Earnings Call Transcript - INVH Q2 2024

Operator, Operator

Greetings and welcome to the Invitation Homes Second Quarter 2024 Earnings Conference Call. This conference is being recorded. At this time, I would like to turn the conference over to Scott McLaughlin, Senior Vice President of Investor Relations. Please go ahead.

Scott McLaughlin, Senior Vice President of Investor Relations

Good morning, and welcome. I'm here today from Invitation Homes with Dallas Tanner, our Chief Executive Officer; Charles Young, President and Chief Operating Officer; John Olsen, Chief Financial Officer; and Scott Eisen, Chief Investment Officer. Following our prepared remarks, we'll conduct a question-and-answer session with our covering sell-side analysts. In the interest of time, we ask that you please limit yourselves to 1 question and then requeue if you'd like to ask a follow-up question. During today's call, we may reference our second quarter 2024 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 2023 annual report on Form 10-K and other filings we make with the SEC from time to time. Except to the extent otherwise required by law, 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 this call. You can find additional information regarding these non-GAAP measures, including reconciliations to the most comparable GAAP measures in yesterday's earnings release. With that, I'll now turn the call over to Dallas Tanner, our Chief Executive Officer.

Dallas Tanner, CEO

Thanks, Scott, and good morning, everyone. We're a little over halfway through the year, and we're pleased with the results we've posted to date. Our residents continue to stay longer with a same-store average length of stay of over 3 years. Our same-store portfolio remains effectively full with an average occupancy of 97.5% during the second quarter. We're pleased with our financial performance for the year-to-date through June, with core FFO up 6.5%. It's an election year, and housing is once again a focus on both sides of the aisle. We encourage elective officials and policymakers to have a complete understanding of the facts so that effective and long-lasting solutions to today's housing challenges can be enacted. Like many others, we follow the great work of John Burns and his team closely. I'd therefore like to start off this morning by reviewing some of their latest housing data. There are roughly 133 million households in the United States today. About 66% of those own their own home, a rate that is above the historical average during the last 6 years, and the other 34% lease something. Of those who lease, roughly 64% rent an apartment, while 31% lease a single-family home. This means there are about 14 million single-family rental homes across the country, with our wholly owned portfolio accounting for just 0.6% of total single-family rental supply. Against that backdrop, I'd like to focus on 3 topics during my prepared remarks today. First, we believe there has never been a more compelling time to lease a home than today. We've spoken a lot about the traditional reasons that millions of Americans choose to lease. These include flexibility and convenience, as well as the desire for additional spaces, privacy, and access to great schools. In addition to those, the past 2 years have opened an unprecedented affordability gap between homeownership and the cost of leasing. According to the Burns data, 2 years ago, it was just under $700 a month more expensive to buy than to lease on average in our markets. Today, the cost of homeownership is nearly $1,200 a month more expensive than leasing. The high cost of homeownership has many causes. Chief among them, according to most economists, is the lack of new housing supply. Add that to the steady increases in homeowners' insurance and property taxes, among other costs of homeownership, and we believe the value proposition of leasing a home with us becomes even more attractive. Various experts estimate our nation's housing supply shortage is in the millions of units. If we were to address these affordability challenges, it is imperative that the homebuilders continue to build more homes to meet that growing demand. That leads to my second point, which is that we're proud to be part of the solution by partnering with homebuilders to build new communities. We continue to expand our partnerships with some of the largest homebuilders in America as well as with regional homebuilders focused within our markets. Our partners understand that, supported by our appetite for growth, they can build larger and more diverse communities and finish those communities faster than they otherwise might have alone. More homes delivered faster is a win for everyone, including the 133 million households in America who are looking to lease or buy their next home. Our current pipeline includes nearly 2,700 new homes that we plan to make available for lease over the next few years, in addition to around the 2,000 homes that we've already added since 2021. In total, that’s nearly 5,000 newly constructed homes built or in our pipeline since we launched our build-to-rent efforts just 3 years ago. Furthermore, our attractive returns are leading the industry with current opportunities being underwritten at a 6% or better yield on cost, while mitigating most of the risks and costs of on-balance sheet development. My third and final point is that doing right by our residents means doing right by all of our stakeholders. We pioneered our professional service standards several years ago as a way to differentiate the worry-free lifestyle that we provide compared to the small landlords who make up the vast majority of this industry. In particular, we believe our 24/7 genuine care service and ProCare's offerings remain unrivaled. To highlight this point, through June year-to-date, our market teams turned and released more than 11,500 homes to new residents, nearly all of whom received a pre-move-in orientation as well as a 45-day post move-in visit. Both of these brand-exclusive customer touch points are performed in person with the resident by our associates. We believe this level of service is feasible in part due to our size and our scale, and that our resident-centric approach helps drive our strong occupancy, customer retention, and overall resident satisfaction. It’s also why some of the largest and most respected portfolio owners have recently chosen our growing third-party management business to care for their homes and for their residents. We also leverage the size and scale for the greater good of our communities. I'll call out 2 more recent examples. First is our support of the American Red Cross, and more specifically, their Sound the Alarm home fire and safety program. Our sponsorship helps the Red Cross install free smoke alarms and educate families on fire escape plans and home fire safety. Secondly, we continue to support local development and improvement of outdoor community spaces through our green spaces programming. This past spring, we funded 2 new brands: the PATCH Community Garden in Dania Beach, Florida, and the Wellspring Women's Center in Sacramento, California. As a long-term neighbor and a supporter of our communities, we take great pride in empowering our local associates to make an impact where they live and work. To wrap up, I'd like to thank our residents for their trust and loyalty and thank all of our associates who work hard every day to earn that trust. We proudly stand behind the work that our company and associates are doing to ensure our residents have a great experience with us. We are honored to be a part of the solution to today's housing challenges. While just a fraction of 1% of the 14 million Americans who lease a home choose to do so with us, we believe we remain the premier choice where individuals and families can thrive. I'll now pass the call on to Charles Young, our President and Chief Operating Officer.

