Invitation Homes Inc. (NYSE:INVH) Q2 2022 Earnings Conference Call July 28, 2022 11:00 AM ET
Company Participants
Scott McLaughlin – Head, Investor Relations
Dallas Tanner – President & Chief Executive Officer
Charles Young – Chief Operating Officer
Ernie Freedman – Chief Financial Officer
Conference Call Participants
Austin Wurschmidt – KeyBanc Capital
Steve Sakwa – Evercore ISI
Nicholas Joseph – Citi
Brad Heffern – RBC Capital
Adam Kramer – Morgan Stanley
Anthony Powell – Barclays
Haendel St. Juste – Mizuho
Sam Choe – Credit Suisse
Jade Rahmani – KBW
Keegan Carl – Berenberg Capital
Tyler Batory – Oppenheimer
John Pawlowski – Green Street
Neil Malkin – Capital One
Dennis McGill – Zelman & Associates
Juan Sanabria – BMO Capital
Chandni Luthra – Goldman Sachs
Joshua Dennerlein – Bank of America
Linda Tsai – Jefferies
Michael Bilerman – Citi
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the Invitation Homes Second Quarter 2022 Earnings Conference Call. My name is Irene and I will be coordinating this event.
I would like to turn the conference over to our host Scott McLaughlin, Head of Investor Relations. Scott, please go ahead.
Scott McLaughlin
Thank you, Irene. Good morning and welcome. I’m here today from Invitation Homes with Dallas Tanner, our President and Chief Executive Officer; Charles Young, Chief Operating Officer; and Ernie Freedman, Chief Financial Officer.
During this call, we may reference our second quarter 2022 earnings release and supplemental information. This document was issued yesterday after the market closed and is available on the Investor Relations section of our website at www.invh.com.
Certain statements we make during this call may include forward-looking statements relating to the future performance of our business, financial results, liquidity and capital resources, and other nonhistorical statements, which are subject to risks and uncertainties that could cause actual outcomes or results to differ materially from those indicated in any such statements.
We describe some of these risks and uncertainties in our 2021 annual report on Form 10-K and other filings we make with the SEC from time-to-time. Invitation Homes does not update forward-looking statements and expressly disclaims any obligation to do so.
We may also discuss certain non-GAAP financial measures during the call. You can find additional information regarding these non-GAAP measures including reconciliations to the most comparable GAAP measures in yesterday’s earnings release.
With that, let me turn the call over to Dallas.
Dallas Tanner
Thanks Scott and good morning. I’m excited to speak with you today following the release of our second quarter results. The state of the business remains very healthy. Second quarter average occupancy was 98%. We set a new record with trailing 12-month turnover at only 21.3%. Lease growth continued to accelerate including a blended rate of 11.8% that was 380 basis points higher year-over-year and same-store NOI growth was 12.4%.
These strong results and our improved expectations for the full year, as provided in our revised guidance, reflect the hard work of our teams and the impact of favorable supply and demand dynamics within our markets. I’d like to discuss these in more detail during my remarks today.
First, let me begin with the hard work of our teams. We’ve been providing a high level of care to single-family residents since we started the business over 10 years ago. As you know we provide 24/7 customer service to our residents routine ProCare visits and a deep and wide bench of dedicated associates.
We believe we offer a differentiated and best-in-class experience that is unique to an industry that is still predominantly comprised of smaller mom-and-pop operators. We know that satisfied residents tend to stay with us longer and take better care of their homes.
And our customers are telling us they are very satisfied both by their comments and with their actions. We believe our high resident satisfaction ratings high resident retention and high occupancy are among the strongest indicators of our residents’ trust satisfaction and loyalty.
I, therefore, like to thank our more than 1,400 associates for delivering the best resident experience in the industry and for executing so well operationally again this past quarter.
Second, the overall shortage of housing. By some estimates, the United States is undersupplied by as many as 2 million to 4 million homes today. Much of this traces back to the Great Recession and the resulting plummet in the number of single-family housing starts. While construction has gradually improved it remains insufficient to meet existing demand and is predicted to decline again over the next few years.
Despite these supply challenges, we continue to offer a valuable choice for those who want to lease a home. This choice is broad-based and in addition to our legacy business now includes options for those preferring a lease-to-own opportunity through our investment in Pathway Homes as well as one for those desiring to lease a home that’s been recently constructed by one of our builder partners.
Third, I’d like to discuss the strong demand we continue to see for our homes. This is driven by job growth and household formation in our markets and continued migration and population growth particularly within the Sunbelt.
It’s also driven by age-based demographics. Millennials still represent the largest population segment in the United States at over 70 million people between the ages of 26 and 41 today. With our average new resident age staying really consistent at about 39 years old, we believe many of this generation are or will be attracted to the lifestyle and affordability that leasing a single-family home provides. This demand is further enhanced as a result of more recent and continuing trends, including the need for more space, such as a home office, the popularity of pets and a rise in mortgage rates that made leasing a home a more affordable option compared to homeownership in all of our markets today.
I also want to say a few things relating to ESG. We recognize the strength of our business is directly linked to the strength of our communities. In this regard, we’ve led by our core values, including those of genuine care and standout citizenship. We live out these core values in many ways, including tens of thousands of company paid hours, that our associates spend volunteering in their local communities each year; our invitation to skill up project, which encourages and supports careers in the skilled trades; and also our green spaces programs, which develop and improve outdoor community spaces and promote conservation efforts. The call to be a standout citizen extends to our corporate government practices as well, where we recently moved up in Green Street’s annual REIT governance rankings, from one of the top-rated REITs to the highest-rated REIT.
Before I wrap up, I want to address the report released this morning by the House Select Subcommittee on the coronavirus crisis. While we have not had time to fully digest the report, there are a few things I’d like to share here. First and perhaps most importantly, the report clearly states that we did not engage in practices that were unlawful, the fact that we’ve known quite well, since we work hard to follow all the laws within our markets.
