Item 1. Financial Statements.
INVITATION HOMES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except shares and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
December 31,
2016
|
Assets:
|
|
(unaudited)
|
|
|
Investments in single-family residential properties:
|
|
|
|
|
Land
|
|
$
|
2,716,934
|
|
|
$
|
2,703,388
|
|
Building and improvements
|
|
7,116,587
|
|
|
7,091,457
|
|
|
|
9,833,521
|
|
|
9,794,845
|
|
Less: accumulated depreciation
|
|
(917,961
|
)
|
|
(792,330
|
)
|
Investments in single-family residential properties, net
|
|
8,915,560
|
|
|
9,002,515
|
|
Cash and cash equivalents
|
|
158,934
|
|
|
198,119
|
|
Restricted cash
|
|
138,264
|
|
|
222,092
|
|
Other assets, net
|
|
306,568
|
|
|
309,625
|
|
Total assets
|
|
$
|
9,519,326
|
|
|
$
|
9,732,351
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Mortgage loans, net
|
|
$
|
4,158,666
|
|
|
$
|
5,254,738
|
|
Term loan facility, net
|
|
1,486,529
|
|
|
—
|
|
Credit facilities, net
|
|
—
|
|
|
2,315,541
|
|
Accounts payable and accrued expenses
|
|
110,919
|
|
|
88,052
|
|
Resident security deposits
|
|
88,781
|
|
|
86,513
|
|
Other liabilities
|
|
30,460
|
|
|
30,084
|
|
Total liabilities
|
|
5,875,355
|
|
|
7,774,928
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
Shareholders' equity
|
|
|
|
|
Preferred stock, $0.01 par value per share, 900,000,000 shares authorized, none outstanding at June 30, 2017
|
|
—
|
|
|
—
|
|
Common stock, $0.01 par value per share, 9,000,000,000 shares authorized, 310,376,634 outstanding at June 30, 2017
|
|
3,104
|
|
|
—
|
|
Additional paid-in capital
|
|
3,675,094
|
|
|
—
|
|
Accumulated deficit
|
|
(38,799
|
)
|
|
—
|
|
Accumulated other comprehensive income
|
|
4,572
|
|
|
—
|
|
Total shareholders' equity
|
|
3,643,971
|
|
|
—
|
|
Combined equity
|
|
—
|
|
|
1,957,423
|
|
Total equity
|
|
3,643,971
|
|
|
1,957,423
|
|
Total liabilities and equity
|
|
$
|
9,519,326
|
|
|
$
|
9,732,351
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
INVITATION HOMES INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except shares and per share data)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
For the Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Revenues:
|
|
|
|
|
|
|
|
|
Rental revenues
|
|
$
|
228,504
|
|
|
$
|
219,354
|
|
|
$
|
454,600
|
|
|
$
|
433,677
|
|
Other property income
|
|
13,712
|
|
|
11,142
|
|
|
26,366
|
|
|
21,321
|
|
Total revenues
|
|
242,216
|
|
|
230,496
|
|
|
480,966
|
|
|
454,998
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Property operating and maintenance
|
|
92,840
|
|
|
91,281
|
|
|
181,008
|
|
|
176,248
|
|
Property management expense
|
|
9,135
|
|
|
7,530
|
|
|
20,584
|
|
|
14,923
|
|
General and administrative
|
|
18,426
|
|
|
15,408
|
|
|
76,692
|
|
|
30,768
|
|
Depreciation and amortization
|
|
67,515
|
|
|
66,079
|
|
|
135,092
|
|
|
131,781
|
|
Impairment and other
|
|
706
|
|
|
546
|
|
|
1,910
|
|
|
363
|
|
Total operating expenses
|
|
188,622
|
|
|
180,844
|
|
|
415,286
|
|
|
354,083
|
|
Operating income
|
|
53,594
|
|
|
49,652
|
|
|
65,680
|
|
|
100,915
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
Interest expense
|
|
(57,358
|
)
|
|
(70,523
|
)
|
|
(125,930
|
)
|
|
(140,800
|
)
|
Other, net
|
|
(869
|
)
|
|
185
|
|
|
(1,095
|
)
|
|
32
|
|
Total other income (expenses)
|
|
(58,227
|
)
|
|
(70,338
|
)
|
|
(127,025
|
)
|
|
(140,768
|
)
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
(4,633
|
)
|
|
(20,686
|
)
|
|
(61,345
|
)
|
|
(39,853
|
)
|
Gain on sale of property, net of tax
|
|
10,162
|
|
|
1,020
|
|
|
24,483
|
|
|
10,212
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
5,529
|
|
|
$
|
(19,666
|
)
|
|
$
|
(36,862
|
)
|
|
$
|
(29,641
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2017
|
|
|
|
February 1, 2017
through
June 30, 2017
|
|
|
Net income (loss) available to common shareholders — basic and diluted (Note 12)
|
|
$
|
5,420
|
|
|
|
|
$
|
(20,092
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding — basic
|
|
311,771,221
|
|
|
|
|
311,723,463
|
|
|
|
Weighted average common shares outstanding — diluted
|
|
312,271,578
|
|
|
|
|
311,723,463
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share — basic
|
|
$
|
0.02
|
|
|
|
|
$
|
(0.06
|
)
|
|
|
Net income (loss) per common share — diluted
|
|
$
|
0.02
|
|
|
|
|
$
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share
|
|
$
|
0.06
|
|
|
|
|
$
|
0.06
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
INVITATION HOMES INC.
CONDENSED CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
For the Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net income (loss)
|
|
$
|
5,529
|
|
|
$
|
(19,666
|
)
|
|
$
|
(36,862
|
)
|
|
$
|
(29,641
|
)
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Unrealized losses on interest rate swaps
|
|
(14,759
|
)
|
|
—
|
|
|
(4,198
|
)
|
|
—
|
|
Losses from interest rate swaps reclassified into earnings from accumulated other comprehensive income
|
|
6,059
|
|
|
—
|
|
|
8,770
|
|
|
—
|
|
Other comprehensive (loss) income
|
|
(8,700
|
)
|
|
—
|
|
|
4,572
|
|
|
—
|
|
Comprehensive loss
|
|
$
|
(3,171
|
)
|
|
$
|
(19,666
|
)
|
|
$
|
(32,290
|
)
|
|
$
|
(29,641
|
)
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
INVITATION HOMES INC.
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
For the Six Months Ended June 30, 2017
(in thousands, except share information)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
Combined Equity
|
|
Number of Shares
|
|
Amount
|
|
Additional Paid-in Capital
|
|
Accumulated Deficit
|
|
Accumulated Other Comprehensive Income
|
|
Total Equity
|
Balance as of December 31, 2016
|
|
$
|
1,957,423
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,957,423
|
|
Net loss
|
|
(16,879
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(16,879
|
)
|
Redemption of Series A Preferred Stock
|
|
(1,153
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,153
|
)
|
Distribution of Class B notes receivable
|
|
(19,686
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(19,686
|
)
|
Cancelation/distribution of Class B notes receivable
|
|
19,686
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
19,686
|
|
Share-based compensation expense
|
|
12,001
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
12,001
|
|
Accrued interest on Class B notes
|
|
15
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
15
|
|
Balance as of January 31, 2017
|
|
1,951,407
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,951,407
|
|
Pre-IPO Transactions (see Note 1)
|
|
(1,951,407
|
)
|
|
221,826,634
|
|
|
2,218
|
|
|
1,949,189
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Issuance of common stock — IPO
|
|
—
|
|
|
88,550,000
|
|
|
886
|
|
|
1,691,172
|
|
|
—
|
|
|
—
|
|
|
1,692,058
|
|
Offering costs
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,726
|
)
|
|
—
|
|
|
—
|
|
|
(5,726
|
)
|
Net loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(19,983
|
)
|
|
—
|
|
|
(19,983
|
)
|
Dividends declared
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(18,816
|
)
|
|
—
|
|
|
(18,816
|
)
|
Share-based compensation expense
|
|
—
|
|
|
—
|
|
|
—
|
|
|
40,459
|
|
|
—
|
|
|
—
|
|
|
40,459
|
|
Total other comprehensive income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,572
|
|
|
4,572
|
|
Balance as of June 30, 2017
|
|
$
|
—
|
|
|
310,376,634
|
|
|
$
|
3,104
|
|
|
$
|
3,675,094
|
|
|
$
|
(38,799
|
)
|
|
$
|
4,572
|
|
|
$
|
3,643,971
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
INVITATION HOMES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
|
|
|
June 30,
|
|
|
2017
|
|
2016
|
Operating Activities:
|
|
|
|
|
Net loss
|
|
$
|
(36,862
|
)
|
|
$
|
(29,641
|
)
|
|
|
|
|
|
Adjustments to reconcile net loss to net cash provided by operating activities:
|
|
|
|
|
Depreciation and amortization
|
|
135,092
|
|
|
131,781
|
|
Share-based compensation expense
|
|
52,460
|
|
|
8,312
|
|
Amortization of deferred leasing costs
|
|
6,226
|
|
|
7,212
|
|
Amortization of deferred financing costs
|
|
16,355
|
|
|
26,981
|
|
Amortization of discount on mortgage loans
|
|
114
|
|
|
2,835
|
|
Provisions for impairment
|
|
1,132
|
|
|
519
|
|
Gain on sale of property, net of tax
|
|
(24,483
|
)
|
|
(10,212
|
)
|
Paid in kind interest on warehouse loan
|
|
—
|
|
|
995
|
|
Change in fair value of derivative instruments
|
|
3,802
|
|
|
—
|
|
Other noncash amounts included in net loss
|
|
(922
|
)
|
|
(789
|
)
|
Change in operating assets and liabilities:
|
|
|
|
|
Restricted cash related to security deposits
|
|
(2,632
|
)
|
|
(4,095
|
)
|
Other assets, net
|
|
(8,564
|
)
|
|
(13,837
|
)
|
Accounts payable and accrued expenses
|
|
24,054
|
|
|
30,976
|
|
Resident security deposits
|
|
2,268
|
|
|
4,112
|
|
Other liabilities
|
|
(814
|
)
|
|
976
|
|
Net cash provided by operating activities
|
|
167,226
|
|
|
156,125
|
|
|
|
|
|
|
Investing Activities:
|
|
|
|
|
Changes in amounts deposited and held by others
|
|
89
|
|
|
2,207
|
|
Acquisition of single-family residential properties
|
|
(84,632
|
)
|
|
(205,932
|
)
|
Initial renovations to single-family residential properties
|
|
(13,026
|
)
|
|
(34,464
|
)
|
Other capital expenditures for single-family residential properties
|
|
(21,133
|
)
|
|
(21,308
|
)
|
Corporate capital expenditures
|
|
(1,494
|
)
|
|
(2,510
|
)
|
Proceeds from sale of residential properties
|
|
129,239
|
|
|
83,940
|
|
Purchases of investments in debt securities
|
|
(51,920
|
)
|
|
(16,036
|
)
|
Repayment proceeds from retained debt securities
|
|
30,916
|
|
|
—
|
|
Changes in restricted cash
|
|
86,460
|
|
|
(12,346
|
)
|
Net cash provided by (used in) investing activities
|
|
74,499
|
|
|
(206,449
|
)
|
|
|
|
|
|
Financing Activities:
|
|
|
|
|
Contributions
|
|
—
|
|
|
138,002
|
|
Dividends paid
|
|
(18,816
|
)
|
|
—
|
|
Redemption of Series A preferred stock
|
|
(1,153
|
)
|
|
—
|
|
Proceeds from initial offering, net of underwriting discounts
|
|
1,692,058
|
|
|
—
|
|
Offering costs paid
|
|
(2,757
|
)
|
|
—
|
|
INVITATION HOMES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
|
|
|
June 30,
|
|
|
2017
|
|
2016
|
Proceeds from credit facilities
|
|
—
|
|
|
184,021
|
|
Payments on credit facilities
|
|
(2,321,585
|
)
|
|
(111,661
|
)
|
Proceeds from mortgage loans
|
|
996,420
|
|
|
—
|
|
Payments on mortgage loans
|
|
(2,083,012
|
)
|
|
(30,738
|
)
|
Proceeds from term loan facility
|
|
1,500,000
|
|
|
—
|
|
Payments on warehouse loans
|
|
—
|
|
|
(95,895
|
)
|
Deferred financing costs paid
|
|
(42,065
|
)
|
|
(8,669
|
)
|
Net cash (used in) provided by financing activities
|
|
(280,910
|
)
|
|
75,060
|
|
|
|
|
|
|
Change in cash and cash equivalents
|
|
(39,185
|
)
|
|
24,736
|
|
Cash and cash equivalents, beginning of period
|
|
198,119
|
|
|
274,818
|
|
Cash and cash equivalents, end of period
|
|
$
|
158,934
|
|
|
$
|
299,554
|
|
|
|
|
|
|
Supplemental cash flow disclosures:
|
|
|
|
|
Interest paid, net of amounts capitalized
|
|
$
|
110,561
|
|
|
$
|
110,268
|
|
Cash paid for income taxes
|
|
1,987
|
|
|
—
|
|
|
|
|
|
|
Noncash investing and financing activities:
|
|
|
|
|
Accrued renovation improvements at period end
|
|
$
|
3,868
|
|
|
$
|
8,037
|
|
Accrued residential property capital improvements at period end
|
|
3,754
|
|
|
3,505
|
|
Transfer of residential property, net to other asset, net for held for sale assets
|
|
41,278
|
|
|
3,669
|
|
Reclassification of offering costs from other assets to additional paid-in capital
|
|
2,969
|
|
|
—
|
|
Change in other comprehensive income from cash flow hedges
|
|
4,572
|
|
|
—
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
INVITATION HOMES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands)
(unaudited)
Note 1—Organization and Formation
Invitation Homes Inc. (“INVH”) was formed for the purpose of owning, renovating, leasing, and operating single-family residential properties. On February 6, 2017, INVH completed an initial public offering (“IPO”) of
88,550,000
shares of common stock at a price to the public of
$20.00
per share. An additional
221,826,634
shares of common stock were issued to the Pre-IPO Owners (as defined below).
Prior to the IPO, we conducted our business through a combination of entities formed by Blackstone Real Estate Partners VII L.P. (“BREP VII”), an investment fund sponsored by The Blackstone Group L.P., along with BREP VII’s affiliated side-by-side funds and co-investment vehicles (“BREP VII and Affiliates”). The first Invitation Homes partnership was formed on June 12, 2012, through the establishment of Invitation Homes L.P. (“IH1”) and its wholly-owned subsidiary, THR Property Management L.P. (the “Manager”). Preeminent Holdings, Inc. (“IH2”) was created on February 14, 2013, Invitation Homes 3 L.P. (“IH3”) on August 8, 2013, Invitation Homes 4 L.P. (“IH4”) on January 10, 2014, Invitation Homes 5 L.P. (“IH5”) on August 22, 2014, and Invitation Homes 6 L.P. (“IH6”) on June 15, 2015 (collectively with IH1, the “Invitation Homes Partnerships”). Through the Manager, we provide all management and other administrative services with respect to the properties we own. The collective owners of the Invitation Homes Partnerships are referred to as the “Pre-IPO Owners.”
Invitation Homes Operating Partnership LP (the “Operating Partnership”) and its general partner, Invitation Homes OP GP LLC (the “OP General Partner”), were formed by one of our Pre-IPO Owners on December 14, 2016. The Operating Partnership began negotiating and entering into certain debt and hedge instruments upon its inception in anticipation of our IPO.
Prior to the IPO, the Invitation Homes Partnerships and the Operating Partnership were under the common control of BREP VII and Affiliates. BREP VII and Affiliates had the ability to control each of the Invitation Homes Partnerships and manage and operate the Invitation Homes Partnerships through the Manager and a common board of directors. As such prior to the IPO, our historical financial statements include assets, liabilities and results of operations of the Operating Partnership and the Invitation Homes Partnerships and their consolidated subsidiaries on a combined and consolidated basis.
As a result of the Pre-IPO Transactions described below, IH2 was effectively merged into INVH (and the assets and liabilities of IH2 were contributed to the Operating Partnership), and the remaining Invitation Homes Partnerships became wholly owned subsidiaries of INVH through the Operating Partnership.
On October 4, 2016, INVH was incorporated in the State of Delaware and was capitalized as of that date by an investment from one of our Pre-IPO Owners. Since inception, and through the date of the Pre-IPO Transactions (as described below), INVH did not engage in any business or activity. On February 6, 2017, INVH changed its jurisdiction of incorporation to Maryland. The Pre-IPO Transactions also included amendments to the INVH charter which provide for the issuance of up to
9,000,000,000
shares of common stock and
900,000,000
shares of preferred stock,
$0.01
par value per share.
Our organizational structure includes several wholly owned subsidiaries that were formed to facilitate our financing arrangements (the “Borrower Entities”). These Borrower Entities are used to align the ownership of our single-family residential properties with individual debt instruments. Collateral for the individual debt instruments is in the form of equity interests in the Borrower Entities or in pools of single-family residential properties owned either directly by the Borrower Entities or indirectly by their wholly owned subsidiaries (see
Note 6
).
References to “Invitation Homes,” the “Company,” “we,” “our,” and “us” refer, collectively, to INVH, IH1, IH2, IH3, IH4, IH5, IH6, the Manager, and the Operating Partnership.
INVITATION HOMES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands)
(unaudited)
Pre-IPO Transactions
On January 31, 2017, we effected certain transactions (the “Pre-IPO Transactions”) that resulted in the Operating Partnership holding, directly or indirectly, all of the assets, liabilities, and results of operations of the Invitation Homes Partnerships, including the full portfolio of homes held by the Invitation Homes Partnerships. As a result of the Pre-IPO Transactions, the Operating Partnership is wholly owned by INVH directly and through its wholly owned subsidiary, the OP General Partner. More specifically:
|
|
•
|
INVH acquired all of the assets, liabilities, and operations held directly or indirectly by IH2 through certain mergers and related transactions as follows:
|
|
|
•
|
IH2 Property Holdings Inc., a parent entity of IH2, merged with and into INVH, with INVH as the entity surviving the merger (the “IH2 Property Holdings Merger”), and the issued and outstanding shares of IH2 Property Holdings Inc., all of which were held by certain of the Pre-IPO Owners, were converted into newly issued shares of common stock of INVH; and
|
|
|
•
|
following the IH2 Property Holdings Merger, IH2 merged with and into INVH, with INVH as the entity surviving the merger (the “IH2 Merger”). In the IH2 Merger, all of the shares of common stock of IH2 issued and outstanding immediately prior to such merger, other than the shares held by INVH, were converted into shares of newly issued common stock of INVH. As a result of the IH2 Merger, INVH holds all of the assets and operations held directly or indirectly by IH2 prior to such merger;
|
|
|
•
|
prior to the IH2 Merger, our Pre-IPO Owners contributed to INVH their interests in each of the other Invitation Homes Partnerships (other than IH2) in exchange for newly-issued shares of INVH; and
|
|
|
•
|
INVH contributed to the Operating Partnership all of the interests in the Invitation Homes Partnerships (other than IH2, the assets, liabilities and operations of which were contributed to the Operating Partnership).
|
The Pre-IPO Transactions were accounted for as a reorganization of entities under common control utilizing historical cost basis.
