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

Well, so Ric, you sort of -- if I could encapsulate what you just said, you made a short-term bullish call on anything but the cities, a longer-term medium bullish call on the cities not dying completely. So that kind of brings us to UDR, which has a little bit of everything. So Tom, how do you agree, disagree with anything that Ric just said? And what are your views on sort of that COVID similarity/difference question?

Yes. Let me take a couple of different points. One, I absolutely agree. I mean housing necessity demographics are on our side. And we've survived 8 years with a very poor immigration policy. So I think there's a lot of bright spots to look on just the demand side of the curve and the defensive nature of this asset class. When you get into the next layer of what's really critical to succeed as a business are our customers, right? I mean here we've got 8% unemployment, and you go around the horn and everybody is doing pretty damn good. So I got to think that that's going to help us and have some tailwinds over the next 2, 3 years. Yes, we'll have a recession. But if it hovers around that number, I don't think we're going to have that severe of a problem. Capital, no one's brought up capital. I mean you look at the unsecured, you look at treasuries, none of us made any money betting on where treasuries were. And yet all of us are benefiting dramatically from refinancings, our entire balance sheets, lowering our -- and extending our maturities. And the companies have done a great job and capital is readily available. And to remind you, this asset class has the GSEs there. So the whole nature of the industry and its capital structure, asset values, you don't hear things on sale, you hear active bid-ask. So capital seems to be good. And I point to, and your research has pointed out in the past, apartments, single-family homes, variety of different housing is underrepresented in most pensions and foreign capital stacks. So I think capital flow coming at us is all positive. The technology, we could have 2, 3 days just on that topic. But it's very clear this pushed us all to realize our customer was already on a self-service template in so much of their life and that we've had to adopt. And Dallas and his team has probably led farther than anybody else in this group towards that self-service model, which -- it's not a necessity anymore. It is -- you're in the business or you're out of the business, which takes me to the point that most of the public companies have the capability, the capital, the intellect and the will power to do it. We've got to realize our industry is still 90-plus percent owned by relatively small operators who will not have that willpower or that capital or capability. And so we're all going to increase our margins, make ourselves more efficient and make the customer happy. I would think that when we get a good cost of capital, we've got a lot of accretive opportunities out there just off of our operating business. And our customer is already there. I mean it's not like we have to create or to [ risk ] there. I think what's come to light that over the next 3 to 5 years, 10 years, the government intervention in our business probably only continues to grow. And that's -- in our industry, we're trying to run hard to get caught up. And while many of us have operated rent-controlled markets and done okay, we've liked it without the government in our backyard. And I think we have to realize that that's there to stay and going to be more active. We have to pick our spots and our battles, and we've got to win them. So that's how I see it. On the associates side, our employees, we're back at 50%. Ric's still virtual. I don't know where Dallas and Marguerite is. But we like having our people in the office. We like it. We think it drives our culture, it drives our training, it drives our innovation. And so that work from home is going to be more of a flex type situation in the future. I think that's part of the norm. But I don't think it's going to be 100% work from home or 100% office. It's going to meet in the middle. And I think that's going to change office space requirements. It's going to change that dynamic of that business. But all of us have -- we're -- if you're not tired of these Zoom things, I am. I like having people around talking through problems and solving them. And I just see that as getting too wound up from the work from home dragging all our customers away. They're still going to want to be close to their employer. The employers' employees still going to want to work with other people and grow. I'll stop there.

Yes. So yes, maybe Dallas, just to wrap up the topic with your perspective. But Invitation, obviously, has got a shorter history than the other companies up here. So sort of borne of the last crisis. So that was obviously an abrupt change from what existed before. But what can you tell us about sort of how you see things going that are similar or different kind of in the same vein as the others that have spoken here?

