Earnings Call Transcript
Invitation Homes Inc. (INVH)
Earnings Call Transcript - INVH Q2 2023
Operator, Operator
Greetings and welcome to the Invitation Homes Second Quarter 2023 Earnings Conference Call. All participants are currently in a listen-only mode. As a reminder, this conference is being recorded. I would now like to turn the conference over to Scott McLaughlin, Senior Vice President of Investor Relations. Please proceed.
Scott McLaughlin, Senior Vice President of Investor Relations
Good morning, and welcome. I'm here today from Invitation Homes with Dallas Tanner, Chief Executive Officer; Charles Young, President and Chief Operating Officer; and Jon Olsen, Executive Vice President and Chief Financial Officer. Following our prepared remarks, we will conduct a question-and-answer session with our covering sell-side analysts. In the interest of time, we ask that you limit yourselves to one question and then re-queue if you'd like to ask a follow-up question. During today's call, we may reference our second quarter 2023 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 non-historical 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 2022 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, our Chief Executive Officer.
Dallas Tanner, CEO
Good morning. And thanks for joining us. These continue to be exciting times with Invitation Homes, once again demonstrating our ability to deliver strong results. Fundamentals remain very favorable for our industry and, in particular, for our markets, products, and price points. Our teams are providing a great resident experience every day, and we continue to seek and find fantastic value creation opportunities through our sound capital allocation strategy. I'd like to discuss a few of these in more detail during my prepared remarks with you today. First, let's begin with value creation and our recent purchase of nearly 1,900 single-family rental homes for approximately $650 million. As we've demonstrated over the last 11 years, we approached external growth opportunities with a strategic, disciplined, and accretive focus. I'm pleased to share with you why we believe this transaction continues in that approach. Essentially, this is a high-growth portfolio of exceptionally well-located homes that we bought at a pretty attractive price. We believe our purchase price represents a meaningful discount to end-user market values, giving us immediate benefits of scale, a value that would have been impossible to replicate through one-off buying in today's environment. Further, we expect our best-in-class platform to help us achieve enhanced returns, starting with the year-one yield in the mid-5s that we anticipate will grow quickly thereafter. In addition, the quality and location of the homes we acquired are right in line with the type of product we'd like to own more of. These are great homes within desirable infill neighborhoods that we believe will provide strong rent growth and value appreciation. Over 90% of these homes we purchased overlap with our existing Sunbelt footprint, including within our Florida and Texas markets, along with Las Vegas, Phoenix, Atlanta, and the Carolinas. Outside of this transaction, we continue to work with our outstanding homebuilder partners across the country. During the second quarter, we took delivery on 157 of these brand-new homes and added an additional 173 homes to our new product pipeline. Our expected future deliveries remain at just under $900 million at the end of the second quarter. Moving forward, we remain focused on smart external growth through our multi-channel acquisition strategy. As we previously announced, Scott Eisen joins us next week as our Chief Investment Officer, and we're excited to add his insight as we further explore disciplined growth opportunities, including additional bulk purchasing from smaller operators and an expansion of our homebuilder pipeline. At the same time, we will continue to keep our heads down and create more meaningful experiences for our residents, growing our ancillary services business and developing new ways for us to engage with our customers. The second topic I want to discuss is the ongoing fundamental tailwinds for our business. We expect these to continue to support our growth objectives for many years to come. Nearly one-fifth of the U.S. population, or almost 60 million people, are between the ages of 23 and 35 years old. We believe this to be a strong indicator of the future demand for our business as they form families and approach our average new resident age of 38.5 years old. Demand for single-family homes for lease has been further enhanced by the rising cost and the burden of homeownership. According to the latest data from John Burns, leasing a home is nearly $1,000 cheaper per month on average than buying a home in one of our markets. This is a reflection of not only an increase in mortgage rates, but also the overall lack of new housing supply. In addition, for-sale inventory remains well below demand, which continues to help support home prices. This, in turn, aids our ability to sell non-core or underperforming assets at attractive cap rates, which we use for accretive capital recycling. Moving on now to my third topic, which is how we continue to improve the resident experience and reinforce our commitment to resident choice and flexibility. The most recent example of this is our partnership with Esusu. We're proud to help our residents build good credit by offering positive credit reporting to all our residents using Esusu's platform at no cost to our residents. This partnership helps to remove barriers to housing choice and allows our residents to improve their credit profile to achieve their financial goals faster. In closing, I'm excited about how we are executing and driving growth today. I would like to express my thanks to our dedicated associates for their hard work and commitment, which has been instrumental to our successes. We believe the increasing demand for single-family rentals, favorable demographic trends, and the flexibility and choice that we provide our residents position us well for both sustained growth and value creation, which we will continue to relentlessly pursue. With that, I'll pass it on to Charles, our President and Chief Operating Officer.
