Appreciate seeing everyone here for another Nareit. I'm Aaron Hecht, Managing Director.
Microphone. I have a hard time hearing.
Can you guys hear me now?
Yeah.
All right, we'll get started here. I said good to see everyone at another Nareit. My name is Aaron Hecht. I'm Senior Equities Analyst, covering multifamily, single-family rental, healthcare, and cannabis mortgage REITs. We're going to get started here with our next presentation, which is going to be Invitation Homes, largest single-family rental operator in the country, $20 billion market cap. We have with us here Dallas Tanner, CEO, Jonathan Olsen, CFO, and Charles Young, President and COO. I guess I'll turn it over to Dallas here to give kind of a brief outline of who Invitation Homes is and what they're all about, for those of you that don't know.
Thanks, Aaron. Can everybody hear me okay? This microphone's a little sensitive. It's great to be with everybody. First and foremost, thank you for your support, and we're grateful to have the audience that we have here at Nareit. Nareit does a wonderful job of connecting us with you all, as well as other buy-side shops. First and foremost, I mean, the fundamentals around single-family rental, I'm sure many of you are up to speed with, you know, sort of the current lay of the landscape couldn't be better.
Long-term fundamentals, as you look at, call it, our average customer, is that millennial that's 39 years old, just coming into that millennial cohort, two earners, combined household income of around $140,000, and they're staying with us, you know, now far longer than we originally underwrote when we started the business 12 years ago. The dislocation between owning versus leasing is, as you know, advantageous to the fundamentals around our business as it's ever been. On average, in our markets, it's somewhere around $930 cheaper to rent that home than to own in an existing Invitation Homes market or footprint.
You know, if you take a step back and you really pay attention to what's happening in the broad landscape of housing, generally, you know, the villain kind of in the marketplace today is really the lack of supply. We are just underserved to the tune of, every economist has a different number, but it's at least in the $1 million to $2 million, $2.5 million kind of unit range. On the single-family side, given we're kind of the tail whip around cost to get sold, construction costs, NIMBYism, planning zone, it's harder and harder to bring new supply into the marketplace. We don't see that being fixed anytime soon.
Second, if you look at, you know, the performance of the business, we've been really consistent the last five, six, seven years in terms of our performance and how we've, you know, mitigated risk through the pandemic, and as well as how we've been able to manage through some of the pressures around lease enforcement and things like that. Our business is, you know, kind of through this, call it the last three years, been really resilient. Today, we have occupancy somewhere around 97.7%. We're seeing rental growth in the, you know, the mid-single digits, and we're sort of in the natural part of our curve, where the summer months can get even better for us from a pricing power perspective.
All things being equal so far through, you know, the first five months of our year, and as we shared in our update through May, things have been very healthy, from the fundamentals perspective. I would say, you know, lastly, as you think about home prices and the stability around home prices, which have always been, for us, a really good proxy to rent growth, those have been, you know, really buoyed up due to that lack of supply, and as well as, what I'd say is, you know, kind of shifting consumer preferences. Although I would say that I think the, the home market today is as healthy as it is, with, you know, homeownership rate around 67%. There's still 47 million households that are making a decision on an annual basis whether to lease or not.
We want to position our business, our markets, our real estate in a way that leasing lifestyle can be captured, that it's friendly, that it's flexible, and that it's on our customers' terms. As we've done that over the last 10 years and gotten better and better at doing that, we've been able to bring in different things around ancillary revenue items, things that can make the experience that much stickier for the customer, which is, you know, lending itself to a longer duration of stay and overall a much happier customer. With that, Aaron, I think I'll flip it back to you for any questions.
Sure. You talked about the demographic shifts that are going on, particularly with the millennial generation. Can you just talk about the timeframe that this is happening over? When will that peak out? How much time do you have to execute on this wave that's coming your way?
