Invitation Homes Inc. Q4 FY2020 Earnings Call

Greetings, and welcome to Invitation Homes Fourth Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode at this time. The operator will provide instructions for Q&A later. As a reminder, this conference is being recorded. At this time I would like to turn the conference over to Greg Van Winkle, Vice President of Corporate Strategy, Capital Markets and Investor Relations. Please go ahead.

Thank you. Good morning and thank you for joining us for our fourth quarter 2020 earnings conference call. On today's call from Invitation Homes are Dallas Tanner, President and Chief Executive Officer; Ernie Freedman, Chief Financial Officer; and Charles Young, Chief Operating Officer. I'd like to point everyone to our fourth quarter 2020 earnings press release and supplemental information, which we may reference on today's call. This document can be found on the Investor Relations section of our website at www.invh.com. I'd also like to inform you that certain statements made 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 in any such statements. We describe some of these risks and uncertainties in our 2019 Annual Report on Form 10-K, our Quarterly Report on Form 10-Q for the period ended September 30, 2020 and other filings we make with the SEC from time to time. Invitation Homes does not update forward-looking statements and expressly disclaims any obligation to do so. During this call we may also discuss certain non-GAAP financial measures. You can find additional information regarding these non-GAAP measures, including reconciliations of these measures to the most comparable GAAP measures in our earnings release and supplemental information, which are available on the Investor Relations section of our website. I'll now turn the call over to our President and Chief Executive Officer, Dallas Tanner.

Thank you, Greg. I'd like to thank you for joining us this morning. I hope you're all doing well and staying safe. It's an exciting time at Invitation Homes as we enter 2021 with positive momentum, accelerating fundamentals and the opportunity to grow our best-in-class platform. We feel well positioned for another year of strong organic growth; at the same time we're entering the New Year more active in the acquisition market than we have been in years. We also see exciting opportunities in front of us to further elevate our resident experience. Before discussing the path ahead though, I want to take a moment to reflect on the unique year we just completed. 2020 was the year in which the durability of our business was tested and validated and in which the value of our differentiated product, service and people resonated with residents and communities more than ever. I'd like to highlight a few of these accomplishments. We achieved record high same-store occupancy that increased every month in 2020 and ended the year at 98.3%. We executed well to capture market rent growth, which accelerated to a high of 5% on a blended basis in the month of December. We maintained rent collections around 97% of our historical rate throughout the pandemic. As a result, we met the mid-point of our initial 2020 guidance, growing AFFO 4.6% despite the disruption in the world that was around us. We also raised nearly $700 million of equity and formed a joint venture with a world-class partner to support external growth. With these tools, we ramped up acquisitions to our fastest pace since 2014, buying over $350 million of homes in the fourth quarter alone. At the same time, we decreased net debt to EBITDA in 2020 by almost a full turn. Finally, of all of our 2020 accomplishments, I'm most proud of the positive impact we made in our communities. We served as a port in the storm for residents, delivering comfortable homes and genuine care when it mattered the most. We worked to create solutions for residents experiencing hardship. We kept our residents and associates safe by reacting quickly to enhanced safety protocols and leveraging the advantage of our virtual leasing and self-show technology, and in doing this we were able to achieve all-time high resident satisfaction scores. As proud as I am of our team for what we have accomplished together in 2020, I'm even more excited as I look ahead. Industry fundamentals are in our favor, with more and more of the millennial generation coming our way. COVID appears to have been beneficial for demand, but we believe its impact has simply been to accelerate a shift from denser urban housing to single-family housing that was already poised to take place over the next many years. As such we believe it is quite possible that single-family will hold on to the share gains that picked up in 2020. Our homes' compatibility with the work-from-home lifestyle and the relative affordability of our square footage when compared to other residential alternatives give us even greater conviction that we are favorably positioned for a world ahead in which people rethink the ways they use space to work and play. Put simply, we see ourselves as a solution to changing preferences, demographics and housing supply-demand balances for years to come. In addition, we believe our differentiated locations, scale and local expertise give us an advantage in turning these favorable industry fundamentals into even better results for our residents and for our shareholders. One of the ways we'll do that is by continuing to focus on the resident experience. In 2020 we rolled out new ancillary services for residents, including smart home enhancements, and a convenient HVAC filter delivery service. In 2021 we'll continue down the path toward expanding additional ancillary options. We're also working to enhance the technology experience through which our associates deliver those services and through which our residents actually interact with Invitation Homes with a particular emphasis on web and mobile capability. On top of creating a better experience for residents, we're growing our portfolio to serve more residents and widen the scale advantages that allow us to serve residents efficiently. In the fourth quarter of 2020, we purchased approximately 1,200 homes which is more homes than we have acquired in any quarter since the second quarter of 2014. I want to stress that we have elevated our acquisition pace while maintaining our underwriting discipline. We estimate a mid-5% stabilized cap rate on homes acquired in the fourth quarter consistent with our track record over the last several years. We believe it continues to be a great time to grow the portfolio through our proprietary acquisition IQ Technology, local relationships and experience across multiple acquisition channels, and see the opportunity to acquire at least $1 billion of homes this year between our joint venture and a wholly owned portfolio. In closing, I'm excited and optimistic about the future as we carry the strong momentum we generated in 2020 into the New Year. With record high occupancy, strong organic growth fundamentals, external growth in high gear and initiatives in progress to enhance our resident experience, I'm thrilled with how we are positioned entering 2021. I want to say thank you to our exceptional associates for helping put us in this position. Their commitment to genuine care throughout the pandemic has been inspiring and it makes me feel even more confident about the heights we can reach together in our future. With that, I'll turn it over to Charles Young, our Chief Operating Officer.

