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

All right. So I'm going to take that as my cue that we're good to go. I don't have the green light, but I'll take it anyway. Those of you who haven't met me, my name is Buck Horne. I'm the Raymond James analyst for residential REITs and home building, and I'm thrilled to be able to introduce to you the team from Invitation Homes. To my left, Charles Young, Dallas Tanner, Scott Eisen and Jon Olsen, the entire Dream team is here to give you the update on all things single-family rental. We'll do a few minutes of overview with Dallas, a quick update, and then we'll dive into some questions. So with that, Dallas.

Great. Thank you, Buck. Good morning, everyone. It's nice to be with everybody here at the Hilton in Midtown once again. We're grateful for the opportunity to give an update on the business, the industry trends, things we're seeing with our company. There's sort of been 3 kind of major themes as we've talked with investors over the last little bit around our business. First has been and foremost is just a reminder on the outstanding fundamentals that surround single-family rental. There's an absolute lack of housing supply in the marketplace today. And we have a customer that continues to get more and more qualified with us longer and longer and continues to adopt ancillary services as part of their lease structure with us. Average customer staying now over 3 years, over 4 years in parts of California and our Western markets where we rolled out the business initially. And we find that this propensity to renew and to adopt these services continue to be a value-additive choice to our customer. Today, 97.5% full from an occupancy perspective, our blended rate in May was, I think, 5.3%. We've seen that continue to accelerate through what is our peak leasing cycle, which is typically between, say, March and August. Business feels great from that regard. That's point one. Point 2 has been we've leaned in and we've talked about this now for the last year, 1.5 years on trying to build much more new supply, newer housing construct for the single-family for rent customer. And we've been very active in that space with a number of both public, private and regional builder partners. We will continue to use our balance sheet to lean in to create additional new housing stock and supply because the customer continues to tell us that through both our surveys, when we're in and out of homes on our renewals. And as we pilot new services, the new community aspect is something that many of our customers are craving. Third, we've been very active and quite vocal in our ability to adopt a third-party management approach for professional capital in the space that's looking for an invitation home standard operating model. We've announced and mostly onboarded 20,000 units in the last 6 months, which have taken our, call it, current home count close to 110,000 homes on our portfolio. So the business itself today will continue to lean in on both third-party growth looking for customers in that business that are particularly professional capital with scale that want to leverage the Invitation Homes operating playbook. We are hyper focused on finding portfolios that look and feel and are synonymous with the current real estate offerings that we have in our book. And we're going to continue to try to find ways to use our third-party business to also enhance the returns on our wholly owned portfolio on the balance sheet. Those are sort of the 3 themes we're excited to be here today. We're grateful to buck to be willing to host us. And we're happy Buck to jump into. And maybe I should just introduce you'd give brief introductions. But to my right is Charles Young, our President and Chief Operating Officer. To my left is Scott Eisen, who's been with us almost a year in our Chief Investment Officer role, and to the left of him is John Olsen, our Chief Financial Officer. Buck?

All right. With that, this one maybe for Charles to start off with because I kind of want to dive into the May operating update and just kind of the stats you guys provided around that. I guess, first of all, congrats on the really strong results. Clearly, demonstrating the lots of strength of demand for the SFR space. I guess maybe a higher-level question. How are you handling the revenue optimization process right now? Like what tools are you using? What data points are you looking at for -- how far you can push pricing? And I guess bigger picture question is, do you think you're still leaving some money on the table in terms of what you can ultimately raise rents to?

First of all, thank you, and I appreciate the question. Look, results are as expected, yet strong. We set the portfolio up coming out of last year to get to a position, as Dallas said, when we're full. And we knew that peak season on new lease is coming. So we're accelerating into that, and we're able to take advantage of it while we're holding renewals. Your optimization question is something that we've always focused on, and it's really a balance between occupancy. And what's driving that is low turnover and days to re-resident, how quickly we are turning from economic occupancy to economic occupancy I would argue that we're one of the best at being able to do that. And if you stay in that kind of full position of power, you can capture the rents that are out there. But that's the reality. We're really only able to capture what is the loss of lease that's in our portfolio. And if you go back and look at our portfolio over the last 5 years, we have constantly been trying to optimize and grab as much of the rents that are out there, we've always been one to push on the renewals and try to capture. That's 2/3 of our business. And so when you look at our blend today in May at 5.3% or for the quarter at 5.3% -- the majority of that is driven by almost 6% on the renewal side. That really is the push here, and you balance that with our occupancy, that's the power of this platform. And you got to remember in single-family when you're turning over, it cost a bit more to turn a home. So we want to find that balance between all of those scenarios while capturing as much of the loss of lease that's out there. The loss of lease in the portfolio is still healthy, but it's not as high as it was during COVID, where the numbers were just elevating, escalating. What we're seeing right now is, if you go back to any period other than kind of COVID period. We still have a healthy growth at these numbers at May 5, 3 and mid-97 occupancy. So we really like where we are, and it's a constant balance, and it kind of ebbs and flows. One of the things to pay attention to is we are back into a more of a seasonal period where you're going to get an acceleration of new lease in the summer and then in the slowdown in the shoulder quarters.