Charles Young, President and COO
Thanks, Dallas. Once again, we were able to build on positive momentum to drive another great quarter. I'd like to thank all of our associates for their hard work through this point in peak season, including all of our outstanding leasing, maintenance, and service teams, for providing the best resident experience within the industry. We still have work to do to close out the busy summer season and to stay diligent about controlling what we can control to finish the year strong. But I'm very proud of the results we're putting up and the great execution that teams have delivered. This includes the strong effort we've made to bring on board the nearly 1,900 homes from our recent portfolio acquisition. Through our existing scale, the dedication and professionalism of our teams, and our established playbook for buying larger portfolios, we expect this to be a smooth transition. In accordance with our mission, we're making a house a home for thousands of new residents who have just joined our Invitation Homes family. We’re pleased to offer them the very best genuine care and outstanding service that all of our residents have come to expect from us. Moving on to our second quarter operating results, same-store NOI grew by 3.6% year-over-year. This was driven by same-store core revenue growth of 5.9% and same-store core expense growth of 11.2%. The main drivers of our second quarter same-store core revenue growth were a 7.4% increase in average monthly rental rate and a 7.3% increase in other income. Notably, we continue to make great progress on working through our lease compliance backlog this year. Same-store bad debt in the second quarter was 150 basis points of gross rental revenue, making us a sequential improvement of about 50 basis points since the first quarter of 2023. We believe this improvement should continue as more of our markets return to pre-COVID performance. Returning to our year-over-year results, same-store core expense growth in the second quarter was primarily the result of expected increases in property taxes, along with higher turnover and property administration costs, mostly driven by progress we're making in our lease compliance backlog. Our expense growth was partially offset during the second quarter by a favorable 6% decrease in R&M expenses due to greater cost controls and lower inflation. Next, I'll cover same-store leasing trends in the second quarter. Lease rates on renewals grew 6.9% year-over-year, while new lease rates grew 7.3% year-over-year. This drove second quarter blended rent growth of 7% year-over-year. In addition, average occupancy remained strong in the second quarter at 97.6%, during which is traditionally the biggest move-out season for our business. We're pleased with the balance we struck so far this year between rate and occupancy. This includes optimizing for the healthy demand we're seeing at this point in our peak leasing and move-out season, especially considering the progress I mentioned earlier on our lease compliance backlog. While this is creating additional pressure on turnover, along with some expected moderation in occupancy through the back end of peak season, we believe we're well positioned for the future with demand for our homes and the quality of our new applicants remaining strong. In particular, the average household income for new residents who have moved in with us over the past 12 months now exceeds $138,000 a year, resulting in an average income-to-rent ratio of 5.1x. In summary, following a great first half of 2023, we're focused on maintaining our momentum going into the second half of the year. Our teams are working hard to ensure we control costs where we can and continue to provide the best leasing lifestyle in the industry for our residents. We remain focused on delivering outstanding service and strong results. I'll now turn the call over to Jon Olsen, our Chief Financial Officer.
Jon Olsen, CFO
Thanks, Charles. Today, I'll cover the following topics. First, an update on our investment-grade-rated balance sheet, along with a few additional details regarding our recent portfolio acquisition. Second, financial results for the second quarter. And lastly, updated 2023 full-year guidance. I'll start with our balance sheet. At the end of the second quarter, we had over $1.4 billion in available liquidity through a combination of unrestricted cash and undrawn capacity on our revolving credit facility. Our net debt to EBITDAre ratio was 5.3x as of the end of the second quarter, down from 5.7x at the end of 2022. Just under three quarters of our total debt is unsecured, and over 99% of our debt is fixed rate or swapped to fixed rate. We've often emphasized how we believe our strong balance sheet positions us well for desirable growth opportunities, should they arise. Our acquisition last week of nearly 1,900 homes for approximately $650 million offers an example. With an average cost per home of $346,000, the acquisition reflects a meaningful discount to market value. This attractive entry point is underscored by the portfolio's outstanding quality and location, which are typically the two best indicators of potential future growth. In addition, the acquisition further enhances our significant scale in many of our premier Sunbelt locations, which we believe has the potential to drive even greater efficiencies and higher margins over time. We funded the acquisition primarily using cash on hand, including dry powder we accumulated through outsized dispositions in the first half of this year at an average stabilized cap rate of 3.8%. The remainder was funded by our revolver. Pro forma for the acquisition, our net debt to EBITDAre ratio at June 30 remains comfortably within our targeted 5.5x to 6x range. We expect this portfolio acquisition to have an immaterial effect on AFFO per share for the remainder of this year and to be accretive to AFFO per share in 2024 and beyond. Next, I'll touch briefly on our second quarter 2023 financial results. Second quarter core FFO increased 5.3% year-over-year to $0.44 per share, primarily due to an increase in NOI. Second quarter AFFO increased 6.8% year-over-year to $0.38 per share. The last thing I'll cover is our updated 2023 full-year guidance. After maintaining strong execution through much of our peak season, and with favorable fundamentals expected to remain in place, we are increasing our full-year 2023 same-store NOI growth guidance to a range of 4.5% to 5.5%, an increase of 25 basis points versus the midpoint of our prior guidance. This is driven by increased same-store core revenue growth guidance of 5.75% to 6.75%, and increased same-store core expense growth guidance of 8.5% to 9.5%, both of which are up 50 basis points at the midpoint from our prior guidance. The increase to core revenue guidance is primarily due to outperformance in rent growth and occupancy in the first half of this year, balanced against our expectation that turnover will trend higher in the second half, resulting in some moderation to occupancy. As a reminder, this is primarily the result of us continuing to make good progress in working through our lease compliance backlog, which has the near-term impact of higher expected turnover and property administrative expenses, but also the longer-term benefits of releasing the homes to stronger credit residents and improving revenue over time. We're pleased with the progress we've made so far this year, and as a result, our expectations for full-year bad debt have improved by 50 basis points at the midpoint to a new full-year range of between 125 and 175 basis points. Our updated guidance also narrows the range and increases the midpoints of our ranges of expected core FFO and AFFO per share. We now expect full-year 2023 core FFO in a range of $1.75 to $1.81 per share, which is an increase of $0.01 per share at the midpoint. AFFO was also increased by $0.01 per share at the midpoint to a revised range of $1.45 to $1.51 per share. Updated assumptions regarding full-year acquisitions and dispositions are included in the guidance section of last night's earnings release. I'll wrap up by restating our excitement for what lies ahead in the second half of this year and beyond. We will continue to focus on our strategic priorities, deliver exceptional service to our residents, and drive sustainable growth and value creation for our shareholders. With that, operator, please open the line for questions.
