Invitation Homes Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 1, 2024

There are 11 speakers on the call.

Operator

Greetings and welcome to the Invitation Homes First Quarter 20 24 Earnings Conference Call. All participants are in a listen only mode at this time. 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.

Speaker 1

Good morning and welcome. I'm here today from Invitation Homes with Dallas Channer, Chief Executive Officer Charles Young, President and Chief Operating Officer John Olson, 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 Q1 2024 earnings release and supplemental information.

Speaker 1

This document was issued yesterday after the market closed and is available on the Investor Relations section of our website atwww.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 2023 Annual Report on Form 10 ks and other filings we make with the SEC from time to time. Except to the extent otherwise required by law, 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.

Speaker 1

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.

Speaker 2

Good morning, everyone, and thank you for joining us. Our teams kicked off 2024 with a great start to the year. In particular, our Q1 results reflect high same store average occupancy, accelerating same store rent growth and strong same store core revenue and NOI growth. We believe this puts us in a great position as we begin our peak leasing season. That being said, operating and leasing success is only one aspect of our anticipated growth this year.

Speaker 2

When we spoke to you in February, we told you that our 14,000 home property and asset management agreement with Starwood was just the beginning. Less than 3 months later, we've added over 7,000 more homes onto our management platform, including through last night's announcement of our joint venture with Quatera, Centerbridge and other high quality investors, as well as our agreement with Nuveen that we signed in March. We are honored to work with each of these respected partners who highly value our coast to coast SFR management expertise and best in class operating and management capabilities. We believe this is just the beginning of the journey to grow our professional management and services business, which as a reminder offers many benefits to Invitation Homes. 1st, we are an attractive property asset management fees that are commensurate with our unmatched expertise and scale.

Speaker 2

2nd, we're able to grow earnings in a capital light manner, including through the opportunity to potentially acquire these homes at a later date. 3rd, we develop deeper insight via the operational data we collect, which help us to better operate our own homes and markets. And 4th, we can further leverage the combined power of scale and density by spreading our costs across a larger number of homes, thereby improving our margins. We believe our partners and residents also benefit from choosing Invitation Homes as their manager. In addition to getting direct access to our operating leasing and asset management expertise, our partners can realize potential savings from utilizing our vast vendor network, our staffing optimization and our advantageous pricing agreements.

Speaker 2

Residents in turn receive our signature Genuine Care and ProCare services, along with the value add amenities we offer, including, for example, our Internet bundle that we buy in bulk in several of our markets and provide to residents at a discount to retail pricing. Another area of growth for us remains our new product pipeline. We announced last month that we added several large homebuilders to our growing list of relationships, including D. R. Horton, Meritage Homes and Dreamfinder Homes.

Speaker 2

We're under contract with them to build approximately 500 new homes primarily in Charlotte, Jacksonville and Nashville with deliveries expected to start later this year. Underwritten cap rates on these acquisitions are in line with our previously stated targets of roughly a 6% yield on cost, which I will remind you is a return that's effectively free of any development risk to us today. Given the dynamic environment we've seen in the last couple of years and the volatility in land pricing, cost of materials and interest in cap rates, our contracts are designed to protect us from the risks inherent with on balance sheet development, while achieving what we believe are far superior risk adjusted total return. We're proud of the growth we've delivered through partnering with the best and largest homebuilders in the country, while also helping to create much needed new housing supply in the communities we serve. To wrap up, we're pleased with how our teams have started off this year.

Speaker 2

I extend my thanks to all of our associates for their hard work and seamlessly bringing thousands of new homes onto our platform, while at the same time continuing to deliver outstanding operating and leasing results. As we look ahead, we're excited by our ability to sustain this momentum as we leverage our strategic approach and operational excellence to drive continued growth for our stakeholders through the remainder of the year. With that, I'll pass the call on to Charles Young, our President and Chief Operating Officer.

Speaker 3

Thank you, Dallas. Our associates really shine during the Q1, delivering great results and preparing the business for our peak leasing and maintenance season, all while bringing 14,000 third party managed homes into our operations. During the Q1, we maintained high occupancy, accelerated lease rent growth and continue to see our customers stay longer with us. We believe this is all part of a simple formula to sustainable NOI growth throughout the year. Now let's cover our Q1 same store operating results in more detail.

Speaker 3

Fundamentals remain strong and thanks to the great performance of our teams, we grew same store NOI by 4.7% in the first quarter. Same store core revenues grew 5.6% year over year driven by average monthly rental rate growth of 4.6% an 80 basis point year over year improvement in bad debt and a 15.9% increase in other income, primarily related to our value add offerings. Same store core operating expenses in the Q1 increased 7.4% year over year. This was the result of an 11.8% increase in fixed expenses and a 0.5% decrease in controllable cost. For fixed expenses, the largest driver of the increase was property taxes.

Speaker 3

As we anticipated and previously discussed, due to the under accrual of property taxes in the 1st 3 quarters of last year, we expect property tax expense growth to be higher during the 1st 3 quarters of this year before normalizing in the Q4. Meanwhile, on the controllable side of expenses, we're pleased to see cost of goods continue to moderate as well as a strong effort by our teams to control costs. This is reflected in our 0.5% reduction in controllable expenses year over year as well as our 4.6% reduction in controllable costs from the Q4 of 2023 to Q1 2024. Of particular note, the 1st quarter same store turnover rate of 5.2% was flat with last year's Q1 results, yet turnover expense was down 2.4% year over year. This is due in part to the progress we've made in working through our lease compliance backlog.

