Invitation Homes Inc. Q3 FY2021 Earnings Call

Greetings and welcome to Invitation Homes Third Quarter 2021 Earnings Conference Call. All participants are in a listen-only mode. As a reminder, this conference is being recorded. At this time, I would like to turn the conference over to Scott McLaughlin, Vice President of Investor Relations. Scott, please go ahead.

Good morning and welcome. Joining me today from Invitation Homes are Dallas Tanner, President and Chief Executive Officer; Ernie Freedman, Chief Financial Officer; and Charles Young, Chief Operating Officer. During this call, we may reference our third quarter 2021 earnings press release and supplemental information. This document was issued yesterday after the market closed and is available on the Investor Relations section of our website at www.invh.com. Certain statements we make 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 2020 annual report on Form 10-K 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. We may also discuss certain non-GAAP financial measures during the call. You can find additional information regarding these non-GAAP measures, including reconciliations to the most comparable GAAP measures to the extent available without unreasonable effort in our earnings release and supplemental information, which are also available on the Investor Relations section of our website. With that, let me turn the call over to Dallas.

Good morning. I’m pleased you could join us as we share our thoughts on the past quarter and the prospects for our company as we look ahead. To start, we had another outstanding quarter of great results. We also continue to find ways to invest capital and generate accretive external growth. I’m particularly proud of our associates, who once again, delivered a resident experience with the genuine care that has become synonymous with our brand. Our ability to develop loyalty with our residents has helped drive strong outcomes for our stockholders. On top of all of this, we believe that the operating fundamentals for our business remain fantastic and that the environment for growth remains favorable with our opportunities to creatively deploy new capital among the best we’ve seen in recent years. I’d like to discuss these points with you in a bit more detail, starting with the strength of the operating fundamentals. As we’ve reported, our average occupancy remains at historically high levels. Turnover continues to trend lower and our rental rate growth continues to accelerate well past our traditional summer leasing window. As the market continues to demand more single-family rental product, we believe a primary driver of the elevated demand is demographics. I’ve spoken previously about the population surge of millennials and how we expect many within this cohort to transition into single family homes over time. They desire more space for raising a family and room for a home office, and they want better access to good schools, jobs, and amenities. They also value the convenience of a worry-free subscription-based lifestyle. We believe we’re well positioned to continue capturing on these trends. In contrast with this surge in demand is a shortage of housing supply, which we expect will continue in our markets, given supply chain constraints, policy restrictions, and the time required to deliver new supply. We therefore believe single-family homes located in infill neighborhoods in high growth markets where supply and demand fundamentals are the most favorable will remain highly attractive investments throughout most real estate cycles. With this favorable backdrop and fundamentals, we believe the growth environment for us to invest meaningful capital remains very strong. We surpassed our original $1 billion acquisition target for the full year back in August. And we had our strongest acquisition quarter in many years during the third quarter with nearly 1,700 new additions to the portfolio. As a result of our improved pace of acquisitions and a better home resale environment, we increased our acquisition guidance last month to between $1.7 billion and $1.8 billion for the full year. With our average acquisition cap rate of 5% this past quarter in excess of our implied cap rate, we believe we are deploying capital at yields greater than our cost of capital. This is because rents have kept pace in our markets as home prices have continued to appreciate and are focused on infill locations and are differentiated from most new entrants into the space. To pursue these opportunities, we have a multi-channel acquisition strategy. As a reminder, we’re always channel agnostic and location specific. And most of our channels in the third quarter were open and active and remain so today. The environment for one-off acquisitions is particularly strong right now, especially for the product we’re targeting, which are well-located homes primarily in our West Coast and Sunbelt markets. In addition, we continue to lean in on our best-in-class home builder network to help bring additional new supply to the marketplace. We’ve bought several hundred new homes directly from builders so far this year representing nearly 20% of our wholly-owned acquisitions. These do not yet include any homes from our previously announced strategic relationship with Pulte Homes for which we’re under contract or have agreed to terms on over 1,500 homes. The first of these Pulte Homes are expected to deliver towards the end of next year with our target of over 7,500 new homes coming in over a five-year period. We are excited to have such a strong pipeline of new homes across a diverse network of home builders without the higher risk burdens of being a developer ourselves. Before I close, I’d like to offer an update on our sustainability efforts. Earlier this month, we achieved an over 13% increase in our GRESB score from 2020 to 2021, which compares favorably to the average GRESB participant who saw no change in their score year-over-year. You’ll recall last year that we were one of the first REITs to add an ESG component to our credit facility. So as a result of our increased GRESB score, we’ll realize a one basis point improvement on pricing on our revolving line of credit. These are pragmatic steps we are taking while leading sustainability is an important part of our long-term success. And we’re proud to be moving in the right direction while recognizing we can continue to do more. Lastly, I really want to say thank you to our team, whether you’re demonstrating our core values directly with our residents or sharing them from our corporate offices. You’re the driving force behind the value we create for both residents and stockholders. And I thank you sincerely for your dedication to our mission. With that, I’ll turn it over to Charles, our Chief Operating Officer to provide more detail on our operating results.

