Invitation Homes Inc. (NYSE:INVH) Q4 2023 Earnings Call Transcript

Invitation Homes Inc. (NYSE:INVH) Q4 2023 Earnings Call Transcript February 14, 2024

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Operator: Greetings, and welcome to the Invitation Homes Fourth Quarter 2023 Earnings Conference Call. All participants are in a listen-only mode at this time. [Operator Instructions] As a reminder, this conference is being recorded. 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. In the interest of time, we ask that you limit yourselves to one question and then re-queue if you’d like to ask a follow-up question. During today’s call, we may reference our fourth 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 non-historical 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 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 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 Tanner, our Chief Executive Officer.

Dallas Tanner: Good morning, everyone, and thanks for joining us. Our customers’ needs are straightforward. They want to lease a great home in a safe neighborhood with great schools and easy access to jobs. They want professional services and genuine care, and they want flexibility and convenience that allows them to live more freely. 12 years ago, a lot of these options either didn’t exist or weren’t readily available. Today, they all do, thanks to the hard work and the commitment of our associates, thanks to the mission of this company that together with you, we make a house a home, and thanks to the hundreds of thousands of residents who have put their trust in us to do exactly that. Last year marked many important milestones for Invitation Homes.

We returned to a more sustainable growth profile, while continuing to expand and improve on the overall resident experience. It was a year in which we helped our homebuilder partners start construction on thousands of much needed new homes across the country. It was a year in which we recycled over $500 million of capital, selling nearly 1,500 homes on the MLS, predominantly to homeowners. And it was a year in which we executed one of the more significant portfolio acquisitions in our company’s history. We are excited to continue this momentum into 2024, as we expand on what it means to live in an Invitation Home. By this, I’m referring to last month’s announcement that our industry-leading operating platform is now available to not just our residents and joint venture partners, but also to large portfolio owners who are seeking the best in single-family property management for their residents and the best in single-family asset management for their investors.

Let me be really clear here. We believe providing professional property and asset management services is both a logical next step for our business, as well as a strategic significant leap forward. It empowers us to accretively leverage our platform in a capital-light manner, while helping us to achieve further scale, increased efficiency and additional margin expansion for our company, and substantial savings and convenience for our residents. It all began with last month’s inaugural agreement to become the property and asset manager on over 14,000 single-family homes. We expect this agreement to drive incremental AFFO of a couple of cents per share in 2024. This results from meaningful property management and asset management fees that we believe fairly compensate us for our unrivaled capability, scale and expertise.

In addition to this, we’ll also earn an outsized share of value-add service revenues such as from smart home, bundled Internet and other initiatives we may roll out in the future, along with potential future incentives, based on the operating and financial performance we’re able to drive over time. We believe this inaugural agreement is the first of what could be many such arrangements. As we pursue additional opportunities, we expect professional management to help us build and grow strategic relationships, while we continue to become even more efficient through greater density, improved procurement, better resident engagement and thoughtful use of data and technology. Most importantly, as in other REIT subsectors, we expect professional management can help us create a pipeline of potential future acquisition opportunities for homes about which we’ll have an information advantage.

In the meantime, we believe the fundamental tailwinds for our business will continue to drive outsized NOI and earnings growth relative to other REIT property types. This includes a well-documented lack of new housing supply across our markets, as well as the strong demand from a surge of young adults who are just starting to reach our average new resident age in their late 30s. These younger generations often favor experiences over possessions and prefer convenience and flexibility over financial anchors and 30 year contracts. It’s also important that we underscore the massive savings from leasing a home today versus owning. Using John Burns’ fourth quarter data as weighted by our markets, it is $1,200 per month less expensive to lease a home than to own it.

That’s an average savings for our residents of over $14,000 a year. We see this reflected in our latest surveys, in which a substantial majority of our new residents say that our rents and services are affordably priced. One of these services, which we just started to provide last year completely free of charge, is Esusu’s positive credit reporting program. Already, over half of our residents have improved their credit score since enrolling, with the average credit score improvement of about 35 points. This could help our residents achieve thousands of dollars in lifetime savings on their borrowing costs, further enhancing the value proposition for leasing a home with us. In summary, we’re very proud of the choices we offer individuals and families to live in a great home without the high costs and burdens of home ownership.

