AMERICAN HOMES 4 RENT The following discussion of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements based upon our current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to, those set forth under Part I, "Item 1A. Risk Factors" in this report. This section of this Form 10-K generally discusses the years endedDecember 31, 2019 and 2018. A discussion of the year endedDecember 31, 2017 is available at Part II, "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year endedDecember 31, 2018 . Overview We are a Maryland REIT focused on acquiring, developing, renovating, leasing and operating single-family homes as rental properties.The Operating Partnership is the entity through which we conduct substantially all of our business and own, directly or through subsidiaries, substantially all of our assets. We commenced operations inNovember 2012 . As ofDecember 31, 2019 , we owned 52,552 single-family properties in selected sub-markets of metropolitan statistical areas, or MSAs, in 22 states, including 1,187 properties held for sale, compared to 52,783 single-family properties in 22 states, including 1,945 properties held for sale, as ofDecember 31, 2018 . As ofDecember 31, 2019 , 48,767, or 94.9%, of our total properties (excluding properties held for sale) were occupied, compared to 47,823, or 94.1%, of our total properties (excluding properties held for sale) as ofDecember 31, 2018 . Our portfolio of single-family properties is internally managed through our proprietary property management platform.
Our Properties and Key Operating Metrics
The following table provides a summary of our single-family properties as ofDecember 31, 2019 : Avg. Number of % of Total % of Gross Avg. Gross Book Property Single-Family Single-Family Gross Book Value Book Value Value per Avg. Age Avg. Year Market Properties (1) Properties (millions) Total Property Sq. Ft. (years) Purchased Atlanta, GA 4,779 9.3 %$ 854.9 9.1 %$ 178,876 2,161 17.4 2015 Dallas-Fort Worth, TX 4,314 8.4 % 712.1 7.5 % 165,058 2,116 15.8 2014 Charlotte, NC 3,681 7.2 % 710.6 7.5 % 193,044 2,095 15.8 2015 Phoenix, AZ 3,088 6.0 % 539.6 5.6 % 174,750 1,835 16.3 2015 Houston, TX 3,053 5.9 % 501.6 5.3 % 164,294 2,093 14.0 2014 Indianapolis, IN 2,807 5.5 % 430.7 4.6 % 153,422 1,930 17.2 2013 Nashville, TN 2,741 5.3 % 579.6 6.1 % 211,440 2,113 15.0 2015 Jacksonville, FL 2,233 4.3 % 393.1 4.2 % 176,056 1,940 14.6 2014 Tampa, FL 2,243 4.4 % 443.3 4.7 % 197,632 1,945 14.9 2015 Raleigh, NC 2,062 4.0 % 379.1 4.0 % 183,860 1,875 14.9 2014 Columbus, OH 2,030 4.0 % 349.4 3.7 % 172,111 1,870 18.0 2015 Cincinnati, OH 1,973 3.8 % 345.2 3.7 % 174,984 1,851 17.5 2013Greater Chicago area, IL and IN 1,751 3.4 % 319.4 3.4 % 182,395 1,868 18.3 2013 Orlando, FL 1,693 3.3 % 305.5 3.2 % 180,446 1,895 18.1 2014 Salt Lake City, UT 1,423 2.8 % 349.3 3.7 % 245,443 2,185 17.7 2014 San Antonio, TX 1,012 2.0 % 162.7 1.7 % 160,781 2,019 15.9 2014 Las Vegas, NV 1,041 2.0 % 186.7 2.0 % 179,359 1,844 16.6 2013 Charleston, SC 1,129 2.2 % 223.6 2.4 % 198,070 1,959 12.0 2015 Savannah/Hilton Head , SC 878 1.7 % 158.1 1.7 % 180,109 1,859 12.4 2015 Winston Salem, NC 813 1.6 % 125.9 1.3 % 154,845 1,748 15.9 2014 All Other (2) 6,621 12.9 % 1,378.0 14.6 % 208,122 1,924 15.6 2014 Total/Average 51,365 100.0 %$ 9,448.4 100.0 %$ 183,946 1,986 16.0 2014
(1) Excludes 1,187 properties held for sale as of
(2) Represents 15 markets in 14 states.
34
--------------------------------------------------------------------------------
The following table summarizes certain key leasing metrics as of December 31,
2019 :
Total Single-Family Properties (1)
Avg. Avg.
Original Remaining
Avg. Monthly Lease Lease Avg.
Avg. Occupied Realized Term Term Blended
Days Percentage Rent per (months) (months) Change in
Market (2) property (3) (4) (4) Rent (5)
Atlanta, GA 95.0 % $ 1,617 12.0 5.8 5.3 %
Dallas-Fort Worth, TX 94.9 % 1,772 12.1 6.1 3.3 %
Charlotte, NC 94.8 % 1,607 12.3 6.2 3.5 %
Phoenix, AZ 95.9 % 1,434 12.0 5.7 7.9 %
Houston, TX 94.2 % 1,655 12.4 6.2 2.7 %
Indianapolis, IN 95.1 % 1,437 11.9 5.7 3.9 %
Nashville, TN 94.4 % 1,747 12.0 5.6 3.0 %
Jacksonville, FL 95.3 % 1,592 12.0 5.8 4.0 %
Tampa, FL 94.9 % 1,734 12.1 6.1 3.4 %
Raleigh, NC 94.6 % 1,544 12.0 6.2 3.5 %
Columbus, OH 96.3 % 1,647 11.9 6.0 4.6 %
Cincinnati, OH 95.4 % 1,617 12.0 6.2 4.0 %
Greater Chicago area, IL and IN 96.2 % 1,880 12.1 6.0 3.2 %
Orlando, FL 95.7 % 1,693 12.0 6.2 4.8 %
Salt Lake City, UT 96.2 % 1,774 12.0 5.6 5.0 %
San Antonio, TX 94.1 % 1,559 12.0 5.7 2.4 %
Las Vegas, NV 96.1 % 1,576 12.0 5.9 6.0 %
Charleston, SC 94.9 % 1,701 12.0 6.3 4.0 %
Savannah/Hilton Head, SC 95.3 % 1,565 12.0 6.0 3.7 %
Winston Salem, NC 95.6 % 1,369 12.1 5.9 4.7 %
All Other (6) 95.2 % 1,701 12.0 6.2 4.6 %
Total / Average 95.2 % $ 1,641 12.1 6.0 4.2 %
(1) Leasing information excludes 1,187 properties held for sale as of
(2) For the year ended
represents the number of days a property is occupied in the period divided
by the total number of days the property is owned during the same period.
(3) For the year ended
calculated as the lease component of rents and other single-family property
revenues (i.e., rents from single-family properties) divided by the product
of (a) number of properties and (b) Average Occupied Days Percentage,
divided by the number of months. For properties partially owned during the
year, this is adjusted to reflect the number of days of ownership.
(4) Average Original Lease Term and Average Remaining Lease Term are reflected
as of period end.
(5) Represents the percentage change in rent on all non-month-to-month lease
renewals and re-leases during the year ended
the annual rent of the previously expired non-month-to-month lease for each
property.
(6) Represents 15 markets in 14 states.
Factors That Affect Our Results of Operations and Financial Condition
Our results of operations and financial condition are affected by numerous factors, many of which are beyond our control. Key factors that impact our results of operations and financial condition include the pace at which we identify and acquire suitable properties, the time and cost required to renovate acquired properties, the pace and cost of our property developments, the time to lease newly acquired or developed properties at acceptable rental rates, occupancy levels, rates of tenant turnover, the length of vacancy in properties between tenant leases, our expense ratios, our ability to raise capital and our capital structure.
