Greetings, and welcome to the Invitation Homes third quarter 2022 earnings conference call. All participants are in listen-only mode at this time. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. As a reminder, this conference is being recorded. At this time, I would like to turn the conference over to Scott McLaughlin, Vice President of Investor Relations. Please go ahead.
Good morning, and welcome. I'm here today from Invitation Homes with Dallas Tanner, our President and Chief Executive Officer, Charles Young, Chief Operating Officer, and Ernie Freedman, Chief Financial Officer. During this call, we may reference our third quarter 2022 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 in any such statements. We describe some of these risks and uncertainties in our 2021 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. With that, let me turn the call over to Dallas.
Thanks, Scott, and good morning. I appreciate everyone joining us today. It was a solid quarter for Invitation Homes with same-store NOI growth of 8.6%, blended lease rate growth of 11.6%, and average occupancy of 97.5%. Our continued low turnover, high occupancy, and high resident satisfaction scores remain a testament to the outstanding efforts of our associates. My thanks to them for providing another quarter of premier resident service, especially those recently impacted by Hurricane Ian. I couldn't be prouder of the quick and caring response our team members provided in the wake of the storm, as well as our role in helping the communities we serve. Across the country, we provide housing choice and flexibility that residents desire and need.
While the macro world we all live in has changed quite a bit in the past year, we believe our business remains well-positioned to succeed within it. Here's why. To start, we believe professionally managed single-family homes for lease are an important part of the housing solution in the United States. We still face a housing supply shortage in this country by as many as several million units from some counts. Today's elevated interest and mortgage rates haven't helped, as seen by the pullback from builders in last month's further decline in starts for single-family homes. It's also harder for those thinking of buying a home in the near term. Recent reports have noted that monthly payments on new mortgages have increased by as much as 60% since the start of this year due to higher mortgage rates.
According to last month's data from John Burns, this contributes to a cost of homeownership that is over 20% higher on average than leasing across Invitation Homes markets. That works out to an average difference of roughly $600 a month in savings from leasing a home. Leasing remains a preferred choice for many families, combining convenience and flexibility as well as value. These advantages further fan the favorable tailwinds of demographics, especially among millennials, who are just beginning to approach our average resident age of 39 years old. With our expectation that these favorable supply and demand dynamics will stay with us, there's a call to grow our industry-leading scale, technology, and experience. We consider this in tandem with our cost of capital.
Our updated acquisition assumption for the full year is $1.1 billion, and through the third quarter, we've acquired approximately $1 billion of that target. We have slowed our acquisition pace in light of the current environment, taking advantage of opportunities to recycle assets and weighing our cost of capital on balance sheet versus our joint ventures. As a result, we're continuing to explore all opportunities available to us to expand our investment management businesses and explore creative growth while at the same time operating as prudent capital allocators who remain nimble for when opportunities may arise. As we have continued to learn and grow, so have many of our best practices, including how we address energy and sustainability. We recently deepened our bench with the hiring of two in-house experts to oversee our ESG and our energy initiatives.
We have a responsibility and a commitment to be a leader in these areas among our industry, and I'm pleased to see us making good progress. Of particular note, we recently learned that our latest GRESB score increased over 13% year-over-year, a significant improvement that reflects the great work by our ESG task force. Before wrapping up, I'd like to comment on our reported results and our updated guidance. Our revised full-year guidance for 2022 is consistent with our prior expectations for the overall business with two exceptions: property taxes and bad debt. Property tax assessments have been impacted more quickly than we would have anticipated due to the robust home price appreciation within our markets.
Our bad debt is expected to stay somewhat elevated compared to before the pandemic, as it's taking us longer to address residents who are not current with their rents. We're committed to doing our best to help manage through these items.
In closing, we believe our business remains favorably positioned within the residential and the broader REIT space, and we're excited by the positive impact we're making for greater options in housing and the opportunities we believe this brings to Invitation Homes and our stakeholders. With that, I'll pass it on to Charles, our Chief Operating Officer.
Thank you, Dallas. I'd like to begin by thanking all of our teams for their commitment to providing outstanding customer service and earning the loyalty of our residents every day. I'm especially proud of our associates in Florida and the Carolinas for their hard work and genuine care following Hurricane Ian. We're thankful to have avoided any reported injuries from the storm. Now, let's discuss the details of our third quarter operating results. Our same-store net operating income grew 8.6% year-over-year. Same-store core revenue growth was 8.3%, primarily driven by a 9.6% increase in average monthly rent and a 15.5% increase in other income. Our same-store average occupancy was 97.5% for the third quarter.
The sequential decrease from the second quarter reflects our expected return to a more normal seasonality patterns that have otherwise been absent the past 2 years. We also saw a return of elevated bad debt in the third quarter to 170 basis points. The quarterly rate has fluctuated this year from as high as 190 basis points to as low as 70 basis points. Rental assistance payments have been a factor in the volatility, and we are seeing that many of these programs are starting to wind down. We've been proud of our role in working with residents who need help and will continue to seek solutions to find common ground. Overall, our portfolio remains very healthy.
