Q4 2023 Invitation Homes Inc Earnings Call
Greetings and welcome to the invitation homes fourth quarter 2023 earnings Conference call.
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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.
Scott Mclaughlin: Good morning, and welcome him here today from invitation homes with Dallas Tanner, Chief Executive Officer.
Charles Young President and Chief operating Officer.
Scott Mclaughlin: John Olson Chief Financial Officer.
Scott Mclaughlin: And Scott Eisen, Chief investment Officer.
Scott Mclaughlin: 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.
Scott Mclaughlin: During today's call, we may reference our fourth quarter 2023 earnings release and supplemental information.
Scott Mclaughlin: This document was issued yesterday after the market closed and is available on the Investor Relations section of our website at Www Dot <unk>.
Scott Mclaughlin: V H dot com.
Scott Mclaughlin: 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.
Scott Mclaughlin: 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.
Scott Mclaughlin: You can find additional information regarding these non-GAAP measures, including reconciliations to the most comparable GAAP measures in Yesterdays earnings release.
Dallas Tanner: I'll now turn the call over to Dallas, Tanner, our Chief Executive Officer.
Dallas Tanner: Good morning, everyone and thanks for joining us our customers' needs are straightforward they want to lease a great home in a safe neighborhood with great schools and easy access to jobs, they want professional services and genuine care and.
Speaker Change: They want flexibility and convenience that allows them to live more freely.
Dallas Tanner: 12 years ago, a lot of these options either didn't exist or wasn't readily available today. They all do thanks to the hard work and commitment of our associates. Thanks to the mission of this company, but together with you we make a house a home and thanks to the hundreds of thousands of residents who have put their trust in us to do exactly that.
Dallas Tanner: Last year marked many important milestones for invitation homes.
Dallas Tanner: We returned to a more sustainable growth profile, while continuing to expand and improve on the overall resident experience.
Dallas Tanner: It was a year in which we helped our homebuilder partners start construction on thousands of much needed new homes across the country.
Dallas Tanner: It was a year in which we recycled over $500 million of capital selling nearly 1500 homes on the MLS predominantly to homeowners.
Dallas Tanner: And it was a year in which we executed one of the more significant portfolio acquisitions in our company's history.
Dallas Tanner: We are excited to continue this momentum into 2024 as we expand on what it means to live in an invitation homes.
Dallas Tanner: By this I'm, referring to last month's announcement that our industry, leading operating platform is now available to not just our residence and joint venture partners, but also to large portfolio owners, who are seeking the best in single family property management for their residents and the best in single family asset management for their investors.
Dallas Tanner: Let me be really clear here, we believe providing professional property and asset management services as both the logical next step for our business as well as the strategic significantly forward.
Dallas Tanner: It empowers us to Accretively leverage our platform in a capital light manner, while helping us to achieve further scale increased efficiency and additional margin expansion for our company.
Dallas Tanner: And substantial savings and convenience for our residents.
Dallas Tanner: It all began with last month's inaugural agreement to become the property and asset manager over 14000 single family homes.
We expect this agreement to drive incremental <unk> of a couple of cents per share in 2024.
Dallas Tanner: This results from meaningful property management and asset management fees that we believe fairly compensate us for our unrivaled capability scale and expertise.
Dallas Tanner: In addition to this we will also learn an outsize share of value added service revenues.
Such as from Smart home bundled Internet and other initiatives, we may roll out in the future along with potential future incentives based on the operating and financial performance, we are able to drive over time.
Dallas Tanner: Yes.
We believe this inaugural agreement is the first of what could be many such arrangements.
Dallas Tanner: As we pursue additional opportunities we expect professional management to help us build and grow strategic relationships, while we continue to become even more efficient through greater density improved procurement better resident engagement and thoughtful use of data and technology.
Dallas Tanner: Most importantly, as in other retail sectors, we expect professional management to help us create a pipeline of potential future acquisition opportunities for homes about which will have an information advantage.
Dallas Tanner: In the meantime, we believe the fundamental tailwind for our business will continue to drive outsized NOI and earnings growth relative to other REIT property types. This includes a well documented lack of new housing supply across our markets as well as the strong demand from a surge of young adults who are just starting to reach our average new resident age in their late <unk>.
Dallas Tanner: <unk>.
Dallas Tanner: These younger generations offered in favor experiences over possessions and preferred convenience and flexibility over financial anchors 30 year contracts.
Dallas Tanner: It's also important that we underscore the massive savings from leasing a home today versus owning.
Dallas Tanner: Using John Burns fourth quarter data as weighted by our markets. It is $200 per month less expensive to Liza home.
Speaker Change: On it.
Dallas Tanner: It is an average savings for our residents of over $14000 a year. We see this reflected in our latest surveys in which a substantial majority of our new residents say that our rents and services are affordably priced one.
Dallas Tanner: One of these services, which we just started to provide last year completely free of charge is as soon as positive credit reporting program.
Dallas Tanner: Already over half of our residents have improve their credit score since enrolling with the average credit score improvement of about 35 points.
Dallas Tanner: Could help our residents achieved thousands of dollars in lifetime savings on their borrowing costs further enhancing the value proposition for leasing a home with us.
Dallas Tanner: In summary.
Dallas Tanner: We're very proud of the choices, we offer individuals and families to live in a great home without the high costs and burdens of homeownership.
Dallas Tanner: We remain committed to investing in our technology systems value add services and other tools to help our residents thrive.
Dallas Tanner: We're excited about how we can continue to grow our business further enhance the resident experience and meaningfully broadened the professional services we offer.
Dallas Tanner: In this regard we truly believe we are just getting started.
Dallas Tanner: With that I'll pass the call on to Charles Young, our President and Chief operating Officer.
Charles D. Young: Thanks, Alice our fourth quarter operating results were a solid finish to close out the year and particularly our teams worked hard to deliver strong same store NOI growth occupancy and resident service.