Property Acquisitions, Development and Dispositions
Since our formation, we have rapidly but systematically grown our portfolio of single-family homes. Our ability to identify and acquire single-family homes that meet our investment criteria is impacted by home prices in our target markets, the inventory of properties available-for-sale through traditional acquisition channels, competition for our target assets and our available capital. We are increasingly focused on developing "built-for-rental" homes through our internal AMH Development Program and acquiring newly constructed homes from third-party developers through our National Builder Program. Opportunities from these new construction channels are impacted by the availability of vacant developed lots, development land assets and inventory of homes currently under construction or newly developed. Our level of investment activity has fluctuated based on the number of suitable opportunities and the level of capital available to invest. During the year endedDecember 31, 2019 , we sold 1,330 homes and acquired or developed 1,099 homes, including 813 homes acquired through new construction channels, of which 648 were developed through our internal AMH Development Program, and 286 homes acquired through broker acquisitions. 35 -------------------------------------------------------------------------------- Our properties held for sale were identified based on sub-market analysis, as well as individual property-level operational review. As ofDecember 31, 2019 and 2018, there were 1,187 and 1,945 properties, respectively, classified as held for sale. We will continue to evaluate our properties for potential disposition going forward as a normal course of business.
Property Operations
Homes added to our portfolio through new construction channels include properties developed through our internal AMH Development Program and newly constructed properties acquired from third-party homebuilders through our National Builder Program. Rental homes developed through these channels involve substantial up-front costs, time to acquire and develop land, time to build the rental home, and time to lease the rental home before the home generates income. This process is dependent upon the nature of each lot acquired and the timeline varies primarily due to land development requirements. Once land development requirements have been met, on average it takes approximately four to six months to complete the rental home vertical construction process. Our internal construction program is managed by our team of development professionals that oversee the full rental home construction process including all land development and work performed by subcontractors. We typically incur costs between$200,000 and$350,000 to acquire and develop land, and build a rental home. Homes added from our new construction channels are available for lease immediately upon or shortly after receipt of a certificate of occupancy. Homes added to our portfolio through traditional acquisition channels require expenditures in addition to payment of the purchase price, including property inspections, closing costs, liens, title insurance, transfer taxes, recording fees, broker commissions, property taxes and HOA fees, when applicable. In addition, we typically incur costs between$15,000 and$30,000 to renovate a home acquired through traditional acquisition channels to prepare it for rental. Renovation work varies, but may include paint, flooring, cabinetry, appliances, plumbing hardware and other items required to prepare the home for rental. The time and cost involved to prepare our homes for rental can impact our financial performance and varies among properties based on several factors, including the source of acquisition channel and age and condition of the property. On average, it takes approximately 40 to 60 days to complete the renovation process. Our operating results are also impacted by the amount of time it takes to market and lease a property, which can vary greatly among properties, and is impacted by local demand, our marketing techniques and the size of our available inventory. On average, it takes approximately 20 to 40 days to lease a property after acquiring or developing a new property through our new construction channels or after completing the renovation process for a traditionally acquired property. Lastly, our operating results are impacted by the length of stay of our tenants and the amount of time it takes to prepare and re-lease a property after a tenant vacates. This process, which we refer to as "turnover," is impacted by numerous factors, including the condition of the home upon move-out of the previous tenant, and by local demand, our marketing techniques and the size of our available inventory at the time of the turnover. On average, it takes approximately 40 to 60 days to complete the turnover process.
Revenues
Our revenues are derived primarily from rents collected from tenants for our single-family properties under lease agreements which typically have a term of one year. Our rental rates and occupancy levels are affected by macroeconomic factors and local and property-level factors, including market conditions, seasonality and tenant defaults, and the amount of time it takes to turn properties when tenants vacate. Additionally, our ability to collect revenues and related operating results are impacted by the credit worthiness and quality of our tenants. On average, our tenants have household incomes ranging from$70,000 to$110,000 and primarily consist of families with approximately two adults and one or more children.
Our rents and other single-family property revenues are comprised of rental revenue from single-family properties, fees from our single-family property rentals and "tenant charge-backs," which are primarily related to cost recoveries on utilities.
Our ability to maintain and grow revenues from our existing portfolio of homes will be dependent on our ability to retain tenants and increase rental rates. We believe that our platform will allow us to achieve strong tenant retention and rental rate increases. Based on our Same-Home population of properties (defined below), the year-over-year increase in Average Monthly Realized Rent per property was 3.5% for the year endedDecember 31, 2019 and we experienced turnover rates of 36.9% and 38.5% for the year endedDecember 31, 2019 and 2018, respectively. Expenses
We monitor the following categories of expenses that we believe most significantly affect our results of operations.
36
--------------------------------------------------------------------------------Property Operating Expenses
Once a property is available for lease, which we refer to as "rent-ready," we
incur ongoing property-related expenses which may not be subject to our control.
These include primarily property taxes, repairs and maintenance ("R&M"),
turnover costs, HOA fees (when applicable) and insurance.
Property Management Expenses
As we internally manage our portfolio of single-family properties through our proprietary property management platform, we incur costs such as salary expenses for property management personnel, lease expenses and operating costs for property management offices and technology expenses for maintaining our property management platform. As part of developing our property management platform, we have made significant investments in our infrastructure, systems and technology. We believe that these investments will enable our property management platform to become more efficient over time, especially as our portfolio grows. Also included in property management expenses is noncash share-based compensation expense related to centralized and field property management employees.
Seasonality
We believe that our business and related operating results will be impacted by seasonal factors throughout the year. We experience higher levels of tenant move-outs and move-ins during the late spring and summer months, which impacts both our rental revenues and related turnover costs. Further, our property operating costs are seasonally impacted in certain markets for expenses such as HVAC repairs, turn costs and landscaping expenses during the summer season. Additionally, our single-family properties are at greater risk in certain markets for adverse weather conditions such as hurricanes in the late summer months and extreme cold weather in the winter months.