Thank you, Dallas. Before I jump into operational results, I want to thank our associates for the remarkable job they did in a year when we asked them to be nimbler than ever. Adapting quickly to change, we were able to elevate our high level of resident care throughout the year and we drove strong results all the way through the finish line. I’ll elaborate on some of our operational achievement Dallas referenced in his remarks beginning with our leasing results. Same-store turnover continued its favorable trend in the fourth quarter, bringing our full year 2020 turnover rate to 26.1% versus 29.7% in 2019. When residents did move out, we released homes significantly faster. Fourth quarter days to re-resident improved 22 days year-over-year, bringing full year 2020 days to re-resident to 36 days versus 46 days in 2019. As a result of these positive trends in turnover and days to re-resident, our same-store occupancy improved sequentially in every month of 2020. We closed the year with fourth quarter same-store occupancy at our record high 98.1%, up 210 basis points year-over-year. Furthermore, we're off to a great start in 2021, with January same-store occupancy at 98.4% or 190 basis points above January 2020. At the same time, we've seen rent growth continue to accelerate and the fourth quarter of 2020 marked our best quarter of the year. New lease rent growth, which we believe is most indicative of today's fundamentals, accelerated to 6.9% in the fourth quarter, up 560 basis points year-over-year. January new lease growth accelerated further to 7.3%. Renewal rents increased 3.8% in the fourth quarter and 4.2% in January. This brought same-store blended rent growth of 4.9% in the fourth quarter and 5.2% for January, up 160 basis points and 230 basis points respectively versus the prior year. Now I’ll turn to our same-store results for the fourth quarter and full year 2020. Same-store NOI growth of 4.3% in the fourth quarter brought our full year 2020 same-store NOI growth to 3.7%. Same-store core revenues in the fourth quarter grew 2% year-over-year. As a result of our strong occupancy increase and a 3.3% increase in average rental rate, gross rental revenues increased 5.7% year-over-year. As expected, this increase was partially offset by two factors related to COVID-19. The first was an increase in bad debt from 0.3% of gross rental income in the fourth quarter of 2019 to 2.5% in the fourth quarter of 2020, which had a 221 basis point impact on same-store core revenue growth in the quarter. The second was a significant decrease in other property income which had a 125 basis point impact on same-store core revenue growth for the quarter, primarily attributable to our non-enforcement and non-collection of late fees. This brought same-store core revenue growth to 2.8% for the full year 2020. With respect to expenses, the freestanding nature of our assets continues to provide an advantage relative to other property types by allowing us to safely serve residents and maintain homes without incurring incremental COVID-related expenses. In addition, reduced turnover resulting from strong demand for our homes was beneficial to expenses. As a result, same-store core expenses in the fourth quarter decreased 2.4% year-over-year, bringing full year 2020 same-store core expense growth to only 1%. Next I’ll cover revenue collections which remain healthy even as we continue to offer flexible payment options to thousands of residents to meet their individual needs and circumstances. In the fourth quarter our cash collections totaled 96% of monthly billings, similar to our collection rate throughout the pandemic thus far and compared to pre-COVID average of 99%. We believe the sustained strength of our revenue collections is a testament to the quality of our resident base, which had an average income of approximately $110,000 across two wage earners per household, covering rent by almost 5x for move-ins in 2020. Looking ahead, we have momentum on our side after a strong close to 2020. Our teams in the field are energized to continue raising the bar for resident service and operational excellence. As was the case last year, there are a number of unknowns with respect to how external factors will unfold in 2021, but we will remain nimble and continue to drive the best possible outcomes for our residents and shareholders. I'll now turn it over to Ernie Freedman, our Chief Financial Officer.

