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Invitation Homes Inc
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Greetings and welcome to the Invitation Homes Second Quarter 2021 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. At this time, I would like to turn the conference over to Scott McLaughlin, Vice President of Investor Relations. Please go ahead.
Good morning and welcome. Joining me today from Invitation Homes are Dallas Tanner, President and Chief Executive Officer; Ernie Freedman, Chief Financial Officer; and Charles Young, Chief Operating Officer.
During this call, we may reference our second quarter 2021 earnings press 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 in any such statements. We describe some of these risks and uncertainties in our 2020 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 to the extent available without unreasonable effort in our earnings release and supplemental information, which are available on the Investor Relations section of our website.
With that, let me turn the call over to Dallas.
Good morning and thank you for joining us today. Last night, we posted our second quarter results, closing out a very strong first half of the year. The current fundamental tailwinds we are experiencing are among the best we have seen and we anticipate that these will stay with us for the foreseeable future. Demand for our high-quality, well-located single-family homes, continues to greatly exceed supply, as shown by our high occupancy and retention rates. Today, there are nearly 90 million people in their 20s and 30s in the United States. We expect this population surge to be heading our way for many years to come. As this segment of the populations form families and seek out more space and homes to live in, we see Invitation Homes as a part of a comprehensive housing solution that helps serve those who prefer the convenience and lifestyle of renting a single-family home.
With our integrated platform delivering a first-rate resident experience and efficient operation, we believe we are well positioned to meet the rising demand for our product through continued growth. In this regard, we significantly enhanced our multi-channel strategy this past week with the announcement of our new strategic relationship with PulteGroup, the nation’s third largest homebuilder. Our preference from the beginning has been to partner with the best homebuilders rather than compete with them directly, and this strategic relationship greatly strengthens that approach.
Over the next 5 years, we expect to buy approximately 7,500 new homes that Pulte will design and build and have already identified the first 1,000 homes across 7 communities located in the Sunbelt region. We love the approach of acquiring great product in great locations across a diverse subset of communities that will further enhance our risk-adjusted return profile for our investors. We look forward to welcoming our new residents into these neighborhoods, where families who both lease and own homes build the communities together. We are pleased to collaborate with Pulte in the important next chapter of our builder partnership story. It’s an exciting time as we invest to bring new homes to the market, complementing our other acquisition channels.
Now, outside of our announcement with Pulte, we bought almost 1,600 homes so far this year through June 30 for $569 million. We are over halfway to our $1 billion acquisition target for this year. We remain confident that we can achieve our target during the second half of this year. Directing us in our effort is our three-pillar strategy of location, scale and eyes in markets. These differentiate us from our peers and support the acquisition engine we have designed and perfected over the last decade.
Our first pillar, location, speaks to our focus on select markets with high population and job growth that offer good schools and easy access to employment centers and transportation corridors. Location is a major driver of outperformance as evidenced by our West Coast and our Sunbelt markets. The second pillar is scale. With about 5,000 homes per market on average, our scale is industry leading and extremely difficult for competitors to quickly or easily duplicate. And our third pillar is being high touch with eyes in markets. This refers to our local team of experts who oversee our resident services, leasing and investment decisions. Our eyes in market go beyond desk-bound associates and algorithms by investing with local insight and relationships in order to find the best homes at the best price. Together, these three pillars support our proven track record of disciplined growth and support our philosophy of genuine care.
We think our occupancy of over 98%, turnover of only 25%, average length of stay now approaching 3 years, and high resident satisfaction scores are amongst the strongest indicators that our teams are delivering on our mission statement. Together with you, we make a house a home. We have lived out that mission in both good and challenging times. During the last 16 months, some of our residents have faced significant hardship. We have helped provide peace of mind to those who have been struggling by providing flexible payment structures, waiving late fees, assisting in securing rental assistance and forgiving past due balances. We have consistently gone above and beyond and I couldn’t be prouder of how our teams have supported our residents and communities during these challenging times. We will continue to follow all government directives, laws and regulations at the national state and local levels. And we will continue to go beyond what is required and work with those impacted by the pandemic, because that is who we have always been and that is who we will continue to be.
Finally, I would like to wrap up with some thoughts on sustainability. We are continuously taking the steps necessary to be a responsible steward who encourages discussion, innovation and action amongst our peers, associates in the industry. Earlier this month, we announced our investment in Fifth Wall’s Climate Tech Fund, which is seeking solutions to reduce carbon emissions from the construction, ownership and operation of real estate. In addition to investing in future solutions, we continue to rollout initiatives to help limit the company’s carbon footprint and the environmental impact of our homes. These include our smart home technology, that help residents manage their homes and save up to 15% on their energy bills and our air filter home delivery program that provide better air quality and improve HVAC efficiency. Looking forward, we are focused on identifying new opportunities to advance further long-term sustainability efforts.
In conclusion, I would like to recognize our nearly 1,200 associates across the country. You continue to be the driving force behind the value we create for both residents and shareholders. And I am grateful for your dedication to that mission. We could not be prouder of the work we are doing together to provide homes for tens of thousands of families who need or prefer to lease a home today.
With that, I will now ask Charles to discuss our second quarter operating results in greater detail.
