Earnings Call Transcript - INVH Q1 2025

Scott McLaughlin, Senior Vice President of Investor Relations

Welcome to the Invitation Homes First Quarter 2025 Earnings Conference Call. As a reminder, this conference is being recorded. At this time, I would like to turn the conference over to Scott McLaughlin, Senior Vice President of Investor Relations. Please go ahead.

Dallas Tanner, CEO

Thanks, Scott, and good morning, everyone. We're pleased to share another quarter of solid performance, further demonstrating the resilience of the single-family rental market and the strength of our operating platform as well as the dedication of our associates and the trust our residents place in us every day. During the first quarter, our same-store portfolio delivered 97.2% average occupancy, 3.6% blended rent growth, and a 3.7% year-over-year increase in NOI. Core FFO per share grew 3.5% year-over-year and AFFO per share grew 4%. These metrics underscore our ability to achieve solid rent growth, sector-leading occupancy, and strong financial performance, even in a volatile environment. And I'm grateful to our team for the terrific start to the year. The demand for single-family homes is driven by several factors. We've often discussed the favorable demographics, the shift towards value and convenience and flexibility over long-term commitments and the high cost of homeownership. On average, in our markets, it's currently over $1,000 per month less expensive to lease a home than it is to own. Whether that's due to elevated mortgage rates or rising homeowners’ insurance premiums and property taxes, we provide a valuable alternative to the 14 million individuals and families who choose the leasing lifestyle. Housing is a fundamental human need, and we believe there is a strong desire for well-located, high-quality, professionally-serviced homes for lease. We've observed this to be true in many recent cycles, including Houston during the energy crisis, across all of our markets during the pandemic, and in my previous business in Phoenix during the global financial crisis prior to co-founding Invitation Homes. In general, in periods of economic uncertainty, SFR occupancy has tended to remain steady and rents have held flat or even increased slightly. In short, we believe Invitation Homes can deliver stable, sticky, and growing property cash flows in both prosperous and challenging times. Consistent with our corporate DNA, we believe that capital recycling and prudent portfolio growth are essential parts of our overall strategy. Our approach of partnering with homebuilders to redeploy disposition proceeds in the new well-located homes has shown to be both effective and accretive. During the quarter, we acquired 577 wholly owned homes for approximately $194 million, nearly all of which were newly built, while strategically disposing of 454 homes, many to first-time homeowners. Additionally, we're helping our partners develop nearly 2,000 additional homes in many of our West Coast and Sunbelt markets. This provides us with a reliable pipeline of future growth opportunities with virtually none of the risks of on-balance sheet development, which we believe is an advantage in the current environment. In addition to new BTR communities and scattered site development, we continue to evaluate stabilized portfolio acquisitions and are exploring several opportunities that we hope to be able to discuss later this year. As always, we remain dedicated to maintaining a disciplined capital allocation strategy, consistently focusing on investments that meet our risk-adjusted return criteria. We continue to target a 6% average yield on cost that's supported by the significant economies of scale we and our partners enjoy. Our ability to derisk larger communities and acquire brand-new scatter-site homes, combined with the synergies we create through best-in-class operations, further supports this objective. Looking ahead, we remain committed to our priorities with a measured outlook. We believe our consistent operating performance, execution of our strategic initiatives and diversified acquisition pipeline form a robust foundation for sustainable growth. Despite the occasional volatility and uncertainty in the financial markets, Invitation Homes is dedicated to focusing on long-term value and opportunities. With that, I've concluded my prepared remarks. Charles, over to you, please.

