Invitation Homes - Q1 2024

Transcript

Operator (participant)

Greetings, and welcome to the Invitation Homes Q1 2024 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 key 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.

Scott McLaughlin (SVP of Investor Relations)

Good morning, and welcome. I'm here today from Invitation Homes with Dallas Tanner, Chief Executive Officer, Charles Young, President and Chief Operating Officer, Jon Olsen, Chief Financial Officer, and Scott Eisen, Chief Investment Officer. Following our prepared remarks, we'll 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 Q1 2024 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.invh.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 described some of these risks and uncertainties in our 2023 Annual Report on Form 10-K and other filings we make with the SEC from time to time. Except to the extent otherwise required by law, Invitation Homes does not update forward-looking statements and expressly disclaims any obligation to do so. We may also discuss certain non-GAAP financial measures during the call. You can find additional information regarding these non-GAAP measures, including reconciliations to the most comparable GAAP measures, in yesterday's earnings release. I'll now turn the call over to Dallas Tanner, our Chief Executive Officer.

Dallas Tanner (CEO)

Good morning, everyone, and thank you for joining us. Our teams kicked off 2024 with a great start to the year. In particular, our Q1 results reflect high same-store average occupancy, accelerating same-store rent growth, and strong same-store core revenue and NOI growth. We believe this puts us in a great position as we begin our peak leasing season. That being said, operating and leasing success is only one aspect of our anticipated growth this year. When we spoke to you in February, we told you that our 14,000 home property and asset management agreement with Starwood was just the beginning. Less than 3 months later, we've added over 7,000 more homes onto our management platform, including through last night's announcement of our joint venture with Quarterra, Centerbridge, and other high-quality investors, as well as our agreement with Nuveen that we signed in March.

We are honored to work with each of these respected partners, who highly value our coast-to-coast SFR management expertise and best-in-class operating and management capabilities. We believe this is just the beginning of the journey to grow our professional management and services business, which, as a reminder, offers many benefits to Invitation Homes. First, we are an attractive property and asset management fees that are commensurate with our unmatched expertise and scale. Second, we're able to grow earnings in a capital-light manner, including through the opportunity to potentially acquire these homes at a later date. Third, we develop deeper insight via the operational data we collect, which help us to better operate our own homes and markets. And fourth, we can further leverage the combined power of scale and density by spreading our costs across a larger number of homes, thereby improving our margins.

We believe our partners and residents also benefit from choosing Invitation Homes as their manager. In addition to getting direct access to our operating, leasing, and asset management expertise, our partners can realize potential savings from utilizing our vast vendor network, our staffing optimization, and our advantageous pricing agreements. Residents, in turn, receive our signature Genuine Care and ProCare services, along with the value-add amenities we offer, including, for example, our internet bundle that we buy in bulk in several of our markets and provide to residents at a discount to retail pricing. Another area of growth for us remains our new product pipeline. We announced last month that we added several large home builders to our growing list of relationships, including D.R. Horton, Meritage Homes, and Dream Finders Homes.

We're under contract with them to build approximately 500 new homes, primarily in Charlotte, Jacksonville, and Nashville, with deliveries expected to start later this year. Underwritten cap rates on these acquisitions are in line with our previously stated targets of roughly a 6% yield on cost, which I will remind you is a return that's effectively free of any development risk to us today. Given the dynamic environment we've seen in the last couple of years and the volatility in land pricing, cost of materials, and interest in cap rates, our contracts are designed to protect us from the risks inherent with on-balance-sheet development while achieving what we believe are a far superior risk-adjusted total return.

We're proud of the growth we've delivered through partnering with the best and largest home builders in the country, while also helping to create much-needed new housing supply in the communities we serve... To wrap up, we're pleased with how our teams have started off this year. I extend my thanks to all of our associates for their hard work in seamlessly bringing thousands of new homes onto our platform, while at the same time continuing to deliver outstanding operating and leasing results. As we look ahead, we're excited by our ability to sustain this momentum as we leverage our strategic approach and operational excellence to drive continued growth for our stakeholders through the remainder of the year. With that, I'll pass the call on to Charles Young, our President and Chief Operating Officer.

Charles Young (President and COO)

Thank you, Dallas. Our associates really shined during the Q1, delivering great results and preparing the business for our peak leasing and maintenance season, all while bringing 14,000 third-party managed homes into our operations. During the Q1, we maintained high occupancy, accelerated lease rent growth, and continued to see our customers stay longer with us. We believe this is all part of a simple formula to sustainable NOI growth throughout the year. Now let's cover our Q1 same-store operating results in more detail. Fundamentals remain strong, and thanks to the great performance of our teams, we grew same-store NOI by 4.7% in the Q1.

Same-store core revenues grew 5.6% year-over-year, driven by average monthly rental rate growth of 4.6%, an 80 basis point year-over-year improvement in bad debt, and a 15.9% increase in other income, primarily related to our value add offerings. Same-store core operating expenses in the Q1 increased 7.4% year-over-year. This was a result of an 11.8% increase in fixed expenses and a 0.5% decrease in controllable costs. For fixed expenses, the largest driver of the increase was property taxes. As we anticipated and previously discussed, due to the underaccrual of property taxes in the first three Qs of last year, we expect property tax expense growth to be higher during the first three Qs of this year, before normalizing in the Q4.