New resident average household incomes continue to improve, climbing to over $134,000 per year, representing an average income-to-rent ratio of 5.3 times. Returning to our same-store results for the quarter, core operating expenses increased 7.6% year-over-year, primarily driven by a 3.8% increase in fixed expenses, a 15.4% increase in repair and maintenance expense, and a 15.2% increase in turnover expenses. These increases were attributable to the continued inflationary pressures and a rise in the number of move-outs of residents who are not current with their rent. Our teams are working hard to leverage our procurement relationships, our scale, and our technology to combat these pressures where we can. Next, I'll cover third quarter leasing trends.
New lease rates grew 15.6%, and renewal rates grew 10.2%. This resulted in blended rent growth of 11.6% or 100 basis points higher than the third quarter of 2021. Given that we're nearing the end of the year, I'll also touch on how things are shaping up for October. We expect new lease rate growth for this month to come in at 9% or better, and renewal increases to come in at 10% or better. We've sent out renewals for November and December in the mid-10% range. All told, these are strong increases that we believe underscore the current health of the single-family fundamentals. Looking ahead, we remain focused on ways we can better utilize technology to lower cost and improve resident experience.
One example of how we've done this is with our mobile maintenance app. We launched the app a bit over a year ago, and it's now been downloaded over 110,000 times with an average app score rating in the high fours. Our residents are submitting about 40% of total work orders through the app today. These submissions include a high rate of photos and videos, reducing a need for return trips and making the experience a lot more convenient for our residents. Since the launch of the mobile app, we have also reduced the proportion of our overall maintenance requests that are received by our call center by nearly a third.
Once again, I'm proud of our teams who rose to the challenges of a hurricane, high bar prior year comps, and significant inflation to deliver a solid result for the third quarter. We remain laser-focused on executing and playing to finish the year strong. I'll now turn the call over to Ernie, our Chief Financial Officer.
Thank you, Charles. Today, I will discuss the following topics. First, our balance sheet. Second, our financial results for the third quarter. Third, our revised 2022 guidance. I'll begin with my first topic, our balance sheet. We believe our solid investment-grade rated balance sheet positions us well as we navigate the current environment. To recap, 99% of our debt is fixed or swapped to fixed at a weighted average interest rate of 3.6%, with approximately two-thirds of our debt being unsecured. We've also made significant progress in laddering our debt maturities with no debt due until 2025. Our net debt to EBITDA ratio is now 5.7 x, solidly within our target range of 5.5x-6x .
As of the end of the third quarter, our liquidity totaled nearly $1.9 billion through a combination of unrestricted cash and undrawn capacity on our revolving credit facility and term loan. Turning now to my second topic, our third quarter financial results. Core FFO increased 9.5% year-over-year to $0.42 per share, primarily due to an increase in NOI, driven by strong rent growth and demand for our homes. This drove an 8.2% year-over-year increase in AFFO to $0.34 per share. I'd like to point out the following two non-recurring items included in our third quarter reconciliation of reported FFO to core FFO. The first is our estimated financial impact of Hurricane Ian.
Our third quarter net casualty losses in our Core FFO reconciliation include a $19 million accrual for estimated losses and damages related to the storm. Based on our prior experience, it's possible that additional damage may be identified over the coming months, and if needed, we will adjust our estimates. Additionally, a small portion of the losses may be recoverable through our insurance policies that provide coverage for wind, flood, and business interruption, subject to deductibles and limits. The second non-recurring item is an approximate $7.5 million global settlement of a multi-state alleged class action regarding resident late fees. The settlement covers claims initially asserted in May 2018 and involves allegations similar to what others in the residential sector have faced or are still facing.
While we strongly believe that the allegations were without merit, and we do not admit to any liability in the settlement, we believe it was in the best interest of the business to settle the case in order to save time and expense associated with the litigation. The settlement remains subject to court approval. The last thing I will cover is our updated guidance for the full year. Included in last night's release are the details of these updates, which reflect our revised expectations for Same-Store results in Core FFO and AFFO per share. As Dallas mentioned, the majority of the change in our updated Same-Store core operating expense guidance is due to our revised expectations for real estate taxes. Home price appreciation has been very strong in our markets for much of 2021 and 2022.
Historically, we have seen that local assessors might take longer to reflect current fair values in their assessments and that millage rate resets might be impactful to partially offset increasing assessments. Although we have not yet received all final tax bills, based on the information available to us, we believe our growth in real estate taxes will now be 7%-8% for 2022, or about 300 basis points higher than previous expectations. This increase is primarily due to significantly higher assessments in anticipated tax bills for our homes in Florida and Georgia, partially offset by favorable expectations in other jurisdictions. Assessments in Florida and Georgia were up, on average, almost 30% from prior year.
