Earnings Call Transcript
Invitation Homes Inc. (INVH)
Earnings Call Transcript - INVH Q3 2020
Operator, Operator
Greetings, and welcome to the Invitation Homes Third Quarter 2020 Earnings Conference Call. As a reminder, this conference is being recorded. At this time, I would like to turn the conference over to Greg Van Winkle, Vice President of Corporate Strategy, Capital Markets and Investor Relations. Please go ahead.
Greg Van Winkle, Vice President of Corporate Strategy, Capital Markets and Investor Relations
Thank you. Good morning and thank you for joining us for our third quarter 2020 earnings conference call. On today's call from Invitation Homes are Dallas Tanner, President and Chief Executive Officer; Ernie Freedman, Chief Financial Officer; and Charles Young, Chief Operating Officer. I'd like to point everyone to our third quarter 2020 earnings press release and supplemental information, which we may reference on today's call. This document can be found on the Investor Relations' section of our website at www.invh.com. I'd also like to inform you that certain statements made 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 2019 Annual Report on Form 10-K, our Quarterly Report on Form 10-Q for the period ended June 30, 2020 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. During this call, we may also discuss certain non-GAAP financial measures. We can find additional information regarding these non-GAAP measures, including reconciliations of these measures to the most comparable GAAP measures in our earnings release and supplemental information, which are available on the Investor Relations' section of our website. I'll now turn the call over to our President and Chief Executive Officer, Dallas Tanner.
Dallas Tanner, CEO
Thank you, Greg. We're thrilled to report yet another quarter of outstanding execution in a time when the need for high-quality single-family rental housing is greater than ever. I'm so proud of our team for consistently meeting that demand with unparalleled resident service, which is also translating to strong results for our shareholders. There are three points I want to emphasize in my remarks today. The first is that we continue to perform extremely well during COVID, validating the strength and stability of our business. The second is that we are more bullish than ever about the long term due to the fundamental tailwinds for our sector and Invitation Homes' unique advantages. The third is that because of our favorable position, we're staying on offense with respect to external growth, leveraging the power of our platform. We're having great success in finding acquisitions with compelling expected returns that will also add to our economies of scale. We are opportunistically increasing our acquisition pace and we've diversified our capital sources with a joint venture to enhance and ensure our ability to remain opportunistic over a multi-year period. I'll now elaborate on our results that continue to strengthen through the pandemic. Same-store occupancy set another record high of 97.8% in the third quarter, up 190 basis points year-over-year and 30 basis points from last quarter. Rent growth has also accelerated, indicative of the fundamental strength in our markets. New lease rent growth of 5.5% in the quarter was 130 basis points better than last year and up to 280 basis points from last quarter. On this higher base and potential rents, we continued to collect through September at a rate of 98% of our historical average collection rates. The unique differentiators of our business also continue to be a benefit to expenses. As a result, we were able to deliver 3.6% same-store NOI growth in a period that continues to prove challenging for the broader economy and real estate sector. More importantly, we've continued to be a port in the storm for our residents, delivering exceptional service and genuine care that is resulting in all-time high resident satisfaction scores. The self-show technology and virtual experience that we've been utilizing for years is allowing prospective residents to feel safe throughout the leasing process. The freestanding nature of our assets is also allowing us to safely serve residents and maintain homes with some tweaks to our protocols for extra safety. With the safety measures in place, we have now completely worked through our backlog of work orders that have previously been deferred during the springtime. To say that our associates have been exceptional in their care for residents would be an understatement. I could not be prouder of our associates' hard work and commitment under the circumstances. We recently recognized their effort with a special bonus for all our frontline workers and non-executives in our corporate and field offices. We also continue to provide COVID-specific benefits and flexibility to associates designed to promote their health and well-being. We believe the past several quarters have battle-tested and demonstrated the durability of our business. Looking ahead, we continue to see a bright future. The millennial generation is only beginning to reach our average resident age of 39 years. Surveying data indicates that COVID may be accelerating a shift in demand for denser urban housing to single-family alternatives. With limited supply of single-family homes available, we believe our sector is positioned to be a key part of housing solutions for years to come. Furthermore, we think the ease and flexibility of leasing from a professional property manager makes the value proposition even more compelling for institutional single-family rental operators who today own less than 2% of the overall single-family rental home market. With these tailwinds at our back, we ramped up acquisition activity in the third quarter and exceeded our expectations by deploying $175 million. The initial underwritten yield in these homes is consistent with where we were acquiring pre-COVID at 5.5% cap rates. After quarter-end, we also closed a bulk acquisition in Dallas for $59 million at a 5.7% NOI cap rate on in-place rents, which we see upside to as we bring these homes onto our platform. Simply put, we feel very strongly that it continues to be a great time to invest in single-family rental homes, especially with