Q2 2023 Invitation Homes Inc Earnings Call

Greetings and welcome to the invitation homes second quarter 2023 earnings Conference call.

All participants are in a listen only mode at this time.

Should you need assistance. Please signal a conference specialist by pressing the star followed by zero as a reminder, this conference is being recorded.

At this time I would like to turn the conference over to Scott Mclaughlin Senior Vice President of Investor Relations. Please go ahead.

Good morning, and welcome him here today from invitation homes with Dallas Tanner, Chief Executive Officer.

Charles Young President and Chief operating Officer, and John Olson Executive Vice President and Chief Financial Officer.

Following our prepared remarks, we will conduct a question and answer session with our covering sell side analysts.

In the interest of time, we ask that you limit yourselves 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 second quarter 2023 earnings release and supplemental information.

This document was issued yesterday after the market closed and is available on the Investor Relations section of our website at Www 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 2022 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.

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, Our Chief Executive Officer.

Good morning, and thanks for joining us these continue to be exciting times with invitation homes once again, demonstrating our ability to deliver strong results.

<unk> remained very favorable for our industry and in particular for our markets product and price points are.

Our teams are providing a great resident experience every day.

And we continue to seek and define fantastic value creation opportunities through our sound capital allocation strategy.

I'd like to discuss a few of these in more detail during my prepared remarks to you today.

First let's begin with value creation.

In our recent purchase of nearly 1900 single family rental homes for approximately $650 million as.

As we've demonstrated over the last 11 years, we have approach to external growth opportunities with the strategic disciplined and accretive focus I am pleased to share with you why we believe this transaction continues in that approach.

Essentially this is a high growth portfolio of exceptionally well located homes that we bought at a pretty attractive price. We believe our purchase price represents a meaningful discount to end user market values, giving us immediate benefits of scale are value that would've been impossible to replicate through one off buying in today's environment.

Further we expect our best in class platform to help us achieve enhanced returns starting with a year one yield in the mid fives that we anticipate will grow quickly thereafter.

In addition, the quality and location of the homes. We acquired are right in line with the type of product, we'd like to own more of in particular these are great homes within desirable until neighborhoods that we believe will provide strong rent growth and value appreciation.

Over 90% of these homes, who purchased overlap with our existing sunbelt footprint, including within our Florida, and Texas markets, along with Las Vegas, Phoenix, Atlanta, and the Carolinas.

Outside of this transaction, we continue to work with our outstanding Homebuilder partners across the country. During the second quarter, we took delivery on 157 of these brand new homes.

And added an additional 173 homes to our new product pipeline.

Our expected future deliveries remained at just under $900 million at the end of the second quarter.

Moving forward, we remain focused on smart external growth through our multichannel acquisition strategy.

And as we've previously announced Scott Eison joins US next week as our Chief investment Officer, and we're excited to add his insight as we further explore disciplined growth opportunities.

Clothing, additional bulk purchasing from smaller operators and an expansion of our homebuilder pipeline.

At the same time, we will continue to keep our heads down and create more meaningful experiences for our residents such as growing our ancillary services business and developing new ways for us to engage with our customers.

The second topic I want to discuss is the ongoing fundamentals tailwind for our business. We expect these to continue to support our growth objectives for many years to come.

Nearly one fifth of the U S population, where almost 60 million people are between the ages of 23% and 35 years old.

We believe this to be a strong indicator of the future demand for our business as they form families and approach our average new resident age of 38, and a half years old.

Demand for single family homes for lease has been further enhanced by the rising cost and the burden of homeownership.

According to the latest data from John Burns leasing a home is nearly a $1000 cheaper per month on average than buying a home in one of our markets.

This is a reflection of not only an increase in mortgage rates, but also the overall lack of new housing supply.

In addition for sale inventory remains well below demand, which continued to help support home prices.

This in turn AIDS, our ability to sell noncore or underperforming assets at attractive cap rates and use those proceeds for accretive capital recycling.

Moving on now to my third topic, which is how we continue to improve the resident experience and reinforce our commitment to resident choice and flexibility the.

The most recent example of this is our partnership with Isuzu.

We're proud to help our residents feels good credit by offering positive credit reporting to all of our residents using our <unk> platform at no cost to our residents.

This partnership helps to remove barriers to housing choice allows our residence to improve their credit profile in order to achieve their financial goals faster.

In closing I'm excited by how we are executing and driving growth today I would like to express my thanks to our dedicated associates for their hard work and commitment which have been instrumental to our successes.

We believe the increasing demand for single family rentals favorable demographic trends and the flexibility and choice that we provide our residents position us well for both sustained growth and value creation.

Which we will continue to relentlessly pursue.

With that I'll pass it onto Charles our President and Chief operating Officer.

Thanks, Dallas once again, we were able to build on positive momentum to drive another great quarter I'd like to thank all of our associates for their hard work through this point in peak season.

<unk> all of our outstanding leasing maintenance and service teams and and for providing the best resident experience within the industry.

We still have work to do to close out the busy summer season, and the state diligent about controlling what we can control to finish the year strong.

But I am very proud of the results, we're putting up in the great execution that teams have delivered.

This includes the strong effort, we've made to bring onboard the nearly 1900 homes from our recent portfolio acquisition.

Through our existing scale, the dedication and professionalism of our teams and our established playbook for buying larger portfolios. We expect this to be a smooth transition.

In accordance with our mission, we're making a house a home for thousands of new residents, who have just joined our invitation homes family.

