American Homes 4 Rent — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; compared with the three months ended March 31, 2017, unless otherwise noted. AH4R is a REIT that acquires, renovates, leases and operates single-family rental homes through American Homes 4 Rent, L.P. (the Operating Partnership). Figures below are consolidated.
Financial and operating results
| Metric | Q1 2018 | Q1 2017 | Change / context |
|---|---|---|---|
| Total revenue | $258.0 million | $233.8 million | Up 10.4%; rents were $218.0 million, up 8.4%. |
| Net income | $21.5 million | $11.8 million | Up 82.5%; net margin was approximately 8.3%, versus 5.0%. |
| Net income (loss) attributable to common shareholders | $5.8 million; $0.02 per share | $(1.5) million; $(0.01) per share | Turned positive; preferred dividends were $14.6 million. |
| Operating cash flow | $112.5 million | $110.0 million | Nearly flat. |
| Investing cash flow | $(221.6) million | $(70.0) million | Higher property, productive-asset and renovation spending. |
| Financing cash flow | $286.5 million | $340.6 million | Included proceeds from the new senior notes and repayment of revolving borrowings. |
| Core NOI | $137.1 million; 62.6% of core revenue | $131.7 million; 65.1% | Up 4.1%; margin narrowed. |
| Same-Home Core NOI | $109.8 million | $109.9 million | Essentially unchanged; after recurring capital expenditures, $103.8 million versus $104.6 million. |
Same-Home core revenue rose 3.1%, while core property operating expenses rose 9.3%. Same-Home average monthly realized rent increased to $1,553 from $1,494. Portfolio leased occupancy, excluding properties identified for disposition, was 95.5%; average monthly realized rent across the portfolio was $1,545 and blended rent change was 3.7%.
Balance sheet, debt and liquidity
- At March 31, 2018, total assets were $9.0 billion and total liabilities were $3.1 billion. Single-family properties, net, were $8.2 billion.
- Debt principal totaled $2.872 billion; debt reported on the balance sheet, net of discounts and financing costs, was $2.825 billion. Debt principal increased from $2.517 billion at year-end 2017, primarily reflecting the February issuance of $500 million of 4.25% senior notes due 2028.
- The new notes generated approximately $494 million of net proceeds before estimated offering costs. A treasury-lock settlement resulted in a $9.6 million gain recorded in other comprehensive income, to be recognized as a reduction of interest expense over the notes’ term.
- The $800 million revolving credit facility had no borrowings outstanding; the $200 million term loan facility was fully drawn. Cash and cash equivalents were $203.9 million, with an additional $156.3 million of restricted cash. Management reported compliance with debt covenants.
- Interest expense was $29.3 million, down from $31.9 million. The Operating Partnership also had $115 million of 3.25% exchangeable notes due November 2018. The filing reports $131.3 million of contractual debt maturities for the remainder of 2018.
Material changes, outlook and notable items
- The Company held 51,840 homes across 22 states, up from 48,336 a year earlier. In Q1 it added a net 601 homes. At March 31, 47,677 homes were leased.
- The disposition program expanded substantially: 1,892 properties were identified for disposition, including 1,318 classified as held for sale and 574 designated for future sale, versus 310 properties at year-end. The Company said it was exiting five smaller markets and would continue evaluating properties for sale.
- Management attributed improved net income mainly to a larger number of leased homes and higher rental rates. It said Same-Home operating costs were affected by winter freeze damage, elevated vacancy carrying costs, and temporarily higher turnover and management costs as it sought to restore occupancy to stabilized levels.
- The Company repurchased 1.8 million Class A shares for $34.9 million at a weighted-average $19.36 per share. It had $265.1 million of common-share and $250 million of preferred-share repurchase authorization remaining at quarter-end.
- On April 5, 2018, after quarter-end, all 7.6 million Series C participating preferred shares were converted into 10.85 million Class A shares. The Company expected to allocate $32.2 million of income to those preferred holders in Q2. The May 3 common dividend declaration remained $0.05 per share.
- No numerical earnings or operating guidance was provided. Management expects operating liquidity generally to come from cash on hand and operations, but cautioned that real estate assets are illiquid and may not be a timely source of liquidity in a shortfall.
- Risks include interest-rate exposure, acquisition competition and costs, vacancy and turnover, property operating costs, and the ability to maintain REIT qualification. A 100-basis-point rate increase was estimated to raise annual interest expense by about $2.0 million, assuming debt balances remain unchanged.
- The Company disclosed SEC subpoenas concerning single-family rental securitizations and broker price opinions, and a separate investigation concerning its trading in Silver Bay Realty Trust stock. It said it was cooperating and did not expect either matter to have a material adverse impact. It also reported routine legal proceedings it did not expect to be material.
Most important facts for investors to verify
- Whether rent growth and occupancy gains can offset the increase in property operating and management costs, particularly given Same-Home Core NOI was flat.
- The execution, sale proceeds and earnings or cash-flow effects of the expanded disposition program and exit from five smaller markets.
- The use of proceeds from the $500 million notes, ongoing debt levels, the November 2018 exchangeable-note maturity and available revolver capacity.
- The Q2 accounting and dilution effects of the Series C conversion and the resulting $32.2 million income allocation.
- Developments in the SEC investigations and any material change in the Company’s assessment of legal or regulatory exposure.