Invitation Homes Inc (INVH) — Q1 2023 Earnings Call Transcript

Good morning and welcome. I am here today from Invitation Homes with Dallas Tanner, Chief Executive Officer; Charles Young, President and Chief Operating Officer; Ernie Freedman, Chief Financial Officer; and Jon Olsen, EVP of Corporate Strategy and Finance and as previously announced, the company’s CFO beginning June 1st. Following our prepared remarks, we will conduct a question-and-answer session with our covering sell-side analysts. In the interest of time, we ask that you limit yourselves to one question and then re-queue if you would like to ask a follow-up question. During today’s call, we may reference our first 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 will now turn the call over to Dallas, our Chief Executive Officer.

Good morning and thank you for joining us. We are pleased to report a strong first quarter result yesterday afternoon, reflecting a great start for the year. Average same-store occupancy improved 50 basis points over the fourth quarter to 97.8% and new lease rent growth has accelerated sequentially every month so far this year. We are encouraged by the execution of our teams and remain bullish on our industry and our business. As long-term fundamentals continue to be favorable, bolstered by our superior balance sheet and liquidity and backed by our best-in-class platform, we will seek to continue to deliver sector-leading NOI growth as we have done for the past five years. Since our inception, we have matured and performed through a variety of operating and macroeconomic environments, including a global pandemic and record high inflation. Throughout this time, we have witnessed the resilience and the relative strength of our business. This is illustrated by a great chart from John Burns Research and Consulting that we included in our March Investor deck. This data shows that over the past 40 years, national SFR rent growth has historically stayed positive even during recessions. In addition, in a recessionary period, we would expect that our business could see a reduction in move-outs and a benefit to occupancy and that external growth opportunities can become more attractive. For these reasons and more, we believe single-family leasing is one of the most stable property types in real estate. The Invitation Homes offers one of the best risk-adjusted return propositions compared to other commercial real estate sectors. To start, supply and demand fundamentals continue to favor our business. On the demand side, this includes the demographic surge of the millennial generation who have begun reaching our average resident age of 39 years old. But it also includes individuals and families of all ages who desire the flexibility and convenience of leasing a single-family home. Like all of us on the call today, our residents value great schools, proximity to growing job centers, access to transportation corridors in desirable neighborhoods for their families. They usually need or want more space with a garage and a yard to better fit their growing household and to have more room for a home office, a kids play room, and their pets. More importantly, today’s residents are requesting flexibility and choice, along with the appeal of a down payment light lifestyle. Further driving the demand for single-family home leasing is the rising cost of homeownership, as well as the lack of inventory of for-sale housing. According to John Burns March data, and weighted by our markets, the monthly cost of owning a single-family home remains on average over $900 more expensive than leasing that same home. Others have calculated an even higher cost of ownership versus leasing. On the supply side, the U.S. continues to suffer from a shortage of housing. With the shortfall in supply relative to demand estimated to be in the millions of units. Like most economists, we think the best way to improve housing affordability is to grow the U.S. housing stock, and more specifically, by encouraging the development of new housing supply. This important work really needs to begin at the state and local levels, including planning and zoning boards, and we stand in strong support of those who want to bring positive change in this regard. In fact, we see ourselves as part of the solution to increasing housing supply through our new product pipeline that is now approaching $1 billion. We will continue to seek out responsible opportunities to add supply and as a result, help improve housing availability and affordability. In consideration of these fundamentals, we believe leasing a home is a great option for anyone who wants all the benefits of living in a home without the hassle or expensive homeownership. And we believe Invitation Homes offers the best service platform and locations for residents to choose from. One reason for this relates to a core belief we have held since the early days of our business that we could revolutionize the single-family resident experience by professionalizing resident service. In short, we took a decades-old antiquated mom-and-pop model and transformed that based on the needs and desires of a 21st-century resident. As part of that approach, we continue to expand our service offerings and look for new and better ways to enhance the simplicity and convenience of the leasing lifestyle. At the same time, we continue to explore ways to improve efficiency through size and scale. We also remain focused on growing our portfolio accretively over the long term, and more importantly, in locations where we would expect the most favorable long-term fundamentals. With regards to growth, we have committed to being prudent capital allocators through all real estate cycles. For the first quarter of 2023, this meant being a net seller of homes disposing of 284 wholly-owned homes for gross proceeds of $95 million and buying 181 wholly-owned homes for $62 million. For the most part, we have recycled capital out of less desirable homes and into brand new well-located homes as part of our new product pipeline. We believe our strategy of partnering with the best home builders is a superior approach to investing on a risk-adjusted basis as it keeps development and its associated risk, including an expensive land bank and high general and administrative load off of our balance sheet. At the same time, our strong balance sheet and current liquidity, including joint venture capital allows us to remain nimble and as opportunities arise, we will be ready. Before I close, I want to speak to the continued dislocation between the retail pricing of single-family homes and public market valuations. Strong demand for housing continues to support home prices in our markets and at our price points. While the lock-in effect, which existing homeowners are discouraged from giving up their lower mortgage rates, is keeping resale supply relatively low. We have seen evidence of this supply and demand imbalance when we list our homes for sale and received multiple competing offers at great prices. We believe the resilience of the U.S. housing market in the current cycle has been underestimated over the past year and that the protracted supply and demand imbalance for single-family housing continues to provide good structural support for home prices just as it does for rent growth. Lastly, on the topic of sustainability. I hope you have taken a moment to read our new progress overview, which we published last month. It’s available on our sustainability webpage and includes information about our efforts to increase the quantity and the quality of our ESG disclosures. This includes new greenhouse gas emission disclosures and an opportunity for engage stakeholders to participate in an online survey to share their thoughts and their ideas with us. We welcome this feedback. My thanks again to all of our teams for their hard work, dedication, and commitment this past quarter and for the remainder of the year ahead. Our associates are the heart and soul of Invitation Homes and we appreciate how they embrace the responsibility to deliver the highest level of service to our residents and strong results for our shareholders. Our plan is to keep pushing to be great here. With that, I will pass it on to Charles, our President and Chief Operating Officer.