We're pleased to offer them, the very best genuine care and outstanding service that all of our residents have come to expect from us.

Moving on to our second quarter operating results same store NOI grew by three 6% year over year.

This was driven by same store core revenue growth of five 9% and same store core expense growth of 11, 2%.

The main drivers of our second quarter same store core revenue growth were seven 4% increase in average monthly rental rate and a seven 3% increase in other income.

Notably we continue to make great progress on working through our lease compliance backlog this year.

Same store bad debt in the second quarter was 150 basis points of gross rental revenue, making us a sequential improvement of about 50 basis points since the first quarter of 2023.

We believe this improvement should continue as more of our markets returned to pre Covid performance.

Returning to our year over year results.

Same store core expense growth in the second quarter was primarily the result of an expected increase in property taxes.

Long with higher turnover of property administration costs, mostly driven by progress, we're making in our lease compliance backlog.

Our expense growth was partially offset during the second quarter by favorable 6% decrease in R&M expenses on greater cost controls and lower inflation.

Next I'll cover our same store leasing trends in the second quarter lease rates on renewals grew six 9% year over year, while new lease rates grew seven 3% year over year. This drove second quarter blended rent growth of 7% year over year. In addition average occupancy remains strong in the second quarter at 97.

6% during which is traditionally the biggest move outs season for our business.

We're pleased with the balanced restrict so far this year between rate Makinson. This includes optimizing for the healthy demand. We are seeing at this point in our peak leasing and move outs season.

Especially considering the progress I mentioned earlier on our lease compliance backlog.

While this is creating additional pressure on turnover along with some expected moderation in occupancy through the back end of peak season. We believe we are well positioned for the future with demand for our homes and the quality of our new applicants remaining strong.

In particular, the average household income for new residents, who have moved in with us over the past 12 months now exceeds $138000 a year.

Resulting in an average income to rent ratio of five one times.

In summary <unk>.

Following a great first half of 2023, we're focused on maintaining our momentum going into the second half of the year. Our teams are working hard to ensure we control costs, where we can.

And continue to provide the best leasing lifestyle in the industry for our residents.

We remain focused on delivering outstanding service and strong results.

I'll now turn the call over to Jon Olson, our Chief Financial Officer.

Thanks, Charles today I'll cover the following topics first an update on our investment grade rated balance sheet, along with a few additional details regarding our recent portfolio acquisition.

Financial results for the second quarter, and lastly, updated 2023 full year guidance.

I'll start with our balance sheet.

At the end of the second quarter, we had over one 4 billion in available liquidity through a combination of unrestricted cash and undrawn capacity on our revolving credit facility. Our net debt to EBITDA ratio was five three times as of the end of the second quarter down from five seven times at the end of 2022.

Just under three quarters of our total debt is unsecured and over 99% of our debt is fixed rate or swapped to fixed rate.

We have often emphasized how we believe our strong balance sheet positions us well for desirable growth opportunities should they arise our acquisition last week of nearly 1900 homes for approximately $650 million offers an example.

With an average cost per home of $346000. The acquisition reflects a meaningful discount to market value.

This attractive entry point is underscored by the portfolio's outstanding quality and location, which are typically the two best indicators of potential future growth.

In addition, the acquisition further enhances our significant scale and many of our Premier Sunbelt locations, which we believe has the potential to drive even greater efficiencies and higher margins overtime.

We funded the acquisition, primarily using cash on hand, including dry powder, we accumulated through outsized dispositions in the first half of this year at an average stabilized cap rate of three 8%.

The remainder was funded by our revolver.

Pro forma for the acquisition, our net debt to EBITDA ratio at June 30 remains comfortably within our targeted five five to six times range.

We expect this portfolio acquisition to have an immaterial effect on <unk> per share for the remainder of this year and to be accretive to <unk> per share in 2024 and beyond.

Next I'll touch briefly on our second quarter 2023 financial results.

Second quarter core <unk> increased five 3% year over year to <unk> 44 per share primarily due to an increase in NOI.

Second quarter, <unk> increased six 8% year over year to 38 per share.

The last thing I'll cover is our updated 2023 full year guidance.

After maintaining strong execution through much of our peak season, and with favorable fundamentals expected to remain in place. We are increasing our full year 2023 same store NOI growth guidance to a range of four five to five 5% or an increase of 25 basis points versus the midpoint of our prior guidance.

This is driven by increased same store core revenue growth guidance of five and three quarters to six and three quarters percent and increased same store core expense growth guidance of eight five to nine 5% both of which are up 50 basis points at the midpoint from our prior guidance.

The increase to core revenue guidance is primarily due to outperformance in rent growth and occupancy in the first half of this year balanced against our expectation that turnover will trend higher in the second half, resulting in some moderation to occupancy.

As a reminder, this is primarily the result of its continuing to make good progress in working through our lease compliance backlog, which has the near term impact of higher expected turnover and property administrative expenses, but also the longer term benefits of re leasing the homes to stronger credit residents and improving revenue over time.

We're pleased with the progress we've made so far this year and as a result, our expectations for full year bad debt has improved by 50 basis points at the midpoint to a new full year range of between $125 and 175 basis points.

Our updated guidance also narrowed the range and increases the mid points of our ranges of expected core <unk> and <unk> per share.

We now expect full year 2023 core <unk> in a range of $1 75 to $1 81 per share, which is an increase of one penny per share at the midpoint.