General and Administrative Expense
General and administrative expense primarily consists of corporate payroll and personnel costs, state taxes, trustees' and officers' insurance expenses, audit and tax fees, trustee fees and other expenses associated with our corporate and administrative functions. Also included in general and administrative expense is noncash share-based compensation expense related to corporate administrative employees. Results of Operations Net income totaled$156.3 million for the year endedDecember 31, 2019 , compared to net income of$112.4 million for the year endedDecember 31, 2018 . This improvement was primarily attributable to higher revenues resulting from a larger number of occupied properties and higher rental rates, which were offset in part by higher property operating expenses, property management expenses, and general and administrative expense, as well as an increase in gain on sale of single-family properties and other, net and a noncash charge related to the redemption of the Series C participating preferred shares through a conversion into Class A common shares during the second quarter of 2018. As we continue to grow our portfolio with a portion of our homes still recently developed, acquired and/or renovated, we distinguish our portfolio of homes between Same-Home properties and Non-Same-Home and Other properties in evaluating our operating performance. We classify a property as Same-Home if it has been stabilized longer than 90 days prior to the beginning of the earliest period presented under comparison and if it has not been classified as held for sale, identified for future sale or taken out of service as a result of a casualty loss, which allows the performance of these properties to be compared between periods. Single-family properties that we acquire individually (i.e., not through a bulk purchase) are classified as either stabilized or non-stabilized. A property is classified as stabilized once it has been renovated by the Company or newly constructed and then initially leased or available for rent for a period greater than 90 days. Properties acquired through a bulk purchase are first considered non-stabilized, as an entire group, until (1) we have owned them for an adequate period of time to allow for complete on-boarding to our operating platform, and (2) a substantial portion of the properties have experienced tenant turnover at least once under our ownership, providing the opportunity for renovations and improvements to meet our property standards. After such time has passed, properties acquired through a bulk purchase are then evaluated on an individual property basis under our standard stabilization criteria. All other properties, including those classified as held for sale or identified for future sale, are classified as Non-Same-Home and Other. One of the primary financial measures we use in evaluating the operating performance of our single-family properties is Core Net Operating Income ("Core NOI"), which we also present separately for our Same-Home portfolio. Core NOI is a supplemental non-GAAP financial measure that we define as core revenues, which is calculated as total revenues, excluding expenses reimbursed by tenant charge-backs and other revenues, less core property operating expenses, which is calculated as property operating and property management expenses, excluding noncash share-based compensation expense and expenses reimbursed by tenant charge-backs. 37 -------------------------------------------------------------------------------- Core NOI also excludes (1) noncash fair value adjustments associated with remeasuring our participating preferred shares derivative liability to fair value, (2) noncash gain or loss on conversion of shares or units, (3) gain or loss on early extinguishment of debt, (4) hurricane-related charges, net, which result in material charges to the impacted single-family properties, (5) gain or loss on sales of single-family properties and other, (6) depreciation and amortization, (7) acquisition and other transaction costs incurred with business combinations and the acquisition or disposition of properties, (8) noncash share-based compensation expense, (9) interest expense, (10) general and administrative expense, (11) other expenses and (12) other revenues. We believe Core NOI provides useful information to investors about the operating performance of our single-family properties without the impact of certain operating expenses that are reimbursed through tenant charge-backs. Core NOI and Same-Home Core NOI should be considered only as supplements to net income or loss as a measure of our performance and should not be used as measures of our liquidity, nor are they indicative of funds available to fund our cash needs, including our ability to pay dividends or make distributions. Additionally, these metrics should not be used as substitutes for net income or loss or net cash flows from operating activities (as computed in accordance with GAAP). 38
--------------------------------------------------------------------------------
Comparison of the Year Ended
The following table presents a summary of Core NOI for our Same-Home properties, Non-Same-Home and Other properties, and total properties for the years endedDecember 31, 2019 and 2018 (in thousands): For the Year
Ended
Same-Home % of Non-Same-Home and % of Total % of
Properties (1) Core Revenue Other Properties Core Revenue Properties Core Revenue
Rents from
single-family
properties $ 750,164 $ 217,245 $ 967,409
Fees from
single-family
properties 10,398 3,437 13,835
Bad debt expense (6,761 ) (2,197 ) (8,958 )
Core revenues 753,801 218,485 972,286
Property tax expense 131,812 17.5 % 40,970 18.8 % 172,782 17.8 %
HOA fees, net (2) 15,237 2.0 % 5,231 2.4 % 20,468 2.1 %
R&M and turnover
costs, net (2) 59,589 7.9 % 17,505 8.0 % 77,094 8.0 %
Insurance 6,768 0.9 % 2,255 1.0 % 9,023 0.9 %
Property management
expenses, net (3) 61,177 8.1 % 19,025 8.7 % 80,202 8.2 %
Core property
operating expenses 274,583 36.4 % 84,986 38.9 % 359,569 37.0 %
Core NOI $ 479,218 63.6 % $ 133,499 61.1 % $ 612,717 63.0 %
For the Year
Ended
Same-Home % of Non-Same-Home and % of Total % of
Properties (1) Core Revenue Other Properties Core Revenue Properties Core Revenue
Rents from
single-family
properties $ 722,415 $ 186,521 $ 908,936
Fees from
single-family
properties 8,286 2,660 10,946
Bad debt expense (6,856 ) (1,876 ) (8,732 )
Core revenues 723,845 187,305 911,150
Property tax expense 124,165 17.2 % 36,484 19.5 % 160,649 17.6 %
HOA fees, net (2) 15,478 2.1 % 4,595 2.5 % 20,073 2.2 %
R&M and turnover
costs, net (2) 56,004 7.8 % 17,394 9.3 % 73,398 8.1 %
Insurance 6,445 0.9 % 1,923 1.0 % 8,368 0.9 %
Property management
expenses, net (3) 59,595 8.2 % 16,496 8.8 % 76,091 8.4 %
Core property
operating expenses 261,687 36.2 % 76,892 41.1 % 338,579 37.2 %
Core NOI $ 462,158 63.8 % $ 110,413 58.9 % $ 572,571 62.8 %
(1) Includes 40,355 properties that have been stabilized longer than 90 days
prior to
(2) Presented net of tenant charge-backs.
(3) Presented net of tenant charge-backs and excludes noncash share-based
compensation expense related to centralized and field property management
employees. Property management expenses, net for the 2018 period also
includes an adjustment for the portion of leasing costs that were previously
capitalized that would be expensed under the new lease Accounting Standards
Update ("ASU") 2016-02, adopted by the Company on January 1, 2019 .
39-------------------------------------------------------------------------------- The following are reconciliations of core revenues, Same-Home core revenues, core property operating expenses, Same-Home core property operating expenses, Core NOI and Same-Home Core NOI to their respective GAAP metrics for the years endedDecember 31, 2019 and 2018 (amounts in thousands): For the Years Ended December
31,
2019 2018
Core revenues and Same-Home core revenues Total revenues$ 1,143,378 $ 1,072,855 Tenant charge-backs (159,851 ) (146,793 ) Other revenues (11,241 ) (6,180 ) Bad debt expense - (8,732 ) Core revenues 972,286 911,150 Less: Non-Same-Home core revenues 218,485 187,305 Same-Home core revenues$ 753,801 $ 723,845 Core property operating expenses and Same-Home core property operating expenses Property operating expenses$ 433,854 $ 412,905 Property management expenses 86,908 74,573
Noncash share-based compensation - property management (1,342 )
(1,358 )
Expenses reimbursed by tenant charge-backs (159,851 ) (146,793 )
Bad debt expense - (8,732 )
Internal leasing costs (1) - 7,984
Core property operating expenses 359,569 338,579
Less: Non-Same-Home core property operating expenses 84,986
76,892
Same-Home core property operating expenses$ 274,583
Core NOI and Same-Home Core NOI Net income$ 156,260 $
112,438
Remeasurement of participating preferred shares - (1,212 ) Loss on early extinguishment of debt 659
1,447
Gain on sale of single-family properties and other, net (43,873 ) (17,946 ) Depreciation and amortization
329,293 318,685
Acquisition and other transaction costs 3,224
5,225
Noncash share-based compensation - property management 1,342 1,358 Interest expense
127,114 122,900
General and administrative expense 43,206 36,575 Other expenses 6,733 7,265 Other revenues (11,241 ) (6,180 ) Internal leasing costs (1) - (7,984 ) Core NOI 612,717 572,571 Less: Non-Same-Home Core NOI 133,499 110,413 Same-Home Core NOI$ 479,218 $ 462,158
(1) Adjustment amount reflects the portion of leasing costs that were previously
capitalized that would be expensed under the new lease accounting standard
ASU 2016-02, adopted by the Company on January 1, 2019 .
