Invitation Homes Inc. ($INVH)

Hello, everyone. Thank you for joining us today for Q&A with the executive management team of Invitation Homes. For those of you who might not know me, my name is John Paul Flangos, and I'm the residential and self-storage analyst at BNP Paribas. Today, we are joined by CIO, Scott Eisen; CFO, John Olsen; CEO, Dallas Tanner; and COO, Tim Lobner. Before we jump into the Q&A, I'd like to turn the table over to Dallas for any opening remarks.

Thanks again. It's good to be with everyone. There's sort of 3 major themes we've been hitting in a majority of our meetings. First, on the fundamentals. Our spring leasing season is tracking well, same-store occupancy and blended lease rate growth accelerated nearly 100 basis points from the first quarter of this year until May, quarter-to-date to 97.2% from an occupancy perspective and 2.5% from a blended rate perspective. That you could sort of deduct is April, as we talked about at 2.3% with May getting to 2.8% on our blends. We're seeing a nice acceleration. New lease rate growth was also positive in both of those months, and we continue to see strong demand for our homes. We're anxiously looking forward to the rest of our summer leasing season. On capital allocation, we've been able to be deliberate as capital allocators. As you know, and as we mentioned on our earnings call, we repurchased nearly $500 million of our shares back in the first quarter. And in addition to that, our disposition program continues to be robust. In the second quarter, our dispose will likely look a lot like our first quarter, and we'll continue to be prudent and judicious in our use of capital when and where we allocate. On regulation, we've also been emphasizing that we've been closely watching the ROAD to Housing Ac and are encouraged by what came out of the House of Representatives, current bills and materially improved outcome relative to the earlier versions that we had seen. Whatever path this takes in the Senate, we are confident in our ability to continue to operate effectively. And we provide a housing option that's not only needed but wanted and desired to create genuinely affordable homes for American families. And nothing about this legislation would change that with or without the legislation. With that, I'll turn it back over to you for questions and answers.

Yes. Thanks for the update, Dallas. That was helpful color. Maybe to just zoom out a little bit and set the stage for any generalists or individuals who are not super familiar with the story. Could you kind of just give a quick version as to what makes SFR structurally different from other residential real estate assets? And then maybe as you look over the next several years, how do you parse out the demand drivers between the structural tailwinds and then the more cyclical ones?

Yes. Great question. So just taking a step back. We own and operate roughly 90,000 homes. And then we have another 20,000 plus or minus that we operate in JVs and third-party management. Our scale is, for the most part, unmatched in the country in terms of what a single-family residential offering offers. From a risk perspective, as you think about investing in the space, one of the really unique things about SFR is the bespoke nature of our portfolio. Now in the early days, as we were kind of building this business and figuring out how to manage it, it created quite a bit of complication because we don't have the same floor plan really anywhere. But at the end of the day, the bespoke nature of our assets actually allows us a pretty meaningful differentiator in that our homes are in neighborhoods where people want to live. And so our average length of stay is pushing close to 4 years. 5 years in California, the customer renews probably 75% to 80% of the time. So you have an inherently strong customer that tends to renew quite a bit. Second, most of our customers today have a credit score of close to 700. Rent-to-income ratio is between 4 and 5x. And so on a weighted basis, they're spending about plus or minus 20% of their monthly wages on our, call it, cost to rent. That is about $1,000 a month in terms of a meaningful difference from between the cost to own versus the cost to lease that same home in the neighborhood. So structurally, to your question, we are very different than maybe multifamily or some of the other housing sectors. As you sort of break up demand, just taking a step back, we had a pretty epic bull run in terms of housing values and value creation, home price appreciation and rent growth from really 2012 through about 2023, plus or minus. And we've basically been in, call it, 4 to 6 quarters of sort of a reset. And I think Tim would tell you the same thing here is that we actually see a little bit better fundamentals this year than we did last year going into the summer leasing cycle. But cyclically, it feels like we're probably in the beginnings of hopefully what is a reset for both the residential space and also for the housing market in aggregate. Home prices were unsustainable for some period of time in terms of the amount of growth that they were receiving on a year-over-year basis and the pandemic actually added to some of that problem and created an even wider gap in the cost of lease versus the cost to own. Going forward, I think there are also some things that make retention and renewals pretty favorable for our business with mortgage rates in the mid- to high 6s, the path to ownership is a bit trickier. And so the value proposition we offer is not only one that's just effective from a cost perspective, but just for consideration, about 80% of our customers come to us because they have rented a single-family home before. So it's not a newness to it. It's not like we're necessarily pulling from multifamily. There's just a huge segment of this country that prefers to lease. They want a yard, they want a garage, they want all those common spaces. And so I think that's sort of the setup. And I think just taking a step back, about 1/3 of the country lease something going back to LBJ to the mid-60s. And it's about the same today. homeownership rate is about 67%. So we're in a really healthy sort of normal setup with hopefully a cycle that's starting to reset, and we're starting to see green shoots of that in our own portfolio.

