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

Hey, everyone, we're about to get started here. Appreciate seeing everyone here for another Nareit. I'm Aaron Hecht, Managing Director...

Microphone.

Can you guys hear me now?

Yes.

All right. We'll get started here. I said good to see everyone in another Nareit. My name is Aaron Hecht. I'm senior equities analyst covering multifamily, single-family rental, health care and cannabis mortgage REITs. We're going to get started here with our next presentation, which is going to be Invitation Homes, largest single-family rental operator in the country, $20 billion market cap. We have with us here Dallas Tanner, CEO; Jon Olsen, CFO; and Charles Young, President and COO. And I guess I'll turn it over to Dallas here to give kind of a brief outline of who Invitation Homes is and what they're all about for those of you that don't know.

Thanks, Aaron. Can everybody hear me okay? This microphone's a little sensitive. It's great to be with everybody. First and foremost, thank you for your support, and we're grateful to have the audience that we have here at Nareit. Nareit does a wonderful job of connecting us with you all as well as other buy-side shops. First and foremost, I mean, the fundamentals around single-family rental. I'm sure many of you are up to speed with sort of the current lay of the landscape is couldn't be better. Long-term fundamentals, as you look at, call it, our average customers, that millennial that's 39 years old, just coming into that millennial cohort, 2 earners, combined household income of around $140,000, and they're staying with us now far longer than we originally underwrote when we started the business 12 years ago. The dislocation between owning versus leasing is as advantageous to the fundamentals around our business as it's ever been. On average, in our markets, it's somewhere around $930 cheaper to rent that home than to own in an existing Invitation Homes market or footprint. And if you take a step back and you really pay attention to what's happening in the broad landscape of housing generally, the villain kind of in the marketplace today is really the lack of supply. We are just underserved to the tune of -- and every economist has a different number, but it's at least in the 1 million to 2 million, 2.5 million kind of unit range. And on the single-family side, given where kind of the tail -- the tail whip around cost of goods sold, the construction costs, [indiscernible] is harder and harder to bring new supply into the marketplace. So we don't see that being fixed anytime soon. Second, if you look at the performance of the business, we've been really consistent for the last 5, 6, 7 years in terms of our performance and how we've mitigated risk through the pandemic, and as well as how we've been able to manage through some of the pressures around lease enforcement and things like that. And our business is -- kind of through this, call it, the last 3 years has been really resilient. Today, we have occupancy somewhere around 97.7%. We're seeing rental growth in the mid-single digits, and we're sort of in the natural part of our curve where the summer months can get even better for us from a pricing power perspective. And so all things being equal, so far through the first 5 months of our year and as we shared in our update through May, things have been very healthy from a fundamentals perspective. And I would say, lastly, as you think about home prices and the stability around home prices, which have always been for us a really good proxy to rent growth, those have been really buoyed up due to that lack of supply. And as well as, what I'd say is, kind of shifting consumer preferences. Although I would say that I think that the home market today is as healthy as it is, with homeownership rate around 67%. There's still 47 million households that are making a decision on an annual basis whether to lease or not. And so we want to position our business, our markets, our real estate in a way that, that leasing lifestyle can be captured, that it's friendly, that it's flexible and that it's on our customers' terms. And as we've done that over the last 10 years and gotten better and better at doing that, we've been able to bring in different things around ancillary revenue items, things that can make the experience that much stickier for the customer, which is lending itself to a longer duration of stay and overall, a much happier customer. So with that, Aaron, I think I'll flip it back to you for any questions.

Sure. You talked about the demographic shifts that are going on, particularly with the millennial generation. Can you just talk about the timeframe that this is happening over? When will that peak out? How much time do you have to execute on this wave that's coming your way?

Yes. I mean when we took the business public, part of our IPO in 2017 -- yes, '17, was that we were about 5 years away from just getting kind of the beginnings of that millennial cohort, which is, call it, plus or minus 35 million people between -- at that point, were between the ages of like 27 and 33 or something like that. We're set up really nicely for the next 7 to 10 years. In terms of being able to have conviction that our current customer, who I mentioned being 39 years old, and by the way, it's been that way since we really started the company, it's always been in the high 30s, but we're going to see a disproportional amount of people in that kind of segment over the next decade. And so as we've sort of pivoted -- not pivoted, but the way we've adjusted our model, to make sure that we're capturing things and using the scale and the power of the platform to drive down costs in other categories from customer: Internet, pest control, smart home technologies, things like that, I think we've set ourselves up nicely. And then also paying attention to the data, the survey information and everything that we get from the customer as they come out, to find ways of what are those kind of incremental adds, or what can we add to that experience beyond just being mobile to make it that much more seamless.

