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Greetings and welcome to Invitation Homes Third Quarter 2021 Earnings Conference Call. All participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded.
At this time, I would like to turn the conference over to Scott McLaughlin, Vice President of Investor Relations. Scott, please go ahead.
Good morning and welcome. Joining me today from Invitation Homes are Dallas Tanner, President and Chief Executive Officer; Ernie Freedman, Chief Financial Officer; and Charles Young, Chief Operating Officer. During this call, we may reference our third quarter 2021 earnings press release and supplemental information. This document was issued yesterday after the market closed and is available on the Investor Relations section of our website at www.invh.com.
Certain statements we make during this call may include forward-looking statements, relating to the future performance of our business, financial results, liquidity and capital resources and other non-historical statements, which are subject to risks and uncertainties that could cause actual outcomes or results to differ materially from those indicated in any such statements.
We describe some of these risks and uncertainties in our 2020 annual report on Form 10-K and other filings we make with the SEC from time to time. Invitation Homes does not update forward-looking statements and expressly disclaims any obligation to do so. We may also discuss certain non-GAAP financial measures during the call. You can find additional information regarding these non-GAAP measures, including reconciliations to the most comparable GAAP measures to the extent available without unreasonable effort in our earnings release and supplemental information, which are also available on the Investor Relations section of our website.
With that, let me turn the call over to Dallas.
Good morning. I’m pleased you could join us as we share our thoughts on the past quarter and the prospects for our company as we look ahead. To start, we had another outstanding quarter of great results. We also continue to find ways to invest capital and generate accretive external growth. I’m particularly proud of our associates, who once again, delivered a resident experience with the genuine care that has become synonymous with our brand. Our ability to develop loyalty with our residents has helped drive strong outcomes for our stockholders.
On top of all of this, we believe that the operating fundamentals for our business remain fantastic and that the environment for growth remains favorable with our opportunities to creatively deploy new capital among the best we’ve seen in recent years. I’d like to discuss these points with you in a bit more detail, starting with the strength of the operating fundamentals.
As we’ve reported, our average occupancy remains at historically high levels. Turnover continues to trend lower and our rental rate growth continues to accelerate well past our traditional summer leasing window. As the market continues to demand more single-family rental product, we believe a primary driver of the elevated demand is demographics. I’ve spoken previously about the population surge of millennials and how we expect many within this cohort to transition into single family homes over time. They desire more space for raising a family in a room for a home office, and they want better access to good schools, jobs, and amenities. They also value the convenience of a worry-free subscription-based lifestyle.
We believe we’re well positioned to continue capturing on these trends. In contrast with this surge in demand is a shortage of housing supply, which we expect will continue in our markets, given supply chain constraints, policy restrictions, and the time required to deliver new supply. We therefore believe single family homes located in infill neighborhoods in high growth markets where supply and demand fundamentals are the most favorable will remain highly attractive investments throughout most real estate cycles.
With this favorable backdrop and fundamentals, we believe the growth environment for us to invest meaningful capital remains very strong. We surpassed our original $1 billion acquisition target for the full year back in August. And we had our strongest acquisition quarter in many years during the third quarter with nearly 1,700 new additions to the portfolio. As a result of our improved pace of acquisitions and a better home resale environment, we increased our acquisition guidance last month to between $1.7 billion and $1.8 billion for the full year.
With our average acquisition cap rate of 5% this past quarter in excess of our implied cap rate, we believe we are deploying capital at yields greater than our cost of capital. This is because rents have kept pace in our markets. As home prices have continued to appreciate and are focused on infill locations as well, differentiated from most new entrance into the space. To pursue these opportunities, we have a multi-channel acquisition strategy.
As a reminder, we’re always channel agnostic and location specific. And most of our channels in the third quarter were open and active and remain so today. The environment for one-off acquisitions is particularly strong right now, especially for the product we’re targeting, which are well-located homes primarily in our West Coast and Sunbelt markets.
In addition, we continue to lean in on our best-in-class home builder network to help bring additional new supply to the marketplace. We’ve bought several hundred new homes directly from builders so far this year representing nearly 20% of our wholly-owned acquisitions. These do not yet include any homes from our previously announced strategic relationship with Pulte Homes for which now we’re under contract or have agreed to terms on over 1,500 homes.
The first of these Pulte Homes are expected to deliver towards the end of next year with our target of over 7,500 new homes coming in over a five-year period. We are excited to have such a strong pipeline of new homes across a diverse network of home builders without the higher risk burdens of being a developer ourselves.
Before I close, I’d like to offer an update on our sustainability efforts. Earlier this month, we achieved an over 13% increase in our GRESB score from 2020 to 2021, which compares favorably to the average GRESB participant who saw no change in their score year-over-year you’ll recall last year that we were one of the first REITs to add an ESG component to our credit facility. So as a result of our increased GRESB score, we’ll realize a one basis point improvement on pricing on our revolving line of credit. These are pragmatic steps we are taking while leading sustainability is an important part of our long-term success. And we’re proud to be moving in the right direction while recognizing we can continue to do more.
Lastly, I really want to say thank you to our team, whether you’re demonstrating our core values directly with our residents or sharing them from our corporate offices. You’re the driving force behind the value we create for both residents and stockholders. And I thank you sincerely for your dedication to our mission.
With that, I’ll turn it over to Charles, our Chief Operating Officer to provide more detail on our operating results.
Thanks Dallas. All of our efforts to create a seamless and easy leasing experience for our residents have resulted in another outstanding quarter operationally. My thanks to all of our associates for making us the premier choice in home leasing. For our same-store portfolio NOI growth accelerated to 11.9% year-over-year, same store revenues grew 7.9% driven by strong rental rate and other income growth. While same store expenses increased a modest 0.6%, mostly attributable to lower turnover and repair maintenance costs.
The combination of lower turnover and lower days to be resident continues to drive record high occupancy. Same-store average occupancy has remained above 98% every month so far in 2021 and came in at 98.1% for the third quarter. Our new lease rent growth was 18.4% for the quarter while renewal rent growth was 7.8%. Together, this drove blended rent growth of 10.6% of 660 basis points year-over-year. Reminder that last year, our blender rent growth was 4% for the third quarter 2020, despite the challenges from the pandemic.
