Invitation Homes Inc. (NYSE:INVH) Q3 2023 Earnings Call Transcript

Invitation Homes Inc. (NYSE:INVH) Q3 2023 Earnings Call Transcript October 26, 2023

Operator: Greetings, and welcome to the Invitation Homes Third Quarter 2023 Earnings Conference Call. [Operator Instructions]. At this time, I would like to turn the conference over to Scott McLaughlin, Senior Vice President of Investor Relations. Please go ahead.

Scott McLaughlin: Good morning, and welcome. I’m here today from Invitation Homes with Dallas Tanner, Chief Executive Officer; Charles Young, President and Chief Operating Officer; Jon Olsen, Chief Financial Officer; and Scott Eisen, Chief Investment Officer. Following our prepared remarks, we’ll conduct a question-and-answer session with our covering sell-side analysts. [Operator Instructions]. During today’s call, we may reference our third quarter 2023 earnings release and supplemental information. This document was issued yesterday after the market closed and is available on the Investor Relations section of our website at www.invh.com. Certain statements we make during this call may include forward-looking statements relating to the future performance of our business, financial results, liquidity and capital resources and other nonhistorical statements, which are subject to risks and uncertainties that could cause actual outcomes or results to differ materially from those identified.

We describe some of these risks and uncertainties in our 2022 annual report on Form 10-K and other filings we make with the SEC from time-to-time. Invitation Homes does not update forward-looking statements and expressly disclaims any obligation to do so. We may also discuss certain non-GAAP financial measures during this call. You could find additional information regarding these non-GAAP measures, including reconciliations to the most comparable GAAP measures in yesterday’s earnings release. I’ll now turn the call over to Dallas Tanner, our Chief Executive Officer.

Dallas Tanner: Good morning, and thanks for joining us. At Invitation Homes, we’ve worked hard to build and enhance our platform over the last dozen years, the foundation of which is our people, our systems and our unmatched scale. We believe our platform is industry-leading and difficult to replicate and, as a result, offers significant value for our stakeholders, residents and partners. It allows us to drive strong performance across diverse, geographically dispersed assets while delivering meaningful returns. We’ve invested heavily in our platform to provide the highest level of professional service, flexibility and convenience to our residents, helping them to live in the home, neighborhood and school system of their choice.

We’re proud of what we have achieved in this regard. And in addition to the power of our platform, favorable fundamentals have continued to drive strong tailwinds for our business. In particular, these include the continuing supply and demand imbalance we frequently mention. By most estimates, the United States continues to face a housing shortage of several million units. At the same time, the demand for single-family homes for lease continues to remain robust due to favorable demographics, a growing desire for flexibility and convenience and soaring mortgage rates that make leasing one of our homes much more attractive and affordable than owning a similar home. According to John Burns, it’s now over $1,100 a month cheaper to lease than to own on average in our markets.

That’s over $13,000 a year in savings that our residents can use to help their families thrive while at the same time benefiting from the choice and flexibility of leasing a home. We believe we remain well positioned to meet this growing demand for single-family homes for lease. In addition, we remain committed to bringing new supply to the marketplace through our extensive homebuilding relationships. Our multichannel growth strategy allows us to nimbly deploy capital across a variety of acquisition channels, which allows us to be opportunistic, depending on the channel that’s most attractive in the various real estate cycles. During the third quarter of 2023, we took advantage of several unique external growth opportunities. This included our previously announced portfolio acquisition of 1,870 wholly owned homes for a contract price of $650 million in July.

As we disclosed, we acquired the portfolio at a year 1 yield in the mid-5s. And we anticipate this to grow into the 6s within the next year. Progress to date on marking the portfolio’s rents to market, increasing occupancy and selling non-core homes has been right in line with our expectations. In addition to the large portfolio transaction, we also acquired another 387 wholly owned homes during the third quarter through those various channels at an average cap rate of 6%. We effectively funded these acquisitions through the sale of 397 wholly owned homes at an average disposition cap rate of approximately 4%. The 200 basis point spread between acquisitions and dispositions once again illustrates our unique ability to accretively recycle capital out of older, higher-dollar value homes and into newer, higher-quality product.