Thanks, Dallas. I’d like to begin by echoing your thanks to our associates for providing another quarter of exceptional care to our residents who place their trust in us to make the leasing a home friendlier and worry-free. Our positive momentum and focus on residents have resulted in another great quarter operationally on both the revenue and cost side. With outstanding fundamentals in our markets and excellent execution by our team, same-store NOI grew 8.4% year-over-year in the second quarter. Same-store core revenue was up 5.9% year-over-year driven by strong rental rate growth, continued strong occupancy and improved other property income. In addition, our collections came in at 99% of historical levels in the second quarter. On the expense side, expenses remained in check during the quarter. Same-store core expenses in the second quarter increased only modestly up 0.9% year-over-year aided by continued low turnover.
Next, I will cover leasing trends for the second quarter. Year-over-year renewals increased 230 basis points to 5.8% and new leases increased 1,110 basis points to 13.8%. This drove blended rent growth to 8% or 470 basis points higher year-over-year. Same-store new and renewal lease rates have grown over the prior month every month this year. At the same time, same-store average occupancy came in at 98.3% in the second quarter and 80 basis points higher year-over-year. In fact, June was the ninth consecutive month that all 16 of our markets averaged above 97% occupancy.
There are two main factors supporting our high occupancy. The first factor is continued strong demand for our high-quality and well-located homes. Included within that are favorable demographics and fundamentals that Dallas mentioned earlier. In addition to these, the need for more space remains the number reason for moving into our homes. The second factor is our continued improvement in our days to re-resident. During our first quarter earnings call, I told you that the number of days between when a resident moves out and a new resident moves in had decreased significantly to 29 days. We reduced this even further during the second quarter to only 23 days. Our goal is to make finding a new home and signing a new lease as simple as possible, and we are continually trying to improve ways we can lease quicker and move in faster.
One of the ways we are doing that is through technology. Prospective residents are able to review floor plans and conduct virtual tours online, with a large majority choosing to do so on their mobile device. When a vacant home is available for an in-person tour, we are happy to work with their preference of doing either a guided tour or a self-tour using our smart home technology. But most of the time during the second quarter, our available homes were pre-leased to a new resident before that home was even rent-ready.
With residents staying longer in our homes at such high occupancy, we are pleased to reintroduce our ProCare home visits in the second quarter after a temporary pause during the pandemic. As a reminder, ProCare is our unique proactive approach to serving our residents from move-in to move-out, including post move-in orientations, proactive service trips and pre-move-out visits. We believe regular proactive visits help us identify opportunities for both R&M and turn savings and provide an enhanced experience to our residents.
In summary, thanks to the great work of our teams, we believe we are well positioned for the second half of 2021 and we are excited to keep this momentum going. We remain very focused on delivering outstanding service to our residents and outstanding results to our stockholders.
With that, I will pass it along to Ernie.
Thank you, Charles. Today, I will cover the following three topics: first, balance sheet and capital markets activity; second, financial results for the second quarter; and third, updated 2021 guidance.
Regarding our balance sheet and capital markets activity, we had over $1.1 billion in available liquidity through a combination of unrestricted cash and undrawn capacity on our revolving credit facility at the end of the second quarter. Earlier this month, we gave notice of our intent to settle conversions of our 3.5% convertible notes with common stock. We expect the $345 million of notes to convert into approximately 15 million shares on or before the maturity date of January 15, 2022.
Post our announcement, to-date approximately $177 million of notes have converted into approximately 8 million shares of common stock. We anticipate the full conversion will reduce cash interest expense by approximately $12 million on an annualized basis, and on a Q2 pro forma basis, result in an improved net debt to EBITDA ratio of 6.7x, down from 7.0x on an as-reported basis. This will leave us with no debt maturing prior to December 2024.
We also announced back in May that we closed $300 million of privately placed senior unsecured notes. The private placement jumpstarted our goal of transitioning toward a higher proportion of unsecured debt and improved the laddering of our debt maturities. It also came on the heels of receiving investment grade ratings from three of the rating agencies in April. We remain committed to further strengthening our balance sheet and are pleased with the progress we have already made since achieving investment grade.
Turning next to our financial results for the second quarter, core FFO per share increased 14% year-over-year to $0.37 and AFFO per share increased 16.9% year-over-year to $0.32. These results exceeded our expectations. Based on our latest forecast through the remainder of the year, we are raising our full year 2021 same-store NOI growth guidance by 100 basis points to a range of 6.5% to 7.5%. This increase includes a 50 basis point increase in same-store core revenue growth in a range from 5% to 6%, while maintaining same-store core expense growth guidance in a range from 2.5% to 3.5%.
Finally, we have increased our guidance for full year 2021 core FFO by $0.02 at the midpoint to $1.44 per share and increased full year 2021 AFFO by $0.02 at the midpoint to $1.24 per share. As Dallas mentioned at the beginning of our prepared remarks, we believe our differentiated strategy of focusing on location, scale and eyes in markets is the best formula for our business now and into the future. When coupled with a strong balance sheet, a robust internal and external growth model and an unwavering commitment to resident care, we believe Invitation Homes is best positioned to deliver outstanding results to our residents and stockholders.
With that, let’s open up the line for Q&A.
[Operator Instructions] And our first question will come from Rich Hill of Morgan Stanley. Please go ahead.
Hey, guys. Good morning. Congrats on another good quarter. I wanted to just go back and talk about the guide a little bit. And Ernie, I am sorry if I missed this in the detailed prepared remarks, but could you maybe walk us through what you are assuming for bad debt and other income in the second half of the year? I recognize in 2Q other income turned into a good guy and bad debt was neutral. Just trying to understand a little bit how conservative those numbers might be in the second half of the year relative to the guide?