Charles Young, President and Chief Operating Officer

Thank you, Dallas. I'll begin by thanking our associates for another strong quarter. This has been the busiest time of the year for us, particularly for our leasing and maintenance teams, and I'm proud of the work they have done to provide exceptional service to our residents. I'll now walk you through our same-store operating results for the second quarter. Same-store NOI grew 3.8% year-over-year, led by an increase in same-store core revenues of 4.8%, an increase of same-store core expense of 7.1%. I'll discuss each of these a little further, starting with the 4.8% growth in core revenues. This is primarily driven by a 4.2% increase in average monthly rent, a 9.6% increase in other income, and a 50 basis point year-over-year improvement in bad debt. The second quarter marks the fifth quarter in a row of sequential improvement in our same-store bad debt, and we're pleased to see progress continuing across our markets. Next, I'll share more detail on our second quarter core expense growth of 7.1%. This was primarily due to a 10.3% increase in property tax expense, which Jon will discuss in more detail during his remarks, as well as a significant year-over-year increase in repairs and maintenance expense due in part to weather conditions. These increases were partially offset by lower turnover, which drove a 10.8% decrease in turnover expense, along with reductions in all of our other controllable expense line items, reflecting the hard work of our teams to control what we can control. I mentioned that weather impacted our R&M OpEx during the second quarter. It also had an outsized impact on R&M CapEx as well. As you probably heard, and many of you felt, the summer season arrived early and hotter in most of our markets this year compared to last. We saw that come through during the second quarter with higher HVAC spend that impacted both R&M OpEx and R&M CapEx. Next, I'll review our same-store leasing results for the second quarter. Year-over-year renewal rent growth, which represents about 3/4 of our business, increased by 5.6%, while new lease rates grew by 3.6% year-over-year. Together, this brought blended rent growth to 5% year-over-year, which represents a healthy return to our historical pre-pandemic norm for the second quarter. What's notably different now compared to the pre-pandemic period is our same-store occupancy, which averaged 97.5% in the second quarter of 2024 or approximately 140 basis points higher than our 3-year historical average for the second quarter prior to 2020. Looking ahead, as the summer leasing season comes to a close, we expect to see a normal degree of seasonality return to our portfolio. While we still have a week remaining here in July, we anticipate that new lease rate growth likely peaked in May and June, as it typically does, and that occupancy this month and next will reflect the usual summer move-outs and a normal seasonal curve. That being said, we expect to continue to lean in on occupancy, particularly as we move deeper into the second half of the year since occupancy is traditionally our most impactful core revenue growth driver. Once again, I'm really proud of our teams for the results they delivered. We've asked a lot of them this year as we've grown our third-party management business, elevated our high standards of genuine care, and made additional improvements to the resident experience, and their performance has been outstanding. I'm especially grateful for their dedication to living our core values and doing what's right for our customers. With that, I'll now turn the call over to Jon Olsen, our Chief Financial Officer.

