American Homes 4 Rent quarterly report, Q3 FY2018

American Homes 4 Rent — Q3 2018 Form 10-Q

Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2018, with comparisons to 2017. The company is a REIT focused on owning, renovating, leasing and operating single-family rental homes; substantially all operations and debt are held through American Homes 4 Rent, L.P. At quarter-end, it owned 52,464 homes in 22 states, including 2,266 identified for disposition.

Financial and operating results

Metric	Q3 2018	Q3 2017	Nine months 2018	Nine months 2017
Total revenue	$280.1 million	$246.8 million	$802.5 million	$717.6 million
Net income	$30.3 million	$19.1 million	$77.7 million	$46.0 million
Net income attributable to common shareholders	$15.2 million	$1.5 million	$5.8 million	$(0.1) million
Operating cash flow	Not provided for quarter	Not provided for quarter	$376.5 million	$349.4 million
Adjusted FFO attributable to common share and unit holders	$79.4 million	$67.1 million	$236.2 million	$207.2 million

Revenue rose 13.5% in Q3 and 11.8% for the nine-month period, driven primarily by portfolio growth, leasing and higher rents. Same-Home Core NOI was $109.1 million in Q3, up from $105.1 million; its margin was 63.4%, versus 63.8%. For nine months, Same-Home Core NOI was $327.6 million, versus $320.2 million, while its margin declined to 64.0% from 64.9%.
Q3 Same-Home realized rent averaged $1,578 monthly, compared with $1,526 a year earlier; occupied days were 95.2%, versus 94.1%. Same-Home rent growth was 3.4% year over year in Q3. Portfolio leased percentage was 95.2% excluding disposition properties.
For the nine months, investing cash outflow was $481.9 million and financing cash inflow was $188.8 million. Cash, cash equivalents and restricted cash increased $83.3 million to $266.2 million. This included $110.1 million of unrestricted cash and $156.0 million of restricted cash at period-end.
Debt principal totaled $2.713 billion; balance-sheet debt, net of discounts and financing costs, was $2.672 billion. The company had no revolving-facility borrowings against its $800 million capacity and $100 million outstanding on its term loan. Total liabilities were $2.982 billion and total equity was $5.989 billion.
Common distributions declared were $0.05 per share for Q3. The filing reports nine-month common distributions of $0.15 per share.

Material changes versus comparable periods

Q3 total revenue increased by $33.2 million and net income by $11.2 million versus Q3 2017. For the nine months, revenue increased by $84.9 million and net income by $31.7 million.
Common-shareholder results reflect preferred distributions and a one-time $32.2 million allocation associated with the April 2018 conversion of Series C participating preferred shares into 10.8 million Class A shares. This substantially affected nine-month common earnings; the redemption allocation is not a recurring operating expense.
Property operating expense rose 16.0% in Q3 and 17.3% over nine months. Management cited property-tax timing and higher repairs in Q3, and elevated turnover costs early in 2018 as part of an occupancy-strengthening initiative for the nine-month increase. Q3 property-management expense increased in dollars but fell as a proportion of revenue net of other revenue, which management attributed to greater efficiencies.
In February, the Operating Partnership issued $500 million of 4.25% senior notes due 2028, with a 4.08% effective yield after hedging. It used financing activity to repay the secured note and reduce term-loan borrowings; interest expense nevertheless increased to $92.2 million for nine months from $86.9 million.
The company issued $115 million of 6.25% Series H preferred shares in Q3 and repurchased $34.9 million of common shares during the nine months. The Series C conversion and issuance of shares contributed to a higher common-share count.
Disposition properties expanded from 310 at December 31, 2017 to 2,266 at September 30, 2018. The company said it was exiting six smaller markets and evaluating other properties for sale.

Outlook, risks and unusual items

The filing gives no specific quantitative earnings or operating guidance. Management expects operating liquidity generally to come from cash on hand and operations, and believes rental cash flow, net of operating expenses and recurring capital expenditures, will generally fund operations and distributions. It cautions that real estate assets are illiquid and might not be a timely source of liquidity.
The $115 million principal of 3.25% exchangeable senior notes was due November 15, 2018. In August, the company elected cash settlement. This near-term cash requirement is important alongside the reported liquidity position.
Management identifies acquisition availability and cost, renovation and leasing timing, occupancy, tenant turnover, rent collection, operating expenses, access to capital and capital structure as factors affecting performance. Seasonality affects tenant moves and certain repair and landscaping costs. Variable-rate debt creates interest-rate exposure; a 100-basis-point rate increase was estimated to raise annual interest expense by $1.0 million at September 30, 2018, before capitalization.
Hurricanes Harvey and Irma generated $10.1 million of net charges in 2017; no hurricane-related charges were recorded in the first nine months of 2018, and $4.0 million of insurance proceeds were received. Hurricane Florence caused approximately $0.5 million of Q3 repair costs. After quarter-end, Hurricane Michael damage to properties in Georgia and the Carolinas was estimated at $0.4 million to $0.7 million.
The company disclosed two ongoing SEC investigations with subpoenas: one concerning certain single-family rental securitizations and broker price opinions, and another concerning trading in Silver Bay Realty Trust stock. The company said it was cooperating and did not expect either matter to have a material adverse effect; neither disclosure alleges a violation of law.
The company had commitments to acquire 196 homes for $48.3 million and $67.3 million of commitments related to developer agreements and land for construction. It also reported that it was in compliance with debt covenants. Management reported effective disclosure controls and no material changes to internal control over financial reporting.

Key facts investors should verify

How the November 15, 2018 exchangeable-note cash settlement was funded and its effect on subsequent liquidity and debt.
Whether the enlarged disposition program, including the planned exit from six markets, affects occupancy, rental revenue, property-sale proceeds or impairment charges.
Whether same-home operating expense growth and lower same-home NOI margin persist, particularly after the early-2018 turnover initiative and property-tax timing effects.
Actual damage, insurance recoveries and remediation costs related to Hurricane Michael, and any further hurricane-related operating effects.
Developments in the SEC investigations and any material change to the company’s assessment of their potential consequences.
Cash available for distributions after recurring capital expenditures and leasing costs; non-GAAP FFO and NOI measures are supplemental and are not substitutes for GAAP earnings or operating cash flow.