We plan to appeal a much higher proportion of these assessments compared to prior years, knowing that there will be a timing difference between when we appeal and when any rebates are received. Less impactful is the change in our outlook for same-store core revenue growth. We've reduced our expectations as we now expect bad debt to remain somewhat elevated relative to pre-pandemic historical norms as it continues to take longer to address residents who are not current with their rent. In conclusion, it's clearly been a dynamic year-to-date, marked with favorable supply and demand fundamentals and overall strong performance from our associates and business. We believe our seasoned team and time-tested platform are well prepared to continue to execute and deliver solid results. With that, operator, please open the line for questions.
Thank you. If you would like to ask a question, please press star one on your telephone keypad. If you wish to withdraw your question, please press star two. Our first question today comes from Derek Johnston from Deutsche Bank. Please go ahead.
Hi, everyone. Thank you. Can you discuss the supply growth or shrinkage in SFR homes available for sale? What is the number of homes you are tracking on the MLS or Zillow? I'm looking for supply growth of single-family listings and more importantly, the measure of change in that metric over the past few months.
Hi, Derek. This is Dallas. It's a good question, and I think it's something that obviously we've spent quite a bit of time looking at over the years and paying even maybe more attention to, in light of, you know, recent volatility around mortgage rates and some of the home price appreciation metrics that are out there. You know, to date, I would say it's so far kind of acting and behaving for the most part in our markets, fairly cyclical. Obviously being impacted by the fact that mortgage rates are kind of, you know, have taken off to new highs. We're not seeing anything that suggests, wholesale change as of yet.
In fact, we had some people in our offices this week who are, you know, a bit more experts on the matter, and we spent some time looking at resale supply across, call it, Invitation Homes markets. Funny enough, it's pretty early. We're actually seeing a drop in new listings that you would typically see at this time of the year. It sort of makes sense as you start to think about where mortgage debt in the country is. Vast majority of the country has mortgage rates in place today that are quite favorable relative to where you could currently go out and price. As much as I think the near-term headlines had been that maybe we'd start to see some opportunities in terms of additional supply to be able to buy on the resale side, that just hasn't been the case thus far.
So far, it feels like months of supply are doing kind of their normal cyclical creep a little bit late in the year. When you start to really, you know, dive down and look at less than 60 days on the market, that's when you're seeing actual new listings decline in the majority of Invitation Homes markets.
Our next question comes from Nicholas Joseph from Citi. Please go ahead.
Thank you. Maybe just on external growth. It seems like you're pulling back on acquisitions, at least currently. I recognize kind of the business was born out of a dislocation in the housing market. What are you looking for in terms of reentering, or what kind of dislocation would you need to see to go in large scale on acquisition mode? As you think about funding that. How do you think about JVs versus increasing leverage from here?
Hey Nick, this is Dallas. Great question. I think in going back to our call that we had in May, we talked about the fact that we had started to pull back on our acquisitions in terms of kind of level setting, and we wanted to get a view on what the market was gonna feel like towards the back part of this year. That being said, we've seen, you know, a little bit of softening, what I would say, in kind of normalized cap rates. Today, it feels like, you know, call it in the kind of product and in the parts of the markets where we typically invest capital, those prices feel kind of in the mid-50s to, you know, call it 5.25% in terms of where current pricing is today.
We would like to probably be measured in our approach in just making sure that we feel like we're not trying to call a bottom, but I think we'd want to average in over time if there are new valuations that could give us, on a risk-adjusted basis, a much better return profile. As we think about how we're going to grow the portfolio over time, we obviously have the use of JVs. We have, you know, the liquidity that Ernie talked about in our opening remarks. Obviously, we've talked over the last couple of years about the need to expand our investment management businesses because we look at that as, you know, extremely accretive growth when at times maybe, you know, the REIT's cost of capital isn't as good as we'd hope it would be.
Certainly right now, we're not thrilled about where, you know, the equity prices are today. With that being said, I think we'll continue to use our partnerships and JVs. We'll find ways to meaningfully invest. We generate a really good amount of what I would call outperformance through our fee structures and our management business around those joint ventures. We've got partners who have been extremely reliable and that are also, I think, looking at the potential environment, as you mentioned, Nick, as being quite appealing. We actually are, you know, being measured, I'd say, in the near term, but cautiously, you know, I think preparing for ourselves for maybe some good opportunities to continue to expand our external growth opportunities in relation to what the market allows for going forward.
Our next question is from Jeff Spector of Bank of America. Please go ahead.
Good morning. If it's okay, just two parts on the real estate taxes and assessments. I know you guys provided an update in September. I guess first, if you can just describe, you know, the process. You know, Ernie, you said that, you know, based on information available today is that clearly the market, you know, is surprised by this update. You know, when did this come to light? And then second, I guess, can you just talk about the normal appeal process or historically in Florida, Georgia, you know, the likelihood or success you've seen in the past just to give us a feel for what may, you know, happen in the coming months. Thank you.