our ability to leverage our proprietary acquisition IQ technology and local investment team's relationships and experience in buying across multiple channels. To diversify our capital sources in pursuit of this external growth opportunity, we have formed a joint venture with a like-minded partner that is expected to provide over $1 billion of additional dry powder for the next couple of years. This adds to the over $500 million of cash on our own balance sheet, in addition to strong operating cash flow, which we can use to grow our wholly-owned portfolio. With these multiple capital sources available to fund our growth, we'll continue to have the opportunity to bring down our overall leverage. At the same time, we achieve our external growth goals. Thinking about joint venture capital, our industry leading scale, technology and experience as an operator position us well against the backdrop of substantial private investor demand wanting to enter the single-family rental space. We are thrilled to have partnered with a highly accomplished investor in a structure that makes great sense for our business. The structure allows for us to invest and manage properties for the joint venture identically to the way we invest in and operate our wholly-owned portfolio. Acquisitions will be sourced by our investment team on an entity-blind basis and allocated automatically between Invitation Homes and the joint venture in accordance with predetermined ratios that enable both entities to simultaneously achieve their capital deployment goals. In addition, our joint venture structure makes the joint venture a potential pipeline for future on-balance sheet external growth when the joint venture reaches the end of its anticipated five- to eight-year life. Along the way, we learn asset management and property management fees expected to be well in excess of any incremental costs. In closing, we are excited about what the future holds for Invitation Homes. We believe the single-family rental sector is favorably positioned within the housing market relative to other types of residential real estate. Within our uniquely positioned industry, we are differentiated from peers by three key advantages. The first is the location of our homes, in infill neighborhoods within high-growth markets where the supply and demand are most in our favor. The second is our scale and market density with nearly 5,000 homes per market. The third is our local expertise and on-the-ground teams in our markets that enable us to better control the quality of our assets and the overall resident experience. We are committed to further enhancing the residents' experience in the years ahead as we grow. And we thank you for your support as we pursue our mission. I'll now turn it over to Charles Young, our Chief Operating Officer.
Charles Young, COO
Thank you, Dallas. Let me reiterate our appreciation for our teams who are out there every day delivering genuine care to our residents. Their efforts have led to outstanding outcomes for both our residents and our shareholders for years. But the difference they make has shined even brighter during the pandemic. This quarter was no different. We're continuing to see the high-quality homes and genuine care we deliver contribute to residents moving in sooner and staying longer. Specifically, in the third quarter, the time to lease improved 14 days year-over-year to 26 days. And turnover fell 16% year-over-year from 8.7% to 7.3%. This drove a 190 basis points year-over-year increase in occupancy to 97.8%, with September marking the 11th straight month of sequential occupancy increases. At the same time, we are executing well to capture market rents. New lease rent growth, which we believe is most indicative of where fundamentals are today, accelerated to 5.5% in the third quarter, up 130 basis points year-over-year. Furthermore, new lease rent growth increased each month during the quarter. Renewal rents increased 3.3% in the third quarter, bringing same-store blended rent growth for the quarter to 4%. Same-store core revenues grew 2.4% year-over-year in the quarter, 40 basis points higher than our second quarter performance. As a result of the aforementioned occupancy increase and a 3.2% increase in average rental rate, gross rental revenues increased 5.3% year-over-year. As expected, this increase was partially offset by two factors related to COVID-19. The first was an increase in bad debt from 0.4% of gross rental income in the third quarter of 2019 to 2.1% in the third quarter of 2020, which had a 175 basis points impact on same-store core revenue growth in the quarter. The second was a significant decrease in other property income, which had a 94 basis point impact on same-store core revenue growth in the quarter, primarily attributable to our non-enforcement of late fees. Same-store core expenses increased 0.4% year-over-year; net of resident recovery, same-store controllable expenses decreased 4.7% due primarily to lower resident turnover. Fixed expenses in the quarter increased 3.9% primarily due to higher property taxes. This was halted in a 3.6% year-over-year increase in same-store NOI. Next I'll cover revenue collections, which remain very healthy, even as we continue to offer flexible payment options to our residents in need. In each month of the third quarter, our cash collections totaled 97% of monthly billings compared to a pre-COVID average of 99%. We believe the strength of our revenue collections is a testament to the high quality and stability of our resident base. To put some context around that, residents moving in over the last 12 months had an average income of nearly $110,000 across approximately two wage earners on average, covering rent by 4.8 times. As we move forward, similar to the last many months, we will remain nimble in leveraging our local market presence to adapt quickly to change as we focus on providing high-quality housing and service to our residents. That focus on flexibility and genuine care has served us well through the pandemic thus far, and I'm confident that it will continue to result in the best possible outcomes for our residents and shareholders as we navigate the road ahead. With that, I'll turn it over to Ernie Freedman, our Chief Financial Officer.