Okay. And has the supply or the delivery of new supply of product improved over the last 5 to 10 years? Or has it gotten worse in terms of the shortfall that is existing with the existing population growth?

Just overall housing story?

Yes.

Well, look, I mean it's not lost to anybody, coming out of the GFC, basically, a couple of things have happened. One, builders got their balance sheets in much better positions over the last decade. And if you're -- specifically right now, if you're a regional guy and you're building product, it's a lot harder right now with the way the banking situation is with some of the regionals, that it's going to be a lot more difficult. I think public builders are going to do really well. That being equal -- all that being equal? No. I mean we've probably underbuilt to the tune of 2.5 million, 3 million units over the last decade.

Yes. And I guess the point I was going to get as your rental rate growth and your NOI growth has been outsized for the last couple of years, the numbers still look good. Maybe you can give some perspective on how you've grown maybe against the industry. And then how you're expecting 2023 to shape up given what you're seeing so far?

Well, I think when we came out with guidance, we feel really good relative to what we've shared at the beginning of the year. We feel like revenue is going to be in the mid-single digits, NOI growth in the mid-single digits. And I think taking a step back, you got to remember, that NOI number is a combination of obviously growth, which you highlighted, but also margin and our operating margins. And we'll quote the great Ernie Freedman because he's no longer our CFO, and now we have Jon, but he used to always say, not all margin is created equal, and that's the truth. Our margins in Phoenix are in the mid-70s. Our margins in California could be in the mid- to high 70s. Our margins in Florida will be in the low 60s, but we love the growth prospects of Florida. And if you look at what we're doing in South Florida and in Orlando and Tampa right now, on a blended basis, high single digits, sometimes approaching double digits, even today, coming off of comps last year that were equally as difficult, if not better. And so I think balancing out, kind of, your margin profile but making sure that you're allocating capital parts of the country where you're going to see the outsized growth is paramount. You have to find that balance.

And I think you guys came out with some numbers in your presentation that went out maybe a week ago. New lease rate growth, 7.5% in April, up from 5.7% in the first quarter. Renewals 7.2% versus 8% in the first quarter. Charles, what would your takeaway be from those numbers, obviously, really nice to see the acceleration on the new rate side and the renewals are pretty strong.

Yes. No, we like the position of the portfolio. I would just add to that. We're doing all that acceleration and healthy growth on top of 97.7%, 97.8% occupancy. So portfolio is in a really healthy shape. What we saw last year was -- or the last couple of years, this outside growth with COVID and there was just no seasonality. It just kept running. Second half of the year, we saw the seasonality come back. And the question was, where was it going to -- kind of how was it going to bottom out? And where would it go from there? What ended up happening is we kind of hit a really healthy number. It's kind of historical plus. And now coming into the first half of the year, we accelerated on the new lease side every month through April. And what you're seeing as we go into May is there will be kind of a flattening out on the new lease side, which is the normal curve. And renewals have just kind of remained steady. And what happens is you see new lease rent growth go above renewals in the summer and then renewals will stay healthy. We put out that we thought we'd be in kind of the mid-single digits, and we're ahead of plan so far this year. And so that feels good. And like we said, we're going into the summer with good momentum and feeling good around the demand that we're seeing at the top of our funnel, and executing well with our teams as we're working through the busy leasing season right now.

Is there anything you guys are seeing on the expense side so far that would potentially be an offset to that outperformance you've seen throughout the year to date on the revenue side?

I think thus far in the year, expenses are running much as we anticipated. And we've talked a lot about why we expect to see expenses be elevated in the first 3 quarters of this year with some moderation in the back part of the year. A lot of that is driven by the fact that we had a bit of a catch-up entry on property tax, which came in higher than expected last year. Some of it is attributable to some of the work we need to do to sort of get back to a normal operating footing. We've got some cleanup that we're working through. It's transitory, but we have been unable to run the business the way we typically would for some period of time, and it's going to take a period of time to sort of get back to normal. So I don't see anything at this moment that spooks me about any surprises on the expense side. We're going to continue to watch everything closely. On property tax, we won't get the actual bills and millage rates until later in the year, so that's always a little bit tough. But we're going to keep a very close eye on things and, thus far, feel good about where we stand.

I assume on the cleanup. You're talking about the bad debt and certain renters that had been in units not paying for a period of time. Can you just give us a perspective on where that is relative to prepandemic levels, and how much progress is expected to be made this year? Is anything going to fall into next year? And maybe just, anecdotally, what do you see when you open up units that haven't been paid for, for a while?

