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spk12: Greetings and welcome to the Invitation Homes second quarter 2021 earnings conference call. All participants are in a 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.
spk14: 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 second quarter 2021 earnings press release and supplemental information. This document was issued yesterday after the market closed and is available on the investor relations section of our website at www.invh.com. Certain statements we make during this call may include forward-looking statements relating to the future performance of our business, financial results, liquidity and capital resources, and other non-historical statements which are subject to risks and uncertainties that could cause actual outcomes or results to differ materially from those indicated in any such statements. We described some of these risks and uncertainties in our 2020 Annual Report on Form 10-K and other filings we make with the SEC from time to time. Invitation Homes does not update forward-looking statements and expressly disclaims any obligation to do so. We may also discuss certain non-GAAP financial measures during the call. You can find additional information regarding these non-GAAP measures, including reconciliations to the most comparable GAAP measures to the extent available without unreasonable effort in our earnings release and supplemental information, which are available on the investor relations section of our website. With that, let me turn the call over to Dallas.
spk13: Good morning, and thank you for joining us today. Last night we posted our second quarter results, closing out a very strong first half of the year. The current fundamental tailwinds we are experiencing are among the best we've seen. and we anticipate that these will stay with us for the foreseeable future. Demand for our high-quality, well-located single-family homes continues to greatly exceed supply, as shown by our high occupancy and retention rates. Today, there are nearly 90 million people in their 20s and 30s in the United States. We expect this population surge to be heading our way for many years to come. As this segment of the populations form families and seek out more space and homes to live in, We see Invitation Homes as a part of a comprehensive housing solution that helps serve those who prefer the convenience and lifestyle of renting a single-family home. With our integrated platform delivering a first-rate resident experience and efficient operation, we believe we are well positioned to meet the rising demand for our product through continued growth. In this regard, we significantly enhanced our multi-channel strategy this past week with the announcement of our new strategic relationship with Pulte Group, the nation's third largest home builder. Our preference from the beginning has been to partner with the best home builders rather than compete with them directly. And this strategic relationship greatly strengthens that approach. Over the next five years, we expect to buy approximately 7,500 new homes that Pulte will design and build and have already identified the first thousand homes across seven communities located in the Sunbelt region. We love the approach of acquiring great product in great locations across a diverse subset of communities that will further enhance our risk-adjusted return profile for our investors. We look forward to welcoming our new residents into these neighborhoods where families who both lease and own homes build a community together. We're pleased to collaborate with Pulte in the important next chapter of our builder partnership story. It's an exciting time as we invest to bring new homes to the market, complementing our other acquisition channels. Now, outside of our announcement with Pulte, we've bought almost 1,600 homes so far this year through June 30th for $569 million. We're over halfway to our billion-dollar acquisition target for this year. We remain confident that we can achieve our target during the second half of this year. Directing us in our effort is our three pillar strategy of location, scale, and eyes and markets. These differentiate us from our peers and support the acquisition engine we've designed and perfected over the last decade. Our first pillar, location, speaks to our focus on select markets with high population and job growth that offer good schools and easy access to employment centers and transportation corridors. Location is a major driver of outperformance. as evidenced by our West Coast and our Sunbelt markets. The second pillar is scale. With about 5,000 homes per market on average, our scale is industry-leading and extremely difficult for competitors to quickly or easily duplicate. And our third pillar is being high touch with eyes and markets. This refers to our local team of experts who oversee our resident services, leasing, and investment decisions. Our eyes and market go beyond desk-bound associates and algorithms by investing with local insight and relationships in order to find the best homes at the best price. Together, these three pillars support our proven track record of disciplined growth and support our philosophy of genuine care. We think our occupancy of over 98%, turnover of only 25%, average length of stay now approaching three years, and high resident satisfaction scores are amongst the strongest indicators that our teams are delivering on our mission statement. Together with you, we make a house a home. We've lived out that mission in both good and challenging times. During the last 16 months, some of our residents have faced significant hardship. We have helped provide peace of mind to those who have been struggling by providing flexible payment structures, waiving late fees, assisting in securing rental assistance, and forgiving past due balances. We have consistently gone above and beyond, and I couldn't be prouder of how our teams have supported our residents and communities during these challenging times. We will continue to follow all government directives, laws, and regulations at the national, state, and local levels. And we will continue to go beyond what is required and work with those impacted by the pandemic, because that is who we've always been, and that is who we will continue to be. Finally, I'd like to wrap up with some thoughts on sustainability. We're continuously taking the steps necessary to be a responsible steward who encourages discussion, innovation, and action amongst our peers, associates, and the industry. Earlier this month, we announced our investment in Fifth Wall's Climate Tech Fund, which is seeking solutions to reduce carbon emissions from the construction, ownership, and operation of real estate. In addition to investing in future solutions, we continue to roll out initiatives that help limit the company's carbon footprint and the environmental impact of our homes. These include our smart home technology that help residents manage their homes and save up to 15% on their energy bills, and our air filter home delivery program that provide better air quality and improve HVAC efficiency. Looking forward, we're focused on identifying new opportunities to advance further long-term sustainability efforts. In conclusion, I'd like to recognize our nearly 1200 associates across the country. You continue to be the driving force behind the value we create for both residents and shareholders. And I'm grateful for your dedication to that mission. We could not be prouder of the work we're doing together to provide homes for tens of thousands of families who need or prefer to lease a home today. With that, I'll now ask Charles to discuss our second quarter operating results in greater detail.
