American Homes 4 Rent — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; comparative periods are the same periods in 2017. Amounts are U.S. dollars. The company is a single-family rental REIT operating through American Homes 4 Rent, L.P.
Business and operating context
- Owned 52,049 homes in 22 states at June 30, including 2,209 designated for disposition; 1,838 were classified as held for sale and 371 identified for future sale.
- Excluding homes designated for disposition, 48,020 homes were leased, a 96.3% leased rate, versus 95.2% at June 30, 2017. Average monthly realized rent was $1,561 per property for Q2.
- Management expanded its disposition program, identifying about 1,400 homes in five smaller markets for sale as it plans to exit those markets.
Financial and operating performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Total revenue | $264.5 million | $237.0 million | $522.5 million | $470.8 million |
| Net income | $25.9 million | $15.1 million | $47.4 million | $26.9 million |
| Net loss attributable to common shareholders | $(15.2) million | $(0.2) million | $(9.3) million | $(1.7) million |
| GAAP interest expense | $32.0 million | $28.4 million | $61.3 million | $60.3 million |
| Net cash from operating activities | — | $250.0 million | $225.2 million | |
| Net cash used in investing activities | — | $(325.6) million | $(222.5) million |
- Q2 revenue rose 11.6% year over year; first-half revenue rose 11.0%. Management attributed net income growth primarily to more leased homes and higher rents.
- Same-Home core revenue increased 3.7% in Q2 and 3.5% for the first half. Same-Home Core NOI was $111.2 million in Q2, up from $107.9 million; its margin was 64.4%, versus 64.8%. First-half Same-Home Core NOI was $220.2 million, versus $216.9 million, with margin declining to 64.3% from 65.5%.
- Company-reported non-GAAP Core FFO attributable to common shareholders and unit holders was $93.6 million in Q2 versus $81.5 million; Adjusted FFO was $82.0 million versus $71.2 million. First-half Core FFO was $178.5 million versus $158.2 million, and Adjusted FFO was $156.8 million versus $140.1 million. These supplemental measures are not substitutes for GAAP results or cash flow.
- Common-shareholder losses include a $32.2 million allocation associated with conversion of Series C participating preferred shares. On April 5, all 7.6 million Series C shares converted into 10.85 million Class A shares; the resulting allocation materially affected reported common earnings, not consolidated net income.
Debt, liquidity and capital
- At June 30, cash and cash equivalents were $53.5 million; restricted cash was $159.0 million. Cash, cash equivalents and restricted cash totaled $212.5 million.
- Debt principal totaled $2.718 billion; balance-sheet debt, net of discounts and financing costs, was $2.674 billion. The revolving credit facility had no borrowings outstanding and offered up to $800 million of capacity. The company reported compliance with debt covenants.
- In February, the Operating Partnership issued $500 million of 4.25% unsecured senior notes due in 2028, receiving approximately $494 million net proceeds before offering costs. It paid off a secured note and repaid $100 million of term-loan principal during Q2. The term loan balance was $100 million at quarter-end.
- About $115 million principal of 3.25% exchangeable senior notes was due November 15, 2018. Contractual debt maturities were $125.4 million for the remainder of 2018, on a fully extended basis.
- First-half investing outflows included $206.1 million for property purchases, $33.0 million for initial renovations and $95.4 million for other productive assets. Financing inflows included $497.2 million net proceeds from the senior notes; uses included debt repayments, distributions and $35.0 million of share repurchases.
- The company repurchased 1.8 million Class A shares in the first half for $34.9 million, at a weighted-average price of $19.36. Common distributions declared were $0.05 per share per quarter.
Management commentary, outlook and risks
- Management said elevated turnover costs through April reflected an initiative to strengthen occupancy. Same-Home core operating expenses rose 5.0% in Q2 and 7.1% in the first half, outpacing Same-Home core revenue growth for those periods.
- Management expects operating liquidity generally to come from cash on hand and operations, while noting that real estate is illiquid and asset sales may not provide timely short-term liquidity. The filing gives no numerical earnings or operating guidance.
- Risks discussed include interest-rate exposure, acquisition competition and costs, occupancy and tenant turnover, property expenses, seasonality, and the ability to access capital. A 1 percentage-point increase in rates was estimated to increase annual interest expense by about $1.0 million, assuming variable debt balances remain unchanged.
- The company disclosed SEC subpoenas concerning single-family rental securitizations and its trading in Silver Bay Realty Trust securities. It said it was cooperating and did not expect either matter to materially affect financial position or results. The filing also reports $62.2 million of commitments for 236 home acquisitions and $42.5 million of developer and land commitments.
- From July 1 through July 31, the company acquired 176 homes for approximately $45.0 million, including 13 internally developed homes. Management reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- How much of the common-shareholder loss reflects the one-time preferred-share conversion allocation, and how should the conversion’s share dilution affect per-share comparisons?
- Whether the elevated turnover and repair costs moderate, and whether occupancy, rent growth and Same-Home margins support continued NOI improvement.
- How the company will address the $115 million exchangeable-note maturity in November 2018 and manage debt costs, refinancing and liquidity.
- What assets comprise the $95.4 million of first-half purchases of other productive assets, and how those investments are expected to contribute to returns.
- Progress and realized proceeds from the expanded disposition program, including the planned exit from five smaller markets, and any developments in the SEC investigations.