Invitation Homes - Q2 2023
July 27, 2023
Transcript
Operator (participant)
Greetings, welcome to the Invitation Homes second quarter 2023 earnings conference call. All participants are on a listen-only mode at this time. Should you need assistance, please signal a conference specialist by pressing star followed by zero. As a reminder, this conference is being recorded. At this time, I would like to turn the conference over to Scott McLaughlin, Senior Vice President of Investor Relations. Please go ahead.
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, and Jon Olsen, Executive Vice President and Chief Financial 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 second quarter 2023 earnings release and supplemental information. This document was issued yesterday after the market closed and is available on the Investor Relations section of our website at www.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 describe some of these risks and uncertainties in our 2022 annual report on Form 10-K and other filings we make with the SEC from time to time. Invitation Homes does not update forward-looking statements and expressly disclaims any obligation to do so. We may also discuss certain non-GAAP financial measures during the call. You 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, our Chief Executive Officer.
Dallas Tanner (CEO)
Good morning. Thanks for joining us. These continue to be exciting times, with Invitation Homes once again demonstrating our ability to deliver strong results. Fundamentals remain very favorable for our industry and, in particular, for our markets, product, and price points. Our teams are providing a great residence experience every day, and we continue to seek and to find fantastic value creation opportunities through our sound capital allocation strategy. I'd like to discuss a few of these in more detail during my prepared remarks to you today. First, let's begin with value creation and our recent purchase of nearly 1,900 single-family rental homes for approximately $650 million. As we've demonstrated over the last 11 years, we've approached external growth opportunities with a strategic discipline and accretive focus. I'm pleased to share with you why we believe this transaction continues in that approach.
Essentially, this is a high-growth portfolio of exceptionally well-located homes that we bought at a pretty attractive price. We believe our purchase price represents a meaningful discount to end-user market values, giving us immediate benefits of scale, a value that would have been impossible to replicate through one-off buying in today's environment. Further, we expect our best-in-class platform to help us achieve enhanced returns, starting with a year one yield in the mid-5s that we anticipate will grow quickly thereafter. In addition, the quality and location of the homes we acquired are right in line with the type of product we'd like to own more of. In particular, these are great homes within desirable infill neighborhoods that we believe will provide strong rent growth and value appreciation.
Over 90% of these homes we purchased overlap with our existing Sun Belt footprint, including within our Florida and Texas markets, along with Las Vegas, Phoenix, Atlanta, and the Carolinas. Outside of this transaction, we continue to work with our outstanding home builder partners across the country. During the second quarter, we took delivery on 157 of these brand-new homes and added an additional 173 homes to our new product pipeline. Our expected future deliveries remained at just under $900 million at the end of the second quarter. Moving forward, we remain focused on smart external growth through our multi-channel acquisition strategy.
As we previously announced, Scott Eisen joins us next week as our Chief Investment Officer, and we're excited to add his insight as we further explore disciplined growth opportunities, including additional bulk purchasing from smaller operators and an expansion of our home builder pipeline. At the same time, we will continue to keep our heads down and create more meaningful experiences for our residents, such as growing our ancillary services business and developing new ways for us to engage with our customers. The second topic I want to discuss is the ongoing fundamental tailwinds for our business. We expect these to continue to support our growth objectives for many years to come. Nearly 1/5 of the U.S. population, or almost 60 million people, are between the ages of 23 and 35 years old.
We believe this to be a strong indicator of the future demand for our business as they form families and approach our average new resident age of 38.5 years old. Demand for single-family homes for lease has been further enhanced by the rising costs and the burden of homeownership. According to the latest data from John Burns, leasing a home is nearly $1,000 cheaper per month on average than buying a home in one of our markets. This is a reflection of not only an increase in mortgage rates, but also the overall lack of new housing supply. In addition, for-sale inventory remains well below demand, which continued to help support home prices. This, in turn, aids our ability to sell non-core or underperforming assets at attractive cap rates and use those proceeds for accretive capital recycling.
Moving on now to my third topic, which is how we continue to improve the resident experience and reinforce our commitment to resident choice and flexibility. The most recent example of this is our partnership with Esusu. We're proud to help our residents build good credit by offering positive credit reporting to all our residents using Esusu's platform at no cost to our residents. This partnership helps to remove barriers to housing choice, allows our residents to improve their credit profile in order to achieve their financial goals faster. In closing, I'm excited by how we are executing and driving growth today. I would like to express my thanks to our dedicated associates for their hard work and commitment, which have been instrumental to our successes.
We believe the increasing demand for single-family rentals, favorable demographic trends, and the flexibility and choice that we provide our residents, position us well for both sustained growth and value creation, which we will continue to relentlessly pursue. With that, I'll pass it on to Charles, our President and Chief Operating Officer.
Charles Young (President and COO)
Thanks, Dallas. Once again, we were able to build on positive momentum to drive another great quarter. I'd like to thank all of our associates for their hard work through this point in peak season, including all of our outstanding leasing, maintenance, and service teams, and for providing the best resident experience within the industry. We still have work to do to close out the busy summer season and to stay diligent about controlling what we can control to finish the year strong. I'm very proud of the results we're putting up and the great execution the teams have delivered. This includes the strong effort we've made to bring on board the nearly 1,900 homes from our recent portfolio acquisition.
Through our existing scale, the dedication, and professionalism of our teams, and our established playbook for buying larger portfolios, we expect this to be a smooth transition. In accordance with our mission, we're making a house a home for thousands of new residents who have just joined our Invitation Homes family. We're pleased to offer them the very best genuine care and outstanding service that all of our residents have come to expect from us. Moving on to our second quarter operating results. Same-store NOI grew by 3.6% year-over-year. This is driven by same-store core revenue growth of 5.9% and same-store core expense growth of 11.2%.