Meanwhile, on the controllable side of expenses, we're pleased to see cost of goods continue to moderate, as well as a strong effort by our teams to control costs. This is reflected in our 0.5% reduction in controllable expenses year-over-year, as well as our 4.6% reduction in controllable costs from the Q4 of 2023 to Q1 2024. Of particular note, the Q1 same-store turnover rate of 5.2% was flat with last year's Q1 results, yet turnover expense was down 2.4% year-over-year. This is due in part to the progress we've made in working through our lease compliance backlog. In that regard, it's great to see more of our markets returning to pre-pandemic normal levels of bad debt.

As a reminder, normal for us is approximately 40-60 basis points of bad debt as a percentage of gross rental revenues, which has historically been industry-leading among our SFR peers. Looking ahead, while we still have some work to do in a few of our markets, we remain encouraged by the continued high quality of our new residents, whose average household income over the last 12 months is now approximately $158,000 a year, bringing our average income to rent ratio to 5.6x. Now let's cover our same-store leasing trends in the Q1. Renewals grew 5.8%, and new leases increased 0.8% year-over-year. This drove blended rent growth to 4.4%. Average occupancy in the Q1 remained strong at 97.6%.

Our preliminary April 2024 results show our peak leasing season has started off well. Renewal rent growth accelerated to 6%, while new lease rate growth accelerated to 3.1%, delivering blended rent growth of 5.2% in April. Average occupancy generally held steady at 97.5%. With occupancy in a strong position and fundamentals remaining in our favor, we believe we're in great shape to capture the demand we're seeing in our markets and continue the great momentum our teams have built. I'd like to thank them again for their focus on resident service and operational excellence, along with their diligent efforts as we plan and prepare for future growth. With that, I'll now turn the call over to Jon Olsen, our Chief Financial Officer.

Jon Olsen (CFO)

Thanks, Charles, and good morning, everyone. Today, I'll cover our financial results for the Q1 2024, followed by an update on our investment grade-rated balance sheet before opening the line for questions. I'll start with our Q1 2024 financial results. Core FFO increased 5.7% year-over-year to $0.47 per share, primarily due to an increase in NOI. These results also reflect the Q1 of contribution from the 14,000-home portfolio we started managing in mid-January. The fees we earned were partially offset by investments we made in resources and support to help prepare for anticipated future growth. These items are included on our income statement under Management Fee Revenues and Property Management Expense, respectively. Meanwhile, higher core FFO drove our 6.8% year-over-year increase in AFFO to $0.41 per share.

We're pleased with these results and appreciate the considerable efforts of our associates to help us begin the year strong. Turning now to our investment grade-rated balance sheet. We had over $1.7 billion in available liquidity at the end of the Q1 through a combination of unrestricted cash and undrawn capacity on our revolving credit facility. Our net debt to trailing-twelve-month Adjusted EBITDA ratio was 5.4x at March 31, 2024, down slightly from 5.5x as of December 31, and just below our 5.5x-6x targeted range.

We have no debt reaching final maturity until 2026. In addition, 99.5% of our total debt is fixed rate or swapped to fixed rate, and over 76% of our total debt is unsecured. This week, we received further validation of the strength of our balance sheet. Specifically, I'm referring to our announcement that Moody's recently upgraded the company to Baa2 from Baa3, joining both S&P and Fitch with triple B flat investment grade ratings. Looking forward, we believe this ratings upgrade further enhances our positioning for when compelling opportunities arise. In summary, we believe Invitation Homes is at the beginning of a new phase of our business, in which exciting opportunities could become more actionable, and the quality of our balance sheet, systems, and talent are the best they've ever been.

All of this puts us on a path from which we believe we can continue to deliver outsized results for our stockholders and the best possible experience for our residents. That concludes our prepared remarks. Operator, please open the line for questions.

Operator (participant)

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. If you are using a speakerphone, please pick up your handset before pressing the keys. In the interest of time, we ask that participants limit themselves to one question, then re-queue by pressing star one to ask a follow-up question. Our first question will come from Michael Goldsmith from UBS. Please go ahead. Your line is open.

Michael Goldsmith (US REITs Analyst)

Good morning. Thanks a lot for taking my question. In the past, you've talked about starting to push rate around the Super Bowl, so mid-February. So it seems like this year, it kind of maybe took a step back in new lease rates kind of took a step back in March before your recent comment that they accelerated in April. So just trying to get a sense of kind of the sequential trajectory of the new lease rent trends during the quarter and into April, and if there was any factors that was influencing maybe some of the choppiness which has resulted in where it is now, it seems kind of on pace. Thanks.

Charles Young (President and COO)

Sure. This is Charles. Appreciate the question. Look, we've seen a really healthy acceleration through the quarter. As we talked about last quarter, we had solved for occupancy coming out of last year as we had some lease compliance turnover that spiked. We did exactly what we said we were gonna do. We got occupancy up from 97.1 to 97.6 for the quarter, which is really healthy, and then we started pushing rates in January in anticipation, as you're talking about, for February to jump. So from January to February, we went up over 300 basis points, continued to push into March to the high 2s, and looking at April here in the high 3s. That's all new lease rent growth. The blend has also accelerated the last three, four months as we anticipated.

What's really great, though, is we're still 97.5 occupied, and we're seeing further acceleration into May. So we set ourselves up really nicely to capture the demand that comes this time of year in peak season. So, really haven't seen any kinda dislocation from what is the typical seasonality that we expected. And, you know, if there was anything, it was just us setting ourself up to take advantage of the demand that's in front of us by getting occupied.

Operator (participant)

Our next question comes from Eric Wolfe from Citi. Please go ahead. Your line is open.

