Greetings and welcome to the Invitation Homes Third Quarter 2022 Earnings Conference Call. [Operator Instructions] As a reminder this conference is being recorded. At this time, I would like to turn the conference over to Scott McLaughlin Vice President of Investor Relations. Please go ahead.

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 third quarter 2022 earnings release and supplemental information. This document was issued yesterday after 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.

Thanks Scott and good morning. I appreciate everyone joining us today. It was a solid quarter for Invitation Homes with same-store NOI growth of 8.6% blended lease rate growth of 11.6% and average occupancy of 97.5%. Our continued low turnover high occupancy and high resident satisfaction scores remain a testament to the outstanding efforts of our associates. My thanks to them for providing another quarter of premier resident service especially those recently impacted by Hurricane Ian. I couldn't be prouder of the quick and caring response our team members provided in the wake of the storm as well as our role in helping the communities we serve. Across the country we provide housing choice and flexibility that residents desire and need, while the macro world we all live in has changed quite a bit in the past year we believe our business remains well positioned to succeed within it. Here's why. To start we believe professionally managed single-family homes for lease are an important part of the housing solution in the United States. We still face a housing supply shortage in this country by as many as several million units from some accounts. Today's elevated interest and mortgage rates haven't helped as seen by the pullback from builders in the last month's further decline in starts for single-family home. It's also harder for those thinking of buying a home in the near term. Recent reports have noted that monthly payments on new mortgages have increased by as much as 60% since the start of this year due to higher mortgage rates. According to last month's data from John Burns, this contributes to a cost of homeownership that is over 20% higher on average than leasing across Invitation Homes markets. That works out to an average difference of roughly $600 a…

Thank you, Dallas. I'd like to begin by thanking all of our teams for their commitment to providing outstanding customer service and earning the loyalty of our residents every day. I'm especially, proud of our associates in Florida and the Carolinas for their hard work and genuine care following Hurricane Ian. We're thankful to have avoided any reported injuries from the storm. Now, let's discuss the details of our third quarter operating results. Our same-store net operating income grew 8.6% year-over-year. Same-store core revenue growth was 8.3%, primarily driven by a 9.6% increase in average monthly rent, and a 15.5% increase in other income. Our same-store average occupancy was 97.5% for the third quarter. The sequential decrease from the second quarter reflects our expected return to a more normal seasonality patterns that have otherwise been absent the past two years. We also saw a return of elevated bad debt in the third quarter to 170 basis points. The quarterly rate has fluctuated this year, from as high as 190 basis points to as low as 70 basis points. Rental system payments have been a factor in the volatility, and we are seeing that many of these programs are starting to wind down. We've been proud of our role in working with residents who need help, and we'll continue to seek solutions to common ground. Overall, our portfolio remains very healthy. New resident average household incomes continue to improve climbing to over $134,000 per year, representing an average income-to-rent ratio of 5.3 times. Returning to our same-store results for the quarter. Core operating expenses increased 7.6% year-over-year, primarily driven by a 3.8% increase in fixed expenses, a 15.4% increase in repair and maintenance expense and a 15.2% increase in turnover expenses. These increases were attributable to the continued inflationary pressure --…

Thank you, Charles. Today, I will discuss the following topics: first, our balance sheet; second, our financial results for the third quarter; and third, our revised 2022 guidance. I'll begin with my first topic our balance sheet. We believe our solid investment-grade rated balance sheet positions us well as we navigate the current environment. To recap, 99% of our debt is fixed or swapped to fixed, at a weighted average interest rate of 3.6%, with approximately two-thirds of our debt being unsecured. We've also made significant progress in laddering our debt maturities with no debt due until 2025. Our net debt-to-EBITDA ratio is now 5.7 times solidly within our target range of 5.5 to six times. As of the end of the third quarter, our liquidity totaled nearly $1.9 billion through a combination of unrestricted cash and undrawn capacity on our revolving credit facility and term loan. Turning now to my second topic, our third quarter financial results. Core FFO increased 9.5% year-over-year to $0.42 per share, primarily due to an increase in NOI, driven by strong rent growth and demand for our homes. This drove an 8.2% year-over-year increase in AFFO to $0.34 per share. I'd like to point out, the following two non-recurring items included in our third quarter reconciliation of reported FFO to core FFO. The first is our estimated financial impact of Hurricane Ian. Our third quarter net casualty losses in our core FFO reconciliation include a $19 million accrual for estimated losses and damages related to the storm. Based on our prior experience, it's possible that additional damage maybe identified over the coming months, and if needed, we will adjust our estimates. Additionally, a small portion of the losses maybe recoverable through our insurance policies that provide coverage for wind, flood and business interruption, subject…