Speaker 3

In that regard, it's great to see more of our markets returning to pre pandemic normal levels of bad debt. As a reminder, normal for us is approximately 40 to 60 basis points of bad debt as a percentage of gross rental revenues, which has historically been industry leading among our SFR peers. Looking ahead, while we still have some work to do in a few of our markets, we remain encouraged by the continued high quality of our new residents, whose average household income over the last 12 months is now approximately $158,000 a year, bringing our average income to rent ratio to 5.6 times. Now let's cover our same store leasing trends in the Q1. Renewals grew 5.8% and new leases increased 0.8% year over year.

Speaker 3

This drove blended rent growth to 4.4%. Average occupancy in the Q1 remained strong at 97.6%. Our preliminary April 2024 results show our peak leasing season has started off well. Renewal rent growth accelerated to 6%, while new lease rate growth accelerated to 3.1%, delivering blended rent growth of 5.2 percent in April. Average occupancy generally held steady at 97.5%.

Speaker 3

With occupancy in a strong position and fundamentals remaining in our favor, we believe we're in great shape to capture the demand we're seeing in our markets and continue the great momentum our teams have built. I'd like to thank them again for their focus on resident service and operational excellence along with their diligent efforts as we plan and prepare for future growth. With that, I'll now turn the call over to John Olson, our Chief Financial Officer. Thanks, Charles, and good morning, everyone. Today, I'll cover our financial results for the Q1 2024, followed by an update on our investment grade rated balance sheet before opening the line for questions.

Speaker 3

I'll start with our Q1 2024 financial results. Core FFO increased 5.7% year over year to $0.47 per share, primarily due to an increase in NOI. These results also reflect the Q1 of contribution from the 14,000 home portfolio we started managing in mid January. The fees we earned were partially offset by investments we made in resources and support to help prepare for anticipated future growth. These items are included on our income statement under management fee revenues and property management expense respectively.

Speaker 3

Meanwhile, higher core FFO drove our 6.8% year over year increase in AFFO to $0.41 per share. We're pleased with these results and appreciate the considerable efforts of our associates to help us begin the year strong. Turning now to our investment grade rated balance sheet. We had over $1,700,000,000 in available liquidity at the end of the Q1 through a combination of unrestricted cash and undrawn capacity on our revolving credit facility. Our net debt to trailing 12 month adjusted EBITDA ratio was 5.4 times at March 31, 2024, down slightly from 5.5 times as of December 31 and just below our 5.5 times to 6 times targeted range.

Speaker 3

We have no debt reaching final maturity until 2026. In addition, 99.5% of our total debt is fixed rate or swapped to fixed rate and over 76% of our total debt is unsecured. This week, we received further validation of the strength of our balance sheet. Specifically, I'm referring to our announcement that Moody's recently upgraded the company to Baa2 from Baa3, joining both S and P and Fitch with BBB Flat Investment Grade Ratings. Looking forward, we believe this ratings upgrade further enhances our positioning for when compelling opportunities arise.

Speaker 3

In summary, we believe Invitation Homes is at the beginning of a new phase of our business in which exciting opportunities could become more actionable and the quality of our balance sheet, systems and talent are the best they've ever been. All of this puts us on a path from which we believe we can continue to deliver outsized results for our stockholders and the best possible experience for our residents. That concludes our prepared remarks. Operator, please open the line for questions.

Operator

Our first question will come from Michael Goldsmith from UBS. Please go ahead. Your line is open.

Speaker 4

Good morning. Thanks a lot for taking my question. In the past, you've talked about starting to push rate around the Super Bowl, so mid February. So it seems like this year, it kind of maybe took a step back new lease spreads kind of took a step back in March before your recent comment that they accelerated in April. So just trying to get a sense of kind of the sequential trajectory of the new lease rent spreads during the quarter and into April.

Speaker 4

And if there was any factors that was influencing maybe some of the choppiness, which is resulting in where it

Speaker 2

is now, it seems kind of on pace? Thanks.

Speaker 3

Sure. This is Charles. Appreciate the question. Look, we've seen a really healthy acceleration through the quarter. As we talked about last quarter, we had solved for occupancy coming out of last year as we had some lease compliance turnover that spiked.

Speaker 3

We did exactly what we said we were going to do. We got occupancy up from 97.1% to 97.6% for the quarter, which is really healthy. And then we started pushing rates in January in anticipation, as you're talking about, for February to jump. So from January to February, we went up over 300 basis points, continued to push into March to the high 2s and looking at April here in the high 3s, that's all new lease rent growth. The blend has also accelerated the last 3, 4 months as we anticipated.

Speaker 3

What's really great though is we're still 97.5% occupied and we're seeing further acceleration into May. So we set ourselves up really nicely to capture the demand that comes this time of year in peak season. So really haven't seen any kind of dislocation from what is the typical seasonality that we expected. And if there was anything, it was just us setting ourselves up to take advantage of the demand that's in front of us by getting occupied.

Operator

Our next question comes from Eric Wolf from Citi. Please go ahead. Your line is open.

Speaker 4

Hey, thanks. I know you get asked this question a lot, but the Wall Street Journal article the other day brought up regulatory risk again and generated some more questions. So I was just curious from your perspective, what you're advocating for that you think would help the housing affordability issues. It's not limits on ownership or rent control. What do you think would improve housing affordability and what role are you going to play in that?

