Welcome to the Invitation Homes First Quarter 2022 Earnings Conference Call. My name is Ruby and I will be your moderator for today's call. I will now hand over to your host, Scott McLaughlin to begin. Scott, please go ahead.

Good morning and welcome. I'm here today from Invitation Homes with Dallas Tanner, our President and Chief Executive Officer; Charles Young, Chief Operating Officer; and Ernie Freedman, Chief Financial Officer. During this call, we may reference our first quarter 2022 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 2021 annual report on Form 10-K and other filings we make with the SEC from time to time. Invitation Homes does not update forward-looking statements and expressly disclaims any obligation to do so. We may also discuss certain non-GAAP financial measures during the call. You can find additional information regarding these non-GAAP measures, including reconciliations to the most comparable GAAP measures in yesterday’s earnings release. With that, let me turn the call over to Dallas.

Thanks, Scott and good morning to those of you joining us today. We believe the fundamental tailwinds remain as strong as ever for our business, and I'm pleased by our team's solid execution that achieved our first quarter results. On the heels of Invitation Homes' 10-year anniversary, it is clear that we've built a great real estate business that owns and operates for lease product with first-rate service, but that's just a foundation as our success is determined by the genuine care and the premier experience we provide to our residents every day, as well as the loyalty and trust our residents place in us. We see this evidenced by our average resident tenure of nearly 32 months, occupancy of over 98% with extraordinary resident retention and work order satisfaction scores of over 4.7 out of 5. To the nearly 1 million residents, who made a house a home with us, and especially to all of our associates, thank you for 10 great years. I often speak about how our homes are attractive to a resident demographic. There is a large population surge of younger adults, just beginning to approach our average resident age of 39 years old. A common theme within this millennial cohort is that they want to live freer, meaning they want more choice and flexibility in their lives, including how and where they live. The pandemic accelerated this shift with many people choosing to move from tight quarters in higher cost cities to working from home in a new location with great schools and a higher quality of life. More recently, the macroeconomic environment, including rising mortgage rates, has meant leasing a home is often a more affordable option than owning. According to recent data, leasing a home is over 12% more affordable on average than owning a home within our markets. These factors and more have led to unprecedented demand for our product, which has intensified due to a lack of available high-quality, well-located homes. At Invitation Homes, we're proud to be a part of the solution to this imbalance by offering choice and flexibility within housing. One way we're offering this is through our partnerships with homebuilders across the country, as well as through our recently announced ventures with Rockpoint and Pathway Homes. I'll start with our builder relationships, which are helping to add new residential housing supply and expand choice for consumers, where it's needed the most. Our current approach keeps development risk off of our balance sheet and partners us with some of the best in the business to select and buy new homes in great locations. We've talked a lot about our preferred relationship with Pulte Homes, which continues to progress towards our goal of buying 7,500 homes over the next several years. We're also working with other national, regional, and local homebuilders. Through these relationships, as of the end of the first quarter, we've built a pipeline of nearly 2,000 new homes, and in a disciplined way, we're adding more every month. Most of these projects will include a mix of owner-occupied and for-lease homes, which underscores our firm belief that everyone should have the choice to live in a great neighborhood, whether they lease or own. So we're proud to be bringing not just new homes, but new and diverse communities to life. Another example is our latest Rockpoint joint venture, which we announced last month to specialize in premium location, higher price point homes for lease. These homes will offer superior locations within our markets and open up investment opportunities where we have limited or no current product. In Phoenix, for example, that might be a home in a submarket like Scottsdale or in the planned submarket of Dallas. In turn, we believe residents may want a higher level of convenience, live in easy amenities, and choose to spend more on ancillary and other services. We expect the new JV to begin buying homes soon, with us earning asset and property management fees in addition to our share of income as we target this new premium segment. Another example is our investment in Pathway Homes. Pathway works directly with aspiring homeowners to identify and purchase a home, offering them the opportunity to lease their home first, with an option to buy at a later date if they choose. Pathway has started acquiring homes as well and is well on the way to providing residents the choice to lease today, with the flexibility to buy tomorrow if they so desire. To further our commitment to choice and flexibility and in response to the ongoing strong demand for our homes for lease, we plan to keep growing our portfolio this year. We plan to leverage our multi-channel acquisition strategy, our proprietary AcquisitionIQ technology, and our localized insights to help us grow prudently where pricing, total risk-adjusted returns, and scale make the most sense. We're targeting a total gross acquisition, including through our JVs, of $2 billion this year. We continue to make good progress so far in that regard with plenty of opportunities still in front of us. In summary, whether it's through our growth, our homebuilder relationships, or our strategic partnerships, we're very proud of our 10-year history of providing choice and flexibility in housing, along with a best-in-class resident experience that allows our residents to live freer. On behalf of this great company and fantastic team, I couldn't be more excited about the opportunities the next 10 years will bring as we remain committed to being part of the overall housing solution that this nation needs. And with that, I'll pass it on to Charles, our Chief Operating Officer.

