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

All right. Well, welcome, everybody, to the 2:30 p.m. company presentation with Invitation Homes. For those of you that don't know me, my name is Austin Wurschmidt. I'm the covering residential health care and lodging analyst at KeyBanc Capital Markets. With me today, the executive management team at Invitation Homes. Direct to my left, we've got Charles Young, President and Chief Operating Officer; Jon Olsen, Chief Financial Officer; Dallas Tanner, Chief Executive Officer; and Scott Eisen, Chief Investment Officer. I'm going to hand it over to Dallas to make some opening remarks here, and then we'll jump into Q&A.

Great. Thank you. We appreciate everybody being here, and we're thankful for the support that Invitation Homes widely receives from many of you. So thank you very much. First, I think as we look at where we are in the year, Nareit is always really a good point for us to check in. We feel really good generally about where we are through the first 5 months of the year, probably slightly ahead a little bit on occupancy and rate from what we laid out at the end of the year. Renewals business, which is 75% of our leases plus, has been really strong going into summer north of 4% or mid- to high 4s. New lease, also pretty steady. We have a handful of markets that are creating a little bit of a drag. We talked about at the beginning of the year, we knew Dallas and Tampa and Phoenix would sort of be tough as we continue to onboard a lot of that new supply. And so those markets have been a little bit challenging. It's a pretty competitive environment. And I'd say on a year-over-year basis, right now, those markets are pretty flat. I will argue that Denver, Seattle, Northern California, Southern California, Atlanta, all of our Midwest markets, very strong both on new and renewal. And so we've seen a nice blend as we head into summer. Occupancy is a touch higher than we would have expected in large part due to that renewal velocity that I talked about before. Now we're sitting in sort of the low 97s with kind of blended rate in the 4s between renewal and new. It's a very healthy position for us to be as we sort of tackle peak leasing season through the summer. And I'd just add that we should expect and you all should expect that we'll see occupancy sort of come in over the next, call it, 2 to 4 months as we have more of our turnover traditionally between June and kind of early to mid-September. Second point, along the lines of what I mentioned around some of the supply dynamics in the marketplace, we feel really good about where we're seeing deliveries in the BTR segment specifically sort of dramatically slow down in terms of those deliveries. We flagged that last summer as that being a potential risk item in our July call that we knew that we were going to see an increased amount of supply, particularly in like Tampa, Phoenix, some of the Texas markets. Those deliveries are dramatically slowing. We're going to be in a very healthy spot here in a couple of quarters in terms of that being an issue around supply pressure. Lastly, Scott and the team, Charles with the onboarding, Jon with figuring out how to pay for it, have done a wonderful job in our homebuilder businesses and what we're doing on the development front. So we take a very capital-light approach to development. We have a number of strategic partners around the country, both large national builders, small to midsized regional builders, where we do C of O sort of structures, where we're really capital-light on the front end, but we lock in pricing with a little bit of flexibility for our partner. And that business continues to basically establish a run rate of -- right now, it's about north of 1,800 homes that are currently under construction and delivery. But the goal here is that we get the business to a place where in any given year, we're sort of bringing on 2,000-plus new homes a year as a sort of normalized run rate. In addition, and we sort of talked about this in our call in February, we mentioned it a little bit at Citi that we're exploring ways to go up the curve on the development cycle. We announced in the last day or two an update on what we're calling our developer lending program. And that's a sort of capital-light way once again to go up the curve with regional builders and drive additional transaction volume to the company with a little bit of an outsized return while they're in the market. And Scott can give you a little bit more on the specifics and sort of the return profile here. But I mean, by and large, what we're trying to do with the business is continue to invest accretively on balance sheet, be really deliberate about where we want to own assets and why, continue to use the size and the scale of our portfolio to drive outsized opportunities that will lend themselves to ultimately, hopefully, balance sheet opportunities. You see that in our 3PM business, which today sits at about 25,000 homes that we manage for a few strategic partners. And then you're going to start to see this with our development lending business, where Scott, over the last couple of years with the team have developed really good relationships on the BTR front with a lot of small and midsized developers around the country. And while it sounds great, it's actually hard in practice to go figure out your financing in a way that's reasonable, especially if things start to slow. And so what we think we can do with our low cost of capital sort of step in and bridge that gap, extend our relationships further, deepen the relationships with some of these regional partners that we really already like to do business with and ultimately build another funnel with a lot of takeout opportunities for us in the long run. And so we're excited to be here today. The business feels great. The market is sort of funny, as we all know, but the business itself at Invitation Homes is in a really strong and really healthy position. Happy to jump anything you want to talk about.