Thanks, Dallas, and good morning, everyone. I’d like to begin by thanking our associates for starting off the year strong. I am really proud of the efforts you display every single day to ensure that our residents feel heard, served, and appreciated. I will now review the details of our first quarter operating results. I will start with same-store core revenues, which grew 7.7% year-over-year. This growth was primarily driven by an 8.5% increase in average monthly rent and a 7.3% increase in other income. These results include some encouraging signs, over half of our markets are now operating in a more normal course of business in terms of timely rent payments and resolution processes. For our other markets, progress continues to move in the right direction as we work through these lease compliance backlogs. These improvements were reflected in our first quarter bad debt, which beat our expectations by holding flat with our fourth quarter reported results even as rent assistance declined by over half during the same period. This indicates to us that residents are returning to a more normal payment pattern post-COVID. We have also seen stronger demand return following the winter leasing season, with new lease rent growth accelerating sequentially each month during the first quarter. Overall, for the first quarter, same-store new lease rent growth came in at 5.7% and same-store renewal growth was 8%, resulting in blended rent growth of 7.3%. Our preliminary April results show further acceleration in the new lease side to 7.5% with renewals at 7.2% and blended at 7.3%. Preliminary average occupancy in April was 97.8%. Turning back to our first quarter same-store results. Core operating expenses increased 14% year-over-year, representing a favorable result compared to our initial guidance expectations for the first quarter expense growth in the mid-teens. The year-over-year increase was driven by an expected year-over-year increase in property taxes due to robust home price appreciation. In addition to the under accrual of property tax expenses in the first three quarters of 2022, as we have previously discussed. Expense growth was also impacted by progress we have made in working through more of the lease compliance backlog compared with last year, as well as higher vacant utility costs and rates and continued inflationary pressures. Taken together, these results led to first quarter growth in same-store NOI of 5% year-over-year. Our teams continue to pursue various ways to improve our efficiency and resident experience, with technology upgrades frequently topping the list. For example, we continue to put mobile technology into the hands of our residents. This includes a mobile experience for maintenance, which we have spoken about previously. This has been a great success with residents using it to send us over 40% of maintenance requests. In addition, we have also just launched a new mobile experience for leasing. That enables prospective residents to create a profile, save searches and view their favorite houses. In today’s mobile-first world, these new mobile experiences are game changers for our residents and us. Many thanks to all of our teams for working diligently to manage all the details of our business this past quarter, while staying focused on resident service and operational excellence. I believe we are well-equipped and energized to carry the positive momentum you have begun through our peak leasing season and the remainder of the year. I will now turn the call over to Jon Olsen, the company’s next Chief Financial Officer.