Thanks Dallas. All of our efforts to create a seamless and easy leasing experience for our residents have resulted in another outstanding quarter operationally. My thanks to all of our associates for making us the premier choice in home leasing. For our same-store portfolio, NOI growth accelerated to 11.9% year-over-year, same-store revenues grew 7.9% driven by strong rental rate and other income growth. While same-store expenses increased a modest 0.6%, mostly attributable to lower turnover and repair and maintenance costs. The combination of lower turnover and lower days to be resident continues to drive record high occupancy. Same-store average occupancy has remained above 98% every month so far in 2021 and came in at 98.1% for the third quarter. Our new lease rent growth was 18.4% for the quarter while renewal rent growth was 7.8%. Together, this drove blended rent growth of 10.6% or 660 basis points year-over-year. Reminder that last year, our blended rent growth was 4% for the third quarter 2020, despite the challenges from the pandemic. So our comp to last year is a very healthy one. At the same time, our turnover rate declined 110 basis points year-over-year. This puts our trailing four quarter turnover rate at only 23.8%, the lowest in our history and another strong testament to our resident satisfaction. We also continued to make progress with our bad debt, which at 1% of gross rental revenues was half of what it was for the third quarter of 2020. An important part of this improvement is due to the outstanding efforts of our team who work closely with our residents to find solutions to keep them in their homes. Since the pandemic began, we have helped thousands of residents apply for rental assistance programs. And as a result, we have received to-date over $25 million in rental assistance payments for the benefit of our residents. Our teams continue to work with those who need help with their claims. By and large, our resident base is strong and stable. Our average new resident today is a family with at least one child and one pet. The adults are on average 39 years old, both work and together earn over $120,000 per year, which equates to an income-to-rent ratio of over five times. As strong as we’ve seen, we believe our markets, locations and quality of homes are driving this higher-end customer, along with the worry-free leasing lifestyle and best-in-class service that we provide and our residents expect. In summary, we believe we stand in a great position to finish the year strong and we’ll remain focused on continuing to execute in the last couple of months. With that, I’ll pass it along to Ernie, our Chief Financial Officer.

Thank you, Charles. Today, I will cover the following topics: balance sheet and capital markets activity, financial results for the third quarter and updated 2021 guidance. We took a number of steps during the third quarter to support our external growth and further improve our balance sheet. To start, we closed our first public unsecured bond offering of $650 million in August. Bonds have a 2% coupon and mature in August 2031. We used the proceeds to voluntarily prepay our highest cost classes of securitization certificates that were due to reach final maturity over the next five years. During the quarter, we issued approximately 17.5 million shares generating over $693 million of net proceeds through both our ATM program and the primary offering that was completed in late September. In October, we sold another 1.875 million shares pursuant to the underwriter’s option to purchase additional shares generating additional net proceeds of $75 million. The proceeds from the issuance were and will be used primarily for general corporate purposes, including acquisitions. As previously announced in July, we gave notice of our intent to settle our 3.5% convertible notes due January 15, 2022 with common stock. As of September 30, 2021, $199 million of principal was converted into approximately 8.7 million shares of common stock at the election of the note holders leaving approximately 6.4 million shares to be distributed no later than January 2022. Including the impact of these third quarter activities, our net debt-to-EBITDA ratio declined to 6.2 times. Looking forward, we will continue to focus on balancing our growth objectives with our goal of reaching a 5.5 to 6 times net debt-to-EBITDA ratio. Moving on to our third quarter financial results. Core FFO was $0.38 per share, 27% higher than last year. And AFFO was $0.32 per share, 32.7% higher than last year. This was largely due to outside NOI growth and interest savings. One point I want to underscore from Charles’s remarks is the widening spread between our new lease and renewal rent rate growth. As you can see in our results, our new lease rates, which are predicated on current market conditions, are significantly higher than our renewal rates. This is leading to a loss to lease that is much higher than we have historically seen. Renewals represent about three-quarters of our leasing activity and the loss to lease on those renewals is much higher than the loss to lease associated with new leases. We believe this could position us favorably for rent growth in the next 12 months and beyond. Last thing I will cover in our update is 2021 guidance. Given our year-to-date results, we are increasing our full year 2021 same-store NOI growth guidance to a range of 8.5% to 9.5%. At the midpoint, this is a 200 basis point increase from our previous guidance. This increase is driven by same-store core revenue growth expectations of 6.25% to 6.5%, which has improved from the previous guidance of 5.5% at the midpoint. Our new guidance is also favorable for same-store core expense growth. We now anticipate growth from a range of 1% to 2%, 150 basis points favorable from our previous guidance midpoint. We’re also raising our full year 2021 core FFO per share guidance up $0.05 at the midpoint to $1.49. And our 2021 AFFO per share guidance up $0.04 at the midpoint to $1.28. In closing, we’re experiencing continued high demand for our product, proving that the desire for flexibility and choice in the housing market remains strong. We are proud of the work we do to help individuals and families who want to enjoy leasing lifestyle. We will continue raising the bar as the best in the business for both our residents and our stockholders. With that, let’s open up the line for questions.

Thank you. We will now begin the question-and-answer session. The first question we have on the phone lines comes from Richard Hill of Morgan Stanley. So Richard, please go ahead when you’re ready.

