Invitation Homes: A Good Dividend-Growth Play (NYSE:INVH)

Invitation Homes (NYSE:INVH) is a residential REIT that focuses specifically on single-family homes. The company’s business is significantly different from many other residential REITs that mostly focus on apartments, condos or mobile home parks, as those who rent single-family homes usually have different expectations, price points and priorities than those who rent apartments. So far the company has shown that it has the ingredients to create value for investors in the long run even though REITs have been struggling in recent years.

The company’s properties are mostly located in the southern half of the country. In fact, more than 90% of the company’s revenues are generated either from California, sunbelt states or Florida. These sunny places also happen to be where most rent rises happen, driven by rising demand and growing economies. Most of California has been enjoying strong real estate prices since the 1970s. Meanwhile, other areas in the southwest such as Nevada and Arizona which were historically known for having access to cheaper real estate have also seen a lot of growth in real estate prices in recent years. In the east, Florida, Georgia and surrounding states started seeing strong demand in the last decade, partly driven by a lot of people moving to retire there and partly driven by new employment opportunities and a stronger economy (not to mention good weather most of the year).

Retirees probably won’t be renting single-family homes, though. Retirees have different choices such as owning their own houses, staying in a senior care facility, or discounted 55+ communities such as mobile parks or condos depending on their budget. Most retirees who live in a single-family house will be owners of the house rather than a renter. The demand for single-family homes will be mostly driven by a specific group of people who are small families with children. These could be people who haven’t yet saved up enough for a down payment, or that they haven’t even decided to buy a house yet. As home prices have been rising tremendously in the last decade, this pool of people is likely to keep getting bigger, especially with mortgage rates being as high as they are.

The company uses a vertically integrated approach of owning, managing, leasing, and maintaining its properties. The company is involved in all aspects of property management, which allows it to keep its margins at healthy levels. Since the company has a rather large scale and owns a large number of properties (about 5k properties on average in each of its top 16 markets), this vertical integration is affordable for the company whereas it may not have been for a company of smaller size without allocating too many resources.

The company is always on the hunt for new properties and looking to expand its portfolio of homes. It uses a multichannel approach where it competes with other buyers (many times individuals) in order to add new properties to its portfolio. The company has existing relationships with many local realtors as well as many builders, so it can learn about new listings before they are available to the public. The company also participates in municipal auctions, iBuyer market, and sale leaseback programs. Sale leaseback actually works very well for the company because the property it just acquired already has a willing renter who has been living there for years and likely took good care of the property already.

The company has been posting impressive growth in recent years, as its revenues are up more than 150% in the last 5 years. Part of this has been driven by rent price increases driven by inflation but most of the growth actually came from the company’s growth of its portfolio by acquiring new properties.

The company’s liquidity position also allows it to continue its growth without worrying too much about rolling its debt. Currently. 99.4% of the company’s total debt is either fixed-rate and no debt maturing until at least 2026. Currently, the company holds about $1.8 billion in liquidity, which it can use to buy more properties and increase its holdings. It’s unlikely for the company to get very aggressive with acquisitions right now though because home prices are either at or close to all-time high right now and pricing is far from favorable even if one doesn’t have to worry about high mortgage rates.

Currently, the stock only yields about 3% as compared to the risk-free rate of 5.5% which doesn’t exactly put it into “high yield” bracket, but I would consider this as a dividend-growth play as the company has an impressive track record of strong dividend growth during its short history as a public company. In the last 5 years, dividend-per-share more than doubled and there is probably room for more dividend growth in the future.

The company’s dividend growth rate is well above the industry average standing at 20% annualized for the last 3 years and 19% annualized for the last 5 years, while the industry average is around 3% for the last 3 years and more or less flat for the last 5 years.

Currently, you might look at the company’s dividend payout ratio on GAAP basis and see the number of 132% and wonder if the company’s dividends are sustainable but keep in mind that this is a REIT and if you want to find out whether a REIT’s dividend is sustainable, you might want to look at the FFO ( Funds From Operations) and AFFO (Adjusted Funds From Operations) metrics rather than net income to see the whole picture. Currently, INVH’s AFFO Payout ratio stands around 70% for both trailing and forward basis as compared to a sector average of 75%. This indicates that the company pays about 70 cents in dividends for each $1 it generates in AFFO. The company’s FFO payout ratios are even lower at around 59% for both trailing and forward numbers as compared to the sector average of 63%. This indicates that the company’s dividend is currently well covered and there is even some room for growth.

If the company’s current growth rate continues, its dividend growth rate can also continue at a healthy rate. For the last 5 years, the company has posted an annual average AFFO Growth Rate of 9.9% as compared to a sector median of 1.9%. The company also posted an annual operating cash flow growth of 10.7% as compared to sector average of 4.15%. In the future, we could see the company growing at about 7-10% per year depending on how much it can raise rates and how quickly it can acquire new properties. It is also possible for the company to provide add-on services for a fee to fuel further growth such as smart home subscriptions and bundled utilities. The company already started testing bundled internet services across all its properties in some cities for a fee.

How about valuations? The company is certainly not cheap at the current valuation as it trades for 19 times FFO (both trailing and forward) and 22 times AFFO (both trailing and forward) as compared to the sector averages that range from 12 to 14 depending on whether you are looking at trailing or forward values. The company trades at a premium price, but one could also argue that it deserves this because it offers high-quality sustainable growth well above sector averages.

I generally like this company and I have a small position in it. This stock is not for everyone, though. For example, it’s not for high-yield investors or those looking to buy a company at discount valuation. This is more of a play for you if you are a growth investor, or at least a dividend-growth investor.