Charles D. Young: In 2023, we saw a return to more normal patterns of rent growth seasonality and lease compliance and as Dallas mentioned it was a year of working towards several new milestones, including our large portfolio acquisition in July and getting prepared to provide professional third party management services.
Dallas Tanner: Our local market teams continue to take all of this in stride. It's what we do they often tell me and I am very grateful for their attitudes and achievements.
Dallas Tanner: Thanks to the strong efforts I am pleased to see how efficiently and effectively we have on boarded these new homes engaged with our new residents and rolled out desirable desirable new services.
Dallas Tanner: I will now walk you through our operating results in more detail same store NOI growth of five 6% in the fourth quarter brought our full year 2023 same store NOI growth to four 8%.
Dallas Tanner: Same store core revenues in the fourth quarter grew five 9% year over year. This increase was driven by average monthly rental rate growth of five 3% and 11, 2% increase in other income and a 50 basis point year over year improvement in bad debt.
Dallas Tanner: That marks three consecutive quarters of improvement in bad debt I am pleased to see lease compliance continuing to move in the right direction. While at the same time also seeing our new residents household income reached its highest level to date, just shy of $150000 a year on average during 2023. This represents an.
Dallas Tanner: To rent ratio of five four times is indicative of the high quality location and desirability of our homes.
Dallas Tanner: Returning to same store growth results full year 2023 same store revenue growth was six 5% while full year same store core expense growth was 10, 3%. The main drivers of this expense growth included a temporary cost of working through our lease compliance backlog, which drove higher property administrative and turn.
Dallas Tanner: Over costs as well as higher property tax and insurance expense by contrast, repairs and maintenance expense came in flat for the full year 2023, a testament to moderating inflation pressures and our team's ability to effectively control costs.
Dallas Tanner: Next I'll cover leasing trends in the fourth quarter of 2023, as we typically do in the slower winter leasing season, we prioritized higher occupancy in the fourth quarter to better position our portfolio as we head into our upcoming peak leasing season. As a result same store average occupancy grew each month, averaging 97, 1% in the <unk>.
Dallas Tanner: Fourth quarter.
Dallas Tanner: In addition, new lease rate growth was flat during the quarter, representing an expected return to more normal seasonal trends.
Dallas Tanner: Renewal lease growth of six 8% was the highest we've seen in the fourth quarter other than during the pandemic as renewals comprise a substantial majority of our leasing business. This strong result drove a fourth quarter blended rent growth of four 6%.
Dallas Tanner: I will now also share our January 2020 for our same store leasing results. We started the year off with an increase in average occupancy to 97, 5%. In addition January blended rent growth was three 5% comprised of renewal rent growth of five 9% and our negative new lease growth of one five.
Dallas Tanner: <unk> <unk>.
Dallas Tanner: Early indications lead us to believe that new lease rates have already begun to turn positive again in February as activity to date.
Dallas Tanner: In combination with a favorable tailwind that Dallas mentioned and a strong delivery by our teams. We believe we are well positioned to capture a strong demand for our homes as we enter the traditional peak leasing season. Later this month and to continue to provide the best resident experience in the industry I will now turn the call over to Jon Olson, our Chief Financial Officer.
Jon Olson: Thanks Charles.
Jon Olson: I'll cover the following topics first an update on our investment grade rated balance sheet and the capital markets second financial results for the fourth quarter and full year 2023, and finally 2020 for full year guidance.
Jon Olson: Leading off with the balance sheet I will start with several of our teams key accomplishments in 2023.
Jon Olson: These include $800 million of senior notes that we issued at approximately five 5% in August as well as outlook or ratings upgrades from all three of our corporate credit rating agencies during the year.
Jon Olson: We ended 2023 with $1 7 billion in available liquidity, which includes $700 million of unrestricted cash and $1 billion of capacity on our undrawn revolving credit facility or.
Jon Olson: Our net debt to adjusted EBITDA ratio improved to five five times as of December 31, 2023 down from five seven times as of the year prior.
Jon Olson: And 99, 4% of our total debt was fixed rate or swapped to fixed rate as of year end 2023 with over 75% of our total debt unsecured and no debt, reaching final maturity prior to 2026.
Jon Olson: I am really pleased by the meaningful execution. Our teams delivered last year and believe our balance sheet continues to offer a strong positioning to achieve our goals in 2024 and beyond.
Speaker Change: I'll now cover our recent financial results and year over year growth.
Jon Olson: Core <unk> for the fourth quarter 2023 was <unk> 45 per share an increase of four 6% while core <unk> for the full year 2023 was $1 77 per share an increase of 6%.
Jon Olson: <unk> for the fourth quarter 2023 was 38 per share an increase of five 8% and <unk> for the full year 2023 was $1 50 per share an increase of six 3%.
Jon Olson: These strong results were primarily driven by higher same store NOI during the quarter and full year.
Jon Olson: The last thing I'll cover is 2024 guidance. This is led by our expectation for same store NOI growth in a range of three five to five 5%, resulting from expected same store core revenue growth in the range of four five to five 5% and same store core expense growth in the range of five five.
Jon Olson: 5% to 7%.
Jon Olson: Our same store core revenue growth guidance assumes 2020 for average occupancy will be similar to our full year 2023 result.
Jon Olson: In addition guidance assumes same store blended rent growth in the high four to low 5% range and continued improvement in our bad debt as a percentage of rental revenue to an expected range of <unk> 65 to 95 basis points.
Jon Olson: Our same store core expense growth guidance assumes higher fixed expense growth to continue in 2024 with property tax expense growth in a range of 8% to 10% and insurance expense growth in the mid to high teens. We expect this to be partially offset by moderating growth in our controllable expenses.
Jon Olson: From a timing perspective, we anticipate same store NOI growth will be higher in the second half of the year than in the first half.
