Invitation Homes Inc. (INVH) Earnings Call Transcript & Summary

Hello and good morning. Thank you for joining us on this virtual NAREIT session. My name is Buck Horne. I'm the housing analyst covering homebuilding, residential REITs, that includes multifamily and single-family rental for Raymond James. And really thrilled to be able to introduce the management team from Invitation Homes. We've got the All-star team. We've got Dallas Tanner, Ernie Freedman, Charles Young, all lined up and available for us and happy to answer questions. If you want to go ahead and queue up any questions, feel free to use that Q&A link, if you can. I'll try to weave in as many as I can into this moderated session. We're going to do a few opening remarks from Dallas, and then we'll jump right into Q&A. If you haven't seen the presentation, I think the slides for the NAREIT presentation for Invitation are on their website. So you can follow along with those. We're trying to get a slide updated here for the background, but we got a few technical issues along the way. But if you don't mind, we're just going to jump right into the discussion. And with that, I'm going to hand it over to Dallas, and then we'll take it from there.

Thanks, Buck. We really appreciate you hosting this webinar, and I'd like to thank everybody for joining this morning. I'd like to start with just a couple of opening comments. And really, there's 3 takeaways I would like everyone to leave with today about Invitation Homes. First, our business continues to perform well amid the COVID-19 environment; second, that our long-term growth story is as strong as ever; and third, we enjoy unique differentiators that we believe play to our advantage today and will continue well into the future. Starting with COVID 19. The agility of our team and our platform are serving us well. The strong demand and occupancy gains that we reported for the first quarter in April have only gotten stronger in May. Same-store average occupancy increased to another record high of 97.5% in May. That's up 30 basis points from April and roughly 90 basis points year-over-year. At the same time, blended rent growth increased from 3.2% in April to 3.4% in May. We're now running with almost no concessions in the market, and our demand has remained really strong. With respect to collections, we collected rents at 97% of our historical average in May. That's up from 95% in April. We believe the strong occupancy and rent growth and rent collections we have experienced are really a testament to the quality of our product and also the resident base. We provide high-quality living space in the leasing lifestyle and it's in high demand today. Our residents came into this pandemic with 2 wage earners per house, income of roughly $110,000 that covered rent by nearly 5x. These healthy trends in our business also gave us confidence to repay $120 million of borrowing on our revolving credit facility in May. We remain in a strong liquidity position with $1.1 billion of cash and revolver capacity as of April 30 and 0 debt maturities until 2022. We expect that in the near term, we'll resume sourcing new acquisitions, and we're monitoring that closely for the right opportunities to do so. Turning to the long-term. We're as bullish as ever. There is a significant pipeline of demand in the millennial generation that will move toward single-family rental over the next decade. And the ripple effects of COVID-19 may accelerate preferences for single-family space versus denser housing options. On top of those organic industry fundamentals, there are multiple growth initiatives we will pursue to further enhance resident experience, our portfolio and its returns. These include things like external growth using the multichannel platform for acquisitions, as I mentioned, when the timing feels right, and investing in value-enhancing CapEx and growing our suite of ancillary services for residents. As we pursue these long-term growth initiatives, as we navigate the near-term COVID environment, there are 3 key differentiators that play to our advantage. The first is the location of our homes, infill parts of high-growth markets, where the population of the U.S. is going and where supply and demand are most in our favor. The second is our scale and market density. It's almost 5,000 homes per market. That's very difficult to replicate. It's a key driver of our efficiencies and intel that we get in the markets. And third is our focus, as you know, of being local and leveraging on-the-ground teams in our markets and collaborations with our central offices. These allow us to enhance control over our asset quality and the residents' experience, and it only works with the kind of scale and team that we have in place today. I think I'll stop there, and feel free to let you take the conversation wherever you'd like to lead it.

All right. Thanks, Dallas. That's a great opening segment. And congratulations on the really encouraging results, given where we stood maybe 6 to 8 weeks ago. I think these types of results still -- pretty mind-boggling that things remained as resilient, given where the unemployment is these days, but still, we'll dive into a few things. I think let's work backwards perhaps in terms of recency of events and maybe let's spend just a minute on the equity raise that the follow-on that occurred Monday night. I've got some questions already. Just curious about the timing of that. What was the decision process on why now is the right time to pull the trigger on that? And kind of where are the first considerations on how to use that additional capital now?