Thank you, Dallas. As Dallas mentioned, this year is off to a strong start, with solid fundamentals helping our teams achieve higher retention, attractive rate growth, strong occupancy, and above all, premier resident service. Let's walk through the first quarter operating results in more detail. Our same-store NOI growth remained over 10% for the third quarter in a row, coming in at 11.7% in the first quarter of 2022. Same-store core revenues grew 9.4%, driven by average monthly rental rate growth of 8.3% and a 47.1% increase in other income. Average occupancy remained strong at 98.1% for the first quarter, which marks 18 consecutive months that occupancy has stayed at or above 98%. Meanwhile, resident turnover remains at historic lows with first-quarter turnover at 4.6%. Demand continues to increase compared to the prior year. We have seen increasing traffic to our website from prospective residents, including over 20% increases in the number of new website visitors in favor of virtual tours. We believe this demand is evidenced by our leasing activity, with new lease rate growth of 14.8% for the quarter and renewal rate growth up 9.7%. This drove blended rent growth to 10.9%, a 550 basis point improvement year-over-year. We continue to take a balanced look at our renewal rates each month compared to market rents. As a result, we believe we have a sizable loss to lease nearing 20%, with our average rent across the portfolio of almost $2,100, significantly below current market rates. On the expense side, as everyone knows, just about everything costs more in the current inflationary environment, but through the efforts of our teams, we were pleased to hold same-store core operating expense growth at 4.5% during the first quarter year-over-year. The two biggest contributors to the increase were property taxes, which were up 4.3%, along with repair and maintenance expenses, which were up 18.9%, primarily due to a challenging comparison to the prior year and higher costs. Lower turnover, meanwhile, continues to help offset some of these rising costs with a 12.4% decline from last year. To help us control costs, we continue to seek efficiencies through tech enhancements. This includes our mobile maintenance app that we launched last year, which has been a big win-win for our residents and us. Using their smartphones, residents can easily send us photos and videos of their service needs, allowing our technicians to be better prepared when they arrive. In turn, this significantly reduces the need for follow-up visits, resulting in higher customer satisfaction and allowing our service technicians to be more productive. For the first time, the number of maintenance requests received from digital methods exceeded those from our call center, and we expect the mobile maintenance app to continue to drive this shift. I'm pleased to see technology make our processes more efficient while remembering that it's our people who make the difference. Thanks to the continued strong demand for our homes, our strategic execution, and above all the efforts of our associates to put our residents first, we stand on great footing for peak season. I'd like to thank our teams for another successful quarter. I will now turn the call over to Ernie, our Chief Financial Officer.

Thank you, Charles. Today, I will discuss the following three topics: balance sheet and capital markets activity, followed by our investment activity during the quarter, before closing with our first-quarter financial results. First, balance sheet and capital markets activity. At the end of March, we priced our third public bond offering that totaled $600 million. The offering advances our stated objective to proactively manage our maturity ladder, and in particular addresses our 2025 and 2026 debt maturities in a measured and prudent manner by harnessing the advantages of the investment-grade ratings we received last year. The new 10-year bonds mature in 2032 when we have no other debt currently maturing. Because the offering closed in early April, its impact is not reflected in our March 31 financial statements or supplemental schedules. However, we have provided the pro forma impact on certain of our metrics in a footnote to supplemental schedules 2B and 2C. In January, we converted the remaining $141 million principal balance of our convertible notes into approximately 6.2 million shares of common stock. We also utilized our ATM program during the first quarter to help fund our growth objectives. This included the sale of 2.1 million shares at an average price of just over $41 a share, totaling $85 million of gross proceeds that settled during the quarter, along with approximately $15 million in additional proceeds from the sale of about 400,000 shares that settled just after the quarter end. At the end of the first quarter, our net debt to EBITDA ratio was 6.0 times. This achieves the top of our targeted range of 5.5 times to 6 times and represents a more than one-turn reduction from the first quarter of last year. We ended the first quarter of 2022 with nearly $1.5 billion in liquidity, including approximately $467 million in cash and the full capacity of our $1 billion revolver available. I'll now cover my second topic, which is our investment activities. During the first quarter, we acquired a total of 822 homes for $341 million through several acquisition channels. This included 518 wholly-owned homes for $218 million at an average 5.3% cap rate, as well as 304 homes for $123 million through our joint ventures. During the quarter, we sold 141 wholly owned homes for $52 million. Finally, I'll walk you through my third topic, which is our first-quarter 2022 financial results. Core FFO per share increased 13.5% year-over-year to $0.40, primarily due to NOI growth and interest expense savings. AFFO per share increased to 11.9% year-over-year to $0.35. Our full-year 2022 guidance remains unchanged from the initial guidance we set in February. In conclusion, we're pleased to see this year off to another strong start, with fundamentals continuing to favor single-family rental and many people choosing to lease a professionally managed home in a great location. We believe we are well positioned to continue to provide strong financial results while offering the best overall resident experience. With that, operator, please open the line for questions.

Our first question is from Rich Hill of Morgan Stanley. Your line is now open. Please go ahead.

Hey, guys, I'll leave the bad debt questions to someone else. But I did want to focus on acquisitions for a second. I think your original forecast was $1.5 billion of balance sheet acquisitions for ’22, that's certainly what we model. I think on a run rate basis you're pretty far off that pace in 1Q. So maybe we can just talk through the cadence of 2Q, 3Q, and 4Q. And if you think that $1.5 billion is still the right level to be thinking about?

Yeah, Rich. This is Ernie. I'll start and I’ll pass it over to Dallas. I'll remind folks that we’re 50% ahead of our pace of last year. In the first quarter of last year, our total acquisitions were $233 million. This year we came in at close to $350 million. So it's typically seasonal for us, Rich. The first quarter is a little bit slower. The fourth quarter in the past has been a little bit slower; things really ramp up in the second and the third quarter for us. I'll turn it over to Dallas to provide any more color there.

