American Homes 4 Rent quarterly report, Q2 FY2014

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Business context and reporting period

American Homes 4 Rent is a Maryland REIT focused on acquiring, renovating, leasing and operating single-family rental homes. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2014. At quarter-end, it owned 27,173 homes in 22 states, including 36 held for sale; 23,364 homes, or 86%, were leased.

Comparisons with 2013 are substantially affected by rapid portfolio growth and the 2013 management internalization and acquisitions. The company cautions that its historical statements are not indicative of results as if it had operated independently.

Financial and operating performance

  • Revenue: Q2 revenue was $94.3 million, versus $18.1 million a year earlier; six-month revenue was $171.6 million, versus $24.7 million. Growth primarily reflected a larger portfolio and higher occupancy. Q2 property revenue, as defined by management, was $93.9 million.
  • Profit and per-share results: Q2 net loss was $3.4 million and net loss attributable to common shareholders was $12.3 million, or $0.07 per share. Six-month net loss was $10.3 million; loss attributable to common shareholders was $25.9 million, or $0.14 per share. Preferred dividends and noncontrolling interests affect the common-shareholder result.
  • NOI and margin: Non-GAAP net operating income (NOI) was $57.1 million in Q2 and $104.9 million for the six months. Q2 NOI margin was 61%, compared with 62% in Q2 2013. NOI excludes numerous costs and is not a measure of liquidity or cash available for dividends.
  • Cash flow and investment: Six-month operating cash flow was $88.7 million, versus $2.0 million in 2013. Investing cash outflow was $723.0 million, including $597.7 million for property purchases and $91.4 million for improvements. Financing cash inflow was $724.4 million. Cash and cash equivalents were $239.1 million at June 30.
  • Debt and liquidity: At June 30, borrowings were $481.0 million on the revolving credit facility and $481.0 million under the new asset-backed securitization; $319.0 million remained available under the facility. The securitization generated $481.0 million gross proceeds and is secured by 3,852 homes. The company reported compliance with both debt agreements’ covenants. Total liabilities were $1.216 billion.
  • Capital and distributions: The company issued 7.6 million Series C preferred shares in May, raising $190.0 million gross. It paid a $0.05 quarterly distribution per common share and declared the next $0.05 common distribution for September 30, 2014.
  • Other metrics: Average leased properties were 22,015 in Q2, compared with 6,292 a year earlier. Management reported 71.8% lease renewals for leases expiring in the first six months, with a 3.0% average rent increase on renewals.

Material changes versus the prior comparable period

  • The portfolio grew to 27,173 homes from 18,326 at June 30, 2013; the share of total homes leased increased to 86% from 56%.
  • Q2 property revenue rose to $93.9 million from $17.8 million, while leased-property operating expenses rose to $36.8 million from $6.9 million. Q2 depreciation and amortization increased to $38.3 million from $10.9 million.
  • Interest expense was $3.9 million in Q2 and $5.4 million for the first six months, reflecting the company’s increased borrowings. In May, the securitization proceeds were used to pay down the credit facility.
  • The company raised preferred equity and paid common and preferred distributions. Six-month common distributions were $18.6 million; preferred distributions were $7.8 million.

Outlook, commentary, risks and unusual items

  • Management expects acquisition activity to vary with investment availability and access to capital. It anticipated completing another securitization in the second half of 2014, but gave no firm commitment or quantified earnings guidance.
  • Management expects occupancy to continue improving as recently acquired homes are renovated and leased. Longer-term revenue growth is expected to rely more on tenant retention and rent increases as occupancy stabilizes. It cited potential for improved operating efficiency as its internal property-management platform scales.
  • The company continued to pay the Sponsor a 5% acquisition and renovation fee, with the arrangement scheduled to end December 10, 2014. It had a right to offer employment to relevant Sponsor personnel beginning that date.
  • Unusual costs included approximately $0.7 million of one-time market-integration costs and a $0.4 million insurance deductible for winter freeze damage in the first half. Management said approximately $1.2 million of freeze damage was expected to be recovered through insurance.
  • Interest-rate exposure is material: a 100-basis-point increase in LIBOR was estimated to raise annual interest expense by $9.6 million before capitalization, after reflecting the interest-rate cap. The debt is variable-rate and subject to covenants.
  • Other risks include execution and costs of acquisitions, renovation and leasing delays, vacancy and tenant defaults, property taxes and maintenance, capital availability, and the ability to maintain REIT qualification. The company said risk factors were not materially changed from its 2013 Form 10-K; it reported no material litigation and effective disclosure controls.
  • Subsequent events: On July 1, the company acquired Beazer Pre-Owned Rental Homes for approximately 8.2 million common shares, $5.0 million held in escrow and assumption/extinguishment of liabilities, including $112.8 million of credit-facility debt; the deal added 1,372 homes. By July 31, credit-facility borrowings stood at $586.0 million. It also acquired 673 homes in July for approximately $96.7 million.

Most important facts for investors to verify

  1. Whether portfolio expansion is translating into sustained occupancy, rent growth and NOI growth, and how much leasing and renovation costs absorb those gains.
  2. The comparability of reported results, given the large portfolio changes, internalization, acquisitions and accounting allocations; distinguish GAAP losses from non-GAAP NOI, FFO and Core FFO.
  3. Debt capacity, variable-rate exposure, covenant headroom and the economics and maturity-extension conditions of the securitization; reconcile the June 30 debt position with subsequent July borrowings.
  4. The cash demands of acquisitions, renovation, distributions and preferred dividends, and the availability and cost of future financing, including the anticipated securitization.
  5. The Beazer acquisition’s final accounting, integration costs, share dilution and effect on leverage and operating performance.
  6. Valuation assumptions for Level 3 Series E and preferred-share derivative liabilities, which were $74.6 million and $55.7 million, respectively, at June 30.