Invitation Homes Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Dollar amounts below are in millions unless otherwise noted. Invitation Homes owns and operates single-family rental homes; at quarter-end it had 82,424 homes in 17 markets. The November 2017 Starwood Waypoint Homes merger added 34,670 homes, so reported year-over-year growth largely reflects the larger portfolio and is not directly comparable with the pre-merger 2017 results.
Financial and operating performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $432.4 | $242.2 | $856.1 | $481.0 |
| Operating income | $77.5 | $53.6 | $144.9 | $65.7 |
| Net income (loss) | $(14.2) | $5.5 | $(31.8) | $(36.9) |
| Net income (loss) per diluted share | $(0.03) | $0.02 | $(0.06) | $(0.06) |
| Operating cash flow | Not presented separately | Not presented separately | $310.3 | $169.9 |
Q2 total revenue rose 78.5% and operating income rose 44.5%; six-month revenue increased 78.0%. The reported periods include different portfolio sizes and merger effects. Operating margin was 17.9% in Q2; total-portfolio NOI was $267.0 million, or approximately 61.8% of revenue. Same Store NOI increased 5.0% in Q2 to $235.2 million and 4.3% for the six-month period to $469.0 million.
- Same Store operations: Q2 rental revenue grew 4.3%. Average occupancy was 96.0% versus 95.8%; average monthly rent per occupied home was $1,726 versus $1,660, up 4.0%. Six-month Same Store rental revenue grew 4.1%, with average occupancy of 95.9% and average monthly rent up 4.0% to $1,716.
- Leasing trends: Q2 Same Store renewal and new-lease net effective rent growth were 4.7% and 4.8%, respectively, versus 5.3% and 5.5% a year earlier. Six-month rates were 4.8% and 3.7%, versus 5.2% and 4.5%. Same Store annualized turnover improved to 37.7% for Q2 and 34.1% for the first half; average days vacant between residents increased to 43 and 48, respectively.
- REIT supplemental measures: Q2 FFO was $128.5 million ($0.24 per diluted share), Core FFO $156.4 million ($0.29), and Adjusted FFO $127.5 million ($0.24). For six months, the respective totals were $249.1 million ($0.47), $307.6 million ($0.58), and $253.3 million ($0.48). These are non-GAAP measures and should not be treated as substitutes for GAAP earnings or cash flow.
Cash, debt and liquidity
- At June 30, unrestricted cash and cash equivalents were $166.9 million; restricted cash was $243.0 million. The $1.0 billion revolving facility was undrawn.
- Debt was $9.66 billion net of financing costs and discounts: mortgage loans $7.62 billion, term loan $1.49 billion, and convertible notes $552.9 million. Mortgage principal totaled $7.68 billion. Total liabilities were $10.08 billion and total assets $18.67 billion.
- Six-month cash provided by operations was $310.3 million; investing activities used $189.4 million and financing activities used $127.6 million. The company paid $115.0 million in dividends during the period and declared $0.22 per share for the first half.
- Three 2018 securitizations raised approximately $3.27 billion and refinanced earlier mortgage loans. Most mortgage debt is floating-rate; the company reported that 75.6% of variable-rate debt was effectively converted to fixed rate through swaps. Its stated sensitivity, assuming debt balances unchanged, was an annual interest-expense increase of $18.5 million for a 100-basis-point LIBOR rise.
Changes, outlook and risks
- Reported revenue and operating costs increased substantially with the enlarged post-merger portfolio. Higher depreciation and amortization also reflected acquired homes and amortization of acquired in-place leases; higher interest expense reflected increased debt and rising LIBOR. Merger-related expenses were $4.2 million in Q2 and $8.6 million for the first half; first-half severance expense was $4.3 million.
- Management cited favorable recent demand and supply conditions, particularly in the Western United States and Florida, and expected those trends to continue in the near to intermediate term. It did not provide quantified earnings or revenue guidance in this filing. Management expects rental income net of operating expenses generally to support near-term operations and dividends, while noting reliance on external capital for longer-term needs.
- Risks include interest-rate increases, refinancing and covenant requirements, competition for acquisitions and residents, property taxes, insurance and HOA costs, resident defaults or non-renewals, property maintenance and turnover, and seasonality. Summer move-outs and seasonal repair and leasing costs can affect results. A 100-basis-point LIBOR decline was estimated to reduce annual interest expense by $19.8 million.
- Hurricanes Harvey and Irma caused property damage: the company recorded $10.8 million of insurance receivables and $1.3 million of estimated unrepaired damage accruals at quarter-end. The SEC investigation into certain single-family rental securitizations, including requests concerning broker price opinions, remained ongoing; the company said it was cooperating and could not predict its outcome or timing.
- Management stated it believed the company was in compliance with debt covenants. Disclosure controls were judged effective, but management’s control assessment excluded SWH, which represented 48.5% of consolidated assets and 41.0% of quarterly revenue; integration review of SWH controls was ongoing.
Important facts for investors to verify
- Separate merger-related portfolio growth from organic performance; review Same Store results and the filing’s pro forma comparisons.
- Track rent growth, occupancy, turnover, and days to re-resident, especially the recent moderation in new-lease rent growth.
- Review debt maturities, extension conditions, floating-rate exposure, hedging coverage, and covenant headroom; significant mortgage maturities fall in 2018–2020.
- Assess the sustainability of dividends against operating cash flow, recurring capital expenditures, and REIT distribution requirements.
- Monitor the SEC inquiry, hurricane insurance recoveries, merger integration and internal-control work, and whether expected merger synergies materialize.