We remain committed to investing in our technology, systems, value-add services and other tools to help our residents thrive. And we’re excited by how we can continue to grow our business, further enhance the resident experience and meaningfully broaden the professional services we offer. In this regard, we truly believe we are just getting started. With that, I’ll pass the call on to Charles Young, our President and Chief Operating Officer.

Charles Young: Thanks, Dallas. Our fourth quarter operating results were a solid finish to close out the year. In particular, our teams worked hard to deliver strong same store NOI growth, occupancy and resident service. In 2023, we saw a return to more normal patterns of rent growth, seasonality and lease compliance. And as Dallas mentioned, it was a year of working towards several new milestones, including our large portfolio acquisition in July and getting prepared to provide professional third party management services. Our local market teams continue to take all of this in stride. It’s what we do, they often tell me, and I’m very grateful for their attitudes and achievements. Thanks to these strong efforts, I am pleased to see how efficiently and effectively we have onboarded these new homes, engaged with our new residents and rolled out desirable new services.

I’ll now walk you through our operating results in more detail. Same store NOI growth of 5.6% in the fourth quarter brought our full-year 2023 same store NOI growth to 4.8%. Same store core revenues in the fourth quarter grew 5.9% year-over-year. This increase was driven by average monthly rental rate growth of 5.3%, an 11.2% increase in other income, and a 50 basis point year-over-year improvement in bad debt. That marks three consecutive quarters of improvement in bad debt. I’m pleased to see lease compliance continuing to move in the right direction, while at the same time, also seeing our new residents’ household income reach its highest level to date, just shy of $150,000 a year on average during 2023. This represents an income-to-rent ratio of 5.4 times that is indicative of the high quality, location and desirability of our homes.

Returning to same store growth results, full-year 2023 same store revenue growth was 6.5%, while full-year same store core expense growth was 10.3%. The main drivers of this expense growth included the temporary cost of working through our lease compliance backlog, which drove higher property administrative and turnover cost, as well as higher property tax and insurance expense. By contrast, repairs and maintenance expense came in flat for the full-year 2023, a testament to moderating inflation pressures and our team’s ability to effectively control costs. Next, I’ll cover leasing trends in the fourth quarter 2023. As we typically do in the slower winter leasing season, we prioritized higher occupancy in the fourth quarter to better position our portfolio as we head into our upcoming peak leasing season.

As a result, same store average occupancy grew each month, averaging 97.1% in the fourth quarter. In addition, new lease rate growth was flat during the quarter, representing an expected return to more normal seasonal trends, while renewal lease growth of 6.8% was the highest we’ve seen in the fourth quarter other than during the pandemic. As renewals comprise a substantial majority of our leasing business, this strong result drove a fourth quarter blended rent growth of 4.6%. I’ll now also share our January 2024 same store leasing results. We started the year off with an increase in average occupancy to 97.5%. In addition, January blended rent growth was 3.5%, comprised of renewal rent growth of 5.9% and a negative new lease growth of 1.5%.

Early indications lead us to believe that new lease rates have already begun to turn positive again in February’s activity to date. In combination with the favorable tailwinds that Dallas mentioned and the strong delivery by our teams, we believe we are well positioned to capture strong demand for our homes as we enter the traditional peak leasing season later this month and to continue to provide the best resident experience in the industry. 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 and the capital markets; second, financial results for the fourth quarter and full-year 2023; and finally, 2024 full-year guidance. Leading off with the balance sheet, I’ll start with several of our team’s key accomplishments in 2023. These include $800 million of senior notes that we issued at approximately 5.5% in August, as well as outlook or ratings upgrades from all three of our corporate credit rating agencies during the year. We ended 2023 with $1.7 billion in available liquidity, which includes $700 million of unrestricted cash and $1 billion of capacity on our undrawn revolving credit facility.

Our net debt to adjusted EBITDA ratio improved to 5.5 times as of December 31, 2023, down from 5.7 times as of the year prior. And 99.4% of our total debt was fixed rate or swapped to fixed rate as of year-end 2023, with over 75% of our total debt unsecured and no debt reaching final maturity prior to 2026. I’m really pleased by the meaningful execution our teams delivered last year and believe our balance sheet continues to offer us strong positioning to achieve our goals in 2024 and beyond. I’ll now cover our recent financial results and year-over-year growth. Core FFO for the fourth quarter 2023 was $0.45 per share, an increase of 4.6%, while core FFO for the full-year 2023 was $1.77 per share, an increase of 6%. AFFO for the fourth quarter 2023 was $0.38 per share, an increase of 5.8%, and AFFO for the full-year 2023 was $1.50 per share, an increase of 6.3%.

