Invitation Homes Inc. (NYSE:INVH) Q4 2022 Earnings Call Transcript

Invitation Homes Inc. (NYSE:INVH) Q4 2022 Earnings Call Transcript February 16, 2023

Operator: Greetings, and welcome to the Invitation Homes Fourth Quarter 2022 Earnings Conference Call. All participants are in a listen-only mode at this time. As a reminder, this call is being recorded. At this time, I would like to turn the conference over to Scott McLaughlin, Vice President of Investor Relations. Sir, please go ahead.

Scott McLaughlin: Good morning, and welcome. Today, we’ll hear remarks from Dallas Tanner, President and Chief Executive Officer; Charles Young, Chief Operating Officer; and Ernie Freedman, Chief Financial Officer. Following these remarks, we’ll conduct a question-and-answer session with our covering sell-side analysts. During today’s call, we may reference our fourth quarter 2022 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 indicated.

We describe some of these risks and uncertainties in our 2021 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 the call. You can 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.

Dallas Tanner: Thanks for joining us this morning. I’d like to start by thanking all of our teams for their hard work last year. Yesterday, we posted 2022 year-over-year core FFO growth of 11.6% and same-store NOI growth of 9.1%. Strong demand for our business continued throughout the year. And despite some headwinds from inflation and an evolving regulatory environment, we believe our business continues to stand on solid footing. As you all know, Ernie recently announced that he’ll be stepping down as CFO in a few months. I’d like to thank him for his extraordinary vision and strategic insight over the past seven years, and I look forward to celebrating his achievements later this year. At the same time, I’m excited for Jon Olsen, who joins us here in the room this morning, to lead our finance team beginning in June.

Jon has been part of Invitation Homes from the beginning with deep involvement in all of our strategic and financial activities. We expect this to be a seamless transition. Before turning it over to Charles and Ernie to provide more details about our 2022 performance and our expectations for 2023, I wanted to take a few moments to discuss the current housing environment in the United States and how we believe Invitation Homes is well positioned to help support the country’s housing needs. It has been reported that the U.S. needs to add more than 13 million housing units over the next seven years in order to accommodate new household formation and address the undersupply of the past decade. Today, however, it remains challenging to deliver new supply in desirable locations, because of state and local restriction, as well as labor and material shortages.

In addition, today’s macroeconomic environment of higher inflation and higher interest rates may discourage investment in new supply. On top of these supply pressures, the largest demographic group, the millennial generation, is now aging in the life stage of needing more space to accommodate their families and their lifestyles. Add to all of that, the increased flexibility of many to work part-time or full-time from home, and we believe demand for single-family housing should remain strong for many years to come. At the core of our business is a straightforward yet critical goal. We seek to be a meaningful part of the solution for high-quality and flexible housing options. We provide quality homes for lease in desirable locations with access to great schools and employment centers.

We offer best-in-class service, allowing residents to focus on their lives. And we’re proud that we partner with 150 public housing authorities and serving thousands of our residents who participate in a housing assistance program, including HUD’s housing choice voucher program. And we’re delivering new homes to marketplace through our previously announced builder relationships. Today, that builder pipeline exceeds 2,300 homes that we expect to deliver over the next few years, and our plans are to continue investing in new construction in the future. As a reminder, our approach to bringing new housing to the marketplace keeps development risk off of our balance sheet and avoid any related G&A burden, while also allowing us to partner with some of the best homebuilders in the business to select and buy new homes in great locations.

We think this approach is a real differentiator and allows us to maximize flexibility and optionality while remaining opportunistic and minimizing risk. All of this is important because the lack of available supply of single-family housing and strong demand from those who wish to live in a single-family home have made homeownership much more expensive today. This supply and demand imbalance is further aggravated by inflation and elevated interest rates, leading to the widest dislocation we’ve seen between the cost of homeownership and the cost of leasing since starting this business. We’re therefore very proud to provide our residents the opportunity to live in neighborhoods and school districts that might not otherwise be accessible at a cost that is often significantly more affordable than any other housing option.