Note 2—Significant Accounting Policies
Basis of Presentation
The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and with the rules and regulations of the Securities and Exchange Commission for interim financial information and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with our audited combined and consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2016. Subsequent to the date of the Pre-IPO Transactions, these condensed consolidated financial statements include the accounts of INVH and its wholly owned subsidiaries. Prior to the date of the Pre-IPO Transactions, these combined and consolidated financial statements include the combined accounts of the Operating Partnership and the Invitation Homes Partnerships and their wholly owned subsidiaries.
All intercompany accounts and transactions have been eliminated in the condensed consolidated financial statements. In the opinion of management, all adjustments which are of a normal recurring nature considered necessary for a fair presentation of our interim financial statements have been included in these condensed consolidated financial statements. Operating results for the
six months ended
June 30, 2017
are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2017.
We consolidate entities when we own, directly or indirectly, a majority interest in the entity or are otherwise able to control the entity. We consolidate variable interest entities (“VIEs”) in accordance with Accounting Standards Codification (“ASC”) 810,
Consolidation
, if we are the primary beneficiary of the VIE as determined by our 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. A VIE is broadly defined as an entity with one or more of the following characteristics: (a) the total equity investment at risk is insufficient to finance the entity’s activities without additional subordinated financial support; (b) as a group, the holders of
INVITATION HOMES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands)
(unaudited)
the equity investment at risk lack (i) the ability to make decisions about the entity’s activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity; or (c) the equity investors have voting rights that are not proportional to their economic interests, and substantially all of the entity’s activities either involve, or are conducted on behalf of, an investor that has disproportionately few voting rights.
Adoption of New Accounting Standards
In January 2017, the FASB issued ASU No. 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business
, which clarifies the definition of a business with the objective of evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Early adoption is permitted only for transactions that occurred before the issuance date of the guidance and has not been previously reported in issued financial statements. Effective January 1, 2017, we adopted ASU 2017-01, and the adoption of this standard had no material impact on our condensed consolidated financial statements for any period presented.
In March 2016, the FASB issued ASU No. 2016-09,
Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
, which simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Effective January 1, 2017, we adopted ASU 2016-09, and the adoption of this standard had no impact on our condensed consolidated financial statements for any period presented.
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. These estimates are inherently subjective in nature and actual results could differ from those estimates.
Accounting Policies
There have been no changes to our significant accounting policies that have had a material impact on our condensed consolidated financial statements and related notes, compared to those policies disclosed in our audited combined and consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016 other than as disclosed below.
Investments in Single-Family Residential Properties
Upon acquisition, we evaluate our acquired single-family residential properties for purposes of determining whether a transaction should be accounted for as an asset acquisition or business combination. Upon adoption of ASU 2017-01, our purchases of homes are treated as acquisitions and are recorded at their purchase price which is allocated between land, building and improvements, and in-place lease intangibles (when a tenant is in place at the acquisition date) based upon their relative fair values at the date of acquisition. The purchase price for purposes of this allocation is inclusive of acquisition costs which typically include legal fees, bidding service and title fees, payments made to cure tax, utility, homeowners’ association (“HOA”), and other mechanic’s and miscellaneous liens, as well as other closing costs. The fair values of acquired in-place lease intangibles, if any, are based on the costs to execute similar leases, including commissions and other related costs. The origination value of in-place lease intangibles also includes an estimate of lost rent revenue at in-place rental rates during the estimated time required to lease the property. The in-place lease intangibles are amortized over the life of the leases and are recorded in other assets, net on our condensed consolidated balance sheets.
INVITATION HOMES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands)
(unaudited)
Prior to our adoption of ASU 2017-01 effective January 1, 2017, acquisition costs for transactions accounted for as business combinations were expensed in the period in which they were incurred and were reflected in other expenses in the accompanying condensed consolidated statements of operations.
Earnings per Share
We use the two-class method to compute basic and diluted earnings (loss) per common share (“EPS”) because certain of our restricted stock units and restricted stock awards (see Share-Based Compensation Expense below) are participating securities as defined by GAAP. We compute basic EPS by dividing net income (loss) available to common shareholders for the period by the weighted-average number of common shares outstanding for the period, adjusted to exclude non-vested shares of RSUs and RSAs. Diluted EPS is similar to computing basic EPS, except that the denominator is increased to include the dilutive effects of non-vested RSUs and RSAs except when doing so would be anti-dilutive. Prior to the IPO, our business was conducted through the Invitation Homes Partnerships which did not have a common capital structure upon which to compute historical EPS. Accordingly, EPS has not been presented for historical periods prior to the IPO.
Derivatives
We enter into interest rate swap and interest rate cap agreements (collectively, “Hedging Derivatives”) for interest rate risk management purposes. We do not enter into Hedging Derivatives for trading or other speculative purposes, and all of our Hedging Derivatives are carried at fair value on our condensed consolidated balance sheets. Designated hedges are derivatives that meet the criteria for hedge accounting and that we have elected to designate as hedges. Non-designated hedges are derivatives that do not meet the criteria for hedge accounting or that we have not elected to designate as hedges.
Pursuant to the terms of certain of our mortgage loans, we are required to maintain interest rate caps. We have elected not to designate these interest cap agreements for hedge accounting (collectively, the “Non-Designated Hedges”). We enter into interest rate swap agreements to hedge the risk arising from changes in our interest payments on variable-rate debt due to changes in the one-month London Interbank Offered Rate (“LIBOR”). In connection with the Pre-IPO Transactions, as of January 31, 2017, we have elected to account for our interest rate swap agreements as effective cash flow hedges (collectively, the “Designated Hedges”). We assess the effectiveness of these interest rate swap cash flow hedging relationships on an ongoing basis. The effect of these interest rate cap agreements and interest rate swap agreements is to reduce the variability of interest payments due to changes in LIBOR.
The fair value of Hedging Derivatives that are in an asset position are included in other assets, net and those in a liability position are included in other liabilities on our condensed consolidated balance sheets. For Non-Designated Hedges, the related changes in fair value are reflected within interest expense in the condensed consolidated statements of operations. For Designated Hedges, the effective portion of the related changes in fair value is reported as a component of other comprehensive income (loss) on our condensed consolidated balance sheets and reclassified into earnings as interest expense in our condensed consolidated statements of operations when the hedged transactions affect earnings; the ineffective portion of the changes in fair value is reflected directly within interest expense in the condensed consolidated statements of operations.
See
Note 7
for further discussion of derivative financial instruments.
Share-Based Compensation Expense
Prior to the IPO, we recognized share-based compensation expense for incentive compensation units granted by the Invitation Homes Partnerships (the “Class B Units”). In connection with and subsequent to the IPO, we issued restricted stock units (“RSUs”) that settle in shares of common stock and restricted shares of common stock (“RSAs”) for which share-based compensation expense is recognized.
We recognized share-based compensation expense for the Class B Units based on the estimated fair value of the Class B Units and vesting conditions of the related incentive unit agreements. Since the Class B Units granted by IH1 were granted to employees of the Manager, a wholly owned subsidiary of IH1, the related share-based compensation expense was based on the grant-date fair value of the units and recognized in expense over the service period. Because units in IH2, IH3, IH4, IH5, and IH6 were granted to non-employees of those respective partnerships, fair value was remeasured for non-vested units at the end of each reporting period. The fair value of the Class B Units was determined based on a valuation model that took into account discounted cash flows and a market approach based on comparable companies and transactions.
INVITATION HOMES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands)
(unaudited)
We recognize share-based compensation expense for the RSUs and RSAs based on their grant-date fair value, net of expected forfeitures, over the service period from the grant date to vest date for each tranche or when any applicable performance conditions are met in accordance with the related RSU and RSA agreements. The grant-date fair value of RSUs and RSAs is generally based on the closing price of our common stock on the grant date except for market based RSU grant‑date fair values which are based on Monte-Carlo option pricing models.
Additional compensation expense is recognized if modifications to existing incentive compensation unit, RSU, or RSA agreements result in an increase in the post-modification fair value of the units that exceeds their pre-modification fair value. Share-based compensation expense is presented as a component of general and administrative expense and property management expense in our condensed consolidated statements of operations. See Note 10 for further discussion of share-based compensation expense.
Income Taxes
As a result of the Pre-IPO Transactions more fully described in
Note 1
, the Invitation Homes Partnerships transferred all assets, liabilities, and operations to INVH through certain mergers and related transactions, including the IH2 Property Holdings Merger. IH2 Property Holdings Inc. had previously elected to qualify as a Real Estate Investment Trust “REIT” for United States federal income tax purposes commencing with its taxable year ended December 31, 2013. Effective upon consummation of the IH2 Property Holdings Merger, INVH became subject to such REIT election.
We intend to continue to operate as a REIT, and our current and continuing qualification as a REIT depends on our ability to meet the various requirements imposed by the Internal Revenue Code of 1986, as amended (the “Code”), which are related to organizational structure, distribution levels, diversity of stock ownership and certain restrictions with regard to owned assets and categories of income. If we qualify for taxation as a REIT, we will generally not be subject to United States federal corporate income tax on our taxable income that is currently distributed to shareholders. This treatment substantially eliminates the “double taxation” (at the corporate and stockholder levels) that generally results from an investment in a corporation. If we fail to qualify as a REIT in any taxable year, we will be subject to federal taxes at regular corporate rates (including any applicable alternative minimum tax) and may not be able to qualify as a REIT for subsequent taxable years.
Even if we qualify as a REIT, we may be subject to United States federal income and excise taxes in various situations, such as on our undistributed income. We also will be required to pay a 100% tax on any net income on non-arm’s length transactions between us and a TRS, defined below, and on any net income from sales of assets that were held for sale to customers in the ordinary course. In addition, we could also be subject to the alternative minimum tax on items of tax preference. State and local tax laws may not conform to the United States federal income tax treatment, and we may be subject to state or local taxation in various state or local jurisdictions, including those in which we transact business. Any taxes imposed on us reduce our operating cash flow and net income.
As part of the formation of INVH, each of the Invitation Homes Partnerships (other than IH2) transferred assets into INVH solely in exchange for shares of common stock. Certain of the assets contributed contained built-in gains. Prior to the Pre-IPO Transactions, the contributing partnerships had indirect C corporation partners to which a portion of the built-in gain would be allocated. As a result, if we dispose of any such assets during the five-year period following the date the REIT acquired such assets, we will be subject to the regulations under Section 337(d) of the Code. In general terms, such regulations subject the REIT to the maximum corporate level tax rate on the lesser of (i) such built-in gains and (ii) the gain recognized by the REIT upon a taxable disposition of the contributed assets. We may, however, choose not to sell such assets during such five-year period or to sell them in a non-taxable transaction. As such, the potential taxes associated with these built-in gains are not estimable.
Certain of our operations or a portion thereof, are conducted through taxable REIT subsidiaries, each of which we refer to as a TRS. A TRS is a subsidiary C-corporation that has not elected REIT status and as such is subject to United States federal and state corporate income tax. We use TRS entities to facilitate our ability to perform non-real estate related activities and/or perform non-customary services for residents that cannot be offered directly by a REIT.
For our TRS entities, deferred income taxes result from temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for United States federal income tax purposes and are measured using the enacted tax rates and laws that are expected to be in effect when the differences reverse. We reduce deferred tax assets by recording a valuation allowance when we determine, based on available evidence, that it is more likely than not that the assets will not be realized. We recognize the tax consequences associated with intercompany transfers
INVITATION HOMES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands)
(unaudited)
between the REIT and TRS entities when the related assets affect our GAAP net income or loss, generally through depreciation, impairment losses, or sales to third-party entities.
Tax benefits associated with uncertain tax positions are recognized only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position.
We file income tax returns in the United States federal jurisdiction as well as various state and local jurisdictions. Our filings are subject to normal reviews by regulatory agencies until the related statute of limitations expires, with open tax years varying based upon the date of incorporation of the specific entity. The years open to examination range from 2013 to present.
Recent Accounting Pronouncements
In May 2017, the FASB issued ASU No. 2017-09,
Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting
, which clarifies the definition of modification with the objective of evaluating whether modification accounting should be applied when there are changes to the terms or conditions of a share-based payment award. The guidance will be effective for us for annual reporting periods beginning after December 15, 2017, and for interim periods within those annual periods with early adoption permitted. We are currently assessing the impact of the guidance on our condensed consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
, which requires that period changes in the total of cash, cash equivalents, and amounts generally described as restricted cash or cash equivalents are explained in the statement of cash flow. Thus, amounts generally described as restricted cash and restricted cash equivalents will be included with cash and cash equivalents when reconciling the beginning and ending balances shown in the statement of cash flows. The guidance will be effective for us for annual reporting periods beginning after December 15, 2017, and for interim periods within those annual periods with early adoption permitted. We are currently assessing the impact of the guidance on our condensed consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15,
Classification of Certain Cash Receipts and Cash Payments
, which clarifies the classification of certain cash receipts and cash payments including debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, proceeds from the settlement of insurance claims, and beneficial interests in securitization transactions. The new standard will be effective for us for annual reporting periods beginning after December 15, 2017, and for interim periods within those annual periods. We are currently evaluating the impact of the guidance on our condensed consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
, which will require lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of more than one year. Lessor accounting will remain similar to lessor accounting under current GAAP, while aligning with the FASB’s new revenue recognition guidance. The new standard will be effective for us for annual reporting periods beginning after December 15, 2018, and for interim periods within those annual periods, with early adoption permitted. We are currently evaluating the impact of the guidance on our condensed consolidated financial statements.
In January 2016, the FASB issued ASU No. 2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities
, which amends certain aspects of recognition, measurement, presentation and disclosure of financial instruments, including the requirement to measure certain equity investments at fair value with changes in fair value recognized in net income. The new standard will be effective for us for annual reporting periods beginning after December 15, 2017, and for interim periods within those annual periods. We are currently evaluating the impact of the guidance on our condensed consolidated financial statements.
INVITATION HOMES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands)
(unaudited)
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
, which provides guidance on revenue recognition and supersedes the revenue recognition requirements in Topic 605,
Revenue Recognition
, most industry-specific guidance and some cost guidance included in Subtopic 605-35,
Revenue Recognition—Construction-Type and Production-Type Contracts
. The standard’s core principle is that a company recognizes revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under current guidance. These judgments may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract. The guidance will be effective for us for annual reporting periods beginning after December 15, 2017, and for interim periods within those annual periods. At that time, we may adopt the full retrospective approach or the modified retrospective approach. Early adoption is permitted only as of annual reporting periods, and interim periods therein, beginning after December 15, 2016. We are currently evaluating the method of adoption of this guidance and do not anticipate that the adoption of this guidance will have a material impact on our condensed consolidated financial statements as most of our revenue is from rental revenues, which this standard does not cover.
Note 3—Investments in Single-Family Residential Properties
The following table sets forth the net carrying amount associated with our properties by component:
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
December 31,
2016
|
Land
|
|
$
|
2,716,934
|
|
|
$
|
2,703,388
|
|
Single-family residential property
|
|
6,856,390
|
|
|
6,829,579
|
|
Capital improvements
|
|
228,419
|
|
|
229,890
|
|
Equipment
|
|
31,778
|
|
|
31,988
|
|
Total gross investments in the properties
|
|
9,833,521
|
|
|
9,794,845
|
|
Less: accumulated depreciation
|
|
(917,961
|
)
|
|
(792,330
|
)
|
Investments in single-family residential properties, net
|
|
$
|
8,915,560
|
|
|
$
|
9,002,515
|
|
As of
June 30, 2017
and
December 31, 2016
, the carrying amount of the residential property above included
$121,831
and
$122,009
, respectively, of capitalized acquisition costs (excluding purchase price), along with
$61,970
and
$62,169
, respectively, of capitalized interest,
$25,907
and
$26,050
, respectively, of capitalized property taxes,
$4,729
and
$4,764
, respectively, of capitalized insurance, and
$2,879
and
$2,890
, respectively, of capitalized HOA fees.
During the
three months ended
June 30, 2017 and 2016
, we recognized
$66,699
and
$64,775
, respectively, of depreciation expense related to the components of the properties, and
$816
and
$1,304
, respectively, of depreciation and amortization related to corporate furniture and equipment. These amounts are included in depreciation and amortization on the condensed consolidated statements of operations. Further, during the
three months ended
June 30, 2017 and 2016
, impairments totaling
$95
and
$519
, respectively, have been recognized and are included in impairment and other on the condensed consolidated statements of operations.
During the
six months ended
June 30, 2017 and 2016
, we recognized
$133,352
and
$129,184
, respectively, of depreciation expense related to the components of the properties, and
$1,740
and
$2,597
, respectively, of depreciation and amortization related to corporate furniture and equipment. These amounts are included in depreciation and amortization on the condensed consolidated statements of operations. Further, during the
six months ended
June 30, 2017 and 2016
, impairments totaling
$1,132
and
$519
, respectively, have been recognized and are included in impairment and other on the condensed consolidated statements of operations.
INVITATION HOMES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands)
(unaudited)
Note 4—Restricted Cash
Pursuant to the terms of the credit facility agreements and the mortgage loans described in
Note 6
, we are required to establish, maintain, and fund from time to time (generally either monthly or at the time borrowings are funded) certain specified reserve accounts. These reserve accounts include, but are not limited to, the following types of accounts: (i) completion reserves; (ii) renovation reserves; (iii) leasing commission reserves; (iv) debt service reserves; (v) property tax reserves; (vi) insurance premium and deductible reserves; (vii) standing reserves; (viii) special reserves; (ix) termination fee reserves; (x) eligibility reserves; (xi) collections; and (xii) non-conforming property reserves. In February 2017, the credit facilities were repaid in full and all related reserve accounts were released. Prior to that time, the credit facility reserve accounts were under the sole control of the Administrative Agent, as defined in the credit facility agreements. The reserve accounts associated with the mortgage loans are under the sole control of the loan servicer. Additionally, we hold security deposits pursuant to resident lease agreements that are required to be segregated. Accordingly, amounts funded to these reserve accounts and security deposit accounts have been classified within our condensed consolidated balance sheets as restricted cash. We also hold letters of credit as required by certain of our insurance policies.