Got it. That's helpful. And then in terms of supply, new BTR deliveries have been a source of pressure over the past few years. Could you kind of speak to where we are in the current cycle, how impactful the lease-up overhang currently is and then expectations on a go-forward basis?

Tim, do you want to talk about supply? .

Sure. Yes. The question comes up a lot about build-to-rent supply, but that's only a portion of the story. Look, there's a couple of different components to supply. There's scattered single-family, there's build-to-rent, there's mom-and-pop-owned properties then there's institutional owned properties. And so there's a lot of different cohorts in that supply. One of the things that we've been talking with investors about and we covered on our Q1 earnings call, was how supply at the beginning of the year was extremely elevated over 2025. So if you think about January 2026 versus January 2025, pretty large volume of homes year-over-year on the market for lease. And what I mean by that is on Internet listing services when you aggregate what is available through Zillow, realtor.com, apartments.com and then you kind of disaggregate that, come up with a number year-over-year, it's pretty high. That number has come down. We saw that over Q1. So that year-over-year growth is down, and we continue to see it stay down. It's right on top of what we saw last year. The largest cohort of houses that have come down in terms of that inventory is really the scattered site properties owned by mom and pops. And I think that's a contributing factor to why we're seeing better pricing power as we move deeper into peak leasing season. I think it's hard to talk about supply without also talking about demand, your setup was good about why the fundamentals of the business long term makes sense. But the reality is we're seeing demand on a gross lead basis year-over-year, stronger in 2026 than we saw in 2025, obviously, that's spread out over more homes that have been on the market. So on a normalized basis, it's a little bit -- a little bit lower year-over-year. I think the major takeaway or headline that I think is worth calling out is that there is still a strong demand for single-family rental houses, especially those managed by professional operators. So again, supply coming down, the build-to-rent component, if you look at John Burns data, the build to rent peak delivery time is in the rearview mirror in all markets. So the fundamentals are lining up nicely, and we've seen that in our operational performance year-to-date.

Got it. And before moving into the operational update, I just wanted to touch on one more supply point. There's been conversations about shadow supply emerging in some markets, which is for sale housing converting to rentals. Could you kind of speak to the pressures you're seeing on that front? Is it meaningful? Immaterial? And then what kind of channel checks do you guys use for that?

Sure. So when you look at the industry, institutional owners and operators account for about 2% to 3% of all inventory. So that other 97%, that's mom-and-pop. So it's a meaningful portion of the market. Over the last 3 years, if you were to look at those supply numbers that I was referencing a moment ago, the largest growth that we saw was in mom-and-pop owned properties. Over the last 3 to 4 months, maybe 5 months, the largest area where we've seen a decline on the market available rental housing product, is also in the mom-and-pop. So we're seeing that number tail off. We don't know exactly why. I mean we don't have exit surveys or surveys from all those -- the owners and operators of those 97% of houses that make up the market. But our thought is that, that product is getting leased. What we're also seeing is that we really look at our markets. That's not a broader commentary on the entire U.S. housing market. But you look at the demographics and the migratory patterns of people, of consumers, although it's not quite what it was in the pandemic, we continue to see favorable net migration to Sunbelt markets like ours. And so that, we believe, is a contributing factor to why that mom-and-pop supply continues to erode in the marketplace.

Got it. And then sticking with you here, the portfolio update showed solid occupancy and new leases accelerating into April and May, like Dallas mentioned, Tim, just -- can you give us more commentary on top of funnel demand? What are you seeing in terms of traffic, leads, applications? Any commentary on the tenant decision-making? Any color there...

