As the COVID-19 crisis drags on, data suggests more borrowers are struggling with paying their rent. According to one survey, nearly 37% of all New York City residents are struggling to come up with the June rent payment.
While New York City is a bit of a special case with sky-high rents and an outsized hit from the coronavirus pandemic, 37% is an alarming number. Is that typical or an outlier?
How are some of the single-family rental real estate investment trusts (REITs) faring?
Data and scale create an opportunity
Invitation Homes (NYSE:INVH) is one of the big single-family rental REITs, financial entities that purchase and rent out single-family homes. Historically, this financial segment has been a highly fragmented industry made up of many small "mom and pop" investors who own a few properties. Invitation's strategy is to use its database of over a million single-family analyses to target the right geographic areas within a metropolitan statistical area and then build up a portfolio of rental properties in which it can use scale to drive down maintenance and property management costs.
Invitation Homes' economies of scale are hard for competitors to replicate, which gives the company somewhat of a competitive moat. And this real estate segment is wide open for growth. The company estimates that there are 16.5 million single-family rentals right now, and institutions control about 2% of them. As of the end of 2019, Invitation owned just under 80,000 single-family rentals in 16 markets.
May rent collections were just 3% off historical levels
The company gave an update at the NAREIT virtual conference last week where it released its rent collection numbers for April and May. Rent collections in May improved to 97% of the historical average from 95% in April. Note that the company reported a 3.4% increase in rental rate growth in April, and about 3% of rent receivables in any one month include prior months being paid late. Don't think of that 3% number as a delinquency rate -- it isn't. Same-home occupancy hit a record level of 97.5%, which speaks to the economic strength of the economy going into the crisis, and the dearth of supply in the market.
Invitation Homes took several steps to adjust to the new COVID-19 environment. The company leveraged self-show technology, closed most of its offices, and deferred non-critical maintenance. Invitation Homes is also holding off on new acquisitions for the moment; however, it remains on the lookout for opportunities. Finally, the company is working with tenants who have been negatively affected by COVID and it is coming up with repayment plans. During the presentation, Invitation management remarked that its rental adjustment plans have helped drive improvement in May rental collections.
Liquidity is in decent shape
Invitation Homes' liquidity is in decent shape, with $225 million in cash on the balance sheet and $850 million in borrowing capacity on the revolving credit agreement. In addition, 51% of Invitation's properties are unencumbered, which means the company has the ability to mortgage some of its properties as well if needed to raise cash. Invitation Homes is currently paying a $0.15 quarterly dividend. Last year, Invitation had adjusted funds from operations (AFFO) of $1.03 per share, which means the dividend is pretty well covered at 58% of AFFO. Interest is well covered at 150%.
COVID-19 is accelerating the migration out of dense urban multi-family housing
Even before the coronavirus crisis, younger adults were beginning to migrate out of the cities and into the suburbs. Today, reaction to the COVID-19 crisis is serving as a catalyst to accelerate the trend from dense multi-family buildings to single-family rentals. Invitation Homes' geographical footprint is Western states and Florida, which have been less affected by COVID-19 than, say, the Northeast.
Invitation pays a relatively miserly dividend of $0.60 per share or about a 2.2% yield, at least compared to the REIT sector as a whole. The company trades at 27 times 2019 AFFO per share, which is a bit on the high side, but it probably reflects the growth and potential margin improvement of the company as it scales its operation. So far, it looks like the COVID-19 crisis has largely missed Invitation Homes and could be a catalyst for improvement going forward.