Jon Olson: All of this brings our full year 2024 core <unk> guidance to a range of $1 82 to $1 90 per share.
Jon Olson: This guidance assumes as a base case that we will acquire between $600 million and $1 billion of homes on balance sheet in 2024, mostly from our homebuilder partners at via portfolio acquisitions.
Jon Olson: We expand we expect to fund much of these home purchases by continuing to Accretively recycle capital from wholly owned dispositions and an expected range of between $400 million and $600 million.
Jon Olson: A detailed bridge of 2023 core <unk> per share to the midpoint of our 2024. Our guidance is included within last night's earnings release.
Jon Olson: Lastly, we provided full year 2024, <unk> guidance in a range of $1 54 to $1 62 per share as.
Jon Olson: As a result of our anticipated growth in <unk> per share in 2024 last month, we increased our quarterly dividend by nearly 8% to <unk> 28 per share.
Jon Olson: In closing we plan to keep a close eye on the capital markets throughout the year and continue our long track record of being disciplined and proactive.
Jon Olson: We will prudently pursue opportunities for meaningful growth and accretive capital recycling.
Jon Olson: And we will continue to lead the industry on our quest to provide the best choices convenience and overall resident experience for the millions of Americans, who prefer to lease a single family home.
Speaker Change: With that we have now concluded our prepared remarks operator, please open the line for questions.
Speaker Change: We will now begin our question and answer session to ask a question. Please press Star then one on your telephone keypad.
Jon Olson: Your question. Please press star one again.
Jon Olson: You are using a speakerphone please pick up your handset before pressing the keys.
Jon Olson: And then we.
Jon Olson: Queue by pressing star one for a follow up question.
Jon Olson: One moment, please while we poll for questions.
Jon Olson: Our first question comes from Michael Goldsmith from UBS. Please go ahead. Your line is open.
Michael Jason Bilerman: Good morning, Thanks, a lot for taking my question.
Michael Jason Bilerman: The question is on the guidance.
Michael Jason Bilerman: What does the guidance assume in terms of new and renewal lease spreads as we move through 2024 and <unk>.
Michael Jason Bilerman: New lease spreads were flat in the fourth quarter, that's kind of below historical levels and was negative in January what gives you confidence that you can kind of maintain your renewal spreads in this sort of environment.
Michael Jason Bilerman: Yeah. Thanks for the question I'll start off this is Charles and just talk a little bit around where we currently are in terms of.
Charles D. Young: Right and occupancy as we signaled on our last call we purposely pushed for occupancy in the fourth quarter to set us up for our peak leasing season, we looked at the landscape back in September and October and decided to get aggressive on occupancy. What we were saying was returned to normal seasonality as I mentioned, we're also coming off a little bit of a spike in turnover.
Charles D. Young: <unk> in Q3 from the lease compliance cleanup, which is a good thing and it's part of why we have confidence in where we're going on bad debt. We also saw some local supply pressures and when we step back. We know that history tells us is best to be full going into peak leasing season, and Thats exactly where we are today.
Charles D. Young: We're sitting at 97 five occupancy in January in a position of strength.
Charles D. Young: And we're going to start to lean in on.
Charles D. Young: On the right side now.
And what we're seeing already from January into February as an acceleration.
Into February and into spring leasing season, as we lean in on that right. You can also see that renewals have stayed steady and.
As a reminder, that's the majority of our lease as we pull through using around 75% are Blendon January is at three five which is a really healthy. If you look back at historical rates pre pandemic of 18, 19, or 20 were right in line, where we want to be and with the acceleration in the February felt really good.
Yeah.
So what I'll leave with you is we'll give an update in February on.
Charles D. Young: In March one at the Citi Conference, but we like our positioning and has put us in a good place with our occupancy and we'll go from there.
Charles D. Young: Our next question comes from Jamie Feldman from Wells Fargo. Please go ahead. Your line is open.
Great. Thanks for taking the question. So I guess just a follow up on the new the new lease rates. If you look at the weakness you had in <unk> clearly those are some of the markets that have a lot more supply in.
In the build to rent business.
What are the odds here that maybe you get you get caught off guard surprised to the downside just how much supply pressure there really is.
In those markets and it's just more than seasonal kind of what gives you comfort that the supply story won't be too bad or maybe just give us your thoughts on supply in those major markets, where you did see the weakest new rents.
Yes, So you are probably calling out Phoenix, a little bit of Vegas.
Two things I'd highlight one we some of that confidence comes from our current level of occupancy we are in a position of strength. So we can kind of hold and know whether we're not trying to solve for the occupancy and we can lean in.
Charles D. Young: We're also seeing that we've gotten occupied in those specific areas. So the demand is still there. That's what's great. We're still seeing strong demand we wouldn't have been able to move occupancy from a low of 96 eight up to 97, five if that demand wasn't there. So as you go into <unk>.
Charles D. Young: Spring.
And we're also.
When you bring up the build to rent relative to our infill portfolio that puts us in a really strong position to think about the same store being able to hold given that we're in that position of strength and we're already seeing some acceleration from January and February.
Our next question comes from Eric Wolfe from Citigroup. Please go ahead. Your line is open.
Eric Wolfe: Hey, thanks.
That guidance can you talk about where you expect to start in the year and how you get comfortable with that so do you start at over 100 basis points, and then kind of add around 50 basis points or is at some point in the year, where the bad debt should step down.
Yes. Thanks.
It's a good question.
We made great strides in reducing bad debt in 2023, if you look back to the fourth quarter of 2022 same store bad debt was 170 basis points. So we improved 50 basis points year over year to 120 basis points. We saw in Q4 of last year.
Eric Wolfe: That improvement came against the backdrop in which rental assistance decreased by $57 million year over year.
And between the first quarter of 2023 in the fourth quarter of 2023, we had four markets that improved bad debt by between 100 basis points and 265 basis points.