These strong results were primarily driven by higher same store NOI during the quarter and full year. The last thing I’ll cover is 2024 guidance. This is led by our expectation for same store NOI growth in a range of 3.5% to 5.5%, resulting from expected same store core revenue growth in the range of 4.5% to 5.5% and same store core expense growth in the range of 5.5% to 7%. Our same store core revenue growth guidance assumes 2024 average occupancy will be similar to our full year 2023 result. In addition, guidance assumes same store blended rent growth in the high-4% to low-5% range and continued improvement in our bad debt as a percentage of rental revenue to an expected range of 65 basis points to 95 basis points. Our same store core expense growth guidance assumes higher fixed expense growth to continue in 2024, with property tax expense growth in a range of 8% to 10% and insurance expense growth in the mid-to-high teens.

We expect this to be partially offset by moderating growth in our controllable expenses. From a timing perspective, we anticipate same store NOI growth will be higher in the second half of the year than in the first half. All of this brings our full-year 2024 core FFO guidance to a range of $1.82 to $1.90 per share. This guidance assumes as a base case that we will acquire between $600 million and $1 billion of homes on balance sheet in 2024, mostly from our homebuilder partners and via portfolio acquisitions. We expect to fund much of these home purchases by continuing to accretively recycle capital from wholly-owned dispositions in an expected range of between $400 million and $600 million. A detailed bridge of 2023 core FFO per share to the midpoint of our 2024 guidance is included within last night’s earnings release.

Lastly, we provided full-year 2024 AFFO guidance in a range of a $1.54 to $1.62 per share. As a result of our anticipated growth in AFFO per share in 2024, last month, we increased our quarterly dividend by nearly 8% to $0.28 per share. In closing, we plan to keep a close eye on the capital markets throughout the year and continue our long track record of being disciplined and proactive. We’ll prudently pursue opportunities for meaningful growth and accretive capital recycling, and we’ll continue to lead the industry in our quest to provide the best choices, convenience and overall resident experience for the millions of Americans who prefer to lease a single-family home. With that, we have now concluded our prepared remarks. Operator, please open the line for questions.

Operator: [Operator Instructions] Our first question comes from Michael Goldsmith from UBS. Please go ahead. Your line is open.

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Q&A Session

Michael Goldsmith: Good morning. Thanks a lot for taking my question. A question on the guidance, and what does the guidance assume in terms of new and renewal lease spreads as we move through 2024? And new lease spreads were flat in the fourth quarter. That’s kind of below historical levels and was negative in January. What gives you confidence that you can kind of maintain your renewal spreads in this sort of environment?

Charles Young: Yes. Thanks for the question. I’ll start off — this is Charles — and just talk a little bit around where we currently are in terms of rate and occupancy. As we signaled on the last call, we purposely pushed for occupancy in the fourth quarter to set us up for a peak leasing season. We looked at the landscape back in September and October and decided to get aggressive on occupancy. What we were seeing was return to normal seasonality, as I mentioned. We’re also coming off a little bit of a spike in turnover in Q3 from the lease compliance cleanup, which is a good thing, and it’s part of why we have confidence in where we’re going on bad debt. We also saw some local supply pressures. And when we step back, we know that history tells us is best to be full going into peak leasing season, and that’s exactly where we are.

So today, we’re sitting at 97.5% occupancy in January and a position of strength, and we’re going to start to lean in on the rate side now. And what we’re seeing already from January into February is an acceleration into February and into spring leasing season. As we lean in on that rate, you can also see that renewals have stayed steady. And as a reminder, that’s the majority of our lease, as we pull through usually around 75%. Our blend in January is at 3.5%, which is really healthy. If you look back on historical rates pre-pandemic of 2018, 2019 or 2020, we’re right in line where we want to be. And with acceleration into February, we feel really good. So what I’ll leave at you is, we’ll give an update in February on — in March when — at the Citi conference, but we like our positioning, and it has put us in a good place with our occupancy, and we’ll go from there.