Speaker 2

Yes. We really appreciate the question. Clearly, the cost of housing in the country is a bit high generally. And it keeps getting worse, particularly due to higher mortgage rates and lack of supply. Now what we can do is our best to encourage that new supply coming into the market, which is why we're working with so many of our homebuilder partners, helping them start large new communities that often include a mix of for sale and for lease housing.

Speaker 2

And you have to remember there's 47,000,000 households in the U. S. That rent something somewhere. It's about a third of the country and it's been that way really for decades. And so it's also important to remember that we learned this from our residents.

Speaker 2

They tell us time and time again that they want choice and flexibility of leasing a home. And it's at a significantly lower cost than owning. If you look at our West Coast markets today, it's upwards of almost $2,000 a month cheaper to lease a home in markets like Seattle and Southern California than it would be to own. So John Burns covers a lot of this data really well, but attempts to restrict companies like ours for being a need or desired option for consumers seems sort of to be misguided. It's also counterproductive.

Speaker 2

I think that's why as noted in that article that you mentioned, none of the anti leasing and anti professional management bills actually get very far to date at both national and state levels. So regardless of the narrative that kind of it's a populous thing to try to point fingers at companies that are providing housing solutions. We're going to continue to work with our trade associations. We work at the state and local levels very effectively. And candidly, you've seen some really positive legislation go through in the states that are much more proactive in this housing debate and trying to create access for private capital to come into the housing market and to provide additional dwelling units.

Speaker 2

So that's our goal is to be part of that narrative, which would be to bring new supply into the market over and over and over. And we're not going to stop. And as we've announced in our script, we're working with some of the best and brightest in the country doing that.

Operator

Our next question comes from Brad Heffern from RBC Capital Markets. Please go ahead. Your line is open.

Speaker 3

Yes, thanks. John, is there any context that you can give for the incremental contribution from the new third party management agreements to earnings? I know you're obviously not changing the guidance, but just some sort of scale on that would be great. Sure. So, I think it's important to note that as you point out, we had guided to $0.02 of earnings contribution from 3rd party management.

Speaker 3

Included in that guide were both the Starwood and the Nuveen agreements. The Upwards America agreement that we announced yesterday is not in there. I think it's also important to note, however, that only one of those three portfolios has been onboarded at this stage. Just the Starwood portfolio, the Nuveen portfolio is scheduled to be onboarded in mid May, and then Upward America sometime in Q3. So I think as we approach those onboarding dates, we get better and better visibility into the operating metrics specific to those portfolios of homes and we'll have better insight into what we think the potential is.

Speaker 3

So I think time will tell. We're still very early on. But as we approach those onboarding dates and we get more time under our belt actually managing those portfolios, we'll see if there's some upside to what we've guided thus far.

Operator

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

Speaker 2

Great. Thanks. Good morning. Charles, I don't know if you had touched on the renewal increases that had maybe gone out for kind of the April, May, June and maybe even July period. So any commentary around that would be great.

Speaker 3

Yes, I hadn't mentioned it. We went out for May June in the mid-70s, which was similar, maybe just slightly lower from what we did with April and we ended up April at 6.0, which was accelerating from all of Q1. So still healthy as you look back on any historical means.

Operator

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

Speaker 5

Yes. Hi, good morning. Just have a question related to transaction activity and I was hoping you could provide some additional comments around the more to enter and then just more broadly about activity in the to enter? And then just more broadly about activity in the transaction market and whether you think there's enough in the pipeline to kind of hit that full year acquisition guidance?

Speaker 2

Yes. Hey, I'll this is Dallas. I'll start and then I'll ask Scott to add anything that he'd like to it. But 1st and foremost, we went back into Nashville as part of a transaction last summer, that allowed us to get a significant amount of more scale in that marketplace. I think Scott can give you more color on the ground with what we're seeing real times in terms of the opportunity side.

Speaker 2

I think we feel very good about our guidance ranges, no change there. And remember, with the new construction that we're building, it's lumpy. It comes in at different times of the year. And we certainly are looking at some M and A and having discussions. And I think you've seen we've been extremely active in the last 6 months, with the 20,000 units that we brought on.

Speaker 2

One thing I just want to highlight and then I'll hand it over to Scott is, I think what's really exciting about the 3 pm business for us is that if you look at the first three transactions we've done, they've all been very different in nature. One is a pure play third party management with maybe an option for a takeout down the road. The other was us actually acquiring management contracts and thinking about further expansion of that relationship with that particular capital partner. And in the last situation, we bought into a new home construction portfolio with both professional capital and a professional homebuilder. And so in participating in the equity stack, so to speak, it gives us obviously aligned incentives, but also clear a clear view on how to grow that business in that particular portfolio over some period of time.

Speaker 2

Scott, do you want to maybe give a little bit more color on what we're seeing just sort of from a scale perspective? Sure.

Speaker 6

And just to address your questions about markets. I mean, Nashville is a good example where we're adding new homes in that market, both through 3rd party management agreements and also some communities that we are buying as well. And so that's just an example of something that we're trying take a market where we were undersized before, but clearly we're getting some good scale in the near run and we hope to grow there more over time. We have other markets that we're also eyeing that we're going to get exposed to through the 3rd party management contracts and contracts and we're hoping to see more like in Austin and San Antonio, for example, as markets. In addition, one thing that I would add is that we continue to expand our dialogue with the homebuilders.

