Invitation Homes Inc. — Q1 2018 Form 10-Q
Business context and reporting period
For the three months ended March 31, 2018. Invitation Homes owns, renovates, leases and operates single-family rental homes. It reported 82,509 homes across 17 markets at quarter-end. Results include Starwood Waypoint Homes (SWH), acquired November 16, 2017; the 2017 reported quarter largely excludes SWH, so headline year-over-year comparisons are not like-for-like.
Financial and operating results
| Metric | Q1 2018 | Comparable period |
|---|---|---|
| Total revenue | $423.7 million | $238.8 million |
| Operating income | $67.5 million | $12.1 million |
| Net loss | $17.6 million | $42.4 million |
| Net loss per share | $0.03 | $0.08 for Feb. 1–Mar. 31, 2017 |
| Operating cash flow | $130.1 million | $76.1 million |
| Investing cash flow | $(102.0) million | $28.4 million |
| Financing cash flow | $(53.9) million | $(188.1) million |
Revenue grew 77.5%, primarily reflecting the larger portfolio after the merger. On a comparable Same Store basis, rental revenue rose 3.9%; average rent per occupied home increased 4.0% to $1,706, while average occupancy was 95.7% versus 95.8%. Renewal and new-lease net effective rent growth were 4.9% and 2.5%, respectively. Same Store NOI was $234.5 million, versus $226.4 million.
GAAP net loss narrowed, while interest expense increased to $92.3 million from $68.6 million, reflecting higher average debt and LIBOR. Depreciation and amortization rose to $144.5 million, partly due to acquired homes and merger-related lease intangibles. Adjusted FFO was $125.8 million, or $0.24 per diluted share, compared with $69.0 million, or $0.22 per share; these are non-GAAP measures.
At March 31, total assets were $18.70 billion and total liabilities $10.06 billion. Debt, net of deferred financing costs and discounts, was $9.67 billion: mortgage loans $7.61 billion, term loan $1.49 billion, revolver $15 million, and convertible notes $551 million. Cash and cash equivalents were $134.9 million; restricted cash was $255.9 million. The $1.0 billion revolving facility had $985 million undrawn. The company declared a $0.11-per-share quarterly dividend.
Changes, outlook, risks and unusual items
- Portfolio size increased from 47,918 homes a year earlier to 82,509, mainly because of the SWH merger. Management cited potential scale, operating-cost and revenue-synergy benefits, but did not quantify realized synergies or provide formal earnings guidance.
- Q1 included $4.4 million of merger and transaction costs and $2.7 million of employee severance accruals. Hurricane-related charges contributed to higher impairment and other expenses; the company recorded $8.1 million of insurance receivables and $3.6 million of estimated unrepaired damages.
- Interest-rate exposure remains material: management estimated a 100-basis-point LIBOR increase would raise annual interest expense by about $17.9 million, assuming debt balances were unchanged. Subsequent to quarter-end, swaps were entered into to fix rates on $2.52 billion of floating-rate debt.
- Near-term refinancing is important. Mortgage maturities included about $3.58 billion in 2018 under the schedule at quarter-end. After quarter-end, a May 2018 securitization of $1.06 billion repaid two loans, and the company requested extensions on other loans. Extensions are conditional; the filing does not establish approval of the requested extensions.
- The SEC is conducting an ongoing fact-finding investigation concerning certain single-family rental securitizations and broker price opinions. The company said it is cooperating and could not predict the timing, outcome or scope. It recorded no loss because no probable, estimable loss had been determined.
- Management expects rental income net of operating expenses generally to support near-term operations and dividends, but notes that real estate is illiquid and REIT distribution requirements limit retained cash. Risks include interest rates, leasing and turnover, property taxes, insurance and HOA costs, acquisition competition, integration and execution of merger benefits, and seasonality.
Investor verification priorities
- Separate merger-driven growth from organic performance; track Same Store rent growth, occupancy, turnover and NOI.
- Verify refinancing outcomes, extensions, maturity concentrations, and the cost and coverage of floating-rate debt after the subsequent securitization and swaps.
- Monitor operating and recurring capital costs against rental growth, and assess the sustainability of cash flow and dividends.
- Track SWH integration, realized merger savings and revenue benefits, and completion of acquired-company internal-control integration.
- Follow developments in the SEC investigation, hurricane insurance recoveries, and the final purchase-price allocation, which remained preliminary.