Invitation Homes Inc.

Greetings and welcome to the Invitation Homes first quarter 2021 earnings conference call. All participants will be in a listen only mode at this time. Should you need assistance, please signal for 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, sir.

Good morning and welcome. Joining me today from Invitation Homes are Dallas Tanner, President and Chief Executive Officer, Ernie Friedman, Chief Financial Officer, and Charles Young, Chief Operating Officer. During this call, we may reference our first 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.indh.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, 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.

Thanks, everyone, for joining us this morning. We hope you are well and have continued to stay safe. We're off to a great start in 2021 with strong fundamentals, steady progress on our growth objectives, and great positioning for the peak leasing season. We are seeing record demand for our homes, and we're executing well to turn that into record high occupancy and capture market-driven rental rate growth. We are also driving growth through acquisitions as our tried and true multi-channel platform and local investment professionals continue to successfully source accretive opportunities as home price appreciation accelerates. Before turning it over to Erk Charles and Ernie, I'd like to elaborate on the macroeconomic opportunity we see and the strategy we've put in place to capitalize on it. To begin, we believe the tailwinds driving growth in our business and markets are stronger than they've ever been. The supply of single-family homes remain well short of growing demand, while the leading edge of the millennial generation is just starting to reach our avid resident age of 39 years. As this large cohort of the population may increasingly seek out single-family homes, we anticipate that their preference for and participation in the subscription economy could continue to drive them toward home rental versus home ownership, further extending demand growth for our product in the years ahead. We also expect continued benefits from our home's compatibility with the work-from-home lifestyle and the relative affordability of our square footage compared to other housing options. We believe these benefits are magnified in a world where people rethink the way they use space to work and play. In addition, we're seeing strong continued growth in household formation within our markets, which are benefiting from the southward migration of the US population. Put simply, we believe the growth we've experienced to date is only the beginning. and we're as bullish as ever about the fundamental outlook for single-family rentals in our markets. These positive industry dynamics are not only a strong backdrop for organic growth, but also enhance the investment thesis for external growth as we look to grow in a very disciplined way. Of the 16 million single-family rental homes in the U.S. today, less than 2% are institutionally owned. We are hearing from our residents and seeing in our results that there is high demand for an increased number of professionally managed single-family rental homes. There is an opportunity and a need for the industry to grow, and with our best-in-class platform, people, and scale, we believe we are the best prepared to invest and execute to capture these growth opportunities ahead. In this regard, our growth strategy is comprised of two parallel avenues. The first is through acquisitions. The second is through enhancing the resident experience. Let me walk you through both of these in a bit more detail. First, I'll cover growing our portfolio. As we've stated, we've projected acquisitions of at least a billion dollars in homes this year, and I'm pleased to report we are off to a great start. During the first quarter, we added 696 homes to our portfolio, including 295 in our joint venture. Our proven multi-channel approach to acquisitions, driven by our proprietary acquisition IQ technology, and in-house local investment experts enable us to remain nimble and source robust acquisition volume while maintaining discipline around location, quality, and risk-adjusted returns. Second, I'd like to talk about our plans to further enhance the resident experience. Our residents look to us not only for shelter, but also a worry-free leasing lifestyle. Our ProCare service offers proactive maintenance to keep our residents' homes in excellent condition. Our smart home technology makes it easy to manage the features and utilities in their homes. And our filthy delivery service make it more convenient for residents to maintain air quality and energy efficiency of their homes. We recently rolled out our pest control services and will launch a landscaping pilot program in select markets next month. All of these items are provided at an additional monthly cost, and both our resident survey data and the number of residents signing up for these services tell us that we're delivering these services that residents want in order to simplify their lives. We estimate we're over halfway to our expectation to reach approximately 15 to 30 million in run rate annual ancillary income by the end of 2022. As we grow, we also remain focused on ESG. including added attention to the environmental performance of our homes. For example, we recently piloted a program designed to help our residents optimize their energy usage while reducing peak energy demand. The software-based system is integrated into our smart home technology and allows our residents to save hundreds of dollars a year in utility costs, in addition to consuming less energy. We also recently launched our green spaces community program, in which we select philanthropic and volunteer opportunities to improve outdoor spaces in our neighborhoods. We kicked off the program earlier this month with support for the Hawes Trail Alliance in Mesa, Arizona, where members of our executive team joined dozens of local associates and community partners to create new hiking and biking trails for our residents and for our neighbors to enjoy. I'd also like to take a minute and comment on our recent investment grade ratings announcement. We are very pleased that the rating agencies recognize the strength of our platform and our team and the safety of our balance sheet. This represents the achievement of a long stated goal since our IPO and Ernie will provide more commentary on what it means for our company going forward. In closing, we're proud of the accomplishments we've made this quarter and are excited by the opportunities we have to grow both internally and externally using our strengths, scale, and operational excellence to continue leading the single-family sector. I'd like to thank all of our associates for their hard work in serving our residents with genuine care and getting us off to a strong start this year. With that, I'll turn it over to Charles to talk further about our operational results.