We continue to see a healthy percentage of lease compliance move outs, which allows us to keep increasing the proportion of residents who are making timely payments.
In the fourth quarter of 'twenty, three Atlanta, and Southern California, where two of our markets with the highest levels of bad debt, but there are also two of the highest markets in terms of lease compliance move outs. So that that's really part of the continued progress we're making with respect to bad debt. I think it's also important to point out that comparing our 24 bad debt guidance with our <unk>.
'twenty three actual result has a few challenges.
Bad debt in the first quarter of 2023 was 180 basis points, which was one of our worst results since the start of the pandemic.
That Q1 result caused an outsized impact on our overall 2023 full year bad debt results are quarter over quarter improvements in bad debt really began in the second quarter of 2023 and that improvement has continued every quarter. Since then.
I think it's also important to note that the reasons for that outsized bad debt result in the first quarter of 2023 don't really exist any longer.
We had restrictions at the first part of last year, there were restrictions in place in southern California that prevented us from beginning to work through our delinquency backlog at its not like it was a January 1st kickoff.
And so over time I think the.
Moratoriums burning off and improvement in the significant court backlogs, we saw in the first half of last year have really eased for us bad debt in the second half of 2023 was significantly better than in the first half. Despite the fact that rent assistance was less than half it was half of what it was in the first half.
I would also point out that we are not assuming any rental assistance and our 2024 guidance. So I think if you put it all together, having the ability to enforce the terms of our leases from the start of the year in 2024 will allow us to continue to make steady improvements over the course of this year, but obviously, it's going to continue to be a major area of focus for us and we're <unk>.
Prepared to.
We're prepared to go out and execute.
Our next question comes from Jeff Spector from Bank of America. Please go ahead. Your line is open.
Great. Thank you can you talk more about the.
New customer demand I believe you mentioned in January.
New rate was minus one 5%.
I guess can you talk about that strength in demand and then put into context, how that number compares to prior years. When you talk about normal seasonality and then maybe what you would expect as we move into peak leasing, which I believe you said should start at the end of this month.
Yes, no great question. This is Charles.
As we mentioned seasonality has returned during the pandemic. It was really high occupancy high demand. It was abnormal and if you go back and think about.
Our pre pandemic years 18 1920 when were full like we are now we're really seeing that similar type of demand that seasonal.
Slows down typically in Q4 and into Q1 and picks up right. After the Super Bowl, which just happened. So we're in a place now where we're looking across the portfolio. We're seeing that we're occupied we did what we wanted to there and we see the demand. It's not the same exact levels that we saw during a pandemic, but those are artificially high.
When you go back and compare it to our 2019 early 'twenty.
We're right in line with what we've seen historical and we arent really good shape in terms of our occupancy and our blended rent growth going into now accelerating spring leasing season.
Our next question comes from Austin <unk> from Keybanc capital markets. Please go ahead. Your line is open.
Great. Thanks, good morning, everybody.
Austin: Charles how have you been have you been offering any concessions to drive some of the traffic and build occupancy here during the softer part of the season and maybe just to push back a little bit on your comment on renewal rates remaining steady I mean, if I recall you were sending out renewal notices in the 9% plus arena and ended up kind of below 7% for the quarter. So.
How does that dynamic also playing out early in the year as to where you are sending out increases and what youre what youre achieving.
Yeah, a couple of thoughts there.
One as we said, we pivoted to occupancy that's on new lease and on renewals and so while we went out.
In.
Eight and low nines.
Q4.
We told the teams negotiate we wanted to try to make sure that we're keeping occupancy high. So we've done that as you look forward now we went out in February and the low eights in April and May in the high Sevens.
Again, when you look back historically these are really great rates, and we'll see where that all kind of settles out, but when you think about where we're looking at the combination of accelerating new lease and holding steady.
Our renewals, we look at that blend in favor and really healthy shape relative to any historical period outside of the pandemic going back to your original question.
Around concessions were running no concessions on any of the same store portfolio right now.
We really we talked about this on the last call we pushed hard prior to the holidays. So we ran some concessions and.
November prior to Thanksgiving and then we took them off and that was all around just trying to accelerate demand. While it was still there knowing that things slow down come December January.
And today, if there is any concessions out there might be one off on some of our smaller build to rent areas, where we talked about where there may be some more competition in our Phoenix or.
Vegas, but outside of that minimal concessions and none in the same store portfolio at all.
Our next question comes from Steve Sackcloth from Evercore ISI. Please go ahead. Your line is open.
Yes. Thanks, Good morning, I guess I wanted to pivot a little bit to expenses and just get your thoughts around the real estate taxes and insurance.
Commentary that you put in the release and if you do the math I guess on those numbers against your overall expense growth it sort of imply something in the 1% to 2% range for the rest of the expense line items. So just some comments around kind of that low growth rate on the other items would be great. Thanks.
Yes, Thanks, Steve It's John Good question, I think Youre right. If you look at it our expectation is that we will see some moderation and controllable expense growth.
Last year was a very heavy year in terms of turnover in terms of all the things that we're doing in the background to work through our lease compliance backlog and so from a comparability standpoint year over year, we don't anticipate seeing sizable increases in those line items I would also note that.
The operations team has done a fantastic job over time of continuing to make.
The R&M portion of our business more and more efficient.
And I think as we look at the controllable side of the house we.
We feel really good about where we are I think a big part of a big part of what makes our platform. So powerful is the ability to continue to drive more efficiency and I would also note that our entree into third party management.
Over time and distance have benefits for the operating efficiency of our own portfolio, but I would also point out that that is not factored into our guidance for 2024.
Our next question comes from John Pawlowski from Green Street. Please go ahead. Your line is open.
Hey, thanks for the time.