spk18: Thanks, Dallas. I'd like to begin by echoing your thanks to our associates for providing another quarter of exceptional care to our residents who placed their trust in us to make leasing a home friendlier and worry-free. Our positive momentum and focus on residents have resulted in another great quarter operationally on both the revenue and cost side. With outstanding fundamentals in our markets and excellent execution by our team, same-store NOI grew 8.4% year-over-year in the second quarter. Same-store core revenue was up 5.9% year-over-year, driven by strong rental rate growth, continued strong occupancy, and improved other property income. In addition, our collections came in at 99% of historical levels in the second quarter. On the expense side, expenses remained in check during the quarter. Same-store core expenses in the second quarter increased only modestly, up 0.9% year-over-year, aided by continued low turnover. Next, I'll cover leasing trends for the second quarter. Year-over-year, renewals increased 230 basis points to 5.8%, and new leases increased 1,110 basis points to 13.8%. This drove blended rent growth to 8%, or 470 basis points higher year-over-year. Same-store new and renewal lease rates have grown over the prior month every month this year. At the same time, same-store average occupancy came in at 98.3% in the second quarter and 80 basis points higher year over year. In fact, June was the ninth consecutive month that all 16 of our markets averaged above 97% occupancy. There are two main factors supporting our high occupancy. The first factor is is continued strong demand for high-quality and well-located homes. Included within that are favorable demographics and fundamentals that Dallas mentioned earlier. In addition to these, the need for more space remains the number one reason for moving into our homes. The second factor is our continued improvement in our days to re-resident. During our first quarter earnings call, I told you that the number of days between when a resident moves out and a new resident moves in had decreased significantly to 29 days. We reduced this even further during the second quarter to only 23 days. Our goal is to make finding a new home and signing a new lease as simple as possible, and we're continually trying to improve ways we can lease quicker and move in faster. One of the ways we're doing that is through technology. Prospective residents are able to review floor plans and conduct virtual tours online, with a large majority choosing to do so on their mobile device. When a vacant home is available for an in-person tour, we're happy to work with their preference of doing either a guided tour or a self-tour using our smart home technology. But most of the time during the second quarter, our available homes were pre-leased to a new resident before that home was even rent-ready. With residents staying longer and our homes at such high occupancy, we're pleased to reintroduce our ProCare home visits in the second quarter after a temporary pause during the pandemic. As a reminder, ProCare is our unique, proactive approach to serving our residents from move-in to move-out, including post-move-in orientations, proactive service trips, and pre-move-out visits. We believe regular, proactive visits help us identify opportunities for both R&M and turn savings, and provide an enhanced experience to our residents. In summary, thanks to the great work of our teams, we believe we are well positioned for the second half of 2021. And we're excited to keep this momentum going. We remain very focused on delivering outstanding service to our residents and outstanding results to our stockholders. With that, I'll pass it along to Ernie.
spk15: Thank you, Charles. Today, I'll cover the following three topics. First, balance sheet and capital markets activity. Second, financial results for the second quarter. And third, updated 2021 guidance. Regarding our balance sheet and capital markets activity, we had over $1.1 billion in available liquidity through a combination of unrestricted cash and undrawn capacity on a revolving credit facility at the end of the second quarter. Earlier this month, we gave notice of our intent to settle conversions of our 3.5% convertible notes with common stock. We expect the $345 million of notes to convert into approximately 15 million shares on or before the maturity date of January 15th, 2022. Post our announcement, to date, approximately $177 million of notes have converted into approximately 8 million shares of common stock. We anticipate the full conversion will reduce cash interest expense by approximately $12 million on an annualized basis, and on a Q2 pro forma basis, result in an improved net debt to EBITDA ratio of 6.7 times, down from 7.0 times on an as reported basis. This will leave us with no debt maturing prior to December 2024. We also announced back in May that we closed $300 million of privately placed senior unsecured notes. The private placement jump started our goal of transitioning toward a higher proportion of unsecured debt and improved the laddering of our debt maturities. It also came on the heels of receiving investment grade ratings from three of the rating agencies in April. We remain committed to further strengthening our balance sheet and are pleased with the progress we've already made since achieving investment grade. Turning next to our financial results for the second quarter, Core FFO per share increased 14% year-over-year to $0.37, and AFFO per share increased 16.9% year-over-year to $0.32. These results exceeded our expectations. Based on our latest forecasts through the remainder of the year, we are raising our full-year 2021 same-store NOI growth guidance by 100 basis points to a range of 6.5% to 7.5%. This increase includes a 50 basis point increase in same-store core revenue growth in a range from 5% to 6%, while maintaining same-store core expense growth guidance in a range from 2.5% to 3.5%. Finally, we have increased our guidance for full-year 2021 core FFO by $0.02 at the midpoint to $1.44 per share and increased full-year 2021 AFFO by $0.02 at the midpoint to $1.24 per share. As Dallas mentioned at the beginning of our prepared remarks, we believe our differentiated strategy of focusing on location, scale, and eyes and markets is the best formula for our business now and into the future. When coupled with a strong balance sheet, a robust internal and external growth model, and an unwavering commitment to resident care, we believe Invitation Homes is best positioned to deliver outstanding results to our residents and stockholders. With that, let's open up the line for Q&A.
spk12: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. And our first question will come from Rich Hill of Morgan Stanley. Please go ahead.
spk17: Hey, guys. Good morning. Congrats on another good quarter. I want to just go back and talk about the guide a little bit. And Ernie, I'm sorry if I missed this in the detailed prepared remarks, but could you maybe walk us through what you're assuming for bad debt and other income in the second half of the year? I recognize in 2Q, other income turned into a good guy and bad debt was neutral. Just trying to understand a little bit how conservative those numbers might be in the second half of the year relative to the guide.