<unk> was also increased by a penny per share at the midpoint to a revised range of $1 45 to $1 51 per share upped.

Outdated assumptions regarding full year acquisitions and dispositions are included in the guidance section of last nights earnings release.

I'll wrap up by restating, our excitement for what lies ahead in the second half of this year and beyond.

We will continue to focus on our strategic priorities deliver exceptional service to our residents and drive sustainable growth and value creation for our shareholders.

With that operator, please open the line for questions.

We will now begin our question and answer session to ask a question. Please press Star then one on your telephone keypad to withdraw your question. Please press star one again.

In the interest of time, we ask that participants please limit themselves to one question and then re queue by pressing star one again for a follow up question.

Our first question comes from Josh <unk> from Bank of America. Please go ahead. Your line is open.

Yes.

Yeah, Hey, guys. Thanks for the time, just wanted to touch base on the portfolio.

Wired.

I guess, how long will it take to kind of integrate into your portfolio is there any capital recycling that youre planning.

Off the bat.

Hi, This is Dallas thanks for the question.

As far as integrating the portfolio and I'll yield the Charles here on the operational side, it's typically pretty easy we don't have any market that has saved more than 350 units and we have pretty good history of doing that I think on the capital recycling piece.

Look we've been active on the disposition side.

Trying to do accretive capital recycling and I think.

The market not having enough overall supply in the retail space has allowed us to when we decide to sell homes.

Get really good.

I would call kind of end user sales prices and to be able to recycle into a high quality portfolio than that Pfizer is something that we we did pretty bullishly.

I'll hand, it over to Charles you can speak and then it just.

On how we integrate any new product when it comes to scale email market Dallas headed well we've been through this before this one happens to be a little bigger and across multiple markets, but on an individual basis, we've been able to take in portfolios like this in Vegas, and Phoenix and other markets and it's just more of the same for US we have a great team.

Essentially that manages how we roll it into our systems.

We get eyes on assets, we make sure that we're providing genuine care to the residents.

As it turns out now we just we roll them in on kind of a media basis, and we're getting out there and we're working with them Thats, where they are in their process and some of them are in lease some of them are moving in soon we just pick it up from there and then we communicate with them well. So it's kind of an ongoing process has no real time line because the homes are in different positions, but.

I am proud of how the teams are taking it on and it's we're in the middle of it right now it's exciting.

From Eric Wolfe from Citi. Please go ahead your line is open.

Okay. Thanks, just to follow up on Jonathan's question there.

Look at <unk> website, it looks like the occupancy of their portfolios are in the sort of the 92% to 93% range on average I'm.

Just curious what sort of occupancy as the portfolio you bought if theres an opportunity to get that higher expand margins.

The yield on acquisition go and then I know this is a long question, but.

Is this sort of representative of the types of opportunities that youre looking at.

Across other portfolios.

Yes, I'll start with what you mentioned last week, we met we talked about this at NAREIT. We've talked about this in some of the endy hours, we've done through the spring and had early summer and look theyre sort of this moment in the marketplace right now where.

Smaller kind of mid scale operators I think are are sort of having the high class debate with themselves about what do they do going forward.

Theres not a lot of visibility obviously for.

Some folks in terms of what the capital markets are going to allow for and I think as you look at our business and scale and platform and the operating efficiencies that we run with.

We have a pretty good history of creating really efficient margin profile in the markets, where we have scale and so I think that there is going to be some compelling opportunities.

For companies like ours, as we've sort of exhibited in this in this trade that we did this month.

Additional margin expansion with this particular portfolio look we think there is upside in terms of how we can operate it we can add to your call. It the existing margin profile in our markets and Theres reasons for doing this.

One example is Texas is a market that we want to grow it we've got call it plus or minus close to 500 homes that are going to go into our Dallas and Houston portfolios here, while we think we can operate these.

With greater call it efficiencies and some embedded growth there it actually helps our existing portfolios because as we scale up relative to the things that we own we should see additional opportunities for margin enhancement. So look it's not one size fits all out there in terms of where.

And what portfolio opportunities may be available from professional management companies, but we certainly want to be ready and I think in this situation. We are ready, we really like the real estate.

Yes.

Real estate that we are familiar with over time and then it's got to make a lot of sense for our business over the long haul.

Yeah.

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

Thank you last quarter's call you talked a lot about the lease compliance backlog.

Can you just give us an update in terms of how large it is what's the major markets AUM or where it's still having an impact.

I guess, even more importantly, whats the upside to kind of normalized occupancy and a regular turnover rate as you were.

Work through and kind of complete that backlog.

Great. This is Charles Thanks for the question yes.

We said, we thought that we were going to see a little heavier work in the first part of the year in regards to at least compliance backlog I think as we look back at Q1, it was a little quieter and things starting to pick up in Q2.

We've made good progress and you can see it in our numbers going down 50 basis points.

Quarter over quarter.

The major markets are where we wanted to see the movement and so we see this as a positive sign Thats socal.

Atlanta Vegas has made some nice progress so as norcal.

And.

The flip side of that is that we're getting a little bit of a spike in turnover and that's expected. It was hard to know when it was going to come through but the good news is the backlog is breaking with the courts and all of that and so that allows us to kind of move these homes through.

And you will see some pressure as I mentioned in my comments on occupancy towards the back half of <unk>.

Peak season, but the good news is demand is still really strong and so we are able to re lease quickly teams are executing well so were turning homes quickly phase III resident or in a healthy place. So all of that is good. This is signs are are positive we still have things to work through we're not there all the way yet but we.