Thanks, Dallas. Let me start by recognizing our teams for another quarter of exceptional care to our residents. Our approach is straightforward. We offer quality homes and easy process and friendly service, And when we execute well, as we did this past quarter, it reflects in several ways. Let me tell you about four of these. First, our residents continue to stay with us longer. During the first quarter, trailing 12-month same-store turnover decreased another 100 basis points to 25.3%. The second point is our ability to lease faster. Our day three resident dropped to 29 days for the first quarter, down over 20 days from the prior year. Today, over half of our new leases are being signed before a new resident has even seen their new home in person. This, along with lower turnover, helped drive our same store average occupancy to 98.4% during the quarter, 170 basis points improvement over prior year. The third point is our rental rate growth. New lease rate growth accelerated to 7.9% in the first quarter, up 610 basis points year over year. while the rate on renewals grew 4.4% in the first quarter. This brought same-store blended rental rate growth for the quarter to 5.4%, up 200 basis points year-over-year. The fourth and final point is resident satisfaction. As a reminder, we receive roughly 60,000 resident surveys each year, and these continue to indicate record high satisfaction rates. Our residents are particularly pleased with how we're using technology to add flexibility, convenience, and time-saving benefits to their lives. For example, we recently rolled out an app to make service requests and appointments easier for our residents and more efficient for us. And we continue to install our smart home suite throughout our portfolio. We're also considering new ways we can continue to improve the resident experience. All of this leads to our same-store NOI growth in the first quarter of 4.4% year-over-year. This is comprised of same-store core revenue growth at 2.2%, as well as a 2.2% reduction in same-store core expenses. On the revenue side, tax collections improved in the first quarter 98% of our historical average as we continue to work with residents to offer flexible solutions for those experiencing hardships. Lower expenses were mostly resolved to double-digit percentage drops in nearly all of our controllable expenses. As Dallas mentioned, we are now in our peak leasing season, and demand for single-family housing is as strong as we've ever seen. This reflects in the current dynamics in the marketplace and is certainly impacting how we think about renewals and new lease rates. In summary, we remain in a strong position to continue delivering on our resident service and operational excellence. and to capture the robust demand we're seeing across our markets. Many thanks again to our team for the genuine care they provide to our residents each and every day. That concludes my remarks. I'll pass it along to Ernie.

Thank you, Charles. Today I'll cover the following topics. First, our recent announcements of our investment grade ratings. Second, acquisition and disposition activity. And third, our financial results and the increase to guidance we announced last night. Last week, we announced that both Fitch and Standard & Poor's have rated us investment-grade, and this week, Moody's has as well. This recognition marks an important milestone for Invitation Homes. We believe it affirms our strong and flexible balance sheet and should also offer us improved access to additional forms of cost-effective capital when we look to refinance future debt maturities. In the meantime, we anticipate the investment-grade ratings will reduce our annualized interest costs on our credit facility by approximately 3 cents per share. With this objective now complete, we remain committed to, one, proactively managing our maturity ladder, which today, other than our convertible notes, has no maturities prior to December 2024, two, continuing to focus on lowering our overall leverage to our long-term target of 5.5 to 6 times net debt to EBITDA, and three, over time, transitioning more of our borrowings into unsecured financings. As for the current status of our balance sheet at March 31st, our overall liquidity at quarter end was approximately $1.2 billion from unrestricted cash and revolver capacity. Net debt to EBITDA also declined from 7.3 times to 7.1 times during the quarter. Regarding our investment activity, we purchased 696 homes during the first quarter for $233 million. 401 of these homes were wholly owned acquisitions for $138 million, and 295 were bought by the JV for $95 million. Acquisition cap rates remain in the mid fives. We also sold 248 wholly owned homes for $75 million. Last up, our financial results. Core FFO per share increased 4.5% year over year to 36 cents, primarily due to higher occupancy, lower controllable expenses, and turnover. AFFO per share increased 6.8% year-over-year to $0.31. As a result of our execution to date, including the benefit of the earn-in of stronger leasing activity achieved during the first quarter and anticipated activity in April and May, we are raising our full-year 2021 same-store NOI growth guidance by 75 basis points to a range of 3.75% to 4.75%. This increase includes a 25 basis point increase in same-store core revenue growth in a range from 3.75% to 4.75%, along with a 75 basis point reduction in same-store core expense growth guidance in a range from 3.75% to 4.75%. In addition, we expect interest expense savings as a result of our investment grade ratings, In consideration of all these items, we are raising our full year 2021 core FFO per share and AFFO per share expectations by 3 cents at the midpoint, in a range from $1.34 to $1.42 for core FFO, in a range of $1.13 to $1.21 for AFFO. So in summary, 2021 is off to a strong start. We are particularly excited about our internal and external growth prospects, which we believe can widen our lead not only in the single-family rental business, but among all housing providers. We believe our best-in-class locations, scale, and local expertise differentiate us from our peers, and our channel-agnostic, location-specific external growth strategy, now even better supported by our investment-grade balance sheet, will propel us forward in helping us to deliver outsized returns. With that, let's open up the line for Q&A.

We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If you would like to withdraw your question, please press star then two. I'd ask that you please limit your questions to two per time in the queue. At this time, we will pause momentarily to assemble our roster. Today's first question comes from Nick Joseph with Citi. Please go ahead, sir. Thanks.

Just given the elevated home price appreciation that we're seeing nationally, is that having any impact on underwriting or initial yields on acquisitions?

Hi, Nick. This is Dallas. We're definitely mindful of the fact that we're in a rising price environment and being, you know, you know, where we're buying and why, given that we are seeing so much growth. We've been able to sustain that. Our cap rates call our stabilized cap rates in the low to mid fives. Large part of that, obviously, we're seeing the acceleration in rate alongside home price appreciation. It's typically pretty good proxy. But it's certainly something we're mindful of because, you know, not all trees grow to the sky, and so we want to make sure that we're measured, be smart about what we're buying. where we're allocating capital and sticking to really our core disciplines that Ernie talked about, being really kind of channel agnostic, but hyper-focused on making sure we're in the right locations.