So our comp to last year is a very healthy one. At the same time, our turnover rate declined 110 basis points year-over-year. This puts our trailing four quarter turnover rate at only 23.8%, the lowest in our history and another strong testament to our resident satisfaction. We also continued to make progress with our bad debt, which at 1% of gross rental revenues was half of what it was for the third quarter of 2020. And important part of this improvement is due to the outstanding efforts of our team who work closely with our residents to find solutions, to keep them in their homes.
Since the pandemic began, we have helped thousands of residents apply for rental assistance programs. And as a result, we have received to-date over $25 million in rental assistance payments for the benefit of our residents. Our teams continue to work with those who need help with their claims.
By and large, our resident base is strong and stable. Our average new resident today is a family with at least one child and one pet. The adults are on average 39 years old, both work and together earn over $120,000 per year, which equates to an income to rent ratio of over five times. As strong as we’ve seen, we believe our markets locations and quality of homes are driving this higher end customer, along with the worry-free leasing lifestyle and best-in-class service that we provide in our residents expect. In summary, we believe we stand in a great position to finish the year strong and we’ll remain focused on continuing to execute in the last couple of months.
With that, I’ll pass it along to Ernie, our Chief Financial Officer.
Thank you, Charles. Today, I will cover the following topics, balance sheet and capital markets activity, financial results for the third quarter and updated 2021 guidance. We took a number of steps during the third quarter to support our external growth in further improve our balance sheet. To start, we closed our first public unsecured bond offering of $650 million in August. Bonds have a 2% coupon and mature in August 2031.
We used the proceeds to voluntarily prepay our highest cost classes of securitizations certificates that were due to reach final maturity over the next five years. During the quarter, we issued approximately 17.5 million shares generating over $693 million of net proceeds through both our ATM program and the primary offering that was completed in late September.
In October, we sold another 1.875 million shares pursuant to the underwriter’s option to purchase additional shares generating additional net proceeds of $75 million. The proceeds from the issuance were and will be used primarily for general corporate purposes, including acquisitions. As previously announced in July, we gave notice of our intent to settle our 3.5% convertible notes due January 15, 2022 with common stock. As of September 30, 2021, $199 million of principal was converted into approximately 8.7 million shares of common stock at the election of the note holders leaving approximately 6.4 million shares to be distributed no later than January 2022. Including the impact of these third quarter activities, our net debt-to-EBITDA ratio declined to 6.2 times. Looking forward, we will continue to focus on balancing our growth objectives with our goal of reaching a 5.5 to 6 times net debt-to-EBITDA ratio.
Moving on to our third quarter financial results. Core FFO was $0.38 per share, 27% higher than last year. And AFFO was $0.32 per share, 32.7% higher than last year. This was largely due to outside NOI growth and interest savings. One point I want to underscore from Charles’s remarks is the widening spread between our new lease and renewal rent rate growth. As you can see in our results, our new lease rates, which are predicated on current market conditions are significantly higher than our renewal rates. This is leading to a loss to lease as much higher than we have historically seen. Renewals represent about three-fourths of our leasing activity and the loss to lease on those renewals is much higher than the loss to lease associated with new leases. We believe this could position us favorably for rent growth in the next 12 months and beyond.
Last thing I will cover in our update is 2021 guidance. Given our year-to-date results, we are increasing our full year 2021 same-store NOI growth guidance to a range of 8.5% to 9.5%. At the midpoint, this is a 200 basis point increase from our previous guidance. This increase is driven by same-store core revenue growth expectations of 6.25% to 6.5%, which has improved from the previous guidance of 5.5% at the midpoint.
Our new guidance is also favorable for same-store core expense growth. We now anticipate growth from a range of 1% to 2%, 150 basis points favorable from our previous guidance midpoint. We’re also raising our full year 2021 core FFO per share guidance up $0.05 at the midpoint to $1.49. And our 2021 AFFO per share guidance up $0.04 at the midpoint to $1.28.
In closing, we’re experiencing continued high demand for our product, proving that the desire for flexibility and choice in the housing market remains strong. We are proud of the work we do to help individuals and families who want to enjoy leasing lifestyle. We will continue raising the bar as the best in the business for both our residents and our stockholders.
With that, let’s open up the line for questions.
Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question we have on the phone lines comes from Richard Hill of Morgan Stanley. So Richard, please go ahead when you’re ready.
Hey, good morning, guys. Ernie, I wanted to maybe start with you. First of all, just a quick question on the 4Q implied guide. It looks like expenses are up fairly significantly recognize revenue and NOI are up as well. I know in the past you’ve talked about expenses being higher in the second half of the year, but maybe you can unpack that just a little bit more for us. So I can better understand it. I guess we were expecting expenses to be higher in 3Q and where they came in. So I’m just wondering if there’s actually upside and that, that expense – implied expense guide.
Yes. Well, unfortunately Richard one area I’ve been wrong all year, so we’d love to be wrong also in the fourth quarter with regards to where our implied guidance is, but with some areas we do think we’ll have some pressure on relative to what we’ve seen in the first three quarters are potentially a little bit higher, but growth rate for property taxes we’ve seen so far this year is we had some really good results coming through on refunds in the first part of the year, including the third quarter.
We do – baked into the guidance, although again, turnover keeps going in the opposite direction. We are assuming turnover kind of stabilizes or maybe slightly higher in the fourth quarter, but we haven’t seen that yet this year. So certainly, there’s some opportunity for upside performance there, personally, you saw in the third quarter ratio, the personnel costs did increase year-over-year. We expect that to also hold into the fourth quarter, if some of that is just due to the outperformance we’ve had this year and we’re making sure that bonus accruals are where they need to be from that perspective.
So we certainly hope that we cannot perform we’ve put out there, we’ve been able to do that each of the last three quarters. But we do expect getting back to more inflationary type expense growth at some point, but we’ll do our best to see if we can make it four quarters in a row where we can do better than we’ve laid out.
