Earnings Call Transcript - INVH Q2 2022

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Invitation Homes Second Quarter 2022 Earnings Conference Call. My name is Irene and I will be coordinating this event. I would like to turn the conference over to our host Scott McLaughlin, Head of Investor Relations. Scott, please go ahead.

Scott McLaughlin, Head of Investor Relations

Thank you, Irene. 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 second quarter 2022 earnings release and supplemental information. This document was issued yesterday after the market closed and is available on the Investor Relations section of our website at www.invh.com. Certain statements we make during this call may include forward-looking statements relating to the future performance of our business, financial results, liquidity and capital resources, and other nonhistorical statements, which are subject to risks and uncertainties that could cause actual outcomes or results to differ materially from those indicated 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.

Dallas Tanner, CEO

Thanks, Scott, and good morning. I'm excited to speak with you today following the release of our second quarter results. The state of the business remains very healthy. Second quarter average occupancy was 98%. We set a new record with trailing 12-month turnover at only 21.3%. Lease growth continued to accelerate including a blended rate of 11.8% that was 380 basis points higher year-over-year and same-store NOI growth was 12.4%. These strong results and our improved expectations for the full year, as provided in our revised guidance, reflect the hard work of our teams and the impact of favorable supply and demand dynamics within our markets. I'd like to discuss these in more detail during my remarks today. First, let me begin with the hard work of our teams. We've been providing a high level of care to single-family residents since we started the business over 10 years ago. As you know we provide 24/7 customer service to our residents, routine ProCare visits and a deep and wide bench of dedicated associates. We believe we offer a differentiated and best-in-class experience that is unique to an industry that is still predominantly comprised of smaller mom-and-pop operators. We know that satisfied residents tend to stay with us longer and take better care of their homes. And our customers are telling us they are very satisfied both by their comments and with their actions. We believe our high resident satisfaction ratings, high resident retention and high occupancy are among the strongest indicators of our residents' trust, satisfaction and loyalty. I, therefore, like to thank our more than 1,400 associates for delivering the best resident experience in the industry and for executing so well operationally again this past quarter. Second, the overall shortage of housing. By some estimates, the United States is undersupplied by as many as 2 million to 4 million homes today. Much of this traces back to the Great Recession and the resulting plummet in the number of single-family housing starts. While construction has gradually improved, it remains insufficient to meet existing demand and is predicted to decline again over the next few years. Despite these supply challenges, we continue to offer a valuable choice for those who want to lease a home. This choice is broad-based and, in addition to our legacy business, now includes options for those preferring a lease-to-own opportunity through our investment in Pathway Homes, as well as one for those desiring to lease a home that's been recently constructed by one of our builder partners. Third, I'd like to discuss the strong demand we continue to see for our homes. This is driven by job growth and household formation in our markets and continued migration and population growth, particularly within the Sunbelt. It's also driven by age-based demographics. Millennials still represent the largest population segment in the United States at over 70 million people between the ages of 26 and 41 today. With our average new resident age staying really consistent at about 39 years old, we believe many of this generation are or will be attracted to the lifestyle and affordability that leasing a single-family home provides. This demand is further enhanced as a result of more recent and continuing trends, including the need for more space, such as a home office, the popularity of pets and a rise in mortgage rates that made leasing a home a more affordable option compared to homeownership in all of our markets today. I also want to say a few things relating to ESG. We recognize that the strength of our business is directly linked to the strength of our communities. In this regard, we've led by our core values, including those of genuine care and standout citizenship. We live out these core values in many ways, including tens of thousands of company paid hours that our associates spend volunteering in their local communities each year; our invitation to skill-up project, which encourages and supports careers in the skilled trades; and also our green spaces programs, which develop and improve outdoor community spaces and promote conservation efforts. The call to be a standout citizen extends to our corporate governance practices as well, where we recently moved up in Green Street's annual REIT governance rankings, from one of the top-rated REITs to the highest-rated REIT. Before I wrap up, I want to address the report released this morning by the House Select Subcommittee on the coronavirus crisis. While we have not had time to fully digest the report, there are a few things I'd like to share here. First, and perhaps most importantly, the report clearly states that we did not engage in practices that were unlawful, a fact that we've known quite well since we work hard to follow all the laws within our markets. Second, this report shows just a tiny fraction of the full picture of the work we did during the pandemic and will continue to do so today. We are proud of how we stepped out early to halt all evictions, to fully comprehend the impact of the pandemic, and quickly moved to provide flexible payment plans for our residents; contacted residents who had fallen behind in order to help them with flexible payment options or assistance with government assistance; and overall, our team showed the kind of genuine care we are proud to exhibit on a daily basis. Through these efforts, we provided help to more than 33,000 residents, who needed extra time or financial assistance, for a total of nearly $175 million. We also helped over 10,000 residents obtain government assistance payments, totaling more than $94 million. These are the outcomes that matter. At Invitation Homes, we believe everyone should have the choice to live in a great neighborhood. When they choose to lease from us, we're committed to providing the highest quality resident experience possible. We're pleased to have favorable supply and demand fundamentals as a tailwind for our business, and we work hard to offer a best-in-class resident experience that allows our residents to live freely. With that, I'll pass it on to Charles, our Chief Operating Officer.

