Earnings Call Transcript - INVH Q4 2022

Operator, Operator

Greetings, and welcome to the Invitation Homes Fourth Quarter 2022 Earnings Conference Call. All participants are in a listen-only mode at this time. As a reminder, this call is being recorded. At this time, I would like to turn the conference over to Scott McLaughlin, Vice President of Investor Relations. Sir, please go ahead.

Scott McLaughlin, Vice President of Investor Relations

Good morning, and welcome. Today, we'll hear remarks from Dallas Tanner, President and Chief Executive Officer; Charles Young, Chief Operating Officer; and Ernie Freedman, Chief Financial Officer. Following these remarks, we'll conduct a question-and-answer session with our covering sell-side analysts. During today's call, we may reference our fourth quarter 2022 earnings release and supplemental information. This document was issued yesterday after the market closed and is available on the Investor Relations section of our website at www.invh.com. Certain statements we make during this call may include forward-looking statements relating to the future performance of our business, financial results, liquidity and capital resources and other nonhistorical statements, which are subject to risks and uncertainties that could cause actual outcomes or results to differ materially from those indicated. We describe some of these risks and uncertainties in our 2021 annual report on Form 10-K and other filings we make with the SEC from time-to-time. Invitation Homes does not update forward-looking statements and expressly disclaims any obligation to do so. We may also discuss certain non-GAAP financial measures during the call. You can find additional information regarding these non-GAAP measures, including reconciliations to the most comparable GAAP measures, in yesterday's earnings release. I'll now turn the call over to Dallas.

Dallas Tanner, President and Chief Executive Officer

Thanks for joining us this morning. I'd like to start by thanking all of our teams for their hard work last year. Yesterday, we posted 2022 year-over-year core FFO growth of 11.6% and same-store NOI growth of 9.1%. Strong demand for our business continued throughout the year. And despite some headwinds from inflation and an evolving regulatory environment, we believe our business continues to stand on solid footing. As you all know, Ernie recently announced that he'll be stepping down as CFO in a few months. I'd like to thank him for his extraordinary vision and strategic insight over the past seven years, and I look forward to celebrating his achievements later this year. At the same time, I'm excited for Jon Olsen, who joins us here in the room this morning, to lead our finance team beginning in June. Jon has been part of Invitation Homes from the beginning with deep involvement in all of our strategic and financial activities. We expect this to be a seamless transition. Before turning it over to Charles and Ernie to provide more details about our 2022 performance and our expectations for 2023, I wanted to take a few moments to discuss the current housing environment in the United States and how we believe Invitation Homes is well positioned to help support the country's housing needs. It has been reported that the U.S. needs to add more than 13 million housing units over the next seven years in order to accommodate new household formation and address the undersupply of the past decade. Today, however, it remains challenging to deliver new supply in desirable locations, because of state and local restrictions, as well as labor and material shortages. In addition, today's macroeconomic environment of higher inflation and higher interest rates may discourage investment in new supply. On top of these supply pressures, the largest demographic group, the millennial generation, is now aging into the life stage of needing more space to accommodate their families and their lifestyles. Adding to this, the increased flexibility of many to work part-time or full-time from home, we believe demand for single-family housing should remain strong for many years to come. At the core of our business is a straightforward yet critical goal. We seek to be a meaningful part of the solution for high-quality and flexible housing options. We provide quality homes for lease in desirable locations with access to great schools and employment centers. We offer best-in-class service, allowing residents to focus on their lives. And we're proud that we partner with 150 public housing authorities and serve thousands of our residents who participate in a housing assistance program, including HUD's housing choice voucher program. And we're delivering new homes to the marketplace through our previously announced builder relationships. Today, that builder pipeline exceeds 2,300 homes that we expect to deliver over the next few years, and our plans are to continue investing in new construction in the future. As a reminder, our approach to bringing new housing to the marketplace keeps development risk off of our balance sheet and avoids any related G&A burden, while also allowing us to partner with some of the best homebuilders in the business to select and buy new homes in great locations. We think this approach is a real differentiator and allows us to maximize flexibility and optionality while remaining opportunistic and minimizing risk. All of this is important because the lack of available supply of single-family housing and strong demand from those who wish to live in a single-family home has made homeownership much more expensive today. This supply and demand imbalance is further aggravated by inflation and elevated interest rates, leading to the widest dislocation we've seen between the cost of homeownership and the cost of leasing since starting this business. We're therefore very proud to provide our residents the opportunity to live in neighborhoods and school districts that might not otherwise be accessible at a cost that is often significantly more affordable than any other housing option. Let me expand on that a little bit further. Based on the John Burns December data, leasing a home costs nearly $900 less each month than owning a home across our markets. This means that leasing a home can save a family nearly 30% a month on their housing costs on average. These savings are even more compelling on a per square foot basis where single-family rental homes currently come out as the most cost-effective housing option compared to not only homeownership costs but also apartment rent. Given that, we believe today's macroeconomic environment and the current supply and demand fundamentals make the Invitation Homes value proposition compelling for both our residents and our shareholders. This is on top of several differentiators of our business that we have noticed in the past. For residents, these benefits include a recently renovated, refreshed or newly built home in a desirable location; ProCare, which is our resident service model that provides for consistent interactions with our residents throughout their time with us; best-in-class technology tools, the most recent example being our mobile maintenance app, offering residents an even more efficient process to submit service requests; and a growing list of resident services designed to elevate their living experience. For our shareholders, we believe there are numerous absolute and relative advantages to the single-family rental industry, including single-family homes being the most liquid real estate sector within the United States. There's typically much lower turnover in single-family rental than in multifamily with residents often staying much longer. And there's a long track record of rent growth within SFR even during recessionary periods. With a nod again to the Burns data, national average single-family rent growth has never had a meaningful decline in nearly 40 years of tracking that data. Lastly, we believe there are numerous advantages to the Invitation Homes way, including our hallmark scale; location and ISO markets, overseen by the best operators in the space as evidenced by our 46.6% cumulative same-store NOI growth rate from 2017 to 2022, nearly 2,500 basis points greater than the average of our residential peers; our strong balance sheet with no debt coming due until 2026; and our builder partner growth pipeline that maximizes flexibility and contributes to new housing supply while also avoiding big investments in land and a large G&A load. In closing, we couldn't be more excited about our real estate, our teams and the underlying fundamentals here in 2023, a year with some uncertainty and also a year we believe full of opportunity to continue delivering a premier resident experience to anyone who chooses to live a more flexible and worry-free lifestyle. With that, I'll pass it on to Charles, our Chief Operating Officer.

