Invitation Homes Inc. — Q3 2018 Form 10-Q
Business context and reporting period. Invitation Homes owns and operates single-family rental homes. This unaudited filing covers the quarter and nine months ended September 30, 2018. The company had 82,260 homes in 17 markets at quarter-end. The November 2017 Starwood Waypoint Homes (SWH) merger materially enlarged the portfolio; reported year-over-year growth therefore reflects acquisition scale as well as underlying performance.
Financial and operating performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $434.3 million | $243.5 million | $1,290.3 million | $724.5 million |
| Operating income | $83.8 million | $29.9 million | $228.7 million | $95.6 million |
| Net income (loss) | $1.0 million | $(22.5) million | $(30.7) million | $(59.4) million |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $513.1 million | $270.4 million |
Q3 operating margin was approximately 19.3%, versus 12.3% a year earlier; the comparison is affected by the merger and larger portfolio. Q3 diluted EPS was reported as $— (less than one cent when rounded); nine-month diluted EPS was $(0.06). Same-store rental revenue increased 4.4% in Q3 and 4.3% for the nine-month period. Same-store NOI, a non-GAAP measure, rose 4.9% and 4.5%, respectively.
Same-store occupancy was 95.5% in Q3 versus 95.0% a year earlier. Same-store average monthly rent per occupied home rose 3.8% to $1,746 in Q3. Same-store annualized turnover declined to 37.0% from 39.1% in Q3.
- Cash flow and investment: Nine-month investing cash outflow was $141.0 million. The company spent $184.5 million on acquisitions, $35.8 million on initial renovations and $104.8 million on other property capital expenditures, partly offset by $201.8 million of home-sale proceeds.
- Liquidity: At September 30, cash and cash equivalents were $130.0 million; an additional $253.6 million was restricted. The $1.0 billion revolving facility was undrawn.
- Debt: Debt, net of financing costs and discounts, totaled $9.455 billion: mortgage loans $7.410 billion, term loan $1.490 billion and convertible notes $555.1 million. Mortgage principal maturities are concentrated in 2019–2020, subject to contractual extension options and conditions. The $230 million 3.0% convertible notes mature July 2019.
- Dividends: The company declared $0.11 per share for Q3 and declared another $0.11 per share dividend in November, payable November 30, 2018.
Material changes versus the prior comparable period
- Total revenue increased 78.3% in Q3 and 78.1% for the nine months, primarily because the merger added 34,670 homes in late 2017. Same-store growth was more modest.
- Q3 operating expenses rose 64.1%, including higher property costs and depreciation following the merger. Interest expense rose 71.8% in Q3 and 57.1% year to date, reflecting higher average debt balances and higher LIBOR, partly offset by lower spreads after refinancing.
- Net loss narrowed year to date, while Q3 moved to a small profit. Q3 2017 included $16.0 million of impairment and hurricane-related losses; Q3 2018 impairment and other expense was $3.3 million.
- Three 2018 securitizations refinanced older mortgage debt. The company also entered interest-rate swaps that it said effectively converted $3.620 billion of floating-rate debt to fixed-rate debt.
Outlook, risks and unusual items
No quantified earnings or operating guidance is provided. Management said Western U.S. and Florida markets had favorable demand and supply fundamentals and expected those trends to continue in the near to intermediate term. It expects rental income, net of operating expenses, generally to support near-term operations and dividends, while noting long-term needs may require operating cash flow, borrowing, securities issuance and property sales. Management identifies potential merger benefits from operating efficiencies, cost reductions and synergies; these are expectations, not guaranteed results.
- Interest-rate exposure remains material: management estimated that a 100-basis-point LIBOR change would alter annual interest expense by approximately $17.4 million upward or $17.7 million downward, assuming debt balances remain unchanged.
- Seasonality, rent growth, occupancy, resident turnover, repair and maintenance costs, property taxes, insurance, HOA costs, acquisition competition and resident defaults can affect results.
- An SEC fact-finding investigation concerning single-family rental securitizations and broker price opinions remains ongoing. The company is cooperating and says its timing, outcome and scope cannot be predicted; no loss was recorded because a probable, estimable loss had not been determined.
- Management reported compliance with debt covenants. However, mortgage extension options are conditional, debt maturities are concentrated in 2019–2020, and real estate assets may not provide timely liquidity.
- Management’s disclosure-control assessment excluded SWH internal controls, which were still being integrated. Management stated disclosure controls were effective at the reasonable-assurance level.
- Subsequent events included sales of 1,324 homes for net proceeds of $210.0 million through October 31 and a $50.0 million voluntary mortgage prepayment on October 9.
Important facts for investors to verify
- Separate merger-driven reported growth from same-store rent, NOI, occupancy and cost trends.
- Review the timing and refinancing plans for 2019–2020 mortgage maturities, extension conditions and the July 2019 convertible notes.
- Assess unrestricted liquidity against dividends, recurring property capital needs and debt service; restricted cash is not freely available.
- Monitor LIBOR exposure, hedge coverage and the effect of refinancing on interest costs.
- Track the SEC investigation and the progress of integrating SWH’s internal controls.
- Evaluate whether anticipated merger synergies are realized and whether home dispositions and capital expenditures support sustainable cash generation.