Yeah. I mean, when we took the business public, part of our IPO in 2017, was that we were about five years away from just getting kind of the beginnings of that millennial cohort, which is, call it, plus or minus 35 million people between. At that point, were between the ages of, like, 27 and 33 or something like that. We're set up really nicely for the next seven to 10 years in terms of being able to have conviction that our current customer, who I've mentioned being 39 years old, and by the way, it's been that way since we really started the company. It's always been in the high 30s. We're going to see a disproportional amount of people in that kind of segment over the next decade.
You know, as we've sort of pivoted, not pivoted, but the way we've adjusted our model to make sure that we're capturing things and using the scale and the power of the platform to drive down costs in other categories for our customer, you know, internet, pest control, smart home technologies, things like that, I think we've set ourselves up nicely. Also paying attention to the data, the survey information, and everything that we get from the, you know, from the customer as they come out, to find ways of what are those kind of incremental adds or what can we add to that experience beyond just being mobile? To make it that much more seamless.
Okay, has the supply or the delivery of new supply of product improved over the last five-10 years, or has it gotten worse in terms of the shortfall that is existing with the existing population growth?
Just overall housing supply?
Yeah.
Well, look, I mean, it's not lost on anybody. Coming out of the GFC, you know, basically, a couple of things have happened. One, builders got their balance sheets in much better positions over the last decade. If you're, you know, specifically right now, if you're a regional guy, and you're building product, it's a lot harder right now with the way the banking situation is with some of the regionals. It's gonna be, you know, a lot more difficult. I think public builders are gonna do really well. That being equal, all that, all that being equal, no. I mean, we've probably underbuilt to the tune of 2.5 million-3 million units.
Yeah
over the last decade.
I guess the point I was gonna get at is your rental rate growth and your NOI growth has been outsized for the last couple of years. The numbers still look good. Maybe you can give some perspective on how you've grown, maybe against the industry, and then how you're expecting 2023 to shape up, given what you're seeing so far?
Well, I think when we came out with guidance, you know, we feel really good relative to what we've shared at the beginning of the year. We feel like, you know, revenue's gonna be in the mid-single digits, NOI growth in the mid-single digits. I think, you know, taking a step back, you've got to remember, that NOI number is a combination of, obviously, growth, which you highlighted, but also margin and our operating margins. You know, we'll quote the great Ernie Freedman, because he's no longer our CFO, and now we have John. He used to always say, "Not all margins are created equal." That's the truth. You know, our margins in Phoenix are in the mid-seventies. Our margins in California could be in the mid to high seventies.
Our margins in Florida will be in the low 60s, but we love the growth prospects of Florida. If you look at what we're doing in South Florida and in Orlando and Tampa right now, on a blended basis, high single digits, sometimes approaching double digits, even today.
Mm-hmm.
Coming off of comps last year that were equally as difficult, if not better.
Yeah.
You know, I think balancing out kind of your margin profile, but making sure that you're allocating capital in parts of the country where you're going to see that outsized growth is paramount. You have to find that balance.
I think you guys came out with some numbers in your presentation that went out maybe a week ago. New lease rate growth, 7.5% in April, up from 5.7% in the first quarter. Renewals, 7.2% versus 8% in the first quarter. As Charles, what would your takeaway be from those numbers? Obviously, really nice to see the acceleration on the new rate side, and the renewals are pretty strong.
We like the position of the portfolio. I would just add to that, we're doing all that acceleration and healthy growth on top of 97.7, 97.8 occupancy. Portfolio is in a really healthy shape. You know, what we saw last year was, over the last couple of years, this outside growth with COVID, and there was just no seasonality. It just kept running. Second half of the year, we saw the seasonality come back, and, you know, the question was, you know, how was it going to bottom out, and where would it go from there? What ended up happening is, we kind of hit a really healthy number.