The amounts funded, and to be funded, to the reserve accounts are subject to formulae included in the credit facility agreements and mortgage loan agreements and are to be released to us subject to certain conditions specified therein being met. To the extent that an event of default were to occur, the loan servicer (as it relates to the mortgage loans) has discretion to use such funds to either settle the applicable operating expenses to which such reserves relate or reduce the allocated loan amount associated with a residential property of ours.
As of
June 30, 2017
and
December 31, 2016
, the balances in our restricted cash accounts are as set forth in the table below. At
December 31, 2016
, no amounts were funded to the completion, renovation, leasing commission, debt service, termination fee, and nonconforming property reserve accounts as the conditions specified in the credit facility agreements that require such funding did not exist, and none are required at
June 30, 2017
as the credit facilities had been repaid in full.
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
December 31,
2016
|
Resident security deposits
|
|
$
|
88,871
|
|
|
$
|
86,239
|
|
Collections
|
|
12,281
|
|
|
42,767
|
|
Property taxes
|
|
32,449
|
|
|
52,256
|
|
Insurance premium and deductible
|
|
—
|
|
|
4,432
|
|
Standing and capital expenditure reserves
|
|
1,754
|
|
|
24,409
|
|
Special reserves
|
|
—
|
|
|
34
|
|
Eligibility reserves
|
|
398
|
|
|
9,274
|
|
Letters of credit
|
|
2,511
|
|
|
2,681
|
|
Total
|
|
$
|
138,264
|
|
|
$
|
222,092
|
|
INVITATION HOMES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands)
(unaudited)
Note 5—Other Assets
At
June 30, 2017
and
December 31, 2016
, the balances in other assets, net are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
December 31,
2016
|
Investments in debt securities, net
|
|
$
|
230,498
|
|
|
$
|
209,337
|
|
Held for sale assets
(1)
|
|
11,191
|
|
|
45,062
|
|
Prepaid expenses
|
|
25,418
|
|
|
21,883
|
|
Deferred leasing costs, net
|
|
7,327
|
|
|
7,710
|
|
Rent and other receivables, net
|
|
9,847
|
|
|
11,604
|
|
Deferred financing costs, net
|
|
8,689
|
|
|
—
|
|
Interest rate swap hedges (see Note 7)
|
|
2,955
|
|
|
—
|
|
Corporate fixed assets, net
|
|
6,001
|
|
|
6,247
|
|
Other
|
|
4,642
|
|
|
7,782
|
|
Total
|
|
$
|
306,568
|
|
|
$
|
309,625
|
|
|
|
(1)
|
As of
June 30, 2017
and
December 31, 2016
(unaudited),
74
and
391
properties, respectively, were classified as held for sale.
|
Investments in Debt Securities, net
In connection with certain of the Securitizations, as defined in
Note 6
, we previously acquired
$193,045
of Class G certificates. In 2016, we purchased
$16,423
of Class F certificates, which had an unamortized discount of
$33
and
$131
as of
June 30, 2017
and
December 31, 2016
, respectively. During the
six months ended
June 30, 2017
, we purchased
$55,500
of Class B certificates, which had an unamortized discount of
$3,521
as of
June 30, 2017
, and received repayments of
$30,916
from retained debt securities. These investments in debt securities are classified as held to maturity investments (for additional information about the Securitizations, see
Note 6
). As of
June 30, 2017
and
December 31, 2016
, there were
no
other than temporary impairments. As of
June 30, 2017
, the Class F and G certificates are scheduled to mature over the next
3
to
14
months, and the Class B certificates are scheduled to mature in
10
years.
Rent and Other Receivables, net
We lease our properties to residents pursuant to leases that generally have an initial contractual term of at least
12
months, provide for monthly payments, and are cancelable by the resident and us under certain conditions specified in the related lease agreements.
Included in other assets, net within the condensed consolidated balance sheets, is an allowance for doubtful accounts of
$1,359
and
$1,183
, as of
June 30, 2017
and
December 31, 2016
, respectively.
Deferred Financing Costs, net
In connection with our Revolving Facility (as defined in
Note 6
), we incurred
$9,673
of financing costs during the
six months ended
June 30, 2017
, which have been deferred as other assets, net on our condensed consolidated balance sheet due to the line of credit features of the Revolving Facility. These deferred financing costs are being amortized as interest expense on a straight line basis over the term of the Revolving Facility.
INVITATION HOMES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands)
(unaudited)
Note 6—Debt
Mortgage Loans
As of
June 30, 2017
, we have completed
eight
securitization transactions (the “Securitizations” or the “mortgage loans”) collateralized by homes owned by the respective Invitation Homes Borrower Entities. The proceeds from the mortgage loans were used to fund (i) partial repayments of the then-outstanding IH1 and IH2 credit facilities and other securitizations, (ii) initial deposits in the reserve accounts, (iii) closing costs in connection with the mortgage loans, (iv) general costs associated with our operations, and (v) distributions and dividends to the Pre-IPO Owners.
The following table sets forth a summary of the mortgage loan indebtedness as of
June 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Principal Balance
(3)
|
|
|
Maturity Date
|
|
Interest Rate
(2)
|
|
Range of Spreads
|
|
June 30,
2017
(4)
|
|
December 31,
2016
|
IH1 2013-1
|
|
N/A
|
|
N/A
|
|
115-365 bps
|
|
$
|
—
|
|
|
$
|
462,431
|
|
IH1 2014-1
|
|
N/A
|
|
N/A
|
|
100-375 bps
|
|
—
|
|
|
978,231
|
|
IH1 2014-2
(1)(5)
|
|
September 9, 2018
|
|
3.13%
|
|
110-400 bps
|
|
704,523
|
|
|
710,664
|
|
IH1 2014-3
(1)
|
|
December 9, 2017
|
|
3.56%
|
|
120-500 bps
|
|
147,634
|
|
|
766,753
|
|
IH2 2015-1, net
(1)(6)
|
|
March 9, 2018
|
|
3.60%
|
|
145-430 bps
|
|
529,497
|
|
|
531,318
|
|
IH2 2015-2
(1)
|
|
June 9, 2018
|
|
3.18%
|
|
135-370 bps
|
|
628,988
|
|
|
630,283
|
|
IH2 2015-3
(1)(7)
|
|
August 9, 2018
|
|
3.41%
|
|
130-475 bps
|
|
1,170,395
|
|
|
1,184,314
|
|
IH1 2017-1, net
(8)
|
|
June 9, 2027
|
|
4.17%
|
|
N/A
|
|
996,479
|
|
|
—
|
|
Total Securitizations
|
|
4,177,516
|
|
|
5,263,994
|
|
Less deferred financing costs, net
|
|
(18,850
|
)
|
|
(9,256
|
)
|
Total
|
|
$
|
4,158,666
|
|
|
$
|
5,254,738
|
|
|
|
(1)
|
The initial maturity term of each of these mortgage loans is
two
years, individually subject to
three
,
one
-
year extension options at the borrower’s discretion (provided that there is no continuing event of default under the loan agreement and the borrower obtains a replacement interest rate cap agreement in a form reasonably acceptable to the lender).
Our
IH1 2014-3, IH2 2015-1, IH2 2015-2, and IH2 2015-3 mortgage loans
have exercised the first extension options, and IH1 2014-2 has exercised the second option.
The maturity dates above are reflective of all extensions that have been exercised.
|
|
|
(2)
|
For each of our first seven mortgage loans, interest rates are based on a weighted average spread to LIBOR; as of
June 30, 2017
LIBOR was
1.23%
. Our IH1 2017-1 mortgage loan
bears interest at a fixed rate of
4.17%
per annum equal to the market determined pass-through rate payable on the certificates, plus applicable servicing fees.
|
|
|
(3)
|
Outstanding Principal Balance is net of discounts and does not include capitalized deferred financing costs, net.
|
|
|
(4)
|
From July 1, 2017 to
August 7, 2017
, we made prepayments of
$848
on our mortgage loans related to the disposition of properties.
|
|
|
(5)
|
On August 3, 2017, we exercised our second
one
-year extension option on IH1 2014-2, extending the maturity from September 9, 2017 to September 9, 2018
(see
Note 15
).
|
|
|
(6)
|
Net of unamortized discount of
$0
and
$55
as of
June 30, 2017
and
December 31, 2016
, respectively.
|
|
|
(7)
|
On July 12, 2017, we exercised our first
one
-year extension option on IH2 2015-3, extending the maturity from August 9, 2017 to August 9, 2018
(see
Note 15
).
|
|
|
(8)
|
Net of unamortized discount of
$3,521
as of
June 30, 2017
.
|
Securitization Transactions
IH1 2013-1: In November 2013, we completed our first securitization transaction (“IH1 2013-1”), in which 2013-1 IH Borrower L.P. (“S1 Borrower”), a newly-formed special purpose entity and wholly owned subsidiary of IH1, executed a loan agreement with a third-party lender. The third-party lender made a
six
component term loan to S1 Borrower in the amount of
INVITATION HOMES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands)
(unaudited)
$479,137
. All
six
components of the loan were sold at par. On February 6, 2017, the outstanding balance of IH1 2013-1 was repaid in full.
IH1 2014-1: In May 2014, we completed our second securitization transaction (“IH1 2014-1”), in which 2014-1 IH Borrower L.P. (“S2 Borrower”), a newly-formed special purpose entity and wholly owned subsidiary of IH1, executed a loan agreement with a third-party lender. The third party lender made a
six
component term loan to S2 Borrower in the amount of
$993,738
. All
six
components of the loan were sold at par. On February 6, 2017 and March 9, 2017, we made voluntary prepayments of
$291,500
and
$260,000
,
respectively.
On April 28, 2017, the outstanding balance of IH1 2014-1 was repaid in full
.
IH1 2014-2: In August 2014, we completed our third securitization transaction (“IH1 2014-2”), in which 2014-2 IH Borrower L.P. (“S3 Borrower”), a newly-formed special purpose entity and wholly owned subsidiary of IH1, executed a loan agreement with a third-party lender. The third-party lender made a term loan comprised of (1)
six
floating rate components and (2)
one
fixed rate component to S3 Borrower in the amount of
$719,935
. Of the
seven
loan components, the Class A, B, C, D and G certificates were sold at par; however, the Class E and F certificates were sold at a total discount of
$3,970
.
We are obligated to make monthly payments of interest with the first payment being due upon the closing of the loan, and subsequent payments beginning October 9, 2014 and continuing monthly thereafter.
IH1 2014-3: In November 2014, we completed our fourth securitization transaction (“IH1 2014-3”), in which 2014-3 IH Borrower L.P. (“S4 Borrower”), a newly-formed special purpose entity and wholly owned subsidiary of IH1, executed a loan agreement with a third-party lender. The third-party lender issued a term loan comprised of (1
)
six
f
loating rate components and (2)
one
fixed rate component to S4 Borrower in the amount of
$769,322
. Of the
seven
components, the Class B and G certificates were sold at par; however, the Class A, C, D, E and F certificates were sold at a total discount of
$7,235
.
We are obligated to make monthly payments of interest with the first payment being due upon the closing of the loan, and subsequent payments beginning December 9, 2014 and continuing monthly thereafter.
On May 9, 2017 and June 9, 2017, we made voluntary prepayments of
$510,000
and
$100,000
, respectively, from the proceeds of IH1 2017-1 securitization transaction and cash flows from operations.
IH2 2015-1: In January 2015, we completed our fifth securitization transaction (“IH2 2015-1”), in which 2015-1 IH2 Borrower L.P. (“S5 Borrower”), a newly-formed special purpose entity and wholly owned subsidiary of IH2, executed a loan agreement with a third-party lender. The third-party lender made a
seven
component term loan to S5 Borrower in the amount of
$540,854
.
Six
of the
seven
components, the Class A, B, C, D, E, and G certificates were sold at par; however, the Class F certificates were sold at a total discount of
$622
.
The unamortized balance of this discount is included in mortgage loans, net on our condensed consolidated balance sheets as of
June 30, 2017
and
December 31, 2016
. We are obligated to make monthly payments of interest with the first payment being due upon the closing of the loan, and subsequent payments beginning March 9, 2015 and continuing monthly thereafter.
IH2 2015-2: In April 2015, we completed our sixth securitization transaction (“IH2 2015-2”), in which 2015-2 IH2 Borrower L.P. (“S6 Borrower”), a newly-formed special purpose entity and wholly owned subsidiary of IH2, executed a loan agreement with a third-party lender. The third-party lender made a
seven
component term loan to S6 Borrower in the amount of
$636,686
. All of the components of the loan were sold at par. We are obligated to make monthly payments of interest with the first payment being due upon the closing of the loan, and subsequent payments beginning June 9, 2015 and continuing monthly thereafter.
IH2 2015-3: In June 2015, we completed our seventh securitization transaction (“IH2 2015-3”), in which 2015-3 IH2 Borrower L.P. (“S7 Borrower”), a newly-formed special purpose entity and wholly owned subsidiary of IH2, executed a loan agreement with a third-party lender. The third-party lender made a
seven
component term loan to S7 Borrower in the amount of
$1,193,950
. All of the components of the loan were sold at par. We are obligated to make monthly payments of interest with the first payment being due upon the closing of the loan, and subsequent payments beginning August 7, 2015 and continuing monthly thereafter.
IH1 2017-1: In April 2017, we completed our eighth securitization transaction (“IH1 2017-1”), in which 2017-1 IH Borrower L.P. (“S9 Borrower”), a special purpose entity previously formed in connection with IH1 2014-1 and wholly owned subsidiary of IH1, entered into a loan agreement with Wells Fargo Bank, National Association (the “FNMA Loan”), providing for a
ten
-year, fixed rate mortgage loan comprised of
two
components with a total principal amount of
$1,000,000
, secured by first priority mortgages on a portfolio of
7,204
of our homes. The Class A certificates, which benefit from Fannie Mae’s guaranty of timely payment of principal and interest, were sold at par. The Class B certificates represent a beneficial
INVITATION HOMES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands)
(unaudited)
interest in the most subordinate component of the FNMA Loan and were sold at a total discount of
$3,580
. The unamortized balance of this discount is included in mortgage loans, net on our condensed consolidated balance sheet as of
June 30, 2017
. We are obligated to make monthly payments of interest with the first payment being due upon the closing of the loan, and subsequent payments beginning June 9, 2017 and continuing monthly thereafter.
Concurrent with the execution of each loan agreement, the respective third-party lender sold each loan it originated with us to individual depositor entities (the “Depositor Entities”) who subsequently transferred each loan to Securitization-specific trust entities (the “Trusts”). The Depositor Entities associated with the IH1 2014-2, IH1 2014-3 and IH1 2017-1 securitizations are wholly owned subsidiaries of IH1, the Depositor Entities associated with the IH2 2015-1, IH2 2015-2, and IH2 2015-3 securitizations are wholly owned subsidiaries of IH2, and the Depositor Entities associated with the IH1 2013-1 and IH1 2014-1 securitizations were wholly owned by unaffiliated third parties.
We accounted for the transfer of the individual Securitizations from the Depositor Entities wholly owned by IH1 and IH2 to the respective Trusts as a sale under ASC Topic 860,
Transfers and Servicing
, with
no
resulting gain or loss as the Securitizations were originated by the lender and immediately transferred at the same fair market value.
As consideration for the transfer of each loan to the Trusts, the Trusts issued certificate classes which mirror the components of the individual loan agreements (collectively, the “Certificates”) to the Depositor Entities, except that Class R certificates do not have related loan components as they represent residual interests in the Trusts. The Certificates represent the entire beneficial interest in the Trusts. Following receipt of the Certificates, the Depositor Entities sold the Certificates to investors using the proceeds as consideration for the loans sold to the Depositor Entities by the lenders. These transactions had
no
effect on our condensed consolidated financial statements other than with respect to the Class B certificates purchased by the Operating Partnership, and the Class G certificates purchased by IH1 and IH2.
For IH1 2014-2, IH1 2014-3, IH2 2015-1, IH2 2015-2, and IH2 2015-3, the Trusts made the Class A through Class F certificates available for sale to both domestic and foreign investors. With the introduction of foreign investment, IH1 and IH2, as sponsors of the respective loans, are required to retain a portion of the risk that represents a material net economic interest in each loan. The Class G certificates for IH1 2014-2, IH1 2014-3, IH2 2015-1, IH2 2015-2, and IH2 2015-3 are equal to
5%
of the original principal amount of the loans in accordance with the agreements. Per the terms of the Securitization agreements, the Class G certificates are restricted certificates and were made available exclusively to IH1 and IH2, as applicable. The Class G certificates are principal only and bear a stated annual interest rate of
0.0005%
.
The Class G certificates are classified as held to maturity investments and are recorded in other assets, net on the condensed consolidated balance sheets
(see
Note 5
).
For IH1 2017-1, the Trust made the Class A certificates available for sale to both domestic and foreign investors. In accordance with risk retention requirements of Regulation RR (the “Risk Retention Rules”) under the Exchange Act, the Operating Partnership, as the loan sponsor, is required to retain a portion of the credit risk that represents not less than
5%
of the aggregate fair value of the loan as of the closing date. Per the terms of the agreement, the Class B certificates are restricted certificates that were made available exclusively to the Operating Partnership. The Class B certificates pay interest and bear a stated annual interest rate of
4.17%
plus applicable servicing fees. The Class B certificates are classified as held to maturity investments and are recorded in other assets, net on the condensed consolidated balance sheets
(see
Note 5
).
The Trusts are structured as pass through entities that receive principal and interest from the Securitizations and distribute those payments to the holders of the Certificates. The assets held by the Trusts are restricted and can only be used to fulfill the obligations of those entities. The obligations of the Trusts do not have any recourse to the general credit of any entities in these condensed consolidated financial statements. We have evaluated our interests in the Class B and G certificates of the Trusts and determined that they do not create a more than insignificant variable interest in the Trusts. Additionally, the Class B and G certificates do not provide us with any ability to direct the activities that could impact the Trusts’ economic performance. Therefore, we do not consolidate the Trusts.
