It is our view that a reset in the for-sale housing market will lead to “stronger for longer” fundamentals in single family rentals.
Single-Family-Rentals: Operating Expenses are up, but Business Still Performing
Higher operating expenses impacted the SFR industry in similar ways as the line item affected the broader rental housing sub-sectors.
There was a fair degree of commonality amongst the three single-family- rental (SFR) REITs this past reporting season as higher operating expenses impacted the SFR industry in similar ways as the line item affected the broader rental housing sub-sectors. High real estate taxes along with inflationary pressures on labor and supplies caused repairs and maintenance costs to drag on third quarter results and this trend will likely continue into the first half of 2023. On a more positive note, it appears that the public SFRs will reap benefits from their built-to-rent (BTR) development relationships and in-house expertise which they have been nurturing over recent years. The development channel is generating attractive returns relative to tradition acquisitions on the multiple listing services (MLS) and returns on development are expected to improve as input costs show signs of moderation.
American Homes 4Rent (AMH) reported somewhat mixed results for 3Q22 and set the stage for what we should expect going into 2023. Top line revenue growth remained strong in 3Q with 97.1% same-store occupancy and rental rate growth of 8.1% year-over-year. This result was down from 9.4% same-store revenue growth in 2Q22, but strong none-the-less. The disappointment was same-store operating expenses which were up over 6% in the period with large increases from insurance and property management, and resulted in a downward revision to same-store net operating income (NOI) expectations for the balance of the year, as well as a negative revision to funds from operations (FFO) guidance as well. The positives in the period included bad debt expense at a manageable 1.1% of revenue and an attractive return expectation on the development pipeline.
From a supply/demand perspective, the company should benefit from inventory levels which will remain near historic lows as expected housing permits trend below 1.0 million per year for the next several years. (Not enough to keep pace with demand) The company’s large market exposure to regions including Texas, Florida and Arizona bode well for fundamentals as these markets are seeing attractive “rent versus own” economics and are still benefiting from positive in-migration due to attractive costs of living and employment opportunities. At the end of 3Q, AMH’s balance sheet and liquidity remained “best in class”, with $1.6 billion of liquidity and a recent corporate debt upgrade from S&P Global Ratings to BBB.
Invitation Homes (INVH) recorded 3Q22 results which were similar to AMH. The overall top line revenue number showed resilient occupancy, ending the period above 97% occupied, in spite of a 60bp year-over-year decrease and a 50bp sequential decrease. Average monthly rents grew approximately 10% and blended lease rate growth was 11.6%. Third quarter results and full year results are being weighed down by operating expenses which were considerably higher than expectation due to repairs/maintenance costs on resident turnovers and real estate taxes. Bad debt expense was elevated in the period primarily due to the California exposure and the burn-off of rental assistance dating back to the pandemic. This resulted in a reduction to full year operating and FFO guidance. The positive attributes in the quarter include a 10% loss to lease going into the fourth quarter and a highly favorable rent versus own differential of 20% based on an analysis from John Burns Real Estate Consulting.
The INVH portfolio is 18% allocated to California with other large markets including Florida and fast-growing sunbelt regions. External growth for INVH is being assisted by three sizeable joint venture arrangements with very distinct strategies. One venture caters to residents looking to transition from renter to homeowner via a lease-to-own lease structure. Another venture favors less commoditized homes in premium locations and price points with rents that are 30-60% above INVH’s traditional base rent level. Finally, the company is also in a program with the large, public homebuilder, Pulte Group with an expectation that INVH will buy upwards of 7,500 newly developed homes from Pulte over a five-year period.
Tricon Residential (TCN), the smallest of the three public SFR companies, was an outlier in the most recent quarter in that the revenue line item as reported was modestly below expectation, while the operating expense line-item growth rate of 2.9% (same store) was “best in class” and substantially below that of the larger peers. Same-store revenue growth of 7.9% was accentuated by 97.9% occupancy and 8.4% blended rent growth. TCN was also the only SFR name to raise full year 2022 guidance, and this resulted from the sale of a sizeable multi-family portfolio, so driven by a non-recurring item. The TCN portfolio is primarily sunbelt focused and with 11% exposure to California. The company reported a 15-20% loss-to-lease on the portfolio at the end of 3Q. External growth at TCN is also tied to several institutional joint venture relationships with the potential to buy and/or develop up to 20,000 additional homes. One notable distinction relative to peers is TCN’s higher cost of capital and higher debt profile. At the end of the quarter, the company had a net debt/ebitda multiple of 8.3x and 31% of total debt was floating. It must be noted that the company’s debt profile has been improving in recent years and they also own a portfolio of non-SFR assets which are being monetized over time at attractive valuations with proceeds being reinvested in the core SFR business.
Looking out into 2023, the SFR sector should experience many similar trends as the traditional multi-family sector based upon the macro-economic backdrop, interest rate cycle and real estate dynamics across the country. With the economy expected to slow or even enter a recession in the coming year, overall revenue growth for the industry will continue to see moderating trends over the course of the next several quarters with rental rate growth on new and renewal leases dropping from the 10-12% levels achieved in 2022 to something closer to 5-6% in 2023. Strong demand and better customer awareness for the product should help landlords keep occupancy levels at least in the mid-90% range, barring a major economic downturn and dramatic rise in unemployment. As for operating expenses, the headwinds in the form of supply inflation and wage pressures will likely be worse in the first half of the new year, with comparisons and overall pressures moderating by the second half of 2023. The summer leasing season will be more important than usual in 2023 and its success will be predicated upon economic certainty and interest rates going into the middle of the year. The employment picture remains quite robust now, but a material rise in unemployment over the next six months would jeopardize the potential for a second half bounce in operating performance.
American Homes 4Rent: Financial Reports for third-quarter 2022
 American Homes 4Rent
 Real Invitation Homes: Financial Statements for third-quarter 2022
 American Homes 4Rent
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