Operator: Our next question comes from Jamie Feldman from Wells Fargo. Please go ahead. Your line is open.

James Feldman: Great. Thanks for taking the question. So I guess just a follow-up on the new lease rates. If you look at the weakness you had in 4Q, clearly, those are some of the markets that have a lot more supply in the build-to-rent business. What are the odds here that maybe you get caught off guard, surprise at downside, just how much supply pressure there really is in those markets, and it’s just more than seasonal? Kind of what gives you comfort that the supply story won’t be too bad? Or maybe just give us your thoughts on supply in those major markets where you did see the weakest new rents.

Charles Young: Yes. So you’re probably calling out Phoenix, a little bit of Vegas. Two things I’d highlight. One, we — some of that confidence comes from our current level of occupancy. We’re in that position of strength, so we can kind of hold and know we’re not trying to solve for the occupancy and we can lean in. We’re also seeing that we’ve gotten occupied in those specific areas. So the demand is still there. That’s what’s great. We’re still seeing strong demand. We wouldn’t have been able to move occupancy from a low of 96.8% up to 97.5% if that demand wasn’t there. So, as you go into spring — and we’re also — when you bring up to build-to-rent relative to our infill portfolio, that puts us in a really strong position to think about the same store able to hold, given that we’re in that position of strength. And we’re already seeing some acceleration from January into February.

Operator: Our next question comes from Eric Wolfe from Citigroup. Please go ahead. Your line is open.

Eric Wolfe: Hi, thanks. For your bad debt guidance, can you talk about where you expect to start the year and how you get comfortable with that? So, do you start at over 100 basis points and then kind of end around 50 basis points? Or is just some point in the year where the bad debt should step down?

Jonathan Olsen: Yes, thanks. It’s a good question. We made great strides in reducing bad debt in 2023. If you look back to the fourth quarter of 2022, same store bad debt was 170 basis points. So we improved 50 basis points year-over-year to the 120 basis points we saw in Q4 of last year. That improvement came against a backdrop in which rental assistance decreased by $57 million year-over-year. And between the first quarter of 2023 and the fourth quarter of 2023, we had four markets that improved bad debt by between 100 basis points and 265 basis points. We continue to see a healthy percentage of lease compliance move-outs, which allows us to keep increasing the proportion of residents who are making timely payments. In the fourth quarter of 2023, Atlanta and Southern California were two of our markets with the highest levels of bad debt, but they are also two of the highest markets in terms of lease compliance move-outs.

So, that’s really part of the continued progress we’re making with respect to bad debt. I think it’s also important to point out that comparing our 2024 bad debt guidance with our 2023 actual result has a few challenges. Bad debt in the first quarter of 2023 was 180 basis points, which was one of our worst results since the start of the pandemic. That Q1 result caused an outsized impact on our overall 2023 full year bad debt results. Our quarter-over-quarter improvements in bad debt really began in the second quarter of 2023, and that improvement has continued every quarter since then. I think it’s also important to note that the reasons for that outsized bad debt result in the first quarter of 2023 don’t really exist any longer. We had restrictions — at the first part of last year, there were restrictions in place in Southern California that prevented us from beginning to work through our delinquency backlog.

It’s not like it was a January 1 kickoff. And so, over time, I think the moratorium is burning off and improvement in the significant court backlogs we saw in the first half of last year have really eased for us. Bad debt in the second half of 2023 was significantly better than in the first half, despite the fact that rent assistance was less than half it was — half of what it was in the first half. I would also point out that we are not assuming any rental assistance in our 2024 guidance. So I think if you put it all together, having the ability to enforce the terms of our leases from the start of the year in 2024 will allow us to continue to make steady improvements over the course of this year. But obviously, it’s going to continue to be a major area of focus for us, and we’re prepared to go out and execute.

Operator: Our next question comes from Jeff Spector from Bank of America. Please go ahead. Your line is open.

Jeffrey Spector: Great. Thank you. Can you talk more about the new customer demand? I believe you mentioned in January, new rate was minus 1.5%. I guess, can you talk about that strength in demand and then put into context how that number compares to prior years when you talk about normal seasonality, and then, maybe what you would expect as we move into peak leasing, which I believe you said should start at the end of this month? Thank you.