Like where we're going.

And ultimately we ended.

Q2 here at mid 90 Sevens.

I expect that will come down to the low 90 Sevens in Q3, we will see where we end up with this demand I think we're going to roll back up and we're going to be in the mid 90 Sevens overall for the year. We started the year strong we will work through this backlog, but one thing I will mention is I think we worked through most of the markets. This year, that's the goal and hope.

But there could be some bleed into next year in markets like Southern California, and we will see how we do on the others Atlanta has a lot of work to do those are our two biggest markets. If you relative to your question. The biggest markets that have the largest impact on our portfolio due to size and due to the backlog are Atlanta and southern California.

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

Yeah, great. Thanks, Charles I was just wondering if you could talk about kind of where the leasing spreads are in the third quarter or do you know where did renewals go out say for July and August and I guess, what are your expectations for third quarter and for the back half of the year.

Yes, thanks for the question.

In terms of we are now we're out our most recent renewal requests go out to September and October and we're actually in the low eights to minutes. So we see it really as being healthy we're not done with July yet so.

Can't get final numbers, but we're seeing more of the same healthy performance.

Our new leases are in the low sevens.

<unk>.

Hi, Hi, <unk>, if you will we will see where the blend settles out but this is typical of what we expected for the summer new lease above renewals.

And Youll see how it moderates and when it does but right now we're still seeing good demand and we like that given my question. The answer to the question earlier, we're getting a little bit more turnover and we get a chance to re lease these homes and what I failed to mentioned before as we're putting really good healthy residents in there with an average household income of 130.

Eight.

So we're in a good shape, we've tightened up our screening criteria, we're still seeing good demand across the board.

So we expect that we'll see more of the same in Q3, but we'll see how it moderates as we get towards the back half of the peak season here.

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

Hey, Thanks for the time I just have a follow up question on the portfolio acquisition Dallas.

Like to hear how you weighed purchasing this portfolio versus deploying capital into your own stock, which at least earlier. This year was it felt like it was that an even larger discount to private market values.

Yeah, John Thanks for the question.

Certainly something we think about and what would move the needle over time and distance.

And while we have events and things that happen inside of the quarter, we really do try to have a long view in terms of how we want to create.

Meaningful external growth and also what I would say is better quality cash flows for the company over time, which we would view as call it.

And the things we wanted to strategically with the business and maybe some near term stock buybacks, which we've never done as an organization, we certainly talked about it.

So with this particular portfolio look we think what's inside of the year.

At a time period, we're going to be in the sixes in terms of call. It a yield on cost that doesn't take into consideration things like ancillary and some of the other things that we can do and then it also is part of our consistent process around capital recycling I think if you look at the things that we're selling.

Call. It a four ish cap rate on average to be able to recycle in the southern it's pretty high quality getting us to a sixth pretty quick it's an area, where we want to continue to probably lean in if anything try to find ways to create better kind of long term growth for our current shareholders. So we will consider everything.

But you know, we're managing with a long deal here.

Our next question comes from Austin <unk> from Keybanc capital markets. Please go ahead. Your line is open.

Great. Thanks on the portfolio acquisition, what rent growth did you underwrite in year, one to achieve that mid 5% cap rate that you quoted and I know you have the revolver availability to fund a portion of the deal, but what are sort of the plans to permanently finance the transaction.

Hey, Austin, it's Jon it's a good question.

So we funded this acquisition primarily with cash on hand, so it was about $495 million of cash and a $150 million draw on our revolver of that $495 million of cash $30 million of that was.

Was funded in upfront deposits prior to the end of the second quarter.

I think from our perspective.

The actual revolver draw is fairly small I think as we consider permanent capital what I will tell you is sort of what we always say because thats. How we always approach things. One we're very fortunate that we don't have any near term maturities. So theres no sort of ticking clock that would force us to do something at a disadvantageous time.

But secondly, we are constantly monitoring the market and we're always working in the background to be prepared so that we can take advantage of opportunities, if if circumstances and market conditions warrant it.

Our next question comes from Brad Heffern from RBC Capital markets. Please go ahead. Your line is open yes.

Yes. Thanks. Good morning, everybody can you talk about property taxes and how the information you have now compares with the original guide and if you could comment on the impact of the Texas legislation as well that'd be great.

Sure. So in the second quarter property tax was up a little over 11% year over year. This was expected and we talked about this on the last call.

Primarily because we recorded a large catch up entry in the fourth quarter of last year due to the fact that we'd been under accrued in the first three quarters. So as a result, we will see elevated year over year property tax increases again in the third quarter and then we'll see some moderation in the fourth quarter.

I would remind you that our three largest contributors to our total tax Bill, our California, Georgia, and Florida, which represent about 70% of the total.

While California is largely known for Florida, and Georgia, We won't know how millage rates change until we start receiving those tax bills in the fourth quarter. So I would say big picture at this point, we haven't yet seen anything that would cause us to revise our full year property tax guidance up or down with respect to Texas, a couple of things there.

Thus far the.

The legislation calls for a 10, 7% decrease in tax bill per $100 of assessed value and then there are some additional compression available that's going to fluctuate by jurisdiction.

Based on how the redistribution under the Robin Hood laws work for school tax funding.

But I would also point out that.

Texas isn't a big state for us and so I would expect that while this is certainly beneficial I don't think in the Grand scheme, its going to move the needle too much.