Charles Young, Chief Operating Officer

Good morning, everyone. As Dallas mentioned earlier, 2022 was a solid year for us. We believe our results are a reflection of the service we offer our residents and our performance in providing an exceptional leasing experience. This is an ongoing journey that we look forward to continuing in 2023. So thank you to all of our associates for your constant commitment to genuine care. I'll now walk you through our operating results in more detail. Same-store core revenues grew 7.6% year-over-year in the fourth quarter. This increase was driven by average monthly rental rate growth of 9.4% and a 16% increase in other property income, net of resident recoveries. Same-store average occupancy was 97.3% in the fourth quarter, down 80 basis points year-over-year as a result of higher vacancy due to increased turnover. For the full-year 2022, our same-store revenue grew by 9%. Same-store core expenses grew 16.3% year-over-year in the fourth quarter. The main driver of this growth was an 18.3% increase in property tax expense. As indicated a few months ago, this increase was anticipated to be outsized due to a catch-up to our property tax accrual in the fourth quarter primarily related to higher property tax bills in our homes in Florida and Georgia. For full-year 2022, including this fourth quarter count, property tax expense grew by 7.8%, while core operating expense for the full-year 2022 was up 8.6%. Outside of property taxes, the inflationary environment was the largest contributor to the higher growth in core operating expenses. Following two years in a row of virtually no expense growth year-over-year, we expect that we will see some of last year's inflationary pressure continue into 2023. Finishing up with our same-store operating results, we reported fourth quarter NOI growth of 3.7%, which brought our full-year 2022 NOI growth to 9.1%. Next, I'll cover leasing trends in the fourth quarter of 2022 and January 2023. Same-store blended rent growth was 9.1% in the fourth quarter, which is comprised of renewal rent growth of 9.9% and new lease rent growth of 7.4%. In January 2023, same-store blended rent growth was 7.4% with renewals coming in at 8.7% and new leases at 4.9%. Same-store occupancy in January was 97.7%, an increase of 40 basis points from our fourth quarter results. As we anticipated, bad debt was a stronger headwind in the fourth quarter than in the third quarter, representing 2% of gross rental revenues. California, and more specifically, Southern California, continued to experience outsized bad debt within our portfolio. Approximately 40% of our Southern California homes are located within Los Angeles County, where ordinances continue to restrict residential lease compliance options. For the remainder of our portfolio, we are seeing some markets return to more regular procedures for addressing delinquency, though it's a slower process now than it has been historically in some of our markets. Across all our markets, we're proud to offer a desirable housing option and a worry-free lifestyle to our residents. In our most recent resident surveys, we heard that the need for more space and desirable location of our homes were once again the top two reasons why new residents choose to lease from us in the fourth quarter. Eighty percent of new resident surveys indicate it's important to have a home office or bonus room, with nearly half stating they work from home at least two days a week. In addition, our average household income for new residents during 2022 remained healthy at approximately $134,000, representing an income to rent ratio of 5.2 times. Finally, our residents continued to demonstrate high satisfaction with the service our teams are providing as evidenced by our high occupancy, low turnover, average length of stay of nearly three years and strong resident satisfaction scores. I extend my thanks to our teams who have helped make this all possible. And I challenge our associates to continue to raise the bar here in 2023. I'll now turn the call over to Ernie, our Chief Financial Officer.

