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

Good morning, and thanks for joining us. My name is Richard Hill. I'm Head of U.S. Commercial Real Estate Research at Morgan Stanley. I'm excited to be joined by Dallas Tanner, CEO of Invitation Homes; and Ernie Freedman, CFO of Invitation Homes. For those of you that might not be familiar with Invitation Homes, it is the nation's premier owner and operator of single-family rental homes in the United States with approximately 80,000 homes for lease in 16 markets across the country. Through disciplined markets and asset selection, they have assembled a high-quality portfolio focused on the Western United States and Florida. They target desirable neighborhoods in convenient proximity to major employments that have good schools and transportation corridors. They designed -- they have designed their portfolio of geographic concentration that cannot be easily replicated, providing economies of scale that enable them to efficiently and effectively serve their residents. A quick housekeeping item before we start. Please note that this webcast is for Morgan Stanley's clients and appropriate Morgan Stanley employees only. This webcast is not for members of the press. If you are a member of the press, please disconnect and reach out separately. For important disclosures, please see the Morgan Stanley research disclosures website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative.

So with that, let's jump right in, Dallas, Ernie. What I want to start off with is just an overview of the single-family rental market. We see it representing around 13% of the housing market and 35% of rentership. But institutional ownership is less than 3% of the 17 million stock of single-family rental homes. But -- so the question I would have is what inning in the sector are we from, from an institutional perspective? And if I can ask, where do you see this going in 3 years', 5 years', 10 years' time? How many homes can you actually own?

Yes, it's a great question, Rich. And it's one that we continually emphasize when we're talking to The Street and to investors, it's still the earliest of innings in terms of where the industry as a whole is going to go. We're going to see continued growth, not only on the portfolio side with different operators, including ourselves, but we will see a tremendous amount of investment happen around the space in terms of ancillary companies that could help support what is a single-family rental experience. That took decades to develop in the multifamily space in the late '70s and early '80s, and we've seen a complete acceleration of some of this at a much quicker pace, just given where we are with technology and everything today. But you're exactly right. I mean there's probably less than, I would say, 400,000 homes that we would consider institutionally managed today in a professional, in a large-scale manner. And there's 16 million people that are renting in that category. And then coupled with the fact that I think you pointed out correctly, somewhere like 75 million households rent in the U.S., in one way, shape or form. So it's a huge opportunity for operators to create quality product, great services and an entry point that makes sense for potential renters.

Got it. So look, maybe just getting into the implications of COVID-19, which have been almost very positive for Invitation Homes in the single-family rental market. But look, we've heard that demand is booming. Our own channel check suggests new leasing spreads are in the high single digits. But I'm curious if you can talk through what markets you're seeing the greatest demand and how that has influenced your views on what markets you're in and what markets you might be in, in the future?

Yes. I mean, to be clear, demand was booming pre-pandemic, and demand will continue to boom post-pandemic. I mean we've seen almost a year now of occupancy gains within our own portfolio. And on a year-over-year basis, we are continually seeing more applicants than we had product for, and that number is starting to compound. So just the lack of fundamental supply in the U.S. has led it to a very healthy environment for people that own single-family product. You're right in that COVID's probably put a little bit of a tailwind on it, a short-term tailwind in terms of creating maybe extra demand coming out of the urban centers. And that psyche may last for some period of time. But we're definitely seeing those high lease kind of year-over-year spreads that you're talking about in the majority of our portfolio, specifically in the West Coast. California, Washington, Arizona, Nevada, all have tremendous amount of demand. We're seeing it -- that kind of almost a similar reciprocal demand in markets like Charlotte and Atlanta and parts of Florida that all feel really, really healthy. So it comes down to what parts of those markets you're in, and we've tended -- as part of our overall strategy make sure that we're, one, very infill; two, we're at a little bit higher price point, which lends itself to some other demand factors that come into play, centered around great schools and transportation corridors, proximity. We were joking with you about it before. Proximity matters, right, when you're coming into work. And you want to be in a product that makes sense that isn't 1.5 hours away. And so we've made that a priority from day 1, just paying a little bit more up the curve, being in better neighborhoods, being surrounded by great schools and commercial activity.

