Invitation Homes: Growing REIT Likely To Reward Investors

Introduction

With interest rates likely falling sometime this year, the REIT sector (XLRE) will likely see some strong upside in the coming months. But as a long-term investor, my goal is to continue to hold my investments unless their fundamentals change, or I see a better investment opportunity.

Even if my holdings become overvalued, I will most likely continue to hold to collect the dividend. Because the sector was slaughtered over the past two years, I continued to dollar-cost average, lowering my cost-basis in the process. Moreover, with the recent CPI report showing inflation moving closer to the Fed’s target, some REITs have seen some share price appreciation over the past week.

One REIT in particular that is still undervalued and offers strong upside in the coming months/years is Invitation Homes (NYSE:INVH). I discuss the company’s fundamentals and why I think they are a great buy for long-term dividend investors.

Previous Buy Rating

I last assigned a buy rating to INVH back in April in an article titled: A REIT With A Bright Outlook And Strong Dividend Growth. Despite their short public record, Invitation Homes had impressive dividend growth, with an annual growth rate of roughly 52% over the past 7 years.

I also touched on that INVH was an attractive investment due to the REIT owning single-family homes. Data showed it was $1,200 cheaper to lease a home than to own it, saving residents over $14k a year. Their balance sheet was also strong, with plenty of liquidity to continue their strong growth going forward.

Growth Through Partnerships

Invitation Homes has hit the ground running since IPO’ing in 2017. Aside from agreeing to become an asset manager for 14,000 homes with Starwood earlier this year, the REIT entered into an additional deal roughly 3 months later.

They acquired a minor equity interest in a single-family home portfolio in a deal with Quarterra, a subsidiary of Lennar Corporation (LEN). This added more than 4,000 homes to INVH’s growing portfolio.

They also entered into agreements with homebuilders D.R. Horton (DHI) and Dream Finder Homes to build 500 new homes in cities like Nashville, Charlotte, and Jacksonville, expected to start delivery this year. This is huge for the REIT, as D.R. Horton is the largest homebuilder in America.

Furthermore, Nashville and Charlotte also happen to be on the list of fastest-growing cities for 2024. This will be important for INVH going forward, as residents are likely to continue to flock to these cities in the coming years. Moreover, there’s a good chance they will likely look to rent single-family homes. Furthermore, management expects to deliver 1,000 homes in 2024.

Financials

Invitation Homes reported their Q1 earnings with a beat on FFO & revenue. FFO grew impressively by more than 23% from the prior quarter’s $0.38 to $0.47. Revenue also increased by roughly 3.5% from the prior quarter as well. This stood at roughly $646 million, beating estimates by more than $14 million.

Year-over-year FFO grew from $0.44 while revenue grew from $589.9 million. FFO growth was driven primarily by NOI growth. So, while the REIT’s partnerships and acquisitions haven’t contributed largely to their bottom line yet, this will likely see strong growth in the coming years.

Below, the REIT’s average growth rate over the next four years is solid at 6.36%. Invitation Home’s FFO represents a 6.21% increase from $1.77 in 2023. For comparison purposes, INVH’s growth rate over the next 4 years is higher than peers Sun Communities’ (SUI) 4.99% and Essex Property Trust’s (ESS) 2.98% respectively.

Same-store NOI growth was 4.7%, while same-store revenues were 5.6%. This was driven by an increase in monthly rents, up 80 basis points year-over-year. New lease growth was lower, at roughly 1% over the same period. Moreover, once interest rates come down gradually over the coming months, this will likely see an uptick.

Investment-Grade Balance Sheet

Impressively, Invitation Homes received one upgrade from S&P in March of last year to BBB and two revisions from stable to positive from both Moody’s & Fitch in April and August 2023 as well. Additionally, Moody’s upgraded the REIT’s rating to Baa2 this past April.

So, INVH seems to be firing on all cylinders currently. Additionally, they also managed to deleverage to 5.4x from 5.5x in the prior quarter. This is well-below management’s targeted range of 5.5x – 6x.

While their leverage was similar to Essex Property Trust’s 5.4x, both were significantly lower than Sun Communities’ 6.1x. Their liquidity of $1.7 billion also puts them in a favorable position to continue growth for the foreseeable future. The REIT had no debt maturing until 2026 and 99.5% of it is fixed-rate.

Dividend

For the first quarter, AFFO was $0.41, a growth rate of 6.8% year-over-year. This safely covers the $0.28 quarterly dividend. Using management’s AFFO guidance of $1.54 – $1.62 for the full-year and expected annualized dividend of $1.14, this gives INVH a 74% payout ratio even if AFFO comes in on the lower end of guidance.

Upcoming Earnings

INVH reports their second quarter earnings on July 24th. Analysts anticipate FFO to remain flat at $0.47 while anticipating a small growth rate less than 1% to $647.19 million. In my opinion, these numbers are very conservative.

Although I don’t expect a huge increase in FFO, I do expect Invitation Homes to deliver another beat with FFO in a range of $0.48 – $0.50. I also expect a higher increase in revenue, somewhere around $650 million, due to the REIT strong acquisitions. And despite the small impact their acquisitions have had on their bottom line so far, I do anticipate solid growth in the coming quarters.

Valuation

Using the midpoint of management’s guidance, this gives Invitation Homes a forward P/AFFO multiple of 22.3x. This is slightly below their blended P/AFFO multiple of 22.85x. This is in comparison to SUI’s 20.31x and ESS’s 20.56x. All three trade above the sector median’s 15.60x at the time of writing. Moreover, with interest rates likely to decline soon, I think many REITs will see solid upside by the end of 2024.

During my last thesis in April, I had a price target of $45 using the Dividend Discount Model. This would imply a multiple of roughly 28.5x, above their 5-year normal of 25.12x. However, if we see multiple rate cuts this year, I still think INVH could see a share price of $45 a share. This compares to Fastgraph’s $40 price target by the end of the year, giving investors 13% upside.

Risks To Thesis

Despite Invitation Homes’ growing partnerships, the current macro environment still placed downward pressures on residents. This is what likely caused occupancy to drop slightly year-over-year. This declined from 97.8% to 97.6%. High interest rates have undoubtedly caused financial issues from consumers. And although this will likely ease in the coming months, a recession could cause vacancies to tick up further.

If so, this will likely have a negative impact on INVH’s financials going forward. Additionally, a recession would likely cause growth to slow as well. And this is something investors should keep an eye out for going forward.

Investor Takeaway

Invitation Homes is a solid REIT that still trades at an attractive price, especially for long-term investors. The REIT has continued impressively growing its portfolio, entering into strategic partnerships with reputable homebuilders like D.R. Horton and Dream Finder Homes.

Furthermore, their locations are in growing cities like Charlotte and Jacksonville, which will likely continue to see an influx of residents looking to rent single-family homes. With a solid balance sheet and no debt maturing until 2026, INVH is well-positioned for further growth.

As a result of their solid fundamentals, strong growth rate in comparison to peers, and investor sentiment shifting positively for the REIT sector due to potentially lower interest rates, I rate Invitation Homes a buy.