Thank you, Charles. Today I will discuss the following topics: balance sheet and capital markets activity, investment activity, financial results and 2021 guidance. I'll start with the balance sheet where we further enhanced our debt maturity profile, debt composition and overall leverage through an active fourth quarter in the capital markets. In the quarter we issued approximately 6.5 million shares of stock to our ATM for gross proceeds of $186 million, which we used to acquire homes. We also closed and upsized a $3.5 billion unsecured credit facility with more favorable pricing than our previous facility. The facility consisted of a $1 billion revolving line of credit that replaced our previous line of credit and a $2.5 billion term loan which replaced our previous $1.5 billion term loan and prepaid secured debt. We're also proud to have included a sustainability component to our new credit facility whereby our revolver pricing will improve if we achieve certain ESG improvements over time as measured by a third party. As a result of these transactions, we have no debt other than convertible notes reaching final maturity before December 2024. In addition, our unsecured debt as a percentage of total debt increased from 22% at September 30 to 35% at December 31, and the percentage of our homes that are unencumbered increased from 51% to 57%. Overall liquidity at year-end was $1.2 billion from unrestricted cash and revolver capacity. Net-debt-to-EBITDA finished the year at 7.3x down from 8.1x at the beginning of the year and we remain committed to reducing leverage further. Regarding investment activity, in the fourth quarter we acquired a total of 1,197 homes for $361 million, using existing cash on our balance sheet and joint venture capital. 1,057 of these homes were purchased for our wholly owned portfolio for $316 million and 140 were purchased in the JV for $45 million. We also sold 277 homes from our wholly owned portfolio for $82 million. Included in this activity were two bulk acquisitions in Dallas and Phoenix that took place in the fourth quarter. In total the homes in these bulk transactions were acquired for $75 million at a 5.5% NOI yield on in-place rents, to which we see upside by bringing the homes onto our platform. Next, I'll cover our financial results. Core FFO and AFFO per share in the fourth quarter were $0.32 and $0.27 per share respectively, bringing our full-year 2020 core FFO and AFFO to $1.28 and $1.08 per share. Excluded from core FFO and AFFO was a $30 million unrealized gain that we recorded as a result of an increase in the value of our Opendoor investment. Notably, despite the external factors that came into play, AFFO finished the year at the mid-point of our initial 2020 guidance. Last thing I will cover is 2021 guidance. Dallas and Charles discussed, we believe we are favorably positioned for both organic and external growth. There remain many unknowns outside of our control related to the pandemic in how local, state and federal regulatory bodies may respond, but I’ll frame how we are thinking about the year at this point. Let me start with revenue growth. We believe our record high occupancy and strong demand fundamentals position us favorably for rent growth in 2021. The biggest source of uncertainty, largely outside of our control, remains our ability to collect rents and enforce the terms of our leases. The mid-point of our guidance assumes that bad debt remains in the low to mid-2s as a percentage of gross rental income in the first half of 2021, and then improves in the second half of the year. If this were to play out, we would expect bad debt to be a slight drag on overall same-store revenue growth for the full year 2021, but to have a positive impact in the second half of 2021. Taking each of these factors into account, we expect same-store core revenue growth of 3.5% to 4.5% for the full year. Expense growth is likely to trend higher in 2021 than it did last year. As a reminder, 2020 benefited from lower turnover. While we expect turnover to remain low in a historical context due to continued strong demand, it is reasonable to expect some degree of higher turnover in 2021. Overall we expect same-store core expenses to grow 4.5% to 5.5% for the full year. The midpoint of this guidance range assumes that higher year-over-year turnover has a 100 basis point negative impact on our same-store core expense growth rate in 2021. This brings our expectation for same-store NOI growth to 3% to 4%. From a timing perspective, we expect same-store core revenue growth and NOI growth to be higher in the second half of the year than the first, primarily due to an improvement in bad debt and late fees, offset somewhat by higher turnover expense. Specific to this year's first quarter, we would expect same-store core revenue growth to be more in-line with fourth quarter 2020 results since the first quarter 2020 results were not impacted by the pandemic. Beyond same-store growth, there are a few other anticipated drivers of our 2021 results I'd like to address. First, we accelerated our acquisition pace in the second half of last year and expect earnings from those acquisitions to drive the increase in non-same store NOI contribution in 2021. We also expect to remain a net acquirer in 2021. As fundamentals stand today, we see a path to acquiring at least $1 billion of homes this year between the REIT and the JV and selling approximately $300 million of homes. We expect to have the opportunity to fund that level of acquisition activity with current cash-on-hand, cash from operations, disposition proceeds and JV capital. Second, I would like to remind everyone that we funded a portion of our 2020 acquisitions with equity, which should result in a higher weighted average share count this year than in 2020. Year-end 2020 share count information can be found on Schedule 2(a) of our fourth quarter supplemental. Finally, a quick note related to our recently formed joint venture. Beginning in 2021 we will report an additional revenue line item for joint venture fee income and another line item for our share of income from investments in unconsolidated JVs. For the purposes of core FFO and AFFO, we will capture our share of recurring JV cash flow in the same manner we do for our wholly owned portfolio. In 2021 during the ramp up phase of our Rockpoint joint venture, we expect less than $0.001 per share contribution to core FFO and AFFO. Putting this all together, we expect full year 2021 core FFO per share in the range of $1.30 to $1.40 and AFFO per share in the range of $1.09 to $1.19, representing year-over-year growth of approximately 5% at the midpoints for each. As a result of anticipated growth in AFFO per share, we have increased our quarterly dividend by 13% to $0.17 per share. Taking a step back, we are thrilled about the future of Invitation Homes. In our view, the single-family rental sector is favorably positioned within the housing market and Invitation Homes is further differentiated by our best-in-class locations, scale and local expertise. We believe those advantages, coupled with a long runway of opportunity to grow scale and transform the resident experience will be a recipe for growth for years to come. With that, let's open up the line for Q&A.

