03/13/22 04:00 PM EDT

SUNDAY NIGHT REIT READ | 3.13.22 | (INVH)

Rob Simone, CFA

@HedgeyeREITs

Takeaway: Hope everyone enjoyed the weekend!

Cartoon of the Weekend: Break Effect

Open RTA Short Positions:

3.9.22 - Sell Signal INVH $39.67

Ticker: INVH

Subsector: Single-Family Rentals (SFR)

Headline: Thoughts on management commentary at conference

There were some "interesting" comments made by INVH's CEO at a REIT conference in Florida last week re: the evolving legal situation hanging over the stock. We wanted to respond/opine on some below:

"There's a person behind Blackbird Special Project, LLC that had filed a suit..." - again, we just question the focus on the person/whistleblower. The initial reaction post-4Q21 both by the company, and presumably by the company using the rest of the sell-side as a megaphone, was to discredit and/or characterize the whistleblower as a politically motived actor with an agenda. We personally find no utility in that approach and would prefer to attack the merits of the argument with facts, of which we have basically none provided by the company at this point outside of "boilerplate" legal responses.
"... in terms of permitting and in terms of scope... 95%+ of what we do is purely cosmetic." - This statement runs directly counter to (1) what we have observed through our own work, (2) the company's own statements + Schedule III in the 10-K which shows ~$30k invested per property in California post-acquisition, and (3) statements we have heard from professional contractors who have performed work for INVH in California, as well as in other states. Just thinking through #2 above logically, if what the CEO said was true (95%+ are just cosmetic), we estimate the cost of non-cosmetic/high-touch renovations would be over ~$300k per home, assuming ~$15k per cosmetic renovation (painting, replacing carpets, not touching any electrical/plumbing, etc.). This would roughly equal the ~$300k spent to initially acquire all 12,260 homes in Northern and Southern California (see Figure 1 below). At ~$20k per cosmetic renovation, the investment per home for the ~5% under management's scenario would be over ~$200k per home based on simple math. Let's think about that one for a second - why would anyone effectively double their basis on a single home, versus conserving that capital and building a larger footprint? We are not saying that it's impossible, just that it makes no logical or economic sense. It is far more likely, in our view, that the costs capitalized subsequent to acquisition are spread out over more properties in the California portfolio, implying a much higher % of high-touch renovations. Again, actual house-by-house data would help if available. Hint: it should be available.
We do not think, and have never thought, that the primary source of liability here is in higher property taxes, rather fines for out-of-code homes, unpaid permitting fees + interest, and treble damages. This would likely be realized through a negotiated settlement, but we think could potentially run in the billions of dollars across INVH's portfolio if the legal situation goes south for INVH.
Finally, the CEO said "... we have zero interest in litigating this over Twitter...", in response to the hosting analyst saying "... you certainly have some others really trying to use it as a way to negatively affect your stock..." - Two points - (1) we use Twitter as a tool to be transparent in cases where we are right and wrong, and (2) we (obviously) have no interest in negatively impacting anyone's stock price deliberately, rather offering unbiased and non-conflicted opinions to help our clients make money. Again, we were long the stock on 2/15...

Figure 1: Cosmetic vs. Full Reno Math