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Morningstar | Invitation Homes Is Positioned to Benefit From Cash-Strapped Millennials

Invitation Homes is the largest single-family rental real estate investment trust with a portfolio of over 80,000 homes. The portfolio is geographically diversified across 17 U.S. markets with approximately 35% of its homes in the Western United States, 31% in Florida, and 22% in other Southeast markets. The cost of renting is cheaper than homeownership in 15 of the portfolio's 17 markets, which supports high occupancies and should allow the company to pass along significant rent increases without much pushback. The company's size gives it some economies of scale in terms of controlling costs as it can hire its own maintenance and repair technicians to service its homes, allowing it to maintain higher operating margins than smaller competitors that need to contract out the same services. The company regularly recycles capital by selling noncore assets and using the proceeds on higher-quality acquisitions with better growth prospects.Invitation Homes focuses on owning newer homes in the starter and move-up segments, which are typically under $300,000 in price and less than 1,800 square feet. These types of homes typically attract a younger demographic. This coincides with a generation of millennials who have long delayed many adult milestones but will probably move to the suburbs in greater numbers over the next decade as they age and start families. Given that millennials typically lack the necessary capital for a down payment, they will probably look to rent single-family homes when they move to the suburbs. This increase in demand combined with slowing supply due to high construction prices should promote solid fundamental growth for several years.However, we caution that the long-term outlook for this segment is not as rosy as the next few years look. The baby boomers are also aging and will eventually return their housing stock to the market. The increased supply will either lower housing prices to the point that renters can afford to purchase a home or will create new rental housing stock that will compete with Invitation Homes' portfolio. Ultimately, we don't think the single-family rental market will support growth above inflationary increases.