When you talk through the guidance for it sounded like blended rent spreads of high four to low 5% expected for this year, but then you marry that with Dallas Your opening remarks on the mass and the affordability gap between the cost to own versus cost to rent. So I guess why arent, we seeing larger rent spikes.
The ability to push rents at a much higher clip.
Is there a true price sensitivity among tenants or is there any.
Self governing of rent increases going all going on in your platform.
Hey, John Dallas really good question, I think by and large and I believe Charles with echoed the same here, we're not seeing any degradation necessarily in demand when you have vacant product on the market, especially year end Charles I think summed it up really well, where you do have to compete a little bit more like we did traditionally in 2017 18 and 19.
It feels to us based on what we're seeing with the customer our average rent income ratios right. Now are five four times. So we're qualifying a much more qualified customer at about an average household income of $150000.
We don't necessarily disagree John that there could be some upside to those numbers throughout the year were certainly not baking that into our guidance I think we've had the luxury of the last few years is thinking about massive tailwind is putting pressure on rate. We are going to do 24 at least sitting here in early February to be more in line with tradition, a year's pre pandemic, we're going to see seasonality in the <unk>.
Curve I think the positives, though to necessarily call out to your question are we have a more full portfolio as you go into 'twenty four we have a customer that's more qualified and we're far more sophisticated in the way that we capture that demand. So I like our chances as we hadn't dear all things being equal we do also want to be sensitive to the fact that we are in sort of a.
Boeing growth environment macro wise for the country and just be sort of modestly aggressive in our approach and so I like where we're sitting with the year I think Charles summed it up well from an occupancy perspective, our goal is to go out and execute manage cost controls and make sure that we deliver and I think youre right to sort of point out that there could be more <unk>.
Austin: And in the market throughout the year, it's just too early to tell and we'll have a better sense as we get through peaking into the summer.
Our next question comes from Hendel St Juste from Mizuho Securities. Please go ahead. Your line is open.
Yes.
Hey, good morning, Thanks for taking my questions.
Dallas I guess my question is on the property management platform. So.
We got to this year includes <unk> <unk> from Starwood that many of us were expecting but I'm more curious about the opportunities.
The fees, you're charging we're able to charge for this business, how we should think about the sizing of the opportunity the ability to scale. It over the near term and how you might be thinking about the risk and maybe perceptions with it.
So they're very sensitive political sector of the apartment Reits are facing class action lawsuit over revenue management.
Austin: Well ill, let me show you the information so with political silly season ahead of Us I'm sure. There's stuff that you will face incremental scrutiny. So maybe again, just the high level opportunity the pricing the opportunity scale, it up and how you're thinking about some of the risks.
Thanks <unk> so.
So first I think what I would sort of take a step back and if you look at multifamily professional management has been in place for decades. There are wonderful companies both in the public and private sector that do a really good job managing scale and creating services and predictability of experience that I think the single family rental space has yet to achieve.
Except for a couple of us larger operators I think our goal has been over time to be methodical in our approach to would we do this and what would be the reason for doing so one you called out appropriately which is I think there is a an adverse.
Ability to drive.
Efficiencies for other professional owners of single family rental but to do it in a very deliberate and purposeful way on our behalf. So I think we've been pretty clear from the outset as we've talked about this over the last couple of quarters and conferences that we believe the size and scale of our platform is meaningful we believe as the sector starts to develop professional services.
Austin: And ancillary opportunities for our customers that you can provide that at a much better cost and helped drive down the cost of living for people, but you need scale and so for US I think we want to work with professional capital professional size and create those efficiencies that we already enjoy in our portfolio for our customers, but by and large over time that will also have a compounding effect for us.
The we can go out and price and procure opportunities.
That will be beneficial to our residents as well.
In terms of kind of what that scale could be over time and those factors look we wouldn't do it if it wasn't an effective way to create.
Shareholder earnings for our company and for our shareholders, but we're not in the business of looking at doing this in small scale, we want to work with professional capital of scale and it ultimately becomes I believe.
A good opportunity for us as the manager of those assets to be obviously have better market Intel on what those portfolios are doing it can inform us of better opportunities of how we can actually enhance our own businesses and we can certainly drive efficiencies in our future pipelines for growth.
The last comment I would make is.
Austin: As you look at our platform today, we now have two markets that are well into the tens of thousands of units that in itself will allow us to get creative on services, we provide residents efficiencies and economies of scale and how we deliver those services and I think ultimately we're going to learn a whole heck of a lot more about how our platform get sufficient.
Our next question comes from Juan Sanabria from BMO Capital markets. Please go ahead. Your line is open.
Hi, Good morning, just a question on the acquisitions you had previously talked about maybe some freeing up of portfolios with some of the debt maturity issues. So for.
So for caps kind of wearing down or.
Turning out just curious on what Youre seeing on the portfolio acquisition opportunity set to start the year.
Scott is and thanks for the question look we are in the market right now obviously in dialogue with various people about opportunities I think clearly we are seeing some owners of portfolios, where what was very cheap debt. A few years ago is now breakeven to negative on cash flow and.
And I think there are people out there that are looking to explore other opportunities and were looking at options on acquisitions that are accretive to us we think could be interesting growth opportunities for us. It is clear that there are some people out there that never fixed and more floating on it and those opportunities I think could potentially come our way.
Our next question comes from Adam Kramer from Morgan Stanley. Please go ahead. Your line is open.
Hey, guys. Thanks for the time just wanted to ask.
Two cents.
And a benefit.
Our tailwind to the midpoint of the guidance that you included in the bridge from the third party management. It seems like that's only from kind of the.
Adam Kramer: You've kind of formal managing of the 14000 homes and not from any kind of expense savings or other synergies back to the to the Owens portfolio. So just wanted to ask about maybe kind of what exactly is in that two pennies.
And then again, maybe a little bit bigger picture, taking a step back.
It is the opportunity for maybe kind of the rest of this year in terms of adding additional homes to each of the managed portfolio.
