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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Greetings, and welcome to the Invitation Homes Fourth Quarter 2022 Earnings Conference Call. All participants are in a listen-only mode at this time. [Operator Instructions] As a reminder, this call is being recorded.
At this time, I would like to turn the conference over to Scott McLaughlin, Vice President of Investor Relations. Sir, please go ahead.
Good morning, and welcome. Today, we'll hear remarks from Dallas Tanner, President and Chief Executive Officer; Charles Young, Chief Operating Officer; and Ernie Freedman, Chief Financial Officer. Following these remarks, we'll conduct a question-and-answer session with our covering sell-side analysts. [Operator Instructions]
During today's call, we may reference our fourth quarter 2022 earnings release and supplemental information. This document was issued yesterday after the market closed and is available on the Investor Relations section of our website at www.invh.com.
Certain statements we make during this call may include forward-looking statements relating to the future performance of our business, financial results, liquidity and capital resources and other nonhistorical statements, which are subject to risks and uncertainties that could cause actual outcomes or results to differ materially from those indicated. We describe some of these risks and uncertainties in our 2021 annual report on Form 10-K and other filings we make with the SEC from time-to-time. Invitation Homes does not update forward-looking statements and expressly disclaims any obligation to do so.
We may also discuss certain non-GAAP financial measures during the call. You can find additional information regarding these non-GAAP measures, including reconciliations to the most comparable GAAP measures, in yesterday's earnings release.
I'll now turn the call over to Dallas.
Thanks for joining us this morning. I'd like to start by thanking all of our teams for their hard work last year. Yesterday, we posted 2022 year-over-year core FFO growth of 11.6% and same-store NOI growth of 9.1%. Strong demand for our business continued throughout the year. And despite some headwinds from inflation and an evolving regulatory environment, we believe our business continues to stand on solid footing.
As you all know, Ernie recently announced that he'll be stepping down as CFO in a few months. I'd like to thank him for his extraordinary vision and strategic insight over the past seven years, and I look forward to celebrating his achievements later this year. At the same time, I'm excited for Jon Olsen, who joins us here in the room this morning, to lead our finance team beginning in June. Jon has been part of Invitation Homes from the beginning with deep involvement in all of our strategic and financial activities. We expect this to be a seamless transition.
Before turning it over to Charles and Ernie to provide more details about our 2022 performance and our expectations for 2023, I wanted to take a few moments to discuss the current housing environment in the United States and how we believe Invitation Homes is well positioned to help support the country's housing needs. It has been reported that the U.S. needs to add more than 13 million housing units over the next seven years in order to accommodate new household formation and address the undersupply of the past decade.
Today, however, it remains challenging to deliver new supply in desirable locations, because of state and local restriction, as well as labor and material shortages. In addition, today's macroeconomic environment of higher inflation and higher interest rates may discourage investment in new supply. On top of these supply pressures, the largest demographic group, the millennial generation, is now aging in the life stage of needing more space to accommodate their families and their lifestyles. Add to all of that, the increased flexibility of many to work part-time or full-time from home, and we believe demand for single-family housing should remain strong for many years to come.
At the core of our business is a straightforward yet critical goal. We seek to be a meaningful part of the solution for high-quality and flexible housing options. We provide quality homes for lease in desirable locations with access to great schools and employment centers. We offer best-in-class service, allowing residents to focus on their lives. And we're proud that we partner with 150 public housing authorities and serving thousands of our residents who participate in a housing assistance program, including HUD's housing choice voucher program.
And we're delivering new homes to marketplace through our previously announced builder relationships. Today, that builder pipeline exceeds 2,300 homes that we expect to deliver over the next few years, and our plans are to continue investing in new construction in the future.
As a reminder, our approach to bringing new housing to the marketplace keeps development risk off of our balance sheet and avoid any related G&A burden, while also allowing us to partner with some of the best homebuilders in the business to select and buy new homes in great locations. We think this approach is a real differentiator and allows us to maximize flexibility and optionality while remaining opportunistic and minimizing risk.
All of this is important because the lack of available supply of single-family housing and strong demand from those who wish to live in a single-family home have made homeownership much more expensive today. This supply and demand imbalance is further aggravated by inflation and elevated interest rates, leading to the widest dislocation we've seen between the cost of homeownership and the cost of leasing since starting this business. We're therefore very proud to provide our residents the opportunity to live in neighborhoods and school districts that might not otherwise be accessible at a cost that is often significantly more affordable than any other housing option.
Let me pull on that string a little bit further. Based on the John Burns December data, leasing a home cost nearly $900 less each month than owning a home across our markets. This means that leasing home can save a family nearly 30% a month on their housing costs on average. These savings are even more compelling on a per square foot basis where single-family rental homes currently come out as the most cost-effective housing option compared to not only homeownership costs, but also apartment rent.
That being the case, we believe today's macroeconomic environment and the current supply and demand fundamentals make the Invitation Homes value proposition compelling for both our residents and our shareholders. This is on top of several differentiators of our business that we have noticed in the past.
For residents, these benefits include a recently renovated, refreshed or newly built home in a desirable location; ProCare, which is our resident service model that provides for consistent interactions with our residents throughout their time with us; best-in-class technology tools of the most recent example being our mobile maintenance app, offering residents an even more efficient process to submit service requests; and a growing list of resident services designed to elevate their living experience.
For our shareholders, we believe there are numerous absolute and relative advantages to the single-family rental industry, including single-family homes are the most liquid real estate sector within the United States. There's typically much lower turnover in single-family rental than in multifamily with residents often staying much longer. And there's a long track record of rent growth within SFR even during recessionary periods. With a nod again to the Burns data, national average single-family rent growth has never had a meaningful decline in nearly 40-years of tracking that data.
Lastly, we believe there are numerous advantages to the Invitation Homes way, including our hallmark scale; location and ISO markets, overseen by the best operators in the space as evidenced by our 46.6% cumulative same-store NOI growth rate from 2017 to 2022, nearly 2,500 basis points greater than the average of our residential peers; our strong balance sheet with no debt coming due until 2026; and our builder partner growth pipeline that maximizes flexibility and contributes to new housing supply while also avoiding big investments in land and a large G&A load.