Thank you, Charles. I am excited to join you all today. I have been part of the Invitation Homes team since 2012 and I am honored to have been named CFO upon Ernie’s departure next month. Ernie has led our finance organization for the past 7.5 years, and in that time, he has overseen tremendous growth and many important milestones for the company. We have both here in the room this morning to answer any questions you may have following our prepared remarks. I will begin by covering our financial results for the first quarter and then provide an update on our investment-grade-rated balance sheet and liquidity position, before wrapping up to open the line for questions. As we have stated, our first quarter results were in line with or slightly ahead of our expectations and offer a solid start to the year. Core FFO for the first quarter of 2023 increased 9.5% year-over-year to 0.44 per share, primarily due to an increase in NOI and AFFO increased 9% to 0.38 per share. Our full-year 2023 guidance remains unchanged from the initial guidance we provided in February as we are still early in the year. Next, I will cover our balance sheet and liquidity position. We believe this is an area of strength for us, not only in comparison to how far we have come since our public listing over six years ago, but also relative to many of our investment-grade peers today. In the six years since our IPO and merger, we have applied a consistent and measured strategy to delever the balance sheet, improve the laddering of our debt maturities, refinance secured debt with unsecured debt, unencumbered assets and lower our net debt-to-EBITDA ratio. We ended the first quarter with over $1.3 billion in available liquidity comprised of our unrestricted cash and undrawn revolver capacity. We have no debt reaching final maturity before 2026, and at the end of the first quarter, over 99% of our debt was fixed rate or swapped to fixed rate, and nearly three quarters of our debt was unsecured, with over 83% of our homes classified as unencumbered. Our net debt-to-EBITDA ratio improved from 5.7 times at the end of 2022 to 5.5 times as of March 31st. In recognition of the great work by our team and the meaningful progress we have made, in March, S&P Global Ratings upgraded our issuer and issue level credit ratings from BBB- to BBB flat. In addition, last week, Moody’s Investors Service revised our rating outlook from stable to positive. In closing, we are pleased to start the year strong and believe our favorable fundamentals, best-in-class operating platform, dedicated associates and strong balance sheet position us well to continue delivering solid results. On behalf of everyone at Invitation Homes, we extend our thanks to Ernie for the enormous impact he has made and look forward to furthering the legacy he helped build. With that, Operator, please open the line for questions.

Oh! Hey. Sorry, guys. It’s Josh Dennerlein. Sorry about that. In the opening remarks, you mentioned demographics influencing demand, and it sounds like you expect sector-leading NOI growth to continue as a result. I guess could you maybe walk us through the demographics that you have seen coming through your portfolio today and how that’s impacting your outlook?

Yeah, this is Dallas. One of the things we have been most optimistic about is the consistency in the fundamentals of our customer base. We have observed strong credit quality and solid personal balance sheets, and importantly, an increasing duration of stay. Over the past decade, we have observed that customers are staying with us for around 40 months on average. This trend is evident on the West Coast, and our Eastern markets are quickly catching up. When considering this group, it’s clear they desire a leasing lifestyle with flexibility. Charles mentioned this in his opening remarks, highlighting the mobile-friendly environment we all live in. This is very favorable for those seeking choice and flexibility while keeping down payments low. Our underwriting of customers continues to show strength, reinforcing that the demand side of our business remains very healthy. We have significant interest in properties as they become available, with plenty of pre-leasing activity, and we haven’t seen any real degradation in our customer base to date.