Ernie Freedman, Chief Financial Officer

Thank you, Charles. This morning, I will cover the following topics: one, balance sheet and capital markets activity; two, financial results for the fourth quarter; and three, our 2023 guidance, which we introduced in yesterday's earnings release. Since our IPO in 2017, we have been focused on reducing our overall leverage, improving our maturity ladder, achieving an investment-grade rating and transitioning to a balance sheet that is capitalized mostly with unsecured debt at fixed rates. We have made significant progress across all of these objectives. At year-end 2022, net debt to adjusted EBITDA stood at 5.7 times. Our weighted average maturity was 5.6 years, and when considering available extension options, we have no debt coming due until 2026. Over 99% of our debt was fixed-rate or swapped to fixed rate. We achieved our investment-grade rating in the spring of 2021. And at year-end 2022, over 83% of our homes were unencumbered, and 73.7% of our debt was unsecured with secured debt representing less than 10% of the gross book value of our real estate. As previously announced, during the fourth quarter, we prepaid the remaining portion of our IH 2018-1 securitization using the delayed draw feature of our seven-year unsecured term loan that closed in June 2022. We ended the year with $1.3 billion of liquidity from both our undrawn revolver and unrestricted cash. I'll now cover our fourth quarter and full-year 2022 financial results. Core FFO for the fourth quarter increased 10.6% year-over-year to $0.43 per share, and AFFO increased 9.2% to $0.36 per share. For the full-year 2022, core FFO and AFFO per share increased 11.6% and 10.2% to $1.67 and $1.41, respectively, each exceeding the midpoint of our guidance. Included in our earnings release, we provided a bridge from 2022 core FFO per share to the midpoint of 2023 core FFO per share guidance. With regards to our same-store operating metrics, we expect same-store core revenue growth in a range of 5.25% to 6.25%. Embedded in our guidance are the following assumptions: first, slightly lower average occupancy versus 2022 due to anticipated higher turnover; and second, elevated bad debt of 25 to 75 basis points higher than 2022. Next, same-store core expense growth, which we expect in the range of 7.5% to 9.5%. Included in this guidance is the assumption that real estate taxes will increase between 6.5% to 7.5%, an improvement from 2022. We also expect to see pressure on turnover, operating and capital expense, due mainly to our assumption of higher turnover in 2023, along with our assumption around ongoing inflationary pressures. As Charles mentioned, our real estate tax expense in 2022 was underaccrued for the first three quarters of 2022. So we recorded an outsized catch-up in the fourth quarter of 2022. As a result, we anticipate 2023 same-store core expense growth in the mid-teens for the first quarter of 2023, followed by sequential improvement during the remainder of the year, resulting in the expected range for the full-year 2023. Taken together, this brings our expectation for same-store NOI growth to 4.0% to 5.5%. We also expect full-year 2023 core FFO per share to be in the range of $1.73 to $1.81 and AFFO per share in the range of $1.43 to $1.51. As a result of this anticipated growth in AFFO per share in 2023, our Board of Directors has authorized an increase in our quarterly dividend by 18.2% to $0.26 per share. Our guidance assumes that our 2023 acquisitions will be modest. This includes our initial expectation for on-balance sheet acquisitions of $250 million to $300 million from our builder partners, which we plan to fund through free cash flow and disposition proceeds. It also includes our expectation for acquisitions in our joint ventures of $100 million to $300 million. Outside of this guidance assumption, our actual acquisition activity will be based on how attractive the buying opportunities are relative to our cost of capital as the year progresses. With our balance sheet in excellent shape, our ample liquidity providing us with plenty of dry powder and our joint ventures offering us access to additional capital, we're well positioned with the flexibility to maintain an opportunistic approach to external growth this year. I'll wrap up by echoing Dallas' and Charles' gratitude to our associates. They continually work hard to deliver strong results and to respectfully care for our residents in our homes. As we look ahead, we are confident in our continued success based on favorable supply and demand fundamentals, our healthy balance sheet, our unwavering commitment to outstanding resident service, our strong team, and our desire to remain the premier choice in home leasing. With that, operator, please open the line for questions.