And I guess, kind of more broadly speaking, when you look at the cost of homeownership right now, I think you have your lost lease statistics, and that's kind of what's in the market today. But against the cost of ownership in your markets, I mean, our stats say the gap is as wide as $1,000 a month in many cases, current mortgage rates and current home prices. I mean how do you think about that in the context of where kind of current loss to lease is? And what's the longer-term runway for -- do you think this -- do you think there is that kind of gap where like we could see a protracted run to fully raise rents $1,000 a month to close that gap? Or is that -- how does that work?

I can start and if Dallas wants to add anything, he can. Look, I think that's what's showing up in the long-term fundamentals. It's still a seasonal business. But ultimately, when you look back at the 12 years that we've been in business. This is some of the better fundamentals that we've seen, and it's showing up where we've had periods of longer, higher lease spreads, but not with this occupancy, not with this level of days -- resident and low turnover. So when you take that bigger picture, it really is a healthy fundamental to drive kind of NOI for the long term. And you're going to get some seasonal periods up and down, but what -- the answer to your question as I see it, is we are going to have a long runway here. Even if rates come up a little bit, there's still high demand. We're undersupplied in housing. We have many of the folks that are coming to us because they want the option to rent. They want to stay in a single-family home. They want to be in a good school district in communities that are safe. This is where they want to raise their family. And to your point, they can do it more affordably and use that money for other things, whatever that may be.

And just diving in this kind of a hybrid question. Going into your thoughts around adding more new supply, obviously, you guys are leaning into that strategy with the built-for-rent. Other builders have been working on adding their own supply, building it on spec in many cases. Are you seeing any effect of the ramping of that new build for rent supply dampening rent growth? Or how does that affect your pricing strategy in the near term?

No. I think if anything, we're seeing that customer profile wants more of that new product. I think BTR is like cast a broad net around what BTR is. And you certainly have single-family detached homes between 1,500 and 2,500 square feet built in a variety of locations. And then that goes to the age-old principle of location matters. So if you've built that product an hour outside of town, you may be fighting for rent a little bit harder. If you built that product 30 minutes inside of town, you've got much more inherent natural demand. The same can be said about some of the smaller product that's been built between 800 and 1,200 square feet that also gets kind of cast underneath the BTR net. It's just not a like-for-like. So just like anything in real estate, it goes back to product, location and customer fit. And I think what we're finding, Buck, is that massive sort of dearth of -- or I'd say, lack of supply that's in a lot of the markets that we operate in will continue to keep demand elevated. So I don't see that changing. I 100% agree with Charles. And then I think what we believed 10 years ago, as the business was starting to form was that families who either wanted to be down payment light or needed to be down payment-light, still desire these same neighborhoods. It's now being validated by studies like the University of North Carolina put out last week that are showing that academic standards are lifting among some of these families that are renting. And so I think as that narrative gets heard more broadly, you're going to actually have increased demand for people that want access to better schools, transportation corridors, job centers, but maybe do not have the ability to have a huge down payment on. And so finding that blend is always going to be the right balance.

Yes. No, I think it's really interesting. I was on the road recently with PulteGroup, one of your key partners on the build-for-rent strategy. And interesting comment they made was that in communities where they're building houses and kind of they kind of carved out a section that you guys will do some rental product with and maybe they've got some entry-level customers on the other side, that they're finding that the customers that are leasing homes from you guys, in many cases, are for better or worse they've got stronger incomes and higher credit scores and maybe not the down payment that is needed, but then what they're getting in terms of their entry-level customer qualification. So it just speaks to, I think, the quality of the tenants that you're attracting from a lifestyle perspective, do you think that, that's -- what's your reaction to something like that, that you're attracting that kind of tenant quality?