Charles Young, President and COO

Thanks. As Dallas mentioned, we posted a strong first quarter achieving 3.7% same-store NOI growth, driven by core revenue growth of 2.5%. Thanks to the hard work of our associates, our peak leasing season kicks solidly in gear with new lease rate growth that's accelerated each month since December. In addition, bad debt has continued to improve underscoring both the strength of our customer and the defensive nature of housing generally. Other sources of property income such as value-add services like smart home and bundled Internet continued to enhance our overall revenue performance while also providing desirable offerings to our residents. On the expense front, we maintained our disciplined approach to cost controls during the first quarter. Same-store core operating expenses were flat year-over-year in part due to our team's continued focus on leveraging operational efficiencies and scale advantages across our portfolio. Additionally, we experienced milder weather in most of our markets during the first quarter versus the same time last year, which helped us achieve a 2% reduction in repair and maintenance expense year-over-year. Turnover expenses also contributed to our favorable overall expense result, decreasing 5.1% year-over-year in the first quarter, driven by the large number of residents who opted to renew their leases with us. This positive trend in renewals was further supported by our same-store leasing performance year-over-year. During Q1, we posted a 5.2% increase in renewal rents and new lease rents generally held steady. This resulted in blended rental rate growth of 3.6% for the quarter. In addition, average occupancy remained healthy at 97.2%, reflecting sustained demand for our homes. Our average length of stay is now 38.5 months with a nearly 80% renewal rate during the first quarter, which we believe validates our long-standing resident-centric approach. Drilling in now to a few of our specific markets. Our western U.S. markets are experiencing strong occupancy and robust renewal and new lease rate growth. With the exception of Phoenix, which we've previously called out along with Texas and Florida, where we continue to keep a close eye on some of the ongoing supply pressures. Nevertheless, we've seen some encouraging signs in these markets so far this year, with solid absorption and steady improvement, including a return last month to positive new lease rate growth. Meanwhile, the Midwest has been performing well and our Southeast markets are achieving solid results that are in line with expectations. As we move further into peak leasing season, preliminary same-store results for the month of April reinforce the encouraging trends I just outlined. Blended rent growth was 4% in April, composed of 4.5% renewal rent growth and 2.7% new lease rent growth. In addition, April occupancy remained very healthy at an average of 97.4%. These higher year-to-date occupancy levels are slightly ahead of our initial expectations, primarily due to lower-than-expected turnover. As Dallas mentioned earlier, it's common for SFR residents to stay put during times of uncertainty. We'll continue to monitor how this trend might affect our usual seasonality patterns, especially as we anticipate some moderation in occupancy this summer when move-outs typically peak. With all of this in mind, we believe we remain well positioned to capture market rate growth. Looking ahead, we're optimistic about maintaining this positive trajectory. Our teams are well prepared to capitalize on seasonal demand while maintaining our high standards for resident quality and service. I'll now turn the call over to you, John.

Jonathan Olsen, CFO

Thanks, Charles. Today, I'll provide a review of our balance sheet and financial results for the first quarter of 2025 and then discuss some high-level thoughts on our guidance for the remainder of the year. I'll start with our balance sheet. As of March 31, our total available liquidity stood at nearly $1.4 billion comprised of unrestricted cash on our balance sheet and undrawn capacity on our revolving credit facility. Our net debt to adjusted EBITDA ratio was 5.3x, and we have no debt reaching final maturity until 2027. As of quarter end, 87.5% of our debt was fixed rate or swapped to fixed rate, 83% of our debt was unsecured and approximately 90% of our wholly owned properties were unencumbered. As we announced in last night's earnings release, Standard and Poor's recently reaffirmed our BBB flat credit rating while also upgrading our outlook from stable to positive. We've been glad to see the rating agencies acknowledge the strength of our balance sheet over the past year, reflecting our steady progress. In addition, earlier this week, we closed a repricing amendment for our $725 million term loan that was originally scheduled to mature in June 2029. The amended term loan has a final maturity date in April 2030 and now bears interest based on the five-year pricing grid, which results in amended pricing of SOFR plus 85 basis points. Based on the new pricing grid, this amendment lowers our borrowing cost by 40 basis points compared to the original term loan and further optimizes our debt maturity ladder. Turning now to our first quarter financial results. We delivered core FFO of $0.48 per share, representing a solid 3.5% increase year-over-year. Similarly, AFFO grew 4% year-over-year to $0.42 per share. Looking ahead, we are confident in our ability to navigate the macroeconomic landscape supported by our well-qualified and resilient customer base. We believe our business is both defensive and growth-oriented, which should benefit shareholders in times of uncertainty, thanks to the effective execution of our strategy, strong customer retention, and diligent expense management. That being the case, we are pleased to reaffirm our full year 2025 guidance provided in late February. In closing, our business remains strong, supported by our solid balance sheet, stable operating performance, and thoughtful growth initiatives. Our well-structured capital position continues to provide the flexibility to pursue appropriate investment opportunities while maintaining our commitment to disciplined growth and steady value creation for our shareholders. This concludes our prepared remarks. Operator, we're ready to begin the question-and-answer session.

