American Homes 4 Rent — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. American Homes 4 Rent is a REIT focused on acquiring, renovating, leasing and operating single-family rental homes. At quarter-end it owned 48,336 homes in 22 states, including 704 held for sale; 95.1% of properties not held for sale were leased.
Financial and operating performance
| Metric | Q1 2017 | Q1 2016 | Change / context |
|---|---|---|---|
| Total revenue | $233.8 million | $195.0 million | Up 19.9% |
| Net income | $11.8 million | $5.0 million | Up year over year |
| Net loss attributable to common shareholders | $1.5 million; $0.01 per share | $4.4 million; $0.02 per share | Loss narrowed |
| Core NOI | $131.7 million | $106.2 million | Up 24.1%; margin on core revenues was 65.1% versus 62.8% |
| Same-Home Core NOI | $103.3 million | $96.1 million | Up 7.6%; margin was 65.4% versus 63.0% |
| FFO attributable to common share and unit holders | $68.5 million | $67.6 million | Up modestly |
| Core FFO | $76.8 million | $63.6 million | Up year over year |
| Adjusted FFO | $68.8 million | $55.6 million | Up year over year |
| Operating cash flow | $110.0 million | $68.6 million | Up; includes $14.4 million from changes in operating assets and liabilities |
- Rent from single-family properties was $201.1 million, versus $168.0 million. Same-Home core property revenue increased 3.6%; average monthly rent for those homes was $1,506 at quarter-end, versus $1,454 a year earlier.
- Average blended rent change was 3.5%. Renewal rent increases averaged 3.1% and re-lease increases 4.0%, both below the respective prior-year rates of 4.1% and 4.7%.
- Property operating expenses were $83.3 million; property management expenses were $17.5 million; depreciation and amortization was $74.0 million; and interest expense was $31.9 million. Management attributed higher depreciation mainly to a larger average property count.
- Cash, cash equivalents and restricted cash totaled $630.9 million, comprising $495.8 million unrestricted cash and $135.1 million restricted cash. The company reported $110.0 million of operating cash flow, $70.0 million of investing cash outflow and $340.6 million of financing cash inflow.
- Quarter-end debt principal was approximately $3.00 billion; balance-sheet debt, net of discounts and financing costs, was approximately $2.94 billion. The revolving facility was undrawn and the term loan balance was $350 million. The company reported compliance with debt covenants.
- Total assets were $8.49 billion and total equity was $5.27 billion at March 31, 2017. Common dividends declared were $0.05 per share, unchanged from Q1 2016.
Material changes and unusual items
- March equity offerings generated $350.6 million of cash proceeds, including an underwritten offering and at-the-market sales. Class A shares outstanding increased from 242.7 million at year-end to 258.3 million at quarter-end.
- Lower acquisition costs helped the year-over-year result: $1.1 million was expensed in Q1 2017 versus $5.7 million in Q1 2016, which included $3.4 million of ARPI merger costs. Q1 2016 also included an $11.5 million gain on conversion of Series E units; Q1 2017 did not.
- Q1 2017 general and administrative expense included $0.7 million of nonrecurring rating-agency fees related to inaugural investment-grade corporate credit ratings. A $5.4 million noncash remeasurement charge on participating preferred shares also affected earnings.
- The company sold 504 homes in Q1 2017, compared with 66 in Q1 2016. Q1 2017 sales generated $24.0 million of net proceeds, including a note receivable, and resulted in a $1.0 million net loss on sale.
- In April, the company repaid approximately $455.4 million of the AH4R 2014-SFR1 securitization using March offering proceeds and available cash. The repayment generated about $6.6 million of early-extinguishment charges, primarily a write-off of financing costs, and released 3,799 pledged homes and $4.8 million of restricted cash.
- Also in April, the company issued 6.0 million Series F preferred shares, raising $150 million gross, with approximately $5 million of offering costs. It paid down $100 million of the term loan; the April 30 balance was $250 million.
Outlook, risks and contingencies
- The filing provides no specific earnings, revenue or acquisition guidance. Management said the portfolio was essentially stabilized and that revenue growth depends on tenant retention and rental-rate increases. Management believes its operating platform can support those aims.
- Management identifies property acquisition availability and pricing, renovation and leasing timelines, occupancy, tenant turnover and credit quality, operating expenses, capital access and capital structure as factors affecting results. The business is seasonal, with higher move-in and move-out activity generally in late spring and summer.
- Interest-rate risk is material. At March 31, management estimated that a 100-basis-point increase in LIBOR would raise projected annual interest expense by $8.1 million before capitalization, assuming debt balances were unchanged. This estimate predates the April securitization payoff.
- Other risks include the illiquidity of real estate, refinancing and financing availability, local rental-market conditions, and continued qualification as a REIT. Management said it believed routine legal and administrative proceedings would not materially adversely affect results; no material litigation was reported.
- The participating preferred-share derivative liability was $75.2 million and was valued using significant unobservable inputs. Management cautioned that changes in valuation assumptions could materially affect the result.
- The company reclassified certain 2016 expense categories to conform to its 2017 presentation, including moving property-platform costs from property operating expenses to property management expenses. It also adopted a new goodwill-related business definition prospectively; management reported no material impact from adoption of the share-based compensation guidance.
Key facts for investors to verify
- Whether rental growth, leasing, occupancy and turnover trends continue, particularly as renewal and re-lease rent increases moderated year over year.
- The effect of the share issuance and subsequent preferred-share offering on per-share results, distributions and capital structure.
- Post-quarter debt balances, interest costs and liquidity after the securitization repayment and term-loan paydown; distinguish unrestricted cash from restricted cash.
- The sustainability of reported FFO and Adjusted FFO, including their non-GAAP definitions and exclusions, and the cash available after recurring property investment and distributions.
- The assumptions supporting the preferred-share derivative valuation and the sensitivity of results to interest rates, home prices and other valuation inputs.
- Progress and costs associated with the 429 property acquisition commitments outstanding at quarter-end, totaling $77.8 million.