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

Okay. Great. Good afternoon, everyone. Thank you for joining us today. This is Tyler Batory, I'm a REIT analyst at Janney Montgomery Scott. Very pleased to be here with the management team from Invitation Homes, ticker INVH, of CEO, Dallas Tanner; and then CFO, Ernie Freedman. The format today is Q&A, and I have a number of prepared questions, but I want to keep this interactive. So for everyone in the audience, if you have any questions, please feel free to put them in the chat box, we'll get them directed to the management team. So just to start before I start going into Q&A. I'm just going to ask Dallas just to make a few introductory comments. Talk a little bit more about INVH.

Excellent. Thanks, Tyler. We really appreciate being part of NAREIT and being here with you all today. It couldn't be a better time for our business in terms of how the company is performing, I think, the supply and demand fundamentals that are clearly behind our space and the industry and the way that we're executing as a business at Invitation Homes. I think there's really kind of 3 things that I'd love to start off with from a commentary perspective. And I'm grateful I have Ernie Freedman, our Chief Financial Officer, with us. First, would just be kind of to emphasize that strong performance that we've had over the first 5 months of the year. Going into the pandemic, we had extremely healthy occupancy, north of 97%. We've seen that accelerate both on the occupancy side, while not mitigating any of our ability to capture market rate rent growth. You saw in our update that for the month of May, we accelerated from roughly 11% new lease growth in April to 15%. And on the renewal side, we saw an additional acceleration to 5.9%. These are important statistics because a couple of things. We're still midway through what is our peak leasing season. We'll recycle roughly 65% to 68% of our portfolio between the months of March and August. And so we look forward to the rest of the summer leasing season as we continue to accelerate through that curve. Occupancy, while we would have expected maybe a little bit more turnover, which we'd normally get in the summer months, hasn't been the case. We've continued to see occupancy, say, well north of 98%. The other -- the second point I want to make is that we're hyper-focused on growing our business. And really, external growth has always been a focus for Invitation Homes. We sit today at close to 81,000 homes in our portfolio. But we feel very comfortable that even in a tight supply environment, we can still buy meaningful assets north of, call it, a 5% run rate stabilized NOI. And we can do that at $1 billion plus pace for the year. Lion's share of which of our acquisitions are coming one-off, and we remain active looking for opportunities to accretively grow the portfolio through M&A in the future as well as keeping ourselves nimble and expanding our current builder relationships with our builder partners. And the third point, I think, which is a real differentiator for our company is the customer service. And it's the way that we approach the resident experience. When you lease from Invitation Homes, we're trying to make that experience extremely sticky for our customers. They stay with us today almost 3 years, 3 years plus. And that median average of our customers staying in the portfolio has continued to tick up quarter-over-quarter. And we're really excited about what we've got going on in terms of the ancillary services and revenues that we're providing for the customer today. We laid out at our Investor Day roughly 18 to 20 months ago, that we wanted to be somewhere between $15 million and $30 million on run rate ancillary income revenue at the end of 3 years, and we're targeting right now between -- to land sometime towards the end of next year between the mid and high point of that range. So we're extremely focused on it. It's a differentiator in terms of the way we approach our business and how we retain our customer, and we believe it also lends to the sticky factor that our business has been able to provide across this and other metrics over the last several years. Tyler with that, I'll stop, and we'll open it up for Q&A.

Okay. Excellent. Excellent. A lot of great color, a lot of great detail. But the first thing that I wanted to ask just to follow-up on is really demand. And I think it's pretty well understood right now how strong demand is for housing and how strong demand is for your product. But talk a little bit more about the sustainability of that demand, what's really driving it? And potentially, what happens as we start to move past the pandemic into more and more normalized times, if you will?

