Company Reports

The US REIT sector remains significantly undervalued, in our perspective. While the pandemic hurt REIT valuations in 2020, the recovery of fundamentals across most sectors combined with low interest rates led to strong total returns in 2021 and early 2022. However, despite fundamentals continuing to perform well over the past two years, with many REITs reaching historical levels of net operating income growth, the sector has underperformed the broader equity markets over the past two years. We believe that the cause has been the sector’s negative correlation with interest rates as income-oriented investors rotate out of the sector, higher rates lower the value REITs can create with external growth, and property valuations fall in line with higher rates. However, we don’t believe that higher rates significantly change our fair value estimates for the sector. Additionally, interest rates are down from the October 2023 highs, and REIT share prices have generally inversely followed the movements of the US 10-year Treasury.

First-quarter results for Invitation Homes were in line with our expectations, leading us to reaffirm our $41 fair value estimate for the no-moat company. Same-store occupancy improved 50 basis points sequentially to 97.6%, better than our estimate of flat growth. Average monthly rents increased 4.6% year over year, leading to same-store revenue growth of 5.6%, which was slightly better than our estimate of 5.1%. However, same-store operating expenses were up even higher, increasing 7.4% in the first quarter. As a result, same-store net operating income increased 4.7% in the quarter, which was in line with our estimate of 4.6%. Invitation Homes reported core funds from operations of $0.47 per share, which was in line with our estimate and 6.0% higher than the $0.44 reported in the first quarter of 2023.

We believe that there are several attractive opportunities across the US REIT sector for investors to consider. Following the recovery of many REIT sector fundamentals from the pandemic by mid-2021, we viewed the REIT sector as fairly valued through early 2022. However, the past two years have seen the rapid rise in interest rates and a slowing economy, which has led to major valuation declines across the sector. Our analysis of the REIT sector over the past 25 years suggests that the relative stock performance of REITs is negatively correlated with interest rate movements. The second and third quarters of 2023 saw large interest rate increases with the 10-year Treasury approaching 5%, which led to the sector underperforming. This occurred even as many REITs reported same-store net operating income, or NOI, growth at historical highs in 2022 due to high inflation. Higher interest rates, lower liquidity, tighter capital market conditions, and decelerating same-store NOI growth all led to a significant correction in the stock price for many REITs.

Invitation Homes is the largest single-family rental real estate investment trust with a portfolio of over 84,000 homes. The portfolio is geographically diversified across 16 U.S. markets with approximately 37% of its homes in the Western United States, 31% in Florida, and 22% in other Southeastern markets. The cost of renting is lower than homeownership in most of the portfolio's markets, which supports high occupancy and should allow the company to pass along significant rent increases without much pushback. The company's size gives it some economies of scale in terms of controlling costs as it can hire its own maintenance and repair technicians to service its homes, allowing it to maintain higher operating margins than smaller competitors that need to contract out the same services. The company regularly recycles capital by selling noncore assets and using the proceeds on higher-quality acquisitions with better growth prospects.

New single-family home sales increased 4% in 2023 to 666,000 units, as homebuilders capitalized on a dearth of existing for-sale inventory while also offering more sales incentives, cutting base home prices, and building smaller homes to improve affordability. By the fourth quarter of 2023, homebuilders began to pull back on sales incentives as the average 30-year fixed mortgage rate retreated from 7.62% in October 2023 to 6.64% in January 2024. However, mortgage rates have trended higher recently, and we now forecast the average 30-year fixed rate will be 6.50% in 2024, up from our previous forecast of 6.10%. Even so, that’s lower than the 2023 average of 6.81%, and we think homebuilders won’t hesitate to increase sales incentives if needed; they still enjoyed above-average gross profit margins last year with elevated incentives. As such, in 2024, we think new-home sales will increase 9% to 730,000 units and single-family housing starts will increase 4% to 985,000 units. However, we expect total housing starts will decline roughly 5% to 1,345,000 units due to a 23% decline in multifamily starts to 360,000 units, as there’s currently approximately 1,000,000 multifamily units under construction—the largest backlog in at least 50 years.

Invitation Homes reported fourth-quarter results that were in line with our estimates, giving us confidence in our $41 fair value estimate for the no-moat company. Same-store occupancy improved by 10 basis points sequentially to 97.1%, slightly better than our estimate of flat growth. Average monthly rents increased 5.3% year over year, which was in line with our estimate of 5.2% growth and drove same-store revenue growth of 5.9% for the quarter. Same-store operating expense growth of 6.6% in the fourth quarter was slightly higher than our 4.1%, leading to same-store net operating income, or NOI, growth of 5.6% that was slightly below our 6.8% estimate. The company reported core funds from operations, or FFO, of $0.45 per share that matched our estimate for the fourth quarter and was two cents better than the $0.43 figure the company reported in the fourth quarter of 2022.

