--- title: Invitation Homes (INVH) description: A real-time case study in active portfolio management. Portfolio Managers move forward with attractive opportunity, despite whistleblower lawsuit. image: https://blog.armadaetfs.com/hubfs/Asset%20Management%20on%20the%20Mechanism%20of%20Metal%20Cogwheels..jpeg --- [![armada-etf-advisors-1_web](https://blog.armadaetfs.com/hs-fs/hubfs/armada-etf-advisors-1_web.png?width=200&height=43&name=armada-etf-advisors-1_web.png)](https://www.armadaetfs.com/) - [HOME](https://www.armadaetfs.com/) - [HAUS](https://www.armadaetfs.com/haus) - [INSIGHTS](https://blog.armadaetfs.com) - [VIDEOS](https://www.armadaetfs.com/videos/) - [TEAM](https://www.armadaetfs.com/team/) - [CONTACT](https://www.armadaetfs.com/contact) Single Family Rental # Invitation Homes (INVH) A real-time case study in active portfolio management. Portfolio Managers move forward with attractive opportunity, despite whistleblower lawsuit. [Al Otero](https://blog.armadaetfs.com/author/al-otero) Apr 26, 2022 --- ### ![Asset Management on the Mechanism of Metal Cogwheels.](https://blog.armadaetfs.com/hs-fs/hubfs/Asset%20Management%20on%20the%20Mechanism%20of%20Metal%20Cogwheels..jpeg?width=1000&name=Asset%20Management%20on%20the%20Mechanism%20of%20Metal%20Cogwheels..jpeg) ### INVH in Hot Water Amidst Whistleblower Lawsuit In mid-February of 2022, several weeks prior to the launch of the HAUS ETF, Invitation Homes (INVH), the largest owner/operator of single-family rental (SFR) homes in the US disclosed on its fourth quarter 2021 earnings conference call that a whistle blower lawsuit had been filed against the company in the state of California. Our understanding is that California law allows private individuals to file whistle blower lawsuits against corporations and to potentially share in the damages (typically in the range of 15-25%), subject to court approvals. ### California AG passed the lawsuit to Individual Cities The suit alleges that INVH renovated thousands of homes across 18 cities (over a multi-year period) and failed to pay permitting fees and commensurate incremental property taxes related to the renovated homes. The California attorney general opted not to pursue the case but passed it along to the individual cities involved to evaluate. As of this writing, ten cities have declined to move forward on the case and the remaining eight are still pending. ### Suit Escalated to Federal Level with over $70m at Risk Irrespective of the outcome at the municipal level, the whistleblower is proceeding with the suit in state court and INVH has requested that the venue be moved to the Federal court. Commentary from at least one independent third-party expert has conjectured that the liability associated with not properly permitting work on upwards of 7,000 housing units under question could be in the range of $10,000 per unit or $70.0 million. This estimate does not include any assumption for incremental property taxes nor does it take into consideration the larger risk that the behavior was systemic and could potentially impact a larger percentage of the portfolio across multiple states. [\[1\]](https://blog.armadaetfs.com/invitation-homes-invh#_ftn1) ### HAUS Takes a Meaningful Position in SFR Sub-sector Leading up to the “creation basket” transaction for HAUS on March 1, 2022, the SFR sub-sector represented approximately 12% of the investable universe with larger market capitalization name, Invitation Homes (INVH) representing just under 8% and its smaller peer American Homes 4Rent (AMH) approximating 4.2% of the sub-sector weight. (Based on FTSE NAREIT All REIT Index Weightings at 12/31/21. The FTSE NAREIT All Equity REITs Index is a market capitalization-weighted, free-float adjusted index of US equity REITs. All tax-qualified REITs having more than 50% of total assets in qualifying real estate assets other than mortgages secured by real property are included in the index). In creating the SFR basket for HAUS, we elected to take an overweight stance on the sub-sector with an allocation of 14%. The constituent breakdown was 6.80% to AMH and 5.66% to INVH. The end result was taking a meaningful position in the sub-sector driven by a highly attractive fundamental outlook, while also deemphasizing the sector bellwether even though its common shares had underperformed its residential peers by a consider margin as a result of the litigation discussed above ### INVH Outcome  More recently, the share price of INVH has recovered a meaningful amount from the time of its mid-February disclosure, having traded from the low-$37/share range back up to $41/share. We have not received any additional clarity on the lawsuit, however there is an expectation that a settlement is a higher probability outcome than a trial and this outcome could come by the end of the third quarter. [\[1\]](https://blog.armadaetfs.com/invitation-homes-invh#_ftn1) (This outcome predicated on an assumption of no additional adverse announcements.) With the recent recovery in INVH’s share price, we have trimmed the position moderately, and it is no longer a Top 10 holding of the fund. ### Legal Matters Affect on Portfolio Construction Methodology  It is our belief and perspective that legal matters such as the one recently announced by INVH warrant a “tactical” classification within our portfolio construction methodology as the ebb and flow of news related to the legal proceedings can trump the operating fundamentals on the ground. It is also during these periods of potentially heightened stock specific volatility that we rely upon the collective backgrounds and wisdom of our team and their experience in the industry. As we consider the risk that the accusations made against the company could have slipped beyond the financial controls and best practices that we believe to be in place, we are emboldened by the leadership and independence of the company’s board of directors as well as the stewardship demonstrated to date by the senior management team ### Creating