Speaker 6

Obviously, we've done a lot historically with Pulte and Lennar, but we're also adding more national and midsized builder relationships to the stable here. We're doing some deals with Horton and we're doing some deals with Meritage. We've got some other midsized builders that we're adding to the stable. And we continue to add more of the built for rent product where we're helping create supply as Dallas talked about earlier and working with the homebuilders to give them confidence to start new communities and know that we can buy some of the homes and have some of those homes be purchased by retail customers. So we continue to do our part to create more supply and obviously it's adding to our acquisition backlog and pipeline.

Operator

Our next question comes from Juan Sanabria from BMO Capital Markets. Please go ahead. Your line is open.

Speaker 7

Hi, good morning. Just taking on the 3 pm theme, just curious about how you think about the overall size of the opportunity. Is there any basic math you could share on what the accretion would be if you add, let's say, 10,000 homes or just whatever metric or you'd like to talk to? And just going back to the previous question about regulation, we've obviously seen some negative headlines for the industry about collusion or whatever on pricing. Is there any concern for you guys that as you take on more responsibility that and you manage third party assets and it's all in one system that you could be come under the threats there or risks around pricing for the industry?

Speaker 2

Juan, thanks for your questions. I'm going to try to hit them in a few different ways. And then I would say, John, feel free to add anything on the economics. Look, I think and we talk about this over and over and over. You have to remember the size and scale of the U.

Speaker 2

S. Housing footprint. We have about 147,000,000 households that own or lease something in the U. S. Today.

Speaker 2

I mentioned earlier, dollars 47,000,000 of those lease. If you look at the single family rental dynamic in the U. S, there's somewhere between call it 15,000,000 ish homes that are for lease. Roughly about 3% of those are probably operated by what we call professional capital that might total maybe 500,000 units. And those are spread amongst at least 60 different companies that I'm aware of.

Speaker 2

So the data actually on the other 97% of single family rentals that are out there is sort of in a universe that nobody has access to that information. So no, I think it's actually the opposite one. As a company, we have our own data. We look at all the public information on the listing data and that has informed our thinking around rents and pricing of homes and things like that for the last decade, just publicly available information. 2nd, in terms of the sizing of what we're calling 3 pm internally, but really it's the additional scale we can bring on to the platform by being a service provider for other owners of single family rental.

Speaker 2

It's still early. And like I mentioned, there's about 500,000 units that we can identify as being sort of professionally owned out of the 15,000,000. So it's about plus or minus 3% of that. We would love to stay active and keep growing our business. I will tell you, you think about like the strength of the platform adding 20,000 units over a 6 or 9 month period is going to give us tremendous amount of horsepower even in our own portfolio.

Speaker 2

You start to think about RFPs that we have out where we're working on getting more efficient with our own costs and our spend. That's going to give us additional capacity there to lean in and to give our vendors more work, but at the same time try to get better pricing for our customers. And so we're really excited about what that means. We see the landscapes currently being tens of 1,000 or maybe 100,000 plus units, but we expect the SFR industry to keep growing. And we expect that over time and maybe the next decade that 97% could come in a little bit at much like you've seen in multifamily over the last 30 years where if you look at multifamily, the numbers are sort of similar.

Speaker 2

About 15% of the multifamily industry is owned by professional capital where 85% is owned by small family office and people that have one off investments. So we would expect SFR over the next couple of decades to hopefully grow in a much better professional manner. John, do you want to add anything to that?

Speaker 3

Yes. I think the other part of your question is the right question. The answer is at this stage of the game, we don't have a shorthand rubric that we can share in terms of how to think about every X 1,000 homes brought on the platform through 3rd party management. I think over time as we onboard the 2 portfolios that we're looking forward to, The law of large numbers suggest that we ought to be able to do that. But I think it's also important to remember that there are a lot of variables that make a simplification a little bit challenging, right?

Speaker 3

Market mix is very price points very sort of degree of upfront renovation done varies. And so I think as we through our asset management exercises help shape these portfolios to perform as best they can. And as we get more homes on the platform and have more sort of actual operating and financial results we can look at, I think we'll be in a much better position to share what we think is a smart way to think about how much those opportunities can potentially add to the bottom line over time.

Operator

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

Speaker 4

Hey, thanks for the time. Charles or Dallas, do you have an internal view of I know you guys are prioritizing occupancy, but this is a question on market rents. And so do you have an internal view of why market rents aren't growing at a much, much faster clip than they are given the affordability gap you referenced in some of your markets, Dallas. Is supply more than we think or is immigration into the Sunbelt slower than we think? Just curious what you think the culprit is?

Speaker 3

Yes. I think I would look at it as a culprit. If you go back outside of the COVID years, we're trending above where we've been historically on both new lease and renewals. So on a blended rate and we're more occupied than we ever been and people underestimate the value of that occupancy to our NOI growth. And so, look, I think we're just seeing back to normal kind of seasonality.

Speaker 3

And coming off of COVID, it feels like it's a slowdown, but the reality is it's still really healthy. To your point though, there are certain markets that were really humming during the pandemic and they're coming back to earth a little Phoenix and Vegas being a couple of those that we've talked about. I expect that we'll start to see them move kind of more positive on the new lease rate side in the near future as we've gotten them occupied now and things are settling down. Florida has been humming for a long time. South Florida is still really strong right now if you look at our rates.