Sure. Great question. I'll take -- I'll offer some comments and then Ernie, if you feel like you want to add anything, feel free. First and foremost, we were looking for a moment where we could be opportunistic. There's a couple of things, going into the pandemic, we were really focused on making sure that we had all hatches battened down, that the business was running in a way that we were comfortable. And as I mentioned in my comments and as you complimented the team, we've done a really good job of making sure we could control the controllables as an organization. We were a little bit aggressive on our leasing going into the pandemic, which accelerated our occupancy to some degree. Then the normalized demand that we typically see this time of year ended up being that plus, what I would say, is even a little bit better to the upside. We've been surprised by the quality of the applications coming into the business, the conversion ratios based on the way that we source and advertise our homes to residents. And so that's all gone really well. The next question was, that I think everybody wanted to know was, how are you going to collect? And our collections have been relatively normal. We certainly are helping a few folks with forbearance and making sure that we do our part as a landlord to help people through this difficult time, but that was a bit of an unknown out there, right? I think most companies were saying, let's see how this comes in. We managed through that very well in April and May. The market was, obviously very bumpy. And we felt like knowing how we typically operate in the back half of the year, we tend to see a lot of acquisition opportunities that make sense after the home buying season slows down. So we thought it would be opportunistic, if available to us, to have a little bit more access to dry powder. We also see probably an opportunity to perhaps pay down a little bit of debt along the way. And we'll make, obviously, the best decisions possible in the use of those proceeds. But we certainly are bullish on the fact that we're seeing excellent occupancy and rate growth right now, given where we are in the pandemic. We haven't seen an inordinate amount of supply come into the marketplace, but we're certainly bullish on the fact that we tend to do some rate buying in the back half of the year. So having a little bit of extra dry powder, some flexibility and, ultimately, having that available to us was important. Now the price is good enough, not necessarily at a price where we felt like it was off the charts, but it was in a place where it felt really safe and could be accretive to shareholders. Ernie, anything you'd like to add to those comments?

No. I think you nailed it, Dallas.

All right. That's very helpful. Now, it makes a lot of sense. We'll -- actually reflectability on the balance sheet certainly seems like a good opportunity at the moment. Maybe let's dive a little bit further into the April, May collection data just a little bit. Just let me clarify. I was noticing on Slide 6 of your presentation deck, just kind of clarifying if the total collections relative to normal, certainly, I guess, increased month-over-month and it seems to be improving, but we also collected a little bit more rent in May that was kind of a rollover from April. Maybe just kind of going through some of the footnotes there, just help contextualize how that April-May rent roll occurred and kind of how things are really trending, kind of really normalize these data points?

Buck, this is Ernie. I can certainly walk through that. So before I talk about April and May, let me just kind of set the table with historically what typically happens. If typically in a month, we'll collect cash that's about 99% of our revenues that we actually reflect and book that month. And we usually carry a receivable balance that's about 3% of our revenues. So in a typical month, we'll collect 96% of the cash will come from that month's billings and 3% will be from prior months' billings. So if you look at our chart on Page 6, you can see in April, it was actually 2%, not the 3% we historically have. And you can see in May, it was 4% that was related to prior months, not that, that [ cyclical ] 3%. And then the other 1% on a historical basis usually comes through either security deposit retention or we write off typically bad debts, 40 to 50 basis points. That's how you get to our 100% number. And so it's very typical for us in the following months to collect some money from the past month. Now in the case of April, receivable balances built up a little bit because of what was happening with the pandemic, and we saw a little more performance in our May collections that reflected from April than we typically would have from a historical perspective. But we always have that kind of rollover effect. I imagine most companies do, too. I don't think anyone collects 100% of their revenues in the month, otherwise, they'd never have any accounts receivable. So specific for April and May, with April at this point, we've collected slightly over 96% of the money we billed in April. 92% of that was reflected in our April collections, and 4% of that came in May. And I would suspect we'll continue to see some April receipts show up in June and maybe a little bit later. And maybe, ultimately, we're going to have to write-off some of the April receivable balances through bad debt. We'll just have to see. And then the same thing's happening with May. As we start our June collections and it's too early, again, to really provide any real detail on June collections, we certainly are seeing some May dollars flowing through in these first couple of days of June, as we would expect.

That's perfect. That's really fair. Thank you for the explanation there. So that helps out a lot. Let's go back to just a little bit on the acquisitions and maybe also the disposition strategy in this market in terms of measuring up the timing. You've got the dry powder now to be opportunistic but I guess, technically, we're still on pause. I think you do highlight in your deck also just a variety of channels that you're trying to be opportunistic with, whether it's auctions, broker, MLS, iBuyers, all of the swords here. What are the signals you're looking for before kind of turning the acquisitions fully on again? Where do you think you can source them best from and push that on the disposition side, how are the -- what's the thought around timing of regular dispositions here to make sure we're not dilutive to the FFO?