Thanks, Adam as John Thats, a great question I think firstly.
The <unk> that we outlined in the bridge just to be clear that is the net contribution based on the property management and asset management fees that we will earn net of the incremental costs that we expect to incur to manage those additional 14000 homes.
As far as what the opportunity could be over time and distance, yes, as we've talked about we believe that.
This will allow us to enhance the efficiency with which we manage our owned portfolio I would say that those efficiency gains are not factored into our guidance I think the reality is that we are going to over time and distance figure out how do we adjust our gearing model how do we take advantage of the opportunities.
To scale, which are going to vary by market.
And how do we think about ways to drive.
Adam Kramer: <unk> opportunity both for us and for those third party portfolio owners as far as what it could be down the line I think time will tell.
I would say since we announced this transaction there have been a number of inbounds from sizable owners of portfolios interim.
Interested in exploring ways to achieve better operational and financial performance and that's what we're here for we're here to drive value for our stakeholders and for our customers by doing what we do which is leverage the best platform in the business.
Okay.
Our next question comes from Danielle <unk> from Scotiabank. Please go ahead. Your line is open.
Hey, good morning, another guidance question, a few quick related ones I don't believe you've given us details so far but what was the revenue earned in at the beginning of the year.
Whereas the loss to lease in the portfolio today, and if you have it what is the embedded market rent growth for the year.
Speaker Change: Yes, so the earn in is about 253%.
And then loss to lease I would say is high single digits.
Our next question comes from Brad Heffern from RBC Capital markets. Please go ahead. Your line is open.
Yes. Thank you can you talk about how you approach the property tax guide for the year, obviously, the past few years, you've been surprised on the millage rates. So does this guide reflect any offset there or is this purely where you would expect valuations to go.
Brad Heffern: Yes, Great question I would say that as we've talked about on past calls we have made some adjustments in terms of.
How we think about property tax.
Brad Heffern: And I think ultimately as we've talked about we are not assuming any improvement in millage rates. I think we are taking a somewhat more conservative approach as I think our experience over the last couple of years warrant.
And as we sort of work our way through the year.
We'll be able to report back on what we're seeing in a variety of markets I do think it's important to remember that two of our three biggest markets.
We don't actually learned the final quote unquote answer until fairly late in the year. So I think we want to be mindful of what our experience has been the last couple of years.
And I think that's reflected in our current guide and that's going to be reflected in how we may or may not adjust that over time.
Okay.
Our next question comes from Keegan Carl from Wolfe Research. Please go ahead. Your line is open.
Yeah, guys. Thanks for the time, so I noticed pathway you sold a home in the quarter, which I believe gives you three total homes sold in the program. Just curious if you can give an update on progress in general how you see us scaling over time and whats your sort of expectations are baked in for more residents potentially buying that home.
It's a great question pathways.
We are a minority partner in the platform. So I want to be careful to speak on their behalf, but they've basically taking a cautious approach kind of in the interest rate mortgage cycle that they've been in and have been selectively deploying capital and sort of fine tuning their business model, when and where it matters. They've certainly continue to add homes a lot in the new construction side of the world as well.
But I think that Thats a program that will continue to develop and get smarter over time, I know, they're exploring some opportunities and shared ownership programming and things like that so we deal is a terrific partner in terms of how we sort of probe the market and understand where the puck scaling and I think as they have more to report on the early wins in <unk>.
Some of the categories and also the products that will lend themselves to the kind of the greatest upside. We're certainly keen on on getting a little bit smarter in deciding when and where we might want to lean in.
Our next question comes from Anthony <unk> from J P. Morgan. Please go ahead. Your line is open.
Yeah. Thanks.
I guess I just wanted to understand you mentioned a high single digit loss to lease, but your new lease spreads are kind of flat to down a bit. It seems so I'm just wondering like how how that works and also just your thought as the year progresses right.
New renewal.
Spreads the spread between those two numbers just kind of abnormally wide for I guess, you guys and multifamily and just trying to think like is there rent fatigue, like which side kind of goes either up or down or does that converge.
So this is Charles as we talked about we set ourselves up here at the start of the year with occupancy at 97, five that we can start to capture that new lease demand that shows up here in February and so when you go back. Yes. This is in January a little lower than we've been but we explained why we did that that was a conscious effort.
But we're set up now to start to capture the demand that we expect will historically always shows up in the summer.
Let's see where that goes to but right now we're already seeing the acceleration and I think we're in good shape, given our occupancy now to capture that.
<unk> said were also been really holding steady on the renewal side at pretty healthy rates again.
It came down slightly as we were.
Solving for occupancy, but we're still seeing steady renewal rates. When you go back to anything Thats pre pandemic and with that lost at least that's what gives us the confidence with our current occupancy you just try to capture what's in the market, we'll see where it ends up but we're seeing acceleration from January to February and we expect that will continue into spring and summer demand.
Brad Heffern: Okay.
Our next question comes from Linda Tsai from Jefferies. Please go ahead. Your line is open.
Yes, Hi, what is the breakdown in the guide between new and renewal.
Hi, Linda its John we actually Havent Havent talked about that and I think we're going to stick with what we did include in the guide which is a blend for the year high fours low fives.
Our next question comes from Anthony Powell from Barclays. Please go ahead. Your line is open.
Hi, Good morning, a question on I guess the cap rates in the MLS market are you seeing any change there and also you just mentioned the cap rates still remain pretty low at one 9% whats the outlook for that this year.
It certainly feels ill, let Scott add any commentary to this it certainly feels like we can continue to sell our dispositions back into the MLS kind of in the mid to high threes low fours, depending on the marketplace and again, we have a much typically are much more expensive home than most of our peers. So when we go to market with some of that product there is massive.
And from Homebuyers, and I think that's a little bit subject to where mortgage rates are at any given time, but that feels like a very accretive way for us to recycle capital Scot anything you'd add to that.