Yeah. Ernie is right. The first quarter is typically a little bit slower out of the gate because the activity tends not to occur towards the end of the previous year. The other thing I'd add, Rich, is that we added a little over 450 new homes into our build pipeline in the first quarter—just under contract. So you're not seeing that come through the numbers as well. So I'm actually pretty happy with where we are early in the year with regard to earnings point. I think we're also seeing really good momentum on the builder side, both in our strategic partnerships with companies like Pulte, and then again in our merchant build program locally. So we're in a good spot. I think we'll start to see a little bit of that velocity increase quarter-over-quarter.

Got it. And so, maybe just one follow-up question on the revenue side of the equation. And I'm going to ask a sort of a direct question about what the earn-and-benefit that's building for 23 years. I'm sorry if you disclosed loss to lease, I didn't hear it, but could you maybe talk through what you think the earn-in. So what's already baked for same-store revenue for 23. The reason I ask the question is your new lease spreads are really good, your turnover is relatively low, very low. So it does suggest to me that there is a lot of big same-store revenue already in for ’23, ‘24, and maybe even ‘25. So I just—above that maybe unpack that a little bit more, Ernie, as much as possible without putting you in a position where I'm asking you to guide?

Well, I'm just glad you are not asking for ‘26 and ‘27, right, all the way out to ‘25. Your supposition is correct. Charles did mention in his call script that our loss lease continues to run at almost 20%. Importantly, we've seen some people talk about this and you as well; our renewal rates continue to accelerate for us. We saw a modest acceleration—good acceleration over the first part of the year and certainly, big acceleration over last year. But our renewal rates are not where our new lease rates are, and that is purposeful in terms of what we think is the right thing to do in this environment where we're at. And said another way, that means we are building up a higher loss of leasing price than any other residential sector. You might certainly see with other companies in the single-family sector like us. And so it does set us up for a good position in terms of having a longer runway of above trend growth because of that as long as market rates continue to be as strong as they are, we're not seeing anything that would tell us otherwise. Without giving a specific number for ’23, ’24, ‘25, I think it's before thinking about models; it’s right to see that we likely have a long runway of above trend growth because we're comparing against a difficult year from last year, rather than the residential space where last year others in the residential space had concessions.

Okay. That's helpful. And Ernie, just one quick clarification question. Could you remind me what was the recapture lost leases on an annualized basis?

Let me make sure I understand that, Rich. We recapture applies to lease.

Yeah. I'm basically saying if you loss leases is 20%, how much of that do you think you can gain in a given year? Obviously, you're not going to get 100% of that because you don't have 100% turnover. So I'm really asking a question of how much of that loss lease can you gain in ‘22, ’23, ’24?

Yes. Got it. So about a quarter of our leases are two-year leases, so you won't recapture on those. And again, as long as renewal leases continue to stay behind new leases, which we had in the first quarter and will likely persist for a while here, certainly it will—you'd have to discount it even further. I'd have to do some quick math in my head to get to Rich's price; it's probably the recapture rates lower than you would see in multifamily due to the short-term leases and the fact that renewal leases in multifamily are at or exceeding new leases right now.

I understand. Thanks, guys.

Thanks.

Our next question is from Derek Johnston of Deutsche Bank. Your line is now open. Please go ahead.

Hi, everybody. Thank you. Yes. So just on the turnover, it really seems to hit a new low every quarter. Are you seeing any indications of a return to normal? Or could this lower level be somewhat of a new normal in a post-pandemic and maybe higher rate environment? And then in that case, would it be safe to assume that the natural rate of occupancy could be higher going forward?

Yeah. Great question. This is Charles. We have and really proud of how turnover has trended down over the last couple of years, honestly. And even before the pandemic, we were seeing that come down year-over-year. We think a lot of it is around the product to our location and the service we're providing. However, the pandemic has slowed down some of that move out and we guided that we thought we'd be a little higher in turnover in 2022 that has not shown up yet to your point. We're keeping an eye on it. I don't think it will stay at this level, like we're seeing right now. However, I don't think it's going to go back to where we were previously. It's going to be somewhere between that given and given our days to re-resident and how we performed in the past, we do think that this is a 97.5%, 98% occupancy business if we continue to do what we're supposed to. We'll see how turnover goes. Right now, it's holding. I do expect there will be some point in the year might come back a little bit, but it's a seasonal metric anyway, and we'll have to see what the Q2 and Q3 has.

Excellent. Thank you. And then, just quickly on getting the Pathway Homes portfolio going with the 46 acquisitions and aiding aspiring homebuyers in a pretty tight market was encouraging to us. So can you give us some further details on how it works and if you feel it addresses or alleviates any regulatory touchpoints in terms of assisting residents?

Well, I think it's early in terms of alleviating stress points in terms of the lack of supply we face nationally; that's a much bigger issue than any of the programs will either support or sponsor ourselves as we grow the business. I think more importantly, we're really excited about the progress that they've made in getting the product out and acquiring the residents that are looking for that lease with an option to purchase. I do think that we are seeing the marketplace evolve to where the customer does want flexibility and choice. I talked a little bit about that in my opening remarks; there is a cohort of people, specifically millennials, that are looking for this flexibility and optionality. In our business, if you look at the way that we structure our leases with some of the ancillary programs, or if you look at some of these new ventures we have, we're trying to design a program that is completely geared towards choice for the consumer. There is a strong sentiment in the marketplace that people are looking for some of these non-traditional methods to ease into a single-family experience, whether it be through leasing or through some of these other products. We're excited; it's obviously just launched; our partners are doing a great job. We're excited to support it. It will be a great revenue center for us over time. I think it's naturally where the marketplace is starting to evolve; it's not as one-dimensional as it was say 20 or 30 years ago.

