09/18/22 03:34 PM EDT

SUNDAY NIGHT REIT READ | SFR MODELING ASSUMPTIONS | 9.18.22 (AMH, INVH, TCN)

Rob Simone, CFA

@HedgeyeREITs

Takeaway: Street numbers too high for INVH, roughly in-line for AMH

Hedgeye Cartoon of the Day: Picked a H*ll of a Day to Quit Drinking...

It is 9.18.22, and Active Short MPW is overvalued by approximately ~$13.80/share.

WEEKLY VALUATION HANDBOOK PDF LINK

Tickers: AMH, INVH, TCN

Company Names: American Homes 4 Rent, Active Short Invitation Homes, Active Short Tricon

Subsector: Single-Family Rentals (SFR)

Headline: We think SFR's make their "earn-in" in FY23, with accelerating opex + capex

First, our assumption is that Active Short INVH and peer AMH just make their "earn-in" on the top-line next year, which on our math translates into a low-4% SSRev growth number for both names. A few points:

We think the landlords generally, but especially INVH, view the level of demand among renters as inelastic to price. In our view this is changing in real time, with available inventories of existing homes doubling since January to ~4.1 months of supply from ~2.1 months. While still below the historically "healthy" level of ~6 months where the market is in "balance," on the margin this is a significant move and directionally headed the wrong way if you care about pricing power. We expect rising inventories to compel builders to increase build-to-own to build-to-rent conversions, which means that "shadow" supply is rising as we speak. We are doing some work in the background to try to figure this part of the picture out. This will likely lead to additional options for tenants that did not exist before.
Pressures on cost of living and ability to pay are already rising, which we believe will limit landlords' ability to pass along rent increases as easily.
The institutional SFR business as presently constituted has never been cycle-tested before, and has basically developed and grown during an era of monetary easing and declining supply of available homes. It is reasonable to assume that the operating environment over the next 12-24 months will look different than the past decade.
We expect bad debt to rise going forward in a consumer-led recession, perhaps back towards the ~200bps+ range.
Occupancy is already falling, particularly for INVH as it aggressively pushes rate, which is obviously a drag on growth.
As a reminder the same-store pool is 91-92% of total NOI for INVH, so it will overwhelm any movements in the non-same store pool.

Based on FactSet estimates we see the Street as materially underestimating SFR SSExp growth next year. We think property taxes could potentially be up +7.5% or higher in FY23, based on conversations with industry players and certain private institutional operators. TCN is already seeing double-digit property tax increases while AMH and INVH tick away at ~5% y/y. By the way we have heard no good answers as to the reason for that delta - TCN's peers may not even be aware that its happening, setting aside understanding the underlying drivers! But one thing is for sure, TCN's property tax increases more closely resemble HPA on a lag, which should theoretically be the main driver of property tax expense growth. Such a +7.5% or higher move in property taxes would mathematically guarantee +6% or higher SSExp growth.
Additionally, turnover costs/R&M + turnover capex are all poised to rise as turnover increases and occupancy levels fall.
When combined with low-4% SSRev growth, this translates into +3% SNOI growth (see Figure 1 below), and at least ~100-200bps of NOI margin compression off of peak levels. We think we are being generous on margins, and despite this there is still significant earnings downside which sets up a potential disappointment when companies begin rolling out FY23 outlooks.
If INVH indeed does refinance its ~$2.6bn term loan due 2025 in roughly equal increments over the next three years, models should reflect a negative ~300bps spread to newly issued debt over that time. This is obviously an additional drag on earnings growth in FY23 and beyond. We do, however, agree that it makes sense to eliminate such a large "bullet" in 2025.
We are nearly -7% below the Street on our FY23 Core FFO estimates, and slightly closer for AMH (-2%).