Charles Young, COO

Thank you, Dallas. I'd like to start by thanking our associates for another extraordinary quarter during one of our busiest times of the year. It's because of their efforts in providing a premier resident experience that we have achieved such strong operating results. I'm proud of our teams, how they've done in the field and earned such strong recognition and loyalty from our residents. We see this evidenced in many ways, including a record low turnover that Dallas mentioned earlier, our sustained A+ Better Business Bureau rating and certification, and our average length of stay approaching three years. I'll now take a moment to review the details of our second quarter 2022 operating performance. Same-store core revenues grew 10.4% year-over-year, which is up from 9.4% year-over-year in the first quarter. Our year-over-year increase was primarily driven by average monthly rental rate growth of 9.4% and a 19.9% increase in other income. These top-line results drove same-store NOI growth to 12.4% year-over-year in the second quarter, making four quarters in a row of double-digit same-store NOI growth. This was despite same-store core operating expenses being up 6.2% year-over-year in the second quarter. Our largest expense increases were in property taxes, which were up 4.7% year-over-year in line with our expectations given the recent rise in property values, and also on repair and maintenance expense, which was up 15.2% year-over-year and includes the impact of higher labor and material costs across the marketplace. Next, I'll discuss the current leasing environment. We continue to see strong demand through the second quarter into July. New lease growth rate accelerated throughout the second quarter, with June's 17.9% result surpassing May's 16.5% and April's 15.4%. Blended rate growth was 11.8% for the second quarter, up 380 basis points from last year's strong results. As we sit today, leads are at or near three-year highs, while our application volume remains in line with the last two years. Markets with the strongest new lease growth continued to include Las Vegas and Phoenix and now also include South Florida, Tampa, and Orlando as well, reflecting the continued strength of the Sunbelt. Further, with our new lease rate growth continuing to significantly exceed renewals, we maintain a sizable loss to lease that we estimate to be approximately 16% across the portfolio. Together with our historically low turnover, we believe we are well positioned for future rental growth. While these leasing trends are notable, so too are new resident incomes. Residents who moved in with us for 12 months ending June 30 had an average annual household income that exceeded $131,000. This represented an income-to-rent ratio of 5.3 times, which means our new residents are spending, on average, less than 19% of their annual income on housing. Leasing a home has become increasingly more affordable, given rising mortgage rates and home prices. According to John Burns' latest figures, in all 16 of our markets, it is more affordable to lease a single-family home today than it is to buy, by a weighted average savings of almost $700 per month or 24%. Our own internal data shows that in the first half of this year compared to the prior year we saw a significant decrease in the number of residents moving out to buy a home. This was the case as measured by both the number of move-outs to buy a home, which was down 24% from the prior year, and also as a percentage of total move-outs, which was down 300 basis points to 26%. And this trend of fewer move-outs to home ownership accelerated this year from the first to second quarter. With just over half of the year behind us, I'm excited by the opportunities in the remaining part of the year to continue to improve and deliver the leasing lifestyle our residents desire. This includes a home that offers individuals and families the additional space they need, is close to work, welcomes their pets, and offers an easy leasing lifestyle that all of our associates do our best to provide each and every day. I'll now turn the call over to Ernie, our Chief Financial Officer.