a Buffer via Proactive Flexibility  We are comfortable that our current portfolio positioning in INVH fairly captures the near-term volatility and risk that could result from the dissemination of additional information related to the lawsuit. We are also confident that the quality and scale of the INVH portfolio, which was painstakingly accumulated over the past two decades, coupled with the platform and operating synergies of the organization provides a buffer to the extent that we see a material dislocation in stock price versus underlying property value and thus we have the flexibility to proactively add to our stock position as warranted. **Investors should consider the investment objectives, risks, charges and expenses carefully before investing. For a prospectus or summary prospectus with this and other information about the Fund, please call [(800) 693-8288.](tel:8006938288)Read the **[**prospectus**](https://www.armadaetfs.com/haus/prospectus)** or **[**summary prospectus**](https://www.armadaetfs.com/haus/summary-prospectus)** carefully before investing.** Footnotes: \[1\] Mizuho Securities USA LLC: REITS Research, March 3, 2022 – Invitation Homes Inc.; By Haendel St. Juste and Vikram Malhotra [Single Family Rental](https://blog.armadaetfs.com/tag/single-family-rental) [Active Management](https://blog.armadaetfs.com/tag/active-management) ## Similar posts Residential REITs ### [Residential REITs: Balance Sheets Built to Last](https://blog.armadaetfs.com/residential-reits-balance-sheets-built-to-last) Shedding some light on the balance sheet characteristics of the Top 10 holdings (constituting roughly 70% of the total portfolio) within HAUS. Al Otero Oct 31, 2022 REIT ### [Single Family Rental - Earnings Deep-dive](https://blog.armadaetfs.com/single-family-rental-earnings-deep-dive) The much-discussed housing shortage playing out across the US is also a key reason for historically low levels of resident turnover within SFR... Al Otero Apr 4, 2022 REIT ### [Demographic Trends & REIT Investing](https://blog.armadaetfs.com/demographic-trends-and-reit-investing) When looking at the investor presentations from some of the largest Apartment REITs, we can analyze where their portfolios are growing and which... Armada Jan 31, 2023 ### Sign Up For Armada ETF Email Updates, Delivered Straight To Your Inbox. 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The fund is new and has limited operating history to judge. **Risks of Investing in the Funds:** The Funds are classified as non-diversified investment companies. The Funds may invest a greater portion of assets in the securities of a single issuer or a smaller number of issuers than if they were diversified funds. To the extent that either Fund invests in other funds, a shareholder will bear two layers of asset-based expenses, which could reduce returns compared to a direct investment in the underlying funds. Through investments in REITs, the Funds are subject to the risks of investing in the real estate market, including decreases in property revenues, increases in interest rates, increases in property taxes and operating expenses, legal and regulatory changes, a lack of credit or capital, defaults by borrowers or tenants, environmental problems, and natural disasters. The Fund smay invest in derivatives, which are often more volatile than other investments and may magnify the Funds’ gains or losses. The HAUS Fund may invest in debt securities which are subject to the risks of an issuer’s inability to meet its obligations under the security; failure of an issuer or borrower to pay principal and interest when due; and interest rate changes affect the prices of fixed income securities. In addition, an increase in prevailing interest rates typically causes the value of existing fixed income securities to fall and often has a greater impact on longer duration and/or higher quality fixed income securities. The PRVT Fund invests in mortgage-backed securities (MBS), which are subject to the risks generally associated with fixed-income securities and mortgage-backed securities. Delinquencies and defaults by borrowers in payments on the underlying mortgages, and the related losses, are affected by general economic conditions, the borrower's equity in the mortgaged property, and the borrower's financial circumstances. In addition, an increase in prevailing interest rates typically causes the value of existing fixed income securities to fall and often has a greater impact on longer duration and/or higher quality fixed income securities. Unlike typical exchange-traded funds, there are no indexes that the Funds attempt to track or replicate. Thus, the ability of the Funds to achieve their respective objective will depend on the effectiveness of the portfolio manager. In general, ETFs can be tax efficient. ETFs are subject to capital gains tax and taxation of dividend income. However, ETFs are structured in such a manner that taxes are generally minimized for the holder of the ETF. An ETF manager accommodates investment inflows and outflows by creating or redeeming “creation units,” which are baskets of assets. As a result, the investor usually is not exposed to capital gains on any individual security in the underlying portfolio. However, capital gains tax may be incurred by the investor after the ETF is sold. The Fund is recently organized, giving prospective investors a limited track record on which to base their investment decision. Investment Objective: The Home Appreciation U.S. REIT ETF (HAUS) seeks total return. For current holdings and performance click [here](https://www.armadaetfs.com/haus/). Investment Objective: The Private Real Estate Strategy via Liquid REITs ETF (PRVT) seeks total return. For current holdings and performance click [here](http://www.armadaetfs.com/prvt/). Distributed by Foreside Fund Services, LLC. Foreside is not affiliated with Armada ETF Advisors, Tidal ETF Services or Thryve Communications. 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