Invitation Homes Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Unless stated otherwise, dollar amounts below are in millions. The company completed its IPO on February 6, 2017; the quarter includes pre-IPO combined reporting and post-reorganization consolidated reporting. The prior-year comparison is therefore not a like-for-like public-company period.
Business context and portfolio
Invitation Homes owns, renovates, leases and operates single-family rental homes. At March 31, 2017, it owned 47,918 homes across 13 markets. Average occupancy was 94.9%, and average monthly rent was $1,661 per occupied home. Its Same Store portfolio comprised 43,224 homes, with 95.8% average occupancy and $1,664 average monthly rent.
Financial and operating metrics
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Total revenue | $238.8 | $224.5 |
| Operating income | $12.1 | $51.3 |
| Net loss | $(42.4) | $(10.0) |
| Operating cash flow | $70.9 | $77.3 |
| Total portfolio NOI (non-GAAP) | $150.6 | $139.5 |
| Same Store NOI (non-GAAP) | $137.2 | $129.8 |
| Adjusted EBITDA (non-GAAP) | $132.7 | $121.0 |
Revenue increased 6.3%, reflecting higher average rent and occupancy despite a slightly smaller home count. Same Store NOI increased 5.7%; total NOI increased 7.9%. Rental revenue rose 5.5%, while other property income rose 24.3%, mainly from pet rent and late fees. Renewal-lease net effective rent growth was 5.2%, unchanged year over year; new-lease growth slowed to 3.4% from 4.8%. Same Store turnover increased to 31.8% from 31.1%, and average days between residents rose to 53 from 47.
Operating expenses increased 30.8% to $226.7 million. General and administrative expense was $58.3 million versus $15.4 million, principally reflecting IPO-related share-based compensation and readiness costs. Share-based compensation totaled $44.2 million, up from $4.2 million; the company also recorded $7.6 million of IPO-readiness costs. Operating margin was approximately 5.1%, compared with 22.8% in the prior-year quarter, with the comparison heavily affected by these items. Interest expense declined 2.4% to $68.6 million as lower average debt partly offset higher LIBOR and derivative fair-value losses.
Net loss included a $14.3 million gain on property sales, compared with $9.2 million in Q1 2016. FFO was $11.0 million, Core FFO was $78.2 million, and Adjusted FFO was $69.0 million; these are non-GAAP measures. Post-IPO net loss per share was $0.08, calculated only for February 1 through March 31.
At March 31, cash and cash equivalents were $192.5 million and restricted cash was $144.2 million. Operating cash flow was $70.9 million. Investing activities provided $111.5 million, largely reflecting released restricted cash and lower acquisitions, while financing activities used $188.1 million after substantial debt repayments. The company reported $9.6 billion of total assets and $3.7 billion of equity.
Material changes and capital structure
- The February IPO sold 88.55 million shares at $20.00 each and generated $1.692 billion net of underwriting discounts, before other offering costs. The Pre-IPO Owners received shares in the reorganization.
- The company repaid its former credit facilities and substantially reduced mortgage borrowings. At March 31, mortgage principal was $4.234 billion and the new term loan principal was $1.500 billion; total debt carrying value, net of financing costs and discounts, was approximately $5.714 billion.
- The new credit facility provides a $1.0 billion revolving line, undrawn at quarter-end, and a $1.5 billion term loan maturing in 2022. The term loan’s stated rate was 2.78% at March 31. The company said it was in compliance with applicable covenants.
- After quarter-end, an April 28 Fannie Mae securitization provided a $1.0 billion, ten-year fixed-rate loan at 4.23%, secured by 7,204 homes. Proceeds repaid the remaining approximately $420 million IH1 2014-1 mortgage balance; on May 9, $510 million was used to prepay IH1 2014-3. These transactions are subsequent events, not quarter-end balances.
- Mortgage debt had significant near-term stated maturities: approximately $3.7 billion in 2017 before considering extension options and subsequent refinancing. Certain mortgage maturities had extension options, subject to conditions.
Outlook, risks and contingencies
The filing provides no quantified earnings or operating guidance. Management described demand and supply fundamentals in key Western U.S. and Florida markets as favorable and expected those trends to continue in the near to intermediate term. Management also noted that results are seasonal, with higher summer move-outs and related turnover, repair and landscaping costs.
Key risks include rent and occupancy changes, resident defaults and turnover, property taxes, HOA and insurance costs, acquisition competition and renovation costs, reliance on third-party services, interest-rate exposure and debt refinancing. A 100-basis-point increase in LIBOR was estimated to raise annual interest expense by $22.1 million at quarter-end, after giving effect to swaps and caps; 78% of variable-rate debt was effectively converted to fixed rate through swaps. The company must maintain REIT qualification and generally distribute at least 90% of REIT taxable income. Failure to qualify could result in corporate tax. Potential tax on built-in gains from certain contributed properties during a five-year period was not estimable.
Management reported no material litigation expected to adversely affect the financial statements and no material change to previously disclosed risk factors. The board declared a $0.06-per-share dividend on May 4, payable May 31. Management concluded disclosure controls were effective at the reasonable-assurance level.
Important facts for investors to verify
- Reconcile the quarter’s large GAAP loss with recurring property performance, including share-based compensation, IPO-readiness costs, property-sale gains and non-GAAP adjustments.
- Review the near-term mortgage maturity and extension schedule, covenant requirements, and the completed post-quarter Fannie Mae refinancing and prepayment details.
- Track Same Store rent growth, occupancy, turnover and days to re-resident, particularly the weakening in new-lease growth and increase in vacancy days.
- Assess variable-rate exposure, hedge effectiveness and the company’s sensitivity to changes in LIBOR.
- Confirm REIT qualification, dividend coverage and liquidity needs, including the limitations on restricted cash and the use of the undrawn revolver.