New-home sales have rebounded since the spring of this year as sales incentives and price reductions have attracted buyers who have fewer options in the supply-constrained existing-home market. That said, homebuilder sentiment data tells us that smaller builders remain cautious. Even so, we forecast single-family starts to increase by 3% in 2024, to 0.92 million units. However, we project this increase in single-family starts will be more than offset by a 24% decline in multifamily starts, to 0.36 million units. Multifamily construction has been robust for the past three years, but a record construction backlog and higher construction and financing costs have tamed developers' appetite for new multifamily projects.

Third-quarter results for Invitation Homes were in line with our expectations, leading us to reaffirm our $41 fair value estimate for the no-moat company. Same-store occupancy fell 70 basis points sequentially to 96.9%, relatively in line with our estimate of 97.0%. Meanwhile, average rents increased 6.2% year over year, close to our estimate of 5.9% growth for the third quarter, which led to same-store revenue growth of 6.0%. Same-store operating expenses remain elevated with the company reporting 10.2% year-over-year growth, though expense growth has been decelerating each quarter since the company reported what appears to be the peak of 16.3% growth in the fourth quarter of 2022. As a result, same-store net operating income grew 4.0% in the third quarter, which is below our estimate of 5.8% growth. Still, Invitation Homes reported core funds from operations of $0.44 per share in the third quarter that matched our estimate and is up $0.02 from the $0.42 figure the company reported in the third quarter of 2022.

Invitation Homes is the largest single-family rental real estate investment trust with a portfolio of nearly 83,000 homes. The portfolio is geographically diversified across 16 U.S. markets with approximately 40% of its homes in the Western United States, 32% in Florida, and 18% in other Southeastern markets. The cost of renting is lower than homeownership in most of the portfolio's markets, which supports high occupancy and should allow the company to pass along significant rent increases without much pushback. The company's size gives it some economies of scale in terms of controlling costs as it can hire its own maintenance and repair technicians to service its homes, allowing it to maintain higher operating margins than smaller competitors that need to contract out the same services. The company regularly recycles capital by selling noncore assets and using the proceeds on higher-quality acquisitions with better growth prospects.

The share prices of U.S. real estate investment trusts have fallen by approximately 30% from their 2021 highs because of higher interest rates and stress in some commercial real estate sectors. We think that the correction is overdone and the current valuations offer an attractive entry point for patient investors. Our core REIT coverage is trading at a discount of approximately 25% to our fair value estimate. We estimate that the average REIT within our U.S. coverage is currently trading at a dividend yield that is 126 basis points higher than the historical average. We see marked differences in valuation across different REIT sectors in the United States. For instance, the industrial sector is fairly valued, with stock valuations already accounting for future growth, but other sectors like offices, hotels, and malls are trading at attractive discounts.

New-home sales have remained resilient despite worsening housing affordability in recent months amid rising mortgage rates, with little relief in home prices in most markets. Year-to-date new-home sales through July were about even with the year-ago period, compared with a 22% decline in existing-home sales. The key to homebuilders’ relative success this year has been their ability to improve affordability by offering sales incentives, lowering base prices, and building smaller homes. According to the National Association of Home Builders, the share of builders offering incentives was 55% in August, up from 52% in July but down from 62% last year. One fourth of homebuilders reported lowering base prices by 6% on average. Homebuilders have also boosted production of speculative homes to capitalize on the tight supply of existing for-sale homes. Spec building also helps builders better manage construction cycle times and costs.

Invitation Homes reported second-quarter results that were in line with our expectations, leading us to reaffirm our $40 fair value estimate for the no-moat company. Same-store occupancy fell 20 basis points sequentially to 97.6%, though that is slightly better than our estimate of 97.3% occupancy. Average rental rates increased 7.4% year over year, in line with our estimate of 7.3% growth, leading to same-store revenue growth of 5.9% in the second quarter. However, same-store operating expenses increased 11.2% in the quarter largely due to a 36.5% increase in turnover costs and a 46.9% increase in property administrative costs from higher lease compliance costs. As a result, same-store net operating income only grew 3.6% in the second quarter, though that is slightly better than our estimate of 2.8% growth. Invitation Homes reported core funds from operations of $0.44 per share in the second quarter, which matched our estimate and is 2 cents better than the $0.42 figure the company reported in the second quarter of 2022.

Through the first four months of 2023 (typically viewed as the “spring selling season” for homebuilders) new home sales significantly outperformed existing home sales. Indeed, April year-to-date new home sales declined roughly 10% year over year compared to over a 26% decline for existing home sales. New home sales improved sequentially during the first four months of the year, and April sales increased 11% year over year, albeit on an easy prior-year comparison (April 2022 new sales were down 24% year over year).