Operator, Operator
Our first question comes from Josh Dennerlein from Bank of America. Please go ahead. Your line is open.
Josh Dennerlein, Analyst
Yes. Hi guys. Thanks for the time. Just wanted to touch base on the portfolio acquired, I guess how long will it take to kind of integrate into your portfolio? And is there any capital recycling that you're planning off the bat?
Dallas Tanner, CEO
Hi, this is Dallas. Thanks for the question. As far as integrating the portfolio our yield to Charles here on the operational side, it's typically pretty easy. We don't have any market that has saved more than 350 units, and we have a pretty good history of doing that. I think on the capital recycling piece. Look, we've been active on the disposition side in trying to do accretive capital recycling. I think the market not having enough overall supply in the resale space has allowed us to, when we decide to sell homes, get really good what I would call kind of end-user sales prices and to be able to recycle into a high-quality portfolio in the mid-5s is something that we did pretty bullishly. I'll hand it over to Charles, who can speak on how we integrate any new product when it comes to scale into a market.
Charles Young, President and COO
Dallas said it well. We've been through this before, and we just have to see a little bigger across multiple markets. But on an individual basis, we've been able to take in portfolios like this in Vegas and Phoenix and other markets, and it’s just more of the same for us. We have a great team essentially that manages how we roll it into our systems. We get eyes on assets, we make sure that we're providing genuine care to the residents. As it turns out now we just roll them in on a kind of a media basis and we're getting out there and we're working with them where they are in their process and some of them are in lease. Some of them are moving in soon, we just pick it up from there and then we communicate with them well. So it's kind of an ongoing process, there's no real timeline because their homes are in different positions, but I am proud of how the teams are taking it on, and it’s exciting.
Operator, Operator
From Eric Wolfe from Citi. Please go ahead. Your line is open.
Eric Wolfe, Analyst
Thanks. Just to follow up on Josh's question there. If I look at a certain website, it looks like the occupancy of their SFR portfolios is in sort of the 92% to 93% range on average. I'm just curious, what sort of occupancy is the portfolio you bought, if there's an opportunity to get that higher expand margins. Where did the yield on acquisition go, and then - I know that's a long question but is this sort of representative of the type of opportunities that you're looking at across other portfolios?
Dallas Tanner, CEO
I'll start with what you mentioned last. We met - we talked about this at NAREIT. We've talked about this in some of the NDRs we've done through the spring and early summer. And look, there's sort of this moment in the marketplace right now where smaller mid-scale operators are having the high-class debate with themselves about what do they do going forward. There's not a lot of visibility, obviously for some folks in terms of what the capital markets are going to allow for. I think as you look at our business and scale and platform, the operating efficiencies that we run with, we have a pretty good history of creating a really efficient margin profile in the markets where we have scale. There are going to be some compelling opportunities for companies like ours as we've exhibited in this trade that we did this month to create additional margin expansion. With this particular portfolio, we think there is upside in terms of how we can operate it, that we can add to the existing margin profile in our markets. One example is Texas, a market that we want to grow in. We've got about 500 homes that are going to go into our Dallas and Houston portfolios here. While we think we can operate these with greater efficiencies and some embedded growth there, it actually helps our existing portfolios. Because as we scale up relative to the things that we own, we should see additional opportunities for margin enhancement. So, it's not one-size-fits-all out there in terms of where and what portfolio opportunities may be available from professional management companies, but we certainly want to be ready. I think in this situation, we are ready, and we really like the real estate that we are familiar with over time, and it's going to make a lot of sense for our business over the long haul.
Operator, Operator
Our next question comes from Jamie Feldman from Wells Fargo. Please go ahead. Your line is open.
Jamie Feldman, Analyst
Thank you. In last quarter's call, you talked a lot about the lease compliance backlog. Can you just give us an update in terms of how large it is, what the major markets are, where it's still having an impact, and I guess even more importantly, what's the upside to kind of normalized occupancy and a regular turnover rate as you work through and complete that backlog?
Charles Young, President and COO
Hi, this is Charles. Thanks for the question. Yes, as we said, we thought that we were going to see a little heavier work in the first part of the year regarding the lease compliance backlog. I think, as we look back at Q1, it was a little quieter, and things started to pick up in Q2. We've made good progress and you can see it in our numbers, going down 50 basis points quarter-on-quarter. The major markets are where we wanted to see the movement. We see this as a positive sign, as SoCal, Atlanta, Vegas has made some nice progress and so has NorCal. The flip side of that is that we're getting a little bit of a spike in turnover, and that's expected. It's hard to know when it was going to come through, but the good news is the backlog is breaking with the courts and all that. That allows us to move these homes through, and you'll see some pressure, as I mentioned in my comments on occupancy towards the back half of peak season. But the good news is, demand is still really strong. We are able to release quickly, teams are executing well. We're turning homes quickly, and residents are in a healthy place. All of that is good. Signs are positive; we still have things to work through; we're not all the way there yet, but we like where we're going. Ultimately, we ended Q2 here at mid-97s. I expect that will come down to the low 97s in Q3; we'll see where we end up. But with this demand, I think we're going to roll back up and we're going to be in the mid-97s overall for the year. We started the year strong, and we'll work through this backlog. The one thing I will mention is, I think we worked through most of the markets this year. That's the goal and hope. But there could be some bleed into next year in markets like Southern California, and we'll see how we do in the others. Atlanta has a lot of work to do. Those are our two biggest markets; the ones that have the largest impact on our portfolio due to size and due to the backlog are Atlanta and Southern California.