Yes. Talking about your tenant base, I'd love to spend a little bit time -- a little bit of time describing the demographic of your tenant. There is some interesting parallels and differences to the apartment sector. But as you think about demographics, can you walk through why someone chooses to rent a single-family rental home versus buy? And by the way, has it shifted from a need to rent to really a desire to rent?

That's a good question. So first, the first part of your question, who's our average renter today? And the average renter today is about 39 years old. It's typically a 2-earner situation in our homes with a combined household income of right around $110,000 when you average that across the portfolio. That demographic or that kind of family with a couple of kids typically falls into 1 of 3 buckets for us as we do our own survey. What's driving that decision -- and there's been a little bit of a shift I would say, in the last 2 to 3 months, which I'll share in a second. But generally speaking, they fall into 1 of 3 categories for us. First is either somebody that's out of need, meaning like they need the space of a single-family home, they need the yard, they have children, they have dogs, they have cats, whatever it is, but they can't do that in an apartment setting today based on their own needs. And that's out of necessity, but maybe they can't afford to buy. And so that represents about 30% of our survey data on who comes in. The next 2 buckets, which are pretty much equally split, say, 35% each are transitional, meaning they've got some sort of a life event occurring. They're testing out an area before they buy or maybe there's a new job, a new marriage, a divorce, whatever, that's created a moment, a transitioning moment in their life, and they're needing to do this for some period of time. And then the last third is what we call preferential. And that is kind of all over the map. It's people that can, quite frankly, afford to own, but they choose to lease for a variety of reasons, either they like being down payment-light, maybe it's a second home for them or even -- we're seeing some boomers do it. Take chips off the table and lease back. And so that preferential bucket is one that we're pretty keen on understanding more as the business grows because that may lend itself to other ancillary opportunities down the road. And then the last little bit is we've seen, obviously, since the pandemic a little bit of shift in some of the decision-making of our residents. So in some of the data, we've gotten response from about 10% of the folks that have moved in between April and August, but it's a pretty large sample set. When we go through there and we look at what's driving those decisions, about 70% are moving into a single-family home versus an apartment because they either want more space or they want to be further out from an urban core. And so there definitely is kind of a near-term preference to having a bit more space and maybe being a little bit outside of the city center right now.

Got it. Ernie, I want to turn to you for a second. Dallas mentioned ancillary income. I'm wondering if you can just talk through the drivers of internal growth and what additional sources of revenue is there beyond base and minimum rent growth? Because rising tide lifts all boats to various different degrees, but I'm sure you look to distinguish yourself relative to peers by really pushing other sources of income. So can you walk through that a little bit?