Sure. So one of the reasons we've been able to have conviction around what's happening in the marketplace from an asset pricing perspective is we've still been active on our dispositions. Ordinary course for us is to look at the kind of bottom 2% to 3% of nonperforming assets and really pressure test and challenge ourselves in terms of our conviction around those assets and why. There's also sometimes some submarket thought that goes into that but we've still been selling through the pandemic, and we've been getting attractive pricing on our dispositions. And so we've had a high degree of confidence that the transaction place is fluid and that buyers are funded and that banks are closing as we sell homes back into the end user market. That, on the flip side, Buck, from the acquisitions perspective, to give you guys a little bit more context, as we started going into the end of February, early March, we slowly started to wind down just given kind of the uncertainty that might be in front of us, we stopped writing a lot of offers. And by the middle of March, had shut down kind of writing off new offers altogether. Now at that point, we still had about, I think, between $40 million and $50 million of properties that were in our pipeline that we were still closing. And so we continued to close those. We're still closing those today. So we haven't stopped closing on properties, we just took a temporary pause on writing new offers to kind of gauge the market and make sure there wasn't any unperceived risk headed our way. Now in terms of how we see the market today, as it's called, early June, feels about like it did pre-pandemic. Supply levels are pretty consistent with where they were going into the pandemic. What you've seen happen is you saw a temporary hiatus of people that were listing properties for sale, kind of pulling them into a temporary off-market status. You saw a ton of that in some of your southwest markets. I think people have been deliberately slow in listing properties. So maybe a little bit of some end-user sales that have been held off the market are now starting to make their way back into the summer sales environment. We're not seeing a lot of distress. I want to be really clear. And you got to be rational about the way residential distress works through the system. If there's any distress, and I think the jury will -- is still going to be out on that for a while, it will take upwards of -- a minimum probably a year to start to kind of see some of that in terms of notices of default, accelerations and some of those things at the foreclosure side of things. And given what the government's done around forbearance, some of these other things to help homeowners, which we're supportive of, I'm not so sure we're going to see a lot of distressed pricing in the near term, if ever. And the flip side of that too, Buck, is the builders, I think, have naturally kind of pulled back to some degree, on new development, infrastructure spend, things like that, just to be cautious. So I would expect, if anything, we may see a little bit of the flip side. We may see pressure on supply for the next little bit, which will help support asset pricing and keep things stable kind of over the near term. But even in this environment, we said this on our earnings call, we -- going into the pandemic, we were somewhere between $150 million and $250 million a quarter of acquisitions, and that environment kind of feels like what it is today, at similar price points, if not maybe a hair better, but we're not seeing any major dislocation yet.

Awesome. Perfect. Maybe let's segue also to a question we're getting on build for rent. And I guess, thoughts on how good those are evolving. A question from investor is, how much chatter are you seeing around supply in the build for rent sector? It seems like there's a lot more capital that's being put to work there, both from private equity. You've got competitors there, clearly, but also maybe some multifamily developers that are planning on joining the space, operating these as horizontal apartment communities to a degree. How do you guys think about that evolution of the industry? And any pros, cons or additional thoughts on how that fits?

Sure. So our first thought centers around, are people doing this in desirable locations. And that's how we hold ourselves accountable in terms of how we invest capital and manage capital for our investors. And I think you're right, Buck, there's kind of 2 buckets that this build to rent's falling in. First is kind of almost like a horizontal garden-style apartment kind of village type concept, where you're seeing these things in clusters and the like, and that's a little bit different from the single-family detached experience. And then you are seeing people, like some of our competitors, that are building out single-family detached kind of neighborhoods that are all for lease. We're not opposed to it. We've done a little bit of it in terms of buying some of it from developers historically. We've done -- we just haven't done it in large aggregation of scale. We've never taken on that risk on our balance sheet as a developer. And it's something that we've actually been appreciative of through this pandemic and through this uncertainty. We don't have any of that construction risk in our portfolio right now. Now if somebody can build it in a part of market that lines up with our kind of core values around how we want to invest capital, infill locations, major transportation corridors, great school districts, we like to look at that stuff. That's typically, from what we've seen historically, the way it weighs over in our footprint would be more of a boutique filler at that point. And we aren't seeing a lot of stuff out in the greenfield kind of brownfield development corridors that are really all that compelling to us. We still see plenty of opportunity to invest on a risk-adjusted basis in the parts of markets in neighborhoods that we're currently investing in. So that's a long way of saying that we want to look at anything if its infill. I don't know if we need to take on that balance sheet risk. We could be the best buyer of single-family homes right now in the country, and we'll continue to focus on making sure that we diversify our risk that way versus wholesale community. There's pros and cons. The pros are, you can develop a lot of new units, builder warranties, all that great stuff. The cons are, it plays out like an apartment building to some degree. All your neighbors know what the rent is, so you have some natural kind of insulators there. But there are some efficiencies that come with it. So we're supportive. We like the innovation that's going on around it, but we're just pretty convicted around our locations and making sure we keep doing the same thing over and over. And candidly, I think that the evidence is in our numbers. We've had strong occupancy, really great rate growth and kind of consistent results for the past several years.