Hey, good morning, guys. Ernie, I wanted to maybe start with you. First of all, just a quick question on the 4Q implied guide. It looks like expenses are up fairly significantly; same store revenue and NOI are up as well. I know in the past you’ve talked about expenses being higher in the second half of the year, but maybe you can unpack that just a little bit more for us so I can better understand it. I guess we were expecting expenses to be higher in 3Q and where they came in. So I’m just wondering if there’s actually upside in that implied expense guide.

Yes. Well, unfortunately Richard, one area I’ve been wrong all year, so we’d love to be wrong also in the fourth quarter with regards to where our implied guidance is, but with some areas we do think we’ll have some pressure relative to what we’ve seen in the first three quarters. Property taxes: we’ve seen some really good results coming through on refunds in the first part of the year, including the third quarter. We do have that baked into the guidance, although again, turnover keeps going in the opposite direction. We are assuming turnover kind of stabilizes or maybe slightly higher in the fourth quarter, but we haven’t seen that yet this year. So certainly, there’s some opportunity for upside performance there. As you saw in the third quarter, personnel costs did increase year-over-year. We expect that to also hold into the fourth quarter; some of that is just due to the outperformance we’ve had this year and we’re making sure that bonus accruals are where they need to be from that perspective. So we certainly hope that we can outperform what we’ve put out there; we’ve been able to do that each of the last three quarters. But we do expect getting back to more inflationary type expense growth at some point, but we’ll do our best to see if we can make it four quarters in a row where we can do better than we’ve laid out.

Yes. That’s helpful. Ernie, I want to talk about your new lease rate growth relative to your turnover. You sort of alluded to this in your prepared remarks, but the new lease rate growth is pretty attractive, very attractive. We don’t really see any signs that it’s abating and your turnover’s call it less than 25%. So it suggests that you have an embedded mark-to-market that’s going to persist for two, three, maybe even a little bit longer than that. I’m not asking you to guide. I’m just asking you to walk through methodology with me, because it seems like absent rents coming down, there’s a sustainable runway for at least several years to have some pretty attractive same-store revenue.

Yes. Certainly, you can look out over the next say 12 to 18 months and based on where rates are today. I think as you go out to two or three years, you have to take into consideration all the changes in the overall market. But your point is exactly right in that we see a loss to lease in the portfolio that is larger than we’ve seen before. And importantly, we’re not pushing renewals to where market rates are. We’re not setting market rates; the market sets market rates. But we’re working with our residents and you can see our renewal rates are less than half of what’s happening in the new lease rates, but that does set us up for a pretty favorable backdrop over the next period of time in terms of a loss to lease that’s in the low-double digits right now with regards to how that could play out, certainly over the next year and at least into the first part of 2023.

Got it. Just one more quick macro question. I don’t know if this is for Dallas or Charles, but I’m curious: home price appreciation has been really robust across the United States and showed some signs of slowing in the recent print. Are you seeing any signs of weakness from supply, from build-to-rent, beginning to emerge in some markets or micromarkets? What are you seeing on the ground?

No, we’re not seeing any weakness in terms of too much supply coming into the marketplace. It’s probably the opposite. The same thing that we’re feeling, like the cost of gasoline or milk or some of these other things, are impacting builders with respect to their supply chains. We obviously stay very close with some of our builder partners and just door and window packages alone are next to impossible to forecast correctly in terms of when they’ll have those things relative to bringing in the new supply. So Richard, it’s actually still a little bit of the opposite. From our vantage point, it still feels like things are taking a while to get through entitlements; things are taking a while to finish, but ultimately, we have seen resale supply creep back up just a little bit, which we view as a net positive. If we get a little bit more interest rate creep, I think that will help things in terms of easing up supply. And Ernie is right in his comments around the loss to lease, but we also don’t have the illusion that you can have 20% home price appreciation forever. I was looking at the Case-Shiller numbers from this point in time last year and a look-back basis, it was like 6%. And if you look at our markets, it’s like 22% right now. It’s just a little bit crazy. And it’s a moment in time where we’re feeling the supply chain challenge and there just isn’t enough quality housing available right now.

Thanks, guys. Congrats on early next quarter.

Thank you, Rich.

Thank you. We now have the next question from Sam Choe of Credit Suisse. So Sam, please go ahead when you’re ready.

Hi guys, congrats on a great quarter. I guess first going back to guidance, I guess holding that level of conservatism and the numbers make sense, but I guess this year you guys have been performing very well with that occupancy at 98% and turnover really trending lower. I’m just curious: have you guys seen enough of your resident base and their behaviors to start thinking about if this is the new normal? And if that’s not the case, I’m just curious what some concerns you have going forward in this current dynamic might be?

Yes. So this is Charles here. Thanks for the question. When we look at overall leasing fundamentals and you ask whether it’s the new normal, we’re in a really healthy position and you called it, we’re at 98% occupancy. You’ve been there all year. Demand is really high for our well located homes. How long will this last? We’ll see. That question around our embedded loss to lease is important. I think that gives us a good opportunity on the renewal side to keep rates moving up as they have been. We’ve been accelerating on the renewal side since last summer. Every quarter has been going up, which is really healthy. And we’re seeing that actually go into Q4 as well. The new lease side, we’re still kind of in that mid-to-high teens; we’re not seeing typical seasonality. So it’s hard to predict how long it’s going to last, but we’re in a really healthy position and set up well to go into 2022.