I'm going to go and then I'm going to ask Scott to give some of his perspective because he's on the ground looking at these communities day in and day out. Look, we started positive credit reporting with our customers last year. We have 190,000 people signed up for positive credit reporting. We've seen average credit scores in the last year, go up to 30 points. We've seen 6% of our portfolio go from subprime credit to prime. Those are really kind of measurable impact as you think about being down payment-light, increasing your quality of living because you're in a newer community or a great neighborhood with access better schools. And by the way, also enhancing your credit profile for future opportunities, whether that's to own, to lease, to buy a car, to lease a car, you name it, really doesn't matter. So what I think is starting to resonate and is also starting to be substantiated by facts are that a leasing lifestyle can lend itself to a lot of the similar upside opportunities as owning a home. Except that, you have greater flexibility. And I think as you look at our core demographic, that customer that's 38, 39 years old, combined household income of $140,000 has a rent-to-income ratio, I think, today at 5.6x, Scott, it's a pretty powerful story. And I think as we continue to tailor our product or our partnerships with builders that build this product, in a way that will draw more of those customers in, this is going to be a very accretive story over time and distance. Scott, what would you add in terms of...

We're actually excited to hear Pulte saying things like that. When we look at a new community acquisition, right, because people throw around this expression BTR. And so for us, what that means is that we will work with either a national production builder or a regional builder, and we will agree to forward purchases from them to buy homes from them in a community. Sometimes they might be building a 400-home community and we're buying 1/3 of that community, and we're buying 10 homes a month as they develop that community over time. Sometimes we may be buying 200 homes in a fully contained community with its own amenities. And so it can be a little bit of both. But when we evaluate a new acquisition, and when we evaluate a new location with a homebuilder, we have our own internal scorecards that we look at. We look at census data in a 3, 5 and 10-mile radius. And then we also look at our own internal Invitation Homes data within a 3-, 5- and 10-mile radius. And this is really where the power of the platform comes in where -- when I first joined last year, we had 86,000, 87,000 homes in the system now with our third-party management business. We're approaching 10,000. We are leveraging that data on our internal portfolio. And so a lot of times, when we look at a community, I might be looking at a deal in Charlotte, I've got information on -- we might have 100 Invitation Homes in a 3-mile radius, 300 homes in a 5-mile radius in 600 homes into 10-mile radius. And we are analyzing that data. And it's quite often that when we look at that information, we may see census track data that says that in that 3-mile radius, the average income is $93,000 but our resident, because we have that data, says it's $125,000 in that 3-mile radius. And so that's why it doesn't surprise me, and I'm excited to see Pulte saying things like that because it is consistent. And obviously, if we see a situation where the census data is different than ours, then we have to take that into account and analyze it as part of our acquisition process. But this is how we look at acquisitions, and we're excited to see Pulte things like that.

Good. Appreciate that color. I'm going to dive into the third-party management strategy and the growth of the platform and kind of where this is -- how is your evolution or your thought process around third-party management kind of evolved over the past year or so, now that you're starting to attract some partners that are really adding some significant scale and now you're seeing -- I think Lennar is now doing a kind of a joint venture, where they're putting some own equity in the game with some of those homes. So how do you see the structure of those types of partnerships evolving? And what's the kind of the longer-term runway for that opportunity?

I think the market's evolving. Just like any good market, it gets smarter. It gets a little bit more efficient over time. Capital gets more intelligent. I think what we saw as the industry started to professionalize. And I think it's an important reminder, if you look at the 16 million or 17 million units that are out there that are single-family homes detached for lease in the U.S. today, professional capital may be involved in about 3% of it. So 97% of our marketplace is still very much a mom-and-pop industry. But what you're starting to see in the evolution of how professional capital, professional management thinks about this are structures that could vary in kind of wide ranges. We have structures. If you look at the 3 third-party announcements we've made this year on those 20,000 units, they're all 3 very different structures. One is a professional capital partner, who is looking for professional grade management, and we have the ability to buy some of those assets over time. The second is we went in and actually physically bought the management contracts with our own balance sheet capital and are looking to negotiate ways to do more business with that potential partner. And then the third as you referenced, Buck, is a JV of consortium between a professional homebuilder, professional capital and now a professional operator. And we are very excited about where those types of structures can go. So I think what's the beauty for Invitation Homes is based on where our cost of capital is in the cycle, we can be nimble. We can do things on balance sheet, which for the record, we'd prefer to do as much as possible when our cost of capital lines up the right way. We can do things in part in JV with other professional capital stacks that are out there that would like SFR exposure with a professional operator and/or we can operate our way into being a potential partner or a value-add partner into existing portfolios. And so I think the type of capital will, just like in the multifamily space evolve over time. It will go from balance sheet risk capital to more maybe lower threshold and return capital that you see more synonymous with the insurance industry. I think the financings that are available to the space will only get better over time. If you look at how the GSEs have financed multifamily and manufactured housing. I would expect that over time and distance, they will get more active in the SFR space, specifically, as you see communities get more established and developed, we will, by the end of this year, have somewhere close to 70 full communities on our platform that we're managing. It is a very different business than a scattered site business that was in the first 10 years. It looks and feels much more like multifamily. I would expect that our processes, our value-add offerings, the ancillary services that we drive will adjust and change. And that will, in kind, lend itself to all different sorts of types of capital and also third-party companies that will support that type of a living experience. And so I think, Buck, it's early days, and we know kind of who the capital is. It's been in SFR and professional as far the first 10 years. I would expect it to continue to mature and to get much more sophisticated and intelligent and simple over time.

