American Homes 4 Rent quarterly report, Q3 FY2019

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American Homes 4 Rent — Q3 2019 Form 10-Q

Reporting period: Three and nine months ended September 30, 2019; filed November 8, 2019. AH4R is a REIT that acquires, develops, renovates, leases and operates single-family rental homes. The Operating Partnership owns and operates substantially all assets. Unless noted, financial amounts below are in U.S. dollars.

Business context and operating performance

  • At quarter-end, the Company held 52,537 homes in 22 states, including 1,439 classified as held for sale. Excluding held-for-sale homes, 95.6% of properties were occupied; average occupied-days percentage was 95.2% for the quarter.
  • Average monthly realized rent was $1,641 per property for the quarter. Same-Home realized rent increased 3.6% year over year; blended rent change on renewals and re-leases was 4.0%.
  • During Q3, the Company acquired or developed 244 homes and sold 341. Its strategy increasingly emphasized internal construction and purchases of newly built homes.

Financial results and liquidity

  • Revenue: Q3 revenue was $298.3 million, up 6.5% from $280.1 million; nine-month revenue was $859.4 million, up 7.1% from $802.5 million. Growth reflected more occupied homes and higher rents.
  • Profit: Q3 net income was $41.4 million versus $30.3 million; net income attributable to common shareholders was $23.5 million versus $15.2 million, or $0.08 versus $0.05 per diluted share. Nine-month net income was $114.8 million versus $77.7 million; common-shareholder income was $62.3 million versus $5.8 million, or $0.21 versus $0.02 per diluted share. The prior-year nine-month common result included a $32.2 million allocation related to redemption of participating preferred shares.
  • Property-level results: Core NOI, a non-GAAP measure, rose 5.1% to $150.9 million in Q3 and 7.6% to $455.5 million for nine months. Same-Home Core NOI margin declined to 61.8% from 62.7% in Q3 and to 63.2% from 63.5% year to date. Management cited elevated property taxes and higher repairs, maintenance and turnover costs. Adjusted FFO attributable to common share and unit holders was $83.9 million for Q3 and $257.5 million for nine months.
  • Cash flow: Nine-month operating cash flow was $420.4 million, compared with $376.5 million. Investing cash outflow was $224.1 million, versus $481.9 million, including $236.4 million of development spending and $151.5 million of net sale proceeds. Financing cash outflow was $73.5 million, compared with $188.8 million of inflow. Cash, cash equivalents and restricted cash ended at $298.0 million, of which $171.2 million was unrestricted cash and cash equivalents.
  • Debt and liquidity: Debt principal totaled $2.876 billion at September 30; balance-sheet debt, net of discounts and financing costs, was $2.837 billion. Asset-backed securitizations were $1.976 billion principal and unsecured senior notes were $900 million principal. No amounts were drawn on the $800 million revolver; $4.8 million was committed to letters of credit. The term loan was fully repaid in June, and management reported no variable-rate debt outstanding at quarter-end.
  • Balance sheet: Total assets were $9.140 billion, total liabilities $3.133 billion and total equity $6.007 billion. Net real estate assets were $8.469 billion.

Material changes versus comparable periods

  • Q3 and nine-month revenue and net income increased, supported by occupancy and rent growth, while property operating and management expenses also rose. Gains on property sales were $13.5 million for Q3 and $32.9 million for nine months, above the respective 2018 amounts of $5.0 million and $10.4 million.
  • The Company issued $400 million of 4.90% unsecured notes due 2029 in January 2019, using proceeds in part to repay revolver borrowings. Compared with year-end 2018, debt principal increased modestly, while the revolver and term loan balances were eliminated.
  • Investing cash outflow fell substantially year over year as property acquisition spending declined and sale proceeds increased; development spending rose to $236.4 million from $149.5 million.
  • The Company adopted the new lease accounting standard on January 1, 2019 using the simplified transition method, without restating comparative periods or recording a cumulative opening adjustment. The standard changed the presentation of certain rental income and bad debt expense and caused additional leasing costs to be expensed.

Outlook, commentary and risks

  • The filing provides no specific earnings or operating guidance. Management expects operating liquidity generally to come from cash on hand and operations, and believes rental income after operating expenses and recurring capital expenditures will generally fund operations and distributions. It cautions that real estate is illiquid and other financing may be needed if cash flows fall short.
  • Management cited property-tax valuation increases, weather and hurricane-related repair and turnover costs, tenant turnover, leasing and construction timelines, and the availability and cost of suitable properties as factors affecting results. Seasonal move-ins and move-outs can affect revenue and costs.
  • The Company reported an ongoing SEC investigation concerning its 2016–2017 trading in Silver Bay Realty Trust securities. It said it was cooperating and believed any monetary payment in a negotiated resolution would not be material, but stated there was no assurance a mutually agreeable resolution could be reached.
  • AH4R’s REIT status depends on meeting tax qualification and distribution requirements. The Company expects to use federal net operating loss carryforwards, reported at approximately $275 million as of December 31, 2018; distributions may need to increase when those losses are exhausted. Management reported no material change to the risk factors in its 2018 Form 10-K.
  • Management concluded disclosure controls were effective at a reasonable assurance level and reported no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

  1. Whether rent growth and occupancy can offset rising property taxes, maintenance, turnover and property-management costs, including the recent decline in Same-Home Core NOI margins.
  2. Development spending, construction commitments and the pace and economics of home acquisitions and dispositions; confirm the contribution of property-sale gains to reported earnings.
  3. Debt maturities, refinancing access and the terms and cost of future borrowing, as well as actual availability under the revolver.
  4. The status and potential outcome of the SEC investigation, and any subsequent developments in legal or other contingencies.
  5. Cash generation after recurring capital expenditures and leasing costs, distributions, and the impact of lease-accounting presentation changes on comparisons with prior periods.

Core NOI and FFO measures are non-GAAP supplemental measures and should not be treated as substitutes for GAAP income or operating cash flow.