By the Numbers

SFR operators come out of Covid stronger

Mary Beth Fisher, PhD | June 4, 2021

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

SFR operators have come out of Covid stronger than going in, at least based on first quarter results from the biggest public platforms. Both Invitation Homes and American Homes 4 Rent reported higher occupancy, lower turnover, shorter vacancies between tenants and significant rent growth. These and other large single-borrower SFR sponsors are in better position to support their securitizations. Along with a higher mark-to-market value for portfolio properties, the stronger sponsor financials suggest the credit quality of collateral backing most outstanding SFR securitizations has strengthened, too.

The two largest institutional operators, Invitation Homes and American Homes 4 Rent, combined account for 48% of single-family rentals in the US. Despite some differences in geographic footprint, both companies target very similar market sectors and the recent performance of their portfolios have been remarkably in-line. This may not be the case going forward, as their growth strategies meaningfully diverge, with American Homes 4 Rent diving into built-for-rent while Invitation Homes pursues growth primarily through traditional purchase of existing homes.

Invitation Homes

The first institutional operator to stand up a single-family rental business, Invitation Homes, is still the largest. The company owns more than 80,000 homes across 16 markets (Exhibit 1), primarily across the Western United States (40%), Florida (31%) and Southeast United States (19%). Invitation Homes specializes in single-family homes for upper-middle-income renters with average home size of 1,860 square feet, monthly rent of $1,916 and average household incomes of $74,000.

Exhibit 1: Invitation Homes single-family rental portfolio summary

Note: Portfolio summary information for the three months ended 3/31/2021. Totals/averages include 7 houses in Nashville where the company is in the process of exiting the market.
Source: Invitation Homes Q1 2021 10-Q, Amherst Pierpont Securities

The performance of the single-family rental sector, which had already been strong due to the structural shortage in housing a decade in the making, has improved sharply over the course of the pandemic. Analysis of Invitation Homes recent quarterly results illustrates several trends seen across the sector (Exhibit 2):

Demand for detached single-family homes due to the pandemic has increased occupancy rates
Average monthly rent growth increased by 3.5% year-over-year, while rent growth for new leases at Invitation Homes climbed 8.0% year-over-year during the quarter ended March 31, 2021, compared to a 2.0% year-over-year increase during the first quarter of 2020
Turnover rates declined as fewer tenants moved, in part due to the rapid price appreciation of single-family homes for sale and the shrinking of supply, keeping more prospective new home buyers out of the market, and
The average number of days a single-family rental property goes unoccupied as tenants turn over has dropped

Exhibit 2: Invitation Homes single-family rental performance metrics

Note: average monthly rent represents average monthly rental income per home for all occupied properties over the measurement period and reflects the impact of non-service rent concessions and contractual rent increases amortized over the life of the related lease.
Source: Invitation Homes Q1 2021 10-Q, Amherst Pierpont Securities

On the downside, the Covid-19 pandemic has raised uncollected rents. The company has experienced an increase in uncollected rents as some tenants have struggled with loss of income due to the economic shutdowns. Prior to the pandemic Invitation Homes had 0.4% of gross rental income not collected during the first quarter of 2020. Bad debt rose to 2.3% of rental income during the first quarter of 2021.

American Homes 4 Rent pushes towards “built-for-rent”

The performance and metrics of the second largest single-family rental operator, American Homes 4 Rent, are very similar to that of Invitation Homes over the past year. This is not surprising as American Homes 4 Rent targets a similar market segment with average home size just under 2,000 square feet and average monthly rent of $1,730. Performance through the first quarter of this year is quite similar (Exhibit 3):

Average occupancy rates rose to 97.1% for the first quarter of 2021, while tenant turnover declined
Average blended rent rose 6.9% while average monthly realized rent—similar to Invitation Homes average monthly rent growth—increased by 3.3% during the quarter
Overall revenue growth was also higher, though it was modestly offset by an increase in uncollectible rents due to the pandemic.

Exhibit 3: American Homes 4 Rent single-family rental portfolio summary

Note: *Average blended change in rent represents the % change in rent on all non-month-to-month lease renewals and re-leases during the 3 months ended 3/31/2021, compared to the annual rent of the previously expired comparable long-term lease for each property. Data as of the three month period ended 3/31/2021.
Source: American Homes 4 Rent Q1 2021 10-Q, Amherst Pierpont Securities

The geographic concentration of single-family rentals between the two companies shows some modest differences, but overall reflects the heavy footprint of properties in the Sun Belt (Florida, Texas, Arizona and Nevada), the US Southeast and the Western US. American Homes for Rent does have 16% of their rentals in the Midwest US and 5.5% in Nashville – two areas where Invitation Homes is either exiting entirely or has a very minor presence. Otherwise, the major difference between the two is that American Homes 4 Rent favors the Southeast (25% of properties) while Invitation Homes has their heaviest concentration in the Western US (40%).

Unlike Invitation Homes, American Homes 4 Rent has also been actively developing built-for-rent properties in order to grow their single-family portfolio. During the first quarter of 2021 the company added 580 homes to their portfolio. These included 299 homes developed through their internal new construction program and 281 homes which they bought from third-party developers through their National Builder Program or through traditional acquisition. These additions were partially offset by 180 homes sold during the quarter. The company invested $180 million during the first quarter of 2021 primarily to build and acquire new properties. According to a report by Hoya Capital Real Estate, the company is planning to invest between $1.2 billion and $1.6 billion of total capital this year to add 3,500 homes to its wholly-owned and joint venture portfolios, including 1,900 to 2,200 homes through its internally operated new construction development program. By contrast, Invitation Homes plans to add about $1 billion in homes this year, about 85% of which are expected to be purchases of existing homes and 15% may be bought new from homebuilders.

Mary Beth Fisher, PhD
marybeth.fisher@santander.us
1 (646) 776-7872

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