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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 portfolios.
In Q4 renters continued to choose single-family option
The fourth quarter of 2021 earnings season for the single-family rental (SFR) sector proved to be a continuation of the theme which had been playing out all year with pandemic induced demographic trends leading to more renters choosing the single-family option which provides greater flexibility for hybrid school and work. The industry also benefited from being geographically weighted towards suburbs and exurbs in sunbelt regions of the country that saw the highest propensity for employment growth prior to the pandemic and a continued influx of migrants and jobs once the pandemic took hold. The much-discussed housing shortage playing out across the US is also a key reason for historically low levels of resident turnover within SFR portfolios. This phenomenon not only positively influences rent growth and occupancy levels, but also helps keep operating expense growth under control as unit turnover costs are one of the larger expense items in the SFR sector.
Invitation Homes (INVH) showed signs of fiscal strength
Industry bellwether, Invitation Homes (INVH) reported sector leading statistics for 4Q21 with same-home revenue growth of 9.5%, expense growth of 3.1% and net operating income (NOI) growth of 12.6%. The blended rent growth for the period was 11.1% year over year, consisting of new lease rent growth of 17.3% and same-home renewal rent growth of 9.0%. Occupancy at the end of the year was an all-time high 98%+. Fourth quarter acquisition volume totaled $656 million and full year acquisitions came in at $1.95 billion. 1Even in light of the strong external growth volumes for the year, the company also managed to follow through on its balance sheet goal of reduced leverage and ended the year with a net debt/adj. EBITDA level of 6.2x, down from 7.3x for the prior year. The company was very active in the debt capital markets, achieving its inaugural foray into the public bond market and achieved an investment grade credit rating. In another sign of fiscal strength, the company raised its dividend by 29% in February. INVH ended the year with over $1.0 billion in liquidity.1
INVH continues JV with Pulte Homes to help tenants build home equity via "lease to own"
During the company’s earnings call, management highlighted the need to bring new housing supply to markets across the US and they have ramped up their efforts to assist with the housing shortage by announcing continued activity under their existing development joint ventures with builder, Pulte Homes and also announced a venture with Pathway Homes to help tenants build home equity via “lease to own” leasing structures. Looking out to 2022 guidance, the company is anticipating the strong fundamental environment to continue. Occupancy is expected to remain around 98%. Bad debt expenses, which had moved higher as a result of the pandemic, will improve in 2022, but remain at modestly elevated levels. Overall revenue growth, expense growth and NOI growth are projected to be 8.5%, 6% and 10%, respectively.1 These are very good operating metrics, but will represent a modest deceleration from those achieved in 2021.
One company specific item bears watching, a whistleblower lawsuit was filed the day before the earnings release. The suit alleges that contractors working for the company did not apply for proper municipal permits prior to initiating renovation work on homes.
American Homes 4Rent (AMH) reported strong operating metrics
American Homes 4Rent (AMH), also reported extremely strong operating metrics in 4Q21 with revenue up 14%, NOI advancing 9.8% and occupancy in excess of 95%. Management was extremely pleased with how the portfolio and operating team performed in 2021 and their confidence in the future was quantified in the form of an 80% raise to the common dividend during the year. 2022 will be driven by further initiatives in technology, which will better allow for scaling of the business model, and external growth via the internal development programs which AMH believes are achieving the highest risk-adjusted returns in the industry. The 2022 initial earnings guidance called for midpoint FFO growth of 14.7%, driven by same home revenue growth of 8.25%, operating expense growth of 5.75% and NOI growth of 9.5%. New investments, in the form of acquisitions and ground-up development are expected to be in the range of $1.7-$2.2 billion. Management hedged a bit on 2022 development deliveries stating that they will be negatively impacted by supply chain delays.2
Tricon Residential (TCN) achieved a 40% CAGR growth over the past 2 years
Rounding out the SFR category is Tricon Residential (TCN), which is the smallest and newest to the public market arena in the US. TCN is interesting in that it is growing off of a much smaller base of homes than its two larger peers and was able to achieve a 40% CAGR growth over the past two years, while reducing leverage and hitting record occupancy, turnover and rent growth. TCN ended 2021 with a net debt/ebitda multiple of 7.8x and has stated that they are comfortable to operate in the 8-9x range going forward. The company achieved 12% FFO growth in 2021 and put forth initial 2022 guidance calling for FFO growth of approximately 8%. They ended the year at 29,000 homes and are targeting 50,000 homes by 2024. On the expense side, TCN has seen higher increases from line items such as repairs and maintenance, insurance and homeowner association fees. They believe that they will benefit from margin improvements as the portfolio scales from here.3
Armada is constructive on the SFR sub-sector; view all HAUS holdings here
Net net, we continue to be constructive on the SFR sub-sector as the fundamental and operational backdrop looks quite compelling for 2022. All three companies are well positioned to benefit from the demographic shifts and migration patterns which continue to favor their lower cost, sunbelt market concentrations. Also, the rising cost of homeownership and lack of adequate new supply will weigh on affordability, adding to the numbers of renters by necessity. It is conceivable that rent growth will start to moderate from here as double-digit rent bumps are not sustainable longer term. It is also expected that the high levels of occupancy and low resident turnover numbers will gradually shift from tailwind to headwind.
EBITDA, or earnings before interest, taxes, depreciation, and amortization, is a measure of a company's overall financial performance and is used as an alternative to net income in some circumstances.
CAGR, or the compound annual growth rate, is the rate of return that would be required for an investment to grow from its beginning balance to its ending balance, assuming the profits were reinvested at the end of each period of the investment’s life span.
1 Invitation Homes Fourth Quarter 2021 and Full Year 2021 Results – February 15, 2022
2 American Homes 4 Rent Fourth Quarter and Full Year 2021 Financial and Operating Results – February 24, 2022