Ernie Freedman, CFO
Thank you, Charles. Today I will discuss the following topics: balance sheet and liquidity, investment activity in the third quarter, financial results for the third quarter, and thoughts concerning the fourth quarter of 2020. With respect to liquidity, we had almost $1.6 billion of unrestricted cash and revolver capacity as of September 30th. We have no debt reaching final maturity before 2022, and over half of our assets are unencumbered. Looking ahead, we remain committed to reducing leverage. The $560 million of cash on our balance sheet, along with expected operating cash flow and disposition proceeds, gives us significant runway to continue funding acquisitions without any additional debt. In the third quarter, we used cash from our June equity raise to acquire 544 homes for $175 million. We also sold 403 homes that did not fit with our long-term strategy for gross proceeds of $115 million. As things stand today, with a compelling external growth opportunity we are seeing in our markets, we plan to remain a net acquirer for the balance of 2020 and into 2021. Next I'll cover our financial results for the third quarter. Core FFO and AFFO per share for the third quarter increased 1.9% and 5.8% year-over-year to $0.30 and $0.24, respectively. These results were driven primarily by higher same-store NOI and lower recurring CapEx. As a reminder, the impact of bad debt is included in both our core FFO and AFFO results. We reserve all receivables aged greater than 30 days as security deposits from residents upon moving typically cover receivables balances aged less than 30 days. Under our bad debt policy, charges are considered due based on the terms of the original lease, with past due amounts in excess of security deposits not recognized as revenue, even if a payment plan is in place with the resident. I'll now provide some thoughts on the fourth quarter of 2020. As Dallas mentioned, we feel great about the way our business is positioned for both the near- and long-term future. That said, pinpointing future results remains difficult due to uncertainty concerning the regulatory landscape and how the pandemic may continue to evolve. With two months left in 2020, though, I will provide some thoughts about how we are thinking about the conclusion of the year. First, let me discuss items impacting revenue. With strong demand continuing, we expect occupancy and leasing spreads in the fourth quarter to be as good or better than in the third quarter. Rent collections remain a source of uncertainty, but have been fairly steady in recent months at approximately 97% of billings. If collections were to continue at that same rate, we would expect bad debt to remain in the twos as a percentage of gross rental income. Finally, we expect the non-enforcement of late fees to continue to be a drag on revenue growth in the fourth quarter. In each of the second and third quarters, late fee income fell by approximately $3 million year-over-year. As we continue to provide flexibility to residents, we would expect late fees to decline similarly year-over-year in the fourth quarter. With respect to expenses, cost to maintain typically decreases seasonally from the third quarter to the fourth quarter. We'd expect a sequential decline in cost to maintain in the fourth quarter of 2020 as well. However, we may not see as large of a seasonal decrease as in typical years, because turnover was already so low in the third quarter of 2020. That said, turnover should be beneficial from a year-over-year perspective. Taking a step back, 2020 is shaping up to be a year to be proud of with respect to both our positive impact on residents and the financial results we are producing amidst challenging circumstances in the world around us. Resident satisfaction scores are at an all-time high, and we've generated year-to-date AFFO growth of 6.8% through the third quarter in sharp contrast to many others in the real estate sector. We believe this is a result not only of our unique fundamentals in the single-family rental industry but also of our differentiated locations, scale, and local expertise. With those advantages on our side, we are focused on remaining nimble to continue delivering great outcomes for our residents, communities, and shareholders in our path forward. With that, let's open up the line for Q&A.
Operator, Operator
We'll now begin the question-and-answer session. Our first question comes from Nick Joseph from Citi. Please go ahead.
Nick Joseph, Analyst
Thanks. Dallas, clearly the transaction market is attracting a lot of capital. So if you think about the amount of capital that's chasing deals, both from an institutional perspective, but also from end users, how do you think that ultimately impacts going-in cap rates? And would you expect to see some compression there going forward?
Dallas Tanner, CEO
We've asked ourselves the same question, Nick, in terms of how to think about expectations through the end of the year and also early next year. We've found this has been the case for the last couple of years; we've been able to be in that sweet spot, called mid-fives from a going-in stabilized NOI cap rate; that's been pretty achievable now. You've certainly seen some ebb and flow, and this year has been a little different than normal, given that the transaction volume from the end user is going much further into the year than normal. But we keep thinking we might need to underwrite maybe a little bit have some expectations around cap rates, but they haven't. And in large part, it's because rates on the leasing side are following a pair of pursue with the home price appreciation that we're seeing in the marketplaces. Overall, it still feels really healthy. We'll see somewhere around 6 million transactions in the U.S. this year, which is in line with what expectations were going into the beginning of the year. The month of supply is something we're going to keep our eye on because it is pretty low right now, given where we are at this point in the year.
Nick Joseph, Analyst
Thanks. And then maybe just the flip side of that, disposition, you've continued to sell assets. Obviously, it sounds like external growth is a focus, but how should we think about disposition activity over the next few quarters?