Speaker 3

But Tampa and Orlando are seeing a little bit of a slowdown relative to what we saw over the last couple of years. So generally, it's really strong. There's not a lot of demographic changes that are material, but we saw a lot of people moving to Florida to Texas and other markets. That slowed down. And so that's taken away a little bit of the edge.

Speaker 3

But that again just takes us back to where we think we are, which is kind of a normal seasonality and normal kind of undersupply of homes. If you look at us relative to multifamily, we know we're in a good position. Tailwinds are in our favor. We've been able to grow occupancy in the slow season, get occupied and now we're going to capture that demand going forward. So feel like we're in healthy shape.

Speaker 3

There's some dynamics in individual markets. We can get into it if you have more further questions, but generally we're in good shape.

Speaker 2

Yes. John, this is Dallas. I just want to add a couple of things that were just sort of anecdotal that I know you're aware of. With new home construction making up about 30% of the overall kind of home transaction market, people are just staying put a little bit longer too. And I think you're seeing some of that even in our peers' information.

Speaker 2

And then we also I think Charles sort of mentioned this in a different way, but we just we also don't have as much loss to lease as some of the other books of business that might be out there. We had quite a bit of rate growth, which to Charles' point puts it as much better denominator. The other thing I would add is in that denominator, our customer is now ticked over 3 years on average length of stay. So I think what Charles and I will kind of solve for with the teams from an optimization perspective will be making sure that on our renewal business, we're always capturing as much share of rate that's out there. We obviously want to get as much new lease growth as we can.

Speaker 2

But I think a bigger portion of our business is going to be renewals than we sort of ever historically thought of from when we started the company 12 years ago. It just feels like the customer is going to stay longer and longer until we get into a cheaper rate environment, where maybe there's more home transaction availability.

Operator

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

Speaker 8

Great. Thank you for taking the question. So I just wanted to shift gears a little and just talk about the balance sheet and debt strategy. Can you just talk through your plans for the rest of the year? And then as you think about next year with the $3,500,000,000 of interest rate swaps coming due, Just what are you thinking about planning for those?

Speaker 8

And just how should we think about potential earnings accretion dilution as we look through the rest of the year and into next year, just based on how you're currently thinking about your strategy and rates being higher for longer?

Speaker 3

Yes. Thanks for the question. Look, we have about $3,100,000,000 of debt maturing in 2026. That, as we talked about, I think, on the last call is comprised of 2 debt instruments. It's $610,000,000 of our last remaining floating rate securitization, IH 20 18-four and the $2,500,000,000 term loan component of our 5 year bank facility.

Speaker 3

We are sitting on the remaining cash from our August 2023 bond deal. That cash is available to either grow the business or to pay off debt. Today, if we look at where that 2018 forward securitization is swapped to, that is swapped to a rate of about 4.15%, 4.2%. Compare that to what we're earning on the cash sitting on our balance sheet, which is around 5 point 5, right? So we're not in a rush to pay that debt off despite the fact that we have ample unrestricted cash sitting on the balance sheet to do so.

Speaker 3

With respect to the bank facility, we have begun dialogue with our lender partners. We are going to focus on a recast of that facility here over the coming months. We'll obviously keep you posted as that process progresses. But I would say that we feel very comfortable with our access to capital, feel very comfortable with the balance sheet. And I think it's important to remember, we have plenty of time left.

Speaker 3

We've shown that we typically aren't going to wait till the last minute to do something. But I think we also have bought ourselves the ability to be patient, which is helpful. With respect to the swap book, there are some swaps expiring in November of this year. I would point out that those correspond pretty well to that 2018 for floating rate securitization. So if we assume that swap expiry potentially aligns with the debt repayment, That probably makes sense.

Speaker 3

And I don't anticipate that we would replace that floating rate debt with anything other than fixed rate debt.

Operator

Our next question comes from Haendel St. Juste from Mizuho Securities. Please go ahead. Your line is open.

Speaker 4

Hey, guys. Good morning.

Speaker 9

So Dallas sorry, one more on 3rd party management here. I guess I appreciate your comments earlier on the state of housing in the U. S. And the roles that SFRs have historically played. But what's different in the latest article from The Wall Street Journal is that it's coming from the Republican Governor of Texas, a large and deep red state calling for legislative some things have added to the legislative agenda in Texas to protect families.

Speaker 9

So you guys are based in Texas. I'm curious what you're hearing and potentially expecting on that front and how it might impact your plans to potentially add to your portfolio in Texas, which is still only about 6% of your total revenue? Thanks.

Speaker 2

Thanks, Haendel. You're right that Texas doesn't represent a very big portion of our business. Look, I hate to speculate on any comment that I don't have sort of the full context of. We're active at both state and local levels in Texas and other markets. And everything we're hearing on the ground is pretty pro housing and pretty friendly in terms of where state legislatures are and things that they want to focus on.

Speaker 2

We've had a number of wins in Georgia and Florida and North Carolina over the last year. We've even seen some of the, what I would call, really crazy bills in California get shelved in the last little bit and it feels like there's sort of a little bit of a pendulum swing to moderation. Look, the tricky part about housing generally in the country is going to be that it's a social issue over and over and over. And the affordability issues that have been in the country really for the last decade since the GFC are largely supply driven in nature. I'm not an expert on political matters and or where people are going to fall on any one particular issue.