Thanks. Dallas, you have talked a lot about the lock-in effect on interest rates and what it’s doing to sale inventory and ultimately, transactions. Just curious whether you can see anything that would change that going forward or should we ultimately just expect a pretty depressed level of acquisitions for a long time?

Well, I think there’s two questions in that question. So, the first piece on the lock-in effect with 80%-some-odd of mortgages being sub-5%. It has probably caused a lot of us and people that are in the market for housing to think about staying put, which I think has also impacted some of the resale supply. It’s had a positive effect in our business, because I also think it’s helping support longer duration of stay, demand, etc. I think in terms of your question around the retail market and what we would expect from sellers? Yeah, there’s no doubt that if people are in a mortgage today, if you acquired it or you refinanced in the last 36 months, it’s an asset for folks and so that may have an impact on resale supply. Good news for us is our focus the last couple of years has been building out a much more robust new product pipeline, which today sits close to $1 billion and we are really excited about that product as it’s coming into our portfolio, both this year and years beyond. I think the resale environment has been limited the last three years to four years. It hasn’t really been a source of truth for people as they have tried to build up, call it, their base. Fortunately, for us, we have real scale in markets. I think where we may see other opportunities down the road this year could be as we see some of these smaller operators who are having trouble getting scale or sizing up; there could be opportunities where potential M&A over the next couple of years. So I think we will stay aggressive in our new product pipeline; we are obviously always looking at things as the resale market changes but just being ready and I think we have a position to do that.

Great. Thanks and good morning. I am just curious if you guys are surprised at all by the strength in new lease rate growth year-to-date, which you highlighted has accelerated each month and surpassed renewals in April. And I am just wondering if that enables you to back off a bit on renewals to limit turnover and help control costs and if you could provide an update on loss to lease; that would be helpful as well? Thank you.

Yeah. This is Charles. Thanks for the question. Yeah. Look, we have seen really healthy demand here in the first quarter and while we expected it to be solid, it’s a little bit out ahead of our expectations, which is great. The funnel is strong; we have been able to grow occupancy by 50 basis points from 97.3% to 97.8%, while as you mentioned, accelerating new lease rent growth. Renewals still have been really strong. We have been in the mid-7s and that’s slightly above where we thought we would be, and we have maintained that in April in the 7s. And as you look forward, May and June, we went out in the mid-7s on our ask and we will see where that ends up. You have been asking the right question, there is a balance here as we have seen this demand and trying to balance off the lease compliance backlog that we have been working through to make sure that we maintain strong occupancy. But right now, we like the kind of balance that we have, the optimization and demand to catch up when we do turn over a home because we are slightly up on turnover but historically low numbers still in the 22% range. We will see how the summer plays out; we are slightly ahead of expectations and optimistic going into the summer. And then the last question around loss to lease. We have updated it today to about 5% to 6% loss to lease.

Thank you for taking my question. I would like you to elaborate on the expense aspect of your outlook. Are there any specific areas where you feel less confident, such as insurance, taxes, utilities, or repairs and maintenance? Additionally, could you provide a timeframe for when you either did or will renegotiate your insurance for the year? Thank you.

Sure. Thanks for the question. This is Jon. Our insurance policy period runs from March to February. So we have now put our new insurance policy in place. Recall that on our last call, we talked about our expectation for the property policy being up somewhere in the neighborhood of 20% to 25% year-over-year. The actual policy came in right in the middle of that range, actually a little bit closer to the bottom end and as we have talked about in the past, the other insurance line items showed smaller year-over-year increases. So our expectation for the balance of the year is that for the next three quarters, we will see the insurance line item be up in the neighborhood of 20% year-over-year and then for the full year, we would expect insurance to be up about 16% year-over-year.

Yeah. Thanks. Good morning, everyone. On the property tax front, I noticed that it was down 3% from the fourth quarter. Can you talk about what that’s related to? Is it lower appraisals or appeal wins or is there something else going on there?