Jon Olsen, Chief Financial Officer

Thanks, Charles. I'll begin by providing an update on our investment-grade rated balance sheet and the capital markets. At June 30, we had approximately $1.7 billion in available liquidity through a combination of unrestricted cash and undrawn capacity on our revolving credit facility. Unsecured debt comprised over 3/4 of our total indebtedness and our net debt to adjusted EBITDA ratio was 5.3x at June 30. Virtually all of our debt was fixed rate or swapped to fixed rate and nearly 84% of our wholly owned homes were unencumbered at the end of the second quarter. As we previously announced on our last earnings call in April, Moody's upgraded our issuer and issue-level credit rating to BAA 2 from BAA 3 with a stable outlook. As we've discussed before, we have no debt reaching final maturity until 2026 when our IH 2018-4 securitization with a current balance of approximately $634 million reaches final maturity, as does our 5-year credit facility, which is comprised of a $2.5 billion term loan along with an undrawn $1 billion revolver. While we have plenty of time remaining prior to 2026, we anticipate we'll address these maturities later this year. This is consistent with our historically proactive approach to managing our balance sheet and is also in consideration of various swap instruments that mature later this year and next. Specifically, we expect to repay the IH 2018-4 securitization later this year as planned, with cash that we had earmarked from our August 2023 bond issuance. We are also in discussions with our bank group regarding a recast of our 5-year credit facility, and we expect to be in a position to share further details on both prior to our next earnings call. Next, I'll review our second quarter and year-to-date financial results. For the second quarter, core FFO increased 7.3% to $0.47 per share, while AFFO increased 4.1% to $0.40 per share. Year-to-date, core FFO increased 6.5% to $0.94 per share and AFFO increased 5.4% to $0.81 per share. These year-to-date results mark a solid finish to the first half of the year, which included growing contributions from our third-party management business, a better than originally expected insurance renewal, and some favorable early outcomes on property taxes in a few of our smaller tax markets. As outlined in last night's earnings release, we have maintained the midpoint of our full year same-store NOI growth guidance at 4.5% while moving the midpoint of our same-store revenue growth guidance down by 12.5 basis points to 4.875%, and improving the midpoint of our same-store expense growth guidance by 50 basis points to 5.75%. In addition, we have raised the midpoint of our full year core FFO guidance by $0.01 to $1.87 per share. The full details of our updated technical difficulty are included in last night's earnings release. One area of our guidance where we think continued caution remains appropriate is property tax expense. As you know, property taxes represent our largest same-store expense line item by far, with over half of the total being impacted by 2 states, Florida and Georgia. Georgia has provided us with limited information to date on assessed values while millage rates and final tax bills from both states aren't expected for a few more months. As we've previously discussed, we expect same-store property tax expense to remain elevated in the third quarter due to the under-accrual in the first 3 quarters of last year prior to a partial offset in the fourth quarter of this year. Our revised expectation for year-over-year property tax growth is 8% to 9.5%. As I mentioned earlier, we've received some favorable feedback from some of our smaller tax jurisdictions and in addition, some early signs from Georgia that are trending positively, but we believe it is prudent to remain cautious until better clarity exists later this year. In closing, we're pleased with what we've accomplished to date and are excited to maintain our momentum in the second half of the year. We remain committed to driving sustainable growth, serving as the premier choice in home leasing, and continuing to create long-term value for our stockholders. That concludes our prepared remarks. Operator, please open the line for questions.

Operator, Operator

Our first question comes from Michael Goldsmith of UBS.

Michael Goldsmith, Analyst

I believe in the prepared remarks, Charles, you said that you were leaning in on occupancy. Should we interpret that as you're being incrementally cautious on occupancy? Is that driving the reduction of the high end of the same-store revenue guidance and then along those lines, are you seeing or expecting potentially more move-outs from tenants looking to purchase homes?

Charles Young, President and Chief Operating Officer

Yes. This is Charles. Great question. If we kind of step back where we are, look at the quarter, Q2 was strong overall. 97.5% occupancy reflects your question that we've been able to sustain occupancy throughout the year. You saw that early in the year as we were pushing. As we got to occupancy, our blended rent growth rose every month for the last 5 months. So Q2 was strong overall. What we did see though was a little bit of moderation in a few markets that have been high-flyers for us for the last several years in Phoenix, Tampa, a little bit of Orlando and Jacksonville. As we saw that, I think that's what's reflected in some of the guide that you're seeing. That kind of normal moderation is also a part of seasonality that's coming. So as we get into the summer here, you’ll start to see that normal seasonality that happens where you'll get occupancy to come down a little bit and then pop back up later in the year. As I talk about that, it's around trying to minimize how far it goes down and be ready for it to pop back up. In terms of the renewal side, look, there's a little bit less loss to lease in the summer, and we have more going into the fall. We went out in the mid-6s for the summer, and that's where you're seeing some of that moderation show up. But as you look forward into September and specifically October, we get back over 7 in our ask. I expect that the renewals will come back up, and we'll get our occupancy back up. The business remains really strong. We're healthy overall. You look at the historical numbers, 97.5% at this time of year with a 5 blend is as strong as you've ever been outside of a pandemic season. So I’ll turn it over to Jon to talk a little bit more about guidance.

Jon Olsen, Chief Financial Officer

Thanks, Charles. Look, we took what we thought was a conservative approach in reassessing guidance this quarter. In doing that, we fine-tuned both our revenue and expense guides. We may have tried to put too fine a point on it, particularly with regard to the revenue revision. Ultimately, that was based on our desire to be as transparent as possible about what we're seeing in a couple of spots. So specifically, as Charles alluded to, Phoenix, Central Florida, where we've seen some moderation began around May and continued into June. It seems as though there's a little bit of price fatigue setting in there and some supply sensitivities following what's been a fantastic run in those markets. We don't think there's anything to be alarmed about. The markets are still quite healthy, but maybe just not quite as strong as we had expected at the beginning of the year. That said, the vast majority of our portfolio is firing on all cylinders. In particular, I'd call out Chicago, Southern California, Seattle, all of those had new lease rate growth above 5% in the second quarter. On the renewal side, South Florida saw a 9.5% renewal growth. Atlanta was at 6.3% and over half of our other markets were in the 5%. We feel really good about that. I think it's also worth noting that we do believe there's still some conservatism baked into the expense guide, particularly as we've talked about being cautious with respect to Florida and Georgia, Texas. We'll know a lot more there in the next few months. So long story short, we're not seeing any fundamental shift in the business, but we probably tried to be a bit too surgical in the revised revenue guide, and we will own that.

Operator, Operator

And our next question comes from the line of Josh Dennerlein from Bank of America.

Josh Dennerlein, Analyst

Maybe just a follow-up on some of the comments there. I appreciate the color on Phoenix and Jacksonville; maybe there's some price fatigue setting in there. Is there any kind of - I think Phoenix has been a high supply market for SFR, just building in general. Is there any kind of dynamic that's playing out from the supply front? Or is it just kind of like pricing has run and it's kind of at the upper limit of where people can afford it relative to incomes in those markets?