Sure.

Our next question comes from Daniel <unk> from Scotiabank. Please go ahead. Your line is open.

Thanks, John or Charles can you break down the components of that 50 basis point increase in same store revenue.

Rents occupancy and bad debt and maybe how that bad debt and.

In Q2 compared to expectations for the rest of the year.

Sure. So I think it's.

We've seen maybe some marginal improvement from our from our mid single digit rate growth assumption that we talked about on the last call.

As well as sort of.

A faster pace of improvement with respect to our bad debt experience, which is absolutely something that we're very encouraged to see as.

As we look at the back part of the year, though we do have to balance those those those positive trends against the fact that we're anticipating continued higher turnover here for the next few months and that is going to have.

And impact on occupancy over time and as Charles has talked about in the past. We're also very cognizant of the fact that there is a balance to be struck between rate and occupancy and so we want to make sure that we're being.

Being mindful of all of those facts, when we think about guidance.

Our next question comes from Hendel, St. Just from Mizuho. Please go ahead. Your line is open.

Hey, good morning out there.

Just a couple more on the portfolio. So what is that mid fives cap rate translate into on an IRR basis, and then curious just more broadly what you're seeing out there portfolio wise pricing is getting more in line with the mid five percents that you targeted in your capacity you, perhaps interest in doing more portfolio deals. Thanks.

Hey, Handel.

Last question I would say.

Look I think there's going to be opportunities to talk to other operators in this space over the next year and I think a lot of those conversations will be dependent on what kind of the capital markets is allowing for.

In terms of how we view obviously the return profile of any trade that we make it's it's two part right. It's one part ill call it going in yield on costs. The second piece on a risk adjusted basis would take into considerations our expectations around <unk>.

And things like that.

This was obviously so far an unlevered transaction, if you look at it in a binary way no.

We would expect a healthy home price appreciation, so I'd call it.

Unlevered basis, we'd probably see this in like the high single digits, but it just depends if it's a mixture of markets and things like that so.

Yes.

Our next question comes from Keegan call from Wolfe Research. Please go ahead. Your line is open.

Yes, thanks for the time guys. So both in the press release the commentary you called out increased turnover expense.

Pretty big driver of your same store opex going higher in year over year basis I'm. Just curious one how this is trending versus your initial expectations and then what your outlook is for the rest of the year on turnover.

We're 23 and that would be a good run rate going forward I'll turn it over here.

This is Charles I'll start and see if John wants to add anything.

Look we knew we're going to have a little higher turnover. This year given that lease compliance backlog were still running historically really low on turnover, which is great.

It was really difficult to as we kind of look forward through the year because of predicting when it was going to happen. It was a little slower than expected in Q1, and really picked up here in the second half of Q2, and we think that will maintain into Q3.

Thought here is that it will start to moderate.

Towards the backend back end of the year hard to say exactly if that's going to be our run rate just given what I talked about earlier around some of the markets and how quickly we're going to get to the end of this and like I say, southern California, or Atlanta, where we have the biggest impact of.

The thing to think about what that turnover is it has two impacts some of this on the lease compliance. These turns take a little longer cost a little bit more on that some of the impact youre seeing in our expenses, but we're the good news is we're able to work through this and we see this as transitory and it's not going to work through it as much as we can as fast as can this year and that's what's in our numbers and I think that gives.

Some optimism as we think and look forward to next year.

Our next.

Comes from Dennis Mcgill from Zelman <unk> Associates. Please go ahead your line is open.

Hi, Thank you all.

My question that was just.

Thinking about home price depreciation fair sitting here a year ago, I think everyone would have expected there to be more pressure on the market that maybe theres been and that's obviously impacting the ability to buy on the MLS just wanted to hear how you're thinking about that.

There remains a disconnect between what you can sell at and where are these portfolios are trading is there a reason why.

The portfolio others wouldn't just go to the MLS and sell at a much more attractive yield does that impact the ability to do some of these in the future.

That is good question Dennis I look on the last part of your question I think it's fair to assume that the frictional cost when youre doing anything and scale is really hard.

And I think we're as good as anyone in this in terms of selling one off in the end user market and even when we sell off those kind of high threes low fours, we have some frictional costs.

There are associated with those sales if youre not doing it all the time I think it can be.

A little bit more difficult to do.

Just say hey, could I tell 1000 homes tomorrow, and what would how would I think about that cost structure look I think the home prices have largely been buoyed up because of the lock in effect that there is a lot of really attractive mortgages in place that I think both homes current homeowners or people that are owning real estate in the.

Single family space.

It's actually an asset.

It's a liability on the balance sheet of the home, but the reality is it's an asset and there is a lot of.

And we've talked about this in some of our other calls mortgage rates call. It inside of 80% of U S mortgages or inside of 5%, which is really I think what's keeping the market.

Supported.

And that lack of volume is creating real.

Still a feeding frenzy sort of mentality when somebody is selling a home.

And we view that as an asset for our business when we want to call and sell homes and we've talked about that that you might see us be a little bit more aggressive selling some homes this year.

But by and large the market feels really healthy I agree with you we have not seen a degradation in home prices within our portfolio that I think when we have these opportunities where we can take advantage of that sort of bid ask spread being a buyer.

We're law, we have a long view on owning great single family residential and we want to earn it with scale in the markets. We operate in so when those opportunities in terms of like this one expect just trying to figure out how to do that transaction if it makes sense.