Got it, got it. That’s helpful color. I guess, it’s been really good to see that the external growth story is really coming back for you guys. Now, when I look at what — when Ernie mentioned the loss to lease dynamic that’s going on right now, I looked at your markets in Seattle, Phoenix and Las Vegas, where that discrepancy is large. So with that said, I saw that some of the acquisitions are more weighted to certain markets. So if I’m looking at Las Vegas, how is that local supply dynamic trending in that area? And obviously, I’m thinking that maybe the disposition plan over time might allow you to reallocate capital into these markets, where you can take advantage of the situation. Am I thinking about everything correctly?

Yes. I think you’re thinking about a lot in that question. There are a few things, let me make sure that I try to touch on the major points. Your last question around capital allocation is one that we’ve always taken a very deliberate approach to in where we invest capital and why. As you called out, in specific markets like Las Vegas and Phoenix, the Southwest Sunbelt type markets have seen an outperformance over really the last eight to ten years, in terms of what we’re seeing with net migration and household formation. And ultimately, that’s showing itself in home price appreciation and the rate growth that we’re seeing with the corresponding growth in the home pricing. We will continue to invest capital in the parts of the country where we believe we’re going to continue to see that outperformance. You haven’t seen us invest capital, for example, in the Midwest over the last five or six years, because we want to make sure that our shareholders are getting the appropriate exposure where the growth is going to be the greatest. Deliberately, a couple of years ago, we started selling out of some of our concentrations in the Midwest, and we started reallocating capital into markets like Phoenix, where a couple of years ago we were only at 7,000 units; I think today we’re closer to like 8,700 units. We want to continue to grow those types of markets, because they are seeing this type of performance, whereas supply gets tight. So yes, that is our blended approach to how we think about risk-adjusted returns. We want to always try to strike that right balance between the appreciation of the asset, where we have the strongest conviction around what’s going to happen with our revenue streams and how rate growth could be impacted, and then make sure that we’re investing our time and our capital accordingly.

Got it. Thank you so much, Dallas.

Thank you.

Thank you. We now have Jeff Spector of Bank of America. So Jeff, please go ahead.

Good morning. Thank you, and congrats on the quarter. First question, I’d like to focus on demand and everyone’s trying to predict forecast growth in demand. You commented on your resident satisfaction stats, and again, turnover continues to trend lower. I know you do a lot of data analytics. I don’t know if you can share anything on this call to discuss a little bit more where you see demand, how long — how the trend in your renters staying — the length of the renter staying in your homes. What do you see this going over the next couple of years?

Yes, this is Charles. Great question. Bottom line, we’re seeing really healthy demand. And when you couple that with our low turnover and a high occupancy, we’re in really great shape. I’ll share a couple of stats from our recent marketing survey of our move-ins in Q3. The majority, 80% are still coming from single family, so they know the product, but what they’re attracted to is the single-family home, obviously, but our locations are infill. The two top reasons that they’re moving to SFR and Invitation Homes specifically are for more space, which obviously single family provides, and closer to work, which most of our infill homes do that. We also asked what’s important to you and they said 78% are looking to have that extra office or bonus room. So those things, as you think about long-term demand and the trends of work from home and all that, put us in a really healthy position, again, coupled with our markets we’re seeing demand in the West. We’re seeing a lot of movement to the Southeast and Florida, specifically Atlanta. And it’s showing up in our rent numbers. So we’re doing really well there. On top of that, you asked about where we are in terms of length of stay — it continues to move up. With that lower turnover, people are staying longer. I mentioned in our remarks our average household is over $120,000. It puts us at a rent-to-income ratio of 5 times, which is as healthy as we’ve seen. So all that really puts us in a great shape for what we think for years to come.

Thanks, Charles. I guess on that length of stay, is there anything more specific you can provide? I mean, again, I know everyone’s trying to forecast like where this business is heading over the next 5, 10, 20 years. Like, what’s the longest length of stay you’re seeing in the portfolio? And what percent of the portfolio was that? Just trying to see where that could hit.

Yes. Our portfolio — our residents are staying longer and longer. What we’re seeing is they’re into their third year and it’s continuing to grow. With this low turnover, we expect that’s just going to get longer and longer well into three years. We’ll see how it plays out over time.

I think, Jeff, average length of someone staying now is over 32 months and our average lease term is 15 months. I mean, someone’s renewing on average twice from their initial lease term with that. That just continues to increase by about a month to a month and a half each quarter. That’s the trend we’ve seen for the last many quarters.

Thank you.

Thank you. We now have another question on the line. We now have a question from Nick Joseph of Citi. Sir, your line is now open.

Thank you. It seems like the political and regulatory environment around the broader single-family rental sector is becoming more of a topic and potentially a risk. How are you dealing with it from an organizational and an operational standpoint?