Actually, no. So recall that last year, in the fourth quarter, we talked about having been under accrued for property taxes in the first part of 2022 and so we had a fairly sizable catch-up entry in the fourth quarter. So what you can expect to see this year is much higher year-over-year property tax increases in the first three quarters of the year and then moderating in the fourth quarter and we have said that we expect property taxes to be up in the range of 6.5% to 7.5% for the full year.

Thank you. First, congrats to Jon and Charles for new roles. And Ernie, I guess, a lot of you will be missed. To go back to your comments earlier on, I think you mentioned you have been working to find a responsible way to help add more supply. I am curious if you can elaborate on what that means. Are you inclined to do more development partnerships or even do it on balance sheet? And if I could sneak in one, can you comment on the new SEC increase on page 55 of the 10-K, the inquiry into your compliance with building codes and permitting requirements? Thank you.

Thanks, Haendel. I will comment briefly on your last, which is we don’t comment on any other legal matters other than to say that we always fully cooperate with any inquiries we get. In terms of new product pipeline and the opportunities there. Today, we have been really cautious and careful around not putting the balance sheet in a position where we would have to take maybe more of an egregious share of the risk in terms of how we want to build product. We really like our approach thus far. We are doing a lot of different underwrites and reviews on opportunities in the marketplace across a variety of builders and develop potential partners. It’s well noted that we have a really good partnership with Pulte Homes. We will continue to do as much with Pulte as we can. They have been terrific. And I would say that with the announcement of that partnership, roughly 18 to 24 months ago, it’s expanded to many other builders and developers coming to us looking for opportunities to grow together. So we have been able to be deliberate, we have been able to be picky about where we want to invest and why, and I think we have been able to do it at a risk basis that is very favorable to our shareholders in terms of not having an outsized portion of risk, a bunch of land sitting on our balance sheet, etc. And by the way, I’d just add, like very little general and administrative load. It’s synonymous with our investment management team here. We have added a couple of people over time on the business guest side and also on the project management side, but it’s going really well and we are coming into these homes at a really accretive basis that we feel good about. Excited to see where that continued chapter for our company develops and has greater magnitude.

Thank you for the question, and best wishes to you, Ernie. I appreciate all the support over the years. I wanted to ask about bad debt on both a gross and net basis. Could you walk us through how gross bad debt in Q1 compares to Q4, and then do the same for net? Additionally, could you highlight any geographic areas or markets where gross bad debt is still worse than pre-COVID levels? Which markets are currently outliers in this regard?

Yes, this is Ernie. Concerning bad debt, we noticed that the rent assistance we received in the fourth quarter was halved in the first quarter. We have observed a significant improvement, as indicated in our earnings supplemental, with the zero to 30-day payments rising to 93% for the first time in a while. This reflects a positive change in gross bad debt, despite receiving less assistance than we had anticipated. In fact, collections for the zero to 30 days performed slightly better than we expected, allowing us to address more issues in the first quarter than we initially thought. This was noted in our earnings release, which mentioned that the results for the beginning of the year exceeded our expectations. While it's still too early to claim this as a trend, we are pleased with the performance for the first three to four months of the year. I will now turn it over to Charles to discuss our observations on a market-by-market basis.

Yeah. So, as Ernie said, we have starting to see kind of a return to normal and all trends are generally positive and this is why rent assistance has gone, was half of last quarter and 20% year-over-year. So we have starting to get back into a normal rhythm. In terms of markets, about half of our markets are operating at their historic levels, which are great. There are a few markets that, because of kind of the lease compliance backlog in the courts and that it’s a little slower SoCal being kind of the largest of that. But the L.A. County, L.A. City adjustment is favorable and we will see how that plays out. There’s still kind of the courts are backlog there. So it will take a little bit of time to clean up. The other markets that are a little slower are Atlanta, Las Vegas, but that’s changing and adjusting quickly in NorCal Vista, California courts as well. Then we have another handful of markets that are trending in the right direction but not quite back to historical levels. So, we feel like we have moving in the right direction and things are kind of working themselves out. And as we talked about on the last call, we knew bad debt was going to be elevated in the first half of the year and we have trending nicely, and we will see if we can continue to keep that momentum, and by the second half, we will be trending back towards where we want to be in cleaning this in.

