Invitation Homes Inc. (NYSE:INVH) Q4 2023 Earnings Call Transcript
Invitation Homes Inc. (NYSE:INVH) Q4 2023 Earnings Call Transcript February 14, 2024
Invitation Homes Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings, and welcome to the Invitation Homes Fourth Quarter 2023 Earnings Conference Call. All participants are in a listen-only mode at this time. [Operator Instructions] As a reminder, this conference is being recorded. At this time, I would like to turn the conference over to Scott McLaughlin, Senior Vice President of Investor Relations. Please go ahead.
Scott McLaughlin: Good morning and welcome. I'm here today from Invitation Homes with Dallas Tanner, Chief Executive Officer; Charles Young, President and Chief Operating Officer; Jon Olsen, Chief Financial Officer; and Scott Eisen, Chief Investment Officer. Following our prepared remarks, we'll conduct a question-and-answer session with our covering sell-side analysts. In the interest of time, we ask that you limit yourselves to one question and then re-queue if you'd like to ask a follow-up question. During today's call, we may reference our fourth quarter 2023 earnings 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. We describe some of these risks and uncertainties in our 2022 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, in yesterday's earnings release.
I'll now turn the call over to Dallas Tanner, our Chief Executive Officer.
Dallas Tanner: Good morning, everyone, and thanks for joining us. Our customers' needs are straightforward. They want to lease a great home in a safe neighborhood with great schools and easy access to jobs. They want professional services and genuine care, and they want flexibility and convenience that allows them to live more freely. 12 years ago, a lot of these options either didn't exist or weren't readily available. Today, they all do, thanks to the hard work and the commitment of our associates, thanks to the mission of this company that together with you, we make a house a home, and thanks to the hundreds of thousands of residents who have put their trust in us to do exactly that. Last year marked many important milestones for Invitation Homes.
We returned to a more sustainable growth profile, while continuing to expand and improve on the overall resident experience. It was a year in which we helped our homebuilder partners start construction on thousands of much needed new homes across the country. It was a year in which we recycled over $500 million of capital, selling nearly 1,500 homes on the MLS, predominantly to homeowners. And it was a year in which we executed one of the more significant portfolio acquisitions in our company's history. We are excited to continue this momentum into 2024, as we expand on what it means to live in an Invitation Home. By this, I'm referring to last month's announcement that our industry-leading operating platform is now available to not just our residents and joint venture partners, but also to large portfolio owners who are seeking the best in single-family property management for their residents and the best in single-family asset management for their investors.
Let me be really clear here. We believe providing professional property and asset management services is both a logical next step for our business, as well as a strategic significant leap forward. It empowers us to accretively leverage our platform in a capital-light manner, while helping us to achieve further scale, increased efficiency and additional margin expansion for our company, and substantial savings and convenience for our residents. It all began with last month's inaugural agreement to become the property and asset manager on over 14,000 single-family homes. We expect this agreement to drive incremental AFFO of a couple of cents per share in 2024. This results from meaningful property management and asset management fees that we believe fairly compensate us for our unrivaled capability, scale and expertise.
In addition to this, we'll also earn an outsized share of value-add service revenues such as from smart home, bundled Internet and other initiatives we may roll out in the future, along with potential future incentives, based on the operating and financial performance we're able to drive over time. We believe this inaugural agreement is the first of what could be many such arrangements. As we pursue additional opportunities, we expect professional management to help us build and grow strategic relationships, while we continue to become even more efficient through greater density, improved procurement, better resident engagement and thoughtful use of data and technology. Most importantly, as in other REIT subsectors, we expect professional management can help us create a pipeline of potential future acquisition opportunities for homes about which we'll have an information advantage.
