Invitation Homes Inc ($INVH) Q4 2024 Earnings Call

Good morning, everyone, and thank you for joining us today. I'm pleased to report that Invitation Homes delivered another strong quarter of operational and financial results to close out 2024. Our full-year results demonstrated solid execution across our platform, including core FFO per share growth of 6.4% and AFO per share growth of 6.7%. I extend my thanks to our dedicated teams and for the continued loyalty of our residents. On the latter point, we're proud that our residents continue to choose Invitation Homes for the long term. During the fourth quarter, average length of stay was approximately 38 months. We also achieved a renewal rate of 80%. With same store rental rate growth on renewals of 4.2% year-over-year. We believe this underscores the value proposition that our industry and our platform offer and the strong relationships we're able to maintain with our residents over time. It's also a testament to the continued demand for our high-quality homes in desirable neighborhoods located in some of the fastest growing areas of the country and delivered with our trademark genuine care.

During 2024, we emerged as the professional manager of choice for partners seeking premium service and performance. We grew our JV and third-party managed home count by more than six and a half times last year to over 25,000 homes. We expect this business to continue to have opportunities to grow in the future. At the same time, we further optimized our wholly owned portfolio, recycling capital from older assets into newly constructed growth-enhancing investments. This was possible in part through our innovative builder partnerships, helping us welcome over 1,800 individuals and families into newly built homes during 2024. In the meantime, our pipeline remains robust with more than 2,000 homes under development by our homebuilder partners at the start of this year. Since we launched our homebuilder partnerships nearly four years ago, we have continued to broaden and refine the traditional build-to-rent model. In doing so, we've moved beyond the binary view of either on-balance sheet development or completed home purchases. Rather, our unique broad spectrum approach considers everything from early stage builder partnerships to the acquisition of stabilized communities. As the market has further evolved and our approach has become more sophisticated, we're continuing to evaluate new opportunities and structures to strengthen our growth profile by thinking outside of the traditional SFR box.

Combined, our strategic growth initiatives allow us to enhance our scale and density within our core markets and potentially expand our existing footprint by evaluating new markets with attractive growth profiles. As we've learned, improved scale and density support better opex and capex management across the entire portfolio, setting the stage for overall margin expansion. In that regard, our same store NOI margin returned to over 68% last year, and we believe we can continue to see improvement as we further execute on our growth and efficiency objectives. Turning now to current market conditions. Last summer, we were among the first to call out the moderating impact that new home deliveries were having in some of our markets. We continue to work through this and are seeing some early signs of improvement. At the same time, we are taking a measured approach with our initial expectations for 2025 and remaining vigilant as we seek better clarity throughout the year, including with regard to new supply for the year ahead, the impact of potential tariffs and the chance for prolonged higher mortgage rates and the effect that builder spec inventory and buyer incentives may have on the market.

Nevertheless, we believe the tailwinds for our business remain supported by the demographics. As a reminder, there are 46 million American households who lease their primary residence. And among those, nearly one in three choose to lease a single family home. With our average resident age of 38 years old, this includes many millennials and young families who desire the flexibility and convenience of leasing a single family home. It also includes those who appreciate the compelling value of leasing with the average cost of leasing a single family home nearly $1,100 a month cheaper than owning in our markets according to John Burns research. As we look ahead, we remain confident in our ability to capitalize on opportunities while maintaining a disciplined approach to capital allocation with our dedicated teams, strategic approach to external growth, and operational excellence. We believe we are well positioned to create value for our stakeholders while delivering on our mission to provide high-quality homes and superior service to our residents. Charles, over to you.

Yeah, great question. To double click on something that John said, we're certainly seeing some reacceleration as we head into the spring leasing season. We've seen supply start to moderate, coming off peaks last summer as we called out when we started to see some of these real supply pressures coming into the market. Now, there is some variability amongst markets. We'd expect that there's still some pressures in Florida and Phoenix and some of those markets that had easier barriers to entry in terms of new development with a lot of the starts in 20 and 21 sort of feeding into the system. We're optimistic as we pay attention to both deliveries and starts that this number probably most likely continues to get better for us. But we've even listened to some of our counterparts with the public home builders and some of their calls as well as our discussion with regionals that we would just expect that there may be a bit more spec inventory as mortgage rates stay elevated. Now, all this is slight headwinds for new lease, but it's terrific for our renewals business. So, we'll continue to anchor on the renewal side of the house, which has been close to 80% of our leasing volume for last year, and be as aggressive as we can on rate on the new lease side. We sort of have to take what the market's giving us, but the skies are a little bit more clear now than they were, say, last summer.