Yes, it's a great question. I mean, we get it all the time. And I think you got to go back to what I said at the beginning, which is 97% plus occupancy business pre-pandemic. And those are important points. We've always said, even from when we went public in 2017, we view this as a 97% plus business. And I think the key thing for us and where we're really executing as a company is in eliminating the drag between somebody moving in and moving out in our portfolio, our pre-leasing component of our business, how we acquire a customer before somebody has actually physically moved out of a home, is far better than it was even 24 months ago. Over the last several months, our days to residence has been in the low to mid-20s, which is light years ahead of where it was, call it at the IPO, where we're close to the high 40s in terms of moving people in and out of the home. Now some of that demand was what I would call organic demand, is going to be a normal part of single-family rental. We've probably picked up a little bit of some seasonality and some tailwinds because of the pandemic. What's been interesting, though, and really across every metric that we track, both on our move-in surveys and on our move-out services, we haven't seen any fundamental shifts in the reason people are making decisions. We've seen maybe a little bit in the pandemic on the front end with folks saying, "Hey, I need a little bit more space because of the work from home component. But again, we're already at 97% plus before we started to kind of pick some of that up in our data. So maybe there's 50 to 100 basis points of what I would call, interesting occupancy. Maybe there's something that could have something to do with pandemic-related decision-making and things like that. We haven't seen anything jump off the page there. But I will say this, we are seeing -- and we have seen this year-over-year in our move-out surveys that the reasons for people moving into our portfolio are pretty consistent. 2/3 of our customer could own a home today if they wanted to. And that's been the case since we started the business in 2012. That hasn't changed. The reason for people moving out to homeownership. That hasn't changed. Between 8% and 10% of our portfolio will cycle out every year into homeownership. That number hasn't changed in the pandemic. So I think as you think about the lack of supply, U.S. housing supply, generally speaking, and you think about those macro fundamentals, we're set up for a really good run rate in terms of lack of supply, outstanding demand for, call it, detached single-family product and a service offering that I hope can match and will actually enhance that experience. You want to tell me to away and go, why would I lease from anyone else? And so that's our focus.

Excellent. Excellent. So let's talk a little bit about rent growth. And you guys disclosed some statistics in terms of how the business is performing through May, which I think were tremendous in terms of the new lease and released growth. Talk a little more about the strategy in terms of driving rents higher? And then also talk a little bit more about how you balance increasing rents versus how you think about that versus occupancy as well.

Sure. Great question. So 2 things to touch on there. First, let's go back to what our leases are. So typically, we're about a 70% renewal business. Over the last 12 to 18 months, that number started to creep a lot closer to retention rates of 75%. So the renewal side of our business, that customer that's staying with us 3-plus years right now obviously, those renewal rates aren't going to be as high as our vacant new lease rate growth, right? We're always trying to strike that balance between rate growth, what the market is dictating, but also keeping your occupancy in check because any drag obviously hurts your performance. And so you're always trying to strike that right balance. With the amount of demand, the amount of home price appreciation and the amount of new lease growth we're seeing in our vacant product over the last 6 months, it's a fair argument to say that even in our renewal numbers, we'd probably have a little bit of embedded loss to lease for the coming years because we aren't getting 14% and 15% renewal rates in our marketplaces. And some of that's by design, and some of it is also just being cognizant of the current environment and what we should and shouldn't be doing, giving -- given where housing costs are. So we're always trying to strike that balance. But we do want to maintain a healthy occupancy for the predictability of our business to be able to enhance the customer experience, et cetera. On the -- that second piece in terms of how you manage that, you really got to be smart about how you manage this exploration curve. Now fortunately, for us, coming out of our merger at the end of 2017, we did a lot of work between '17 and '19 to get our lease expiration curve in a place that would be really predictable. I mentioned that in my opening remarks. 65% of our leases revolving between the months of March and August, it gives us absolute pricing power in the marketplaces. Typically, most people are moving in or moving out of a home between those months. They typically center around school district changes or school changes for families. And remember, our customer today is about 39 years old, typically a dual earner situation and has a combined household income that's quickly approaching about $120,000. And so we're always trying to maximize our pricing power in the marketplaces, but also being cognizant of where your peak demand cycles are because we want to stay full. At the end of the day, we're in the housing business. And it's our goal to stay as full as we can, capture as much of the market rate that's available, but always threading the needle on that balance. And we understand, too, and it's worth saying that we're in an environment that isn't normal right now, right? You're not going to see 14% and 15% new lease rate growth forever. Trees don't grow to the sky. But while our homes are sitting there vacant, and we have very few of those, we are going to try to price where the market is and create that value for our shareholders so that earns in over time and distance.