spk15: Sure, thanks, Rich. Yeah, specifically with other income and bad debt, you're right to point out that other income became a bit of a tailwind for us in the second quarter because we had a comp where last year in the second quarter we didn't charge any late fees, and now we're charging late fees where permissible pretty much across the portfolio, again, where it's allowed. We expect that to continue here into the second half of the year, so you should have a very good comp for the second half of the year in other income that was similar to what we saw in the second quarter. With bad debt, we were pleased to see that we saw some improvement a little bit faster than we thought we would. We thought the second quarter was going to have more of a headwind. With regards to bad debt, comparing to last year, we ended up coming in at the same number. You may recall last year, Rich, in the second half of 2020, we saw bad debt go into the low 2% range. We do expect that, we hope, and based into our guidance, that bad debt will continue to improve off the number that you saw in the second quarter. Still staying above our historical average of about 40 basis points significantly, but trailing down more into the mid-100 range, maybe a little bit better as we get into the fourth quarter. So it should be a tailwind for us, but it should continue to be a tailwind for us, we would hope, as we go into 2022 as well.
spk17: Got it. And then moving to the expense side of the equation, it looks like expenses are going to be a little bit higher in the second half of the year. Some of that has to do with seasonality. But I also think, you know, if I remember correctly, some of this has to do with insurance costs and then maybe a little bit higher turnover. Do you think there's any scenario where, you know, the expense, the assumed expenses in the second half of the year could test the low end of the range or said another way, what would drive it to the low end of the range and give you confidence that it could maybe be a little bit lower than what it implies at the midpoint?
spk15: Yeah, that's a good question, Rich. Yeah, there's certainly absolutely scenarios where we can do better than midpoint in the range and maybe get down to the low end or maybe even do a little bit better. We do think in the second half of the year, expense numbers will be higher for really the following reasons. One, we had a really good second quarter real estate tax number that you might have seen on a year-over-year basis as we had some refunds come through. We expect to get back more to where we expected the run rate to be for real estate taxes during the second half of the year, which is probably about a 4% increase year-over-year. That's coming off of basically about a 1% number that you saw in the second quarter. Real estate taxes are the biggest component of our expenses. They're almost 60% of our expenses. We do think turnover will continue to, you know, maybe, well, actually continue, could increase year over year. We haven't seen that yet this year. So we've built that into our guidance that we do expect a year over year increase in turnover. We'll just have to see if that comes to fruition. Insurance costs, as you pointed out, are running higher than they were last year, up about 7%, which is, I think, industry leading in the residential space. I think most people are seeing increases in the 20% to 30%. space in the residential world with insurance. So that's worked out pretty well for us. So, you know, we hope that we'll have similar performance that we saw in the first and second quarter where things came in a little bit better than we originally thought. We're going to certainly try hard to do that, but we wanted to lay out something that, you know, we thought gave us, you know, where we thought things could potentially come under expenses and just look to outperform like we've had so far this year.
spk17: Got it. That's helpful. Hey, Dallas, just one more question from me. I'm curious what you're hearing about home builders with similar partnerships relative to what you just announced with Bolte. Is this sort of something that you can replicate on a much larger scale? And I'm asking really from, I suspect you would have done a lot of these over the past five years if you could have. But are you seeing much more demand from the home builders to do these? And is this just a template that could take you from 7,500 homes over the next five years to something incrementally higher than that?
spk13: Well, good question, Rich. First and foremost, I think we've talked about this really the last few quarters. We work with a variety of builders, generally speaking, in the past. And we've done stuff with both public, private builders, boutique builders in different markets. The Pulte relationship has continued to develop over time. Ryan Marshall and I got to know each other a couple of years ago, and this was something that we've been working on in a spirit of partnership to try to figure out, you know, how can we really move the needle for both companies over time and distance? And so I think it's the right start between us and a partner like Pulte where, you know, we can help them in ways that they can be, you know, As Ryan mentioned on his call, a little bit more aggressive maybe on some bigger parcels, and they can certainly help us in that we can have a partner who's an expert at what they do help us with, you know, future delivery pipelines in parts of the country that, you know, we can be a bit picky about. Is it replicable? Perhaps. Maybe also it can go beyond what we've already talked about. So I think we're excited about it. It doesn't preclude either company from doing business with other parties, but it's meant to be strategic in nature. We're going to collaborate and find ways to take these first 7,500 and hopefully grow it well beyond there.
spk17: Great. Thank you, guys, and congrats on continuing to put up some nice growth here.
spk15: Thanks, Rich. Appreciate it.
spk12: The next question comes from Jeff Spector of Bank of America. Please go ahead.
spk07: Great. Good morning. Just to follow up on the Pulte announcement, can you discuss a little bit more how it will work? Are they building the homes specifically for rentals, meaning better materials or anything different than they normally do? And I guess the margins or, you know, how does this exactly work for you?
spk13: Well, so first of all, they're really good at what they do generally, right? I mean, the nation's third largest home builder, they build, you know, tens of thousands of homes every year. I think what is strategic for us is to have the ability to appreciate and understand future pipeline and where some of those opportunities may be to collaborate on floor plans and fit and finish standards that are, you know, incrementally helpful to us as a single family rental operator. And I think more importantly, we're bringing additional supply into the marketplace beyond what perhaps, you know, Pulte would do in a given year. This is meant to be, you know, incremental growth for both companies. So all that you described there, you know, it really is some of the finishing details of why partnerships like this can make sense. And I think, you know, more importantly, it'll kind of come in a variety of buckets. There will be Neighborhoods where we're buying homes that are part of a broader sales effort by Pulte, so our renters will have neighbors that own their homes, much like our portfolio exists today. There will be opportunities where we can cluster and do some things from an efficiency perspective that will allow us to have maybe better efficiency standards that could create margin expansion to your earlier point. And then I think there will also be, you know, parts or entire parts of communities that could lend themselves to rental, which will allow us to, you know, test and try some different service standards for our residents over time and distance. All meant to be collaborative, all meant to be in a spirit of partnership with Pulte, and really not all that different from our approach with builders in the past, except that we can be in on the ground floor much earlier in a much bigger scale.