We believe our portfolio makeup affords us this opportunity to accretively recycle capital in this way for some time to come. In closing, I’d like to express my thanks to our dedicated associates. Through their hard work, Invitation Homes has continued to achieve significant milestones and deliver strong financial performance. As we move forward, we remain confident in our ability to navigate these challenges, capitalize on opportunities and leverage our platform in order to drive sustainable growth and value for our stockholders. Thank you for your continued trust and support. With that, I’ll pass the call on to Charles Young, our President and Chief Operating Officer.

Charles Young: Thanks, Dallas. To start, I’d like to echo your comments and thank our associates for delivering another great quarter. This includes the hard work by our teams to smoothly onboard the nearly 1,900 homes we acquired in July. Our premier size and scale help make acquiring large portfolios like this one relatively programmatic while it is our amazing associates who ensure the transition is seamless and the ongoing resident experience is worry-free. I’ll now walk you through our third quarter operating results. Favorable fundamentals and strong execution led to same-store NOI growth of 4% year-over-year in the third quarter of 2023, in line with expectations. Same-store core revenues in the third quarter grew 6% year-over-year.

This increase was driven by average monthly rental rate growth of 6.2% as well as a 20 basis point improvement in bad debt. We’re pleased to see progress here for the second consecutive quarter, including within Southern California, where court times have meaningfully improved since the first part of the year. In the meantime, we continue to attract high-quality residents with our great homes and professional service. For the trailing 12 months, our new residents earned a combined household income of over $142,000 a year, representing an average income-to-rent ratio of 5.2x. The financial strength of our customer is also evidenced by our industry-leading partnership with Esusu that we announced in July. In just a short time, we’ve helped enroll over 160,000 of our residents onto Esusu’s free credit reporting program.

About half of these residents have already seen an improvement in their credit score with an average increase of over 20 points. In addition to attracting high-quality residents, they continue to stay longer with us. Length of stay is an indicator of overall resident satisfaction, which we’re pleased to see has increased again this past quarter to an average of 36 months. We believe our premier ProCare service, along with the many convenient and value-add services we offer, help contribute to this longevity. The newest offering that we have just started to roll out is bundled Internet. We’re excited to partner with one of the nation’s largest providers to offer high-speed Internet and digital media to over 1/3 of our residents across the country.

Once again, our scale allows us to provide this essential service at a substantial discount to what our residents might otherwise pay on their own. Turning back to our same-store results. Third quarter 2023 core expenses increased 10.2% year-over-year. This included year-over-year increases of 11.7% in fixed expenses and 8% in controllable expenses, the latter of which was primarily driven by an increase in turnover compared to the historic lows of last year, along with the cost related to the progress we’re making on our lease compliance backlog. Next, I’ll cover same-store leasing trends in the third quarter. Demand in our markets remained strong through the end of peak leasing season. As we’ve noted previously, we are seeing a return to more normal seasonality, which we believe represents a much healthier and sustainable footing following the extraordinary market rent growth we saw in the past 2 years.

Nevertheless, our third quarter 2023 same-store leasing results are still well above pre-pandemic norms. This includes average occupancy in the third quarter of 96.9%, or 120 basis points higher than our 2018 and 2019 third quarter averages. In addition, blended rent growth in the third quarter of 2023 was 6.2%, or 170 basis points higher than our 2018/2019 third quarter averages. Third quarter 2023 blended rent growth of 6.2% was comprised of renewal rent growth of 6.6% and new lease rent growth of 5.2%. We’re pleased to have seen an acceleration in renewal rent growth each month in the third quarter of 2023. Renewal rent growth is further accelerating with October’s preliminary results. This represents a strong performance for the third quarter that is once again attributable to our outstanding associates.

As we approach the end of the year, we remain focused on continuing this momentum and finish the year strong. I’m proud of our teams for their tremendous contributions this past quarter and the great effort I know they will deliver during the remainder of the year. I’ll now turn the call over to Jon Olsen, our Chief Financial Officer.

Jonathan Olsen: Thanks, Charles. Today, I’ll cover the following topics: first, an update on our investment-grade rated balance sheet; second, financial results for the third quarter; and finally, updated 2023 full year guidance. I’ll begin with our balance sheet. At the end of the third quarter, we had $1.8 billion in available liquidity through a combination of unrestricted cash and undrawn capacity on our revolving credit facility. Our net debt-to-EBITDA ratio was 5.5x as of the end of the third quarter, at the low end of our targeted 5.5x to 6x range. Our outstanding borrowings carried a weighted average interest rate of 3.8%. And we have no debt reaching final maturity until 2026. Over 75% of our total debt is unsecured and over 99% of our debt is fixed rate or swapped to fixed rate.