Thank you. [Operator Instructions] Our first question today comes from Derek Johnston from Deutsche Bank. Please, go ahead.

Hi, everyone. Thank you. Can you discuss the supply growth or shrinkage in SFR homes available for sale? So what is the number of homes you were tracking on the MLS or Zillow? And I'm looking for supply growth of single-family listings and more importantly the measure of change in that metric over the past few months.

Hi, Derek, this is Dallas. It's a good question. And I think it's something that, obviously, we've spent quite a bit of time looking at over the years and paying even maybe more attention to, in light of recent volatility around mortgage rates and some of the home price appreciation metrics that are out there. Today, I would say, it's so far kind of acting and behaving for the most part in our markets fairly cyclical, obviously, being impacted by the fact that mortgage rates are kind of -- have taken off to new highs. We're not seeing anything that suggests wholesale change as of yet. In fact, we had some people in our offices this week who are a bit more experts on the matter and we spent some time looking at resale supply across, call it, Invitation Homes markets. And funny enough it's pretty early, we're actually seeing a drop in new listings that you would typically see at this time of the year. And it sort of makes sense, as you start to think about where mortgage debt in the country is. Vast majority of the country has mortgage rates in place today that are quite favorable relative to where you could currently go out and price. So, as much as, I think, the near-term headlines had been that maybe we'd start to see some opportunities in terms of additional supply to be able to buy on the resale side, that just hasn't been the case thus far. So far it feels like, months of supply are doing kind of their normal cyclical creep a little bit late in the year. But when you start to really dive down and look at less than 60 days on the market, that's when you're seeing actual new listings decline in the majority of Invitation Homes markets.

Our next question comes from Nicholas Joseph from Citi. Please, go ahead.

Thank you. Maybe just on external growth, it seems like you're pulling back on acquisitions, at least, currently. And I recognize, kind of, the business was born out of a dislocation in the housing market. And so, what are you looking for in terms of reentering, or what kind of dislocation would you need to see to go in large scale on acquisition mode? And then, as you think about funding that, how do you think about JVs versus increasing leverage from here?

Hi, Nick, this is Dallas. Great question. I think -- and going back to our call that we had in May, we talked about the fact that we had started to pull back on our acquisitions in terms of kind of level setting and we wanted to get a view on what the market was going to feel like towards the back part of this year. That being said, we've seen a little bit of softening, what I would say, in kind of normalized cap rates. Today it feels like, call it, the kind of product and in the parts of the markets where we typically invest capital, those prices feel kind of in the mid-5s to kind of the, call it, 5.25 in terms of where current pricing is today. We would like to probably be measured in our approach and just making sure that we feel like -- we're not trying to call a bottom, but I think we'd want to average in over time if there are new valuations that could give us on a risk-adjusted basis a much better return profile. As we think about how we're going to grow the portfolio over time, we obviously have the use of JVs. We have the liquidity that Ernie talked about in our opening remarks. And then, obviously, we've talked over the last couple of years about the need to expand our investment management businesses, because we look at that as extremely accretive growth when, at times, maybe the REIT's cost of capital isn't as good as we'd hope it would be. And certainly, right now, we're not thrilled about where the equity prices are today. So with that being said, I think, we'll continue to use our partnerships and JVs. We'll find ways to meaningfully invest. We generate a really good amount of, what I would call, outperformance through our fee structures and our management business around those joint ventures. And we've got partners who have been extremely reliable and that are also, I think, looking at the potential environment as you mentioned, Nick, as being quite appealing. So we actually are being measured, I'd say, in the near term but cautiously, I think, preparing for ourselves for maybe some good opportunities to continue to expand, our external growth opportunities in relation to what the market allows for going forward.

