Invitation Homes Inc. annual report, FY2017

Invitation Homes Inc. — 2017 Form 10-K

Reporting period: Fiscal year ended December 31, 2017. The filing includes fourth-quarter results, but reports primarily on the full year. Invitation Homes owns and operates single-family rental homes; it completed its IPO in February 2017 and merged with Starwood Waypoint Homes (SWH) on November 16, 2017. Because SWH results are consolidated only from the merger date, full-year comparisons are not like-for-like.

Business context and portfolio

At year-end, the company owned 82,570 homes across 17 markets. The portfolio comprised 47,917 Legacy IH homes and approximately 34,700 SWH homes.
Legacy IH portfolio average occupancy was 94.7% and average monthly rent was $1,692. Its 42,689-home same-store portfolio had 95.7% average occupancy and $1,694 average monthly rent.
Western U.S. and Florida markets generated 72.0% of 2017 revenue, concentrating exposure in those regions.

Financial performance and liquidity

Metric	2017	2016
Total revenue	$1,054.5 million	$922.6 million
Operating income	$118.2 million	$190.8 million
Operating margin	11.2%	20.7%
Net loss attributable to common shareholders	$105.3 million	$78.2 million
Net cash from operating activities	$259.8 million	$250.1 million
Net cash from investing activities	$53.3 million provided	$255.0 million used
Net cash used in financing activities	$331.3 million	$71.8 million

Revenue rose 14.3%, reflecting higher rents and other property income as well as SWH’s post-merger contribution. SWH contributed $84.7 million of revenue from November 16 through year-end.
Operating expenses increased 27.9% to $936.2 million. General and administrative expense rose sharply, including $71.0 million of incremental share-based compensation and $29.8 million of merger and transaction expenses. Depreciation also increased with the expanded portfolio.
Net loss from continuing operations was $139.7 million; a $33.9 million net gain on property sales reduced the reported net loss. Management attributes recurring losses in part to substantial non-cash depreciation.
NOI was $663.0 million, up from $562.3 million; same-store NOI was $550.6 million, versus $512.5 million. Core FFO was $351.1 million and Adjusted FFO was $296.6 million, or $1.04 and $0.88 per diluted share, respectively. These are non-GAAP measures and are not substitutes for GAAP earnings or cash flow.
Fourth-quarter revenue was $330.0 million; net loss available to common stockholders was $46.2 million, or $0.11 per diluted share.
Year-end cash and cash equivalents were $179.9 million, with $236.7 million of restricted cash and $965.0 million undrawn on the revolving facility. Operating cash flow increased 3.9%.
Debt principal totaled $9.72 billion; its balance-sheet carrying amount, net of financing costs and discounts, was $9.65 billion. Approximately $8.15 billion was variable-rate debt before hedging; 75.1% of variable-rate borrowings was effectively fixed through swaps. A 100-basis-point LIBOR change was estimated to affect annual interest expense by $20.3 million.
Dividends declared totaled $0.22 per share for 2017. The board declared a subsequent $0.11-per-share dividend in February 2018.

Material changes versus the prior period

The SWH merger substantially expanded the portfolio and balance sheet. Total assets increased to $18.68 billion from $9.73 billion, and total equity to $8.65 billion from $1.96 billion. Merger consideration was valued at approximately $4.92 billion; preliminary purchase accounting recorded $258.2 million of goodwill, primarily for expected synergies.
Although revenue increased, operating income fell 38.0% and the net loss widened. The comparison reflects merger costs, higher share-based compensation, larger depreciation expense, hurricane-related charges and only a partial year of SWH operations.
Legacy IH same-store average rent per occupied home increased 4.2%, while occupancy declined to 95.7% from 96.1%. Renewal lease rent growth eased to 5.1% from 5.5%; new-lease growth declined to 3.6% from 5.5%. Average time to re-resident increased to 47 days from 42 days.
Interest expense fell 10.2% to $257.0 million, mainly due to lower average debt balances, partly offset by higher LIBOR. Year-end debt nevertheless increased following the merger and financing activity.
Cash from investing activities turned positive, driven by the merger cash acquired, releases of restricted cash, retained-security repayments, property sales and lower acquisition spending.

Outlook, risks and unusual items

Management expects potential operating efficiencies and cost savings from the merger, but did not provide quantified financial guidance. Full integration and realization of expected savings were not expected until 2019; the company cautions that costs could exceed savings or benefits may not be achieved.
Management described recent rental-market fundamentals, particularly in the Western U.S. and Florida, as favorable and expected trends to continue in the near to intermediate term. This is an expectation, not a formal forecast.
Hurricanes Harvey and Irma caused damage. The company recorded $21.5 million of hurricane losses/damages in 2017, including a $21.5 million accrual cited in non-GAAP reconciliations; at year-end it reported $9.2 million of insurance receivables and $11.5 million of estimated remaining damages in accrued liabilities.
An SEC fact-finding investigation into single-family rental securitizations and broker price opinions was ongoing. The company had responded to a subpoena and said it could not predict the timing, scope or outcome; it had not recorded an accrual for a probable, estimable loss.
Key risks include substantial leverage and refinancing needs, exposure to rising interest rates and LIBOR transition, property tax/HOA/insurance cost increases, regional concentration, resident turnover and leasing competition, renovation and maintenance costs, natural disasters, and dependence on third-party service providers. The company also identified merger-integration and potential legacy liabilities as risks.
The February 2018 subsequent securitization raised $916.6 million at floating rates and refinanced two mortgage loans; management stated it would shift certain obligations from 2018 to 2020. The company reported compliance with debt covenants at year-end and through issuance of the financial statements.
The auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective, but excluded SWH from its control assessment; the auditor did not attest to internal-control effectiveness.

Important facts for investors to verify

How comparable operating performance is after separating Legacy IH results from SWH’s post-merger contribution and merger-related costs.
Whether integration achieves the expected savings by the stated timetable, and the remaining one-time costs and severance obligations.
Debt maturities, available refinancing capacity, covenant headroom, hedging coverage and sensitivity to interest rates and LIBOR replacement.
Actual insurance recoveries and final hurricane repair costs, and any material developments in the SEC investigation or related litigation.
Whether occupancy, renewal and new-lease rent growth, turnover and re-resident times improve or weaken across the combined portfolio.
Cash available for dividends after recurring capital expenditures and debt service; GAAP losses and non-GAAP FFO measures should be assessed alongside one another.