Sure. Thanks, Rich. Yes, specifically with other income and bad debt, you are right to point out that other income became a bit of a tailwind for us in the second quarter, because we had a comp where last year in the second quarter, we didn’t charge any late fees. And now we are charging late fees where permissible pretty much across the portfolio again, where it’s allowed. We expect that to continue here into the second half of the year. So, you should have a very good comp for the second half of the year and other income that was similar to what we saw in the second quarter. With bad debt, we were pleased to see that we saw some improvement a little bit faster than we thought we would. And we thought the second quarter was going to have more of a headwind. With regards to bad debt comparing to last year, we ended up coming in at the same number. You may recall last year, Rich, in the second half of 2020, we saw bad debt go into the low 2% range. We do expect that we hope and baked into our guidance that bad debt will continue to improve off the number that you saw in the second quarter. Still staying above our historical average of about 40 basis points significantly, but trailing down more into the mid-100 range, maybe a little bit better as we get to the fourth quarter. So that should be a tailwind for us, but this continue to be a tailwind for us, we would hope as we go into 2022 as well.
Got it. And then moving to the expense side of the equation, it looks like expenses are going to be a little bit higher in the second half of the year. Some of that has to do with seasonality. But I also think if I remember correctly, some of this has to do with insurance costs and then maybe a little bit higher turnover. Do you think there is any scenario where the expense – the assumed expenses in the second half of the year could test the low end of the range or said another way, what would drive it to the low end of the range and give you confidence that could maybe be a little bit lower than what it implies at the midpoint?
Yes, that’s a good question, Rich. Yes, there is certainly absolutely scenarios where we can do better than the point in the range and maybe get down to the low end or maybe even do a little bit better. We do think in the second half of the year, the expense numbers will be higher for really the following reasons. One, we had a really good second quarter real estate tax number that you might have seen on a year-over-year basis as we had some refunds come through. We expect to get back more to where we expected the run-rate to be for real estate taxes during the second half of the year, which is probably about a 4% increase year-over-year. And that’s coming off of basically that 1% number that you saw in the second quarter. The real estate taxes are the biggest component of our expenses. They are almost 60% of our expenses. We do think turnover will continue to maybe – well shouldn’t continue – could increase year-over-year. We haven’t seen that yet this year. So we have built that into our guidance that we do expect a year-over-year increase in turnover. We will just have to see if that comes to fruition. Insurance costs, as you pointed out, are running higher than they were last year, up about 7%, which is I think industry leading in the residential space. I think most people are seeing increases in the 20% to 30% space in the residential world with insurance. So, that’s worked out pretty well for us. So, we hope that we will have a similar performance that we saw in the first and second quarter, where things came in a little bit better than we originally thought. We are going to certainly try hard to do that. But we wanted to lay out something that we thought gave us – where we thought things could potentially come on in expenses and just look to outperform like we’ve had so far this year.
Got it. That’s helpful. Dallas, just one more question from me, I am curious what you’re hearing about homebuilders. With similar partnerships relative to what you just announced with Pulte, is this sort of something that you can replicate on a much larger scale? And I’m asking really from – I suspect you would have done a lot of these over the past 5 years if you could have. But are you seeing much more demand from the homebuilders to do these? And is this just a template that could take you from 7,500 homes over the next 5 years to something incrementally higher than that?
Well, good question, Rich. First and foremost, I think we’ve talked about this really in the last few quarters. We work with a variety of builders generally speaking in the past. And we’ve done stuff with both public, private builders, boutique builders in different markets. The Pulte relationship has continued to develop over time. Ryan Marshall and I got to know each other a couple of years ago, and this is something that we’ve been working on in a spirit of partnership to try to figure out how can we really move the needle for both companies over time and distance. And so I think it’s the right start between us and a partner like Pulte, where we can help them in ways that they can be, as Ryan mentioned on his call, a little bit more aggressive maybe on some bigger parcels. And we – and they can certainly help us and that we can have a partner who’s an expert at what they do, help us with future delivery pipelines in parts of the country that we can be a bit picky about. So is it replicable? Perhaps. Maybe also it can go beyond what we’ve already talked about. So I think we’re excited about it. It doesn’t preclude either company from doing business with other parties. But it’s meant to be strategic in nature. We’re going to collaborate and find ways to take these first 7,500 and hopefully grow it well beyond there.
Great. Thank you, guys and congrats on continuing to put up some nice growth here.
Thanks, Rich. Appreciate it.
The next question comes from Jeff Spector of Bank of America. Please go ahead.
Good morning. Just a follow-up on the Pulte announcement. Can you discuss a little bit more how it will work? Are they building the homes specifically for rentals, meaning better materials or anything different than they normally do? And I guess, the margins – how does this exactly work for you?
Well, first of all, they are really good at what they do generally, right? I mean they are the nation’s third largest homebuilder. They build tens of thousands of homes every year. I think what is strategic for us is to have the ability to appreciate and understand future pipeline and where some of those opportunities may be, to collaborate on floor plans and fit and finish standards that are incrementally helpful to us as a single-family rental operator. And I think more importantly, we’re bringing additional supply into the marketplace beyond what perhaps Pulte would do in a given year. This is meant to be incremental growth for both companies. So all that you described there really is some of the finishing details of why partnerships like this can make sense. And I think more importantly, it will kind of come in a variety of buckets. There will be neighborhoods where we’re buying homes that are part of a broader sales effort by Pulte. So our renters will have neighbors that own their homes, much like our portfolio exists today. There will be opportunities where we can cluster and do some things from an efficiency perspective that will allow us to have maybe better efficiency standards that could create margin expansion, to your earlier point. And then I think there will also be parts or entire parts of communities that can lend themselves to rental, which will allow us to test and try some different service standards for our residents over time and distance. All meant to be collaborative, all meant to be in the spirit of partnership with Pulte. And really not all that different from our approach with builders in the past, except that we can be in on the ground floor much earlier in a much bigger scale.
