In the Invitation Homes Second Quarter 2023 Earnings Conference Call, Scott McLaughlin, Senior Vice President of Investor Relations, welcomed all participants and introduced Dallas Tanner, Chief Executive Officer; Charles Young, President and Chief Operating Officer; and Jon Olsen, Executive Vice President and Chief Financial Officer. He then explained that the conference call would include a question-and-answer session with covering sell-side analysts and that the participants should limit themselves to one question and re-queue for follow-up questions. He also mentioned that the company had issued an earnings release and supplemental information after the market closed, which is available on the Investor Relations section of their website. Finally, he warned that certain statements made during the call may include forward-looking statements and mentioned the risks and uncertainties associated with them, as well as the non-GAAP financial measures discussed during the call.

Invitation Homes recently purchased nearly 1,900 single family rental homes for approximately $650 million. CEO Dallas Tanner believes this is a great opportunity as the purchase price is a discount to the end-user market values and the homes are in desirable infill neighborhoods. The purchase will provide a yield in the mid-5s and is expected to provide strong rent growth and value appreciation.

The Sunbelt has purchased over 90% of the homes that overlap with their existing footprint, such as Florida, Texas, Las Vegas, Phoenix, Atlanta, and the Carolinas. Additionally, they have taken delivery of 157 brand new homes and added 173 more to their pipeline. Scott Eisen is joining the team as Chief Investment Officer to explore more disciplined growth opportunities, such as bulk purchasing from smaller operators and expanding their homebuilder pipeline. Furthermore, there are ongoing fundamental tailwinds for the business, such as the rising cost of homeownership and the nearly 60 million people between 23 and 35 years old, which is expected to lead to increased demand for single family homes for lease.

Dallas and Charles both expressed their gratitude to the team for their hard work and commitment in driving growth and value creation. They discussed how the increasing demand for single-family rentals, favorable demographic trends, and their commitment to providing residents with flexibility and choice have positioned them well for continued success. They also mentioned how their partnership with Esusu helps their residents improve their credit profile and remove barriers to housing choice. Finally, they reiterated their dedication to finishing the year strong.

In the second quarter of 2023, Invitation Homes experienced a smooth transition while acquiring nearly 1,900 homes. Same-store NOI grew 3.6% year-over-year, driven by same-store core revenue growth of 5.9% and same-store core expense growth of 11.2%. The main drivers of the revenue growth were a 7.4% increase in average monthly rental rate and a 7.3% increase in other income. Lease rates on renewals grew 6.9% year-over-year, while new lease rates grew 7.3% year-over-year, resulting in a blended rent growth of 7% year-over-year.

Charles discussed the strong occupancy rate of 97.6% during the second quarter, which is traditionally the biggest move-out season. He is pleased with the balance between rate and occupancy, and the average household income for new residents is over $138,000 a year. Jon Olsen then discussed the company's investment grade-rated balance sheet, financial results for the second quarter, and updated full year guidance.

American Homes 4 Rent completed an acquisition of nearly 1900 homes for approximately $650 million, funded primarily by cash on hand and revolver. This portfolio acquisition is expected to have an immaterial effect on AFFO per share for the remainder of this year and be accretive to AFFO per share in 2024 and beyond. Core FFO and AFFO both increased in the second quarter of 2023, and the company has updated its 2023 full year guidance.

The company is increasing its full year 2023 same-store NOI growth guidance due to increased same-store core revenue and expense growth. This is mainly due to progress in working through lease compliance backlogs, resulting in higher turnover and property administrative expenses. The company also expects improved bad debt and increased core FFO and AFFO per share.

Dallas Tanner and Charles Young from the company discussed their strategy for integrating an acquired portfolio of homes. They have experience with integrating portfolios of up to 350 units, and have been successful in doing so. They plan to recycle capital in an accretive way by selling homes for high end-user prices and reinvesting those profits into a high quality portfolio in the mid-5s. Their team has experience with integrating portfolios into multiple markets, and they have a great team to manage the process and ensure that residents are provided with genuine care.

Dallas Tanner is discussing the occupancy rate of Streets' SFR portfolios, which is in the 92-93% range on average. He then mentions that there is a moment in the marketplace right now where smaller mid-scale operators are debating what to do going forward due to lack of visibility in the capital markets. Tanner then mentions that Streets has a good history of creating efficient margin profiles in markets where they have scale.

Charles Young provides an update on the lease compliance backlog from last quarter's call. He states that the company has been doing heavier work in the first part of the year to work through the backlog. He also mentions that there is potential upside in terms of normalized occupancy and turnover rate as they complete the backlog.

In Q2, there was good progress in the major markets, such as SoCal, Atlanta, and Vegas, leading to a 50 basis point decrease in numbers. However, there is a spike in turnover, which is expected. Despite this, demand is still strong, allowing homes to be released quickly. The occupancy rate is in a healthy place and numbers are expected to come down to the low 97s in Q3. The two biggest markets that have the most impact on the portfolio due to size and backlog are Atlanta and Southern California, with Atlanta having a lot of work to do.

Charles Young discusses the leasing spreads in the third quarter, which are in the low 80s to mid-80s. He notes that new leases are in the low sevens and renewals in the high 8s or 6s. He also mentions that they have tightened up their screening criteria and are still seeing good demand across the board. Dallas Tanner then answers a question from John Pawlowski about weighing the portfolio acquisition versus deploying capital in their own stock, which was felt like it was an even larger discount to private market values.

Jon Olsen explains that the company funded the portfolio acquisition primarily with cash on hand and a $150 million draw on the revolver. They are expecting to achieve a mid-5% cap rate and have a long-term view on creating meaningful external growth and better-quality cash flows for the company. They are also considering near-term stock buybacks, which they have never done before.