Absolutely, Rich. It's an excellent point. Certainly, we like the prospects for how rent growth may proceed over the next period of time. As you mentioned in your introduction, we're seeing accelerating fundamentals of rent growth that we typically wouldn't see out of our peak season. We are a bit of a seasonal business in terms of being busier and typically driving more rent in the summer months when people are typically moving, but we're seeing more of an acceleration into the winter than we've ever seen before. That said, we're really excited about our other opportunities. And Dallas alluded to in his last comment, where we can provide additional services that our residents may want and desire and find valuable. And so today, we're doing some things, 2 things that we're doing today are, one, is providing Smart Home technology for our residents. It's not a really Smart Home when you think about the technology that's available today. But it's pretty basic, whether it's access from a door lock perspective and it's a smart thermostat. But we're also looking at other opportunities around potentially video doorbell, security systems, et cetera, that would tie into that platform. So we're really excited about that. And when someone moves into our home, 80% of the time they choose to subscribe to the Smart Home technology and keep that in place. We originally have put it in place for efficiency purposes to help us lease the home and allow for self-showing in an -- which is very important in an environment like this. But it's actually turned into a revenue generator for us as well, not just an efficiency savings for us. Another program that we rolled out this year and we're having good success with is our filter program, which doesn't sound real exciting, but actually has some really nice bottom line impacts for us. Our residents are required to change the filters in their homes every 3 months. So that's -- the operating system, if think about the HVAC system, the furnace, the air-conditioning, look at the efficiency. But a lot of residents don't know what size filter to get, don't want to take the time to run to Home Depot or Lowe's to get that. And so we're now drop shipping filters on many leases to our residents. It's the correct size. They're dated. So when our service techs might be doing a service call at the home, we can see that the filters have been changed, and we expect that it's going to provide for a longer useful life for our systems. So it's a win for the residents, it makes something easier for them. And it's a win for us because we should have systems that get a little bit more useful life out as well. And then as we think about what's next for us, Rich, we're looking at things around pets. Dallas mentioned the fact that the vast majority of our residents have a pet, whether it's a dog or a cat. And so there's lots of services we can potentially tie into that. And then we're also looking, not to be confused with pests, in terms of pest control and make it again easier for residents to be able to get a good service and a good price at a more discounted price they would otherwise be able to get and, again, would help maintain the homes for us. So those are some of the things that are in the near term that we're focused on. And then we have a list of over 60 items that we've identified as possibilities. And we're just working through those one at a time. And the nice thing about our portfolio is with 80,000 homes spread across 16 markets, we can pilot something in 1 market or 2 markets. If it goes well, we can then roll it out across the country. And if it doesn't, we learn quickly that it's not one of our better ideas and we can move on to the next. And so we don't have a huge investment that we have to make into any of these upfront to see whether it may be a success or not. So we're really excited about the prospects of additional revenue streams that we can provide our shareholders.

Yes. I couldn't go through 30 minutes without asking you an earnings-related question and earnings, not an Ernie-related question, to be clear. So you put up really pretty strong same-store revenue growth in 2Q and 3Q. And one of the things I'm not sure everyone recognize is you did that despite there being a bad debt headwind and a headwind from other income from not charging late fees. I'm not asking an earning -- a guidance question by any means. But can you talk about how in the future at some point maybe those headwinds might become tailwinds because, at some point, the coin will flip on the other side and how you think about that from an operating metric standpoint?

Yes. It's a good question, Rich. Because you're right to point out, in the second quarter, in the third quarter, we put up core revenue growth of 2% and 2.4%. And one of the things that was helping to boost those numbers was the fact that we've been able to run at a higher occupancy. But what's really been a headwind for us against those numbers, to the tune of almost 250, 300 basis points, have been those items that you mentioned that we would hope -- would think that would not be permanent in terms of how we think about how we run the business. One of those is bad debt. Yes. Not surprisingly, in the environment we're in, cash collections aren't quite where they've been at from a historical perspective. From a historical perspective, we typically collect about 99% of our rent the month that it's due. During the pandemic, we've been closer to 97% to 96% -- about 97%, so about 200 basis points off. What that means is we're -- typically, in the past, our bad debt is around about 40 basis points annually. Right now, if you annualize our bad debt, it probably will be closer to 200 basis points because we're not collecting as much cash -- we're collecting most of our cash, but not all of it. We would expect at some point that would revert back to historical norms, just because of the strength of our resident base and as we work our way through the pandemic and the economic impacts from that. So that should certainly be a tailwind for us in the future. And as we go back, what we would expect at some point, to more of our historical run rate of bad debt of, say, 40 basis points, that easily will be 150, 200 basis point tailwind for us. And the other item you mentioned is that we typically collect about 1% of our revenue annually from late fees. Some residents chooses, as they're managing their own pocketbook, to take advantage of the fact that they do have the ability to pay rent a little bit late, and we charge a modest fee for that. That, we've stopped charging for the most -- almost entirely across our portfolio in the second quarter. We started charging some late fees in the third quarter. We've taken the tack that if a resident is working with us, they may be struggling because of the economic situation, we're not going to charge them a late fee if they're working with us. And then in some jurisdictions, there's rules locally that don't allow us to charge late fees. And so we've had about 100 basis point hit to our revenue growth year-over-year in both the second and third quarter because we were not charging late fees like we have in past. And so between those 2 items, Rich, if we were to look back again to historical norms sometime in the next period of time as we would hope things normalize, that could be a nice pickup for us on a year-over-year basis. In fact, we have an easy comp as you think about what our revenue growth could be going forward. And then we're confident in how we're running the business, we can maintain higher occupancy for all the reasons Dallas talked about, about the demand fundamentals that are so strong right now.

