Like many real estate stocks, Invitation Homes (INVH) has been under pressure this year. Shares of the real estate investment trust (REIT) currently sit more than 13% below their 52-week high.

The main factor weighing on its shares is the significant surge in interest rates. That’s increasing borrowing costs and could slow down the economy and demand for rental housing.

However, the decline in Invitation Homes’ share price has the residential REIT trading at a discount to the value of its real estate portfolio. It has also driven its dividend yield up to 3.3%, more than double the S&P 500’s current yield of 1.6%. These factors make it look like an attractive investment opportunity right now.

A bargain in the current housing market
Evercore ISI analyst Steve Sakwa recently highlighted Invitation Homes by upgrading the stock from in-line to outperform. One factor driving that upgrade was that the REIT currently trades at a 21% discount to its net asset value (NAV). That’s almost double its average discount of 11% over the years.

That has the REIT trading at an attractive value, especially considering its rental growth upside. Limited supply is driving up home values, while surging mortgage rates are pushing up mortgage payments. Because of that, it’s currently much cheaper to rent than buy. According to data from John Burns, it’s $1,000 per month or 30% cheaper to rent one of the REIT’s homes than to buy a comparable property.

These market conditions are allowing Invitation Homes to steadily raise rents as existing leases expire. Rents grew about 7% year over year during the second quarter. While that’s a notable slowdown from 2022’s 11.8% growth rate, it’s faster than the 5% rent growth the REIT saw in 2018-2019.

Invitation Homes should be able to continue increasing its rents at above-average rates even if there’s a recession. That’s because the affordability gap between renting and owning remains wide, and there’s limited new supply of single-family homes coming on the market. These factors drive Sakwa’s view that while rent growth and occupancy will likely moderate in the coming months as the economy slows, rents for single-family homes should increase faster than apartments.

Dual dividend growth drivers
The continued healthy rental growth rates will help drive strong same-store net operating income (SSNOI) growth for Invitation Homes. Since 2017, the REIT’s SSNOI has grown by 46.6% overall, outperforming other single-family REITs and those focused on multifamily properties by a wide margin. That’s giving it more income to pay dividends.

The company’s other growth driver is acquisitions. It has many acquisition sources, including buying homes directly from builders and purchasing properties from other investors. Invitation Homes recently acquired a large-scale portfolio of 1,870 homes from one seller for $645 million. Given the current housing market, that portfolio would have been impossible to replicate at that price through one-off transactions.

In addition, Invitation Homes continues to buy homes directly from builders through its partnerships. It purchased 157 homes in the second quarter from its homebuilder partnerships. Meanwhile, it added another 173 homes to its pipeline and has agreed to acquire nearly $900 million of new homes in the future. Add in its other acquisitions, and the REIT purchased 276 homes for $88 million in the second quarter, including wholly owned homes and those purchased in its various joint ventures.

These drivers are helping grow Invitation Homes’ cash flow at a healthy pace. That’s enabling the REIT to increase its dividend. It boosted its payout by 18.2% earlier this year and has grown its dividend by over 330% since coming public in 2017.

A great buy right now
Invitation Homes currently trades at a wide discount to the underlying value of its rental property portfolio. That gives investors a great entry point for a company that should continue growing its rental income and dividends even if there’s a recession. That income and growth combination for a value price makes Invitation Homes look like an attractive stock to buy right now.

— Matthew DiLallo

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Source: The Motley Fool