Strong Single-Family Rental Trends to Push Consumers into For-Sale Market
SEE LAST PAGE OF THIS REPORT FOR IMPORTANT DISCLOSURES
Dan Oppenheim, CFA(415) 889-5617
May 9th 2019
- Shift in housing: rental affordability worsens as for-sale affordability improves. The healthy single-family rental trends, with the trio of 1) strong and rising single-family rent growth, 2) high occupancy, and 3) record-low turnover at a time of declining mortgage rates and slowing home price appreciation will likely lead to an inflection in the rental and for-sale markets, with consumers pushed into the for-sale market based on this relative affordability. The trends are favorable for AMH and INVH in the short term, but we believe will lead to outperformance for the homebuilders over time. Among the single-family REITs, we prefer Invitation Homes (INVH) over American Homes 4 Rent (AMH), as INVH generates over 40% of its net operating income from the west, where for-sale housing is less attainable.
- Accelerating rents on renewals won’t bring joy to residents. INVH and AMH both reported acceleration in rental rates, especially on renewal leases. Renewal rates increased 5.2% year/year for INVH and 4.1% for AMH, with these increases coming at a time when for-sale affordability was better than in the year-ago period (largely due to lower 30-year mortgage rates, which currently stand at 4.10%, well below 4.55% one year ago). This 45-basis point decline in mortgage rates lowers the mortgage payment by the same amount as a 4.5% decrease in the amount borrowed (essentially, the decline in mortgage rates would offset 4.5% home price appreciation, whereas the median existing home price increased by just 3.8% year/year in March). Thus, this combination of lower mortgage rates and modest appreciation results in a lower mortgage payment if one were to buy in 2019 relative to buying in 2018, but whereas single-family rental rates have increased.
- High occupancy likely means further increases in rental rates. INVH and AMH’s occupancy increased in April on a year/year basis, with 96.6% occupancy for INVH (up 40 basis points year/year) and 95.8% for AMH (up 60 basis points year/year). High occupancy leads to upward pressure on rental rates, which helps revenue and net operating income for the single-family REITs, but consumes a greater share of their residents’ income, and will in time lead to greater turnover.
- Turnover down year/year for AMH and at record-low for INVH. AMH’s 1Q19 turnover fell to 7.7%, down 100 basis points from 1Q18 after falling by 40 basis points in 1Q18 vs 1Q17. Consistent with this, INVH’s 1Q19 turnover fell 130 basis points to 6.4%, with trailing four quarter turnover falling to a record low of 31.0%.
- Greatest opportunity in building products, homebuilders, home centers, and mortgage insurers. We expect the improving affordability to drive greater home sales, home improvement, and home price appreciation. Among stocks, we see the greatest opportunity in: building products – MAS; homebuilders – DHI, MTH, TOL, and MTH; home centers – LOW; mortgage insurers – MTG; multi-family REITs – AVB and EQR; and single-family REITs – INVH.
|Exhibit 1: SSR’s Preferences Among Housing-Related Sectors|
|Source: SSR analysis|
Strong Single-Family Rental Trends to Push Consumers into For-Sale Market
Shift in housing as rental affordability worsens while for-sale affordability improves. The healthy single-family rental trends, with the trio of 1) strong and rising single-family rent growth, 2) high occupancy, and 3) record-low turnover at a time of declining mortgage rates and slowing home price appreciation will likely lead to an inflection in the rental and for-sale markets, with consumers pushed into the for-sale market based on relative affordability.
Preference for INVH over AMH, as INVH’s market exposure limits competition with for-sale. High occupancy, rising rents, and low turnover will lead to accelerating net operating income (NOI) in the near term. However, over time, the relatively more challenged rental affordability due to the rising rents as for-sale costs are falling create risk of greater turnover and subsequently less pricing power. We prefer INVH to AMH, given that it generates over 40% of its net operating income from the western U.S., where for-sale affordability is less attainable. This advantage from its market exposure was evident in INVH’s renewal lease growth of 6.8% in its Western region in 1Q19, significantly above the 5.2% for its overall portfolio. Renewal growth was more modest in Florida (up 4.7%), the Southeast (up 4.2%), Texas (up 3.6%), and the Midwest (up 2.4%). In contrast, AMH generates just over 10% of its NOI from the western U.S. (primarily Phoenix, Las Vegas, and Denver), with AMH’s largest markets being more affordable markets in Texas (Dallas, Houston, and San Antonio), the Southeast (Atlanta, Charlotte, Nashville, Jacksonville, Tampa, Raleigh), and the Midwest (Indianapolis, Cincinnati, Chicago, and Columbus).
|Exhibit 2: INVH’s Greater Exposure to Western Markets Will Bring Higher Rents, Lower Turnover|
|Source: Company reports and SSR analysis|
Renewal and new lease rent trends points to sustainability challenge in more affordable markets. In more affordable markets, single-family rental companies generated stronger rent growth on renewal leases than on new leases. Existing residents are often willing to absorb some increase in rent for stability and to avoid moving costs. However, in the less-affordable western markets, not only was renewal growth stronger than the portfolio average, but new leases in these markets also exceeded that high level of renewal rent growth. INVH’s new lease growth in its Western region reached 7.2% in 1Q19, 40 basis points above the 6.8% renewal growth. In contrast, renewal growth exceeded new lease growth by 270 basis points in INVH’s Florida markets, 210 basis points in the Southeast, 390 basis points in Texas, and 440 basis points in the Midwest. AMH’s 4.1% renewal growth for its portfolio exceeded its 3.5% new lease growth, with the lower overall growth driven by its market exposure.
Turnover trends in 2Q and 3Q will likely show impact from varying affordability of markets. Rental turnover is highest in the spring and summer months (2Q and 3Q). We believe turnover trends in 2Q and 3Q of 2019 will show the typical seasonal increase, but also will reflect the varying competition with the for-sale market so that turnover will increase much more in the affordable Midwestern, Southeastern, and Texas markets than in the less-affordable Western markets. Given the improved relative affordability of the for-sale market in spring 2019 as compared with spring 2018, we would not be surprised to see this trend declining turnover moderate, with a larger shift for AMH than INVH as a result of AMH’s exposure to more affordable markets.
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