Ernie Freedman, CFO

Thank you, Charles. Today I will discuss the following topics: balance sheet and capital markets activity, followed by our financial results for the second quarter, before wrapping up with our updated 2022 guidance. I'll begin with our capital markets activity, starting with our recently announced $725 million unsecured term loan. The seven-year term loan matures in June 2029 and bears interest at adjusted SOFR plus 124 basis points based on our current credit ratings. This pricing includes the benefit we received from meeting certain ESG performance targets similar to our existing unsecured credit facility. The new term loan has a delayed draw feature that allowed us the option to receive a portion of the proceeds at closing, followed by up to three additional draws over a six-month period. We elected to draw $150 million of proceeds in our initial funding at closing in June and used the initial proceeds to voluntarily prepay a portion of our secured debt that was scheduled to mature in 2025. As a reminder, at the start of the second quarter, we also closed a $600 million 10-year unsecured public bond offering. The 4.15% senior notes were priced at the end of March and are scheduled to mature in April 2032. Net proceeds were also used to voluntarily prepay a portion of our secured debt that was scheduled to mature in 2025. As a result of these capital market activities, we increased our unencumbered pool to approximately 78% of our wholly owned properties and raised the portion of our total debt structure that's unsecured to over 66%. We have no debt coming due until 2025 and our weighted average maturity was 5.8 years at quarter end. At the end of the second quarter, our net debt-to-EBITDA ratio was 5.9 times within our targeted range of 5.5 to 6 times. As of the end of the second quarter, we had nearly $1.8 billion of liquidity including approximately $273 million of cash along with the undrawn capacity of our credit facility and term loan. I'll now touch briefly on my next topic, which is our second quarter 2022 financial results. Core FFO per share increased 13.2% year-over-year to $0.42, primarily due to NOI growth. AFFO per share increased 11.9% year-over-year to $0.36. The last thing I will cover is our updated 2022 guidance. As a result of strong execution and favorable supply and demand fundamentals, we raised our full-year 2022 same-store core revenue growth expectations to a range of 9% to 10%, up 100 basis points at the midpoint. While we're coming off two years in a row with exceptionally low expense growth of 1% and 0.5% respectively, as expected, inflationary headwinds have been strong this year and are predicted to remain. As a result, we revised our full year 2022 same-store expense growth expectations of 6% to 7%, which is an increase of 50 basis points at the midpoint from prior guidance. All considered, our revised full-year 2022 same-store NOI growth guidance has been increased to a range of 10% to 11.5%, up 100 basis points at the midpoint. Regarding investment activity, considering current and anticipated market conditions for the near term, and also due to the cost of capital increasing from both the beginning of the year and more recent expectations, we now expect gross acquisitions for 2022 of approximately $1.5 billion. Through the end of the second quarter, we acquired approximately $800 million of homes on balance sheet and in our joint ventures. With regards to dispositions, we now expect approximately $200 million of proceeds for the year, of which approximately $130 million have closed through the end of the second quarter. Taking these changes into account, we are increasing and tightening our guidance for core FFO and AFFO to reflect our revised outlook. We now expect full year 2022 core FFO of $1.66 to $1.72 per share, which represents an increase of $0.03 per share at the midpoint from previous guidance. AFFO is now expected to be $1.41 to $1.47 per share or an increase of $0.02 per share at the midpoint. I'll close by echoing Dallas' and Charles' comments that we continue to be pleased with the business and our team's execution. Moreover, supply and demand fundamentals remain favorable. We feel well positioned with our loss to lease and low turnover and we remain committed to delivering an exceptional resident experience. With that, operator, please open the line for questions.

Operator, Operator

Thank you. We will now begin our question-and-answer session.

Austin Wurschmidt, Analyst

Great. Thanks, everybody. Wanted to just hit on the guidance, first, specifically on revenue. And Ernie, within that revised guidance, I guess, how much embedded deceleration in lease rates are you baking in for the back half of the year? And do you expect the easier occupancy comps to be a modest tailwind moving forward?

Ernie Freedman, CFO

Well, two things. On the new lease side, we do expect some seasonal slowdown, but we'll certainly have better numbers than we've seen historically based on where we're at today. But we do expect to see some modest deceleration as we get to the later half in the new lease rates. Renewal rates, we expect to see would be pretty steady. We've been able to achieve low-double-digits or 10%-plus renewal rates. And the way things are shaping up and where those renewals have gone out for the next few months, we would expect to be a stay in the very high-single-digits or maybe around 10%. Now I would say, the occupancy comp isn't necessarily so easy. We've been at record high occupancy for quite a period of time. So, we're not anticipating that we necessarily have easy guidance that would certainly benefit us from the occupancy side. We'd be pleased to see things kind of in a steady state from where it was last year. And that should get us into the middle of the range of our guidance.