Dallas Tanner, CEO
Yes. We would expect to still be calling pieces and parts of the portfolio that don't line up, and we'll do that. That's ordinary course for us. We've been doing that for years. We have signaled in the past that we think dispositions ultimately will be a little lower than where we've been traditionally, and I'd expect that to be the case. The good news is that when we do go out and try to sell, given the low supply, we're getting excellent pricing, whether that's selling something vacant or small portfolios that we might sell to a smaller operator; pricing has been excellent, and multiple offers, and all the things you want to see from a selling perspective.
Nick Joseph, Analyst
The trailing call at $125 million a quarter, a good run rate, at least in the near term.
Ernie Freedman, CFO
Nick, this is Ernie. I think over the next period of time, you'll see it's kind of Atlanta in the $50 million to $100 million range each quarter going forward, which would be about one to one and a half, maybe 2% of our portfolio that feels like it will be for the foreseeable future.
Nick Joseph, Analyst
Great. Thank you very much.
Operator, Operator
The next question comes from Alua Askarbek with Bank of America. Please go ahead.
Alua Askarbek, Analyst
Hi everyone. Thanks for taking the questions. So just to start off looking at the renewal rates, it looks like they dropped 20 basis points from Q2. Is it because renters are negotiating their leases more? Or is this just leases that became effective after being signed earlier in the pandemic?
Charles Young, COO
Yes. Thanks for the question. This is Charles. When you think about renewal growth, a lot of it is the fact that we price renewals about 90 days before expiration. So you're going out when the pandemic hit in March. You're going out at rates that we were being very cautious as the pandemic unfolded and we gave our teams a little bit more room to negotiate. As you look at how it's transpired, we hit our low point on the renewal side in June and July. When you think about where we were 90 days prior to that, what's been great is we've gone out at a slightly higher rates, and we've had our teams negotiate since then a little tighter to the actual, and you've seen each month since then accelerate on renewal growth, and those trends continue today. I think some of it is just us being thoughtful, trying to solve for occupancy position of power. On the flip side when we do flip, because we're in a strong occupancy position, the new lease growth has been really strong. So we think renewals will continue to get better as things stabilize.
Alua Askarbek, Analyst
Got it. And where are renewals going out right now for November and December? Can you share that?
Charles Young, COO
Yes, no problem. So November and December, we're going out in a kind of low five to mid-fives. And then we're just starting to look at January, we're actually going out mid to high five. So like I said, we're going out a bit more aggressive to capture market rents. And then we're asking our teams to continue to work with folks, but also kind of tighten that negotiation band up. We've had a little more spread than normal because of the pandemic.
Alua Askarbek, Analyst
Great. Thank you.
Operator, Operator
The next question comes from Douglas Harter from Credit Suisse. Please go ahead.
Douglas Harter, Analyst
Thanks. I guess as you layer in the JV, capital to be deployed, how should we think about the pace of acquisitions in the coming quarters?
Ernie Freedman, CFO
Hey, Doug, this is Ernie. I think we see a real opportunity, especially coming off how we did in the third quarter. I'll turn it over to Dallas for a second here. Just to give you a little sense for how October shaped out. We talked about in the earnings release a bulk acquisition, but that was just a portion of what we did in October. Yes, our goal as we go into next year is roughly a 50:50 split between balance sheet activity and JV activity. We're seeing the opportunity to potentially ramp up our overall acquisition pace. Again, roughly half goes into the JV and half goes onto the balance sheet. Dallas, why don’t you give a quick highlight on October so folks can get a sense for it? It may be a one-off month, but it's been a very strong one for us in October.
Dallas Tanner, CEO
Yes. Just for clarity, remember we took off about three months of buying activity during the pandemic. When we turned things back on towards the middle to end of June, there's obviously a little bit of a lag between when you start to close properties. We've historically said we feel pretty comfortable between that $200 million and $250 million a quarter; but Ernie’s point in October, we're likely to close about $150 million worth of new property. So our fourth quarter could be a little bit bigger. As we monitor the path of progress going forward, what supply looks and feels like, there's certainly an ability to outperform that $250 million a quarter if we see the opportunity in front of us.
Ernie Freedman, CFO
Yes. So 59 of that $150 million was the bulk transaction we talked about in the earnings release, but we've seen the one-off acquisition pace keep ramping up each month during the last few months. So we're feeling really good as we go into next year.
Douglas Harter, Analyst
And then just, I guess, does the October volume kind of get split between the JV and the balance sheet, or I guess when do we start to see that split?
Ernie Freedman, CFO
Yes. We haven't closed into the JV yet. We're finalizing our financing for the JV. I do expect before the year is done that you will see some assets close into the JV, probably later in November, certainly in December. But as of right now, everything is still closing on the balance sheet.
Douglas Harter, Analyst
Great. Thank you.
Operator, Operator
Next question comes from Dennis McGill from Zelman & Associates. Please go ahead.
Dennis McGill, Analyst
Good morning. Thank you guys. First question just has to do with more on the expense side. This is maybe more just a general directional question, but do you have any sense of how many of your tenants are in work from home mode now? And then more bigger picture as you roll forward, what do you think the impact will be over the next 12 to 18 months for maintenance and service expenses, either good or bad?