Okay. Excellent. So we've got a couple of questions from the audience before we're going to get through, again, encourage anyone if you have questions, please feel free submit those, we'll get those asked. One of the advantages and one of the unique things that you guys have is your scale and how big you are. So I'm interested if you can talk a little bit more about that, how much of a competitive advantage that is versus some of the other players, just in terms of the sheer size of your portfolio and the number of homes that you have?

Yes. Well, there's -- Ernie, feel free to chime in here, too, if you'd like to add anything. There's a lot of obvious areas. One is, just the way we manage our business from a G&A perspective, how you think about your property management functionality. We operate in a system called pods. In a pod, we'll manage anywhere from 2,800 to 3,200 homes. And that pod will be a team of, call it, 10 to 12 people, with supporting maintenance staff in the marketplace, and it's an extremely efficient way to manage our business. If you look at where our pods were even 5 years ago, they were managing probably half that volume, right? So with systems, technologies and efficiencies, you get better and scale is obviously your friend there. And then you just start to think about procurement and how you price flooring, how you think about Smart Home technology and your ability to enhance that overall experience and give people instant access to things like thermostat controls and ingress, egress and to be able to share those codes with family and everything like that. You're going to have a hard time doing and offering all those services if you've got a portfolio of 1,000 homes. It's just not as easy. So there's a variety of reasons why it makes sense. Ernie, do you want to add anything to that?

The only thing I'd add, Dallas, is that it also gives us really the opportunity, Tyler, to invest in our infrastructure and specifically around technology. And just you know having this scale that we have, it gives us an opportunity to maybe have some of the better technology that's out there around -- for our service teams, for our leasing teams and for our off-site teams. So I think the combination of all that really puts us in a unique position until we'd be able to drive better bottom line results for our shareholders.

Right. Excellent. So let's switch gears a little bit. And certainly, a lot of investors and you hit on this in the opening remarks, Dallas, a lot of investors are focused on the external growth opportunity or focus on acquisitions and what that looks like for you guys? So multipart question here. Just talk a little bit more about the acquisition strategy, how you think about balancing location versus channel? And then also talk a little bit more about what you're seeing in the marketplace. It seems like every day, we read about how high home prices are. So just talk a little bit more about how that factors into acquisitions and then touch on cap rates as well?

Well, Tyler, you said it really well. We're a location specific channel agnostic. We certainly want to focus on how to get more available product because it's a growing segment with 16 million households running a single-family detached home today. But we are absolutely anchored on location. And I think one of the reasons why you've seen the performance in our business, if you just -- and if you stroll through our deck, if you look at that page where we talk about NOI growth over the last 4 years, Ernie and I joke about this a little bit from time to time, like as smart as you want to think we are, real estate's always done really well if you anchor in on just being location centric in your approach. And there's times and seasons where you can obviously, buy things at better values than others. But if you just stay committed to being in the right locations, and we had the fortunate benefit of having capital partners early on, that really were aligned with us on that strategy and making sure that we were location specific and not caught up on maybe shift quantum or figuring out how to have every channel available in the near term, but really anchor in on building a quality portfolio over time because it's a marathon approach. We've been going at this now 10 years. And the consistency with which we've experienced results, both from an operating perspective, if you're looking at cost to maintain or OpEx, CapEx discussions. Or if you're just looking at rate and the earn in to the bottom line for our shareholders. We've been very consistent in terms of expectations around execution. And so I think as we think about where the business can go and how we'll continue to be able to grow this over time and distance, we want to find ways to find meaningful opportunities for growth. We're doing that through a variety of ways and means right now. Obviously, we're very active in the one-off space, always have been. We built the company one by one. So we're very comfortable adding incrementally to our portfolio one by one. We also -- I've mentioned this on a number of earnings calls lately, really worked at developing standup builder partnerships, both with public and private builders in the marketplaces, that will continue to lend itself to additional opportunities. We talked a little bit about that on the last earnings call. We're now starting to see those opportunities coming. We're in real time, looking at half a dozen term sheets on locations and communities that make a ton of sense for our portfolio. And that's an active process that continually goes on. M&A. We're not afraid to grow through the right strategic opportunities. We proved that out with the Colony merger and earned into all those synergies that we laid out for our shareholders through that process. So I think that while supply will remain relatively tight in the near term. We don't see anything that suggests an influx of U.S. housing supply. We are very nimble and able to act and to invest in a way in the marketplace. That's meaningful. And if you just take a step back, one of the benefits of SFR for everyone listening, you probably understand this, but you really feel it when you operate this business is that It's so nimble because of the fact that there's 6 million transactions that happen every year in the U.S., and we can go in and out of that, right? We can sell into that marketplace, which we do all the time. We'll likely sell 1,000 homes this year. And we can buy homes from that marketplace and bring it into the rental portfolio. And so it's a very liquid asset class, U.S. single family housing. There's a lot of ways for investors and homeowners and for those that want to lease to be able to be active in the space. And so that gives us an added benefit. But we would expect that given the amount of under supply that's come into the marketplace over the last 5 to 6 years and the way that we're even in our conversations with homebuilder partners having discussions around smart growth, we don't see builders or anyone really putting their neck out there in a way because it's going to create dislocation from a supply perspective. We expect the market to stay relatively tight. So we're just going to continue to stay active. We feel good about the number that we put out there with our guidance. We'll do $1 billion plus this year in normalized growth, that would include anything strategic. And we're certainly going to look for opportunities to be as strategic as possible when those opportunities present themselves.