Okay, thank you. And then I know that you have several important data analytic initiatives. I just find it so interesting. Every quarter, we talked about increasing demand and average length of stay continues to increase. Anything else you can share with us what you’re learning on whether it’s your new customers or those that are staying through your data initiatives?
Yes, this is Charles. I mean what we’ve been able to track really from both marketing and data is what’s driving the demand for our homes. And as we talked about in previous calls, we’ve been serving our residents as they come in. And it’s interesting that, I said in my opening remarks, that they are looking for more space, about 27% are moving from cities to the suburbs. We’re also seeing a trend of people coming from out of state into our markets like Florida, to the Southeast, Atlanta, Carolinas, even into Texas coming out of some of the western states. So that data is all leading towards us seeing an uptick in our average length of stay that is moving. As we talked about, we expect to be around 3 years. And each month, each quarter is getting a little longer. So we continue to watch that data as well as other things that are making it – so we can make sure we’re creating great opportunity for our residents. Most in – foremost is it’s the great locations of our homes. And frankly, that is – the portfolio was built originally, and that’s what’s driving the demand, good school districts, safe neighborhoods of well-located homes.
Thanks. And then my last question, a follow-up, I guess, on that point is just I know location, of course, matters and it’s critical, but demand is strong. It seems like for single-family rentals throughout the country. Are there more markets you’re looking to enter?
Yes, great question. I mean, look, if you look at our current footprint, we’re seeing household formation at almost 2.5x the U.S. average. So your point about demand is spot on. The country continues to move further south. And we’ve been pretty vocal about the fact that we would like to be in a few other markets, maybe over time. Salt Lake City would be a market that is one that we’ve looked at Austin. We’ve always liked, when we were in Nashville, we just didn’t love the product. So I do think there will be opportunities in the future, hopefully, that will allow us to maybe have a little bit more market expansion. But again, taking a step back, remember, our scale matters. It’s one of the three pillars we focus on from an investment perspective. And so expect us to continue to invest in the markets that we’re in and drive that additional scale, which will then enhance our overall return profile for shareholders.
Great. Thank you.
Thanks.
Next question comes from Sam Choe of Credit Suisse. Please go ahead.
Hi, good morning guys. Just going back to the Pulte relationship, so when you receive those new homes in future years, are you planning on receiving them in communities or is it more spread across select markets?
It’s a combination of the two. So within a community, we may – and I’m just using an example of Pulte, were to build 600 or 800 homes in the community, we may be a buyer of 100 to 150 of those. And then there may be other communities where they can be clustered or spread out in much smaller numbers. It just depends on the opportunity set.
Yes, Sam, what’s going to happen is Pulte will bring forward to us well before they move forward with the project, the opportunity. And we will sit down with them and will negotiate on a project-by-project basis, whether we’re interested and what makes sense for both parties in terms of how much we would participate in that project. And then that will just go into the pipeline for us. So you’re going to see things that are going to be delivered on a community-by-community basis. And over time, we will see a buildup in the various markets we’re working with that. But it’s very much on a project-by-project basis. It’s how the delivery schedule will be set.
Got it. So I mean, I was just curious because like for those community-based acquisitions, I guess, could there be potential for amenity fees being incorporated in those?
So what typically happens is in HI will be set up in a community. And if we’re a part of a community, then just like we have with HOAs currently, if they have amenities in our current homes across the portfolio that would be setup that way. If we were to buy an entire community, then something will be established with regards to that entire community that we’d be responsible for at that point.
Got it. Okay, great color. One more for me, just looking at your two JVs, could you remind us how the portfolio construction differs for Rockpoint and Fannie?
So the Fannie JV is very much of a JV that came – that’s a historical JV that came over from the merger. And that has homes in Nevada, California and Arizona. And it’s really kind of in its wind-down phase, but it will take a few years for that to happen. At this point, I think it’s less than 500 homes or around 500 homes. And each year, we’ve been selling between, say, 50 and 150 homes out of that. The Rockpoint JV, the geographies there will be more similar to the portfolio that we have today here in Invitation Homes. That JV is not going to focus on every market, the 16 markets that Invitation Homes invest in, but it’s going to focus on more between 8 to 10 markets. So that will be a little bit more of a geographically diverse portfolio. And that’s a growing portfolio, and that will continue to grow likely over the next year to 1.5 as we have a 3-year investment horizon for that JV.
Got it. Appreciate the color. Thank you guys.
Yes.
The next question comes from Haendel St. Juste of Mizuho. Please go ahead.
Thank you. Good morning out there.
Hey, good morning, Haendel.
So, another one on the strategic partnership with Pulte, I was hoping you could discuss a bit more – provide a bit more color on some of the targeted yields or IRRs, thoughts on funding. And I understand your comments about scale. I guess I’m curious, would you be open to entering new markets via this partnership because their platform – I guess their footprint is a bit more expansive than yours.
Yes. I mean, to answer your last question first, yes. I mean I think one of the benefits of this partnership will be we could look at new markets together and it would give us a meaningful approach to scale, which you know for us, Haendel, is really important. – to offer the suite of services like ProCare and some of the other benefits of being in our portfolio that are derived from that position of strength being scale. In terms of the return profile, it’s very similar in terms of how we’ve been buying for the last couple of years. We think that we can find what we think of as stabilized yields in the 5s in parts of the country that are – you’re going to lend themselves to that outperformance, both from a home price appreciation perspective as well as where we believe rate will go over time. I think that the one net benefit that we probably haven’t had historically would be just the new product side of it, right? With builder warranties and updated fit and finish standards that are exactly how we want them going in, that will be a strategic chip for us, so to speak, as we think about OpEx and CapEx over the long haul in some of those communities.