The operator will now open the floor for questions. Our first question is from Alua Askarbek from Bank of America, go ahead.

Good morning, everyone. Thank you for taking the questions and holding the call despite all that's going on. Hope everyone is safe. But just to start off on that note, I wanted to talk a little bit about that cold front right now, and it seems like we're hearing a lot about pipes bursting and plumbers are already expecting delays on this. I assume this was not part of the initial guidance, but could this bring expenses past the higher end or just I guess how are you guys thinking this will impact CapEx this year?

Yeah, I appreciate the well wishes. This is Ernie, Alua, and it has been challenging in a lot of parts of the country for sure. The good news is we’ll have insurance coverage for this due to this one event, because it’s across multiple states and so we'll have a $250,000 deductible on it, but any damages beyond that will be covered by insurance. We do take the first portion of losses in our insurance up to a certain amount. We’ve had a very good insurance year that expires in February of 2021. So overall we should be in a pretty good spot from that. There may be some minor things that flow through that will be outside the insurance. Those were not considered in our guidance. But that said, throughout the year, things do happen to pop up and so our base budget has taken acceleration of some type of events happening, but we certainly did not specifically call out what was going on right now. But that's a long way of saying, I don't think this puts our expense guidance range in any kind of risk at this point.

Okay, great, thank you. And then I know you guys talked about your turnover expectations for this year remaining low, but maybe ticking up from 2020. Have you guys seen any pick-up so far in January and February? Just kind of want to see if there is a little bit of a reversal in demand now that we're starting to see a little bit of normalcy?

Yeah, no this is Charles. We haven't really seen any reversal of that trend to date. We still see really healthy demand and our residents in our homes continue to want to stay there just given that the pandemic is still going. Work-from-home dynamics are in place. We ended Q4 as I mentioned at 26%. We do have a little higher number in there for the whole year, but in January and so far in February we're kind of trending toward that lower number which is a good sign, which has allowed us to stay kind of assertive on the revenue side, and you can see that on our new lease growth as well as some of our renewals growing.

Got it. And then sorry, just one quick follow up. What is the median length of stay at this point and how did it compare to last year?

Yeah, that continues to grow for us as the portfolio continues to season. In this last month it's now over 30 months. With our turnover as low as it is, we would expect it to continue to trend upward toward 35, 36 months by the end of the year. So yeah, we continue to see that people are staying past their lease, a second if not a third renewal. So our average lease term is about 15 to 16 months.

Got it! Thank you so much.

You're welcome.

Our next question is from Sam Choe from Credit Suisse. Go ahead.

Hi, guys. Congrats on a great quarter. I guess, well it’s good to see you guys ramp-up acquisition and as Dallas mentioned, I mean you guys have discipline in mind, maintaining that mid-5% yield. But I mean, we are aware of the fact that it's a competitive housing market, where you kind of hear the stories of home builders overbidding for homes, waiving contingency. So I'm wondering, how are you guys thinking about your buy-box. Are you starting to, I mean I know that location matters for you, but are you guys starting to look at more of the peripheries to the markets you are looking at?

Good question. This is Dallas, Sam. First and foremost, it is a tight environment as you mentioned. But we still feel pretty confident in our ability to buy between say $200 million and $300 million a quarter, even in this existing environment. We wouldn’t have to change our buy-box to use your phrase in any sort of way. We are pretty disciplined around making sure that we're in parts of markets that lend themselves to outperformance; we see that in our both new and renewal rates. In terms of the work we're doing with partners and builders, you mentioned that's an area of focus. Historically we’ve been buying about 10% to 15% of our homes through builders. We're also seeing opportunities to roll-up and aggregate smaller portfolios. You saw us do a little bit of that in the fourth quarter. The good news on those, as you walk into stabilized cash flow day one, we typically see some embedded leasing upside in those opportunities and so those will continue to be on our radar. So we feel pretty confident at the beginning of this year that that run rate should stay pretty consistent and we’ll continue to work to find avenues and ways to maybe expand channels, not necessarily the box, but really keep focusing in on the parts of the country that we are active in, while making sure that we are aligned with as many opportunities as possible.

Got it. Okay, I mean that makes sense. With that said, I mean the bulk opportunities you did this quarter. Was that more one-off in nature or could we see that kind of playing a factor in 2021 as well?

We have a good track record of at least a couple of times a year rolling up 200 to 300 home portfolios and I would expect that we’ll see more of those; people aggregating for the last five to eight years that have wanted to harvest some gains or are looking for other opportunities to deploy capital. As you mentioned, it is kind of hard to grow scale unless you've got the infrastructure to do it. We are fortunate that we're local on the ground, so we get access to a lot of these opportunities in working direct with partners. So the two that we did in the fourth quarter are a perfect example. One of them was a competitive process in Phoenix and the one in Dallas, we've known the operator for a long period of time; we're able to just get a transaction done. Those relationships are meaningful and they matter and it's a big focus for our teams in market.

