American Homes 4 Rent — FY 2016 Form 10-K
Reporting period: Year ended December 31, 2016. The filing also reports fourth-quarter results. American Homes 4 Rent is a REIT focused on acquiring, renovating, leasing and operating single-family rental homes.
Business context
At year-end, the Company owned 48,422 homes in 22 states, including 1,119 held for sale; 44,798 homes, or 94.7% of properties excluding those held for sale, were leased. Portfolio growth included 8,936 homes acquired through the February 29, 2016 merger with American Residential Properties, Inc. (ARPI). The Company had 953 full-time personnel and internally managed its portfolio.
Financial and operating metrics
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Total revenue | $878.9 million | $630.6 million |
| Net income (loss) | $10.4 million | $(47.9) million |
| Net loss attributable to common shareholders | $(33.5) million; $(0.14) per share | $(84.6) million; $(0.40) per share |
| Core NOI | $476.6 million; 62.6% of core revenue | $343.0 million; 61.1% |
| FFO attributable to common shareholders and unit holders | $253.5 million | $164.9 million |
| Adjusted FFO attributable to common shareholders and unit holders | $242.5 million | $148.6 million |
| Cash provided by operating activities | $278.9 million | $212.3 million |
| Cash used for investing activities | $(522.4) million | $(861.8) million |
| Cash provided by financing activities | $324.8 million | $632.5 million |
Year-end total assets were $8.11 billion and total liabilities were $3.17 billion. Debt principal was approximately $2.98 billion, compared with $2.58 billion a year earlier; balance-sheet debt, net of discounts and financing costs, was $2.92 billion. Cash and cash equivalents were $118.8 million, plus $131.4 million of restricted cash. The Company had no revolving-facility borrowings and $325 million drawn on its $350 million term loan; its $650 million revolving facility remained available. Management reported compliance with debt covenants at year-end.
Same-home core revenue increased 5.6%, supported by average monthly rent of $1,502 versus $1,448 and average occupancy of 95.1% versus 94.0%. Same-home core operating expenses were 37.5% of core revenue, down from 39.4%. Average rent increases were 3.7% on renewals and 5.1% on re-leases. Same-home tenant retention was 67.5%, compared with 68.5%.
Fourth-quarter 2016 rents were $199.0 million, versus $152.4 million in fourth-quarter 2015. Fourth-quarter net income was $9.3 million; net income attributable to common shareholders was $2.4 million. The filing reports basic earnings per share of $0.01 and diluted loss per share of $(0.01) for the quarter.
Material changes versus the prior period
- Revenue rose 39.4%, reflecting portfolio expansion, including the ARPI merger, and increased tenant charge-backs. Net income improved from a loss to positive income, while common shareholders still recorded a loss after preferred dividends and noncontrolling interests.
- Core NOI increased 39.0%; the total-portfolio core NOI margin improved from 61.1% to 62.6%.
- Interest expense increased to $130.8 million from $89.4 million, primarily due to higher average borrowings. Depreciation and amortization increased to $298.7 million from $242.8 million as the portfolio grew.
- Operating cash flow increased, while investing cash outflow declined, in part because 2016 included property-sale and nonperforming-loan proceeds and a $350 million payoff of ARPI’s credit facility.
- The Company issued $268.8 million of Series D preferred shares and $230.0 million of Series E preferred shares, before offering costs. It also issued $104.0 million of common shares through its at-the-market program and repurchased $96.0 million of common shares.
Outlook, risks and unusual items
The filing provides no quantified earnings, acquisition or occupancy guidance. Management expects to continue pursuing acquisitions where it sees attractive total returns and expects operating liquidity generally to come from cash on hand and operations. It stated that rental income, net of operating expenses and recurring capital expenditures, is expected generally to support operations and distributions; this is not a guarantee.
- Key risks include competition for homes and tenants, rising acquisition prices, rental demand and occupancy changes, tenant defaults and turnover, renovation costs and delays, geographic concentration, and the limited operating history of the large-scale single-family rental model.
- Interest-rate exposure is material: the filing estimates a 100-basis-point increase in LIBOR would increase projected annual interest expense by approximately $7.8 million, before capitalization and reflecting the interest-rate cap.
- Debt agreements include financial and operating covenants; securitized property pools and cash flows are subject to lender controls and remedies. Real estate is illiquid, and refinancing or additional capital may not be available on favorable terms.
- The ARPI merger contributed $119.2 million of revenue and $1.2 million of net income from February 29 through year-end. The Company recorded a $13.4 million loss on early debt extinguishment, a $14.6 million net gain on property sales, an $11.5 million gain on conversion of Series E units and $5.0 million of impairment on properties held for sale.
- In fourth-quarter 2016, the Company recorded a $5.7 million reduction to noncontrolling interest following a correction to income and loss allocations; prior periods were not revised because the effect was assessed as immaterial.
- The Company reported no material litigation beyond ordinary-course matters. Management and the independent auditor concluded internal control over financial reporting was effective; the auditor issued an unqualified opinion on the financial statements.
Common-share distributions remained $0.20 per share for 2016, or $0.05 quarterly. The board declared a further $0.05 quarterly common dividend in February 2017. Common distributions are subordinate to cumulative preferred dividends and remain at the board’s discretion.
Important facts for investors to verify
- How much of 2016’s revenue, NOI and earnings growth reflects the ARPI merger versus same-home rent, occupancy and expense performance.
- The sustainability of adjusted FFO and operating cash flow after recurring capital expenditures, leasing costs, preferred dividends and common distributions.
- Debt maturities, variable-rate exposure, covenant headroom and the availability and cost of refinancing; confirm the effect of subsequent term-loan borrowings.
- The pace and economics of dispositions, including the 1,119 homes held for sale and recorded impairments, and whether sales proceeds are being reinvested or used to reduce debt.
- The effect of preferred-share obligations and equity issuance or repurchases on common-share dilution, cash available for distributions and per-share returns.