Photo by Francesca Tosolini on Unsplash

Let me pull on that string a little bit further. Based on the John Burns December data, leasing a home cost nearly $900 less each month than owning a home across our markets. This means that leasing home can save a family nearly 30% a month on their housing costs on average. These savings are even more compelling on a per square foot basis where single-family rental homes currently come out as the most cost-effective housing option compared to not only homeownership costs, but also apartment rent. That being the case, we believe today’s macroeconomic environment and the current supply and demand fundamentals make the Invitation Homes value proposition compelling for both our residents and our shareholders. This is on top of several differentiators of our business that we have noticed in the past.

For residents, these benefits include a recently renovated, refreshed or newly built home in a desirable location; ProCare, which is our resident service model that provides for consistent interactions with our residents throughout their time with us; best-in-class technology tools of the most recent example being our mobile maintenance app, offering residents an even more efficient process to submit service requests; and a growing list of resident services designed to elevate their living experience. For our shareholders, we believe there are numerous absolute and relative advantages to the single-family rental industry, including single-family homes are the most liquid real estate sector within the United States. There’s typically much lower turnover in single-family rental than in multifamily with residents often staying much longer.

And there’s a long track record of rent growth within SFR even during recessionary periods. With a nod again to the Burns data, national average single-family rent growth has never had a meaningful decline in nearly 40-years of tracking that data. Lastly, we believe there are numerous advantages to the Invitation Homes way, including our hallmark scale; location and ISO markets, overseen by the best operators in the space as evidenced by our 46.6% cumulative same-store NOI growth rate from 2017 to 2022, nearly 2,500 basis points greater than the average of our residential peers; our strong balance sheet with no debt coming due until 2026; and our builder partner growth pipeline that maximizes flexibility and contributes to new housing supply while also avoiding big investments in land and a large G&A load.

In closing, we couldn’t be more excited about our real estate, our teams and the underlying fundamentals here in 2023, a year with some uncertainty and also a year we believe full of opportunity to continue delivering a premier resident experience to anyone who chooses to live a more flexible and worry-free lifestyle. With that, I’ll pass it on to Charles, our Chief Operating Officer.

Charles Young: Good morning, everyone. As Dallas mentioned earlier, 2022 is a solid year for us. We believe our results are a reflection of the service we offer our residents and our performance in providing an exceptional leasing experience. This is an ongoing journey that we look forward to continuing in 2023. So thank you to all of our associates for your constant commitment to genuine care. I’ll now walk you through our operating results in more detail. Same-store core revenues grew 7.6% year-over-year in the fourth quarter. This increase was driven by average monthly rental rate growth of 9.4% and a 16% increase in other property income, net of resident recoveries. Same-store average occupancy was 97.3% in the fourth quarter, down 80 basis points year-over-year as a result of higher vacancy due to increased turnover.

For the full-year 2022, our same-store revenue grew by 9%. Same-store core expenses grew 16.3% year-over-year in the fourth quarter. The main driver of this growth was an 18.3% increase in property tax expense. As indicated a few months ago, this increase was anticipated to be outsized due to a catch-up to our property tax accrual in the fourth quarter primarily related to higher property tax bills in our homes in Florida and Georgia. For full-year 2022, including this fourth quarter count, property tax expense grew by 7.8%, while core operating expense for the full-year 2022 were up 8.6%. Outside of property taxes, the inflationary environment was the largest contributor to the higher growth in core operating expenses. Following two years in a row of virtually no expense growth year-over-year, our expectation that we will see some of last year’s inflationary pressure continue into 2023.

Finishing up with our same-store operating results, we reported fourth quarter NOI growth of 3.7%, which brought our full-year 2022 NOI growth to 9.1%. Next, I’ll cover leasing trends in the fourth quarter of 2022 and January 2023. Same-store blended rent growth was 9.1% in the fourth quarter, which is comprised of renewal rent growth of 9.9% and new lease rent growth of 7.4%. In January 2023, same-store blended rent growth was 7.4% with renewals coming in at 8.7% and new leases at 4.9%. Same-store occupancy in January was 97.7%, an increase of 40 basis points from our fourth quarter results. As we anticipated, bad debt was a stronger headwind in the fourth quarter than in the third quarter, representing 2% of gross rental revenues. California, and more specifically, Southern California continued to experienced outsized bad debt within our portfolio.

