Fitch Ratings has affirmed the ratings of
The Rating Outlook is Stable. The ratings reflect the positive steps the company has taken since its IPO to reduce leverage and Fitch's expectation that leverage will continue to drift lower to the 5.5x-6.0x range over the forecast period.
Key Rating Drivers
Investment Grade Credit Metrics: Fitch expects leverage (net debt excluding preferred/recurring operating EBITDA) to continue to decrease to the mid-to-high-5x, from mid-7x in 2020, consistent with company's long-term leverage target of 5.5x-6x. INVH's leverage was 6.0x and fixed-charge-coverage exceeded 4x for the quarter ended
Fitch estimates annual acquisitions of
Favorable Operating Performance Trends: Fitch's base case assumes low- to mid-single-digit same store NOI (SSNOI) growth over the forecast period, after a 4.3% and 12.6% increase in 2020 and 2021, respectively. INVH's leasing activity has been strong during the pandemic and particularly in 2021, with blended leasing spreads in the low-double digits, resident turnover at historical lows and occupancy levels above 98% at 1Q22, demonstrating strong tenant demand for INVH's properties.
Although risks remain given the uncertainty around the pandemic and high capital markets volatility, Fitch expects the SFR subsector to continue to generate above average growth given secular demand tailwinds.
The 23-34 age population will decline in the late 2020s as growth of those aged 35-55 accelerates. Over the next several years, aided by the demographic shift of an aging Millennial wave, many of those in the current renter cohort will demand more space (children, home office) and more affordability, driving demand to suburban submarkets.
Much of this demand will be picked up by single-family homes, both for purchase and for rent. Given the SFR tenant make up, in the right locations, resident turnover should be lower than traditional multifamily, which has historically had an average stay of just under two years. In addition, the relatively short lease term of SFRs should act as an inflation hedge, especially if income growth picks up.
Very High Portfolio Granularity: INVH has very high portfolio granularity due to its ownership of over 82,000 homes across 16 different markets, as of
Additionally, the portfolio benefits from good geographic diversity and exposure to growing Sunbelt and
Strong Access to Capital: INVH has demonstrated strong capital access, including common equity, secured mortgage debt, unsecured and secured bank debt, joint ventures and public unsecured debt markets. The company launched its first public senior unsecured notes in
Additionally, INVH has established a partnership with homebuilder
Limited Operating History: INVH's rapid growth and shorter operating history relative to other traditional property types results in limited comparable performance metrics. Positively, the company's portfolio metrics have been strong during the pandemic aided by secular tailwinds of INVH's target resident demographic and geographic focus. INVH has limited public REIT experience, but an experienced board and quality and transparent reporting.
Derivation Summary
INVH's rating reflects the company's focus on quality, SRF assets in Sunbelt and
The company has demonstrated access to the debt and equity capital markets, and investor demand for a broader range of capital offerings is expected to be favorable, given wider investor acceptance and interest in the strong growth profile of the property type.
Compared to multifamily peers, where continued GSE support has led to cap rate compression, SFR has a natural buyer pool in the second market for single family homes, supported by attractive, often times government subsidized, mortgage financing.
Fitch rates the IDRs of the parent REIT and subsidiary operating partnership on a consolidated basis, using the weak parent/strong subsidiary approach and open access and control factors, based on the entities operating as a single enterprise with strong legal and operational ties. No Country Ceiling or operating environment aspects have an impact on the rating.
Key Assumptions
3%-5% SSNOI growth per year through 2025, with the exception of 2022 at approximately 9%. 150bps of occupancy loss over the period as turnover ticks up from 2021 lows;
Wholly owned acquisitions of
Dividend growth of 1% per year.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Fitch's expectation for REIT leverage (net debt excluding preferred/operating EBITDA) to sustain below 6x, combined with expectations for management to commit to lower leverage policy targets;
INVH demonstrates and further develops its ability to access unsecured debt capital, including public debt markets, consistent with higher rate peers.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Fitch's expectation for REIT leverage (net debt excluding preferred/operating EBITDA) to stay above 7x;
Challenged capital markets access that limits the company's ability to transition to a primarily unsecured borrowing strategy;
Unencumbered Assets/Unsecured Debt ratio sustaining below 2x.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Adequate Liquidity: Liquidity coverage through 2023 is 1.1x, or 3.2x assuming 80% of secured debt is refinanced. Assuming extension options on its secured debt are exercised, the company has no debt maturities until 2025. As of
Fitch defines liquidity coverage as sources of liquidity divided by uses of liquidity. Sources include unrestricted cash, availability under unsecured revolving credit facilities and retained cash flow from operating activities after dividends. Uses include pro rata debt maturities, expected recurring capex and forecast (re)development costs.
Issuer Profile
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
RATING ACTIONS
Entity / Debt
Rating
Prior
LT IDR
BBB
Affirmed
BBB
LT IDR
BBB
Affirmed
BBB
senior unsecured
LT
BBB
Affirmed
BBB
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VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com
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