Eric Wolfe (Director)

Hey, thanks. I know you get asked this question a lot, but the Wall Street Journal article the other day brought up regulatory risk again and generated some more questions. So was just curious, from your perspective, you know, what you're advocating for, that you think would help, you know, the housing affordability issues. If it's not limits on ownership or rent control, what do you think would improve housing affordability, and what role are you going to play in that?

Dallas Tanner (CEO)

Yeah, I really appreciate the question. You know, clearly, the cost of housing in the country is a bit high, generally, and it keeps getting worse, particularly due to, you know, higher mortgage rates and lack of supply. Now, what we can do is our best to encourage that new supply coming into the market, which is why we're working with so many of our home builder partners, helping them start large new communities that often include a mix of for-sale and for-lease housing. And you have to remember, there's 47 million households in the US that rent something, somewhere. It's about 1/3 of the country, and it's been that way, really, for decades.

It's also important remember that, you know, we learned this from our residents, they tell us time and time again that they want choice and flexibility of leasing a home. It's at a significantly lower cost than owning. If you look at our West Coast markets today, it's upwards of almost $2,000 a month cheaper to lease a home in markets like Seattle and Southern California than it would be to own. So you know, John Burns covers a lot of this data really well, but attempts to restrict companies like ours for being, you know, a need or a desired option for consumers seems sort of to be misguided. It's also counterproductive.

I think that's why, as noted in that article that you mentioned, none of the anti-leasing and anti-professional management bills actually get very far to date at both national and state levels. So regardless of the narrative, that kind of it's a populist thing to try to point fingers at companies that are providing housing solutions. We're gonna continue to work with our trade associations. We work at the state and local levels very effectively, and candidly, you've seen some really positive legislation go through in the states that are much more proactive in this housing debate and trying to create, you know, access for private capital to come into the housing market and to provide additional dwelling units.

So that's our goal, is to be part of that narrative, which would be to bring new supply into the market over and over and over. We're not gonna stop. And as we've announced in our script, we're working with some of the best and brightest in the country doing that.

Operator (participant)

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

Brad Heffern (Director)

Yeah, thanks. Jon, is there any context that you can give for the incremental contribution from the new third-party management agreements to earnings? I know you're obviously not changing the guidance, but just some sort of scale on that would be great.

Jon Olsen (CFO)

Sure. So, I think it's important to note that as, as you point out, you know, we had guided to $0.02 of earnings contribution from third-party management. Included in that guide were both the Starwood and the Nuveen agreements. The Upward America agreement that we announced yesterday is not in there. I think it's also important to note, however, that only one of those three portfolios has been onboarded at this stage, just the Starwood portfolio. The Nuveen portfolio is scheduled to be onboarded in mid-May, and then Upward America, sometime in the Q3. So I think as we approach those onboarding dates, you know, we get better and better visibility into the operating metrics specific to those portfolios of homes, and we'll have better insight into what we think the potential is. So I think time will tell.

We're still very early on, but as we approach those onboarding dates and we get more time under our belt, actually managing those portfolios, you know, we'll see if there's some upside to what we've guided thus far.

Operator (participant)

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

Steve Sakwa (Senior Managing Director and Senior Equity Research Analyst)

Great, thanks. Good morning. Charles, I don't know if you had touched on the renewal increases that had maybe gone out for kind of the April, May, June, and maybe even July period. So any commentary around that would be great.

Charles Young (President and COO)

Yeah, I hadn't mentioned it. We went out for May and June in the mid-7s, which was similar, maybe just slightly lower from what we did with April, and we ended up April at 6.0, which was accelerating from all of . So still healthy as you look back on any historical means.

Operator (participant)

Our next question comes from Austin Wurschmidt, from KeyBanc Capital Markets. Please go ahead. Your line is open.

Austin Wurschmidt (Director and Equity Research Analyst)

Yeah. Hi, good morning. Just have a question related to transaction activity, and I was hoping you could provide some additional comments around the more significant entrants into Nashville, you know, whether or not you're looking at other new markets to enter, and then just more broadly about activity in the transaction market and whether you think there's enough in the pipeline to kind of hit that full year acquisition guidance.

Dallas Tanner (CEO)

Yeah, hey, I'll... This is Dallas. I'll start, and then I'll have Scott add anything that he'd like to it. But, you know, first and foremost, we went back into Nashville as part of a transaction last summer that allowed us to get, you know, a significant amount of more scale in that marketplace. I think Scott can give you more color on the ground with what we're seeing real time in terms of the opportunity set. I think we feel very good about our guidance ranges. No change there. And remember, with the new construction that we're building, it's lumpy. It comes in at different, you know, times of the year.

You know, we certainly are looking at some M&A and having discussions, and I think you've seen, we've been extremely active in the last six months with the 20,000 units that we brought on. One thing I just want to highlight, and then I'll hand it over to Scott, is, I think what's really exciting about the 3PM business for us is that if you look at the first three transactions we've done, they've all been very different in nature. One is a pure play, third-party management with maybe an option for a takeout down the road. The other was us actually acquiring management contracts and thinking about, you know, further expansion of that relationship with that particular capital partner.

And in the last situation, we bought into a new home construction portfolio with both professional capital and a professional home builder. And so in participating in the equity stack, so to speak, it gives us, you know, obviously aligned incentives, but also clear, a clear view on how to grow that business in that particular portfolio over some period of time. Scott, do you want to maybe give a little bit more color on what we're seeing and just sort of from a scale perspective?