Operator, Operator
Our next question comes from Steve Sakwa from Evercore ISI. Please go ahead. Your line is open.
Steve Sakwa, Analyst
Yes, great. Thanks. Charles, I was just wondering if you could talk about kind of where the leasing spreads are in the third quarter, where did renewals go out, say, for July and August and I guess, what are your expectations for third quarter and for the back half of the year?
Charles Young, President and COO
Yes, thanks for the question. In terms of renewing requests for September and October, we're actually in the low 80s to mid-80s, so we see really healthy performance. We're not done with July yet, so we can’t get final numbers, but we're seeing more of the same healthy performance where new leases are in the low sevens, and renewals are in the high 6s, if you will. We'll see where the blend settles out. But this is typical of what we expect for the summer. New lease rates above renewals. We'll see how it moderates and when it does, but right now, we're still seeing good demand, and we like that given my answer to the earlier question, we're getting a little bit more turnover, and we get a chance to release these homes. What I failed to mention before is we're putting really good healthy residents in there with an average household income of $138,000. So, we're in a good shape. We've tightened up our screening criteria, and we're still seeing good demand across the board. We expect that we will see more of the same in Q3, but we’ll see how it moderates as we get towards the back half of peak season here.
Operator, Operator
Our next question comes from John Pawlowski from Green Street. Please go ahead. Your line is open.
John Pawlowski, Analyst
Hi. Thanks for the time. I just have a follow-up question on the portfolio acquisition. Dallas, I’d like to hear how you weighed purchasing this portfolio versus deploying capital into your own stock which, at least earlier this year, was felt like it was an even larger discount to private market values?
Dallas Tanner, CEO
Yes, hi, John, thanks for the question. It's certainly something we think about and what would move the needle over time and distance. While we have events and things that happened inside of the quarter, we really do try to have a long view in terms of how we want to create meaningful external growth and also what I would say is better-quality cash flows for the company over time, which we would view as having far more of an impact on the things we want to do strategically with the business than maybe some near-term stock buybacks, which we've never done as an organization, although we've certainly talked about it. With this particular portfolio, we think that within a year, we’re going to be in the 6s in terms of yield on cost that doesn't take into consideration things like ancillary and some of the other things that we can do. It’s part of our consistent process around capital recycling and you look at these things, we're selling at about a four cap rate on average, and you'd be able to recycle them to something that's pretty high-quality, getting us to a six pretty quickly. It's an area where we want to continue to lean in, if anything, try to find ways to create better long-term growth for our current shareholders. So, we'll consider everything, but we're managing with a long view here.
Operator, Operator
Our next question comes from Austin Wurschmidt from KeyBanc Capital Markets. Please go ahead. Your line is open.
Austin Wurschmidt, Analyst
Great, thanks. On the portfolio acquisition, what rent growth did you underwrite in year one to achieve that mid-5% cap rate that you quoted? I know you have the revolver availability to fund a portion of that deal, but what are sort of the plans to permanently finance the transaction?
Jon Olsen, CFO
Hi, Austin, it's Jon. That's a good question. We funded this acquisition primarily with cash on hand. So, it's about $495 million of cash and a $150 million draw on our revolver. Of that $495 million of cash, $30 million of that was funded in upfront deposits prior to the end of the second quarter. From our perspective, the actual revolver draw is fairly small. I think as we consider permanent capital, what I'll tell you is sort of what we always say because it's how we always approach things. One, we're very fortunate that we don't have any near-term maturities. So there's no ticking clock that would force us to do something at a disadvantageous time. But secondly, we are constantly monitoring the market, and we're always working in the background to be prepared, so that we can take advantage of opportunities if circumstances and market conditions warrant it.
Operator, Operator
Our next question comes from Brad Heffern from RBC Capital Markets. Please go ahead. Your line is open.
Brad Heffern, Analyst
Yes, thanks. Good morning, everybody. Can you talk about property taxes and how the information you have now compares with the original guide? And if you could comment on the impact of the Texas legislation as well, that would be great.
Jon Olsen, CFO
Sure, so in the second quarter, property tax was up a little over 11% year-over-year. This was expected and we talked about this on the last call, primarily because we recorded a large catch-up entry in the fourth quarter of last year due to the fact that we've been under-accrued in the first three quarters. As a result, we'll see elevated year-over-year property tax increases again in the third quarter and then we'll see some moderation in the fourth quarter. I would remind you that our three largest contributors to our total tax bill are California, Georgia, and Florida, which represent about 70% of the total. While California is largely known, for Florida and Georgia, we won't know how millage rates change until we start receiving those tax bills in the fourth quarter. Big picture at this point, we haven't yet seen anything that would cause us to revise our full-year property tax guidance up or down. With respect to Texas, a couple of things there. Thus far, the legislation calls for a $0.107 decrease in the tax bill per $100 of assessed value, and then there is some additional compression available that’s going to fluctuate by jurisdiction based on how the redistribution under the Robin Hood laws worked for school tax funding. I would also point out that Texas isn't a big state for us, so I would expect that while this is certainly beneficial, I don't think in the grand scheme it's going to move the needle too much.