General Terms
The general terms that apply to all of the mortgage loans require us to maintain compliance with certain affirmative and negative covenants. Affirmative covenants with which we must comply include our, and certain of our affiliates’, compliance with (i) licensing, permitting and legal requirements specified in the loan agreement, (ii) organizational requirements of the jurisdictions in which we, and certain of our affiliates, are organized, (iii) federal and state tax laws, and (iv) books and records requirements specified in the respective loan agreements. Negative covenants with which we must comply include
INVITATION HOMES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands)
(unaudited)
our, and certain of our affiliates’, compliance with limitations surrounding (i) the amount of our indebtedness and the nature of our investments, (ii) the execution of transactions with affiliates, (iii) the Manager, and (iv) the nature of our business activities. At
June 30, 2017
,
and through the date our financial statements were issued, we believe we were in compliance with all affirmative and negative covenants.
Prepayments
For the mortgage loans, prepayments of amounts owed are generally not permitted by us under the terms of the respective loan agreements unless such prepayments are made pursuant to the voluntary election and mandatory provisions specified in such agreements. The specified mandatory provisions become effective to the extent that a property becomes characterized as a disqualified property, a property is sold, and/or upon the occurrence of a condemnation or casualty event associated with a property. To the extent either a voluntary election is made, or a mandatory prepayment condition exists, in addition to paying all interest and principal, we must also pay certain breakage costs as determined by the loan servicer and a spread maintenance premium if prepayment occurs before the month following the one year anniversary of the closing dates of each of the mortgage loans except for IH1 2017-1. For IH1 2017-1, prepayments on or before December 2026 will require a yield maintenance premium. For the
six months ended
June 30, 2017
and
2016
, voluntary and mandatory prepayments totaling
$2,083,012
and
$30,738
, respectively, were made under the terms of the loan agreements.
Collateral
Collateral for the mortgage loans includes first priority mortgages on certain of our properties and a grant of a security interest in all of our personal property. The following table lists the gross carrying values of the single-family residential properties, including held for sale properties, pledged as collateral for the loans as of
June 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Homes
(1)
|
|
June 30,
2017
|
|
December 31,
2016
|
IH1 2013-1
|
|
—
|
|
|
$
|
—
|
|
|
$
|
533,005
|
|
IH1 2014-1
|
|
—
|
|
|
—
|
|
|
1,124,069
|
|
IH1 2014-2
|
|
3,619
|
|
|
784,024
|
|
|
785,459
|
|
IH1 2014-3
|
|
3,915
|
|
|
844,870
|
|
|
850,056
|
|
IH2 2015-1
|
|
2,999
|
|
|
593,546
|
|
|
594,155
|
|
IH2 2015-2
|
|
3,507
|
|
|
744,001
|
|
|
744,070
|
|
IH2 2015-3
|
|
6,985
|
|
|
1,368,310
|
|
|
1,382,683
|
|
IH1 2017-1
|
|
7,204
|
|
|
1,241,282
|
|
|
—
|
|
Total
|
|
28,229
|
|
|
$
|
5,576,033
|
|
|
$
|
6,013,497
|
|
|
|
(1)
|
The loans are secured by first priority mortgages on portfolios of single-family residential properties owned by S1 Borrower, S2 Borrower, S3 Borrower, S4 Borrower, S5 Borrower, S6 Borrower, S7 Borrower, and S9 Borrower. The numbers of homes noted above are as of
June 30, 2017
. As of
December 31, 2016
, a total of
30,900
homes (unaudited) were secured by the above-mentioned mortgage loans.
|
INVITATION HOMES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands)
(unaudited)
Debt Maturities Schedule
Future maturities of these mortgage loans as of
June 30, 2017
are set forth in the table below:
|
|
|
|
|
|
Year
|
|
Principal
(1)
|
2017
|
|
$
|
147,634
|
|
2018
|
|
3,033,403
|
|
2019 and thereafter
|
|
1,000,000
|
|
Total payments
|
|
4,181,037
|
|
Less discounts
|
|
(3,521
|
)
|
Total mortgage loans, net
|
|
$
|
4,177,516
|
|
|
|
(1)
|
Each of the mortgage loans, except IH1 2017-1, are subject to
three
one
-year extension options at the borrower's discretion (upon approval from the lender), of which the
IH1 2014-3, IH2 2015-1, IH2 2015-2, and IH2 2015-3 mortgage loans
have exercised the first extension options, and IH1 2014-2 has exercised the second option.
|
New Credit Facility
On February 6, 2017, we entered into a loan agreement with a syndicate of banks, financial institutions and institutional lenders for a new credit facility (the “New Credit Facility”). The New Credit Facility provides
$2,500,000
of borrowing capacity and consists of a
$1,000,000
revolving facility (the “Revolving Facility”), which will mature
on February 6, 2021, with a
one
-year extension option, and
a
$1,500,000
term loan facility (the “Term Loan Facility”), which will mature
on February 6, 2022. The Revolving Facility also includes borrowing capacity available for letters of credit and for short-term borrowings referred to as swing line borrowings, in each case subject to certain sublimits. The New Credit Facility provides us with the option to enter into additional incremental credit facilities (including an uncommitted incremental facility that provides us with the option to increase the size of the Revolving Facility and/or the Term Loan Facility by an aggregate amount of up to
$
1,500,000
),
subject to certain limitations. Proceeds from the Term Loan Facility were used to repay existing indebtedness and for general corporate purposes.
The following table sets forth a summary of the outstanding principal amounts under such loans as of
June 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
Maturity Date
|
|
Interest Rate
(1)
|
|
June 30,
2017
|
Term loan facility
|
|
February 6, 2022
|
|
3.03%
|
|
$
|
1,500,000
|
|
Revolving facility
|
|
February 6, 2021
|
|
N/A
|
|
—
|
|
Total
|
|
1,500,000
|
|
Less deferred financing costs, net
|
|
(13,471
|
)
|
Total
|
|
$
|
1,486,529
|
|
|
|
(1)
|
Interest rate for the Term Loan Facility is based on LIBOR plus an applicable margin of
1.80%
; as of
June 30, 2017
, LIBOR was
1.23%
.
|
Interest Rate and Fees
Borrowings under the New Credit Facility bear interest, at our option, at a rate equal to a margin over either (a) a LIBOR rate determined by reference to the Bloomberg LIBOR rate (or comparable or successor rate) for the interest period relevant to such borrowing or (b) a base rate determined by reference to the highest of (1) the administrative agent’s prime lending rate, (2) the federal funds effective rate plus
0.50%
,
and (3) the LIBOR rate that would be payable on such day for a LIBOR
INVITATION HOMES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands)
(unaudited)
rate loan with a one-month interest period plus
1.00%
.
The margin is based on a total leverage based grid. The margin for the Revolving Facility ranges from
0.75%
to
1.30%
, in the case of base rate loans, and
1.75%
to
2.30%
,
in the case of LIBOR rate loans. The margin for the Term Loan Facility ranges from
0.70%
to
1.30%
, in the case of base rate loans, and
1.70%
to
2.30%
,
in the case of LIBOR rate loans. In addition, the New Credit Facility provides that, upon receiving an investment grade rating on its non-credit enhanced, senior unsecured long term debt of BBB- or better from Standard & Poor’s Rating Services, a division of The McGraw-Hill Companies, Inc., or Baa3 or better from Moody’s Investors Service, Inc. (an “Investment Grade Rating Event”), we may elect to convert to a credit rating based pricing grid.
In addition to paying interest on outstanding principal under the New Credit Facility, we are required to pay a facility fee to the lenders under the Revolving Facility in respect of the unused commitments thereunder. The facility fee rate is based on the daily unused amount of the Revolving Facility and is either
0.350%
or
0.200%
per annum based on the unused facility amount. Upon converting to a credit rating pricing based grid, the unused facility fee will no longer apply; and we will be required to pay a facility fee ranging from
0.125%
to
0.300%
.
We are also required to pay customary letter of credit fees.
Prepayments and Amortization
No
prepayment or amortization is required under the New Credit Facility. We are permitted to voluntarily repay amounts outstanding under the Term Loan Facility at any time without premium or penalty, subject to certain minimum amounts and the payment of customary “breakage” costs with respect to LIBOR loans. Once repaid,
no
further borrowings will be permitted under the Term Loan Facility.
General Terms
The New Credit Facility contains certain customary affirmative and negative covenants and events of default. Such covenants will, among other things, restrict, subject to certain exceptions, our ability and that of the Subsidiary Guarantors (as defined below) and their respective subsidiaries to (i) engage in certain mergers, consolidations or liquidations, (ii) sell, lease or transfer all or substantially all of their respective assets, (iii) engage in certain transactions with affiliates, (iv) make changes to the our fiscal year, (v) make changes in the nature of our business and our subsidiaries and (vi) incur additional indebtedness that is secured on a pari passu basis with the New Credit Facility.
The New Credit Facility also requires us, on a consolidated basis with our subsidiaries, to maintain a (i) maximum total leverage ratio, (ii) maximum secured leverage ratio, (iii) maximum unencumbered leverage ratio, (iv) minimum fixed charge coverage ratio, (v) minimum unencumbered fixed charge coverage ratio and (vi) minimum tangible net worth. If an event of default occurs, the lenders under the New Credit Facility are entitled to take various actions, including the acceleration of amounts due under the New Credit Facility and all actions permitted to be taken by a secured creditor. At
June 30, 2017
,
and through the date our financial statements were issued, we believe we were in compliance with all affirmative and negative covenants.
Guarantees and Security
The obligations under the New Credit Facility are guaranteed on a joint and several basis by each of our direct and indirect domestic wholly owned subsidiaries that own, directly or indirectly, unencumbered assets (the “Subsidiary Guarantors”), subject to certain exceptions. The guarantee provided by any Subsidiary Guarantor will be automatically released upon the occurrence of certain events, including if it no longer has a direct or indirect interest in an unencumbered asset or as a result of certain non-recourse refinancing transactions pursuant to which such Subsidiary Guarantor becomes contractually prohibited from providing its guaranty of the New Credit Facility. In addition, INVH may be required to provide a guarantee of the New Credit Facility under certain circumstances, including if INVH does not maintain its qualification as a REIT.
The New Credit Facility is collateralized by first priority or equivalent security interests in all the capital stock of, or other equity interests in any Subsidiary Guarantor, held by us and each of the Subsidiary Guarantors. The security interests granted under the New Credit Facility will be automatically released upon the occurrence of certain events, including upon an Investment Grade Rating Event or if the total net leverage ratio is less than or equal to
8.00
:
1.00
for
four
consecutive fiscal quarters.
INVITATION HOMES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands)
(unaudited)
Debt Maturities Schedule
Future maturities of the New Credit Facility as of
June 30, 2017
are set forth in the table below:
|
|
|
|
|
|
Year
|
|
Principal
|
2022
|
|
$
|
1,500,000
|
|
Credit Facilities
All of the then-existing credit facilities were paid in full on February 6, 2017 in connection with the closing of our IPO. The following table sets forth a summary of the outstanding principal amounts of these credit facilities as of
June 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Principal Balance
(1)
|
|
|
Origination
Date
|
|
Range of Spreads
|
|
June 30,
2017
|
|
December 31,
2016
|
IH1 2015
|
|
April 3, 2015
|
|
325 bps
|
|
$
|
—
|
|
|
$
|
85,492
|
|
IH2 2015
|
|
September 29, 2015
|
|
275 bps
|
|
—
|
|
|
43,859
|
|
IH3 2013
|
|
December 19, 2013
|
|
300-425 bps
|
|
—
|
|
|
932,583
|
|
IH4 2014
|
|
May 5, 2014
|
|
300-425 bps
|
|
—
|
|
|
529,866
|
|
IH5 2014
|
|
December 5, 2014
|
|
275-400 bps
|
|
—
|
|
|
564,348
|
|
IH6 2016
|
|
April 13, 2016
|
|
250-375 bps
|
|
—
|
|
|
165,437
|
|
Total
|
|
—
|
|
|
2,321,585
|
|
Less deferred financing costs, net
|
|
—
|
|
|
(6,044
|
)
|
Total
|
|
$
|
—
|
|
|
$
|
2,315,541
|
|
|
|
(1)
|
Outstanding Principal Balance does not include capitalized deferred financing costs, net.
|
Note 7—Derivative Instruments
From time to time, we enter into Hedging Derivatives to manage the economic risk of changes in interest rates. We do not enter into derivative transactions for speculative or trading purposes. Designated hedges are derivatives that meet the criteria for hedge accounting and for which we have elected to designate them as hedges. Non-Designated Hedges are derivatives that do not meet the criteria for hedge accounting or we have not elected to designate them as hedges.
Designated Hedges
We have entered into various interest rate swap agreements, as outlined in the table below. Certain of the Invitation Homes Partnerships and certain Borrower Entities guaranteed the obligations under each of the interest rate swaps from the date the swaps were entered into through the date of the IPO. Each of these swaps was accounted for as a non-designated hedge until January 31, 2017, when the criteria for hedge accounting were met as a result of the Pre-IPO Transactions described in Note 1. At that time, we designated these swaps for hedge accounting purposes; and the effective portion of changes in the fair value of these swaps is recorded in other comprehensive income subsequent to that date.
INVITATION HOMES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands)
(unaudited)
The table below summarizes our interest rate swap instruments as of
June 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agreement Date
|
|
Forward
Effective Date
|
|
Maturity Date
|
|
Strike Rate
|
|
Index
|
|
Notional Amount
|
December 21, 2016
|
|
February 28, 2017
|
|
January 31, 2022
|
|
1.97%
|
|
One-month LIBOR
|
|
$
|
750,000
|
|
December 21, 2016
|
|
February 28, 2017
|
|
January 31, 2022
|
|
1.97%
|
|
One-month LIBOR
|
|
750,000
|
|
January 12, 2017
|
|
February 28, 2017
|
|
August 7, 2020
|
|
1.59%
|
|
One-month LIBOR
|
|
1,100,000
|
|
January 13, 2017
|
|
February 28, 2017
|
|
June 9, 2020
|
|
1.63%
|
|
One-month LIBOR
|
|
595,000
|
|
January 20, 2017
|
|
February 28, 2017
|
|
March 9, 2020
|
|
1.60%
|
|
One-month LIBOR
|
|
325,000
|
|
The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income on the condensed consolidated balance sheets and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the
six months ended
June 30, 2017
, such derivatives were used to hedge the variable cash flows associated with existing variable-rate interest payments. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. Changes in fair value related to the ineffective portion of our Designated Hedges resulted in an unrealized gain of
$38
for the
six months ended
June 30, 2017
, which is included in interest expense in our condensed consolidated statements of operations.
Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on our variable-rate debt. During the next twelve months, we estimate that an additional
$11,452
will be reclassified to earnings as an increase to interest expense.
There were
no
interest rate swap agreements outstanding during the six months ended June 30, 2016.
Non-Designated Hedges
Concurrent with entering into certain of the mortgage loan agreements, we entered into and maintain interest rate cap agreements with terms and notional amounts equivalent to the terms and amounts of the loans made by the third-party lenders and strike prices ranging from approximately
2.52%
to
3.09%
(collectively, the “Strike Prices”). To the extent that the maturity date of one or more of the loans is extended through an exercise of one or more of the extension options, replacement or extension interest rate cap agreements must be executed with terms similar to those associated with the initial interest rate cap agreements and strike prices equal to the greater of the Strike Prices and the interest rate at which the debt service coverage ratio (as defined) is not less than
1.2
to
1.0
. The interest rate cap agreements, including all of our rights to payments owed by the counterparty and all other rights, have been pledged as additional collateral for the loans.
Changes in fair value related to Non-Designated Hedges resulted in unrealized losses of
$3,802
for the
six months ended
June 30, 2017
, which are included in interest expense in our condensed consolidated statements of operations. Of the unrealized losses,
$3,674
related to changes in value on interest rate swaps prior to their designation on January 31, 2017, and
$128
related to the non-designated interest rate caps.
INVITATION HOMES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands)
(unaudited)
Tabular Disclosure of Fair Values of Derivative Instruments on the Condensed Consolidated Balance Sheets
The table below presents the fair value of our derivative financial instruments as well as their classification on the condensed consolidated balance sheets as of
June 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
|
|
Fair Value at:
|
|
|
|
Fair Value at:
|
|
Balance
Sheet Location
|
|
June 30,
2017
|
|
December 31,
2016
|
|
Balance
Sheet Location
|
|
June 30,
2017
|
|
December 31,
2016
|
Derivatives designated as
hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
Other
assets
|
|
$
|
2,955
|
|
|
$
|
—
|
|
|
Other
liabilities
|
|
$
|
9,872
|
|
|
$
|
—
|
|
Derivatives not designated as
hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
Other
assets
|
|
—
|
|
|
—
|
|
|
Other
liabilities
|
|
—
|
|
|
8,683
|
|
Interest rate caps
|
Other
assets
|
|
—
|
|
|
29
|
|
|
Other
liabilities
|
|
—
|
|
|
—
|
|
Total
|
|
|
$
|
2,955
|
|
|
$
|
29
|
|
|
|
|
$
|
9,872
|
|
|
$
|
8,683
|
|
Tabular Disclosure of the Effect of Derivative Instruments on the Condensed Consolidated Statements of Operations
The tables below present the effect of our derivative financial instruments on the condensed consolidated statements of operations for the
three months ended
June 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) Recognized in OCI on Derivative (Effective Portion)
|
|
Location of Gain (Loss) Reclassified from Accumulated OCI into Net Loss (Effective Portion)
|
|
Amount of Gain (Loss) Reclassified from Accumulated OCI into Net Loss (Effective Portion)
|
|
Location of Gain (Loss) Recognized in Net Loss on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
|
|
Amount of Gain (Loss) Recognized in Net Loss on Derivative (Ineffective Portion and Amounts Excluded from Effectiveness Testing)
|
|
For the Three
Months Ended
June 30,
|
|
|
|
For the Three
Months Ended
June 30,
|
|
|
|
For the Three
Months Ended
June 30,
|
|
2017
|
|
2016
|
|
|
|
2017
|
|
2016
|
|
|
|
2017
|
|
2016
|
Derivatives in cash flow hedging relationships:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
$
|
(14,759
|
)
|
|
$
|
—
|
|
|
Interest
expense
|
|
$
|
(6,059
|
)
|
|
$
|
—
|
|
|
Interest
expense
|
|
$
|
37
|
|
|
$
|
—
|
|
INVITATION HOMES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Location of
Gain (Loss)
Recognized in
Net Loss
on Derivative
|
|
Amount of Gain (Loss) Recognized in Net Loss on Derivative
|
|
|
|
For the Three Months Ended
June 30,
|
|
|
|
2017
|
|
2016
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
Interest rate swaps
|
Interest
expense
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest rate caps
|
Interest
expense
|
|
(50
|
)
|
|
—
|
|
Total
|
|
|
$
|
(50
|
)
|
|
$
|
—
|
|
The tables below present the effect of our derivative financial instruments on the condensed consolidated statements of operations for the
six months ended
June 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) Recognized in OCI on Derivative (Effective Portion)
|
|
Location of Gain (Loss) Reclassified from Accumulated OCI into Net Loss (Effective Portion)
|
|
Amount of Gain (Loss) Reclassified from Accumulated OCI into Net Loss (Effective Portion)
|
|
Location of Gain (Loss) Recognized in Net Loss on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
|
|
Amount of Gain (Loss) Recognized in Net Loss on Derivative (Ineffective Portion and Amounts Excluded from Effectiveness Testing)
|
|
For the Six
Months Ended
June 30,
|
|
|
|
For the Six
Months Ended
June 30,
|
|
|
|
For the Six
Months Ended
June 30,
|
|
2017
|
|
2016
|
|
|
|
2017
|
|
2016
|
|
|
|
2017
|
|
2016
|
Derivatives in cash flow hedging relationships:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
$
|
(4,198
|
)
|
|
$
|
—
|
|
|
Interest
expense
|
|
$
|
(8,770
|
)
|
|
$
|
—
|
|
|
Interest
expense
|
|
$
|
38
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of
Gain (Loss)
Recognized in
Net Loss
on Derivative
|
|
Amount of Gain (Loss) Recognized in Net Loss on Derivative
|
|
|
|
For the Six Months Ended
June 30,
|
|
|
|
2017
|
|
2016
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
Interest rate swaps
|
Interest
expense
|
|
$
|
(3,674
|
)
|
|
$
|
—
|
|
Interest rate caps
|
Interest
expense
|
|
(128
|
)
|
|
—
|
|
Total
|
|
|
$
|
(3,802
|
)
|
|
$
|
—
|
|
Credit-Risk-Related Contingent Features
We have agreements with our derivative counterparties for our interest rate swap agreements that contain a provision where we could be declared in default on our derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to our default on the indebtedness.