Our next question is from Jeff Spector of Bank of America. Please go ahead.

Good morning. If it's okay, just two parts on the real estate taxes and assessments. I know you guys provided an update in September. I guess, first, if you can just describe the process. Ernie you said that, based on information available today that clearly the market is surprised by this update. When did this come to light? And then second, …

Yeah.

…I guess, can you just talk about the normal appeal process or historically in Florida, Georgia the likelihood or success you've seen in the past, just to give us a feel for what may happen in the coming months? Thank you.

Yeah. Sure Jeff. So with regards to real estate taxes there's, really two key components to the real estate tax bill: one is the assessment and one is millage rates. We do start to see preliminary views on assessments during the third quarter in both Florida and Georgia. The challenge is we don't see millage rate information until in some cases -- actually in most cases the earliest is mid-October. And in some cases Jeff we still haven't seen the final numbers on millage rates at this point. We won't see those to the tax bills that come out here in the next few weeks. So the challenge is in the past we've seen assessments in millage rates do some different things in terms of when assessments go up often millage rates will come down. But we don't have the full picture and the full understanding of that until we get towards the end of October. So that's why as we are out and engaging with folks in August and September we do not have clarity as to where the real estate tax bills may be going. And we want to make sure we had full information before making a final judgment on what that would be. And hence that's why we had the adjustment that we had here as we think about our fourth quarter numbers. You'll see in our numbers that they're not even reflected in the third quarter, because we didn't have all the information in our third quarter numbers, but we do have that today. With regards to appeals it really varies jurisdiction-by-jurisdiction, Jeff. It can be as quick as three to six months in some cases. In other cases it can take as many as nine to 18 months. And so we really won't have a good sense for our success rate on appeals until we're well into 2023. Most of them will have an opportunity to get a sense for where it's heading in 2023. And there will be a small handful that may take into early 2024 to have final results on the appeals. We're optimistic that we're seeing assessments as high as they went that we'll have better opportunity we've had in the past to fight. And we're certainly going to do that. We're going to appeal more than we ever have in the past especially in those two states. And we'll just have to see how that plays out.

Our next question is from Haendel St. Juste from Mizuho. Please go ahead.

Hi guys. Good morning out there. So you delivered very solid operating results in the third quarter and better stability in rents than we've seen in multifamily. But obviously cutting guidance late in here was a bit of a surprise. So I was hoping you could help us under understand a bit more what's going on at least with the same-store revenue reduction. You mentioned a few times that bad debt is taking longer to get resolved. So I'm curious, why is it taking so much longer? And is that mostly focused in a particular region perhaps California? And do you think bad debt overall can become a tailwind into next year? Thanks.

Hi Haendel, it’s Charles. Thanks for the question. Let me just step back and kind of set context around the environment. As we talked about on prior calls since early in the pandemic we were very conscious of working with residents that face the closer hardship and helped thousands of residents with flexible payment plans and the like. But in 2022, we purposely were focused in on getting back to our typical enforcement of the lease where we legally could. But what we're seeing in the process -- and it has been working is -- what we're seeing in the process though however is the states are taking -- and it varies by state they're taking two or three times longer to process non-payers through the system. And to your question, California, Southern California specifically is the most difficult area; the NorCal, Illinois, Georgia. That being said, at the same time, rental assistance has been a big part of what we've done to help our -- support our residents. And today we've supported over 12,000 residents secure rental assistance. And in 2022 alone, we've secured over $57 million to help them. And we knew that that rental assistance would slow down towards the back half of the year, but that acceleration in Q3 was a little faster than we thought it would be. The good news is, as that acceleration has come we have gotten better at being able to collect rent on normal non-rental assistance and that our residents are also seeing that. And we're starting to see them step up in terms of recognizing that kind of perverse incentive that they were waiting on the rental systems to show up that they need to pay now. So it is kind of across the board with the rental assistance but we saw the biggest slowdown in the California markets as well and that's where the biggest delay is. And we've talked about this before L.A. County and L.A. City are some of the more kind of slower to move off of the -- being able to go through the normal legal process. So we're moving through it and it's just going to be a little bit of a transition as we work through it over the next few quarters.