I think you hit on a lot of themes that are worth hitting on, one of which you started out with, which was the strong retention and kind of the demand side of this business. Can you just talk high level a little bit about the demographics, where we are in the adoption of single-family rentals as a housing alternative? And maybe speak to the penetration rate of that target customer.

Go ahead.

Yes. Look, your question is kind of broader about the customer in general, but just to emphasize briefly what Dallas said, in terms of where we are this year, kind of right where we expected healthy occupancy, maybe a little stronger given the low turnover. We thought this would be a year where we kind of bring occupancy in a little bit from the COVID levels. We were running really high and a bit of a reset in terms of getting back to normal seasonality that have been out of the business. And so with that, we are seeing, to your question, our customer really has kind of 3 different angles, if you will. Those who are renting out of choice, and we see that as a growing segment. Those who want the flexibility, the optionality not have to pay for the high insurance costs and taxes rising or deal with a roof or otherwise. And so they choose the leasing lifestyle, if you will. You got those who are in transition. That's a big part of our book. Those who are moving new to an area or they're going through a circumstance where they want to rent for a while, and hopefully, we can capture them for longer term. Our residents are staying over 3 years and getting longer every quarter. And then we have those who are kind of renting out of necessity because they don't have their credit built up, and we'll help them do that. And ultimately, they'll stay longer or they may get to a place where they can choose to move on. But our goal, as Dallas alluded to, is we're running a really good business. We're adding value to the resident in terms of services that we provide. It's more affordable to rent one of our homes than it is to buy in all of our markets, on average, about $1,100 more affordable. And as we look at that from a practical sense, that means a family can get into a school district, safe neighborhood and send their kids to a school that they may not be able to go to otherwise. And we're finding that's kind of rinse and repeating in a kind of inflationary environment. So I gave you a lot there. I don't know if I answered your question directly, but it's a good question.

Yes. I think just hitting on the affordability piece a little bit. You talked about the $1,100 delta between renting versus owning and some of the renters by necessity, either credit perspective or otherwise. How is that historical relationship? How wide has that spread been over time [indiscernible]?

Yes. Yes, this is probably on the higher end of it, kind of given what's happened post COVID, supply chain, all of that. We've always had a bit of a spread in almost all of our markets. At times, there's been a couple of markets that are a little more even. But even when that number has been lower, we performed really well. And so yes, I think it's stretched out a little bit. And I think as we work through -- and that's showing up in many of our markets where we're not seeing a little bit of the absorption challenges. So when you look at the Carolinas or California or Seattle, Denver, that affordability factor is part of why we're performing so well there. And I think as we work through some of the supply in the Phoenix and parts of Texas and parts of Northern Florida, we'll start to go back to that as well. So yes, it's about as wide as it's been for a little while.

How has traffic been up into this point? Because within the operations update, renewables remain strong, retention remains strong. You saw new lease rates maybe get back a little bit into May. What do you attribute from a demand perspective in traffic versus the supply that you just alluded to?

Yes. As we talked about, it's kind of what we expected this year. This is more of a return to normal seasonality. Traffic -- demand is still strong, down from last year, but we still had some kind of COVID effects, but even or slightly better than pre-COVID. And so those numbers are great. Our teams are really executing well. So as you have your funnel, we're able to pull through in the bottom line using technology. A little bit of AI is helping on that front. And outside of the markets that we're talking about, you're kind of in this normal kind of supply/demand where we're strong occupancy, getting north of 4% blended rates. And if we get some of our bigger markets like Phoenix and Tampa returning to that normal seasonality, I think we're going to get even a little bit more growth. But even with that, when you're running a book in the low 97s and 4-plus on blend, it's a pretty good business for us right now.