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

Hi, This is Derek metzler on for Adam Kramer.

I'm just wondering if you could talk a little bit about market rent trends across your portfolio and give an update on the loss to lease today.

Yes. This is Charles.

We're seeing what's historically been really strong.

New lease and renewal rates through the summer and take out the COVID-19 kind of anomaly.

When we're in that blend of.

Seven in Q2 is really strong that's maintaining here as we get into Q3.

New lease side the markets that are leading have been kind of markets that have been out in front for the last year or so it's our Florida markets with Orlando Q2, North of 9% and we have five six markets.

<unk>.

Mid to high eight Tampa, South, Florida, Southern California, Atlanta Carolina. Good news is as we talked about earlier as we're cleaning up the backlog that we were able to release the homes because of the demand.

And Thats been great renewals are holding steady we are kind of stabilizing here and that kind of high sixes in.

I think that'll be steady through the year, if not we will see where we end <unk> I mentioned earlier that we went out in September and October and a low eight.

So I think that's real positive as we think through on that side.

And some of this will be a balance between occupancy and rate is.

John talked about when we're talking working through this backlog but.

That turnover impact isn't in all markets is in certain markets, where we have a backlog highlighted by Atlanta Vegas in Socal, all the markets in Q2 actually turnover went down year over year. So.

It really is market specific and we're seeing good demand across the board. The only softness that we're seeing is a little bit of Vegas. Some of it is because of the lease compliance back backlog. Some of it is there is some competition in the market in a little bit of a slowdown in that market in general so we're paying attention to it.

So overall, we're seeing really good healthy positive trends.

And we're excited about China finish off peak season strong strong and finish off the year really strong.

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

Hi, Good morning, a question on the on the builder pipeline, we've seen the homebuilders have good success in selling.

New homes to our new homeowners are they showing less interest in selling homes to you and others.

And as far as space or do they continue to see you guys get partners, who could outlets for certain of their homes.

Well look I think we mentioned on the script.

We're continually adding to our pipeline I'd say.

Sort of the opposite.

I think most companies would envy the position of the public builders are and they're lowly levered. They are taking a much larger share of overall home sales as it relates to call. It U S housing stock and it's because they're one of the few groups out there that can go out and build and create now that being said I think the playbook that we've built with pulte is sort of our beginning sponsor.

Partner is now actually starting to work its way through with several different relationships for us actually.

I think it's sort of caught on that this is a really nice way for an operator of for sale homebuilding business to be able to align some interest with professional management companies that want to be a natural buyer of some of this product over long periods of time, and so I actually expect that side of our business to grow I think our teams.

<unk> largely led by Peter Dilello and now Scott is <unk> coming in have done a really nice job of starting to build up frequency there and I think the nice part about it is we were able to get under the Hood early and really talk about our strategy of the company with these partners and helping them understand where we want to grow our footprint and then I think over time. It also allows.

US to get under the Hood have influence on.

Things like portfolio composition and design.

And neighborhood fit and feel which is an important part of our overall value factor for the customer as they're thinking about choice and I think it's still too early for us to really have a strong view on this but I think the customer coming in to brand new product really does view that that move in experience as their home and my instincts and I cant pro.

This yet with any data, but I think they'll prove an even stickier customer over time as we bring out some of this newer product that has a little bit more of a focused it and lastly, the thing we love about it which I can't emphasize enough is we are very G&A light in this program. So we don't have a lot of our balance sheet tied up a dirt.

Our other kind of potential riskier parts of that business, we'd rather just continue to partner with proven operators in the space and be a good playing partner for them that that strategy is really working for us at this point in time.

Our next question comes from Juan San Apria from BMO Capital markets. Please go ahead. Your line is open.

Alright.

A couple of questions I'm, assuming we're towards the end I guess and I apologize if I missed this on the same store expense guidance increase what drove that I mean, it seems like the bad debt is lower.

<unk> has picked up but albeit temporarily and set to decrease into year end and taxes, it's too early to tell and no change in expectations I'm just curious.

What drove the expense increase in guide and then.

The second part is just on the renewals.

Why is that decelerated or the pace of increase has slowed and as the September October numbers.

You put out there that any age does that imply a reacceleration or is there some give back that would kind of keep that number steady for September and October expected.

Hey, Juan this is John I'll take the first part of your question and hand, it off to Charles for the second part I think it's a couple of things on the expense side, what we're seeing as Charles noted is that.

The turnover has come there was a little bit of a delay in terms of when it really started to show up in the portfolio I would also say that turnover increased each month since the end of the first quarter.

So it is it is more concentrated and as we've started to see kind of the flow through impacts on a whole variety of different line items in the P&L, what we're seeing sort of suggested that <unk>.

Moving the moving the goalposts on the expense guide did make sense now to be clear.

I want to remind everyone that we think working through this backlog is just fundamentally healthy for our business long term right. It's something that is going to allow us to put.

Stronger credit tenants back into those homes get them back in service get them back cash flowing but there is short term pressure on expenses and I think it's important that we acknowledge that and that's what we've done here.

This is Charles I'll, just add on the renewal side.

As you think through kind of portfolio mix and kind of the cohorts that come through.

Renewal in the summer or in the.

Peak season, if you will or or or off season in Q1 or.

Q4.

We've historically really been <unk>.

Strong it pushing out trying to capture as much of that market. That's out there and you think about the last couple of years on the new lease side, we've been in that high mid teens.

