Fitch Ratings has affirmed the ratings of Invitation Homes Inc (NYSE: INVH) and Invitation Homes Operating Partnership LP including the Long-Term Issuer Default Ratings (IDRs) of 'BBB'.

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.

Invitation Homes' strong operating performance has benefited from an acceleration in demographic trends that were underway before the pandemic. Fitch expects an aging Millennial wave to continue to drive demand for single family rentals (SFRs), particularly in INVH's markets, and rising rates and costs may dampen homebuying activity. Greater adoption of work-from-home, has and should continue to provide incremental lift to demand for the sector as well, as renters seek more space.

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 March 31, 2022, metrics which are appropriate for the category.

Fitch estimates annual acquisitions of $800 million to $1,200 million per year over the forecast period. As the company executes its external growth strategy, on balance sheet and through its JVs, Fitch expects the company to have the financial flexibility, in terms of funding mix, to allow for further deleveraging.

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 March 31, 2022. Assets are acquired, oftentimes, one unit at a time and can be disposed individually, allowing landlords to hone in on neighborhoods, streets, and unit characteristics that optimize growth and value. Fitch expects this to continue as the company grows through acquisitions, and the company has demonstrated an ability to scale acquisition activity.

Additionally, the portfolio benefits from good geographic diversity and exposure to growing Sunbelt and West Coast markets. Although rents in higher-density, urban markets have rebounded in the past few quarters as companies reinstituted return-to-office, the continued strength in INVH's portfolio suggests above average growth may be sustainable for some time. Still, Fitch's ratings case provides for moderating growth in the back half of 2022, due in part to tougher comps, and returning to longer term growth trends over the forecast period.

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 August 2021, and has since priced two additional public bonds, enabling them to proactively manage 2025 and 2026 maturities. Fitch views this positively, as it can allow the company to efficiently monetize asset value to provide contingent liquidity.

Additionally, INVH has established a partnership with homebuilder PulteGroup, providing for additional investment opportunities at attractive yields while minimizing development risk and balance sheet drag. The recently announced joint venture (JV) with Rockpoint Group allows INVH to target premium market locations with higher price point homes for lease while generating management fees, and the investment in Pathway Homes expands housing solutions for single family home renters.

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 West Coast markets. Although SRFs tend to have shorter lease terms than most traditional property sectors, outside of hotels and apartments, Fitch believes the asset type lends itself lower turnover vs multifamily over time, particularly when focused on certain tenants and markets. And positive demographic trends somewhat offset the shorter average-lease-term concerns, especially when compared to other traditional property sectors that may be experiencing secular challenges.

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 $800M-$1,200M per year at 5% cap rate. $200M-$600M of dispositions per year;

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 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

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 March 31, 2022, the company had $467 million of cash on hand and full capacity under its $1 billion revolving facility.

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

Invitation Homes (INVH) is a leading owner and operator of single-family homes for lease (SFR). As of March 31, 2022, the company was in 16 markets, with over 82,000 homes.

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

Invitation Homes Inc.

LT IDR

BBB

Affirmed

BBB

Invitation Homes Operating Partnership LP

LT IDR

BBB

Affirmed

BBB

senior unsecured

LT

BBB

Affirmed

BBB

Page

of 1

VIEW ADDITIONAL RATING DETAILS

Additional information is available on www.fitchratings.com

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