Michael Goldsmith, Analyst

Good morning. Thanks a lot for taking my questions. It seems like the renewal rate in the first quarter was 5.2% and in April it dipped to 4.5%. So just trying to understand what are the dynamics that would drive the renewal rate down sequentially and if there are any other factors that are weighing on that? Thanks.

Charles Young, President and COO

Yes. Thanks for your question. This is Charles. We signaled this last quarter. This is kind of the typical flow of renewals throughout the year. They're going to peak in Q1, which you saw was really strong. There's usually and typically a little bit of moderation into the summer, and we're starting to see that a little bit as we go into Q2. It's not going to move much from here, and month-by-month it's going to go up and down. We expect that at the end of the year it's going to come back up. So this is unfolding exactly as we expected. And as you look at it, combined with the new lease rate, blends have been going up every month since December. So this is in line with what we thought. As you go into the summer, you get a little higher turnover, and that's kind of natural of what you see on the renewal process.

Eric Wolfe, Analyst

Thanks. The home builder commentary has been somewhat subdued thus far. So I was just wondering, if you could talk maybe about the new home builders that are approaching you now given some of the weakness from the retail buyer, how much you could scale up the partnerships? And then secondly, to what extent some of this weaker homebuilder commentary gets you worried about some of the shadow supply impact that maybe you saw last year? Thanks.

Scott Eisen, CIO

Thanks, Eric. Hey, it's Scott Eisen. Look, our dialogue with the homebuilders continues to be strong. We've obviously really built out our relationships with them over the last two years. We continue to engage daily, weekly with the national and regional homebuilders. I'd say that in terms of our forward flow for the CFO, we continue to sift through lots of opportunities and we selectively choose the forward purchase communities that make sense for us in our buy box locations and demographics. And so that flow continues, and I think we're pleased with what we see from the builders. I think there's probably been a little bit of an increase in the dialogue we've had with them on the end of month tapes. And I think, opportunistically, we're seeing some ability to buy some homes, two, three, five homes at a time at the end of month, and we're seeing some ability to execute there. But I'd say, generally speaking, the dialogue is strong and continues to be.

Steve Sakwa, Analyst

Yes. Maybe just following up on that question. How are you thinking about kind of your yield hurdles, just kind of with more volatility, bond market pricing? I guess, is a 6% yield still adequate in today's environment? And do you have any ability to sort of push that up?

Dallas Tanner, CEO

Steve, this is Dallas. As Scott mentioned, look, he used the word shifting. We're getting to see more deal flow. There's no doubt about that right now than maybe where we were a year ago. All things being equal in terms of how we're underwriting yield on cost and what our cost of capital is to be able to lean in there, I would say it's sort of the following. We've been pretty active as you know disposing and calling assets that are sort of in the low 4s on a run rate cap rate basis, reinvesting at a 6%. I think Scott and I hope that forward opportunities may get a little bit better. We're certainly seeing more volume, which typically would lead to a conversation around seeing better pricing. We can't obviously speak for each builder or what they're dealing with. I think for John and I, as we sit around and think about our sources and uses and how we want to grow both on balance sheet and in our joint venture partnerships, we're trying to be as deliberate as we can around what is the highest and best use of our cost of capital at any given point. And so we've got somewhere around call it $1.5 billion of dry powder between our revolver and cash, we can dispose of more assets. We'd love to see the spreads get wider to your point. But I think development and development costs aren't necessarily coming in, right. So it's more around finding stuff where a seller or a partner is willing to build at a margin that's just a bit more accretive than it was maybe a year or two ago. And then look, it's your point on the bond markets and John can speak more on this later, it's been hard to sort of think about the spot where long-term debt is or as we think about how to sort of think about that as another source of capital over time. But right now, we're going to use as much of our disposition proceeds in cash and just keep kind of evolving out of older homes into newer product, both at the community level and also scattered.

Jana Galan, Analyst

Thank you. Good morning. Congratulations on the bad debt achieving a new post-pandemic low. I was curious, do you think you have further opportunity to bring it down, or is it better to be more cautious now in this macro environment?

