American Homes 4 Rent — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. The company is a REIT focused on acquiring, renovating, leasing and operating single-family rental homes. Figures below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context and operations
- Owned 48,038 homes in 22 states at quarter-end, including 1,582 held for sale. Excluding held-for-sale homes, 96.3% were leased and 94.8% were occupied; average contractual monthly rent was $1,461 per property.
- Completed the February 29 merger with American Residential Properties, Inc. (ARPI), adding 8,936 homes. The transaction was intended to increase scale, add density in key markets and generate operating synergies.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $221.0 | $153.6 | $416.2 | $285.4 |
| Net income (loss) | $(3.8) | $(8.4) | $1.3 | $(16.7) |
| Net loss attributable to common shareholders | $(10.4) | $(17.7) | $(14.8) | $(35.5) |
| Basic and diluted loss per common share | $(0.04) | $(0.08) | $(0.06) | $(0.17) |
| Interest expense | $35.5 | $22.0 | $66.5 | $37.7 |
| Depreciation and amortization | $79.6 | $59.2 | $149.1 | $112.9 |
| Operating cash flow | Not separately stated | Not separately stated | $149.4 | $103.8 |
- Q2 revenue rose about 44% year over year, reflecting portfolio growth and ARPI contribution. Q2 net loss attributable to common shareholders narrowed, primarily on higher revenue, partly offset by increased property operating costs, depreciation and interest.
- Q2 Core NOI, a company-defined non-GAAP measure, was $120.9 million versus $84.2 million; total Core NOI margin was 62.1% versus 60.8%. Same-Home revenue increased 5.4%, supported by higher rent and occupancy; Same-Home Core NOI was $66.4 million versus $60.8 million.
- Q2 Adjusted FFO was $62.6 million, or $0.21 per weighted-average FFO share and unit, versus $32.1 million, or $0.12, a year earlier. The company cautions that FFO measures are non-GAAP and are not substitutes for cash flow or GAAP results.
- For the six months, investing cash outflow was $410.2 million and financing cash inflow was $473.5 million. Cash and cash equivalents increased $212.7 million to $270.4 million.
Balance sheet, debt and liquidity
- At June 30, total assets were $8.25 billion and total equity was $4.88 billion. Debt carrying value was $3.095 billion; principal before unamortized discounts and financing costs was approximately $3.167 billion.
- Debt included $2.860 billion of asset-backed securitization principal, $115 million of 3.25% exchangeable senior notes due 2018, a $50.3 million secured note and $142 million drawn on the revolving credit facility. The company reported compliance with debt covenants.
- The $800 million credit facility’s borrowing availability period was scheduled to end in September 2016. In July, the company repaid the $142 million balance using proceeds from its 6.35% Series E preferred-share offering.
- Six-month financing included $482.7 million net proceeds from perpetual preferred shares; the company also repurchased $96.1 million of common shares. Restricted cash was $134.0 million and is separate from reported cash and cash equivalents.
Material changes, outlook and risks
- The ARPI merger materially expanded the portfolio and brought additional debt, including floating-rate securitization debt and exchangeable notes. ARPI properties contributed $34.7 million of Q2 revenue and a $3.1 million net loss for the quarter.
- Six-month results included an $11.5 million gain on conversion of Series E units, a noncash item that improved reported net income. Preferred-share dividends were $7.4 million in Q2 and $13.0 million for the six months.
- Management provided no specific earnings or operating guidance in the supplied filing text. It said rental income, net of operating costs and recurring capital expenditures, is generally expected to support operations and distributions, while noting property assets are illiquid and other financing could be needed if cash flow falls short.
- Interest-rate exposure is material: management estimated a 100-basis-point increase in LIBOR would raise projected annual interest expense by about $9.6 million, before any interest capitalization. Risks also include rent collection, occupancy, tenant turnover, renovation and leasing timelines, property costs, acquisition competition and access to capital.
- The company reported routine legal and administrative matters that management did not expect to materially affect financial position. It added a tax risk concerning potential “fast-pay stock” treatment if preferred shares are issued in certain reopenings. REIT qualification and distribution requirements are also relevant risks.
Important facts for investors to verify
- Post-merger operating performance: leased and occupied rates, rent growth, retention, and integration or synergy results, with ARPI properties distinguished from Same-Home results.
- Debt terms and refinancing: floating-rate exposure, the status and terms of the credit facility after its September 2016 availability date, and maturities or extension conditions on securitizations and notes.
- Cash available for distributions: reconcile operating cash flow with renovation, recurring capital expenditures, leasing costs, debt service and preferred dividends; do not treat non-GAAP FFO as cash available.
- Held-for-sale portfolio: disposition pace and proceeds. From July 1 through July 31, the company reported 180 sales for approximately $14.0 million net and 157 acquisitions for approximately $32.9 million.
- Capital allocation and dilution: preferred-share obligations, common-share repurchases, merger-issued shares and units, and potential exchange of the senior notes.