Operator, Operator

Thank you. We will now begin the question-and-answer session. We have the first question on the phone lines from Josh Dennerlein of Bank of America. Please go ahead.

Josh Dennerlein, Analyst

Yes. Thank you for the question. I'm looking at your AFFO midpoint guidance compared to the FFO midpoint guidance, and it seems to be about 83% of FFO. For 2022 actuals, it was 84%. There appears to have been a smaller gap before that. What is causing this change? Could it be that the gap has narrowed due to lower turnover in recent years?

Ernie Freedman, Chief Financial Officer

Yes, Josh, this is Ernie. We are noticing inflationary pressures affecting turnover expenses, as Charles mentioned. The distinction between FFO and AFFO will mainly come from our capital replacement spending. We are experiencing increased pressure on the capital side, including repairs, maintenance, and turn expenses. At the start of the year, we incorporated a cautious approach in our projections to position ourselves for positive performance later in the year. This is why you’ve observed some changes over the past couple of years. Overall, we've been maintaining flat net costs for OpEx and CapEx combined. However, for 2022 and our outlook for 2023, we anticipate a noticeable rise due to inflationary effects. We expect higher turnover in 2023 compared to 2022, but as we look to 2024 and 2025, we may see the numbers return to previous levels regarding the gap between core FFO and AFFO.

Josh Dennerlein, Analyst

Thanks, Ernie. Appreciate that.

Operator, Operator

We now have Nicholas Joseph of Citi. Your line is open.

Nicholas Joseph, Analyst

Thank you. I was hoping you can elaborate a bit more on the trends you're seeing in the acquisition market in terms of cap rates and available properties. And then what are you hearing from your JV partners on their appetite to deploy capital in this current acquisition environment?

Dallas Tanner, President and Chief Executive Officer

Yes, Nick. Let me address your second question first, and then I'll share some insights on what we're observing in real time. Our joint venture partners have a strong interest in continuing to grow and find attractive investment opportunities. I can confirm this. From a supply standpoint, the market remains relatively tight. A year ago, we were purchasing at low to mid 5% cap rates, but we've seen a shift in the resale environment by about 20 to 30 basis points, with a typical market around 5.5 to 5.6 for similar products. Additionally, we are experiencing the lowest levels of resale supply inventory we've seen in the past three to four years, making this an intriguing moment. The newer developments that are coming online, along with the discussions we're having with builders, appear to offer a better return profile. However, the number of these opportunities won't be drastically high, as builders may be hesitant to act in this uncertain environment, especially given interest rates. Overall, there is significant capital looking to invest, but not many immediate opportunities. We anticipate that this situation may normalize throughout the year. We need to keep an eye on the trends in mortgage rates, which recently approached around 6.75%. Builders have managed to buy down mortgage rates to remain competitive in the short term, and we hope there will be more opportunities in the year if mortgage rates rise. We will also closely monitor resale supply and its relation to the labor market.

Scott McLaughlin, Vice President of Investor Relations

Operator, our next question, please.

Austin Wurschmidt, Analyst

Hey, good morning, everybody. I was just curious if you could provide a little bit of an update of sort of what you're seeing on the ground and whether there's anything giving you pause in any of your markets that kind of has you taking a more conservative outlook through the balance of this year? And then just maybe a quick update on how market rents have trended from kind of late last year into the early part of this year.

Charles Young, Chief Operating Officer

Yes, this is Charles. Thanks for the question. We like what we're seeing on the ground right now. Our Q4 results reflected some seasonality similar to what we noticed in the middle of last year. As expected, we returned to a more typical pattern. During COVID, occupancy was around 98% with high rent growth, and now we are seeing more seasonality. However, the reality is that the performance remains strong for this time of year. In Q4, we achieved 97.3% occupancy, which increased throughout the quarter, ending December at 97.4% and starting January at 97.7%. This indicates solid demand in our markets. In terms of rates for Q4, we experienced a blended increase of 9.1%, renewals at 9.9%, and new leases at 7.4%. While January and December typically see lower rates due to seasonality, achieving a 4.9% new lease rent growth in January is historically strong. Coupled with 97.7% occupancy and an 8.7% renewal rate, we believe our portfolio is well-positioned as we approach peak season, which generally begins after the Super Bowl. We are also seeing some acceleration in new leases for February. Overall, things are looking positive. There is more seasonality in colder markets like Denver and Chicago, but we are witnessing a lot of strength in Florida. Arizona has experienced some slowdown due to seasonality but is beginning to show positive momentum. Overall, we are optimistic about the structure of our portfolio.