It's kind of historical plus, and now coming into the first half of the year, we accelerated on the new lease side every month through April. What you're seeing as we go into May is there will be kind of a flattening out on the new lease side, which is a normal curve. Renewals have just kind of remained steady. What happens is, you see new lease rent growth go above renewals in the summer, and then renewals will stay healthy. We put out that we thought we'd be in kind of the mid-single digits, and we're ahead of plan so far this year. That feels good.
Like we said, we're going into the summer, with good momentum and feeling good around the demand that we're seeing at the top of our funnel, and executing well on with our teams as we're working through the busy leasing season right now.
Is there anything you guys are seeing on the expense side so far that would potentially be an offset to that outperformance you've seen throughout the year to date on the revenue side?
I think thus far in the year, expenses are running much as we anticipated. We've talked a lot about why we expect to see expenses be elevated in the first three quarters of this year, with some moderation in the back part of the year. A lot of that is driven by the fact that we had a bit of a catch-up entry on property tax, which came in higher than expected last year. Some of it is attributable to some of the work we need to do to sort of get back to a normal operating footing. We've got, you know, some cleanup that we're working through.
It's transitory, but, you know, we have been unable to run the business the way we typically would for some period of time, and it's gonna take a period of time to sort of get back to normal. I don't see anything at this moment that spooks me about, you know, any surprises on the expense side. We're gonna continue to watch everything closely. You know, on property tax, we won't get the actual bills and millage rates until later in the year. That's always a little bit tough, but, you know, we're gonna keep a very close eye on things and thus far, feel good about where we stand.
I assume on the cleanup, you're talking about the bad debt and certain renters that had been in units not paying for a period of time. Kind of just give us perspective on where that is relative to pre-pandemic levels, and how much progress is expected to be made this year. Is anything gonna fall into next year? Maybe just anecdotally, what do you see when you open up units that haven't been paid for?
Yes, all good questions. I'd start by saying, when you talk about how do we relative to kind of normal times, about half our markets are running at our historical bad debt rate, which is great. Those are the markets where the compliance process, the court process, is running historically normal. The cleanup that John is referring to, and you're asking about, is really only happening in a handful of states. The leader of that has been Southern California. L.A. County, L.A. City, was the last to let the eviction moratorium for non-payment of rent expire on March 31st. We're just getting to a place where we're working with those residents, and that process is moving kind of according to schedule as we look at it. There's a handful of other markets.
Parts of Atlanta have counties that are a little slower, Chicago, Vegas, Washington. When you look at the Texas markets, the Florida markets, Denver markets, we're really back to normal. All that's healthy. We expect that the first three quarters were gonna be the cleanup period. The only caveat that I'd put on that are two things. One, we'll see how long the L.A. situation, the California courts can take a while, so even if we're starting to move into the compliance, it can take multiple months to get there. Some of it is also dependent on how much, how fast the backlog in the courts work out.
Right now, it's been ahead of schedule, which is great, but we have some innings left, and we're going to keep moving it. I don't know if I missed any last part of your question.
I was just saying, when, you know, when you open up some of these doors.
Yeah.
Like, is it the same stuff that we heard about during the financial crisis, where people were-
Yeah. Not, yeah.
What are we looking at here?
Not quite that bad. You know, when we look at it on average, some homes are, as they would be a regular way, some are in a little worse shape, but on average, it's around 40%-50% more costly to do a non-compliant turn, and it takes a few days longer as well. We bake that into our, into our numbers and our guidance, and we're not being surprised by anything that we're seeing right now.
Are you seeing much in terms of dispersion of performance from different geographies at this point? It got pretty homogenous during the pandemic period, where everything was rising. Has anything kind of spread out and changed?
In terms of rents? I want to make sure.
Well, we can talk about rents.
Yeah.
General demand, but usually it goes hand in hand.