Hi Nick. Great question. We’ve been dealing with this for almost 10 years since we started the business in terms of being active in both purchasing homes and in standardizing the single-family rental environment. We obviously have a team of people here both from a PR front and also from a legal perspective. We’ve dealt with a variety of challenges over the years. Two and four years ago, we dealt with some of the rent control challenges and some of the ballots that were within different markets and we’re very active in that space. We’ve also had a range of inquiries over time with legislative bodies or groups wanting to understand more about what it is that we do now. The story is an easy one, because single-family renting has gone on in this country for over 200 years, but it’s organizing yourself and making sure that you have the data in front of you that you can share with whomever the inquiry is coming from to help them understand what’s going on with the space.

Thanks. And then, is there any update in details that you can give on the FTC letter that you received? I think that was disclosed in early September.

No, not really. We’ve gotten inquiries from time to time from different legislative bodies. Pre-pandemic, we were working with the House Financial Services Committee as an industry and getting information out there. So from time to time, we do get these inquiries. We wanted to make sure that we disclosed the letter that we got from the FTC, but no update as of right now.

Thank you.

We have a question on the line. We now have Dennis McGill. Please go ahead.

Hi, thank you. Dallas, first question just goes to you mentioned the ability to still buy at an attractive 5% cap rate. Maybe explain a bit why you think you haven’t seen more compression in cap rates over the last 12 to 18 months, given how much capital has been focused on the sector and how much yield compression there has been in sister industries, especially multifamily and the chase for yield in general around assets.

Great questions. Let me answer the second part first. I think we get a little myopic at times when we think about single-family rentals in terms of the volume. And there certainly is a lot of capital coming into the space. It’s validation of the fact that the business can exist in a very favorable or even non-favorable environment, like what we had with the pandemic. But you have to take a step back: there’s 6.5 million resale transactions every year in the U.S. As you start to think about SFR operators or investors wanting to be active in that cohort every year, we are a very small percentage of the overall buying and selling that goes on in the marketplace. By the way, it’s one of the reasons why this is a great business. It’s a very liquid marketplace for both end users and for investors. Now, the reason I don’t think we’ve seen the compression, Dennis, is a couple of things. One is, remember, and I talked about this in an earlier comment around this dynamic, but the home price appreciation has been fairly dramatic in the last 12 to 18 months. It’s been very steady for the last 10 years. We’ve seen, in a similar fashion, really over the last year to year and a half, we’ve seen rent really keep up with what we’re seeing with pricing. Now that won’t grow to the sky. We don’t have illusions that that’s normal. We would typically expect mid to high single digits for the way that we would think about rate growth in a normal year. We’ve just been fortunate as operators that the environment doesn’t have enough supply, so it’s supporting the rate growth in a similar fashion. Now that will come down over time. But again, going back to the first point, there’s a lot of transactions happening in the space around other operators, many of which have much more scale. So I think what we’ve been really good at is picking our spots. We’ve been active in parts of the country that lend themselves to better performance, like I talked about before. But we’re also very deliberate about where we invest capital and why. If you look at what we’ve done to date, I think we’re close to 2,000 homes acquired on the balance sheet through the third quarter. That’s really diminutive in that world of 6.5 million resales. So as long as you know where you’re investing capital and why, I think you can find that outperformance and you stick to your investment thesis. As Ernie mentioned, and I mentioned earlier, we have a good cost of capital right now, so we’re taking advantage of it.

Does that imply to some degree that a lot of the institutions that we all read about and the scale that we see others trying to gain, they’re targeting different markets or price points than you are?

It could. A lot of the build-to-rent story you hear about right now is happening a little further out than other parts of the country, quite frankly, where we don’t operate. I think we do have some parallels with other platforms where we may bump up against each other in a couple of markets, but generally speaking, we buy a more expensive product that’s much more infill. It’s differentiated from the large majority of our peers. Our average price point in Q3 was close to $440,000 on the balance sheet. That’s a much more expensive home than a majority, I would say, of a lot of the new capital coming into the marketplace is targeting.

Got it. And then maybe just one more, change gears a bit. We’ve seen a lot from home builders, as well as iBuyers struggling with getting homes either built or acquired and renovated and back to market. Are you running into any similar challenges on your acquisitions? Or can you elaborate a bit on as you acquire homes today, whether the pace of getting them back to market and leased has changed at all?

Yes. We have the buying volume that we have and we’re focusing in a few markets where for the majority we have great teams on the ground who are ready to take this on. The volume is real and we’re paying attention to it, but we’re able to keep up and we’re pushing them through. A lot of these homes are, like Dallas said, really in good shape and we know what we need to do on the rehab side. A lot of these homes will be ready early next year, and what we’ve seen and what we’ve been able to bring through have been really healthy in terms of the rent gains. So we feel like we’re in good shape to manage it.

Thank you, guys. Good luck.

Thanks, Dennis.

Thank you. We now have Brad Heffern from RBC. So Brad, please go ahead.

Thanks. Good morning, everybody. A couple more on acquisitions. So obviously the guidance went up a lot to the $1.7 billion to $1.8 billion. I’m curious if that was just the large number of opportunities that you were sort of unexpectedly seeing this year? Or if you think that that’s something that’s sustainable and how should we think about the Pulte homes next year being complementary to that?