Yes. I think great comments on capital. We don't necessarily benefit from some of that GSE support, but it's pretty funny to think about it, right? I'll take a step back. So we all start kind of pushing red buttons, trying to figure everything out. Second week of March, when things are starting to really escalate, a lot of companies, out of abundance of caution, are hitting their revolvers and making sure they got cash. And everybody's kind of doing these, I would say, preventative measures. You fast forward 60 days later, we went out and did a $0.5 billion equity offering at a pretty good price that we could have, quite frankly, raised a whole lot more on. So I think we figured out pretty quickly that, a, our demand was really, really steady. So I'll talk about kind of the product and the resident first. We figured out -- and we -- Tom kind of touched on this but, like, we've been self-show and using technology, with SmartHome technology for the better part of 3 to 4 years. So a majority, a vast majority of our leasing occurs that way. I think where we've gotten better is on virtual tours, doing things that are giving people more information upfront earlier. People have obviously taken advantage of that through this process. And we're continuing to invest in ways to be better at that part of the business, making sure that we're making it as user-friendly as possible. We'll spend -- this was already part of our plan. But over the next couple of years, we're going to really enhance our resident portals in terms of how the resident kind of -- from this thing, can communicate with us on basically anything they need all the time. You shouldn't have to pick up a phone, which should also mitigate deficiencies even in our own operating structure, right, using technology, but keeping a personal touch, I think that's the balance. With associates, we've -- pre-pandemic, we were starting to move more towards flexible structures with people. And I think it lands somewhere in the middle at the end of this. I think Ric said, we've all gotten a lot smarter. And if you had said that we would operate with 98% and 99% efficiency for this long through 5 or 6 months, we probably would have said no way. And that's exactly what it's been. I mean I do worry about -- as you develop your people, there is some learning through osmosis being around -- especially for your juniors, being around senior talent and kind of getting some of that experience. And not being on the road, spending time with your teams, like that's invaluable in terms of just dinners, lunches, things that you can do, where you talk about the business, talk strategy and identify areas where you can get better. So I think some of that really hurts. I tend to agree that like we need a balance there, but I do think we all kind of land somewhere in between. And the comment on government intervention, I -- we've dealt with this in California for a while, especially around election cycles. And if anything, this pandemic, and maybe rightfully so, has given government the ability to mandate some things. And I worry that that also becomes a bit more of a new norm in some pockets. And it may impact the way we invest capital over time in business, which, at the end of the day, isn't maybe the best thing for the consumer. And so I think we've got to make sure that, collectively, as a residential space, we're taking inventory together on kind of common goals and things that matter so that we're all kind of fighting the same fires. But there is a total underlying fundamental about a lack of supply in the country generally, which will continue to create great tailwinds for residential. And we're part of the solution. I think that's the part of it that we have to help different administrations, both at the federal and state levels, understand that we're trying to provide quality housing at the end of the day, and we're doing our part. And if you make that too difficult, then you'll try to figure out other markets where it's easier to operate. [indiscernible] people away. So we've got to make sure we're striking that balance in our conversations.

Yes. It sounds about right. Well, since a couple of you brought up capital, let's just broaden that to capital allocation priorities and strategy, whether in the current environment or as we think about the next maybe 12 to 24 months. So Marguerite, I'll start with you. I know that deals in your space are maybe a little more bespoke and a little more dependent on the buyers -- I'm sorry, the sellers' willingness to transact in a way that's maybe a little bit different from kind of traditional multifamily here or what Dallas is doing. So maybe tell us what are your targets over the next 12 months? And where are you seeing deal flow and pricing and some of those elements, if you don't mind.