Steve Sakwa, Analyst

Yeah. Great. Thanks. I was wondering if you could just maybe talk about the development opportunities and whether you see the opportunity to further expand that, just given the housing shortage that we've got in the US, and just how you sort of see that unfolding over the next couple of years.

Dallas Tanner, CEO

Yes. Steve, this is Dallas. Great question. It's certainly been by design that we wanted to have a structure in place where we could work with some of the nation's best builders to develop a pipeline that we believe over time becomes very influential. Today, we've got about 2,300 homes in that pipeline with our national builder partners. And I would say, your inclination is right where we probably have an even greater opportunity to bring additional supply into the fold. The nice thing about these structures, as you know, is we're under the hood early with our partners and we can influence things like floor plans, fit and finish standards, and even sometimes community layouts, and that's been a really advantageous position for us, but being very balance sheet-sensitive. And so, we would expect that if there is a little bit of a slowdown, those partnership opportunities should be that much more appealing to both our partners and to us. And I would expect for us both in how we think about growth and also how we think about shaping the portfolio to have our builder structures play a major part in that over the coming years. There's no doubt about it.

Nicholas Joseph, Analyst

Thank you. Just maybe on acquisition guidance coming down a bit. Is that more a reflection of your cost of capital or is it an opportunity set? And then how are you thinking about funding that growth in the back half of the year?

Dallas Tanner, CEO

It's a little bit of everything, Nick. First of all, we don't love where our cost of capital is today, to be fair on balance sheet. But we've done a nice job of building out our investment management business over the last couple of years, so we think that will lend itself to additional opportunities in the future. In terms of the market and pricing changing with particular assets, it's still a little early. I think we've taken a little bit of a cautious approach through summer wanting to see where supply could shake out. Because we're certainly long investors, so it's candidly impossible to be perfect in terms of how you buy an asset every day. But we do want to see where some of these submarkets start to settle out. We think there could be some even better buying opportunities towards the end of the year. So we've been methodical in our approach. Ernie?

Ernie Freedman, CFO

And Nick, to address the question around capital. So we do anticipate the $1.5 billion, and these are year-to-date numbers Nick that we'll end up with about $700 million of balance sheet acquisitions for the year and about $800 million will be funded through our joint ventures. With that, we do have capital available to do more, whether it's on balance sheet or on the joint ventures without raising any more capital this year without increasing leverage. We'll actually end the year with more cash than we would have thought because we're bringing the guidance down a little bit. So if we do see the market change in a way that's favorable for us, we can take advantage of that with capital either in our joint ventures or some balance sheet capital. And, of course, if our cost of capital change that could also be another way.

Brad Heffern, Analyst

Hi everybody. Thanks for taking the question. Are you getting more calls from your homebuilder partners looking to offload supply? And how do you look at the attractiveness of that versus the traditional MLS channel right now?

Dallas Tanner, CEO

On the one-off opportunities, most definitely. Over the last month it feels like a lot of our partners have been calling us because they've had some cancellations. I think you've seen some of that even in the news releases that are out there. So, yes, I would say almost call it two Fed raises ago when they moved at 75 basis points for the first time, it felt like we had a lot of cancellations in communities that we were active in and we're able to take some advantage of that. I think wholesale programmatic things? No, I think the pipeline takes a little bit of time to develop but we'd expect that we might see more opportunities towards the latter part of the year.

Adam Kramer, Analyst

Hi, everyone. Thank you for the question. I think your core NOI margins are quite relevant. In the Western US, they are around 75%, while Texas and the Midwest are slightly below 60%. I'm curious about what causes the variations in margins across these regions. Are there fundamental differences at play? Can we improve margins in Texas and the Midwest over time? I'm interested in understanding the range of margins and their sustainability, especially considering the record low turnover we are experiencing.

Ernie Freedman, CFO

Yeah. I mean it's a good question. We certainly think across all the markets there's going to be opportunities for us to improve margins still. But really the reason you see the wide difference across our portfolio is because of our fixed expenses. In certain states, property taxes run much higher than in other states and that's mainly because of whether there's an income tax in those states or not. So, for instance, in Florida and Texas, there's not a personal income tax but funds are raised by local jurisdictions by having higher property taxes than maybe in other states. The other item that has a wide dispersion across our portfolio would be the insurance costs, and so for instance any of our markets that have exposure to windstorm, like Florida and Houston specifically, are going to have significantly higher property insurance rates incurring costs versus other markets. And then just the cost to operate is a third item, but that's much less so. And so that's why you see markets like Phoenix that have low insurance rates and lower property taxes. Market like California, even though it has higher insurance, because of earthquakes, has lower property taxes because of Prop 13. You see that wide range of NOI margins. That will certainly continue to exist in the portfolio. But over time, there are opportunities across the portfolio to hopefully improve margins in each of our markets.