Thanks, guys. That's it for me.

Our next question is from Chandni Luthra of Goldman Sachs. Your line is now open. Please go ahead.

Hi. Thank you for taking my question. So in terms of kind of thinking long-term. How do you think about managing homes as a business for basically not your JV partners? Essentially, do you think about third-party property management? And is that something that you could perhaps evaluate down the line?

Yeah. We never say never. One thing we've looked at the business on itself—it's not a high-margin business generally, property management. I think you really do want to have a strategic view as to why you would do that. Does it help you with your bottom line? Can you mitigate costs over some broader subset of homes? I think what we've really been focused on is curating an experience for our customers that's very specific and that we can repeat across the country, through scale and high-touch service. For us, if we were to ever entertain that down the road, we'd likely want to provide that same level of service. You could certainly see a world where, as our ancillary offerings expand and some of the other things that we do with the customer, it could be beneficial. But you have to have enough scale for it to really make sense, I think that’s our current viewpoint on the third-party space. There are only so many hours in the day, and we’d love to spend our time making sure that we're driving the best returns possible on our capital.

Got it. And then on the Rockpoint Homes, I mean these higher price point homes basically, how is the geography different? Even if it's in sort of the same geography, how are the locations different from your current homes in that these quasi-suburban properties close to transportation corridors? How are these higher price point homes different from that standpoint?

It's a great question. One we’ve talked about a little bit at Citi and a few of the other conferences; they're meant to be a little more infill, a little bit higher price point. You might see a little bit higher-end finishes. We own some of this in our portfolio today in parts of the country where maybe you get priced out of certain categories as well. You could take a market like Seattle that way in terms of having interesting opportunities to invest in infill locations that may have higher price points. It also is a nice complement to our partnerships with our builders and the partners in that space, where they have communities that might be thought of as a little bit more infill at a higher price points and segments that would be well beyond what our average rents are today. We view it as completely complementary. We’ve looked at the customer in this higher price point of our own portfolio. We see very similar statistics in terms of the types of decisions they make while in our portfolio. We also know that there is a growing preference for leasing these higher price point assets. We see it as a value add really across the chain. It's not all that different from what we currently own and operate, just a little bit higher price points, maybe a little further in.

So does that give you any kind of—does it make it harder from a maintenance standpoint?

No, it’s too early to say that. I’m sorry. I wasn't coming through very clearly. No, it still has all the same characteristics we typically want to try and achieve when acquiring assets, but just could be that it's in a little bit more of a higher price point segment. Within those geographies, I’ll give you an example that I mentioned on the call. We operate in Phoenix really inside the major rings—the 202s, the 101 freeways—but there are different geographies within some of those sub-markets. The south Scottsdale submarket, for example, would fit great into this higher quality price point where we own plenty of homes in Tempe, which is 5 to 10 minutes away, just a little bit further south. I use that as an example where it might just be a little more infill but still have the same major arterials, similar school scores, and things like that; it's just a little bit higher price point segment.

Got it. Thank you so much.

You're welcome.

Our next question is from Nicholas Joseph of Citi. Your line is now open. Please go ahead.

Thank you. Ernie, guidance was unchanged, but if you look at the same-store numbers, they were ahead of what the full-year implies. Obviously, the comps change, and we're still early in the year. But how did 1Q trend relative to what guidance assumed, and was it more of a company policy decision to wait till the middle of the year, or are things trending more towards the midpoints?

Yeah, Nick. I can tell you with a guidance perspective, we are trending a little bit better toward the higher end of the ranges, but it wasn't such a significant outperformance that we felt this early in the year made sense to provide a guidance update. Typically in the past, we haven't done guidance updates in the first quarter. To your point, I won't call it a policy, but just the reality is we just provided guidance about 60 to 70 days ago, and this year has been other than a couple nuance things that are kind of offsetting each other has been what we expected it to be. But as I said, we're trending a little bit better than the midpoints, but it makes sense at this point to not make a material change to guidance where we're at and the years playing out for the most part as we expected at this point.

Thanks. That's helpful. And then can you provide an update on the California lawsuit—where it is today and if there are any updates from our conference back in early March?

Yeah. Hi, Nick. Dallas. Not a lot to update, but just kind of by way of summary. In late February, we elected to remove the California State Court action to Federal Court, so that action is now pending in Federal District Court in the Southern District of California. We're currently preparing our motion to dismiss the complaints, which we intend to file shortly. And it's really in accordance with the court's schedule, so under that schedule once we do that, the plan at this time is to respond. We have time to respond to that, and so the deal definitely take us into the middle part of the year. Outside of that, as I've said before, we think we have some pretty compelling arguments, and we're just interested, I guess, in having our time in court to go defend us properly.

Thank you.

Thanks.

Thanks, Nick.

Our next question is from Jeff Spector of Bank of America. Your line is now open. Please go ahead.

Great. Thank you. And first, congratulations on the 10-year anniversary.

Thank you.

Thanks, Jeff.

Question—absolutely, amazing 10 years. First question I had was just on Charles commented on the website traffic, and it seemed like there was some moderation in the new lease rate growth. Can you talk about that a little bit and tie those together?