In closing, we couldn't be more excited about our real estate, our teams and the underlying fundamentals here in 2023, a year with some uncertainty and also a year we believe full of opportunity to continue delivering a premier resident experience to anyone who chooses to live a more flexible and worry-free lifestyle.
With that, I'll pass it on to Charles, our Chief Operating Officer.
Good morning, everyone. As Dallas mentioned earlier, 2022 is a solid year for us. We believe our results are a reflection of the service we offer our residents and our performance in providing an exceptional leasing experience. This is an ongoing journey that we look forward to continuing in 2023. So thank you to all of our associates for your constant commitment to genuine care.
I'll now walk you through our operating results in more detail. Same-store core revenues grew 7.6% year-over-year in the fourth quarter. This increase was driven by average monthly rental rate growth of 9.4% and a 16% increase in other property income, net of resident recoveries. Same-store average occupancy was 97.3% in the fourth quarter, down 80 basis points year-over-year as a result of higher vacancy due to increased turnover.
For the full-year 2022, our same-store revenue grew by 9%. Same-store core expenses grew 16.3% year-over-year in the fourth quarter. The main driver of this growth was an 18.3% increase in property tax expense. As indicated a few months ago, this increase was anticipated to be outsized due to a catch-up to our property tax accrual in the fourth quarter primarily related to higher property tax bills in our homes in Florida and Georgia.
For full-year 2022, including this fourth quarter count, property tax expense grew by 7.8%, while core operating expense for the full-year 2022 were up 8.6%. Outside of property taxes, the inflationary environment was the largest contributor to the higher growth in core operating expenses.
Following two years in a row of virtually no expense growth year-over-year, our expectation that we will see some of last year's inflationary pressure continue into 2023. Finishing up with our same-store operating results, we reported fourth quarter NOI growth of 3.7%, which brought our full-year 2022 NOI growth to 9.1%.
Next, I'll cover leasing trends in the fourth quarter of 2022 and January 2023. Same-store blended rent growth was 9.1% in the fourth quarter, which is comprised of renewal rent growth of 9.9% and new lease rent growth of 7.4%. In January 2023, same-store blended rent growth was 7.4% with renewals coming in at 8.7% and new leases at 4.9%. Same-store occupancy in January was 97.7%, an increase of 40 basis points from our fourth quarter results.
As we anticipated, bad debt was a stronger headwind in the fourth quarter than in the third quarter, representing 2% of gross rental revenues. California, and more specifically, Southern California continued to experienced outsized bad debt within our portfolio. Approximately 40% of our Southern California homes are located within Los Angeles County, where ordinances continue to restrict residential lease compliance options.
For the remainder of our portfolio, we are seeing some markets return to more regular procedures for addressing delinquency, though it's a slower process now than it has been historically in some of our markets. Across all our markets, we're proud to offer a desirable housing option and worry-free lifestyle to our residents. In our most recent resident surveys, we heard that the need for more space and desirable location of our homes were once again the top two reasons why new residents choose to lease from us in the fourth quarter.
80% of new resident surveys indicate it's important to have a home office or bonus room with nearly half stating they work from home at least two days a week. In addition, our average household income for new residents during 2022 remain healthy at approximately $134,000, representing an income to rent ratio of 5.2 times.
Finally, our residents continued to demonstrate high satisfaction with the service our teams are providing as evidenced by our high occupancy, low turnover, average length of stay of nearly three years and strong resident satisfaction scores. I extend my thanks to our teams who have helped make this all possible. And I challenge our associates to continue to raise the bar here in 2023.
I'll now turn the call over to Ernie, our Chief Financial Officer.
Thank you, Charles. This morning, I will cover the following topics: one, balance sheet and capital markets activity; two, financial results for the fourth quarter; and three, our 2023 guidance, which we introduced in yesterday's earnings release.
Since our IPO in 2017, we have been focused on reducing our overall leverage, improving our maturity ladder, achieving an investment-grade rating and transitioning to a balance sheet that is capitalized mostly with unsecured debt at fixed rates. We have made significant progress across all of these objectives.
At year-end 2022, net debt to adjusted EBITDA stood at 5.7 times. Our weighted average maturity was 5.6 years, and when considering available extension options, we have no debt coming due until 2026. Over 99% of our debt was fixed rate or swapped to fixed rate. We achieved our investment-grade rating in the spring of 2021. And at year-end 2022, over 83% of our homes were unencumbered, and 73.7% of our debt was unsecured with secured debt representing less than 10% of gross book value of our real estate.
As previously announced, during the fourth quarter, we prepaid the remaining portion of our IH 2018-1 securitization using the delayed draw feature of our seven-year unsecured term loan that closed in June 2022. We ended the year with $1.3 billion of liquidity from both our undrawn revolver and unrestricted cash.
I'll now cover our fourth quarter and full-year 2022 financial results. Core FFO for the fourth quarter increased 10.6% year-over-year to $0.43 per share, and AFFO increased 9.2% to $0.36 per share. For the full-year 2022, core FFO and AFFO per share increased 11.6% and 10.2% to $1.67 and $1.41, respectively, each exceeding the midpoint of our guidance. Included in our earnings release, we provided a bridge from 2022 core FFO per share to the midpoint of 2023 core FFO per share guidance.
With regards to our same-store operating metrics, we expect same-store core revenue growth in a range of 5.25% to 6.25%. Embedded in our guidance are the following assumptions: first, slightly lower average occupancy versus 2022 due to anticipated higher turnover; and second, elevated bad debt of 25 to 75 basis points higher than 2022.
Next, same-store core expense growth, which we expect in the range of 7.5% to 9.5%. Included in this guidance is the assumption that real estate taxes will increase between 6.5% to 7.5%, an improvement from 2022. We also expect to see pressure on turnover, operating and capital expense, due mainly to our assumption of higher turnover in 2023, along with our assumption around ongoing inflationary pressures.
As Charles mentioned, our real estate tax expense in 2022 was underaccrued for the first three quarters of 2022. So we recorded an outsized catch-up in the fourth quarter of 2022. As a result, we anticipate 2023 same-store core expense growth in the mid-teens for the first quarter of 2023 followed by sequential improvement during the remainder of the year, resulting in the expected range for the full-year 2023.