Great question. We started to signal a few quarters ago that we are seeing a few more opportunities in the marketplace. To be clear, the 1,700 homes that we bought in Q3, the vast majority of these are just one-off buys. The power of our platform is really unique in terms of our ability to identify one-off acquisitions and to be able to then process those, put our own finish standards on those homes and have them ready for lease in a high-velocity way. Hard to say what the marketplace could look like a couple of quarters from now, but so long as we have a decent cost of capital and we can buy at these kinds of prices, we’d like to stay opportunistic. We certainly love to look for opportunities to buy scale. One of the ways we know we can bring dedicated scale into the platform is partnerships with builders like the one we have with Pulte. We’ve been active with a lot of different builders. Pulte is just one of our preferred partners who we’re going to try to have programmatic buying opportunities with. They’ve been a terrific partner. They do a fantastic job as the nation’s second largest home builder. We’ll start to see those come into our normal distribution towards kind of the end of the third quarter of next year. John and Peter have done a nice job on the team working with Pulte to start to look at parts of the country that we can start to forecast out a year or two in advance, and that gives us a real strategic advantage. By the way, we aren’t incurring any substantial incremental back-office costs for that. We haven’t had to upsize our team a ton to run that program. So we feel like we’re in a good spot and that will complement what we’re already doing pretty well in the one-off space.

Okay. Got it. Thanks for that. And I was wondering if you could talk about the iBuyer channel a little bit. Obviously we saw the news about one of the larger iBuyers pausing. Is that news meaningful for you guys in any way? And can you talk about more recently how much that channel represents of your acquisition volumes?

iBuying has always been a pretty small percentage of what we buy. It’s one of our many channels that I talked about in my opening remarks. We want to have all the channels open and available to us. I don’t want to comment specifically on any one company’s strengths or weaknesses in a particular quarter. These things tend to ebb and flow and I’m sure they’ll work through it. I think it probably speaks more to some of the labor challenges that are in the marketplace. It’s not an easy environment to operate in if you don’t have your infrastructure set up for the long haul. Even then you’ve got to manage those pressures as they flex different ways. But certainly, it presents more opportunities for platform buying with companies like ours. We are a friendly partner to iBuyers; we love the fact that transactions in the residential space are starting to digitize and get more efficient. That makes a lot of sense for the end user and for investors.

Okay. Thank you.

We now have another question on the line from Alan Peterson from Green Street. So Alan, please go ahead when you’re ready.

Thanks, guys. Just focusing still on external growth. Dallas, you touched on some of the supply chain bottlenecks that are affecting your builder partners. Is this affecting pricing with partners like Pulte? Are you seeing any compression in those stabilized yields than you have previously quoted on those next swath of acquisitions there?

I would say generally we feel pretty good about what we’ve talked about in the past and the way we were viewing the world. We built a structure with them specifically that protects both companies in the event that we have expense creep, but it allows us to rethink and reset together if there’s market volatility. We saw that with lumber by the way. Price of lumber is coming back to earth. We think we’ll see that in some of these other categories. It’s not just the cost of goods sold. If you think about what happened with the pandemic in terms of new supply coming in, it slowed down entitlement processes with municipalities and cities. It disrupted many parts of the process. It’s hard to find a car right now or a used car. It’s similar in terms of bringing new supply into the marketplace. It created a log jam from a supply chain efficiency perspective. We forecast and believe that this will all start to regulate and get back to normal and start to bring some of that expedited supply back into the marketplace over time.

Got you. So the stabilized 5% yields are still intact for your partnership with Pulte then?

It’s no different than we’ve quoted before; we’re getting those at a similar cap rate, and we haven’t seen any change in that dynamic. Typically, we’re 25 to 50 basis points better than what the market would show in a partnership like this, and that hasn’t changed.

Perfect. And then that’s one for me. Charles, can you provide some context on what’s driving some of the sequential revenue performance in Dallas and then just a little bit of the softness in Denver? Just trying to dig in on market fundamentals there.

If I look at both of those markets in terms of rent growth, we’re accelerating in both, especially in Dallas, where we had really good increases on the new lease side in Q3 of 15.5% and renewals have been healthy at close to 6% for a nice blend. Denver is similar. New leases were almost 12% and renewals at 7% to 7.5% or so. So both markets are really, in our perspective, healthy. We have good leadership on the ground and they’re moving in the right direction. We are buying a lot in Denver and we’re paying attention to that, which is great. Those are markets we want to grow and we think they’ll be good long-term.

Got you. Thanks guys. Appreciate the time.

The next question is from Keegan Carl with Berenberg. Keegan, your line has been opened.

Hi, thanks for taking the question, guys. Just one for me. Given the current housing shortage, has your intention to implement the spec platform changed at all? It’s my view that now might be an opportunity time. You look at a number of people who might want to take advantage of the hot housing market yet not relocate or buy at current price levels.

We like your thinking. It certainly feels like there’s going to be some opportunities as we look at bringing more product into the single-family rental space. While we’re not ready today to announce any pivot or change, there are categories that we’re looking at and spending more time on. We do think a sale-leaseback product over time is a great way for people who want to think about retirement or want to spend part of the year in different markets. We’ve seen that even in our own portfolio where we’ll have a couple who pick up a lease in Florida because they spend part of the year there. In the evolution of our company and the things that we’re focused on, I think you’ll start to see us over time explore more of these types of product and weave them into our business model. Not necessarily tomorrow, but over time.