Scott Eisen (Chief Investment Officer)

Sure. And just to address your questions about markets, I mean, Nashville is a good example where we're adding new homes in that market, both through third-party management agreements and also some communities that we are buying as well. And so that's just an example of something that we're trying to, you know, take a market where we were undersized before, but clearly we're getting some good scale in the near run, and we hope to grow there more over time. We have other markets that we're also eyeing that we're gonna get exposed to through the third-party management contacts and contracts, and we're hoping to see more, like in Austin and San Antonio, for example, as markets. In addition, one thing that I would add is that we continue to expand our dialogue with the home builders.

Obviously, we've done a lot historically with Pulte and Lennar, but, you know, we're also adding more, you know, national and mid-sized builder relationships to the stable here. We're doing some deals with Horton, we're doing some deals with Meritage. We've got some other mid-sized builders that we're adding to the stable. And we continue to add more of the build-for-rent product, where we're helping create supply, as Dallas talked about earlier, and working with the home builders to give them, you know, confidence to start new communities and know that we can buy some of the homes and have some of those homes be purchased by retail customers. So we continue to do our part to create more supply, and obviously, it's adding to our acquisition backlog and pipeline.

Operator (participant)

Our next question comes from Juan Sanabria from BMO Capital Markets. Please go ahead. Your line is open.

Juan Sanabria (Managing Director)

Hi, good morning. Just sticking on the, the 3PM theme, just curious about how you think about the overall size of the opportunity. Is there any basic math you could share on what the accretion would be if you add, let's say, 10,000 homes or just, whatever metric or you'd like to talk to? And just going back to the previous question about regulation, we've obviously seen some negative headlines for the industry about, you know, collusion or whatever on, on pricing. Is there any concern for you guys that as you take on more responsibility, that, and you manage third-party assets, and it's all in one system, that, that you could become under the threats there or risks around pricing for the industry?

Dallas Tanner (CEO)

Juan, thanks for your questions. I'm going to try to hit them in a few different ways, and then I would say, John, feel free to add anything on the economics. Look, I think, and we talk about this over and over and over, you have to remember the size and scale of the U.S. housing footprint. We have about 147 million households that own or lease something in the U.S. today. I mentioned earlier, 47 million of those lease. If you look at the single-family rental dynamic in the U.S., there's somewhere between, call it 15 million-ish homes that are for lease.

Roughly about 3% of those are probably operated by what we call professional capital, that might total maybe 500,000 units, and those are spread amongst at least 60 different companies that I'm aware of. So the data, actually, on the other 97% of single-family rentals that are out there is sort of in a universe that nobody has access to that information. So no, I think it's actually the opposite, Juan. As a company, we have our own data. We look at all the public information on the listing data, and that has informed our thinking around rents and pricing of homes and things like that for the last decade, just publicly available information.

Second, in terms of the sizing of what we're calling 3PM internally, but really it's the additional scale we can bring onto the platform by being a service provider for other owners of single-family rental. It's still early, and like I mentioned, there's about 500,000 units that we can identify as being sort of professionally owned out of the 15 million. So it's about, you know, ±3% of that. We would love to stay, you know, active and keep growing our business. I will tell you, you think about, like, the strength of the platform, adding 20,000 units over a 6- or 9-month period, is going to give us tremendous amount of horsepower, even in our own portfolio.

You start to think about, you know, RFPs that we have out, where we're working on, you know, getting more efficient with our own costs and our spend. That's going to give us additional capacity there to lean in and to give, you know, our vendors more work, but at the same time, try to get better pricing for our customers. And so we're really excited about what that means. We see the landscapes, you know, currently being tens of thousands or maybe a 100,000+ units, but we expect the SFR industry to keep growing. And we expect that over time and maybe the next decade, that 97% could come in a little bit, at much like you've seen in multifamily over the last 30 years, where, you know, if you look at multifamily, the numbers are sort of similar.

About 15% of the multifamily industry is owned by professional capital, where 85% is owned by, you know, small family office and people that have, you know, one-off investments. So we would expect SFR over the next couple of decades to, to hopefully grow in a, in a much better professional manner. John, do you want to add anything to that?

Jon Olsen (CFO)

Yeah, I think the other part of your question is the right question. The answer is, at this stage of the game, you know, we don't have a shorthand rubric that we can share in terms of how to think about, you know, every X thousand homes brought on the platform through third-party management. I think over time, as we onboard the two portfolios that we're looking forward to, the law of large numbers suggests that we ought to be able to do that. But I think it's also important to remember that there are a lot of variables that, you know, make a simplification a little bit challenging, right? Market mixes vary, price points vary, you know, sort of degree of upfront renovation done varies.

And so I think as we, through our asset management exercises, help shape these portfolios to perform as best they can, and as we get more homes on the platform and have more sort of actual operating and financial results we can look at, I think we'll be in a much better position to share what we think is a smart way to think about, you know, how much those opportunities can potentially add to the bottom line over time.

Operator (participant)

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

John Pawlowski (Managing Director of Residential and Health Care)

Hey, thanks for the time. Charles or Dallas, do you have an internal view of... I know you guys are prioritizing occupancy, but this is a question on market rents, and so do you have an internal view of why market rents aren't growing at a much, much faster clip than they are, given the affordability gap you referenced in some of your markets, Dallas? Is supply more than we think, or is immigration into the Sun Belt slower than we think? Just curious, what you think the culprit is.