Taken together, this brings our expectation for same-store NOI growth to 4.0% to 5.5%. We also expect full-year 2023 core FFO per share to be in the range of $1.73 to $1.81 and AFFO per share in the range of $1.43 to $1.51.
As a result of this anticipated growth in AFFO per share in 2023, our Board of Directors has authorized an increase in our quarterly dividend by 18.2% to $0.26 per share. Our guidance assumes that our 2023 acquisitions will be modest. This includes our initial expectation for on-balance sheet acquisitions of $250 million to $300 million from our builder partners, which we plan to fund through free cash flow and disposition proceeds. It also includes our expectation for acquisitions in our joint ventures of $100 million to $300 million.
Outside of this guidance assumption, our actual acquisition activity will be based on how attractive the buying opportunities are relative to our cost of capital as the year progresses. With our balance sheet in excellent shape, our ample liquidity providing us with plenty of dry powder and our joint ventures offering us access to additional capital, we're well positioned with the flexibility to maintain an opportunistic approach to external growth this year.
I'll wrap up by echoing Dallas' and Charles' gratitude to our associates. They continually work hard to deliver strong results and to respectfully care for our residents in our homes.
As we look ahead, we are confident in our continued success based on favorable supply and demand fundamentals, our healthy balance sheet, our unwavering commitment to outstanding resident service, our strong team and our desire to remain the premier choice in home leasing.
With that, operator, please open the line for questions.
Thank you. We will now begin the question-and-answer session. [Operator Instructions] We have the first question on the phone lines from Josh Dennerlein of Bank of America. Please go ahead.
Yes. Hey guys, thanks for the question. Just kind of thinking about your AFFO midpoint guide with the FFO midpoint guide, it looks like it's kind of 83% of FFO. I think it was 84% for 2022 actuals. What -- it looks like before that; it was kind of running at a smaller gap. Kind of what's driving that, but maybe it would have shrunk given lower turnover the last few years?
Yes, Josh, this is Ernie. We are seeing -- and Charles talked about it and alluded to it with regards to inflationary pressures on turnover expenses. And so the difference between FFO and AFFO is going to be our capital replacement spending. We are seeing a little more pressure on the capital side on both our repairs and maintenance expenses as well as on our turn expenses. And we want to make sure at the beginning of the year, we had the right amount of caution built into our numbers.
So we can hopefully set ourselves up for -- we hope to have a good performance later in the year off of that. That's why you've seen over the last couple of years, that's changed a bit. We're basically running closer to flattish net cost to maintain on the OpEx and CapEx combined for the last couple of years. But for 2022 and what we're projecting for 2023 is certainly a higher increase from inflationary pressures. And specifically in turnover, we do expect to have high -- a little bit higher turnover in 2023 versus 2022. Maybe as we get out into 2024 and 2025, you'll see numbers revert back to what you saw in the past for us in terms of the differences between core FFO and AFFO.
Thanks, Ernie. Appreciate that.
Thanks, Josh.
We now have Nicholas Joseph of Citi. Your line is open.
Thank you. I was hoping you can elaborate a bit more on the trends you're seeing in the acquisition market in terms of cap rates and available properties. And then what are you hearing from your JV partners on their appetite to deploy capital in this current acquisition environment?
Yes. Nick, Dallas. Let me answer your second question first, and then I'll talk a little bit about what we're seeing in real time. I think there's plenty of appetite with our JV partners to continue to grow and find compelling ways to invest capital. I think the -- well, I know that to be the case. I think what I would add from a supply perspective is things are still relatively tight. If you go back to a year ago, we were kind of buying in the kind of low to mid-5s from a cap rate perspective. I think we've seen that move on the ground in the resale environment, maybe 20 or 30 basis points is kind of a mid-5-ish kind of market, 5.5, 5.6 for kind of like-kind product.
Now that being said, there's also the least amount of resale supply inventory in the market that we've seen in the last three to four years. So it's a really interesting moment. The newer build stuff that seems to be coming online, both things that we're taking from a delivery perspective, conversations we're having with builders, I think the return profile is a little bit better. But those are going to be fewer -- not fewer and far between, but there's just going to be, I think, more angst on the builder side to lean out in sort of an uncertain environment, given where interest rates and things are.
So all things being equal, plenty of capital interested in investing, not a tremendous amount of opportunity real time. But we expect that to kind of moderate throughout the year. I think we got to see what happens with mortgage rates. I think as of yesterday, there were a 30-year was closer to like a [6.75] (ph) number. And I think builders have been able to basically buy down mortgage rates to stay pretty competitive in the near-term. Let's see what happens there. I think we may have more of an opportunity, hopefully, over the year if mortgage rates creep up. And then we're definitely going to watch resale supply and how that's impacted by the labor market. Operator?
Operator, our next question, please.
We now have the next question from Austin Wurschmidt of KeyBanc Capital Markets.
Hey, good morning, everybody. I was just curious if you could provide a little bit of an update of sort of what you're seeing on the ground and whether there's anything giving you pause in any of your markets that kind of has you taking a more conservative outlook through the balance of this year? And then just maybe a quick update on how market rents have trended from kind of late last year into the early part of this year.
Yes, this is Charles. Thanks for the question. Yes, we like what we're seeing on the ground right now. Our Q4 results showed a bit of the seasonality that we saw towards the middle of last year. And as expected, we kind of got back to that normal curve. During COVID, we -- it was kind of 98% across the board and really high rent growth. So we're seeing more seasonality. But what the reality of it is it's still really strong given the time of year. So looking at Q4 at 97.3% occupancy, that increased throughout the quarter. So we ended December at 97.4% and came into January 97.7%. So showing real strong demand that we're seeing on the ground.
As we look at rates in Q4, a blended 9.1%, renewal at 9.9% and new at 7.4%. As you would expect with seasonality, January and December will be a little lower, but given that, a 4.9% new lease rent growth in January is really strong historically. Couple that with the 97.7% occupancy and 8.7% on the renewal side, we think the portfolio is really well positioned going into peak season, which typically starts right here after the Super Bowl.