Our next question is from Brad Heffern at RBC Capital Markets. Please go ahead.

Hey. Thanks. Good morning, everyone. Ernie a follow-up on the property taxes. So typically when you have one elevated expense quarter you get three more of them as it sort of flows through. Obviously, you're not giving 2023 guidance. But I'm curious should we expect to see some, sort of, teens operating expense growth in the first few quarters of 2023 as this increased property tax level flows through?

No. Actually Brad I'm glad you're asking that so we can clarify it. It's going to be the opposite. We have to do a catch-up because we didn't accrue enough in the first three quarters of 2022. So we're going to have a very elevated growth rate for real estate taxes in the fourth quarter here because we upped the increase, but it's because we were under accrued in hindsight without having all the information available to us. So you're going to see a very elevated growth here in the fourth quarter. But then as we think about our year-over-year comps you'll see some -- because we've had a reset at a higher level you'll see it slightly elevated in the first part of the year. And then the fourth quarter, of course, would be an easier comp as things played out the same. But it shouldn't be at the same level that you're seeing here in the fourth quarter.

Our next question is from Juan Sanabria from BMO Capital Markets. Please go ahead.

Hi. Just going back to an earlier question with regards to some of the for-sale product coming back to the market. What's going on with that? Is that being moved to for rental? And is there maybe kind of a shadow supply in the single-try rental space that's impacting, whether it's occupancy or churn or rate that you could speak to across your portfolio and anything different geography-wise?

Juan no. Actually I'd sort of say the opposite. All things being equal I think if you look at our blended rate growth this quarter at roughly I think 11.6% we went back and looked at called pre-pandemic numbers from the third quarter of 2019 we're at like 4.5%. So we're still seeing call it accelerated demand and appreciating that in between the balance of home price appreciation and the amount of demand for product. Our occupancy still elevated in the mid kind of 97s. And so as you think about that on a kind of historical basis over the last 10 or 11 years that we run the business we're actually seeing more demand for this time of the year than we would typically see in a normal year. So I wouldn't say so. Now certainly there are other operators out there that are -- that probably have and are digesting new product as it comes to the marketplace. And some of your Sun Belt markets you might see maybe a little bit of additional more supply. But we're not seeing anything in our numbers and Charles to speak to this as well that would suggest that we're having any change in top of funnel or our ability to execute on leases. Now all things being equal this tends to be in a normal year the slower part of the year from a leasing perspective. So it is good to keep that perspective that as you get into the last quarter of the year and kind of early call it January that is where we have generally always have had our lowest leasing velocity outside of the two what I would call the 2021 pandemic year. So that -- those last two kind of fall months into the winter have not behaved as normal as what we are seeing probably a little bit more so this year. So we're not seeing any of the supply front at the end of the day that's causing us really any concern. It's just more about how can we execute the business fight the inflationary cost pressures and continue to kind of maximize efficiencies within our platform.

Our next question comes from Adam Kramer at Morgan Stanley. Please go ahead.

Hi, guys. Appreciate it. Just want to ask about bad debt. Look recognize that there may have been some kind of rental assistance impacts in the quarter, but clearly kind of less than prior quarters. So just wondering if you can kind of quantify the rental systems received in the quarter. And then relative to kind of the 170 bps of bad debt in the quarter recognizing kind of pre-COVID normal was maybe 30 bps to 40 bps what's kind of the process from getting from here to there? How long could that take? And is there a chance that we kind of just structurally or maybe due to regulatory changes that maybe we never kind of get back to that kind of pre-COVID basis points 30 to 40 basis points?

