Invitation Homes Acquires 580 New Homes, Thumbs Nose At Congress

On the playground of the U.S. financial system, there is always a tug-of-war between those representing free markets and those in Government who seek to regulate it and prevent excesses that could harm the public good.

Real estate investment trusts (REITs) have recently come under intense Government scrutiny, with one side feeling it's necessary while the other side argues it's just a way to score political points through excessive Government control.

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Invitation Homes 

Invitation Homes Inc. INVH, a Dallas-based residential REIT, purchases large numbers of higher-quality single-family homes and then leases or lease-purchases them to higher-income tenants.

Invitation Homes has more than 80,000 homes for lease in desirable neighborhoods across the U.S. and is now the largest owner/landlord of single-family homes in the country. It focuses on communities with strong rental demand and where purchasing homes is difficult due to high prices and limited inventory. Its second-quarter 2024 average occupancy rate was 97.1%, a slight decline from 97.6% in the first quarter. 

On Sept. 9, Invitation Homes announced it had acquired 580 newly constructed single-family homes from two homebuilders during July and August, for a total price of $216 million. These homes will be used as single-family rentals.

Invitation Homes also secured a $3.5 billion unsecured credit facility, consisting of a $1.7 billion revolving line of credit and a $1.75 billion term loan, maturing in 2028. This replaces an existing $2.5 billion unsecured term loan facility that would have expired in January 2026.

More Build-To-Rent (BTR) homes will be forthcoming. As of June 30, Invitation Homes had a BTR pipeline of nearly 2,700 homes.

However, not everyone is happy with the success of REITs such as Invitation Homes. In December 2023, Congressman Adam Smith (D-Wash.) and Sen. Jeff Merkley (D-Ore.) introduced the "End Hedge Fund Control of American Homes Act of 2023." 

If passed, this bill would restrict hedge funds, REITs, and other pooled funds from investing in single-family homes. It would also mandate that such investors sell at least 10% of their single-family home holdings each year for the next decade. Thus, within 10 years, REITs would be required to own far fewer single-family homes than they do now. Any large entity still owning more than 100 homes would face heavy excise taxes on 50% of the fair market value of each residence.

Although this legislation had the potential to devastate hedge funds and real estate investment trusts (REITs) that invest in single-family homes, it didn't significantly affect REIT share prices. Investors realized that the chances of the bill passing as written were slim.

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There are concerns that such a law could be unconstitutional. From a pragmatic standpoint, it could force hundreds of thousands of renters to scramble for new living quarters. If so many homes were forced onto the sales market, it might also severely impact the real estate market.

When that bill didn't go anywhere, California State Sen. Nancy Skinner introduced SB 1212 in February 2024 to prohibit an investment entity from purchasing, acquiring, or leasing a single-family home or duplex in California. The Senator noted that California has the lowest level of owner-occupied homes in decades because hedge funds and large investment firms with billions in cash can outbid average families trying to buy a home with a mortgage. This bill did not pass either.

Proponents of these laws feel that hedge funds and REITs hold an unfair advantage over ordinary citizens and are preventing families from buying a home with a standard mortgage. They also feel that investment firms have exacerbated the housing crisis and are escalating prices with so many purchases.

However, the housing numbers do not support that view. As of this week, there were 909,344 active listings for homes for sale in the U.S. Obviously, hedge funds and REITs are not buying up all of the houses. 

Colin Trovato, portfolio manager at Ranger Global Real Estate Advisors, noted in a recent Podcast that it's about 28% cheaper to rent than to buy a home today, well above the 5% historical standard. In his view, institutional landlords have contributed to the overall housing market and are part of the solution, not the problem. Trovato states they have been unfairly painted as removing too many houses from the market. He adds that rentals serve those who like the flexibility inherent in renting rather than owning. REITs such as Invitation Homes have addressed the housing shortage by building new homes and updating existing ones.

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Those opposed to the recently proposed legislation feel it is government interference in the free market and question the constitutionality of forcing a company to sell its assets, destroy its business model, and risk shareholder value with excessive taxation.

In another instance of the Government coming down on REITs, a recent letter by Sen. Elizabeth Warren (D-Mass) to the Internal Revenue Service (IRS) urges them to increase scrutiny on health care and hotel REITs to see if they are violating U.S. tax laws by using a taxable REIT subsidiary (TRS) to operate the REIT's properties indirectly. Thus far, the IRS has not named any REITs as violating the tax laws.   

Investors should realize that in election years, politicians often create legislation that sounds good to win votes, even if they know it is unlikely to be passed.

The End Hedge Fund Control of American Homes Act is likely going nowhere. The bill has been sitting in the House Ways and Means and Financial Services Committees since the same day it was introduced. Adam Smith and Jeff Merkley received some favorable media coverage for introducing it, but thus far, no one seems anxious to try to pass it.

In the meantime, Invitation Homes continues its home purchasing plan, undaunted by any lectures from Washington or elsewhere.