Hey. Thanks for the time. Dallas, I want to circle back to the lawsuit. I know your views haven’t changed where you do not think it has merit, but curious if the internal views have changed at all when trying to size the potential impact, if you have wrong and things go South in court. So can you help us give us a sense of whether your views have changed on the potential financial impact for shareholders?

There is no change in our views. And again, we have really careful guys. We don’t want to comment on any pending litigation. But, no, it’s just the same, John. And we will continue to defend ourselves vigorously and we believe that the claim is really without merit.

Thank you. Question on the builder pipeline, it looks as though some of the 2023 and 2024 deliveries were pushed out to the following year with the recent release. Can you comment on the different components driving that? Thanks.

It’s just timing on projects more or less than anything. I think, by and large, everything that we expected to take from a delivery perspective this year is on schedule and then some of it has to do with timing in P&C and some of the zoning commission things that we mentioned in my earlier comments.

Hi. Thanks for the time. Just curious if you could speak a little bit more on the acquisition side. Are you seeing any potential distress from some larger portfolio owners given the change in rates and some financing may be coming due? And as part of that question, maybe if you can just comment on where you see cap rates today for assets that are transacting and how does that compare to your in-place cap rate thinking about your own cost of capital?

Hello, Juan and Dallas. Regarding our balance sheet, we are not satisfied with our current cost of capital, which seems undervalued in real estate terms. We have been clear that we plan to expand our joint venture business and attract external capital. We can still find quality real estate opportunities, both in new constructions and resales, and possibly in M&A. This is beneficial for the REIT as it generates various fee structures that contribute to funds from operations for shareholders. Presently, the market for new homes indicates that purchasing volume is around the low to mid-5% cap rate for stabilized properties. However, there are limited significant opportunities in the resale market. Contrary to expectations, the residential market has not imploded over the past year; instead, we have seen reasonable price stability in single-family housing. New home construction currently accounts for a third of the resale market, significantly higher than the usual levels, supporting transaction activity as builders adjust mortgage rates. We are not witnessing much distress among operators. There could be opportunities for those without enough scale or a substantial portfolio, as growth may become more challenging. Scale will likely become more advantageous in the coming years, benefitting companies like ours in the REIT sector, where we maintain low leverage and access to various capital sources. Over the past 12 years, we have successfully found ways to grow, and we see opportunities ahead. As I mentioned earlier, we are prepared. With our current cash, ventures, and credit availability, we have a couple of billion dollars ready to invest when the right opportunities arise; for now, we are focusing more on recycling our capital.

Just on your JV dispositions, what was the driver and what was the average cap rate on what was sold?

On the JV disposition, the question?

On the JV dispositions, this is Ernie. The dispositions are from our legacy Fannie Mae joint venture, and the plan for that joint venture over the coming years is to gradually sell homes, primarily when they are not renewing. Therefore, you can expect to see a steady stream of sales each quarter as we move forward. Regarding other JVs, we just completed the investment period for the 2020 Rockpoint JV, so we are quite a ways off from any sales there. For the 2022 Rockpoint JV, we are still in the investment period. In terms of what we've been selling at Fannie Mae, the number is small and consistent with what we have on the balance sheet.

Hi. Thank you, guys. Dallas, I guess just going back to the transaction market, I’d be interested in what you think breaks the stalemate, because you have sitting here with a cap rate that’s not all that attractive, but fundamentals are good; you have able to sell at an easy cap rate, attractive cap rate, it doesn’t sound like inventory is going to be coming to market with a lock-in effect. So other than the long end of the curve coming down and debt costs coming down, which probably brings with it some economic challenges. What changes the confidence of everybody out there to just transact that this is the new norm?