Got it, alright, thank you so much guys.

Thanks.

Our next question is from Carl Keegan from Berenberg. Go ahead.

Hey guys, thanks for taking my question. I know you touched on a little bit briefly, but I guess what are the expectations for seasonality going forward? Meaning the longer the pandemic persists, you see turnover trending lower. Is it fair to assume that less move-outs and high demand will kind of diminish some of the year's normal seasonality aspect?

Yes, this is Charles. Seasonality is a natural part of the business. However, with the pandemic we saw last year that those trends were disrupted by people working from home and uncertainty with school. We've returned to somewhat of a high demand environment, so it would be interesting to see how the summer comes. I think some of it is going to be based on what happens with the vaccine rollout, herd immunity and all that. What we like is we are seeing numbers in this time of year, Q4, that are typical of our summer season. So demand for our product is really high and we would expect that come summer we may end up in a similar circumstance where there may be a little bit more turnover which is natural for seasonality — kind of higher turnover in Q2 and Q3. That being said, given that people are still looking for our market, they are moving to the states that we are in, we would expect that demand will continue. Hard to predict, but we're watching it and right now we like the position that we are in with the rate growth on the new lease side and renewal side, both improving. New lease growth on a Q4 basis is the best we've seen in a Q4 since I've been in the business frankly. So it'll be interesting to see how it plays out, but we think demand will still be high in the summer, especially if people are thinking about finally repositioning and thinking about schools for the fall.

Got it. And if we don't mind pivoting a little bit, my next question is on new lease growth. Obviously it continued to trend up. How sustainable do you guys think that is, particularly in the Western U.S.?

A big part of it has been our occupancy. I'll step back and give our teams a shout-out — they’ve just done a phenomenal job in a changing landscape; I can't thank them enough. When you look across our markets, almost every market’s at high 97% or 98% occupancy. That gives us a position with low supply of homes so we can push those markets, and then you get the dynamics around people moving to wanting space and getting out of urban cores and moving to our homes. I think the West is continuing to drive new lease growth — Phoenix was very strong in Q4, Vegas is real high, California new lease growth is near 10%. If we keep executing the way we are, days to re-resident down, keep occupancy up, I think we'll be able to continue to push and we have high expectations going into the rest of the year.

Alright, thank you, that’s it from me.

Our next question is from Nick Joseph from Citi, go ahead.

Thank you. Hope everyone is staying safe. On the $300 million of dispositions expected this year, does that contemplate any market exits, any portfolio sales or is it more one-off dispositions?

Hey Nick! Dallas. No, it's just normal ordinary dispositions. We're not anticipating market exits at all.

Thanks, and then just as leverage has moved down Ernie, how are the conversations with the rating agencies going? Is there any update on the timing?

Yeah Nick, we're feeling more and more opportunistic seeing where we're at and seeing how the business has done as well as it had in 2020. So I think we're going to be in a position sometime over the next few quarters to more formally engage. Where I would have said maybe it would have been a year and a half to two years out a quarter or two ago, it feels like we need to do a little bit better than that Nick, so I think 2021 will be a time for us to really figure out the right timing to engage with the agencies and see if we can get there, because if the business is doing well and the metros continue to improve. So we're optimistic that we're on the right path and hopefully have better news about that in the next several quarters here.

Which metrics still need some level of improvement or what's the focus on today?

You know I think with the credit facilities that we were able to recast in December, we were able to get our unencumbered pool larger, which gets us really close to where the rating agencies would like us and importantly we pivoted more to unsecured financing; we've been mainly a secured borrower. I think the one area where we're still maybe a little bit off is, I believe the rating agencies would like to see our net debt to EBITDA number in the sixes and I think we'll be able to show them — as a lot of you have in your model — that we get into the sixes. If we don't hit the sixes by the end of this year, we’ll certainly be there next year I would expect, and so the question will be whether that is soon enough for them with the clear path. Fortunately I think we have a very clear path to demonstrate how we've done that; we've got a good track record and we've certainly been talking about wanting to have our net debt-to-EBITDA number in the low sixes as our target. So I think all that bears well for us and it’s just we’re getting one step closer each day to that number.

Thanks.

Thanks Nick.

Our next question is from Alex Kalmus from Zelman & Associates, go ahead.

Alright, thanks guys. Looking into the average price point per home this quarter on the acquisition front, it seems like the Rockpoint JV homes were a higher value, like 15% over the wholly owned acquisitions. Is this emblematic of the strategy for the JV or do you expect this to revert to the mean later on?

Alex, it’s a good question. It’s actually going to revert to the mean, because the type of buying we're doing in the JV is consistent with what we're doing with regards to the balance sheet. What you see in the fourth quarter though is that the two bulk transactions brought our average price down. The homes we bought in Dallas are a lower price point market for us anyway and what we bought there, as well as what we did with the Phoenix portfolio, if you take those out you would probably see that we'd be right on top of each other with regard to what the JV bought versus what the balance sheet bought because of those bulk transactions.