40--------------------------------------------------------------------------------
Total Revenues
Total revenues increased 6.6% to$1.14 billion for the year endedDecember 31, 2019 from$1.07 billion for the year endedDecember 31, 2018 . Revenue growth was primarily driven by continued strong leasing activity, as our average occupied portfolio grew to 48,687 homes for the year endedDecember 31, 2019 , compared to 47,368 homes for the year endedDecember 31, 2018 , as well as higher rental rates. This was partially offset by a$9.0 million reclassification of bad debt expense during the year endedDecember 31, 2019 , which was included in total revenues as a result of the adoption of the new lease accounting standard onJanuary 1, 2019 . Property Operating Expenses Property operating expenses increased 5.1% to$433.9 million for the year endedDecember 31, 2019 from$412.9 million for the year endedDecember 31, 2018 . This increase is primarily attributable to higher property tax expense and increases in repairs and maintenance and turnover costs, partially offset by the$9.0 million reclassification of bad debt expense associated with the adoption of the new lease accounting standard.
Property Management Expenses
Property management expenses for the years endedDecember 31, 2019 and 2018 were$86.9 million and$74.6 million , respectively, which included$1.3 million and$1.4 million , respectively, of noncash share-based compensation expense related to centralized and field property management employees. The increase in property management expenses is primarily attributable to higher personnel costs and additional leasing costs recorded to property management expenses as a result of the new lease accounting standard.
Core Revenues from
Core revenues from Same-Home properties increased 4.1% to$753.8 million for the year endedDecember 31, 2019 from$723.8 million for the year endedDecember 31, 2018 . This increase is primarily attributable to higher Average Monthly Realized Rent per property, which increased 3.5% to$1,625 per month for the year endedDecember 31, 2019 compared to$1,570 per month for the year endedDecember 31, 2018 , a rise in the Average Occupied Days Percentage, which increased to 95.4% for the year endedDecember 31, 2019 compared to 95.0% for the year endedDecember 31, 2018 , and higher fees from single-family properties resulting from operational enhancements to our fee structure.
Core Property Operating Expenses from
Core property operating expenses consists of direct property operating expenses, net of tenant charge-backs, and property management costs, net of tenant charge-backs, and excludes noncash share-based compensation expense. Core property operating expenses from Same-Home properties increased 4.9% to$274.6 million for the year endedDecember 31, 2019 from$261.7 million for the year endedDecember 31, 2018 . Same-Home core property operating expenses as a percentage of total Same-Home core revenues increased to 36.4% for the year endedDecember 31, 2019 from 36.2% for the year endedDecember 31, 2018 . This increase in Same-Home core property operating expenses as a percentage of Same-Home core revenues was driven mostly by higher property tax expense related to 2019 valuation increases and higher repairs and maintenance and turnover costs, net.
General and Administrative Expense
General and administrative expense primarily consists of corporate payroll and personnel costs, state taxes, trustees' and officers' insurance expense, audit and tax fees, trustee fees and other expenses associated with our corporate and administrative functions. General and administrative expense for the years endedDecember 31, 2019 and 2018 was$43.2 million and$36.6 million , respectively, which included$3.5 million and$2.1 million , respectively, of noncash share-based compensation expense related to corporate administrative employees. The increase in general and administrative expense is primarily related to the new executive compensation program and an increase in noncash share-based compensation expense, partially offset by lower legal expenses.
Interest Expense
Interest expense increased 3.4% to$127.1 million for the year endedDecember 31, 2019 from$122.9 million for the year endedDecember 31, 2018 . This increase is primarily due to the unsecured senior notes issued inFebruary 2018 andJanuary 2019 , partially offset by the payoff of the secured note payable inMay 2018 , the paydown and payoff of the term loan facility inJune 2018 andJune 2019 , respectively, the payoff of the exchangeable senior notes inNovember 2018 and an increase in capitalized interest. 41 --------------------------------------------------------------------------------
Acquisition and Other Transaction Costs
Acquisition and other transaction costs were$3.2 million and$5.2 million for the years endedDecember 31, 2019 and 2018, respectively, which primarily related to costs associated with purchases of single-family properties, including newly constructed properties from third-party builders, as well as costs associated with the disposal of certain properties or portfolios of properties.
Depreciation and Amortization
Depreciation and amortization expense consists primarily of depreciation of buildings and improvements. Depreciation of our assets is calculated over their useful lives on a straight-line basis over three to thirty years. Our intangible assets are amortized on a straight-line basis over the asset's estimated economic useful life. Depreciation and amortization expense increased 3.3% to$329.3 million for the year endedDecember 31, 2019 from$318.7 million for the year endedDecember 31, 2018 primarily due to growth in our average number of depreciable properties. Other Revenues Other revenues were$11.2 million and$6.2 million for the years endedDecember 31, 2019 and 2018, respectively, which primarily related to interest income on short-term investments, insurance recoveries, fees from unconsolidated joint ventures and equity in earnings/(losses) from unconsolidated joint ventures.
Other Expenses
Other expenses were
Liquidity and Capital Resources
Our liquidity and capital resources as ofDecember 31, 2019 included cash and cash equivalents of$37.6 million . Additionally, as ofDecember 31, 2019 , we had no outstanding borrowings under our revolving credit facility, which provides for maximum borrowings of up to$800.0 million , of which$6.2 million was committed to outstanding letters of credit. Liquidity is a measure of our ability to meet potential cash requirements, maintain our assets, fund our operations, make distributions to our shareholders and OP unitholders, including AH4R, and meet other general requirements of our business. Our liquidity, to a certain extent, is subject to general economic, financial, competitive and other factors beyond our control. Our liquidity requirements consist primarily of funds necessary to pay for the acquisition, development, renovation and maintenance of our properties, HOA fees (as applicable), real estate taxes, non-recurring capital expenditures, interest and principal payments on our indebtedness, general and administrative expenses, payment of quarterly dividends on our preferred shares and units, and payment of distributions to our common shareholders and unitholders. We seek to satisfy our liquidity needs through cash provided by operations, long-term secured and unsecured borrowings, issuances of debt and equity securities (including OP units), asset-backed securitizations, property dispositions and joint venture transactions. We have financed our operations, acquisitions and development expenditures to date through the issuance of equity securities, borrowings under our credit facilities, asset-backed securitizations and unsecured senior notes, and proceeds from the sale of single-family properties. Going forward, we expect to meet our operating liquidity requirements generally through cash on hand and cash provided by operations. We believe our rental income, net of operating expenses and recurring capital expenditures, will generally provide cash flow sufficient to fund our operations and dividend distributions. However, our real estate assets are illiquid in nature. A timely liquidation of assets might not be a viable source of short-term liquidity should a cash flow shortfall arise, and we may need to source liquidity from other financing alternatives including drawing on our revolving credit facility. 42 --------------------------------------------------------------------------------
Cash Flows
The following table summarizes the Company's and the
For the Years Ended
2019 2018 Change
Net cash provided by operating activities
410,882 $ 47,005
Net cash used for investing activities (376,866 ) (674,408 ) 297,542
Net cash (used for) provided by financing
activities (92,116 ) 255,917 (348,033 )
Net decrease in cash, cash equivalents and
restricted cash $ (11,095 ) $ (7,609 ) $ (3,486 )
Operating Activities
Our cash flows provided by operating activities, which is our principal source
of cash flows, depend on numerous factors, including the occupancy level of our
properties, the rental rates achieved on our leases, the collection of rent from
our tenants and the level of property operating expenses, property management
expenses and general and administrative expenses. Net cash provided by operating
activities increased $47.0 million , or 11.4%, from $410.9 million in 2018 to
$457.9 million in 2019 primarily as a result of increased cash flows generated
from a larger number of occupied properties and increases in rental rates on
lease renewals and re-leasing of our single-family properties.