In the meantime, we believe the fundamental tailwinds for our business will continue to drive outsized NOI and earnings growth relative to other REIT property types. This includes a well-documented lack of new housing supply across our markets, as well as the strong demand from a surge of young adults who are just starting to reach our average new resident age in their late 30s. These younger generations often favor experiences over possessions and prefer convenience and flexibility over financial anchors and 30 year contracts. It's also important that we underscore the massive savings from leasing a home today versus owning. Using John Burns' fourth quarter data as weighted by our markets, it is $1,200 per month less expensive to lease a home than to own it.
That's an average savings for our residents of over $14,000 a year. We see this reflected in our latest surveys, in which a substantial majority of our new residents say that our rents and services are affordably priced. One of these services, which we just started to provide last year completely free of charge, is Esusu's positive credit reporting program. Already, over half of our residents have improved their credit score since enrolling, with the average credit score improvement of about 35 points. This could help our residents achieve thousands of dollars in lifetime savings on their borrowing costs, further enhancing the value proposition for leasing a home with us. In summary, we're very proud of the choices we offer individuals and families to live in a great home without the high costs and burdens of home ownership.
We remain committed to investing in our technology, systems, value-add services and other tools to help our residents thrive. And we're excited by how we can continue to grow our business, further enhance the resident experience and meaningfully broaden the professional services we offer. In this regard, we truly believe we are just getting started. With that, I'll pass the call on to Charles Young, our President and Chief Operating Officer.
Charles Young: Thanks, Dallas. Our fourth quarter operating results were a solid finish to close out the year. In particular, our teams worked hard to deliver strong same store NOI growth, occupancy and resident service. In 2023, we saw a return to more normal patterns of rent growth, seasonality and lease compliance. And as Dallas mentioned, it was a year of working towards several new milestones, including our large portfolio acquisition in July and getting prepared to provide professional third party management services. Our local market teams continue to take all of this in stride. It's what we do, they often tell me, and I'm very grateful for their attitudes and achievements. Thanks to these strong efforts, I am pleased to see how efficiently and effectively we have onboarded these new homes, engaged with our new residents and rolled out desirable new services.
I'll now walk you through our operating results in more detail. Same store NOI growth of 5.6% in the fourth quarter brought our full-year 2023 same store NOI growth to 4.8%. Same store core revenues in the fourth quarter grew 5.9% year-over-year. This increase was driven by average monthly rental rate growth of 5.3%, an 11.2% increase in other income, and a 50 basis point year-over-year improvement in bad debt. That marks three consecutive quarters of improvement in bad debt. I'm pleased to see lease compliance continuing to move in the right direction, while at the same time, also seeing our new residents' household income reach its highest level to date, just shy of $150,000 a year on average during 2023. This represents an income-to-rent ratio of 5.4 times that is indicative of the high quality, location and desirability of our homes.
Returning to same store growth results, full-year 2023 same store revenue growth was 6.5%, while full-year same store core expense growth was 10.3%. The main drivers of this expense growth included the temporary cost of working through our lease compliance backlog, which drove higher property administrative and turnover cost, as well as higher property tax and insurance expense. By contrast, repairs and maintenance expense came in flat for the full-year 2023, a testament to moderating inflation pressures and our team's ability to effectively control costs. Next, I'll cover leasing trends in the fourth quarter 2023. As we typically do in the slower winter leasing season, we prioritized higher occupancy in the fourth quarter to better position our portfolio as we head into our upcoming peak leasing season.
As a result, same store average occupancy grew each month, averaging 97.1% in the fourth quarter. In addition, new lease rate growth was flat during the quarter, representing an expected return to more normal seasonal trends, while renewal lease growth of 6.8% was the highest we've seen in the fourth quarter other than during the pandemic. As renewals comprise a substantial majority of our leasing business, this strong result drove a fourth quarter blended rent growth of 4.6%. I'll now also share our January 2024 same store leasing results. We started the year off with an increase in average occupancy to 97.5%. In addition, January blended rent growth was 3.5%, comprised of renewal rent growth of 5.9% and a negative new lease growth of 1.5%.