Yeah, I got it, it makes sense. And on the move-outs, obviously occupancy is extraordinarily high, but for the few that are moving out, do you have a sense where they're going? Are they buying homes or are they moving to apartments or other single-family rentals? Do you keep track of that data?

We track move-out reasons, but we don't yet have comprehensive forwarding-address-level data. Purchases for homes are a reason for move-outs, and move-out reasons were in the mid-20s, slightly up in Q4, but not material as you'd expect with interest rates. Overall the turnover number being so low, we're just not seeing a lot of move-outs and there's no drastic change from what it's been historically. We'll continue to monitor it, but we're proud of what we've been able to do with overall turn numbers.

Got it. And I guess that you’re not really seeing a lot of move-outs to apartments, so once the renters are in single-family homes they are staying within that style of living overall?

Correct. Most people who move in or out of our homes are coming from a single-family residence. What we're seeing now from those moving into our homes is a lot of people coming out of the urban core to our suburban locations. We're up because people are trying to come to single-family homes for extra bedrooms, work-from-home, backyard, and the safety and space that a single-family home provides in today's world.

Great! Thank you very much.

Our next question is from Richard Hill from Morgan Stanley. Go ahead.

Hey, you got Ron Kamdem on for Richard Hill. Just two quick ones from me. Sticking with the acquisitions, maybe can you talk a little bit more about sort of the competition? Is it still sort of end user or are you starting to see more institutional players coming in, and on the guidance for the $1 billion for 2021, is it fair to say that we’ve done that without bulk acquisitions or is sort of bulk acquisitions embedded in that number? Thanks.

Hey, yeah I think it's safe to say that that $1 billion number doesn't include a lot of bulk acquisitions and I think the landscape is pretty similar to how it's been the last three or four years. The one exception might be that you just keep hearing about more capital wanting single-family rental exposure, which we view as a positive. Remember, there are roughly 6 million transactions in the U.S. in single-family housing each year and the SFR footprint is a very small percentage of those. It's still end users buying and selling homes in a vast majority of those transactions, so we wouldn’t expect it to change all that much. If anything, a few more aggregators will present opportunities for us down the road.

Great! My second question was just going back to sort of the same-store revenue guidance. If I think about 4Q on a gross basis the portfolio grew about 5.7% versus the guide for 2021 of 3.5%-4.5%. Is it fair to say that the delta is really coming back to late fees and the bad debt headwinds that you mentioned in your opening comments? I'm just trying to get a sense of how much conservatism is baked into that, especially as we roll into the easier comp in the second half of the year.

Yes, you're exactly right. When you look at what we've been able to do, occupancy gains and rent achievement drove strong results in late 2020. Offsetting that were bad debt comparisons to the prior year — we didn't have the pandemic in the prior year — which was up a couple of hundred basis points and our other income being a drag down about 100 basis points as well. So that's how we ended up at 2% revenue growth for the year. As we go through 2021, we do expect sequentially that our bad debt number will come down each quarter from the prior quarter, but we think the first half of the year will have bad debt more like what you saw in Q3 and Q4, in the low to mid-2s in percentage terms. Hopefully that's conservative and we do better, but we want to make sure people understand our guidance assumes some prudence. We don't expect pre-pandemic levels for bad debt in 2021; those were typically in the 40 basis points range historically. We expect improvement in the second half of 2021, but not all the way back to pre-pandemic levels immediately. Also remember Q1 2020 was not impacted by the pandemic and had low bad debt, so comps will be easier as the year progresses.

Thank you for helping clear that. Thanks so much.

Got it, yeah.

Our next question is from John Pawlowski from Green Street. Go ahead.

Great, thanks. Ernie, maybe sticking with bad debt, just a very modest sequential uptick this quarter. Was that more regulatory driven in California or did some other non-California markets kind of erode on the collection front?

Good question John. We are seeing a little bit of deterioration in Southern California; Northern California has not been a challenge for us. That's been behaving like the average across the whole portfolio. We did see some degradation in Southern California and then it's just the earnings overall across the board. In terms of levels, we're less than 100 basis points different than what we saw in the third quarter — a narrow gap. Every month we seem to collect somewhere between about 96% to 97% of billings. Some months just under 96%, some months a little over 97%, but around that range since July. We're not seeing any trouble spots beyond Southern California and Charles and the team are doing a wonderful job working with residents and maintaining contact.

Okay, understood. And then Charles or Ernie, obviously new lease spreads are fantastic. Just curious, the acceleration and revenue-enhancing CapEx in recent years, can you give me a sense for how much benefit is flowing through the new lease figures from revenue-enhancing CapEx?

John, let me touch base with you offline to give you a more specific number. We're not doing a huge amount in the grand scheme relative to the size of the business, so my guess is it's probably maybe a tenth to two-tenths of a point in terms of helping the new lease side. Let me go back and check my notes and Greg and I can touch base with you offline to make sure I'm not speaking out of turn.

Okay, thank you.

