We do not normally profile REITs, but today we wanted to take a look at Invitation Homes (INVH), as it's a recent IPO and a pretty interesting story. It just reported its first quarter as a public company as it made its IPO debut in early February. Invitation Homes is a REIT that owns/operates the largest portfolio of single-family homes for lease in the US. Basically it goes around and buys single family homes that it then rents out and sometimes the family that moves in winds up buying the house down the road. Its portfolio of nearly 50,000 homes is concentrated in attractive in-fill submarkets of major MSAs.
INVH has selected locations with strong demand drivers, high barriers to entry and high rent-growth potential. The company is highly concentrated in the Western US and Florida (72% of revenue) with significant exposure in California, Seattle, Phoenix and Las Vegas. In Florida, its main markets are South Florida, Tampa, Orlando and Jacksonville. It also operates in other areas as well, including Atlanta, Charlotte, Chicago and Minneapolis.
In simple terms, INVH buys up homes, renovates them and rents them out. Its homes average approximately 1,850 square feet with three bedrooms and two bathrooms and an average monthly rent of $1,623, appealing to a resident base that is less transitory than the typical multi-family resident.
INVH generally avoids bulk portfolio acquisitions, choosing instead to construct its portfolio through individual acquisitions by its local teams who know the market well. INVH then spends approximately $25,000 per home in terms of renovations. Renovation work varies, but may include paint, flooring, carpeting, cabinetry, appliances, plumbing hardware, roof replacement, HVAC replacement, and other items required to prepare the home for rental. As a result, its portfolio benefits from high occupancy and low turnover rates.
The single-family rental market has grown in recent years as the homeownership rate has declined following the global financial crisis. New single and multifamily housing supply is significantly below long-term average levels. Since the start of the housing crisis in 2007, new housing completions as a share of households in the US have averaged 43% below the 1984-2015 average and current 2016 levels are 36% below the 1984-2015 average. This decline in supply has been even more pronounced in INVH's markets. Single-family construction activity is expected to remain low over the near and intermediate term.
Single-family rental residents prefer single-family homes over apartments due to lifestyle differences (e.g., families with children, space requirements and quality of schools). The propensity to rent has increased for every age group due to factors including delaying of major life events, increasing student loan burdens, reduced availability of mortgage credit and lifestyle preference for renting.
Rising interest rates may result in greater rental demand, as the increasing cost of homeownership may make rental housing relatively more attractive. Rising rates should not really hurt the value of INVH's homes as higher rates have not historically been linked to falling home prices because the demand created by a growing economy (increased jobs, income growth, and increased consumer confidence) has historically offset the increased cost of housing caused by rising mortgage rates. Meanwhile, INVH believes home prices still appear attractive compared to multifamily prices.
In terms of the Q1 report, INVH reported adjusted FFO (REITs typically use FFO instead of EPS like most companies, but they are pretty similar) of $0.22. Revenue increased 6.3% YoY to $238.8 mln. Both results were in-line with market expectations. Looking ahead, INVH expects the location and scale of its portfolio will position it for another year of significant internal growth in 2017. Furthermore, INVH believes that limited new supply and favorable demand trends should drive continued rent growth for the foreseeable future. INVH says its portfolio offers an attractive opportunity for residents to lease high quality homes in in-fill neighborhoods while enjoying a resident-centric service experience.