I would just add that we are continuing our dialogue with national and regional builders and we used to have a growing backlog of opportunities to work with them on buying partial and full community deals.
I think we feel good about where the spread is on potential cap rates for us and I think it is.
System with.
It's clearly call it in the high fives low <unk> in terms of where we think there are opportunities for that.
Our next question comes from Jesse Letterman from Zelman. Please go ahead. Your line is open.
Hey, Thanks for taking my questions and congrats on the strong results.
Just looking at your estimate for new home deliveries it looks like 700 <unk>.
The 150 more than in 2023 with this becoming more of a focus for you what's presenting what's preventing us from being even higher is.
Is it interest rates or are you finding it more challenging to compete with primary homebuyers.
Given the for sale market is heating backup in other words, our homebuilders kind of shifting away from selling to rental operators at all because of how strong the for sale market as Ben Thanks.
Good question I think between me and Scott, we can give a little bit more color on what we're seeing there I think Scott summed it up nicely, which is our homebuilder pipeline is continuing to grow now we've talked about this over the last couple of years I think a year or so ago. Our deliveries were like $3 5400. This past year was 700 plus.
Number that you just quoted in the mid seven hundreds is what we have currently on schedule to deliver we will certainly see other opportunities in closeouts with some of our.
Current partners and new partners that will happen throughout the year that arent on schedule would be or would be our best estimate those cap rates are typically six plus in today's environment now Scott can talk and give a little bit more color, but strategically speaking we are on the record that we have a terrific partnership with Pulte homes, we continue to evaluate opera.
Brad Heffern: <unk> Scott you were talking to a number of other builders about some of some other pipeline additions and I think I mentioned earlier in the call or yesterday with some media. We've got about 800 homes under contract plus or minus another thousand that were close to putting in our pipeline and the only thing. This is Scott the only thing I would add here is that it's clear in our dialogue with the builders that they are <unk>.
<unk> that this is an important business line for them and they clearly have their regular way sales that they're doing the individual consumers, but at the same time, they look at having an institutional partner like us across the cable demand that gives them the ability to just continue to grow I think of it like fleet sales that somebody does with an auto company and we are just another opportunity for them to continue.
<unk> housing to America and for us to be an incremental buyer to give that incremental demand and for them to continue to grow their deliveries and for us to have opportunities to grow our platform as well.
Our next question comes from Steve <unk> from Evercore ISI. Please go ahead. Your line is open.
Yes, Hi, excuse me. Thanks, John I, just wanted to maybe circle back on some of those controllable expenses and just see if you could provide a little bit more color.
Steve: Within the 23 results.
What sort of elevated cost that you incur all this extra move out and the delinquencies and trying to just get a feel for the quantification of that savings may be moving into 'twenty, four and how that might keep those controllable expenses down to that low single digit growth rate.
Yes, Steve.
I think the main drivers when you think about how the delinquency backlog flows through the P&L. There is obviously a bit of an impact that the occupancy line, if we talked about that last year.
Speaker Change: The other primary areas are things like property admin expense, which is really the property level of legal cost to sort of manage through that process of enforcing the terms of our lease.
You've seen substantial growth in 'twenty three over 'twenty two in that area.
The other area is sort of turn opex.
No.
As we've talked about when we get some of these some of these turns back from homes that had delinquency move outs those turns can be 50% more expensive and they can take some number of days longer to work our way through I think when you look at 24 versus 23 I think the important thing is that it's not that those cars.
Costs are going down, but we don't anticipate substantial year over year increases really.
The costs are stabilizing.
We're going to work to try to improve upon what our experience was last year, but we still got some wood to chop.
Our next question comes from Eric Wolfe from Citigroup. Please go ahead. Your line is open.
Eric Wolfe: Thanks, It's Nick here with Eric just a quick question on the balance sheet.
I was hoping to get your early thoughts on the plans for the $2 5 billion term loan maturing early next year.
Extended for another year into 2026 or would you look to put new swaps in place to refinance with longer term debt.
Yes, Great question I would I would start off by pointing out that that term loan final maturity is in January of 2026. So it's not a it's not a next year event, we don't have any debt reaching final maturity prior to 2026.
With respect to the term loan.
No.
We are going to be having dialogue, we're already in dialogue with our bank group and our goal is going to be to recast that facility sometime between now and summer 2025.
We will continue to monitor the rates market as we contemplate the timing of that recast and at the appropriate time. We will also look at our swap book to adjust it based on what our pro forma debt maturity schedule might look like but I will say that in the Grand scheme, we feel very comfortable with both our relationship.
With our bank group, we feel very comfortable with our access to capital we may not love our current price.
Cost of capital on new debt today.
And when the appropriate time comes we'll we'll work our way through that that term loan and we will move on from there.
Our next question comes from Jamie Feldman from Wells Fargo. Please go ahead. Your line is open.
Great. Thanks, I mean sticking with the.
The balance sheet.
That question what are you assuming in guidance in terms of debt pay downs. This year I know you can pay down the secured loan early.
Speaker Change: And I.
I think you have some swaps expiring at the end of this year as well can you just talk about exactly what's in guidance.
Sure. So in guidance you have $800 million of bonds outstanding for seven months of 2020 for that work in place in 2023. So we did that deal in August of last year.
It would on its own represent about <unk>.
And then Youre absolutely right the $640 million 2018 for securitization is freely pre payable at any time.
We have held off on paying off that debt, even even following that bond deal.
Does we like having excess cash on hand, it gives us flexibility to use that cash either to retire debt or for growth opportunities.
In the current market I think it's important to point out that we're earning on average about five 3% on those excess cash balances and you can compare that to the rate at which we've swapped that 2018 for securitization, which is around $4 20. So in our guidance is the assumption based on the forward curve and sort of extrapolating, what we think.