INVITATION HOMES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands)
(unaudited)
As of
June 30, 2017
, the fair value of interest rate swap derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was
$10,445
. As of
June 30, 2017
, we have not posted any collateral related to these agreements. If we have breached any of these provisions at
June 30, 2017
, we could have been required to settle its obligations under the agreements at their termination value of
$10,445
.
Note 8—Equity
Shareholders’ Equity
In connection with our IPO, we issued
310,376,634
shares of common stock to the public and the Pre-IPO Owners and
3,290,126
RSUs (see
Note 10
), and our IPO raised
$1,692,058
, net of underwriting discount, and before offering costs of
$5,726
.
To qualify as a REIT, we are required to distribute annually to our shareholders at least 90% of our REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and to pay tax at regular corporate rates to the extent that we annually distribute less than 100% of our net taxable income. We intend to pay quarterly dividends to our shareholders, which in the aggregate are approximately equal to or exceed our net taxable income in the relevant year.
On May 31, 2017 we paid a
$0.06
dividend per share; and on August 3, 2017, we declared an
$0.08
dividend per share to stockholders of record on August 15, 2017, which is payable on August 31, 2017.
Combined Equity
Prior to the IPO, our business was conducted through the Invitation Homes Partnerships which did not have a common capital structure. As described in Note 1, IH1, IH3, IH4, IH5, and IH6 are partnerships. These entities each had limited partners and a general partner (the “Class A Partners”), along with a board of directors designated in the respective limited partnership agreements. IH2 was a Delaware corporation and had issued
1,000
shares of common stock and
113
shares of Series A Preferred Stock. IH2 had a board of directors elected by the common shareholders. The same board of directors was responsible for directing the significant activities of the Invitation Homes Partnerships and the Operating Partnership on a combined basis.
The IH2 Series A Preferred Stock ranked, in respect of rights to the payment of dividends and the distribution of assets in the event of any liquidation or dissolution, senior to the IH2 common stock. Holders of such IH2 Series A Preferred Stock shares were entitled to receive cumulative cash dividends at the rate of
12.0%
per annum of the total of a liquidation preference. On January 31, 2017, in connection with the Pre-IPO Transactions, the Series A Preferred Stock was redeemed for
$1,153
, inclusive of the redemption premium and accrued and unpaid dividends to that date.
No
dividends were declared or paid with respect to the Series A Preferred Stock during the
six months ended
June 30, 2016
. As of
December 31, 2016
, there were
no
dividend amounts declared and outstanding related to the
12.0%
per annum dividend requirements of the Series A Preferred Stock.
Profits and losses, and cash distributions were allocated in accordance with the terms of the respective entity’s organizational documents. We made
no
distributions to our equity investors, and we received
$138,002
of contributions during the
six months ended
June 30, 2016
.
As further described in
Note 10
, we granted certain individuals incentive compensation units in IH1, IH2, IH3, IH4, IH5, and IH6, which consisted of Class B units that were accounted for as a substantive class of equity due to the terms of the agreements and rights of the holders. We previously made distributions to certain Class B unitholders in the form of non-recourse cash advances totaling
$11,023
. Any amounts distributed to the holders of the Class B units whose Class B units were converted in connection with the Pre-IPO Transactions (see
Note 10
), reduced the number of converted shares common stock received by amounts previously paid to such Class B unitholders as advance distributions. As a result of the Pre-IPO Transactions, there are no longer any Class B Units outstanding.
We previously executed notes receivables with certain Class B unitholders (the “Class B Notes”) and funded
$20,228
pursuant to those note agreements, of which
$1,527
, including accrued interest had been repaid as of
December 31, 2016
. On January 5, 2017,
$7,723
of Class B Notes, including accrued interest, were canceled, and the transaction was accounted for as a distribution to the underlying unitholder. As part of the Pre-IPO Transactions, IH1 assigned
$11,963
, including accrued
INVITATION HOMES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands)
(unaudited)
interest, of Class B Notes to a wholly owned subsidiary of the Pre-IPO Owners that was formed in connection with the reorganization described in Note 1, and the transaction was accounted for as a distribution. The Class B Notes were secured by certain of the Class B units of the makers of the Class B Notes and were otherwise non-recourse to the makers. The Class B Notes matured at the earlier of a liquidation event or defined dates in 2024 and bore interest of
1.57%
to
1.97%
per annum. As such, the Class B Notes were recorded as a component of combined equity on our condensed consolidated balance sheet as of
December 31, 2016
.
Note 9—Related Party Transactions
Through December 31, 2014, certain related parties provided us with consulting services for which we recorded payables. We also made offsetting income tax payments related to distributions on behalf of these related parties. During the year ended
December 31, 2016
, we repaid the
$1,959
outstanding as of December 31, 2015.
Note 10—Share-Based Compensation
We have share-based compensation programs for the purpose of retaining certain key employees. Prior to the IPO, the program consisted of incentive compensation units, the Class B Units, granted in the form of profits interests in the Invitation Homes Partnerships. In connection with and subsequent to the IPO, we granted awards in the form of RSUs that settle in shares of common stock of INVH and RSAs that are restricted shares of common stock of INVH.
Profits Interests — Class B Units
Prior to the IPO, the Invitation Homes Partnerships granted incentive compensation units to certain key employees, which were profits interests for United States federal income tax purposes. The Class B Units were accounted for as a substantive class of equity and contained both service based and performance based vesting criteria. Recognition of compensation expense was recorded based on whether or not the award recipient was an employee of the Manager, a wholly owned subsidiary of IH1, resulting in some awards being recognized based on grant-date fair value and others being remeasured at each reporting period until the actual vesting date as required for non-employee awards. Prior to the IPO, none of the performance based vesting criteria had been achieved, and as such through the date of the IPO,
no
compensation expense had been recorded for performance based Class B Units. However, the IPO triggered achievement of the performance based criteria and effectively converted all such awards into service based awards.
2017 New Class B Unit Awards
: Pursuant to an amended and restated partnership agreement, on January 5, 2017, IH6 issued certain individuals a total of
9,650
Class B Units that were expected to vest based on terms and conditions similar to all other Class B Units. In January 2017, an additional
188
Class B Units in total were issued from IH1, IH2, and IH3.
2017 Class B Unit Conversion
: The Pre-IPO Transactions described in Note 1 resulted in accelerated vesting of
7,520
Class B Units held by certain unitholders which resulted in additional share-based compensation expense of
$11,601
during the
six months ended
June 30, 2017
. On January 31, 2017, in connection with the IPO, all of the Class B Units held by current employees of the Manager (except for
3,878
fully vested Class B Units awarded to a certain unitholder) were either converted into shares of INVH common stock or canceled based on the value of the Class B Units implied by the per share price of common stock sold to the public in the IPO. As such, a total of
730
Class B Units were converted into
62,529
RSAs, and
17,669
Class B Units were canceled for no consideration. For the Class B Units converted into RSAs, vesting and other terms of the RSAs delivered in the conversion have the same vesting and other terms applicable to the corresponding Class B Units converted.
Additionally, the obligations under the remaining
40,992
fully vested Class B Units, including those of the unitholders who are not current employees of the Manager and the
one
employee unitholder noted above that did not convert, were converted into similar units of newly formed subsidiaries of the Pre-IPO Owners. All Class B Units held by former employees of the Manager are fully vested.
INVITATION HOMES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands)
(unaudited)
The following table summarizes the activity related to the Class B Units for the period from December 31, 2016 through January 31, 2017, the date at which they were all canceled or converted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class B Units
|
|
|
Employee
|
|
Non-employee
|
|
Total Class B Units
|
|
|
Number of Units
|
|
Weighted Average Fair Value
|
|
Number of Units
|
|
Weighted Average Fair Value
|
|
Number of Units
|
|
Weighted Average Fair Value
|
Balance, December 31, 2016
|
|
9,915
|
|
|
$
|
4.2
|
|
|
39,638
|
|
|
$
|
2.5
|
|
|
49,553
|
|
|
$
|
2.9
|
|
Granted
|
|
85
|
|
|
14.0
|
|
|
9,753
|
|
|
—
|
|
|
9,838
|
|
|
0.1
|
|
Converted to RSAs
|
|
(245
|
)
|
|
(3.4
|
)
|
|
(485
|
)
|
|
(0.8
|
)
|
|
(730
|
)
|
|
(1.7
|
)
|
Canceled
|
|
(555
|
)
|
|
(8.2
|
)
|
|
(17,114
|
)
|
|
(0.4
|
)
|
|
(17,669
|
)
|
|
(0.6
|
)
|
Converted to Units of affiliated entities
|
|
(9,200
|
)
|
|
(4.0
|
)
|
|
(31,792
|
)
|
|
(2.9
|
)
|
|
(40,992
|
)
|
|
(3.2
|
)
|
Balance, January 31, 2017
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
As of January 31, 2017,
no
Class B Units were outstanding.
RSAs and RSUs Issued by INVH
RSAs:
In connection with the conversion of the Class B Units in January 2017, we issued
62,529
RSAs, of which
54,729
were fully vested as of
June 30, 2017
, and the remaining
7,800
non-vested RSAs will vest in accordance with the original terms of the Class B Unit award agreements. The conversion of the Class B Units into RSAs resulted in a modification of the awards of which some were previously accounted for as non-employee awards. The modification resulted in the reversal of
$246
of previously recognized incentive compensation expense with respect to these non-employee awards during the
six months ended
June 30, 2017
.
RSUs:
Prior to the completion of the IPO, our board of directors adopted, and our shareholders approved, the Invitation Homes Inc. 2017 Omnibus Incentive Plan (the “Omnibus Incentive Plan”) to provide a means through which to attract and retain key personnel and to provide a means whereby our directors, officers, employees, consultants and advisors can acquire and maintain an equity interest in us, or be paid incentive compensation, including incentive compensation measured by reference to the value of our common stock, and aligning their interests with those of our shareholders. Under the Omnibus Incentive Plan, we may issue up to
16,000,000
shares, and as of
June 30, 2017
, we have awarded
4,467,409
shares under the Omnibus Incentive Plan pursuant to our annual Long Term Incentive Plan (“LTIP”) awards, Supplemental Bonus Plan, the IH6 Bonus Awards, and certain non-employee director awards.
|
|
•
|
Annual LTIP Awards:
On June 23, 2017, we granted
860,837
RSUs pursuant to LTIP awards (the “LTIP Awards”) each of which is divided into three tranches (“Tranche 1,” “Tranche 2,” and “Tranche 3”). Within each tranche,
25%
of the LTIP Award contains time-vesting conditions, approximately
25%
contains a market based vesting condition based on absolute total shareholder return, and approximately
50%
contains performance based vesting conditions based on compounded annual growth in our same store net operating income and adjusted funds from operations.
|
The time-vesting awards vest in installments based on anniversary dates of March 1, 2017 based on continued employment through the applicable vesting date as follows: Tranche 1 on the first anniversary; Tranche 2 in two equal installments on each of the first and second anniversaries; and Tranche 3 in four equal installments on each of the first four anniversaries. The time-vesting LTIP awards are participating securities for EPS purposes.
The market and performance based awards may be earned based on the achievement of certain measures over an approximate
one
-,
two
-, or
three
-year performance period, which performance periods correspond, respectively, to the Tranche 1, Tranche 2, and Tranche 3 LTIP Awards. The number of RSUs earned will be determined based on performance achieved during the specified performance period for each measure at certain threshold, target, or maximum levels and corresponding payout ranges. In general, the market and performance based RSUs are earned on the date after the end of the performance period on which the performance results are certified by the compensation committee of the board of directors (the “Certification Date”). The Tranche 1 and Tranche 2 market and performance based RSUs will vest on the Certification Date subject to continued employment through such
INVITATION HOMES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands)
(unaudited)
date. The Tranche 3 market and performance based RSUs will vest in two equal installments, on the related Certification Date and December 31, 2020, subject to continued employment through such vesting dates. The market and performance based LTIP RSUs are not participating securities for EPS purposes.
All of the LTIP Awards are subject to certain change in control and retirement eligibility provisions that may impact these vesting schedules.
|
|
•
|
Retention Awards:
On June 23, 2017, we issued
307,327
RSUs in the form of retention awards (the “Retention Awards”) each of which is a time-vesting award with service periods ranging from
three
to
five
years. The Retention Awards are participating securities for EPS purposes.
|
|
|
•
|
Supplemental Bonus Plan:
In October 2016, we established a supplemental bonus plan for certain key executives and employees (the “Supplemental Bonus Plan”). Pursuant to the Supplemental Bonus plan, the awards became payable and the payment amount became determinable upon the completion of the IPO. The
$59,776
of awards were converted into
2,988,120
time-vesting RSUs that will generally vest in three equal annual installments, commencing on the completion of the INVH IPO and on the first and second anniversaries thereafter. The Supplemental Bonus Plan awards are participating securities for EPS purposes.
|
|
|
•
|
IH6 Bonus Awards:
In addition to the Class B Units granted by IH6 to certain individuals, these individuals were also granted bonus awards (the “IH6 Bonus Awards”) equal to
$0.5
multiplied by the
9,650
IH6 Class B Units granted, entitling the recipients to receive bonus payments in connection with an IPO or exit event. Upon completion of the INVH IPO, the IH6 Bonus Awards became payable to the recipients and were converted into the right to receive shares of common stock. The
$4,825
of awards were settled in the form of
241,250
RSUs that were fully vested upon issuance. The IH6 Bonus Awards are participating securities for EPS purposes.
|
|
|
•
|
Director Awards:
INVH issued
$1,398
of awards, or
69,875
RSUs, to directors who are not our employees or employees of BREP VII. These awards will fully vest on the date scheduled for INVH’s 2018 annual shareholders meeting, subject to the director’s continued service on the board of directors through such date. The Director Awards are participating securities for EPS purposes.
|
The following tables summarize the status of non-vested RSUs and RSAs as of
June 30, 2017
and changes during the period from January 31, 2017 through
June 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RSUs
|
|
RSAs
|
|
Total Share-Based Awards
|
|
|
Number
|
|
Weighted Average
Grant-Date
Fair Value
(Actual $)
|
|
Number
|
|
Weighted Average
Grant-Date
Fair Value
(Actual $)
|
|
Number
|
|
Weighted Average
Grant-Date
Fair Value
(Actual $)
|
Balance, January 1, 2017
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
Granted
|
|
4,467,409
|
|
|
20.53
|
|
|
62,529
|
|
|
15.50
|
|
|
4,529,938
|
|
|
20.46
|
|
Vested
(1)
|
|
(1,446,351
|
)
|
|
(20.00
|
)
|
|
(54,729
|
)
|
|
(15.71
|
)
|
|
(1,501,080
|
)
|
|
(19.85
|
)
|
Forfeited
|
|
(83,909
|
)
|
|
(20.00
|
)
|
|
—
|
|
|
—
|
|
|
(83,909
|
)
|
|
(20.00
|
)
|
Balance, June 30, 2017
|
|
2,937,149
|
|
|
$
|
20.80
|
|
|
7,800
|
|
|
$
|
14.01
|
|
|
2,944,949
|
|
|
$
|
20.79
|
|
|
|
(1)
|
All vested RSAs and RSUs are included in basic EPS for the period during which they are outstanding. However, the vested RSUs will not settle with the individual awardees until August 7, 2017, and therefore are not included in legally outstanding shares of common stock as of
June 30, 2017
.
|
INVITATION HOMES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands)
(unaudited)
During the period from January 31, 2017 through
June 30, 2017
,
54,729
RSAs and
1,446,351
RSUs with an estimated fair value of
$29,845
fully vested. As of
June 30, 2017
,
641,719
RSUs included performance and market based criteria. Grant-date fair value of the RSAs and RSUs is generally based on the closing price of our common stock on the grant date. However, for the awards granted in connection with the IPO, the grant-date fair value is the opening offering price per common share, and the grant-date fair values for RSUs with market condition vesting criteria are based on Monte-Carlo option pricing models. The following table summarizes the significant inputs utilized in these models:
|
|
|
|
|
|
June 30, 2017
|
Expected volatility
(1)
|
|
25%
|
Risk-free rate
|
|
1.40%
|
Expected holding period (years)
|
|
0.52-2.52
|
|
|
(1)
|
Expected volatility is estimated based on the leverage adjusted historical volatility of certain of our peer companies over a historical term commensurate with the remaining expected holding period.
|
Summary of Total Share-Based Compensation Expense
During the
three months ended
June 30, 2017
and
2016
, we recognized
$8,216
and
$4,106
respectively, of share-based compensation expense, comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-Based Compensation Expense for the Three Months Ended June 30,
|
|
|
2017
|
|
2016
|
|
|
General and Administrative
|
|
Property Management Expense
|
|
General and Administrative
|
|
Property Management Expense
|
Class B Units
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,008
|
|
|
$
|
98
|
|
RSUs
|
|
6,876
|
|
|
1,336
|
|
|
—
|
|
|
—
|
|
RSAs
|
|
4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
6,880
|
|
|
$
|
1,336
|
|
|
$
|
4,008
|
|
|
$
|
98
|
|
During the
six months ended
June 30, 2017
and
2016
, we recognized
$52,460
and
$8,312
respectively, of share-based compensation expense, comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-Based Compensation Expense for the Six Months Ended June 30,
|
|
|
|
|
2017
|
|
2016
|
|
|
|
|
General and Administrative
|
|
Property Management Expense
|
|
General and Administrative
|
|
Property Management Expense
|
|
Unrecognized Expense at
June 30, 2017
|
Class B Units
|
|
$
|
11,998
|
|
|
$
|
3
|
|
|
$
|
8,059
|
|
|
$
|
253
|
|
|
$
|
—
|
|
RSUs
|
|
35,339
|
|
|
5,356
|
|
|
—
|
|
|
—
|
|
|
47,554
|
|
RSAs
|
|
(186
|
)
|
|
(50
|
)
|
|
—
|
|
|
—
|
|
|
19
|
|
Total
|
|
$
|
47,151
|
|
|
$
|
5,309
|
|
|
$
|
8,059
|
|
|
$
|
253
|
|
|
$
|
47,573
|
|
As of
June 30, 2017
, there was
$47,573
of unrecognized share-based compensation expense related to non-vested RSUs and RSAs which is expected to be recognized over a weighted average period of
1.76
years.
