American Homes 4 Rent — Q3 2013 Form 10-Q
Business context and period. This quarterly report covers the three and nine months ended September 30, 2013. The Maryland REIT acquires, renovates, leases and operates single-family rental homes. At quarter-end, it owned 21,267 properties across 22 states; 14,384, or 67.6%, were leased. The company was formed in 2012 and rapidly expanded during 2013, so comparisons with 2012 are not representative of a mature business.
Financial and operating performance
- Revenue: Q3 revenue was $49.5 million, including $48.7 million in rent, versus $1.0 million in Q3 2012. Nine-month revenue was $74.1 million versus $1.3 million. Management attributed the increase primarily to portfolio growth.
- Profit and margins: Q3 net loss was $3.9 million; net loss attributable to common shareholders was $7.7 million, or $0.05 per share. Nine-month net loss was $9.6 million and net loss attributable to common shareholders was $29.4 million, or $0.29 per share. The common-shareholder result includes a $10.5 million preferred-unit conversion adjustment. Property net operating income (NOI), a non-GAAP measure, was $31.2 million for Q3 and $45.9 million for the nine months; reported NOI margins were 64% and 63%, respectively. NOI excludes substantial costs, including depreciation, vacant-property expenses and corporate costs, and is not cash flow.
- Cash flow: Nine-month operating cash flow was $4.3 million, compared with cash used of $3.8 million in 2012. Investing used $2.0 billion, including $1.7 billion for property purchases and $321.6 million for improvements. Financing provided $1.8 billion, principally through equity issuance and credit-facility borrowings. Cash declined by $239.1 million to $158.1 million.
- Debt and liquidity: Credit-facility borrowings were $238 million at September 30. The facility’s maximum capacity had been expanded to $800 million, subject to borrowing-base and other terms; interest was one-month LIBOR plus 2.75% through March 2017, then plus 3.125%. The company reported compliance with covenants. Cash and cash equivalents were $158.1 million; restricted resident-security-deposit cash was $21.3 million. Total liabilities were $396.0 million and total equity was $3.49 billion.
- Portfolio and leasing: Of the 21,267 homes, 4,147 were being renovated and 2,736 were rent-ready and vacant. For leases reaching full-term maturation during the quarter and nine-month period, renewal rates were 73% and 69%, with average rent increases of 1.7% and 2.1%, respectively. Management cautioned that this limited history may not predict future results.
Material changes versus the prior comparable period
- Portfolio size rose from 2,081 homes at September 30, 2012 to 21,267 at September 30, 2013. Revenue, operating expenses and depreciation therefore increased sharply; the prior-period figures are not like-for-like comparisons.
- Major 2013 transactions included a 2,770-home Sponsor contribution, acquisition of a 4,778-home joint venture, consolidation of two smaller joint ventures, and the June internalization of the advisor and property manager.
- The August IPO and concurrent private placements raised substantial equity. The IPO’s approximately $769.8 million net proceeds were used to pay down the credit facility. At September 30, cash was lower than at year-end 2012, while property assets and equity had expanded significantly.
- The internalization ended advisory and property-management fees, while bringing personnel and related costs in-house. The Sponsor continued to provide acquisition and renovation services for a 5% fee, scheduled to cease December 10, 2014.
Outlook, risks and unusual items
- No quantified operating guidance was provided. Management said acquisition activity had slowed to align investment with capital raising and would fluctuate with suitable opportunities and available capital. In October, the company acquired approximately 600 homes for about $79.3 million.
- After quarter-end, the company raised $110 million gross in a Series A preferred offering, with an additional $16.5 million gross from the underwriters’ over-allotment. Credit-facility debt was $220 million at October 31 after borrowings and repayments. The board declared an initial $0.05 quarterly common-share distribution and an initial pro-rated preferred dividend.
- Key risks include the company’s limited operating history and untested scale, rapid growth and execution demands, competition for properties and tenants, renovation costs and delays, vacancies and tenant turnover, concentration in single-family rentals and selected markets, dependence on external financing, variable-rate debt, covenant restrictions, and the possibility of failing to maintain REIT qualification.
- Unusual items include $120.7 million of goodwill recorded with the management internalization and a $65.3 million fair-value liability for contingently convertible Series E units. The Series E valuation uses significant unobservable inputs and is sensitive to assumptions. The nine-month results also include a $10.9 million gain on remeasurement of an equity-method investment and a $0.9 million gain on the sale of 38 properties.
- Management stated that disclosure controls were effective and that no material litigation was pending or known to be threatened. The filing notes that historical financial statements include Sponsor activity and are not indicative of results had the company operated independently.
Important facts for investors to verify
- Whether leasing, occupancy, renewal and rent-growth trends improve as renovated homes enter service, and how the company defines the distinct leasing statistics reported.
- Whether property-level NOI converts into sustainable operating cash flow after vacant-home, renovation, corporate and other costs.
- Acquisition yields and total costs, including the Sponsor’s 5% acquisition and renovation fee, and progress toward ending Sponsor dependence in 2014.
- Available borrowing capacity under the facility’s borrowing base, covenant headroom, exposure to LIBOR increases and the company’s continuing need for external capital.
- The assumptions and potential dilution associated with Series C, D and E units, the Series E liability valuation, and the significance of internalization goodwill.
- Whether distributions are supported by recurring cash generation; the declared distributions were subsequent to quarter-end and do not establish future payment capacity.