The main drivers of our second quarter same-store core revenue growth were a 7.4% increase in average monthly rental rate and a 7.3% increase in other income. Notably, we continue to make great progress on working through our lease compliance backlog this year. Same-store bad debt in the second quarter was 150 basis points of gross rental revenue, making a sequential improvement of about 50 basis points since the first quarter of 2023. We believe this improvement should continue as more of our markets return to pre-COVID performance. Returning to our year-over-year results, same-store core expense growth in the second quarter was primarily the result of expected increase in property taxes, along with higher turnover and property administration growth, mostly driven by progress we're making in our lease compliance backlog.
Our expense growth was partially offset during the second quarter by a favorable 6% decrease in R&M expenses on greater cost controls and lower inflation. I'll cover same-store leasing trends in the second quarter. Lease rates on renewals grew 6.9% year-over-year, while new lease rates grew 7.3% year-over-year. This drove second quarter blend of rent growth of 7% year-over-year. Average occupancy remained strong in the second quarter at 97.6%, during which is traditionally the biggest move-out season for our business. We're pleased with the balance we struck so far this year between rate and occupancy. This includes optimizing for the healthy demand we're seeing at this point in our peak leasing and move-out season, especially considering the progress I mentioned earlier on our lease compliance backlog.
While this is creating additional pressure on turnover, along with some expected moderation in occupancy through the back end of peak season, we believe we're well positioned for the future, with demand for our homes and the quality of our new applicants remaining strong. In particular, the average household income for new residents who have moved in with us over the past 12 months now exceeds $138,000 a year, resulting in an average income-to-rent ratio of 5.1x. In summary, following a great first half of 2023, we're focused on maintaining our momentum going into the second half of the year. Our teams are working hard to ensure we control costs where we can and continue to provide the best leasing lifestyle in the industry for our residents. We remain focused on delivering outstanding service and strong results.
I'll now turn the call over to Jon Olsen, our Chief Financial Officer.
Jon Olsen (EVP and CFO)
Thanks, Charles. Today, I'll cover the following topics. First, an update on our investment grade-rated balance sheet, along with a few additional details regarding our recent portfolio acquisition. Second, financial results for the second quarter, and lastly, updated 2023 full-year guidance. I'll start with our balance sheet. At the end of the second quarter, we had over $1.4 billion in available liquidity through a combination of unrestricted cash and undrawn capacity on our revolving credit facility. Our net debt-to-EBITDA ratio was 5.3x as of the end of the second quarter, down from 5.7x at the end of 2022. Just under three-quarters of our total debt is unsecured, and over 99% of our debt is fixed rate or swapped to fixed rate.
We've often emphasized how we believe our strong balance sheet positions us well for desirable growth opportunities should they arise. Our acquisition last week of nearly 1,900 homes for approximately $650 million offers an example. With an average cost per home of $346,000, the acquisition reflects a meaningful discount to market value. This attractive entry point is underscored by the portfolio's outstanding quality and location, which are typically the two best indicators of potential future growth. In addition, the acquisition further enhances our significant scale in many of our premier Sun Belt locations, which we believe has the potential to drive even greater efficiencies and higher margins over time.
We funded the acquisition primarily using cash on hand, including dry powder we accumulated through outside dispositions in the first half of this year at an average stabilized cap rate of 3.8%. The remainder was funded by our revolver. Pro forma for the acquisition, our net debt-to-EBITDA ratio at June thirtieth, remains comfortably within our targeted 5.5x to 6x range. We expect this portfolio acquisition to have an immaterial effect on AFFO per share for the remainder of this year, and to be accretive to AFFO per share in 2024 and beyond. Next, I'll touch briefly on our second quarter 2023 financial results. Second quarter core FFO increased 5.3% year-over-year to $0.44 per share, primarily due to an increase in NOI.
Second quarter AFFO increased 6.8% year-over-year to $0.38 per share. The last thing I'll cover is our updated 2023 full-year guidance.. After maintaining strong execution through much of our peak season, with favorable fundamentals expected to remain in place, we are increasing our full-year 2023 same-store NOI growth guidance to a range of 4.5%-5.5%, or an increase of 25 basis points versus the midpoint of our prior guidance. This is driven by increased same-store core revenue growth guidance of 5.75%-6.75%, an increased same-store core expense growth guidance of 8.5%-9.5%, both of which are up 50 basis points at the midpoint from our prior guidance.
The increase to core revenue guidance is primarily due to outperformance in rent growth and occupancy in the first half of this year, balanced against our expectation that turnover will trend higher in the second half, resulting in some moderation to occupancy. As a reminder, this is primarily the result of us continuing to make good progress in working through our lease compliance backlog, which has the near-term impact of higher expected turnover and property administrative expenses, but also the longer term benefits of releasing the homes to stronger credit residents and improving revenue over time. We're pleased with the progress we've made so far this year. As a result, our expectations for full-year bad debt have improved by 50 basis points at the midpoint to a new full-year range of between 125 basis points and 175 basis points.
Our updated guidance also narrows the range and increases the midpoints of our ranges of expected core FFO and AFFO per share. We now expect full-year 2023 core FFO in a range of $1.75-$1.81 per share, which is an increase of one penny per share at the midpoint. AFFO was also increased by a penny per share at the midpoint to a revised range of $1.45-$1.51 per share. Updated assumptions regarding full-year acquisitions and dispositions are included in the guidance section of last night's earnings release. I'll wrap up by restating our excitement for what lies ahead in the second half of this year and beyond. We will continue to focus on our strategic priorities, deliver exceptional service to our residents, and drive sustainable growth and value creation for our shareholders.
With that, operator, please open the line for questions.
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. In the interest of time, we ask that participants please limit themselves to one question and then re-queue by pressing star one again for a follow-up question. Our first question comes from Josh Dennerlein from Bank of America. Please go ahead. Your line is open.
Joshua Dennerlein (Director and Senior Equity Research Analyst)
Yeah. Hey, guys, thanks for the time. Just wanted to touch base on the portfolio acquired. I guess, how long will it take to kind of integrate into your portfolio? Is there any capital recycling that you're planning, off the bat?