Thanks. And then congratulations on the investment grade rating. As you move more towards that five and a half to six times target, will further investment grade credit increases impact your interest rate on the line?

Yeah, we have – Nick, it's Ernie. And the answer to that, one, thank you for mentioning that. I appreciate your congratulations. And two, yes, we have a grid that's consistent with most companies in terms of investment-grade grids. So if we were to be able to go to BBB+, there would be further increases in terms of the savings we would have as well as if we were to ever someday get into the A ranges. So, yeah, there is opportunity for us to have further savings going into the future.

Thanks. Thanks. The next question comes from Jeff Spector with Bank of America. Please proceed.

Great. Good morning, and congratulations on the investment grade ratings. First question is on collection of late fees. It seems like it's still dragging on. If you could just comment on that, please, when you expect to start collecting late

Yeah, hi. Good morning. It's Charles Young. In terms of late fees, you know, Q1 was more of a transition period for us, trying to get back to our normal course and communicating with our residents. And so today, as we move into April, we're running more like our historical structure. However, keep in mind that we're still prohibited in a number of states of charging late fees. So while we're back to our normal structure, we're not going to be all the way back until some of those rules are pulled back. And then at the same time, we still are working with residents who may have a hardship and are willing to go in some type of arrangement with us. And so if they reach out, we'll do that. But in the meantime, I think you'll start to see us move towards our typical late fee collection throughout the year. It should increase as the rules evolve.

Thanks, Charles. And then second question is, around some of the tailwinds mentioned. There still seems to be some investor concern that, you know, some of those could fade with reopenings. Can you provide any color on what you're seeing in April as, you know, we've seen some of the coastal areas reopen? How are your retention rates in April? Anything you can discuss or share with us, please?

Yeah, I think all indications are we're really in a strong position. As you can see from our results at Q1, we have a really favorable position with occupancy north of 98%, accelerating rent growth on new lease and renewals. And as you – you know, we have a few days left in April, but if you look at the numbers that we have, we're going to be north of 10% on the new lease growth, which is further acceleration from Q1. Renewals in the kind of mid-fives, a blend around 7%. We'll see where we settle out. But all of that is really healthy, and that's also with strong retention and renewal numbers. Again, as you go into peak season, it's a little seasonal. We're going to try to push rate and balance that appropriately. So you may see a little bit of push down on retention and renewal as things turn, but we're as strongly positioned as I've seen in my career in single family. So I'm really excited about the opportunity going forward.

Great. Thank you.

Thanks, Jeff. The next question is from Rich Hill with Morgan Stanley. Please proceed.

Hey, good morning, guys. Wanted to talk about bad debt for a second. Bad debt was still a headwind in 1Q, which makes some sense. So, two-part question. Can you talk about, and I think this is directed for you, Ernie, but can you talk about what's embedded in your guide for the rest of the year for bad debt and when we think that might switch from a bad guy to a good guy?

Yeah, Rich, I appreciate you asking that. The answer is yeah, bad debt does continue to be a headwind. The comp gets a little bit easier as the year moves forward. But it's really, we're on the path that we talked about on the last quarter, that on a sequential basis, We anticipate that bad debt will get a little bit better each quarter, but we still think, for instance, in the second quarter it's going to run similarly to what you saw in the first quarter, somewhere between 200 and 250 basis points. Hopefully we get into the mid to high hundreds as we get into the second half of the year. And so for the whole year, when you compare full year 21 to full year 20, we're still anticipating at the midpoint of our guidance that it's a bit of a headwind, but it does get better each quarter. But we clearly don't get back to historical numbers that we saw in 2019 of somewhere between 30 and 40 basis points until sometime well into 2022.

Okay, helpful. Hey, Dallas, I'm going to preface what I'm about to say by giving you a caveat. This is a specially annoying sell-side question. But walk us through why you're just not supposed to buy everything here. Some of your competitors are obviously being pretty aggressive with various different programs. We see a lot of new entrants in the space. There's tremendous tailwinds. I recognize HPA is expensive, and I fully appreciate the need to be prudent, but why not take your investment grade bond rating and just start buying as much as you can right now?

I'll try not to give you an especially annoying answer, Rich. I would say a couple of things. I mean, look, we're investors for the most part across all cycles. We want to be smart about when and where. We don't disagree that we have a pretty good cost of capital. So if things make sense, we would certainly want to try to find a way to lean in. But with that being said, too, we're also seeing pricing, especially on stabilized portfolios in the marketplace, trading well beyond what someone would deem a retail value. We're seeing cap rates compress and kind of the stability of that cash flow being extremely appealing to investors. So we're just trying to, you know, really weigh that all out in our approach. Now, also, let's just be cognizant of the fact that there's very limited supply right now. It is a tight supply environment, but we're active. And look, we went into the year feeling like $200 million to $300 million a quarter was pretty rational in a base case scenario where we could generate really strong risk-adjusted returns for the shareholders. And through the first quarter, we feel pretty good about that. We haven't done anything special yet this year. We you know, we agree on the sense or on the side of your question that, you know, we are in a favorable position. So if things become available to us, we're certainly going to try to be aggressive. But at the same time, we also don't, you know, want to be overly aggressive and dilute what is an exceptional portfolio with really, really strong operating metrics. I just want to echo what Charles said, which is, you know, in 10 years of running and being involved in this business, we've never seen fundamentals like this, to your point, Rich. So, We want to really continue to execute on the operational side, continue to add to the balance sheet through growth, but really emphasize that ancillary part of our business, which our residents are continually opting into, because that will be an enduring income stream for the business over the long haul.