Yeah. So as I mentioned, we're seeing good demand; occupancy maintaining 98%, and then you look across kind of how we've been progressing in Q1, which is typically a slower period. Each month newly signed, we see an improvement. Ending on the newly signed in Q1 of 14.8% is really strong, and April has continued to accelerate and will be in the 15s. It's still early; we haven't—we're not completely closed, but we're still seeing good demand going into peak season maintaining that, our strong occupancy turnover seems to be holding. We see nothing but good upside going into peak season.

Okay. That's great news. So, April, you're saying you're seeing an acceleration into peak, and then I guess any particular market color you can add on to that, Charles?

Yeah. It's been strong all around; markets are the kind of typical. Phoenix led on the new lease side has been really strong in Q1 to north of 20%—almost 23—north of 23%. But what's been unique about this market and some of the demand kind of conversations we've had previously around people moving. The Florida markets are really stepping up for us. So, South Florida is on the new lease side, north of 20% as well—just around 20.9%. We're also seeing Vegas, which has historically been strong; that's still strong at 19%. Atlanta has been holding well, north of 15%, and Tampa. So those Florida markets are really kind of the addition to what we've seen in historically on the West. The same thing kind of on the renewal side—Phoenix, Vegas, South Florida, Seattle catching up after having some limitations, which is great, and we're happy to see that in Atlanta, Tampa also holding pretty strong on the renewal side. So it's great to see our typical markets that have been performing at the top if you see the Eastern Florida do well is nice as well.

Great. Thank you very much.

Our next question is from Neil Malkin of Capital One Securities. Your line is now open. Please go ahead.

Good morning, everyone. Yeah. Good morning. Thanks for the time. I was wondering if you could talk about ancillary revenue. I think previously you mentioned you had a couple of pretty significant initiatives you're working on one being the smart rents systems and things along those lines. Can you just give us an update on how those things are going, if there are any more in the pipeline and what you kind of see as your—this is an example, 4Q like ’22 quarterly run rate versus ‘19, given the things that you've done over the last couple of years or plan to initiate on?

Yeah. Great. Thanks for the question. We're really proud of what we've been able to do on the ancillary side. We had our Investor Day a couple of years ago when we said we're going to start to build these programs and infrastructure. We put a team around it. They're a fabulous team and they're really executing well. As you mentioned, the hallmark of the ancillary is our Smart Home technology. We have that in all of our available homes—well over half of our homes and we continue to add every month as homes turn. What we've done there is launched our video doorbell piece, which is additional revenue as well as convenient for the resident, and we're packaging that really well. That's going to give us further growth that's going to go into the numbers that Ernie will talk about in a minute. The other things that we've worked on this year and last year going into this year is our pet program, really optimizing what we're doing there as well as thinking about future partnerships. We launched our filter program, which is a win-win in terms of better air quality and energy savings for our residents, but it also keeps the HVAC costs down for us in terms of overall maintenance. We have insurance partnerships. We have a pest partnership with Terminix, which is a great partnership as they get our residents lower costs than they would find on their own, and we get a revenue share from that. We're working on some pilots around utility management and energy, as well as landscaping. Landscaping is a big one as we look at it because this is a lease obligation that our residents need to do, but we can give them a really easy and affordable option that makes it a bit of a turnkey. Those are the hallmarks of the programs that we're running in ‘22. But as we look forward, we're building partnerships that we think are going to be real win-wins for our residents, as we think about whether it's gym memberships or our convenient food memberships, in terms of thinking about high-speed internet, which are attractive things to our residents. These are parts of the business that we hope to have a suite of things that we're building over time to help to get to that run rate. I'll give it over to Ernie to talk about kind of where we are numbers from an ancillary perspective.

Neil, you referred to 2019, which is back, I'm guessing, to our Investor Day where we thought we'd be at our annualized run rate of about $15 million to $30 million a year for ancillary items. The team has done a great job to get us ahead of that pace, and we're actually going to deliver somewhere between $40 million and $45 million ancillary income this year on 2022, so ahead of the $30 million annualized number we provided three years ago. That's going to ramp up here a little bit as we go through the year. So as we get into the fourth quarter, to your question, that number for us would be closer to $12 million plus or minus. So that puts us in a good footing for continued growth, and that's before any of these new items that Charles has talked about, which should start earning in later this year as well in the next year too. So we continue to see upside from ancillary income opportunities.

That's great. Really helpful. I guess another one from me in terms of pathway and how that's going, and maybe how big it could be, or how much of a component of the company it could be. I think some advertisements for other types of programs, companies that are similar. Wondering if that impacts your view on that market share or a built-like addressable market the ability to capture as much as you may have thought? Or maybe impact your view on how much money to allocate to that or to invest in funds in future funds, anything you could talk about on the competitive landscape and how maybe that evolves near term would be great.

Yeah. Let's just take a step back for a second and think about what that funnel looks like. There are roughly 170 million households in the U.S., of which about 50 million plus or minus are in some form of a rental product today. As you think about what I mentioned earlier around shifting preferences, millennial kind of changes of behavior and the things that we're seeing even in our portfolio with rent-to-income ratios and things like that. There's definitely a customer out there that's looking for flexibility. Rising mortgage rates are probably only adding to some of these decision points for people right now about maybe putting off potential homeownership. So all lends itself to platforms and companies that can provide choice. I think you're going to carry really good momentum through kind of different parts of the cycle. While we're early in our venture down pathways, we're certainly bullish on the prospects of offering choice and maybe a lifecycle for people in terms of the different stages of their lives and what they need and how to suit those needs to best while helping people remain down payment light. I think that's a very important characteristic of the types of things that we want to spend our time on, which is how do we drive overall costs down for the consumer while creating an experience that looks at deals, maybe close to homeownership. So we're bullish about where that's going; it's early in the process. As we disclosed at the end of the first quarter, we had around our first 50 homes kind of in that program. Partners are learning a lot about the customer, and I think we'll continue to see some of these shifting opportunities. The key thing for us is what do we believe that we can do over time and distance and actually provide value through scale. We see this as one or two of those categories, whether it's a rent-to-own structure, a sale-leaseback structure, or maybe some of these alternative equity builder programs that are consumer-friendly, and we're already in the business, and it should be an easy thing for us to part with our offerings down the road.