In August, we closed on an $800 million dual-tranche public bond offering comprised of $450 million of 7-year notes at a 5.45% coupon and $350 million of 10-year notes at a 5.5% coupon. We used a portion of the net proceeds to repay the $150 million we drew on our revolver in July with the remaining net proceeds serving as additional dry powder for growth or future debt repayment while earning an attractive deposit yield from our banks in the meantime. In August, as a result of our strong balance sheet and continued access to capital, we were pleased to see Fitch upgrade its ratings outlook for the company from stable to positive and affirm our BBB flat rating. Next, I’ll briefly touch on our financial results. Third quarter core FFO per share increased 4.7% year-over-year to $0.44, primarily due to an increase in NOI.

Third quarter AFFO per share increased 3.7% year-over-year to $0.36. The last thing I’ll cover is our updated 2023 full year guidance. Our third quarter year-to-date results have generally been in line with our expectations. With a little over 2 months remaining in the year, last night’s release included a tightening of most of our guidance expectations. This includes a narrowed range for full year 2023 same-store NOI growth of 4.5% to 5%, which is based on a narrowed range for same-store core revenue growth of 6.25% to 6.75% and revised same-store core expense growth of 10.25% to 10.75%. The expected increase in same-store core expense growth guidance is based primarily on a higher same-store property tax expense expectations in Florida and Georgia.

While the fundamentals that have favored housing are well known to us, we originally anticipated property tax millage rates in both Florida and Georgia would decline to at least partially offset some of the unprecedented home price appreciation that’s occurred there. Based on the property tax bills we’ve received or expect to receive during the fourth quarter, that’s not been the case and causes us to now expect full year same-store property tax expense growth of approximately 10% to 10.5%. Our updated guidance also tightens the ranges of expected core FFO per share and AFFO per share. We now expect full year 2023 core FFO per share in a range of $1.75 to $1.79, or 6% growth year-over-year at the midpoint, and full year 2023 AFFO per share in a range of $1.46 to $1.50.

With that, we have now concluded our prepared remarks. Operator, please open the line for questions.

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Q&A Session

Operator: [Operator Instructions]. The first question comes from Michael Goldsmith with UBS.

Michael Goldsmith: My question seeks to frame the factors that caused the deceleration in occupancy and the slowdown in lease rent. So how much is attributable to normal seasonality, a return to more long-term pre-COVID averages, lease compliance and moderating underlying demand? I guess, where is the business structurally better now? And where is it reverting back to pre-COVID averages?

Charles Young: Yes, thanks for the question. This is Charles here. Now look, I think as you laid out, we’re seeing seasonality that we expected. I think we’ve signaled this all year. Coming off of the pandemic times, which are kind of heady in terms of rent growth and occupancy, we expected that the end of the year, we’d see this more typical seasonality. And let’s level set a little bit on what that means. What that means is new lease kind of goes a bell curve throughout the year with peak being around June or July. And so historically, we’ve always seen kind of going down that bell curve in August and September as the end of the move-in season happens. Because typically, your summer is when you’re getting the turnover and people are moving in.

And that’s why you get the real pop in the new lease rent growth. And the peak may vary. But at the end of the day, that downturn, if you will, on the bell curve is August and September. So if you look back pre COVID, and I went back to prior to the pandemic times, that new lease range was around 1.5% to 3.5%. And for our September, we’re right around 3% or just below. So this is normal. What’s not normal is renewals, on the other hand, historically stayed steady throughout the year. And so we’ve been there, but we’re running a little warmer than we’ve seen historically. If you look back pre COVID, renewal rate was around 3% to 5%. Now our September renewal rate is 6.9%. What that tells you is we still are in this really strong fundamentals of the business, where there’s high demand, an undersupply of homes, we’re leasing well.

And I would add to it that we have, as we expected, a little higher turnover this year, given our lease compliance backlog work. You put all that together, we’re in really normal seasonality that we would expect. And Q3 being at 96.9% occupancy, if you go back to those years I was talking about, we weren’t this high. So we’re combining really nice blended overall rent growth for this time of the year, really high occupancy and kind of a return to normal seasonality with strong fundamentals kind of driving the business. So I feel good where we are. And I understand how it may seem like it’s different. But at the end of the day, we had 2 years that were just abnormal, and we’re going back to more typical season.

Operator: The next question comes from Eric Wolfe with Citi.