Yeah, sure, Jeff. With regards to real estate taxes, there's really, you know, two key components to the real estate tax bill. One is the assessment, and one is millage rates. We do start to see preliminary views on assessments during the third quarter in both Florida and Georgia. The challenge is we don't see millage rate information until in some cases, you know, actually most cases, the earliest is mid-October. In some cases, Jeff, we still haven't seen final numbers on millage rates at this point. We won't see those till the tax bills that come out here in the next few weeks. The challenge is, in the past we've seen, you know, assessments and millage rates do some, you know, some different things in terms of when assessments go up, often millage rates will come down.
We don't have the full picture and the full understanding of that until we get toward the end of October. That's why as we, you know, are out and engaging with folks in August and September, we do not have clarity as to where the real estate tax bills may be going and wanted to make sure we had full information before making a final judgment on what that would be. That's why we had the adjustment that we had here. As we think about our fourth quarter numbers, you'll see in our numbers that they're not even reflected in the third quarter because we didn't have all the information in our third quarter numbers. We do have that today. With regards to appeals, it really varies jurisdiction by jurisdiction, Jeff.
It can be as quick as three to six months in some cases. In other cases, it can take as many as 9-18 months. We really won't have a good sense for our success rate on appeals until we're well into 2023. Most of them will have an opportunity to get a sense for where it's heading in 2023, and there'll be a small handful that may take into early 2024 to have final results on the appeals. You know, we're optimistic that we're seeing assessments as high as they went that we'll have a better opportunity than we've had in the past to fight. We're certainly gonna do that, and we're gonna appeal more than we ever have in the past, especially in those two states.
We'll just have to see how that plays out.
Our next question is from Haendel St. Juste from Mizuho. Please go ahead.
Hey, guys. Good morning out there. You delivered a very solid operating results quarter in the third quarter and better stability in rents than we've seen in multifamily, but obviously cutting guidance late in here was a bit of a surprise. I was hoping you could help us understand a bit more what's going on, at least with the same store revenue reduction. You mentioned a few times that bad debt is taking longer to get resolved. I'm curious, why is it taking so much longer? And is that mostly focused in a particular region, perhaps California? And do you think bad debt overall can become a tailwind into next year? Thanks.
Hey, Haendel St. Juste. It's Charles Young. Thanks for the question. Let me just step back and kind of set context around the environment. As we talked about on prior calls, since early in the pandemic, we were very conscious of working with residents that faced a COVID hardship and helped thousands of residents with flexible payment plans and the like. In 2022, we purposely were focused in on getting back to our typical enforcement of the lease, where we legally could. What we're seeing in the process, and that has been working, though, however, is the states are taking, and it varies by state, two or three times longer to process non-payers through the system. To your question, California, Southern California specifically is the most difficult area.
NorCal, Illinois, Georgia
That being said, at the same time, rental assistance has been a big part of what we've done to help our support our residents. Today, we've supported over 12,000 residents secure rental assistance. In 2022 alone, we've secured over $57 million to help them. We knew that that rental assistance would slow down towards the back half of the year, but that acceleration in Q3 was a little faster than we thought it would be.
The good news is, as that acceleration has come, we have gotten better at being able to collect rent on normal non-rental assistance, and that our residents are also seeing that, and we're starting to see them step up in terms of recognizing that kind of perverse incentive that they were waiting on that rental assistance show up that they need to pay now. It is kind of across the board with the rental assistance, but we saw the biggest slowdown in the California markets as well, and that's where the biggest delay is. We've talked about this before, L.A. County and L.A. City are some of the more kind of slower to move off of the being able to go through the normal legal process.
We're moving through it, and it's just gonna be a little bit of a transition as we work through it over the next few quarters.
Our next question is from Brad Heffern, RBC Capital Markets. Please go ahead.
Hey. Thanks. Morning, everybody. Ernie, a follow-up on the property taxes. You know, typically when you have one elevated expense quarter, you get three more of them as it sort of flows through. Obviously, you're not giving 2023 guidance, but I'm curious, should we expect to see some sort of, you know, teens operating expense growth in the first few quarters of 2023 as this increased property tax level flows through?
No. Actually, Brad, I'm glad you're asking that so we can clarify. It's gonna be the opposite. We have to do a catch-up because we didn't accrue enough in the first three quarters of 2022. We're gonna have a very elevated growth rate for real estate taxes in the fourth quarter here because we upped the increase, but it's because we were underaccrued in hindsight without having all the information available to us. You're gonna see a very elevated growth here in the fourth quarter. Then as we think about our year-over-year comps, you know, you'll see some.
You know, because we're at a reset at a higher level, you'll see it slightly elevated in the first part of the year, and then the fourth quarter, of course, would be an easier comp if things played out the same. It shouldn't be at the same level that you're seeing here in the fourth quarter.
Our next question is from Juan Sanabria from BMO Capital Markets. Please go ahead.