Let me walk through the first part of the question Adam with regards to the impact of rental assistance, and how that's dropped off a little bit here from the second quarter to third quarter. I'll turn it over to Charles, about how we think where we go next with bad debt. So from the second quarter to the third quarter, we saw rent assistance payments drop for us by $9 million from $23 million to $14 million. Bad debt went up $5 million from the second quarter to third quarter. So, one might have thought that if we're going to lose $9 million of rent assistance, bad debt would have been up $9 million. It's only up $5 million, and that's because of what Charles talked about. People are getting -- they understand that rent assistance, isn't going to be available for them anymore. And people are starting to get back on I'd say, what we saw pre-pandemic in terms of keeping more current with their rents. So we would expect going forward maybe a similar type thing, where you see rent assistance continue to drop off and fade away and likely be gone as we -- it may be a little bit trickles into the first quarter of 2023, but we're not counting on very much there at all. But for the last couple of quarters, we've seen better behavior in terms of people then making up for the fact, that we've had a little bit of a dropoff there.

Yes. As I said on earlier question, the flexibility that we were showing while we're waiting and supporting the residents, with rental assistance and how we've been tightening this year, we're just going to continue to do that as residents recognize that the rental assistance going away. The partial payments and all that stuff, we're going really back to where we were before. And as Ernie just mentioned, we've seen improvement in terms of how residents are paying. A lot of it is just the psychology effect of them getting back to understanding we are at our normal way in which we enforce the lease. And we'll continue to do that to execute while the rental assistance, wanes and we're starting to see good improvement and we'll continue to push. And it will be like I said, a little bit of a transition period as we work through back to normal eventually.

The next question is from Keegan Carl at Wolfe Research. Please go ahead.

Hi, guys. Thanks for the time. Maybe, just wanted to clarify some things. Just kind of curious what percentage of your leases are month-to-month rather than annual? And how does this compare to pre-pandemic levels?

Yes. So on the month-to-month side, we're at about 6% to 8% A – Ernie Freedman: Yes.

California is really where we see the majority of the month-to-month leases. Other than that, we haven't really seen any change to the number. The California numbers are increasing just because of the CPI plus 5% that are happening on the renewals. And the numbers are close to each other in terms of doing a renewal or a new lease. And sometimes, they just choose to go month-to-month. We're not seeing any change in terms of, retention or renewal rates. It's just around the month-to-month itself.

Our next question is from Chandni Luthra from Goldman Sachs. Please go ahead.

Hi. Thank you for taking my question. So you guys laid out taxes for next year, but how should we think about other line items within expenses going into 2023, so repair and maintenance utilities, insurance all of those line items, please? A – Ernie Freedman: Yes. Chandni, this is Ernie. To be clear, with real estate taxes the question was pretty specific around just what's happened with the fourth quarter here and what things may look like on a year-over-year comp basis. I want to make very clear, we didn't provide any guidance for what we thought 2020, the overall real estate taxes would be. And Chandni, we're not providing guidance at this time for any 2023 items. So unfortunately, we're not the decline to answer that.

Our next question is from Brian Spahn from Evercore ISI. Please go ahead.

Hi, Thanks. I might have missed this but could you talk about, where the loss of lease is today at the portfolio and just your expectations in capturing that today? And then also, what the earn-in looks like for next year just given the activity year-to-date? A – Ernie Freedman: Yes. Loss of lease right now is tracking to be right around 10%, where we currently stand in terms of where market rents are. And if you were to just look at where we think rents end out through the remainder of the year, and where the year is at this point relative to what our average rents were for the year, our earn-in is it will be almost right at 4%, just a hair under 4% in terms of just from a rate perspective. Of course, we'll have to take in consideration what we think is going to have with occupancy rates next year, as well as bad debt to get to a fuller picture for rental growth or revenue growth, excuse me.

Our next question is from Neil Malkin from Capital One. Please go ahead.

Thanks. Good morning. A question on the homebuilding side. I guess, you could say it's a two-parter. First, just given the reduction in mortgage applications and homebuilder sentiment, are you seeing -- are you getting more inbound calls, and what kind of momentum or capital allocation priorities? Are you kind of dedicating toward buying more of those assets homes through the homebuilder relationships? And then secondly, what's your thought about potentially buying a regional homebuilder just to kind of give yourself an embedded growth pipeline when the acquisition market isn't advantageous?