Operator, Operator

Thank you. We now have the next question from Brad Heffern from RBC Capital Markets. Your line is now open.

Brad Heffern, Analyst

Hey, good morning, everyone. Ernie, could you walk through the buildup to the revenue guidance as far as earn-in, loss to lease, occupancy, all the sort of moving pieces that get you there?

Ernie Freedman, Chief Financial Officer

Yes, definitely. Brad, as we mentioned in our prepared remarks and earnings release, let’s focus on the midpoint of our guidance range. At that midpoint, we expect a slight decrease year-over-year. In 2022, we were at about 97.7% to 97.8%, and we anticipate that will decrease a bit primarily due to higher turnover. As we've noted, we are making progress with residents who are not current on their rents, which will contribute to increased turnover and consequently lower occupancy rates. Another significant factor negatively impacting our revenue growth is bad debt. We are encountering challenges similar to others with exposure to Southern California. We expect bad debt will rise between 25 to 75 basis points compared to 2022, estimating it will be around 2%, up from approximately 1.5% for the previous year. We predict that elevated levels will continue in the first half of 2023, with an improvement possible in the latter half of the year. Additionally, we anticipate that our other income will increase by low double digits, in line with last year, as we continue to enhance our ancillary income sources. Regarding rates, we previously mentioned that we expect an earn-in of about 4% from 2022's activities, and that figure remains consistent into the fourth quarter. The loss to lease has significantly decreased since the end of the third quarter, currently projected at about 1% to 2%. This reduction is attributable to both increased leasing activity and the typical seasonal patterns seen in the residential market. In a typical year, there are expected month-over-month declines in rental rates, which we didn’t observe in 2021 or 2020 but returned in 2022. We saw these sequential declines from September to October through December. Considering all these factors and our expectations for leasing activity—both renewals and new leases—your guidance for same-store core revenues is outlined. We remain optimistic about the potential for better outcomes and are committed to striving for that, but we want to ensure we set realistic expectations at the year's outset. Hopefully, we can replicate previous years where we have underpromised and over-delivered, but we will see how everything unfolds.

Operator, Operator

We now have Sam Choe with Credit Suisse. Your line is open.

Sam Choe, Analyst

Hi, guys. Just was wondering if you could provide an update on your general thoughts on utilizing concessions and what that might look like during peak leasing season.

Charles Young, Chief Operating Officer

Yes, we have no concessions running at all. I think we talked about on our last call, we had a short-term kind of small concessions going into the holiday to try to push up on the occupancy as we saw seasonality come back. That's typical that we run in that time of year, given the seasonal curve. But as of December, we had no concessions, and we don't see any need to do it, given our current occupancy and the demand that we're seeing right now.

Operator, Operator

Thank you. We now have Steve Sakwa with Evercore ISI.

Steve Sakwa, Analyst

Yes, thanks. Good morning. Dallas, I was just wondering if you could comment a little bit more on some of the builder relationships. And given the challenges that they're facing in actual home sales, I just didn't know if bulk sales and a bigger commitment from you to them to take down homes was more in the offering here and how those discussions have maybe unfolded.

Dallas Tanner, President and Chief Executive Officer

Our current pipeline consists of approximately 2,300 homes that we have contracted with various builder partners. We are currently collaborating with five to ten builders both nationally and regionally on a range of opportunities. We are keen to construct as many homes as possible with Pulte, who has been an excellent partner with a strong team. Last summer brought a lot of uncertainties regarding market volatility, particularly related to rates. Most builders have effectively managed mortgage and payment aspects without significantly reducing prices. There have been minor quarter-end opportunities, but the future largely hinges on labor market conditions. If the market continues to slow, it would present a favorable opportunity for Invitation Homes to expand our pipeline through purpose-built construction projects. We are beginning to launch some of our first full communities; we toured one in Atlanta recently and were very satisfied with the product quality, return profile, and demand, as mentioned by Charles. Moving into 2023, we plan to take an opportunistic approach to enhance and expand our pipeline and relationships, and to find more programmatic ways to work with our preferred partners. If there is a slowdown, that could be advantageous for single-family rentals. However, we will need to consider how we fund these initiatives moving forward. As mentioned earlier, we have substantial third-party capital interested in these opportunities, and we aim to invest judiciously from our balance sheet as well.

Operator, Operator

Thank you. We now have Juan Sanabria from BMO Capital Markets. Your line is open.

Juan Sanabria, Analyst

Hi, thanks. I have a question for Ernie regarding the rate aspect of the same-store revenue guidance for 2023. Can you share your thoughts on the expected market rent growth across your portfolio for this year? Additionally, how should we anticipate the trend in renewals, considering the moderating loss to lease? Do you think they will remain around the high single digits throughout 2023, or should we expect a decrease in that regard?