Fair enough. Appreciate that. I guess a question on California, your portfolio there. I think you’re at around 18%, 19% of NOI, I believe, still a pretty large exposure down from where it had been. But I’ve heard a number of others in resi land talk about culling portfolios there, getting some really good pricing. So I guess I’m curious about your long-term view on your California exposure. Are you perhaps open to actively culling and could that be a source of funding for perhaps some of the Pulte investments?
Well, first, in terms of culling in California, we’ve done a little bit of it, right? When homes get really, really pricey, a lot of times, there is a higher and better use for that capital, to your point. And we will sell and recycle that capital in another part of the market where we can find a risk-adjusted return that makes sense. Taking a step back, though, we love being in California. We think it’s a differentiator. What we mentioned in our release, one of our first projects with Pulte looks like it’s going to be in Southern California. We want to continue to invest in California and create additional affordable housing solutions for those markets. And so there is a lot of benefits. Obviously, it’s got a great economy. And the Prop 13 advantages are really special in terms of how you can think about property tax growth and things like that. So all of that we do is a net positive. But again, to your point, sometimes it is a very expensive place from a real estate perspective and on occasion as things get too pricey, we have sold. But that’s – I wouldn’t say it’s a core focus for us by any stretch of the imagination right now.
Got it. Got it. Thanks. And lastly, if I could, just on the days to re-rent, Charles, kudos getting that number down more than perhaps I would have thought a year ago. So here you are sitting at 23 days in the quarter. I guess I’m curious overall, and not to sound like we’re not impressed, but how much better can that get? It sounds like you’ve mined out a lot of inefficiencies using technology really well. I guess I’m curious what the remaining opportunity and how do you get there? Thanks.
Hey, Haendel, good question. No, we’re really proud of the teams and what we’ve been able to do on the days of re-resident. We reduced at about 13 days quarter-over-quarter. We got here through a combination of great execution on reducing our turn times, keeping aged inventory down. And the majority, I brought it up in the comments, around pre-leasing. Technology has helped there. I think we’re driving towards what we hope is a new normal. I can’t predict how much lower we’re going to go, but we’re going to push. And I think it’s on consistently getting that pre-leasing done and using the technology there. We do have some markets, when you look, across 15 of our 16 markets are in the 20-day range, which is really impressive. And you have a couple of markets that are in the teens, again, high occupancy, low turnover, all of that leads towards it. So we’re in a really good environment, and we’re going to do our best to sustain if not get better. But it’s a constant work by the teams. They are doing a great job.
Fair enough. Thank you.
Thanks, Haendel.
The next question comes from Nick Joseph of Citi. Please go ahead.
Thanks. Sorry if I missed this, but for the Pulte relationship, what’s the total capital outlay over those 7,500 homes?
Yes. Nick, we haven’t disclosed that. We are looking at projects all across the country. So we could be at dine homes that are in the high $200,000 range up to the mid-400s, for instance, the deal of California is going to be at a higher price point. So we don’t know yet exactly what that’s going to be, but I think the way to get a good sense for it is take a look at our average home price that we’re purchasing today across our portfolio, and it’s going to be in that ballpark as we think about all the different markets we’re going to work with them on.
Thanks. That’s helpful. And then you mentioned the potential for margin expansion for some of the clustered homes. Can you try to frame that versus just a normal home within the portfolio?
Yes. I think because – yes. I mean, because we have such good scale, we think it should be incremental. I think what’s going to get very interesting is we think about amenity packages, things we can do there, additional revenues we can potentially get by having the clustered homes. And of course, there could be some efficiencies. We don’t expect to change our operating model. I know some people in the build-to-rent world outside of the single-family world where they are hiring multifamily operators are putting people and staff on site. We’re not sure that’s going to be – that would be necessary, and we think that would be inefficient. So I think it’s just – it’s not going to be hundreds of basis points. It’s probably going to be in the 10s to maybe a little bit better than 10s of basis points, where we think with the clustered opportunities, it’s just going to overall enhance what we can do from an operating perspective.
Thanks.
Thanks Nick.
The next question comes from Rich Hightower of Evercore. Please go ahead.
Hi, good morning guys. Thanks for taking a couple of questions here. Just in – I’m looking at results for occupancy in the quarter and how strong that’s been. Is there an optimal level of occupancy that you’re targeting as you think about the strength in new lease growth as well? How do you sort of optimize those variables?
Yes. It’s Charles. It’s a constant balance. I mean the optimization is the right word. We have lots of really smart people, and our field teams on the ground working in tandem to try to find that right balance between occupancy, new lease rate growth, renewal rate growth. And we’re at that balance given the demand that we’re seeing for our product right now. I thought that we might be a little lower than 98%. I’m pleased that we ended the quarter at 98.3%. Seasonality would typically take us a little lower this time of year. You can see our new lease and renewal rent growth, we are trying to find that proper balance given that we ended the quarter a new lease at 13.8% and renewals at 5.8%. So we’re still kind of calculating in there, and we will see how it balances out. I expect that we might go down slightly on the occupancy side. But with the demand that we’re seeing and what we’re doing on the days to re-resident, as I talked about earlier, we’re controlling what we can control and the demand is there. So we will keep watching it. Again, this is a unique environment that we’re in and the teams are doing a really good job of executing right now.