Charles Young, COO
Hey, Dennis. This is Charles here. We don't have any specific data that says how many are working from home, but anecdotally many of us are. It's clear that there's more use of our homes than we had in the past. However, there's also the benefit of lower turnover because people want to stay in their homes. They're appreciating that we have that extra space and extra bedroom and people can functionally work from home and take care of the kids. We're going to continue to monitor it. At the end of the day, there may be a little bit more wear and tear, but it's going to be hard to quantify. But we're also seeing lower turnover, which helps us. In terms of ongoing work orders, as Dallas said in our prepared remarks, we're completely caught up on any deferred work orders. We will keep running our ProCare program and make sure that we're servicing our homes when residents need it. Time will tell, but as you can expect, I would think most people are working from home, like the rest of the economy, and that will fade over time as the economy starts to open back up.
Dennis McGill, Analyst
Got it. And then on the property tax side, I think it's been relatively stable in this 5% to 6% range. We're seeing really aggressive price appreciation in the marketplace now, especially on a seasonally adjusted basis. I imagine that's going to take some time to come through; what would you consider to be the typical lag with price appreciation today and when we might see that come through on the property tax side? And do you have any preliminary thoughts or expectations about how that might filter through?
Ernie Freedman, CFO
Yes, Dennis. This is Ernie. Unfortunately, the downside of home price appreciation, which is such a positive for us, is it means we will likely continue to see assessments that are greater than inflation, creating greater than inflationary pressure on our real estate taxes. It typically takes about 12 to 18 months for that to cycle through. We're in pretty constant communication across the country as each locality has different timelines and cycles, but we're working closely with experts and local assessors to see what we can do. My guess is what you're seeing now will not likely flow through to the 2021 tax bills, but if not 2021, definitely in 2022.
Dennis McGill, Analyst
Ernie, would you expect that there's going to be added pressure from just municipal budget shortfalls on rates in addition to the value pressure?
Ernie Freedman, CFO
Well, Dennis, there could be, but at the same time, remember that they have to pass along those same assessments and increases to all the people who vote in those local jurisdictions because we get taxed the same way as end-users. In general, there are going to be pressures in some jurisdictions. The good news is that the jurisdictions where there are the biggest pressures and the biggest fiscal challenges are probably in markets where we're not invested, primarily in the Northeast, with very few dollars invested in those markets. Other parts of the country will see even more pressure there, but my guess is broader commercial real estate owners will have more pressure than residential owners. If we get a higher tax bill, so does everyone else in the neighborhood who votes and lives in that jurisdiction.
Dennis McGill, Analyst
Okay, that’s helpful. Thank you guys. Good luck.
Ernie Freedman, CFO
Thanks.
Dallas Tanner, CEO
Thanks.
Operator, Operator
Next question comes from Rich Hill from Morgan Stanley. Please go ahead.
Rich Hill, Analyst
Hey, Ernie, how are you this morning?
Ernie Freedman, CFO
Good morning, Rich. I'm doing well. How about yourself?
Rich Hill, Analyst
I'm lovely.
Ernie Freedman, CFO
Great.
Rich Hill, Analyst
Hey, I want to come back to the breadcrumbs that you were kind enough to give us both for 4Q and 2021. I want to first of all start with the headwinds on bad debt. At some point you're going to anniversary, and at some point you are going to be collecting more rent in line with what you've historically collected. As we think about 2021, is there a scenario where those headwinds actually become tailwinds in the second half of the year?
Ernie Freedman, CFO
I think certainly as things normalize. It's hard to predict when that's going to normalize; we hope it's in 2021. We'll get back to the bad debt numbers that we used to have in the past, which were 40 to 50 basis points. I think that's certainly a possibility. It’s very hard to predict right now when that may happen, but that would certainly be an expectation at some point as we work our way through this cycle.
Rich Hill, Analyst
Got it. And then the second portion of that is the leasing growth that you're seeing. I think you said 5% for renewals; everything we're seeing on the new lease side suggests that it can continue to accelerate higher from what you reported in Q3. So as I'm thinking about 2020 and 2021, it just seems to me that the bad debt headwind goes away, the lease growth continues to rise, and so there's a really healthy path for a meaningful increase – acceleration in same-store revenues. I'm not asking you to guide, but I'm just trying to ensure that our methodology is correct as we think about that.