Got it. Would a pilot program look like focusing on one of your smaller markets and testing it out? Where would you be more aggressive from the job?

I’d hate to speculate on specifics today. Ten years ago we did a lot of sale-leaseback on homes where we were buying through distressed channels and someone was leasing back. So we’re familiar with the process side of it. You could pilot in a market and partner with other ventures that are currently doing it, and bring back-office expertise. There are a lot of ways to think about it. We’re not in a place where we know exactly how we want to approach it yet, but we see social housing opportunities as a way for a subscription economy to offer choice. That’s something we believe in: there isn’t a one-size-fits-all approach to how people want to live. For some it’s ownership, for some leasing, and for some an option to buy. We’ll watch these markets and pick our spots if and when we want to participate.

Got it. That’s it from me. Thanks guys.

We have another question on the line from Rich Hightower of Evercore. Rich, please go ahead.

Hey, good morning, everybody. A lot of good questions so far. I want to go back to the $120,000 median household income you mentioned for new leases recently. I want to get a sense of the growth rate year-over-year in that statistic and how do we correlate that to rent and home price appreciation and how do you expect that to evolve over the next year or two?

We’ve seen our income-to-rent ratio increase from about 4.6x to 4.7x and now it’s over 5x with the numbers Charles mentioned. We’re seeing rent growth pretty significant and the new resident cohort’s income has been keeping up with rent growth. It’s very correlated — almost identical — and actually slightly better, because we’ve gone from about 4.6 to over 5x in our average income-to-rent ratio. Predicting what that will be in the future is challenging, but we’ve seen a good trend over many years: our average income has moved from around $100,000 at IPO to where we are today.

Okay. If that’s true, going from 100 to 120 is approximately 20% since the IPO — that roughly matches new lease growth in a year. It’s remarkable. I’m trying to figure out how to square that with everything we’re seeing. It seems off the charts; is that all making sense from Invitation’s perspective?

Remember, we’re in very infill locations where people want to live close to good schools and jobs. We’re not necessarily marketing to the broad average. The markets we’re in — Sunbelt, Southeast and the West — are attracting people who prefer renting as part of a subscription economy. Many can buy but choose not to for reasons of flexibility and convenience. We’re providing that product and service, and Charles and the team are delivering on it. It continues to work for us.

I appreciate the color. One follow-up: Invitation has a deliberate infill strategy. How would you contrast that with strategies of several new entrants or long-standing competitors and even within build-to-rent? How far out of city center are you seeing a lot of the competitive SFR product being bought or added when it’s probably not that competitive? How would you characterize the landscape?

We differentiate ourselves by location, scale and being in higher-end markets. Many new single-family projects are further out or in tertiary markets where we typically don’t operate. Our scale is a differentiator in running efficiently and helps solve supply chain issues because we’ve been in these markets a long time and have longstanding labor and supply relationships. It doesn’t make us immune, but we manage those pressures better than others reporting issues.

I want to add that scale is your friend. It allows us to invest in technology, update systems, hire better people and replicate a mature platform. Invitation Homes’ platform is difficult to replicate, especially in this environment. The 10 or 11 years we’ve been doing this shows that scale allows consistency, better resident communication, and operational performance that new entrants will find difficult to match.

Okay, great. Thank you guys.

We have another question on the line from an unidentified analyst. Your line is now open.

Thank you. Good morning. Had a couple of follow-up questions. Starting with the robust rent growth you’re seeing and the acceleration into the third quarter, I’m curious: is the FTC inquiry having any impact on your rental pricing strategies? Also can you give us some color on the new and renewal rates from October and what you’re seeing in November, December?

Hi Andy. No, the FTC inquiry is not impacting leasing. If you step back and think about our leasing performance: low turnover, high occupancy and our locations being infill put us in a healthy position. The West continues to lead on the new lease side: Phoenix and Las Vegas are almost 30% and 29% respectively for new leases. It’s not just those markets; Florida and the Southeast are strong: Atlanta new leases at 20%, Tampa at 21%, Jacksonville at 19%. These strong numbers have been maintained into October. On the renewal side, we’ve seen acceleration since last summer and Q3 renewals were 7.8% versus just over 3% last year, with September ending at 8.4%. That growing trend continued into October. As we look forward into January, on renewals we’re thinking in the high eights to nines for what we will be asking. So we’re set up well to continue that renewal momentum.

Got it. Appreciate the color, Charles. You also mentioned you received $25 million of rental assistance year-to-date. What is your expectation for the full year and what does that imply for next year? Also some color on bad debt: you made progress getting it down to 1% of gross rental revenues. How are you thinking about that near term?

On rental assistance it’s actually about $22 million this year and about $3 million last year, so lifetime to date is approximately $25 million. We progressively got stronger in May, June into August and September where each month we were collecting about $5 to $6 million of rental assistance. It’s hard to predict how that will play out. There are tens of millions of dollars of applications still outstanding for our residents in local jurisdictions. Our operating teams are helping residents through the process. We still have a large accounts receivable balance that includes historically overdue balances, so if rental assistance programs stay open and funded, there is an opportunity for greater collections which could help continue the sequential decrease in bad debt that we’ve seen. In Q3 bad debt was 1% of gross rental revenues, better than in Q2 and Q1. We feel like we’re on a glide path toward improving that over time; hopefully back to historical levels toward the end of next year, closer to our historical 40 basis points, depending on how rental assistance and collections play out. There may even be periods of catch-up where we see better-than-normal collections if assistance programs are effective.