Investing Activities
For the Years Ended December 31,
2019 2018 Change
Sources of cash from investing activities:
Net proceeds received from sales of
single-family properties and other $ 221,930 $ 106,157 $ 115,773
Distributions from joint ventures 22,561 36,917 (14,356 )
Proceeds received from hurricane-related
insurance claims 2,171 4,522 (2,351 )
$ 246,662 $ 147,596 $ 99,066 Uses of cash for investing activities: Cash paid for development activity$ (383,271 ) $ (215,797 ) $ (167,474 ) Cash paid for single-family properties (120,487 ) (489,625 ) 369,138 Change in escrow deposits for purchase of single-family properties (7,171 ) 1,818 (8,989 ) Recurring and other capital expenditures for single-family properties (71,481 ) (54,465 ) (17,016 ) Renovations to single-family properties (21,883 ) (52,379 ) 30,496 Investment in unconsolidated joint ventures (13,114 ) (8,400 ) (4,714 ) Other purchases of productive assets (6,121 )
(3,156 ) (2,965 )
$ (623,528 ) $
(822,004 )
Net cash used for investing activities$ (376,866 ) $
(674,408 )
Net cash used for investing activities decreased$297.5 million , or 44.1%, from$674.4 million in 2018 to$376.9 million in 2019 driven by a strategic transition from systematic, rapid growth of our portfolio through the acquisition of homes through traditional channels (using cash generated from both operating and financing activities) to a growth plan focused on development of homes through our internal AMH Development Program and by working with third-party developers through our National Builder Program (using cash primarily generated from operating activities). This also resulted in lower cash outflows for renovations to single-family properties. Additionally, net proceeds received from sales of single-family properties and other increased, which was offset by an increase in recurring and other capital expenditures for single-family properties as a result of investments in properties to increase future revenues or reduce maintenance expenditures. The development of "built-for-rental" homes and our property-enhancing capital expenditures may reduce recurring and other capital expenditures on an average per home basis in the future. Further, as we continue to expand our internalAMH Development Program as well as focus on external portfolio growth, we expect to have increased cash outflows for development activities and acquisitions of single-family properties in the future, which we may fund through operating cash flows, debt or equity financings or net proceeds received from sales of single-family properties. 43 --------------------------------------------------------------------------------
Financing Activities
Net cash related to financing activities changed from an inflow of
Debt
As ofDecember 31, 2019 , the Company had outstanding asset-backed securitizations with varying maturities for an aggregate principal amount of$2.0 billion and outstanding unsecured senior notes maturing in 2028 and 2029 for an aggregate principal amount of$900.0 million . During the year endedDecember 31, 2019 , the Company issued$400.0 million of unsecured senior notes and received$397.9 million in proceeds, net of a discount, paid off the outstanding amounts on the term loan facility and revolving credit facility for$100.0 million and$250.0 million , respectively, and paid$21.5 million in principal for its asset-backed securitizations. During the year endedDecember 31, 2018 , the Company issued$500.0 million of unsecured senior notes and received$497.2 million in proceeds, net of a discount, drew$110.0 million of net borrowings on the revolving credit facility, paid down$100.0 million on the term loan facility and$20.8 million in principal for its asset-backed securitizations, and paid off the outstanding amounts of$135.1 million on the exchangeable senior notes and$49.4 million for the secured note payable. For additional information regarding the Company's debt issuances, see Note 7. Debt to our consolidated financial statements included as a separate section in Part IV, "Item 15. Exhibits and Financial Statement Schedules" of this Annual Report on Form 10-K.
Share/Unit Issuances and Redemptions
During the third quarter of 2018, the Company issued 4,600,000 6.25% Series H cumulative redeemable perpetual preferred shares in an underwritten public offering, raising gross proceeds of$115.0 million before offering costs of approximately$4.4 million , with a liquidation preference of$25.00 per share.The Operating Partnership issued an equivalent number of the same class of perpetual preferred units to AH4R in exchange for the net proceeds from the share issuance. During the second quarter of 2018, the Company redeemed all 7,600,000 shares of the outstanding 5.5% Series C participating preferred shares through a conversion of those participating preferred shares into Class A common shares of beneficial interest,$0.01 par value, in accordance with the conversion terms in the Articles Supplementary. This resulted in 10,848,827 Class A common shares issued from the conversion, based on a conversion ratio of 1.4275 Class A common shares issued per Series C participating preferred share.The Operating Partnership also redeemed its corresponding Series C participating preferred units through a conversion into Class A units onApril 5, 2018 . The conversion ratio was calculated by dividing (i) the initial liquidation preference on the Series C participating preferred shares, as adjusted by an amount equal to 50% of the cumulative change in value of an index based on the purchase prices of single-family properties located in our top 20 markets (adjusted for a maximum 9.0% internal rate of return), plus unaccrued dividends by (ii) the one-day volume weighted-average price of the Company's Class A common shares onMarch 29, 2018 , the date the Company delivered the required notice of redemption. As a result of the redemption, the Company recorded a$32.2 million allocation of income to the Series C participating preferred shareholders in the second quarter of 2018, which represents the initial liquidation value of the Series C participating preferred shares in excess of the original equity carrying value of the Series C participating preferred shares as of the redemption date. The original equity carrying value of the Series C participating preferred shares was net of the initial bifurcated home price appreciation derivative liability and offering costs.
At-the-Market Common Share Offering Program
The Company established an at-the-market common share offering program under which we were able to issue Class A common shares from time to time through various sales agents up to an aggregate of$500.0 million (the "At-the-Market Program"). The program was established in order to use the net proceeds from share issuances to repay borrowings against the Company's revolving credit and term loan facilities, to acquire and renovate single-family properties and for related activities in accordance with the Company's business strategy, and for working capital and general corporate purposes. The program may be suspended or terminated by the Company at any time. As ofDecember 31, 2019 , no shares have been issued under the At-the-Market Program and$500.0 million remained available for future share issuances.
Share Repurchase Program
During the first quarter of 2018, the Company's board of trustees re-authorized our existing share repurchase program, authorizing the repurchase of up to$300.0 million of our outstanding Class A common shares and up to$250.0 million of our outstanding preferred shares from time to time in the open market or in privately negotiated transactions. The program does not have an expiration date, but may be suspended or discontinued at any time without notice. All repurchased shares are constructively retired 44 -------------------------------------------------------------------------------- and returned to an authorized and unissued status.The Operating Partnership funds the repurchases and constructively retires an equivalent number of corresponding Class A units. During the year endedDecember 31, 2019 , we did not repurchase and retire any of our shares. During the year endedDecember 31, 2018 , the Company repurchased and retired 1.8 million of our Class A common shares on a settlement date basis, in accordance with the program, at a weighted-average price of$19.36 per share and a total price of$34.9 million . As ofDecember 31, 2019 , we had a remaining repurchase authorization of up to$265.1 million of our outstanding Class A common shares and up to$250.0 million of our outstanding preferred shares under the program.
Distributions
As a REIT, we are required to distribute annually to our shareholders at least 90% of our REIT taxable income (determined without regard to the deduction for dividends paid and excluding any net capital gains) and to pay tax at regular corporate rates to the extent that we annually distribute less than 100% of our REIT taxable income.The Operating Partnership funds the payment of distributions. We expect to use our NOL to reduce our REIT taxable income in future years. AH4R had an NOL forU.S. federal income tax purposes of an estimated$188.8 million as ofDecember 31, 2019 and approximately$275.0 million as ofDecember 31, 2018 . Once our NOL is fully used, we may be required to increase AH4R's distributions to comply with REIT distribution requirements and our current policy of distributing approximately all of our REIT taxable income (determined without regard to the deduction for dividends paid).
During the years ended
Off-Balance Sheet Arrangements
We have no material obligations, assets or liabilities that would be considered off-balance sheet arrangements.
