American Homes 4 Rent quarterly report, Q3 FY2014

American Homes 4 Rent — Q3 2014 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2014. Unaudited consolidated financial statements; amounts below are in millions unless stated otherwise. The company is a REIT focused on acquiring, renovating, leasing, and operating single-family rental homes. Results are not fully comparable year over year because the portfolio expanded substantially and prior-period statements reflect predecessor and acquisition activity.

Business context and operating performance

Owned 30,877 homes across 22 states at September 30, 2014, versus 21,267 a year earlier. At quarter-end, 26,161 homes were leased (84.7% of the portfolio), compared with 14,384 (67.6%) a year earlier.
Average leased homes rose to 24,763 in Q3 from 12,315; for the nine-month periods, the average increased to 21,880 from 7,033. Q3 portfolio growth included the acquisition of 1,372 Beazer homes.
Leasing measures: reported occupancy was 93.2% for homes available for rent at least 30 days and 94.1% for at least 90 days. Average annual scheduled rent per property was $16,931.
For leases ending in the first nine months, tenant retention was 70.3%, with an average renewal rent increase of 3.4%. Management said leasing efforts prioritized occupancy over rent increases.

Financial results and liquidity

Metric	Q3 2014	Q3 2013	Nine months 2014	Nine months 2013
Total revenue	$110.4	$49.5	$282.0	$74.1
Net loss	$(12.8)	$(3.9)	$(23.1)	$(9.6)
Net loss attributable to common shareholders	$(21.7)	$(7.7)	$(47.7)	$(29.4)
Basic and diluted loss per share	$(0.11)	$(0.05)	$(0.25)	$(0.29)
Net operating income (NOI, non-GAAP)	$59.4	$31.6	$164.3	$46.5
Core FFO per weighted-average FFO share (non-GAAP)	$0.15	$0.10	$0.42	$0.09

Q3 NOI margin on single-family property revenue was 54.0%, down from 64.2%; the nine-month margin was 58.5%, down from 63.3%. Leased-property operating costs rose as a share of revenue, with higher maintenance and turnover costs, property-management costs, and bad debt.
Q3 acquisition fees and costs expensed were $14.6, versus $0.5 a year earlier; nine-month expense was $15.9, versus $4.0. Depreciation and amortization was $44.9 for Q3 and $118.3 for the nine months. Interest expense was $5.1 and $10.5, respectively.
Cash from operating activities was $131.7 for the first nine months, versus $4.3 a year earlier. Investing cash outflow was $1,261.4, including $914.1 for property purchases and $136.2 for initial renovations. Financing cash inflow was $1,084.7. Cash and cash equivalents ended the period at $103.9, down from $149.0 at year-end 2013.
Total assets were $5,536.3 and total liabilities $1,349.5 at September 30. Debt included $993.1 of asset-backed securitizations and $82.0 outstanding on the credit facility. The company reported $718.0 of remaining credit-facility availability and compliance with applicable debt covenants.
Operating cash flow and investment needs should be considered together: substantial acquisition and renovation spending was funded through equity, securitizations, and credit-facility activity.

Material changes and unusual items

Portfolio scale and revenue increased sharply, largely reflecting many more leased homes, acquisitions, and the July Beazer Rental Homes acquisition. Beazer contributed $5.3 of revenue and $0.5 of net income from July through September.
In May, the company completed a $481.0 floating-rate securitization, with a two-year initial term and a weighted spread of LIBOR plus 1.54%; an interest-rate cap applied for the initial term. In September, it completed a $513.3 fixed-rate, ten-year securitization at a weighted-average 4.42%. Proceeds primarily repaid credit-facility borrowings; the company also purchased $25.7 of non-interest-bearing Class F certificates in the second transaction.
In August, it issued 17.8 million Class A shares in a public offering and concurrent private placement, generating $313.3 gross proceeds, and issued 7.6 million Series C preferred shares in May for $190.0 gross proceeds. Share count and preferred dividends increased; preferred distributions were $13.4 for the nine-month period.
Noncash remeasurement of the Series E units and preferred-share derivative affected earnings. The preferred derivative liability rose to $57.4 from $28.2 at year-end; the Series E liability was $71.1 versus $66.9.
Management attributed part of the nine-month vacant-property cost increase to approximately $0.9 of one-time transition costs and $1.2 of freeze-related damage; the reported insurance deductible for the weather events was $0.4, with the company expecting the damage to be recovered through insurance.

Outlook, management commentary, and risks

Management expects acquisition activity to vary with suitable investment availability and funding. It anticipated another securitization in Q4 2014, but stated there was no assurance it would be completed.
The company planned to internalize the Sponsor’s acquisition and renovation platform in December 2014. Management expected the change to be cash-flow positive, while warning that a larger share of costs would be expensed under GAAP rather than capitalized as acquisition fees.
Management expects occupancy to increase as recently acquired homes become a smaller proportion of the portfolio. Near-term growth depends on renovating and leasing new homes; longer-term performance depends more on tenant retention and rent increases. Turnover and seasonality can affect rent and costs.
Interest-rate exposure is material: a 100-basis-point increase in LIBOR was estimated to raise annual interest expense by about $5.6, before considering capitalization. The company noted that higher rates could also make acquisitions more costly or reduce yields.
Key risks include illiquid real estate and reliance on continued financing; debt covenant and cash-management provisions; potential cash sweeps if securitization performance tests are not met; and REIT qualification. The company also disclosed potential adverse tax consequences if Beazer Rental Homes failed to qualify as a REIT before its merger, and operational disruption risks from a recent financial and property-management software conversion.
Subsequent to quarter-end, the company acquired 971 homes for approximately $150.5 through October 31. Credit-facility borrowings and repayments in October resulted in an outstanding balance of $273.0 on October 31. The board declared a $0.05 quarterly common-share dividend payable in December.

Important facts for investors to verify

Whether leasing and occupancy gains translate into improved same-home NOI, given the lower reported NOI margins and higher maintenance, turnover, and bad-debt costs.
How much of growth in revenue and cash flow reflects portfolio expansion and acquisitions versus comparable-property performance; year-over-year periods are not directly comparable.
Debt maturities, interest-rate sensitivity, securitization performance tests, and available liquidity after planned acquisitions, renovations, and distributions.
Actual costs and operating impact of internalizing acquisition and renovation functions, including the shift from capitalized fees to expenses.
Resolution of the Beazer REIT qualification exposure and indemnification escrow, as well as progress and any effects of the management-system conversion.
Definitions and reconciliations of non-GAAP NOI, FFO, and Core FFO; these measures are not substitutes for GAAP earnings or operating cash flow.