Invitation Homes: Benefitting from Moves to the Suburbs?

Ticker: INVH

Rating: Overweight

Price Target: $40

Target Date: 4 months, and also bullish over a multi-year horizon

We are initiating coverage of Invitation Homes (INVH) with an overweight rating and a $43 price target. We see (INVH) benefitting from secular tailwinds, as its rental properties are tailored to the millennial demographic and located in some of the hottest real estate markets in the US. We also view management’s execution on the bottom line (profitability and earnings) as being very strong.

Let’s double click into some of these metrics.

First, let’s look at their real estate portfolio.

Invitation Homes owns the largest single-family rental real estate investment trust portfolio of over 80,000 single family rental homes. The company focuses on owning homes in the starter and move-up segments of the housing market with an average sale price below $300,000 and its properties are generally less than 1,800 square feet. The portfolio is geographically diversified across 16 target markets that feature high employment and household formation growth with roughly 70% of the portfolio in the Western U.S. and Florida. More specifically, of the 16 U.S. markets, approximately 37% of its homes in the Western United States, 31% in Florida, and 22% in other Southeastern markets.  We view their exposure to Florida homes as being a tailwind for the stock, as data shows an increasing number of people moving towards Florida and claiming Florida as their home state for tax purposes. A large number of Florida properties, coupled with exposure to suburban properties outside (but near) major cities in the western and southeast regions put INVH in a position to capitalize on a broader trend that we’re seeing across the country of people fleeing cities and moving towards more suburban neighborhoods, as they look to situate themselves for remote work environments that don’t require them to be so close to the office.

The cost of renting is lower than homeownership in 15 out of 16 of the portfolio's markets, which gives the company substantial pricing power and enables it to grow Year over Year revenue by simply raising rents for existing occupants. This is obviously beneficial for Invitation Homes business, because we don’t expect they’ll see much churn or pushback from tenants in response to rent increases, as the opportunity cost of buying versus renting, or switching rental properties typically outweighs accepting a higher rent cost.

INVH caters almost exclusively to the younger demographic, who we believe is likely to remain as renters, not buyers, over the next several years.

Invitation Homes focuses on renting newer homes to younger tenants, as the majority of its properties are under $300,000 in price and less than 1,800 square feet per unit. This coincides with a generation of millennials who have delayed many adult milestones but will probably move to the suburbs in greater numbers over the next decade as they age and start families. Given that millennials entered the workforce during or after the great depression, their net worth and available assets are significantly behind previous generations that rushed to buy homes in their 20s. Because of this, it is likely that the millennial generation will likely look to rent single-family homes when they move to the suburbs.

In addition, as you’ve probably seen in the news, housing prices are higher than they’ve ever been as people have been leaving cities and rushing for the suburbs. High housing prices should be an additional factor discouraging millennials from buying in the housing market, continuing to make renting a more attractive option.

Okay, the portfolio is clearly strong. Let’s talk about their profitability, and how much money these rental properties actually bring in.

The company benefits from economies of scale at the bottom line, as its size gives it ability to control maintenance costs, as it can hire its own maintenance and repair technicians to service its properties. This is a substantial positive for operating margins, as Invitation Homes can charge the same rate as its competitors but realize greater profitability because it does not have to contract out (more expensive alternative) maintenance labor. Additionally most of Invitation Homes portfolio has been recently renovated, so capital expenditures and any additional renovation costs should be minimal in the near future, keeping costs tightly controlled.

Overall, we believe Invitation Homes is well positioned to benefit from broader trends in the market of millennials renting in the suburbs. We view INVH’s geographical footprint as being well positioned to benefit from migration trends to Florida and the Southeast, and a broader move to the suburbs and out of cities. While we see $44 as a realistic price target, we are also confident in INVH as a multi-year story, as millennials continue to move to the suburbs over the next several years.