Yes. So all good questions. I'd start by saying when you talk about how do we, relative to kind of normal times, about half our markets are running at our historical bad debt rate, which is great. And those are the markets where the compliance process, the core process is running historically normal. The cleanup that Jon is referring to and you're asking about is really only happening in a handful of states. The leader of that has been Southern California. L.A. County, L.A. City was the last to let the eviction moratorium for nonpayment of rent expire on March 31. So we're just getting to a place where we're working with those residents. And that process is moving kind of according to schedule as we looked at it. There's a handful of other markets. Parts of Atlanta have counties that are a little slower, Chicago, Vegas, Washington. But when you look at the Texas markets, the Florida markets, Denver markets, we're really back to normal. So all that's healthy. We expect that the first 3 quarters were going to be the cleanup period. The only caveat that I'd put on that are 2 things: One, we'll see how long the L.A. situation -- the L.A. -- the California courts can take a while. So even if we're starting to move into the compliance, it can take multiple months to get there. And then some of it is also dependent on how much the -- how fast the backlog in the courts work out. So right now, it's been ahead of schedule, which is great, but we have some innings left, and we're going to keep moving it. I don't know if I missed any last part of your question.

I was just saying when you open up some of these doors, like is it the same stuff that we heard about during the financial crisis, when people were working back home? What are we looking at here?

Yes. Not -- yes. Not quite that bad. When we look at it on average, some homes are, as they would be, a regular way, some are in a little worse shape. But on average, it's around 40% to 50% more costly to do a noncompliant turn, and it takes a few days longer as well. But we baked that into our numbers and our guidance, and we're not being surprised by anything that we're seeing right now.

Are you seeing much in terms of dispersion of performance from different geographies? At this point, it got pretty homogenous during the pandemic period where everything was rising. Is anything kind of spread out and changed?

In terms of rents? I want to make sure...

Well, when you talk about rents or general demand, but usually it goes hand in hand.

Yes. No, I think Dallas was saying it earlier, there's a lot of green lights in the portfolio right now where generally, demand funnel is high, supply of single-family is low. So we're in really healthy shape. Our Florida markets have been outperforming for the last 2 years. They continue to. South Florida, Tampa, Orlando, have been some of our best. Atlanta continues to be strong. Phoenix softened for a little bit second half of the year and is now kind of back to its normal kind of trajectory. California continues to be strong for us. So we're seeing a lot of good things. There are a couple of soft spots here or there, but nothing material. And usually, we work through those pretty quickly. And some of it is because of the compliance issue. We have a little bit of a turnover piece to work through, but this is healthy turnover. This is what we expected and wanted to get the portfolio back to a normal way.

As you turn those units over that had been kind of somewhat stagnant for a while, how should we think about occupancy in general for the portfolio? Because the occupancy level had gotten very high. I assume that those numbers include renters that aren't paying. What's full functional occupancy? Or how should -- how can we think about that?

No, it's a great question. We ran artificially high during COVID, we're 98-plus. And as we've been -- but a lot of that was because we were working with residents and emergency rental systems and all that. So now that we're getting to a place where we stabilize -- if you just look at our current turnover level, kind of historic, how quickly we're able to move residents in and out, our days to re-resident, that's going to tell us that we should be in a mid-97, high-97 occupancy just fundamentally. And you'll get some variance by market depending on what's going on with seasonality and turnover and all that. But that's about where we are today as we're starting to work through this compliance backlog.

Okay. And what are the capital plans right now in terms of investing in new properties? Maybe you can tie that into dividend policy, free cash flow. It all kind of ties together.

Sure. I mean from a capital allocation perspective, we continue to write offers for homes that are for sale on the MLS every day, and we're writing offers in sort of the high 5, low 6 cap rate range. Those homes continue to trade away from us to end users who are paying prices that, based on our cash flow underwriting, are low to mid-5 cap rates. So still a bid ask spread, by and large, on MLS buying. We continue to look to our builder partners to build out our new product pipeline, which we're really excited about, looking to grow. We see lots of opportunity to add to that pipeline in sort of that high 5, low 6 type cap rate range with very minimal risk to us. We like our -- we think we've built a pretty good mousetrap in terms of our approach to that. Dividend policy is sort of dictated by a number of things. I would say that we continue to pay out at close to 100% of our sort of taxable income level. I think we're going to have to be mindful of the fact that, thus far this year, we've been a net seller. We have been sort of disposing of certain assets as they become vacant, as we sort of prune underperforming assets out of the portfolio. So over time and distance, we'll have to be mindful of kind of the gains accumulated and what our sort of position is with respect to net operating losses that we sort of accumulated over time. So I think the short answer is it kind of depends. The longer answer is from a capital perspective, we are going to try to be patient and opportunistic, but we're excited about some of the opportunities that we think might begin to present themselves, particularly around smaller portfolio on that.