Second, this report shows just a tiny fraction of the full picture of the work we did during the pandemic and will continue to do so today. We are proud of how we stepped out early to halt all evictions, to fully comprehend the impact of the pandemic and quickly moved to provide flexible payment plans for our residents; contacted residents who had fallen behind in order to help them with flexible payment options or assistance with government assistance; and overall, our team showed the kind of genuine care, we are proud to exhibit on a daily basis.
Through these efforts, we provided help to more than 33,000 residents, who are in need of extra time or financial assistance, for a total of nearly $175 million. We also helped over 10,000 residents obtain government assistance payments, totaling more than $94 million. These are the outcomes that matter.
At Invitation Homes, we believe everyone should have the choice to live in a great neighborhood. When they choose to lease from us, we’re committed to providing the highest quality resident experience possible. We’re pleased to have favorable supply and demand fundamentals as a tailwind for our business, and we work hard to offer a best-in-class resident experience, that allows our residents to live freer.
With that, I’ll pass it on to Charles, our Chief Operating Officer.
Charles Young
Thank you, Dallas. I’d like to start by thanking our associates for another extraordinary quarter during one of our busiest times of the year. It’s because of their efforts in providing a premier resident experience that we have achieved such strong operating results. I’m proud of our teams, how they’ve done in the field and earn such strong recognition and loyalty from our residents. We see this evidenced in many ways, including a record low turnover that Dallas mentioned earlier, our sustained A+ Better Business Bureau rating and certification and our average length of stay approaching three years.
I’ll now take a moment to review the details of our second quarter 2022 operating performance. Same-store core revenues grew 10.4% year-over-year, which is up from 9.4% year-over-year in the first quarter. Our year-over-year increase was primarily driven by average monthly rental rate growth of 9.4% and a 19.9% increase in other income. These top line results drove same-store NOI growth to 12.4% year-over-year in the second quarter, making four quarters in a row of double-digit same-store NOI growth. This was despite same-store core operating expenses being up 6.2% year-over-year in the second quarter.
Our largest expense increases were in property taxes, which were up 4.7% year-over-year in line with our expectations given the recent rise in property values and also on repair and maintenance expense, which was up 15.2% year-over-year and includes the impact of higher labor and material costs across the marketplace.
Next, I’ll discuss the current leasing environment. We continue to see strong demand through the second quarter into July. New lease growth rate accelerated throughout the second quarter, with June’s 17.9% result, surpassing May’s 16.5% and April’s 15.4%. Blended rate growth was 11.8% for the second quarter, up 380 basis points from last year’s strong results. As we sit today, leads are at or near three-year highs, while our application volume remains in line with the last two years. Markets with the strongest new lease growth continued to include Las Vegas and Phoenix and now also include South Florida, Tampa, Orlando as well, reflecting the continued strength of the Sunbelt.
Further with our new lease rate growth continuing to significantly exceed renewals, we remain – we maintain a sizable loss to lease that we estimate to be approximately 16% across the portfolio. Together with our historically low turnover, we believe we are well positioned for future rental growth.
While these leasing trends are notable so too are new resident incomes. Residents who moved in with us for 12 months ending June 30 had an average annual household income that exceeded $131000. This represented income-to-rent ratio of 5.3 times, which means our new residents are spending on average less than 19% of their annual income on housing.
Leasing a home has become increasingly more affordable, given rising mortgage rates and home prices. According to John Burns’ latest figures, in all 16 of our markets it is more affordable to lease a single-family home today than it is to buy, by a weighted average savings of almost $700 per month or 24%.
Our own internal data shows that the first half of this year compared to the prior year we saw a significant decrease in the number of residents moving out to buy a home. This was the case as measured by both number of move-outs to buy a home, which was down 24% from prior year and also as a percentage of total move-outs, which was down 300 basis points to 26%. And this trend of fewer move-outs to home ownership accelerated this year from the first to second quarter.
With just over half of the year behind us, I’m excited by the opportunities in the remaining part of the year to continue to improve and deliver the leasing lifestyle our residents desire. This includes a home that offers individuals and families, the additional space they need is close to work and welcomes their pets, and offers an easy leasing lifestyle that all of our associates do our best to provide each and every day.
I’ll now turn the call over to Ernie, our Chief Financial Officer.
Ernie Freedman
Thank you, Charles. Today I will discuss the following topics: balance sheet and capital markets activity, followed by our financial results for the second quarter, before wrapping up with our updated 2022 guidance. I’ll begin with our capital markets activity, starting with our recently announced $725 million unsecured term loan. The seven-year term loan matures in June 2029 and bears interest at adjusted SOFR plus 124 basis points based on our current credit ratings. This pricing includes the benefit we received from meeting certain ESG performance targets similar to our existing unsecured credit facility.
The new term loan has a delayed draw feature that allowed us the option to receive a portion of the proceeds at closing, followed by up to three additional draws over a six month period. We elected to draw $150 million of proceeds in our initial funding at closing in June and used the initial proceeds to voluntarily prepay a portion of our secured debt that was scheduled to mature in 2025.
As a reminder, at the start of the second quarter, we also closed a $600 million 10-year unsecured public bond offering. The 4.15% senior notes priced at the end of March and are scheduled to mature in April 2032. Net proceeds were also used to voluntarily prepay a portion of our secured debt that was scheduled to mature in 2025.
As a result of these capital market activities, we increased our unencumbered pool to approximately 78% of our wholly owned properties and raised the portion of our total debt structure that’s unsecured to over 66%. We have no debt coming due until 2025 and our weighted average maturity was 5.8 years at quarter end.
At the end of the second quarter, our net debt-to-EBITDA ratio was 5.9 times within our targeted range of 5.5 to six times As of the end of the second quarter we had nearly $1.8 billion of liquidity including approximately $273 million of cash along with the undrawn capacity of our credit facility and term loan.
I’ll now touch briefly on my next topic, which is our second quarter 2022 financial results. Core FFO per share increased 13.2% year-over-year to $0.42, primarily due to NOI growth. AFFO per share increased 11.9% year-over-year to $0.36. The last thing I will cover is our updated 2022 guidance. As a result of strong execution and favorable supply and demand fundamentals, we raised our full year 2022 same-store core revenue growth expectations to a range of 9% to 10%, up 100 basis points at the midpoint. While we’re coming off two years in a row with exceptionally low expense growth of 1% and 0.5% respectively, as expected inflationary headwinds have been strong this year and are predicted to remain.