Yes. That’s helpful. Ernie, I want to talk about your new lease rate growth relative to your turnover. You sort of alluded to this in your prepared remarks, but the new lease rate growth is pretty attractive, very attractive. We don’t really see any signs that it’s abating and your turnovers call it less than 25%. So it suggests that you have an embedded mark-to-market that that’s going to persist for two, three, maybe even a little bit longer than that. I’m not asking you to guide. I’m just asking you to walk through methodology with me, because it seems like absent rents coming down. There’s a sustainable runway for at least several years to have some pretty attractive same-store revenue.
Yes. Certainly, you can look out over the next say 12 months to 18 months and based on where rates are today. I think as you go out to two or three years, you have to take into consideration all Rich, what do you think the overall market’s going to be. But your point is exactly right in that, we see a loss to lease in the portfolio that’s larger than we’ve seen before. And then importantly, we’re not pushing renewals to where market rates are. We don’t set market rates. The markets that’s market rates, but we’re working with our residents and you can see our renewal rates are less than half of what’s happening in the new lease rates, but that does set us up for a pretty favorable backdrop over the next period of time in terms of a loss of lease that’s in the low-double digits right now with regards to how that could play out, certainly over the next year and at least into the first part of 2023.
Got it. Just one more quick macro question. And I don’t know if this is for Dallas or Charles, but I’m curious, home price appreciation has been really robust across the United States, obviously, showed some signs of slowing and the recent print, but Dallas or Charles, are you seeing any signs of weakness from supply, from build to rent, beginning to emerge in some markets where micro markets. What are you seeing on the ground?
No, we’re not seeing any weakness in terms of like too much supply coming into the marketplace. It’s probably the opposite still this – the same thing that we’re filling in like the cost of gasoline or milk or some of these other things are impacting builders with relative to their supply chains. We obviously stay very close with some of our builder partners and just door and window packages alone are next to impossible to forecast correctly in terms of when they’ll have those things relative to bringing in the new supply.
So Richard, it’s actually still a little bit of the opposite. And from our vantage point, it still feels like things are taking while to get through entitlements. Things are taking while it’s finished, but ultimately, we have seen resale supply crew back up just a little bit, which we view as a net positive. If we get a little bit more interest rate creep, I think that will help things in terms of easing up supply. And Ernie is right in his comments around the loss of lease, but we also don’t have the illusion that, that you can have 20% home price appreciation forever.
I was looking at the case showing numbers from this point in time last year and a look back basis, it was like 6%. And if you look at our markets, it’s like 22% right now. It’s just – it’s a little bit crazy. And it’s a moment in time where we’re feeling the supply chain challenge and there just isn’t enough quality housing available right now.
Thanks, guys. Congrats on early next quarter.
Thank you, Rich.
Thank you. We now have the next question from Sam Choe of Credit Suisse. So Sam, please go ahead when you’re ready.
Hi guys, congrats on a great quarter. I guess first going back to guidance, I guess holding that level of conservatism and the numbers make sense, but I guess this year, you guys have been performing very well with that occupancy at 98% turnover really trending lower. I’m just curious like are we – have you guys seen enough of your resident base and their behaviors to start thinking about if this is the new normal. And if that’s not the case, I’m just curious like what are some concerns you have going forward in this current dynamic?
Yes. So this is Charles here. Thanks for the question. When we look at overall leasing fundamentals and you ask whether it’s the new normal, we’re in a really healthy position and you called it, we’re at 98% occupancy. You’ve been there all year. Demand is really high for our well located homes. And how long will this last, we’ll see that last question and conversation was around our embedded loss to lease. And I think that gives us a good opportunity on the renewable side to keep that as high as it’s been. We’ve been accelerating on the renewal side since last summer. Every quarter has been going up, which is really healthy. And we’re seeing that actually go into Q4 as well. The new lease side, we’re still kind of in that mid to high teens, we’re not seeing typical seasonality. So it’s hard to predict how long it’s going to last, but we’re in a really healthy position and set up well to go into 2022.
Got it, got it. That’s helpful color. I guess, it’s been really good to see that the external growth story is really coming back for you guys. Now, when I look at what – when Ernie mentioned the loss to lease dynamic that’s going on right now. I kind of looked at your markets in Seattle, Phoenix and Las Vegas, where that discrepancy is pretty, is large. So with that said, I saw that some of the acquisitions are more weighted to certain markets. So if I’m looking at Las Vegas, how is that local, like, supply dynamic, like trending in that area? And obviously, I’m thinking that maybe the disposition plan over time might allow you to kind of reallocate capital into these markets, where you can kind of really take advantage of the situation. Am I kind of thinking about everything correctly?
Yes. I think you’re thinking about a lot in that question. There are a few things, let me just make sure that I try to touch on the major points. I think, your first question – your last question around capital allocation is one that we’ve always taking really a very deliberate approach to in where we invest capital and why. As you called out, in specific markets like Las Vegas and Phoenix, the Southwest Sunbelt type markets have seen an outperformance over really the last eight to 10 years, in terms of what we’re seeing with net migration, household formation. And ultimately, that’s showing itself in home price appreciation and the rate growth that we’re seeing with the corresponding growth in the home pricing. We will continue to invest capital in the parts of the country, where we believe we’re going to continue to see that outperformance.
You haven’t seen us invest capital, for example, in the Midwest over the last five or six years, because we want to make sure that our shareholders are getting the appropriate exposure where the growth is going to be the greatest. Deliberately, couple of years ago, we started selling out of some of our concentrations in Midwest, and we started reallocating capital into markets like Phoenix, where a couple of years ago, we were only at 7,000 units. I think today we’re closer to like 8,700 units.
We want to continue to grow those types of markets, because they are seeing this type of performance, whereas supply gets tight. So yes, that is our blended approach to how we think about risk adjusted returns. We want to always try to strike that right balance between the appreciation of the asset, where we have the strongest conviction around what’s going to happen with our revenue streams and how rate growth could be impacted. And then make sure that we’re investing our time and our capital accordingly.
Got it. Thank you so much, Dallas.
Thank you.
Thank you. We now have Jeff Spector of Bank of America. So Jeff, please go ahead.