Operator, Operator
Our next question comes from Daniel Tricarico from Scotiabank. Please go ahead. Your line is open.
Daniel Tricarico, Analyst
Thanks. Jon or Charles, can you break down the components of the 50 basis-point increase in same-store revenue? Rents, occupancy, and bad debt? And maybe how that bad debt in 2Q compares to expectations for the rest of the year?
Charles Young, President and COO
Sure. I think we've seen maybe some marginal improvement from our mid-single-digit rate growth assumption that we talked about on the last call, and also a faster pace of improvement with respect to our bad debt experience, which is absolutely something that we're very encouraged to see. As we look at the back part of the year, though, we do have to balance those positive trends against the fact that we're anticipating continued higher turnover here for the next few months. That is going to have an impact on occupancy over time, and as Charles has talked about in the past, we're also very cognizant of the fact that there is a balance to be struck between rate and occupancy. We want to make sure that we're being mindful of all those factors when we think about guidance.
Operator, Operator
Our next question comes from Haendel St. Juste from Mizuho. Please go ahead. Your line is open.
Haendel St. Juste, Analyst
Hi, good morning out there. Just a couple more on the portfolio. So what does that mid-5s cap rate translate into on an IRR basis? And then curious, just more broadly what you're seeing out there, portfolio-wise, pricing is getting more in line with the mid-5% that you targeted in your capacity, or perhaps interest in doing more portfolio deals?
Jon Olsen, CFO
Hi, Haendel. On the last question, I would say, look, I think there are going to be opportunities to talk to other operators in this space over the next year, and I think a lot of those conversations will be dependent on what kind of the capital markets are allowing for. In terms of how we view the return profile of any trade that we make, it's two-part; one part is going in yield on cost, and the second piece on a risk-adjusted basis would take into consideration our expectations around HPA and things like that. This was obviously, so far, an unlevered transaction, and if you look at it in a binary way, we would expect healthy home price appreciation; on an unlevered basis, we'd probably see this in the high-single digits, but that depends and is a mixture of markets and things like that, so yes.
Operator, Operator
Our next question comes from Keegan Carl from Wolfe Research. Please go ahead. Your line is open.
Keegan Carl, Analyst
Yes, thanks for the time guys. So both in the press release, the commentary you called out increased turnover expense, a pretty big driver of your same-store OpEx going higher on a year-over-year basis. I'm just curious, one, how this is trending versus your initial expectations, and then what your outlook is for the rest of the year on turnover, and then do you think we're '23 end to be a good run-rate going forward on turnover?
Charles Young, President and COO
This is Charles. I'll start and see if Jon wants to add anything. Look, we knew we were going to have a little higher turnover this year given the lease compliance backlog. We're still running historically really low on turnover, which is great. It was really difficult to predict when it was going to happen. It was a little slower than expected in Q1 and really picked up here in the second half of Q2. We think that will maintain into Q3. The thought here is that it will start to moderate towards the back end of the year. Hard to say exactly if that's going to be our run rate, just given what I talked about earlier around some of the markets and how quickly we're going to get to the end of this in markets like Southern California or Atlanta, where we have the biggest impact. The thing to think about with that turnover is it has two impacts. Some of this on the lease compliance, these turns take a little longer, and cost a little bit more, and that's some of the impact you're seeing in our expenses. The good news is we're able to work through this, and we see this as transitory. It won't impact us as much as we can, as fast as we can this year. That’s what’s in our numbers and I think that gives us some optimism as we think about and look forward to next year.
Operator, Operator
Our next question comes from Dennis McGill from Zelman & Associates. Please go ahead. Your line is open.
Dennis McGill, Analyst
Hi, thank you. I guess my question, Dallas, would be on just thinking about home price appreciation and where we're sitting here a year ago. I think everyone would have expected there to be more pressure on the market than maybe there's been, and that's obviously impacting the ability to buy on the MLS. Just wanted to hear how you're thinking about that. And to the degree there remains a disconnect between what you can sell at and where these portfolios are trading, is there a reason why the portfolio dollars wouldn't just go to the MLS and sell at a much more attractive yield? Does that impact the ability to do some of these in the future?
Dallas Tanner, CEO
Yes, good question, Dennis. Look, on the last part of your question, I think it's fair to assume that the frictional costs when you're doing anything in scale are really hard. I think we're as good as anyone in terms of selling one-off in the end-user market. Even when we sell those at high 3s or low 4s, we have some frictional costs associated with those sales. If you're not doing it all the time, it can be a little more difficult to just say, hey, could I sell 1,000 homes tomorrow and how would I think about that cost structure? Look, I think the home prices have largely been buoyed up because of the lock-in effect that there are a lot of attractive mortgages in place. We’ve talked about this in some of our other calls; mortgage rates, about 80% of U.S. mortgages are at 5% or below, which I think is what's keeping the market supported. The lack of volume is creating this feeding frenzy mentality when someone is selling a home. We view that as an asset for our business. So, when we have these opportunities where we can take advantage of that bid-ask spread being a buyer, we have a long view on owning great single-family residential. We want to own it with scale in the markets we operate in. When those opportunities show themselves, like this one, expect us to try to figure out how to do that transaction if it makes sense.
Operator, Operator
Our next question comes from Adam Kramer from Morgan Stanley. Please go ahead. Your line is open.