As a result, we revised our full year 2022 same-store expense growth expectations of 6% to 7%, which is an increase of 50 basis points at the midpoint from prior guidance. All considered, our revised full year 2022 same-store NOI growth guidance has been increased to a range of 10% to 11.5%, up 100 basis points at the midpoint.
Regarding investment activity, considering current and anticipated market conditions for the near term, and also due to the cost of capital increasing from both the beginning of the year and more recent expectations, we now expect gross acquisitions for 2022 of approximately $1.5 billion. Through the end of the second quarter, we acquired approximately $800 million of homes on balance sheet and in our joint ventures.
With regards to dispositions, we now expect approximately $200 million of proceeds for the year, of which approximately $130 million have closed through the end of the second quarter.
Taking these changes into account, we are increasing and tightening our guidance for core FFO and AFFO to reflect our revised outlook. We now expect full year 2022 core FFO of $1.66 to $1.72 per share, which represents an increase of $0.03 per share at the midpoint from previous guidance. AFFO is now expected to be $1.41 to $1.47 per share or an increase of $0.02 per share at the midpoint.
I’ll close by echoing Dallas’ and Charles’ comments that we continue to be pleased with the business and our team’s execution. Moreover, supply and demand fundamentals remain favorable. We feel well positioned with our loss to lease and low turnover and we remain committed to delivering an exceptional revenue experience.
With that, operator, please open the line for questions.
Question-and-Answer Session
Operator
Thank you. We will now begin our question-and-answer session. [Operator Instructions] Our first question comes from Austin Wurschmidt from KeyBanc Capital. Austin, your line is open.
Austin Wurschmidt
Great. Thanks, everybody. Wanted to just hit on the guidance, first, specifically on revenue. And Ernie, within that revised guidance, I guess, how much embedded deceleration in lease rates are you baking in for the back half of the year? And do you expect the easier occupancy comps to be a modest tailwind moving forward?
Ernie Freedman
Well, two things. On the new lease side, we do expect some seasonal slowdown, but we’ll certainly have better numbers than we’ve seen historically based on where we’re at today. But we do expect to see some modest deceleration as we get to the later half in the new lease rates.
Renewal rates, we expect to see would be pretty steady. We’ve been able to achieve low-double-digits or 10%-plus renewal rates. And the way things are shaping up and where those renewal as have gone out for the next few months, we would expect to be a stay in the very high-single-digits or maybe around 10%.
Now I would say, the occupancy comp isn’t necessarily so easy. We’ve been in record high occupancy for quite a period of time. So, we’re not anticipating that we necessarily have a good guide that would certainly benefit us from the occupancy side. We’d be pleased to see things kind of in a steady state from where it was last year. And that should get us into the middle of the range of our guidance.
Austin Wurschmidt
Great. Thank you.
Operator
Our next question comes from Steve Sakwa from Evercore ICI. Steve, your line is open.
Steve Sakwa
Yeah. Great. Thanks. I was wondering if you could just maybe talk about the development opportunities and whether you see the opportunity to further expand that, just given the housing shortage that we’ve got in the US, and just how you sort of see that unfolding over the next couple of years.
Dallas Tanner
Yes. Steve, this is Dallas. Great question. It’s certainly been by design that we wanted to have a structure in place where we could work with some of the nation’s best builders to develop a pipeline that we believe over time becomes very influential. Today, we’ve got about 2,300 homes in that pipeline with our national builder partners. And I would say, your inclination is right where we probably have an even greater opportunity to bring additional supply into the fold.
The nice thing about these structures, as you know, is we’re under the hood early with our partners and we can influence things like floor plans, fit and finish standards, even sometimes community layouts, and that’s been a really advantageous position with us, but being very balance sheet-sensitive.
And so, we would expect that if there is a little bit of a slowdown, those partnership opportunities should be that much more appealing both to our partners and to us. And I would expect for us both in how we think about growth and also how we think about shaping the portfolio to have our builder structures play a major part in that over the coming years. There’s no doubt about it.
Operator
Our next question comes from Nicholas Joseph from Citi. Nicholas, your line is open.
Nicholas Joseph
Thank you. Just maybe on acquisition guidance coming down a bit. Is that more a reflection of your cost of capital or is it opportunity set? And then how are you thinking about funding that growth in the back half of the year?
Dallas Tanner
It’s a little bit of everything Nick. First of all we don’t love where our cost of capital is today to be fair on balance sheet. But we’ve done a nice job of building out our investment management business over the last couple of years, so we think that will lend itself to additional opportunities in the future.
In terms of the market and pricing changing with particular assets, it’s still a little early. I think we’ve taken a little bit of a cautious approach through summer wanting to see where supply could shake out. Because we’re certainly long investors, so it’s candidly impossible to be perfect in terms of how you buy an asset every day. But we do want to see where the — some of these submarkets start to settle out. We think there could be some even better buying opportunities towards the end of the year. So we’ve been methodical in our approach. Ernie?
Ernie Freedman
And Nick to address the question around capital. So we do anticipate the $1.5 billion and these are year-to-date numbers Nick that we’ll end up with about $700 million of balance sheet acquisitions for the year and about $800 million will be funded through our joint ventures.
With that, we do have capital available to do more whether it’s on balance sheet or on the joint ventures without raising any more capital this year without increasing leverage. We’ll actually end the year with more cash than we would have thought because we’re bringing the guidance down a little bit. So if we do see the market change in a way that’s favorable for us, we can take advantage of that with capital either in our joint ventures or some balance sheet capital. And, of course, if our cost of capital change that could also be another way.
Nicholas Joseph
Thank you.
Operator
Thank you. Our next question comes from Brad Heffern from RBC Capital. Brad, your line is open.
Brad Heffern
Hi everybody. Thanks for taking the question. Are you getting more calls from your homebuilder partners looking to offload supply? And how do you look at the attractiveness of that versus the traditional MLS channel right now?