Good morning. Thank you, and congrats on the quarter. First question, I’d like to focus on demand and everyone’s trying to, of course, predict forecast growth in demand. You commented on your resident satisfaction stats, and again, turnover continues to trend lower. I know you do a lot of data analytics. I don’t know if you can share anything on this call to discuss a little bit more, where you see demand, how long – how the trend in your renters staying – the length of the renter staying in your homes. What do you see this going over the next couple of years?
Yes, this is Charles. Great question. Bottom line, we’re seeing really healthy demand. And when you couple that with our low turnover and a high occupancy, we’re in really great shape. I’ll share a couple of stats from our recent marketing survey of our move-ins in Q3. The majority, 80% are still coming from single family, so they know the product, but what they’re attracted to is the single family home, obviously, but our locations infill.
The two top reasons that they’re moving to SFR and IH on specifically are for more space, which obviously single family provides and closer to work, which most of our infill homes do that. We also – we asked – what’s important to you and they said 78% are looking to have that extra office or bonus room.
So those things, as you think about long-term demand and the trends of work from home and all that, put us in a really healthy position, again, coupled with our markets we’re seeing demand in the west. We’re seeing a lot of movement to the Southeast Florida, specifically Atlanta. And it’s showing up in our rent numbers.
So we’re doing really well there. On top of that, you asked about where we are in terms of length of stay continues to move up. We’re on with that lower turnover, people are staying longer. And then I mentioned this in our remarks, our average household is over 120,000. It puts us at a rent to income ratio of 5 times, which is as healthy as we’ve seen. So all that really puts us in a really great shape what we think for years to come.
Thanks, Charles, I guess on that length of stay, is there anything more specific you can provide? I mean, again, I know everyone’s trying to forecast, like, where this business is heading over the next 5, 10, 20 years. Like, what’s the longest length of stay you’re seeing in the portfolio is that and what percent of the portfolio was that? Just trying to, again, see where that could hit?
Yes. Our portfolio, like I said, it’s been our residents are staying longer and longer. And what we’re seeing is, they’re into their third year and it’s continuing to grow. And with this low turnover, we expect that’s just going to get longer and longer well into three years. We’ll see how it plays out over time.
I think, Jeff, average length of someone’s staying now is over 32 months in our average lease term is 15 months. I mean, someone’s renewing on average twice from their initial lease term with that. That just continues to increase by about a month to month and a half each quarter. That’s in the trend we’ve seen for the last many quarters.
Thank you.
Thank you. We now have another question on the line. We now have a question from Nick Joseph of Citi. Sir, your line is now open.
Thank you. It seems like the political and regulatory environment around the broader single family rental sector is becoming more of a topic and potentially a risk. How are you dealing with it from an organizational and an operational standpoint?
Yes. Hi, Nick. Dallas here. Great question. We’ve been really dealt with this for almost 10 years since we started the business in terms of being active in both purchasing homes and in standardizing the single family rent environment. We obviously have a team of people here both from a PR front and also from legal perspective. And we’ve dealt with a variety of challenges over the years.
So going back, two and four years ago, we dealt with some of the rent control challenges and some of the ballots that were within different markets and we’re very active in that space. And we’ve also – you have had range of inquiries over time with legislative bodies or groups wanting to understand more about what it is that we do now. The stories that really easy one, because single family for rent has gone on in this country for over 200 years, but it’s organizing yourself and making sure that you have the data in front of you that you can share with whomever the inquiry is coming from to help them understand really what’s going on with the space.
Thanks. And then, is there any update or in details that you give on the FTC letter that you received? I think that was disclosed in early September.
No, not really. We’ve gotten inquiries from time to time from different legislative bodies, pre-pandemic, we were working with the house financial services committee as an industry and getting information out there. And so from time to time, we do get these inquiries. We wanted to make sure that we disclosed on the letter that we got from the FTC, but no update as of right now.
Thank you.
Thanks, Nick.
We now have Dennis McGill of Zelman. So Dennis, please go ahead when you’re ready.
Hi, thank you. Dallas, first question just goes to, you mentioned the ability to still buy an attractive 5% cap rate. And best planner, if you could maybe explain a little bit, why you think you haven’t seen more compression at cap rate over the last 12 or 18 months, given how much capital has been focused on the sector institutional capital that is. And how much yield compression there has been in sister industries, especially multifamily and the chase for yield in general around assets.
Yes. Great questions. Let me answer the second part first. So I think we get a little myopic at times, when we think about SFR, in terms of the volume. And there certainly is a lot of capital coming into the space. It’s validation of the fact that, the business can exist in a very favorable or even non-favorable environment, like, what we had with the pandemic. But with that being said, you got to take a step back, there’s $6.5 million resale transactions every year in the U.S.
And so as you start to think about SFR operators or investors wanting to be active in that cohort every year, we are a very small percentage of the overall buying and selling that goes on in the marketplace. By the way, it’s one of the reasons why this is a great business. It’s just a very liquid marketplace for both end users and for investors.
Now, the reason I don’t think we’ve seen the compression Dennis is a couple of things. One is, you have to remember, and I talked about this in an earlier comment around [indiscernible] but the home price appreciation has been fairly dramatic and say the last 12 to 18 months. It’s been very steady for the last 10 years. We’ve seen in kind of a similar fashion, really over the last year, year and a half, we’ve seen rate really keep up with what we’re seeing with pricing.
Now that won’t grow to the sky. We don’t have illusions of the fact that that’s normal. We would typically expense mid to high single digits for the way that we would think about rate growth in a normal year. We’ve just been lucky as operators that the environment or the marketplace doesn’t have enough supply. So it’s supporting the rate growth in a similar fashion. Now that will come down over time and distance.
But again, going back to the first point, there’s a lot of transactions happening in the space that are happening in and around us of our operators in fact, with much more scale. So I think what we’ve been really good at is picking our spots. We’ve been active in parts of the country that lend themselves to that better performance, like I talked about before. But we’re also very deliberate about where we invest capital and why. If you look at what we’ve done to date, I think we’re close to 2000 homes acquired on the balance sheet through the third quarter. That’s really diminimous in that world of 6.5 million resales.
So as long as you know, where you’re investing capital and why, I think you can find that outperformance and you stick to your investment thesis and as Ernie mentioned and I mentioned in our earlier comments, we just have a good cost of capital or generally good cost of capital right now, so we’re taking advantage of it.