Certainly. Days to re-resident was another component you guys spent a lot of time talking about and kind of how that came down pretty significantly during the COVID period, and that's begun to normalize. How are you thinking about this re-resident component, how that's tracking relative to the more pre-pandemic levels?

Yes. We're about in line to pre-pandemic levels. There's 2 parts that make up days to re-resident. There's the turn portion, how quickly we can turn that house and get it back in service and then how long we have to wait on market to lease that home. Turn-wise, we're executing well. We're right within our numbers, kind of 10 to 14 days, some markets on the lower end, some markets on the higher end. But we knew this year where we're going to have to compete on price a bit more, and we thought that it was going to take longer to get some homes leased. And that's why we're going to start to see occupancy come down relative to last year. And so we're going back to kind of where we were pre-pandemic. It was artificially low during COVID. We got down into the high 20s at some point. This year, I think we added 3, 4 or maybe 5 days year-over-year in that expectation that we're going to have to compete on price and knowing that occupancy was going to come in. Right now, we're tracking kind of on budget with that. We'll see how the rest of the summer goes.

So you referenced a little bit ago on traffic down just a little bit but still stronger than what you saw pre-pandemic. Can you just speak to from a revenue management perspective kind of how hands-on you are with the systems, how you think about sort of targeting a certain level of occupancy versus being a little bit more aggressive on rate?

Yes. This year, we knew we were going to solve for trying to capture as much market rate as we could, knowing that occupancy was going to come down. And we knew that was driven more out of days to re-resident, kind of that on-the-market versus the turnover effect. We knew turnover was going to kind of hang where we were last year, and that's what we're seeing so far, maybe a little lower in the first quarter. And so as we're looking at kind of how that plays out in the numbers for us right now, it's kind of how we expected it would be. And ultimately, we're getting to a place where we feel like we have that right balance. And what we use in terms of pricing, going back to your revenue management question, we have the ability to basically see pricing -- rental pricing across the country with publicly available information. And we use that information to kind of set pricing based on algorithms, bed/bath count, location, all of that. Ultimately, that kind of sets the price so we know where we expect market to be. And then from there, we look at the number of leads that are coming through to drive, whether we think that price is in the strike zone or do we need to adjust one way or the other. And given that we manage over 110,000 homes, it's really good data that we have within our submarkets within our markets. And then ultimately, we have lots of people on the ground. We have offices in each of our markets. And then if we have a house that's not getting a lot of leads or it doesn't seem to be performing as we had thought, we'll make sure that we can roll a truck out there, get somebody to put eyes on assets to make sure that it's at the quality that we expect. So it's a little bit of -- a lot of art -- a lot of science, but a little bit of art in terms of trying to work with the teams locally and data. And I think over time, AI will start to play into that even more. But right now, it's really a lot of data science to make sure that we're making smart decisions.

On the supply side, I think everybody is kind of waiting for some of the supply across various spectrum of the residential market to come down. Certainly, build-to-rent has gotten a good amount of attention on that front as well. But can you talk a little bit from a shadow supply perspective in the rising home inventory levels that are being seen. Certainly, Florida market seems to come up a bit. Do you feel competitive pressure from some of that shadow inventory rising or more just specific to build-to-rent?