Our next question is from Haendel St. Juste from Mizuho, go ahead.

Hey, good morning out there. Hope everyone's okay.

Thanks Haendel.

So, I guess first question or maybe for Charles on days to re-resident. I know the improvement there — I think you said 22 days in the fourth quarter versus fourth quarter of '19 and 13 days overall in 2020 versus 2019. I guess can you talk a bit about some of the drivers of that, what you've been able to perhaps do to lower that number, and then sitting here in the mid-thirties, how much better do you think that can get and what are you thinking for 2021? Thanks.

Hey Haendel, it's Charles. Thanks for the question. First of all just to clarify, year-to-date we're down 10, not 13, so we ended up at 36 days in 2020 versus 46 days in 2019. A significant reduction and as you said Q4 was down 22. The real impact has come from a combination of items. One is reducing our turn times, which we brought down significantly at the start of 2020 from the high teens down to the low teens — 10 days in some markets, single digits in others. We can keep that going and we have been looking at that as a key piece. We're not going to be able to get much lower there, but we can look at a day or two improvement. The other big piece that moved us this year is focusing on aged inventory and that's been a big advantage — making sure that if something is aging, we get the price right or check the asset, eyes on assets, make sure that it's going right. The big piece that moved us this year also is focusing on pre-leasing — I think that's the opportunity going forward. As you think through what we can do in 2021, if we keep our occupancy at a healthy level, demand continues to be strong the way that we're seeing it and we can market our properties effectively using virtual tours and other tools and be thoughtful about how we show a home while it's still in residence, then when it moves out and we can turn it quickly, that'll get us into the teens on some of those days. So when you combine that with managing aged inventory, we’ll see where we can go. We're looking to move it down this year and we'll see if we can get out of the thirties, but the low hanging fruit is gone — you're not going to see another 10-day move, but we will continue to try to bring it down a day or two as we go.

That's good color, thank you. And Dallas maybe one for you; certainly we’ve noted the increased competition for acquisitions, the industry overall has obviously very good fundamentals, strong revenue and NOI growth, there's proof of concept in single-family rental development and you've got an improved balance sheet here — perhaps not quite where you want it just yet. I'm curious stepping back and thinking about on-balance-sheet development here. How is your view evolving? Is there any change; are you more inclined to consider on-balance-sheet development here today and if not, what could get you to change your mind?

Hey Haendel. Our philosophy hasn't changed: we're focused on the right locations. We've started to develop good channels working with development partners and builders in market and I would expect that will continue to be a focus. In terms of taking on balance sheet risk, our position really hasn't changed — we want to be flexible and be a good partner for builders, not a threat. We'll keep building pipelines with a few strong partners at national, local and boutique levels, have direct access to communities and product, and be discretionary about where it's a good use of our capital. Our balance sheet is in strong shape and our ability to raise equity or issue at appropriate prices is a tool we'll use when it makes sense. We'll remain deliberate about when we do that and continue to focus on finding the right opportunities, but we're not broadly changing posture to take on more balance sheet risk at this time.

Yes, so that's not exactly a no, but certainly not right now.

Yeah, definitely not a yes. Right now we're focused on taking the least amount of risk possible while providing access to attractive projects and partnering with builders where appropriate.

Our next question is from Rich Hightower from Evercore, go ahead.

Hey, good morning everybody, thanks for taking the question here. Just a quick one for me on the Opendoor investment. Obviously you're sitting on a nice gain, keeping it on the balance sheet for the time being, but just wondering what your future plans are for that investment and are you restricted in the meantime with a lock-up or anything that would prevent you from liquidating entirely? Just a little more color on that, thanks.

Yeah, absolutely Rich. This is Ernie. It's been a great partnership for us and we've been pleased with the investment outcome. The mark referenced was at December 31, and the investment is up even further since then. We are currently under a lock-up arrangement, so we're not able to do anything immediately. You can see the Opendoor public documents for the specifics on the lock-up. We have the opportunity to sell some of the shares later in the second quarter and if the stock price stays at a certain level — and it's been well above that level — we’d have the flexibility to sell the entire position before the end of the second quarter. We haven't made any determinations as to what we may want to do there. We continue to work with Opendoor on a lot of different things. We'll come to a conclusion with our investment committee of our Board probably later in the quarter to decide what our longer term plan for that position may be.

Great, thanks for the color Ernie.

Our next question is from Jade Rahmani from KBW, go ahead.

Thank you very much. Some questions I've gotten from investors relate to the competitive landscape and the increasing number of new entrants in this space. I think the Front Yard Residential takeout is a recent example with the partnership that was established with ARE. I just want to get your thoughts as to whether you believe that newer entrants have a competitive operational advantage over the established players such as Invitation Homes and American Homes 4 Rent or whether you think the reverse is the case — that the lessons learned having built scale and investments in technology will provide companies like you the upper hand over these newer entrants.