Speaker 2

I have become well versed in that, we see a lot of headlines all the time and there's clickbait and we live in a 24 hour news cycle where things can also get taken out of context very quickly. And so our focus is as a provider of housing to be consistent both in the things that Charles and John shared and Scott around deliveries, execution, how we view the customer experience and creating this kind of lifestyle flexibility for a massive subset of consumers that are nearly 47,000,000 households deep. SFR represents about 10 bps of that at the end of the day. And so those 10 bps in the way that we behave, I think are the only things that we can control in the real time, which is just be a great business that offers flexibility and service. And by the way, have the conversations at state and local levels as we continue to build out our thesis around housing to make sure that we're part of the solutions and that the facts are actually understood.

Speaker 2

And I think that particular article was disappointing. The headline reads one way and as you get into the article deeper, you realize that a lot of the facts in the subset suggest that a lot of this stuff isn't gaining traction. Because I think as you get into the data, you start to figure out that we need many different types of solutions to combat this problem. So we'll be one part of a subset of many, but the question makes sense Haendel. Can't tell you what any particular politician is thinking at any given time.

Operator

Our next question comes from Josh Dennerlein from Bank of America. Please go ahead. Your line is open.

Speaker 5

Yes. Hey, everyone. Thanks for the time. John, just wanted to follow-up on a comment you made on the fees you're receiving from the management contracts are being offset by some investment

Speaker 10

spend what that investment spend entails?

Speaker 3

Yes. Look, I think as we onboard these portfolios, obviously, we need to add some heads in the field. We need to add some heads in the back office and we need to make some technology investments. I don't anticipate that we're going to be perfect at this coming out of the gate. The good news is, as we've talked about, this is really attractive high margin business for us.

Speaker 3

But just as we spent years optimizing our balance sheet, optimizing our operating platform, iterating towards a better outcome and sort of a better structure. We're going to be doing the same with respect to the 3rd party property management business. So some of these incremental costs that show up in property management expense are upfront and one time in nature and will spread across the majority of these new agreements. Some of them are more variable and are going to correlate more strongly to the number of homes that come online. But I think big picture, this is a really attractive business from an earnings contribution perspective.

Speaker 3

And our expectation is that we should be able to make those margins higher for us as we get more and more efficient in terms of how we manage.

Operator

Our next question comes from Adam Kramer from Morgan Stanley. Please go ahead. Your line is open.

Speaker 10

Hey, guys. Thanks for the question. It was asked a little bit earlier, and we should ask in a different way. Just wanted to ask about maybe how your expectations for new and renewal growth for 2024 compared to your expectations last time we chatted, roughly 3 months ago. And I know you didn't provide specific numbers at that point.

Speaker 10

So maybe just walk us through given you've now had 4 months, right, and I think additional visibility has been renewal for the next few months. How do your expectations for new and renewal growth stay compared to what you provided 3 months ago?

Speaker 3

Yes. Thanks for the question. I think obviously we have not revised guidance. We continue to feel very comfortable with our expectations for where blended rate growth will shake out over the course of the year. What we've said is we expect the blend to be high fours, low fives.

Speaker 3

Look, we're sitting here May 1st. We feel really good about the results we saw in the Q1. We feel really good about the fact that it's aligning very, very closely with how we sort of shaped guidance and our view for how the year would likely progress. So I'm not sure that there's really much if any change. I think that the May blend of 5.2% that Charles alluded to earlier is reflective of things kind of falling in line the way we expected them to.

Speaker 3

Sorry, April blend of 5.2%, just to clarify.

Speaker 5

Thank you.

Operator

Our next question comes from Daniel Trokarico from Scotiabank. Please go ahead. Your line is open.

Speaker 5

Thank you. On the acquisitions in the quarter, you quoted a 6.1% cap rate in the sub. Curious if you could break down what percentage of those are from homebuilder pipeline versus the traditional MLS and what the spread on cap rates looks like today between those two channels?

Speaker 2

Yes, I would say that hey, this

Speaker 6

is Scott Eisen, great question. From our perspective, a majority of what we're doing right now is with the homebuilder direct purchasing. We're doing very little on the MLS right now. We've focused most of our efforts on growing our 3rd party management business and also focusing on doing more deals with our homebuilder partners. And look, we are still, as we've said before, targeting these homebuilder acquisitions in and around a 6 cat in terms of what our yield on cost expectation is for these transactions.

Speaker 6

And in terms of dispositions, I think we're still in the market disposing as we had said we would and it's still in that range of the 4 ish cap or so in terms of the dispo rate. And I don't think anything has changed materially in terms of what seeing in terms of that acquisition yield.

Operator

Our next question comes from Jesse Letterman from Zelman and Associates. Please go ahead. Your line is open.

Speaker 4

Thanks for taking my question and nice job during the quarter. You noted at a recent conference you expect new move in rent growth to exceed renewal rent growth this summer consistent with your typical trajectory maybe pre COVID. Can you discuss what you're seeing in the market that gives you confidence new move and rent growth will accelerate roughly 300 basis points from April and how that 300 basis points relates to the typical, call it, April to summer peak acceleration? Thank you.

Speaker 3

Yes. We're seeing that typical kind of acceleration into on the new lease side into the summer. And we usually peak somewhere in June, maybe July. It varies year by year whether new lease will overtake renewals. Can't predict that this year.