Dallas Tanner
Every — on the one-off opportunities, most definitely over the last month it feels like a lot of our partners have been calling us because they’ve had some cancellations. I think you’ve seen some of that even in the news releases that are out there. So, yes, I would say almost call it two Fed raises ago when they moved at 75 basis points for the first time, it felt like we had a lot of cancellations in communities that we were active in and we’re able to take some advantage of that. I think wholesale programmatic things? No, I think the pipeline takes a little bit of time to develop but we’d expect that we might see more opportunities towards the latter part of the year.
Operator
Thank you. Our next question comes from Adam Kramer from Morgan Stanley. Adam, your line is open.
Adam Kramer
Hi, guys. Thanks for the question. So I think your core NOI margins in the — kind of like — right? So Western US is at 75% or so. Texas and the Midwest are a little bit below 60%. Just wondering what drives the differences in margins across those regions. Are there structural differences there? Can margins in Texas and the Midwest be raised over time? Just wondering about the, I guess, kind of the dispersion of the margins and the sustainability of those margins given the record low turnover that we have?
Ernie Freedman
Yeah. I mean it’s a good question. We certainly think across all the markets there’s going to be opportunities for us to improve margins still. But really the reason you see the wide difference across our portfolio is because of our fixed expenses. In certain states, property taxes run much higher than in other states and that’s mainly because of whether there’s an income tax in those states or not. So, for instance, in the State of Florida, in the State of Texas there’s not a personal income tax but funds are raised by local jurisdictions by having higher property taxes than maybe in other states.
The other item that has a wide dispersion across our portfolio would be the insurance costs, and so for instance any of our markets that have exposure to windstorm. So again the Florida market as well as Houston specifically and the Texas market are going to have significantly higher property insurance rates incurring costs versus other markets.
And then just the cost to operate is a third item, but that’s much less or so. And so that’s why you see markets like Phoenix that have low insurance rate and lower property taxes.
Market like California, even though it has higher insurance, because of earthquake has lower property taxes because of Prop 13. You see that wide range of NOI margins. That will certainly continue to exist in the portfolio. But overtime there’s opportunities across the portfolio to hopefully improve margins in each of our markets.
Operator
Thank you. Our next question comes from Anthony Powell from Barclays. Anthony, your line is open.
Anthony Powell
Hi. Good morning. Question on renewals versus new lease spreads they converged a bit in the past few quarters. I know you want to be prudent in terms of pushing rate on renewals. That said is there more of an opportunity to maybe be a bit more aggressive there given the overall dynamics in rental housing across your markets?
Charles Young
Yeah. As we said from the beginning — this is Charles here. We’ve been really tough on renewals. As you can see we’ve been pushing up almost every quarter every month for the last year or so, breaking into the low-10% here.
Ernie mentioned it, we’re — for September and October we’re out in the mid-10s, 10.5, 10.4. So I expect that we’re going to stay steady there. And what you’ll see is we’re kind of in really nice new lease spreads, but accelerating from Q2 to Q3.
Naturally we’ll see that stay high in Q3. But as we move into Q4 you’ll see some seasonal slowdown. And I think those spreads will start to — between the new lease and renewals start to converge a bit.
And given our loss to lease that I mentioned earlier, we think that those renewals are going to stay steady for a little while as we try to catch-up and clean up there. So we’ve been thoughtful. Low turnover is a good thing for this business.
We look at it in terms of our markets and where we think market is. But on an individual home or a submarket our local teams are really thoughtful around are we pushing the rent too much?
We’re not we don’t have any really hard caps other than where we’re required in California, but we are thoughtful about how we do that and where we go. And you can see we’re still steadily pushing that number up. So we’re going to keep finding that right balance and I think we’re putting up good numbers overall.
Operator
Thank you. Our next question comes from Haendel St. Juste from Mizuho. Haendel, your line is open.
Haendel St. Juste
Thank you, and good morning guys. I guess, Ernie, maybe you could help us understand what’s going on with the collection stats. Why have revenues, collected in the same month remained so low versus pre-COVID levels?
Your net bad debt improved I think 100 basis points to 70 basis points I believe, but there was no real movement in the better collections in the month. I understand that rental assistance has helped, but what happens when that runs out? Will bad debt move up again? So maybe you could help us understand what’s going on here. Thanks.
Ernie Freedman
Yeah. Haendel it’s certainly — it’s been a new experience for all of us dealing with collections in a pandemic period. And certainly in hindsight it’s not has been as predictable as we hope it would be. You’re right to point out, that we’ve been pretty consistent in terms of collecting current rents.
Historically we collected about 96% of our rents current and then, people were catching up for the next three and change. We got to a low 99% collection rate in the past. What we’ve seen over the last many quarters is we’ve kind of been steady around 91% 92% in terms of current rent being paid.
And then we have some volatility around the past rents being paid in terms of people catching up sometimes with the help of rental assistance sometimes without just people getting the opportunity to catch-up. And we were surprised in the first quarter with where our results came out to the bad with regards to what happened with collections.
So we had a bigger bad debt number than we expected. But then, we were surprised to the good in the second quarter offsetting it. So year-to-date we’re still a bit off from where we thought we would be. But then, over the longer six-month period it’s kind of closer to where we thought things would be.
I suspect there certainly could be some timing issues with regards to what happens to bad debt over the next period of time here at Dallas as rent assistance will drop off and new application is not being accepted. But our application is still being processed. And we received rent assistance in July and we’ll certainly likely receive some rent assistance in August.
But we are also seeing some good things happening with regards to people getting more current as we move past the pandemic period and we’ve been able to work — continue to work with folks. So it could mean there is some noise in the second half of the year around bad debt in terms of it coming out at a number that’s more like what it was for the average in the first half of the year versus what you saw in the second quarter.
And it’s kind of we’re not too far off from what we thought we said at the beginning of the year that we don’t expect to get to our historical numbers here in 2022. And sitting here today now seven, eight months into the year, we certainly feel very strongly about that statement that we will not get to our historical bad debt numbers and collection numbers before the end of this year. It will likely take some time into 2023 before we get closer to that.
Operator
Thank you. Our next question comes from Sam Choe from Credit Suisse. Sam, your line is open.