So on the renewal side, so when the summer renewals come through they are coming off a pretty high base. So we're just realistic on kind of what we can do and as you get into the back half why we still have good demand. There is an opportunity to capture where market is we didn't go out as high in those shoulder seasons. If you will so that's some of what Youre seeing I think we can see how it.

All plays out and what it implies but implies that generally we are still seeing good good strong demand and we're going to do what we can kind of capture where market is for these homes and that portfolio. When it comes through of homes at the time.

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

Hi, Good morning. Thank you two follow ups on the acquisition conversation here.

Rates look like on the MLS channel, where you're bidding where deals clearly in the market in Dallas, just given some of the commentary on portfolio deals. Some of the scale you can build pretty quickly on those plus some of the attractive pricing with your builder relationships does it make more sense to hold off on the MLS.

That was an acquisition channel, perhaps can serve some of your capital for some of these other opportunities than traditionally channel agnostic location specific there has been a big part of the strategy, but I was wondering if maybe that might change just given some of the opportunities that are out there.

It's great question. So I think Youre basically just looking for color on that question of what we're seeing real time MLS and how do we view that relative to some of these things so.

Look.

Painting, a broad stroke on kind of the market. We've hit this in a couple of different ways.

In our markets and the 16 markets that we operate if we were active in the MLS today and really buying some scale it would be in the low fives, if not close to probably maybe a couple of markets Mike touch mid five once in a while but not really.

So for US we haven't been very active but to be clear over really the last four quarters, we've not bought very much if any.

MLS property in the retail space. So we've been really just taking deliveries through our new product pipeline and a merchant build program and then spending time talking to other operators around some of these kind of bigger opportunities, where we can integrate scale much quicker.

I do think that there is a bid ask spread between where portfolios need to trade today and where are the <unk>.

Scale, one offs would occur and I think that's kind of below <unk> as I mentioned before if not inside of a five and some of these but Las Vegas. For example, you can't buy a home.

At a five cap, it's just next to impossible.

All subtypes, so look I don't view the MLS as a channel for us it'll be one thing we always looking at we write one hundreds of offers every week at price points that we'd be willing to transact at and we're striking out quite a bit because that spread so wide.

I Love the entry point that we're seeing in kind of the new builder stuff most of our pipeline that we're reviewing and putting in play right now is a little bit closer to a six cap, albeit the deliveries are expected.

I'll call it a year to 18 months out on any new product that we're putting in contracts. So it just feels like there is some dislocation this should be when it's beneficial to be a REIT, we're lowly levered.

We have access to capital, we still feel really good about our access to capital from liquidity perspective.

And we've got.

A platform that can handle.

Trunks of.

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

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

Hi, Thanks for taking my question for your new portfolio, what's the average rent you charge for these homes and how does that compare to the current rent for your existing portfolio and then just in terms of margin enhancement from integrating.

Can you give us a little more color on what initiatives you're thinking about.

So on your first question basically in place rents.

As we took these homes are around $2200, which for the markets that these are comprised of is about 10% greater than than where our current average rents. In these markets are so all accretive in terms of that but we do see the same embedded loss to lease.

This opportunity as we do in our own portfolio somewhere between call it 8% to 10% upside in our books, so and I'm, sorry, I didn't get it or last question. The last question. The third part of your question in terms of.

Margin enhancement from integrating into your existing portfolio, just a little more color on what initiatives you're thinking about.

Too early to tell but it's not like our Texas markets.

We would basically grow the portfolio by 10% and we wouldn't need to bring on really any head count. There. So we will see additional expansion kind of in those two markets, but in terms of like ancillary that'll be a slow process because what we typically do is is bring some of those services into play as leases revolve and renew and so as Charles mentioned earlier on the call as we get into the <unk>.

Book, and as we're actually operating it and updating leases and lease agreements.

And updating our renewal pricing that's when those ancillary services will be able to come in and.

So that will integrate in overtime.

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

Thanks for taking the follow up Charles I was hoping you could expand on the weakness in pricing power and the new lease growth rates in Vegas, you alluded to what do you think is driving that specifically and then maybe on a somewhat related topic are you seeing notable increase in shadow supply from conversions of short term rentals Airbnb.

Days to traditional rentals in a Las Vegas your other vacation heavy destinations.

I'll take your first question your last question first.

Not really much impact on the shadow piece that's out there frankly, it's always been there I think it's a fair question given the low interest rates and how homeowners maybe approaching whether they want to sell or lease a home, but we've always been competing against the market and thats, mostly driven by mom and Pops.

We're just kind of operating within that dynamic.

Going back to Vegas, each market has its own dynamics Theres a couple of things going on one we've had a real spike in turnover as I've talked about trying to get through the lease compliance. The good news is the courts have really come starting to open up and move faster and so we're competing against some of our own supply to be honest with you. So that's put some pressure.

We're not the only ones operating in that market. So theres other supply that are going through the same backlog and so that puts some extra supply in the market temporarily we saw some of this in Phoenix last year and work through it pretty quickly in a month or two.

What we will see over time is trying to figure out what if theres any kind of.

Demographic change with with with Vegas in terms of people moving out of the market. It's hard for us to get a good vision of that right now, but right now it's more around the supply that exist in our own book and with others.

But we don't see it as right now a long term trend will work through this.

We will see how it plays out overtime.

Our next question comes from Jade Rahmani from <unk>. Please go ahead. Your line is open.