Anthony Powell, Analyst

Hi. Good morning. Question on renewals versus new lease spreads they converged a bit in the past few quarters. I know you want to be prudent in terms of pushing rate on renewals. That said, is there more of an opportunity to maybe be a bit more aggressive there given the overall dynamics in rental housing across your markets?

Charles Young, COO

We've been really focused on renewals from the start. Our efforts have led to an increase nearly every quarter and month for the past year, and we're now seeing renewal rates in the low to mid-10% range, around 10.5% and 10.4% for September and October. I expect we'll maintain that level. Additionally, we've observed positive new lease spreads that have accelerated from Q2 to Q3, and I anticipate those will remain high into Q3. However, as we transition into Q4, there may be some seasonal slowdown, and I expect the gap between new leases and renewals to narrow a bit. Given our current loss to lease, we believe renewals will remain stable as we work to address that. Low turnover is beneficial for our business, and we analyze our approach based on local market conditions, ensuring we're not increasing rents excessively. While we have to adhere to certain requirements in California, we're careful with our pricing strategies. Overall, we continue to see positive progress and are committed to finding the right balance.

Haendel St. Juste, Analyst

Thank you, and good morning, guys. I guess, Ernie, maybe you could help us understand what's going on with the collection stats. Why have revenues, collected in the same month remained so low versus pre-COVID levels? Your net bad debt improved I think 100 basis points to 70 basis points I believe, but there was no real movement in the better collections in the month. I understand that rental assistance has helped, but what happens when that runs out? Will bad debt move up again? So maybe you could help us understand what's going on here. Thanks.

Ernie Freedman, CFO

Dealing with collections during the pandemic has been a new experience for us all, and in hindsight, it's been less predictable than we anticipated. While we have been consistent in collecting current rents, historically around 96%, we've seen a collection rate of about 91% to 92% in recent quarters. There has been some variability in past rents being paid, with some individuals catching up with or without rental assistance. The first quarter results were disappointing regarding collections, leading to a larger bad debt number than we expected. However, the second quarter brought positive surprises that offset those results. Overall, we are somewhat behind our expectations for the year, but over the longer six-month period, the numbers are closer to what we anticipated. We may experience some timing issues with bad debt as rental assistance declines and new applications are not accepted, although we are still processing applications and expect to receive assistance in July and likely in August. We are witnessing improvements as we navigate past the pandemic, with more individuals becoming current on their payments. However, there may be fluctuations in bad debt in the second half of the year, aligning more with first-half averages rather than second-quarter results. We believe that we will not reach our historical good debt and collection figures by the end of this year, and it may take until 2023 to get closer to those historical numbers.

Sam Choe, Analyst

Hi, guys. I just wanted to focus a little bit on the operating expense side. How much of the R&M increase was due to the seasonal turnover quarter-over-quarter versus the inflationary pressures? And then also on utilities, what led to that uptick quarter-over-quarter?

Ernie Freedman, CFO

Yes. So, Sam, we generally look at a more year-over-year basis versus sequentially because of the seasonality of the business. Quarter-over-quarter, we always do see a big increase in repairs and maintenance costs from the first quarter to the second quarter. They stay elevated in the third quarter. And that's really around HVAC season, air conditioning. And as we all know, it's a pretty hot summer. So we're certainly seeing a little bit more of that this year than we did last year. So a little bit is that. But the majority of the year-over-year difference is around inflation. We had a couple of years in a row where our total net cost to maintain and our R&M costs were really under control in terms of modest increases. But the environment we've been in now for almost 12 months, really kind of started toward the tail end of the third quarter, certainly grew in the fourth quarter and continued to grow in the first and second quarter of this year, is we're in a pretty significant inflationary environment on the R&M side. So that's certainly been, I think, a challenge for a lot of companies across the board. We're not immune to that. And you throw a hot summer on top of that as well; we're seeing elevated R&M costs. And we do expect those to continue for the remainder of the year in our guidance. With regards to utilities, there's a few other items that we group in that as well. And so, I think the bigger challenge there is a bunch of different items associated with that. And so, the utility costs are definitely up across the board. We're responsible for utilities where the homes are vacant. And so, because of that, we're seeing increases and we're not immune to what's happening in the market with regards to utility costs.