Sam Choe
Hi, guys. I just wanted to focus a little bit on the operating expense side. How much of the R&M increase was due to the seasonal turnover quarter-over-quarter versus the inflationary pressures? And then also on utilities, what led to that uptick quarter-over-quarter?
Ernie Freedman
Yes. So, Sam, we generally look at a more a year-over-year basis versus sequentially because of the seasonality of the business. Quarter-over-quarter, we always do see a big increase in repairs and maintenance costs from the first quarter to the second quarter. They stay elevated in the third quarter. And that’s really around HVAC season, air conditioning. And as we all know, it’s a pretty hot summer. So we’re certainly seeing a little bit more of that this year than we did last year.
So a little bit is that. But the majority of the year-over-year difference is around inflation. We had a couple of years in a row where our total net cost to maintain and our R&M costs were really under control in terms of modest increases.
But the environment we’ve been in now for almost 12 months really kind of started toward the tail end of the third quarter, certainly, grew in the fourth quarter and continued to grow in the first and second quarter of this year, is we’re in a pretty significant inflationary environment on the R&M side.
So that’s certainly been, I think, a challenge for a lot of companies across the board. We’re not immune to that. And you throw a hot summer on top of that as well we’re seeing the elevated R&M costs. And we do expect those to continue for the remainder of the year in our guidance.
With regards to utilities, there’s a few other items that we group in that as well. And so, I think, the bigger challenge there is a bunch of different items associated with that. And so, the utility costs are definitely up across the board. We’re responsible for utilities where the homes are vacant. And so, because of that, we’re seeing increases and we’re not immune to what’s happening in the market with regards to utility costs.
Operator
Thank you. Our next question comes from Jade Rahmani from KBW. Jade, your line is open.
Jade Rahmani
Thank you, very much. On the investment side, capital deployment side, how are you seeing the market adjust currently? Are you seeing cap rates move in any material way? Are you seeing investors slow down their purchases as they assess their cost of capital?
What are you seeing in terms of those trends? I know it will eventually be probably a big opportunity for Invitation Homes considering its institutionalization, its strong balance sheet. But in the current market what are you seeing? Thanks very much.
Dallas Tanner
Thanks, Jade. This is Dallas. We certainly feel equally as confident about our capabilities if the opportunities present themselves. I think, so far, we haven’t seen much movement in pricing. In fact, it’s still been a relatively active home buying season across the board for both buyers and sellers as well as maybe investors through summer.
I think the Case-Shiller Index through the end of March, early April, our markets is still like 23%. So we’re still seeing significant home price appreciation, albeit, is starting to moderate to some degree. So the backdrop of not having enough supply isn’t going to turn on big changes in cap rates overnight. And there still is a buyer in the marketplace even with a higher cost of mortgage, given the amount of pressure.
But with that being said, we would expect that as you get into Q3, Q4, later in the year is typically a little bit slower season, you might see some opportunities start to develop. And I think it’s really hard to forecast beyond that. We just got to see how the economy is, what’s happening with the consumer.
Builders, I would imagine, are going to start to be a little bit more careful in terms of deliveries and things like that as well. So it could lead to, like, an extended supply-constrained environment, truthfully. So that may offset any potential cap rate gains or things that you would hope that you might be able to see in the marketplace.
But feel generally pretty healthy right now. I think a quarter ago if you had asked me, Jade, about if we’re making an offer on a one-off property, we’re probably competing with eight to 10 other buyers. And in the market today it feels like you might be competing with three to four, just given where rates have gone and things like that. So that’s really kind of the current color on the ground.
Operator
Thank you. Our next question comes from Keegan Carl from Berenberg Capital. Keegan, your line is open.
Keegan Carl
Yes, guys. Thanks for taking the questions. Just when we think about same-store occupancy declining 40 basis points in the quarter, what were the main drivers of that? Are you seeing any more pushback on elevated rate increases causing move-outs?
Charles Young
No. We really haven’t. I think we’re just getting back to a normal environment. As you think about last year with COVID, and kind of where we were in that environment, we now see people starting to move again. And we’re getting back to our kind of normal kind of seasonal curve that we’ve seen. And if you look at our quarter at 98% occupancy, it’s still very good. And so I think this is just kind of getting back to a natural area. And we’re doing that, also by making sure that we’re capturing the new lease rate that’s out there, as we start to push renewals.
So I wouldn’t – I have no disappointment in our 98% occupancy. It’s very strong. You look back at 98.3% that’s not naturally where we are. We’re typically much lower than that in Q2 and Q3, because that’s the time when people move out, as they’re looking for schools for their kids and all of that. But I would pay attention to our low turnover number that’s sub-22% and 21%. It’s just really healthy.
And that just shows that, we have homes in the right areas and we’re providing the right service and people like what we’re doing, including our extra ancillary services and the like. So 98% feels really good. I would think in Q3, you might see it come down, or stay right around there maybe a little bit and then you’ll start to see it go back up in Q4. That’s the seasonal curve we typically see, and I think we’re getting back to that normal curve.
Operator
Thank you. Our next question comes from Tyler Batory from Oppenheimer. Tyler, your line is open.
Tyler Batory
Good morning. Thank you. A follow-up question on turnover. What’s included in the guide in terms of turnover for the second half of this year? Do you expect that metric to remain pretty low just given some of the challenges for affordability out there? Are you expecting it to pick up a little bit? And I guess, as we look at the guidance, if turnover continues to move lower or perhaps stays, where it is right now could that be a little bit of a tailwind to the guidance that you provided?
Ernie Freedman
Yeah. Tyler, we continue to see a month – comparing month-to-month, year-over-year that turnover is lower this year than it was last year. We continue to expect to see that for the foreseeable future, as we finish out the year. So we think we have turnover numbers will continue to stay in that low range as Charles just talked about better than we saw last year in terms of – and more favorable in terms of a little bit lower. And we’ll just have to see whether we can do better still, or it goes slightly the other direction, but we think we have a room with our range to cover that.
Operator
Thank you. Our next question comes from John Pawlowski from Green Street. John, your line is open.