Yeah. No, I think Dallas was saying it earlier, there's a lot of green lights in the portfolio right now, where generally, demand funnel is high, supply of single family is low, so we're in really healthy shape. Our Florida markets have been outperforming for the last two years. They continue to. South Florida, Tampa, Orlando, have been some of our best. Atlanta continues to be strong. Phoenix softened for a little bit, second half of the year, and is now kind of back to its normal kind of trajectory. California continues to be strong for us. We're seeing a lot of good things there. There are a couple of soft spots here or there, but nothing material, and usually, we work through those pretty quickly. Some of it is because of the compliance issue.
We have a little bit of a turnover piece to work through. This is healthy turnover. This is what we expected and wanted to get the portfolio back to normal way.
As you turn those units over, that had been kind of somewhat stagnant for a while, how should we think about occupancy in general for the portfolio? The occupancy level had gotten very high. Assume that those numbers include renters that aren't paying. What's full functional occupancy, or how can we think about that?
Yeah, it's a great, it's a great question. You know, we ran artificially high during COVID. We're 98 plus, and as we've been a lot of that was because we were working with residents, emergency rental assistance, and all that. Now that we're getting to a place where we're stabilized, if you just look at our current turnover level, kind of historic, how quickly we're able to move residents in and out, our days to re-resident, that's going to tell us that we should be in a mid-97, mid, high 97 occupancy, just fundamentally. You'll get some variance by market, depending on what's going on with seasonality and turnover and all that. You know, that's about where we are today as we're starting to work through this compliance backlog.
Okay. What are the capital plans right now in terms of investing in new properties? Maybe you can tie that into dividend policy, free cash flow. It all kind of ties together.
You go first.
Sure. I mean, from a capital allocation perspective, you know, we continue to write offers for homes that are for sale on the MLS every day. We're writing offers in sort of the high five, low six cap rate range. Those homes continue to trade away from us to end users, who are paying prices that, you know, based on our cash flow underwriting, are low to mid-5 cap rates. Still a bid-ask spread, by and large, on MLS buying. We continue to look to our builder partners to build out our new product pipeline, which we're really excited about, looking to grow. We see lots of opportunity to add to that pipeline in sort of that high five, low six type cap rate range, with very minimal risk to us.
We like our, we think we've built a pretty good mousetrap in terms of our approach to that. You know, dividend policy is sort of dictated by a number of things. I would say that, you know, we continue to pay out at close to 100% of our sort of, you know, taxable income level. I think, you know, we're going to have to be mindful of the fact that thus far this year, we've been a net seller. You know, we have been sort of disposing of certain assets as they become vacant, as we sort of prune underperforming assets out of the portfolio.
Over time and distance, you know, we'll have to be mindful of kind of the gains accumulated and what our sort of position is with respect to net operating losses that we sort of accumulated over time. I think the short answer is, it kind of depends. The longer answer is, from a capital perspective, you know, we are gonna try to be patient and opportunistic, but we're excited about some of the opportunities that we think might begin to present themselves, particularly around smaller portfolio on that.
The other thing I'd just compliment John Olsen and Ernie's work on getting our balance sheet in a position where, you know, we're somewhere around five and a half times. We see a world, you know, based on, call it, our current liquidity, free cash, untapped revolvers, joint ventures. We have about $2 billion of liquidity. We wanna grow. We just wanna grow intelligently and do it in a way that is, you know, extremely accretive to shareholders over time. I do think that the pendulum sort of swung from, you know, if you were a levered buyer of SFR in the last several years, the cards were stacked a little bit in your favor to some degree, and I do believe that pendulum is now swinging to more the unlevered buyer, the balance sheet that is, you know, investment grade.
I think that will be a something that we can use as a tool, obviously, but can be more opportunistic as we look at some of these opportunities. There may be a lot of smaller portfolios likely that are stuck.
Leverage has obviously gotten significantly better since the IPO. There are some maturities coming, I think, in 2026. Do you have to start managing for the 2026 maturity? I think it's $2.6 billion. Do you start managing for that now, or is that something you consider more down the road?