Hi, This is Jason <unk> on for <unk> can you. Please comment on the outlook for property insurance and do you see a captive insurer as a potential solution for some of the rate increases that we've been seeing.

Hey, Thanks for the question I will say that similar to what we talked about on our last call.

While we don't love, the extent to which our property tax or I'm, sorry, our insurance Bill went up year over year. I think we were very fortunate relative to what we've heard from some of the other Reits and I think that's down to a couple of things one we have a very favorable loss history.

Our insurers have never lost money on invitation homes, the worst year, they ever had with last year when they broke even.

Secondly, I would say that the geographic dispersion and the granularity assets compared to.

Traditional commercial real estate, which are big and chunky certainly is a benefit in terms of risk mitigation and lastly, I would say we're not coastal so I think if you put all that together, we feel really good about where we landed I think for the third and fourth quarter as we talked about on the last call you should expect to see quarterly year over year increases in the neighborhood of 20%.

With the full year insurance expense line item being up.

Little over 16%.

As far as captives and other things of that nature look we are going into next year's renewal, we're going to be evaluating a whole host of different alternatives.

I think this is not a one and done type of situation, we've seen a lot of capacity leave the market.

And I think we've seen a lot of carriers, who are trying to recoup fairly painful loss histories over the last several years. So I think it's.

Something to stay tuned to but I can't give you any any particular insight into what our strategy is going to be for next year just yet.

Our next question comes from Daniel <unk> from Scotiabank. Please go ahead. Your line is open.

Thank you started going back to Austin's question earlier, John where do you think you can raise unsecured debt today and credit spreads have come in recently and you talked about your leverage being lower lower than your longer term targets. So do you view. This as a good time to raise that kind of capital or our dispositions going to stay the preference.

Well.

Couple of observation. Thanks for the question dispositions have been our most attractive cost of capital thus far this year.

We have sold homes year to date at an average stabilized cap rate.

Under 4%.

And then we've been able to put that cash in the bank and earn 5% plus and then in the case of this portfolio trade redeploy that capital into something with an even higher yields. So we think that the.

The prospects for accretive capital recycling driven by strategic dispositions.

Has worked out pretty well for us.

With respect to the unsecured market, yes, it certainly does seem as though.

<unk> spreads of ground, a little bit tighter with the GDP report. This morning, I think the 10 year is probably gapping out as we speak a little bit.

But we're going to continue to monitor the market, we are constantly sort of.

Keeping track of where we think our new deal might go off at a variety of different tenors.

How we run the business regular way as we want to keep a very close eye on what the opportunity set looks like so.

We're always doing the work in the background to be in a position to move quickly. If we think it makes sense to do so and I don't think our approach is going to change.

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

Great. Thanks, just two quick follow ups, one Dallas you had mentioned that it's a great time to be a REIT part of being a REIT is being able to issue equity I just wanted to get your thoughts on.

Equity as a source of capital today, and then secondly, as you are.

It seems like the winter kind of shifting and where the opportunities are what are your latest thoughts on expanding outside the U S, whether canada or anywhere else in the world. Thank you.

No great question I think in terms of expansion.

We're pretty consistent with saying this like we run 12 or 13000 units in Atlanta as easy as we run 3800 in Seattle as well.

We'd love to see all of our markets get closer to eight to 10000 units, we see margin expansion, we see ability to offer different services, we can be.

<unk> systems can all run a heck of a lot more efficient and we get better granularity and efficiency with scale in those markets. So I would expect our first choice would be subject to an opportunity set I guess would be to just continue to build.

Build scale and density in the markets, we operate and we have also been on the record that we would like to own and some other markets over time, and we see that there is a little bit of Nashville.

And this trade and there are markets like Austin, and San Antonio in Salt Lake City that we all find very appealing for variety of reasons.

I think internationally, it's a fun question to speculate on but the reality is no.

Most of these countries probably have more restrictive housing policies.

Unless there were a real strategic opportunity or a reason to get it I don't know why we wouldn't just stay in this.

This great country that we have an amazing space for housing and we can build it we can buy it we can improve it. It's just it's a very good place to operate in theory, yes in terms of equity and John just to answer. This is how we think about the capital markets look we think about our cost of capital daily and this business and we try to hold ourselves accountable.

<unk> to being smart stewards of capital I think we've gotten fairly good marks over time of being smart capital allocators.

Like that we're disposing of homes that are noncore or parts of the country. There may be a little harder operate at kind of a for a sub four cap reinvesting that capital kind of in the mid fives pushing to a six on the new construction, that's a winning strategy right now all the world's sort of funky, it's been nice to see that our call. It our <unk>.

Share price has gotten a little bit better, but it's not in a ZIP code that we're really thrilled about and for kind of a variety of reasons. When we look at where home prices are actually trading and so I think to John's point Youll, probably watch the capital markets over time see how those evolved we'd certainly love to see good performance.

We up our stock price even further.

But we're comfortable recycling capital and being smart and as I've said before we're not going to be afraid to do this stuff off balance sheet with partners that want access to <unk>, so far and so we have current availability in our.

Second rock play venture of about 700 million I would expect we'll start to deploy some of that over the coming year, we have an untapped revolver and we're going to still continue to generate good free cash flow in this business. So.

Between dispositions and all of that I, just remind I think we've got ample dry powder to go look at some of these opportunities and continue to try to grow the business.

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

We appreciate everyone's support everyone being on the call. We hope everyone has a.

Safe rest of summer and look forward to seeing some of the in the fall.

Yes.

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