John Pawlowski
Hey, thanks for time. With turnover continue going down and length of stay increasing Ernie or Charles, could you take a stab at quantifying just how much deferred kind of total cost to maintain is in the portfolio right now we might see come through the system once turnover starts to normalize?
Ernie Freedman
Yeah. John, we certainly have seen as people are staying longer in the portfolio, we’re seeing that our cost of turn is increasing and increasing a little bit faster than inflationary. To give you a number off the top of our head, here, wouldn’t be appropriate at this point. But certainly, as people have been there longer, we do expect those costs to rise a little bit. But also remember, we have our ProCare maintenance, and then when we go out to the home once not twice a year, to make sure things are in a good spot. It gives us an opportunity to make sure that things are in the place where they need to be.
So we don’t expect there to be a material change. It should put some pressure on the cost to turn that might be a little bit more than inflationary pressure but not meaningfully different.
Operator
Thank you. Our next question comes from Neil Malkin from Capital One. Neil, your line is open.
Neil Malkin
Thank you. Good morning. Charles, a question for you on the operating side. So it’s very important in terms of resident relationships and expectations that you as the regional manager, a regional team that are well versed well trained well equipped to handle a variety of problems that can occur just – again, this is someone’s home, so they probably have always a sense of urgency and emotional connection. So, can you just maybe generally talk about how you guys go about training and sort of doing like continuing education or improvement to have your regional managers, or your people-facing staff ready to handle questions making people stay as enjoyable, so it reflects well on the company? And maybe if you can give something like an average maintenance request average time to being fixed or something as just another way to kind of help us understand how all those things work? Thank you.
Charles Young
Yes. No. Great question. Look, we’re really proud of our approach in what we do in the field. We’ve been doing this for a while now. And part of what is special about us is all of the talented team members that we have in our markets that are — we break them into pods and groups that are focused on homes and those residents. And as they are either turning those homes or dealing with work orders — and when you take a step back, we do over 500,000 work orders a year.
And we survey our residents and their overall experience on every interaction, whether it’s a work order or a work order from our vendor and the like. And I think the vast majority of our residents are just really happy with what we’re doing. And in my mind they vote with their feet and their wallets 98% occupancy, or low turnover, or 79% renewal rate, the BBB things, the rating that I talked about. Google and Yelp score is over 4%. We measure them. We measure ourselves and we use that when we track as to your question on how we train and make sure that our residents — our associates are up to speed to provide a great experience for our residents.
Our brand really is about that experience. It’s the quality of the homes, the location of the homes and then how responsive we are to those residents. Do we get it right 100% of the time? No. There are some things and hundreds of moving parts in the house. In any business you’re going to have a couple of instances. But generally, we really like what we’re doing, and we continually get better and we make sure that we train our teams.
We do national things that come out of the central team, and we do things locally to make sure that our people are trained. We also have — as we bring new employees on, we’re making sure that they’re up to speed and that’s kind of an ongoing effort we need to do.
Your last question is around response time. Let’s be clear, there are multiple avenues in which someone can request a maintenance request. So it could be through our new maintenance mobile app. It could be on our website, so online portal or they can call our 24/7 call center. And when we do that there’s — the requests all go through the same criteria and we really break it down in terms of what’s an emergency request, what’s urgent and what’s kind of a normal fix that might be taken care of in a ProCare service or done or scheduled on the timing of when the resident wants to let us in. Again, we don’t have permission to enter. So we have to schedule along with the residents.
The thing I want to be clear about is, if there is an emergency we’re there within 24 hours. And that’s what really matters for us to make sure that we’re getting those and that’s about 20% of the work orders that come through. So when you take an average of how long it takes us to respond, it’s really an average between, whether it’s urgent, whether it’s in normal course, or something that may need to be coordinated.
And then the last thing I would add is, historically, about 75% of our work orders are handled on that first visit. So that’s a big thing for our residents. They want us to come in and be done. Sometimes there’s follow-up and we’ll come back. But generally, we’re responding quickly. We’re showing up and finishing that job within that first unless there is some follow-on that needs to be done. Bottom line is, we’re proud of what we’ve been doing, and we continuously improve and use that as training opportunities for our teams.
Operator
Thank you. Our next question comes from Dennis McGill from Zelman & Associates.
Dennis, your line is open.
Dennis McGill
Hi. Thank you. Ernie just going back to the bad debt. There’s a lot of different numbers, I guess, as we talk about the collections and the reserve and rental assistance and so forth. Can you maybe just peel apart the 0.7% number that we see on the P&L between what the gross reserve was in the quarter, and then the puts and takes to get us down to that the rental assistance and so forth?
Ernie Freedman
Dennis we really analyze it unfortunately on that number. Certainly, you’re going to have some netting against that as some stuff becomes due. And then we have rent assistance that comes in that goes up against it. That’s how we disclose and how we talk about it. I’d rather not confuse the issue more by throwing other metrics out there that I think we list what the bad debt is and it’s at 70 bps.
Operator
Thank you. Our next question comes from Juan Sanabria from BMO Capital. Juan, your line is open.
Juan Sanabria
Good afternoon. Just wondering if you can talk a little bit about expectations with regards to CapEx, for homes given the inflationary environment and kind of the rough numbers for remodeling now that you’re factoring in, as you buy homes as part of that normal process just to think about kind of the go-forward run rate.
Ernie Freedman
Juan, for the last few years we had had our recurring maintenance CapEx reserve, which took into account work that we did for repairs and maintenance as well as churn. For the last many years ahead of this year it was running — they ran that consistently about $1,500 per home. So again that’s the CapEx side, of our net cost to maintain. There was really no increase. We’re able to offset any inflationary increases that we had during those periods of times, granted when inflation was much lower than it was today, through productivity through being able to get better contracts in place for procurement.
And certainly lower turnover helped somewhat in that number as well. We’re certainly trending toward a higher number this year, that could be as much as 20% or more, higher than what that was in the past. So if you take the $1,500 we’re probably, trending something that’s going to be closer to $1,800 this year.
Going forward, we’ll just have to see. We do anticipate at some point inflation is going to come down. Very hard to predict when that’s going to be, we get to a more normalized environment. And certainly in a lot of cases, we’re seeing less pressure on the supply chain. And then, if we’re going to some economic uncertainty, it’s possible we’re going to see less pressure on the labor side, going forward as well.