We have a plan for that. It's actually $3.1 billion of maturities that's comprised of the $2.5 billion term loan, which is part of our five-year bank facility. Then there's about $650 million in our last remaining outstanding securitization. We're comfortable that we continue to have a good amount of time to deal with those. Capital markets are open to us. We obviously don't love our cost of funding today, so we think that, you know, we can continue to be patient. We were very purposeful in terms of how we approach de-levering the balance sheet over time to put ourselves in a position where we have the flexibility to be opportunistic if interesting things, you know, become available.
I would say that, you know, that's something that we're not gonna wait too much longer than kind of, I would guess, the middle part of next year before we're gonna wanna start formulating a real actionable plan. The good news is, shouldn't be a surprise. Our plan continues to revolve around, you know, accessing the unsecured bond market.
Mm-hmm.
That's the market where we wanna be active. You know, we're gonna take advantage of the time we've bought ourselves to not have to do something today, which I think is a, candidly, a great spot to be in.
Dallas, you talked about your builder partners being, you know, a really nice pipeline for acquisitions. How would you characterize that product that's been delivered so far? Do you like having it as part of the portfolio more than maybe some of the older product? Is it easier to manage, Charles, from your perspective? Is it a better return, and any thoughts around this?
I mean, return is all subject to when we put something in contract, and at what pricing and where is our pricing power stronger or weaker, wherever that happens. I would say, look, from a CapEx perspective, it's terrific. Going in yields are awesome, and we really love the strategics that we've partnered with over time. We started a national program with PulteGroup a couple of years ago. That's going really well. I would say today, in our dedicated pipeline, we have close to $1 billion, roughly, call it 2,500 homes ±, across probably 15 communities. We have very limited capital outlay for that, which is terrific, and we can manage it extremely efficiently.
I think what's been nice is that as you know, for us, with working with new partners and looking at more opportunities, is as builders have warmed up to the concept about having strategic partners in our space, it's certainly lending itself to more opportunities, obviously, but also strategic thinking early on.
Mm-hmm.
A lot of our partners will come to us with opportunities very early. We can get under the hood, we can give them our two cents about what we think would work in that kind of part, that geography, that shift mix, whatever the product is, and we can actually influence design elements within the communities, and it's really a resourceful way for being in the space without carrying, you know, heavy load or, you know, we're not having to carry thousands of lots on our balance sheet. Love our approach as it works today, and I think what we've proved out over time, and even what some of our peers have been working on and been announcing, is that that model works.
Right.
It's a very effective way to be in the new construction space without having to carry the G&A burden.
Right. We've got about a minute left. Any sort of closing thoughts you want to give the audience and those listening in about Invitation Homes and what the takeaway should be from this presentation?
Look, I feel like we're always on repeat, but, like, I couldn't be more excited about the business we're in, the markets we're in, specifically with how we've designed our portfolio. We've always erred towards being in a more expensive product, a little bit higher price point, a little more qualified customer who's willing to take on additional services and have kind of an experience-added situation as they choose how to live. I think there are a variety of ways to live. There's a variety of ways to lease, and it's not one-dimensional. I think what Invitation Homes is gonna continue to try to push the boundaries on are, what can that flexibility and that for lease or for choice lifestyle be like?
Are there ways that we can do it through both newer product, new communities, where it feels like a brand-new home you're moving into, and it feels like your brand-new home, but at the same time, anchoring in on the fact that we've got 85,000 units that are highly infill, you know, where we've densified and kind of, I would say, diversified actually, the risk profile of our portfolio? We have done a really nice job, I think, over the years, of culling 12,000-13,000 assets out of the portfolio to get this thing to the place where it is.
As Charles talks about 97.5% occupancy and all this terrific, you know, revenue growth that we've seen, you know, really year-over-year, it's in large part to the work we've done around portfolio composition. If there's a differentiator, I think it's that we're in the right markets, the right footprint, with the right type of customer.
Great. Thank you very much. Thanks, everybody.
Thank you.