Charles Young (President and COO)

Yeah, I think I wouldn't look at it as a culprit. If you go back outside of the COVID years, we're trending above where we've been historically on both new lease and renewals. So on a blended rate, and we're more occupied than we've ever been, and people underestimate the value of that occupancy to our NOI growth. And so, look, I think we're just seeing back to normal kind of seasonality and, coming off of COVID, it feels like it's a slowdown, but the reality is, it's still really healthy. To your point, though, there are certain markets that were really humming during the pandemic, and, you know, they're coming back to Earth a little bit. Phoenix and Vegas being a couple of those that we've talked about.

I expect that we'll start to see them move kind of more positive on the new lease rate side in the near future, as we've gotten them occupied now and things are settling down. Florida's been humming for a long time. South Florida is still really strong right now, if you look at our rates. But Tampa and Orlando are seeing a little bit of a slowdown relative to what, you know, what we saw over the last couple of years. So generally, it's really strong. There's not a lot of demographic changes that are material, but we saw a lot of people moving to Florida and Texas and other markets. That's slowed down, and so that's taken away a little bit of the edge.

But that, again, just takes us back to where we think we are, which is kind of a normal seasonality and normal kind of under supply of homes. If you look at us relative to multifamily, we know we're in a good position. Tailwinds are in our favor. We've been able to grow occupancy in a slow season, get occupied, and now we're going to capture that demand going forward. So feel like we're in healthy shape. There's some dynamics in individual markets we can get into if you have more further questions, but generally, we're in good shape.

Dallas Tanner (CEO)

Yeah, Jon, this is Dallas. I just want to add a couple of things that were just sort of anecdotal that I know you're aware of. You know, with new home construction making up about 30% of the overall kind of home transaction market, people are just staying put a little bit longer, too. I think you're seeing some of that even in our peers' information. And then we also, I think Charles sort of mentioned this in a different way, but we just, we also don't have as much loss to lease as some of the other books of business that might be out there. We had quite a bit of rate growth, which, to Charles's point, puts it as a much better denominator.

The other thing I would add is, in that denominator, our customer is now ticked over three years on average length of stay. So I think, you know, what Charles and I will kind of solve for with the teams from an optimization perspective will be making sure that on our renewal business, we're always capturing as much share of rate that's out there. We obviously want to get as much new lease growth as we can, but I think a bigger portion of our business is going to be renewals than we sort of ever historically thought of from when we started the company 12 years ago. It just feels like the customer is going to stay longer and longer until we get into a cheaper rate environment, where maybe there's more home transaction availability.

Operator (participant)

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

Jamie Feldman (Managing Director of Head of REIT Research)

Great. Thank you for taking the question. So I just wanted to shift gears a little and just talk about the balance sheet and debt strategy. Can you just talk through your plans for the rest of the year? And then as you think about next year, with the $3.5 billion of interest rate swaps coming due, just what are you thinking about planning for those, you know, and just how should we think about potential earnings, accretion, dilution, as we look through the rest of the year and into next year, just, you know, based on how you're currently thinking about your strategy and, and rates being higher for longer?

Jon Olsen (CFO)

Yeah, thanks for the question. Look, we have about $3.1 billion of debt maturing in 2026. That, as we talked about, I think on the last call, is comprised of two debt instruments. It's $610 million of our last remaining floating rate securitization, IH 2018-4, and the $2.5 billion term loan component of our five-year bank facility. We are sitting on, you know, the remaining cash from our August 2023 bond deal. That cash is available to either grow the business or to pay off debt. Today, if we look at where that 2018-4 securitization is swapped to, that is swapped to a rate of about 4.2%.

Compare that to what we're earning on the cash sitting on our balance sheet, which is around 5.5, right? So, we're not in a rush to pay that debt off, despite the fact that we have ample unrestricted cash sitting on the balance sheet to do so. With respect to the bank facility, we have begun dialogue with our lender partners. You know, we are going to focus on a recast of that facility here over the coming months. We'll obviously keep you posted as that process progresses. But I would say that, you know, we feel very comfortable with our access to capital, feel very comfortable with the balance sheet, you know, and I think it's important to remember, you know, we have plenty of time left.

We've shown that we typically aren't going to wait till the last minute to do something, but I think we also, you know, have bought ourselves the ability to be patient, which is helpful. With respect to the swap book, there are some swaps expiring in November of this year. I would point out that those correspond pretty well to that 2018-4 floating rate securitization. So if we assume that, you know, that swap expiry potentially aligns with a debt repayment, you know, that probably makes sense, and I don't anticipate that we would replace that floating rate debt with anything other than fixed-rate debt.

Operator (participant)

Our next question comes from Haendel St. Juste from Mizuho Securities. Please go ahead. Your line is open.

Haendel St. Juste (Equity Research Analyst)

Hey, guys. Good morning. So, Dallas, sorry, one more on third-party management here. I guess I appreciate your comments earlier on the state of housing in the U.S. and the roles that SFRs have historically played. But what's different in the latest article from the Wall Street Journal is that it's coming from the Republican governor of Texas, a large and deep red state, calling for, you know, legislative, some things to be added to the legislative agenda in Texas to protect families. So you guys are based in Texas. I'm curious what you're hearing and potentially expecting on that front and how it might impact your plans to potentially add to your portfolio in Texas, which is still only about 6% of your total revenue. Thanks.

Dallas Tanner (CEO)

Thanks, Haendel. You're right in that Texas doesn't represent a very big portion of our business. Look, I hate to speculate on any comment that I don't have sort of the full context of. We're active at both state and local levels in Texas and other markets. And, you know, everything we're hearing on the ground is pretty, you know, pro-housing, and pretty friendly in terms of where state legislatures are and things that they want to focus on. We've had, you know, a number of wins in Georgia and Florida, North Carolina over the last year. We've even seen some of the, you know, what I would call really, you know, crazy bills in California get shelved in the last, you know, little bit, and it feels like there's sort of a little bit of a pendulum swing to moderation.