Okay. Thank you, Dallas. Congrats on a good quarter.

Thanks.

We really appreciate it. The next question comes from Dennis McGill with Zellman. Please proceed.

Hi, good morning, guys. Thanks for the time. Charles, you made a comment. I think you said that just the strength of the market is impacting how you are thinking about new and renewals. And I just wanted to see if you could elaborate on what you meant by that.

Oh, yeah. So, you know, as we look forward to peak season coming, we've been performing – the numbers we put up in Q1 are what we typically see in summer months when things are – are really strong. And so the position of our portfolio puts us in a really nice position. So when you think about our renewal asks out into the summer, we went out in May with an ask in the high sixes. June, we're asking around seven. In July, we're asking around eight. These are all on renewals, which is an indication of the healthy strength of our portfolio. And a lot of that is buoyed by our occupancy rate, how we're executing, the teams are doing a phenomenal job, and the new lease rates that we're starting to see forward. And, you know, today, as I mentioned on the previous question, that for April, we're north of 10% on new lease. So that gives us a lot of strength to think about how we want to go about positioning the portfolio and capturing the strong market that's out there.

So you just meant that you're willing to be a little bit more aggressive than you normally would seasonally because of how robust occupancy is. That's right. Okay. Got it. And then, Dallas, on the acquisition side, with the competitiveness out there, are you either forced to or more willing to take on homes that might require more upfront CapEx and utilize your redevelopment expertise on that to still achieve the same level of cap rate, or is that unchanged?

No, I'd say it's unchanged. Dennis, we're certainly not afraid of a project if it's in a great location. But, no, our view on that hasn't changed at all. Great. Thank you, guys.

Thanks, Dennis.

The next question comes from Handel St. Justy with Mizuho. Please proceed.

Thank you, operator. So, good morning. Good morning. I wanted to go back and ask the acquisition question. Good morning. a slightly different way. Clearly, there's, you know, understanding that there's, you know, lots of competition type supply being selected. But I guess I'm really wondering, you know, what's giving you the confidence to hit that billion dollar target for the year, right? We're off to a bit of a slower start in the first quarter than I would have thought. And again, giving your comments about the market. I guess I'm curious, is there anything special underway, portfolios or anything meaningful under contract or LOI or something that's giving you a bit more confidence or something that could be helpful in us understanding the confidence that you're having in hitting that number.

Yeah. And, Dale, just for fun, you know, 233 is pretty close to a quarter of a billion dollars.

Net is 150.

That's okay. Well, we never talked about gross to net, but I would say this. A couple of things. Like I said, it was a pretty base case quarter for us. Going back to Q4 and even kind of pre-pandemic, our kind of normalized run rate's been right around, I would say, $250 million a quarter. That has some ebb and flow. I think in Q3 or Q4 of last year, we had a bigger quarter because we had a few other little things kind of come into our opportunity set. We feel good about it. I mean, look, we're in, call it a less than five weeks of supply in all of our core markets right now, just from an available inventory perspective. There's so much capital coming into the space that everything's pretty competitive. We've done a nice job of building up and starting to build a pipeline with a lot of our builder partners. So we'll continue to emphasize that as another channel for us as we continue to grow going forward. And, you know, we're likely to see some mini bulk and call it, you know, other consolidation opportunities over the next couple of years. Now, all that being aside, we still feel like we can grow to the tune of a billion dollars a year. And remember, we report on closings. It doesn't necessarily talk about pipelines, but we're in a pace that we're really comfortable with right now.

Okay, fair enough. And then on to the ancillary income, appreciate some of the commentary there. I think you mentioned you're halfway to your run rate of ancillary income by a year and 22. So pet care, I think you mentioned pest control. So what's next? And, you know, what is that back half of this year, more next year? So kind of curious on, you know, what you've accomplished on that checklist and what's remaining on the ancillary income front.

Thanks. Sure. So it goes back to our investor day a little over a year and a half ago. We talked about wanting to be between $15 and $30 million as a goal and kind of by the end of three years. And remember, back at that point, our ancillary revenue was basically zero. And we feel like we'll likely land somewhere between the mid and high point of that range over the next 18 months. But what we've done so far is really obviously revamped and enhanced our smart home technology platform and offering. Charles and the team have done a fantastic job of continually rolling out that product. That is now basically standard in our lease that we have people that are utilizing that service. We've added things around some enhancements to that profile, which we'll continue to adjust over the next 12 to 18 months. We've done things around filters and filter delivery services. That is now a standard feature that comes with all of our new lease signings, and we're working on renewal structures through 2020 – excuse me, 2021 as well. I talked about the fact that our PET program is being revamped through the end of 21. That also includes a bit more of an enhancement around screening. We've rolled out and is rolling out across the country now our pest control partnership with Terminex. We've got a number of initiatives that are centered around landscaping that we'll start to pilot later this quarter. I would call most of that stuff table stakes, and then as part of our ancillary focus in creating a better mobile experience for our resident, we would view that kind of beyond those being kind of our core offerings that we'll continue to offer ancillary product offerings that are also both national and market-specific in the coming years. None of that is really weighed into our forecast for the next 18 months. So we view all of that as additional opportunity to grow our business and our footprint with the customer going forward.