Dallas Tanner (CEO)
Hey, this is Dallas. Thanks for the question. You know, as far as integrating the portfolio, I'll yield to Charles here on the operational side, it's typically pretty easy. We don't have any market that has, say, more than 350 units, and we have pretty good history of doing that. I think on the capital recycling piece, look, we've been active on the disposition side in trying to do accretive capital recycling. I think, you know, the market not having enough overall supply in the resale space has allowed us to, when we decide to sell homes, get really good, what I would call kind of end user sales prices. To be able to recycle into a high quality portfolio that fits is something that we view pretty bullishly.
I'll hand it over to Charles, who can speak a minute just on how we integrate, you know, any new product when it comes to scale into a market.
Charles Young (President and COO)
Dallas said it well. you know, we've been through this before. This one happens to be a little bigger and across multiple markets, but on an individual basis, we've been able to take in portfolios like this in Vegas and Phoenix and other markets, and it's just more of the same for us. We have a great team centrally that.
how we roll it into our systems. We get eyes on assets. We make sure that we're providing genuine care to the residents. You know, as it turns out now, we roll them in on kind of an immediate basis, and we're getting out there, and we're working with them is where they are in their process. Some of them are in lease, some of them are moving in soon. We just pick it up from there, and then we communicate with them well. It's kind of an ongoing process. There's no real timeline because the homes are in different positions. I'm proud of how the teams are taking it on, and it's, we're in the middle of it right now. It's exciting.
Operator (participant)
From Eric Wolfe from Citi. Please go ahead. Your line is open.
Eric Wolfe (Director)
Thanks. Just to follow up on Josh's question there. You know, if I look at Green Street's website, it looks like the occupancy of their SFR portfolios are in sort of the 92%-93% range on average. Just curious what the sort of occupancy is of the portfolio you bought, if there's an opportunity to, to get that higher, expand margins, where the yield on acquisition go, and then I know this is a long question, but, you know, is this sort of representative of the type of opportunities that you're looking at, you know, across other portfolios?
Dallas Tanner (CEO)
You know, I'll start with what you mentioned last. We talked about this at Nareit. We've talked about this in some of the NDRs we've done through the spring and kind of early summer. Look, there's sort of this moment in the marketplace right now where smaller, kind of mid-scale operators, I think are sort of having the high-class debate with themselves about what do they do going forward. There's not a lot of visibility, obviously, for, you know, some folks in terms of what the capital markets are gonna allow for. I think as you look at our business and scale and platform and the operating efficiencies that we run with, we have a pretty good history of creating really efficient margin profile in the markets where we have scale.
I think that there is going to be some compelling opportunities for companies like ours, you know, as we've sort of exhibited in this, in this trade that we did this month to create, you know, additional margin expansion. With this particular portfolio, look, we think there is upside in terms of how we can operate it. We can add to, you know, call it the existing margin profile in our markets, and there's reasons for doing these, right? You know, one example is, you know, Texas is a market that we wanna grow in. We've got, you know, call it plus or minus, close to 500 homes that are gonna go into our Dallas and Houston portfolios here.
While we think we can operate these, with greater, you know, call it efficiencies and some embedded growth there, it actually helps our existing portfolios, because as we scale up relative to the things that we own, we should see additional opportunities for margin enhancement. Look, it's not one size fits all out there in terms of where and what portfolio opportunities may be available from professional management companies, but we certainly wanna be ready. I think in this situation, we're ready. We really like the real estate. It's, you know, this is a real estate that we are familiar with over time, and it's gonna make a lot of sense for our business over the long haul.
Operator (participant)
Our next question comes from Jamie Feldman from Wells Fargo. Please go ahead. Your line is open.
Jamie Feldman (Managing Director and Head of REIT Research)
Thank you. You know, last quarter's call, you talked a lot about the lease compliance backlog. Can you just give us an update in terms of, you know, how large it is, what the major markets are, where it's still having an impact? I guess even more importantly, you know, what's the upside to kind of normalized occupancy and a regular turnover rate, as you work through and kind of complete that backlog?
Charles Young (President and COO)
Great. This is Charles. Thanks for the question. Yeah, we, as we said, we thought that we were gonna see a little heavier work in the first part of the year in regards to lease compliance backlog. I think as we look back at Q1, it was a little quieter, and things started to pick up in Q2. We've made good progress, and you could see it in our numbers going down 50 basis points quarter-over-quarter. The major markets are where we wanted to see the movement, and so we see this as a positive sign. That's SoCal, Atlanta, Vegas has made some nice progress, and so has NorCal.
The flip side of that is that we're getting a little bit of a spike in turnover, but that's expected. It was hard to know when it was gonna come through, but the good news is the backlog is breaking with the courts and all that, and so that allows us to kind of move these homes through. You'll see some pressure, as I mentioned in my comments, on occupancy towards the back half of peak season. The good news is demand is still really strong, and so we are able to re-lease quickly. Teams are executing well, so we're turning homes quickly. Day three resident are in a healthy place. All that is good. This is, you know, signs are positive. We still have things to work through.
We're not there all the way yet, but we like where we're going. you know, and ultimately, we ended Q2 here at mid-97s. I expect that we'll come down to the low 97s in Q3. We'll see where we end up. With this demand, I think we're gonna roll back up, and we're gonna be in the, you know, mid-97s overall for the year. We started the year strong. We'll work through this backlog. The one thing I will mention is I think we worked through most of the markets this year. That's the goal and hope, but there could be some bleed into next year in markets like Southern California, and we'll see how we do in the others. Atlanta has a lot of work to do. Those are our two biggest markets. If you really.
To your question, the biggest markets that have the largest impact on our portfolio, due to size and due to the backlog, are Atlanta and Southern California.
Operator (participant)
Our next question comes from Steve Sakwa, from Evercore ISI. Please go ahead. Your line is open.
Steve Sakwa (Senior Managing Director)
Yeah, great, thanks. Charles, I was just wondering if you could talk about kind of where the leasing spreads are in the third quarter. You know, where did renewals go out, say, for July and August? I guess, what are your expectations for third quarter and for the back half of the year?