Charles Young, President and COO

I appreciate the question. Yes, we're proud of the work that the teams have done to bring bad debt in. It's been a good effort. It's also a reflection of the quality of our residents. We're off to a good start. We'll see how the summer goes. There's a macro backdrop that's out there. But right now, teams are executing as we look across the markets. It's really kind of improvement across the board. Some of our historically low bad debt markets are getting back to their expected levels. The markets that we're monitoring are Atlanta, Chicago, Southern California, and a little bit of the Carolinas, all improving. But as we look at the court times and kind of that process, that's something we keep an eye on. So we're cautiously optimistic that we're going in the right direction here.

Austin Wurschmidt, Analyst

Great. Thanks, and good morning, everybody. Appreciate all the detail on April leasing trends, but I'm just curious, if I recall correctly around mid-May of last year, maybe into June, you had started to see some softening in trends. So I'm just wondering when you look at your dashboards, the leading indicators, if there's anything that suggests the momentum you've seen year-to-date could be moderating into the peak leasing season or if the runway looks clear as far out as you're able to see? Thanks.

Charles Young, President and COO

Yes. Look, the year is unfolding as we expected. Demand is still healthy. We're looking at all of our metrics, as you talked about, new visitors to the website from Q4 to Q1 are up. Demand is still here. You see we're absorbing well. We're holding occupancy while getting new lease rate growth every month. The way this typically unfolds is that there will be some continued acceleration as we look at the new lease side into the summer. We typically peak out somewhere around June, give or take. But the most important thing is renewals are steady. As we discussed earlier, they're strong. You get a little bit of moderation in the summer, but they're going to stay where they are, if not slightly higher and then accelerate at the end of the year. So we believe we're seeing exactly what we want. Occupancy has held strong in Q1. That's going to come down a little bit as we get into move-out season, and we're trying to make sure that we're optimizing and capturing market rate on rents. So we like the setup coming off of Q1, and we think we're well-positioned to capture all that we can going into the peak leasing season.

Haendel St. Juste, Analyst

Hey, guys. Good morning. So, I understand the importance of the renewal rates you were just talking about. I want to talk about turnover here for a moment. Turnover continues to come in really low, in fact, lower than last year, which was a very low year. So maybe you could talk a bit about what you sense are the drivers of this increasingly lower turnover, and then maybe some color around what's embedded in your guidance for turnover this year. And if this lower trend of turnover continues, could this be a source of upside to the FFO guidance? Thanks.

Dallas Tanner, CEO

Thanks, Haendel, for the question. This is Dallas, and I'll ask Charles to add a little color here to my comments. But I think you got to take a step back. And I think as you think about the business, the industry, our company, what the SFR resident has sort of proved out over the last decade is that they're by nature a lot stickier than maybe what we see in some of the other sectors. Excluding manufactured housing, the customer has sort of been extremely sticky and has continued to show a propensity to renew. That being said, Charles signaled this in the fall of last year. We've seen renewal rates as high as 80%, which we would not expect. I want to emphasize that point that Charles just made in the previous question. We know that has to come in. Traditionally, pre-pandemic, we're sort of in the low to mid-70s in terms of how often we renew. And then through the pandemic, it's sort of creeped up into the 70s and the high 70s. I would also add there's this mortgage dynamic that's going on right now that's really interesting. If you just think about how the company is performing and what the customer is likely feeling and seeing in the marketplace, our move out to homeownership buying is as low as it's ever been on our surveys, and that continues to lend itself to this thesis that the customer is going to stay longer and longer. What's been equally supportive in both our backdrop and the setup going into summer, as Charles mentioned, is that this new lease acceleration is doing what we thought it would do going into summer. While we would expect to have less renewal, we certainly are renewing more earlier in the year than we underwrote originally to your point, Haendel, and we got to see how that plays out through summer. I don't want to set Charles up to be the good guy or the bad guy in terms of what every customer does with their decision-making through summer. But we've seen, and Charles just alluded to it, we can see out 69 days, and it feels pretty good. So maybe I hand that to Charles to add a bit more perspective, but just the backdrop and the setup is really favorable right now.