Our money market yields could be.
Pivot to potentially paying off that debt now I think the reality is we're going to do exactly what I. Just said in response to the prior question, which is we're going to watch the market.
I don't want to give a sense that.
A specific path forward is prescriptive.
That's how we got to the <unk> in the bridge.
Our next question comes from John Pawlowski from Green Street. Please go ahead. Your line is open.
Yeah.
I'm sorry to belabor. This rent growth question revenue growth guidance, but I'm still confused Jon I want to make sure I understand you guys math on loss policing Hernan.
Just take the midpoint of revenue guidance, 5% when you strip out the benefit of bad debt you have to low 4%. Then you say loss to lease is high single digits. I know you only capture a portion of that in the earnings 2.5% to 3%. So how do you not get well above 4% kind of organic revenue growth for this year and I.
Speaker Change: Standing at his loss to lease and learn and definition.
No I don't think Youre misunderstanding, John I think what it reflects is the fact that we're.
We're here in early February it's early in the year. There is a reason that we present guidance in a range.
Does there are a variety of potential outcomes, both positive and negative right and so I think we are cognizant of the fact that we are entering into what feels like a more normal kind of market rent growth environment between new and renewal rent.
But I think as Dallas said earlier, there is certainly the potential for a little bit of upside there.
But we're going to wait and see how the year develops.
Our next question comes from Juan Sanabria from BMO Capital markets. Please go ahead. Your line is open.
Alright, Thanks for the time, just a couple of follow up questions on guidance, one would be how do you expect churn or turnover to trend. This year relative to last year, maybe relative to pre pandemic and then secondly would be just.
Juan Sanabria: Capex guidance, what are you assuming in terms of growth rate on a per home basis.
Thanks, a lot and as John I think from a from a turnover perspective.
Similar to our occupancy guide when we articulated that we expect it to be generally similar to what we saw in 2023 I think the same holds true for turnover in 2024. The reality is we've still got sort of the tail of the lease compliance backlog to work through.
But I think in the Grand scheme, we feel very comfortable with the fact that turnover is <unk>.
Trending much lower than it was pre pandemic and we think thats emblematic of a really strong demand backdrop of.
A favorable sort of affordability picture relative to homeownership.
That should benefit propensity to rent duration of stay and likelihood of renewal.
With respect to Capex I think that that is going to continue to grow at sort of an inflationary rate I think we have done.
A particularly good job in making smart asset management decisions about where and when it does make sense to reinvest capital into our portfolio and in places where it does not pencil.
We found as we can sell those homes into an incredibly liquid.
Juan Sanabria: End user market at cap rates inside 4% and then recycle that capital into newer assets that are going to have less of a capex demand over time.
Our next question comes from Keegan Karl from Wolfe Research. Please go ahead. Your line is open.
Yeah, guys. Thanks for the follow up just curious did you have any material impact in your greater Los Angeles area assets from the recent flooding and if so was that embedded in your guidance at all.
Yes. This is Charles Youre, referring to the atmospheric river.
And then.
Juan Sanabria: Hit, California look we're still in the process of fully assessing.
Charles D. Young: But early indications is that the vast majority of our portfolio really was not impacted.
Have some work orders theyre not that many of them were getting through them as you can imagine it's around landscaping with trees and some roof stuff, but nothing really major.
Charles D. Young: Our teams are great at responding to stuff like this so we're assessing but we don't see it as being a major issue.
Our next question comes from Michael Goldsmith from UBS. Please go ahead. Your line is open.
Michael Jason Bilerman: Hey, guys.
Earlier in the call you made the point that Youre seeing more competition in the build to rent type products versus the infill or are you expecting to difference in performance in between your built to run in your interim product and then separately you've talked a little bit about pushing occupancy through the winter months.
At this similar to what you have done in prior years. Thanks.
Yes.
Second question first pushing.
Pushing up occupancy is what we've typically done, especially as we've had more experience in the portfolio on what's the best way to operate in a seasonal business where in the.
Winter and.
Speaker Change: Early spring.
Demand is lower as you go into the winter and then it picks up going into the spring and summer getting fall and that period is important because it gives us that position of strength to capture that demand of new lease rent growth and what's great about renewals, which is the majority of what we do is pretty steady throughout the year. So this is in line with what we've done historically.
During a pandemic, we did not see that seasonal pattern and what we are recognizing now is we're back to that seasonal pattern.
Going to your first question look build to rent portfolios. When you take down a 100 200 homes at once it's like a lease up and theres going to be a kind of an aggressive stance to give momentum to get that project going.
It's a moment in time for that project or those that are within kind of driving distance that you may be competing my my point is the majority of our portfolio that we've acquired over the 10 years is really more infill closer into job centers and the majority of the build around are typically further out now we're really smart around what projects we pay it.
And how they balance to us, but you have to recognize that when there are a number of build around projects that are hitting a community or MSA at one time and we may have other homes. There. It has an effect, especially when we're pushing on occupancy and we wanted to make sure that we got to a place where we could get to the second part of this question. We're here.
Occupy it and make sure that we're capturing.
Speaker Change: The best rent growth out there. So it's something that we're going to pay attention to Scott knows and team there they're understanding what these build to rent projects are but long term they are fantastic because it's an <unk>.
Great experience for the resident the amenities that come with it for us and it's going to be.
Less capital on repair and maintenance over the short period of time. So this is a balance that you get with the opportunities to take on build to rent projects like this.
This concludes our question and answer session I would now like to turn the conference back to Dallas Tanner for any closing remarks.
Dallas Tanner: Thank you we look forward to seeing many of you in South, Florida and a couple of weeks, please reach out to Scott or John with any questions. If we can help.
Thank you very much we hope everyone has a great day.
This concludes today's conference call. Thank you for your participation you may now disconnect.
Please wait the conference will begin shortly.
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