American Homes 4 Rent annual report, FY2014

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American Homes 4 Rent — 2014 Form 10-K Summary

Business context and reporting period. American Homes 4 Rent is an internally managed REIT focused on acquiring, renovating, leasing and operating single-family rental homes. This 10-K covers the fiscal year ended December 31, 2014; it also reports fourth-quarter results. The company operated in 22 states and owned 34,599 homes at year-end, up from 23,268 a year earlier. It reported 28,250 homes leased, or 81.6% of its portfolio, and approximately 752 dedicated personnel.

Financial and operating highlights

  • Revenue: Full-year revenue was $398.9 million, including $376.4 million in rents, compared with $139.0 million in 2013. The increase principally reflected portfolio growth; average leased homes increased to 23,154 from 9,092.
  • Profitability and margins: GAAP net loss was $33.1 million versus $19.1 million in 2013; net loss attributable to common shareholders was $67.0 million, or $0.34 per share, versus $43.9 million, or $0.36 per share. Non-GAAP NOI was $232.3 million, a 58.5% margin on property revenue, versus $86.5 million and 62.7%. The margin decline reflected higher maintenance and turnover costs and property-management costs. FFO was $107.5 million ($0.43 per FFO share); Core FFO was $143.8 million ($0.57 per FFO share). These are non-GAAP measures and are not substitutes for GAAP earnings or operating cash flow.
  • Fourth quarter: Rental revenue was $109.5 million; net loss was $10.0 million and net loss attributable to common shareholders was $19.3 million, or $0.09 per share.
  • Cash flow and investment: Operating cash flow was $160.5 million, investing cash outflow was $1.90 billion and financing cash inflow was $1.70 billion. Cash and cash equivalents declined by $40.2 million to $108.8 million. Investing outflows included property acquisitions and $185.4 million of initial renovations.
  • Debt and liquidity: Year-end debt totaled $1.78 billion: $1.52 billion in asset-backed securitizations, $207.0 million under the revolving credit facility and $51.6 million of assumed note debt. Total assets were $6.23 billion; total liabilities were $2.06 billion. The $800 million credit facility had $207.0 million drawn at year-end and required minimum liquidity and other financial covenants; the company reported compliance. Its borrowing availability period was due to expire March 7, 2015, and management expected to seek a one-year extension. By January 31, 2015, facility borrowings had risen to $353.0 million.
  • Distributions: Common distributions declared were $0.20 per share in 2014, up from $0.05 in 2013. Preferred distributions were also declared. Common distributions cannot be paid unless cumulative preferred dividends are paid.

Material changes versus 2013

  • Portfolio scale expanded substantially and year-end leased share rose from 74.5% to 81.6%. Occupancy for rent-ready homes available for rent at least 30 days was 91.5%; this is a different measure from the leased share of the entire portfolio.
  • The company completed two portfolio acquisitions: Beazer Rental Homes, 1,372 homes, for consideration including 8.16 million common shares and extinguishment of $108.2 million of debt; and Ellington, 914 homes, for approximately $126.0 million, including $74.4 million cash and $51.6 million assumed debt.
  • Three securitizations raised approximately $1.50 billion gross proceeds. Two were fixed-rate, ten-year transactions with weighted-average rates of 4.42% and 4.40%; the first was floating-rate, based on LIBOR plus 1.54%, and had a rate cap. Year-end asset-backed securitization debt was $1.52 billion.
  • Acquisition and renovation functions were internalized in December 2014. The company stopped paying AH LLC its 5% acquisition and renovation fee and employed the relevant personnel. Management anticipated cash-flow benefits, but said a larger portion of costs would be expensed under GAAP rather than capitalized.
  • Leased property operating expenses rose to 41.5% of property revenue from 37.3%; maintenance and turnover costs, as well as internal property-management costs, contributed. Interest expense increased to $19.9 million from $0.4 million as borrowings increased.

Outlook, risks and unusual items

  • Management expected portfolio occupancy to continue improving as recently acquired homes were renovated and leased, and anticipated opportunities to optimize rents once occupancy stabilized. It provided no quantified earnings, revenue or acquisition guidance.
  • Principal risks include the untested, operationally complex single-family rental model; competition for homes and tenants; renovation costs and delays; tenant turnover and rent fluctuations; geographic concentration, with about 57% of homes in five states; and dependence on continued access to financing.
  • Debt-related risks include floating-rate exposure, refinancing and maturity risk, collateral and cash-control provisions, and covenants that can restrict distributions or investment activity. A 100-basis-point LIBOR increase was estimated to raise annual interest expense by $6.9 million, before any change in debt balances.
  • Other material exposures include foreclosure/title and possession disputes, contingent property liabilities, HOA and landlord-tenant regulation, environmental and uninsured losses, REIT qualification and related-party conflicts. Management said there was no material litigation, apart from routine proceedings, and no material impairment charges had been recorded.
  • Unusual and judgment-sensitive items include acquisition costs expensed ($22.4 million), noncash fair-value remeasurements of preferred-share and Series E unit liabilities, and winter freeze damage for which the company expected insurance recovery beyond its deductible. Historical statements also include predecessor operations of AH LLC and are not necessarily representative of standalone results.
  • Auditors issued an unqualified opinion on the financial statements and internal controls; management also concluded controls were effective. Subsequent to year-end, the company priced another securitization expected to generate approximately $552.8 million gross proceeds, subject to closing.

Investor verification priorities

  1. Reconcile GAAP losses, NOI, FFO and Core FFO, including depreciation, acquisition costs, preferred dividends and noncash fair-value changes.
  2. Verify actual occupancy, rent growth, tenant retention and turnover costs, distinguishing whole-portfolio leased percentage from rent-ready occupancy metrics.
  3. Review debt maturities, floating-rate exposure, borrowing-base availability, covenant headroom, credit-facility extension status and securitization cash-control terms.
  4. Assess whether operating cash flow and liquidity support renovation and acquisition needs, debt service, preferred dividends and common distributions.
  5. Examine acquisition valuations and returns, post-acquisition integration, internalization costs, related-party arrangements and the final closing and terms of the subsequent securitization.