Property tax was up 11% year-over-year in the second quarter, due to a catch-up entry from the previous year. It is expected to remain elevated in the third quarter before moderating in the fourth quarter. The three largest contributors to the total tax bill are California, Georgia, and Florida, which account for 70% of the total. Millage rates for Florida and Georgia will not be known until tax bills are received in the fourth quarter.

Charles Young discussed the components of the 50 basis-point increase in same-store revenue, rents, occupancy and bad debt. He also mentioned that bad debt in the second quarter compared to expectations for the rest of the year, and that there is a balance to be struck between rate and occupancy. He concluded that they need to be mindful of all these facts when considering guidance.

Charles Young and Jon Olsen are discussing the increased turnover expense as a result of a lease compliance backlog and how it will affect the outlook for the rest of the year. They expect that the turnover will be higher this year and that there will be opportunities to talk to other operators in the space. They also expect to see the transaction yield on cost in the high-single digits, depending on the markets.

Dallas is asked about the discrepancy between the home price appreciation and the ability to buy on the MLS. He explains that the slower than expected turnover in Q1 and the increase in Q2 will moderate towards the end of the year. The slower turnover affects lease compliance and costs, but they are optimistic that it will be transitory. Dallas also suggests that the portfolio dollars could go to the MLS to sell at a more attractive yield, which could impact the ability to do future portfolios.

Dallas Tanner explains that frictional costs can make it difficult to sell large quantities of single-family homes, but the market is buoyed up by attractive mortgage rates, creating a feeding frenzy mentality when a home is sold. Tanner believes that the lack of volume is an asset for their business, and they may be more aggressive selling homes this year. He also notes that they have not seen any degradation in home prices within their portfolio.

Charles Young reported that new lease and renewal rates have been historically strong through the summer, with Florida markets leading with mid to high 8s in Q2. Renewals are holding steady in the high 6s, and September and October saw low 8s. Turnover is down in most markets, but is market specific, with some softness in Vegas.

Charles Young states that the public homebuilders are in a strong position due to their low leverage and large share of home sales. He believes that their partnership with Pulte has caught on and that they will continue to grow their for-sale homebuilding business with professional management companies. He credits Peter DiLello and Scott Eisen for leading the way in building up the frequency of their business.

The company has been able to get "under the hood" early and talk about their strategy with partners, influence portfolio composition and design, and have a move-in experience that is "sticky" and G&A light. The increase in same-store expenses is driven by lower bad debt, an increase in churn that is expected to decrease by year-end, and no change in taxes expectations.

Jon Olsen and Charles Young are discussing the deceleration of renewals and the effect this has had on expenses. They explain that the turnover has increased each month since the end of the first quarter and that this has had a flow-through impact on the P&L. They also note that historically, they have been strong at pushing out to capture as much of the market as possible, with new leases and renewals in the high mid-teens.

Dallas Tanner provides insight into the current market conditions of the MLS channel, stating that cap rates are in the low-5s in the 16 markets that they operate in. He also states that they have not been very active in the MLS channel, and suggests that they might conserve their capital for other opportunities, such as portfolio deals with their builder relationships.

The company has primarily been focusing on taking deliveries of new product and engaging with other operators to create larger opportunities for scale. The bid-ask spread on portfolios is below 5-caps in some cases, and it is difficult to buy at this price in Las Vegas. The company is writing offers weekly, but the spread is too wide to be successful. The company is looking at new builder opportunities at a 6-cap, with deliveries expected in the next year to 18 months. The company is well-positioned to handle this growth due to its low leverage and access to capital.

Charles Young answered a question from Linda Tsai about the average rent for the new portfolio and how it compares to the current rent of the existing portfolio. He said the in-place rents are about 10% greater than the current average rents in the markets. He also said there is an embedded loss to lease of 8-10% and that there will be additional expansion in the Texas markets. Ancillary services will be integrated over time as leases are renewed.

Charles Young discusses the lack of impact from shadow supply due to low-interest rates, as well as the spike in turnover in the Las Vegas market due to lease compliance. He suggests that the extra supply in the market is temporary, and that they are monitoring the potential for a demographic change in the market.

Charles Young commented on the outlook for property insurance, noting that Invitation Homes was fortunate in their rate increases compared to other REITs due to their favorable loss history, geographic dispersion, and lack of coastal exposure. He expects quarterly year-over-year increases of 20% and a full-year insurance expense line item increase of 16%. He also mentioned that they are evaluating different alternatives for next year's renewal due to capacity leaving the market and carriers trying to recoup losses.

Jon Olsen discussed the benefits of dispositions as a way of accretive capital recycling and mentioned that credit spreads have tightened with the GDP report. He also mentioned that they are constantly monitoring the market and are in a position to move quickly if it makes sense to do so. Dallas mentioned that it is a great time to be a REIT and issue equity.

Dallas Tanner explains that they would like to expand their markets to 8000-10000 units to increase their margins and efficiency. They are also interested in expanding to other markets such as Nashville, Austin, San Antonio, and Salt Lake City. Internationally, they are not as interested due to restrictive housing policies. In terms of equity, they are focused on being smart stewards of capital.

The company has been allocating capital wisely and has seen an improvement in their share price, but it is not where they would like it to be. They have access to $700 million in their Rockpoint venture and an untapped revolver which they will use to grow the business. They are confident in their ability to generate free cash flow and have ample dry powder to take advantage of opportunities.

This summary was generated with AI and may contain some inaccuracies.