Charles Young (President and COO)
Yeah, thanks for the question. In terms of, you know, our most recent renewal requests go out September and October, and we're actually in the low 8s to mid-8s. We see it really as being healthy. We're not done with July yet, so, can't give final numbers, but we're seeing more of the same healthy performance, where new leases are in the low 7s, renewals in the high 8s, high 6s, if you will. We'll see where the blend settles out. This is typical of what we expected for the summer, new lease above renewals. You know, we'll see how it moderates and when it does, but right now we're still seeing good demand, and we like that given my answer to the question earlier.
We're getting a little bit more turnover, we get a chance to re-lease these homes. What I failed to mention before is we're putting really good, healthy residents in there with an average household income of $138,000. We're in a good shape. We've tightened up our screening criteria. We're still seeing good demand across the board. You know, we expect that we'll see more of the same in Q3, but we'll see how it moderates as we get towards the back half of peak season here.
Operator (participant)
Our next question comes from John Pawlowski from Green Street. Please go ahead. Your line is open.
John Pawlowski (Managing Director)
Hey, thanks for the time. I just have a follow-up question on the portfolio acquisition. Dallas, I'd just like to hear how you weighed purchasing this portfolio versus deploying capital into your own stock, which at least earlier this year, it felt like it was at an even larger discount to private market values.
Dallas Tanner (CEO)
Yeah. Hey, John, thanks for the question. You know, it's certainly something we think about in what would move the needle over time and distance. While, you know, we, we have events and things that happen inside of the quarter, we really do try to have a long view in terms of how we want to create, you know, meaningful external growth and also what I would say is, you know, better quality cash flows for the company over time. Which we would view as, you know, call it, have far more of an impact in, in the things we want to do strategically with the business than maybe some near-term, you know, stock buybacks, which we've never done as an organization. We've certainly talked about it.
With this particular portfolio, look, we think with inside of a year-ish, you know, kind of time period, we're going to be in the 6s in terms of call it a yield on cost. That doesn't take into consideration, you know, things like ancillary and some of the other things that we can do. Then it also, you know, is part of our, you know, consistent process around capital recycling. I think you look at the things that we're selling, you know, kind of call it a 4-ish cap rate on average, and be able to recycle into something that's pretty high quality, getting us to a 6 pretty quick. It's an area where we want to continue to probably lean in, if anything, try to find ways to create better kind of long-term growth for our current shareholders.
You know, we'll consider everything, you know, we're managing with a long view here.
Operator (participant)
Our next question comes from Austin Wurschmidt from KeyBanc Capital Markets. Please go ahead. Your line is open.
Austin Wurschmidt (Senior REIT Analyst)
Great, thanks. On the portfolio acquisition, what rent growth did you underwrite in year one to achieve that mid-5% cap rate that you quoted? I know you have the revolver availability to fund a portion of the deal, but what are sort of the plans to permanently finance the transaction?
Jon Olsen (EVP and CFO)
Hey, Austin, it's Jon. It's a good question. We funded this acquisition primarily with cash on hand, so it was about $495 million of cash and a $150 million draw on our revolver. Of that $495 million of cash, $30 million of that was funded in upfront deposits prior to the end of the second quarter. I think from our perspective, you know, the actual revolver draw is fairly small. I think as we consider permanent capital, what I'll tell you is sort of what we always say, because it's how we always approach things. One, we're very fortunate that we don't have any near-term maturities, so there's no sort of ticking clock that would force us to do something at a disadvantageous time.
Secondly, you know, we are constantly monitoring the market, and we're always working in the background to be prepared so that we can take advantage of opportunities if circumstances and market conditions warrant it.
Operator (participant)
Our next question comes from Brad Heffern from RBC Capital Markets. Please go ahead. Your line is open.
Brad Heffern (Director of REIT Equity Research)
Yeah. Thanks. Good morning, everybody. Can you talk about property taxes and how the information you have now compares with the original guide? If you could comment on the impact of the Texas legislation as well, that would be great.
Jon Olsen (EVP and CFO)
Sure. In the second quarter, property tax was up a little over 11% year-over-year. This was expected, and we talked about this on the last call, primarily because we recorded a large catch-up entry in the fourth quarter of last year due to the fact that we'd been underaccrued in the first three quarters. As a result, we'll see elevated year-over-year property tax increases again in the third quarter and then we'll see some moderation in the fourth. I would remind you that, you know, our three largest contributors to our total tax bill are California, Georgia, and Florida, which represent about 70% of the total. While California is largely known, for Florida and Georgia, we won't know how millage rates change until we start receiving those tax bills in the fourth quarter.
I would say big picture at this point, you know, we haven't yet seen anything that would cause us to revise our full-year property tax guidance up or down. With respect to Texas, a couple of things there. Thus far, the legislation calls for a $0.107 decrease in tax bill per $100 of assessed value. There's some additional compression available that's going to fluctuate by jurisdiction, based on how the redistribution under the Robin Hood laws work for school tax funding. I would also point out that, you know, Texas isn't a big state for us. I would expect that, you know, while this is certainly beneficial, I don't think in the grand scheme, it's going to move the needle too much.
Operator (participant)
Our next question comes from Daniel Tricarico from Scotiabank. Please go ahead. Your line is open.
Daniel Tricarico (Associate Director and Research Analyst)
Thanks. Jon or Charles, can you break down the components of the 50 basis point increase to same-store revenue, you know, rents, occupancy and bad debt, and maybe how that bad debt in Q2 compares to expectations for the rest of the year?
Jon Olsen (EVP and CFO)
Sure. I think it's, you know, we've seen maybe some marginal improvement from our mid-single digit rate growth assumption that we talked about on the last call, as well as, you know, sort of a faster pace of improvement with respect to our bad debt experience, which is absolutely, you know, something that we're very encouraged to see. As we look at the back part of the year, though, we do have to balance those positive trends against the fact that we're anticipating continued higher turnover here for the next few months. That is gonna have, you know, an impact on occupancy over time. As Charles has talked about in the past, you know, we're also very cognizant of the fact that there is a balance to be struck between rate and occupancy.