Jade Rahmani, Analyst

Thank you very much. On the investment side, capital deployment side, how are you seeing the market adjust currently? Are you seeing cap rates move in any material way? Are you seeing investors slow down their purchases as they assess their cost of capital? What are you seeing in terms of those trends? I know it will eventually be probably a big opportunity for Invitation Homes considering its institutionalization, its strong balance sheet. But in the current market what are you seeing? Thanks very much.

Dallas Tanner, CEO

Thanks, Jade. This is Dallas. We certainly feel equally as confident about our capabilities if the opportunities present themselves. I think so far, we haven't seen much movement in pricing. In fact, it's still been a relatively active home buying season across the board for both buyers and sellers as well as maybe investors through summer. I think the Case-Shiller Index through the end of March, early April, in our markets is still like 23%. So we're still seeing significant home price appreciation, albeit, starting to moderate to some degree. So the backdrop of not having enough supply isn't going to turn on big changes in cap rates overnight. And there still is a buyer in the marketplace even with a higher cost of mortgage, given the amount of pressure. But with that being said, we would expect that as you get into Q3, Q4, later in the year as typically a little bit slower season, you might see some opportunities start to develop. And I think it's really hard to forecast beyond that. We just got to see how the economy is, what's happening with the consumer. Builders, I would imagine, are going to start to be a little bit more careful in terms of deliveries and things like that as well. So it could lead to, like, an extended supply-constrained environment, truthfully. So that may offset any potential cap rate gains or things that you would hope that you might be able to see in the marketplace. But feel generally pretty healthy right now. I think a quarter ago if you had asked me, Jade, about if we're making an offer on a one-off property, we're probably competing with eight to 10 other buyers. And in the market today, it feels like you might be competing with three to four, just given where rates have gone and things like that. So that's really kind of the current color on the ground.

Keegan Carl, Analyst

Yes, guys. Thanks for taking the questions. Just when we think about same-store occupancy declining 40 basis points in the quarter, what were the main drivers of that? Are you seeing any more pushback on elevated rate increases causing move-outs?

Charles Young, COO

No. We really haven't. I think we're just getting back to a normal environment. As you think about last year with COVID, and kind of where we were in that environment, we now see people starting to move again. And we're getting back to our kind of normal seasonal curve that we've seen. And if you look at our quarter at 98% occupancy, it's still very good. And so I think this is just kind of getting back to a natural area. And we're doing that, also by making sure that we're capturing the new lease rate that's out there, as we start to push renewals. So I wouldn't – I have no disappointment in our 98% occupancy. It's very strong. You look back at 98.3% that's not naturally where we are. We're typically much lower than that in Q2 and Q3, because that's the time when people move out, as they're looking for schools for their kids and all of that. But I would pay attention to our low turnover number that's sub-22% and 21%. It's just really healthy. And that just shows that we have homes in the right areas and we're providing the right service and people like what we're doing, including our extra ancillary services and the like. So 98% feels really good. I would think in Q3, you might see it come down, or stay right around there maybe a little bit and then you'll start to see it go back up in Q4. That's the seasonal curve we typically see, and I think we're getting back to that normal curve.

Tyler Batory, Analyst

Good morning. Thank you. A follow-up question on turnover. What's included in the guide in terms of turnover for the second half of this year? Do you expect that metric to remain pretty low just given some of the challenges for affordability out there? Are you expecting it to pick up a little bit? And I guess, as we look at the guidance, if turnover continues to move lower or perhaps stays, where it is right now could that be a little bit of a tailwind to the guidance that you provided?

Ernie Freedman, CFO

Yeah. Tyler, we continue to see a month – comparing month-to-month, year-over-year that turnover is lower this year than it was last year. We continue to expect to see that for the foreseeable future, as we finish out the year. So we think we have turnover numbers will continue to stay in that low range as Charles just talked about, better than we saw last year in terms of – and more favorable in terms of a little bit lower. And we'll just have to see whether we can do better still, or it goes slightly the other direction, but we think we have room with our range to cover that.

John Pawlowski, Analyst

Hey, thanks for time. With turnover continuing to go down and length of stay increasing Ernie or Charles, could you take a stab at quantifying just how much deferred kind of total cost to maintain is in the portfolio right now we might see come through the system once turnover starts to normalize?