Okay. Excellent. There's -- we've got a lot of great questions from the audience here, which we'll start rolling though. So please everyone out there, please keep them coming. Question about cap rates. Just talk a little bit more about the pricing that you're seeing in some of your markets and also perhaps touch on some transactions that you guys have completed in terms of sales, what sort of cap rates you're seeing in terms of selling assets?

Well, on the buy side, and I mentioned this quickly early on, but we can still buy between a 5%, 5.5% cap on the one-off space. We're certainly seeing, and it's worth noting for this group, the private markets are valuing portfolios, stabilized SFR portfolios at premiums relative to where maybe end user pricing would be and or one-off buying opportunities. So we've seen a couple of trades even in the last quarter, that are trading in the low 4s, if not maybe even the high 3s in some markets. When I want -- I'm saying low 4s had to have tied stabilized cap rates based on the amount of capital that wants to get into the space right now. And we're certainly active in participating on some of those opportunities, but we're also disciplined enough and have enough scale that we don't need to chase unless it's something truly strategic in nature. On the disposition side, typically, we've been selling between a 3.5% to 4.5% cap on our one-off sales. And we feel really good about the portfolio we have right now. I think it's evidenced in the efficiencies and in the operating results that we've got good real estate that's properly located. But those are kind of the numbers right now, Tyler, real-time in terms of what we're seeing.

Okay. Great. Another good question from the audience, and I'm going to build on it a little bit. Just on competition, who and what do you really consider to be your competition in terms of other SFR companies or multifamily? And then perhaps more broadly, might be one of the most common questions that I get. There's a lot of money that we read about coming into the SFR space. What do you think that does to the competitive dynamics of the industry and how that might impact you guys?

Well, I mean, there's a couple of things for context. So I mentioned before, 16 million U.S. single-family families leasing a home, in some way, shape or form, detached today. There's a similar number in multifamily, but it's sort of beside the point. The case I would make is we got to remember a couple of things. One, maybe all of institutional capital this year might buy 2% of the existing single-family sales. So 98% are still going to homeowners, mom-and-pops, maybe small investors, et cetera. It feels to me like the additional capital coming in the space in the near-term is creating obviously a lot of pressure on sales. The flip side of it is we view it as a net positive because it's creating awareness, smart capital continues to invest in the space. We enjoy the ability to be a category leader in the space from a scale perspective also from an execution perspective. And with that comes responsibility, but the new capital coming into the space is also creating a bunch of ancillary businesses and other companies that are innovating in and around SFR. We view that as an absolute net positive for the industry, to be really clear. And I say this all the time and people are probably tired of hearing it, but -- and I think Ernie would agree. We both agree, like it's still the first or second inning of where this space is going to go. There's so much growth that will likely happen over the next decade across SFR, similar to what you saw in multifamily in the 70s and 80s. And I think in the near term, you're going to experience pressures. I mean there's a new build-to-rent idea that's popping up literally weekly, either in a form of media or in a deal deck that we review or see, there are smart aggregators that are out buying properties and trying to build efficient operating systems around it. And I think there's going to be a lot of ways that people can invest in the space over time and distance. So overall, I think it just validates the thesis we started with 10 years ago, which is, this is a business, not a trade. You can build real scale. And I think on the margin side, we've proved out that our margins are as good as multifamily, if not better. Half of our markets today at Invitation Homes are north of 70% from an operating margin perspective. And that's in really, call it, the first 5 years of being public. I'm excited about what we can do with this business over time.

