Invitation Homes: Wait For A More Inviting Price (NYSE:INVH)

Summary

The shares have been largely rangebound since our initial report on Invitation Homes (NYSE:INVH). The shares barely registered to an in-line Q4 ’23 earnings report and are now trading slightly below where we gave our Sell rating. This report provides our thoughts on the quarter, revised valuation, and outlook for the year ahead. Overall, we remain bullish on SFH fundamentals and feel a little bit better about Invitation’s valuation. However, we still do not see an adequate margin of safety and believe there are far more attractive risk/return profiles within REITs. We are upgrading to an ambivalent Hold.

Earnings Update

In the earnings call, management explained that they were focused on increasing occupancy throughout the quarter to position themselves favorably going into the seasonally stronger leasing season in Q1. We are a bit skeptical about this, given occupancy only increased ~20bps, and are concerned that it is an excuse for weaker than expected rent growth. While renewal rent growth during the quarter accelerated QoQ, rates on new leases were flat and actually declined ~1.5% in Jan-24. While management says new lease rates have turned positive this month (Feb-24), we will only know for sure once they release Q1. Turnover was lower than Q3, which saw an abnormally high turnover related to delinquent tenants.

AMR grew ~1.1% QoQ, notably slower than the prior quarter’s ~1.5% sequential growth. This is likely attributable to weaker market rent growth and management’s focus on occupancy (i.e., being less aggressive on pricing to drive leasing).

Notably, FFO, Core FFO, and AFFO all increased QoQ and allowed management to increase the dividend by ~8% while maintaining a reasonable payout ratio.

Acquisition activity declined significantly, while disposition activity was comparable to the PQ, leading to a slight decline in the overall portfolio size. While Invitation did not disclose the average cap rate for acquisitions and dispositions, we can infer that the investment spread improved significantly QoQ based on the average price per home.

Overall, the results seemed positive, but we will be closely monitoring rent growth in the coming quarter for signs of further weakness.

Valuation

Invitation is trading for 18.4x / 21.5x LQA Core FFO / AFFO and 17.7x / 20.8x the guidance midpoint for FY24 Core FFO / AFFO. Following the recent ~8% dividend increase, it is yielding ~3.4%. Current prices imply a ~7% premium to our NAV estimate and a ~5.7% cap rate.

The major balance sheet adjustments for our updated NAV estimate are shown below. We are applying a 6% cap rate to a stabilized NOI ~8% higher than LTM NOI (n.b., not same-store).

Our updated target price/NAV per share of ~$30.8 per share implies ~6% downside and ~17x / ~20x FY24 midpoint guidance Core FFO / AFFO.

While our TP increased ~$0.8 per share, and the implied return improved to ~-6% from ~-11%, we still need to see a lower valuation before getting bullish. Two data points from the earnings call stood out to us as confirmation that Invitation’s current price does not compensate for its risk profile: 1) in Aug-23, Invitation issued $800MM of senior notes at 5.5%, and 2) Invitation is currently earning ~5.3% on its excess cash. With current prices implying a portfolio cap rate of ~5.7%, investors in the common stock are only earning a ~20bps premium to the new senior noteholders and a ~40bps premium to Invitation’s rate of return on cash. While the bonds and cash balance don’t offer growth potential, these figures demonstrate how much growth the market has already given the company credit for. Assuming the rent growth weakness is transient, we see few good reasons for Invitation to massively underperform. However, we see far more appealing opportunities elsewhere.

Conclusion

Invitation’s Q4 was relatively in line with expectations. Most of its key metrics moved in the right direction, despite some signs of slowing rent growth. Guidance for FY24 implies ~5% YoY growth in Core FFO and AFFO per share and includes a +$0.02 per share impact from its recently announced expansion into professional property and asset management services. We are upgrading Invitation to a Hold, reflecting the upward revision of our target price and a modest decline from our initial Sell rating. We are waiting for a more significant margin of safety before getting bullish.