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Invitation Homes: Robust Results, Valuation Risks Remain
Stock Analysis & Ideas

Invitation Homes: Robust Results, Valuation Risks Remain

Invitation Homes (INVH) owns and manages single-family homes for lease. Specifically, the company offers its residents high-quality homes in sought-after neighborhoods across the United States.

As of its latest filings, the company held 80,000 homes for lease in 16 markets across the country. Its properties seek to satisfy changing lifestyle needs by providing access to high-quality, refurbished homes with valued characteristics such as close proximity to areas with high employability prospects, and access to good schools.

Since its IPO in 2017, Invitation Homes has successfully executed its mass-acquisition growth strategy, which has resulted in rapidly growing AFFO and dividends per share.

The company’s favorable momentum remained rather strong in its most results as well. However, with current macroeconomic developments threatening the housing market, and the stock’s valuation remaining at elevated levels, investors should be wary moving forward. I am neutral on the stock.

Recent Developments

Invitation Homes’ performance has remained robust lately, despite rising concerns surrounding the housing market. In its Q1 results, the company reported revenue growth of 12% year-over-year to $532.3 million. Higher revenues were powered by new leases, rent growth on renewals, and sky-high occupancy levels, as market fundamentals remain vigorous for the time being.

Notably, average occupancy remained stable sequentially, at 98.1%, even though it slightly declined from 98.4% in the prior-year period. Further, the company achieved same-home new lease rent growth of 14.8%, and same-home renewal rent expansion of 9.7%. Thus, blended rent growth increased 550 basis points to 10.9%.

During the quarter, management continued to develop the company’s property portfolio. Specifically, the company purchased 822 homes for $341 million, and disposed of 147 homes for $54 million, resulting in a net expansion.

Further, in spite of the Invitation Homes’ share count increasing amid equity issuances that were utilized to fund these acquisitions, adjusted FFO per share increased 12.9% to $0.35 following thoughtful cost management.

For the rest of the year, management anticipates that the market for single-family rental homes will remain healthy. This is supported by assumptions of steady job growth and favorable demographic trends in the markets in which the company’s homes are located.

Accordingly, and taking into consideration the company’s results during the first quarter, management reiterated its initial guidance. The company is expected to deliver AFFO per share between $1.38 and $1.46 in Fiscal 2022.

At the midpoint, this implies growth of 10.9% versus Fiscal 2021, suggesting another prosperous year for the company, despite the underlying chaos currently intimidating the global markets.

Dividend & Valuation

In line with its rapid AFFO/share growth since its public listing, the company has swiftly raised its dividends per share. In 2020 and 2021, the company hiked its payouts by 15.4% and 13.3%, respectively, despite the disturbance caused by the COVID-19 pandemic.

Assuming the company achieved the midpoint of its Fiscal 2022 guidance, the payout ratio would stand at just under 62%. Thus, it’s quite likely that dividend growth will be sustained in the double-digits, backed by the company’s underlying growth and relatively spacious room for further dividend hikes.

Despite the company’s strong dividend increases and recent share price decline, however, its dividend yield currently stands at a somewhat underwhelming 2.4%.

On the one hand, considering the company is growing quite expeditiously, this makes for a decent starting yield for dividend growth investors. On the other hand, it could suggest that shares are still a bit overvalued.

There is something to note when valuing Invitation Homes. The company reports adjusted funds from operations, which includes recurring capital expenditures. As a result, the denominator in P/AFFO is less relative to utilizing P/Core FFO. This automatically leads to a higher valuation multiple than it normally would.

At the midpoint of management’s guidance, the stock’s current price implies a forward P/AFFO of 24.6. This multiple is unusually high for a REIT, and could reasonably be assumed rich despite the company’s double-digit growth.

However, because it is based on the company’s adjusted metrics, one can see the reason behind it. Nevertheless, I would consider the stock more fairly valued at a multiple in the low 20s. A lower multiple would still reflect the company’s growth prospects, while taking into account risks related to the growth of rental rates in a tough macro environment.

Wall Street’s Take

Turning to Wall Street, Invitation Homes has a Strong Buy consensus rating based on 11 Buys and two Holds assigned in the past three months. At $46.73, the average Invitation Homes price target implies 31.8% upside potential.

Takeaway

Invitation Homes is one of the better plays out there for investors who seek exposure in the single-family housing market. The company has retained robust growth momentum that has lasted both through the pandemic, and during the current times of increased uncertainty. Dividend growth investors are likely to find the stock rather attractive.

That said, investors should also be wary as shares of Invitation Homes could be rather overvalued at their current levels. A prolonged recession in the United States could reduce household income levels, weakening the company’s ability to grow as fast. In turn, this could result in a substantial valuation multiple compression, damaging shareholder return prospects.

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