And we're seeing some acceleration in February on the new lease side. So across the board, it's looking good. There's more seasonality in the colder markets, the Denver and Chicago and the like, but we're still seeing a lot of strength in our Florida markets. Arizona had a bit of a slowdown with the seasonality, but it's starting to show some real momentum. So we're seeing some good stuff across the board. And we're leaning and feel good about where the portfolio is structured.
Thank you. We now have the next question from Brad Heffern from RBC Capital Markets. Your line is now open.
Hey, good morning, everyone. Ernie, could you walk through the buildup to the revenue guidance as far as earn-in, loss to lease, occupancy, all the sort of moving pieces that get you there?
Yes, sure. So Brad, we talked about in our -- in the prepared remarks as well as in the earnings release, a couple of the items, one with -- and I'll talk about kind of the midpoint of the guidance range, Brad. At the midpoint of guidance, we do expect down a little bit year-over-year. I think we're in 2022, we're at 97.7%, 97.8%. I think that's going to come down a little bit. It has to do mostly with the fact we think turnover is going to be a little bit higher. And we talked about that as well in terms of -- as we're able to finally to make some more progress on residents, who haven't been keeping current with the rents. We do expect turnover to tick up some, and that's why you're going to see occupancy come down.
The other thing -- the other material mover on the negative side for us with regards to -- for growth on revenues is going to be bad debt. And we're certainly facing a lot of the challenges that other folks are out there who have exposure to Southern California. We do expect that bad debt is going to be up anywhere between 25 basis points and 75 basis points from where it was in 2022. So roughly at the midpoint about 2% where we came in at about 1.5% for the year for 2022. We do think that's going to be elevated a little bit more in the first half of 2023. And we do -- we see a path that we can start getting a little bit better for us in the second half of the year.
The last thing I'd say, the other two pieces that are important with our other income. And we think other income is going to be up again low double-digits, similar to what it was last year as we continue to make progress on our ancillary income items. And finally, with rates, our earn-in -- we talked about it on our last call, our earn-in as we got into the year, we expect it to be about 4% from the activity that was done in 2022, and that didn't change in the fourth quarter. We did see the loss to lease shrink significantly from where it was at the end of the third quarter, where it was at the end of the fourth quarter. The loss to lease going into the year is about 1% to 2%.
And we saw that decrease for a couple of reasons, Brad. One was just leasing activity. We started to catch up to that. But two, and Charles talked about it, typical seasonal patterns for folks in the residential business, and we're no different than a single-family is that you actually -- in a typical seasonal year, you'll see some sequential declines month-over-month in rental rate. Now we didn't see that in ‘21. We really didn't see much of that in 2020. But in 2022, it did come back. And so we did see some sequential declines as we went from September to October to November to December with regards to where overall rate was. And so that's why the combination of those two things have brought loss to lease down.
If you take that all into consideration and our expectations around what leasing activity is going to look like for renewal and new in this year in 2023, you get to our guidance range that we had provided with regards to where we thought same-store core revenues will go out. We feel optimistic that we have an opportunity to maybe do a little bit better, and we're certainly going to try hard to do that. But we want to make sure we set the ground the right way at the beginning of the year. And hopefully, we have a year like we've had in the past where we have underpromised and overdelivered, but we'll just have to see how that plays out.
We now have Sam Choe with Credit Suisse. Your line is open.
Hi, guys. Just was wondering if you could provide an update on your general thoughts on utilizing concessions and what that might look like during peak leasing season.
Yes. We have no concessions running at all. I think we talked about on our last call, we had a short-term kind of small concessions going into the holiday to try to push up on the occupancy as we saw seasonality come back. That's typical that we run in that time of year, given the seasonal curve. But as of December, we had no concessions, and we don't see any need to do it, given our current occupancy and the demand that we're seeing right now.
Thank you. We now have Steve Sakwa with Evercore ISI.
Yes, thanks. Good morning. Dallas, I was just wondering if you could comment a little bit more on some of the builder relationships. And given the challenges that they're facing in actual home sales, I just didn't know if bulk sales and a bigger commitment from you to them to take down homes was more in the offering here and how those discussions have maybe unfolded.
Steve, first of all, our pipeline today sits at about 2,300 homes that we have in contract with our different builder partners. And we're working right now with five to 10 builders, kind of, nationally and regionally across a variety of opportunities. Obviously, everybody is familiar with our strategic structure with Pulte. We'd like to build as many homes with them. They've been a terrific partner, and they have a great team.
It's interesting, Steve. We sort of -- there was a lot of unknowns going into summer last year around kind of volatility of what was going to happen with rate. I think what we've seen most builders, as I mentioned before, do really well is kind of navigate the mortgage and the payment side of things without having to discount pricing too much.
There's certainly kind of quarter-end stuff where we've had some small opportunities. But I think time will tell, and it's largely dependent on what happens with the labor market. If things continue to slow down, I would view that as a very good opportunity for Invitation Homes in terms of building out a much wider and longer pipeline across purpose-built construction that will come into our portfolio.
We are now coming out of the ground with some of our first kind of full communities. We are touring one last week in Atlanta, in fact. And very pleased with the not only quality of the product, but the return profile and the demand, as Charles mentioned, top of funnels really. So Steve, our approach going into ‘23 would be that we're going to look opportunistically to enhance and grow that pipeline and also those relationships, find ways to do things more programmatically with our preferred partners. And obviously, if things slow down, that would be, I think, viewed as a good thing for SFR.
Now it will depend on how we pay for those things going forward. But we've got plenty of, as I mentioned before, third-party capital that would like to look at these opportunities with us. And we'd also like to invest as accretively as we can on the balance sheet.
Thank you. We now have Juan Sanabria from BMO Capital Markets. Your line is open.
Hi, thanks. Just maybe a question, I guess, for Ernie, just on the rate side of the same-store revenue equation for ‘23 guidance. Just curious if you can comment on assumed market rent growth across your portfolio in ’23. And maybe how you should -- how we should expect renewals to trend, given the moderating loss to lease. Do you think they could stay pretty sticky around the high single digits for the course of ‘23? Or should we expect that to moderate as well?