Ernie Freedman, CFO

Yeah. John, we certainly have seen as people are staying longer in the portfolio, we're seeing that our cost of turn is increasing and increasing a little bit faster than inflationary. To give you a number off the top of our head here wouldn't be appropriate at this point. But certainly, as people have been there longer, we do expect those costs to rise a little bit. But also remember, we have our ProCare maintenance, and then when we go out to the home, once not twice a year, to make sure things are in a good spot. It gives us an opportunity to make sure that things are in the place where they need to be. So we don't expect there to be a material change. It should put some pressure on the cost to turn that might be a little bit more than inflationary pressure but not meaningfully different.

Neil Malkin, Analyst

Thank you. Good morning. Charles, a question for you on the operating side. So it's very important in terms of resident relationships and expectations that you as the regional manager, a regional team that are well versed, well trained, well equipped to handle a variety of problems that can occur just – again, this is someone's home, so they probably have always a sense of urgency and emotional connection. So, can you just maybe generally talk about how you guys go about training and sort of doing continuing education or improvement to have your regional managers, or your people-facing staff ready to handle questions making people stay as enjoyable, so it reflects well on the company? And maybe if you can give something like an average maintenance request or average time to being fixed or something as just another way to kind of help us understand how all those things work? Thank you.

Charles Young, COO

Yes, we are very proud of our approach in the field. We have a talented team that is organized into pods and groups focused on homes and residents. We manage over 500,000 work orders each year and survey our residents about their experiences with each interaction. Most residents seem quite satisfied with our services, as indicated by our 98% occupancy rate, low turnover, and 79% renewal rate. Our ratings on platforms like Google and Yelp are over 4%. We constantly measure our performance and train our associates to ensure a great experience for our residents. Our brand revolves around the quality of our homes, their locations, and our responsiveness. While we strive for perfection, we recognize that there will be some challenges and complexities. We are committed to continuous improvement and effective training for our teams. Regarding maintenance requests, residents can submit these through our mobile app, website, or by calling our 24/7 call center. All requests are evaluated based on urgency. For emergencies, we respond within 24 hours, which constitutes about 20% of the work orders. The average response time varies depending on the nature of the request, but typically, about 75% of our work orders are resolved on the first visit. Our goal is to quickly address issues and ensure that they are completed during that initial visit unless additional follow-up is necessary. Overall, we take pride in our efforts and continuously seek ways to improve and train our teams.

Dennis McGill, Analyst

Hi. Thank you. Ernie, just going back to the bad debt. There's a lot of different numbers, I guess, as we talk about the collections and the reserve and rental assistance and so forth. Can you maybe just peel apart the 0.7% number that we see on the P&L between what the gross reserve was in the quarter and then the puts and takes to get us down to that the rental assistance and so forth?

Ernie Freedman, CFO

Dennis, we really analyze it unfortunately on that number. Certainly, you're going to have some netting against that as some stuff becomes due. And then we have rent assistance that comes in that goes up against it. That's how we disclose and how we talk about it. I'd rather not confuse the issue more by throwing other metrics out there that I think we list what the bad debt is and it's at 70 bps.

Juan Sanabria, Analyst

Good afternoon. Just wondering if you can talk a little bit about expectations with regards to CapEx, for homes given the inflationary environment and kind of the rough numbers for remodeling now that you're factoring in, as you buy homes as part of that normal process just to think about kind of the go-forward run rate.

Ernie Freedman, CFO

Juan, over the past few years, we maintained a reserve for recurring maintenance CapEx that accounted for repairs, maintenance, and churn. Historically, this has been around $1,500 per home. That figure has not increased as we managed to offset inflationary pressures through productivity and better procurement contracts, along with reduced turnover. However, this year, we are likely seeing an increase of about 20% or more, with projections suggesting it could reach around $1,800 per home. Looking ahead, we expect inflation to decrease eventually, although it's difficult to predict when that normalization will occur. We're also observing less pressure on the supply chain, and potential economic uncertainty might ease labor costs as well. In the long term, we anticipate that increases will align more closely with inflation. While it is challenging to outpace inflation, our scale and size may provide some advantages. This year, the comparisons are tougher due to favorable conditions in prior years, leading to the noticeable growth we are experiencing now.

Chandni Luthra, Analyst

Hi, this is Chandni. Thank you for taking my question. Could you give us an update on where things stand on the legal front? I believe your arguments are filed just last week or more recently. Could you give us an update there? And what's the next step in that process? Thank you.