That's helpful. Thank you. And one last one, if I may, just another one of these. Well, maybe it's impossible to answer, but you don't have to ask it anyway. Occupancy and turnover hitting 50%. All-time best again. You're sitting here at 98.5%. You've got days to re-resident. I believe you said 20 days in the quarter, so I'm not sure how much better that can get from that perspective. But just curious on how you're thinking about some of these levels you're hitting with occupancy and turnover. Is this as good as you ever thought you'd get? Can it be better? Just curious if there's any perspective you have to share on that.

Thanks. Yeah. Yeah. I'm glad to jump in. Look, our teams are doing an unbelievable job at all levels. And it's been a very dynamic landscape. You think about where we were a year ago to what the teams have been able to do and adjust. And we are controlling what we can control. The market is in our favor. Nice tailwinds. But in terms of our ability to control costs, move people in, quickly, pre-lease homes by utilizing marketing and other tools, as well as turning homes, rehabbing homes quickly. All those are just driving our numbers down. We were already moving down on days of re-resident prior to COVID. And we continue to execute well. So, you know, look, we're at heady numbers. But as I said before, we're going into the summer in really strong shape. And with the demand still there, we'll see where it ends and how long it goes for. But the teams are ready, and they're doing everything they can to make sure that we capture what's out there. Proud of them.

Great. Great. Thanks, Charles. Thanks, everyone.

Our next question comes from Rich Hightower with Evercore. Please proceed.

Hey, good morning, guys. I'll echo everyone else's congrats on a nice quarter in several respects. Ernie, just on the investment grade rating, I think last quarter you talked about that being a distinct possibility, you know, later this year at the earliest. And so, you know, just maybe walk us through for a second what specific factors changed in such a short period of time maybe versus the timing that was originally expected on that, if you don't mind.

Yeah, happy to, Rich. You never know. It's not in our control completely, obviously. It's up to the rating agencies. We started to build more confidence after we were able in December to close on our new credit facility, which really upsized the amount of unsecured financing we had. And earlier than that, we weren't certain we'd be able to upsize it as much as we were able to. So we were able to add another billion dollars of unsecured financing to pay off secured financing. And a couple of the agencies are very focused on how much unsecured you have versus secured. And then, you know, the other real question was, Rich, was, you know, how are the agencies going to take to the current operating environment? Certainly the sector held up well during the pandemic, but we weren't sure, you know, how they would view things from a going forward perspective. And so certainly, you know, always try to err on the side of under-promising and over-delivering, you know, but we felt good in engaging with the agencies later in December a little more informally that there might be a window for us to go forward here in the first quarter of 2021 and We had some very good help from some advisors in the process as well, and we decided it was the right time to try. And fortunately, the agencies liked the path we were on. They certainly recognized, as you probably saw in the reports, the strength of the industry, the strength of our company in particular from a credit perspective. And we were fortunate to get there. It's the second time I've taken the company through, so you never know exactly how that's going to go. And so that's why I wanted to make sure we were being cautious, but at the same time we had some optimism. That's how we were able to get here maybe about a year earlier than we otherwise would have thought.

Okay, great. That's helpful, Cutler. You know, for my second question, I know you've mentioned several times in the past, including on this call, that, you know, work from home is increasingly, you know, probably a net benefit for your business and your tenant base. But I'm just wondering, you know, maybe the flip side of that coin, you know, as more and more companies are announcing, starting to announce a return to office plan at some point later this year, you know, clearly some portion of the workforce is going to have to be commuting into the office, you know, a certain number of days a week. And, you know, how does that change or factor into your underwriting criteria, you know, in terms of geography and the distance from sort of the urban CBDs, you know, respectively throughout the portfolio? And, you know, what's your comfort level or house view with the idea that more and more people might work from home permanently? And just how does that factor into the investment mix, if you don't mind?

Yeah, good question. So a couple of things I just want to touch on, Rich. You know, first and foremost, let's go back to pre-pandemic. We were 97% plus going into the pandemic. So call it all the macro tailwinds that center around millennials wanting flexible lifestyle and boomers that are preferential that are making some of these choices, that demand profile was in the business pre-pandemic. Your point around the work-from-home component and the balance of people going back to the office or staying home, we've certainly seen that in our survey data that one of the bigger drivers over the last year on our new leases and move-in that was being influenced was by people's desire to maybe have a bit more square footage because of the work-from-home component. So we view that as purely just a net positive for business, call it beyond the 97% plus pre-pandemic. I think for us as a company, in terms of how we position into that narrative, it'll be important that we stay current in terms of where those trends are going and are there things that we can do that offer that flexibility. Charles and his team look at a number of these things, both from how we rehab a home, fit and finish standards, certain offerings we can do with some of our partners in the marketplace, whether it be Home Depot or office furniture companies, et cetera, where we can drive additional synergies for the resident experience. I think that's the key thing here. The occupancy was there pre-pandemic. The demand was there pre-pandemic. But, you know, how do we continue to capitalize on that theme if it stays relevant for our business going forward?

Okay. Thanks, Del. You know, maybe just to drill down on one aspect of the question here, I mean, you know, if – Increasing work from home is part of the house view of, you know, the business's strategy going forward. I mean, are you increasingly comfortable acquiring homes farther outside the urban CBD? And does that open up, you know, investment opportunities that maybe you wouldn't have thought about if we were having this conversation two years ago? You know, can you go farther and farther out?