Does that imply to some degree that a lot of the institutions that we all read about and the scale that we see others trying to gain that they’re targeting different markets or price points than you are?
It could. I mean, a lot of the build to rent story you hear about right now is happening a little further out than other parts of the country, quite frankly, we just don’t operate. I think we do have some parallels with other platforms where we may bump up against each other in a couple of markets, but generally speaking, I think, you know this Dennis, we buy a more expensive product that’s much more infill. It’s differentiated from the large majority of our peers. And so I think our average price point in Q3 was close to $440,000 on balance sheet. That’s a much more expensive home than a majority, I would say of a lot of the new capital coming into the marketplace is targeting.
Got it. And then maybe just one more, just to change gears a bit. We’ve seen a lot from home builders, as well as iBuyers struggles with getting homes, either built or acquired and renovated and back to market. Are you running into any similar challenges on your acquisitions? Or can you elaborate a bit on as you acquire homes today, whether the pace of getting them back to market and least has changed at all?
Yes. No, it’s great that we have the buying volume that we have. And we’re focusing in a few markets, these are markets for the majority that we have great teams on the ground who are ready to take this – take on the challenge. The volume is real and we’re paying attention to it, but we’re able to keep up and we’re pushing them through. A lot of these homes are like Dallas said, really in good shape and we know what we need to do on the rehab side. And it sets us up nicely. A lot of these homes will be ready early next year, and we’ll – what we’ve seen and what we’ve been able to bring through, have been really healthy in terms of what we’ve been able to gain on rent. So we feel like we’re in good shape to be in a manager.
Thank you, guys. Good luck.
Thanks, Dennis.
Thank you. We now have Brad Heffern from RBC. So Brad, please go ahead.
Thanks. Good morning, everybody. A couple more on acquisitions. So obviously the guidance went up a lot to the $1.7 billion to $1.8 billion. I’m curious if that was just the large number of opportunities that you were sort of unexpectedly seeing this year? Or if you think that that’s something that’s sustainable and how should we think about the Pulte homes next year being complimentary to that?
Yes. Great question. So, we started to signal a few quarters ago that we are seeing a few more opportunities in the marketplace. And to be clear, the 1700 homes that we bought in Q3, the vast majority of these are just one-off buying. And Charles, talked a little bit about this. But the power of our platform is really unique in terms of our ability to identify one-off acquisitions and to be able to then process those, put our own finish standards on those homes and have them ready for lease in a real high velocity way of doing things. Hard to say what the marketplace could look and feel like a couple of quarters from now. But so long as we have a decent cost of capital and we can buy at these kinds of prices, we’d like to stay opportunistic.
We certainly love to look for opportunities to buy scale. One of the ways with which we know we can bring dedicated scale into the platform is partnerships with builders like the one we have with Pulte. Now, we also started talking about that a few quarters ago. We’re active with a lot of different builders. Pulte is just one of our preferred partners who we’re going to try to have programmatic buying opportunities with. And they’ve been a terrific partner. They do a fantastic job as the nation’s second largest home builder. And we’ll start to see those come into our normal distribution towards kind of the end of the third quarter of next year.
John and Peter have done a nice job on the team working with the Pulte Group to start to look at parts of the country that we can start to forecast out a year or two in advance. And that gives us a real strategic advantage. And by the way, we aren’t incurring any costs for that. Like we haven’t had to upsize our team or bring on a ton of additional G&A to be able to run that program. So we feel like we’re in a really good spot and that will compliment what we’re already doing pretty well in the one-off space.
Okay. Got it. Thanks for that. And I was wondering if you could talk about the iBuyer channel a little bit. Obviously we saw the news about below pausing. Is that news meaningful for you guys in any way? And can you talk about maybe more recently, how much that channels representative the acquisition volumes?
iBuying has always been a pretty small percentage of what we buy. It’s one of our many channels that I talked about in my opening remarks. We want to have all the channels open and available to us. I don’t want to comment specifically on any one company’s strengths or weaknesses in a particular quarter. But these things tend to ebb and flow and I’m sure they’ll work through it. I think it probably speaks more to some of the labor challenges that are in the marketplace, which Charles just discussed. It’s not an easy environment to operate in if you don’t have your infrastructure set up for the long haul.
And even then you’ve got to manage those pressures as they kind of flex different ways. But certainly to present more opportunities for platform buying with companies like ours, but we are friendly partner at all iBuyers, we love the fact that the transactions in the residential space are starting to digitize and get more efficient. That makes a lot of sense for the end user, for investors, for anyone that’s really active in single family.
Okay. Thank you.
Thanks.
We now have another question on the line from Alan Peterson from Green Street. So, Alan, please go ahead when you’re ready.
Thanks, guys. Just focusing still on external growth. Dallas, you touched on some of the supply chain bottlenecks that are affecting your builder partners. Is this affecting pricing with partners like Pulte? Are you seeing any compression in those stabilized yields than you have previously quoted on those next swath of acquisitions there?
I would say generally we feel pretty good about what we’ve talked about in the past with those on the call and in our – the way we were viewing the world. We build a structure with them specifically that protects both companies in the event that we have, expense creep, but it allows us to kind of rethink and reset together if there’s market volatility. We saw that with lumber by the way. Price of lumber is coming back to earth. We think we’ll see that in some of these other categories. It’s just – and it’s not just – it doesn’t just lend itself to the cost of goods sold to be really clear.
If you think what happened with the pandemic in terms of new supply coming in, it’s slowed down the entitlement processes with municipalities and cities. It does a lot of things, it disrupted. In the same way, it’s hard to find a car right now or a used car. It’s very similar in terms of bringing new supply into the marketplace. It just created a little bit of a log jam from a supply chain efficiency perspective. We forecast and would believe that this will all start to regulate and get back to normal and start to bring some of that expedited supply back into the marketplace over time.
Got you. So the stabilized 5% yields are still kind of intact for your partnership with Pulte then.
Actually it’s no different than we’ve quoted before that this action, we’re getting those at a better cap rate, so that hasn’t changed. We’ve been typically 25, 50 basis points, what we’re doing in a market with that relationship. And we haven’t seen any change in that dynamic.