First-quarter results for no-moat Invitation Homes were slightly better than we anticipated, leading us to reaffirm our $40 fair value estimate. Same-store occupancy improved 50 basis points sequentially to 97.8%, better than our estimate of flat growth. Average rental rates were up 8.5% year over year, leading to same-store revenue growth of 7.7% that was just slightly ahead of our 7.2% estimate. However, same-store operating expenses were up 14.0%, in line with our estimate, with real estate taxes up 11.3%, personnel costs up 18.4%, costs related to turning over units up 45.7%, and utility costs up 64.5%. As a result, same-store net operating income was up 5.0%, which is less than the revenue increase but beat our 4.1% same-store NOI growth estimate. Core funds from operations came in at $0.44 per share in the first quarter, which is a penny better than our $0.43 estimate and 9.5% higher than the $0.40 figure reported in the first quarter of 2022.

Invitation Homes is the largest single-family rental real estate investment trust with a portfolio of over 83,000 homes. The portfolio is geographically diversified across 16 U.S. markets with approximately 43% of its homes in the Western United States, 30% in Florida, and 19% in other Southeastern markets. The cost of renting is lower than homeownership in most of the portfolio's markets, which supports high occupancy and should allow the company to pass along significant rent increases without much pushback. The company's size gives it some economies of scale in terms of controlling costs as it can hire its own maintenance and repair technicians to service its homes, allowing it to maintain higher operating margins than smaller competitors that need to contract out the same services. The company regularly recycles capital by selling noncore assets and using the proceeds on higher-quality acquisitions with better growth prospects.

U.S. home sales slowed significantly in 2022 as rising mortgage rates and elevated home prices made homeownership less affordable for more Americans. By mid-2022, the average 30-year fixed mortgage rate had increased roughly 300 basis points year over year to over 6%. According to estimates from the National Association of Home Builders, this rate increase priced out more than 16 million households. We also think higher rates and general economic uncertainty caused some qualified prospective buyers to move to the sidelines. All told, 2022 new- and existing-home sales declined 17% and 18% year over year, respectively.

Invitation Homes reported mixed results compared with our expectations for the fourth quarter, though we didn’t see anything that would materially change our $40 fair value estimate for the no-moat company. Same-store occupancy declined 20 basis points sequentially to 97.3%, slightly worse than our estimate of occupancy remaining flat. Average rental rates increased 9.4% year over year, relatively in line with our estimate of 9.0% growth, leading to same-store revenue increasing 7.6% year over year. However, the company reported an 18.3% growth in property taxes paid as the under-accrual of taxes paid in the first three quarters of the year led to a high catch-up bill in the fourth quarter. Combined with repair costs increasing 14.8% and turnover costs increasing 54.0%, Invitation Homes reported same-store operating expense growth of 16.3% that was well above our estimate of 5.2%. As a result, same-store net operating income, or NOI, growth of 3.7% fell short of our 8.9% estimate. However, core funds from operations, or FFO, of $0.43 per share came in ahead of our estimate of $0.42 as the company reported fewer miscellaneous costs than we anticipated in the fourth quarter.

Invitation Homes is the largest single-family rental real estate investment trust with a portfolio of over 83,000 homes. The portfolio is geographically diversified across 16 U.S. markets with approximately 37% of its homes in the Western United States, 30% in Florida, and 23% in other Southeastern markets. The cost of renting is lower than homeownership in most of the portfolio's markets, which supports high occupancy and should allow the company to pass along significant rent increases without much pushback. The company's size gives it some economies of scale in terms of controlling costs as it can hire its own maintenance and repair technicians to service its homes, allowing it to maintain higher operating margins than smaller competitors that need to contract out the same services. The company regularly recycles capital by selling noncore assets and using the proceeds on higher-quality acquisitions with better growth prospects.

Third-quarter results for no-moat Invitation Homes were in line with our expectations, leading us to reaffirm our $42 fair value estimate. Same-store occupancy was down 50 basis points sequentially and 60 basis points year over year to 97.5%. Still, average rental rates increased 9.7% year over year, leading to same-store revenue growth of 8.3% which was in line with our 8.0% estimate for the third quarter. However, same-store operating expenses increased 7.6%, the largest increase in the company’s history, due to inflation driving a 15.4% increase in the cost of repairs and maintenance and a 15.2% increase in turnover-related expenses. As a result, same-store net operating income came in at 8.6%, and while that is in line with our 8.2% estimate for the third quarter, it is below the double-digit same-store NOI growth Invitation Homes reported over the past four quarters. Core funds from operations grew 9.5% in the third quarter to $0.42, in line with our estimate for the firm.

With the United States experiencing historically high inflation growth, many investors are wondering if real estate provides a natural hedge against inflation and if the REIT sector should therefore outperform the broader equity market. Many REITs in our coverage have reported rent and revenue growth at or near historic peaks over the past several quarters, with inflation being one of the largest reasons for the high growth. Given this and some historical evidence that REITs outperformed in the 1970s and early 1980s when inflation was similarly high, some investors are questioning why REITs have not outperformed in 2022.