And what I would just add is as when you think about the third-party business for us, it's really 5 advantages for us, right? First is it's a capital-light way to grow the fee stream and earnings of the company. Second is by taking on these third-party agreements, it also gives us the ability to potentially scale in new markets more quickly. So for example, Nashville was a market we had exited. Between these 3 agreements, we now have 700, 800 homes in Nashville. And so it's now giving us an opportunity to leg back into Nashville on a much more efficient basis than it would have been to buy homes one at a time. Third is we either have a ROFO or at least an effective first look on any assets that get sold by our partners. And so they notify us when they're considering selling something, we obviously have the information advantage and the first look on it and gives us an opportunity to potentially buy assets and put them on the balance sheet. The fourth advantage is these are -- these 3 people that we've announced is with -- are very well capitalized institutions that clearly could be future capital partners for us. And then lastly, it's the information advantage, right? We now have information on 110,000 homes. We can use that information to help manage our business, manage our acquisitions, have better information advantage when it comes time to thinking about revenue and expenses for the company. And so when you really think about this, this is a very -- we call it 3PM, but Dallas and I have jokingly called it SPM, strategic property management. And this is what we think will be value add to us and help obviously grow earnings and be accretive to our shareholders.

Can we drill down a little bit on the fee structure and the margins of how these initial agreements work? And what kind of accretion you guys are anticipating? And I guess if you add -- keep adding more of these agreements, does it get incrementally more profitable as you scale?

I think the short answer is, it depends, right? So the structures and the economic terms of each of these agreements vary depending on what our partners' sensitivities and goals may be. We've been a little bit coy about sharing a tremendous amount of detail on the economics, in part because we're sensitive to our customers' right to confidentiality. Recall that we onboarded the first portfolio, I believe it was January 15 to 16. The second portfolio was onboarded in the middle of May. So in our first quarter numbers, you saw less than a full quarter of contribution from the original Starwood portfolio. We'll have a little bit of contribution from the Nuveen portfolio that was onboarded in May. And then the last piece will come on sometime in the third quarter. I think once we have onboarded all 20,000 plus of these homes, and we're able to provide information on a slightly more anonymized basis and candidly had a little bit more operating and financial history we can look at. I think we'll be in a much better place to give folks a little bit of a shorthand way of thinking about the economics that is useful in terms of understanding the business and what it can do while sort of preserving the confidentiality of our customers. What I will say is this, this is a high-margin business for us. We are not interested in commodity property management. That's not what we do. As Scott said, this is a highly strategic line of business for us, the goal of which is to improve our wholly owned portfolio and grow our business over time and distance in a thoughtful, capital-light way and we're really excited about it. I think that the paradigm of third-party management in the multifamily world does not apply here. I think some of our peers have talked about third-party property management, as maybe not being what they had anticipated or hoped. I think we have entered into these agreements very much with eyes wide open and with economic structures that are designed to both protect us and align our incentives in terms of driving better operational and financial performance over time. So we really view it as a win-win-win. It's a win for our customers, it's a win for us and it's a win for our stakeholders.

And what kind of operational lift does it require to onboard 20,000 houses into the portfolio? And does that stress the other -- the regular business? Or is there an upper limit to what you guys can onboard?