Contractual Obligations
Contractual obligations as ofDecember 31, 2019 consisted of the following (in thousands): Payments by Period Less than 1 Total year 1-3
years 3-5 years After 5 years
Revolving credit facility (1)
-
Asset-backed securitizations (2) 1,970,993 20,714 41,428 976,589
932,262
Unsecured senior notes (2) 900,000 - - - 900,000
Interest on debt obligations (3) 789,399 126,580 250,819 243,921
168,079
Operating lease obligations 4,110 1,792 1,719 590 9
Purchase obligations (4) 119,395 119,395 - - -
Total $ 3,788,897 $ 270,481 $ 296,966 $ 1,221,100 $ 2,000,350
(1) Includes the 0.25% annual commitment fee on the principal amount of the
commitments of $800.0 million .
(2) Amounts represent principal amounts due and exclude unamortized discounts
and deferred financing costs.
(3) Represents estimated future interest payments on our debt instruments based
on applicable interest rates as of
repayment of the AMH 2015-1 and 2015-2 securitizations on their anticipated
repayment dates in 2025. The fully extended maturity dates for the AMH
2015-1 and 2015-2 securitizations are in 2045 and the interest rates
increase on the anticipated repayment dates in 2025. If the AMH 2015-1 and2015-2 securitizations are not repaid on the anticipated repayment dates in
2025, our interest on debt obligations above would increase.
(4) Represents commitments to acquire 289 single-family properties for an
aggregate purchase price of
purchase commitments.
As a condition for entering into some of its development contracts, the Company had$14.5 million in outstanding surety bonds and$6.2 million in letters of credit as ofDecember 31, 2019 and$5.1 million in outstanding surety bonds and$1.1 million in letters of credit as ofDecember 31, 2018 .
Critical Accounting Policies and Estimates
Our discussion and analysis of our historical financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States of America ("GAAP"). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could ultimately differ from these estimates. Listed below are those policies that management believes are critical and require the use of judgment in their application. There are other items within the financial statements that require estimation, but they are not considered critical as they do not require significant judgment or are immaterial. 45 --------------------------------------------------------------------------------
Consolidation and Investments in
The consolidated financial statements of the Company include the accounts of AH4R, theOperating Partnership and their consolidated subsidiaries. The consolidated financial statements of theOperating Partnership include the accounts of theOperating Partnership and its consolidated subsidiaries. Intercompany accounts and transactions have been eliminated. The Company consolidates real estate partnerships and other entities that are not variable interest entities ("VIEs") when it owns, directly or indirectly, a majority interest in the entity or is otherwise able to control the entity. The ownership interest in a consolidated subsidiary of the Company held by outside parties, which was liquidated during the second quarter of 2018, is included in noncontrolling interest within the consolidated financial statements. The Company consolidates VIEs in accordance with Accounting Standards Codification ("ASC") 810, Consolidation, if it is the primary beneficiary of the VIE as determined by its power to direct the VIE's activities and the obligation to absorb its losses or the right to receive its benefits, which are potentially significant to the VIE. Entities for which the Company owns an interest, but does not consolidate, are accounted for under the equity method of accounting as an investment in unconsolidated entity, such as our investments in unconsolidated joint ventures. Investments in unconsolidated joint ventures are recorded initially at cost, and subsequently adjusted for equity in earnings and cash contributions and distributions. Under the equity method of accounting, our net equity investment is included in escrow deposits, prepaid expenses and other assets within the consolidated balance sheets, and our share of net income or loss from the joint ventures is included within other revenues in the consolidated statements of operations. Our recognition of joint venture income or loss is generally based on ownership percentages, which may change upon the achievement of certain investment return thresholds. The ultimate realization of the investment in unconsolidated joint ventures is dependent on a number of factors, including the performance of each investment and market conditions. Our investments in unconsolidated joint ventures are reviewed for impairment periodically and we will record an impairment charge when events or circumstances change indicating that a decline in the fair values below the carrying values has occurred and such decline is other-than-temporary.
Investments in Real Estate
Purchases of single-family properties are treated as asset acquisitions and, as such, are recorded at their purchase price, including acquisition costs, which is allocated to land and building based upon their relative fair values at the date of acquisition. Fair value is determined in accordance with ASC 820, Fair Value Measurements and Disclosures, and is primarily based on unobservable data inputs. In making estimates of fair values for purposes of allocating the purchase price of individually acquired properties subject to an existing lease, the Company utilizes its own market knowledge obtained from historical transactions, its internal construction program and published market data. In this regard, the Company also utilizes information obtained from county tax assessment records to assist in the determination of the fair value of the land and building. For the year endedDecember 31, 2019 , the Company completed the acquisition of 451 single-family properties for a total purchase price of$118.5 million , which was included in cash paid for single-family properties within the consolidated statement of cash flows. The value of acquired lease-related intangibles is estimated based upon the costs we would have incurred to lease the property under similar terms. Such costs are capitalized and amortized over the remaining life of the lease. Acquired leases are generally short-term in nature (less than one year). The allocation of the consideration to the various components of properties acquired during the year can have an effect on our net income due to the useful depreciable and amortizable lives applicable to each component and the recognition of the related depreciation and amortization expense. The nature of our business requires that in certain circumstances we acquire single-family properties subject to existing liens. Liens that we expect to be extinguished in cash are estimated and accrued for on the date of acquisition and recorded as a cost of the property. We incur costs to prepare our acquired properties for rental. These costs, along with related holding costs, are capitalized to the cost of the property during the period the property is undergoing activities to prepare it for its intended use. We capitalize interest costs as a cost of the property only during the period for which activities necessary to prepare an asset for its intended use are ongoing, provided that expenditures for the asset have been made and interest costs have been incurred. Upon completion of the renovation of our properties, all costs of operations, including repairs and maintenance, are expensed as incurred.
Land and construction in progress related to our internal construction program
(AMH Development Program) are presented separately in single-family properties
under development and development land within the consolidated balance sheets.
Our capitalization policy on development properties follows the guidance in ASC
835-20, Capitalization of Interest, and ASC 970, Real Estate-General. Costs
directly related to the development of properties are capitalized and the costs
of land and buildings under development include specifically identifiable costs.
We also capitalize interest, real estate taxes, insurance, utilities, and
payroll costs
46
--------------------------------------------------------------------------------
for land and construction in progress under active development once the
applicable GAAP criteria have been met. Determination of when a development
project commences and capitalization begins, and when a development project is
substantially complete and held available for occupancy and capitalization must
cease, involves a degree of judgment.
Impairment of Long-Lived Assets
We evaluate our long-lived assets for impairment periodically or whenever events or circumstances indicate that their carrying amount may not be recoverable. Significant indicators of impairment may include, but are not limited to, declines in home values, rental rates and occupancy percentages, as well as significant changes in the economy. If an impairment indicator exists, we compare the expected future undiscounted cash flows against the net carrying amount. The evaluation of anticipated cash flows is highly subjective and is based in part on assumptions regarding anticipated hold periods, future occupancy, rental rates and capital requirements that could differ materially from actual results in future periods. If the sum of the estimated undiscounted cash flows is less than the net carrying amount, we record an impairment loss for the difference between the estimated fair value of the individual property and the carrying amount of the property at that date. Because cash flows on properties considered to be long-lived assets to be held and used are considered on an undiscounted basis to determine whether an asset has been impaired, our established strategy of holding properties over the long term directly decreases the likelihood of recording an impairment loss. No material impairments on operating properties have been recorded since the inception of the Company, except for certain properties in ourHouston ,Florida and Southeast markets that were impacted by the hurricanes in the third quarter of 2017. We use the held for sale impairment model for our properties classified as held for sale. The held for sale impairment model is different from the held and used impairment model. Under the held for sale impairment model, an impairment loss is recognized if the carrying amount of the long-lived asset classified as held for sale exceeds its fair value less cost to sell. Because of these two different models, it is possible for a long-lived asset previously classified as held and used to require the recognition of an impairment charge upon classification as held for sale.