I believe it's important to focus on yields that are sensible. Our shareholders wouldn't want us to aggressively pursue yields that aren't very beneficial. The past year has been challenging for private operators looking at recaps or financing, which may create opportunities for us. We have the right strategy with our new product pipeline, as upcoming deliveries are expected to yield significant returns even with the current capital costs. The market will unfold as various factors come into play. The decline in long-term rates and improved credit access might stimulate transaction activities, particularly in retail. Additionally, our new product pipeline and potential mergers and acquisitions in the resale market could contribute to a more normalized activity level. Many single-family rental operators have paused to assess housing prices, seeking stability and price durability in the market. It seems that this stability is emerging, and now it’s about finding and acting on those opportunities.

Yeah. Thanks. I think Charles had provided maybe the April renewal. I am just curious if I missed it; did you talk about where renewals were going out for May and June? And maybe secondly, could you just maybe comment on some of the larger occupancy drops like Las Vegas, and I guess, what are you seeing in some of the markets where the occupancy drop more than the portfolio average?

Sure. I previously mentioned the renewal rates. For May, we were in the mid-7s and in June, we were in the mid-to-high 7s, and we expect this trend to continue. Given the current demand and occupancy levels, we're in a solid position. Regarding your second question about Las Vegas, it has faced some challenges with bad debts, but the situation is improving, leading to a slight increase in turnover, which is putting some pressure on occupancy. Minnesota also experienced below-average performance due to previous lease compliance issues and the impact of seasonality in colder weather. However, we're starting to see improvements in both markets, maintaining occupancy in the high 96s, which is acceptable. Overall, due to healthy demand, we believe we'll quickly return to stable conditions, while other markets are performing well in the high 97s to 98.

Hi. This is Adam on for Sam. Thanks for taking my question. I wanted to circle back quickly to the lease growth discussion. We were really encouraged by the lease acceleration, especially on the new lease side going into peak leasing season. I was wondering if you have seen anything driving that demand besides the demographic shifts you have already discussed, and adjacent to that, you mentioned some technology upgrades. Are there any new initiatives that could possibly help ancillary revenue on that side?

Overall, the demand for our product is very strong, influenced by our location, schools, and safety. It's noteworthy that the reasons for purchasing a home are currently at their lowest in some time. We've been managing that alongside some turnover. Given the current interest rates, it's expected that people in need of a single-family home will turn to us, which we've observed. Approximately 80% of our clients had rented before, and about 77% were coming from a single-family home prior to joining us. All indicators suggest positive trends and strong demand. As we approached Q1, we positioned ourselves well for the summer. While we recognize the realities of the past couple of years, we feel optimistic as we enter this period, aware that we may not experience the same meteoric rise as during COVID. However, with our current occupancy and the progress we've made, we feel confident moving forward.

Hi. Good morning. This is Lee in on behalf of Chandni. Thanks for the question. So could you talk more about the turnover expense overall, especially on the resident turnover? Like, how much of it was from normal seasonality and inflation and how much of it was impacted by working through the lease units in California? And what’s your expectation on the growth for the rest of the year? Thanks.

Thanks. Great question. This is Jon. Look, on turnover, there are a few factors at play here. The first is that you have seen a year-over-year increase in turnover rate and that’s related to what Charles walked through, which is the return of our markets to more normal course mechanisms related to delinquency resolution. The second component is that the average cost per turn on those delinquency turns, as we talked about on the last call, can be materially higher than a regular weight turn, sometimes to the effect of 40% to 50% more costly and it would follow that they are likely to also take a little bit longer. I think the other less influential factor is that, as Dallas talked about, with average length of stay elongating, you see a little bit more kind of normal wear and tear even in our regular way turns. But I think those are really the primary drivers coupled with continued inflationary pressure that we have seen in our markets. As for the balance of the year, as we have talked about, we expect to see somewhat lower occupancy in 2023 than we did last year. That’s primarily related to our expectation for a little bit higher turnover and the expectation that it’s going to take us a little bit of time to work our way through our lease compliance backlog. But I think big picture, we are very optimistic about how the business is performing.

Hi. This is Jason Sabshon on for Jade. Does leveraging new investments make sense at this point or is it best to stay unlevered and figure out financing later on?