Hi. Just going back to an earlier question, with regards to some of the for-sale product coming back to the market. What's going on with that? Is that being moved to for rental, and is there maybe a kind of a shadow supply in the single-family rental space that's impacting whether it's occupancy or churn or rate that you could speak to across your portfolio in anything different geography-wise?
Hi, Juan. No. You know, actually, I'd sort of say the opposite. That, you know, all things being equal, I think if you look at our blended rate growth this quarter, at roughly I think 11.6, you know, we went back and looked at called pre-pandemic numbers from the third quarter of 2019, we're at, like, 4.5%. We're still seeing, you know, call it accelerated demand and appreciating that in between the balance of home price appreciation and the amount of demand for product. Our occupancy is still elevated in the mid, you know, kind of 97s.
As you think about that on a kind of historical basis over the last 10 or 11 years as we run the business, we're actually seeing more demand for this time of year than we would typically see in a normal year. I wouldn't say so. Now, certainly, there are other operators out there that probably have and are digesting new product as it comes in the marketplace. You know, some of your Sun Belt markets, you might see maybe a little bit of additional more supply. But we're not seeing anything in our numbers, and Charles can speak to this as well, that would suggest that we're having any change in top of funnel or in our ability to execute on leases.
Now, all things being equal, this tends to be, in a normal year, the slower part of the year from a leasing perspective. It is good to keep that perspective that as you get into the last quarter of the year and kind of early, call it January, that is where we have generally always have had our lowest leasing velocity, outside of the two, what I would call the 2021 pandemic years. Those last two kind of fall months into the winter have not behaved as normal as what we are seeing probably a little bit more so this year. We're not seeing anything on the supply front at the end of the day that's causing us really any concern.
It's just more about how can we execute the business, fight the inflationary cost pressures, and continue to kind of maximize efficiencies within our platform.
Our next question comes from Adam Kramer at Morgan Stanley. Please go ahead.
Hey, guys. Appreciate it. Just wanted to ask about bad debt. Look, I recognize that there may have been some kind of rental assistance impact in the quarter, but clearly kind of less than prior quarters. I'm just wondering if you could kind of quantify the rental assistance received in the quarter. Then relative to kind of the 170 basis points of bad debt in the quarter, recognizing kind of pre-COVID normal was maybe 30-40 basis points, what's kind of the process from getting from here to there? You know, how long could that take? You know, is there a chance it'll be kind of just structurally or maybe due to regulatory changes that maybe we never kind of get back to that kind of pre-COVID 30-40 basis points.
Yeah. Well, let me walk through the first part of the question, Adam, with regards to the impact of rental assistance and how that's dropped off a little bit here, from the second quarter to third quarter. I'll turn over to Charles about, you know, how we think where we are going next with bad debt. You know, from the second quarter to the third quarter, we saw rent assistance payments drop for us by $9 million, from $23 million to $14 million.
Bad debt went up $5 million from the second quarter to the third quarter. You know, one might have thought that if we're gonna lose $9 million in rent assistance, bad debt would have been up $9 million. It was only up 5, and that's because of what Charles talked about. People are getting, you know, they understand that rent assistance isn't going to be available for them anymore, and people are starting to get back to on, you know, let's say what we saw pre-pandemic in terms of, you know, keeping more current with their rents.
We would expect, you know, going forward, maybe a similar type thing where we see rent assistance, you know, continue to drop off and fade away and likely be gone, it may be a little bit trickles into the first quarter of 2023. We're not accounting on very much there at all. For the last couple quarters, we've seen better behavior in terms of people, then making up for the fact that we've had a little bit of a drop off there.
Yeah. As I said in an earlier question, the flexibility that we were showing while we were waiting and supporting the residents with rental assistance and how we've been tightening this year, we're just gonna continue to do that as residents recognize that the rental assistance is going away, the partial payments and all that stuff, we're going really back to where we were before. As Ernie just mentioned, we're seeing improvement in terms of how residents are paying. A lot of it is just the psychological effect of them getting back to understanding we are at our normal way in which we enforce the lease. We'll continue to do that to execute while the rental assistance wanes, and we're starting to see good improvement, and we'll continue to push.
It'll be, like I said, a little bit of a transition period as we work through back to normal eventually.
The next question is from Keegan Carl at Wolfe Research. Please go ahead.
Hey, guys. Thanks for the time. Maybe just wanted to clarify some things. Just kind of curious what percentage of your leases are month to month rather than annual, and how does this compare to pre-pandemic levels?
Yeah. On the month-over-month side, we're at about 6.8%. Say again.
That's good.
Yeah. California is really where we see the majority of the month-to-month leases. Other than that, we haven't really seen any change to the number. The California numbers are increasing just because of the CPI + 5% that are happening on the renewals, and the numbers are close to each other in terms of doing a renewal or a new lease, and sometimes they just choose to go month-to-month. We're not seeing any change in terms of retention or renewal rates. It's just around the month-to-month itself.