Derrick Metzler, Analyst
Hi, this is Derrick Metzler on for Adam Kramer. I was wondering if you could talk a little bit about market rent trends across your portfolio and do an update on loss to lease today. Thanks.
Charles Young, President and COO
Yes, this is Charles. We're seeing what's historically been really strong new lease and renewal rates through the summer, taking out the COVID kind of anomaly. When we're in that blend of a 7 in Q2, that's really strong. That's maintaining here as we get into Q3. The markets that are leading have been our Florida markets with Orlando in Q2 north of 9% and we have five to six markets in the mid to high 8s: Tampa, South Florida, Southern California, Atlanta, Carolina. The good news is, as we talked about earlier, we’re cleaning up the backlog, and we are able to release new homes due to the demand, and that's been great. Renewals are holding steady; we're kind of stabilizing here in high 6s, and we think that'll be steady through the year. If not, we'll see where we end. I mentioned earlier that we went out in September and October in the low 8s. That’s real positive as we think through that side, and some of this will be a balance between occupancy and rate as Jon talked about. When we’re working through this backlog, but that turnover impact isn’t in all markets; in certain markets where we have a backlog, highlighted by Atlanta, Vegas, and SoCal. All the markets in Q2 actually had turnover go down year-over-year. It really is market-specific. Overall, we're seeing really good healthy positive trends and we're excited about trying to finish off peak season strong and finish off the year really strong.
Operator, Operator
Our next question comes from Anthony Powell from Barclays. Please go ahead. Your line is open.
Anthony Powell, Analyst
Hi, good morning. Question on the builder pipeline. We've seen homebuilders have good success in selling new homes to homeowners. Are they showing less interest in selling homes to you and others? And as a SFR space, do they continue to see you guys as good partners?
Charles Young, President and COO
Well, I think we mentioned on the script that we're continually adding to our pipeline. I'd say sort of the opposite; I think most companies would envy the position the public builders are in. They're lowly levered; they are taking a much larger share of overall home sales as it relates to U.S. housing stock. Because they're one of the few groups that can go out and build and create. That said, the playbook that we've built with Pulte, as sort of our beginning sponsored partner is now actually starting to work its way through with several different relationships for us. It's caught on that this is a really nice way for an operator of the for-sale homebuilding business to align some interest with professional management companies that want to be a natural buyer of some of this product over long periods of time. I actually expect that side of our business to grow. Our teams, largely led by Peter DiLello and now Scott Eisen coming in, have done a really nice job of starting to build up a frequency there. The nice part about it is we’re able to get under the hood early and really talk about our strategy as a company with these partners and help them understand where we want to grow our footprint. Over time, it also allows us to have an influence on things like portfolio composition and design and neighborhood fit and feel, which is an important part of our overall value factor for the customer as they're thinking about choice. The customer coming into brand new product really does view that move-in experience as their home. My instinct is, I can't prove this yet with any data, but I think they'll prove an even stickier customer over time as we bring out some of these newer products that have more focus. We are very G&A light in this program, so we don’t have our balance sheet tied up in dirt or other riskier parts of that business. We'd rather just continue to partner with proven operators in this space and be a good partner for them. That strategy is really working for us at this point in time.
Operator, Operator
Our next question comes from Juan Sanabria from BMO Capital Markets. Please go ahead. Your line is open.
Juan Sanabria, Analyst
Hi. A couple of questions. I'm assuming we're towards the end. I guess, I apologize if I missed it on the same-store expense guide. The increase, what drove that? I mean it seems like the bad debt is lower, the churn has picked up but albeit temporarily and set to decrease into year end and taxes. It's too early to tell and no change in expectations. Just curious on what drove the expense increase in the guide. And then the second part is just on the renewals. Why is that decelerated, or the pace of increase has slowed, and as the September, October numbers that you put out there in the 8s, does that imply a reacceleration, or is there some get-back that would kind of keep that number steady for September and October expected?
Jon Olsen, CFO
Hi, Juan. It's Jon. I'll take the first part of your question and hand it off to Charles for the second part. I think it's a couple of things. On the expense side, what we're seeing, as Charles noted, is that the turnover has come. There was a little bit of a delay in terms of when it started to show up in the portfolio. I would also say that turnover increased each month since the end of the first quarter. So it is more concentrated. As we started to see kind of the flow-through impacts on a variety of different line items in the P&L, suggested that moving the goalposts on the expense guide did make sense. To be clear, I want to remind everyone that we're working through this backlog, and it's fundamentally healthy for our business long-term, right? It’s something that allows us to put stronger credit tenants back into those homes, getting them back in service, back cash flowing, but there's short-term pressure on expenses. I think it's important that we acknowledge that. That's what we've done here.
Charles Young, President and COO
This is Charles. I'll just add on the renewal side. As you think through kind of portfolio mix and the cohorts that come through for renewal in the summer or in the peak season, if you will, or off-season in Q1 or Q4, we've historically really been strong at pushing out trying to capture as much of that market as possible. If you think about the last couple of years on the new lease side, we've been in the high mid-teens, also on the renewal side. So when the summer renewals come through, they're coming off a really high base. So we're just realistic on what we can do. The back half still has good demand, there is an opportunity to capture where the market is, and we didn't go out as high in those shoulder seasons, if you will. That's some of what you're seeing; I think we’ll see how it plays out, and we’ll see what it implies. Generally, we're still seeing good strong demand, and we’re going to do what we can to capture where the market is for these homes and that portfolio when it comes through at that time.