Sure. We don't really have targets with respect to our deal flow. It's just the timing is uncertain when deals are going to happen. They come up and then they're -- it's a quick-to-close kind of thing. You don't know they're there, but the relationships are built over time. There hasn't been very much new supply. If -- more than a handful of new properties built every year. So that makes it that our target list for manufactured communities and RV parks has been the same for 20-plus years. So we know all the assets we want to buy. It's just a matter of when they're going to -- when the owners are ready to become sellers. So we spend a lot of time working with them, trying to figure out what's the right timing. And then when they're ready, we're there for them to do a transaction. So that's a high priority for us on a capital allocation, and we continue to pursue transactions as they come up, either portfolios or one-off transactions, both on the MH side and the RV. And we're really -- between MH and RV, we're indifferent as long as it's in the locations where we want to operate, which is essentially coastal locations in and around major metros. So that's where our capital allocation will kind of focus in on acquisitions. And then we also have development of our existing land that's adjacent to our properties. So we develop about 1,000 sites a year, new sites a year. And so we'll spend our capital there, and we're able to start getting revenue on that almost immediately. Once the site is developed, a home is put on, and we're immediately getting rent on that. So that's a very good transaction for us to do, and we do that in the areas where it makes sense. At any given point in time, we have between 14 to 18 projects going at a time just to get new sites developed. So those are the kind of the order we'll have, first the acquisitions and then the development. And then, of course, just our traditional CapEx and recurring CapEx and upgrade CapEx.

And remind me of the yields that you're getting on those development projects and how that squares with your cost of capital, which is obviously excellent.

Right. Sure. The cost of capital is excellent. But on the new developments, we -- it costs between $25,000 to $35,000 to develop a site, and we immediately start getting about $6,000 to $7,000 of revenue. And there's not too much of an expense that falls -- so it pretty much all falls to the bottom line. So really high returns. And so it's a matter of us getting in there and developing. In some instances, we have some hurdles to develop, just getting the proper permitting to do the development. But once we get the permits, and we're ready to go, we start developing and then immediately start getting the revenue.

It sounds like an awful business.

Yes, it's awful.

Ric and Tom, just on multifamily. I mean, correct me if I'm wrong, but at least some of the conversations we're having with your private peers and with brokers, right, you could make the case that asset values where they're transacting today in multifamily in a lot of cases may not be too, too far off of pre-COVID pricing. But how the heck do you get there if the rent roll is down, 10%, 15%? Again, it depends on where you are. And the answer always seems to come back to interest rates and capital flows keeping cap rates and IRRs in check versus pre-COVID. So just what are you guys seeing and potentially working on? What's in your pipeline? And how has any of that changed in the last 6 months? So Ric, I'll start with you.

Okay. So bottom line is, I think what you just said is accurate that there really has been no major price change in the private market in terms of acquisitions. Now I'll say that with a caveat in that there hasn't been a lot of transactions done either. So you do have a big pipeline of merchant builder product that has to go from point A to point B and needs to ultimately be sold to long-term hands. So for now, clearly, cap rates have actually compressed, not expanded. And people are underwriting, making the general assumption that multifamily fundamentals are going to get really good in the next couple of years. That's the only way you can make that math work unless you are assuming really low IRRs and hurdle rates there. So the acquisition market is pretty tough right now because there's just not a lot of supply out there, but also things that are getting done are pretty much at the same price in the past. In terms of -- so what we've been looking at, though, if you look at development starts, for example, where the pressure in the market is today -- I see Toomey smiling about this because he's out there working on this stuff. So if you look at development peak -- starts peaked at about 400,000 units. And we think -- if you look at Ron Whitten's numbers, he thinks they're going to fall below 200,000 units in the next 12 to 18 months. And what's happening is, is that the real governor on development today is construction loans. If you go to money center banks, Wells Fargo, JPMorgan, U.S. Bank, these banks are out of the construction loan business, except for really strong top-tier clients that sort of demand them to make loans or command them to make loans and they will. And so -- but the bottom line is the larger, broader part of the development market is just out -- is not getting their development deals done. Banks don't want to syndicate with each other. If you have a loan more than $75 million, it's not getting done. We have an ongoing bet, I know Toomey does this as well with his merchant builder friends, is we have this over and under on Ron Whitten's projection for national multifamily starts, and everybody has taken the under right now. And maybe that's a bad sign. But when I talk to people like Ken Valach at Trammell Crow, and he says, yes, man, I'm having to go talk to banks in Arkansas and banks in Alabama and banks -- these small banks that I never had to talk to before. So that is, I think, an indicator that development is going to be an interesting area. And so what we're going to be focused on the most is getting our developments moving as fast as we possibly can because if that actually happens and you do have this massive drop in starts, and then you have some semblance of recovery in 2022, 2023, 2024, you're going to have the same kind of situation that happened in multifamily in the last cycle, which was you had a hole in the market that was created by the financial crisis, and we actually had a shortage of multifamily properties coming out of the Great Recession. And when you look at what happened, we had the best growth years in our business, everyone did, from 2010 -- end of 2010 through 2014. And I think you're going to have the same kind of situation. That's why I think people are going to underwrite a big blip in rent growth in 2020 -- maybe 2022, 2023, 2024, and that's how they're going to justify low cap rates, low interest rates, buying assets today for that uptick that you're going to see in 2022 through 2024. So we're going to focus on development to the extent we can help some merchant builders out of their development, so they can retool. We'll do some acquisitions as well. Right now, we have $0.5 billion in cash sitting on our balance sheet and $900 million unsecured line of credit unfunded. And we have lots of capacity in our debt position because we're the lowest leverage company in multifamily land. And so with that said, it will be interesting to see how it all plays. There are merchant builders who are dropping deals now, or are trying to go to Tom and get him to finance their deals. I'm sure you're spending a lot of time on that, Tom, with your people there.