Our next question is from Chandni Luthra from Goldman Sachs. Please go ahead.
Hi. Thank you for taking my question. You guys laid out taxes for next year, but how should we think about other line items within expenses going into 2023? You know, repair and maintenance, utilities, insurance, all of those line items, please.
Yeah. Chandni, this is Ernie. You know, to be clear, with real estate taxes, the question was pretty specific around just what's happened with the fourth quarter here and what things may look like on a year-over-year comp basis. I wanna make very clear we do not provide any guidance for what we thought 2023 overall real estate taxes would be. Chandni, we're not providing guidance at this time for any 2023 items, so unfortunately, we have to decline to answer that.
Our next question is from Brian Spahn from Evercore ISI. Please go ahead.
Hi. Thanks. I might have missed this, but could you talk about where the loss to lease is today at the portfolio and just your expectations in capturing that today? Also, you know, what the earn in looks like for next year just given the activity year to date?
Yeah. Loss to lease right now is tracking to be right around 10%, where we currently stand in terms of where market rents are. If you were to just look at where we think rents end up for the remainder of the year and where the year is at this point relative to what our average rents were for the year, you know, our earn-in is it'll be almost right at 4%. It's just a hair under 4%, in terms of just from a rate perspective. Of course, we'll have to take into consideration what we think is gonna happen with occupancy rates next year, as well as bad debts to get to a fuller picture for rental growth or revenue growth, excuse me.
Our next question is from Neil Malkin from Capital One. Please go ahead.
Thanks. Good morning. Question on the home building side. I guess you could say it's a two-parter. You know, first, just given the reduction in mortgage applications and home builder sentiment, are you getting more inbound calls? And what kind of momentum or capital allocation priorities, you know, are you kind of dedicating toward buying more of those assets, you know, homes through the home builder relationships? And then secondly, you know, what's your thought about potentially buying a regional home builder, just to kind of, you know, give yourself an embedded growth pipeline when the acquisition market isn't as advantageous?
Hi, this is Dallas. Yeah, we definitely would wanna stay opportunistic with any opportunities that come to us, you know, vis-a-vis home builders. There's certainly a lot of chatter out there. I think right now it's sort of the early stages of what home builders are thinking with their future pipelines and call it active inventory and things like that. Safe to say we've gotten a lot of phone calls, and I'm assuming a lot of our peers are getting the same phone calls. I think it doesn't really change our strategy in terms of, you know, having a large desire to continue to stay and buy opportunities that seem extremely accretive over the long haul and put structures in place that will protect us, you know, safe from further downside risks that could happen in the marketplace.
I still feel like it's pretty early.
In terms of kind of where some of this is shaking out, I think builders have done a nice job of trying to move some of their, you'll call it current sitting inventory. They've also got some tools in their tool belt from what I'm hearing on the kind of just conversations around buying down mortgage rates and things like that. I imagine a lot of the near-term inventory can get taken care of through kind of the use of buying down rate. Also obviously, you know, selling scattered sites to operators like ourselves. We have done some of that, I think, over the last couple of years. We've picked up a couple hundred homes that way. We're gonna continue to invest in it. It's part of our thesis.
We have, you know, over 2,000 homes in our pipeline that we're doing with PulteGroup and other partners, and we would view this as a very opportunistic moment for us, say, over the next year or two, where we should be able to lean in and be a good partner with not only our current partners, but maybe future partners down the road. You know, from our vantage point, we've seen this once before. While my current belief is that we're not going to see housing move backwards like we did in 2007 and 2008, I think it could be a great opportunity for Invitation Homes over time to make additional meaningful investments that will add to our already, you know, what I would call industry-leading scale and performance.
We're viewing the next, you know, call it couple of years as a great opportunity for growth.
Our next question comes from Jade Rahmani from KBW. Please go ahead.
Hi, this is actually Jason Sabshon speaking on behalf of Jade. You know, there's a lot of chatter about multifamily demand slowing driven by a slowdown in housing formation. Do you view single-family rental as a substitute product for multifamily, and do you expect the sector to behave similarly?
The short answer is we would expect SFR to be pretty resilient in a down cycle. I think we exhibited that quite frankly over the last two and a half years during the pandemic. We had tremendous performance in 2021. In addition to that, you know, a couple things you gotta keep in mind. One, the customer isn't exactly the same customer. While our businesses operate very similarly, if you look at them from a P&L or a balance sheet perspective, customers are typically different. The other advantage that single family typically has is that on a rent per square foot basis, it's much more efficient with a single family for rent product.
Lastly, I would also add that, you know, in an opportunity where square footage may matter or, you know, people are looking at, you know, how can I have, you know, kind of call it the best and greatest use of my dollars, SFR is gonna provide a better bang for your buck. We would expect our business to hold up pretty well, given any of the down cycles, some of the embedded loss, at least that Ernie talked about, and the overall limitations around supply. You have to take a step back in these moments and also remember, on a fundamental basis, we don't have enough housing units in this country. Specifically, if you look at our portfolio and where we're lined up, you still are gonna have household formation and demographic growth. It's almost 2.5 x the U.S. average.