We wanna make sure that we're being mindful of all of those facts when we think about guidance.
Operator (participant)
Our next question comes from Haendel St. Juste from Mizuho. Please go ahead. Your line is open.
Haendel St. Juste (Managing Director and Senior REIT Analyst)
Hey, good morning out there. Just a couple more on the portfolio. What does that mid-5s cap rate translate into on an IR basis? Curious, just more broadly, what you're seeing out there portfolio-wise, if pricing is getting more in line with the mid-5%, that you targeted in your capacity or perhaps interest in doing more portfolio deals? Thanks.
Dallas Tanner (CEO)
Hey, Haendel. On the last question, I would say, you know, look, I think there's gonna be opportunities to talk to other, you know, operators in the space over the next year, and I think a lot of those conversations will be dependent on what, you know, kind of the capital markets is allowing for. In terms of how we view, you know, obviously the return profile of any trade that we make, it's, you know, it's two-part, right? It's 1 part, you know, call it going in yield on cost. The second piece on a risk-adjusted basis would take into considerations or expectations around HPA and things like that. This was obviously so far an unlevered transaction if you look at it in a binary way. We would expect, you know, a healthy home price appreciation.
I'd call it, you know, on an unlevered basis, we'd probably see this in like the high single digits, but it just depends, and it's a mixture of, you know, markets and things like that. So, yeah.
Operator (participant)
Our next question comes from Keegan Carl from Wolfe Research. Please go ahead. Your line is open.
Keegan Carl (SVP of Equity Research)
Yeah, thanks for the time, guys. Both in the press release, the commentary, you called out increased turnover expense, a pretty big driver of your same-store OpEx going higher on a year-over-year basis. I'm just curious, one, how this is trending versus your initial expectations and then what your outlook is for the rest of your own turnover. Do you think where 2023 ends would be a good run rate going forward on turnover?
Charles Young (President and COO)
This is Charles. I'll start and see if Jon wants to add anything. You know, look, we knew we were gonna have a little higher turnover this year given the lease compliance backlog. We're still running historically really low on turnover, which is great. It was really difficult to, as we kind of looked forward through the year, to predict when it was gonna happen. It was a little slower than expected in Q1 and really picked up here in the second half of Q2, and we think that will maintain into Q3. The thought here is that it will start to moderate towards the back end of the year.
Hard to say exactly if that's gonna be our run rate, just given what I talked about earlier around some of the markets and how quickly we're gonna get to the end of this in the, like, say, Southern California or Atlanta, where we have the biggest impact. The thing to think about with that turnover is it has two impacts. Some of this, some of the lease compliance, these terms, take a little longer, cost a little bit more. That's some of the impact you're seeing in our expenses.
The good news is we're able to work through this, and we see this as transitory and, it's not gonna, you know, we'll work through it as much as we can, as fast as we can this year, and that's what's in our numbers, and I think that gives us some optimism as we think and look forward to next year.
Operator (participant)
Our next question comes from Dennis McGill from Zelman & Associates. Please go ahead. Your line is open.
Dennis McGill (Co-Founder and Director of Research)
Hi, thank you all. I guess my question to us would be on just thinking about home price appreciation, and if we were sitting here a year ago, I think everyone would have expected there to be more pressure in the market than maybe there's been, and that's obviously impacting the ability to buy on the MLS. Just wanted to hear how you're thinking about that. To the degree there remains a disconnect between what you can sell at and where these portfolios are trading. Is there a reason why the portfolio holders wouldn't just go to the MLS and sell at a much more attractive yield, and does that impact the ability to do some of these in the future?
Dallas Tanner (CEO)
That's a good question, Dennis. Look, on the last part of your question, I think it's fair to assume that the frictional cost when you're doing anything at scale is really hard. I think we're as good as anyone in this in terms of selling one-off in the end user market. Even when we sell at those kind of high threes, low fours, we have some frictional costs that are associated with those sales.
If you're not doing it all the time, I think it can be, you know, a little bit more difficult to just say, "Hey, could I sell 1,000 homes tomorrow, and what would my, how would I think about that cost structure?" Look, I think home prices have largely been buoyed up because of the lock-in effect, that there's a lot of really attractive, you know, mortgages in place that I think both home, current homeowners or people that are owning real estate in the single-family space are, it's actually an asset. It's a, it's a, it's a liability on their, on the balance sheet of the home, but the reality is, it's an asset.
There's a lot of, and we've talked about this on some of our other calls, mortgage rates, you know, call it inside of 80% of U.S. mortgages are inside of 5%, which is, you know, really, I think, what's keeping the market supported. That lack of volume is creating, you know, really still a feeding frenzy sort of mentality when somebody is selling a home. We view that as an asset for our business when we want to call and sell homes. We've talked about that, that you might see us be a little bit more aggressive selling some homes this year. By and large, the market feels really healthy. I agree with you. We have not seen a degradation in home prices within our portfolio.
I think when we have these opportunities where we can take advantage of that sort of bid-ask spread, being a buyer, you know, we have a long view on owning great single-family residential, and we wanna own it with scale in the markets we operate in. When those opportunities present themselves, like this one, expect us to try to figure out how to do that transaction, if it makes sense.
Operator (participant)
Our next question comes from Adam Kramer from Morgan Stanley. Please go ahead. Your line is open.
Derrick Metzler (Equity Research Associate)
Hi, this is Derrick Metzler on for Adam Kramer. I just wondered if you could talk a little bit about market rent trends across your portfolio and give an update on loss to lease today. Thanks.
Charles Young (President and COO)
Yeah, this is Charles. you know, we're seeing what's historically been really strong, you know, new lease and renewal rates, through the summer. Take out the COVID kind of anomaly, when we're in that blend of a 7% in Q2, it's really strong. That's maintaining here, as we get into Q3. new lease side, the markets that are leading have been kind of markets that have been out in front for the last year or so. It's our Florida markets with Orlando, Q2, north of 9%, and we have five, six markets, in 8%, you know, mid to high 8%: Tampa, South Florida, Southern California, Atlanta, Carolina. Good news is, as we talked about earlier, as we're cleaning out the backlog, and we're able to re-lease these homes because of the demand.