Affirmative.

And we've had some other of our REIT brethren who have -- we've been working on taking merchant builders out of their projects they can't build because they can't get construction loans. We got some of our coastal competitors invading our other markets like Denver and South Florida and others where they never would have gone there before, but now they are. And so I think that's where the opportunity is going to be as in development, some acquisitions. But when you think about the wall of capital that's out there, it's just so huge that once multifamily properties -- I don't see that you're going to have some -- there's clearly not going to be fire sales or anything like that. And with rates the way they are with the demand for housing, you could make a great argument that multifamily is going to do really well over the next 5 years. I don't think it's -- you're just going to have a lot of competition for acquisitions. Toomey, you see any other way?

No. I think you got it right. I mean it's a low volume market right now. You've got a lot of capital stacked up. Nobody's figured out what the NOI number is. But if you take a look over the last 8 years, cap rates compressed across all the markets. That's not right. The value we were all paying, didn't matter if it was Downtown Manhattan, L.A. or [indiscernible]. The truth is, on the backside of this, the NOI trajectories will start to become more transparent as you move into '21 and '22, and that cap rate compression is going to play out and spread out. So I don't think the market is going to be eager to be buying a whole lot, right, in this window of time. Because you just don't have sellers that have any reason to sell and they can hang on for the NOI recovery and there's cheap debt and capital. Ric's right on the developer capital program. LPs have pulled back. Lenders -- construction lending is extremely tight if not impossible to get over 55%. So there's an opportunity in the marketplace. You know our program. We're in it for 4 to 5 years with a kicker on the backside and an option to buy. So we're betting that we can stack up enough options on the backside of this that we can get assets maybe below retail price with some of that participation. So we're trying to build back that. But our first priority on capital allocation, back to your question, work on the technology side. Get as far ahead of that as we can. The payback is enormous, just push that. Second, developer capital program. We'll buy some dirt. We'll -- not a whole lot. I mean our development activity is about half of what they were at last cycle peak. Can't see growing that a whole lot. Sale-wise, we've announced and closed $150 million of sales. Those are generally 1031 money. We get a lot of inbound inquiries about assets and where people are repositioning because they're selling them 1031s. But Rich, between now and the end of the year, you've got a market that's going to be tight, given the election, given the tax unknowns. And I suspect after the first week of November, you will have a rash of opportunities that people will be there, and we'll see how that plays out. But it's the typical election cycle unknowns that are challenging the marketplace to transact heavily.