Eric Wolfe: So I appreciate that visibility on 2024 taxes is probably really low at this point. But just trying to understand whether you think it’s going to be sort of another year of very aggressive tax increases or if the moderation that you’ve seen in home prices this year will result in a similar moderation of taxes. And just historically, if you look at in a given year, the degree of change in home prices, is that a good predictor of what next year should look like in terms of tax increases?

Jonathan Olsen: Thanks for the question. It’s Jon. While we’re not prepared to talk about 2024 at this time, I think you really hit the nail on the head when you tied together what’s been happening with asset appreciation, what’s been happening with home values and what the outsized year-over-year property tax expense growth has been for the last 2 years. I think it’s interesting, if you look over a trailing 5-year period, our annual same-store property tax growth averaged around 5.5%. But within that time period, 2021 was sort of an outlier to the low side. So I think we’ve seen a bit of a catch-up factor. As we look and think about property tax, we’ve always been pretty good at predicting where values were going to come in.

Values haven’t been the problem for us. The challenge for us is that we have assumed that as values increase, and those increases have been substantial, that we would see some degree of relief on millage rates. That was our experience over much of our history. That is what we expected last year. Obviously, it didn’t come to pass. This year, we did not expect that same pattern to unfold. So as it turned out, I think the revenue need in municipal budgets was greater than we anticipated, probably based on inflation. And we saw little to no relief on millage rates in Georgia and Florida. So as we look to 2024, we’re going to be reassessing how we think about property tax. I think we’ll be less reliant on what our historical experience has been, at least for the intervening period.

But as I said, we’re not prepared to give a sense for 2024. We’ll talk about ’24 in February.

Operator: The next question comes from Jeff Spector with Bank of America.

Jeffrey Spector: I just want to, I guess, clarify the comments on seasonality and how we should think about that heading into the fourth quarter, what that may mean for new lease rate growth. And maybe you could talk about historically what you would normally now see, let’s say, from September to October, from 3Q into 4Q. Like what should we be expecting?

Charles Young: Yes. As I described, the new lease kind of bell curve goes up and down through the year and goes into Q4 and will kind of bottom out and then go into Q1 and build up later on. Where we will kind of low point will be, it’s hard to predict. But we’re still seeing good demand. We have high occupancy. As you look at that, some of that is we are trying to drive towards what we know are kind of the healthy occupancy, given our low turnover at this point. And so that will be kind of the balance there. But I don’t expect it will go much lower than we are right now. And we’ll see where it goes. I think the strength is on our renewals, as I talked about. Again, we’re seeing acceleration from September into October, as I mentioned.

And keep in mind that given our low turnover, 75% of our newly — of our leasing business is renewals. And so that really does drive our overall results. So seasonality is — on the new lease side is a part of the business. It actually — we look at it and welcome it because it brings us to a more normal period that we’re used to. And we understand how that works. And when you look at the blend throughout the year, we’re really strong. And our blend is much higher than we’ve been historically pre COVID as well. So business is in good stead. And I expect we’ll — Q4 is where new leases kind of bottom. And then we go into Q1, we’ll start to bounce out of there and go while I’m feeling good around our renewals, given our loss to lease and overall low turnover.

Operator: The next question comes from James Feldman with Wells Fargo.

James Feldman: So if I could just grab a quick rebound off of Jeff’s question, which is can you talk about new lease rates in October? But my question is actually, you had talked about 4% yields on your cap rates on your asset sales versus 6% on acquisitions. I mean, how sustainable is it? We’ve got the 10-year treasury at 5%, mortgage rate is high. I mean, how sustainable is it to keep that 4% sales yield or cap rate or even your 200 basis point spread, given how much rates have moved and just where the market looks today?

Dallas Tanner: Yes. This is Dallas. And look, as we look at the overall landscape of the marketplace, there’s no doubt that the elevated mortgage rate and mortgage rate environment is certainly shifting behaviors in the home buying and selling arena. Now our view of that landscape currently is, as Charles pointed out, it’s probably going to impact to the positive our renewals business because there is less transaction availability in the marketplace overall. The lock-in effect and things that we’re hearing as we talk with economists out there and homebuilders, and we obviously have a lot of great relationships there, is very real. And I think the resale environment is evidenced by, I think, NAR’s number on annualized sales are predicting somewhere around 4 million, which is off by like 30% in terms of how you think of normal transaction volumes.