That could help us out. So I think over the long-term, Juan, we would expect that increases would be closer to inflation, it’s hard to fight inflation with the opportunity through our scale and our size and what we do to maybe do a little bit better than that. But certainly in this environment, especially coming off a few years where things are more challenging — or excuse me more favorable to us, but the comps kind of creates a more challenging comparison for us this year. And so I think, that’s why you’re seeing the outsized growth.
Operator
Thank you. Our next question comes from Chandni Luthra from Goldman Sachs. Chandni, your line is open
Chandni Luthra
Hi, this is Chandni. Thank you for taking my question. Could you give us an update, on where things stand on the legal front? I believe your arguments are filed just last week or more recently. Could you give us an update there? And what’s the next step in that process? Thank you.
Dallas Tanner
Yes. This is Dallas. I think you’re asking about the qui tam suit that we’re dealing with in the state of California. No, real update. I’ll say that we had published I think in mid-July our response as part of the process. And now the judge has it in their hands on the motion to dismiss. And we’ve been told that these can take anywhere from three to six months, to get a ruling on that. And then what happens beyond that, is indicative of where we stand there.
Operator
Thank you. Our next question comes from Joshua Dennerlein from Bank of America. Joshua, your line is open.
Joshua Dennerlein
Hi, everyone. Just kind of curious on the expense front. I know there’s been kind of record heat waves across kind of the country. Just kind of thinking about potential for higher AC repair needs, is this something you’re seeing or something maybe you factored in?
Charles Young
Yes. No. Look, we always know in the summer as it heats up that this is going to be a higher expense period. So that’s baked into our numbers. But you can never tell, kind of how hot it’s going to be. And there are some regions this summer, that are just hotter than we’ve seen. And so that’s starting to show up in the numbers a little bit this quarter, and I expect in Q2 and we’ll expect to see through a bit of Q3. So we always know that that’s there. And we try to get out ahead of it to make sure that, we have our vendors on call. We think about any preventative maintenance, we can do with our ProCare service. But ultimately, we have to show up when there is any challenge. And we treat it always the same, where we go in and evaluate whether it’s a repair or replace, based on what’s going on. And when you have this type of heat, you just need to be ready. Our teams have been responding well. And when there are any instances, as I talked about before, from a customer service, we’re going to be really thoughtful around how we support our residents through that. So this is normal course, maybe a little hotter than normal and we’ll see how it all plays out. Hopefully, it’ll cool off a little bit.
Operator
Thank you. Our next question comes from Linda Tsai from Jefferies. Linda, your line is open.
Linda Tsai.
Thank you. In terms of the loss of the lease of 16% across the portfolio, can you discuss regional differences and how that’s trending?
Ernie Freedman
Linda, this is Ernie. We do look at that more on an overall basis. There’s no really markets that stick out too much with possibly the exception of California because of the rules associated with what we can do on the renewal side. So, we do see in California the loss to lease is bigger than in other parts of the country which would make sense. We’re certainly seeing it in markets where we’re seeing more recent higher activity like Florida.
So Florida has really taken off in the last six to eight months where some of our markets like Phoenix and Las Vegas have been great for the last 15 to 18 months. So, Florida is certainly leaning toward being more of an outperformer. And then on the weaker side would be the markets where we’re generally seeing again on a relative basis the weaker activity markets like in the Midwest, Chicago, Minneapolis a market like Houston. But California, most of our Sunbelt markets and especially Florida would have a disproportionate higher amount of loss to lease relative to the other markets.
Operator
Thank you. The next question is a follow-up question from Nicholas Joseph from Citi.
Michael Bilerman
Hey, it’s Michael Bilerman here with Nick. I just had two follow-ups. One, just Dallas, just on the lawsuit. I assume not only are you spending a lot of time, but you’re spending some money in defending the company. So maybe just outline how much capital was spent in the second quarter and if there’s any expectation at least in guidance for what you may spend the rest of the year. And then I just had a follow-up on a separate topic.
Ernie Freedman
Michael, it’s Ernie. It’s really been pretty de-minimis on the lawsuit at this point because as you’ve seen we just filed briefs. We’ve certainly done a lot of work internally to understand where we’re at, but it’s in the low tens of hundreds of thousands of dollars. It’s not a big number. We’re not going to disclose specifically what we’re spending on any specific loss or any legal activity, but it’s not something that’s material nor do we expect it to become material at this stage as we think about our guidance. And we’ll just have to see how this plays out over the next period of time and what may or may not be required depending on the judge’s ruling.
Operator
Thank you. Our next follow-up question comes from John Pawlowski from Green Street. John, your line is open.
John Pawlowski
Thanks. Just a follow-up on the qui tam complaint. I know we have to wait for the legal process to play out. But curious, Dallas in your own internal review have you seen anything that makes you change your opinion? I think you’ve voiced at the Citi conference where you feel good about the facts. And if we’re wrong and I don’t think we are if we’re wrong the financial impact would be pretty de-minimis. Is there anything you’ve seen to change that view?
Dallas Tanner
No. Nothing from our viewpoint has changed. We feel good about the facts we have. Charles and the whole operating team do a really good job of running, not only the right processes, but the right checks and balances. But again we’ve got to let the — these are the kind of the unfortunate things about being a public company. You get picked on from time to time and I’m not sure the motive’s always pure in terms of why companies have to deal with some of this stuff. But we’ll just deal with it. No change in terms of our internal view.
Operator
Thank you. Another follow-up question comes from Nicholas Joseph from Citi. Nicholas, your line is open.
Nicholas Joseph
I’m back. I guess the line gets muted after you ask. So, I prefer not to go on a whole diatrive and get into a little bit of a conversation. But two questions. One was just going off on the lawsuit is there anything that we should read into from the Washington Post article where they brought in Charlotte and Orlando effectively trying to highlight that this may not just be a California issue?