I think to Tom's point on cap rate compression across the country, I think you're going to -- that's going to change, but not like in the next year or 2. It will change maybe when you see trajectory of revenue. If your trajectory is not really great in the recovery, then you might have a widening of cap rates. But to give you a sense, what we're going to do is a lot of -- and I hope we have this opportunity, and I think we will, which is, in the last cycle, we sold $3 billion worth of real estate, average age of 23 years. We bought $2.1 billion, average age of 4 years. And we built $3 billion, average years of 0 year, right? And the negative spread between the sell and the buy was, I mean, 26 or 27 basis points negative spread. And if you would have told me that I would have sold 23-year old assets in Vegas and redeveloped and repositioned those assets in other markets like Atlanta and D.C. at a very small negative spread with much better growth trajectories long term, I would have said you're nuts. And I think that could be a really good opportunity in the future as well. That's -- it sounds like what Tom is thinking about, too, with his dispositions in the future.

I agree with Ric in that we had dispositions, and we looked at the exchange into out of the Midwest and into Florida and the trade was tremendous. It was unbelievable. So I see that continuing.

Yes. Perfect. And I want to give Dallas a chance to chime in on capital allocation. I know that in your presentation, your acquisition pace has ramped up a little bit. Tell us kind of what you're seeing, what you're buying and the spread there between the sort of the cap rate and where you see Invitation's cost of capital?

Yes. I mean we can -- we're pretty active, right? I mean we kind of sit in this interesting universe between people that want to buy home, sell homes and then people like us that want to lease homes. And so it will be something like 6 million transactions on the single-family side this year alone. We're running it right now kind of pre-pandemic levels of about $200 million a quarter in growth. And I think I could see probably a way to see that increase even in a tight supply market just given that we're pretty active. And we're seeing things, seeing some smaller kind of packaged deals 200, 300 units here or there. But it's going to be a lot of onesie-twosies for SFR players right now because there's so much new entrants coming into the market and good names, too. I mean my old dancing partner just got back in the space with Blackstone taking a position with Tricon and Brookfield's in the game now. There's really good names that are out trying to build scale. And so I think the way we look at it is we can -- we have a fairly decent cost of capital if we wanted to go raise more equity. Debt levels when you can lever is pretty cheap. I mean securitizations right now are pricing really, really cheap. And so there's -- if you're a borrower and you're building a portfolio today, it's probably pretty easy to leg into pretty competitive mid-teens type returns from an IRR perspective. Can you get the product is the question. And the builders are as active as they've ever been, I think, talking about do we want to own portfolios or not, both on the public and private side. So it'd be interesting to see how the industry continues to develop over the next few years. We're bullish. I mean we want to grow. We see opportunities to grow within the markets we're in. We manage 12,500 units in Atlanta as efficiently as we manage 4,000 units in Seattle. So I'd like to see Seattle get to 10,000, I'd like to see Phoenix get to 12,000 units. I mean these are all markets that are great margins, high-growth prospects. And I think where we're going to feel a pinch on supply, will probably have more to do with how it impacts builders in terms of lumber costs and things like that, that are just naturally put some governors on maybe their pace of play and how they grow and additional new supply coming into the market. But the resale market is always going to be active. The low interest rate environment, too, just one thought on this is, cap rates, I agree with what Campo said, which is, you may not see it this year. But with rates being as low as they are generally for anything that's stabilized, whether it's multifamily, single-family portfolio or whatever, you can finance this stuff. There are a lot of buyers that are trying to leg into a lower cap rate, justifying that they can do it with their cost of capital. So that forecast, at least in my opinion, isn't changing in the next 12 months. We're going to have cheap debt for the next 6 to 12 months. That feels pretty foreseeable. So let's see what happens in the election. Let's see what kind of rhetoric comes out of whatever the administration is next year. But I think it's a pretty healthy environment for residential period at the end of the day right now.

All right. Perfect. Well, I'm looking at my clock, and it looks like we have reached the end of our allotted time. I was going to ask a question about the presidential election, but we can't do it because we're out of time. So you'll have to wait for the next time we all get together. But thank you, everybody, for joining, both on the panel and people watching. And I know the next panel starts in about 8 minutes, so you'll definitely want to tune in for that. So thanks again, everybody. Bye-bye.

Take care.

Take care, everybody.