In an inflationary environment, it's important to make sure your investment dollars are hard at work, keeping pace or surpassing today's inflation rate. Hard assets, like single-family homes, have proved to be one of the most inflation-resistant assets in the past, but especially so in today's red-hot housing market. Home prices increased 20% in February 2022 when compared to one year prior, far outpacing today's 8.5% inflation rate.
This inflation-beating growth is one of the reasons Invitation Homes (INVH 1.04%), a residential real estate investment trust (REIT) that specializes in single-family rental properties, is such an appealing buy right now. If you're unfamiliar with this inflation-resistant stock, here are three reasons it should be on your radar.
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1. It's in a high-demand industry that isn't waning
Invitation Homes got its start as a subsidiary of The Blackstone Group. That company snagged up single-family homes at rock-bottom prices following the Great Recession and then rented them to tenants. The business model clearly worked. Invitation Homes is now its own REIT, completely independent from Blackstone Group, with over 80,000 rental homes under management.
Rental properties are an essential part of our economy. People will always need a place to live, one of the biggest reasons the single-family rental business is inflation-resistant. Rental demand is at historic levels, largely in Invitation Homes' operating markets: 95% of its homes are in the Sunbelt, in suburban and urban areas, which has resulted in a huge boost in its performance.
Last year, its funds from operations (FFO), a key metric used to assess a REIT's profitability, grew 16.2% while net operating income is expected to grow by 9% to 10% in 2022, ahead of inflation.
2. Short-term leases can be a hedge against inflation
Most commercial real estate leases operate on longer terms. It's not uncommon for a commercial real estate lease to be 10 to 15 years, which can make it difficult to capture robust rent growth fueled by high demand or keep up with inflation like we're seeing today. Single-family homes, however, operate on annual leases, meaning Invitation Homes has the benefit of being able to increase rents to adjust for rising costs and inflation each year.
In 2021, its blended rental rates grew 8.8% year over year on average, with 2022 looking even stronger. Both January and February have seen 14% year-over-year increases in the average blended rent rate while occupancy sits at an impressive 98.2%. Its renewal growth for January and February (tenants who renewed their lease for another year) rose by 9.6% and 9.9%, respectively.
3. It has diversified avenues for growth
Invitation Homes, unlike many of its competitors, doesn't focus solely on built-for-rent homes. Rather, it uses a variety of acquisition channels -- including iBuying, bulk real-estate-owned sales (meaning homes owned by a lender or investor), auction platforms, as well as builder partnerships and individual sales -- to help increase its inventory. This is important right now as construction costs continue to soar and supply chain issues cause delays in deliveries of newly developed communities.
With home prices continuing to climb and the housing market remaining severely undersupplied, rental-housing demand isn't going to wane anytime soon. This, along with its exposure in many of the country's fastest-growing real estate markets and its ability to raise rents regularly, is why Invitation Homes is a standout buy to combat inflation.
US Existing Home Inventory data by YCharts
The company has managed to outperform the S&P 500 since its initial public offering and has provided a return four times higher than the S&P 500 over the past year. Share prices today are around 28 times its FFO, which is definitely premium pricing. But I think it's a price worth paying if you're looking for a reliable inflation-resistant investment in today's market.