The second topic I wanted to follow up on was, Ernie on your comment about — I think you said, we don’t love our cost of capital. And just to drill in both from an equity and debt perspective obviously you did the debt earlier in the spring. Those bonds are yielding about 5% today from a debt perspective and your equity is in a low four cap. And while you’re not at the mid-40s where you peaked from a stock price perspective, you’re high 30s at this point. I’m just trying to understand your sort of — is it the debt side or the equity side? Is it both? And where does that capital that you get comfortable with in terms of issuing it for external purposes?
Charles Young
Hey, this is Charles. I’ll start on the first part of your question around the Washington Post article. To Dallas’ comments around the qui tam, look we like and understand exactly what’s going on here and we know that we do this thing the right way.
And we disagree with the Post’s premise that they laid out there. And we recognize we’re in a bit of a moment. I think, it’s time to try to, kind of, step back and think about our business. And our approach is as we — our business plan and when we target an acquisition it’s typically a light improvement that we’re going after about 10% of the purchase price $25,000 — $35,000. And we try to avoid properties that need heavy work or really require permits.
And when we look at our numbers, 80% of what we do is cosmetic. And when I say cosmetics let’s just think about that. It’s paint, flooring, it’s cleaning, it’s landscaping. Maybe some cabinet work, a little bit of countertops, some lighting interior exterior. That’s 80% of what we do and typically would not require any permits at all.
And so when we — this is our business. We’ve been doing this for a while. And we’ve kind of broken that down and looked even further. If you think about what might need permits it’s really only about 6% of our spend, which would be like a roof replacement or a large HVAC replacement or something like that. And that remaining 10% or 14% are — would be a fence or depending on the municipality would be unlikely to require a permit.
The point of all that is we know what we’re doing here. Our teams do a great job. We work with contractors locally that are licensed. They know the local laws. They — and we rely and we make sure that we hold them accountable in terms of the applicable laws and what they need to do on permit. So as we look at this we see no other kind of risk out there that’s going to make a big difference.
Ernie Freedman
Michael, it’s Ernie. To address your second part of your question with regards to our cost of capital. Yes, we look at the components very specifically. On the debt side, we were able to raise the unsecured term loan at SOFR — adjusted SOFR plus 124. So we certainly like that cost of capital.
We’ve drawn $150 million of that to pay down one of the pieces of secured debt — within the range of where we want to be from leverage right now. So if we saw a really good buying opportunity, we certainly consider using some of the unfunded proceeds that remain about $575 million do some modest buying on the balance sheet if we thought so because that certainly would be a good cost of capital if we do that. So we want to balance those two things.
That said overall, we’re not looking to really increase our leverage much from where it is if at all because we are within our range, but we certainly have the capability to use some leverage. And to your point leverage especially, what we just recently raised would certainly be favorable for that.
From an equity perspective, the stock price has certainly been extremely volatile for all the companies out there over this last period of time. It’s really hard to time something exactly around that. But we’re not so much focused on where we were at Michael. That’s history. We want to focus on what our opportunity is at hand, and compare that to how we can deploy that capital and would that be accretive for shareholders whether it’s on an NAV basis, whether it’s on an earnings basis.
When the stock is trading in the mid-30s based on how we view a valuation we would certainly say that would not be accretive. As we get closer — if it potentially increases and gets somewhere higher than where it’s been in the last many months, it’s certainly potentially more of an option for us. But then again, we want to marry that up against where we can buy, and see where cap rates as Dallas talked about earlier ultimately kind of land over this next period of time for homes whether we’re buying them from our builder partners, whether we are buying them off the MLS like we traditionally do. So we’ll certainly stay nimble.
And the nice thing is we buy homes about $350,000 to $400,000 at a time. So it certainly gives us some more optionality that other people might not have in terms of the size of capital that needs to be raised to be able to fund future growth and we’ll be prepared to do that if we think we’re in a favorable position both in terms of the buying opportunity and the capital opportunity.
Operator
Thank you. Our last follow-up question comes from Jade Rahmani from KBW. Jade, your line is open.
Jade Rahmani
Have you talked about on this call — and I apologize, if I missed it under a modest recession scenario where you think occupancy might trend? Just curious as to what you think some of the risk sensitivities are that we should be focused on. And also, if you think that rent growth would still remain positive considering the constrained supply environment? Thank you.
Dallas Tanner
Jade, this is Dallas. Good question. Look I think our business is really well positioned as a recessionary hedge quite frankly. I think we’ve seen it a little bit in turnover ratio say in the last 90 days as we’ve seen mortgage rates and a few things, maybe impact people’s thinking in a time where we would traditionally see more volatility in our leasing program because we have more people moving out to homeownership and doing some things like that. So I think we’re insulated. And one of the things I’ve loved about this business and I’ve almost been doing this now close to 20 years is how resilient SFR is over time and over distance. In a previous life, we had about 1,000 rentals I shared with some of you in Phoenix back in the last crisis of 2007 and 2008. While you get a little bit more muted on your rent growth, it’s just more of like a CPI type of number our occupancy stayed really steady through the Great Recession in that kind of 96% 96.5% range.
So I feel really good about — and by the way we didn’t have the tools the resources or the platform which Invitation Homes is now. I think we’ve developed a really good track record with our current customers. I think it’s evidenced in the retention rates and in the renewals that we’re seeing. And I also think our service levels are getting that much better. So I think in a recessionary environment, if people have got to make a decision about where they want to live and how they want to spend their own capital. We’re really in a position of strength, coupled with the fact that right now our rent to income ratio is approaching 5.3 times, the customer is spending somewhere around 17% or 18% of their monthly rent with us. So I just think we’re really well positioned. We’re in the right markets for a recessionary environment and we’ve got a product that quite frankly as Ernie pointed out people want and need in the right areas. So I think we’re well positioned for this next chapter.
Operator
Thank you. Ladies and gentlemen, currently we have no further questions. Therefore, I would like to hand back to Mr. Dallas Tanner for any closing remarks.
Dallas Tanner
We just want to thank everyone for their support of the company and we look forward to seeing you all either in person or on our next earnings call. Thank you.
Operator
Thank you. Ladies and gentlemen, this concludes today’s conference call. Thank you for being with us today. Have a lovely day ahead. You may disconnect your lines now.
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