Hi. This is Dallas. Yes, we definitely would want to stay opportunistic with any opportunities that come to us vis-à-vis homebuilders. There's certainly a lot of chatter out there. I think right now, it's sort of the early stages of what are homebuilders thinking with their future pipelines and call it, active inventory and things like that. It's safe to say, we've gotten a lot of phone calls and I'm assuming a lot of our peers are getting the same phone calls. I think it doesn't really change our strategy in terms of having a large desire to continue to stay infill buy opportunities that seem extremely accretive over the long-haul and put structures in place that will protect us, call from further downside risk that could happen in the marketplace. So, I still feel like it's pretty early in terms of kind of where some of this is shaking out. I think builders have done a nice job of trying to move some of their call it current sitting inventory. They've also got some tools in their tool belt from what I'm hearing on the kind of just conversations around buying down mortgage rates and things like that. So, I imagine a lot of the near-term inventory can get taken care of through kind of the use of buying down rate. Also, obviously, selling scattered sites to operators, like ourselves, we have done some of that. I think over the last couple of years, we've picked up a couple of hundred homes that way. So, we're going to continue to invest in it. It's part of our thesis. We have over 2000 homes in our pipeline that we're doing with Pulte and other partners. And we would view this as a very opportunistic moment for us say over the next year or two where we should be able to lean in and be a good partner with not only our current partners but maybe future partners down the road. So, from our advantage point, we've seen this once before. While my current belief is that we're not going to see housing move backwards like we did in 2007 and 2008. I think it could be a great opportunity for Invitation Homes over time to make additional meaningful investments that will add to our already, what I would call industry-leading scale and performance. So, we're viewing the next, call it, a couple of years as a great opportunity for growth.

Our next question comes from Jade Rahmani from KBW. Please go ahead.

Hi. This is actually Jason Sabshon, speaking on behalf of Jade. But there's a lot of chatter about multifamily demand slowing driven by a slowdown in housing formation. Do you view single-family rental as a substitute product for multi? And do you expect the sector to behave similarly?

The short answer is, we would expect SFR to be pretty resilient in a downcycle. I think we exhibited that quite frankly over the last 2.5 years during the pandemic. We had tremendous performance in 2021. In addition to that, a couple of things you got to keep in mind. One, the customer isn't exactly the same customer. While our businesses operate very similarly, if you look at them from a P&L or a balance sheet perspective, customers are typically different. The other advantage of single-family typically has is that on a rent per square foot basis it's much more efficient with a single-family for-rent product. And then lastly, I would also add that in an opportunity where square footage may matter or people are looking at how can I have kind of call it, investing greatest use of my dollars, SFR is going to provide a better bang for your buck. So, we would expect our business to hold up pretty well given any of the downcycle some of the embedded loss at least that Ernie talked about and the overall limitations around supply. You have to take a step back in these moments and also remember, on a fundamental basis, we don't have enough housing units in this country. Specifically, if you look at our portfolio and where we're lined up, you still are going to have household formation and demographic growth that's almost 2.5 times the US average. So we would expect a lot of near and medium-term demand for our product. And then, we talked about it earlier in our call that millennial cohort of 65 million people between say the ages of 25 and 38, are just coming into our business right now. So, we're actually quite bullish in terms of, what I would call natural tailwinds that should feed into the SFR value proposition.

Our next question is from Adam Hamilton at Credit Suisse. Please go ahead.

Good morning, gentlemen. Thanks for your time. I really appreciate all the color around the bad debt the tailwinds and what you just spoke about in terms of the housing tailwinds. So I was wondering if you could provide, maybe, some specifics around the geographical concentration of some of that bad debt and whether or not you guys are seeing any price sensitivity associated with that going forward. Thanks.

Yes. This is Charles. Thanks for the question. As I mentioned, geographically, California, Southern California specifically is where we're seeing both the kind of slowdown in the rental assistance, as well as the slowdown in the court systems, where historically it might have been 60, 90 days; it's taking 180 to over 200 days. That's in Southern California. NorCal, it's 120 to 180 days. The other markets that we're seeing a little bit of a change -- again, this isn't necessarily behavior of the residents, but it's around the process to move non-payers through are in Georgia, where it used to be 90 days its 150 days-plus. And Vegas is -- surprisingly used to be very quick it's 150 days. So -- and then when we have L.A. County and L.A. City where you're still -- we're not even able to file. That's going to show up next year as we work through some of this. So there's going to be a little bit of a tail in the California markets as we deal with this. But all the markets again, as we work through the legal enforcement, we're getting there and the residents are responding as they're seeing the rental assistance go away and slow down. I'll just step back on one question that Keegan asked earlier around month-to-month. I overstated the number. We're about 3.5% month-to-month. So I just want to make sure we got the number precise.