Yes, implicit in our guidance and when I walk through the pieces, Juan, is that we're looking at -- for growth on rate, blended rate to be kind of in the mid-single-digits. I think honestly, that's probably we have the best most upside opportunity with regard to our revenue. And we are going to be able to cautious is on the bad debt side. We got burned a little bit by that last year. I think we've built enough into our guidance that we're probably okay there, but I want to be cautious there and balance those two.
So I do think on the renewal side, we certainly have the opportunity to continue to stay at elevated levels, but it's hard to say that I would say at the high-digits for the entire year. So I'd be cautious to say that would be more towards the high-end of our guidance range or even a little bit higher. We feel very good about having some strong renewal growth throughout the rest of the year. But -- and we put up some strong numbers here in January, and I wouldn't extrapolate that for the rest of the year.
But it's certainly possible if the market -- the designs that we're seeing in the market is pretty strong. There's a possibility that could happen. But I think if you do the math and how things will play out and taking consideration the number of 2-year leases we have, you'd solve to a number that gets to kind of the mid-single digits for blended growth rate for 2023.
Thank you. We now have Adam Kramer of Morgan Stanley. Please go ahead when you are ready Adam.
Hey, I just want to follow-up on an earlier question around JVs. Look, I think there's been some kind of news in the press last kind of number of months about maybe JVs being more of an avenue that you guys would pursue.
Certainly, a challenging environment for acquisitions in 2023 overall. Wondering just kind of the willingness or desire to maybe go that route. Obviously, you could pick up a little bit of fee income and change the economics a little bit in the model. So yes, I guess, just kind of generally around willingness to kind of go further down the JV path?
This is Dallas. I mean, look, we've shown a willingness. We, in the last couple of years, have raised a couple of ventures both with Rockpoint as a strategic partner. You're exactly right that it does have a lot of value add to the REIT in both terms of, call it, our returns on our cost of capital off balance sheet and then also the fee generation and kind of additional service opportunities it creates as we build out a little bit more robust manager.
And so I would expect the joint venture capital will always be something that we look at on a relative basis to where our current cost of capital is from a balance sheet perspective. Don't get me wrong, we would love to invest as much capital on balance sheet as we can. Obviously, at today's prices and the way that the book has been discounted in the public markets, that cost of capital is not very attractive.
And so I think using third-party avenues or having longer-term partners that we can continually deploy capital with is a very good thing for our business and for our shareholders. We generate outsized returns. It also allows us to be a little bit more particular niche across maybe a couple of different areas. And we think that, that will also give the company in its strategic thinking a lot more flexibility over time. So I would expect us to continue to explore and use venues like joint ventures over time but never at a way that it would impact our ability to grow our balance sheet and always trying to find that right balance.
Thank you. Your next question comes from Chandni Luthra of Goldman Sachs. Please go ahead.
HI, good morning. Thank you for taking my question. I wanted to talk about property taxes a little bit. So your guidance assumes real estate taxes will increase 7%, and that's an improvement from 2022. What's the driver behind this expectation of improvement in the growth rate? Are there certain markets that make you think that basically tax growth will moderate? Anything going on more specific or more idiosyncratic anywhere? Would love your thoughts there.
Yes, Chandni, it's Ernie. Happy to talk about the real estate taxes. So as a reminder to everyone on the call, for us, when you think about real estate tax, you want to think about our three largest markets where we pay the most taxes, which are Florida, California and Georgia, and we talked about that in the last quarter. California, we can kind of take off the table because of Prop 13. So that's always going to be a lower rate year-over-year. And there'll be some noise around appeals and things like that even within California.
For Florida, we're not -- I know we're wrong last year, but we're not anticipating another year of tax bills being up 20% or about 14% last year with assessments being up almost 30% last year. Similar story with Georgia. We're not expecting a second back-to-back year with it as high as it was before. In Florida, there is some relief for folks as to how much can get pushed through in one year. There are some caps on two-thirds of your tax bill. Said another way, because assessments were so high, we'll probably bump up against those caps again in Florida for that two-thirds piece. But when you kind of do the math on Florida, California and Georgia, we think we'll be in a better position than we were in 2022. And those three combined are about 70% of our tax bill.
We do have some other areas that we do think we have some significant increases from prior year. But again, because they're smaller tax bills for us, it's not as impactful, Maciver County in Charlotte will be an example where we will see some pressure there, because revaluations happen not on an annual basis, but a multiyear basis. You say the same thing about Denver, where we'll have that challenge as well. Again, the tax bill is in Colorado as well as the tax bills in North Carolina aren't as material to us.
And then finally, we did see large tax bills in Texas as well. But for us, Texas is not a material player. I wouldn't be surprised if Texas has another rough year in 2023. But again, for us because our exposure is small, it's not going to have the impact on us that it might have on others. So overall, that's why we basically come in with the year, Chandni that we think is going to be pretty similar to what last year. Last year was, as you pointed out, it was 7.8%. This year, we're guiding 6.5% to 7.5%.
So those are still historically really high numbers for us, but we do see a path that things might get a little bit better. And then importantly, with taxes, in case I think people are thinking about it, we really haven't baked in very much in terms of appeal wins. So if we do see some material appeal wins, that could help us get us to the lower end of our range. But we'll just have to see how that plays out. Those are certainly very hard to predict, but we don't need to have material appeal wins to get to the range that we've provided in our guidance.
Thank you. We now have Keegan Carl with Wolfe Research. Your line is open, Keegan.
Hey, thanks, guys. So I know you gave the percent breakout as far as shares go. But I'm just curious if you could give us a little bit more breakout on your growth expectations between growth, property management and G&A for ’23?
Yes. We noted on the -- in the -- if you look at our supplemental schedule, we gave a walk of FFO from 2022 to the midpoint of our guidance in 2023. And we had pointed out that we thought that property management expense line would grow about $0.03. So for us, that's about $17 million, $18 million. A lot of that is the continued investment in our technology platform. Part of that is the continued growth of our joint venture. So as we get more income from our joint ventures with regards to property management fees, we have property management expense offsetting that because of a number of homes.