Speaker 3

I don't think I've said that, but we typically see that you're going to see new lease accelerate peak in the summer and renewals will stay steady throughout the year. I could see renewals moderating slightly in the summer as Dallas mentioned. The loss to lease is a little lower over the summer. That cohort, we've kind of pushed on demand. So that might bring it down.

Speaker 3

So we'll see how it goes. I think as we've talked about, we're in a really kind of healthy and or typical season and where it works out for the summer will be determined. That said, we are seeing the acceleration that we expected to see from the start of the year. We started January as we're building up the occupancy, negative new lease rate growth and now in April at 3.1% and accelerating into May, we'll see where it takes us for the summer. We're right where we wanted to be.

Operator

Our next question comes from Michael Gorman from BTIG. Please go ahead. Your line is open.

Speaker 3

Yes, thanks. Apologies if I missed this, but could you just spend a little bit of time talking about the insurance renewal that you mentioned in the sup and maybe just talk about if there's any change in coverage levels or any other terms that allowed for the execution there on the pricing? And then I guess just I know you left guidance unchanged, but is there anything left that would potentially push insurance back up to the initial guidance range of mid to high teens growth from the 7.5% that's implied? Thank you. Yes.

Speaker 3

So great questions. Thank you. There is nothing left that would cause insurance to come in higher. We working with our insurance brokers sort of formed an early view, and that was reflected in our initial guidance over the course of kind of our annual trips to London and Bermuda to meet with underwriters and sort of help explain all the reasons why our business has a number of really attractive risk built in risk mitigants, Coupled with the fact that reinsurance treaties came in much more constructive than last year, we were really pleased with the outcome there. I think at the end of the day, however, insurance is a relatively small line item for us.

Speaker 3

So there's not a ton in it. What's going to be much more impactful obviously is property tax as we talked about. The fact that expenses were sort of as elevated as they were year over year here in the Q1 is largely attributable to the fact that we were under accrued on property tax in each of the 1st three quarters last year. So when people see the expense growth numbers, that is sort of to be expected and that was also baked into our guidance. Specifically, what caused our insurance renewal to be so positive, I think a lot of it is driven by the market environment.

Speaker 3

But there are also some nice things about our business that benefit us. We're not coastal. We have the ability to asset manage on a house by house basis. And I think it's a nice reminder of the scale of our business. On average, our insurance costs per home in the state of Florida, for example, are less than $1,000 For a homeowner, that's probably between $5,000 $6,000 annually at the price points where we operate.

Speaker 3

So I think that's a really nice sort of testament to the benefits of scale. And then to answer the first part of your question last just to round it out, we made no changes to our policy structure or limits or anything of that nature.

Operator

Our next question comes from Linda Tsai from Jefferies. Please go ahead. Your line is open. Yes. Hi.

Operator

If renewals are a bigger part of your business going forward, how much more does this expand your margins over time? And how do we quantify how much less turn each quarter reduces OpEx?

Speaker 3

I'll let John answer anything in terms of kind of margin expansion. But for us, if you go back and look at our business pre pandemic, we were moving turnover down year over year. It really kind of bottomed out during the pandemic, but we're back on that track where we're just really healthy turnover. And a lot of that is driven by having high renewals. And it's a balance of some of the tailwinds that we've talked about in the industry, but also a big part of our genuine care and how we serve the resident and people want to stay with us longer, getting over 3 years now with California getting closer to 5.

Speaker 3

It's just a really healthy position and that's what shows up in our occupancy. You take that low turnover, plus good days to re resident that we've been operating at and keeps the occupancy high. And from there, I think given as Dallas said, it's a really nice opportunity in lifestyle that we see that people for moving out reasons to buy home are as low as it's ever been in the last few years. It's leading to really kind of strong, low turnover and strong renewals. And as Dallas said, we expect it will be a strong part of our big part of our business going forward.

Operator

Our next question comes from Connor Peeks from Deutsche Bank. Please go ahead. Your line is open.

Speaker 5

Hi, thank you. I think you touched on this a little bit earlier, but if we could discuss the economics around the homebuilders and maybe specifically why Invitation can get higher yields versus the homebuilders selling to individual buyers? Thanks.

Speaker 2

Hi, this is Dallas. And anything I don't cover, Scott, if you would like to add anything, please do. I think taking a step back, one thing that's come full circle and been evident to us as we've started growing a lot of these relationships over the last several years has been sort of the following. 1, I think the homebuilder industry recognizes a need for for lease product. They have a number of customers that come through that can't qualify for mortgage, but they want to be in great communities with access to good schools, etcetera.

Speaker 2

I think they view partners like us as a more fleet side of their business where we can do significant amounts of scales to get together at reduced cost. And I would add, I believe on their end, it's a much easier efficiency. We know exactly what we want to have inside our homes and we're happy to take multiple different elevations on the exterior, but they're building us the same product over and over and over. 2, we can also help with the way that we structure those transactions to help alleviate burden of cost. And I think there is just a natural market that exists somewhere in the middle.

Speaker 2

The second piece of it is, and I can't speak for homebuilders, I think they view the retail business as a terrific business for them and they've been able to kind of work through even a higher rate environment. But I also think that we help derisk a portion of their future thinking. And so I think there is a natural symmetry between professional capital that wants to operate in the for lease business, much like you see in multifamily versus maybe an owner operator or a just purely fee simple builder. And then at the regional levels, we can actually I think help some of these smaller builders in ways that a lot of regional banks have not been able to facilitate over the last say year or so where we can also help de risk some of the costs there and create some certainty around the production of new housing units. So there's just it makes sense.