Our next question is from Dennis McGill at Zelman & Associates. Please, go ahead.

Hi. Good morning. Thanks, guys. Ernie could you just maybe walk through a little bit more beyond property taxes? If we look at the full year guidance for expense growth back into something for fourth quarter, it seems like other categories as well would have to show some notable acceleration from where you were in the third quarter, which were already pretty elevated, unless I'm doing something wrong.

Yes. No, Dennis, we continue to have inflationary pressures on both the -- with regards to repairs and maintenance and on terms. With churn, I would call out, we also do expect turnover to be maybe slightly higher than at last year. But the bigger issue with the turnover is, as we are having some success as Charles talked about in dealing with residents who aren't paying rent, those churns tend to be more expensive when someone comes out. So you got the cost pressures as well our average cost per churn is going up a little bit more as well because of that. But you're absolutely right. It's been a challenging year for us across the board. When you take a look at what we think what's going to happen with real estate taxes, we continue to expect to see continued pressures on repairs and maintenance as well as churn. And those are the categories that are really driving, based on what our guidance is you're trying to interpolate what fourth quarter looks like, certainly the highest number we've seen all year, mainly driven by real estate taxes, but also because of some of the other issues.

Our next question is from Austin Wurschmidt from KeyBanc. Please, go ahead.

Great. Thanks. Good morning. Can you guys just remind us how you calculate loss to lease and how changes in home prices impact that calculation? I believe you said the loss to lease is 10%. And then, Dallas, I think earlier on the call you referenced a 20% average difference between the cost to own versus rent in your market. So can you just talk about the interplay of those various variables?

Yes. I would tell you, Austin, they don't really relate necessarily directly from a pricing perspective. The cost to rent and the value you get from renting relative to what it cost -- the price of home isn't how the pricing mechanism works for us with regards to how do we price our leases. We're pricing our leases based on what the market will bear. And sometimes the market bears more sometimes the market bears less. Specific then to how do we calculate our loss to lease and which is today is about 10%, is each month we price anywhere between 5% to 10% of our portfolio, because of what's coming due from a renewal and new lease perspective. It's a pretty good proxy of what we think the entire -- with the entire portfolio price, you understand we have a very homogeneous product and each house is very different. We don't go each month and say 80,000 homes in our portfolio repriced. We use that as a proxy to where market rents are and we're running that through our revenue management system. And then, we take that and on a weighted average basis then put that across our entire portfolio to calculate what we think estimated market rent is today. And again, it's not going to tie into an affordability metric for buying a house versus necessarily renting it -- renting in our markets. They're really two distinct things, but that's how we come up with our loss to lease.

Our next question is from Linda Tsai from Jefferies. Please, go ahead.

Hi. To the extent there's concern over the economy slowing, do you have a sense of how your rents compare to the market rents of single-family homes across your different markets?

We price to market. So I think we have -- in general across the very broad rental space we're at a little bit of a higher end relative to other rentals that are out there and that's pretty consistent market to market. But in terms of where the types of homes we have the size of the homes we have in terms of where they're in we're generally -- we think we're very much at the market for those. We try to do it a little bit better because we're professionally managed. But we think we're kind of in that same space. And I think importantly when you look at our affordability metrics coming in at almost $134000 for average income 5.3 income-to-rent ratios. Where I think most rental companies across the board their minimum requirements are 3:1, we feel like we're in a pretty good spot especially we're also having on average two wage earners in each of our homes.

Our next question is from Alan Peterson at Green Street. Please go ahead.

Hi, everyone. Thanks for the time. Charles, we noticed on your website that you're now offering concessions in select markets. Just a question on concession usage. Is this meant to build up occupancy from here, or is the decision to use concessions based on the view that occupancy could continue to decline if you weren't to use them?