It's a lot. I'll try to hit it -- our funnel really starts outside, right? We look at people that look on Google or search on Google using search words like home for rent, house for lease, a variety of different terms. That's really the top of the funnel externally, and those numbers are healthy year-over-year. They're in line with last year, which aligns with our lead volume. As I mentioned earlier, it's very healthy year-over-year. As you get through the funnel, it's interesting, not every lead is a good lead, right? Just like any consumer walking into a bricks-and-mortar store, not everybody is going to buy something. So our goal is to make sure that our leads or at least try to position the application process such that only the leads that really are going to make it through make it through. For example, we introduced a rent calculator at the very front end of our leasing process so that people can type in their household income to see whether or not they're going to qualify for that house before actually going through the application process. That's been very helpful for us. We'd like to see people self-select out. That's reduced the number of leads to a better number of leads to, I'd say, a higher strike rate cohort of leads. We're also looking at other ways and making the application process much, I guess, easier to navigate. And so I think the overall metrics as it comes to the funnel are very strong. Our operating fundamentals are good. Our teams in the field are doing a great job. I talked a little bit at our Investor Day back in November about how we're really trying to not shift our lens away from our asset-centric approach because we're a REIT, we understand we always have to think about things in terms of asset centricity but also layering in a degree of customer centricity. And one of the things that we're implementing right now is a CRM platform, customer relationship management, that's going to help us even more with that process as you navigate the funnel, really being able to target our efforts on leads that matter. So the dynamics are changing, but they're healthy right now.

Got it. And then on rent growth, renewals have been a bright spot, while the team has been able to keep retention high. I'm just curious how sustainable is that going forward? And specifically, what metrics do you guys look at that kind of tells you, you can lean into renewals a little bit more now or you have to pull back?

Look, I'll start with the second part of your question. I think occupancy, one of the things you're always trying to balance is occupancy and rent growth, rent growth being made up of 75% on the renewal side, 25% on the new lease growth side. But you really have to -- not balanced because you don't want a perfect balance in terms of occupancy and rent growth. You just want to know when you've got enough occupancy that you can start to really test on the renewal growth and new lease growth for that matter. . And so look, we're always trying to be really nimble in terms of how we price, how we negotiate on renewals. And we don't make the market. I mean the 97% mom-and-pop, 3% [indiscernible], and we're a small part of that 3%, we've got to be nimble in the marketplace. In terms of how long is the pricing power there, like on the renewal side, rent growth, it generally stays -- not going to say flat but within 100, 150 basis points year round. You're kind of mid-3s, low-3s, all the way up to mid-4s, high 4s depending on the time of year and depending on the cohort of homes and existing rent prices in the homes that are turning over during a specific period, but that's -- it's a pretty stable part of our business, 75%, 80% of our book, and it performs well. And I'd also say, look, our 75%, 80%, somewhere in that range, I think, is a reflection of the service that we offer, the product that we offer, a good location, good value. Our value-add services program is something that differentiates, we offer Internet in homes for a very discounted rate. We're now offering washers and dryers in several of our markets. So we're trying to make it about the whole leasing experience, not just renting a house. There's more to it than just renting a house. We want people to be sticky. And look, people often compare the multifamily to single-family. You look at the makeup, we have -- generally, it's a household that's got 2 incomes, you've got kids likely a pet. These people are sticky. And so we believe the renewal side of the business will remain strong.

I had 2 points. Just real quick, 2 things on fundamentals. So one is on the new lease side relative to last year. Tim, we mentioned this in my earlier remarks, we peaked a lot earlier last year from where our new lease perspective is, and we still see that accelerating. And then while we'll give a more robust update on our July call, we certainly see renewals accelerating in the summer as well.

And then, Tim, you mentioned Internet services. I kind of wanted to touch on the non-lease related revenue. The team has done a great job at growing that through value-add services like Internet, the third-party property management income and then most recently, fee built income. How is the team thinking about the growth of this bucket over the next several years? And how much more penetration remains on the value-add front?

I can talk about value and I'll turn it over to Scott. On the value-add side, look, we believe that the value-add number continues to grow. Our number that we're targeting for this year on a gross basis is about $100 million, and that number still has room to grow after that. The makeup of our growth, it's about half of our -- half of that growth is from existing programs that are already well received by our residents. We just need to earn into them. I'll give you an example in the Internet service package. We only have about 40% of our houses on that program today. We've expanded our offering. So now we're including Spectrum, AT&T and Comcast. They've got different footprints, but we're able to offer it to more and more of our houses. So we're excited about the earning there. And then that's about half of the future growth going into all the way into 2028, the other half on new programs that we feel confident based upon our surveying of residents in terms of what they're looking for, that it will land well with them. But I'll let Scott talk about the other aspect of our noncore revenue.