All right. Makes sense there. Getting some questions about concerns over if the stimulus or the government benefits start to go away, how vulnerable do you think your tenant base is? Do you think there's another wave of challenges or risks ahead of you if the government benefits start to bleed off without any change in unemployment? I guess, have you done some analysis on your resident base to understand how many people are really affected by unemployment or how stable their income levels are, maybe that's a measure of exposure to certain industries or certain markets? Any additional data you can provide around that thought?

Well, maybe Ernie, take this one and talk through some of the stress testing and things we've done.

Yes, Buck, it's really hard for us to know with an absolute degree of certainty exactly where our residents reside with regards to how dependent they may or may not be on government stimulus, unemployment checks and like. One of the strong suits of our business and industry is that retention is very high, and residents stay with us on average 3, almost 4 years, and they may change jobs while they're doing that. One of the reasons why we were pretty aggressive in trying to fill occupancy is when the pandemic started was, with any new rather than moving in, of course, we have the opportunity to do a lot of due diligence on them, understand who their current employer is, if they have income coming through, and importantly, if they have to write a check for really, 2 months' worth of rent between the first month of rent and any security deposits. So we drive a high degree of confidence in the financial stability of people who are moving in at this point. So the best we can do is certainly taking a look at, as we stress the portfolio, and we've run a number of stress tests, 3 or 4x since the pandemic started, and took a look at where we can -- have comfort levels where we could have liquidity strength and things like that. Overall, we saw good collections in April before those type of things popped into play in terms of stimulus and unemployment checks. And most importantly, and maybe I'll turn it over to Charles, the team has done a wonderful job in communicating with those folks who are having some challenges, really understanding those folks specifically. So not necessarily across our 80,000 homes and our 76,000 or 77,000 residents, but really reaching out, and I'll let Charles talk about the process the team has done there. So those very few number of folks in the low thousands of numbers that we've actually had direct communication with, 1,000 or 2000. What we're doing there, understanding their needs, where their stresses are and how we can work with them.

Yes, I'll jump in quickly. Ernie, spot on. Part of what encourages us is the improvement that we saw from April to May, and the number of requests for hardship went down month-to-month. I think early on here, there's some uncertainty in the market and we wanted to provide flexibility for our residents. And [indiscernible] went off plans that went -- 1 month of most of the forbearance we gave, you paid within that month. So if you were April rent, you were paid in April, same with May. When we got to May, there was really only a handful that went beyond 1 month. And so -- and June seems to be tracking really well. So if there are some challenges, it's really a small part of our portfolio. The majority of our residents have been able to pay, pay on time, paid within the month, so we'll -- like Greg said, we can't predict it exactly, but we like the trend that we're seeing so far and it feels like we're getting back to some semblance of normal, especially if you start to see the state economies begin to open up.

Great. Awesome. Thank you for that answer. Looking at that longer-term thesis, once again, a big part of our rationale is, obviously, there's a tremendous -- been a tremendous demand effect, but even post COVID, it seems like some of the trends that were already in place, whether it was a de-urbanization or a shift to the Sun Belt or de-densification, have you seen any anecdotal or even any sort of evidence that could corroborate this surge in demand, this occupancy boost that seems to have occurred? Is that coming from people that are relocating from either an urban core area? Are you seeing any evidence of people coming from more dense markets or anything that's noticeable in the data yet? Or is it still too early to measure that effect?

So I'll jump in. This is Charles. We've certainly seen healthy demand, as Dallas said. And anecdotally, we've heard some of the stories of people wanting more space, backyard, what we offer in our single-family offerings in safe neighborhoods and good school districts. Don't have any specific data we can point to right now. We'll continue to monitor that. But anecdotally, it makes sense, and we're hearing that people, if they're going to shelter for a little while or work from home or want that extra bedroom so they can have an office, that's what we offer. And so we're seeing some of that. Again, you got to remember we're in 16 different markets, and they're different urban settings. So there may not be as many people getting out of the density that may exist in a city like Chicago or New York. But demand has been -- that secular demand has been there for us, and it seems to be picking up in this period. So anecdotally, there may be some of that there, and we'll continue to monitor.