Perfect. And then that’s one for me. Charles, can you provide some context on what’s driving some of the sequential revenue declines in Dallas and then just a little bit of the softness in Denver? Just trying to dig in on market fundamentals there.
Yes. I mean, I guess if I look at both of those markets in terms of rent growth, we’re accelerating in both especially in Dallas, we’ve had really good kind of increases on the new lease side of Q3 of 15.5% and renewals have been healthy at close to 9% – close to 6% for a nice blend. So, I think as you think about revenue in Dallas, we love that market, we’re buying in the market. We’re going to continue to grow there. Denver is similar. It’s been a healthy market. New leases are almost 12% and renewals at 7% – 7.5% or so. So, both markets are really in our perspective, we have good leadership on the ground and they’re moving in the right direction. We are buying a lot in Denver and we’re paying attention to that, which is great. And I think that’s one of those markets like Dallas that we want to grow both of them. And we think they’re going to be good markets for us long-term.
Got you. Thanks guys. Appreciate the time.
The next question is from Keegan Carl with Berenberg. Keegan, I’ve opened your line.
Hey, thanks for taking the questions, guys. Just one for me. Given the current housing shortage is your intention to implement the spec platform changed at all. It’s just my view, but I think now it’d be an opportunity time. You look at a number of people who might want to take advantage of the hot housing market yet not relocate or buy at current price levels.
Yes. We like your thinking. I mean, it certainly feels like there’s going to be some opportunities and as things that we’ve looked at and how to bring, a little more social housing product into the single family space. And while we’re not necessarily ready today to talk about any pivot or change. And there are certainly categories that we’re looking at and spending more time on.
We do think that a sale leaseback product over time is a great way for people who want to think about retirement that want to spend, part of the year in different markets. And we’ve seen that even in our own portfolio where we’ll have, a couple pickup lease in Florida, because they’re going to spend half the year there, but they spent, the other half of the year up north, somewhere in the warmer months. So yes, the short answer is, in the evolution of our company and the things that we’re focused on. I think you’ll start to see us overtime explore more of these types of product and weave them into our business model. But not necessarily tomorrow, but overtime. Absolutely.
Got it. Would a pilot program look like on that one you just focus on one of your smaller markets and test it out. Where do you think you’d be pretty aggressive from the job?
I’d hate to speculate. Now give you a little bit of some kind of real-world we did do a lot of sale lease back 10 years ago. When we had homes where you’re buying something through distress channels and someone was leasing back. So, we’re very familiar with the process side of it, but you could always get your point. You could pilot it in a more robust form and in a market you could partner with other ventures that are currently doing it and bring back office expertise. I think there’s a lot of ways you can think about it.
We’re not in a place where we know exactly yet how we want to approach this, but we certainly see these social housing opportunities as a way for that subscription economy to craft a choice. And that’s something that we believe in a big way at invitation homes is that. There is not a one size fits all approach to how you want to live. For some people it’s ownership, for some people it’s leasing, for some people it’s an option to buy. And so I think as those markets continue to develop, we’re going to play close attention and pick our spots, if, when and where we want to participate.
Got it. That’s it from me. Thanks guys.
We have another question on the line from Rich Hightower of Evercore. So Rich, please go ahead. When you’re ready.
Hey, good morning, everybody. A lot of good questions so far. But I want to go back to the 120,000 median household income. I think you sit on new leases recently. So, I just want to get a sense of the growth rate, year-over-year in that statistic and how do we correlate that to rent, to home price appreciation and how do you expect that to evolve over the next year or two?
Well, we’ve seen, I guess the easiest way to talk about it as we’ve seen our income to rent ratio increase from about 4:6 to 4:7 to now it’s over five times with the numbers that, that Charles talked about. We’re about 123,000. So in over that period of time, you’ve seen rent growth pretty significant. So, we’re seeing that for the resident who’s moving in. So it was, that’s how we track this. It’s our new residents that they’re keeping up with rent growth in terms of where their income is. So it’s a very correlated, almost identically are actually slightly better, because we’ve gone from about 4:6, 4:7 5 to 5:2, 5:3 with regards to what our average income to rent ratio is.
To predict what that’s going to be into the future would be challenging. But we certainly seen a good trend over the last many years of our average income going from, I think, around $100,000, maybe even a little bit less than that, that IPO five years ago to where we are today.
Okay. Well, if that’s true or anything, 100 to 120 is I guess that would approximate over since the IPO, let’s call it 20%. So that’s matching what, new leases are growing in a year almost. I mean, that’s just a pretty remarkable statistic. Don’t you think? I’m just trying to – I’m just trying to think about how to square that with everything that we’re seeing right now. Everything just seems off the charts and I’m trying to figure out whether it all makes sense or not. I guess it’s all good from invitations perspective.
Well, remember, we’re in very infill locations, people who want to live close to good schools, close to their jobs. And so, we’re not necessarily marketing to the broad in terms of the averages. And then again, thinking about the markets we’re into, and we’re specifically in the Sunbelt and the Southeast and the west, where people are migrating to. And so there’s a big cohort of people out there who like the subscription economy who want to rent and they certainly have the economics and the capability to buy, but they’re choosing not to for a lot of reasons. And we’re trying to provide them that product and that service, and Charles and team are delivering on that. So, I think it’s, it continues to work for us and we hope for, we can do to make that available for folks going forward.
All right. I appreciate the color. And then maybe one follow-up question, just on obviously invitations get a very deliberate infill strategy. As you guys have mentioned many times on this call and also in the past, I mean, how would you contrast that with the strategies of several sort of new entrance or even kind of long-standing competitors in the market and even within the build to rent space? I mean, how far out of the city center are you seeing a “competitive SFR product being bought or added when in reality it’s probably not that competitive”. I mean, how would you characterize the landscape there?