spk07: Okay, thank you. And then I know that you have several important data analytic initiatives. I just find it so interesting every quarter we talk about increasing demand and average length of stay continues to increase. Anything else you can share with us what you're learning on whether it's your new customers or those that are staying through your data initiatives?
spk18: Yeah, this is Charles. I mean, what we've been able to track really from both marketing and data is what's driving the demand for our homes. And as we talked about in previous calls, we've been surveying our residents as they come in. And it's interesting that I said in my opening remarks that they're looking for more space. About 27% are moving from cities to the suburbs. We're also seeing a trend of people coming from out of state into our markets like Florida to the southeast, Atlanta, Carolinas, even into Texas coming out of some of the western states. So that data is all leading towards us seeing an uptick. in our average length of stay. That, you know, is moving, as we talked about, we expect to be around three years, and each month, each quarter, it's getting a little longer. So we continue to watch that data, as well as other things that are, you know, making it, you know, so we can make sure we're creating great opportunity for our residents. Most and foremost is it's the great locations of our homes. Um, and, and frankly, that is the portfolio was built originally and that's what's driving the demand. Good school district, safe neighborhoods, uh, well located homes.
spk07: Thanks. And then my last question, a follow up, I guess, on that point is just, I know location of course matters, uh, and it's critical, but demand is strong. It seems like for single family rentals throughout the country, are there more markets you're looking to enter?
spk13: Yeah, great question. I mean, look, if you look at our current footprint, we're seeing household formation at almost two and a half times the U.S. average. So your point about demand is spot on. The country continues to move further south. And we've been pretty vocal about the fact that we would like to be in a few other markets maybe over time. Salt Lake City would be a market that is one that we've looked at. Austin. We've always liked when we were in Nashville, we just didn't love the product. So I do think there will be opportunities in the future, hopefully, that will allow us to maybe have a little bit more market expansion. But, again, taking a step back, remember, our scale matters. It's one of the three pillars we focus on from an investment perspective. And so expect us to continue to invest in the markets that we're in and drive that additional scale, which will then enhance our overall return profile for shareholders.
spk07: Great. Thank you.
spk12: Thanks. The next question comes from Sam Cho of Credit Suisse. Please go ahead.
spk01: Hi. Good morning, guys. Just going back to the Pulte relationship, so when you receive those new homes in future years, are you planning on receiving them in communities, or is it more spread across select markets?
spk13: It's a combination of the two. So within a community, you know, we may, and I'm just using an example, if Pulte were to build 600 or 800 homes in a community, we may be a buyer of 100 to 150 of those. And then there may be other communities where, you know, they can be clustered or spread out in much smaller numbers. It just depends on the opportunity set.
spk15: Yes, Sam, what's going to happen is Pulte will bring forward to us, well before they move forward with the project, the opportunity. And we'll sit down with them and we'll negotiate on a project-by-project basis whether we're interested in what makes sense for both parties in terms of how much we would participate in that project. And that will just go into the pipeline for us. So you're going to see things that are going to be delivered on a community-by-community basis. And over time, we'll see it build up in various markets. We're working with that. But so it's very much on a project-by-project basis is how the delivery schedule will be set.
spk01: Got it. So, I mean, I was just curious because, like, for those community-based acquisitions, I guess, could there be potential for amenity fees being incorporated in those?
spk15: So what typically happens is an HOA will be set up in a community. And if we're a part of a community, then just like we have with HOAs currently, if they have amenities in our current homes across the portfolio, that would be set up that way. If we were to buy an entire community, then something would be established with regards for that entire community that we would be responsible for at that point.
spk01: Got it. Okay. Great color. One more from me. Just looking at your two JVs, could you remind us how the portfolio construction differs for Rockpoint and Fannie?
spk15: So the Fannie JV is very much a JV that came, that's a historical JV that came over from the merger. And that has homes in Nevada, California, and Arizona. And it is really kind of in its wind down phase, but it will take a few years for that to happen at this point. I think it's less than 500 homes or around 500 homes. And each year we've been selling between, say, 50 and 150 homes out of that. The Rock Point JV, the geographs there will be more similar to the portfolio that we have today here at Invitation Homes. That JV is not going to focus on every market, the 16 markets. that Invitation Homes invests in, but it's going to focus on more between 8 and 10 markets. So that will be a little bit more of a geographically diverse portfolio. And that's a growing portfolio, and that will continue to grow likely over the next year to year and a half as we have a three-year investment horizon for that JV.
spk01: Got it. Appreciate the color. Thank you, guys. Got it.
spk12: The next question comes from Handel St. Just of Mizuho. Please go ahead.
spk05: Thank you. Good morning out there.
spk15: Hey, good morning, Handel.
spk05: So another one on the strategic partnership with Pulte. I was hoping you could discuss a bit more, provide a bit more color on some of the targeted yields or IRRs, thoughts on funding, and understanding your comments about scale. I guess I'm curious, would you be open to entering new markets via this partnership because their platform, I guess their footprint is a bit more expansive than yours?
spk13: Yeah, I mean, to answer your last question first, yes. I mean, I think one of the benefits of this partnership will be, you know, we could look at new markets together, and it would give us a meaningful approach to scale, which you know for us, Handel, is really important to offer the suite of services like ProCare and some of the other, you know, benefits of being in our portfolio that are derived from that position of strength being scale. You know, in terms of the return profile, it's very similar in terms of how we've been buying for the last couple of years. You know, we think that we can find, you know, what we think of as stabilized yields in the fives in parts of the country that are going to lend themselves to that outperformance, both from a home price appreciation perspective, as well as where we believe rate will go over time. I think that the one net benefit that we probably haven't had historically would be just the new product side of it, right? With builder warranties and you know, updated fit and finish standards that are exactly how we want them going in, that will be a strategic, you know, chip for us, so to speak, as we think about OPEX and CAPEX over the long haul in some of those communities.