INVITATION HOMES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands)
(unaudited)
Note 11—Fair Value Measurements
The carrying amounts of restricted cash, certain components of other assets, accounts payable and accrued expenses, resident security deposits, and other liabilities approximate fair value due to the short maturity of these amounts. Our interest rate swap agreements are the only financial instruments recorded at fair value on a recurring basis within our condensed consolidated financial statements. The fair values of our interest rate caps and swaps, which are classified as Level 2 in the fair value hierarchy, are estimated using market values of instruments with similar attributes and maturities. See
Note 7
for the details of the balance sheet classification and the fair values for the interest rate caps and swaps.
The following table displays the carrying values and fair values of financial instruments as of
June 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
|
|
|
Carrying
Value
|
|
Fair
Value
|
|
Carrying
Value
|
|
Fair
Value
|
Assets carried at historical cost on the consolidated balance sheets
|
|
|
|
|
|
|
|
|
|
|
Investments in debt securities
|
|
Level 2
|
|
$
|
230,498
|
|
|
$
|
234,413
|
|
|
$
|
209,337
|
|
|
$
|
209,390
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities carried at historical cost on the consolidated balance sheets
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans
(1)
|
|
Level 2
|
|
$
|
4,177,516
|
|
|
$
|
4,195,249
|
|
|
$
|
5,263,994
|
|
|
$
|
5,265,180
|
|
Term loan facility
(2)
|
|
Level 3
|
|
1,500,000
|
|
|
1,501,248
|
|
|
—
|
|
|
—
|
|
Credit facilities
(3)
|
|
Level 3
|
|
—
|
|
|
—
|
|
|
2,321,585
|
|
|
2,329,551
|
|
|
|
(1)
|
The carrying values of the mortgage loans are shown net of discount and exclude
$18,850
and
$9,256
of deferred financing costs as of
June 30, 2017
and
December 31, 2016
, respectively.
|
|
|
(2)
|
The carrying value of the term loan facility excludes
$13,471
of deferred financing costs as of
June 30, 2017
.
|
|
|
(3)
|
The carrying values of the credit facilities exclude
$6,044
of deferred financing costs as of
December 31, 2016
.
|
The fair values of our investments in debt securities and of our mortgage loans, which are classified as Level 2 in the fair value hierarchy, are estimated based on market bid prices of comparable instruments at the end of the period. The fair values of our credit facilities and Term Loan Facility, which are classified as Level 3 in the fair value hierarchy, are estimated using a discounted cash flow methodology based on market interest rate data and other market factors available at the end of the period.
Our assets measured at fair value on a nonrecurring basis are those assets for which we have recorded impairments. The assets for which we have recorded impairments, measured at fair value on a nonrecurring basis, are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended
June 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Investments in single-family residential properties, net held for use (Level 3)
|
|
|
|
|
|
|
|
|
Pre-impairment amount
|
|
$
|
—
|
|
|
$
|
1,057
|
|
|
$
|
496
|
|
|
$
|
1,057
|
|
Total impairments
|
|
—
|
|
|
(229
|
)
|
|
(267
|
)
|
|
(229
|
)
|
Fair value
|
|
$
|
—
|
|
|
$
|
828
|
|
|
$
|
229
|
|
|
$
|
828
|
|
INVITATION HOMES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended
June 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Investments in single-family residential properties, net held for sale (Level 3)
|
|
|
|
|
|
|
|
|
Pre-impairment amount
|
|
$
|
885
|
|
|
$
|
3,959
|
|
|
$
|
8,127
|
|
|
$
|
3,959
|
|
Total impairments
|
|
(95
|
)
|
|
(290
|
)
|
|
(865
|
)
|
|
(290
|
)
|
Fair value
|
|
$
|
790
|
|
|
$
|
3,669
|
|
|
$
|
7,262
|
|
|
$
|
3,669
|
|
For additional information related to our single-family residential properties during the
three and six months ended
June 30, 2017 and 2016
, refer to
Note 3
.
Note 12—Earnings per Share
We compute EPS only for the period our common stock was outstanding during 2017, referred to as the Post-IPO period. We have defined the Post-IPO period as February 1, 2017, the date our shares began trading on the New York Stock Exchange, through
June 30, 2017
, or
91
and
150
days of activity, respectively, for the
three months ended
June 30, 2017
, and for the Post-IPO period. Basic EPS is computed by dividing the net loss available to common shareholders for the Post-IPO period by the weighted average number of shares outstanding during the Post-IPO period, adjusted for non-vested shares of RSUs and RSAs. Diluted EPS is similar to computing basic EPS, except that the denominator is increased to include the dilutive effects of non-vested RSUs and RSAs except when doing so would be anti-dilutive.
All outstanding non-vested RSUs and RSAs that have nonforfeitable rights to dividends or dividend equivalents that participate in undistributed earnings with common stock are considered participating securities and are included in computing EPS pursuant to the two-class method. The two-class method is an earnings allocation formula that determines EPS for each class of common stock and participating securities according to dividends or dividend equivalent and participation rights in undistributed earnings in periods when we have net income. Certain of our non-vested RSUs and RSAs are considered participating securities as identified in
Note 10
.
Basic and diluted EPS are calculated as follows:
|
|
|
|
|
|
|
|
|
|
(in thousands, except share and per share data)
|
|
Three Months Ended June 30, 2017
|
|
February 1, 2017
through
June 30, 2017
|
Numerator:
|
|
|
|
|
Net income (loss) available to common shareholders — basic and diluted
|
|
$
|
5,420
|
|
|
$
|
(20,092
|
)
|
|
|
|
|
|
Denominator:
|
|
|
|
|
Weighted average common shares outstanding — basic
|
|
311,771,221
|
|
|
311,723,463
|
|
Weighted average common shares outstanding — diluted
|
|
312,271,578
|
|
|
311,723,463
|
|
|
|
|
|
|
Net income (loss) per common share — basic
|
|
$
|
0.02
|
|
|
$
|
(0.06
|
)
|
Net income (loss) per common share — diluted
|
|
$
|
0.02
|
|
|
$
|
(0.06
|
)
|
For the three months ended
June 30, 2017
,
35,770
incremental shares attributed to non-vested RSUs and RSAs were excluded from the computation of diluted EPS because they would be anti-dilutive. F
or the period from February 1, 2017 through
June 30, 2017
,
445,595
incremental attributed to non-vested RSUs and RSAs were excluded from the computation of diluted EPS because we had a net loss for the period.
INVITATION HOMES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands)
(unaudited)
Note 13—Income Tax
We account for income taxes under the asset and liability method. For the TRSs, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using the enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. We provide a valuation allowance, from time to time, for deferred tax assets for which we do not consider realization of such assets to be more likely than not.
As of
June 30, 2017
, there were
no
deferred tax assets and liabilities or unrecognized tax benefits recorded. We do not anticipate a significant change in unrecognized tax benefits within the next
12
months.
During the
six months ended
June 30, 2017
, we sold assets subject to Section 337(d) of the Code (see additional discussion in
Note 2
). These transactions resulted in
$1,987
of current income tax expense which has been recorded in gain on sale of property, net of tax on the condensed consolidated statement of operations.
Note 14—Commitments and Contingencies
Insurance Policies
Pursuant to the terms of our credit facility agreements and mortgage loan agreements (see
Note 6
), laws and regulations of the jurisdictions in which our properties are located, and general business practices, we are required to procure insurance on our properties. For the
six months ended
June 30, 2017 and 2016
,
no
material uninsured losses have been incurred with respect to the properties.
Legal Matters
We are subject to various legal proceedings and claims that arise in the ordinary course of our business. We accrue a liability when we believe that it is both probable that a liability has been incurred and that we can reasonably estimate the amount of the loss. We do not believe that the final outcome of these proceedings or matters will have a material adverse effect on our condensed consolidated financial statements.
Note 15—Subsequent Events
In connection with the preparation of the accompanying condensed consolidated financial statements, we have evaluated events and transactions occurring after
June 30, 2017
, for potential recognition or disclosure.
Proposed Merger
On August 9, 2017, we entered into a definitive agreement with Starwood Waypoint Homes (“SFR”) to form a combined company in a stock-for-stock merger of equals transaction. Under the terms of the agreement, each SFR share will be converted into 1.614 shares of our common stock based on a fixed exchange ratio. Upon the closing of the transaction, our stockholders will own approximately 59% of the combined company’s stock, while SFR’s stockholders will own approximately 41% of the combined company’s stock. The transaction is expected to close by year end and is subject to approval by SFR’s stockholders and other customary closing conditions.
Dividend Declarations
On August 3, 2017, the board of directors declared an
$0.08
dividend per share to stockholders of record on August 15, 2017, which is payable on August 31, 2017.
Extensions of Existing Mortgage Loans
On July 12, 2017, we exercised our first
one
-year extension option on IH2 2015-3, extending the maturity from August 9, 2017 to August 9, 2018
.
INVITATION HOMES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands)
(unaudited)
On August 3, 2017, we exercised our second
one
-year extension option on IH1 2014-2, extending the maturity from September 9, 2017 to September 9, 2018
.
Residential Property Dispositions
Between July 1, 2017 and
August 7, 2017
, we disposed of
47
homes with a net carrying amount of
$7,105
as of
June 30, 2017
, for an aggregate net sales price of
$8,716
. A portion of the proceeds were used to make various prepayments on our mortgage loans totaling
$848
. At
June 30, 2017
,
42
of these properties were classified as held for sale and presented in other assets, net and
five
were classified as investments in single-family residential properties on our condensed consolidated balance sheet.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the information appearing elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2016.
This discussion and analysis 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 those set further under Part I. Item 1A. “Risk Factors” in our most recent Annual Report on Form 10-K as updated by our other periodic reporting.
Capitalized terms used without definition have the meaning provided elsewhere in this Quarterly Report on Form 10-Q.
Overview
Invitation Homes is a leading owner and operator of single-family homes for lease, offering residents high-quality homes in desirable neighborhoods across America. With nearly 50,000 homes for lease in
13
markets across the country, Invitation Homes is meeting changing lifestyle demands by providing residents access to updated homes with features they value, such as close proximity to jobs and access to good schools. Our mission, “Together with you, we make a house a home,” reflects our commitment to high-touch service that continuously enhances residents’ living experiences and provides homes where individuals and families can thrive.
We have selected locations with strong demand drivers, high barriers to entry and high rent-growth potential, primarily in the Western United States and Florida. Through disciplined market and asset selection, we designed our portfolio to capture the operating benefits of local density as well as economies of scale that we believe cannot be readily replicated. Since our founding in 2012, we have built a proven, vertically integrated operating platform that allows us to effectively and efficiently acquire, renovate, lease, maintain and manage our homes.
We invest in markets that we expect will exhibit lower new supply, stronger job and household formation growth and superior NOI growth relative to the broader U.S. housing and rental market. Within our
13
markets, we target attractive neighborhoods in in-fill locations with multiple demand generators, such as proximity to major employment centers, desirable schools and transportation corridors. Our homes average approximately
1,860
square feet with
three
bedrooms and
two
bathrooms, appealing to a resident base that we believe is less transitory than the typical multifamily resident. We have made approximately
$1.2 billion
of upfront renovation investment in the homes in our portfolio, representing approximately
$25,000
per home, in order to address capital needs, reduce ongoing maintenance costs and drive resident demand. As a result, our portfolio benefits from high occupancy and low turnover rates, and we are well positioned to drive strong rent growth, attractive margins and predictable cash flows.
Reorganization and Initial Public Offering
On January 31, 2017, we and our Pre-IPO Owners effected certain transactions (the “Pre-IPO Transactions”) that resulted in the Operating Partnership holding, directly or indirectly, all of the assets, liabilities, and results of operations reflected in our condensed consolidated financial statements, including the full portfolio of homes held by the IH Holding Entities. As a result of the Pre-IPO Transactions, the Operating Partnership is wholly owned by Invitation Homes Inc. (“INVH”) directly and through its wholly owned subsidiary, Invitation Homes OP GP LLC, which serves as the Operating Partnership’s sole general partner.
The Pre-IPO Transactions have been accounted for as a reorganization of entities under common control utilizing historical cost basis. Accordingly, after January 31, 2017, our condensed consolidated financial statements include the accounts of INVH and its wholly owned subsidiaries. Prior to that date, our condensed combined financial statements include the combined accounts of the Operating Partnership and the IH Holding Entities and their wholly owned subsidiaries.
On February 6, 2017, INVH completed an initial public offering of 88,550,000 shares of common stock at a price to the public of $20.00 per share (the “IPO”). An additional 221,826,634 shares of common stock were issued to the Pre-IPO Owners.
Our Portfolio
The following table provides summary information regarding our total and Same Store portfolio as of and for the period ended
June 30, 2017
as noted below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market
|
|
Number
of Homes
(1)
|
|
Average
Occupancy
(2)
|
|
Average Monthly
Rent
(3)
|
|
Average Monthly
Rent PSF
(3)
|
|
% of
Revenue
(4)
|
Western United States
|
|
|
|
|
|
|
|
|
|
|
Southern California
|
|
4,625
|
|
|
95.0
|
%
|
|
$
|
2,252
|
|
|
$
|
1.32
|
|
|
12.5
|
%
|
Northern California
|
|
2,857
|
|
|
96.3
|
%
|
|
1,765
|
|
|
1.12
|
|
|
6.7
|
%
|
Seattle
|
|
3,203
|
|
|
96.0
|
%
|
|
1,945
|
|
|
1.02
|
|
|
8.3
|
%
|
Phoenix
|
|
5,425
|
|
|
95.7
|
%
|
|
1,170
|
|
|
0.74
|
|
|
8.2
|
%
|
Las Vegas
|
|
959
|
|
|
94.5
|
%
|
|
1,453
|
|
|
0.75
|
|
|
1.7
|
%
|
Western United States Subtotal
|
|
17,069
|
|
|
95.6
|
%
|
|
1,723
|
|
|
1.02
|
|
|
37.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Florida
|
|
|
|
|
|
|
|
|
|
|
South Florida
|
|
5,591
|
|
|
93.8
|
%
|
|
2,178
|
|
|
1.13
|
|
|
14.6
|
%
|
Tampa
|
|
4,900
|
|
|
95.2
|
%
|
|
1,590
|
|
|
0.81
|
|
|
9.7
|
%
|
Orlando
|
|
3,707
|
|
|
95.3
|
%
|
|
1,522
|
|
|
0.79
|
|
|
7.0
|
%
|
Jacksonville
|
|
1,958
|
|
|
95.3
|
%
|
|
1,565
|
|
|
0.78
|
|
|
3.8
|
%
|
Florida Subtotal
|
|
16,156
|
|
|
94.7
|
%
|
|
1,773
|
|
|
0.91
|
|
|
35.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Southeast United States
|
|
|
|
|
|
|
|
|
|
|
Atlanta
|
|
7,293
|
|
|
95.2
|
%
|
|
1,379
|
|
|
0.67
|
|
|
12.6
|
%
|
Charlotte
|
|
3,110
|
|
|
94.9
|
%
|
|
1,385
|
|
|
0.69
|
|
|
5.3
|
%
|
Southeast United States Subtotal
|
|
10,403
|
|
|
95.1
|
%
|
|
1,381
|
|
|
0.67
|
|
|
17.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Midwest United States
|
|
|
|
|
|
|
|
|
|
|
Chicago
|
|
2,915
|
|
|
93.2
|
%
|
|
2,022
|
|
|
1.20
|
|
|
7.0
|
%
|
Minneapolis
|
|
1,182
|
|
|
95.3
|
%
|
|
1,770
|
|
|
0.89
|
|
|
2.6
|
%
|
Midwest United States Subtotal
|
|
4,097
|
|
|
93.8
|
%
|
|
1,948
|
|
|
1.10
|
|
|
9.6
|
%
|
Total/Average
|
|
47,725
|
|
|
95.0
|
%
|
|
$
|
1,683
|
|
|
$
|
0.90
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Same Store Portfolio Total/Average
|
|
42,904
|
|
|
95.9
|
%
|
|
$
|
1,688
|
|
|
$
|
0.91
|
|
|
90.7
|
%
|
|
|
(1)
|
As of
June 30, 2017
.
|
|
|
(2)
|
Represents average occupancy for the
three months ended June 30, 2017
.
|
|
|
(3)
|
Represents average monthly rent for the
three months ended June 30, 2017
.
|
|
|
(4)
|
Represents the percentage of total revenue generated in each market for the
three months ended June 30, 2017
.
|
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 market fundamentals, property acquisitions and renovations, rental rates and occupancy levels, turnover and days to re-resident homes, property improvements and maintenance, and financing arrangements.