Charles Young, President and COO

Yes. Look, I think it's a combination of residents enjoying our product. They're staying longer. We're up to 38.5 months. We're providing value-add services that make it easy for them to stay with us. And then you have the macro backdrop as Dallas talked about. It does vary by market, but overall, it's a good start in Q1. Turnover is slightly lower than we expected. That's why you're seeing some of the strong occupancy. But we're going into the move-out season, and there'll be some step up in that turnover. So we're going to keep an eye on it. I'll let John speak to where we are on our guidance. But right now, we feel like we're on track on turnover, maybe a little bit ahead of it, but we have some months left here to see how it plays out.

Jonathan Olsen, CFO

Yes, Haendel, it's John. It's a good question. As Charles noted, we're maybe slightly ahead of where we expected to be in terms of turnover. But I would remind everyone that turnover combined with days to re-resident is really the driving force in terms of how those statistics flow through to occupancy. I think when we laid out our guidance, we articulated our expectation that days to re-resident would be marginally higher this year than in the last few. And that's primarily driven by the longer days on the market as we go out and try to optimize and capture the market rate that's available. So I think it's too early in the year to really be able to say whether there is upside relative to the guidance based on what we're seeing with turnover. But as Dallas and Charles said, we're really pleased with the first quarter results. Our customer is sticky, the business is quite stable, and we're looking forward to getting into the mid to peak season and seeing where we go from here.

Daniel Tricarico, Analyst

Great, thanks. You can hear me.

Jamie Feldman, Analyst

Hello. This is Cooper Clark on for Jamie. Thanks for taking the question. Could you talk about the strong OpEx performance in Q1 and how much, if any, of the lower growth was timing related? And also, what numbers might have come in lower versus what you assumed in guidance outside of the positive update on your insurance renewal?

Charles Young, President and COO

Hey, Cooper, this is Charles. Yeah, I think I mentioned on the call the reduction in R&M quarter-over-quarter is really what drove the good performance on OpEx. This year that cost to maintain overall we've been tracking in the right direction, but quarter-over-quarter can really vary based on weather when it comes to R&M, and we saw much more mild kind of early part of the year here than we did last year, and that's the big driver. Overall, though, we are controlling what we can control. Our teams are executing well. We have just such a great platform when it comes to our scale and density procurement, all that we do. And that just shows up in how we do things. I would also say the execution on turns has been strong in addition to R&M. We're turning well in terms of time. And as you think about the turnover, we just talked a little bit about that being lower. That's another driver of why the R&M number is slightly lower.

John Pawlowski, Analyst

Thanks for the time. John, can you provide some color around the large increase year-over-year on share-based comp? I think it was up about 30%. And is this $40 million kind of plus or minus annual rate a reasonable assumption moving forward?

Jonathan Olsen, CFO

Yes. Thanks for the question, John. I think we made some changes to the way our share-based comp program works. We used to have periodic performance-based plans that would run for a period of years and then get replaced. As we've laid out in the proxy, we've moved away from that approach. And so now we're going to have more performance-based grants annually rather than the lumpy, every few year, OPP plan or outperformance plan. Happy to go into more detail on that offline, but that's what's driving the difference.

Adam Kramer, Analyst

Great. Good morning, guys. Thanks for the time. Just wanted to ask about the kind of state of built-to-rent competition here. I know you guys have talked about it in the past. I think you guys are pretty early on to talk about the competitive pressure there for new BTR deliveries. Where are we today in that process? I think you guys have talked about deliveries that would be down pretty significantly year-over-year in '25. So is that still the base case here? And what are you seeing with regards to second half of the year 2025 deliveries, maybe even into 2026 deliveries, just generally kind of the state of BTR composition?

Charles Young, President and COO

Yes, this is Charles. Look, we signaled this last year that we saw some supply coming in the middle of the year in Phoenix, Texas, and Central Florida. The good news is those deliveries are down, and we're working through it. We're absorbing well, and you can see it in our results. Those markets specifically, while behind some of the Western markets and the Midwest as I talked about in my prepared remarks, they're turning positive on the new lease side, and occupancy is holding steady if not increasing. We’re working through it. Can't tell you exactly how long it's going to take. We're keeping an eye on it, but the good news is we're not seeing a lot of new deliveries come on, it's down substantially, but we need to absorb in those markets. The other markets, we can have more of a balance of supply and demand, maybe a slight uptick overall given what's going on with mortgage rates. But the reality is they're acting as we would expect when you think about Atlanta and Carolina, Chicago, the California market, Seattle, Denver, in line with a balanced supply and demand. Demand is still here for our product, as you can see from our turnover in all of our metrics. So, we expect that we're going to work through it in these markets, and we'll keep an eye on it and keep you all updated.