Got it. And what’s that receivables balance today?

On a gross basis it’s over $50 million; approximately $55 million of rent receivables are due to us. Of course, we have a large reserve against that, so the net number on our financial statements is much lower — about $13 million to $14 million on a net basis. We’ll continue to work on getting rental assistance to help residents and bring the net receivable down over time.

Got it. That’s helpful. Thank you.

You have a question on the line from Chandni Luthra of Goldman Sachs. Chandni, please go ahead.

Hi, thank you for taking my question. Given demand-supply metrics are hugely tilted in your favor, how are you thinking about ancillary opportunities at the moment? Is there more upside there? Are there areas that perhaps you hadn’t contemplated earlier that you think are now on the table? Just trying to assess how that could look in 2022 as you continue to scale.

Hi Chandni. Even through the pandemic, ancillary has been a big focus for us. About two years ago at our investor meeting we put out a target to get to a $15 million to $30 million run rate on ancillary services by the end of three years (end of 2022). We’re on track to be at the high end of that and we’ll do everything we can to overachieve. The main focus has been expanding and lowering the cost of our smart home technology. In 2022 we expect to roll out video doorbells which will help to grow that. We’ve done a filter program that helps reduce costs and provides a lower-margin revenue. We’re working on categories around pets and pests; we have a national deal with Terminix. We see many programs like that that will continue to roll out in 2022 and beyond: energy, landscaping, handyman services, broadband. We’re being thoughtful about when and how we roll them out. As residents ask for these services and convenience, we think it will extend resident stay, which supports our long-term plan. We’re on track with what we set out a couple years ago.

Got it. For a follow-up, home price appreciation has been high. Could you give any early reads on how to think about real estate taxes next year in light of current home prices?

It’s always challenging to predict. I’d say real estate taxes are a risk to be materially higher than where they are today, but you should remember that a 10% or 20% increase in home prices doesn’t automatically translate into a similar jump in tax bills. Voters and taxpayers’ incomes don’t rise at that pace generally. So over the next few years, real estate taxes could show greater-than-inflation growth, but it would be surprising to see them match the full magnitude of recent home price appreciation.

Got it. Congratulations once again on a strong quarter.

Thank you.

We now have Jade Rahmani from KBW. Jade, please go ahead.

Thank you very much. Wondering if you could comment on recent resident satisfaction scores — have they been trending — and also has there been any negative perspective from residents on the dramatic levels of rent growth that we’re seeing?

Resident satisfaction continues to be a bright spot for us. Our teams are doing an amazing job in the field. We monitor and ask for surveys after every interaction with the resident, whether it’s move-in, move-out, or a work order, and our teams do a great job. That feedback informs what residents are experiencing and how we can improve. We’ve continued to see a rise in our social scores on Google and Yelp; we’re over four on average across all our markets. We like what our teams are doing and we’re continuing to focus on improving.

What about pushback on rent increases?

We’re thoughtful on rent. For new leases, it’s a vacant house and we’re pricing to market, so we don’t get pushback there. On the renewal side, we’re very thoughtful and work closely with national and local teams to be mindful of residents. Typically renewals lag new lease pricing. We focus on being fair and maintaining relationships to drive retention.

Just to add, over the last 90 days we had record-high retention and a historically low third-quarter turnover rate. Consumers understand what’s going on and many feel they’re getting a good deal relative to market rents given our renewal pricing.

Thanks. Could you remind me what percentage of work on a house is done with in-house teams? And do you feel you’ve experienced the brunt of the supply chain disruptions or is that a potential coming headwind?

On average our maintenance staff handles about half of the work orders that come through — handyman work and smaller items. Larger jobs like roof or concrete we outsource to vendors. That percentage is seasonal but right now we’re about 50% in-house. We haven’t seen a lot of supply chain issues hitting routine maintenance work orders. Early in the pandemic there was appliance availability noise and some cost pressure, but our centralized procurement and scale help mitigate that. We aren’t immune to labor pressure, but our local density and scale allow us to recruit and redeploy people effectively.

Thanks. And to sum up on the topic, considering pressures out there, what is the main driver for the change in the fourth-quarter same-store expense guidance?

It’s largely based on what happened in the first part of the year and some expectations for the fourth quarter. The implied fourth-quarter guidance is higher than we’ve run this year and we do expect some pressures: property taxes a bit higher than expected, personnel costs reflecting outperformance and bonus accruals, and some normalization back to inflationary growth at some point. We’re being conservative in the guide, but we’ll work to outperform where we can.

Thank you.

Thank you. We have the final question on the line from Andrew Rosivach from Wolfe Research. Andrew, your line is open.

Guys, you’ve answered all my questions. Thanks a lot and congrats on a good quarter.

Thanks Andrew.

This ends our question-and-answer session and marks a conclusion of our conference. Thank you again for joining. You may now disconnect your lines.