Market Fundamentals:
Our results are impacted by housing market fundamentals and supply and demand conditions in our markets, particularly in the Western United States and Florida, which represented
72.5%
of our revenues during the
three months ended June 30, 2017
. In recent periods, our Western United States and Florida markets have experienced favorable demand fundamentals in the form of employment growth and household formation rates and favorable supply fundamentals such as the rate of new supply delivery. We believe these favorable supply and demand fundamentals have driven strong rental rate growth and home price appreciation for our Western United States and Florida markets in recent periods and we expect these trends to continue in the near to intermediate term.
Rental Rates and Occupancy Levels:
Rental rates and occupancy levels are primary drivers of rental revenues and other property income. Our rental rates and occupancy levels are affected by macroeconomic factors and local and property-level factors, including market conditions, seasonality, resident defaults, and the amount of time it takes to prepare a home for its next resident and re-lease homes when residents vacate. An important driver of rental rate growth is our ability to increase monthly rents from expiring leases, which typically have a term of one to two years.
Turnover and Days to Re-Resident:
Other drivers of rental revenues and property operating and maintenance expense include increasing the length of stay of our residents, minimizing resident turnover rates, and reducing the number of days a home is unoccupied between residents. Our operating results also are impacted by the amount of time it takes to market and lease a property. The period of time to market and lease a property can vary greatly and is impacted by local demand, our marketing techniques, the size of our available inventory, and economic conditions and outlook. Increases in turnover rates and the average number of days to re-resident increase property operating and maintenance expenses and reduce rental revenues as the homes are not generating income during this period.
Property Improvements and Maintenance:
Property improvements and maintenance impact capital expenditures, property operating and maintenance expense, and rental revenues. We actively manage our homes on a total portfolio basis to determine what capital and maintenance needs may be required, and what opportunities we may have to generate additional revenues or expense savings from such expenditures. Due to our size and scale both nationally and locally, we believe we are able to purchase goods and services at favorable prices.
Property Acquisitions and Renovations:
Future growth in rental revenues and operating income may be impacted by our ability to identify and acquire homes, our pace of property acquisitions, and the time and cost required to renovate and lease a newly acquired home. Our ability to identify and acquire single-family homes that meet our investment criteria is impacted by home prices in targeted acquisition locations, the inventory of homes available for sale through our acquisition channels, and competition for our target assets. The acquisition of homes involves expenditures in addition to payment of the purchase price, including payments for acquisition fees, property inspections, closing costs, title insurance, transfer taxes, recording fees, broker commissions, property taxes and HOA fees (when applicable). Additionally, we typically incur costs to renovate a home to prepare it for rental. Renovation work varies, but may include paint, flooring, carpeting, cabinetry, appliances, plumbing hardware, roof replacement, HVAC replacement, and other items required to prepare the home for rental. The time and cost involved in accessing our homes and preparing them for rental can significantly impact our financial performance. The time to renovate a newly acquired property can vary significantly among homes for several reasons, including the property’s acquisition channel, the condition of the property, and whether the property was vacant when acquired. Due to our size and scale both nationally and locally, we believe we are able to purchase goods and services at favorable prices.
Financing Arrangements:
Financing arrangements directly impact our interest expense, mortgage loans, term loan facility, and revolving facility, as well as our ability to acquire and renovate homes. We have historically utilized indebtedness to acquire and renovate new homes. Our current financing arrangements contain financial covenants, and certain financing arrangements contain variable interest rate terms. Interest rates are impacted by the characteristics of our homes, market conditions, and the terms of the underlying financing arrangements. See Item 3. “Quantitative and Qualitative Disclosures about Market Risk” for further discussion regarding interest rate risk. Our future financing arrangements may not have similar terms with respect to amounts, interest rates, financial covenants, and durations.
Recent Events
Initial Public Offering
On February 6, 2017, we completed our IPO in which we sold 88,550,000 shares of common stock at an initial public offering price of $20.00 per share. The shares offered and sold in the offering were registered under the Securities Act pursuant to our Registration Statement on Form S-11, which was declared effective by the SEC on January 31, 2017. The common stock is listed on the NYSE under the symbol "INVH" and began trading publicly on February 1, 2017. The offering generated net proceeds of $1,692.1 million to us after underwriting discounts, but before other transaction costs. We used a portion of the net proceeds, together with the borrowings under the Term Loan Facility of our New Credit Facility (described below), to repay all of our existing credit facilities and our mortgage loan relating to the IH1 2013-1 securitization and a portion of the mortgage loan relating to the IH1 2014-1 securitization transaction, and to pay fees and expenses related to the offering.
In March 2017, we used the remaining IPO proceeds, together with cash on hand, to voluntarily prepay approximately $260.0 million of additional borrowings outstanding under the mortgage loan relating to the IH1 2014-1 securitization transaction, reducing the outstanding principal balance to approximately $421.0 million.
New Credit Facility
On February 6, 2017, the Operating Partnership entered into a new credit agreement with the lenders party thereto, Bank of America, N.A., as administrative agent and the other parties party thereto. The new credit agreement provides for senior secured credit facilities (together, collectively, the “New Credit Facility”) consisting of (i) a $1,000.0 million revolving facility (the “Revolving Facility”), which will mature on February 6, 2021, with a one-year extension option subject to certain conditions and (ii) a $1,500.0 million “Term Loan Facility,” which will mature on February 6, 2022. See “—Liquidity and Capital Resources.”
Fannie Mae Securitization Transaction
On April 28, 2017, we completed a securitization transaction pursuant to which we entered into a loan agreement, providing for a new ten-year, fixed rate mortgage loan comprised of two components with a total principal amount of $1,000.0 million (the “FNMA Loan”). The FNMA Loan will mature June 9, 2027 and is secured by first priority mortgages on a portfolio of 7,204 of our homes. See “—Liquidity and Capital Resources.”
We used proceeds from the FNMA Loan to repay the remaining $420.0 million outstanding under our mortgage loan relating to the IH1 2014-1 securitization transaction, to fund certain reserves and to pay transaction fees and expenses incurred with respect to the FNMA Loan. The IH1 2014-1 mortgage loan outstanding balance had been reduced as of April 28, 2017 due to prepayments from IPO proceeds and application of proceeds from sales of homes. On May 9, 2017, we used the remaining proceeds to voluntarily prepay $510.0 million of our mortgage loan relating to the IH1 2014-3 securitization transaction. On June 9, 2017, we made a $100.0 million prepayment, reducing the outstanding principal balance to approximately $151.0 million.
Dividend Declarations
On May 31, 2017 we paid a
$0.06
dividend per share; and on August 3, 2017, we declared an
$0.08
dividend per share to stockholders of record on August 15, 2017, which is payable on August 31, 2017.
Proposed Merger
On August 9, 2017, we entered into a definitive agreement with Starwood Waypoint Homes (“SFR”) to form a combined company in a stock-for-stock merger of equals transaction. Under the terms of the agreement, each SFR share will be converted into 1.614 shares of our common stock based on a fixed exchange ratio. Upon the closing of the transaction, our stockholders will own approximately 59% of the combined company’s stock, while SFR’s stockholders will own approximately 41% of the combined company’s stock. The transaction is expected to close by year end and is subject to approval by SFR’s stockholders and other customary closing conditions.
Components of Revenues and Expenses
The following is a description of the components of our revenues and expenses:
Revenues
Rental Revenues
Rental revenues, net of any concessions and uncollectible amounts, consist of rents collected under lease agreements related to our single-family homes for lease. These include leases that we enter into directly with our residents, which typically have a term of one to two years.
Other Property Income
Other property income is comprised of: (i) resident reimbursements for utilities, HOA fines, and other charge-backs; (ii) rent and non-refundable deposits associated with pets; and (iii) various other fees including application and lease termination fees.
Expenses
Property Operating and Maintenance
Once a property is available for its initial lease, which we refer to as “rent-ready,” we incur ongoing property-related expenses, which consist primarily of property taxes, insurance, HOA fees (when applicable), market-level personnel expenses, utility expenses, repairs and maintenance, leasing costs and marketing. Prior to a property being “rent-ready,” certain of these expenses are capitalized as building and improvements. Once a property is “rent-ready,” expenditures for ordinary maintenance and repairs thereafter are expensed as incurred and we capitalize expenditures that improve or extend the life of a home.
Property Management Expense
Property management expense represents personnel and other costs associated with the oversight and management of our portfolio of homes. All of our homes are managed through our internal property manager.
General and Administrative
General and administrative expense represents personnel costs, professional fees, and other costs associated with our day to day activities. We have incurred additional legal, accounting and other expenses that we have not incurred as a private company, including costs associated with public company reporting requirements. As a result, general and administrative expense in the historical periods discussed in “—Results of Operations” may not be comparable to general and administrative expense in periods from and after the IPO.
Share-Based Compensation Expense
Certain current and former employees, as well as certain of our founders, were granted Class B incentive units in certain of the IH Holding Entities or their parent entities. In connection with the IPO, all of the Class B units were converted into shares of common stock, canceled, or converted into similar units of newly formed subsidiaries of the Pre-IPO Owners. We have recognized incentive compensation expense related to the value of those units in our results of operations. In connection with and subsequent to the IPO, we modified certain of our incentive awards and issued new awards in order to align our employees’ interests with those of our investors. All incentive unit and share-based compensation expense is recognized on our statements of operations as a component of general and administrative expense and property management expense.
Depreciation and Amortization
We recognize depreciation and amortization expense associated primarily with our homes and other capital expenditures over their expected useful lives.
Impairment and Other
Impairment and other represents provisions for impairment when the carrying amount of our single-family residential properties is not recoverable and casualty losses, net of any insurance recoveries.
Interest Expense
Interest expense includes interest expense as well as amortization of discounts and deferred financing costs from our financing arrangements, and unrealized gains (losses) on non-designated hedging instruments. Interest expense for periods prior to the IPO and our 2017 refinancing activity discussed in “—Recent Events” does not reflect the impact of the following: (i) certain financing transactions that we completed concurrently with the completion of the IPO; (ii) certain hedging instruments ; (iii) the FNMA Loan that was entered into on April 28, 2017 as defined in “—Liquidity and Capital Resources”; or (iv) the repayment of certain indebtedness with a portion of the net proceeds from the IPO, the New Credit Facility, and the FNMA Loan.
Other, net
Other, net includes interest income, other miscellaneous income and expenses, and acquisition costs (in periods prior to January 1, 2017).
Gain (Loss) on Sale of Property, net of tax
Gain (loss) on sale of property, net of tax consists of net gains and losses resulting from sales of our homes.
Results of Operations
Three Months Ended June 30, 2017
Compared to
Three Months Ended June 30, 2016
The following table sets forth a comparison of the results of operations for the
three months ended
June 30, 2017 and 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
|
($ in thousands)
|
|
2017
|
|
2016
|
|
$ Change
|
|
% Change
|
Revenues:
|
|
|
|
|
|
|
|
|
Rental revenues
|
|
$
|
228,504
|
|
|
$
|
219,354
|
|
|
$
|
9,150
|
|
|
4.2
|
%
|
Other property income
|
|
13,712
|
|
|
11,142
|
|
|
2,570
|
|
|
23.1
|
%
|
Total revenues
|
|
242,216
|
|
|
230,496
|
|
|
11,720
|
|
|
5.1
|
%
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Property operating and maintenance
|
|
92,840
|
|
|
91,281
|
|
|
1,559
|
|
|
1.7
|
%
|
Property management expense
|
|
9,135
|
|
|
7,530
|
|
|
1,605
|
|
|
21.3
|
%
|
General and administrative
|
|
18,426
|
|
|
15,408
|
|
|
3,018
|
|
|
19.6
|
%
|
Depreciation and amortization
|
|
67,515
|
|
|
66,079
|
|
|
1,436
|
|
|
2.2
|
%
|
Impairment and other
|
|
706
|
|
|
546
|
|
|
160
|
|
|
29.3
|
%
|
Total operating expenses
|
|
188,622
|
|
|
180,844
|
|
|
7,778
|
|
|
4.3
|
%
|
Operating income
|
|
53,594
|
|
|
49,652
|
|
|
3,942
|
|
|
7.9
|
%
|
|
|
|
|
|
|
|
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
Interest expense
|
|
(57,358
|
)
|
|
(70,523
|
)
|
|
(13,165
|
)
|
|
(18.7
|
)%
|
Other, net
|
|
(869
|
)
|
|
185
|
|
|
1,054
|
|
|
N/M
|
|
Total other income (expenses)
|
|
(58,227
|
)
|
|
(70,338
|
)
|
|
12,111
|
|
|
17.2
|
%
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(4,633
|
)
|
|
$
|
(20,686
|
)
|
|
$
|
16,053
|
|
|
77.6
|
%
|
Rental Revenues
As of
June 30, 2017 and 2016
, we owned
47,725
and
48,353
single-family homes for lease, respectively, generating rental revenue of
$228.5 million
and
$219.4 million
, respectively, for the three months then ended. Rental revenues
increased
4.2%
due to an increase in average monthly rent per occupied home, despite a decrease in number of homes owned and a decrease in occupancy. During the
three months ended
June 30, 2017 and 2016
, we acquired
229
and
413
homes, respectively, and sold
422
and
74
homes, respectively.
Average occupancy for the total portfolio was
95.0%
and
95.1%
for the
three months ended
June 30, 2017 and 2016
, respectively. Average rent per occupied home in actual dollars for the
three months ended
June 30, 2017
was
$1,683
, compared to
$1,603
for the
three months ended
June 30, 2016
, a
5.0%
increase.
For our Same Store portfolio, our average occupancy was
95.9%
and
96.4%
for the
three months ended
June 30, 2017 and 2016
, respectively, and our average rent per occupied home in actual dollars for the
three months ended
June 30, 2017
, was
$1,688
, compared to
$1,618
for the
three months ended
June 30, 2016
, a
4.3%
increase.
To monitor prospective changes in average rent per occupied home, we compare the monthly rent from an expiring lease to the monthly rent from the next lease for the same home, in each case, net of any amortized concessions. Leases are either renewal leases, where our current resident stays for a subsequent lease term, or a new lease, where our previous resident moves out and a new resident signs a lease to occupy the same home. The following information regarding our renewal leases and new leases is with respect to our total portfolio.
For the
three months ended
June 30, 2017 and 2016
, renewal lease net
effective rental rate growth for the total portfolio averaged
5.1%
and
5.5%
, respectively. For the
three months ended
June 30, 2017 and 2016
, new lease net effective rental rate growth for the total portfolio averaged
5.0%
and
7.3%
, respectively.
For the
three months ended
June 30, 2017 and 2016
, the turnover rate for our Same Store portfolio was
38.7%
and
38.8%
, respectively. For our total portfolio, an average home remained unoccupied for
41
and
35
days between residents for the
three months ended
June 30, 2017 and 2016
, respectively.
Other Property Income
For the
three months ended
June 30, 2017 and 2016
, other property income was
$13.7 million
and
$11.1 million
, respectively, a
23.1%
increase
. The primary drivers of the
increase
were pet rent and late fee income attributable to the implementation of our national lease for all leases written beginning in February 2016 and the automation and consistent application of these fees beginning in March 2017.
Operating Expenses
Operating expenses were
$188.6 million
and
$180.8 million
for the
three months ended
June 30, 2017 and 2016
, respectively, a
4.3%
increase
. Of the
$7.8 million
increase
in expenses,
$4.1 million
relates to share-based compensation expense as more fully described below. Set forth below is a discussion of changes in the individual components of operating expenses.
Property operating and maintenance expense
increased
to
$92.8 million
for the
three months ended
June 30, 2017
from
$91.3 million
for the
three months ended
June 30, 2016
primarily due to an increase in property taxes of $4.3 million which represents a 11.5% increase in those costs. The increase in these costs is largely attributable to supplemental California property taxes resulting from our IPO. These costs were partially offset by a $2.4 million decrease in personnel expenses.
Property management expense and general and administrative expense
increased
to
$27.6 million
for the
three months ended
June 30, 2017
from
$22.9 million
for the
three months ended
June 30, 2016
. An
increase
in share-based compensation expense of
$4.1 million
for the
three months ended
June 30, 2017
compared to
June 30, 2016
drove the majority of the variance.
Depreciation and amortization expense
increased
due to a higher average cost basis per home at
June 30, 2017
compared to
June 30, 2016
driven by improvements capitalized over the past 12 months.
Interest Expense
Interest expense was
$57.4 million
and
$70.5 million
for the
three months ended
June 30, 2017 and 2016
, respectively, an
18.7%
decrease
. The
decrease
in interest expense was due to a reduction in average debt balances outstanding. The
decrease
in interest expense was partially offset by an increase in our weighted average cost of debt by 87 bps for the
three months ended
June 30, 2017
compared to
2016
due to an increase in LIBOR, a fixed rate on our IH1 2017-1 mortgage loan which was at a higher rate than prior year variable rate debt, and the impact of interest rate swaps. As of
June 30, 2017
, we had
$5,645.2 million
of debt outstanding, net of deferred financing costs and discounts, compared to
$7,693.8 million
as of
June 30, 2016
, a
26.6%
decrease. The decrease in debt outstanding was attributable to the
$2,321.6 million
payoff of our credit facilities, as well as
$2,083.0 million
of prepayments on our mortgage loans from cash from IPO proceeds, operations, and proceeds from home sales, net of borrowings of
$1,500.0 million
from the Term Loan Facility and
$996.4 million
from the IH1 2017-1 mortgage loan.
Gain on Sale of Property, Net of Tax
Gain on sale of property, net of tax was
$10.2 million
and
$1.0 million
f
or the
three months ended
June 30, 2017 and 2016
, respectively
. Of the
422
homes sold during the
three months ended
June 30, 2017
, 219 were sold in one bulk transaction for a gain of $2.7 million. The additional 203 homes sold in the
three months ended
June 30, 2017
, sold for a net gain of $7.5 million, in comparison to the
74
homes sold during the
three months ended
June 30, 2016
for a net gain of
$1.0 million
. The primary driver for the difference in the gain on sale between periods was the volume and composition of homes sold during the respective periods.
