American Homes 4 Rent — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Unaudited consolidated financial statements; amounts below are in millions unless stated otherwise. The company is a REIT focused on acquiring, renovating, leasing, and operating single-family rental homes. Results are not fully comparable year over year because the portfolio expanded substantially and prior-period statements reflect predecessor and acquisition activity.
Business context and operating performance
- Owned 30,877 homes across 22 states at September 30, 2014, versus 21,267 a year earlier. At quarter-end, 26,161 homes were leased (84.7% of the portfolio), compared with 14,384 (67.6%) a year earlier.
- Average leased homes rose to 24,763 in Q3 from 12,315; for the nine-month periods, the average increased to 21,880 from 7,033. Q3 portfolio growth included the acquisition of 1,372 Beazer homes.
- Leasing measures: reported occupancy was 93.2% for homes available for rent at least 30 days and 94.1% for at least 90 days. Average annual scheduled rent per property was $16,931.
- For leases ending in the first nine months, tenant retention was 70.3%, with an average renewal rent increase of 3.4%. Management said leasing efforts prioritized occupancy over rent increases.
Financial results and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $110.4 | $49.5 | $282.0 | $74.1 |
| Net loss | $(12.8) | $(3.9) | $(23.1) | $(9.6) |
| Net loss attributable to common shareholders | $(21.7) | $(7.7) | $(47.7) | $(29.4) |
| Basic and diluted loss per share | $(0.11) | $(0.05) | $(0.25) | $(0.29) |
| Net operating income (NOI, non-GAAP) | $59.4 | $31.6 | $164.3 | $46.5 |
| Core FFO per weighted-average FFO share (non-GAAP) | $0.15 | $0.10 | $0.42 | $0.09 |
- Q3 NOI margin on single-family property revenue was 54.0%, down from 64.2%; the nine-month margin was 58.5%, down from 63.3%. Leased-property operating costs rose as a share of revenue, with higher maintenance and turnover costs, property-management costs, and bad debt.
- Q3 acquisition fees and costs expensed were $14.6, versus $0.5 a year earlier; nine-month expense was $15.9, versus $4.0. Depreciation and amortization was $44.9 for Q3 and $118.3 for the nine months. Interest expense was $5.1 and $10.5, respectively.
- Cash from operating activities was $131.7 for the first nine months, versus $4.3 a year earlier. Investing cash outflow was $1,261.4, including $914.1 for property purchases and $136.2 for initial renovations. Financing cash inflow was $1,084.7. Cash and cash equivalents ended the period at $103.9, down from $149.0 at year-end 2013.
- Total assets were $5,536.3 and total liabilities $1,349.5 at September 30. Debt included $993.1 of asset-backed securitizations and $82.0 outstanding on the credit facility. The company reported $718.0 of remaining credit-facility availability and compliance with applicable debt covenants.
- Operating cash flow and investment needs should be considered together: substantial acquisition and renovation spending was funded through equity, securitizations, and credit-facility activity.
Material changes and unusual items
- Portfolio scale and revenue increased sharply, largely reflecting many more leased homes, acquisitions, and the July Beazer Rental Homes acquisition. Beazer contributed $5.3 of revenue and $0.5 of net income from July through September.
- In May, the company completed a $481.0 floating-rate securitization, with a two-year initial term and a weighted spread of LIBOR plus 1.54%; an interest-rate cap applied for the initial term. In September, it completed a $513.3 fixed-rate, ten-year securitization at a weighted-average 4.42%. Proceeds primarily repaid credit-facility borrowings; the company also purchased $25.7 of non-interest-bearing Class F certificates in the second transaction.
- In August, it issued 17.8 million Class A shares in a public offering and concurrent private placement, generating $313.3 gross proceeds, and issued 7.6 million Series C preferred shares in May for $190.0 gross proceeds. Share count and preferred dividends increased; preferred distributions were $13.4 for the nine-month period.
- Noncash remeasurement of the Series E units and preferred-share derivative affected earnings. The preferred derivative liability rose to $57.4 from $28.2 at year-end; the Series E liability was $71.1 versus $66.9.
- Management attributed part of the nine-month vacant-property cost increase to approximately $0.9 of one-time transition costs and $1.2 of freeze-related damage; the reported insurance deductible for the weather events was $0.4, with the company expecting the damage to be recovered through insurance.
Outlook, management commentary, and risks
- Management expects acquisition activity to vary with suitable investment availability and funding. It anticipated another securitization in Q4 2014, but stated there was no assurance it would be completed.
- The company planned to internalize the Sponsor’s acquisition and renovation platform in December 2014. Management expected the change to be cash-flow positive, while warning that a larger share of costs would be expensed under GAAP rather than capitalized as acquisition fees.
- Management expects occupancy to increase as recently acquired homes become a smaller proportion of the portfolio. Near-term growth depends on renovating and leasing new homes; longer-term performance depends more on tenant retention and rent increases. Turnover and seasonality can affect rent and costs.
- Interest-rate exposure is material: a 100-basis-point increase in LIBOR was estimated to raise annual interest expense by about $5.6, before considering capitalization. The company noted that higher rates could also make acquisitions more costly or reduce yields.
- Key risks include illiquid real estate and reliance on continued financing; debt covenant and cash-management provisions; potential cash sweeps if securitization performance tests are not met; and REIT qualification. The company also disclosed potential adverse tax consequences if Beazer Rental Homes failed to qualify as a REIT before its merger, and operational disruption risks from a recent financial and property-management software conversion.
- Subsequent to quarter-end, the company acquired 971 homes for approximately $150.5 through October 31. Credit-facility borrowings and repayments in October resulted in an outstanding balance of $273.0 on October 31. The board declared a $0.05 quarterly common-share dividend payable in December.
Important facts for investors to verify
- Whether leasing and occupancy gains translate into improved same-home NOI, given the lower reported NOI margins and higher maintenance, turnover, and bad-debt costs.
- How much of growth in revenue and cash flow reflects portfolio expansion and acquisitions versus comparable-property performance; year-over-year periods are not directly comparable.
- Debt maturities, interest-rate sensitivity, securitization performance tests, and available liquidity after planned acquisitions, renovations, and distributions.
- Actual costs and operating impact of internalizing acquisition and renovation functions, including the shift from capitalized fees to expenses.
- Resolution of the Beazer REIT qualification exposure and indemnification escrow, as well as progress and any effects of the management-system conversion.
- Definitions and reconciliations of non-GAAP NOI, FFO, and Core FFO; these measures are not substitutes for GAAP earnings or operating cash flow.