Ernie Freedman, CFO
Certainly, as we're finishing out this fourth quarter, we're seeing acceleration in a lot of important factors in a favorable way on the same-store side. In October, we're anticipating our original growth rates will be higher than it was in September. We're expecting the new lease rate to be higher than it was in September. Occupancy is actually going to tick up probably about five or ten basis points as we finish out the month. We finished at 97.9 for September; it looks like October is going to get to 98.0%. As they always say, trees don't grow to the sky, Rich, but things are certainly set up favorably for us from a supply and demand perspective. We're seeing this in a time where typically you wouldn't see any of it. We're at a peak season right now. So, I've been in the residential space for a long time and have not seen accelerating fundamentals this late after peak season. That all sets up very favorably for us. On the flip side, we're in a challenging environment. It’s not known exactly how the pandemic is going to play out, whether local regulatory rules change on us and in terms of how we can run our business and things like that. But we're certainly feeling very good about how we did through the third quarter; our team has worked really hard. It's setting us up for a good fourth quarter. It feels a lot like how the third quarter was, or maybe a little better on the same-store metrics, as I talked about in the prepared remarks. I want to be cautious about getting too far ahead of ourselves about what 90, 180, 360 days out may look like.
Rich Hill, Analyst
Understood. You and I have different jobs. But I appreciate that. Thanks, guys. Nice quarter.
Ernie Freedman, CFO
Thank you, Rich.
Operator, Operator
The next question comes from Haendel St. Juste from Mizuho. Please go ahead.
Haendel St. Juste, Analyst
Hey there. Good morning.
Dallas Tanner, CEO
Good morning, Haendel.
Haendel St. Juste, Analyst
Hey guys. So I guess my first question is on the pricing power in the portfolio. The continued acceleration in pricing power this year has been pretty remarkable; you're pushing rents at levels you were a year ago and deeper into the years than you typically would, while still managing to grow occupancy 11 months in a row. And it sounds like by your comments, you're still willing to push maybe even a little harder on the rate side here going into year-end. So I guess I'm curious; it sounds like the demand is strong, so perhaps some color on application levels and how they compare to a year ago? But also, how are we thinking about occupancy? Are you willing to perhaps create a bit of occupancy here to sustain that 4%-ish type of blended rate growth? As we look into next year, the world returning to a more normal place, or at least on a path to more normal post-vaccine; how concerned are you about maybe some of that occupancy degradation or other operating headwinds? Thanks.
Ernie Freedman, CFO
You always seem to do a good job asking multiple questions in one. So I’ll make sure we try to get it done. So let me turn it over to Charles to see if we can get through each of those items you brought up.
Charles Young, COO
Great. Hey, Haendel, I'll do my best to kind of work through it. Why don't I start with occupancy? I think it's important to highlight that when COVID hit, we were actually running really nicely on occupancy. We were at kind of an all-time high for that period in Q1 and Q2 at the time. We came in under a position of strength, and then we wanted to see how it all played out. We got a little conservative on rates to ensure occupancy, but we quickly pivoted, and you can see now how we're pushing. Some of that occupancy gain is from lower turnover, COVID-related demand, as well as our team's execution on days to be resident; we're down 14 days in Q3 overall, driving quicker turnover, and that has a real push on how quickly we turn to keep occupancy up. If we can continue to do that, that gives us the confidence to try to get back to some normalcy on the rate side. You're seeing that on the new lease side; we ended September on new lease rates at a 6.2%, and it seems like October is going to have the same similar demand. However, this is very late in the season. We're trying to capture that. We're getting back to normal, to a degree, but we're still instructing our teams to find the right balance. And so, we're not going to aggressively push occupancy in the winter without a vaccine, understanding that there may be uncertainty. Keeping that high occupancy gives us a position where we feel confident we can do that. Keeping days to be resident where we want to is another factor that we’re driving. A lot of this has been driven by getting turn times down, pre-leasing and being thoughtful about how we manage that side of the business.
Haendel St. Juste, Analyst
Charles, thank you. I guess I wanted to ask a question on the joint venture as well. Regarding more potential conflicts that might arise; I understand the JV is going to pursue similar assets that you will on your own balance sheet. Can you talk about the mechanism for resolving any perceived conflicts on what new buy versus what the JV might buy in similar markets? Also, I understand that your new JV partner has also formed a new JV with one of your peers; how will that potential perception of conflict be carved out or addressed?
Dallas Tanner, CEO
Yes, great question, Haendel. First of all, I'll address the overall structure; there’s no conflict between us and anything we would do with that other peer. We have defined price zones where we're allowed to invest and operate in, and the same for them. As you know, we typically buy a little more high-end, nicer product. The way to think about the JV is that it's incremental growth for our business at the end of the day. For example, in a market like Atlanta, where we have 12,500 units, we are on balance sheet, obviously a bit pickier about what would go into the portfolio. We certainly see opportunities to invest in Atlanta, and the JV is a perfect vehicle for us to be more active than we otherwise would on our wholly owned balance sheet, given our capital limitations. Our teams operate agnostically to allow them to be active. After properties go into contract, we can allocate those between the balance sheet and the JV based on predetermined ratios and market parameters agreed upon with our partners.
