Vertigo3d/E+ via Getty Images One of my goals has been to come to understand in detail how it is that REITs grow. The point is to be able to accurately estimate their relative value and to find the best investments.
For those new to REITs, here is a primer on REIT acronyms and jargon: Acronyms and jargon for REITs. Recently, I showed that the growth of AFFO/share can be found using only four variables. Importantly, two of them appear as the ratio of Investment AFFO Yield to Traded AFFO Yield.
Previously much of my focus for REITs had been only on Investment AFFO Yield. And this does matter, since it strongly impacts growth from retained earnings.
But in the context of issuing shares, Traded AFFO Yield also matters greatly. Having a low AFFO yield (and the corresponding low dividend) powerfully improves the ability to increase shareholder value by issuing shares.
This realization focused more of my attention on analyzing low-yield REITs, and in particular on Invitation Homes ( INVH ). I am now long INVH and am writing to share why. Invitation Homes Today
Invitation owns and operates single-family rental homes. They own 80,000 of them, and seek to have a minimum of 5,000 homes in their markets.
They emphasize sunbelt and western markets, as you can see here. This takes advantage of the high growth of jobs and incomes in these markets. Invitation Homes property map. Invitation has had a specific strategy since their IPO. They emphasize “infill locations,” where there is no threat that development will provide a big oversupply.
These locations are where people can be close to work and access good schools. They attract professionals with good incomes.
No wonder the average value of their homes is above $400,000. These are not in slums and not in cheap tracts distant from urban centers. A house owned by Invitation Homes. A few other features of Invitation deserve mention: High occupancy above 98%
Blended lease rent growth of about 10% (higher for new leases)
Investment grade BBB balance sheet
Debt Ratio of 40% continuing to drop
Good and improving debt maturity ladder
Participation in many channels of property acquisition
Favorable Context
You are very likely aware that America has been underbuilding houses since the Great Recession. Here is the plot relating to that which INVH shows. Housing permits history. This sets up a high-demand market overall that is likely to persist for a decade or more. Strong local growth exacerbates the shortage in many of the INVH markets.
What’s more, the population of young adults in the age range where the number of people ready to be in houses is about to increase significantly: Demographics of demand. In short, the demand picture for single-family rentals is positive. And while there is A LOT of supply coming into that category, it can’t get to the infill locations emphasized by Invitation. Some Relevant History
Invitation faced quite a few challenges upon their listing as a REIT less than 5 years ago. They have made excellent progress in quickly working through them. Here are remarks about some of them.
First, they had far too much debt, with a Debt Ratio above 50% and Debt/EBITDAre at 10.7. They have pulled both of these down rapidly, so that the Debt Ratio is now 40% and they project getting Debt/EBITDAre below 6 in 2022.Rapid debt reduction often impedes the growth of shareholder value. That did not happen here; AFFO/sh has grown at a CAGR of 13% since the IPO. In context, this was extraordinary performance. One key aspect is their high level of retained earnings, discussed further below.Second, their interest rates were far too high and they suffered from lack of access to bond markets. In 2017, interest expenses were above 40% of NOI.With their investment-grade rating and bond issuance, interest expenses on new acquisitions now run only 20% of NOI.Third, they wanted to reposition quite a bit of their portfolio. They merged with Starwood Waypoint Homes in 2017, which was important as a way to add scale.For the next couple of years Invitation was selling about 5% of their properties each year and recycling the capital into properties more aligned with their focus. The rate of recycling has dropped a lot over the past couple of years.That merger also left Invitation holding some convertible notes, with the attendant potential for shareholder dilution. The last of these matured this month.Fourth, in Q3 of 2020 Invitation announced the establishment of a Joint Venture to access an additional $1B of capital […]
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