Look, the tricky part about housing generally in the country is going to be that it's a social issue over and over and over. The affordability issues that have been in the country, really for the last decade, since the GFC, are largely supply driven in nature. I'm not an expert on political matters, and/or, you know, where people are going to fall on any one particular issue.... I have become well-versed in that, we see a lot of headlines all the time, and there's clickbait, and we live in a 24-hour news cycle where things can also get taken out of context very quickly.

Our focus is, as a provider of housing, to be consistent, both in the things that Charles and Jon shared, and Scott, around deliveries, execution, how we view the customer experience, and creating this kind of lifestyle flexibility for a massive subset of consumers that are nearly 47 million households deep. SFR represents about 10 bps of that at the end of the day. And so those 10 bps in the way that we behave, I think, are the only things that we can control in real time, which is just be a great business that offers flexibility and service. And by the way, have the conversations at state and local levels as we continue to build out our, you know, thesis around housing to make sure that we're part of the solutions and that the facts are actually understood.

And I think that particular article was disappointing. The headline reads one way, and as you get into the article deeper, you realize that a lot of the facts in the subset suggest that a lot of this stuff isn't gaining traction, because I think as you get into the data, you start to figure out that we need many different types of solutions to combat this problem. So we'll be one part of, you know, a subset of many, but we... You know, the question makes sense, Haendel. Can't tell you what any particular politician is thinking at any given time.

Operator (participant)

Our next question comes from Josh Dennerline from Bank of America. Please go ahead. Your line is open.

Josh Dennerline (Director and Senior Equity Research Analyst)

Yeah. Hey, everyone. Thanks for the time. John, just wanted to follow up on a comment you made on the fees you're receiving from the management contracts are being offset by some investment set, investment spend. How should we think about the duration of that investment spend? And could you elaborate on maybe just what that investment spend entails?

Jon Olsen (CFO)

Yeah, look, I think as we onboard these portfolios, obviously, we need to add some heads in the field, we need to add some heads in the back office, and we need to make some technology investments. I don't anticipate that we're going to be perfect at this coming out of the gate. The good news is, as we've talked about, this is really attractive, high-margin business for us. But, you know, just as we spent years optimizing our balance sheet, optimizing our operating platform, you know, iterating towards a better outcome and sort of a better structure, we're going to be doing the same with respect to the third-party property management business.

So, you know, some of these incremental costs that show up in property management expense are, you know, upfront and one-time in nature and will spread across the majority of these new agreements. Some of them are more variable and are going to correlate more strongly to the number of homes that come online. But I think big picture, this is a really attractive business from an earnings contribution perspective, and our expectation is that we should be able to make those margins higher for us as we get more and more efficient in terms of how we manage.

Operator (participant)

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

Adam Kramer (VP of Equity Research)

Hey, guys, thanks for the question. It was asked a little bit earlier. Let me try to ask it in a different way. Just wanted to ask about maybe how your expectations for new and renewal growth for 2024 compare to your expectations the last time we chatted, you know, roughly three months ago. I know you didn't provide specific numbers at that point. Maybe just walk us through, you know, given you've now had four months, right, and additional visibility into renewal for the next few months, you know, how do your expectations for new and renewal growth today compare to what you provided three months ago?

Jon Olsen (CFO)

Yeah, thanks for the question. I think, you know, obviously, we have not revised guidance. We continue to feel very comfortable with our expectations for where blended rate growth will shake out over the course of the year. What we've said is we expect the blend to be high 4s, low 5s. You know, look, we're sitting here, May 1st, we feel really good about the results we saw in the Q1. We feel really good about the fact that it's aligning very, very closely with how we sort of shaped guidance and our view for how the year would likely progress. So I'm not sure that there's, you know, really much, if any, change.

I think, you know, the May blend of 5.2% that Charles alluded to earlier is reflective of things kind of falling in line the way we expected them to.

Charles Young (President and COO)

Sorry, the April blend of 5.2%, just to clarify.

Adam Kramer (VP of Equity Research)

Thank you.

Operator (participant)

Our next question comes from Daniel Tricarico from Scotiabank. Please go ahead. Your line is open.

Daniel Tricarico (Associate Director of Research Analyst)

Thank you. On the acquisitions in the quarter, you quoted a 6.1 cap rate in the sup. Curious if you could break down what percentage of those are from home builder pipeline versus the traditional MLS and what the spread on cap rates looks like today between those two channels.

Scott McLaughlin (SVP of Investor Relations)

Yeah, I would say that... Hey, guy, this is Scott Eisen. Great question. From our perspective, a majority of what we're doing right now is with the home builder direct purchasing. You know, we're doing very little on the MLS right now. We've focused most of our efforts on growing our third-party management business and also focusing on doing more deals with our home builder partners. And look, we are still, as we've said before, you know, targeting, you know, these home builder acquisitions in and around a six cap, in terms of what our yield on cost expectation is for these transactions. And in terms of dispositions, I think we're still in the market disposing, as we had said we would, and it's still in that range of, you know, the 4-ish cap or so in terms of the dispo rate.

I don't think anything has changed materially in terms of what we're seeing in terms of that acquisition yield.

Operator (participant)

Our next question comes from Jesse Lederman from Zelman & Associates. Please go ahead. Your line is open.