Look, I agree with everything Charles said around sort of the supply-demand dynamics that we see with somebody coming through our door. I think what is interesting about the housing sort of market generally plays really well for Invitation Homes is that you have this rising cost of homeownership across pretty much every category, whether it's mortgage, property tax, homeowners' insurance, cost to maintain. You have noise around sort of your own procurement costs as a homeowner, right, that are elevated even from where they were 2 or 3 years ago. Resale supply has ticked up in parts of the country 3 to 5 months, maybe 4 to 6 months in some markets. And yet you're not seeing the transaction volume. I think on a run rate basis, we're seeing about, plus or minus, call it, somewhere between $4 million and $4.5 million of annual sales, which typically pre-pandemic was always kind of somewhere between $5.25 million and, say, $6 million on a national basis. So like what's going on? You have a higher mortgage rate with, call it, 75% of the country and something that's pretty fixed and at a much lower price point. You have the rising costs that I mentioned before. And so I think there's going to be a propensity to renew, which we've seen in our numbers for the first couple of quarters this year. Renewals were a little bit stickier than what we'd seen. You're certainly not seeing the transaction volume, to your point. I think the plus side for us on the new lease front when something is vacant is that for the last year, we've had to compete pretty heavily in our full community division, like our BTR business with outside communities that were coming online. And we saw pretty standard across the board a month of concessions in this -- that is now starting to burn off. So Scott can speak to this as much as I can, but we have basically 60-plus full communities that we own or operate today. We have a really good idea of what a BTR customer is doing real time. And so that is going into our calculus of how we're thinking about underwriting new opportunities. The second thing that we're spending a ton of time on to sort of beat some of that supply risk is, look, the one thing that we've really figured out over the last 3 to 5 years is our scattered site business, which is the vast majority of our company, is a true strategic moat for single-family. We have customers that are extremely sticky. They want to stay in that neighborhood. Their kids are growing up playing with a bunch of homeowner in that neighborhood, and they have no intention of moving out. Our average length of stay across the country is north of 38 months. It keeps ticking up every quarter. In our California markets, it's over 5 years. That is an incredibly sticky customer. And it's a really interesting business model when you start to think about other ways that we can weave in, other things into that leasing experience that can drive down cost for the customer. We have an ability to do that, I think, in even a more intelligent way in our scattered site business than we can in the BTR. So I think with BTR, a little lower barrier to entry for other people that want to go build it, operate it, figure out how to solve for it. I think in our scattered business, and we're buying a lot of this right now, specifically from builders as they're having sitting inventory rise, is an area that we're really focused on. We're not buying on the MLS. We're not buying very much resale ever. I think we did between 20 and 30 homes last year. I mean that's just not a focus for us. Our focus is how do we develop 2,000-plus new homes a year, how do we continue to be smart around M&A, how do we leverage the platform both from a third-party management perspective and also now in a lending perspective that we can create residual value for other housing providers in the market.

So if we were to see these rising inventory levels, I guess, impact home price appreciation from any perspective, how do you think that affects your ability to price homes and push rents over time?

Look, let's be really clear about one thing. Like we don't -- and we say push rents, but the market dictates rent, like full stop. Like if we are overpriced with a sitting home, it won't lease. If we're underpriced, it would lease too fast. Like the market is what the market is. I think where you can have leading indicators, to your point, of where rents may be going is that if we see decent home price appreciation in a particular submarket or market, that gives us a lot of conviction. We've seen how this has worked for the last 20 years that rents typically follow suit. And in a market like Texas, where we've had basically little to no home price appreciation for the last 12 to 18 months, we're still seeing sort of a CPI sort of number around our rent growth. And on the renewal side, it's probably a little bit better. And so as you kind of think about those dynamics, it makes sense that rents haven't totally caught up to where home pricing has gone over the last 5 years. So we would expect that there's fundamentally some pretty good tailwinds in our business. But at the same time, you also pay the piper when it comes to property tax and the rising costs around [indiscernible] and everything else. That seems to be sort of slowing down. So that's another reason that we're pretty optimistic that on the noncontrollable expense side, we're going to have a lot less volatility over the next few years because home price appreciation is going back to much more normal levels. So I think all things being equal, and we said this in another meeting, like we can't predict the future perfectly, but it feels like we're in sort of back to this pre-pandemic sort of norm. We could predict probably somewhere between 3% to 5% rent growth on a blend across our kind of book if things sort of stay somewhat normal. And it feels like the expense growth is sort of inflationary. And that's a good business for us. Just at a stand-alone base case scenario, that's a really good business for us.

When you think strategically about portfolio positioning within certain markets and submarkets really and sort of the newer build-to-rent-type full communities versus owning more one-off infill submarkets, do you have preference? Or do you think one over the long term has a better ability to push rents over time?