Speaker 2

It's a lot like the car business where you pick any big car manufacturer in the U. S, a massive portion of their business is retail and they have a system outlined to be successful in that category. But then they also sell to the Hertz and the Progressives and the 24 hour rental companies that we all lease from at different airports around the country. I think our business can evolve in a way with homebuilders and I say that in the plural sense in a way that it is a very commercial relationship over time and distance where we are a small part of what they do, but we do it in such a meaningful way and we try to be a great partner that it's a no brainer that we should try to do as much as we can together.

Speaker 3

And hey, Connor, it's

Speaker 6

Scott Eisen. The only other thing I would add here is, look, a builder, it gives them confidence to take on a larger project and create more homes when they know that Invitation Homes is going to be buying a portion of that project. So as a result, maybe they might only start a 200 home community, but with us as their partner, they might start a 300 home community. Also as you asked about relative pricing, remember they're saving on things like sales and marketing costs when they work with us because they're not actually having to go out in the market and market those homes themselves. And then lastly, I think I would add that in terms of when we get deliveries, we get deliveries on average between 8 10 homes a month from a builder when normally they might only be selling 3 to 5 homes a month through the retail market.

Speaker 6

So you put all those three things together, it's a reason why what we're doing is accretive to the builders and frankly supplements what they try to do in terms of selling to individual retail customers.

Operator

Our last question today will come from Buck Horne from Raymond James. Please go ahead. Your line is open.

Speaker 4

Yes. Thanks, guys. I just want

Speaker 5

to follow-up on that a little bit here because I guess the question from my mind on this topic is that you're not the only one in the market trying to negotiate deals with builders and it's obviously really hot topic and so there's a lot of capital chasing deals with builders. But I guess you're talking about still being able to negotiate those 6% yield on cost numbers when everyone else is kind of saying maybe those numbers are in the 4s. I guess what's the secret sauce or is there a secret sauce other than what you guys have described so far to achieving those kinds of numbers?

Speaker 2

Really good question. And I appreciate you following up Buck because maybe I didn't answer this very well in the question before. It centers around predictability. We have predictability in our operating margins. We have predictability in showing up and closing.

Speaker 2

We have a really great track record in the market with M and A and with the ability to close when asked to. Our operating margins, which by the way I think would add to a lot of the inbound interest we've had in 3 pm are an attractive thing for investors and I think they're an attractive thing for operators in the marketplace. We see very quickly in just some of the transactions we've looked at and are doing in 3 pm, immediate margin pickup for our partners just by doing a couple of things differently. And so and a lot of that, as you know Buck, it has to do with scale. When you have a business that's 97.5% occupied, growing revenue in the mid-5s and we're now in a decelerating cost environment as we view property tax and cost of goods sold and all these things, like we could not have better blue sky situation for our business as we think about the next couple of years.

Speaker 2

We're positioned very nicely. We're just getting started in our access to these homebuilder relationships. Like anything professionally that we've done in the 1st 12 years, these things develop over time and as you build trust. And I think for us, it's the same way we approach our opportunities with the homebuilding industry. It's the same way we're going to approach risk in 3 pm.

Speaker 2

We want to work with the best and the most professional capital that's out there because those expectations we have of each other matter and that they will show up and do the things that we said will do, equally matter. I think that's going to lend itself to conditional outperformance as you look at that Buck to your question specifically relative to maybe other operators that are in the space that don't have the scale or the capacity or the ability to close on this kind of scale and to seamlessly integrate it. So I give Charles and in the field and John in the back office all the kudos as Scott and his team are out there developing these relationships and trying to build what will be the next decade of growth for Invitation Homes. The SFR industry is going to be about bringing new housing supply into the marketplace. That is the narrative as I see it for the next several years.

Speaker 2

It's going to be about creating new product, bringing new product into these markets and doing it at yields. But to your point that makes sense and on a risk adjusted basis, a total return profile that makes sense for us and our shareholders.

Operator

This completes our question and answer session. I would now like to turn the conference back over to Dallas Tanner for any closing remarks.

Speaker 2

We thank everyone for attending our call. We're grateful for your participation. We look forward to seeing everybody at NAREIT in June. Thank you for your time today.

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Key Takeaways

  • Invitation Homes reported 97.6% same-store occupancy in Q1, with 4.7% same-store NOI growth and 5.6% core revenue increase driven by accelerating rent growth.
  • The company expanded its third-party management platform to over 21,000 homes through agreements with Starwood, Quatera/Centerbridge, and Nuveen, offering high-margin, capital-light earnings.
  • Under contracts with D.R. Horton, Meritage Homes, and Dreamfinder Homes, Invitation Homes will acquire ~500 newly built homes in markets like Charlotte, Jacksonville, and Nashville at ~6% yield on cost with no development risk.
  • Invitation Homes ended Q1 with $1.7 billion of liquidity, a net debt/EBITDA ratio of 5.4x (below its 5.5–6.0x target), no maturities until 2026, and received a Moody’s credit upgrade to Baa2/BBB.
  • Q1 same-store core operating expenses rose 7.4% year-over-year, driven by an 11.8% increase in fixed costs—mainly property tax accruals—expected to remain elevated through Q3 before normalizing.
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Earnings Conference Call
Invitation Homes Q1 2024
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