Key Takeaway: We do not think INVH's results were a great read through to TCN, and think that the ~6.3% selloff is likely significantly overdone. We think TCN likely properly accrued its property taxes already, has less exposure to bad debt/eviction delays and will continue to have group-low turnover, all of which are differences compared to what INVH reported. We do think the company will face the same pressures as the rest of residential on the repair and maintenance (R&M) line.
• INVH news: INVH traded off 7.7% on Thursday after reporting 3Q22 earnings after the close on 10/26. The primary reason was an unexpectedly large guide down to 4Q22 estimates. There were two primary components, including higher than expected property taxes and higher than expected bad debt due to eviction proceedings taking longer than expected. Higher non-property tax expenses also contributed, particularly in the repair and maintenance (R&M) and turnover categories. On the property tax front, assessments in Florida and Georgia came in nearly 30% higher YoY, causing INVH's expectations for 2022 property tax growth to jump by 300 bps to 7-8% YoY. INVH expects this to result in high teens expense growth in 4Q22 to true up expenses that were under accrued during 1Q22-3Q22.
• Read through for TCN property taxes: In 1H22, TCN reported total same home property tax growth of 13.6%, well in excess of the 4.5% that INVH reported over the same time period, and also well above INVH's revised 7-8% 2022 property tax growth guidance. We do think that TCN will likely see greater property tax growth than INVH given less exposure to California (18% of homes for INVH, 4% for TCN), where tax increases are limited by Prop 13. However, we think that TCN has likely accrued properly for rising property taxes, both obviating the need for a large true up in 4Q22 and likely indicating lower property tax growth rates in 2023 as well.
• Read through for TCN bad debt: INVH called out five regions where eviction proceedings are taking a particularly long time. In order of delay, these are Southern California, Northern California, Illinois, Georgia and Las Vegas. In SoCal, INVH cited a 180-200+ day time lag, with NorCal at 120-180 days, Georgia at 150+ days and Las Vegas at 150 days. INVH's exposure to these five cities is 38%, while TCN's exposure is lower at 27%. We also think bad debt problems are most acute in Southern California, where TCN has <1% exposure and INVH is at 12%. As a result, we also do not think there is a great read through to TCN from INVH's bad debt issues.
• Read through for TCN controllable operating expenses: INVH noted an increase in controllable operating expenses both in the R&M (+16% YTD) and turnover (+1% YTD, but +15% in 3Q22) categories. For 1H22, TCN's turnover expense was actually down significantly at -47% YoY, while R&M was up 9%. TCN has consistently led the group in low turnover, and we think this is likely to continue given TCN's management of renewal rate increases at a relatively lower level. We also think fewer bad debt issues in the TCN portfolio likely lead to less turnovers on eviction. On the R&M front, we think TCN will likely face the same pressures as INVH.