Okay. Great. And then just a little part B of that exact line—maybe I know you're probably limited in what you can say that we're on a public call. Do you think that this is also something that helps you almost have an embedded shield toward legislative scrutiny or sort of Twitter headline negative news that you're helping people get into homes? Is that sort of added intangible benefit you guys kind of think about?

Well, I think we have an array of products available to consumers is just a good thing for the marketplace. We can't really predict where the shifting political winds are going to be or what they're going to focus on. We don't spend a lot of time worrying about that; it's about running our business the right way and finding ways to solve problems that consumers are currently facing. At the end of the day, we spend a lot of time thinking about great products and great processes. Charles just talked about all the exciting things we're trying to focus on that are going to create a better experience for the resident. We think the results will speak for themselves. But we're certainly ready to defend what it is that we do, which is provide a quality product at a much better price than you can find in the marketplace today.

All right. Thank you for all the insights. Great quarter.

Thanks.

Our next question is from Austin Wurschmidt of KeyBanc. Your line is now open. Please go ahead.

Great. Thanks, everybody. I was wondering if you guys could provide a little bit of detail and context around the 80 basis point increase in bad debt as a percentage of rental revenue and maybe what markets are driving that and if this is a concerning trend for you?

Yeah. Great question. This is Charles here. Let me step back a little bit; if you think back over our collections bad debt, second half of the year, we were really seeing a nice gradual improvement in all of our markets, including California. Some of our residential peers have talked about this, but going into Q1, we saw that the rental agencies were a little slow on their payments that were outstanding, and you couple that with residents who were waiting on those payments and deciding not to pay. That kind of hit us in Q1 as a bit of a surprise, especially in February. The good news is we bounced back; some of those payments started to show up in March and in April; we're still a little bit of time left. But we've seen a significant increase because the payments have shown up, but you also couple that with what's going on in California; in that April payments and beyond are no longer eligible for rental assistance. The psychology effect of that on the resident is they're starting to pay where they thought they might have a chance to. Some of them had a chance to wait for rental assistance. April is encouraging; as I said, all of the markets are gradually getting back to normal. We thought that the first half would be a little more challenging from a collection of bad debt, and we thought that the second half is where we start to catch up. We don't see it as a major concern, but we're going to keep an eye on it and we'll see how we progress with California going forward.

That's a helpful clarification. And then I'm just curious if there's anything holding you guys back from driving higher turnover. And Ernie, I believe you said it's kind of the renewals you're sending out below new leases is the right thing to do. So should we take that as your self-limiting increases, or should we expect—and have you assumed that those will continue to increase as we get into the peak leasing season?

Yeah. This is Charles. I’ll take that one. We've really taken a balanced approach. We believe it's the right approach, given the tenure of our residents, living in a home—families, all of that. Also, keep in mind that renewals are priced 90 days in advance, and so if you go back over the last year or more, every month we've improved on our renewal pricing. We will continue to get that as we look out to kind of May and June—we’re asking over 10% on our ask. You look at our Q1 renewal spreads at 9.7%. As I mentioned on the newly side, we've actually seen more acceleration in April on renewals into the mid-10% range. We think there will be continued improvement; we'll see how high that goes. The goal here is to really take a balanced approach and be thoughtful around our resident experience and keep a resident who is good and paying in the home for a long time—a 10% increase is really good. Now, we have that loss to lease, and as things turn, we will capture that. We're going to keep pushing and improving the renewal rates when we can capture it.

Very helpful. Thanks, guys.

Our next question is from Brad Heffern of RBC Capital Markets. Your line is now open. Please go ahead.

Yeah. Thanks. Good morning. Acquisition cap rates—I noticed they ticked up by about 30 basis points from the low end of the third quarter. I'm curious, has competition abated at all or what else would you attribute that change to?

Still early to say that there's an argument around rising mortgage rates creating some new supply. It just comes down to a shift mix and what we're seeing in the marketplace. Generally, I wouldn't read too much into it either way, but early in the year, as I mentioned earlier on the call, there’s a little less supply than you typically see. You see the spring and summer seasons typically see your supply creep up. We'll keep an eye on it and keep you guys posted, but right now going in, cap rates feel pretty good.

Okay. Got it. And then on the third-party homebuilder pipeline, I know it went up a few hundred homes for last quarter—the ‘22 deliveries went up as well, but I thought the ‘23 went down, and there were 167 cancellations. So I was wondering if you could just give some color on the puts and takes there?

Yeah. In the ‘23 and the cancellations are lined up with each other. There was one project that we were moving forward with the builder, and as they completed the work on zoning, it turned out it wasn't going to work out for us, and that's why the nice thing about this program is that there is a flexibility to get locked into something that may not work. So we don't expect cancellations each quarter, but we did happen to have one cancel, and what ‘23 delivery that was the project that ended up canceling on us. We just move forward, and as you saw, we grew the pipeline pretty robustly beyond that.