It's been great. Renewals are holding steady. We're kind of stabilizing here in that kind of high 6s, you know, we think that'll be steady through the year. If not, we'll see where we end. You saw, I mentioned earlier that we went out in September and October in the low 8s. I think that's real positive as we think through on that side. You know, some of this will be a balance between occupancy and rate, as Jon talked about when we're talking, working through this backlog. You know, that turnover impact isn't in all markets. It's in certain markets where we have a backlog highlighted by Atlanta, Vegas, and SoCal. Other markets in Q2, actually, turnover went down year-over-year.
It really is market specific, and we're seeing kind of good demand across the board. The only softness that we're seeing is a little bit in Vegas. Some of it is because of the lease compliance backlog. Some of it is there's some competition in the market and a little bit of a slowdown in that market in general, we're paying attention to it. Overall, we're seeing really good, healthy, positive trends. And we're excited about trying to finish off peak season strong and finish off the year really strong.
Operator (participant)
Our next question comes from Anthony Powell, from Barclays. Please go ahead. Your line is open.
Anthony Powell (Director of Equity Research)
Hi, good morning. A question on the builder pipeline. You know, we've seen the homebuilders have good success in selling new homes to new homeowners. Are they showing less interest in selling homes to you and others, and as a far space, or do they continue to see you guys as good partners or good outlets for certain of their homes?
Dallas Tanner (CEO)
Well, I think we mentioned on the script that we're continually adding to our pipeline. I'd say, you know, sort of the opposite. I think most companies would envy the position the public builders are in. They're lowly levered. They're taking a much larger share of overall home sales as it relates to, call it, U.S. housing stock. It's because they're, you know, one of the few groups out there that can go out and build and create. That being said, I think, you know, the playbook that we've built with PulteGroup is, is sort of our beginning sponsor partner, is now actually starting to work its way through with several different relationships for us.
I actually think it's sort of caught on that this is a really nice way for, you know, an operator of for-sale homebuilding business to be able to align some interests with professional management companies that want to be a natural buyer of some of this product over long periods of time. I actually expect that side of our business to grow. I think our teams, you know, largely led by, you know, Peter DiLello and now Scott Eisen coming in, have done a really nice job of starting to build up frequency there. I think the nice part about it is, we are able to get under the hood early and really talk about our strategy as a company with these partners and helping them understand where we want to grow our footprint.
I think over time, it also allows us to, you know, get under the hood and have influence on, you know, things like portfolio composition and design, and neighborhood fit and feel, which is an important part of our overall value factor for the customer as they're thinking about choice. I think it's still too early for us to really have a strong view on this, but I think the customer coming in to brand-new product really does view that move-in experience as their home. My instincts, and I can't prove this yet with any data, but I think they'll prove an even stickier customer over time as we bring out some of this newer product that has a little bit more of a focus to it.
Lastly, the thing we love about it, which I can't emphasize enough, is we are very G&A light in this program. We don't have a, you know, a lot of our balance sheet tied up in dirt, or other kind of potential riskier parts of that business. We'd rather just continue to partner with proven operators in the space and be a good playing partner for them. That strategy is really working for us at this point in time.
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, a couple of questions I'm assuming we're towards the end. I guess, I apologize if I missed this. On the same-store expense guide, the increase—
What drove that? I mean, it seems like the bad debt is lower, the churn has picked up, but albeit temporarily, and set to decrease into year-end, and taxes, it's too early to tell, and no change in expectations. Just curious on what drove the expense increase in guide? Then, the second part is just on the renewals. Why is that decelerated or the pace of increases slowed? Has the September, October numbers that, or that you put out there, in the eighth, does that imply a re-acceleration, or is there some giveback that would kind of keep that number steady for September and October expected?
Jon Olsen (EVP and CFO)
Hey, Juan, it's Jon. I'll take the first part of your question and hand it off to Charles for the second part. I think it's a couple of things. On the expense side, what we're seeing, as Charles noted, is that the turnover has come. There was a little bit of a delay in terms of when it really started to show up in the portfolio. I would also say that turnover increased each month since the end of the first quarter. You know, it is more concentrated, and as we started to see kind of the flow-through impacts on a whole variety of different line items in the P&L, you know, what we're seeing sort of suggested that you know, moving the goalpost on the expense guide did make sense.
Now, to be clear, you know, I wanna remind everyone that we think working through this, this backlog is just fundamentally healthy for our business long term, right? It's, it's something that is gonna allow us to put stronger credit tenants back into those homes, get them back in service, get them back cash flowing. There is short-term pressure on expenses, and I think it's important that we acknowledge that, and that's what we've done here.
Charles Young (President and COO)
Hey, Charles, I'll just add on the renewal side. As you think through kind of portfolio mix and kind of the cohorts that come through, for renewal in the summer or in the, you know, peak season, if you will, or off-season in Q1 or Q4, we've historically really been strong at pushing out, trying to capture as much of that market that's out there. You think about the last couple of years on the new lease side, we've been in that high mid-teens, also on the renewal side. When these summer renewals come through, they're coming off a pretty high base.
We're just realistic on kind of what we can do, and as you get into the back half, while we still have good demand, there's an opportunity to capture where market is, as we didn't go out as high in those shoulder seasons, if you will. That's some of what you're seeing. I, I think we can see how it all plays out and what it implies, but it implies that generally we're still seeing good strong demand, and we're gonna do what we can to kind of capture where market is for these homes and that portfolio when it comes through of homes at the time.
Operator (participant)
Our next question comes from Tyler Batory from Oppenheimer. Please go ahead. Your line is open.