Okay. A quick question from an investor, noticing that there is still a significant focus on the urban -- or in these 16 core markets you're in now, but would you consider smaller markets with strong economies with more affordable home prices? What are your thoughts on expanding outside of kind of the core clusters that you're in now?

Well, we love the markets we're in. I mean, we're really bullish on the markets we're in. I think it's evidenced in the demand, to Charles's point, that we've been having. And I think where you'd see us -- look, are there a couple of markets out there that are excellent markets, you'd love exposure like Salt Lake City or Austin or something like that? Sure. They're about the size of our Charlotte market but we'd have to see a path to scale, and I think where you'd probably rather see us focus and where we will focus is on driving greater density and scale in markets like Denver, Dallas and Seattle, where we can operate 3,000 to 4,000 units as efficiently as we offer 12,000 units in a market like Atlanta. So we get greater economies of scale, better margin expansion, an ability to offer a more robust suite of services to the resident as we build up that scale and get to -- as our average climbs, well beyond 5,000 homes per market. So I think that's probably, Buck, where you'd likely see us continue our focus right now.

Okay. Wonderful. Let's spend a minute maybe on value-add CapEx opportunities. Obviously, maybe also the ancillary income streams that you're working on, how those can be additive? And just a question around that, with resident retention increasing or the turnover rate decreases, does that -- how does that alter the ability to put in the value? Does that enhance the opportunity for value-add Capex? Or how does that work when you have resident retention at these levels now?

Yes, absolutely. A stickier resident that's enjoying their experience is much more likely to want to upgrade their home and do some things with us through the value-enhancing CapEx program. We put -- now for us, really, the way the value CapEx has been working so far has definitely centered around updated -- updating kitchens and bathrooms. Those are easy ones that our customers at times want to modify and upgrade and are willing to meet us there in terms of paying. Now we typically target on the value CapEx side, somewhere around an unlevered mid-teens ROE on that spend. And so we're targeting, say, like a 15 in terms of the cost that will cost us to put that in a home and the resident is willing to take that on and pay something for that upgraded service. In terms of the ancillary revenue buckets that are available to us, we see a lot of opportunity right now. We've upgraded and have started to roll out a pilot on an enhanced smart home package. That's been rolling out in the Southwest. The pandemic doesn't really set us back too much on some of our ambition around some of these ancillary services, but it certainly slows us down a little bit on the piloting perspective and fine-tuning those programs before we roll them out across the country. We've got a couple of things going on this year around filters and HVAC, maintenance programs with drop shipping of filters. That should roll out through the end of the year. And then we've got a couple of fun ones that we're working on around pests, pest control and a few other things that we think will make the experience overall much better. And we're still trying to figure out what's the best way to offer premium packages around landscaping and things like that. That's going to take a little bit more time to fine tune because when you roll this stuff out, you want to roll it out once and you want to have full stop solutions in place that makes it simple for the resident and simple for us to manage.

All right. Wonderful. We've got about 1 minute left. So I'm going to try throw this one in. It's related to a CapEx question. Just with the changes and maybe you had some -- this plays into the resident turnover issue as well. But how do you think recurring CapEx is going to play out this year? And maybe there's a dip in those numbers near-term and then maybe you have to catch up later this year. What other things are you able to do to kind of help scale and maybe mitigate any additional CapEx increases or deferred maintenance items?

Yes. Actually, CapEx probably -- you're certainly going to have timing blips this year because of our ability to get out to homes. But, typically, CapEx requirements are things that are more urgent, emergency type items. We've been servicing those types of work orders even during the pandemic. It's really our routine work orders that we delayed and those typically are more OpEx related than CapEx. So I think we're going to stay on a similar path that we've seen on for the year, and again, maybe a little [ annoyed ] between second quarter and third quarter. But for the full year, still you have to get to the place where you expect to be. We run CapEx reserves typically at about $1,500 per home. That's about half of our total cost to maintain for our home, the other half comes from the operating expense side. And we continue to see opportunities to try and manage against the inflationary costs, of course, associated with CapEx, supplies, labor and things like that. And certainly, pre-COVID, we're on an upward trajectory.

All right, guys. I think we're at our time's end. Thank you, everyone, for joining us. I apologize if I couldn't get to your question, but thank you for everybody that did queue up questions. I tried to weave in as many as I could. If you got further questions, we're happy to try to follow-up for you later, but thank you again to the team, and we'll talk soon. Be well, guys.

Thank you, Buck. Thanks, everyone.

Thanks.