Okay. Thank you.

Our next question is from Keegan Carl of Berenberg. Your line is now open. Please go ahead.

Hey, guys. Thanks for taking the questions. So just kind of going back to acquisitions in the quarter. Could you just walk us through your expected yield, please? Because if you get back-envelope math 5.6% stabilized cap rate same-store NOI margin of 70%, your rents roughly 30% higher than your existing plan. So just kind of curious what sort of rent growth you're baking in going forward?

On new acquisitions? Well, I think it's safe to say that, like in your models, it varies by market, and your year one assumptions are going to be a little bit more aggressive than your other assumptions. But at the end of the day, kind of mid- to high-single digits, probably for your year one is kind of your base case. Then you just have to mirror the product with the sub-markets and everything else that you're buying, and it can kind of go from there. But you're right in that those are really healthy cap rates going in considering where rate growth has been and where it's likely going. It could be pretty good yields years two and year three.

Got it. And then shifting gears here, I guess specifically to markets. So if you look at Denver and Seattle, there is no improvement quarter-over-quarter in occupancy. Just curious, is this still a function of renovations taking longer than expected?

It's been really a function of two things. One, we continue to buy in those markets, and two, as we talked about last quarter, we've made some improvements across many of our markets in terms of getting ratings done a little bit quicker, but there are still some challenges and with regards to getting the vendors on board—our DCs to help us with that. Those are two markets where we've seen a little bit more challenged, but we're starting to make some good steps and move in the right direction for both of those.

Got it. And just one final one for me, so insurance expenses were up 5.1% year-over-year same-store. I guess, what should we kind of expect for the balance of the year, given you're supposed to hear about it in March?

Yeah. We actually had a pretty flat renewal with regards to our property insurances, as the vast majority of certain liability lines were low double-digits; for the vast majority of the costs coming through on insurance is in the property line. I think you actually see that get a little bit better as we get through the rest of the year. We still had the first two months of the year that we're comparing to the prior insurance policy; the new insurance policy on the property side is flat year-over-year. I think you'll see some improvement in our year-over-year insurance growth will decline from what you saw in the first quarter.

Got it. Thanks for your time, guys.

Thank you.

Our next question is from Juan Sanabria of BMO Capital. Your line is now open. Please go ahead.

Hi. Thanks for the time. Just wanted to touch on the builder relationships in the contracts there. Could you just remind us how the pricing works when you lock in the prices per home and how that fluctuates, if at all, with the changing cost of capital, particularly on the debt side?

Yeah. So from a high level, typically what we do is structure an agreement where we lock in pricing prior to the obviously the project getting going through zoning in some of those entitlement works Ernie mentioned earlier. We have a little bit of some protections built in for both our builder partner and for us. In a rising cost environment, we have an out if things get to a point where we're not comfortable with what that pricing needs to be. We have a variety of what I would call kind of open book factors. On the flip side, if we're able to minimize costs in a couple of key areas, we share in some of those wins, and our entry point gets a little bit better. We try to make these contracts as flexible for us and for our partner as we can, while locking in conviction that we're all in on the opportunity subject to that range in pricing. That range is pretty tight in terms of where final pricing ends up. We've already like to do what we would imagine; we underwrote initially to call it a worst-case scenario that we like the price no matter what within that specific range. So far so good in terms of the majority of how these structures have gone. We’re reviewing a lot of other projects right now, so excited about what the future will hold.

Thank you. And then just to follow up on the qui tam issue, recognizing you're confident in what may happen in California going forward, but curious if you've had any indications or potential investigations or questioning by anybody on those same issues that have been a less than California in other geographies outside of California.

No, we have not.

Great. Thank you.

Thanks.

Thanks, Juan.

Our final question today is from Dennis McGill of Zelman. Your line is now open. Please go ahead.

All right. Thank you, guys. Ernie, can you just remind us what the definition—how you guys calculate loss lease just mathematically with the way you're estimating both the market and the latest rate you're using that?

Yeah. So we just take where we see current market rates across our portfolio. It's a little trickier for us than the multifamily space because each of our 2,000 homes is unique. But each month, we reprice a good chunk of those during our renewal process. So we take a snapshot out of our revenue management system to where we think market rates are. We're comparing that market rate number to where our current rents are in our portfolio based on the leases that are in hand and the leases that were signed and people living in those homes since.

And that would include anyone that just signed a lease essentially being mark-to-market? So anybody that wasn't signed in the recent period would obviously be higher than that portfolio average?

Yes. And that's why we have a loss to lease. Yes, we're looking at the leases in hand as they are for the quarter—where they're at compared to where market rates are so it weren’t certainly—we're currently in an environment now that people are signing leases now that are much higher than the ones that were expiring.

Yeah, that I understand. I'm just saying, obviously that you signed leases in the quarter, and that wasn’t the period that would be mark-to-market, and those new leases, does the 20% loss to lease treat those as mark-to-market or exclude those from the comparison?

No, because leases in January potentially had some market increases. So we look at all of the leases, Dennis. So absolutely, we’re looking at the most recent releases.

Okay. Got it. That's helpful. And then going back to just the Rockpoint JV, the new one, previously in the past that it always been, I think generally thought of in the industry that higher-priced homes were a little more challenging to get the right yield of a right return; how do you guys think about that as an evolution for you to get to believe you can get the same yield and return on these homes as the lower-priced homes, or is there a different kind of risk-reward balance that you're looking at there?