It's the latter. Coming into this business, there's so much to figure out — how to run assets, create a service model and build a team. The inner workings and how those all connect is quite difficult and it has taken companies like ours years to get better at and continually find more efficiencies. When you get to our scale and density, the tools and resources we have allow us to onboard 1,200 homes in a quarter as we did and digest that. A new company would have many challenges trying to run the customer experience at that scale. The short answer is, it's much better to be in our position than coming into this space right now.

And as a follow-up have you seen any of these private entities have either a lower cost of capital or longer time horizon with respect to where they are underwriting cap rates? You mentioned the homes were purchased with a mid-5% stabilized cap rate. Are you seeing any of these bids come in materially below that, perhaps 100 to 150 basis points below that, on a five- to seven-year view that if rent growth sustains a private company would be able to absorb that drag, whereas a public company might have different expectations for earnings?

There are different niches within the space that operators focus on. We tend to buy a slightly higher price point asset with higher gross economic rent, which differentiates us, so we don't typically compete directly with many single-family operators. Some entrants may underwrite with different leverage and cost of capital assumptions, especially at lower price points, believing they can achieve better yields over time. We can't speak to their investment committees. There are advantages to a longer-term lens and approach — thinking about CapEx and upgrades that can materially affect returns over the life of the asset. We've figured out the right balance on finish standards and return costs over time, and you're seeing the impact in our renewal rates and outcomes. Experience managing thousands of properties gives Invitation Homes an advantage.

Thank you very much.

Our next question is from Rick Skidmore from Goldman Sachs. Go ahead.

Hey Dallas, good morning. As you think about acquisitions and the geographic mix, how should we be thinking about that $1 billion being deployed in 2021 across your footprint? Is it going to be reasonably evenly distributed, focused more in the West or Texas? Can you give some color on geographic mix going forward? Thanks.

Good question. The mix shouldn't change much. In the fourth quarter we were active in Dallas and a couple of Florida markets. The JV provides more exposure to Florida and our Sun Belt focus has been consistent. I wouldn't expect major shifts. We'd love to buy more homes in California and Washington, but those are competitive from an end-user perspective and we don't chase pricing that doesn't work for us. We also see strong activity in Charlotte and Atlanta. If you look at rate growth in Q4 in markets like Atlanta and South Florida, it gives us conviction about our risk-adjusted returns in those markets for the next several years.

Right. Thanks and then one follow-up, in your prepared comments you talked about ancillary revenue opportunities in 2021. Can you elaborate on what you're planning to roll out in 2021 and how that might contribute to revenue growth in '21?

A couple of things: we've upgraded our smart home hardware and created structures to make that more profitable for us. We updated in 2020 an HVAC filter program for new leases that will expand. We have pilots around pest control, particularly in Florida as adoption proves out, that could roll out across more markets. We also have pilots for pet compliance and control aimed to be both revenue generators and expense mitigators. We have a few other initiatives in the test kitchen that we're not ready to discuss yet. The focus is delivering optionality to residents; many services will be optional while some will be included in the lease.

Great, thanks Dallas.

Our next question is from Todd Stender from Wells Fargo, go ahead.

Hi, thanks. Just one from me. In your prepared remarks you indicated that you might see a little more turnover this year. Is that because you guys are pushing rate a little more given high occupancy, or are residents in better financial footing so they have more housing options? Any color there? Thanks.

We had a great outcome with turnover in 2020 versus 2019 — down from roughly 30% to 26%. Given the landscape this year, it's possible at the midpoint of our guidance that turnover picks up a bit, somewhere between those two numbers. The pandemic caused some residents to hunker down longer in 2020 due to uncertainty. We think we may see a slight increase in turnover compared to 2020, but still below historical levels from 2019, so our guidance assumes modestly higher turnover for prudence.

Understood. Thank you.

Our next question is from Tyler Batory from Janney, go ahead.

Hey, good morning, thanks for taking my question. Just one for me. I wanted to go back to the discussion on rent growth and bring in the relationship between higher home prices and rent growth. Can you talk more about how you're thinking about affordability on the new and renewal side in terms of how much more you might be able to push price? I understand demand has been strong, but you also want to avoid pricing potential renters out. Curious about your updated thoughts.

Great question. We think our lease optimization curve and revenue management system are key strengths and get better each year with more data across our 80,000 homes. The pandemic changed typical behavior and encouraged many residents to stay put longer, which increased demand. Interest rate volatility can create nuance around whether a home is more affordable to lease or to own in a market, but generally most of our portfolio is more affordable to lease than own once you consider down payment and maintenance over the life of the home. We offer a friendly alternative since we manage maintenance and capex risk. That said, affordability varies by market and submarket, and we remain thoughtful in striking the balance: capturing market rates on new leases, being smart on renewals, and being sensitive to local market dynamics — for example, California and Seattle have unique circumstances we've been navigating.

Okay, I appreciate all that detail. Thanks very much.

Thanks.

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

Thank you. We appreciate everyone joining us for the call and our thoughts and sympathy are with all those in Houston and Dallas, our residents and our associates there, during this weather. Hang in there, we’re all in this together. We appreciate everybody joining us today. Thanks.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.