Ernie Freedman, Chief Financial Officer

Yes, implicit in our guidance is that we expect blended growth rates to be in the mid-single digits. I believe this is where we have the greatest potential for revenue growth. We need to be cautious about bad debt since we faced some challenges last year. We've factored enough into our guidance that we should be fine, but we want to approach this carefully and strike a balance between the two. On the renewal side, we definitely have the chance to maintain elevated levels, but I wouldn’t necessarily say that we’ll remain in the high-digits for the whole year. I'm inclined to think it will trend toward the higher end of our guidance range or possibly a little above it. We’re optimistic about experiencing strong renewal growth for the rest of the year, especially after posting solid numbers in January, although I wouldn’t extrapolate that across the entire year. The market indicators we’re observing are quite robust, which suggests that strong performance is possible. However, if you calculate how things are likely to unfold, considering the number of 2-year leases in place, you would arrive at a mid-single-digit blended growth rate for 2023.

Operator, Operator

Thank you. We now have Adam Kramer of Morgan Stanley. Please go ahead when you are ready, Adam.

Adam Kramer, Analyst

Hey, I just want to follow up on an earlier question around JVs. Look, I think there's been some kind of news in the press last kind of number of months about maybe JVs being more of an avenue that you guys would pursue. Certainly, a challenging environment for acquisitions in 2023 overall. Wondering just kind of the willingness or desire to maybe go that route. Obviously, you could pick up a little bit of fee income and change the economics a little bit in the model. So yes, I guess, just kind of generally around willingness to kind of go further down the JV path?

Dallas Tanner, President and Chief Executive Officer

This is Dallas. I mean, look, we've shown a willingness. We, in the last couple of years, have raised a couple of ventures both with Rockpoint as a strategic partner. You're exactly right that it does have a lot of value add to the REIT in both terms of, call it, our returns on our cost of capital off balance sheet and then also the fee generation and kind of additional service opportunities it creates as we build out a little bit more robust manager. And so I would expect the joint venture capital will always be something that we look at on a relative basis to where our current cost of capital is from a balance sheet perspective. Don't get me wrong, we would love to invest as much capital on balance sheet as we can. Obviously, at today's prices and the way that the book has been discounted in the public markets, that cost of capital is not very attractive. And so I think using third-party avenues or having longer-term partners that we can continually deploy capital with is a very good thing for our business and for our shareholders. We generate outsized returns. It also allows us to be a little bit more particular niche across maybe a couple of different areas. And we think that, that will also give the company in its strategic thinking a lot more flexibility over time. So I would expect us to continue to explore and use venues like joint ventures over time but never in a way that it would impact our ability to grow our balance sheet and always trying to find that right balance.

Operator, Operator

Thank you. Your next question comes from Chandni Luthra of Goldman Sachs. Please go ahead.

Chandni Luthra, Analyst

HI, good morning. Thank you for taking my question. I wanted to talk about property taxes a little bit. So your guidance assumes real estate taxes will increase 7%, and that's an improvement from 2022. What's the driver behind this expectation of improvement in the growth rate? Are there certain markets that make you think that basically tax growth will moderate? Anything going on more specific or more idiosyncratic anywhere? Would love your thoughts there.

Ernie Freedman, Chief Financial Officer

Yes, it's Ernie. I'm glad to discuss real estate taxes. To recap for everyone, when considering real estate tax, we focus on our three largest markets—Florida, California, and Georgia—where we pay the most taxes, as mentioned last quarter. California can be excluded from major concern due to Prop 13, which keeps rates low year-over-year. There may be some fluctuations from appeals within California. For Florida, although we were mistaken last year, we don't expect another year with tax bills increasing by 20% like last year, which had a 14% increase with assessments rising nearly 30%. The same applies to Georgia; we don't foresee consecutive years of such high increases. In Florida, there are mechanisms to limit how much can be increased in one year, with caps affecting two-thirds of tax bills. Given the high assessments, we may hit those caps again in Florida. Overall, we believe our situation regarding Florida, California, and Georgia will improve compared to 2022, which collectively represent about 70% of our tax bill. There are other areas where we anticipate significant increases from last year, but due to the smaller size of these tax bills, they will have less impact. For instance, Maciver County in Charlotte will experience some pressure due to multi-year revaluations, as will Denver. However, tax bills in Colorado and North Carolina are not significant for us. We also noticed substantial tax bills in Texas, but since our exposure there is limited, it won't severely affect us. I wouldn't be surprised if Texas experiences another challenging year in 2023, but its limited impact on us remains. Therefore, we anticipate a year similar to last year—7.8% last year compared to our guidance of 6.5% to 7.5% this year. These are still historically high figures, but we see potential for slight improvement. Importantly, we haven't incorporated much in terms of successful tax appeals into our estimates. Material success in appeals could allow us to reach the lower end of our range. However, predicting that is quite difficult, and we don't need significant appeal wins to achieve the guidance we've set.

