Invitation Homes Inc. — Q3 2017 Form 10-Q
Business context and period. Invitation Homes owns, renovates, leases and operates single-family rental homes. This unaudited filing covers the quarter and nine months ended September 30, 2017. At quarter-end, the company owned 47,867 homes across 13 markets; its 42,795-home Same Store portfolio is used for comparable operating measures. The company completed its IPO in February 2017, so its post-IPO equity and earnings-per-share reporting is not directly comparable with earlier periods.
Financial and operating performance
- Revenue: Q3 total revenue was $243.5 million, up 4.5% year over year; rental revenue was $229.4 million, up 3.8%. Nine-month revenue was $724.5 million, up 5.3%, including rental revenue of $684.0 million, up 4.5%.
- Rental operations: Q3 total-portfolio occupancy averaged 94.4% versus 94.3% a year earlier. Average rent per occupied home rose 5.1% to $1,705; Same Store rent rose 4.2% to $1,706, with occupancy of 95.4% versus 95.5%. Blended net effective rent growth moderated to 4.4% from 6.2%. Same Store turnover improved to 38.1% from 39.6%, while total-portfolio days between residents increased to 42 from 38.
- Profitability: Q3 operating income fell 32.8% to $29.9 million, and net loss was $22.5 million versus a $21.9 million loss. Nine-month operating income declined 34.3% to $95.6 million; net loss widened to $59.4 million from $51.6 million. Approximate operating margin was 12.3% in Q3 (19.1% in Q3 2016) and 13.2% for nine months (21.1% prior year). Q3 basic and diluted loss per share was $0.07. Post-IPO loss per share for February 1–September 30 was $0.14.
- Operating cash flow and non-GAAP measures: Nine-month cash provided by operations was $267.3 million, up 7.9%. Management reported total-portfolio NOI of $450.2 million, up from $417.5 million, and Same Store NOI of $407.7 million, up from $381.9 million. Adjusted FFO was $196.5 million versus $155.2 million; these non-GAAP measures are not substitutes for GAAP earnings or cash flow.
- Cash and liquidity: September 30 cash and cash equivalents were $134.4 million, down from $198.1 million at year-end; restricted cash was $153.8 million. The $1.0 billion revolving facility was undrawn and available. Nine-month investing cash use was $11.4 million and financing cash use was $319.5 million.
- Debt: Debt carrying value, net of financing costs and discounts, was $5.644 billion, down 26.3% from September 30, 2016. This included $4.157 billion of mortgage loans and $1.487 billion of term-loan carrying value; the $1.5 billion term loan bore 3.03% at quarter-end. A $1.0 billion Fannie Mae securitization issued in April carries a fixed 4.17% rate and a 2027 maturity. Management reported covenant compliance. Interest-rate swaps effectively fixed 75.3% of variable-rate debt; a 100-basis-point LIBOR increase was estimated to add about $11.6 million to annual interest expense, assuming debt balances unchanged.
Material changes and unusual items
- Revenue growth was supported by higher rents and other property income, but operating expenses rose 15.9% for the nine months, faster than revenue. General and administrative expense rose substantially, reflecting IPO-related costs, higher share-based compensation and merger costs.
- Q3 and nine-month impairment and other expense included approximately $16.0 million accrued for Hurricane Irma damages. Some damages may be recoverable under insurance, subject to deductibles and limits; the filing does not quantify expected recovery.
- Interest expense declined 12.6% for the nine months as debt balances fell, partly offset by an 80-basis-point increase in weighted-average debt cost and derivative effects. The company repaid prior credit facilities and refinanced debt using IPO proceeds, a new term loan and securitization proceeds.
- The company sold 1,051 homes in the first nine months versus 842 in 2016, recognizing $28.2 million of net gains on property sales versus $13.2 million. It acquired 620 homes versus 1,135 in the prior-year period.
- Dividends declared were $0.06 per share for Q2 and $0.08 for Q3. An additional $0.08 dividend was declared in October and paid November 7, 2017.
Outlook, risks and contingencies
Management said favorable employment, household-formation and supply-demand conditions in Western U.S. and Florida markets had supported rental growth and were expected to continue in the near to intermediate term. This is commentary, not quantified earnings guidance. The company cited rent growth, occupancy, turnover, acquisition and renovation execution, property costs and financing terms as key performance drivers; it also noted seasonal summer move-outs and related costs.
- Proposed merger: The August 2017 agreement with Starwood Waypoint Homes contemplated a stock-for-stock merger, with each SFR share converting into 1.614 Invitation Homes shares. At closing, existing Invitation Homes holders were expected to own about 59% of the combined company and SFR holders about 41%. Closing was expected in Q4 2017, subject to conditions including SFR shareholder approval; completion was not assured. Two shareholder lawsuits challenged the transaction, one naming Invitation Homes and affiliates.
- SEC inquiry: The company received a subpoena in September concerning an SEC fact-finding investigation into single-family rental securitizations, including broker price opinions and related materials. The company said it was cooperating; timing, scope and outcome were unknown.
- Subsequent financing: On November 9, the company completed an $865.0 million floating-rate securitization, using proceeds in part to repay the IH1 2014-2 and 2014-3 loans. Those loans were repaid in full that date.
- Other risks: Risks include interest-rate exposure, debt and covenant requirements, rising property taxes, HOA and insurance costs, resident defaults and non-renewals, competition, reliance on third-party services, REIT qualification and possible merger delays or failure. The filing reports no off-balance-sheet arrangements.
Important facts for investors to verify
- Merger approval, closing status, integration expectations, transaction costs and litigation developments.
- Insurance recoveries and final costs related to Hurricane Irma.
- Debt maturities, refinancing terms and interest-rate sensitivity, including the post-quarter securitization and loan repayments.
- Whether rent growth, occupancy, turnover and re-resident timelines sustain NOI and cash generation.
- Reconciliation of GAAP losses with NOI, Adjusted FFO and other non-GAAP measures, and the effects of IPO-related compensation and costs.
- Outcome and potential implications of the SEC securitization investigation, and continued REIT qualification and covenant compliance.