Goodwill represents the fair value in excess of the tangible and separately identifiable intangible assets that were acquired in connection with the internalization of the Company's management function inJune 2013 , including all administrative, financial, property management, marketing and leasing personnel, including executive management.Goodwill has an indefinite life and is therefore not amortized. The Company analyzes goodwill for impairment on an annual basis pursuant to ASC 350, Intangibles-Goodwill and Other, which permits us to assess qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than the carrying amount as a basis to determine whether an impairment test is necessary. Under the provision of ASC 280, Segment Reporting, the Company has determined that it has one reportable segment with activities related to acquiring, renovating, developing, leasing and operating single-family homes as rental properties. The qualitative assessment requires judgment to be applied in evaluating the effects of multiple factors, including macroeconomic conditions, industry and market conditions, cost factors, overall financial performance, other relevant entity-specific events, events affecting the reporting unit, and whether or not there has been a sustained decrease in the Company's stock price. We also have the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the goodwill impairment test. The impairment test compares the fair value of the reporting unit with its carrying amount. If the carrying amount exceeds the fair value, the impairment loss is determined as the excess of the carrying amount of the goodwill reporting unit over the fair value of that goodwill, not to exceed the carrying amount. Impairment charges, if any, are recognized in operating results. Based on our assessment of qualitative factors onDecember 31, 2019 , we concluded it was more likely than not that the Company's recorded goodwill balance of$120.3 million was not impaired and did not perform the quantitative test. No goodwill impairment was recorded during the years endedDecember 31, 2019 , 2018 and 2017.
Revenue and Expense Recognition
We lease single-family properties that we own directly to tenants who occupy the
properties under operating leases, generally, with a term of one year. As a
result of the adoption of ASU No. 2016-02, Leases (Topic 842) ("ASC 842") on
January 1, 2019 , the Company classifies our single-family property leases as
operating leases and elects to not separate the lease component, comprised of
rents from single-family properties, from the associated non-lease component,
comprised of fees from single-family properties and tenant charge-backs. Rental
revenue, net of any concessions, is recognized on a straight-line basis over the
term of the lease, which is not materially different than if it were recorded
when due from tenants and recognized monthly as it is earned. Tenant
charge-backs, which are primarily related to cost recoveries on utilities, are
recognized as revenue on a gross basis in the period during which the expenses
are incurred.
Upon adoption of ASC 842, we no longer have an allowance for doubtful accounts.
When collectability is not deemed probable, we write-off the tenant's
receivables and limit lease income to cash received. Prior to January 1, 2019 ,
we maintained an allowance for doubtful accounts for estimated losses that may
have resulted from the inability of tenants to make required rent or other
47
--------------------------------------------------------------------------------
payments. This allowance was estimated based on, among other considerations,
payment histories, overall delinquencies and available security deposits. The
Company's allowance for doubtful accounts was $8.6 million as of December 31,
2018 and was included in rent and other receivables, net within the consolidated
balance sheets.
We accrue for property taxes and HOA assessments based on amounts billed, and,
in some circumstances, estimates and historical trends when bills or assessments
are not available. The actual assessment may differ from the estimates,
resulting in a change in estimate in a subsequent period.
Gains on sales of properties are recognized pursuant to the provisions
included in ASC 610-20, Other Income. Under ASC 610-20, we must first determine
whether the transaction is a sale to a customer or non-customer. We typically
sell properties on a selective basis and not within the ordinary course of our
operating business and therefore expect that our sale transactions will not be
contracts with customers. We next determine whether we have a controlling
financial interest in the property after the sale, consistent with the
consolidation model in ASC 810, Consolidation. If we determine that we do not
have a controlling financial interest in the real estate, we evaluate whether a
contract exists under ASC 606, Revenue from Contracts with Customers, and
whether the buyer has obtained control of the asset that was sold. We recognize
a full gain on sale, which is presented in gain on sale of single-family
properties and other, net within the consolidated statements of operations, when
the derecognition criteria under ASC 610-20 have been met.
Income Taxes
AH4R has elected to be taxed as a REIT forU.S. federal income tax purposes under Sections 856 to 860 of the Code, commencing with our taxable year endedDecember 31, 2012 . We believe that we have operated, and continue to operate, in such a manner as to satisfy the requirements for qualification as a REIT. Provided that we qualify as a REIT and our distributions to our shareholders equal or exceed our REIT taxable income (determined without regard to the deduction for dividends paid and excluding any net capital gains), we generally will not be subject toU.S. federal income tax. Qualification and taxation as a REIT depend upon our ability to meet the various qualification tests imposed under the Code, including tests related to the percentage of income that we earn from specified sources and the percentage of our earnings that we distribute to our shareholders. Accordingly, no assurance can be given that we will continue to be organized or be able to operate in a manner so as to remain qualified as a REIT. If we fail to qualify as a REIT in any taxable year and do not qualify for certain statutory relief provisions, we would be subject toU.S. federal income tax and state income tax on our taxable income at regular corporate tax rates, and we would likely be precluded from qualifying for treatment as a REIT until the fifth calendar year following the year in which we fail to qualify. Even if we qualify as a REIT, we may be subject to certain state or local income and capital taxes andU.S. federal income and excise taxes on our undistributed REIT taxable income, if any. Our TRS will be subject toU.S. federal, state and local taxes on their income at regular corporate rates. The tax years from 2015 to present generally remain open to examination by the taxing jurisdictions to which the Company is subject. We believe that ourOperating Partnership is properly treated as a partnership forU.S. federal income tax purposes. As a partnership, theOperating Partnership is not subject toU.S. federal income tax on our income. Instead, each of theOperating Partnership's partners, including AH4R, is allocated, and may be required to pay tax with respect to, its share of theOperating Partnership's income. As such, no provision forU.S. federal income taxes has been included for theOperating Partnership . ASC 740-10, Income Taxes, requires recognition of deferred tax assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. We recognize tax benefits of uncertain tax positions only if it is more likely than not that the tax position will be sustained, based solely on its technical merits, with the taxing authority having full authority of all relevant information. The measurement of a tax benefit for an uncertain tax position that meets the more likely than not threshold is based on a cumulative probability model under which the largest amount of tax benefit recognized is the amount with a greater than 50% likelihood of being realized upon ultimate settlement with the taxing authority having full knowledge of all the relevant information. As ofDecember 31, 2019 , there were no deferred tax assets and liabilities or unrecognized tax benefits recorded by the Company. We do not anticipate a significant change in unrecognized tax benefits within the next 12 months.
Recent Accounting Pronouncements
See Note 2. Significant Accounting Policies to our consolidated financial
statements included as a separate section in Part IV, "Item 15. Exhibits and
Financial Statement Schedules" of this Annual Report on Form 10-K for a
discussion of the adoption and potential impact of recently issued accounting
standards.