Charles Young, President and Chief Operating Officer

It's Charles again. Great question. Look, I think you hit on it in a few of these markets, specifically Phoenix. We mentioned this in Vegas before; there is some build-to-rent coming on, which creates some short-term temporary supply shocks. You couple that with the fatigue, I think that's what we're seeing here. Florida as well, Tampa, Orlando, Jacksonville, these are markets where there's a lot of action happening on the build-to-rent side. You couple that with the kind of moderation seasonality, a little bit of fatigue, we’ll work through it. We've done that. We've seen these kinds of ins and outs. We wanted to make sure that we were open and transparent about what we're seeing. I think it's a little bit of both. As Jon mentioned, there are other markets that are really still humming along, not as much of that kind of fatigue. That’s what happened in Chicago. Chicago never really had that run, and it's starting to catch up now. We're still pretty low on move-out to purchase a home, but you can look across the markets and see that there's a little bit more inventory starting to come in some markets. I think it creates a little bit more optionality. Again, given the supply-demand imbalance of single-family rentals in this country long-term, we're in really great shape. You just get some of these supply and fatigue items market by market, but that's why we're in multiple markets.

Operator, Operator

Our next question comes from Steve Sakwa from Evercore ISI.

Steve Sakwa, Analyst

I just wanted to maybe circle up with Dallas or Scott, just on the capital deployment, kind of what are your expectations going into the back half of the year? And where are you seeing more opportunities? And I know you talked about that 6% yield. How do you think that yield might trend looking forward over the next 12 months?

Dallas Tanner, CEO

Steve, Dallas, I'll start, and then I'll hand it to Scott, who can add maybe a little bit more detail, real-time. Look, we feel really good about our guidance in terms of being in line with what we laid out at the beginning of the year, both from an acquisitions perspective and what we were generally seeing from a yield on cost point as well. I would say, and Scott can confirm this, that the majority of our relationships are expanding. We're seeing product in a lot of new areas. What's been sort of interesting has been maybe the regional operator wanting to lean in a little bit harder and figure out if there are ways to work together. It feels like yield on costs, kind of on our numbers are in the 6 pluses. We’re looking at some creative ways to even maybe make that better over time. We're certainly having more deal flow than I'd say we've seen even in the last couple of years, good opportunities.

Scott Eisen, Chief Investment Officer

And look, Steve, it’s a good question. Thank you. We continue the same strategy that we started when I came on board about a year ago, which is to expand our relationships with both the national builders and the regional builders. They have been very open with us on their pipelines. We're obviously picking and choosing the locations and the communities that make the most sense for us. We're trying to find communities that are both proximate to where we have existing operations and existing homes and also communities that we think have the best in-built demand. Look, we continue to underwrite new homes and communities every day in our dialogue with the builders. We have probably got another 1,000-plus homes in the backlog that we're trying to see whether they make sense for us and whether we can come close to getting those under contract or not. We're looking within the same market that are the IH target markets, albeit maybe with also trying to see if we can do more in Nashville, in particular, given the new presence we have there with the third-party management contracts. As far as yields and pricing, I'd say that they are consistent with sort of what the guidance is we've been giving to the Street for the last 6 months. There were some markets where it's going to be a little lower, like a market like Denver, where it's a higher price point, and some markets where it's going to be a little higher on the cap rate. We're trying to get to the right blend across the company. But we continue to be pleased with the supply and dialogue we have with the builders. We're picking and choosing what we like. Not everything we see from them makes sense. We pick the locations we like. We do a very detailed analysis on the demographics, on the location, on the performance of our assets. We underwrite where competitive supply is, etc. We're trying to make the right decisions that are consistent with our operating strategy. But I'd say that the dialogue continues to be strong and significant, and we're trying to add more builders to our stable of partners every day.

Operator, Operator

Our next question comes from Eric Wolfe from Citigroup.

Eric Wolfe, Analyst

I think at NAREIT, renewals were looking pretty strong for June and similar to May. I was just curious whether you saw any increased pushback from tenants in June, such that the take rate was maybe a little bit lower than normal versus where you're sending things out? And if you could also just share where you're achieving renewals for July and August versus where you're sending them. I think that would be helpful context as well.

Charles Young, President and Chief Operating Officer

I'll begin with July and August. We haven't finished yet, so we won't provide the numbers for July. To respond to your question, we were in the high 5s for the first five months of the year, hitting 5.8, 5.7, and 5.9. April came in at 6.0, and May was 5.9. We observed a slight moderation in June, with a blend ending at 5.0 and 4.7. That made us cautious as we assessed the markets, and some areas, such as Phoenix and Central Florida, pulled down the numbers a bit. However, some markets remain very strong, like South Florida, which is in the 9s, among others. There are several factors at play. It's not just pushback; as we noted at NAREIT, there's a smaller loss to lease in summer because we've been maintaining that period for years. As our portfolio turns over during summer, there are fewer options available. By focusing on occupancy, we aim not to overextend ourselves, which could widen our loss to lease toward year-end. You'll see renewals start to improve, reflected in August's mid-6s for renewals, high 6s in September, and above 7 in October. Putting everything together, renewals will begin to rise, largely influenced by loss of lease and the seasonal nature of move-outs. We're still addressing some lease compliance issues and have more move-outs happening than in past years, and we’re working to maintain full occupancy. It’s a balancing act as we enhance our revenue.