We would expect a lot of near and medium term demand for our product. We talked about it earlier in our call, that millennial cohort of 65 million people between, say, the ages of 25 and 38 are just coming into our business right now. We're actually quite bullish in terms of what I would call natural tailwinds that should feed into the SFR value proposition.
Our next question is from Adam Hamilton at Credit Suisse. Please go ahead.
Morning, gentlemen. Thanks for your time. I really appreciate all the color around the bad debt, the tailwinds, and what you just spoke about in terms of the housing tailwinds. I was wondering if you could provide maybe some specifics around the geographical concentration of some of that bad debt and whether or not you guys are seeing any price sensitivity associated with that going forward. Thanks.
Yeah, this is Charles. Thanks for the question. As I mentioned, the geographically, California, Southern California specifically, is where we're seeing both the kind of slowdown in the rental assistance as well as the slowdown in the court systems, where historically it might have been 60-90 days, it's taking 180 to over 200 days. That's in Southern California. Nor Cal, it's 120-180 days. The other markets that we're seeing a little bit of a change, again, this isn't necessarily behavior of the residents, but it's around the process to move non-payers through, are in Georgia, where it used to be 90 days, it's 150 days plus. Vegas is surprisingly used to be very quick, it's 150 days.
We have L.A. County and L.A. City where we're not even able to file. That's gonna show up next year as we work through some of this. There's gonna be a little bit of a tail in the California markets as we deal with this. But all the markets, again, as we work through the legal enforcement, we're getting there and the residents are responding as they're seeing the rental assistance go away and slow down. I'll just step back on one question that Keegan Gaerth asked earlier around month-to-month. I overstated the number. We're about 3.5% month-to-month, so just wanted to make sure we got the number precise.
Our next question is from Dennis McGill at Zelman & Associates. Please go ahead.
Hi, good morning. Thanks, guys. Ernie, could you just maybe walk through a little bit more beyond property taxes? If we look at the full-year guidance for expense growth back into something for fourth quarter, it seems like other categories as well would have to show some notable acceleration from where you were in the third quarter, which were already pretty elevated, unless I'm doing something wrong.
Yeah, no, Dennis, we continue to have inflationary pressures on both the with regards to repairs and maintenance and on rents. With rents I would call out, we also do expect, you know, turnover to be maybe slightly higher than it was last year. But the bigger issue with turnover is
We are having some success, as Charles talked about in dealing with residents who aren't paying rent, those turns tend to be more expensive when someone comes out. You got the cost pressures as well. Our average cost per turn is going up a little bit more as well because of that. No, you're absolutely right. It's been a challenge year for us across the board. When you take a look at what we think what's gonna happen with real estate taxes, we continue to expect to see continued pressures on repairs and maintenance as well as churn.
Those are the categories that are really driving, you know, based on what our guidance is, you're trying to interpret what fourth quarter's gonna look like, you know, certainly the highest number we'll have seen all year, mainly driven by real estate taxes, but also because of some of the other issues.
Our next question is from Austin Wurschmidt from KeyBanc. Please go ahead.
Great. Thanks. Good morning. Can you guys just remind us how you calculate loss to lease and how changes in home prices impact that calculation? I believe you said the loss to lease is 10%. Dallas, I think earlier on the call you referenced a 20% average difference between the cost to own versus rent in your market. Can you just talk about the interplay of those various variables?
Yeah. What I would tell you, Austin, they don't really relate necessarily directly from a pricing perspective. The cost to rent and the value you get from renting relative to what it costs to price a home is not how the pricing mechanism works for us with regards on how do we price our leases. We're pricing our leases based on what the market will bear, and sometimes the market bears more and sometimes the market bears less. Specific then to how do we calculate our loss to lease, and which is today is about 10%, is each month we price anywhere between 5%-10% of our portfolio because of what's coming due from a renewal and new lease perspective. It's a pretty good proxy of what we think the entire where the entire portfolio price.
You understand we have a very homogeneous product and each house is very different. We don't go each month and say, "all 80,000 homes in our portfolio reprice." We use that as a proxy to where market rents are, and we're running that through our revenue management system. We take that and on a weighted average basis, then put that across our entire portfolio to calculate what we think estimated market rent is today. Again, it's not gonna tie into an affordability metric for buying a house versus necessarily renting it, renting in our markets. They're really two distinct things. That's how we come up with our loss to lease.
Our next question is from Linda Tsai from Jefferies. Please go ahead.
Hi. To the extent there's concern over the economy slowing, do you have a sense of how your rents compare to the market rents of single-family homes across your different markets?
We price to market, Linda.
Yeah.
I think in general, across the very broad rental space, we're at a little bit of higher end relative to other rentals that are out there, and that's pretty consistent market to market. In terms of where the types of homes we have, the size of homes we had in terms of where they're in, you know, we're generally, you know, we think we're very much at the market for those who try to do a little bit better because we're professionally managed. We think we're kind of in that same space.