Dallas, I want to transfer back to you for a second. Ernie was talking about technology and homes, Smart Homes, but I got to think that technology itself is allowing you to expand margins as well, but also maybe more efficient on how you acquire homes. Can you talk about how technology is evolving? I've personally been surprised about some of the commentary and anecdotes I've heard about virtual tours of homes that were up for sale during the COVID pandemic. So it seems like maybe we're on the cusp of another technological evolution that can make buying and selling homes and single-family rentals much more efficient. But you're in the front lines, I'd love to hear from you on that.

Yes. You nailed it. I mean if you just look at where we are versus where we were maybe 10 years ago, in terms of the type of technology that can go into us helping make decisions around an asset, whether you're a renter or a buyer, it's pretty remarkable. I mean the floor plans that we're mapping out right now and correlating with the way you can -- there's companies now that are taking mockups of furniture and being able to put those over those floor plans where somebody can actually get a sense for how that home would look and feel with their stuff. That's pretty remarkable. We are mapping our portfolios now or upgrading the way that we share some of that information digitally, which has a profound impact in that regard in terms of how we prelease. I mean we get really efficient. I mentioned on our earnings call, days to re-resident is down for us year-over-year pretty dramatically. And a large part of that has to do with our ability to be able to lease a home before it becomes vacant. In the old days, and the old days could be as early as 7 or 8 years ago, you wouldn't lease something site unseen, right? Now in today's universe, if you know you've got a great home and a good neighborhood and you can get a good sense through 3D mapping and virtual tours of how that home will feel going in and out of it, with whether your stuff may be able to fit or not fit, you can make a decision or, at a very minimum, tie up a home with a healthy deposit, right? And that overall helps operators like us that we can make decisions quicker -- or excuse me, our customers can make decisions quicker and we can provide a better level of service in turning that home faster to have somebody -- which all eliminates drag in our business. The other things that we see around technology, to your point, are really interesting in the way that information is being shared on the buy-sell environment. And what someone can do in today's environment, being able to buy assets remotely or get a sense around where your pricing should be remotely before you've been able to go in and do an inspection on a home. Now we put eyes on every asset that we buy. That's just the nature of our principles in terms of underwriting. But we certainly can disseminate quite a bit of information through a funnel in a much quicker fashion using the tools and technologies we've built and adapted to over time. It also has an ability to impact our leasing curve. You start to think about how smart our portfolio gets, every year, we're getting like 20% or 25% smarter because we've turned 20%, 25% of the portfolio in a given year. And we've been able to look at what our data is doing on a compounding basis year-over-year makes us that much smarter about how our lease expiration curve should look and feel. It helps us maximize pricing and efficient occupancy. And so as you look at kind of all of those things, there are companies, third-party services, there are a number of things that we're plugging into that are providing us with tremendous amounts of raw data that we can then put through our algorithms and our AcquisitionIQ tools, that can help us make informed decisions about where we want to grow our footprint and our portfolio. And then the mechanisms for buying, like we've talked about, iBuyers, a number of these channels where technology is making things easier, are one of a dozen tools that we have at our disposal that continue to grow the portfolio. So we're not really beholden to any one tool. We say this all the time, we're channel-agnostic, but we are location-specific in terms of how we want to invest. And we want to use all those technology bits that are available to us to try and drive additional opportunities.

So guys, a couple of questions coming over the webcast. First, I think this is a really important one. But what's the key differentiator between Invitation Homes, other public companies and maybe even the private operators? It seems like every hour of every day, we hear another person getting into the single-family rental space, which is great. But what's your real differentiator? What's making you different than Tricon, American Home 4 Rent and maybe even some of the smaller private guys that might be out there?