American Homes 4 Rent — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. American Homes 4 Rent is a REIT focused on acquiring, developing, renovating, leasing, and operating single-family rental homes. At quarter-end it held 52,634 homes in 22 states, including 1,664 classified as held for sale; 96.4% of properties excluding those held for sale were occupied. Amounts below are in U.S. dollars; financial statement amounts are in millions unless indicated.
Financial results and liquidity
| Metric | Q2 2019 | Q2 2018 | Change |
|---|---|---|---|
| Total revenue | $281.9 | $264.5 | +6.6% |
| Net income | $40.3 | $25.9 | +55.6% |
| Net income (loss) attributable to common shareholders | $22.5 | $(15.2) | Turned positive |
| Diluted earnings (loss) per share | $0.08 | $(0.05) | Turned positive |
| Core NOI, non-GAAP | $154.0 | $144.1 | +6.9% |
| Same-Home Core NOI, non-GAAP | $120.6 | $116.4 | +3.6% |
Q2 total Core NOI margin was 63.0%, versus 63.1% a year earlier. Same-Home Core NOI margin was 63.4%, versus 63.9%; management attributed the quarterly margin pressure primarily to higher property taxes. Same-Home realized rent increased 3.7% year over year, and average occupied-days percentage rose to 95.7% from 95.3%.
- Six-month results: Revenue was $561.1 million, up 7.4%; net income was $73.4 million versus $47.4 million; common-shareholder income was $38.8 million versus a $9.3 million loss. Core NOI was $304.6 million versus $279.6 million.
- Cash flow, six months: Operating cash flow was $287.5 million, compared with $250.0 million. Investing cash outflow was $170.0 million, versus $325.6 million, including $139.7 million of development spending and $49.8 million of initial renovation and recurring property capital expenditures. Financing cash outflow was $7.8 million, versus $105.4 million of inflow. Cash, cash equivalents, and restricted cash increased $109.7 million to $284.9 million; cash and cash equivalents alone were $119.2 million.
- Debt and liquidity: Debt principal was $2.882 billion; balance-sheet debt carrying value was $2.841 billion. This included $1.982 billion of asset-backed securitizations and $900 million principal of unsecured notes. The company issued $400 million of 4.90% notes due 2029 and repaid its $250 million revolver balance and $100 million term loan. No variable-rate debt or revolver borrowings remained at June 30; the revolving facility has up to $800 million of capacity. Restricted cash is subject to restrictions and is not necessarily available for general use.
- Distributions: The quarterly common distribution was $0.05 per share. Preferred-share dividends were $13.8 million for the quarter.
Material changes and notable items
- Revenue growth reflected higher rents and more occupied homes: average occupied homes rose to 48,989 in Q2 from 47,427. Same-Home revenue grew 4.4%; property operating and management costs grew faster, up 5.8% on a Same-Home basis.
- Q2 net income included a $13.7 million net gain on property sales, compared with $3.2 million in Q2 2018. The prior-year common-shareholder loss was affected by a $32.2 million allocation related to redemption of Series C participating preferred shares; no such redemption was reported in 2019.
- The company sold 433 homes in Q2 2019 versus 113 a year earlier. Six-month net proceeds from property sales were $115.5 million versus $29.6 million. A $30.7 million secured note receivable, net of discount, arose from a bulk sale of 215 homes; it bears 2.70% interest through October 2019 and 4.50% thereafter, with principal due in 2025.
- The company adopted the new lease accounting standard on January 1, 2019. Comparative periods were not restated; bad-debt expense was reclassified from property operating expense to revenue presentation, and certain leasing costs are now expensed rather than capitalized.
- In July 2019, a development joint venture was expanded from $156.3 million to $312.5 million and its five-year term reset from the amendment date. From July 1 to July 31, the company added 53 homes for approximately $13.6 million and disposed of 110 for approximately $21.9 million.
Outlook, risks, and contingencies
The filing provides no quantified earnings, revenue, or acquisition guidance. Management expects to meet operating liquidity needs primarily from cash on hand and operations, while also identifying borrowing, securities issuance, property dispositions, and joint ventures as potential capital sources. Management stated that rental income, net of operating costs and recurring capital expenditures, is generally expected to support operations and distributions, but cautioned that real estate assets are illiquid and may not provide timely short-term liquidity.
- Key operating sensitivities include occupancy, achievable rents, tenant collections and turnover, property taxes, repairs and maintenance, renovation and development costs, and the pace of leasing. Management noted seasonality in move-ins, move-outs, turnover costs, and weather-related exposure.
- As a REIT, AH4R must meet qualification and distribution requirements. It reported approximately $275 million of federal net operating loss carryforwards at December 31, 2018, which may reduce taxable income; distributions may need to rise when those losses are used.
- The company disclosed an SEC staff investigation concerning trading in Silver Bay Realty Trust securities, including a subpoena for documents and communications. The company said it is cooperating and does not believe the matter will materially adversely affect its financial position or results.
- At June 30, the company had $56.2 million of purchase commitments for developer agreements and construction land, plus commitments for 10 homes totaling $3.3 million. It reported no material change in risk factors from its 2018 Form 10-K and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether rent growth and occupancy gains continue to outpace property-tax, maintenance, and management cost increases, particularly in the Same-Home portfolio.
- The sustainability of cash available for distributions after recurring property investment, development spending, and debt service; distinguish unrestricted cash from restricted cash and non-GAAP measures from GAAP cash flow.
- Execution and returns on development and joint-venture investments, including the expanded venture, and the collectability and repayment terms of the $30.7 million property-sale note.
- Debt maturities, refinancing access, and the effect of the 2029 notes and future capital needs; confirm the reported absence of variable-rate debt at quarter-end.
- Developments in the SEC investigation, REIT qualification and distribution requirements, and the timing and proceeds of continued property dispositions.