American Homes 4 Rent — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; balance-sheet figures are as of March 31, 2015, unless otherwise noted. The company is a REIT focused on acquiring, renovating, leasing and operating single-family rental homes.
Business context and operating performance
The portfolio grew to 36,588 homes in 22 states from 34,599 at year-end 2014 and 25,505 a year earlier. At quarter-end, 31,183 homes were leased, or 85.2% of the portfolio; the reported leased percentage was 81.0% a year earlier. Average scheduled monthly rent per property was $1,411.
- Same-home core revenue increased 2.8% to $52.3 million. Average monthly rent rose to $1,409 from $1,374, while average occupancy declined to 92.3% from 94.6%.
- Tenant renewal rate was 79.2%, versus 83.0%; rent increases on renewed non-month-to-month leases averaged 3.6%, versus 2.8%. Tenant retention, including early terminations, was 68.1%, versus 71.8%.
- Management’s non-GAAP Initially Leased Property Core NOI was $76.5 million, compared with $47.7 million. As a percentage of core revenue, it was 63.3%, versus 64.8%.
Financial results and liquidity
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Total revenue | $131.7 million | $77.3 million |
| Net loss | $8.3 million | $6.9 million |
| Net loss attributable to common shareholders | $17.8 million; $0.08 per share | $13.7 million; $0.07 per share |
| Interest expense | $15.7 million | $1.5 million |
| Depreciation and amortization | $53.7 million | $35.1 million |
| Operating cash flow | $28.9 million | $47.2 million |
| Investing cash flow | $(373.2) million | $(379.1) million |
| Financing cash flow | $351.2 million | $286.1 million |
| Ending cash and cash equivalents | $115.7 million | $103.2 million |
Cash used for property purchases and renovations drove investing outflows: the filing reports approximately $295.0 million for property acquisitions and $60.0 million for renovations. Q1 2015 financing included $552.8 million of securitization proceeds, partly offset by $162.0 million of net credit-facility repayments. Cash and cash equivalents plus restricted cash totaled $202.1 million.
Total debt was $2.165 billion, compared with $1.778 billion at December 31, 2014. It comprised $2.068 billion of asset-backed securitizations, a $51.4 million secured note and $45.0 million drawn on an $800 million credit facility. The company reported compliance with debt covenants. Subsequent to quarter-end, credit-facility borrowings and repayments resulted in a $94.0 million balance at April 30, 2015.
FFO was $37.3 million, or $0.14 per weighted-average FFO share and unit; Core FFO was $41.9 million, or $0.16. These are non-GAAP measures and are not substitutes for GAAP earnings or operating cash flow, nor necessarily cash available for distributions.
Material changes and unusual items
- Revenue growth principally reflected portfolio expansion, including growth in average leased non-same-home properties. Total revenue increased about 70% year over year.
- Interest expense rose substantially as aggregate borrowings increased to about $2.2 billion from $671.0 million at March 31, 2014.
- Acquisition fees and costs expensed rose to $5.9 million from $0.5 million. Following the December 2014 internalization of acquisition and renovation services, internal acquisition-function costs are expensed, whereas the former 5% related-party fee was primarily capitalized for asset acquisitions.
- Vacant-property expenses fell to $6.0 million from $9.0 million; Q1 2014 included severe-weather-related costs and a $0.4 million insurance deductible.
- The March 2015 securitization raised $552.8 million gross before $13.3 million of issuance costs, was secured by 4,661 homes with $751.2 million net book value, and has a 4.14% weighted-average rate and an April 2025 anticipated repayment date. Failure to repay then may trigger a higher interest rate.
Outlook, risks and contingencies
Management expects acquisition activity to fluctuate with suitable investment availability and access to capital. It expects portfolio occupancy to rise as recently acquired homes are renovated and leased, while longer-term revenue growth will depend more on tenant retention and rent increases. The filing gives no specific numerical earnings or revenue guidance. Management stated that rental income, net of operating expenses and recurring capital expenditures, is generally expected to support operations and dividend distributions, but cautioned that many homes are not stabilized and real estate is illiquid.
Key risks include the pace and cost of acquisitions, renovation and leasing delays, occupancy and tenant turnover, operating costs, access to capital, and interest rates. A 100-basis-point increase in LIBOR was estimated to increase projected annual interest expense by $5.2 million before interest capitalization, considering the interest-rate cap. The company also noted REIT qualification and distribution requirements. It reported no material litigation, no material change to previously disclosed risk factors, and no off-balance-sheet arrangements. Outstanding renovation-contract commitments were $4.1 million; commitments to acquire 119 homes totaled $17.3 million. Management said routine legal and administrative matters were not expected to materially adversely affect financial position.
The board subsequently declared Q2 2015 distributions of $0.05 per Class A and Class B share and stated per-share distributions for Series A, B and C preferred shares. The filing says disclosure controls were effective; no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Whether portfolio growth translates into sustained same-home occupancy, rent growth and tenant retention, given lower same-home occupancy and renewal rates.
- Debt-service capacity and refinancing exposure, including the securitization’s 2025 anticipated repayment date, rate step-up provisions and variable-rate debt sensitivity.
- Cash generation relative to acquisition, renovation, interest and distribution needs; operating cash flow declined year over year.
- The effect of internalized acquisition costs and other growth-related expenses on GAAP results and property economics.
- How non-GAAP NOI, FFO and Core FFO reconcile to GAAP results and cash available for distributions.