American Homes 4 Rent quarterly report, Q1 FY2014

Full document

American Homes 4 Rent — Q1 2014 Form 10-Q

Business context and reporting period

Quarter ended March 31, 2014. The Maryland REIT acquires, renovates, leases and operates single-family rental homes. It owned 25,505 homes in 22 states at quarter-end, up from 7,574 homes in 18 states a year earlier. Of the portfolio, 20,666 homes were leased (81%), versus 2,338 (31%) a year earlier.

Comparisons require caution: prior-period results include Sponsor historical operations and the company’s portfolio and operations changed substantially through acquisitions and management internalization. The filing says historical results are not indicative of results as if the company had operated independently.

Financial and operating performance

  • Revenue: Total revenue was $77.3 million, versus $6.6 million in Q1 2013. Property revenue (rents, fees and tenant charge-backs) was approximately $77.0 million, up from $6.6 million. Growth primarily reflected portfolio expansion and higher occupancy.
  • Profit: GAAP net loss was $6.9 million, compared with $6.9 million in Q1 2013. Net loss attributable to common shareholders was $13.7 million versus $7.8 million, including $3.1 million of preferred dividends and $3.6 million allocated to noncontrolling interests. Basic and diluted loss per share was $0.07 versus $0.16; management cautioned that historical per-share comparisons are not meaningful because of common-control transactions.
  • Operating measures: Leased-property net operating income (NOI), a non-GAAP measure, was $47.7 million versus $4.1 million; NOI margin was 62%, unchanged from Q1 2013 and Q4 2013. FFO was $23.9 million and Core FFO was $28.1 million, or $0.10 and $0.12 per FFO share, respectively. These non-GAAP measures are not substitutes for GAAP earnings or cash flow.
  • Expenses and unusual items: Total expenses were $81.0 million, including $35.1 million depreciation and amortization. Leased-property operating expenses were $29.3 million. Property operating costs included about $1.2 million of winter-freeze damage, expected to be recovered through insurance except for a $0.4 million aggregate deductible, as well as $0.4 million in one-time market-transition costs.
  • Cash flow: Operating activities provided $47.2 million, versus $5.4 million. Investing used $379.1 million, including $341.1 million for property purchases and $45.4 million for improvements. Financing provided $286.1 million, primarily from net credit-facility borrowings. Cash and cash equivalents ended at $103.2 million, down from $149.0 million at year-end.
  • Debt and liquidity: Credit-facility borrowings were $671 million at March 31, against an $800 million facility; $129 million was available. The variable rate was 30-day LIBOR plus 2.75% through March 2017. The company reported compliance with covenants. A 100-basis-point LIBOR increase would raise annual interest expense by an estimated $6.7 million before capitalization.
  • Balance sheet: Total assets were $4.52 billion; total liabilities were $889.9 million and total equity was $3.63 billion. Single-family properties, net, were $4.22 billion.

Changes, outlook and risks

  • Quarter-on-quarter property revenue increased 19.4% to $77.0 million as total portfolio occupancy rose from 75% at December 31, 2013 to 81% at March 31. Leased homes increased from 17,328 to 20,666.
  • Management said acquisition activity had slowed as it matched investment pace with capital raising; future acquisitions are expected to fluctuate with suitable opportunities and available capital. No quantified earnings or acquisition guidance was provided.
  • Management expects occupancy to rise as recently acquired homes are renovated and leased. Longer-term revenue growth will depend increasingly on tenant retention and rental-rate increases. Among 1,686 leases expiring in Q1, 71.8% renewed, at an average rent increase of 2.8%.
  • The company identified renovation time and costs, leasing and vacancy, tenant defaults and turnover, property expenses, capital availability and interest rates as important risks. It also noted that properties are illiquid and many were not yet stabilized. Legal matters were described as routine and not expected to materially affect financial position; no material change to the annual report’s risk factors was reported.
  • After quarter-end: The company acquired 513 homes for approximately $72.1 million in April. Credit-facility borrowings rose to $792 million by April 30, then were reduced to $613 million on May 2 after a $179 million paydown funded with preferred-share proceeds. The May 2 preferred offering raised $190 million gross. A securitization backed by approximately 3,852 homes was priced with expected proceeds of about $481 million at a duration-weighted blended rate of LIBOR plus 154 basis points; closing was expected around May 21.

Important facts for investors to verify

  1. Whether portfolio occupancy, leasing pace and rent growth improve as renovated homes enter service, and whether the reported 81% portfolio lease rate is sustained.
  2. How comparable operating performance is after accounting for acquisitions, common-control historical accounting, and the large increase in share count; review GAAP results alongside NOI, FFO and Core FFO.
  3. Whether freeze-damage insurance recoveries are received and whether property-level expense ratios and the 62% NOI margin hold as the portfolio scales.
  4. Current debt, facility availability, covenant headroom and exposure to variable interest rates, including the completed preferred-funded paydown and the securitization’s final terms and closing.
  5. Related-party obligations and fees, including the 5% acquisition and renovation fee paid to the Sponsor through at least December 10, 2014, and the reconciliation of amounts due between the company and Sponsor.