Haendel St. Juste, Analyst
Yes, that’s great, Dallas. If I may add a follow-up to that, what about future overall JV appetite? Is this it for now? Certainly, we've heard stories of the long list of folks interested in investing in the space. I'm curious about the future of JV appetite; are you perhaps willing to bring in a second partner or are you more inclined to expand this current JV or perhaps extend this one further?
Dallas Tanner, CEO
We're comfortable with our partner right now. I think 2020 is the perfect example of why having a flexible structure with a partner like Rockpoint is perfect for us in this environment. There's stock price volatility, but you still see meaningful opportunities to invest and grow your balance sheet. We maintain flexibility to take down any potential M&A on our balance sheet. We have not given away those rights; as we see opportunities to grow, if this structure works, we could find ways to expand if we want. But we’re comfortable with what we got; our big focus is on growing our own balance sheet as well.
Haendel St. Juste, Analyst
Great. Thanks, Dallas.
Dallas Tanner, CEO
Thank you.
Ernie Freedman, CFO
Thanks, Haendel.
Operator, Operator
Thank you. Next question comes from Jade Rahmani from KBW. Please go ahead.
Unidentified Analyst, Analyst
Hi everyone. This is Ryan on Jade. Thanks for taking the questions. Just looking at the build-to-rent model that a number of other players are pursuing, has your view around that strategy changed at all? Wondering if you would consider increasing your footprint there, whether through the balance sheet or potentially through JVs?
Dallas Tanner, CEO
About 10% of what we buy today comes from builders in parts of communities where we'll buy new product with builder warranties and everything else associated with that model. However, we don't like the balance sheet risk associated with being a developer in today's environment; you've got rising prices, costs, and labor challenges. We love the idea of buying direct and being one of the best buyers of finished homes from builders. That's a good opportunity for us if it lines up with our expectations around location. We're comfortable right now with not being out buying land and working on entitlements. We feel very good about our current playbook.
Unidentified Analyst, Analyst
Great. You mentioned seeing upside in the Dallas portfolio you acquired in terms of yield. I was wondering if you can quantify that at all and maybe broadly discuss the type of return you can typically achieve by bringing on these smaller portfolios onto your more scaled platform?
Dallas Tanner, CEO
That's a great question. When we buy these portfolios, we tend to see some embedded loss to lease in many of these properties; we're able to be a bit more aggressive on the underwrite or feel pretty comfortable with current yields to negotiate a discount, and we can, over the course of 12 months, reclaim a lot of that lost lease value. In the case of the Dallas portfolio, we see about a 30 basis points yield increase once we bring them onto the platform. We saw this happen in Las Vegas last year; we bought it in the mid-to-high fives and quickly stabilized it in the low sixes with renewed leases. We definitely like these opportunities in small portfolios that have been assembled and stabilized.
Unidentified Analyst, Analyst
Great. Thanks for taking the questions.
Dallas Tanner, CEO
Thank you.
Operator, Operator
The next question comes from Rick Skidmore with Goldman Sachs. Please go ahead.
Rick Skidmore, Analyst
Thank you. Dallas, just a couple of quick ones. In terms of ramping up acquisitions, do you have to scale up personnel to do that, or can you do that with existing headcount?
Dallas Tanner, CEO
We're built for a variety of scale with the team that we have, so no impact on headcount.
Rick Skidmore, Analyst
All right. And then second quick one. In terms of ancillary revenue, you talked about a year ago at your Investor Day regarding ancillary revenue growth. How are you thinking about that now as you go into 2021?
Dallas Tanner, CEO
Yes, we're well in line with our plan that we laid out at the Investor Day. We've updated both our programming and our smart rent packages, as well as some of the optional opportunities for our residents. There are a few more pilots we'll be rolling out this year to help expand that offering. Also, we’re driving down monthly costs, which will create a better spread for the business overall over the long haul. Secondly, we've rolled out updated filter programs, which are now automatic as part of our leases. If you sign a new lease with us today, we will drop ship filters to your home every 90 days that residents are expected to replace. It also benefits our business regarding cost, and will have a material impact in helping drive down HVAC costs in time. There are a few other things we're piloting this year before we roll out nationally. But we're well on our way to achieving some of those goals that we laid out in September of last year.
Rick Skidmore, Analyst
Okay. Thank you.
Dallas Tanner, CEO
Thank you.
Operator, Operator
The next question comes from Tyler Batory from Janney Capital Markets. Please go ahead.
Tyler Batory, Analyst
Hey, good morning. Thank you for taking my questions. I wanted to follow-up on the acquisition topic. I apologize for beating a dead horse in terms of some of these questions. But are there any markets specifically looking more or less attractive in terms of some of the demand dynamics out there as you're ramping up acquisitions? Any thoughts in terms of moving into new markets perhaps? Also, when considering where you might be sourcing acquisitions, is there a change in your mix between bolt-on acquisitions versus working with builders?
