Invitation Homes Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Unless noted, financial amounts below are in millions of dollars. The company owns and operates single-family rental homes; it completed its IPO in February 2017. Because of the pre-IPO reorganization, the 2017 and 2016 periods reflect combined predecessor entities, while the post-IPO company structure began in 2017.
Financial and operating highlights
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $242.2 | $230.5 | $481.0 | $455.0 |
| Operating income | $53.6 | $49.7 | $65.7 | $100.9 |
| Net income (loss) | $5.5 | $(19.7) | $(36.9) | $(29.6) |
| Cash from operating activities | Not provided for quarter | Not provided for quarter | $167.2 | $156.1 |
| Net operating income (NOI), non-GAAP | $149.4 | $139.2 | $300.0 | $278.8 |
- Q2 rental revenue rose 4.2%; total revenue increased 5.1%. For the first half, rental revenue grew 4.8% and total revenue 5.7%.
- Q2 net income included a $10.2 million gain on property sales; loss from continuing operations was $4.6 million. First-half loss from continuing operations was $61.3 million, and property-sale gains were $24.5 million.
- Reported NOI margin, calculated as NOI divided by total revenue, was approximately 61.7% in Q2 2017 versus 60.4% a year earlier, and 62.4% for the first half versus 61.3%.
- Same-store NOI increased 6.3% in Q2 to $135.7 million and 6.1% in the first half to $272.4 million.
- Q2 average occupancy was 95.0% across the portfolio (95.9% same-store). Average monthly rent per occupied home was $1,683, up 5.0% year over year; same-store rent was $1,688, up 4.3%. Same-store occupancy was lower year over year.
- Q2 renewal and new-lease net effective rent growth was 5.1% and 5.0%, respectively, compared with 5.5% and 7.3% in Q2 2016. Average days to re-resident increased to 41 from 35.
Debt, liquidity and cash flow
- At June 30, cash and cash equivalents were $158.9 million; restricted cash was $138.3 million. The $1.0 billion revolving facility was undrawn and available. Management said rental cash flow was expected to support near-term operations and distributions, while noting the portfolio’s illiquidity and reliance on external capital for longer-term needs.
- Debt, net of deferred financing costs and discounts, was $5.645 billion: $4.159 billion of mortgage loans and $1.487 billion of term loans. Total liabilities were $5.875 billion. Debt was down from $7.694 billion at June 30, 2016, according to management, principally after repayments funded with IPO proceeds and refinancing.
- The new credit facility comprises a fully drawn $1.5 billion term loan due in 2022 and a $1.0 billion revolving facility due in 2021, with a one-year extension option. The term loan’s reported rate was 3.03% at June 30. The company also issued a $1.0 billion, ten-year fixed-rate mortgage loan at 4.17%, secured by 7,204 homes.
- First-half operating cash flow was $167.2 million, up 7.1%. Investing activities provided $74.5 million, versus $206.4 million used in the prior-year period, reflecting, among other items, fewer acquisitions, property-sale proceeds, and released restricted cash. Financing activities used $280.9 million, including substantial debt repayments; cash declined $39.2 million during the period.
- Mortgage principal maturities shown at June 30 include $147.6 million in 2017 and $3.033 billion in 2018; many loans have extension options subject to conditions. Subsequent to quarter-end, the company extended two mortgages to 2018.
Changes, outlook and risks
- Operating expenses rose 4.3% in Q2 and 17.3% in the first half. First-half expenses included $52.5 million of share-based compensation, versus $8.3 million a year earlier, and $8.3 million of offering-related costs. Supplemental California property taxes following the IPO also increased property costs.
- Interest expense decreased 18.7% in Q2 and 10.6% for the first half as average debt declined, partly offset by higher borrowing costs, rising LIBOR and swap effects. Management reported 75.2% of variable-rate debt effectively converted to fixed through swaps; a 100-basis-point LIBOR increase was estimated to add about $11.6 million to annual interest expense.
- Management described Western U.S. and Florida rental demand and supply trends as favorable and expected these trends to continue in the near to intermediate term. The filing provides no formal earnings or operating guidance.
- Key risks include rent and occupancy changes, resident turnover and re-leasing time, property taxes and maintenance costs, acquisition competition, interest-rate and refinancing exposure, debt covenants, and REIT qualification. The business is seasonal, with historically higher summer move-outs and related costs. The company reported covenant compliance and no material change to previously disclosed risk factors.
- Subsequent event: on August 9, 2017, Invitation Homes agreed to a stock-for-stock merger of equals with Starwood Waypoint Homes. Each Starwood share would convert into 1.614 Invitation Homes shares; the expected ownership split was approximately 59%/41%. Closing was expected by year-end, subject to shareholder approval and customary conditions.
- The company declared a quarterly dividend of $0.06 per share paid May 31 and declared $0.08 per share payable August 31. It intends to qualify as a REIT, which requires annual distributions of at least 90% of REIT taxable income, subject to applicable rules.
Important facts for investors to verify
- Merger approval, closing timetable, exchange mechanics, and the effect of the transaction on ownership and per-share results.
- Mortgage maturities and extension conditions, refinancing plans, and liquidity available beyond cash and the undrawn revolver.
- Whether rent growth can offset softer same-store occupancy, slower new-lease growth, and longer re-leasing periods.
- Underlying earnings and recurring cash generation apart from property-sale gains and IPO-related share compensation and costs; review non-GAAP NOI, FFO and AFFO reconciliations alongside GAAP results.
- Interest-rate exposure, hedge effectiveness, and compliance with debt covenants and REIT distribution and qualification requirements.