I mean look, I think when we think about how we're targeting acquisitions today, there's a balancing act, obviously, between the different channels we have, right? So we have the MLS channel through which we buy homes. We have buying inventory tapes from the builders. We have buying stabilized communities from developers and high-quality operators, and then we've got our forward purchase program from the builders, right? When we look at markets and we look at houses, we go within our markets. We are trying to buy houses in areas where we already have boots on the ground. Every time we look at a portfolio acquisition, we're looking at the 3, 5, 10-mile radius. What homes do we have in the area? What is the performance of our homes in that area? And we're trying to get the right balance. Obviously, we look at both infill and also areas where the builders are building. But at the end of the day, we're going to areas where we've got homes. If it's not infill next to it, it's clearly adjacent to it. And so that's as we think about our growth and how we place our capital. As Dallas said, at the moment, I think we've talked a lot about the difference between the resale inventory and the builder inventory. I think we've seen some real opportunity to work with the builders. I think, obviously, you've seen rising inventory levels and we've been successful. Some of that $100 million of acquisitions that we announced in our press release last night, some of that was buying directly from builders from some of their inventory tapes. And we found some very strong opportunity for us to make accretive acquisitions in the high 5s and low 6s. And so we continue to pivot between those 4 channels and where we see accretive opportunities for our shareholders, we're allocating capital.

How significant getting into the developer lending program, which you hit on, is kind of a new piece to the business? I mean, how significant of an opportunity is that? What are the economics that you see for that as well?

Sure. We think about this builder program as just another extension of our business. If you think about it, we're in the market every day talking to brokers, talking to builders, talking to developers, right? Many times more engaged with those folks. They're trying to get us to either work with them on a forward purchase agreement, trying to work with them on buying a stabilized community. So those same counterparties with whom we engage every day, they also are looking for debt and equity capital to build their projects. You've obviously seen the money center banks have essentially exited financing for homebuilding. The regional banks have dialed it back a little. You've seen some nonbank lenders step into that area of the market. But we have relationships with these folks. We'd like to deepen our relationships. As Dallas said, we'd like to go a little further up the chain with them. And I think we see this as an opportunity. Look, the average project that someone's building is a $40 million to $70 million project. I think we're kind of looking at making loans to those folks somewhere in that 75-plus LTC range of an [ advance rate ]. But to be clear, we want to lend money on communities that ultimately we would love to own and we would like to buy. So we generally have not allocated capital to the 1- and 2-bedroom, cottage-style product. We're doing 3-bedroom townhomes with 2-car garages. We're doing detached 3 bedrooms, detached 4 bedrooms. And the same communities that we'd like to buy upon stabilization are the same communities that we have both the origination and underwriting capabilities to get our arms around. And so that's the market we're going to target, and that's the consumer with whom we want to continue to evolve our relationships.

To go just a step further because you asked about size and pricing, and I think what Scott would tell you is that we know that we're a REIT. We know that ultimately, we want to own assets on our balance sheet that are long term in nature, that on a risk-adjusted basis over some long period of time are going to perform equal to or better than other alternatives that are out there. We also know that we need to make sure that the aperture for our funnels are diverse because we've seen this even in the 13, 14 years we've been in this business, there are season and times across those 4 cycles that Scott talked about. So in today's market, it feels like Scott can do loans between $30 million and $60 million per loan that have sort of a 3-year term plus maybe 1- or 2-year extensions, depending on where they are in their cycle. It feels like we can put that out today at 10% or 10%-plus sort of types of returns, and then we can close on that basically like a prenegotiated 6% cap or something like that. Now every market is a little different. Every builder situation is going to be a little bit different, but we want to be really clear about a couple of facts on this. One, we're going to go slow and methodical with it. And we're only interested in doing projects that could live on our balance sheet. And we're going to try to structure them in the way that ultimately we could be the buyer. Maybe not every time, but I hope most of the time. Second, we are not interested in product, to Scott's point, that is not homogenous with what we do today in the event that we need to take something on or finish something, et cetera. And I think lastly, the TAM on this is what's the most exciting. Today, we don't know exactly, but it's tens of billions of dollars of this stuff is going on real time. It's obviously going to grow. As the [ for lease ] segment gets more sophisticated, as BTR gets more sophisticated, as the fit and finish standards, the customer-centric approach gets better and better, not just our company but the industry, there are going to be a lot of smart developers that focus on this segment. And we know, based on our own experience and the partners that Scott talks to that, that banking environment is a little fickle and it changes all the time. So instead of doing a 65% LTC with a customer -- with a regional bank, maybe you can do a 75% or an 80% with us, certainty of close in a partner with an option price that Scott feels good about. And so I think ultimately, we've sort of signaled that we're going upstream with our thinking around development. But that doesn't mean that we're going to go out and buy tens of thousands of lots. I don't think we have to. I think we can do this in a capital-light way that allows us to turn it on and off based on opportunity and to be really risk-averse in our approach to it.

