American Homes 4 Rent — Q2 2015 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and six months ended June 30, 2015. American Homes 4 Rent is a REIT focused on acquiring, renovating, leasing, and operating single-family rental homes. At quarter-end it owned 37,491 homes across 22 states; 34,903, or 93.1%, were leased. The portfolio was internally managed.
Financial and operating results
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $153.6 million | $94.3 million | $285.4 million | $171.6 million |
| Net loss | $(8.4) million | $(3.4) million | $(16.7) million | $(10.3) million |
| Net loss attributable to common shareholders | $(17.7) million | $(12.3) million | $(35.5) million | $(25.9) million |
| Loss per common share, basic and diluted | $(0.08) | $(0.07) | $(0.17) | $(0.14) |
| Operating cash flow | Not separately stated for the quarter | $103.8 million | $88.7 million | |
| Capital and investing cash flow | Not separately stated for the quarter | $(577.5) million | $(723.0) million | |
| Financing cash flow | Not separately stated for the quarter | $455.6 million | $724.4 million |
- Q2 revenue increased about 63% year over year, primarily reflecting portfolio expansion. Six-month revenue increased about 66%.
- Q2 Initially Leased Property Core NOI, a company-defined non-GAAP measure, was $84.2 million, or 60.8% of core revenue, versus $56.6 million, or 63.0%, a year earlier. For the first half, it was $160.6 million, or 62.0%, versus $104.3 million, or 63.8%.
- Same-home Q2 core revenue rose 4.6%, supported by rent and occupancy gains, while same-home core property operating expenses rose 8.8%; the NOI margin declined to 60.4% from 61.9%. Same-home occupancy was 93.9% in Q2 2015 versus 93.3% in Q2 2014.
- Core FFO attributable to common share and unit holders was $45.3 million, or $0.17 per share and unit, in Q2 2015, compared with $35.3 million, or $0.15, in Q2 2014. First-half Core FFO was $87.2 million, or $0.33, versus $63.4 million, or $0.26. FFO and Core FFO are non-GAAP measures and are not substitutes for GAAP earnings or cash flow.
- At June 30, cash and cash equivalents were $90.7 million; total debt was $2.292 billion, compared with $1.778 billion at December 31, 2014. Total assets were $6.687 billion and total equity was $4.110 billion.
- First-half investing outflows included $438.7 million for property purchases, $93.7 million for initial renovations, and other property-related investments and expenditures. Cash and cash equivalents declined $18.1 million over the six months to $90.7 million.
Material changes versus comparable periods
- The portfolio grew from 27,173 homes at June 30, 2014 to 37,491 at June 30, 2015. Leased homes increased from 23,364 to 34,903.
- Interest expense increased to $22.0 million for Q2 from $3.9 million, and to $37.7 million for the first half from $5.4 million, largely reflecting higher borrowings. Aggregate borrowings were approximately $2.3 billion at June 30, 2015, versus $962.0 million at June 30, 2014.
- Acquisition fees and costs expensed increased to $4.2 million in Q2 and $10.1 million in the first half. Following the December 2014 internalization of acquisition and renovation personnel, related internal costs are expensed, whereas much of the former 5% affiliate fee was capitalized for asset acquisitions.
- Management attributed higher same-home operating costs mainly to greater turnover and maintenance costs and increased property tax rates. Tenant renewal and retention rates were lower year over year for both the quarter and first half.
Debt, liquidity, outlook, and risks
- In March 2015, the company completed a $552.8 million securitization, with $13.3 million of issuance costs. The fixed-rate financing has a 4.14% weighted-average rate, a 2045 legal maturity, and an anticipated repayment date in 2025. It is secured by 4,661 homes; the company reported compliance with its 1.20-to-1.00 debt-service-coverage covenant.
- The $800 million credit facility had $177.0 million outstanding at June 30, 2015; the company reported compliance with its covenants. Its borrowing availability period runs through March 2016, with outstanding balances converting to a term loan through September 2018. In July, the balance rose to $195.0 million after additional borrowing and repayments.
- Of the debt reported at quarter-end, $653.0 million was variable-rate, including the credit facility and 2014-SFR1 securitization. Management estimated that a 100-basis-point LIBOR increase would raise projected annual interest expense by $6.5 million before capitalization, reflecting the interest-rate cap. The filing notes that interest-rate changes can affect earnings and acquisition economics.
- Management expects acquisitions to fluctuate with suitable investment availability and funding. It expects portfolio occupancy to benefit as the share of recently acquired homes declines; longer-term revenue growth will depend more on tenant retention and rent increases. The company said leasing efforts to date prioritized occupancy over rent increases. No quantified earnings or operating guidance is provided.
- Liquidity is expected to come from cash, operations, secured and unsecured borrowing, securities issuance, securitizations, dispositions, and joint ventures. Management believes rental income, net of operating expenses and recurring capital expenditures, will generally support operations and distributions, but cautions that real estate assets are illiquid and alternative financing could be needed.
- Risks include acquisition and renovation execution, occupancy and tenant turnover, operating-cost changes, access to capital, interest-rate exposure, and continued qualification as a REIT. Management reported no material change to previously disclosed risk factors, no material litigation beyond routine matters, and no material changes in internal control over financial reporting. It stated that disclosure controls were effective.
- Outstanding commitments at June 30 included $26.4 million to acquire 171 homes and $2.2 million for renovation contracts. The company reported no off-balance-sheet arrangements. The board declared subsequent quarterly common dividends of $0.05 per share, payable September 30, 2015.
Important facts for investors to verify
- Whether portfolio growth and leasing progress translate into durable same-home NOI growth, particularly given lower same-home margins and weaker tenant retention.
- Debt-service capacity, refinancing and repayment requirements, covenant compliance, and exposure to higher LIBOR rates.
- Cash needs for acquisitions, renovations, maintenance, and distributions relative to operating cash generation and available financing.
- The assumptions underlying Level 3 valuations of the Series E units and preferred-share derivative liabilities, which totaled $125.3 million at quarter-end.
- Whether the company continues to meet REIT qualification and distribution requirements; management stated that failure to qualify could result in corporate-level taxes.