Operator, Operator

Our next question comes from Austin Wurschmidt from KeyBanc.

Austin Wurschmidt, Analyst

I guess I'm still just trying to reconcile a few things a little bit of the why and the fact that turnover was down this quarter, occupancy was stable throughout the quarter. So what was it that you saw happening from a demand or notice to move-out perspective that led you to dial back the renewal rate growth 75 to 100 basis points in June relative to the increases achieved in April and May? And I'm also curious, do you think that the onboarding and sort of pricing strategy of the third-party management platform had any impact on the in-place portfolio?

Charles Young, President and Chief Operating Officer

This is Charles again. I'll take the last part again. There's really third parties had no impact here. This is really a kind of market situation. What we saw at NAREIT is in May into June, we’re still going strong. We saw some moderation in the second half of June. As we looked at July, that seasonality started to show; we typically peak on blend in June and then in July and August, you get the moderation that comes with the seasonality as people move out, and you couple that with the markets. At this time of the year, it showed up a little earlier than we expected, and we wanted to make sure that we were being transparent about what we see.

Operator, Operator

Our next question comes from Brad Heffern of RBC Capital Markets.

Brad Heffern, Analyst

I'm sure you're limited on what you can say, but can you give whatever color you can on this FTC inquiry? And then is this accrual, I guess, placeholder, or is this close to what you think the real liability might be?

Dallas Tanner, CEO

Thanks. This is Dallas. You hit it. I mean, we can't say much because it's a pending legal matter. As we disclosed in the summer of '21, we received an inquiry from the FTC requesting information about how we conduct our business generally and specifically during the COVID-19 pandemic. Since then, we've fully cooperated with the FTC. As we've previously disclosed during the first quarter, we've begun some preliminary discussions with them about a potential resolution. Those discussions have continued since that time. They've been productive, and we certainly appreciate the dialogue with them to date. As you know, GAAP requires a company to accrue for contingent liabilities when certain amounts or circumstances have been met, including consideration of a settlement offer that could be made in good faith. The amount we accrued as of the end of June reflects the amount that the company would consider paying to resolve the matter without any admission of liability and to avoid the inconvenience and expense of it continuing. We do think a potential resolution of the matter will have no material ongoing impact on our business. That being said, presently, we can't say how it will proceed going forward or how it could ultimately be resolved.

Operator, Operator

Our next question comes from Jamie Feldman from Wells Fargo.

Jamie Feldman, Analyst

Can you talk about the earnings impact from the incremental third-party homes added in the quarter? And what's in your guidance for the rest of the year?

Jon Olsen, Chief Financial Officer

Sure. Thanks. Recall at the outset of the year when we introduced guidance, we thought that there were about $0.02 of incremental AFFO contribution from the third-party business. The increase to the core FFO guide at the midpoint is reflective of finding that there's a little bit more in it with the upcoming Upward America onboarding and a couple of other smaller things, but that's really what drove the midpoint increase on core FFO.

Operator, Operator

Our next question comes from Linda Tsai from Jefferies.

Linda Tsai, Analyst

With your average stay at 3 years, do you think this is the peak given interest rates coming down? Or would you expect this to go higher by next year, given that John's Burns' comment about it being $1,200 more costly to buy versus rent?

Dallas Tanner, CEO

It's a great question. This is Dallas. Look, I think we've seen sequentially every quarter, our average length of stay continue to grow. If you look at how the business was started, we started in the West Coast markets early on in 2012. Our West Coast markets are getting close to - in some markets outside of California, almost 4 years. California is well into almost its fifth year of average length of stay. I wouldn’t expect this to be a peak at all. As you look at the housing supply-demand imbalances, we would expect that as we bring on additional services, as we create the flexibility and efficiency of the scale of the platform that this leasing lifestyle outside of a cost differential is appealing to the masses on a much greater scale. Furthermore, I would add that while this may be a tipping point or close to in terms of the bid-ask spread between ownership and cost of lease, we’ve operated in an environment where that differential was much less than it is today and continue to see that acceleration. We think now it's sort of a minimum probably with the new customer that they’re going to stay with us for 3 years and well into the fourth or fifth.

Operator, Operator

Our next question comes from Juan Sanabria from BMO Capital Markets.

Juan Sanabria, Analyst

Just a question. You mentioned higher R&M costs both on the OpEx and CapEx line. So just curious if you can give more details around that and how maybe your CapEx budget has changed. I noticed the AFFO or FAD guidance didn't change despite the change in core, so if you could remind us what we should be assuming for CapEx, that would be helpful.

Charles Young, President and Chief Operating Officer

Thank you. I'll start. This is Charles, and I'll give it to Jon. Look, as I mentioned, we saw the weather really heat up earlier than is typically seen for us and specifically relative to last year. The curve looks the same in terms of it gets hot in our markets around the start of the summer, but it started about a month early. The impact comes on the repairs and maintenance line on both the OpEx and CapEx when you're dealing with HVACs; you can get into a little higher cost around repair and replacement and doing what's right by the resident, ensuring the house is cooled. It is happening earlier and in many markets across our portfolio from Florida to Phoenix, Texas, where we are today, it just got hotter earlier, and that's the impact. I'll let Jon talk about how it impacts the guidance.