Brad Heffern, Analyst

Yes. Thanks, everybody. On third-party management, you obviously got a lot over the finish line when the program was launched, but it's been kind of quiet since mid-last year. So is there anything to read into that? And what would you attribute the lull to? And are you continuing to have lots of conversations around the offering?

Dallas Tanner, CEO

Great question. This is Dallas. First, as we laid out last year, as we started to announce the program, we said that we were going to be really specific about who, when, and what, which portfolios. It has to make sense. We don't want to create noise in our own business. We want to try to do things that are both accretive internally and how we can operate a more efficient business and also look for the right sort of portfolio overlap, etc. They have to be strategic partners. And we're having a number of conversations, we always do. And we haven't seen anything yet that's truly fit in that strategic bucket. I would say that, like I said last summer, we're fine if this stays at 3 clients candidly. We'd also be fine if it were 10 clients if they were the right portfolio. So our goal is just to do things that make our business better, that create strategic value add for the company. But I think that this will be a continued industry that will evolve, and I think our opportunity set will get wider over time.

Julien Blouin, Analyst

Yes. Thank you for taking my question. Could you sort of help us understand how we should think about the defensiveness of the SFR sector if the macro were to deteriorate? I mean, it tends to be relatively more resilient when we look at sort of recent instances. But does maybe even the larger portability gap versus homeownership make it that much more resilient than in the past, sort of becoming a trade-down option for some homeowner families that fall on hard times?

Dallas Tanner, CEO

It's a great question. You mentioned part of the answer already. Our customer base includes healthcare professionals, teachers, and people from various industries. They are consistently looking for three key things: space, access to a yard for their children and pets, and proximity to good transportation options for reasonable commute times. Additionally, they desire access to excellent schools and to be near school districts they might not be able to afford otherwise. This demand for quality of life at a lower cost compared to ownership creates a value opportunity for our customers. Regarding your question about how we compare to the multifamily sector, on a rent per square foot basis, we are much more affordable. The quality of our spaces and the flexibility for things like having an aging parent move in are further advantages of the leasing lifestyle. We've categorized our customers into three groups: those who need housing, those experiencing a life transition, and those who prefer leasing over owning. I believe we're in a strong position. As John mentioned, despite market uncertainties, Invitation Homes provides a solid value proposition and we still expect significant growth opportunities. We operate in a favorable environment regarding both revenue and expenses. While we've faced challenges with property taxes, we anticipate ongoing positive trends in our expenses. Although we can't predict the future perfectly, our company has shown resilience through previous cycles of economic uncertainty.

Richard Hightower, Analyst

Hey, guys. Thanks for taking the question here. I guess to continue a little bit of that same line of questioning, obviously, the for-sale housing market in the country is pretty much broken for a lot of reasons. Do you guys have a sense of pent-up demand for people who really would prefer to own? They just can't afford the monthly payment because of mortgage rates. But if that math ever changes, what's the risk to Invitation's current demand set, if you've thought about it that way?

Dallas Tanner, CEO

Good question. We think about that way all the time. Don't forget we built this business in an incredibly low mortgage rate environment, with 2%, 3%, 4% mortgages. We had 96% to 97% occupancy through all those sorts of chapters. So even in a low-cost of ownership environment, it doesn't change the fact that there are 47 million households at least in the U.S., which supports our business. If mortgage rates were to go through the floor and that spurs homeownership activity, we view that as a positive. Our business typically runs between about 18% and 27% of our customers moving out and clicking the box saying, I'm moving out because I'm going to purchase a home. We view our company as a normal part of that housing continuum. So we're okay there. I think the retention and the renewals that Charles talked about are probably more indicative of it being a little higher and elevated right now, which is a net-positive, but it's just a near-term positive. If homeownership picks up, as I mentioned before, it would be hugely positive for a couple of reasons. One, it's a healthier market overall. We prefer that, candidly, where there's enough supply in the market and enough transaction volume to get a better sense of values. Two, if home price appreciation starts to pick up, that is actually a proxy for where rents typically go. And so in our business, as the values of our assets increase, typically you'll see that the rents are increasing as well. And then SFR supply is indicative of what happens there. Today you're seeing more resale supply tick up in the markets, which is more options for people, which we view as a good thing. The calculus is that right now people are wanting to hunker down and bet on predictability versus anything else.