And then on top of that, we just have some inflationary pressures. We also ran a little bit understaffed in the first part of 2022. I think a lot of organizations were challenged with filling positions, and we're assuming a more full headcount in 2023. We'll see how that comes to play. But those are the main factors in terms of with regards to that. And specifically on our P&L, we do break out property management separate from G&A. And we'll see a little bit more of that growth on the property management side, but it's going to be more proportionate this year.
If you look at ‘22 to ‘21, G&A was relatively flat, and most of the growth we had in those combined items came from property management. This year in 2023 compared to 2022, it's going to be closer to being even growth, but a little bit more on the property management side versus the G&A line.
Thank you. We now have Tyler Batory of Oppenheimer. Your line is now open.
Good morning. Thank you. So just on the operating cost side of things, I really just want to tie the loop on this topic. I mean, ex property taxes, when we look at same-store OpEx, I just want to be clear on the drivers of that, quite a bit of growth there. How much of that is due to higher turnover? How much of that is due to just general cost inflation?
And really, what I'm trying to get at, has there been a structural change in terms of the cost structure? I think there was always a concern with your business model that it would be difficult to scale. So I'm not sure if perhaps this outlook here indication that maybe some just economies of scale creeping in your business model, just given your size and the age of some of your homes?
Tyler, it’s Ernie. I appreciate you asking because if you have that concern, other people might have that concern as well. And the answer is no, we're not seeing any concerns with having dissynergies from the size of the organization. I think that's helping us. I can certainly walk through some of the details, but you're right to point out that we're guiding real estate taxes to be up about 7% at the midpoint, but we're guiding overall, which is a little bit more than half of our overall expenses. Overall, we're guiding to a number that's about 8.5% at the midpoint. So that means everything else is going up a little bit more.
So I think most of that, and I'll walk you through the details, we believe are more transitory items based on the circumstances where we're at right now in the marketplace. I'll just go through some of the material items in there. One was insurance costs. I don't think anyone is surprised in the environment hearing, but others, but property insurance rates are certainly going to go up. We'll finish our renewal here in about three weeks. So we don't have the final numbers on that. But in the last two years, our property insurance only went up combined about 3% or 4%. It was 0% one year, about 7% or 8% the next year. So we did much better than the broader residential.
But with the cost of reinsurance treaties going way up this year, and certainly, of course, the events that happened in 2022, insurance costs are going to go up. We don't think that's a permanent issue. We think that's a onetime issue. I wouldn't be surprised if property insurance rates go up as much as 20% to 25%, which would bring our overall insurance costs up somewhere into the low double-digits, because the good news on other insurance lines, we're not seeing those kind of increases.
The ones that are more material for us, Tyler, are really around turnover. And a couple of things with turnover. One, there are inflationary pressures. We do think those will subside as you get later into 2023 and 2024, but we're still in an inflationary environment there. The other items that really point out with turnover are two important things. One, we do think turnover is going to go up. And we think that's a good thing. Turnover is going to -- because we think we're going to have a better opportunity in 2023 than we had in 2022 for residents who have been delinquent in making rental payments, not paying the rent, we expect to see more activity there in people moving out homes. And so we do think turnover is going to go up for that reason. We think that's more of a transitory item and work itself out as we get later into 2023 and maybe a little bit of hangover in 2024 because of Southern California.
The other item, though, is those residents I just alluded to, they've typically been in our houses longer. Often, they don't allow us to come in to do repair and maintenance work. They don't call in service requests as often as our residents, who are keeping current in their rent. And so when we go in to do the turns on those homes, those turns are materially more expensive than a regular way turn, sometimes as much as 40% to 50% more on average than our regular turn. So as we're dealing with those residents, Tyler, that are -- have been treating the houses the way they have and have not been paying the rents, we again think that it's more of a 2023 event. It goes away in 2024 in terms of our cost per turn, having a much more higher growth rate than we've seen in the past.
So we don't think that's an issue with -- if you think about the long-term thoughts about what expense growth is going to be. So summarizing real-quickly, we think that's more of a specific ‘23 issue. We think property taxes will revert back to more normalized growth rates as we get into ‘24 and going forward. We think turnover will certainly go up over the next period of time. We get to a more normalized rate for us going forward.
And then the cost return, which I just alluded to, should actually see some deflationary pressures over time because of the type of turns that we're going to be doing. And that should all put us back on a path that you saw from us for a very long time, where we had expense growth that was within inflation or a little bit less than inflation.
Thank you. We now have John Pawlowski of Green Street.
Thanks. Maybe just continuing that line of thought. It just feels like you're baking in a lot of inflation on the expense line items and not a lot of inflation on rents, because some of these costs are going to push up the cost of ownership. So Charles, what markets on the ground are you seeing as potential canary in the coal mine for new lease growth going to, whatever, 3%, which seems to be implied in the guidance? Where are you seeing cracks in demand?
Yes. As we talked about earlier, occupancy is real-strong. Historically, looking at last year, Florida has been really strong for us, where we started to see when the seasonality came back was a bit of a slowdown in our traditional colder markets like the Denvers, the Chicagos. But in -- Minnesotas. But again, they're not material to us. And generally, we're still seeing good demand. And to Ernie's point, there's an opportunity or upside here on the new lease side, given kind of the structure of the portfolio today.
Our occupancy is running really high for January historically, and we like the acceleration that we're seeing. So I don't see any markets that have concern. I see markets that have been really performing well. Phoenix slowed down. There was a lot of supply there for a short period, but we're seeing that bounce back quickly. So I'm not seeing anything that has us concerned.
I think we're getting back to our historical rates. If you go back to pre-COVID, you're going to see seasonally the summer where there's turnover and high demand, we're going to see that's where new lease is going to push up. And I think it will be across the board. Some markets will perform a little better than others.
And then you get into Q1 and Q4, and you get that seasonal slowdown where on the renewal side, we think it's going to be pretty steady. We're at a -- in the 8s in Q4, and we're holding steady here in January. We do think it's going to moderate a little bit as you get further out, given the loss to lease scenario laid out by Ernie. But I think the renewal side will be more steady, and we'll get the typical seasonality on the new lease side. That's great for us given our historical kind of footprint in our 60 markets. It's a nice balance.
Thank you. We now have Dennis McGill of Zelman. Your line is now open.