Jon Olsen, Chief Financial Officer

Thanks, Charles. Yes, Juan, I think you hit the nail on the head. If you look at the revision to the core FFO guide and the fact that we did not move AFFO, it's sort of reflective of the fact that with the peak temperatures of summer kicking in a little earlier, CapEx has been running hot. If we look at the year-over-year increases there, they're sizable on both the expense and capital side. Given where we are relative to where we expected to be, we just weren't in a position yet to make a move on the AFFO front. The teams are very focused on cost controls. Typically, what we see is when HVAC season starts, you see a big pickup in work order volume as people start turning those systems on and discovering what sort of repairs or other maintenance might be required. Once we've gotten through that, you see the volume of work orders dissipate on the back end. The shape of that curve this year looks really familiar and very comparable to last year, just shifted forward a little bit. So we're going to continue to watch that concerning CapEx and the AFFO guide, and more to come on that probably next quarter.

Operator, Operator

Our next question comes from Jesse Lederman of Zelman & Associates.

Jesse Lederman, Analyst

Nice job in the quarter. A quick one on acquisition guidance. So if I take your current spending year-to-date and incorporate roughly 700 homes you expect to be delivered from homebuilders in the second half of the year and normalize for a consistent number of existing homes that you've acquired the last couple of quarters, it looks like you'd still need to purchase about 800 homes beyond that to get to the midpoint of the $800 million. So I just wanted to ask currently, what do you view as the most likely source of these additional homes between additional deliveries from homebuilders, the existing home market, which seems to maybe have loosened up, or a portfolio acquisition?

Scott Eisen, Chief Investment Officer

Yes, great question. This is Scott. Look, in terms of our acquisition backlog and where we're focused, we continue to negotiate directly with the national and regional builders on buying the partial and full communities from them. Part of the incremental acquisitions that we would expect to get under contract between now and year-end is just continuing to buy directly from the homebuilders. We are also looking at some full community acquisitions. There are sponsors out there that have developed full communities and are ready to monetize and exit them that are either partially or fully stabilized. We look at various of these communities when they come to market, and there are a few of them out there that we're taking a hard look at. To the extent we could find something that makes sense for us and is at the right yield, we could supplement buying directly from the homebuilders by buying some full communities from some specific BTR developers.

Operator, Operator

Our next question comes from Haendel St. Juste from Mizuho.

Haendel St. Juste, Analyst

Charles, I want to go back to something you mentioned earlier about the expectation for renewal pricing to pick up into the fourth quarter, obviously, we’re going through a bit of seasonality here, but an expectation for that to rebound. Just looking back the last couple of years, that hasn't really been the case. I know COVID, obviously, the last couple of years impacted the numbers, but even before COVID. I'm curious, what gives you the confidence that you will see that recovery indeed into the fourth quarter?

Charles Young, President and Chief Operating Officer

Thanks, Haendel. Yes, I think you called it out. Coming off of COVID, there was no seasonality. The numbers, the supply-demand, what was going on with lease compliance, all that. The renewals were just high for a few years, and you didn't get the kind of up and down that we're talking or seeing in the normal seasonal curve this year. There's not as much loss to lease in the summer because historically, that portfolio has a long length of stay, and we renew and we’ve been pushing; there’s just not as much to capture. You balance that with trying to stay occupied; you don't see it. What we do see is there’s much more loss to lease as we go into the fall. We’re back to that normal seasonal curve. We’ve passed the pandemic period and are starting to see what the ask of October in the 7s looks like coming up from the mid-6s. I expect we will start seeing renewals come back. So time will tell, but this is kind of the normal historical that we’ve seen, and it's the math in terms of loss to lease and what we see in the portfolio.

Operator, Operator

Our next question comes from Daniel Tricarico from Scotia Bank.

Daniel Tricarico, Analyst

Charles or Jon, could you put some numbers around the change in growth expectations for those Florida, Phoenix and Vegas markets this year?

Charles Young, President and Chief Operating Officer

I don't know if we typically give specifics by market. I'm speaking for Jon here a little bit. We typically kind of give what we think our blend will be for the year. Personally, I had expectations watching how Florida had performed late last year and early this year that we might keep some of that momentum going. The reality is, as we talked about, there’s a bit of moderation in return to seasonality, and it happened a little earlier than we expected. That’s what's reflected in our adjustment to the guide and just being thoughtful around what we're seeing in those markets. Again, a little bit more negotiation, a little bit of short-term supply based on build-to-rent. Same thing with Phoenix. We've seen that for a little while. It’s starting to come back. But this is some of the things that you see with markets that have been flying high for a while. There is some moderation here, and we'll get back to kind of equilibrium over time.

Jon Olsen, Chief Financial Officer

Yes. I think the only thing I would add to that is to reiterate that we probably tried to get a little bit too surgical in referencing what we saw in Phoenix and some of the non-Florida markets other than South Florida. The reality is we felt comfortable that overall growth remains robust. We feel really comfortable with where the business is. As Charles mentioned, we see that loss to lease opening back up for us in the next couple of months. But we want to be really thoughtful about striking a balance between rate and occupancy because as Charles said, occupancy is much more impactful for ultimately, our guide to core revenue growth, and that is what we want to optimize. The levers we have to pull are the trade-off between rate and occupancy.