So I think one of the highlights that's happened more recently for you guys, taking on the capital allocation, acquisition, disposition distribution topic. The fact that you got the investment-grade rating in terms of the balance sheet. So I think it's interesting, perhaps Ernie, if you could talk a little bit more about that. How you're able to get that? And then what that does to your strategy as you think about capital allocation and the avenues out there that are available to you?

Yes. And thanks, Tyler. We're certainly pleased to get the investment-grade rating and maybe a little sooner than we would have thought. Certainly when the pandemic started a year ago, but even as more recently as a few months ago, we were hoping that we're going to be pretty close, but we learned that we made it. And for us, it doesn't really change what we're doing as a business, it doesn't really change what we're trying to do from a balance sheet perspective. We had a safe balance sheet, whether or not we had the investment-grade rating because we've been very focused on making sure our maturity profile is very long dated. Making sure we fixed our interest costs by using interest rate swaps where we have floating rate debt. And just being really smart about that. I think what happens going forward is we continued on the path to delever. So even though we have those investment-grade ratings. We told folks who want to get to about 5.5 to 6x, which puts us in a position to be able to use leverage financing to grow the business if that's the right way for us to do it in addition to using equity capital. As we've been very focused on for the last couple of years, Tyler, we've been over equitizing our growth, our acquisitions to help bring leverage down because that was the right thing to do on a risk-adjusted basis. I think going forward, it's important for us to be investment-grade. It just opens up another tool that's available to us with regards to how to finance the business. You want to have more tools available to you versus less. And so we do anticipate that going forward, we will be a predominantly an unsecured borrower in the public markets. We have approximately $6 billion of fully prepayable debt that comes due between 2024 and 2026, that will start refinancing over the next period of time opportunistically and get in front of that. So we continue to elongate our maturity profile and put us -- continue on our route of making the balance sheet safe for each and every day.

Okay. Great. Dallas, another good question here, I think, from the audience in terms of regulation. How do you assess that potential risk as SFR continues to grow? Certainly, the rent numbers that you guys are putting up are quite strong for the rent growth numbers, I should say. Any risk out there of potentially some more political movement towards rent controls or something like that, that makes you concerned?

Well, the overarching comment is housing is a sensitive subject. It's social, right? It matters to each of us. We would expect that we're always going to have to be active in education and making sure people understand who it is that Invitation Homes is and what it is that we're focused on. What I call the missionary work side of things, we're constantly talking to legislators, both at the federal and state level. We update every year, all of our state and federal legislators, over 5,000 of them with fact sheets, about who we are as a company, how much capital we're investing in their neighborhoods, and how many vendors and other third-party businesses we resource with and employ, including our own in these marketplaces. And so it's important that you educate folks both on your impact in the communities, but also at the overall end of the day, institutional single-family rental ownership is less than 2% of the single-family renter base that's out there today. We're very small. Whereas if you look at multifamily, it's somewhere around 10% to 15%, right, of the overall multifamily properties that are out there. They're institutionally owned. So we're a very small part of the overall housing continuum. But we're hyper-focused on being the best part. And so I think we have to be diligent about the fact that when companies like ours in the real estate space have as much of a presence and a footprint as we do, we got to be active. And we're doing it beyond just investing capital and creating quality housing. We have, for example, a huge focus on our ESG initiatives. We took the GRESB survey this last year. We participated again this year. We had our Open Spaces initiative that we launched this year, where we're investing in communities. We started in Phoenix with a 3-year commitment to the Hawes Trail Alliance, with not only just dollars and allocated resources that way, but our people, our residents, our associates are all committing time to creating walking trails and running trails and spaces. And that will continue to fan-out through all of our markets over time. So we view it as a responsibility. We want to be a good corporate citizen, but I do think we got to be aware that we have a voice and a seat at the table, and we got to make sure we're educating. And then when an issue arises, we got to make sure that we react. We got to talk about these things. And we've got to make sure that we're spending time both with federal and state leaders and helping them understand where we fit into this space and why we're an important part for people in terms of choice. People want choice. And you shouldn't have to own a home today to have the same experience as you can have with us.