Operator, Operator
Our next question comes from Tyler Batory from Oppenheimer. Please go ahead. Your line is open.
Tyler Batory, Analyst
Good morning. Thank you. A few follow-ups on the acquisition conversation here. What do cap rates look like on the MLS channel? Where are you bidding? Where are deals clearly in the market? And Dallas, just given some of the commentary on portfolio deals, some of the scale, you can build quickly on those, plus some of the attractive pricing with your builder relationships, does it make more sense to hold off on the MLS as an acquisition channel, perhaps conserve some of your capital for some of these other opportunities and traditionally channel-agnostic, location-specific has been a big part of the strategy, but wondering if maybe that might change, given some of the opportunities that are out there?
Dallas Tanner, CEO
It's a great question. So, I think you're basically looking for color on what we're seeing real-time MLS and how we view that relative to some of these things. Painting a broad stroke on the market, we've hit this in a couple different ways. In our markets, in the 16 markets that we operate, if we're active in the MLS today and really buying some scale, it would be in the low-5s, if not close to mid-5%. For us, we haven't been very active, to be clear. Really the last four quarters, we haven't bought much if any MLS property in the resale space. We've been taking deliveries through our new product pipeline and our merchant build program, and spending time talking to other operators around bigger opportunities where we can integrate scale quicker. I do think there's a bid-ask spread between where portfolios need to trade today and where the scale one-off sense would occur, and I think that's kind of below-5s, as I mentioned before. In Las Vegas, for example, you can't buy a home at a 5-cap, it's just next to impossible; it's all sub-5. I don't view the MLS as a channel for us; it’s one thing we’re always looking at. We write hundreds of offers every week at price points that we would be willing to transact at, and we're striking out quite a bit because that spread is so wide. I love the entry point we’re seeing in kind of the new builder stuff. Most of our pipeline that we’re reviewing and putting in play right now is a little bit closer to a 6-cap, albeit the deliveries are expected to be a year to 18 months out on any new products that we're putting into contract. It feels like there's some dislocation. This should be beneficial as a REIT. We're lowly levered, we have access to capital; we still feel really good about our liquidity perspective. We've got a platform that can handle chunks of growth like this and digest it very easily, building it into our normal operating procedure where we can bring in the ancillary services and everything else. It's a good moment, a good chapter for us to see this growth in today’s market, and I expect that we’ll keep our nose down and keep trying to find other ways to create additional scale in the markets we operate.
Operator, Operator
Our next question is from Linda Tsai from Jefferies. Please go ahead. Your line is open.
Linda Tsai, Analyst
Hi, thanks for taking my question. For your new portfolio, what's the average rent you charge for these homes and how does that compare to the current rent of your existing portfolio? And then just in terms of margin enhancement from integrating, can you give us a little more color on what initiatives you're thinking about?
Charles Young, President and COO
So on your first question, basically in-place rents, as we took these homes, are all around $2,200, which for the markets this consists of is about 10% greater than where our current average rents in these markets are. So, it’s all accretive in terms of that. We do see the same embedded loss to lease in this opportunity as we do in our own portfolio, somewhere between, call it, 8% and 10% upside in our books. Sorry, I didn't get the last part of your question.
Linda Tsai, Analyst
In terms of margin enhancement from integrating into your existing portfolio, just a little more color on what initiatives you're thinking about?
Charles Young, President and COO
It's too early to tell, but like our Texas markets, we would basically grow the portfolio by 10%, and we would need to bring on any headcount there. So, we will see additional expansion in those two markets, but in terms of ancillary services, that’ll be a slow process because we typically bring those services into play as leases revolve and renew. As we get into the book and as we're operating it, updating leases and lease agreements and our renewal pricing, that's when those ancillary services will integrate in over time.
Operator, Operator
Our next question comes from John Pawlowski from Green Street. Please go ahead. Your line is open.
John Pawlowski, Analyst
Thanks for taking the follow-up. Charles, I was hoping you could expand on the weakness in pricing power and the new lease growth rates in Vegas that you alluded to. What do you think is driving that specifically? And then maybe on a somewhat related topic, are you seeing notable increases in shadow supply from conversions of short-term rentals, Airbnbs to traditional rentals in Las Vegas or other vacation-heavy destinations?
Charles Young, President and COO
Yes, I'll take your last question first. Not really much impact on the shadow piece; it's out there. Frankly, it’s always been there. I think it's a fair question, given the low-interest rates and how homeowners may be approaching whether they want to sell or lease a home, but we’ve always been competing against the market, and that's driven mostly by mom-and-pops. We’re just kind of operating within the dynamic. Going back to Vegas, each market has its own dynamics. There is a couple of things going on. One, we've had a real spike in turnover, as I talked about trying to get through the lease compliance. The good news is the courts really started to open and move faster. We're competing against some of our own supply, to be honest with you. That's put some pressure on pricing, but we’re not the only ones operating in that market. Other supply is going through the same backlog, and that puts some extra supply in the market temporarily. We saw some of this in Phoenix last year and worked through it pretty quickly in a month or two. What we will see over time is trying to figure out if there is any demographic change with Vegas in terms of people moving out of the market. It’s hard to get a good vision on that right now, but right now, it's mostly around the supply that exists in our own book and with others. We don’t see it as a long-term trend; we'll work through this and see how it plays out over time.
Operator, Operator
Our next question comes from Jade Rahmani from KBW. Please go ahead. Your line is open.