spk05: Fair enough. Appreciate that. I guess a question on California, your portfolio there. I think you're, what, around 18%, 19% of NOI, I believe. Still a pretty large exposure down from where it had been, but I've heard a number of others in Resiland talk about culling portfolios there, getting some really good pricing. So I guess I'm curious about your long-term view on your California exposure. Are you perhaps open to actively culling and could that be a source of funding for perhaps some of the Pulte investments?
spk13: Well, you know, first in terms of culling in California, we've done a little bit of it, right? When homes get really, really pricey, a lot of times there's a, higher and better use for that capital, to your point, and we'll sell and recycle that capital in another part of the market where we can find a risk-adjusted return that makes sense. Taking a step back, though, we love being in California. We think it's a differentiator. We mentioned in our release, one of our first projects with Pulte looks like it's going to be in Southern California. We want to continue to invest in California and create additional affordable housing solutions for those markets. And so there's a lot of benefits. Obviously, it's got a great economy. And the Prop 13 advantages are really special in terms of how you can think about property tax growth and things like that. So all that we do is a net positive. But again, to your point, sometimes it is a very expensive place from a real estate perspective. And on occasion, as things get too pricey, we have sold. But I wouldn't say it's a core focus for us by any stretch of the imagination right now.
spk05: Got it. Got it. Thanks. And last one, if I could, just on the days to be read, Charles, kudos getting that number down more than perhaps I would have thought a year ago. So here you are sitting 23 days in the quarter. I guess I'm curious overall, and not to sound like we're not impressed, but how much better can that get? It sounds like you've mined out a lot of inefficiencies using technology really well. I guess I'm curious what's the remaining opportunity and how do you get there? Thanks.
spk18: Hey, Hendo. Good question. No, we're really proud of the teams and what we've been able to do on the days of re-resident. We reduced it about 13 days, you know, quarter over quarter. You know, we got here through a combination of great execution on reducing our turn times, keeping aged inventory down, and the majority, I brought it up in the comments, around pre-leasing. Technology has helped there. I think we're driving towards what we hope is a new normal. I can't predict how much lower we're going to go, but we're going to push. And I think it's on consistently getting that pre-leasing done and using the technology there. We do have some markets, when you look across, 15 of our 16 markets are in the 20-day range, which is really impressive. And you have a couple of markets that are in the teens. Again, high occupancy, low turnover, all of that leads towards it. So we're in a really good environment, and we're going to do our best to sustain, if not get better. But it's constant work by the teams. They're doing a great job.
spk05: Fair enough. Thank you.
spk18: Thanks, Andel.
spk12: The next question comes from Nick Joseph of Citi. Please go ahead.
spk03: Thanks. Sorry if I missed this, but for the Pulte relationship, what's the total capital outlay over those 7,500 homes?
spk15: Yeah, Nick, we haven't disclosed that, but we're looking at projects all across the country. So we could be buying homes that are in the high 200,000 range up to the mid 400s. For instance, the deal in California is going to be at a higher price point. So we don't know yet exactly what that's going to be, but I think the way to get a good sense for it is take a look at our average home price that we're purchasing today across our portfolio and And it's going to be in that ballpark as we think about all the different markets we're going to work with them on.
spk03: Thanks. That's helpful. I think you mentioned the potential for margin expansion for some of the clustered homes. Can you try to frame that versus just a normal home within the portfolio?
spk15: Yeah, I think because we have such good scale, we think it's going to be incremental. I think we're going to get very interested as we think about amenity packages, things we can do there, additional revenues we can potentially get by having the clustered homes. And of course, There could be some efficiencies. We don't expect to change our operating model. I know some people in the build-to-rent world, outside of the single-family world where they're hiring multifamily operators, are putting staff on site. We're not sure that would be necessary, and we think that would be inefficient. So I think it's not going to be hundreds of basis points. It's probably going to be in the tens to maybe a little bit better than tens of basis points where we think with the clustered opportunities, it's just going to overall enhance what we can do from an operating perspective. Thanks. Thanks, Nick.
spk12: The next question comes from Rich Hightower of Evercore. Please go ahead.
spk16: Good morning, guys. Thanks for taking a couple questions here. I'm looking at results for occupancy in the quarter and how strong that's been. Is there an optimal level of occupancy that you're targeting as you think about the strength in new lease growth as well? How do you optimize those variables?
spk18: Yeah, it's a – hey, it's Charles. It's a constant balance. I mean, optimization is the right word. We have lots of really smart people and, you know, our field teams on the ground working in tandem to try to find that right balance between occupancy, new lease rate growth, renewal rate growth. And we're at that balance given the demand that we're seeing for our product right now. I thought that we might be a little lower than 98%. I'm pleased that we ended the quarter at 98.3. Seasonality would typically take us a little lower this time of year. You can see our new lease and renewal rent growth. We are, you know, trying to find our proper balance, given that we ended the quarter new lease at 13.8% and renewals at 5.8%. So, you know, we're still, you know, kind of calculating in there. Um, and we'll see how it balances out. I expect that we might go down slightly on the occupancy side, but with the demand that we're seeing and what we're doing on the days we resident, as I talked about earlier, we're controlling what we can control and the demand is there. So we'll keep watching it. Um, again, this is a unique environment that we're in and the teams are doing a really good job of executing right now.