Jesse Lederman (Director of Research and Securities)

Thanks for taking my question and nice job during the quarter. You noted at a recent conference you expect new move-in rent growth to exceed renewal rent growth this summer, consistent with, you know, your, your, typical trajectory, maybe pre-COVID. Can you discuss what you're seeing in the market that gives you confidence new move-in rent growth will accelerate, roughly 300 basis points from April, and how that 300 basis points relates to the typical, we'll call it April to summer peak acceleration? Thank you.

Charles Young (President and COO)

Yeah, we're seeing that, typical kind of acceleration into, on the new lease side, into the summer, and we usually peak somewhere in June, maybe July. It varies year by year, whether new lease will overtake renewals. Can't predict that this year. I don't, I don't think I said that, but it, we typically see that you're gonna see, new lease, accelerate, peak in the summer, and renewals will stay steady throughout the year. I could see renewals, moderating slightly in the summer. As Dallas mentioned, the loss to lease is a little lower over the summer. That cohort, we've kind of pushed on demand, so that might bring it down. So we'll see how it, how it goes.

I think, as we've talked about, we're in a really kind of healthy and/or typical season, and, you know, where it works out for the summer will be determined. That said, we are seeing the acceleration that we expected to see from the start of the year. We started January as we're building up the occupancy, negative on new lease rent growth, and now in April, at 3.1 and accelerating into May, we'll see where it takes us for the summer. We're right where we wanted to be.

Operator (participant)

Our next question comes from Michael Gorman from BTIG. Please go ahead. Your line is open.

Michael Gorman (Managing Director and BTIG REIT Analyst)

Yeah, thanks. Apologies if I missed this, but could you just spend a little bit of time talking about the insurance renewal that you mentioned in, in the supp, and maybe just talk about if there's any change in coverage levels or any other terms that allowed for the execution there on the pricing. And then, I guess, just... I know you left guidance unchanged, but is there anything left that would potentially push insurance back up to the initial guidance range of mid- to high-teens growth from the 7.5% that's implied? Thank you.

Jon Olsen (CFO)

Yeah. So, great questions. Thank you. There is nothing left that would cause insurance to come in higher. You know, we, working with our insurance broker, sort of formed an early view, and that was reflected in our initial guidance, over the course of, you know, kind of our, our annual trips to London and Bermuda to meet with underwriters and, and sort of help explain all the reasons why our business has a, a number of really attractive risk, built-in risk mitigants, coupled with the fact that reinsurance treaties came in much more constructive than last year. You know, we were really pleased with the outcome there. I think at the end of the day, however, insurance is a relatively small line item for us. So, you know, there, there's not a ton in it.

What's gonna be much more impactful, obviously, is property tax. As we talked about, you know, the fact that expenses were sort of as elevated as they were year-over-year here in the Q1 is largely attributable to the fact that we were underaccrued on property tax in each of the first three quarters last year. So, you know, when people see the expense growth numbers, that is, you know, sort of to be expected, and that was also baked into our guidance. You know, specifically what caused our insurance renewal to be so positive, I think a lot of it is driven by the market environment. But, you know, there are also some nice things about our business that benefit us. We're not coastal.

We have the ability to asset manage on a house-by-house basis, and I think, you know, it, it's a nice reminder of the scale of our business. You know, on average, our insurance costs per home in the state of Florida, for example, are less than $1,000. For a homeowner, that's probably between, you know, $5,000 and $6,000 annually at the price points where we operate. So I think that's, that's a really nice sort of testament to the benefits of scale. And then to answer the first part of your question last, just to round it out, we made no changes to our policy structure, or limits or anything of that nature.

Operator (participant)

Our next question comes from Linda Tsai from Jefferies. Please go ahead. Your line is open.

Linda Tsai (Senior Analyst of US REIT Team)

Yes. Hi. If renewals are a bigger part of your business going forward, how much more does this expand your margins over time? You know, how do we quantify how much less turn each quarter reduces OpEx?

Charles Young (President and COO)

I'll let John answer anything in terms of the kind of margin expansion, but, you know, for us, if you go back and look at our business pre-pandemic, we were moving turnover down, year-over-year. It really kind of bottomed out during the pandemic, but we're back on that track where we're just really healthy turnover. And a lot of that is driven by having high renewals. You know, it's a balance of some of the tailwinds that we've talked about in the industry, but also a big part of our Genuine Care and how we serve the resident, and people want to stay with us longer, getting, you know, over three years now, with California getting closer to five. You know, it's just a really healthy position, and that's what shows up in our occupancy.

You take that low turnover, plus good days to re-rent that we've been operating at, and it keeps the occupancy high. And from there, I think, you know, given, as Dallas said, you know, it's a really nice opportunity and lifestyle, yet we see that people moving out reasons to buy home are as low as it's ever been in the last few years. It's leading to really kind of strong low turnover and strong renewals, and as Dallas said, we expect it will be a big part of our business going forward.

Operator (participant)

... Our next question comes from Connor Peaks from Deutsche Bank. Please go ahead. Your line is open.

Connor Peaks (Research Analyst)

Hi, thank you. I think you touched on this a little bit earlier, but if we could discuss the economics around the home builders, and maybe specifically why Invitation can get higher yields versus the home builder selling to individual buyers? Thanks.