Jason Sabshon, Analyst
Hi, this is Jason Sabshon on for Jade. Can you please comment on the outlook for property insurance and do you see a captive insurer as a potential solution for some of the rate increases that we've been seeing?
Charles Young, President and COO
Hi, thanks for the question. I will say that similar to what we talked about on our last call, while we don't love the extent to which our property tax or our insurance bill went up year-over-year, I think we were very fortunate relative to what we've heard from some of the other REITs. I think that's down to a couple of things. One, we have a very favorable loss history; our insurers have never lost money on Invitation Homes, with the worst year being last year when they broke even. Secondly, the geographic dispersion and the granularity of the assets compared to traditional commercial real estate, which are big and chunky, certainly is a benefit in terms of risk mitigation. And lastly, we're not coastal. I think if you put it all together, we feel really good about where we landed. I think in the third and fourth quarters, as we talked about on the last call, you should expect to see quarterly year-over-year increases in the neighborhood of 20%, with the full-year insurance expense line item being up a little over 16%. As far as captives and other things of that nature, we are going into next year's renewal, and we're going to be evaluating a whole host of different alternatives because I think this isn't a one-and-done situation. We’ve seen a lot of capacity leave the market, and we’ve seen carriers trying to recoup fairly painful loss histories over the last several years. So I think it’s something to stay tuned to, but I can't give you any particular insight into what our strategy is going to be for next year just yet.
Operator, Operator
Our next question comes from Daniel Tricarico from Scotiabank. Please go ahead. Your line is open.
Daniel Tricarico, Analyst
Thank you. Sorry, going back to Austin’s earlier question and Jon, what do you think you could raise unsecured debt today? Credit spreads have come in recently, and you talked about your leverage being lower than your longer-term targets. Do you view this as a good time to raise that kind of capital, or are dispositions going to stay the preference?
Jon Olsen, CFO
A couple of observations. Thanks for the question. Dispositions have been our most attractive cost of capital thus far this year. We've sold homes year-to-date at an average stabilized cap rate of under 4%, and we’ve been able to put that cash in the bank and earn 5% plus. In the case of this portfolio trade, we’re redeploying that capital into something with an even higher yield. We think the prospects for accretive capital recycling driven by strategic dispositions have worked out pretty well for us. In terms of the unsecured markets, yes, it seems as though credit spreads have tightened a little bit with the GDP report this morning. The tenor is probably gapping out as we speak a little bit. We’re going to continue to monitor the market. We’re always keeping track of where we think a new deal might go off at a variety of different tenors. It’s just part of how we run the business regularly; we want to keep a close eye on what the opportunity set looks like. Our approach is not going to change.
Operator, Operator
Our next question comes from Jamie Feldman from Wells Fargo. Please go ahead. Your line is open.
Jamie Feldman, Analyst
Great, thanks. Just two quick follow-ups. One, Dallas, you had mentioned it's a great time to be a REIT - part of being a REIT, issue equity. I just wanted to get your thoughts on equity as a source of capital today. And then secondly, as it seems like the winds are shifting in where the opportunities are, what are your latest thoughts on expanding outside the U.S., whether Canada or anywhere else in the world? Thank you.
Dallas Tanner, CEO
Hi, great question. I think in terms of expansion, we’ve been consistent in saying this: we run 12,000 or 13,000 units in Atlanta as easy as we run 3,800 in Seattle. We’d love to see all our markets get closer to 8,000 or 10,000 units. We see margin expansion; we see the ability to offer different services; we can run our pro care systems much more efficiently, and we’ll get better granularity and efficiency with scale in those markets. I would expect our first choice, subject to an opportunity set, would be to just continue to build scale and density in the markets we operate. We’ve also been on record that we would like to own in other markets over time. There’s a little bit of Nashville in this trade, and there are markets like Austin, San Antonio, and Salt Lake City that we all find appealing for a variety of reasons. I think internationally, it’s fun to speculate, but most of these countries probably have more restrictive housing policies. Unless a real strategic opportunity or reason arises, I don't know why we would expand outside of this great country that we have, with an amazing space for housing; we can build it, we can buy it, we can improve it. It’s just a very good place to operate and be a REIT. In terms of equity, Jon just answered how we think about the capital markets. We think about our cost of capital daily in this business. We've gotten fairly good marks over time as smart capital allocators. I like that we're disposing of homes that are non-core, or in parts of the country that may be a little harder to operate, and kind of a four or sub-four cap, reinvesting that capital in the mid-5s, pushing to a 6 on the new construction. That's a winning strategy right now, even with the world sorting itself out. It's been nice to see that our share price has improved a little, but it's not in a zone that we're thrilled about. A variety of reasons come into play there; when we look at home prices actually trading, I think, to Jon's point, you will watch the capital markets over time and see how those evolve. We’d love to see good performance buoy up our stock price further. However, we're comfortable recycling capital and being smart. We're not afraid to do this stuff off the balance sheet with partners wanting access to SFR. We have current availability in our second Rockpoint venture of about $700 million. I expect we’ll start to deploy some of that over the coming year. We have untapped revolvers, and we’re still generating good free cash flow. So, between dispositions and all that, we've got ample dry powder to look for opportunities to continue growing the business.
Operator, Operator
This completes our question-and-answer session. I would now like to turn the conference back over to Dallas Tanner for any closing remarks.
Dallas Tanner, CEO
We appreciate everyone's support and everyone being on the call. We hope everyone has a safe rest of summer and look forward to seeing some of you in the fall.
Operator, Operator
The conference has now concluded. You may now disconnect.