Approximately 40% of our Southern California homes are located within Los Angeles County, where ordinances continue to restrict residential lease compliance options. For the remainder of our portfolio, we are seeing some markets return to more regular procedures for addressing delinquency, though it’s a slower process now than it has been historically in some of our markets. Across all our markets, we’re proud to offer a desirable housing option and worry-free lifestyle to our residents. In our most recent resident surveys, we heard that the need for more space and desirable location of our homes were once again the top two reasons why new residents choose to lease from us in the fourth quarter. 80% of new resident surveys indicate it’s important to have a home office or bonus room with nearly half stating they work from home at least two days a week.

In addition, our average household income for new residents during 2022 remain healthy at approximately $134,000, representing an income to rent ratio of 5.2 times. Finally, our residents continued to demonstrate high satisfaction with the service our teams are providing as evidenced by our high occupancy, low turnover, average length of stay of nearly three years and strong resident satisfaction scores. I extend my thanks to our teams who have helped make this all possible. And I challenge our associates to continue to raise the bar here in 2023. I’ll now turn the call over to Ernie, our Chief Financial Officer.

Ernie Freedman: Thank you, Charles. This morning, I will cover the following topics: one, balance sheet and capital markets activity; two, financial results for the fourth quarter; and three, our 2023 guidance, which we introduced in yesterday’s earnings release. Since our IPO in 2017, we have been focused on reducing our overall leverage, improving our maturity ladder, achieving an investment-grade rating and transitioning to a balance sheet that is capitalized mostly with unsecured debt at fixed rates. We have made significant progress across all of these objectives. At year-end 2022, net debt to adjusted EBITDA stood at 5.7 times. Our weighted average maturity was 5.6 years, and when considering available extension options, we have no debt coming due until 2026.

Over 99% of our debt was fixed rate or swapped to fixed rate. We achieved our investment-grade rating in the spring of 2021. And at year-end 2022, over 83% of our homes were unencumbered, and 73.7% of our debt was unsecured with secured debt representing less than 10% of gross book value of our real estate. As previously announced, during the fourth quarter, we prepaid the remaining portion of our IH 2018-1 securitization using the delayed draw feature of our seven-year unsecured term loan that closed in June 2022. We ended the year with $1.3 billion of liquidity from both our undrawn revolver and unrestricted cash. I’ll now cover our fourth quarter and full-year 2022 financial results. Core FFO for the fourth quarter increased 10.6% year-over-year to $0.43 per share, and AFFO increased 9.2% to $0.36 per share.

For the full-year 2022, core FFO and AFFO per share increased 11.6% and 10.2% to $1.67 and $1.41, respectively, each exceeding the midpoint of our guidance. Included in our earnings release, we provided a bridge from 2022 core FFO per share to the midpoint of 2023 core FFO per share guidance. With regards to our same-store operating metrics, we expect same-store core revenue growth in a range of 5.25% to 6.25%. Embedded in our guidance are the following assumptions: first, slightly lower average occupancy versus 2022 due to anticipated higher turnover; and second, elevated bad debt of 25 to 75 basis points higher than 2022. Next, same-store core expense growth, which we expect in the range of 7.5% to 9.5%. Included in this guidance is the assumption that real estate taxes will increase between 6.5% to 7.5%, an improvement from 2022.

We also expect to see pressure on turnover, operating and capital expense, due mainly to our assumption of higher turnover in 2023, along with our assumption around ongoing inflationary pressures. As Charles mentioned, our real estate tax expense in 2022 was underaccrued for the first three quarters of 2022. So we recorded an outsized catch-up in the fourth quarter of 2022. As a result, we anticipate 2023 same-store core expense growth in the mid-teens for the first quarter of 2023 followed by sequential improvement during the remainder of the year, resulting in the expected range for the full-year 2023. Taken together, this brings our expectation for same-store NOI growth to 4.0% to 5.5%. We also expect full-year 2023 core FFO per share to be in the range of $1.73 to $1.81 and AFFO per share in the range of $1.43 to $1.51.