I mean, not so much from our current vantage point or our view. Guys, remember, at the end of the day, we're total return investors. So if the work-from-home component started to drive value in those neighborhoods that were much further out, companies might look at it. But we all know how this tends to play out. The pendulum swings one way and then it starts to swing the other. I think we've always prided ourselves on being more focused on buying infill product, higher demand factors that are driving to that ultimate experience, and it centers around school districts and transportation corridors. They go well beyond just whether you work from home or not. So all of those demand factors, Rich, from our current view, aren't changing. We would view our approach in allocating capital as continuing to be very deliberate in where we invest capital and why. And so far, on a risk-adjusted basis, we're not seeing anything that's telling us to go further out.

Got it. Thank you.

Thanks.

Our next question is from John Pawlowski with Green Street. Please proceed.

Hey, thanks for the time. Charles or Ernie, hoping you could provide some kind of details on the path for two drivers of the business as COVID impacts normalize. How does occupancy trend once you're able to move through evictions, and what's a reasonable trajectory of cost to maintain once turnover starts to pick up a little bit?

Yeah, so first question, you know, as we go into peak season, there's always seasonality around demand and turnover as well as occupancy. You know, we're at the high 98%. I don't think we'll be here forever. But given our turnover numbers, we were trending in the high 20s prior to the pandemic. We do think and expect that second half of the year we may see a little bit more turnover, but our execution on days of re-resident should mitigate that. So I think we'll settle somewhere in the 97s, mid-97s, high-97s. But at the same time, we're going to capture what the demand that's out there. With that comes what we're seeing is really high demand for our homes and locations, as Dallas was talking about, and we're able to capture that in the rent growth. So You know, our investment management team and ops team have always tried to optimize for the environment. And they're doing that right now. And as things change, we'll do the same. But our general execution with days to be resident in Q1 of 29 days, that's really phenomenal. That's down 20 days. We're keeping that going. And at the end of the day, I think we're going to end up in a kind of solid position that captures the markets.

And, John, on the cost to maintain question that you had, we certainly are seeing some positive impacts with the low turnover and our overall cost to maintain. You know, it's a reminder, you know, in our cost to maintain numbers, the repairs and maintenance of our homes is roughly about two-thirds of that cost, and about one-third of that cost is turnover. It's actually a little bit, you know, it's changed a little bit because turnover is lower at this point. Our guidance does assume that in the second half of the year, we get to a higher turnover number as we're able to work through some of the challenges we have in the portfolio, but But we think on a long-term basis, you know, we kind of normalize back to kind of what we saw in the 2019 range, which is, you know, prior between around $3,000, maybe $3,100 per door. But, of course, that grows with inflation, John. So if you're indexing back to 19, you have to grow that with inflation for two or three years and once we get back to a more normalized environment. But we're not seeing any additional pressures. But you certainly will see some short-term pressures, possibly, if turnover gets elevated in the second half of this year or into the early part of next year as we get back to a more normal operating environment.

Okay, understood. And then just last one for me, understood bad debt is fairly stable across the portfolio. Charles, have you seen any kind of sequential deterioration in payment trends across markets?

You broke up a little bit, but no, you're asking about bad debt or collections specifically within the markets?

Yeah, any market jumping out as deteriorating sequentially. Okay.

No, we really haven't seen any of that. You know, there's more challenging markets that we've talked about in the past with California, a little bit of Chicago. But I can say that some of these third-party rental assistance programs are helping in those markets, and our teams are doing a great job of really advocating on behalf of our residents to try to get some of those rental assistance. And so some of that's starting to show up. But to your base question, no, we're not seeing any real you know, sequential demand market by, you know, region by region. And as we have looked at in general, March was a good performance on collection. In April, we have a couple days left, but we're coming in fairly strong as well.

All right, great. Thanks for the time.

Thanks, Rob. The next question comes from Gade Ramani with KBW. Please proceed.

Hi, this is Sarah on for Jade. My first question is, with the surge in home price appreciation, are you pursuing rent-to-own strategies with customers in any market?

Not officially, no. What we've been doing is fee-simple buying with anywhere from a one- to two-year lease.

Thank you. And my second question is, what are the most promising offerings within ancillary revenues?

Well, we think there's a few things that we do really well, including smart home technology that allows people to manage their home mobily, both from ingress, egress issues, as well as managing their thermostat. We certainly are excited about some of these pilots I talked about earlier that we think deliver in a better way on a worry-free leasing lifestyle, and things like landscape and being able to offload or ancillary product offerings, discounts with some of our biggest vendors are all going to add to that value experience for the customer. So I think as we continue to find things that are sticky, and maybe more importantly, things that our customers can take with them. Our pest control partnership, for example, is a great avenue for that, where somebody comes into the portfolio, maybe stays with us for a couple of years, has a subscription-based service. As I mentioned before, the subscription economy that we're all part of and then they take it with them in their walk of life beyond maybe their stay with Invitation Homes. That continues to be an ancillary income generator for our business. So we're really excited about not only piloting, but figuring out how to enhance some of those offerings so that they can be perpetual income for the business going forward.

Got it. Thanks for taking my question.

Thank you. Thank you. The next question comes from Brad Heffern with RBC. Please proceed.

Hey, good morning, everyone. Another question on the sort of acquisition angle. Has the sort of amount of work that you've had to put in to get a similar acquisition number changed over time? Like, does the hit rate on the $233 million that you acquired this quarter, is that significantly lower than it has been in the past?