Thank you. Ernie, I was just hoping you can go back to that loss to lease comment. I think you said it was one to two. And last quarter, I think it was maybe 10, and there's a couple of factors there. You mentioned you're realizing some of it, and then some of it is just what's going on with seasonality or market rents. Just given that there's not as much turnover in the fourth quarter, I was wondering if you could maybe split out how much do you think of that is market versus what you've realized?
Yes. And rough-rough, I think about -- when we looked at it, I'd say probably about a third of it, Dennis, was we were able to continue to earn into what's happening with leasing activity, but we did see a drop off of where market rate was in August, September of 2022 to where it ended up in December. We've certainly seen that already starting to work its way back up as we typically do in season, and Charles talked about our season starts a little bit sooner. But rough-rough was probably one-third, two-third, Dennis, in terms of what we were able to earn into versus where we saw some market declines from where they were in the stronger numbers in the third quarter.
And is that 1% to 2% number, is that end of the year or is that end of January?
That would be December 31st.
Okay, thank you.
Yes.
Thank you. We now have Anthony Powell of Barclays. Your line is open. Please go ahead when you are ready. Hello, Anthony could you please check your line is unmuted locally, we are not going any audio from the line.
We'll move on to the next questioner. We now have Jade Rahmani of KBW.
Thank you very much. Can you comment on what you're seeing in terms of new supply? Generally speaking, I think you made some comments about Phoenix having bounced back, but there's still pretty record levels of both multifamily supplies expected as well as build to rent with nearly every homebuilder allocating maybe 5% to 10% of their production towards single-family for rent. What are you expecting from new supply? And I know you're generally concentrated in infill locations, mainly having sourced properties from the existing home market. But your thoughts there would be helpful. Thank you.
Yes. Thanks, Jade. And Charles can feel free to add anything to this. I think on the multifamily side, you're right, I think there's going to be some multifamily pressure in, kind, of a few different markets. But I think you've seen -- I think we -- even in our release, we talked about the differential on a per square foot basis in terms of how much more attractive SFR rents are likely than multifamily.
The other thing I would just add is in just some of the data that we follow, we've actually seen kind of a pickup in new lease growth across call it the 99 SFR markets. It grew about -- according to Burns, it was like 6.5% in 2022. They're seeing a little bit -- most people are forecasting a little bit of a deceleration to Charles' point on the seasonality side. But look, I hope the takeaway here from the conversation and what Charles and Ernie have shared is we've been pleasantly surprised so far with the January numbers and where demand seems to be picking up. There were markets that had a little bit of pressure going into summer last year. But we are not seeing anything in our markets that's suggesting that a multifamily proposition is outweighing somebody's decision than to go at SFR.
On the build-to-rent side of it, it's been really interesting to watch that market evolve, Jade. I toured a bunch of this last week in Phoenix. And some of this stuff is a little bit further out than what you would think of our portfolio if you spent some time in the car with us. And it's different. It comes in all shapes and sizes. Some of it is more of your kind of stack product or kind of share a common wall Gemini-type of kind of split floor plans where you have townhomes and a few other things.
And then some of it is also the SFR detached piece. So I think the SFR detached piece, I worry less about from a value proposition perspective with townhome and amenities. We are paying attention to see if there's a value additive or a premium that is expected with those types of delivery. So far, we're not seeing anything that is directly impacting our business.
And lastly, just as a reminder, we have built the portfolio from a purpose-built perspective going back 11 years ago to make sure that we made a much bigger focus on being infill and living amongst our neighbors and a lot of fee simple home ownership. That has carried the day for us, I think, both on a perspective of how we've been able to make sure that we are attracting some of the best rental rate in the marketplace but also the duration, length of stay.
I've been most impressed lately with our -- some of this probably gets a little bit of a COVID tailwind to it. But our length of stay is now over almost three years in all our markets. California, we're seeing a push close to four years. People are just staying a lot longer, and I think it speaks to both the product, location, and I think the value proposition of a for-lease experience with a good business.
Thank you. We now have the next question from Haendel St. Juste of Mizuho. Please go ahead when you are ready.
Hey, guys. It's Barry Lu on for Haendel St. Juste. Thanks for taking my question. I just had a quick question on the appeal process for George and Florida. Are you seeing any likelihood of success or material recoveries in those markets?
Oh, there definitely is. There's likelihood they're having some success. We'll just have to see whether it will be material or not. The Georgia process can take a little -- both process can actually take a little bit of a while. As a reminder, we appealed more than we ever have in Georgia. Florida, we appealed similar to what we've done in past years and maybe a little bit more. Florida is a relatively fair regime when it comes to doing assessments.
And so there's not going to -- we didn't put in a material number of appeals but may have a material success rate in terms of what happens in Florida. So I think the bigger opportunity for us and certainly, where we've appealed more especially based on where we saw assessments came out are going to be in Georgia, which is our third largest state. So we'll just have to wait and see in terms of how that plays out.
Thank you. We now have the next question from Michael Gorman of BTIG. Please go ahead, when you are ready, Michael.
Yes, thanks. Good morning. Ernie, could I just spend another minute on the bad debt side of the equation? I think you mentioned exposure to Southern California. Is that the only market that's driving the 75 -- 25 to 75 basis points or are there other geographies? And then how much of that is related to potential softening on the economic side versus regulatory pressures that's making it harder to deal with those tenants who do get behind on their rent?
Yes, good question. The majority -- the vast majority of the increase is because of Southern California. We certainly have other markets and are performing where we want them to be and are higher where they've been historically. But we expect those markets to actually do about the same or improve from where they were in 2022, because we -- in most of the other markets, we're a little bit further along and be able to deal with things. So the majority of the concern is coming from Southern California, but it is sprinkled in some other places as well.
And I'd say it's almost all, if not entirely due to the regulatory environment and working with the local courts, working with -- in some markets where pools to show the propensity to change. We're not seeing anything in today's numbers, anything in the last 12 months, not projecting anything forward that would tell us we need to do something different or more from a bad debt perspective with regards to just the overall environment and where things are at.
Thank you. We now have Linda Tsai of Jefferies. Your line is now open.