I can address part of this. We are quite pleased with our leverage profile. We have put in significant effort to improve it to a level that is much better than five years ago when we went public. We have utilized more leverage in some of our initiatives, which was my intention, and we have been strategic and deliberate about how and when we do this. Overall, the cost of debt is reasonable right now, even for an unsecured borrower like us. Therefore, I do not see leverage playing a major role in our immediate strategy for funding our growth.

Great. Thanks for taking a follow-up question. I guess I just wanted to get your thoughts on NOI margins. I mean year-over-year, they have clearly declined in most markets; sequentially, they have a little bit more mix but definitely picked up for the portfolio overall. I mean, how do you see this trending through the course of the year or even beyond, now that you have got a better handle on the expense side, especially with insurance and taxes and a pretty good view on revenue as well?

Yeah. I think it’s a good question. We have seen a little bit elevated expense here in the first three quarters of this year for all the reasons we have talked about previously and that’s going to put a little bit of pressure on margin for us, at least for the first three quarters of 2023. I think over the long-term, what you have seen from our business is sort of a steady improvement in NOI margin over time, as we have been able to extract more and more efficiencies in terms of how our property management platform operates, continue to harvest the benefits of our unrivaled scale in markets. So I think we continue to be bullish about our ability to drive NOI margin higher over the long-term.

Thanks. I just have one follow-up on the turnover and repair and maintenance conversation, Jon. So far this year and starting out in the spring and summer, the trajectory of R&M and turnover are trending in line, better or worse than you originally expected heading into this year?

I think they have been trending generally in line with what we have expected. I think, overall, we have performing relatively well, maybe a little bit ahead of our expectations for the year, but it’s early in the year, right? So we want to continue to see how things develop, but I would say that we feel good about what we have seen on the cost to maintain side of things.

Thanks. It’s actually Nick Joseph here with Eric. One of your Sun Belt department companies mentioned on their call that you thought the starts had come down about 60% from current levels. So wondering kind of historically, when you have seen big swings in apartment deliveries, what’s the impact on single-family rental operations?

That’s an interesting question. We haven’t seen a lot of it and there’s sort of two things on there. One, our customers are a little bit different. I mentioned duration of stay and Charles talked about it as well that we have customers that are anchoring around schools and transportation corridors, so the customer profile is a little bit different. And then on a price per square foot, SFR is so much more affordable, generally speaking, than comparative multifamily. So it’s really not an apples-to-apples comparison.

Yeah. Thanks. Good morning. Sorry if I missed it, but I just wanted to double check. I know you maintained your operating guidance for the full year for operating expenses. Should we expect any kind of outsized impact in the second quarter just because of some of the extreme weather we have seen, especially in some of the Florida market? Does that change how you have been thinking about the progression of operating expenses throughout the year, even within the maintained guidance?

No. I don’t think we have anticipating a material impact related to weather patterns. I think right now what we have seen in the business is a business that is sort of recalibrating as some of the structural impediments to us operating the way we normally would work themselves out over time. I think weather is something that we are always going to have to deal with. I think we feel good about the processes we have in place, the ground game that we roll out to make sure that we are protecting our assets and that we are well insured in the event of some sort of catastrophic events. But I would say that the impact is not expected to be significant.

Hi. Thank you. Question on Phoenix and Tampa. I think two markets that people were concerned about given a lot of the supply growth both on the multifamily and the single-family side. Are you seeing very strong rent growth there, so maybe comment on those two markets?

Yes, this is Charles. I can provide an update. Tampa has performed exceptionally well for us, achieving over 8% growth in new lease rents in Q1 and maintaining mid-8% growth on renewals. Although Phoenix saw a slight dip in Q4 compared to the strong performance last year, it has quickly rebounded, reaching 98% occupancy and experiencing 6.3% growth in new lease rents, placing it among our top five markets. Phoenix is a resilient area, and we are fortunate to have excellent operators there, similar to what we have in Tampa. Overall, Florida has shown robust performance, with strong demand driven by demographic changes.

We appreciate everybody’s participation and look forward to seeing everyone at upcoming conferences. Thank you.