It's been more or less about the same for the last couple of years. With certainly less supply, there's not as much to look at, albeit we do look at everything in the marketplaces. but it's generally been from a macro perspective on supply, the same number for the last couple of years. At this point, our data and what we call our acquisition IQ technology has become so much more sophisticated and robust because every year it gets a year smarter. We're well over, call it a million plus homes underwritten in the last 10 years, and our view on anything from a zip code to a sub-market continues to evolve and get smarter and smarter with time and distance, as we've seen things happen both at the marketplace and as we've seen things happen within our portfolio. So our ability to make quicker decisions has probably gotten faster, but the data continually enhances and makes that experience even better for our underwriting team.

Okay, got it. And then just thinking about the guide, you know, some of the commentary earlier about the renewal rates that you're asking in the coming months, I mean, it sounds really robust. So I'm curious how much of, you know, the April new lease growth of 10 plus or the July renewal of A plus, like how much of that's actually in the guidance and how much of it's upside?

Yeah, I would say, Brad, if we're able to achieve close to those numbers that Charles said, there's always a little bit of a give and take on the renewal asks. We don't get all the way to our number. But if we're able to continue with the numbers that we had in April and those numbers that Charles laid out there, we'll certainly have an opportunity to aim toward the high end of our guidance range or maybe even a little bit better. But we'll just have to see how that plays out.

The next question comes from Keegan Carl with Brandenburg. Please proceed.

Hey, guys. Thanks for taking the questions. I guess to kind of take a different point of view from earlier questions, what's stopping you guys from kind of clearing out the bottom 2% to 5% of your portfolio that's performing maybe below average and then taking advantage of the current housing level and then kind of recycling that into markets you think are going to perform better over time?

It's a good question. And, you know, we have a pretty good track record of, you know, consistently culling the bottom 1% to 2% of our portfolio any given year. This year we're off to, you know, I would say a similar pace. I think we had, what, 200 – how much did we have in dispositions? 75 million. Yeah, it was about 75 million, about 250 homes in the first quarter. So, you know, at that run rate, we would, you know, call it cull through 1% to 1.5% of our portfolio annually. this year, if my math's right, in terms of, say, 1,000 sales or so on the current portfolio base. So you're right in that pricing is really good. Now, taking a step back, you know, when you're in these types of moments, you definitely can see a value proposition on maybe what your sale prices are, but you've got to weigh that out with some of the growth that we're seeing as well. So, you know, in our West Coast markets where in just the first quarter we're seeing new lease rate growth between 15% in Phoenix, 12% in Vegas, another 11% in Seattle, it makes it hard to want to sell much of anything with this kind of momentum. And the portfolio, as Ernie mentioned before, has been pretty consistent in terms of operating expenses and our expectations around retention. So we're weighing that all out. And we certainly would start to cull if we saw an area or a part of the market that we thought we could maximize pricing. But we've done quite a bit of selling in the last you know, three to five years as well to be prepared for this month. But we're really excited about how the portfolio is behaving. We'll look to maximize those returns going forward.

Got it. Thanks. And then specifically when looking at Florida, have you guys experienced any significant insurance premium increases? And do you think this will kind of influence your decisions on transacting in the state going forward?

It's a great question, something we look at very, very carefully within the property insurance markets, which has been very difficult for the last few years in the residential space. I know the multifamily guys have been talking about insurance increases each of the last two years of anywhere between 20% and 40% for each year. We've actually had some pretty good luck down there because the risks of our assets are so much different because they're so spread out, and each of our individual assets have an insurable value that's relatively small. It's not a large multifamily community. It's not a large office building, things like that. And so with that, two years ago, we had our insurance renewal, and our insurance renewal was happening in March. So our March 2020 insurance renewal, we actually held our rates flat across the portfolio. And this year, they were only up about 7% or 8%. So over two years, we're only up about 7% or 8% combined, where I think multifamily is up potentially 30% to 40% over that same period of time. It's something we watch really closely. It's something we're very cognizant of. But to date, we've been fortunate that the property insurance market understands the risk profile of our portfolio that's significantly different than anything else you would see in the commercial space. And it's played out well for us.

Great. Thanks for your time, guys.

You're welcome.

Our next question is from Ryan Gilbert with BTIG. Please proceed.

Hi. Thanks, everyone. First question, Dallas, was hoping you could add some detail around just your acquisition channels in the quarter. Did the mix between channels change at all from prior quarters, and how are you thinking about the opportunity, I guess, between sourcing acquisition volume between the MLS channel, iBuyers, home builders, or anywhere else you can buy homes?

Yeah, good question. And it always varies quarter to quarter. So, you know, I certainly can report on what we did in the first quarter. As I mentioned before, we had very little bulk in Q1, but we probably 80% of our homes came through what we would call traditional kind of one-off channels. We had, call it, 10% to 12% coming through our builder partners and another, say, 5% to 6% coming through iBuyer channels as well. So that can, you know, tend to vary based on any given quarter kind of course of what we have going on. Whereas in Q4, you know, it was roughly 30, 40% that came through what we call mini bulk just for, you know, some comparison. So I would call this like a, I hate to use the word vanilla, but it was kind of a pretty vanilla quarter. Nothing too exciting outside of just consistently buying, you know, one-off properties at the local level.

Okay, got it. And looking ahead, has there been any change in deal flow or how does the pipeline look by channel? Any changes?