Dallas Tanner, CEO

Yes. This is Dallas. I think you're asking about the qui tam suit that we're dealing with in the state of California. No, real update. I'll say that we published I think in mid-July our response as part of the process. And now the judge has it in their hands on the motion to dismiss. And we've been told that these can take anywhere from three to six months to get a ruling on that. And then what happens beyond that is indicative of where we stand there.

Joshua Dennerlein, Analyst

Hi, everyone. Just kind of curious on the expense front. I know there's been kind of record heat waves across the country. Just kind of thinking about potential for higher AC repair needs, is this something you're seeing or something maybe you factored in?

Charles Young, COO

Yes. No. Look, we always know in the summer as it heats up that this is going to be a higher expense period. So that's baked into our numbers. But you can never tell, kind of how hot it's going to be. And there are some regions this summer that are just hotter than we've seen. And so that's starting to show up in the numbers a little bit this quarter, and I expect in Q2 and we'll expect to see through a bit of Q3. So we always know that that's there. And we try to get out ahead of it to make sure that we have our vendors on call. We think about any preventative maintenance, we can do with our ProCare service. But ultimately, we have to show up when there is any challenge. And we treat it always the same, where we go in and evaluate whether it's a repair or replace, based on what's going on. And when you have this type of heat, you just need to be ready. Our teams have been responding well. And when there are any instances, as I talked about before, from a customer service standpoint, we're going to be really thoughtful around how we support our residents through that. So this is normal course, maybe a little hotter than normal, and we'll see how it all plays out. Hopefully, it'll cool off a little bit.

Linda Tsai, Analyst

Thank you. In terms of the loss of lease of 16% across the portfolio, can you discuss regional differences and how that's trending?

Ernie Freedman, CFO

Linda, this is Ernie. We do look at that more on an overall basis. There are no markets that stick out too much with possibly the exception of California because of the rules associated with what we can do on the renewal side. So we do see in California the loss to lease is bigger than in other parts of the country which would make sense. We're certainly seeing it in markets where we're seeing more recent higher activity like Florida. So Florida has really taken off in the last six to eight months where some of our markets like Phoenix and Las Vegas have been great for the last 15 to 18 months. So Florida is certainly leaning toward being more of an outperformer. And then on the weaker side would be the markets where we're generally seeing again on a relative basis the weaker activity markets like the Midwest, Chicago, Minneapolis, and a market like Houston. But California, most of our Sunbelt markets, and especially Florida would have a disproportionate higher amount of loss to lease relative to the other markets.

Michael Bilerman, Analyst

Hey, it's Michael Bilerman here with Nick. I just had two follow-ups. One, just Dallas, just on the lawsuit. I assume not only are you spending a lot of time, but you're spending some money in defending the company. So maybe just outline how much capital was spent in the second quarter and if there's any expectation at least in guidance for what you may spend the rest of the year. And then I just had a follow-up on a separate topic.

Ernie Freedman, CFO

Michael, it's Ernie. It's really been pretty de-minimis on the lawsuit at this point because, as you've seen, we just filed briefs. We've certainly done a lot of work internally to understand where we're at, but it's in the low tens of hundreds of thousands of dollars. It's not a big number. We're not going to disclose specifically what we're spending on any specific loss or any legal activity, but it's not something that's material nor do we expect it to become material at this stage as we think about our guidance. And we'll just have to see how this plays out over the next period of time and what may or may not be required depending on the judge's ruling.

John Pawlowski, Analyst

Thank you. Just a follow-up on the qui tam complaint. I know we have to wait for the legal process to play out. But curious, Dallas, in your own internal review have you seen anything that makes you change your opinion? I think you've voiced at the Citi conference where you feel good about the facts. And if we're wrong and I don't think we are, if we're wrong the financial impact would be pretty de-minimis. Is there anything you've seen to change that view?

Dallas Tanner, CEO

No, nothing has changed from our perspective. We feel confident about the facts we have. Charles and the entire operating team effectively manage not only the appropriate processes but also the necessary checks and balances. However, we have to accept that being a public company comes with its challenges. Sometimes, we are unfairly scrutinized, and the motives behind this scrutiny can be questionable. Nevertheless, we will handle it. Our internal perspective remains unchanged.

Operator, Operator

Thank you. Ladies and gentlemen, currently we have no further questions. Therefore, I would like to hand back to Mr. Dallas Tanner for any closing remarks.

Dallas Tanner, CEO

We just want to thank everyone for their support of the company, and we look forward to seeing you all either in person or on our next earnings call. Thank you.

Operator, Operator

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for being with us today. Have a lovely day ahead. You may disconnect your lines now.