Tyler Batory (Executive Director)
Good morning. Thank you. Two follow-ups on the, the acquisition conversation here. What do cap rates look like on the MLS channel? Where are you bidding? Where are deals clearing the market? Dallas, just given some of the commentary on portfolio deals, some of the scale, you can build pretty quickly on those, plus some of the attractive pricing with your builder relationships. Does it make more sense to hold off on the MLS as an acquisition channel, perhaps conserve some of your capital for some of these other opportunities? I mean, you know, traditionally, channel agnostic, location specific has been a big part of the strategy, but wondering if maybe that might change, just given some of the opportunities that are out there.
Dallas Tanner (CEO)
It's great questions. I think you're basically just looking for color in that question of what we're seeing real-time MLS and how do we view that relative to some of these things. You know, look, painting a broad stroke on kind of the market, we've hit this in a couple different ways. If, in our markets, in the 16 markets that we operate, if we were active in the MLS today and really buying some scale, it would be in the low 5s, if not close to probably maybe a couple of markets might touch mid-5 once in a while, but not really. For us, we haven't been very active, to be clear. Really, the last four quarters, we've not bought very much, if any, you know, MLS property in the resale space.
We've been really just taking deliveries through our new product pipeline and our merchant build program, and then spending time talking to other operators around some of these kind of bigger opportunities where we can integrate scale much quicker. I do think that there is a bid-ask spread between where portfolios need to trade today and where scale in a one-off sense would occur. I think, you know, that's kind of the low 5s, as I mentioned before, if not inside of a 5 in some of these. Las Vegas, for example, you can't buy a home at a 5 cap. It's just next to impossible. It's all sub-5. Look, I don't view the MLS as a channel for us. It'll be one thing we're always looking at.
We write hundreds of offers every week at price points that we'd be willing to transact at. We're striking out quite a bit because that spread's so wide. I love the entry point that we're seeing in kind of the new builder stuff. Most of our pipeline that we're reviewing and putting in play right now is a little bit closer to a 6 cap, albeit the deliveries are expected, you know, call it a year to 18 months out on any new product that we're putting in contract. Yeah, it just feels like there's some dislocation. This should be when it's beneficial to be a REIT. We're lowly levered. We have access to capital. We still feel really good about our access to capital from a liquidity perspective.
We've got, you know, a platform that can handle chunks of growth like this and digest it, you know, very easily and build it right into our normal operating procedure, where we can bring in the ancillary services and everything else. You know, it's a good moment, a good chapter for us to see this kind of growth in today's market. I expect that we'll keep our nose down and keep trying to find other ways to create additional scale in the markets we operate.
Operator (participant)
From Linda Tsai from Jefferies. Please go ahead. Your line is open.
Linda Tsai (SVP)
Hi, thanks for taking my question. For your new portfolio, what's the average rent you charge for these homes, and how does that compare to the current rent of your existing portfolio? Just in terms of margin enhancement from integrating, can you give us a little more color on what initiatives you're thinking about?
Dallas Tanner (CEO)
On your first question, basically, in place rents, as we took these homes on, were around $2,200, which for the markets that these are comprised of, is about 10% greater than where our current average rents in these markets are. All accretive in terms of that. We do see the same embedded loss to lease in this opportunity as we do in our own portfolio. You know, somewhere between, call it 8% and 10% upside in our book, so. I'm sorry, I didn't get her last question. The last question, third part of the question.
Linda Tsai (SVP)
In terms of, margin enhancement from integrating into your existing portfolio, you know, just a little more color on what initiatives you're thinking about.
Dallas Tanner (CEO)
You know, it's too early to tell. In, like, our Texas markets, you know, we would basically grow the portfolio by 10%, and we wouldn't need to bring on really any headcount there. We would see, you know, additional expansion kind of in those two markets. In terms of like ancillary, that'll be a slow process because what we typically do is bring some of those services into play as leases revolve and renew. As Charles mentioned earlier on the call, as we get into the book and as we're actually operating it and updating leases and lease agreements, and updating our renewal pricing, that's when those ancillary services will be able to come in. That will integrate in 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)
Thanks for taking the follow-up. Charles, I was hoping you could expand on the weakness in pricing power and the new lease growth rates in Vegas you alluded to. What do you think is driving that specifically? Then maybe on a somewhat related topic, are you seeing notable increase in shadow supply from conversions of short-term rentals, Airbnbs, to traditional rentals in a Las Vegas or other vacation-heavy destinations?
Jon Olsen (EVP and CFO)
Yeah, I'll take your first question, last question first. Not really much impact on the shadow piece. It's out there. Frankly, it's always been there. I think it's a fair question, given the low interest rates and, you know, how homeowners may be approaching whether they want to sell or lease a home. We've always been competing against the market, and that's mostly driven by mom and pops. Again, we're just kind of operating within that dynamic. Going back to Vegas, you know, each market has its own dynamics. There's a couple of things going on. One, we've had a real spike in turnover, as I talked about, trying to get through the lease compliance.
The good news is the courts have started to open up and move faster, so we're competing against some of our own supply, to be honest with you. So that's put some pressure. But we're not the only ones operating in that market, so there's other supply that are going through the same backlog. That puts some extra supply in the market temporarily. We saw some of this in Phoenix last year and worked through it pretty quickly in a month or two. What we will see over time is trying to figure out if there's any kind of, you know, demographic change with Vegas in terms of people moving out of the market.
It's hard for us to get a good vision of that right now. Right now it's more around the supply that exists in our own book and our, and with others. We don't see it as, right now, a long-term trend. We'll work through this, and we'll see how it plays out over time.
Operator (participant)
Our next question comes from Jade Rahmani from KBW. Please go ahead. Your line is open.
Jason Sabshon (Equity Research Associate)
Hi, this is Jason Sabshon on for Jade. Can you please comment on the outlook for property insurance, and do you see a captive insurer as a potential solution for some of the rate increases that we've been seeing?