Without giving too much forward guidance, I would just say we feel really good about where the pipeline is, both from the partnerships I talked about earlier on the call with our builder partners as we look to expand those channels. We've talked about that for well over a year now. And those opportunities take time to come to fruition. We're really excited about the work that, you know, the team have been doing on some of the smaller, you know, really smaller consolidation opportunities that are out there. But again, this is more of an aggregator's environment right now with low interest rates and the amount of capital that's coming in the space. I think we will be really well positioned over the next, call it two to five years for some good consolidation opportunities.

Okay, got it. Second question's on build to rent. We've heard a lot about it. I'm wondering if you're noticing an increase in competition from build to rent operators And if there's any markets you could, you know, where you're seeing maybe a bit of pressure on either turnover or occupancy, funded rent. I mean, it doesn't seem like it's showing up in your quarterly numbers. But, you know, maybe any color you could provide would be helpful.

Yeah. So, good question. We don't get any pressure, generally speaking, from build-to-rent operators. Typically, those neighborhoods are much further out relative to our portfolios. But, you know, we're always being approached by build-to-rent developers, other landowners to see if we'd be interested in parts or whole sections of communities. We apply really the same thinking that we do to buying an individual home, which is do we like that location and are we long-term believers in the fundamentals around that neighborhood? We certainly own parts or whole neighborhoods around different markets in the country, but generally they're much more infill in nature. Okay, great. Thanks very much for the time. Thanks, Ryan.

Our next question is from Rich Skidmore with Goldman Sachs. Please proceed.

Hey, Ernie. Just a quick follow-up on guidance just to make sure I understood correctly. You raised guidance by three cents and benefited from the IG rating by three cents, but you took up same-store NOI, which would probably add another couple of pennies. I'm just trying to make sure I understand what might be the offset. Is it just that the three cents on interest expense is an annualized number?

Can you just clarify that? Yeah, that's exactly it, Rick. The three cents is an annualized number, so for the rest of the year, it's about a penny and a half, maybe a little bit better of benefit, and the rest of the benefit comes from the increase in the same store annualized. Yeah, you called out. You got it exactly right.

Got it. Thanks, guys. Appreciate it.

The next question comes from Sam Cho with Credit Suisse. Please proceed.

Hi, guys. Congrats on a great quarter. So my question is similar to, I think, the portfolio turn question you had before. I'm just looking at the blended rent spreads, and the Midwest has been lagging the rest of the portfolio. I know you've become and always been a Sunbelt focus, but kind of just wondering what your thoughts around that area is and how it factors into your premier location, local strategy.

Yeah, I think, Sam, it's Ernie. Certainly, we have a portfolio of 16 markets. You're going to have your better-performing markets and your weaker-performing markets. And you've certainly seen we've had outside sales out of some of our weaker-performing markets. But even our weakest-performing markets are doing pretty darn well. And we're talking about some record high numbers we're seeing across the portfolio that, you know, the markets that may be lagging a little bit are still putting up really solid numbers. But we'll certainly look at the opportunity, and if it makes sense to call a few more homes because it's a really unique time in the market, we're real estate investors first. And we'll certainly consider that. But we also have to weigh against that, what additional home price appreciation or rental growth may be giving up if we sell today versus selling sometimes in the future. But we do recognize that there's a good opportunity and there's a good market out there. And as you guys have seen in the past, we've done bulk transactions to other institutions. More than half of our sales, we've sold over 10,000 homes since we started. And over half of our sales have been to other institutions. And I think everyone's aware there's certainly capital available if we want to pursue that. And then the other half we've sold roughly on a one-off basis. back into the end-user market. So it's a good observation that folks have had on the call today as well as yourself, and it's something we certainly think hard and long about. Got it.

And then I want to touch again on the ancillary revenues. I mean, that $15 to $30 million, I mean, that's helpful. Just wondering, how much of the resident population do you think will pick that up? I know you guys probably did a lot of studies around this. So just curious as to what you're expecting when you're kind of factoring that into guidance.

Let me take a swing at that and let Charles wing in. Well, I think each one's going to be a little bit different. So as Alice mentioned, the smart home device is going to be something that's mandatory going forward. So at some point, that's going to get very close, if not all the way to 100% compliance as leases turn over and people who are renewing, you add that to the program. Other things, you know, like pest control are certainly going to be more popular in certain parts of the country than others, depending on just the nature of where they're at. You know, pets we think universally will be accepted because pets are generally, you know, there's an equal dispersion of pets throughout our entire portfolio. And in landscaping, again, you know, for some markets it's going to be more prevalent than in others. You know, some of our markets, you know, we're very cognizant of things like drought conditions and do a lot of hardscapes. So landscape's not going to be as prevalent in some of those markets, Sam, as it would be in other markets. So we do have a pretty good sense across the board on a product-by-product basis what that could look like, but, you know, the answers are going to range somewhere in the, you know, to a third of the portfolio to maybe all the way up to 100% of the portfolio depending on the product. Okay, that's helpful, Colin. Thank you so much. Got it.

At this time, I am showing no further questioners in the queue, and this concludes our question and answer session. I would now like to turn the call back over to Dallas Tanner for any closing remarks.

Thank you. We appreciate everybody joining us today. We have a great business with excellent fundamentals, and we wish you all the best. We look forward to seeing many of you soon. Thanks.

Thank you again for joining us today, and we wish you all the best. We look forward to seeing you again soon.