Look, it's a really great question on how to think about accretively recycling capital. Scott and I spend a lot of time looking at ways to create highest and best use cost of capital for the company. We've certainly had a successful year in 24 selling roughly 1,500 homes on balance sheet for proceeds of around $600 million. And those are typically priced around a 4 cap in today's market. And then Scott's done a nice job of creatively reinvesting that capital closer to a six. So I think as you think about Southern California specifically to your question, there will likely always be opportunities for us to continue to refine that portfolio. But it's really at our discretion based on a total return model as we look at the higher expected rents that Charles just talked about in a business that's pretty automatic in terms of our expectations around renewals and new lease and weighing that out with where we see appetite on a risk-adjusted basis. And so for us, we're a total return investor. It's important to remember we don't look at things in just a binary bubble all the time either on yield or on total value, but we're looking to creatively grab both over time and distance.

I'll take it. This is Dallas. Let me take the first part of this and ask Scott to provide some color. From a high level, we're absolutely focused on bringing more and more new product into the portfolio through these builder partnerships and structures that we're seeing candidly evolve and get better and even create ways for us on a risk-adjusted basis to have less capital out the door early, but to lock ourselves into some really good opportunities over time. You'll see that even in the fourth quarter, we backed off of a few opportunities because we felt some market dynamic shifting and that was at basically little to no risk to the company. We love the fact that we're kind of asset light in this model but driving towards unlevered sixes. I'll ask Scott to provide more color on what he's seeing on the ground right now between stabilized transactions, bulk, and what really is a nothing market in terms of one-off acquisitions.

Oh, yeah. Happy to answer those questions. Thanks for asking. First of all, it's going to be a luxury of riches for me to have Charles freed up to work on a few more strategic things and areas of the business that we see are going to continue to grow for the company over time. Scott's doing a really nice job in building out our new product pipelines and everything that centers around traditional SFR growth. Charles and I have our eye on a number of opportunities, including ones we're already doing like 3PM and our strategies around how to make the platform more efficient over time that both Charles and I will get the opportunity to work on together. Secondly, Tim's been in the weeds on the business for a long time on the cost side of our house, really rehab, turn, and maintenance for basically a decade. Last year, Charles made the decision in concert with me and the rest of management to give Tim a little bit more flexibility to get more involved on the property management and leasing side of the house. And it just makes more sense because so much of our business is a sweet combination between being centralized and the boots on the ground part of our organization that is high-touch in the field. That transition went really seamless, I would say, through most of last year. I think for Charles and I, the goal is how do we widen the breadth of the organization without having to reinvent the wheel. And you saw what we did last year in adding 20,000 plus new units to our 3PM business. We're excited about what that business is, not only because it adds extra efficiencies for our partners, but it creates better margin-enhancing profile for our own business. We see some opportunities there. We're looking at some things around AI and technology that we'd like to implement with a little bit more pace and scale and focus, and candidly, I think having Charles as a partner to work on some of these things with me will allow us to go quicker, create more innovation, and lend another set of senior strategic thinking around the things we're working on. I have no plans of going anywhere, nor does Charles. So the goal is to just keep our heads down and keep trying to find ways to create alpha for both our shareholders and better opportunities for our residents.

Great question, Handel. And I'll emphasize something John said earlier on, which is we are taking a measured approach as we go into the year, just knowing that there are some supply headwinds that we flagged 6 months ago. But to your point, we're seeing good velocity and we also know that it's probably unrealistic to stay in the 97% plus occupancy sort of run rate forever. So we have rational expectations that sort of comes in and moderates a bit and you see that in our guide as well. I think as you go back and think about the business since we went public in 2017, renewals have generally been outside of the COVID years pretty sticky at around 4 to 5% as you think about it on a blend. We've had an unbelievable run in terms of rate in this country which is driven by a lot of different things, and new lease is always going to be a story around supply and expectations around future deliveries and how you optimize your lease expiration curve. We've done some really great work over the last 6 months on our lease expiration curve. We feel like we're in a pretty defendable position going into the year this summer. And so we'd expect that we can lean a little harder on rate hopefully, but we got to see what the market's willing to give. It's a different environment than it was pre-pandemic, it was a lot more predictable in terms of deliveries. And I do think as the deliveries come down and all the data we follow suggests that deliveries are going to be somewhere between 50 and 70% down this year versus last. But that doesn't take into consideration starts. And while there's still a relatively low cost of capital in the environment, there certainly are developers and operators to the point that Scott made earlier that are bringing product to the market that are fighting to get full and create some tougher operating environments particularly in the Sun Belt right now. But I would just take a step back and as much as we're impressed with our rate of growth in the Midwest right now, we're still very long on our fundamental beliefs around the Sun Belt and the Southeast. All the demographic information suggests that we're going to see prolonged tenure of demand. We know that there's something like 12,000 to 13,000 people a day turning age 35. Our average customer today is right around 38 years old. The profile of that customer has been pretty resilient over the last 5 to 7 years. So there's nothing in our business today that suggests that we need to change course, rethink a strategy or invest in different parts of the country. In fact, maybe the opposite. While things are a little bit soft, we may actually look to extend our lead and scale in density in some of these markets while pricing softens so that we can be in a position to really capture a bull run as the supply side sort of works through itself.