spk16: Got it. Yeah. It's definitely a high class problem. Um, just a quick follow up on, uh, renewals in Seattle. Obviously, that's sort of the outlier last quarter on the low side. Can you confirm that there are still regulatory caps in place, or what's the situation out there?
spk18: So there were regulatory caps for Q2, and you can see that in our numbers. As we're going into Q3, they're starting to loosen and into the fall. So you'll start to see that come up. We're trying to be thoughtful and we're watching it. There's also been kind of, you know, start to pull back and then move back and forth. Each of the states have been monitoring that. But we're at a place now where we're going out with more normal ads on our renewal side. So you'll start to see that come up later in the year. We'll see how it plays out.
spk16: Thanks, Charles.
spk18: Thank you.
spk12: The next question comes from Brad Heffron of RBC. Please go ahead.
spk02: Hey, good morning, everyone. For my first question, it seems like, you know, those homes would just naturally have to be more suburban than the existing portfolio. I guess, first of all, is that correct? And then does it represent sort of a strategy change, and how does it affect the expectations for density and growth?
spk13: No, on the strategy change. And, you know, I think the balance, if you look at where they build and develop, they do have a lot of infill projects. But I think there are some opportunities in parts of markets where we already currently invest capital that one of the first transactions that we put in contract with them is you know, lays over nicely with a bunch of stuff that we already own in Atlanta. And so, no, it does not change the strategy shifts at all. I mean, the reality is we want to continue to buy probably a little bit more expensive home that's a little more infill in nature. There's certainly, you know, parts of markets where you're seeing, you know, the potential for high growth that could be, you know, a little bit more suburban-ish. But at the end of the day, that's not our model. We want to try to invest capital in parts of the country that are going to lend themselves to that continued outperformance, keep that occupancy up that Charles just talked about, But I think more importantly, it's evidence in our lease rates. The real estate we own tends to be more infill along all those important factors like transportation, quarters, jobs, and schools, and therein lies quite a bit of demand. So we're going to stick to that playbook.
spk02: Yeah, okay, very clear. And then how incremental are these acquisitions? So obviously you're not going to get 22 guidance, but Does the 2022 acquisition budget become $1.5 billion instead of $1 billion because of this deal, or is there some overlap?
spk15: It's definitely incremental, but you're right, Brad, we can't give guidance. What I tell you is it depends on what the opportunity set is for all of our channels because we're location-specific channel agnostic, so it's a little bit hard to predict today. what things may look like next year with regards to buying off the MLS, buying from the iBuyers and things like that. But this really is an incremental source for us. It's not going to replace other things that are available to us.
spk02: Okay, got it. And then I apologize if I missed this in the prepared comments, but Charles, do you have any stats for blended lease growth in July or any other colors you could give along those lines?
spk18: Yeah, what I would do is... You know, we gave you – overall, Q2 was phenomenal. Blended came in at 8.0. New lease, 13.8. Renewals, 5.8. We ended June – or ended every quarter of the month accelerating. So June ended at 16.2 on the newly side. The renewal, 6.0. And blended, 8.8. What we're seeing in July – we're not all the way there yet – further acceleration. The demand is still there, it's healthy, and we're seeing a similar trend. So we'll see how the rest of the quarter shapes up, but it's a good start to the second half of the year.
spk02: Okay, thank you.
spk12: The next question comes from John Pawlowski of Green Street. Please go ahead.
spk04: Thanks a lot for the time. I want to stick with the conversation on scale and what it means for operating margins. But within the existing portfolio, Charles, as you look at your markets and maybe the smaller markets, are there still any markets where you know you could operate at meaningfully higher margins if you had 25%, 50% greater homes?
spk18: Yeah. I mean, we have some really great markets that Dallas and team are buying in. The Denver's, the Seattle's, Dallas, you know, even markets like Phoenix where we have good scale, we want more. And so the way we have our operating model set up is, you know, we can add in these incremental homes and not necessarily have to add more headcount until we start to get significant size. or add significantly more homes. So it's really a healthy model, and our teams know how to do it. It's utilizing technology. It's being thoughtful with our repair and maintenance and turn side using the technology there. So the markets where we're at 3,000, we'd love to double. In Phoenix, we could add 2,000, 3,000 more. You can see it, which shows up in our Atlanta market. We're really performing well with 12,000 homes there, and we can add more there as well. But that's a good testament of of where we get really efficient. It's one of our more efficient markets in terms of headcount and how we're able to perform, and it's showing up also in their occupancy and rate growth that they've been able to get this summer. So, yeah, look, there's lots of markets that we're looking at, and Florida's been healthy for us as well. I know we're looking at some markets there in terms of expansion. We like where we're buying, and we think it all helps, especially as we continue to be thoughtful around how we load in technology and get more and more effective and efficient.
spk04: Okay. And then there's a few of those smaller metros. You referenced Denver and Seattle. Again, if you double those markets, are we talking another point in NOI margin, less, more? Just any sensitivity would be helpful.
spk15: Yeah, John, it's a good question. I think for us to quantify precisely is a little bit challenging. I think in the ballpark, like you said, I could certainly see that we could improve margins by a point or two as we get more scale, for sure.
spk04: Okay. Last question for me. It's around policy risk. So I know the sector's never had an easy battle on the public relations front, but it does seem to be getting worse in terms of media headlines and maybe some national government oversight. But at the local level, is there any policies coming down recently enacted or in the hopper that's making your lives more difficult in buying homes?
spk13: No, not at the local level. No, John.
spk04: State, national level?
spk13: Okay. No, I mean, not in terms of buying. No, I mean, in terms of growth, no. It has more to do around you know, just how you manage your properties and everything else. But no, on the growth side, there's nothing. Okay. Thank you. Thanks.