We’d agree with that Rich. And I think the way we differentiate ourselves from others in this space are location, scale, highs in market. So, we’re very focused on infill locations. And we do think that many of the new single family projects that are coming up or are more further out or they’re in more tertiary markets. So, we’re very focused on location in terms of where we want to be on a market, as well as what markets we’ve chosen to be in. We believe scales a differentiator in terms of be able to run more efficiently. And I think it helps solve a lot of the issues that others may be having around supply chain, because we’ve been in these markets for a long time. And so we have longstanding labor relationships and supply relationships doesn’t mean that we’re immune to it. But, I think we’re dealing maybe better with that than what others have been reporting. And then finally highs in market. And it helps us from our being smart about how we acquire and how we operate.
Yes. I want to add one thing here, Rich. Dallas, Ernie hit scale and I just cannot stress enough based on, the 10 or 11 years we’ve all been doing this. Scale is your friend. It allows us to invest in technology. It allows us to update systems loves to hire better, hire, better people like to replicate the type of platform that invitation homes has today, is very difficult. Even in this environment. Now there’s a lot of hot money coming into the space, which, in large part would probably do fine. And that’ll be treated more like a trade. It’ll be interesting to see how that works itself out over time. But the power of our platform is really showing itself. Right now, I would say through the pandemic and as we start to recover the consistency, the ability to be able to operate, to communicate with the residents in a way that allows you to have turn times like we’ve had over the last 18 months is just remarkable. And that that in itself is I think something that is very hard for new money to come in and try to replicate.
Okay, great. Thank you guys.
Thank you. We have another question from [indiscernible]. Sir please go ahead I have opened your line.
Thank you. So good morning. Had a couple of follow-up questions here on my list. I guess starting first with the robust rent growth you’re seeing the acceleration here into third quarter. I guess I’m curious is the FTC inquiry is having any impact on your rental pricing strategies and also can you give us some color on the new and renewal rates from October and what you’re sending out from November, December? Thanks.
Sure. So hi, Andy [ph] Charles here. So to your first question, no one packed from the FTC in terms of leasing perspective. If you just step back and think about the overall performance of our leasing a lot of it is, as I spoke to low turnover, high occupancy grade locations puts us in a really healthy position and on the new lease side, the west continues to lead, which is great. You look at Phoenix and you look at Vegas at almost 30% and 29% respectively. But it’s not just those markets at all markets. And it was really exciting to see what’s happening in Florida and in the Southeast, as you think, are in Atlanta, Atlanta new lease a 20%, Tampa, 21%, Jacksonville at 19%, these are really strong numbers for our portfolio.
And we’re seeing that kind of maintain itself going October to your question here. And then on the renewal side, I talked about this a little earlier. We’ve seen just really acceleration again, they kind of lag the newly side and new leases arisen so quickly, but we’ve been increasing almost every month since last summer. And in Q3 you saw that we came in at a renewals of that were really healthy 7.8% versus where we were last year, just over 3%, with September ending at 8.4%. And that kind of growing trend is continuing into October to your question.
And then, as we went out in terms of what we’re asking going forward, we’re in the high eights to nines, as you think through to January. So, we’re set up well to continue that renewal side. And that’s where I think there’s a real change from the typical seasonality that we might see this time of year is really just not showing up.
Got it, got it. Appreciate the color, Charles. I think you also mentioned you received $25 million of rental assistance year-to-date. I guess I’m curious what your expectation is for the full year, I guess, the rest of the calendar year here and what that implies for the opportunity next year, and then maybe also some color on bad debt. You made some progress there on getting it down to year-over-year still above the long-term run rate. How are you thinking about that opportunity near term? Thanks.
Yes. On rental assistance it’s actually about $22 million this year is about $3 million last year. So year-to-date, sorry, life time dates to $25 million that you referenced. And with that, progressively get stronger and stronger as we got to say, the May June timeframe into the August, September where each month in August, September, we’re collecting about $5 to $6 million of rental assistance. Hard to predict how that’s going to continue to play out. There are tens of millions of dollars of applications still outstanding for our residents in the local jurisdictions, the $0.06 are doing a better job of trying to work. Those there’s an importantly operating teams are helping those folks through that process where we can. Just hard to say how long that run rate will continue or whether it will continue to accelerate as we’ve gotten into the fourth quarter here in and into early next year.
That said, we still have a large accounts receivable balance that has a lot of historically overdue balances. So if rental assistance programs stay open, if they continue to stay funded, there’s certainly an opportunity for us to have some greater collections and hopefully continue to see our sequential decrease in bad debt that you’ve seen over the last quarter. A couple of quarters here in the third quarter, bad debt was 1% of gross rental revenues, which is better than what we had in the second quarter, which was better than we had in the first.
So it does feel like we’re, we continue on that glide path to get, hopefully back to our historical numbers sometime toward the end of next year, in terms of being closer to 40 basis, points of a bad debt. And then maybe we do a little bit better for a period of time with catch-up from the rental assistance. And then you see a period of time where, bad debt could go. Maybe even maybe, maybe negative as things are caught up from the delinquency side, we’ll just have to see if that happens.
Got it. And what’s that receivables balance probably should know this, but do you have that number handy?
Yes, it’s today it’s on a gross basis; it’s over $50 million. It’s about $55 million of rent receivables that are due to us. And of course we have a big reserve against that. So the net number on our financial statements is much lower it’s about $13 million or $14 million from an on a net basis. And so, we’ll see what we can do to try to get rent assistance in for, you know, to help our residents to help bring that number down over a period of time.
Got it. That’s helpful. Thank you.
Thank you.
Thank you. You have a question on the line from Chandni Luthra of Goldman Sachs. So Chandni, please go ahead.
Hi, thank you for taking my question. Team, I was wondering, given demand supply metrics are hugely tilted in your favor. How were you thinking about ancillary opportunities at the moment? Is there more upside there? Are there areas, that perhaps you hadn’t contemplated earlier that you think are now on the table? Just trying to assess, how that could look in 2022, as you continue to get skilled?
Hi, this is Charles. It’s a great question. Even through the pandemic, ancillary has been a big focus for us. About two years ago, we did our investor meeting and we put out a target that we’d get a 15 million to 30 million run rate on our ancillary services by the end of three years, which would be the end of 2022; we’re on track to be at the high end of that. And we’re going to do everything we can to overachieve, and that’s just the beginning as we think about it. And so this has been a major kind of focus of building the pipeline and the infrastructure of projects to get us there, and the main focus has really been on around expanding and lowering the cost of our smart home technology. In 2022, we expect we’re going to roll out video doorbells, which will help to, to grow that.