Operator, Operator

Our next question comes from Adam Kramer from Morgan Stanley.

Adam Kramer, Analyst

Just on the property taxes. Wondering which kind of the markets that came in below expectations. I think you mentioned some of the kind of non-Florida, Georgia markets. Just wondering if you could call out the specific market that came in below expectations.

Jon Olsen, Chief Financial Officer

Yes, sure. Great question, Adam. In Washington State and Minnesota, we had good guides in the first quarter. The revision to the top end of that property tax guidance range is entirely attributable to actual good guides that we recorded in the first half. Our underlying assumptions for property tax expense growth outside of those markets are unchanged, right? We haven't touched up our Florida or Georgia assumptions. As I referenced in my prepared remarks, the Georgia values that we are getting back and have gotten back have shown that assessed values are coming in below what we've incorporated in our assumptions. We don’t have millage rates or final tax bills yet, so that’s not something that we’re going to take to the bank. When I said that there were some signs that we thought supported cautious optimism, that’s what they are.

Operator, Operator

Our next question comes from Omotayo Okusanya from Deutsche Bank.

Omotayo Okusanya, Analyst

With the additional supply you're mentioning in markets like Florida, can you explain who is responsible for that construction? How much of it is actually being rolled out and how quickly can we expect that to be absorbed in these markets?

Dallas Tanner, CEO

Yes. I can't give you exactly a Florida-specific answer on absorption and new home starts in a succinct answer. Scott and I would both agree, we're out in the market. We are seeing both build-to-rent operators regionally and even nationally homebuilders that are much more willing to deal on pending pipeline. Some of that comes from the natural slowdown of the homebuyers with mortgage rates in the 7s or in the low 7s. Some BTR operators are - we've seen it, Scott, even in some of our conversations where they're thinking about where they are in the middle of a project or call it, entitlements delivery and rethinking things. There’s definitely some new supply where we’ve been able to sort of cherry-pick. It’s hard to tell you how much that is absorption, but like to emphasize what Charles and Jon said, you’ve certainly seen some supply sensitivity in Phoenix, Tampa, and Orlando. Some of that is driven by average listings; some of it's driven by new product coming into the marketplace.

Operator, Operator

Our next question comes from Anne Ken from Green Street.

Unidentified Analyst, Analyst

Do you have any thoughts on whether the lower turnover recently is signifying a larger trend going forward? And if so, how should we look at quantifying the impact to OpEx and CapEx from the lower turn?

Charles Young, President and Chief Operating Officer

I can start on the turn trend here. Prior to last year, as we were going through the bad debt lease compliance cleanup, we lowered turnover year-over-year. It got kind of abnormally low during the pandemic, just given the dynamics. Last year, it went up, and a lot of that was as we were trying to work through the lease compliance. We are still working through some of that, especially in some of our bigger markets, Atlanta, SoCal's made some good moves. We’re still dealing with Carolina, Chicago a bit. From a historical perspective, it's still a little higher than it might have been. But relative to last year, we’re starting to see that trend down. How it balances out? We still have some cleanup in markets like Atlanta and a few others. So time will tell. So far, it's trended nicely. We talked a little bit about the R&M expense, again, driven by weather. Our turn costs and other parts have come in well, mostly because we are starting to see that trend down. It’s hard to predict where it ends up, but I like our trend, and being in that low 20s is a really healthy place. It is part of what's driving our occupancy as well as coupling it with good days to re-resident; the teams are executing well. We’re proud of the teams and how they behave.

Jon Olsen, Chief Financial Officer

No, I think the only observation I would share, and I think it's a good question, is that the lease compliance move-out that we continue to see while we're seeing some moderation in the quantum of those, it's still a pretty good number, right? About 17.5% of move-outs in the second quarter were sort of lease compliance backlog cleanup. That was down about 200 basis points from the first quarter. It’s about 100 basis points lower than our average over the last 5. We're seeing reasonable turnover inclusive of some ongoing cleanup of the COVID hangover, and I would say the turn cost being down year-over-year, taking into consideration that we still had a sizable number of lease compliance move-outs, is typically in the neighborhood of 50% more costly than a standard turn. If we put it all together, we feel quite good about controlling the things that are within our control.

Operator, Operator

Our next question comes from Jade Ramani from KBW.

Jason Sabshon, Analyst

This is Jason Sabshon on for Jade. My question is, how much do rates need to come down for acquisitions to really accelerate?

Scott Eisen, Chief Investment Officer

I appreciate the question. From our viewpoint, we have a specific hurdle rate for our acquisitions and our objectives. As mentioned before, we're currently executing builder deals around the 6-plus percent range. As market conditions and interest rates fluctuate, we will assess our cost of capital and our readiness to engage in transactions. It’s challenging to specify how much our acquisition cap rates will adjust with every basis point change in treasury rates. We will evaluate our weighted average cost of capital, identify market opportunities, whether it involves purchasing from builders, acquiring portfolios, or investing in stabilized assets, and adjust our strategy accordingly as the market evolves. However, I can't provide a precise prediction on how cap rates will shift in response to interest rate changes.

Operator, Operator

Our next question comes from Jamie Feldman from Wells Fargo.