spk12: The next question comes from Keegan Carl of Barenburg. Please go ahead.
spk08: Hey, guys. Thanks for taking the questions. I think first, can you just remind us how you determine what gets placed in the wholly owned bucket versus the Rock Point JV when you're looking at specific markets that the JV is targeting?
spk15: Yeah, so we start right there, Keegan, where we came into a negotiation with the JV partners of what markets they were interested in investing in. And then the second step was we then talk about proportions of what assets will go where. So in markets like Atlanta, where we have a high concentration on our balance sheet, we agreed that as we sourced homes in markets like Atlanta, we would maybe do three out of four homes to the JV, and the fourth home would go to the balance sheet. In markets where we're underscaled, and we were just kind of talking about it on the last question, like Denver and Dallas, we go the opposite direction. We came to an agreement that we would do three out of four on the balance sheet versus the JV. And then as the local teams source those homes, they have no idea where it's going to go. And it's really just a algorithm that runs behind the scenes that says, all right, if an invitation home's balance sheet got the three homes that just closed, the fourth home goes to the JV, and then we just run the same thing. Most of the markets are 50-50. I just want to differentiate so you understand how it works. But it really is just kind of behind the scenes. And if multiple closings happen on a day, we put them in alphabetical order and we close them into each entity based on that.
spk08: Okay, that's very helpful. Thank you. And I know this came down to scale in the past, but do you guys regret selling out of Nashville given the current market dynamics? And I know it was touched on earlier, but what would really drive the desire to reenter that market?
spk13: Well, I mean, taking a step back, Nashville, I think, was less than 1% of our overall revenue. So no regrets because we didn't love the product type. And we talked about at the time, you know, we did really well on the sale there. We'd like to be back in Nashville at some point with the right product. So what would it take to get back there? I think just having enough scale and having, you know, a vision that it makes a ton of sense. Sometimes, you know, when you think about markets, with Nashville specifically, you it's a pretty small market from an MSA perspective, but very high growth. And there's challenges to getting the right kind of scale in the right parts of the market, you know, without being diligent in how you do it. So hopefully someday we'll get back into that market through a trade or an opportunity to enter. You know, there's markets all around there like Charlotte and a few others that we've been able to really scale up instead of, you know, applying capital in Nashville.
spk15: And to Dallas's point, we got a very nice price when we exited Nashville for product long-term. We redeployed that capital in the markets that are growing faster than Nashville at very good price points at that time when we redeployed. So it certainly worked out fine for us from a trade perspective.
spk08: All right, great. Thanks for the time, guys. Thanks.
spk12: The next question comes from Jade Rahami. of KBW. Please go ahead.
spk11: Hi, this is Sarah Obeidi on 4J. Thanks for taking my question. My first one is, does the Pote Agreement represent any shift in location strategy, and can you speak to how those homes will fit within the broader footprint and comments on any locations you're targeting?
spk13: Yes, those answers are in line with what we've said earlier on the call, which is No change in shift in terms of approach of where we're buying. A lot of the communities that we'll be buying in lay up nicely relative to product we already own. I think the net benefit of having that new product, obviously, is that all of your hard fixtures and everything are brand new. You've got builder warranties. And I think a partner that we can also work out floor plans and some of the other fit and finish standards that we care about. So all net benefits to our existing strategy.
spk11: Thanks. And my second question is, how much of a priority is growing the investment management business? Is there a target for assets under management or aggregate number of homes?
spk13: You know, look, we talked about the Rock Point JV as one that was pretty opportunistic. And it's got a limited shelf life to it in terms of the capital that has been committed to that opportunity set. But we're always going to look for opportunities to enhance shareholder returns if they make sense and don't compete with our core interests. So Right, we don't have a set target of what we'd like to do, but Ernie and I, and we've talked about this over time and distance, that there could be different vehicles that are available to us over time or different seasons of investing that could make sense in a JV structure.
spk11: That's great. Thanks so much. Thanks.
spk13: You're welcome.
spk12: The next question comes from Ryan Gilbert of BTIG. Please go ahead.
spk06: Hey, everyone. Thanks for the time. First question is for Charles. I appreciated your comments on July. Do you have a sense of where occupancy is shaking out in July? And I guess more broadly, you know, what's your view on, you know, 2021 exhibiting typical seasonality versus seeing another extended leasing season like we saw in 2020?
spk18: Yeah, good questions. You know, we ended on average Q2 at 98.3%. As I mentioned before, you know, these summer months, you're typically going to see a little higher turnover and occupancy is going to come down. As I've been looking at it month to month, I think July will come down a little bit, but we're still going to be 98, so it's still really healthy. We'll see where the further months go. You know, if you think about seasonality, these are really healthy numbers that we're putting up for the summer, and I do expect that we're going to see some form of typical seasonality where it will slow down in Q4, but we're coming off high numbers, so it's a relative slowdown. And so we'll see what that looks like. But at the end of the day, you know, the holidays happen and, you know, all that will be there, and I think it is going to – you're not going to have people moving as much, so you'll have a little bit of a slowdown, but we're coming off a really nice basis relatively.
spk06: Okay, got it. And then second question is on expenses. appreciate that lower turnover, lower days to re-resident is really helping out on the controllable expense side. Do you have a sense of what the underlying material and labor inflation is and controllable expenses?
spk18: Yeah, we're watching it. We're not immune to what's going on in the market from both material and labor side. It's part of the market. So, you know, we're... You know, we're looking at that. It's market by market as well, and we've seen a little bit of the staffing challenges and demand for our talented folks. So as you – you know, we've given our kind of guidance change. Any of those costs are baked into those – you know, into our guidance at this point. So we'll continue to monitor if it ends up being material. But if you look at it, you know, we've put up good numbers today. Things are trending well. But it's something to pay attention to, not only for the second half of the year, but going into next year.