Got it. Yes. It’s definitely a high-class problem.
Sure.
And then just a quick follow-up on renewals in Seattle, obviously, that’s sort of the outlier last quarter on the low side. Can you confirm that there are still regulatory caps in place? Or what’s the situation out there?
So there were regulatory caps for Q2, and you can see that in our number. As we’re going into Q3, they are starting to loosen, and into the fall, so you’ll start to see that come up. We’re trying to be thoughtful, and we’re watching it. There is also been kind of start to pull back and then move back and forth. Each of the states have been monitoring that. But we’re at a place now where we’re going out with more normal ads on our renewal side. So you’ll start to see that come up later in the year. We will see how it plays out.
Okay. Thanks, Charles.
Thank you.
The next question comes from Brad Heffern of RBC. Please go ahead.
Hey, good morning everyone. [Technical Difficulty] It seems like those homes would just naturally have to be more suburban than the existing portfolio. I guess, first of all, is that correct? And then does it represent sort of a strategy change? And how does it affect the expectations for density and growth?
No, on the strategy change. And I think the balance, if you look at where they build and develop, they do have a lot of infill projects. But I think there are some opportunities in the parts of markets where we already currently invest capital, that one of the first transactions that we put in contract with them is – lays over nicely with a bunch of stuff that we already own in Atlanta. And so no, it does not change the strategy shifts at all. I mean the reality is we want to continue to buy probably a little bit more expensive home that’s a little more infill in nature. There are certainly parts of markets where you are seeing the potential for high growth that could be a little bit more suburbanish. But at the end of the day, that’s not our model. We want to try to invest capital in parts of the country that are going to lend themselves to that continued outperformance. Keep that occupancy up to Charles just talked about. But I think more importantly, it’s evidenced in our lease rates. The real estate we own tends to be more infill along all those important factors like transportation, quarters, jobs and schools. And therein lies quite a bit of demand, so we are going to stick to that playbook.
Yes. Okay. Very clear. And then how incremental are these acquisitions? So obviously, you are not going to give ‘22 guidance, but is the ‘22 acquisition budget become $1.5 billion instead of $1 billion because of this deal or is there some overlap?
No, it’s definitely incremental. But you are right, Brad, we can’t give guidance. What I would tell you is it depends on what the opportunity set is for all of our channels because we are location-specific channel agnostic. So, it’s a little bit hard to predict today what things may look like next year with regards to buying off the MLS, having – buying from the iBuyers and things like that. But this really is an incremental source for us. It’s not going to replace other things that are available to us.
Okay. Got it. And then I apologize if I missed this in the prepared comments. But Charles, do you have any stats for blended lease growth in July or any other color you could give on those lines?
Yes. What I would do is we gave you – overall, Q2 was phenomenal, blended came in at 8.0, our new lease 13.8, renewals 5.8. We ended June or ended every quarter of the month accelerating. So, June ended at 16.2 on the new lease side, the renewals 6.0 and blended 8.8. What we are seeing in July, we are not all the way there yet, is further acceleration. The demand is still there, it’s healthy. And we are seeing a similar trend. So, we will see how the rest of the quarter shapes up, but it’s a good start to the second half of the year.
Okay. Thank you.
The next question comes from John Pawlowski of Green Street. Please go ahead.
Thanks a lot for the time. I wanted to stick with the conversation on scale and what it means for operating margins. But within the existing portfolio, Charles, as you look at your markets and maybe the smaller markets, are there still any markets where you know you could operate at meaningfully higher margins if you had 25%, 50% greater homes?
Yes. I mean we have some really great markets that Dallas and team are buying in the Denver, the Seattle, Dallas, even in the markets like Phoenix, where we have good scale, we want more. And so the way we have our operating model set up is we can add in these incremental homes and not necessarily have to add more headcount until we start to get significant size or add significantly more homes. So, it’s really a healthy model, and our teams know how to do it. It’s utilizing technology. It’s being thoughtful with our repair and maintenance and turn side, using the technology there. So, the markets where we are at 3,000, we would love to double. In Phoenix, we could add 2,000, 3,000 more. You can see it, which shows up in our Atlanta market. We are really performing well with 12,000 homes there, and we can add more there as well. But it’s a – that’s a good testament of where we get really efficient. It’s one of our more efficient markets in terms of headcount and how we are able to perform. And it’s showing up also in their occupancy and rate growth that they have been able to get this summer. So look, there is lots of markets that we are looking at, and Florida has been healthy for us as well. I know we are looking at some markets there in terms of expansion. So, we like where we are buying, and we think it all helps, especially as we continue to be thoughtful around how we load in technology and get more and more effective and efficient.
Okay. And then there is a few of those smaller metros, you referenced Denver and Seattle. Again, if you double those markets, are we talking another point in NOI margin, less, more, just any sensitivity would be helpful?
Yes, John, it’s a good question. I think it’s – for us to quantify precisely is a little bit challenging. I think in the ballpark, like you said, I could certainly see that we could improve margins by a point or 2 points as we get more scale for sure.
Okay. Last question for me, it’s around policy risk. So, I know the sector has never had an easy battle on the public relations front, but it does seem to be getting worse in terms of media headlines and maybe some national government oversight. But at the local level, is there any policies coming down recently enacted or in the hopper that’s making your lives more difficult in buying homes?
No, not at the local level.
No, John.
State national level?