Yes. No great question. Look we -- 97.5% ended Q3 really strong. We know that it's Q4 as Dallas mentioned that we're seeing the seasonality return to the market that wasn't there the last couple of years. And so, this is typical as we go into Q4 and it's a push for the holidays. So the -- we're running limited concessions on select homes as really a push before Thanksgiving just to secure and make sure that we keep occupancy at a healthy rate which it is or 97%-plus for this time of the year is amazing. We're seeing good demand and healthy rent growth with the numbers that I gave you. Blended rent growth with the strength of renewals are really strong. So this is really just making sure we go into the slow period highly occupied as high as we can and then set us up well for 2023.

Our next question is from Anthony Powell from Barclays. Please go ahead.

Hi. A quick question on the bad debt. I wanted to confirm that it was all due to I guess COVID-era tenants who weren't paying versus newly delinquent tenants that may be finding some current issues given the economy?

The growing kind of bad debt number is the historical those that are COVID that are working through the courts. If there is somebody who's new we're -- again we're going through our enforcement of the lease. And that process isn't creating a lot of new. But again, you end up with the courts that are slower. So there's a little bit of a mixed bag in there. But the big numbers are really based on the historical a lot of the California -- Southern California residents as we've talked about.

Our next question is from Juan Sanabria from BMO Capital Markets. Please go ahead.

Hi. I just wanted to follow up on the Pulte relationship and the relationship with other homebuilders where you're taking out a product upon completion. Is the pricing on that preset once you give them the go ahead to build or how should we think about the mechanics of kind of changing the takeout price given the higher debt cost and cost of capital in today's environment?

Well, the structure is pretty easy to follow. We basically -- any time we look at a project we decide on basically a given range of where we think we could execute on pricing with them. And then we have callers to kind of protect them and us generally speaking on both sides so that if they have cost creep then there's another discussion beyond a certain limit and we have the ability more or less to walk away. If there are savings meaning costs come down or there's some market changes there, we have another discussion. So by and large we're pretty well protected with pretty limited what I would call earnest money upfront. And a lot of these projects tend to be inflight with updates along the way. So general structures have callers to protect both Pulte and us. And then we have -- we take those deliveries in different tranches over call it longer periods of time, so that we can have market dynamics come into that as well. So all I think generally I could say very favorable from a structure perspective. And obviously as we go forward as we look at new opportunities, we're also going to spend more time looking at just call it price volatility and how it could relate to the overall markets over the next year or two. So everybody's going to be eyes wide open on new opportunities to make sure that not only are we locking in great assets, good locations but that we'll be at pricing that is either favorable to call it current market, the conditions or future. So Juan I hope that answered your question.

Our final question comes from Jade Rahmani from KBW. Please go ahead.

Hi. I just wanted to follow-up quickly. So is the shortfall in home purchase demand directly benefiting single-family rental new lease demand, or is the impact not material at this point? In other words, are you seeing notable percentage of applications from people who otherwise would be looking to buy a home?

No. Our top of funnel has felt pretty consistent in terms of call it the type of customer coming into our business today. And it lines up with things that we generally would see in normal years around this time of the year. Now that being said and I think it's important to emphasize, we're not seeing anything that's suggesting wholesale changes in the housing market right now outside of maybe new listings coming into the space and decelerating, which should support home prices in the near-term. That being said I think we're also early in where the impact of mortgage rates are and what that could mean for our business both in how we capture existing demand in the marketplace, because one could obviously argue if the cost of owning a home is 60% higher today than it was in January of earlier this year that's a net windfall to single-family rental one would assume. We're not seeing anything on the supply side that's suggesting that we're going to have a tremendous amount of inbound to put pressure on our existing supply. So we view the overall landscape as quite favorable, but we're also being realistic that it's still pretty early in terms of where mortgage rates are providing impact. But we'll obviously keep everybody updated on our thoughts as we go forward. End of Q&A:

This concludes the Q&A session. I will hand the call back to Dallas.

We appreciate everyone's participation today. We look forward to seeing everyone at upcoming conferences. Thanks.

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