spk06: Okay. Do you have a sense of the magnitude? Maybe just a very broad range would be helpful.
spk18: You know, it's hard to tell. You know, it's coming from different places when you think about materials. our procurement staff is amazing. And so we're able to buy from a national level using our scale. So that helps us. So, you know, that's going to mitigate some of it. And then at a local level, you know, it really kind of comes down to, you know, what's our staff turnover. We've seen a little bit, but nothing that's out of the ordinary during summer months. So it's hard to quantify. I wish I could give you that, but it's hard to put specific numbers on it. But right now it's not having a material impact when you think about what we've put out for our guidance changes.
spk06: Definitely. Okay, great. Thanks for the time. I appreciate it.
spk12: The next question comes from Dennis McGill of Zellman. Please go ahead.
spk09: Hi. Thank you, guys. First question, just on the Pulte arrangement, on pricing, at what point in the process do you negotiate price, or how is price negotiated, and is there any point where that would change depending on market conditions?
spk13: As Ernie talked about before, Dennis, we look at these projects on a project-by-project basis, and our teams are able to negotiate directly with Pulte on each of those up front. That is, I think, a really simple and clean way of doing this, where it's on a project-by-project basis, and the teams have a familiarity with each other. They know what kind of product we're going to want to look at, what kind of sub-markets make the most sense for our business. So that's already kind of been figured out, and it obviously just gets smoother the more you do these repetitions together between the two companies. So that's how it exists today.
spk09: Right, and I guess to the degree the market shifts one way or the other, does that price just remain fixed, or is there sensitivity to the market?
spk13: Well, without getting into the details, no. I mean, we look at being fair to both parties and making sure that we have structures in place that represent that.
spk09: Okay, got it. Second question, on the acquisitions in the quarter, both wholly owned and joint venture, can you give us a sense of how that breaks down by channel?
spk13: Yeah, plus or minus. Majority of this quarter was one-off. We talked about this in the first quarter call that we would expect velocity to pick up through the latter part of the year, and second quarter was much bigger than first. And just a little bit of a heads-up, July is looking really healthy. We'll probably be north of $200 million for just the month. So we'd expect the third quarter to be pretty strong as well. So majority of which is still just kind of one-off acquisitions, either off-market through MLS or some of our local channels.
spk09: And so that would exclude new and iBuying as well? Yeah, I mean, we had a little bit of it. But those are small?
spk13: Yeah, we had a little bit of it. I would say 80%, 90% of second quarter was basically one-off transactions.
spk09: Okay, perfect. And then just last one, I guess, as you kind of listen through all the data points and understand how robust everything is, it's easy to see how strong the business is. But when you look out over the next 12, 18 months and think about risks that you need to be mindful of, what comes to mind for you running the company and trying to balance kind of opportunity versus the unexpected risks?
spk13: Yeah, I think, you know, we've talked about a couple of them on the call. Charles and their team are doing a great job. of trying to stay ahead of procurement costs, cost of goods sold, some of the volatility that's kind of happened over the last year with the supply chain has been tricky to navigate. I think we've done a really good job of it, but it's caused us to think about how do we hedge some of those risks in the future differently. We obviously worry about public perception and some of the false narratives that's out there around what companies like ours are doing. Our teams have done a fantastic job of really navigating the pandemic working with residents and making sure that we stay apprised of their needs. But I think, you know, lastly, we want to make sure that at the local level, state levels, we're pretty active in the conversations around housing opportunity and what it is that we do. You know, California is always a little bit tricky. Mark and his team do a good job of staying in front of, you know, the legislative issues that happen there at the state level. But it feels like, you know, we're always kind of moving around between what state's doing what and how and why. Those are the things that we really want to stay ahead of because every market behaves a little bit differently, both with the product that we buy, how we operate it, and what some of the other market-driven dynamics are. I think those are the things that we spend a lot of time as a management team talking about and trying to make sure that we stay apprised of on an operational perspective. We don't want to get comfortable. I want to be really clear. We want to continue to grow the business. We want to find ways to to continue to innovate for the resident experience. And that's really more, I think, what we spend time worrying about is how do we not get flat and make sure that we're still pushing ourselves to bring the best service and quality standards to the resident.
spk09: All right, very helpful. Thanks for that. Good luck, guys.
spk12: Thanks, Dennis. The next question comes from Tyler Batori of JANI. Please go ahead.
spk10: Hey, good morning. I appreciate it. I'll stick to one question here. Acquisition cap rates, any movement one way or the other, just given where home prices are and some of the competition that's out there, and any perspective on what yields might look like the rest of the year?
spk13: Yeah, we signaled on this a little bit last quarter on our call. You know, we've traditionally kind of been in the mid-fives with the product we were buying. With some of the price increase, we've seen that kind of go into kind of the low to mid-fives. So I think, you know, we've been somewhere around 5%, 2%, 5.25%. on a blended basis of what we've been buying in Q2. And that feels like the market right now. You know, fortunately, we are seeing a little bit more supply creep back into the marketplace. You're seeing listings, new listings kind of creep up. But we don't expect, like, some drastic change in supply. I would expect this to be hopefully, you know, around a five cap or a little bit better if we stayed at this pace.
spk10: Okay. Excellent. Appreciate the detail. Thank you. Thanks.
spk12: This concludes our question and answer session. I would like to turn the conference back over to Dallas Tanner for any closing remarks.
spk13: Thank you. We appreciate everybody's support, and we look forward to talking to everybody next quarter, hopefully getting to see a few of you in the fall. Thanks again.
spk12: The conference is now concluded. Thank you for attending today's presentation, and you may now disconnect.
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