The other thing, I'd just compliment Jon and Ernie's work on getting our balance sheet in a position where we're somewhere around 5.5x. And we see a world based on, call it, our current liquidity, free cash, untapped revolvers, joint ventures, we have about $2 billion of liquidity. So we want to grow. We just want to grow intelligently and do it in a way that is extremely accretive to shareholders over time. So I do think that the pendulum sort of swung from if you were a levered buyer of SFR in the last several years, the cards were stacked a little bit in your favor to some degree. And I do believe that, that pendulum is now swinging to more of the unlevered buyer, the balance sheet that, as you know, investment grade. And I think that will be something that we can use as a tool, obviously, but can be more opportunistic as we look at some of these opportunities. I mean a lot of smaller portfolios likely they're stuck.

Yes. Leverage has obviously gotten significantly better since the IPO. There are some maturities coming, I think, in '26. Do you have to start managing for the '26 maturity? I think it's $2.6 billion. Do you start managing for that now? Or is that something you consider more down the road?

We have a plan for that. It's actually $3.1 billion of maturities that's comprised of the $2.5 billion term loan, which is part of our 5-year bank facility. And then there's about $650 million in our last remaining outstanding securitization. So we're comfortable that we continue to have a good amount of time to deal with those. Capital markets are open to us. We obviously don't love our cost of funding today. So we think that we can continue to be patient. We were very purposeful in terms of how we approach delevering the balance sheet over time to put ourselves in a position where we have the flexibility to be opportunistic if interesting things become available. But I would say that, that's something that we're not going to wait too much longer than kind of, I would guess, middle part of next year before we're going to want to start formulating a real actionable plan. The good news is -- shouldn't be a surprise, our plan continues to revolve around accessing the unsecured bond market. That's the market where we want to be active. And we're going to take advantage of the time we bought ourselves to not have to do something today, which I think is candidly a great spot to be in.

Dallas, you talked about your builder partners being a really nice pipeline for acquisitions. How would you characterize that product that's been delivered so far? Do you like having it as part of the portfolio more than maybe some the older products? Is it easier to manage, Charles, from your perspective? Is it a better return? And any thoughts around that?

Yes. I mean return is all subject to when we put something in contract and at what pricing, and where is our pricing power stronger or weaker, wherever that happens. I would say, look, from a CapEx perspective, it's terrific. Going in yields are awesome, and we really love the strategics that we've partnered with over time. We started a national program with Pulte a couple of years ago. That's going really well. I would say today, in our dedicated pipeline, we have close to $1 billion, roughly, call it, 2,500 homes, plus or minus, across probably 15 communities. And we have very, like limited capital outlay for that, which is terrific, and we can manage it extremely efficiently. I think what's been nice is that as -- for us with -- working with new partners and looking at more opportunities, as builders have warmed up to the concept about having strategic partners in our space, it's certainly lending itself to more opportunities, obviously, but also strategic thinking early on. So a lot of our partners will come to us with opportunities very early. We can get under the hood, we can give them our 2 cents about what we think would work in that kind of part of that geography, that shift mix, whatever the product is, and we can actually influence design elements within the communities. And it's really a resourceful way for being in the space without carrying heavy load or we're not having to carry thousands of lots on our balance sheet. So love our approach as it works today. And I think what we've proved out over time and even what some of our peers have been working on and been announcing is that, that model works. And it's a very effective way to be in the new construction space without having to carry the G&A burden.

Right. We've got about a minute left. Any sort of closing thoughts you want to give the audience and those listening in about Invitation Homes and what the takeaway should be from this presentation?

Look, I feel like we're always on repeat, but like I couldn't be more excited about the business we're in, the markets we're in, specifically with how we've designed our portfolio. We've always erred towards being in a more expensive product, a little bit higher price point, little more qualified customer who's willing to take on additional services and have kind of an experience added situation as they choose how to live. I think there are a variety of ways to live, there's a variety of ways to lease, and it's not one dimensional. And I think what Invitation Homes is going to continue to try to push the boundaries on are what can that flexibility in that for-lease or for-choice lifestyle be like? And are there ways that we can do it through both newer product, new communities, where it feels like a brand-new home you're moving into, and it feels like your brand new home. But at the same time, anchoring in on the fact that we've got 85,000 units that are highly infill, where we densified and kind of, I would say, diversified actually the risk profile of our portfolio. We have done a really nice job, I think, over the years of culling 12,000 to 13,000 assets out of the portfolio, to get this thing to the place where it is. And as Charles talks about 97.5% occupancy and all this terrific revenue growth that we've seen really year-over-year, it's in large part to the work we've done around portfolio composition. And if there's a differentiator, I think it's that we're in the right markets, the right footprint with the right type of customer.

Great. Thank you very much. Thanks, everybody.

Thank you.