Invitation Homes Operating Partnership L.P. -- Moody's assigns a first-time Baa3 issuer rating to Invitation Homes; stable outlook

Rating Action: Moody's assigns a first-time Baa3 issuer rating to Invitation Homes; stable outlookGlobal Credit Research - 26 Apr 2021New York, April 26, 2021 -- Moody's Investors Service, ("Moody's") assigned a first-time Baa3 issuer rating to Invitation Homes Operating Partnership L.P., the operating subsidiary of Invitation Homes Inc. (collectively "Invitation Homes" or "INVH"). The rating outlook is stable.The stable rating outlook reflects INVH's large scale and good operational performance. The outlook incorporates the expectation that Invitation Homes will maintain its disciplined approach towards the balance sheet and continue to reduce its leverage levels. It is also expected that management will continue to selectively grow the portfolio and prudently manage its liquidity, while deepening its access to capital as it transitions to a more unsecured borrowing strategy.Issuer: Invitation Homes Operating Partnership L.P.- Issuer Rating, Assigned Baa3 Outlook Action: - Outlook, Stable RATINGS RATIONALE Invitation Homes' Baa3 issuer rating incorporates the REIT's dominant platform as the largest single-family rental (SFR) home operator in a highly fragmented sector, backed by a stable and flexible balance sheet with a good liquidity and funding profile to support growth. The rating also considers the REIT's experienced management team and its prudent financial and dividend policies. The large and substantially unencumbered portfolio is located in sought-after residential neighborhoods with attractive demand drivers and high-growth potential. Additionally, the business' operating performance has been resilient during the COVID-19 (coronavirus) crisis. Moreover, the REIT continues to benefit from the sector's strong underlying fundamentals and secular tailwinds due to persistently constrained supply, demographic changes and growing SFR demand.These credit strengths are offset by the company's elevated operating leverage (net debt to EBITDA) and secured debt levels, although significantly improved over the last four years. INVH has a limited history as a public company since its initial public offering in 2017, and operates a business that generally has high fixed operating costs, specifically real estate taxes and insurance. Furthermore, the institutional SFR space is small and relatively new, when compared to the professionally managed apartment sector, in terms of its breadth and depth as well as its performance record through different cycles of the market. Lastly, new or stricter housing policies or regulatory action to promote housing affordability or homeownership could affect the broader housing rental market and have a mixed, or a negative impact on the SFR space's profitability.With $20.0 billion in gross assets and a total portfolio of over 80,000 wholly-owned homes, INVH benefits from the economy of scale as the largest SFR leasing company in the US. Located in 16 core markets and across 235 submarkets, INVH's portfolio is nearly one and half times larger than its closest institutional competitor in terms of property count. In creating location density to drive operating efficiencies, the REIT has clustered its properties into 33 pods, each one consisting of approximately 2,400 homes. Atlanta, Southern California and South Florida are the portfolio's top three submarkets, generating approximately 38% of total revenues as of the close of 2020. The inherent geographic concentration risk is mitigated by the tight housing inventory and strong demand drivers in these submarkets, supported by rising home price appreciation.INVH also benefits from the boost in growing SFR demand due to the convergence of the undersupply of new single-family homes, tight existing inventory and demographic changes. The COVID-19 pandemic has had an adverse impact on all real estate property sectors, including housing. Compared to some of its housing REIT peers, Invitation Homes has performed more resiliently with an average same-property occupancy of 97.5% during 2020. For the full year period, the company's same-property core revenue and NOI growth rates rose year-over-year by 2.8% and 3.7%, respectively, with same-property new leasing and renewal rates growing by 4.2% and 3.7%, respectively. Despite a rise in bad debt expense to a high of 2.5% in the fourth quarter of 2020, total rent collections for the year remained strong at approximately 97% of the historical monthly billings collection rate of 99%. In addition, the cumulative tenant turnover rate for the year declined to a low of 26% from approximately 30% in the prior year, and the number of days to turn and to re-let homes decreased to a low of 36 days from 46 days in 2019. Overall, EBITDA margins (Moody's adjusted) remained healthy in the mid- to high 50% range. Notably, same-property occupancy rate rose to 98.3%, while same-property new lease growth and renewal growth rates accelerated to 8.3% and 4.4%, respectively in February 2021.Moody's considers Invitation Homes to have adequate liquidity and broad access to capital to meet its near-term obligations and to fund growth. As of 31 December 2020, the REIT had $213.4 million of unrestricted cash and cash equivalents and full borrowing capacity under its undrawn $1.0 billion unsecured revolving credit facility, which matures in 2025. The company is authorized to issue the remaining $500 million of common stock under its "At-the-market" continuous equity program, and expects to sell an additional $300 million of properties in 2021 under its annual asset/capital recycling. INVH has minimal near-term debt maturities through 2024, assuming the REIT's equity settlement of its 2022 convertible notes and full exercise of the extension options on its mortgage debt. Management has guided to complete approximately $1.0 billion of new acquisitions and renovations between itself and its joint venture partner, Rockpoint Group LLC. Given its various sources of capital, the REIT can fund the $75 million, or its 20% share, of the $375 million needed to capitalize the investment vehicle. In terms of shareholder distributions, management maintains a low adjusted FFO payout ratio in the mid-50% range, providing ample dividend protection as well as retained cash flow for future debt repayment or reinvestment.Lastly, the REIT's financial flexibility is supported by a sound fixed charge coverage ratio at 2.9x, providing some cushion against unexpected cash flow declines or spikes in interest expense. The unencumbered base is substantial, equal to approximately 61% of gross assets, as of year-end 2020.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGUpward rating movement would be predicated upon the REIT achieving the following criteria on a sustained basis: 1) total debt to gross assets approaching the mid-30% range; 2) net debt to EBITDA below 6.0x; 3) unencumbered assets greater than 70% of gross assets; 4) secured debt below 20% of gross assets and 5) demonstration of consistent access to the public capital markets.Downward rating pressure would be predicated upon the following criteria on a sustained basis: 1) total debt to gross assets approaching 45%; 2) net debt to EBITDA above 7.5x; 3) secured debt to gross assets approaching 30%; 4) a submarket generating more than 15% of total revenues and 5) any significant liquidity challenges or a meaningful decrease in the valuation of the unencumbered asset base.Headquartered in Dallas, Texas, Invitation Homes is an internally managed, vertically integrated REIT dedicated to the business of aggregating, owning, renovating, managing and leasing SFR homes. As of 31 December 2020, the REIT owned 80,177 homes (71,433 homes in the same-property portfolio) and 711 homes in two separate joint ventures.The principal methodology used in this rating was REITs and Other Commercial Real Estate Firms published in September 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1095505. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. 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Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1263068.At least one ESG consideration was material to the credit rating action(s) announced and described above.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Juan Acosta Asst Vice President - Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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