Okay, no. No in terms of buying, no. I mean, in terms of growth, no. It has more to do around just how you manage your properties and everything else. But no, on the growth side, there is nothing.
Q - John Pawlowski l
Okay. Thank you.
Thanks.
The next question comes from Keegan Carl of Berenberg. Please go ahead.
Hi guys. Thanks for taking the questions. I think first, can you just remind us how you determine what gets placed in the wholly owned bucket versus the Rockpoint JV when you are looking at specific markets that the JV is targeting?
Yes. So, we start right there, Keegan, where we came into negotiation with the JV partners of what markets they were interested in investing in. And then the second step was we then talk about proportions of what assets will go wear. So, in markets like Atlanta, where we have a high concentration on our balance sheet, as we find – we agreed that as we sourced homes in markets like Atlanta, we would maybe do three homes out of four homes to the JV and the fourth home and go to the balance sheet. In markets where we are under-scaled and we were just kind of talking about on the last question, like Denver and Dallas, we go the opposite direction. We came to an agreement that we would do three out of four on the balance sheet versus the JV. And then as the local team source those homes, they have no idea where it’s going to go. And it’s really just an algorithm that runs behind the scenes that says, alright, if the Invitation Homes balance sheet got these – the three homes that just closed, the fourth home goes to the JV and then we just run the same thing. Most of the markets are 50-50. I just want to differentiate you understand how it works. But it really is just kind of behind the scenes and multiple closings happen on a day, we put them in alphabetical order. And we just – we closed them into each entity based on that.
Okay. That’s very helpful. Thank you. And I know this came down to scale in the past, but do you guys regret selling out of Nashville given the current market dynamics? And I know it was touched on earlier, but what would really drive the desire to reenter that market?
Well, I mean taking a step back at Nashville, I think, was less than 1% of our overall revenue, so no regrets, because we didn’t love the product type. And we talked about at the time. We did really well on the sale there. We would like to be back in Nashville at some point with the right product. So, what would it take to get back there, I think just having enough scale and having a vision that it makes a ton of sense. Sometimes when you think about markets, with Nashville specifically, it’s a pretty small market from an MSA perspective, but very high growth. And there is challenges to getting the right kind of scale in the right parts of the market without being diligent in how you do it. So, hopefully, someday, we will get back into that market through a trade or an opportunity to enter. But there are some markets all around there like Charlotte and a few others that we have been able to really scale up instead of applying capital in Nashville.
And Keegan, to Dallas’ point, we got a very nice price when we exited Nashville for product long-term. We have redeployed that capital in the markets that are growing faster than Nashville at very good price points at that time when we redeployed. So, it’s certainly worked out fine from us from a trade perspective.
Alright, great. Thanks for the time guys.
Thanks.
The next question comes from Jade Rahmani of KBW. Please go ahead.
Hi. This is Sarah Obaidi on for Jade. Thanks for taking my question. My first one is does the Pulte agreement represent any shift in location strategy and can you speak to how those homes will sit with any broader footprint, and your comments on any locations you are targeting?
Yes. Those answers are in line with what we have said earlier on the call, which is no change in shift in terms of approach of where we are buying. A lot of the communities that we will be buying in lay up nicely relative to product we already own. I think the net benefit of having that new product, obviously, is that all of your hard fixtures and everything are brand new. You have got builder warranties and I think a partner that we can also work out floor plans and some of the other fit and finish standards that we care about, so all net benefits to our existing strategy.
Thanks. And my second question is how much of a priority is growing the investment management business? Is there a target for assets under management or aggregate number of homes?
Look, we talked about the Rockpoint JV as one that was pretty opportunistic. And it’s got a limited shelf life to it in terms of the capital that has been committed to that opportunity set. But we are always going to look for opportunities to enhance shareholder returns if they make sense. You don’t compete with our core interest. So right, we don’t have a set target of what we would like to do. But Ernie and I, and we have talked about this over time and distance that there could be different vehicles that are available to us over time or different seasons of investing that could make sense in a JV structure, so.
That’s great. Thanks so much.
Thank you.
The next question comes from Ryan Gilbert of BTIG. Please go ahead.
Hi everyone. Thanks for the time. First question is for Charles. I appreciated your comments on July. Do you have a sense of where occupancy is shaking out in July? And I guess, more broadly, what’s your view on 2021 exhibiting typical seasonality versus seeing another extended leasing season like we saw in 2020?
Yes. Good questions. We ended on average Q2 at 98.3%. As I mentioned before, these summer months, you are typically going to see a little higher turnover and occupancy is going to come down. As I have been looking at it month-to-month, I think July will come down a little bit, but we are still going to be in 98%, so it’s still really healthy. We will see where further months go. If you think about seasonality, these are really healthy numbers that we are putting up for the summer. And I do expect that we are going to see some form of typical seasonality where it will slowdown in Q4. But we are coming off high numbers, so it’s a relative slowdown. And so we will see what that looks like. But at the end of the day, the holidays happen and all that will be there and I think it is going to – you are not going to have people moving as much. So, you will have a little bit of a slowdown, but we are coming off a really nice basis relatively.
Okay, got it. And then second question is on expenses. I appreciate that lower turnover, lower days to re-resident is really helping out on the controllable expense side. Do you have a sense of what the underlying material and labor inflation is in controllable expenses?
Yes. We are watching it. We are not immune to what’s going on in the market from both the material and labor side. It’s part of the market. So, we are looking at that. We were – it’s market-by-market as well. And we have seen a little bit of the staffing challenges and demand for our talented folks. So, as you – we have given our kind of guidance change. Any of those costs are baked into those – into our guidance at this point. So, we will continue to monitor if it ends up being material. But if you look at it, we have put up good numbers to-date, things are trending well. But it’s something to pay attention to, not only for the second half of the year, but going into next year.