Right. And then on the other 2 aspects, you mentioned where the third-party property management business and also our recent acquisition of ResiBuilt. Just to be clear, those aren't counted in the value-add services bucket from a reporting perspective. But on the third-party property management business, we now have 24,000 homes that we manage 2 joint ventures and 3 different institutional third-party management contracts. That's a business we got into about 3 years ago. . That's a business where we wanted to be able to work with external clients that could be part of the Invitation Homes system and operate homes for third-party fees in markets where we already had an operational presence and economies of scale. It's a business that we've continued to get more sophisticated in terms of our reporting and how we work with our customers. And it's a business that we are out every day talking to potential partners and looking for ways to grow that business. I think for us, we're looking for an institutional customer, someone who's got at least 1,000 homes, someone that we could be in multiple markets with and that we could have growth potential with. We haven't necessarily targeted the smaller investor that might only have 100 or 200 homes, but we're looking for sophisticated institutions. And sometimes we're approached by the LP who'd like to make a change in manager and sometimes we're approached by a GP that might be at a point in their life cycle where they may not have the margins or growth capabilities that they thought they might have had. Obviously, with what's been going on, on the political front for the last 4 or 5 months here. I think there are some people that maybe have not been able to grow the platforms as ambitiously as they might have originally thought, and those are the types of folks who we would like to target for the third-party management growth. The other business that you referred to was in January, we announced that we were buying a build-to-rent developer called ResiBuilt that's based in Atlanta. They are a platform that operates in 3 states. They operate in Georgia, actually 4 states, Georgia, North Carolina, South Carolina and Florida. They had both a business where they would be a GP in terms of developing build-to-rent communities for themselves and a joint venture partner. And then they also have a third-party fee build business where they act as a general contractor on behalf of other smaller developers, that is now part of Invitation Homes, and we're hoping to grow both sides of that business. We've started to evaluate opportunities. It's early days. And it's only been 4 months since we closed, but it's early days in terms of evaluating opportunities for us to invest with them. And at the same time, we continue to have existing third-party clients that we're building for, and we intend to continue to do that on a going-forward basis. And so we'd like to build both for ourselves and for others. And so that's how we manage through both of those business lines.

Got it. And then just sticking with you, Scott. The construction lending platform has grown to close to $300 million in commitments. Is the current strategy simply an opportunity to step in, given the current financing environment? Or is this a platform that the team would like to scale over time?

I don't think anything has really changed since what we discussed at our November Investor Day. This is a business where, as we talk to people in the market. We've had a number of people that we've talked to over the years where we could potentially buy homes from them. They've wanted us to be potentially an equity partner with them. And we realized about 15 months ago that there was an opportunity for us to be a construction lender on communities, the same exact types of communities that we either want to own or build for ourselves. It's the same product. It's a 3-bed 2-bath, 2-car garage, townhome or detached single-family home, 4-bed, 2.5 bath, et cetera. So it's same buy box that we invest in. It's markets we know, it's product. We know it's rents we know how to underwrite. And so for us, those same people in the market that in the past to try to sell us stabilized communities, we thought there would be an opportunity for us to be a lender. So our loan book's grown to about $280 million of loans across 6 different projects. It's in 5 different states -- I'm sorry, 5 different cities with 5 different counterparties. So we've gotten some nice diversification to both counterparty risk and also market risk. And again, I don't think our plans have changed materially from what we outlined at Investor Day, where the goal was to get up to $1 billion of this. But look, the average construction loan we're doing is $30 million to $50 million, and it's a business on product that we underwrite every day. And I think it's, again, something where we're leveraging the cross-sell on our platform. One of the other interesting cross-sells that we discovered since we closed on ResiBuilt is that we think there could be a synergy between our third-party business, our fee build business and the construction lending business. And we've had some borrowers come to us that don't have a general contractor, and we've introduced them the ResiBuilt as a potential contractor. We've had some ResiBuilt fee built clients that needed a construction loan. Ultimately, I think we could also be in the third-party property management business on behalf of all of those customers. So we're very, very early days in terms of truly understanding the synergies of that flywheel, but I think it's something we're excited about is growth going forward.

Got it. And then, Jon, one for you. The stock has been trading at a meaningful discount to its long-term historical averages. And at the current share price, it implies the underlying real estate is cheaper than where homes are trading in the private market. How do you think about that disconnect? And how does that shape capital allocation going forward?

