Q1 2024 Earnings Summary
- Strong leasing and occupancy trends with accelerating rent growth: Invitation Homes achieved an average occupancy of 97.6% in Q1, up from 97.1%. New lease rent growth accelerated to 3.1% in April, with further acceleration expected into May. Renewal rates are high, with April renewals increasing by 6.0%, and projected mid-7% increases for May and June. Low turnover and longer resident stays (average over 3 years, nearly 5 years in California) contribute to high occupancy and reduced operating expenses.
- Expansion of high-margin third-party management business: The company is expanding its third-party management (3PM) business, adding approximately 20,000 units over a 6-9 month period, including agreements with Starwood, Nuveen, and Upward America. This business contributes an expected $0.02 per share in earnings, with potential upside as more portfolios are onboarded. Adding scale enhances efficiency, reduces costs, and increases margins.
- Strategic partnerships with homebuilders driving growth and attractive acquisitions: Invitation Homes is deepening relationships with national and mid-size homebuilders like D.R. Horton, Meritage Homes, and Dream Finders Homes, securing contracts to build approximately 500 new homes. Majority of acquisitions are direct purchases from homebuilders at target cap rates around 6% yield on cost. These partnerships enable expansion into new markets like Nashville, Austin, and San Antonio, increasing their acquisition pipeline and supporting new housing supply.
- Increasing competition for homebuilder deals is putting pressure on acquisition cap rates, with other investors accepting yields in the 4% range, which could reduce Invitation Homes' future returns compared to their target of 6% yields.
- Regulatory risks in key markets like Texas, where the governor is calling for legislative measures to restrict large single-family rental operators, could negatively impact Invitation Homes' operations and growth.
- Potential exposure to legal risks related to collusion or pricing practices, as the company's expansion into third-party management and increased scale could draw regulatory scrutiny and threaten earnings.
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Rent Growth Expectations for 2024
Q: How do your rent growth expectations compare to last time?
A: Management has not revised guidance and remains comfortable with expectations for blended rate growth over the year, anticipating high 4% to low 5% growth. April's blended rate was 5.2%. -
Balance Sheet and Debt Strategy
Q: What are your plans regarding debt maturities and interest rate swaps?
A: The company has $3.1 billion of debt maturing in 2026, including $610 million in floating-rate securitization and a $2.5 billion term loan. They are holding cash from the August 2023 bond deal, earning around 5.5%, and are in discussions to recast debt facilities. For swaps expiring in November, they anticipate replacing floating-rate debt with fixed-rate debt. -
Acquisitions and Cap Rates
Q: What's the breakdown of acquisitions and cap rates between homebuilder pipeline and MLS?
A: The majority of acquisitions are direct purchases from homebuilders, with minimal MLS activity. They target homebuilder acquisitions at around a 6% cap rate, consistent with yield expectations. -
Earnings from Third-Party Management
Q: Can you provide context on earnings from new third-party management agreements?
A: They had guided to $0.02 earnings contribution from third-party management, including agreements with Starwood and Nuveen. The recent Upward America agreement is not included in guidance. As portfolios are onboarded, they expect better visibility into potential upside. -
Achieving 6% Yields in Builder Deals
Q: How are you achieving 6% yields in deals with builders when others report lower?
A: Their success centers on predictability in operations, ability to close transactions, and a strong track record. Builders value their efficient bulk purchases, saving on sales and marketing costs, and providing confidence to start larger projects. -
Regulatory Risk and Affordability Solutions
Q: What are you advocating to help housing affordability amid regulatory risk?
A: They encourage new supply by partnering with homebuilders on communities that mix for-sale and for-lease housing. Attempts to restrict companies like theirs are seen as misguided; notably, no anti-leasing bills have progressed significantly at national or state levels. -
Investment in Third-Party Management
Q: How should we think about investment spend tied to management contracts?
A: Onboarding portfolios requires adding staff and investing in technology. Some costs are upfront and one-time; others are variable, correlating with the number of homes managed. They anticipate improving margins over time. -
Market Expansion and Activity
Q: Can you discuss your significant entrance into Nashville and other markets?
A: They've increased scale in Nashville through acquisitions and third-party management agreements. They're also eyeing markets like Austin and San Antonio, expanding relationships with national and midsize homebuilders. -
Market Rent Growth Expectations
Q: Why aren't market rents growing faster despite affordability gaps?
A: Current rent trends are healthy and above historical rates outside COVID years. Perceived slowdowns are due to returning seasonality. Strong occupancy and renewal rates support NOI growth. -
Summer Rent Growth Confidence
Q: What gives you confidence in accelerating new move-in rent growth?
A: They're experiencing typical seasonal acceleration in new lease rates into summer, with peaks usually in June or July. April new lease rent growth was 3.1%, accelerating into May, positioning them to capture demand with high occupancy. -
Upcoming Renewal Rent Increases
Q: Any commentary on renewal increases for upcoming months?
A: Renewal offers for May and June went out in the mid-7% range, similar to April. April achieved renewal rate was 6.0%, accelerating from Q1 levels. -
Economics with Homebuilders
Q: Why can you get higher yields than homebuilders selling to buyers?
A: They offer builders predictability, efficient closings, and bulk purchases, reducing sales and marketing costs. Builders can undertake larger projects knowing Invitation Homes will purchase a portion. -
Insurance Renewal Impact
Q: Any changes in insurance coverage levels affecting pricing?
A: There were no changes to policy structure or limits. They don't expect factors that would increase insurance costs beyond the guided 7.5% growth, lower than initial mid- to high-teens expectations. -
Third-Party Management Opportunity Size
Q: What is the overall size of the third-party management opportunity?
A: Professionally managed single-family rentals total about 500,000 units, roughly 3% of the 15 million rentals in the U.S. The industry is expected to grow, but it's early to quantify earnings per additional units managed. -
Renewals' Impact on Margins
Q: How do increasing renewals affect margins and OpEx?
A: High renewal rates lead to lower turnover, reducing operating expenses and supporting high occupancy. Average resident stay is now over 3 years, with California nearing 5 years, positively impacting margins. -
Potential Regulation in Texas
Q: Is proposed Texas legislation affecting your expansion plans?
A: They're aware of headlines but haven't observed significant regulatory traction. They continue engaging at state and local levels, focusing on housing solutions, with Texas comprising about 6% of revenue. -
Occupancy and Rent Trends
Q: What is the trajectory of new lease rent trends and occupancy?
A: Occupancy improved from 97.1% to 97.6% during the quarter. New lease rent growth accelerated, with rates up over 300 basis points from January to February, reaching high 2% in March and high 3% in April. Further acceleration is expected into May.