Yes. As we mentioned, we've been really strategic about who we're partnering with. First of all, they're in our markets. So -- and we have -- and part of why they want to partner with us is that we have that scale and density in those local markets. We have the teams on the ground. So really, it's incremental. We're just adding to the teams that are already there. We're not building anything new on that side of the business. And in many ways, we'll see how it plays out. We think it's going to add efficiency to our base book and our ability to have more density locally, whether it comes to leasing the repair maintenance, the turns or rehabs, the ability the drive time from one home to another is a big part of our efficiency. And if we have more dense with the third party, we're able to service those homes, get to them quicker, use our algorithms to route and all that stuff that really makes us as efficient and high margin that we are as a business. So we really see it as we've done this before, whether it's buying a portfolio of 3,000 homes or managing a portfolio. Now the first one with Starwood at 14,000 homes. That was a bit of a lift. And there were a couple of markets like Atlanta and Phoenix, where it took a little extra lift, but we took down all 14,000 homes in terms of integrating into our portfolio in 2 days. A lot of work happened before that, but our ability to just jump -- have them come in to the portfolio is a testament to our teams locally and their dedication and being able to hire and get them into our engine. And long term, it's going to -- our partners are going to be excited to be able to try to get some of the improvements and efficiencies that we can bring to their portfolio.

And I want to dive back into the build-for-rent side or the build-to-rent. Because you had this announcement just second quarter to date, like upwards of 1,000 houses under new contract, $274 million potential total investment are the yields on those homes similar to what you've characterized before in terms of roughly a 6%-ish yield? And I guess a question we get from investors a lot is 6% a real number? Like are we talking apples-to-apples versus comparable yield on cost after CapEx, fully loaded kind of thing?

I think the short answer is when we're underwriting these communities, we're underwriting on an untrended deal, and we're targeting north of a 6% return. Now remember, this is new construction homes, right? So the delta between the nominal and economic cap rate is very little because when we first buy them, the upfront CapEx, the brand new homes. And so realistically, it's a 5- or 10-year cycle until the CapEx on this increases materially. But I think the short answer is what we just announced last night was 1,000 homes that we have under forward purchase agreements. It's spread across 4 different builders and those are homes that get delivered anytime between the next month and the next 12 months. And so I think you should see us -- you should expect to see us to continue to make announcements like this. When I joined the company almost 1 year ago, I think we were engaged with 2 major homebuilders. Now we're engaged with the, Dallas said, 6 to 8. We'd like to be engaged with more -- we're increasing that dialogue with both the national production builders as well as the regional builders. And we think from a risk-reward perspective, this is the right place in the spectrum for where we can play. This is also giving us forward visibility to our acquisitions pipeline. If you think about it, while when you look at what we were doing 3, 4 years ago in terms of the MLS acquisitions, we didn't necessarily have line of sight because we were still buying homes one at a time, but at the time, there was a very substantial increased volume of home sales. Obviously, the existing home sales has declined dramatically in the last few years because of where interest rates are. but we now have forward visibility. I think we said in our first quarter earnings, we had about 1,900 homes under forward purchase. We announced another 1,000 last night, so that's almost 3,000 homes of forward visibility. We expect to continue to do forward purchases with the builders and expect to still target something in and around, if not north of a 6% cap.

I got to jump in before we run out of time with the obligatory balance sheet type question for John. Given these opportunities that you can grow both a 3PM platform and the build for rent is you're leaning in on that. How do you think about the capital stack right now? Do you think about, at some point, utilizing the ATM for additional equity issuance if there's additional growth opportunities? How do you position your cash flows going forward?

Yes, I think the answer is all of the above, right? So as we sit, disposition proceeds have been a significant source of capital for us because it is so accretive for us to sort of prune the portfolio of underperforming assets or maybe assets in markets where we'd like to have a few fewer eggs in one basket. And we're able to sell between a 3% and a 4% cap put the cash on the balance sheet at 5.25%, 5.35% and then redeploy it as Scott said, north of 6%. I think if you couple that with our access to capital, both debt and equity, we certainly don't love our share price today, but would love to get to a point where we could use the ATM, including potentially the forward component of our ATM to match fund. But I think we feel very comfortable with where the balance sheet sits with our access to capital. We have a plan to address our near-term maturities, which recall we don't have any debt maturing prior to 2026. So I think from a capital perspective, we feel really good about our approach to the new product pipeline that doesn't require us to put a bunch of capital out the door. It allows us to sort of maintain dry powder and sort of evaluate the full spectrum of opportunities that present themselves. And then as we sort of move forward with takedowns, and we address the capital need accordingly. But I think -- our approach is designed to be attractive from a risk-adjusted return perspective and from the perspective of being capital light up until the point that we are prepared to take down a finished home that is ready for lease up and to start generating cash flow. So I think the balance sheet is in a great spot. Obviously, we were pleased to see the upgrade from Moody's recently. And so I think from a capital availability perspective and from a match funding perspective, we feel really good.

All right. With that, I think we're out of time. So let me leave it there. Thank you for all for joining us and attending, and thanks for the team.