yeah.
Thank you we now have a question Washington, That's key key bank capital markets.
Go ahead, when you're ready.
Thank you.
Yes, thanks for taking the follow up here I don't believe this has been hit on but just wanted to ask about the Cui Cam and sort of the latest update you know.
How you guys are thinking about potential length lengthy court proceedings.
What the potential costs of that could be and whether or not you're considering or evaluating.
You know a potential settlement in order to be mindful I guess of the overall costs just any update there you can provide.
Yeah. Thanks, Austin. This is Dallas first like obviously as we said before we don't we don't comment really in great detail on ongoing legal matters in relationship to the qui Tam it'll be likely a long process.
Not even to a discovery phase, it's still kind of at the front end of the administrative side I will say, what we said before we feel like we have really good facts on our side.
We will and reserve the right to defend ourselves.
Appropriately and we'll obviously update.
The Street and you guys as or if we had new information when it come to us, but no update there at this point in time.
Thank you.
You have the final question on the line from Anthony Powell of Barclays. Your line is now open.
Yeah.
Hi, Hello can you hear me.
Okay. Here you can yeah. Thanks, sorry for the earlier Oh excuse me I guess on turnover I mentioned a lot of times that turnover is increasing I wanted to confirm that that's really isolated to southern California. Another another bad debt situations. This is not really a general increase of turnover in our portfolio.
No no it's across the board because we're still working through in all our markets residents that that that haven't.
Paying rent at issuance in southern Cal or Theres, certainly more there.
Across the board, we're going to see an increase in turnover in fact honestly in California may take a little longer for us to get there because of the situation and the regulatory environment. So the bad debt number and it's being elevated is it going to be because of southern California, because it is more difficult.
It's to move forward with residents who are paying their but eventually it's going to turn here with Westwood should hopefully continues to be with where the rules are.
It's going to be more across the board as we kind of just clean up from the remainder of what was going on during the pandemic environment in most of our markets.
Got it but it's not like due to tenants just mag excepting rent increases are moving out it's more of a bad debt tenants complete up is that fair.
It is.
Absolutely, where we're seeing our retention levels for people accepting.
Renewal increases have been where they've always been so it's just it's it's it's taken care of what you described.
Thank you.
I'd like to hand, it back to Dennis <unk> for any closing remarks.
We thank everyone for joining us on the call today, and we look forward to seeing everybody at the Citi Conference in a couple of weeks take care.
Yeah.
Thank you for joining that does conclude today's call. Please have a lovely day and you may now disconnect your alarm.
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