Invitation Homes Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Invitation Homes is a REIT that owns and operates single-family rental homes. It reported more than 80,000 homes across 17 markets; the 2017 Starwood Waypoint Homes merger remains part of the company’s operating and reporting context. Financial amounts below are in U.S. dollars.
Financial and operating results
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Rental revenues and other property income | $435.5 million | $423.7 million |
| Total expenses | $435.0 million | $448.5 million |
| Net income (loss) | $21.2 million | $(17.6) million |
| Net income (loss) available to common stockholders | $20.7 million; $0.04 per diluted share | $(17.5) million; $(0.03) per diluted share |
| Net cash provided by operating activities | $193.2 million | $130.1 million |
| Net cash provided by (used in) investing activities | $55.0 million | $(102.0) million |
| Net cash used in financing activities | $(256.8) million | $(53.9) million |
- Rental revenue increased 2.8%. Total-portfolio average occupancy was 94.7% versus 94.5%, and average monthly rent per occupied home rose 4.5% to $1,781. Same Store occupancy was 96.5% versus 95.7%; average monthly rent increased 4.1% to $1,784.
- Same Store net operating income (NOI), a non-GAAP measure, rose to $260.3 million from $242.6 million, approximately 7.3%. Total-portfolio NOI was $275.2 million versus $262.9 million. Total-portfolio NOI margin, calculated as NOI divided by rental revenue and other property income, was approximately 63.2% versus 62.1%.
- Revenue growth reflected higher rent, occupancy and utility reimbursements. Operating and maintenance expense was nearly flat; property management and general and administrative expenses declined. Interest expense increased 1.8% to $94.0 million, primarily due to higher average LIBOR, partly offset by lower average debt balances and refinancing effects.
- Net income included a $17.6 million gain on property sales, compared with $5.5 million in the prior-year quarter. The company sold 654 homes versus 251, and acquired 208 versus 190.
Financial position, debt and liquidity
- At March 31, 2019, total assets were $17.85 billion and total liabilities were $9.63 billion. Net carrying value of rental properties was $16.51 billion.
- Debt carrying value was approximately $9.08 billion: mortgage loans of $7.03 billion, term loan of $1.49 billion and convertible notes of $559.6 million. Gross principal debt was approximately $9.16 billion. The $1.0 billion revolving facility was undrawn.
- Unrestricted cash and cash equivalents were $130.9 million; restricted cash was $220.5 million. The filing states that reserve and security-deposit restrictions apply to restricted cash, so it is not all available for general use.
- Operating cash flow improved by 48.5%, reflecting improved operating performance and working-capital changes. Investing cash flow was positive largely because home-sale proceeds increased to $142.6 million. Financing outflows included $180.8 million of mortgage repayments and $68.0 million of dividends.
- Most mortgage loans are floating-rate, and the $1.5 billion term loan is LIBOR-based. The company reported that swaps effectively converted 85.9% of its $7.59 billion of variable-rate debt to fixed rates. It estimated that a 100-basis-point LIBOR increase would raise annual interest expense by $9.2 million, after hedges and other contract terms.
Changes, outlook and risks
- Compared with Q1 2018, the company moved from a net loss to net income, increased rental revenue and Same Store NOI, and generated more operating cash. Results benefited from the larger property-sale gain; the filing does not provide a formal earnings or revenue outlook for 2019.
- The quarterly dividend declared was $0.13 per share, up from $0.11 in Q1 2018. A further $0.13 dividend was declared May 2, 2019.
- Other comprehensive loss was $98.7 million, primarily reflecting unrealized losses on interest-rate swaps; this is distinct from net income. Management estimated $26.4 million of accumulated hedge amounts would be reclassified as a reduction of interest expense over the next 12 months.
- Subsequent events included $70.0 million of voluntary mortgage prepayments on April 9 and completion of a 463-home acquisition for $115.0 million on April 26. At March 31, the company also reported commitments to acquire 543 homes.
- Management cited interest-rate exposure, housing-market and acquisition competition, resident defaults and turnover, property taxes, HOA and insurance costs, maintenance and renovation needs, and reliance on third-party services as risks. Summer seasonality can increase move-outs and property costs. Management reported compliance with debt covenants; routine legal matters were not expected to have a material adverse effect. No material litigation was reported.
- Management concluded disclosure controls were effective as of March 31, 2019, and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Near-term debt maturities: the debt schedule lists $2.13 billion for the remainder of 2019, including $230.0 million of convertible notes and mortgage obligations subject to extension options. Confirm refinancing, extension and settlement plans.
- Assess how much reported earnings and investing cash flow depend on property dispositions, and whether sale volumes and gains are sustainable.
- Review the quality and availability of liquidity, including restricted cash, the undrawn revolver, reserve requirements and the company’s dividend and acquisition commitments.
- Monitor rent growth, occupancy, turnover and Same Store NOI alongside property operating costs, especially HOA assessments, and test the company’s interest-rate sensitivity against actual debt and hedge terms.
- Review the effects of the April acquisition and prepayments, and distinguish GAAP results from management’s non-GAAP NOI, FFO and adjusted FFO measures.