Yes, that's -- I mean, we talked about this at length, as you can imagine today and on our last earnings call. We have been very deliberate about how we are allocating capital. As you note, there is a significant dislocation between how the public markets are valuing our assets and what the private market is valuing our assets at. And we talked about that on the last earnings call. We tried to illustrate that by pointing out that -- on average, in the first quarter, we were selling homes in the neighborhood of $425,000 per door in the public markets at the share price at the time was valuing them around, I think it was $275,000 per door. That's a very market dislocation. And so from our perspective, if we can prune from the bottom x percent of our portfolio, homes that are maybe less well located, operationally just don't perform as well as some of the other homes in the same submarket, homes that have experienced material appreciation in the underlying assets and therefore, maybe don't make sense to continue on as long-term holds. Well, if we can sell those assets into the end-user market, recycle that capital into something that is accretive, we're going to do that. And I would also note that I'm obviously biased, but I think we have the best single-family rental portfolio in the United States. It's the most infill in nature. I think it's the most well located that there is. And if the public market is going to value those homes and to say nothing of the platform we've developed over time at a level that we think is sort of divorced from reality, then we want to reinvest in that portfolio at a really attractive valuation. Now we don't want to over time and distance, have just one sort of avenue of capital deployment. We want to make sure that we're constantly evaluating the whole opportunity set. And so we will, as always, be looking to create shareholder value by redeploying capital accretively into opportunities that are going to drive growth and margin improvement over time and distance. There are points in time, however, where the highest and best use of any excess capital is self-evident, and that was our experience in the first quarter.

That's helpful. Dallas or Tim, beyond the AI-enabled leasing engine that was mentioned at the November Investor Day, where else does the team see opportunity to implement AI and how much could it move the needle?

Yes, I'll take that. I think there's applications of AI in a lot of different places. I think that a lot of people actually get the opportunity set a little bit wrong in that. I think the first thing you look for is just automation. A lot of people confuse automation for AI. So I think where we're going to start is looking for a simple automation of processes and workflow. We are using it, as you pointed out, in our leasing operations. We also use it in renewals now as well. I do see application of it in a couple of different other places, one being delinquency management in terms of people that don't pay on time. Fortunately, that's not a huge problem. You saw our bad debt numbers. They were about 60 basis points. So it's not a huge area. But it's certainly an area where there's follow-up when there are nonpaying residents. Another area is HOA management when we have homes and HOAs where we have to pay assessments. We receive a lot of mail and so processing that mail processing, if there's ever an infraction that we need to follow up on or enforce with the resident to remain compliant, I think AI can play a huge role there. I think any time that you engage with a resident via any form of communication, you can overlay AI. We're right now building a CRM platform, as I mentioned earlier. There's going to be an AI component to that at some point where we'll be able to consolidate all historical communication with that resident, makes the job a whole lot easier of associates as they navigate conversations and communications with residents. So I do think that there's lots of opportunity as we go forward. The other area that we're focused on is not just technology enablement, and I talked about this at Investor Day, we're also looking at how we optimize our workflow through centralization. We're centralizing some of these functions right now. That's really important because running a business with 16 different market offices, you have 16 teams with 16 leaders, no matter what the workflow is it's hard to sometimes ensure like accuracy and easy training and shifts. If we have a process shift by consolidating that in a single location, we certainly get a better, I think, experience for our residents, better experience for our associates and more consistent service at the bottom line. So there's a lot of change that we're driving in the business right now.

Got it. And then it looks like we're coming up on time. Dallas, do you have any closing remarks?

Look, I've got a great team up here, but we've got an even better team behind us, and there's so much blue sky in our business. I think we're at a really interesting sort of inflection point where fundamentals are starting to reset. We're getting through a lot of the supply year-over-year, the homebuilders are building less and less from a permitting perspective. So we've probably got future tailwinds in our space, both from an asset appreciation perspective and also in all likelihood where rents goes. So I think just making sure we execute at a high level consistently that we roll out a lot of that road map, Tim, just talked about in terms of what we're doing with AI and centralization and then just continually pushing into that sort of flywheel that Scott talked about. I mean there's a lot of synergistic opportunities between what we do operationally, our ability to allocate capital ultimately to build for both ourselves and third parties. And so I think the opportunity set in front of us is pretty wide. We just need to execute on it. That's how we feel about the business today.

Got it. Thanks.