Just to manage the size of that, given sort of the higher yield nature of it, is there a cap sort of that you're thinking about or a size where you would feel a little uncomfortable from recycling that?

I think we -- if we could put out $200 million, $300 million a year every year and build up to where we had a $1 billion business over, call it, a 3-year period, I think that would be a success. If it's half that, that's okay. It's just good growth. And so I think for us, it's sort of the same approach to third party and if we do other services, it's got to be the right partner, it's got to be the right sponsor.

And again, for us, this is just ultimately another channel of growth for us. Again, we view this as being -- look, every single loan we do, we'd love to be in a position of being able to buy it. We're not going to be able to buy every deal we loan on, but we just view this as being a long-term way for us to add accretive growth and accretive acquisitions to the balance sheet over time. And so our intention is not to turn Invitation Homes into a bank. Our intention is to have an acquisitions pipeline and an accretive use of capital for our shareholders.

Absolutely. The other strategic piece, you hit on third-party management you entered into last year. Curious just how that's going. Any additional opportunities as you look to kind of broaden these acquisition channels through either third-party management, whether it's the developer lending program and just speak to that?

Look, growing the third-party business is obviously something we're keen to try to do more of. But I think we're just trying to find the right situations, right? And as we think about it, we want to be working with institutional capital, right? We want to have people that want to run our playbook, right? So sometimes we get approached, and it may be that the assets that somebody owns, it's not in our markets, it's not in our buy box. It's a different price point. It's a different rent level. And so for us, we also want to be selective in terms of how we allocate our time to the business. Not every third-party management customer and contract is the same. And so some of it has to do with making sure that fits within our buy box and our playbook. And some of it just has to do with sort of our relationship with the customer, right? And if they want us to change how we're operating our business day-to-day, that may not be the right customer and relationship for us.

I would just add overall, it's been a really successful business for us on partnership. We've gotten it off the ground in 1 year with 20,000 homes, created a lot of efficiency for us in terms of having more homes in our markets that we can create some efficiency, have better procurement by getting rebates from our partners. And ultimately, it's taken us into a few new markets that we can get more smart on. It gets back to our ability to have more data in terms of pricing the home. So ultimately, we'd like to grow that business, but it needs to match up to everything that Scott is talking about. They find the right fit, and we're having ongoing conversations. So we'll see where it goes.

Just to pick on Jon here, maybe give him slide one in. He's always getting it a little easy, but just maybe talk about all of this or a lot of this requires capital and the various capital sources available. And just what's the most attractive today?

Sure. So when we laid out our acquisition and disposition guidance for the year, our plan was to fund external growth with disposition proceeds, which we can still sell assets at really attractive cap rates, depending on the market, 4% cap sub-4% in the case of Southern California, in some instances, so that's really attractive. We throw off a significant chunk of excess operating cash flow each year. Those are funds available for external growth. And we have an attractively priced revolver. I think the things that we are focused on are accretive external growth, capital-light earnings growth where we can drive that and then bringing the right assets onto our balance sheet over time. And the way we will do that is probably for now using our revolver. And then as that revolver balance grows, we'll look to term it out in the bond market.

Dallas, any final remarks? I think we're wrapping up on time, but...

No. We just appreciate all the support. Company is in a great position right now. It feels like we can be a defensive sort of rally in a time where it's a little uncertain. You never tell like where long-term wins are going. But our business has been really consistent through cycles, and we've got a great management team, as you can see here, and even better people on the ground running our business. So we're excited to be here, and thanks for your time. We appreciate it.