Hi, what kind of unemployment expectations do you assume for the base case of ‘23 guidance? Is it flat with today? Or are you forecasting deterioration?
Yes, we're not -- we're -- I'll tell you, Linda, is we're assuming it's going to be an environment that's kind of similar what we've seen for the last 12 months. So we're not expecting a significant improvement. It would be hard improve where unemployment numbers are for where they are today that it's so low. We're also not forecasting at the midpoint of our guidance a degradation or a material degradation from where they are.
And of course, then our guidance ranges do capture the fact that if we aren't able to push rate as much as we want or we have some occupancy challenges because of the labor market, that would get captured somewhat in our numbers with regards to the lower end of our range. But as Charles talked about, early days, but we're feeling pretty good with where occupancy is.
And we're certainly seeing opportunity to do well on rate and maybe a little better than our guidance implies. But overall, we're kind of assuming it's going to be just kind of an overall similar type market, whether it's unemployment, whether -- and all the other macros that we're looking at right now.
Thank you. We now have Tony Paolone of JPMorgan. Please go ahead, when you are ready.
Thank you. You've talked in the past that you've built Invitation Homes to run materially more than the 83,000 homes you currently own. And so I'm just wondering, what are the -- what's the biggest gating factor to turn external growth back on in a more meaningful way? Like is it really your capital cost? Is it the selectivity of what you want to buy? Or do you just think prices are going to come down, and you don't want to be in front of that?
It's not the latter. I mean, I think last year was more of the latter, Tony, in terms of -- we started to slow down our buying in April or May significantly because we were worried -- there's a lot of unknowns when the Fed started moving rate as fast as it did. Now I think we're all happy to say nine months later, we haven't seen a degradation in home prices that would suggest that there is huge doom and gloom on the horizon. It's really the opportunity set.
Remember, we were able to build really significant scale over time in an environment where you had years of resale supply on the market and a cost of capital that was pretty attractive. In today's environment, we have less supply. We see kind of an uncertainty in how we even view kind of our own balance sheet capital right now. We're not pleased with where the stock is currently trading.
And lastly, we see builders being a little more cautious, and there's local regulatory restriction. Now all that sounds negative. It's actually a really good thing for the demand side of our business, as you guys know. We are not seeing any degradation in top of funnel. In fact, to Ernie's point to what Charles said earlier, we're really bullish on the prospects of both the quality of the resident. We've seen a tremendous increase in, call it, the underwriting standards of our resident over the last couple of years and the amount of demand we have for the product. We obviously want to grow. We would love to grow. I think we've gotten pretty good marks of being a prudent capital allocator over time. And I think we got it right in large part by being in the markets that we are with the type of scale that we have.
Tony, we're going to continue to find ways to build new product and to bring more product into the marketplace. We made that commitment about 18, 24 months ago. We've got over $1 billion, call it $1 billion, $1.5 billion in our current pipeline. And we're going to find ways to continue to build and create strategic ventures with partners that are on the homebuilding side so that we can start to ramp that up over the coming years. But we also want to continue to be opportunistic and buy in a one-off nature.
The one thing that I think will be interesting and we're keeping an eye on is over the next couple of years, with interest rate costs being where they are, I think there are going to be some opportunities for additional M&A with small to midsized portfolios as operators consider their options around recapping or not. And I hope that we'll get an opportunity to look at some of those types of opportunities.
And I would expect that in the sector, we'll still see opportunities for consolidation. Invitation Homes today is the combination of four or five different companies as it currently sits. And I would expect that there'll be opportunities to buy additional businesses or portfolios in the coming years. So expect us to kind of continue to keep an eye towards growth as we always have. But it's been a little bit of a weird year in terms of uncertainty and candidly just the limited amount of supply in the marketplace.
Thank you. We now have Austin Wurschmidt of KeyBanc Capital Markets. Please go ahead, when you are ready, Austin.
Yes, thanks for taking the follow-up here. I don't believe this has been hit on, but just wanted to ask about the qui tam and sort of the latest update how you guys are thinking about a potential lengthy court proceedings, what the potential cost of that could be and whether or not you're considering or evaluating a potential settlement in order to be mindful, I guess, of the overall cost? Just any update there you can provide? Thanks.
Thanks, Austin. This is Dallas. First, like, obviously, as we said before, we don't comment really in great detail on ongoing legal matters. In relationship to the qui tam, this will be likely a long process. We're not even to a discovery phase. It's still kind of at the front end of the administrative side. I'll say what we've said before. We feel like we have really good facts on our side. We will and reserve the right to defend ourselves appropriately. And we'll obviously update The Street and you guys as -- or if we had new information when it, come to us, but no update there at this point in time.
Thank you. We have the final question on the line from Anthony Powell of Barclays. Your line is now open.
Hi, hello? Can you hear me?
We can hear you.
We can.
Yes, thanks. Sorry for the earlier [Indiscernible]. I guess on turnover, mentioned a lot of times that turnover was increasing. I wanted to confirm that, that's really isolated to Southern California and other -- another bad debt situation. This is not really a general increase in turnover in your portfolio.
No, no, it's across the board because we're still working through in all our markets, residents that haven't paying rent an issue in Southern Cal, there's certainly more there. So across the board, we're going to see an increase in turnover. And in fact, honestly, California may take a little longer for us to get there, because of the situation in the regulatory environment. So the bad debt number, and it's being elevated is going to be because of Southern California and because it's more difficult to move forward with residents who aren't paying there. But eventually, it's going to turn here with -- which hopefully continues to be with where the rules are. But it's going to be more across the board as we kind of clean up from the remainder of what was going on during the pandemic environment in most of our markets.
Got it. But it's not like due to tenants just not accepting rent increases and moving out, it's more of a bad debt tenants, can clean up. Is that fair?
That is -- yes, absolutely. We're seeing our retention levels for people accepting and renewal increases being where they've always been. So it's just -- it's taking care of what you described.
Thank you. I would like to hand it back to Dallas Tanner for his closing remarks.
We thank everyone for joining us on the call today. And we look forward to seeing everybody at the Citi conference in a couple of weeks. Take care.
Thank you all for joining. That does conclude today's call. Please have a lovely day, and you may now disconnect your lines.