American Homes 4 Rent — Q2 2017 Form 10-Q
Business context and reporting period. Unaudited results for the quarter and six months ended June 30, 2017, compared with the corresponding 2016 periods. The Maryland REIT acquires, renovates, leases and operates single-family rental homes. At quarter-end, it owned 48,982 homes in 22 states, including 582 held for sale; 95.2% of non-held-for-sale homes were leased.
Financial and operating performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Total revenue | $237.0 million | $220.3 million | $470.8 million | $415.3 million |
| Net income (loss) | $15.1 million | $(3.8) million | $26.9 million | $1.3 million |
| Net loss attributable to common shareholders | $(0.2) million | $(10.4) million | $(1.7) million | $(14.8) million |
| Operating cash flow | Not separately reported for quarter | Not separately reported for quarter | $225.2 million | $161.8 million |
| Core NOI (non-GAAP) | $131.7 million | $120.9 million | $263.5 million | $227.1 million |
| Adjusted FFO (non-GAAP) | $70.4 million | $62.6 million | $139.3 million | $118.3 million |
- Q2 total revenue increased 7.6% year over year. Rental revenue was $204.6 million; tenant charge-backs were $27.4 million.
- Q2 Core NOI margin was 64.0% of core revenue, versus 62.1% a year earlier. Same-Home Core NOI rose 6.5% to $102.7 million; its margin increased to 64.3% from 62.6%.
- Average contractual monthly rent per property was $1,510, with 94.0% occupancy. Same-Home average monthly rent was $1,522, up from $1,476 a year earlier.
- First-half investing cash outflow was $222.5 million and financing cash outflow was $57.1 million; cash, cash equivalents and restricted cash declined $54.4 million to $195.8 million. Operating cash flow included $30.7 million from changes in operating assets and liabilities.
- At June 30, cash and cash equivalents were $67.3 million. Debt carrying value on the balance sheet was $2.435 billion; debt principal was approximately $2.481 billion. Total liabilities were $2.735 billion.
- At quarter-end, borrowings included $92 million on an $800 million revolving facility and $200 million on a $200 million term loan. The company reported covenant compliance. In July, it repaid the revolving balance, leaving no revolver borrowings as of July 31.
Changes versus prior period
- Common-shareholder losses narrowed in both the quarter and first half, although the company remained loss-making for common shareholders. Management attributed the improvement mainly to higher revenue and lower interest expense; the first-half comparison also benefited from lower acquisition costs. Preferred-share dividends continued to exceed net income attributable to common shareholders.
- First-half operating cash flow increased by $63.4 million year over year. Investing outflow was substantially lower than in 2016, when it included the $350 million payoff of a credit facility associated with the ARPI merger.
- Interest expense fell to $28.4 million in Q2 from $35.5 million and to $60.3 million for the first half from $66.5 million. The company cited debt repayments, lower credit-facility interest costs and increased capitalized interest.
- Q2 property operating expenses increased to $86.0 million from $77.9 million; total expenses declined to $216.2 million from $224.6 million. The filing notes 2017 expense-category reclassifications, including moving property-management platform costs from property operating expenses to property management expenses.
Outlook, commentary, risks and unusual items
- No specific earnings, revenue or acquisition guidance is provided. Management expects operating liquidity generally from cash on hand and operating cash flow, and says rental income net of operating expenses and recurring capital expenditures is expected generally to support operations and distributions. Management cautions that real estate assets are illiquid and may not provide timely short-term liquidity.
- The June 2017 credit-agreement amendment expanded revolving capacity to $800 million, reduced term-loan capacity to $200 million and lowered borrowing costs. The facilities bear floating rates, exposing the company to rate increases; a 100-basis-point increase was estimated to add about $2.9 million to annual interest expense at June 30, before capitalization.
- The company paid off approximately $455.4 million of the AH4R 2014-SFR1 securitization in Q2, recording a $6.6 million early-extinguishment loss, primarily from writing off deferred financing costs. The payoff released 3,799 pledged homes and $9.4 million of restricted cash.
- Capital raised included a first-quarter common-share offering and private placement, and a Q2 $155 million gross Series F preferred-share offering. A further $115 million gross Series G preferred offering and $26.9 million gross ATM common-share issuance occurred in July. These financings support liquidity and investment capacity but involve dilution or preferred distributions.
- Other items include a $7.1 million first-half noncash remeasurement loss on the participating preferred-share derivative liability and $2.5 million of first-half impairment expense related to properties held for sale. The derivative valuation uses significant unobservable inputs.
- Management identifies acquisition availability and costs, renovation and leasing timelines, occupancy, tenant turnover, property expenses, access to capital and interest rates as factors affecting results. Newly disclosed development risks include permitting, construction delays or cost overruns, contractor or materials issues, and rents or returns below expectations.
- The company reported no material litigation, no material changes to previously disclosed risks other than development risks, and no material off-balance-sheet arrangements. It stated that disclosure controls were effective.
Important facts for investors to verify
- Reconcile GAAP common-shareholder losses with non-GAAP Core NOI, FFO and Adjusted FFO, including the exclusions used in those measures.
- Track same-home rent growth, occupancy, renewal and re-lease increases, turnover, and property-level expense trends; assess whether seasonal factors affect comparisons.
- Review debt maturities, floating-rate exposure, securitization terms and collateral, available revolver capacity, covenant headroom, and the effect of July repayments and subsequent financing.
- Assess ongoing share and preferred issuance, dilution, preferred-dividend obligations, and whether operating cash flow after capital expenditures adequately supports distributions and investment plans.
- Monitor execution and returns from land acquisition and home construction, along with commitments at June 30 to acquire 354 homes for $73.1 million and $8.9 million of land commitments.
- Consider the sensitivity of the preferred-share derivative valuation to assumptions and the effect of property-sale impairments and debt-extinguishment charges on reported results.