Jesse Lederman, Analyst

Hey, thanks for taking my question. I wanted to ask a little bit on property management expense. Looks like it's been a little bit higher the last couple of quarters and on an apples-to-apples basis from 1Q 2024, it's up about 80 basis points. Can you maybe talk about what's driving the increase if it's the wholly owned portfolio or the third-party property management portfolio and any moving pieces there? Thanks.

Jonathan Olsen, CFO

Hey, Jesse, it's John. That's a good question. I would remind you that we phased on, we onboarded our third-party management clients over the course of last year. And so if you're comparing first quarter 2025 to first quarter 2024, first quarter 2024 was not reflective of the headcount additions, some of the technology investments we made in order to put ourselves in a position to service these new third-party management customers. So that's what the primary increase is related to.

Juan Sanabria, Analyst

Hi, good morning. Question on tariffs. Curious what you think may happen during the peak leasing season, the summer season with HVACs, and should we anticipate any increase in costs as a result of presumably higher replacement costs given the proposed tariffs?

Charles Young, President and COO

Yes, look, this is Charles. We're monitoring the situation closely. It's too early to tell kind of where and if it's going to flow through, and so you're asking the right question. There's a pause, and we'll see where it all comes out. The reality is, we're in a great position given our scale, size, and our procurement, our national programmatic partnerships that we have. We have dual partnerships when you talk about HVAC and appliances, so we've kind of back up between a couple of options. This gives us some of the best pricing in the industry. That being said, we'll have to watch how it flows through. HVAC and appliances are probably the area on the R&M side we'd pay attention to. But you need to talk about this; this is a small part of our overall book. We're turning homes, and labor is a bigger part of our cost structure. While there could be some impact, I think we're going to be mitigated by our scale and size and our programs and our partnerships. Ultimately, we're going to keep an eye on it. It's a kind of fluid situation.

Daniel Tricarico, Analyst

Great, thanks. You can hear me. Right?

Dallas Tanner, CEO

Yes, we have started operations in San Antonio and part of Nashville. We have discussed additional markets we are interested in exploring in the future. However, our focus is not solely on the number of markets we enter. When we evaluate our strategy with our board for the long-term future of the company, we aim for a sound risk-adjusted approach that aligns with growth potential and the demographics of those areas. We plan to continue expanding into new markets in the years ahead, particularly in the Sunbelt and Southeast regions, as we anticipate better growth opportunities there.

Linda Tsai, Analyst

Yes. Hi. I think last quarter you said you expected FY 2025 occupancy to end at 96.5%. Just wondering if that's your current expectation still?

Charles Young, President and COO

Yes, good question. Probably in light of the high occupancy we showed in Q1, that's typical of how the book kind of operates throughout a year. We're going into move-out season. This is the heavier kind of lease expiration part of the year, and you'll see turnover start to tick up slightly and occupancy come down. As John mentioned earlier in the call, we're trying to capture as much of the market rate as possible. So we may be staying on the market a little longer. Our budget has us going up on days to be resident year-over-year because we're expecting that there is a little bit more supply than there have been during the COVID periods. We talked about specifically in a few of our markets, we're absorbing some of the supply that's there. Again, we're absorbing well, but that's in our underwriting that we're going to see it come down. From here Q2 to Q3 and then towards the end of the year, it typically starts to come back up. But each year has its own cycle, so we'll see how it plays.

Jade Rahmani, Analyst

Your line is open.

Jonathan Olsen, CFO

This is really good. Thank you.

Charles Young, President and COO

No, this is Charles. We haven't seen anything. Our reason to move out for purchase is as low as we've really seen. It's in the mid-teens. And look, we know the homebuilders are buying down rates, and I think they've been performing well based on that. But in our book, we're not seeing a lot of move outs for purchase at this point, but we're going to keep an eye on it.

Dallas Tanner, CEO

Thanks everybody for joining us today. And a final word of thanks to all of our associates. What a great quarter. We look forward to seeing many of you next month at Nareit. Thanks. Take care.