Dallas Tanner (CEO)

Hi, this is Dallas, and I'll anything I don't cover, Scott, if you would like to add anything, please do. I think, you know, taking a step back, one thing that's come full circle and been evident to us as we've started growing a lot of these relationships over the last several years, has been sort of the following: one, I think, you know, the home builder industry recognizes a need for for-lease product. They have a number of customers that come through that can't qualify for mortgage, but they wanna be in great communities with access to good schools, et cetera. I think they view partners like us as a more fleet side of their business, where we can do significant amounts of scales to get together at reduced costs. And I would add, I believe on their end, it's a, it's a, it's a much easier efficiency.

We know exactly what we wanna have inside our homes, and we're happy to take multiple, you know, different elevations on the exterior, but they're building us the same product over and over and over. Two, we can also help with the way that we structure those transactions to help alleviate burden of cost, and I think there is just a natural market that exists somewhere in the middle. The second piece of it is, and I can't speak for home builders, I think they view the retail business as a terrific business for them, and they've been able to kinda work through even a higher rate environment. But I also think that we help de-risk a portion of their future thinking.

And so I think there is a natural symmetry between professional capital that wants to operate in the for-lease business, much like you see in multifamily, versus maybe an owner-operator or a just purely fee-simple builder. And then at the regional levels, we can actually, I think, help some of these smaller builders in ways that a lot of regional banks have not been able to facilitate over the last, say, year or so, where we can also help de-risk some of the costs there and create some certainty around the production of new housing units. So there, there's just... It makes sense. It's a lot like the car business, where, you know, you pick any big car manufacturer in the U.S., a massive portion of their business is retail, and they have a system outlined to be successful in that category.

But then they also sell to the Hertz and the Progressive and the 24-hour rental companies that we all lease from at different airports around the country. I think our business can evolve in a way with home builders, and I say that in the plural sense, in a way that it is a very commercial relationship over time and distance, where we are a small part of what they do, but we do it in such a meaningful way, and we try to be a great partner, that it's a no-brainer, that we should try to do as much as we can together.

Scott Eisen (Chief Investment Officer)

And hey, Connor, it's Scott Eisen. The only other thing I would add here is, look, a builder, it gives them confidence to take on a larger project and create more homes when they know that Invitation Homes is gonna be buying a portion of that project. And so, as a result, maybe they might only start a 200-home community, but with us as their partner, they might start a 300-home community. Also, as you asked about the relative pricing, remember, they're saving on things like sales and marketing costs when they work with us because they're not actually having to go out in the market and market those homes themselves.

And then lastly, I think I would add that in terms of, you know, when we get deliveries, we get deliveries on average between 8 and 10 homes a month from a builder, when normally they might only be selling 3-5 homes a month through the retail market. So you put all those three things together, it's a reason why what we're doing is accretive to the builders, and frankly, supplements what they try to do in terms of selling to individual retail customers.

Operator (participant)

Our last question today will come from Buck Horne, from Raymond James. Please go ahead. Your line is open.

Buck Horne (Managing Director)

Yeah, thanks. Because I just wanna follow up on that a little bit here, because I guess, the question from my mind on this topic is, is that, you know, you're not the only one in the market trying to negotiate deals with builders, and it's obviously a really hot, you know, topic, and so there's a lot of capital chasing deals with builders. But I guess, you know, you're talking about still being able to negotiate those 6% yield on cost numbers when everyone else is kind of saying maybe those numbers are in the 4s. I guess, what's the secret sauce, or is there a secret sauce other than what you guys have described so far to achieving those kinds of numbers?

Dallas Tanner (CEO)

Really good question, and I appreciate you following up, Buck, because maybe I didn't answer this very well in the question before. It centers around predictability. We have predictability in our operating margins. We have predictability in showing up and closing. We have a really great track record in the market with M&A and with the ability to close when asked to. Our operating margins, which, by the way, I think would add to a lot of the inbound interest we've had in 3PM, are an attractive thing for investors, and I think they're an attractive thing for operators in the marketplace. We see very quickly in just some of the transactions we've looked at and are doing in 3PM, immediate margin pickup for our partners just by doing a couple of things differently.

And a lot of that, as you know, Buck, it has to do with scale. When you have a business that's 97.5% occupied, growing revenue in the mid-5s, and we're now in a decelerating cost environment as we view property tax and cost of goods sold and all these things, like, we could not have better blue sky situation for our business as we think about the next couple of years. We're positioned very nicely. We're just getting started in our, in our access to these home builder relationships. Like anything professionally that we've done in the first 12 years, these things develop over time and as you build trust.

And I think for us, you know, it's the same way we approach our opportunities with the home building industry, it's the same way we're gonna approach risk in 3PM. We wanna work with the best and the most professional capital that's out there, because those expectations we have of each other matter, and that we'll show up and do the things that we said we'll do equally matter. I think that's gonna lend itself to conditional outperformance as you look at that, Buck, to your question, specifically, relative to maybe other operators that are in the space that don't have the scale or the capacity or the ability to close on this kind of scale and to seamlessly integrate it.

So I give Charles and in the field, and John in the back office, all the kudos as you know, Scott and his team are out there developing these relationships and trying to build what will be the next decade of growth for Invitation Homes. The SFR industry is gonna be about bringing new housing supply into the marketplace. That is the narrative as I see it for the next several years. It's gonna be about creating new product, bringing new product into these markets, and doing it at yields, Buck, to your point, that makes sense, and on a risk-adjusted basis, a total return profile that makes sense for us and our shareholders.

Operator (participant)

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

Dallas Tanner (CEO)

We thank everyone for attending our call. We're grateful for your participation. We look forward to seeing everybody at NAREIT in June. Thank you for your time today.

Operator (participant)

This concludes today's conference call. Thank you for your participation. You may now disconnect.