Dallas Tanner, CEO
Yes, no real change in the volume mix. I would say 70%, 80% of this is typically coming through traditional channels, perhaps another 10% to 15% through builder relationships, and then I put 5% in the iBuyers/FSBO community piece of it. Our channels are getting more robust with iBuyers; we're working on algorithms and things with them that will also open up hopefully new product lines. We discussed sale leaseback in the past, and that's an area we're focused on. In terms of market mix, no, it's the usual suspects for us: We love the Sun Belt and we love the fact that our coastal presence still has tremendous demand. If you look at the difference between what multi-family is experiencing in California vs. what we're encountering in single-family, it's almost night and day. We’re seeing strong blended rates from both Southern and Northern California with high occupancy rates. Those continue to be good markets for us; we aim to buy as much product as we can in markets like Phoenix, Denver, and Dallas. We want to add our footprint as mentioned previously with the JV in markets like Charlotte and Atlanta. We've continued to exit out of parts of the Midwest while being smart about HOAs presenting challenges or properties that may cap for us down the road.
Tyler Batory, Analyst
Okay, great. That's helpful. And as a follow-up question, curious on the CapEx side of things, both recurring and on the initial renovation. Are you seeing any cost creep in terms of labor or material costs that might be impactful?
Ernie Freedman, CFO
Hey, Tyler, we haven't. Our initial renovation budgets have been running on budget or slightly inside and we continue to harden our assets more when we acquire a home than we would have seven, eight, or nine years ago. So that hasn't been a pressure for us. On the recurring CapEx side, fortunately, we're locked into good contracts for the majority of the things that we're buying for R&M. Therefore, we haven’t seen any challenges on the labor or cost side, but we're monitoring it very closely. That’s a great question to ask in this environment, and there could be some pressure there, but so far we’re doing okay.
Tyler Batory, Analyst
Great. That's all for me. Thank you.
Dallas Tanner, CEO
Thanks.
Operator, Operator
The next question comes from John Pawlowski with Green Street. Please go ahead.
John Pawlowski, Analyst
Just one question from me. Dallas, a follow-up on the disposition conversation, curious; in some markets that you don't think are a long-term hold, are you less bullish on? Is COVID kind of handing you a gift in terms of a temporary sugar high in values where we stare at three to five years and the values don't make sense in terms of the rent growth you can expect? Could this potentially pull forward a market exit or a big bulk sale?
Dallas Tanner, CEO
Yes, I think sugar rush is probably too strong of a word. Taking a step back, we're probably undersupplied by about a million housing units today, which is creating natural pressure on pricing. I think in some of these markets, where we have seen better pricing later in the year, that’s tied to COVID impact. For example, in Florida, you’re likely seeing similar trends; house prices are moving rapidly, and people from the Northeast want warmer weather and space. Many are making decisions in terms of school districts for short or long-term stays. Some of this has carried through on pricing power as we sell assets. But looking back last year, we weren’t having problems selling assets at the other end of 2019; demand was healthy given low supply. I don’t see anything in our portfolio today that suggests we want to exit the market completely. This is less relevant to how we look at our current book today. When you attempt to sell an entire market, pricing will align with normalized price parameters for interested buyers, so we don't want to speculate.
John Pawlowski, Analyst
Okay, got it.
Dallas Tanner, CEO
Thank you.
Operator, Operator
The next question comes from Derek Johnston from Deutsche Bank. Please go ahead.
Derek Johnston, Analyst
Hi everyone. How are you doing? You've covered a lot, so I'll try to be creative. I'm trying to better understand the NAV accretion opportunity here. Given the continued and recent rise in single-family home values, especially in your markets, how do you track and what is the embedded mark-to-market of the portfolio versus when the homes were acquired? And secondly, more specific to the dispositions in Q3, can you share the gain on sales versus the initial home purchase price plus CapEx?
Dallas Tanner, CEO
We look at this a couple of ways; one way you described, we take it on a home-by-home basis. We look at the last time we got a BPO, or broker price opinion, and roll that forward based on our housing index. We do that on a home-by-home basis in a large spreadsheet to understand BPOs assigned to our houses. Additionally, we triangulate this against the cap rate approach so we can gauge more deeply where cap rates are in each of our markets, since we're active buyers and sellers. Those two methods are used to give us a solid sense of what our NAV is. We’ve seen significant appreciation from when we bought these homes, especially from acquiring 50,000 homes around 2012, 2013, 2014, along with the additional 30,000 homes that came onto the platform from our merger with Colony Starwood. My estimate is that overall, the NAV increase represents a significant rise in value over the years; however, I can’t provide a specific quantifiable number apart from what you may find in our GAAP financial statements.
Derek Johnston, Analyst
We can look that up. Thanks, guys.
Operator, Operator
There are no more questions in the queue. This concludes our question-and-answer session. I'd like to turn the conference back over to Dallas Tanner for any closing remarks, please.
Dallas Tanner, CEO
Thanks again for joining us today. We wish you all the best. Please stay safe. And operator, this concludes our call.
Operator, Operator
Okay. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.