Jamie Feldman, Analyst

I want to clarify, Jon, because you've mentioned a few times that you might have approached this too carefully in your revised guidance. Are you implying that it might have been better not to adjust the guidance at all? I've had several inquiries about this, and I believe everyone is eager to understand what you mean by being too careful. You've mentioned it, and now it's up to you to explain it.

Jon Olsen, Chief Financial Officer

Yes. Well, I think that we were a bit surprised by the reaction, candidly. I think we were maybe too mechanical in how we approached the puts and takes that we saw, based on what we learned in the first half of the year. It was a little bit of a mea culpa because we weren’t trying to launch 1,000 ships and give people the sense that we see underlying weakness in our business because we don't. We wanted to acknowledge that we alluded to this at NAREIT; over the course of the balance of June, we saw a trend continuing, and that was moderation in certain markets that Charles referenced based on a little bit of price fatigue on the part of the customer. In the interest of transparency, that was what was reflected in the guide.

Operator, Operator

Our next question comes from Omotayo Okusanya from Deutsche Bank.

Omotayo Okusanya, Analyst

The pipeline, you talked about the 2,700 homes, which I think includes the 1,000 homes you just announced, how quickly do you expect that to be delivered?

Scott Eisen, Chief Investment Officer

Great question. Thank you. The way that these builder pipelines work is when we get something under contract, let's say, we’re buying 150 homes in a community from a builder. The builders deliver those homes to us, let’s say, 10 homes a month within any given community. When we talk about our backlog, we're giving visibility to a pipeline that could get - is getting delivered over the next 8 quarters or so. In our supplemental, we disclosed that we have a backlog of about 2,700 homes in the pipeline. We expect 691 of those homes to be delivered in the second half of this year, and the balance is what gets delivered over time. Each time we get a community under contract, there is a forward delivery schedule, and the builders on average tend to deliver between 8 and 10 homes a month. That's why when you look at that pipeline, you see a certain percentage for the second half and a certain half for 2015. We don’t get 150 homes delivered all at once, but it gets spread over time. From a leasing perspective, it also makes it a little more efficient for us. Instead of having a community that’s 100% vacant for 150 homes, we get 10 homes a month. We can sort of balance our leasing as they get delivered. That’s the right way to think about that pipeline, and that’s why we have that disclosure in our supplemental.

Operator, Operator

Our next question comes from Eric Wolfe from Citigroup.

Eric Wolfe, Analyst

Sorry, line dropped out for a second. So if you've already answered this, my apologies. But I was just curious what's sort of embedded in your guide for the back half of the year for blended spreads. You did, I think, 4.7% in the first half. So I was just curious what would be in the guide for the second half of the year and sort of if you could give a little bit of building blocks to how you're going to get there?

Jon Olsen, Chief Financial Officer

It's a good question, Eric. Our guidance is around core revenue growth, but we did articulate that we thought that blended rent growth would be high 4s, low 5s for the balance of the full year. As you know, we are 4.7 through the first half. The path forward from here is going to be a story of balancing rate and occupancy. We'll take as much rate as we can when we can take it and where we can take it, but we’ll be conscious of wanting to stay full. I think we have leverage available to maximize revenue and NOI. We react to the signals in the market. We try to lean in and be aggressive where we can. But at the same time, if we need to give a little to stay full and keep driving revenue and NOI contribution, that's what we'll do.

Operator, Operator

Our next question comes from Austin Wurschmidt from KeyBanc.

Austin Wurschmidt, Analyst

I appreciate you taking the follow-up as well and just kind of the thought around being transparent and just confidence in the underlying business. I guess it’s just not providing a July update may be sending a little bit of a different message. I’m trying to understand what gives you the confidence around renewal rate growth reaccelerating during what is the seasonally slower part of the year. You highlighted, I think, mid-6% to 7% plus from August to October. So maybe just help us understand what you expect to achieve relative to that asking rate because there has been some giveback on the ask versus what was achieved here within recent months.

Charles Young, President and Chief Operating Officer

Yes, this is Charles. Look, there’s always a little spread between what we ask and what we pull in, and it can be 100 basis points, could be 200 basis points. It goes back and forth. We’ve never given exact numbers on where we are, there’s still time left. But as we looked at kind of June, we’re seeing similar trends. We kind of peaked out, as I talked about on the new lease side in May and June at 3.8, 3.7. July is going to moderate slightly as we get into seasonality on the new lease side. Renewals aren’t far off from where we are in June, maybe down a little bit like we talked about because of loss of lease and the spread, but we expect that those renewals will come up over time. As we talked about, again, we went into ending the quarter at 97.5%, a 5% blend. Going into the seasonality still seeing good demand. We have a few markets that are softening, but we have some markets that are very strong. We talked about Chicago, SoCal, what we're seeing in South Florida. Even Atlanta has really strong rate growth at this point, kind of top half of where we are. We’re in a position that we want to go into the summer like this. Coming in at 97.5%, we’ll find that normal moderation of occupancy over a couple of months, and everything’s going to pop back up. We think renewals, which are 2/3 of what we do, will start to come back. The position we’re in is strong. We saw a little moderation and seasonality show up a little earlier than expected, but other than that, things remain robust. Demand is there, we're getting the leads, and we'll keep pushing toward revenue.

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 all the support. I look forward to seeing people at the call conferences. Thank you.

Operator, Operator

The conference has now concluded. You may disconnect.