As a result of this anticipated growth in AFFO per share in 2023, our Board of Directors has authorized an increase in our quarterly dividend by 18.2% to $0.26 per share. Our guidance assumes that our 2023 acquisitions will be modest. This includes our initial expectation for on-balance sheet acquisitions of $250 million to $300 million from our builder partners, which we plan to fund through free cash flow and disposition proceeds. It also includes our expectation for acquisitions in our joint ventures of $100 million to $300 million. Outside of this guidance assumption, our actual acquisition activity will be based on how attractive the buying opportunities are relative to our cost of capital as the year progresses. With our balance sheet in excellent shape, our ample liquidity providing us with plenty of dry powder and our joint ventures offering us access to additional capital, we’re well positioned with the flexibility to maintain an opportunistic approach to external growth this year.

I’ll wrap up by echoing Dallas’ and Charles’ gratitude to our associates. They continually work hard to deliver strong results and to respectfully care for our residents in our homes. As we look ahead, we are confident in our continued success based on favorable supply and demand fundamentals, our healthy balance sheet, our unwavering commitment to outstanding resident service, our strong team and our desire to remain the premier choice in home leasing. With that, operator, please open the line for questions.

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Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. We have the first question on the phone lines from Josh Dennerlein of Bank of America. Please go ahead.

Josh Dennerlein: Yes. Hey guys, thanks for the question. Just kind of thinking about your AFFO midpoint guide with the FFO midpoint guide, it looks like it’s kind of 83% of FFO. I think it was 84% for 2022 actuals. What — it looks like before that; it was kind of running at a smaller gap. Kind of what’s driving that, but maybe it would have shrunk given lower turnover the last few years?

Ernie Freedman: Yes, Josh, this is Ernie. We are seeing — and Charles talked about it and alluded to it with regards to inflationary pressures on turnover expenses. And so the difference between FFO and AFFO is going to be our capital replacement spending. We are seeing a little more pressure on the capital side on both our repairs and maintenance expenses as well as on our turn expenses. And we want to make sure at the beginning of the year, we had the right amount of caution built into our numbers. So we can hopefully set ourselves up for — we hope to have a good performance later in the year off of that. That’s why you’ve seen over the last couple of years, that’s changed a bit. We’re basically running closer to flattish net cost to maintain on the OpEx and CapEx combined for the last couple of years.

But for 2022 and what we’re projecting for 2023 is certainly a higher increase from inflationary pressures. And specifically in turnover, we do expect to have high — a little bit higher turnover in 2023 versus 2022. Maybe as we get out into 2024 and 2025, you’ll see numbers revert back to what you saw in the past for us in terms of the differences between core FFO and AFFO.

Josh Dennerlein: Thanks, Ernie. Appreciate that.

Ernie Freedman: Thanks, Josh.

Operator: We now have Nicholas Joseph of Citi. Your line is open.

Nicholas Joseph: Thank you. I was hoping you can elaborate a bit more on the trends you’re seeing in the acquisition market in terms of cap rates and available properties. And then what are you hearing from your JV partners on their appetite to deploy capital in this current acquisition environment?

Dallas Tanner: Yes. Nick, Dallas. Let me answer your second question first, and then I’ll talk a little bit about what we’re seeing in real time. I think there’s plenty of appetite with our JV partners to continue to grow and find compelling ways to invest capital. I think the — well, I know that to be the case. I think what I would add from a supply perspective is things are still relatively tight. If you go back to a year ago, we were kind of buying in the kind of low to mid-5s from a cap rate perspective. I think we’ve seen that move on the ground in the resale environment, maybe 20 or 30 basis points is kind of a mid-5-ish kind of market, 5.5, 5.6 for kind of like-kind product. Now that being said, there’s also the least amount of resale supply inventory in the market that we’ve seen in the last three to four years.