Jon Olsen (EVP and CFO)
Hey, thanks for the question. I will say that, you know, similar to what we talked about on our last call, while we don't love the extent to which our property tax, or sorry, our insurance bill went up year-over-year, I think we were very fortunate, you know, relative to what we've heard from some of the other REITs. I think that's down to a couple of things. One, we have a very favorable loss history. Our insurers have never lost money on Invitation Homes. The worst year they ever had was last year when they broke even.
Secondly, I would say that the, you know, the geographic dispersion and the granularity of the assets compared to, you know, traditional commercial real estate, which are big and chunky, certainly is, is a benefit in terms of risk mitigation. Lastly, I would say we're not coastal. I think if you put all that together, we feel really good about where we landed. I think for the third and fourth quarter, as we talked about on the last call, you should expect to see quarterly year-over-year increases in the neighborhood of 20%, with the full-year insurance expense line item being up a little over 16%. As far as captives and other things of that nature, look, we are going into next year's renewal.
We're gonna be evaluating a whole host of different alternatives because I think this is not a one-and-done type of situation. We've seen a lot of capacity leave the market. I think we've seen a lot of carriers who are trying to recoup, you know, fairly painful loss histories over the last several years. I think, you know, it's something to stay tuned to, but I can't give you any particular insight into what our strategy is gonna be for next year just yet.
Operator (participant)
Our next question comes from Daniel Tricarico from Scotiabank. Please go ahead. Your line is open.
Daniel Tricarico (Associate Director and Research Analyst)
Thank you. We're going back to Austin's question earlier. Jon, where do you think you could raise unsecured debt today? You know, credit spreads have come in recently, and, you know, you talked about your leverage being, you know, lower than your longer-term target. You know, do you view this as a good time to raise that kind of capital, or are dispositions, gonna stay the preference?
Jon Olsen (EVP and CFO)
Well, a couple of observations. Thanks for the question. You know, dispositions have been our, you know, most attractive cost of capital thus far this year. You know, we have sold homes year-to-date at an average stabilized cap rate of under 4%. Then we've been able to put that cash in the bank and earn 5%+. Then in the case of this portfolio trade, redeploy that capital into something with an even higher yield. We think that, you know, the prospects for accretive capital recycling, driven by strategic dispositions, you know, that has worked out pretty well for us. With respect to the unsecured markets, yes, it certainly does seem as though credit spreads have ground a little bit tighter.
With the GDP report this morning, I think the ten-year is probably gapping out as we speak a little bit. We're gonna continue to monitor the market. You know, we are constantly sort of keeping track of where we think a new deal might go off at a variety of different tenors. You know, it's just part of how we run the business regular way, is we wanna keep a very close eye on what, you know, the opportunity set looks like. We're always doing the work in the background to be in a position to move quickly if we think it makes sense to do so, and I don't think our approach is gonna change.
Operator (participant)
The next question comes from Jamie Feldman from Wells Fargo. Please go ahead. Your line is open.
Jamie Feldman (Managing Director and Head of REIT Research)
Great, thanks. Just two quick follow-ups. One, Dallas, you had mentioned, it's a great time to be a REIT. You know, part of being a REIT is being able to issue equity. I just wanna get your thoughts on, you know, equity as a source of capital today. Secondly, you know, as seems like the winds are kind of shifting and where the opportunities are, what are your latest thoughts on expanding outside the U.S., whether Canada or anywhere else in the world? Thank you.
Dallas Tanner (CEO)
Hey, good, great question. I think, you know, in terms of expansion, we're pretty consistent with saying this, like we run, you know, 12,000 units or 13,000 units in Atlanta as easy as we run, you know, 3,800 in Seattle. I think, you know, we'd love to see all of our markets get closer to, you know, 8,000 and 10,000 units. We see margin expansion, we see ability to offer different services. We can be, you know, our ProCare systems can all run a heck of a lot, you know, more efficient and we get better granularity and efficiency with scale in those markets. I would expect. You know, our first choice would be subject to an opportunity set, I guess, would be to just continue to build scale and density in the markets we operate.
We've also been on the record that, you know, we would like to own in some other markets over time. You know, you see that there's a little bit of you know, Nashville in this trade, and, you know, there are markets like Austin and San Antonio and Salt Lake City that we all find very appealing for a variety of reasons. I think internationally, it's a, it's a fun question to speculate on, but the reality is, most of these countries probably have more restrictive housing policies. Unless there were a real strategic opportunity or a reason to get in, I don't know why we wouldn't just stay in this great country that we have and amazing space for housing, and we can build it, we can buy it, we can improve it.
It's just, it's a very good place to operate and be a REIT. In terms of equity, and Jon just answered this, is how we think about the capital markets. Look, we think about our cost of capital daily in this business, and we try to hold ourselves accountable to being smart stewards of capital. I think we've gotten fairly good marks over time of being smart capital allocators. I like that we're disposing of homes that are non-core or in parts of the country that may be a little harder to operate at kind of a 4 or sub-4 cap, reinvesting that capital kinda in the mid-5s, pushing to a 6 on the new construction. That's a winning strategy right now, while the world's sort of funky.
It's been nice to see that our, you know, call it our share price, has gotten a little bit better, but it's not in a zip code that we're really thrilled about, and for kind of a variety of reasons when we look at where kind of, you know, home prices are actually trading. I think to Jon's point, you know, we'll probably watch the capital markets over time, see how those evolve. We'd certainly love to see good performance, buoy up our stock price even further. But we're comfortable recycling capital and being smart. As I said before, we're not gonna be afraid to do this stuff off balance sheet with partners that want access to SFR. We have, you know, current availability in our second Rockpoint venture of about $700 million.
I'd expect we'll start to deploy some of that over the coming year. We have an uncapped revolver, we're gonna, you know, still continue to generate good free cash flow in this business. Between dispositions and all that, I just, you know, reminded, I think we've got ample dry powder to go look at some of these opportunities and continue to try to grow the business.
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 appreciate everyone's support, everyone being on the call. We hope everyone has a safe rest of summer and look forward to seeing some of you in the fall.
Operator (participant)
The conference is now concluded. You may now disconnect.