I think importantly, when you look at our affordability metrics, coming in at almost $134,000 for average income, 5.3 rent-to-income ratios, where I think most rental companies across the board, their minimum requirements are at three to one. You know, we feel like we're in a pretty good spot, especially with also having on average two wage earners in each of our homes.
Our next question is from Alan Peterson at Green Street. Please go ahead.
Hi, everyone. Thanks for the time. Charles, we noticed on your website that you're now offering concessions in select markets. Just a question on concession usage. Is this meant to build up occupancy from here, or is this decision to use concessions based on the view that occupancy could continue to decline if you weren't to use them?
Yeah. No, great question. You know, look, we 97.5% ended Q3 really strong. We know that it's Q4, as Dallas mentioned, that we're seeing the seasonality return to the market that wasn't there the last couple of years. This is typical as we go into Q4, and it's a push for the holidays. We're running limited concessions on select homes as really a push before Thanksgiving just to secure and make sure that we keep occupancy at a healthy rate, which it is. 97+% for this time of year is amazing. We're seeing good demand and healthy rent growth with the numbers that I gave you. Blend of rent growth with the strength of renewals are really strong.
This is really just making sure we go into the slow period, highly occupied, as high as we can, and then set us up, well for, 2023.
Our next question is from Anthony Powell from Barclays. Please go ahead.
Hi. A quick question on the bad debt. I wanted to confirm that it was all due to, I guess, COVID era tenants who weren't paying versus newly delinquent tenants that may be finding some current issues given the economy.
You know, the growing kind of bad debt number is the historical, those that are COVID that are working through the courts. If there is somebody who's new, we're going through our enforcement of the lease. You know, that process isn't creating a lot of new, but again, you end up with the courts that are slower. There's a little bit of a mixed bag in there. But the big numbers are really based on the historical and a lot of the California, Southern California residents, as we talked about.
Our next question is from Juan Sanabria from BMO Capital Markets. Please go ahead.
I just wanted to follow up on the PulteGroup relationship and the relationship with other home builders where you're taking out the product upon completion. Is the pricing on that preset once you give them the go-ahead to build or how should we think about the mechanics of?
Of kind of changing the takeout price given the higher debt costs and cost of capital in today's environment.
Well, the structure's pretty easy to follow. We basically any time we look at a project, we decide on basically a given range of where we think we could execute on pricing with them. Then we have collars to kind of protect them and us, generally speaking, on both sides so that if they have cost creep, then there's another discussion beyond a certain limit, and we have the ability, you know, more or less to walk away. If there's savings, meaning costs come down or there's some market changes there, we have another discussion. By and large, we're pretty well protected with pretty limited what I would call earnest money up front. A lot of these, you know, projects tend to be in flight with updates along the way.
That general structures have collars for to protect both PulteGroup and us. We take those deliveries in different tranches over, call it, longer periods of time so that we can have market dynamics come into that as well. You know, I think generally I could say very favorable and from a structure perspective. Obviously, as we go forward, as we look at new opportunities, we're also gonna, you know, spend more time looking at just, you know, call it price volatility and as to how it could relate to the overall markets over the next year or two.
Everybody's gonna be eyes wide open on new opportunities to make sure that not only are we locking in, you know, great assets, good locations, but that we'll be at pricing that is either favorable to call it current market conditions or future. Juan, I hope that answered your question.
Our final question comes from Jade Rahmani from KBW. Please go ahead.
Hi. I just wanted to follow up quickly. Is the shortfall in home purchase demand directly benefiting, single-family rental new lease demand, or is the impact not material at this point? In other words, are you seeing a notable percentage of applications from people who otherwise would be looking to buy a home?
No, our top of funnels felt, you know, pretty consistent in terms of, call it, the type of customer coming into our business today, and it lines up with things that we generally would see in normal years, around this time of the year. Now that being said, and I think it's important to emphasize, we, you know, we're not seeing anything that's suggesting wholesale changes in the housing market right now outside of maybe new listings coming into the space and decelerating, which should support home prices, in the near term. That being said, I think we're also early in where the impact of mortgage rates are and what that could mean for our business, both in how we capture existing demand in the marketplace.
'Cause one could obviously argue if the cost to own a home is 60% higher today than it was in January of earlier this year, that's a net windfall to single-family rental, one would assume. We're not seeing anything on the supply side that's suggesting that we're gonna have a tremendous amount of inbound to put pressure on our existing supply. We view the overall landscape as quite favorable, but we're also, you know, being realistic that it's still pretty early in terms of where mortgage rates are providing impact. We'll obviously keep everybody updated on our thoughts as we go forward.
This concludes the Q&A session. I will hand the call back to Dallas.
We appreciate everyone's participation today. We look forward to seeing everyone at upcoming conferences. Thanks.
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