48
--------------------------------------------------------------------------------Additional Non-GAAP Measures
Funds from Operations ("FFO") / Core FFO / Adjusted FFO attributable to common share and unit holders
FFO attributable to common share and unit holders is a non-GAAP financial measure that we calculate in accordance with the definition approved by theNational Association of Real Estate Investment Trusts ("NAREIT"), which defines FFO as net income or loss calculated in accordance with GAAP, excluding gains and losses from sales or impairment of real estate, plus real estate-related depreciation and amortization (excluding amortization of deferred financing costs and depreciation of non-real estate assets), and after adjustments for unconsolidated partnerships and joint ventures to reflect FFO on the same basis. Core FFO attributable to common share and unit holders is a non-GAAP financial measure that we use as a supplemental measure of our performance. We compute this metric by adjusting FFO attributable to common share and unit holders for (1) acquisition and other transaction costs incurred with business combinations and the acquisition or disposition of properties, (2) noncash share-based compensation expense, (3) noncash interest expense related to acquired debt, (4) hurricane-related charges, net, which result in material charges to the impacted single-family properties, (5) gain or loss on early extinguishment of debt, (6) noncash fair value adjustments associated with remeasuring our participating preferred shares derivative liability to fair value, and (7) the allocation of income to our participating preferred shares in connection with their redemption. Adjusted FFO attributable to common share and unit holders is a non-GAAP financial measure that we use as a supplemental measure of our performance. We compute this metric by adjusting Core FFO attributable to common share and unit holders for (1) recurring capital expenditures that are necessary to help preserve the value and maintain functionality of our properties and (2) capitalized leasing costs incurred during the period. As a portion of our homes are recently developed, acquired and/or renovated, we estimate recurring capital expenditures for our entire portfolio by multiplying (a) current period actual recurring capital expenditures per Same-Home property by (b) our total number of properties, excluding newly acquired non-stabilized properties and properties classified as held for sale. We present FFO attributable to common share and unit holders because we consider this metric to be an important measure of the performance of real estate companies, as do many investors and analysts in evaluating the Company. We believe that FFO attributable to common share and unit holders provides useful information to investors because this metric excludes depreciation, which is included in computing net income and assumes the value of real estate diminishes predictably over time. We believe that real estate values fluctuate due to market conditions and in response to inflation. We also believe that Core FFO and Adjusted FFO attributable to common share and unit holders provide useful information to investors because they allow investors to compare our operating performance to prior reporting periods without the effect of certain items that, by nature, are not comparable from period to period. FFO, Core FFO and Adjusted FFO attributable to common share and unit holders are not a substitute for net income or net cash provided by operating activities, each as determined in accordance with GAAP, as a measure of our operating performance, liquidity or ability to pay dividends. These metrics also are not necessarily indicative of cash available to fund future cash needs. Because other REITs may not compute these measures in the same manner, they may not be comparable among REITs. 49
-------------------------------------------------------------------------------- The following is a reconciliation of the Company's net income or loss attributable to common shareholders, determined in accordance with GAAP, to FFO attributable to common share and unit holders, Core FFO attributable to common share and unit holders and Adjusted FFO attributable to common share and unit holders for the years endedDecember 31, 2019 and 2018 (in thousands): For the
Years Ended
2019 2018
Net income attributable to common shareholders $ 85,911 $ 23,472
Adjustments:
Noncontrolling interests in the Operating Partnership 15,221 4,424
Net (gain) on sale / impairment of single-family properties and other
(40,210 ) (12,088 )
Adjustments for unconsolidated joint ventures 1,797 -
Depreciation and amortization 329,293 318,685
Less: depreciation and amortization of non-real estate assets
(7,933 ) (7,352 )
FFO attributable to common share and unit holders $ 384,079 $ 327,141
Adjustments:
Internal leasing costs (1) - (7,984 )
Acquisition and other transaction costs 3,224 5,225
Noncash share-based compensation - general and
administrative 3,466 2,075
Noncash share-based compensation - property management 1,342 1,358
Noncash interest expense related to acquired debt - 3,303
Loss on early extinguishment of debt 659 1,447
Remeasurement of participating preferred shares - (1,212 )
Redemption of participating preferred shares - 32,215
Core FFO attributable to common share and unit holders
$ 363,568 Recurring capital expenditures (2) (39,997 ) (35,888 ) Leasing costs (4,095 ) (12,603 ) Internal leasing costs (1) - 7,984
Adjusted FFO attributable to common share and unit holders
(1) Adjustment amount reflects the portion of leasing costs that were previously
capitalized and treated as a reduction to Adjusted FFO attributable to
common share and unit holders that would be expensed under the new lease
accounting standard ASU 2016-02, adopted by the Company on
(2) As a portion of our homes are recently developed, acquired and/or renovated, we estimate recurring capital expenditures for our entire portfolio by multiplying (a) current period actual recurring capital expenditures per Same-Home Property by (b) our total number of properties, excluding newly acquired non-stabilized properties and properties classified as held for sale.
EBITDA / EBITDAre / Adjusted EBITDAre / Adjusted EBITDAre after Capex and Leasing Costs
EBITDA is defined as earnings before interest, taxes, depreciation and
amortization. EBITDA is a non-GAAP financial measure and is used by us and
others as a supplemental measure of performance. EBITDAre is a supplemental
non-GAAP financial measure, which we calculate in accordance with the definition
approved by NAREIT by adjusting EBITDA for the net gain or loss on sales /
impairment of single-family properties and other and adjusting for
unconsolidated partnerships and joint ventures on the same basis. Adjusted
EBITDAre is a supplemental non-GAAP financial measure calculated by adjusting
EBITDAre for (1) acquisition and other transaction costs incurred with business
combinations and the acquisition or disposition of properties, (2) noncash
share-based compensation expense, (3) hurricane-related charges, net, which
result in material charges to the impacted single-family properties, (4) gain or
loss on early extinguishment of debt, (5) gain or loss on conversion of shares
and units and (6) noncash fair value adjustments associated with remeasuring our
participating preferred shares derivative liability to fair value. Adjusted
EBITDAre after Capex and Leasing Costs is a supplemental non-GAAP financial
measure calculated by adjusting Adjusted EBITDAre for (1) recurring capital
expenditures and (2) leasing costs. We believe these metrics provide useful
information to investors because they exclude the impact of various income and
expense items that are not indicative of operating performance.
50
--------------------------------------------------------------------------------
The following is a reconciliation of net income or loss, as determined in
accordance with GAAP, to EBITDA, EBITDAre, Adjusted EBITDAre and Adjusted
EBITDAre after Capex and Leasing Costs for the years ended December 31, 2019 and
2018 (in thousands):
For the Years Ended December 31,
2019 2018
Net income $ 156,260 $ 112,438
Interest expense 127,114 122,900
Depreciation and amortization 329,293 318,685
EBITDA $ 612,667 $ 554,023 Net (gain) on sale / impairment of single-family properties and other
(40,210 ) (12,088 )
Adjustments for unconsolidated joint ventures 1,797 -
EBITDAre $ 574,254 Noncash share-based compensation - general and administrative 3,466 2,075 Noncash share-based compensation - property management 1,342 1,358 Acquisition and other transaction costs 3,224 5,225 Loss on early extinguishment of debt 659 1,447 Remeasurement of participating preferred shares - (1,212 ) Adjusted EBITDAre$ 582,945
Recurring capital expenditures (1) (39,997 ) (35,888 ) Leasing costs (4,095 ) (12,603 ) Adjusted EBITDAre after Capex and Leasing Costs$ 538,853
(1) As a portion of our homes are recently developed, acquired and/or renovated,
we estimate recurring capital expenditures for our entire portfolio by
multiplying (a) current period actual recurring capital expenditures per
Same-Home Property by (b) our total number of properties, excluding newly
acquired non-stabilized properties and properties classified as held for
sale.
51--------------------------------------------------------------------------------
© Edgar Online, source