Operator, Operator

Thank you. We now have Keegan Carl with Wolfe Research. Your line is open, Keegan.

Keegan Carl, Analyst

Hey, thanks, guys. So I know you gave the percent breakout as far as shares go. But I'm just curious if you could give us a little bit more breakout on your growth expectations between growth, property management and G&A for ’23?

Ernie Freedman, Chief Financial Officer

Yes, we highlighted in our supplemental schedule the transition of FFO from 2022 to the midpoint of our 2023 guidance. We indicated that we expect property management expenses to increase by approximately $0.03. This translates to about $17 million to $18 million, largely due to ongoing investment in our technology platform and the growth of our joint ventures. As we generate more income from these joint ventures related to property management fees, we'll see property management expenses offsetting this due to the number of homes involved. Additionally, we are facing some inflationary pressures and were somewhat understaffed in early 2022, which many organizations experienced in filling positions. We anticipate being fully staffed in 2023 and will closely monitor that situation. On our profit and loss statement, we separate property management from general and administrative expenses, and we expect to see more growth in property management this year, although the growth will be more balanced compared to 2022. In 2022 compared to 2021, general and administrative expenses were relatively flat, with most growth originating from property management. For 2023 versus 2022, we anticipate growth to be more evenly distributed, with a slight edge toward property management.

Operator, Operator

Thank you. We now have Tyler Batory of Oppenheimer. Your line is now open.

Tyler Batory, Analyst

Good morning. Thank you. So just on the operating cost side of things, I really just want to tie the loop on this topic. I mean, ex property taxes, when we look at same-store OpEx, I just want to be clear on the drivers of that, quite a bit of growth there. How much of that is due to higher turnover? How much of that is due to just general cost inflation? And really, what I'm trying to get at, has there been a structural change in terms of the cost structure? I think there was always a concern with your business model that it would be difficult to scale. So I'm not sure if perhaps this outlook here indicates that maybe some just economies of scale creeping in your business model, just given your size and the age of some of your homes?

Ernie Freedman, Chief Financial Officer

Tyler, it's Ernie. Thank you for raising that question, as it may be a concern for others too. I want to clarify that we are not experiencing any issues with dissynergies related to our organizational size; rather, it is beneficial for us. I can definitely provide some specifics, but you're correct in noting that we're projecting real estate taxes to rise about 7% at the midpoint, which accounts for a bit more than half of our overall expenses. In total, we are looking at an overall guidance of approximately 8.5% at the midpoint, indicating that other areas are increasing a bit more. I believe most of those increases are more transitory items influenced by the current market conditions. To highlight some key aspects, property insurance costs, for instance, are expected to rise. We're nearing the end of our policy renewal process in the next few weeks, so our final figures aren't available yet. Over the last two years, our property insurance only increased around 3% to 4% collectively. It was stable one year, then saw an increase of about 7% to 8% the following year, which was much better compared to the wider residential market. However, due to the substantial rise in reinsurance costs this year and last year's events, we do expect insurance expenditures to increase. We consider this to be a one-time situation. It's possible that property insurance rates could climb by 20% to 25%, which would elevate our overall insurance costs into the low double digits, but the positive note is that we're not experiencing similar increases in other insurance lines. The larger concerns for us revolve around turnover. We anticipate an increase in turnover, which we view positively as it will provide better opportunities in 2023 compared to 2022 for residents who have fallen behind on rent. We expect to see more movement related to residents vacating their homes, which should normalize as we progress through 2023 and into 2024, especially given the conditions in Southern California. Importantly, the residents I mentioned typically remain in our properties longer and are less likely to submit service requests and allow for necessary repairs, leading to significantly higher costs per unit for our turnarounds—sometimes 40% to 50% more than standard turnovers. We believe this situation is mainly a 2023-centric challenge. By 2024, the costs associated with turns should decrease significantly. When considering long-term trends, we don't see these issues affecting the overall growth of our expenses. In summary, we view the current environment as a specific challenge for 2023, with property taxes expected to return to more normalized rates by 2024. We anticipate turnover will increase in the near term, eventually stabilizing as we move forward. Furthermore, the costs associated with turns should also reflect a decrease over time due to the changes in our current operational focus, allowing us to return to the expense growth trajectory we've historically maintained, which aligns with inflation or even slightly below.