And it’s something as we survey our residents that they’re asking for, in today’s world, that’s really valuable we’ve done the filter program that helps us on the reduction of costs on our filters, but also provides a lower revenue where we’re working in things around pets and pests in terms of a deal national deal with Terminex. And we see many programs like that, that will continue to roll out at 2022 and beyond services around energy, landscaping, handyman services, broadband services. So there’s a lot that we’re working on and we’re being thoughtful around when and how we roll them out. And then when you put this on top of what our residents are looking for and asking for, and we talked about this a little earlier in the call.
We think this is going to extend the state that our residents are going to stay with us because we’re giving what they’re asking for. We’re making it really convenient and easy for them to lease with us. So this is a big part of our kind of long-term plan. And we’re on track for a, what we set out a couple years ago.
Got it. In for my follow-up. I like to talk about, home price appreciation that we seen so far. Could you perhaps give us any early reads on how we should be thinking about real estate taxes next year in light of the level of home prices that we see?
Yes. It’s always a challenge to try to predict where that’s going to be. But I’d say is that you’re certainly a risk assessments are going to be materially higher than where they’re at today, but we typically see in the past and in cycles like there, - the is that no-interest rates come down because just because home price appreciation is up 10%, 15%, 20%, your real estate tax bill, doesn’t go up 10%, 15% or 20%. The people who live in those jurisdictions, the people who vote for the various folks who make those decisions, overall on average, those people’s incomes are not up 10%, 15%, 20%.
So I think overall, you’ll see for the next few years, real estate taxes continue to be a risk item in terms of having greater than inflationary growth rate. But it would be surprising, in would not really match up that we’ve seen in prior cycles to see that it would be as much as you’ve seen an increase as you’ve seen where home price appreciation has gone.
Got it. Congratulations, once again, on a strong quarter.
Thank you.
We now have Jade Rahmani from KBW. So Jade, please go ahead.
Thank you very much. Wondering if you could comment on recent color, most satisfaction scores have they been trending and also, has there been any negative perspective on the dramatic levels of rent growth that we’re seeing?
Yes, this is Charles. Resident satisfaction continues to be a bright spot for us. Our teams are doing an amazing job in the field. As you may know, we still monitor and ask for surveys after every interaction with the resident, whether it’s the move in, move out, work order. And our teams do a great job and it helps to inform what our residents are experiencing and how it’s going. I will note that we’ve continued to see a rise and, you take our social scores of Google and Yelp. And we were over four on average across all of our markets. And so all that is really healthy. Are there areas where we want to continue to improve it? That’s why we do the surveys and we’re learning. But we like as what our teams have been doing and we’re continuing to focus on it.
What was – rate?
Yes. And then yes, the we’ve been thoughtful on rate on the new lease side. You have to remember, this is a vacant house we’re really we marked to the market. And so, we’re just kind of setting rents at what the market is. And so you don’t really get any pushback there. On the renewable side, we try to be really thoughtful. We’re actually based on what’s happening when new leases pricing below what’s market. Typically and we want to be thoughtful about that. And we work closely with the national team that sets rents and our local team to make sure that we’re being as thoughtful as we can we’re residence.
And Jade it’s the – just for the last 90 days, we had a record high retention rate from residence, and you saw that we had the lowest turnover rate we’ve ever had in the third quarter. In third quarter, doesn’t have numbers this low typically. So I think the consumer understands what’s going on and actually feels like they’re getting a pretty good deal in terms of where we’re putting our renewal rates compared to where the market is at, which is, you know, less than half the increase you’re seeing in market rates is where our renewals are today.
Thank you very much. Appreciate the conservative approach you guys add also wanted to ask about supply chain. I guess, could you remind me what percentage of the work on a house is done with in-house teams and in your view, do you feel that you’ve experienced the brunt of the ongoing supply chain destructions or is this potentially coming headwind?
Yes. So to your first question, our maintenance staff on average does about half of the work orders that come through. And this usually the handyman work that they’re doing the larger roof and concrete and stuff like that. If there is that we’ll outsourced all the vendors, maybe HVC and the like that’s a seasonal metric, so it goes down a little bit in the summer. But this time of year we’re actually trending at about a 50%. Right now we’re not seeing a lot of that kind of supply chain stuff hit the, that a work order maintenance work directly. We did see some early noise in the pandemic around appliances and other items. There’s a little bit of cost pressure that, we’re looking at, but we have a couple of advantages when it comes to that.
And, you know, that’s, our Dallas talked about it. Our scale and size really helps. So what our centralized procurement teams do a great job of being able to kind of mitigate that. We’re not going to keep it at zero, but it allows us to kind of fare better than others. And then on the labor side, you can see in our numbers, it’s not showing up, but there’s some pressure out there and we’re paying attention to it. And what’s great is our, that’s another thing that our local scale, local density allows us. If we do have somebody turn over the next person, next teammate could step up. And, we’re attractive platform being the leader in industry we’re able to recruit, and our team does a great job of recruiting from an HR perspective.
Thanks. And just to sum up the topic, considering the pressures out there, supply chain three theater about, okay, what is the main driver for the lower same store expense guide?
Yes, it’s really just the earning from what’s happened in the first part of the year. You can certainly see that the implied guidance for the fourth quarter, Jade’s higher than we’ve run this year, significantly higher. And so we do expect to have some pressures that we talked about in terms of the real estate taxes, a little bit higher than we expected. We saw in the first three quarters personnel costs because of the outperformance we’ve had this year and things like that. But we read and you saw the drop was the fact that we had an extraordinary expense a quarter here in the third quarter that 90 days ago, we didn’t think would be that strong.
Thank you.
Thanks, Jade.
Thank you. We have the final question on the line from Andrew Rosivach from Wolfe Research. So Andrew, I’ve opened your line, please go ahead.
Guys, you’ve answered all my questions. Thanks a lot and congrats on a good quarter.
Thanks Andrew.
This ends our question-and-answer session and marks a conclusion of our conference. Thank you again for joining. You may now disconnect your lines.