10/26/22 07:28 PM EDT

INVH 3Q22 RESULTS | PERHAPS THE WORST QTR IN RECENT MEMORY FOR A "BLUE CHIP" | 10.26.22 (INVH)

Rob Simone, CFA

Takeaway: This one is REALLY bad. Forget a victory lap, we're spiking the football

Hedgeye Cartoon of the Day: That Fish is Actually INVH

It is 10.26.22, and Active Short MPW is overvalued by approximately ~$10.85/share. Warm up the popcorn for tomorrow.

Ticker: INVH

Company Name: Active Short Invitation Homes

Subsector: Single-Family Rentals (SFR)

Headline: Finally getting paid on this one

We are going to start off with our high level thoughts on this unmitigated disaster of a quarter for INVH, with the numbers/variances to follow below.
First, we do not think it's a stretch to call this the worst quarter in recent memory for a "blue chip" REIT. This one is really bad, and is going to bury a lot of people. We did what we could to warn the market of what we thought was coming, specifically peak NOI margins amidst a decelerating top line and property tax-driven SSExp acceleration, and then of course the non-permitting lawsuit which remains ongoing. For those who are losing money but engaged with us in good faith, as we tried to do, we are sorry that you are taking losses here and will continue doing the work. For those who stayed away, we hope the work was helpful and will continue doing the same where we think it is warranted. For those who questioned our credibility, motives and independence... well, sometimes you're the dog, other times you're the hydrant.
Second, the below quote on the front of the earnings press release is flat out ridiculous. You just slashed your SSNOI outlook below the low-end of the prior range in late-October with two months remaining in the year. When this happens it signals to investors that you do not know how to model your own business, and/or the operating environment deteriorated so fast that you could not keep up. Either way it's bad, but someone (us) saw it coming. We don't even work there.

"Included within this release is our updated full year guidance for 2022. While these updates are generally consistent with our previous expectations for our overall business, our expected property taxes have been impacted more quickly than we had anticipated due to rising home price appreciation, and our reserve for bad debt is expected to remain elevated compared to pre-COVID averages, as it continues to take longer to address residents who are not current with their rent."
What are you talking about?
On 9.9.22 INVH provided this update that made no mention of elevated R&M, Turnover or Property Tax expense growth, nor rising bad debt issues. It did, however, highlight August QTD leasing spreads, the new lease portion of which appears to have decelerated significantly in September (3Q actual +15.6% y/y vs. +16.9% QTD at the time) and very likely into October which we will listen for on the call.

Third, and to be absolutely clear, the ~$7.4 million legal settlement recognized in the quarter is related to resident late fees and is NOT related to the qui tam whistleblower case. The latter, which was the initial impetus for our short recommendation on INVH, remains ongoing but at the same time has taken a back seat to the deteriorating fundamental outlook for SFR in our view. The lawsuit remains a "tail event."
Fourth and regarding the revised FY22 outlook, as we expected INVH is taking up is expectations for property tax growth which we expect to really impact FY23. We think it is reasonable to assume +6.5% to +7.5% property tax expense growth next year. The company highlighted recent assessments up +30% y/y in Florida and Georgia as driving an increase in tax bills. While INVH will likely contest more of these increases via appeals, all else the same and as we have written about previously we would expect the success rate on winning these appeals to be lower going forward. Bad debt is rising as expected, and INVH took down its acquisition guidance (wisely, to be fair) to ~$1.1 billion from ~$1.5 billion.
Fifth, coming into the quarter our view was that Street FY23 Core FFO estimates were at least 6-8% too high. Numbers need to and will be coming down. We also think capex estimates, including our own, need to come up which will obviously result in lower AFFO estimates going forward.
3Q22 Core FFO at $0.42/share was a penny below both Hedgeye and FactSet. Our variances:

SSNOI: -$0.01/share on lower SSRev and SSExp
Below the line it looks like all rounding and add-backs of one-time items including the above legal settlement and ~$19 million accrual for Hurricane Ian losses and damages.

Figure 1: INVH 3Q22 Earnings Variances