Operator, Operator

Thank you. We now have John Pawlowski of Green Street.

John Pawlowski, Analyst

Thanks. Maybe just continuing that line of thought. It just feels like you're baking in a lot of inflation on the expense line items and not a lot of inflation on rents, because some of these costs are going to push up the cost of ownership. So Charles, what markets on the ground are you seeing as potential canaries in the coal mine for new lease growth going to, whatever, 3%, which seems to be implied in the guidance? Where are you seeing cracks in demand?

Charles Young, Chief Operating Officer

Yes. As we talked about earlier, occupancy is real strong. Historically, looking at last year, Florida has been really strong for us, where we started to see when the seasonality came back was a bit of a slowdown in our traditional colder markets like the Denvers, the Chicagos. But again, they're not material to us. And generally, we're still seeing good demand. And to Ernie's point, there's an opportunity or upside here on the new lease side given kind of the structure of the portfolio today. Our occupancy is running really high for January historically, and we like the acceleration that we're seeing. So I don't see any markets that have concern. I see markets that have been really performing well. Phoenix slowed down. There was a lot of supply there for a short period, but we're seeing that bounce back quickly. So I'm not seeing anything that has us concerned. I think we're getting back to our historical rates. If you go back to pre-COVID, you're going to see seasonally the summer where there's turnover and high demand, we're going to see that's where new lease is going to push up. And I think it will be across the board. Some markets will perform a little better than others. And then you get into Q1 and Q4, and you get that seasonal slowdown where on the renewal side, we think it's going to be pretty steady. We’re at a in the 8s in Q4, and we're holding steady here in January. We do think it's going to moderate a little bit as you get further out, given the loss to lease scenario laid out by Ernie. But I think the renewal side will be more steady, and we'll get the typical seasonality on the new lease side. That's great for us given our historical kind of footprint in our 60 markets. It's a nice balance.

Operator, Operator

Thank you. We now have Dennis McGill of Zelman. Your line is now open.

Dennis McGill, Analyst

Thank you. Ernie, I was just hoping you can go back to that loss to lease comment. I think you said it was one to two. And last quarter, I think it was maybe 10, and there's a couple of factors there. You mentioned you're realizing some of it, and then some of it is just what's going on with seasonality or market rents. Just given that there's not as much turnover in the fourth quarter, I was wondering if you could maybe split out how much do you think of that is market versus what you've realized?

Ernie Freedman, Chief Financial Officer

Yes. When we looked at it, I would estimate that about a third of it came from our ability to capitalize on leasing activity. However, we did notice a decline in market rates from August and September 2022 to December. We are already seeing those rates beginning to recover, which typically occurs with the season, and as Charles mentioned, our season starts somewhat earlier. So roughly, it's about one-third from what we were able to earn versus the two-thirds that reflects the market declines compared to the stronger numbers in the third quarter.

Dennis McGill, Analyst

And is that 1% to 2% number, is that end of the year, or is that end of January?

Ernie Freedman, Chief Financial Officer

That would be December 31st.

Operator, Operator

Thank you. We now have Anthony Powell of Barclays. Your line is open. Please go ahead.

Anthony Powell, Analyst

Hi, hello? Can you hear me?

Dallas Tanner, President and Chief Executive Officer

We can hear you.

Ernie Freedman, Chief Financial Officer

We can.

Anthony Powell, Analyst

Yes, I apologize for the earlier question. Regarding turnover, I've mentioned several times that it is increasing. I would like to confirm that this increase is primarily limited to Southern California and a specific bad debt situation. It does not reflect a widespread rise in turnover across your portfolio.

Ernie Freedman, Chief Financial Officer

No, it's happening across the board because we are still addressing issues with residents who haven't been paying rent. There's a significant situation in Southern California, and it's going to result in an overall increase in turnover. Honestly, California might take a bit longer to resolve this due to the regulatory environment. The elevated bad debt numbers are primarily due to challenges in Southern California, where it's harder to proceed with residents who aren't paying. Eventually, we expect things to improve, guided by the current rules. However, the overall situation will continue to be impacted as we work through the repercussions of the pandemic across most of our markets.

Operator, Operator

Thank you. I would like to hand it back to Dallas Tanner for his closing remarks.

Dallas Tanner, President and Chief Executive Officer

We thank everyone for joining us on the call today. And we look forward to seeing everybody at the Citi conference in a couple of weeks. Take care.

Operator, Operator

Thank you all for joining. That does conclude today's call. Please have a lovely day, and you may now disconnect your lines.