All right, thanks, John. On the first question, no, we're not currently contemplating an office in Rio de Janeiro or anything like that. All jokes aside, we see a great opportunity here in the US to continue to look for ways to meaningfully add scale. As I mentioned earlier, as we mentioned in our prepared remarks, our NOI margin continues to enhance and we get better at offering our services in a more cost effective way over scale. But we I guess you could never say never, but that's not in the cards right now. Secondly, as we think about stuff that's outside of traditional SFR, there's sort of two ways to think about that. One is, Scott and I are looking at a number of opportunities where we can lend strength to regional operators or builders in a way that might help lower their cost of capital, create meaningful opportunities for us to close on those assets at the end of maybe a construction or delivery cycle. So those are things that we're looking at. We've done more townhome projects candidly in the last year, looked at more opportunities where we're candidly single family rental units but maybe they share a common wall but they have all the aspects and characteristics of our business. Typically on the townhome product we're looking at stuff that's much more infill, so higher gross economic pricing, higher gross economic rents, and ability to sort of compress costs across that scale. And I think lastly we're going to pay attention to whether there is a convergence at some point where you see more multifamily and SFR in operating structures. We certainly see that with smaller companies today, but it's not something we're currently thinking about, but we are keeping our eyes open to look for opportunities to add meaningful scale in parts of markets that we're already in, or maybe new markets as I mentioned before.

Great question. I'll add a little bit of commentary on top of what Scott said earlier. I mean, we are seeing with some of our partners and people that we do a lot of business with, every month, every quarter, just sort of getting to see opportunities on spec that sort of fit the profile of our traditional product. We love, candidly, the product quality that both the public and the private builders generally have in place. We're not seeing anything that alarms us in terms of builders both at a big scale or maybe a regional scale that are putting so much product out in the pipeline that it causes us to be fearful. I think we're just recognizing the fact that there is a basis spread in the market right now between where mortgage rates are and maybe where deliveries are coming in. And so with that, I would expect that Scott and the team will be a little bit more aggressive in buying both scattered in those opportunities and also in our strategic thinking around when we do a development. Remember, we're pretty agnostic. We're fine taking development bets on large sections of master plans. We're also fine sprinkling within a community over scale and density. It looks and feels like 80,000 of our current home business. So I don't see anything on the horizon that suggests that there's such a major tilt that it's a problem. Just recognizing that we're seeing a little bit more deal flow. And this stuff tends to change quarter to quarter based on the market dynamics. And right now those dynamics, as you guys know, is mortgage rates are elevated. People still want access to good quality product. It's about $1,100 a month cheaper to lease a home from us than it would be to buy that similar home in that market. So we're taking advantage of that dislocation.

You know, Scott and I get inbounds all the time with people that are curious like what's our program, how do we think about third-party management, could we help operating margins be more efficient for prospective partners. I want to reemphasize sort of two broad points and then Scott feel free to add any color. One is that we're only really interested in partners that have scale and that have pretty similar market overlap. That's the first point. And two, that want to operate their portfolios in a manner that's very in line with how we run our own business. So leaning in on the areas that scale and efficiency give you. Scott, there's nothing really of color to note, but just generally that we're definitely on people's radar, I would think.

Thanks for the questions. Plural. I'll try to make sure that I tackle basically just broad strokes around how we think about our JVs and what we're focused on. As we mentioned and as we reconfirmed in the earnings transcript, we were successful in raising another joint venture with what we think is a very high quality partner here in the US. That gives us added flexibility as we come across opportunities, primarily probably in the new construction space, but it'll lend itself to lots of creative thinking together as we look to maximize returns both for our shareholders and for theirs. Right now our focus has been and this is our third joint venture that we've announced in the history of the business and really probably the third in the last four to five years. It gives us an extra layer of creative capital to go after opportunities that may warrant different structures, different leverage structures as well. So we are finishing deploying one other venture right now while looking at opportunities to invest in this new venture and we have a very matter-of-fact clear and transparent structure on how we rotate those opportunities. They don't all fit into the same buckets which makes it easy for us as well. And we certainly are looking for ways to protect the REIT so that we can grow on balance sheet as much as possible. And what's nice about these joint venture partners and I would argue that they are partners is that we can work collectively to be smart around how we think about deploying the capital, what their structures are in relationship to your question around promotes, but we don't get into any detail of that publicly unless we get to a point that we think that we need to. So at this point in time, I think what I would just say is we have excellent partners that give us added flexibility. It's making us more opportunistic and allowing us to look at more opportunities for growth knowing that we've got that added layer of flexibility.

We want to thank everyone again for joining us today. These are really exciting times for our company, Invitation Homes, and we feel privileged to work alongside such a talented team. I also want to extend gratitude and appreciation to Charles and join him in congratulating Tim. Both are exceptional leaders. They'll both play pivotal roles in driving Invitation Homes forward in the future and helping us achieve our long-term goals. We look forward to seeing everybody at the Citi Conference. Thanks.