Yeah. To be clear, they are a little bit different from a return profile. We've been pretty clear about this; we kind of see these homes coming in, in that kind of low 4s to mid-4s from a cap rate perspective. The other key thing here, Dennis, is that more expensive product does not equal bigger product; that's also an important differentiator. You want to make sure that from an operating perspective, keep your square footages in check so that you don't get into trouble having bigger homes that cost more to turn. On obviously on your rent on a per square foot basis, you're going to be a little bit more elevated, but from a total yield perspective, from a customer perspective, from an ancillary opt-in kind of services perspective, we're really intrigued by this customer. We're going to look to get a bit smarter in the category through our partnership with Rockpoint, hopefully well into the future.

Yeah, it makes sense. And then one more quick one for you. Ernie, it looked like there were some movement in swaps during the quarter, maybe taking on a little bit more floating at this point versus before; is that just timing? Or can you maybe just walk through what the impact was of that?

Yeah, Dennis. It's exactly timing. We priced our bond offering on March 25, and we broke the swap that was associated with the debt. We're going to pay off at that time. So we didn't take any pricing risk or interest rate risk, but we actually didn't close on the bonds until April 5; that's when we received the cash. So we get right back to where we were before in terms of basically being 98%, 99% hedged. We just had over the quarter; it looks like we went down to 92% because we broke the swap before the bond actually closed a few days later.

Makes sense. Okay. Thanks. Good luck, guys.

Thanks.

Our next question is from Haendel St. Juste of Mizuho. Your line is now open. Please go ahead.

Hey. Thanks for taking my question. Ernie, just wanted to go back and clarify what was the bad debt assumptions for improvement in bad debt at the start of the year, and has that changed at all in light of what's going on in Southern California?

Yeah. We ended last year in the fourth quarter at about 1.1% bad debt, which was what we reported. We thought we'd have a number that was closer to that; we thought it would go up a little bit as Charles mentioned earlier. You may have heard January tenant and December tenant to be ones that are a little bit more challenging for bad debt versus the rest of the year. So what surprised us was the February activity. We thought we’d be a little bit higher than 1.1%, but not as high as the 1.8% that we reported. It's too early to say at this point, hand up our full year expectations for bad debt has changed, as Charles alluded to, we're doing better on the rate side and the occupancy side; that's certainly helping offset that. We feel very good about our guidance and don't change what I said earlier that we're trending toward the higher end of our guidance range.

Got it. Understood. On the whistleblower case going to court, is that going to pressure G&A at all? Are you comfortable with the range still here? Any reason for us to paint that perhaps upper end or maybe a little bit more on the G&A side?

As Dallas, it’s kind of going into through the process we expect that it's, and you say it's going to court. We have to—we'll file our motion to dismiss, but then there'll be some activity that happens beyond that, as Dallas described. We're not seeing anything different at this point that would tell us we need to do anything different with our guidance. We feel very good about with the case, but it's going to be a process; nothing should be read into that other than we talked about.

Got it. Okay. Thanks. And Dallas, maybe one for you here. Certainly, we’ve seen a lot in this industry evolve here in the last 10 years. More recently, it seems like the industry—your guys earn a bit of defense in terms of the narrative with the oversight, the regulations, and the messaging lately. It appears a bit of a shift hearing more of the—we're helping to solve the housing need; you have the pathway JV. I guess I'm curious, are you at the point now—or maybe the industry will start getting a bit more offensive in the messaging and dictating messaging a bit versus having someone else dictate the messaging, which I guess you had a point now where it seems like sometimes the value proposition, the quality, the homes, what you're providing often gets muffled by all the other chatter going on around us?

Yeah. Haendel, I mean we obviously are aware of, kind of shifting narratives that are out there, but they shift. I think that's the key thing. If you go back, we are celebrating our 10year this month and 10 years ago, the narrative was we were saving housing. Companies like ours were coming in, and we talked about this a little bit at our event, at least have neighbors come up and give us big hugs for fixing dilapidated homes that were in their neighborhood. Now as we're in a period where there are rising housing costs and everybody wants to figure out what's cognizant, there's a lot of times—you—the narrative is going to shift, I think is the easiest way of saying it. We're not too focused on the moment, really focused on the big picture is what it is that we do. We buy quality housing; we produce quality housing with our partners. The goal is to create flexibility of choice. If that's a defensive tone, I guess you could call it that, except that it's really offensive in the sense that we have total conviction around the business model. It's been here forever; no one has done it professionally, and we're going to continue to find ways to do it and do it in even a better fashion. Whether it's through some of these other products and being sensitive to the fact that down payments are hard for people to come by. Sure. That just means the industry is evolving and we're happy to be a participant in that. I think we're getting better at talking about what it is that we do beyond just buying great real estate and offering great services. Some of that is the qualitative stuff, and it does matter; it’s important—it’s an industry. We get the narrative out there about what it is that we do as companies, but at the end of the day, it's really about running a great business. The results have, I think, spoken for themselves at least in the five years that we've been public. I think, you know us evolving as a company just shows that we're growing and finding ways to invest capital in meaningful ways that I think provide other alternatives to people because the lease isn't for everyone necessarily all the time either. We want to explore those avenues and figure out ways to make the company better over time.

Got it. Well, keep up the pipe. You've come a long way. Thanks for the time.

Thanks.

Thanks.

We have no further questions, so I'll hand back to our hosts for the closing remarks.

We want to thank everyone for joining the call, and we look forward to seeing everybody at NAREIT in June. Thanks.

This concludes today's call. Thank you for joining. You may now disconnect your lines.