Okay. Do you have a sense of the magnitude? Maybe just a very broad range would be helpful.
It’s hard to tell. It’s coming from different places when you think about materials. Our procurement staff is amazing. And so we are able to buy from a national level using our scale. So, that helps us. So, that’s going to mitigate some of it. And then at a local level, it really kind of comes down to what’s our staff turnover. We have seen a little bit, but nothing that’s out of the ordinary during the summer months. So, it’s hard to quantify it. I wish I could give you that, but it’s hard to put specific numbers on it. But right now, it’s not having a material impact when you think about what we put out for our guidance change.
Okay, great. Thanks for the time. I appreciate it.
The next question comes from Dennis McGill of Zelman. Please go ahead.
Hi. Thank you, guys. First question, just on the Pulte arrangement on pricing, at what point in the process do you negotiate price or how is price negotiated? And is there any point where that would change dependent on market conditions?
As Ernie kind of talked about before, Dennis, we look at these projects on a project-by-project basis. And our teams are able to negotiate directly with Pulte on each of those upfront. So that is, I think, a really simple and clean way of doing this, where it’s on a project-by-project basis. And the teams have a familiarity with each other. They know what kind of product we are going to want to look at, what kind of submarkets make the most sense for our business. So, that’s already kind of been figured out. And it obviously just gets smoother, the more you do these repetitions together between the two companies. So, that’s how it exists today.
Right. And I guess to the degree that market shifts one way or the other, does that price just remain fixed or is there a sensitivity to the market?
Without getting into the details, no, I mean, we look at being fair to both parties and making sure that we have structures in place that represent that, so.
Okay, got it. Second question, on the acquisitions in the quarter, both wholly-owned and joint venture, can you give us a sense of how that breaks down by channel?
Yes. Plus or minus, majority of this quarter was one-off. We talked about this in the first quarter call that we would expect velocity to pick up through the latter part of the year. And second quarter was much bigger than first. And just a little bit of a heads up, July is looking really healthy, we will probably be north of $200 million for just a month. So, we would expect the third quarter to be pretty strong as well. So, majority of which is still just kind of one-off acquisitions, either off-market through MLS or some of our local channels.
And so that would exclude new and iBuying as well?
Yes. I mean…
Those are small.
Yes, we had a little bit of it. I would say 80%, 90% of second quarter was basically one-off transactions.
Okay. Perfect. And then just last one, I guess, as you kind of listen through all the data points and understand how robust everything is, it’s easy to see how strong the business is. But when you look out over the next 12 months, 18 months and think about risks that you need to be mindful of what comes to mind for you running the company and trying to balance kind of opportunity versus the unexpected risks?
Yes, I think we have talked about a couple of them on the call. Charles and their team are doing a great job of trying to stay ahead of procurement cost, cost of goods sold, some of the volatility that’s kind of happened over the last year with the supply chain has been tricky to navigate. I think we have done a really good job of it, but it’s caused us to think about how do we hedge some of those risks in the future differently. We obviously worry about public perception and some of the false narrative that’s out there around what companies like ours are doing. Our teams have done a fantastic job of really navigating the pandemic, working with residents and making sure that we stay apprised of their needs. But I think lastly, we want to make sure that at the local level, state levels, we are pretty active in the conversations around housing opportunity and what it is that we do. California is always a little bit tricky. Mark and his team do a good job of staying in front of the legislative issues that happened there at the state level. But it feels like we are always kind of moving around between what states doing what and how and why. And those are kind of the things that we really want to stay ahead of. Because it’s – every market behaves a little bit differently, both with the product that we buy, how we operate it and then what some of the other kind of market-driven dynamics are. And so I think those are the things that we spend a lot of time as a management team talking about and trying to make sure that we stay apprised of on an – apprised on an operational perspective. But we don’t want to get comfortable. I want to be really clear like we want to continue to grow the business. We want to find ways to continue to innovate for the resident experience. And that’s really more, I think, what we spend time worrying about is how do we not get flat and make sure that we are still pushing ourselves to bring the best service and quality standards to the resident.
Thanks for that. Good luck guys.
Thanks Dennis.
The next question comes from Tyler Batory of Janney. Please go ahead.
Hi, good morning. I appreciate it. I will stick to one question here. Acquisition cap rates, any movements one way or the other, just given where home prices are and some of the competition that’s out there? And any perspective on what yields might look like the rest of the year?
Yes. We signaled on this a little bit last quarter on our call. We have traditionally kind of been in the mid-5s with the products we are buying. With some of the price increase, we have seen that kind of go into kind of the low to mid-5s. So, I think we have been somewhere around 5.2, 5.25 on a blended basis of what we have been buying in Q2. And that feels like the market right now. Fortunately, we are seeing a little bit more supply creep back into the marketplace. You are seeing listings – new listings kind of creep up and – but we don’t expect like some drastic change in supply. I would expect us to be hopefully around a 5 cap or a little bit better if we stayed at this pace.
Okay, excellent. I appreciate the detail. Thank you.
Thanks.
This concludes our question-and-answer session. I would like to turn the conference back over to Dallas Tanner for any closing remarks.
Thank you. We appreciate everybody’s support, and we look forward to talking to everybody next quarter, hopefully getting to see a few of you in the fall. Thanks again.
The conference has now concluded. Thank you for attending today’s presentation. And you may now disconnect.