Early indications lead us to believe that new lease rates have already begun to turn positive again in February's activity to date. In combination with the favorable tailwinds that Dallas mentioned and the strong delivery by our teams, we believe we are well positioned to capture strong demand for our homes as we enter the traditional peak leasing season later this month and to continue to provide the best resident experience in the industry. I'll now turn the call over to Jon Olsen, our Chief Financial Officer.
Jonathan Olsen: Thanks Charles. Today, I'll cover the following topics: first, an update on our investment-grade rated balance sheet and the capital markets; second, financial results for the fourth quarter and full-year 2023; and finally, 2024 full-year guidance. Leading off with the balance sheet, I'll start with several of our team's key accomplishments in 2023. These include $800 million of senior notes that we issued at approximately 5.5% in August, as well as outlook or ratings upgrades from all three of our corporate credit rating agencies during the year. We ended 2023 with $1.7 billion in available liquidity, which includes $700 million of unrestricted cash and $1 billion of capacity on our undrawn revolving credit facility.
Our net debt to adjusted EBITDA ratio improved to 5.5 times as of December 31, 2023, down from 5.7 times as of the year prior. And 99.4% of our total debt was fixed rate or swapped to fixed rate as of year-end 2023, with over 75% of our total debt unsecured and no debt reaching final maturity prior to 2026. I'm really pleased by the meaningful execution our teams delivered last year and believe our balance sheet continues to offer us strong positioning to achieve our goals in 2024 and beyond. I'll now cover our recent financial results and year-over-year growth. Core FFO for the fourth quarter 2023 was $0.45 per share, an increase of 4.6%, while core FFO for the full-year 2023 was $1.77 per share, an increase of 6%. AFFO for the fourth quarter 2023 was $0.38 per share, an increase of 5.8%, and AFFO for the full-year 2023 was $1.50 per share, an increase of 6.3%.
These strong results were primarily driven by higher same store NOI during the quarter and full year. The last thing I'll cover is 2024 guidance. This is led by our expectation for same store NOI growth in a range of 3.5% to 5.5%, resulting from expected same store core revenue growth in the range of 4.5% to 5.5% and same store core expense growth in the range of 5.5% to 7%. Our same store core revenue growth guidance assumes 2024 average occupancy will be similar to our full year 2023 result. In addition, guidance assumes same store blended rent growth in the high-4% to low-5% range and continued improvement in our bad debt as a percentage of rental revenue to an expected range of 65 basis points to 95 basis points. Our same store core expense growth guidance assumes higher fixed expense growth to continue in 2024, with property tax expense growth in a range of 8% to 10% and insurance expense growth in the mid-to-high teens.
We expect this to be partially offset by moderating growth in our controllable expenses. From a timing perspective, we anticipate same store NOI growth will be higher in the second half of the year than in the first half. All of this brings our full-year 2024 core FFO guidance to a range of $1.82 to $1.90 per share. This guidance assumes as a base case that we will acquire between $600 million and $1 billion of homes on balance sheet in 2024, mostly from our homebuilder partners and via portfolio acquisitions. We expect to fund much of these home purchases by continuing to accretively recycle capital from wholly-owned dispositions in an expected range of between $400 million and $600 million. A detailed bridge of 2023 core FFO per share to the midpoint of our 2024 guidance is included within last night's earnings release.
Lastly, we provided full-year 2024 AFFO guidance in a range of a $1.54 to $1.62 per share. As a result of our anticipated growth in AFFO per share in 2024, last month, we increased our quarterly dividend by nearly 8% to $0.28 per share. In closing, we plan to keep a close eye on the capital markets throughout the year and continue our long track record of being disciplined and proactive. We'll prudently pursue opportunities for meaningful growth and accretive capital recycling, and we'll continue to lead the industry in our quest to provide the best choices, convenience and overall resident experience for the millions of Americans who prefer to lease a single-family home. With that, we have now concluded our prepared remarks. Operator, please open the line for questions.
Operator: [Operator Instructions] Our first question comes from Michael Goldsmith from UBS. Please go ahead. Your line is open.
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