Charles Young: Yes. No, great question. This is Charles. As we mentioned, seasonality has returned. During the pandemic, it was really high occupancy, high demand. It was abnormal. And if you go back and think about our pre-pandemic years, 2018, 2019, 2020, when we were full like we are now, we’re really seeing that similar type of demand. That’s seasonal. That slows down typically in and into Q1 and picks up right after the Super Bowl, which just happened. So we’re in a place now where we’re looking across the portfolio. We’re seeing that we’re occupied. We did what we wanted to there. And we see the demand. It’s not the same exact levels that we saw during the pandemic, but those are artificially high. When you go back and you compare it to our 2018, 2019, early 2020, we’re right in line with what we’ve seen historical, and we’re in really good shape in terms of our occupancy and our blended rent growth going into now accelerating spring leasing season.

Operator: Our next question comes from Austin Wurschmidt from KeyBanc Capital Markets. Please go ahead. Your line is open.

Austin Wurschmidt: Great. Thanks. Good morning, everybody. Charles, how have you been — have you been offering any concessions to drive some of the traffic and build occupancy here during the softer part of the season? And maybe just to push back a little bit on your comment on renewal rates remaining steady, if I recall, you were sending out renewal notices in the 9%-plus arena and ended up kind of below 7% for the quarter. So how is that dynamic also playing out early in the year as to where you’re sending out increases and what you’re achieving? Thanks.

Charles Young: Yes, a couple of thoughts there. One, as we said, we pivoted to occupancy. That’s on new lease and on renewals. And so, while we went out in 8s and low-9s in Q4, we told the teams, negotiate. We wanted to try to make sure that we’re keeping occupancy high. So we’ve done that. As you look forward now, we went out in February in the low-8s and April and May in the high-7s. Again, if you look back historically, these are really great rates. And we’ll see where that all kind of settles out. But when you think about we’re looking at the combination of accelerating new lease and holding steady on renewals, we look at that blend and say, we’re in really healthy shape relative to any historical period outside of the pandemic.

Going back to your original question around concessions, we are running no concessions on any of the same store portfolio right now. We really — we talked about this on the last call. We pushed hard prior to the holidays. So we ran some concessions in November prior to Thanksgiving, and then we took them off. And that was all around just trying to accelerate demand while it was still there, knowing that things slow down come December, January. And today, if there’s any concessions out there, it might be one-off on some of our smaller build-to-rent areas where we talked about where there may be some more competition in Phoenix or Vegas, but outside of that, minimal concessions and not in the same store portfolio at all.

Operator: Our next question comes from Steve Sakwa from Evercore ISI. Please go head. Your line is open.

Stephen Sakwa: Yes, thanks. Good morning. I guess I wanted to pivot a little bit to expenses and just get your thoughts around the real estate taxes and insurance commentary that you put in the release. And if you do the math, I guess, on those numbers, against your overall expense growth, it sort of implies something in the 1% to 2% range for the rest of the expense line item. So, just some comments around kind of that low growth rate on the other items would be great. Thanks.

Jonathan Olsen: Yes. Thanks, Steve. It’s Jon. Good question. I think you’re right. If you look at it, our expectation is that we will see some moderation in controllable expense growth. Last year was a very heavy year in terms of turnover, in terms of all the things that we’re doing in the background to work through our lease compliance backlog. And so, from a comparability standpoint, year-over-year, we don’t anticipate seeing sizable increases in those line items. I would also note that the operations team has done a fantastic job over time of continuing to make the R&M portion of our business more and more efficient. And I think as we look at the controllable side of the house, we feel really good about where we are. I think a big part of what makes our platform so powerful is the ability to continue to drive more efficiency.

And I would also note that our entree into third-party management will, over time and distance, have benefits for the operating efficiency of our owned portfolio. But I would also point out that, that is not factored into our guidance for 2024.

Operator: Our next question comes from John Pawlowski from Green Street. Please go ahead. Your line is open.

John Pawlowski: Hi. Thanks for the time. I want to talk through the guidance for it sounded like blended rent spreads of high-4% to low-5% expected for this year. But then, you marry that with, Dallas, your opening remarks, and the massive affordability gap between the cost to own versus cost of rent, so I guess, why aren’t we seeing larger rent spikes or the ability to push rents in a much higher clip? Is there true price sensitivity among tenants? Or is there any self-governing of rent increases going on in the platform?