P R E M I U M
Thursday, July 29

The Real Estate Stock to Watch in the Second Half of 2021


Good News:

Invitation Homes just crossed our price target.

 

Even Better News:

Spoiler Alert: There’s a massive change coming! With the update below, we have updated their rating, assigned a new price target, a new target date, and created a new analysis on what's to come for the company.

 

Bad News (for us only):

This created days of work, travel, phone calls and analysis - but hey, that's why we're here 😂

The takeaway is that we are, and continue to be, investors in Invitation Homes. However something in the near term is exciting us more than we originally anticipated. This is causing us to increase our price target (see below for the new price target) as they hit our first price target faster than we anticipated!

 

So, what is it?

INVH recently announced a strategic partnership with the company Pultegroup! In this partnership INVH will purchase roughly 7,500 homes in the next several years. However here is the key term of the deal: INVH will not being using their own cash to build these homes. What will be happening however, is that Pultegroup will design and build all of the homes for INVH's exclusive access. Yes you read that right.

INVH has pulled off an incredible partnership with a homebuilder to have them finance, build and model single family rentals for INVH's sole exclusive use only.

Even better, most of these homes will be built in FL, GA, NC, TX & SoCal. And guess where most of the population, who has relocated, has moved too? Florida, Texas and these areas. Why? Mostly tax reasons paired with remote working abilities.

Construction of a new INVH single family home

If you read our old post on INVH, we called out this exact tailwind as something that could propel INVH further! This is because 31% of their market is already in FL and 22% is in the other southeastern states. This partnership therefore just ramped up that market share up significantly. By also not having to finance the expansion project themselves, INVH is a position to take significant market share of a rental market, that is exploding in value and opportunity (10-15% rental listing growth YoY). This nets them out a huge expansion opportunity, thereby increasing our growth outlook for them!

 

Valuation:

As you may have noticed in many of our posts, we often like to take into account broader themes as part of our investment strategies. Why? Because so many stocks and sectors are affected by the news cycle and macro factors outside of their control. Therefore when creating investing strategies, we therefore often look for external influences that positively affect whatever the company is working on.

In the case of INVH, when factoring in this partnership for the growing areas of the US, we see this as a huge tailwind to their business. This increased growth, as a part of the partnership, leads us to increase our projections on their core business. Using these projections and comparing them against their current stock price, we see that there is a mismatch between what they are worth vs. what the market is saying they're worth! Therefore, this leads us to believe that INVH is undervalued relative to their current price! Even with 41% growth in the last year alone, our current revenue multiple shows a discount to what they should be worth based on market trends.

 

So in summary:

  • INVH hit our price target. Given the recent partnership and growth prospects, we updated our projections.
  • The partnership, leading this updated projection, should seriously accelerate their expected growth in the coming years.
  • Because of the faster than expected increase in expected growth, our price target has increased to reflect this update.
  • Our price target believes there is a mismatch between the current valuation and the expected valuation.

 


 

Price Target: $50 (25% upside from current price)

Target Date: End of 2022

Rating: Overweight

Ticker: INVH


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