Okay. Excellent. Excellent. So we've got about 5 minutes remaining here. So I want to go back, I think, a little bit more to the demand discussion. And we've got a few questions here on population migration and job growth. And I think really your market exposure, obviously, you guys have a lot of exposure at the California. What are you seeing in terms of migration trends? Does that change? How you think about the market mix and the market makeup of the portfolio?

No, not generally, no. I mean we feel really good about the footprint we have today. We talk about this. We built this company in this footprint by design. If you look at the U.S. housing demographics in our 16 markets, household formation is somewhere between 2 and 3x the U.S. average. Wage and employment growth statistic is very similar. I think COVID was actually kind of a little bit of a tell, so to speak, in terms of where people want to go if they hope they've got to make some decisions around affordability, housing opportunity, good schools, and it's very heavily kind of in that Southwest Sunbelt Southeast region. Now your specific question around California, we do have a decent-sized concentration in California with roughly 12,500 homes. We love our California footprint. It's a differentiator. I don't think anyone can repeat it today. You think about the benefits there. And California is a different state in terms of to operate in, our multifamily peers know this, but you have -- rent is capped plus CPI right now. And it's healthy. I think it's a pretty healthy environment with where the state landed on that. But you also have net benefits around property tax and a lot of our homes in California aren't in HOAs. So you have the ability to create a really good product for folks, and our customers are really sticky in California. They stay with us a long time. They like the product. They stay longer than the rest of the portfolio on average. And so we view it as a net positive. It's strategic for us to be over on the West Coast. California still has one of the largest GDPs in the world. It's a very active economy, and we're grateful to be a part of that community.

Yes. Say, Tyler, notwithstanding the headlines, our Northern California portfolio has been running at 99% occupancy. In some months, even higher. And we've had Southern Cal running in the high 98s. So notwithstanding the headlines of people leaving California. Our customer -- not everyone's leaving California and very nicely for there, and we're putting up some of our strongest new lease growth, and we're putting up a renewal growth that is basically at the point where the local legislation will allow us to push it.

So how about -- in the last couple of minutes that we have here, what about -- how do you think about new markets? In any place where you'd like to get access to? And then you obviously focus on The Smile, the Southern U.S. and West Coast. Maybe anything more in the middle of the country that might be interesting, perhaps?

Well, 2 points here. One, we want to get additional scale and density in the markets we currently operate in. We operate, and I say this a lot, we operate 3,800 homes in Seattle as well as we operate 13,000 in Atlanta, right? It would just get better with scale, and we can offer more services. There are other markets. We talked about this openly. We love Salt Lake. We love Austin. We think Nashville makes a lot of sense. We just didn't necessarily love the homes that we had and we sold out of there. So in all likelihood, I imagine we could continue to add in some of those high-growth markets. In terms of Midwest focus, I think the short answer is no. We like what we have. Chicago is actually really performing well right now. We're seeing excellent new lease growth through the summer. Our occupancy has been very sticky. Minneapolis is super consistent. So we like that we have a little bit of a flag in the Midwest for maybe strategic opportunities later. But no, in the near term, we want to continue to invest where the rooftops are forming and where net migration is happening.

Okay. Excellent. So I think we're pretty much out of time here. So I think this is actually a great place to stop. So I appreciate everyone in the audience for joining us. And Dallas, Ernie, thank you as well. Good-bye.

Thanks for having us.

Thanks, Tyler. Take care, everyone.

Take care.