Results of Operations
Six Months Ended June 30, 2017
Compared to
Six Months Ended June 30, 2016
The following table sets forth a comparison of the results of operations for the
six months ended
June 30, 2017 and 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
($ in thousands)
|
|
2017
|
|
2016
|
|
$ Change
|
|
% Change
|
Revenues:
|
|
|
|
|
|
|
|
|
Rental revenues
|
|
$
|
454,600
|
|
|
$
|
433,677
|
|
|
$
|
20,923
|
|
|
4.8
|
%
|
Other property income
|
|
26,366
|
|
|
21,321
|
|
|
5,045
|
|
|
23.7
|
%
|
Total revenues
|
|
480,966
|
|
|
454,998
|
|
|
25,968
|
|
|
5.7
|
%
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Property operating and maintenance
|
|
181,008
|
|
|
176,248
|
|
|
4,760
|
|
|
2.7
|
%
|
Property management expense
|
|
20,584
|
|
|
14,923
|
|
|
5,661
|
|
|
37.9
|
%
|
General and administrative
|
|
76,692
|
|
|
30,768
|
|
|
45,924
|
|
|
149.3
|
%
|
Depreciation and amortization
|
|
135,092
|
|
|
131,781
|
|
|
3,311
|
|
|
2.5
|
%
|
Impairment and other
|
|
1,910
|
|
|
363
|
|
|
1,547
|
|
|
426.2
|
%
|
Total operating expenses
|
|
415,286
|
|
|
354,083
|
|
|
61,203
|
|
|
17.3
|
%
|
Operating income
|
|
65,680
|
|
|
100,915
|
|
|
(35,235
|
)
|
|
(34.9
|
)%
|
|
|
|
|
|
|
|
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
Interest expense
|
|
(125,930
|
)
|
|
(140,800
|
)
|
|
(14,870
|
)
|
|
(10.6
|
)%
|
Other, net
|
|
(1,095
|
)
|
|
32
|
|
|
1,127
|
|
|
N/M
|
|
Total other income (expenses)
|
|
(127,025
|
)
|
|
(140,768
|
)
|
|
(13,743
|
)
|
|
(9.8
|
)%
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(61,345
|
)
|
|
$
|
(39,853
|
)
|
|
$
|
(21,492
|
)
|
|
(53.9
|
)%
|
Rental Revenues
As of
June 30, 2017 and 2016
, we owned
47,725
and
48,353
single-family homes for lease, respectively, generating rental revenue of
$454.6 million
and
$433.7 million
, respectively, for the
six
months then ended. Rental revenues
increased
4.8%
due to an increase in both average occupancy and average monthly rent per occupied home, despite a slight decrease in number of homes owned. During the
six months ended
June 30, 2017 and 2016
, we acquired
350
and
926
homes, respectively, and sold
923
and
711
homes, respectively.
Average occupancy for the total portfolio was
95.0%
and
94.8%
for the
six months ended
June 30, 2017 and 2016
, respectively. The increase in average occupancy correlates with the decrease in the number of homes acquired during
2017
compared to
2016
as newly acquired homes are unoccupied for a longer period of time during initial renovations than during a re-resident period. Average rent per occupied home in actual dollars for the
six months ended
June 30, 2017
was
$1,672
, compared to
$1,588
for the
six months ended
June 30, 2016
, a
5.3%
increase.
For our Same Store portfolio, our average occupancy was
95.8%
and
96.4%
for the
six months ended
June 30, 2017 and 2016
, respectively, and our average rent per occupied home in actual dollars for the
six months ended
June 30, 2017
, was
$1,678
, compared to
$1,607
for the
six months ended
June 30, 2016
, a
4.4%
increase.
To monitor prospective changes in average rent per occupied home, we compare the monthly rent from an expiring lease to the monthly rent from the next lease for the same home, in each case, net of any amortized concessions. Leases are either renewal leases, where our current resident stays for a subsequent lease term, or a new lease, where our previous resident moves out and a new resident signs a lease to occupy the same home. The following information regarding our renewal leases
and new leases is with respect to our total portfolio.
For the
six months ended
June 30, 2017 and 2016
, renewal lease net effective rental rate growth for the total portfolio averaged
5.2%
and
5.4%
, respectively. For the
six months ended
June 30, 2017 and 2016
, new lease net effective rental rate growth for the total portfolio averaged
4.3%
and
6.1%
, respectively.
For the
six months ended
June 30, 2017 and 2016
, the turnover rate for our Same Store portfolio was
35.2%
and
34.9%
, respectively. For our total portfolio, an average home remained unoccupied for
47
and
40
days between residents for the
six months ended
June 30, 2017 and 2016
, respectively.
Other Property Income
For the
six months ended
June 30, 2017 and 2016
, other property income was
$26.4 million
and
$21.3 million
, respectively, a
23.7%
increase
. The primary drivers of the
increase
were pet rent and late fee income attributable to the implementation of our national lease for all leases written beginning in February 2016 and the automation and consistent application of these fees beginning in March 2017.
Operating Expenses
Operating expenses were
$415.3 million
and
$354.1 million
for the
six months ended
June 30, 2017 and 2016
, respectively, a
17.3%
increase
. Of the
$61.2 million
increase
in expenses,
$44.1 million
relates to share-based compensation expense and
$8.3 million
relates to offering related costs as more fully described below. Set forth below is a discussion of changes in the individual components of operating expenses.
Property operating and maintenance expense
increased
to
$181.0 million
for the
six months ended
June 30, 2017
from
$176.2 million
for the
six months ended
June 30, 2016
primarily due to an increase in property taxes of $7.3 million which represents a 9.7% increase in those costs. More than half of the increase in these costs is attributable to supplemental California property taxes resulting from our IPO. This increase was partially offset by a $4.4 million decrease in personnel expenses.
Property management expense and general and administrative expense
increased
to
$97.3 million
for the
six months ended
June 30, 2017
from
$45.7 million
for the
six months ended
June 30, 2016
. An
increase
in share-based compensation expense of
$44.1 million
for the
six months ended
June 30, 2017
, was driven by
$12.0 million
of vesting of Class B Units and
$39.4 million
of awards issued in connection with the IPO. Additionally,
$8.3 million
of IPO readiness costs and other offering costs were incurred during the
six months ended
June 30, 2017
.
Depreciation and amortization expense
increased
due to a higher average cost basis per home at
June 30, 2017
compared to
June 30, 2016
driven by improvements capitalized over the past 12 months.
Interest Expense
Interest expense was
$125.9 million
and
$140.8 million
for the
six months ended
June 30, 2017 and 2016
, respectively, a
10.6%
decrease
. The
decrease
in interest expense was due to a reduction in average debt balances outstanding, which was offset by an increase in our weighted average cost of debt by 75 bps due to an increase in LIBOR for the
six months ended
June 30, 2017
compared to
2016
due to an increase in LIBOR, a fixed rate on our IH1 2017-1 mortgage loan which was at a higher rate than prior year variable rate debt, and the impact of interest rate swaps. Additionally, there was an increase in the fair value mark to market adjustment of
$3.8 million
related to the interest rate swaps during 2017. As of
June 30, 2017
, we had
$5,645.2 million
of debt outstanding, net of deferred financing costs and discounts, compared to
$7,693.8 million
as of
June 30, 2016
, a
26.6%
decrease. The decrease in debt outstanding was attributable to the
$2,321.6 million
payoff of our credit facilities, as well as
$2,083.0 million
of prepayments on our mortgage loans from cash from IPO proceeds, operations, and proceeds from home sales, net of borrowings of
$1,500.0 million
from the Term Loan Facility and
$996.4 million
from the IH1 2017-1 mortgage loan.
Gain on Sale of Property, Net of Tax
Gain on sale of property, net of tax was
$24.5 million
and
$10.2 million
f
or the
six months ended
June 30, 2017 and 2016
, respectively
. Of the
923
homes sold during the
six months ended
June 30, 2017
, 454 were sold in two bulk transaction for a gain of $9.5 million. The additional 469 homes sold in the
six months ended
June 30, 2017
, sold for a net gain of
$15.0 million. Of the
711
homes sold during the
six months ended
June 30, 2016
, 590 homes were sold in one bulk sale transaction for a gain of $9.4 million. The additional 121 homes sold in the
six months ended
June 30, 2016
sold at a net gain of $1.0 million. The primary driver for the difference in the gain on sale between periods was the composition of homes sold during the respective periods.
Liquidity and Capital Resources
Our liquidity and capital resources as of
June 30, 2017
and
December 31, 2016
included unrestricted cash and cash equivalents of
$158.9 million
and
$198.1 million
, respectively, a
19.8%
decrease
due primarily to repayments of certain of our indebtedness which is discussed in further detail in “—Cash Flows.” As of
June 30, 2017
and through the date of this filing, the total balance of our $1,000.0 million Revolving Facility is available for any liquidity requirements.
Liquidity is a measure of our ability to meet potential cash requirements, maintain our assets, fund our operations, make distributions and dividend payments to our equity investors 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 near-term liquidity requirements consist primarily of: (i) renovating newly-acquired homes; (ii) funding HOA fees (as applicable), real estate taxes, insurance premiums and the ongoing maintenance for our homes; (iii) interest expense; and (iv) payment of dividends to our equity investors. Our long-term liquidity requirements consist primarily of funds necessary to pay for the acquisition of and non-recurring capital expenditures for our homes and principal payments on our indebtedness.
We will seek to satisfy our long-term liquidity needs through cash provided by operations, long-term secured and unsecured borrowings, the issuance of debt and equity securities, and property dispositions. We have financed our operations and acquisitions to date through cash provided by operations, capital contributions from the Pre-IPO Owners, and financing arrangements. We believe our rental income net of operating expenses will generally provide cash flow sufficient to fund our operations and distributions and dividend payments on a near-term basis. Our real estate assets are illiquid in nature. A timely liquidation of assets may 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, such as the Revolving Facility.
As a REIT, INVH is required to distribute to its shareholders at least 90% of its taxable income, excluding net capital gain, on an annual basis. Therefore, as a general matter, it is unlikely that we will be able to retain substantial cash balances that could be used to meet our liquidity needs from our annual taxable income. Instead, we will need to meet these needs from external sources of capital and amounts, if any, by which our cash flow generated from operations exceeds taxable income.
We have historically utilized credit facilities, mortgage loans and warehouse loans from our Sponsor to fund acquisitions and renovation improvements. As of
June 30, 2017
, we have repaid all outstanding borrowings under the credit facilities, the IH1 2013-1 mortgage loan, the IH1 2014-1 mortgage loan, and the warehouse loans. As further described and defined below, we entered into a New Credit Facility on February 6, 2017 which includes a $1,000.0 million revolving line of credit component that is currently undrawn and a fully drawn $1,500.0 million term loan component. On April 28, 2017, we entered into a $1,000.0 million FNMA Loan (as defined in “—Securitization Transactions”) and used net proceeds to repay all obligations outstanding under the existing IH1 2014-1 mortgage loan and to make voluntary prepayments totaling
$510.0 million
on the IH1 2014-3 mortgage loan.
Mortgage Loans
As of
June 30, 2017
, we have completed
eight
securitization transactions (the “Securitizations” or the “mortgage loans”) collateralized by homes owned by the respective Invitation Homes Borrower Entities. The proceeds from the mortgage loans were used to fund (i) partial repayments of the then-outstanding IH1 and IH2 credit facilities and other securitizations, (ii) initial deposits in the reserve accounts, (iii) closing costs in connection with the mortgage loans, (iv) general costs associated with our operations, and (v) distributions and dividends to the Pre-IPO Owners.
The following table sets forth a summary of the mortgage loan indebtedness as of
June 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Principal Balance
(4)
|
($ in thousands)
|
|
Maturity Date
|
|
Maturity Date if Fully Extended
(2)
|
|
Rate
(3)
|
|
Range of Spreads
|
|
June 30,
2017
(5)
|
|
December 31,
2016
|
IH1 2013-1
|
|
N/A
|
|
N/A
|
|
N/A
|
|
115-365 bps
|
|
$
|
—
|
|
|
$
|
462,431
|
|
IH1 2014-1
|
|
N/A
|
|
N/A
|
|
N/A
|
|
100-375 bps
|
|
—
|
|
|
978,231
|
|
IH1 2014-2
(1)(6)
|
|
September 9, 2018
|
|
September 9, 2019
|
|
3.13%
|
|
110-400 bps
|
|
704,523
|
|
|
710,664
|
|
IH1 2014-3
(1)
|
|
December 9, 2017
|
|
December 9, 2019
|
|
3.56%
|
|
120-500 bps
|
|
147,634
|
|
|
766,753
|
|
IH2 2015-1, net
(1)(7)
|
|
March 9, 2018
|
|
March 9, 2020
|
|
3.60%
|
|
145-430 bps
|
|
529,497
|
|
|
531,318
|
|
IH2 2015-2
(1)
|
|
June 9, 2018
|
|
June 9, 2020
|
|
3.18%
|
|
135-370 bps
|
|
628,988
|
|
|
630,283
|
|
IH2 2015-3
(1)(8)
|
|
August 9, 2018
|
|
August 7, 2020
|
|
3.41%
|
|
130-475 bps
|
|
1,170,395
|
|
|
1,184,314
|
|
IH1 2017-1, net
(9)
|
|
June 9, 2027
|
|
N/A
|
|
4.17%
|
|
N/A
|
|
996,479
|
|
|
—
|
|
Total Securitizations
|
|
4,177,516
|
|
|
5,263,994
|
|
Less deferred financing costs, net
|
|
(18,850
|
)
|
|
(9,256
|
)
|
Total
|
|
$
|
4,158,666
|
|
|
$
|
5,254,738
|
|
|
|
(1)
|
The initial maturity term of each of these mortgage loans is
two
years, individually subject to
three
,
one
-
year extension options at the borrower’s discretion (provided that there is no continuing event of default under the loan agreement and the borrower obtains a replacement interest rate cap agreement in a form reasonably acceptable to the lender).
Our
IH1 2014-3, IH2 2015-1, IH2 2015-2, and IH2 2015-3 mortgage loans
have exercised the first extension options, and IH1 2014-2 has exercised the second option.
The maturity dates above are reflective of all extensions that have been exercised.
|
|
|
(2)
|
Represents the maturity date if we exercise each of the remaining one-year extension options available, which are subject to certain conditions being met.
|
|
|
(3)
|
For each of our first seven mortgage loans, interest rates are based on a weighted average spread to LIBOR; as of
June 30, 2017
LIBOR was
1.23%
. Our IH1 2017-1 mortgage loan
bears interest at a fixed rate of
4.17%
per annum equal to the market determined pass-through rate payable on the certificates, plus applicable servicing fees.
|
|
|
(4)
|
Outstanding Principal Balance is net of discounts and does not include capitalized deferred financing costs, net.
|
|
|
(5)
|
From July 1, 2017 to
August 7, 2017
, we made prepayments of
$0.8 million
on our mortgage loans related to the disposition of properties.
|
|
|
(6)
|
On August 3, 2017, we exercised our second
one
-year extension option on IH1 2014-2, extending the maturity from September 9, 2017 to September 9, 2018
.
|
|
|
(7)
|
Net of unamortized discount of
$0.0 million
and
$0.1 million
as of
June 30, 2017
and
December 31, 2016
, respectively.
|
|
|
(8)
|
On July 12, 2017, we exercised our first
one
-year extension option on IH2 2015-3, extending the maturity from August 9, 2017 to August 9, 2018
.
|
|
|
(9)
|
Net of unamortized discount of
$3.5 million
as of
June 30, 2017
.
|
Securitization Transactions
IH1 2013-1: In November 2013, we completed our first securitization transaction (“IH1 2013-1”), in which 2013-1 IH Borrower L.P. (“S1 Borrower”), a newly-formed special purpose entity and wholly owned subsidiary of IH1, executed a loan agreement with a third-party lender. The third-party lender made a
six
component term loan to S1 Borrower in the amount of
$479.1 million
. All
six
components of the loan were sold at par. On February 6, 2017, the outstanding balance of IH1 2013-1 was repaid in full.
IH1 2014-1: In May 2014, we completed our second securitization transaction (“IH1 2014-1”), in which 2014-1 IH Borrower L.P. (“S2 Borrower”), a newly-formed special purpose entity and wholly owned subsidiary of IH1, executed a loan agreement with a third-party lender. The third party lender made a
six
component term loan to S2 Borrower in the amount of
$993.7 million
. All
six
components of the loan were sold at par. On February 6, 2017 and March 9, 2017, we made voluntary prepayments of
$291.5 million
and
$260.0 million
,
respectively.
On April 28, 2017, the outstanding balance of IH1 2014-1 was repaid in full
.
IH1 2014-2: In August 2014, we completed our third securitization transaction (“IH1 2014-2”), in which 2014-2 IH Borrower L.P. (“S3 Borrower”), a newly-formed special purpose entity and wholly owned subsidiary of IH1, executed a loan agreement with a third-party lender. The third-party lender made a term loan comprised of (1)
six
floating rate components and (2)
one
fixed rate component to S3 Borrower in the amount of
$719.9 million
. Of the
seven
loan components, the Class A, B, C, D and G certificates were sold at par; however, the Class E and F certificates were sold at a total discount of
$4.0 million
.
We are obligated to make monthly payments of interest with the first payment being due upon the closing of the loan, and subsequent payments beginning October 9, 2014 and continuing monthly thereafter.
IH1 2014-3: In November 2014, we completed our fourth securitization transaction (“IH1 2014-3”), in which 2014-3 IH Borrower L.P. (“S4 Borrower”), a newly-formed special purpose entity and wholly owned subsidiary of IH1, executed a loan agreement with a third-party lender. The third-party lender issued a term loan comprised of (1
)
six
f
loating rate components and (2)
one
fixed rate component to S4 Borrower in the amount of
$769.3 million
. Of the
seven
components, the Class B and G certificates were sold at par; however, the Class A, C, D, E and F certificates were sold at a total discount of
$7.2 million
.
We are obligated to make monthly payments of interest with the first payment being due upon the closing of the loan, and subsequent payments beginning December 9, 2014 and continuing monthly thereafter.
On May 9, 2017 and June 9, 2017, we made voluntary prepayments of
$510.0 million
and
$100.0 million
, respectively, from the proceeds of IH1 2017-1 securitization transaction and cash flows from operations.
IH2 2015-1: In January 2015, we completed our fifth securitization transaction (“IH2 2015-1”), in which 2015-1 IH2 Borrower L.P. (“S5 Borrower”), a newly-formed special purpose entity and wholly owned subsidiary of IH2, executed a loan agreement with a third-party lender. The third-party lender made a
seven
component term loan to S5 Borrower in the amount of
$540.9 million
.
Six
of the
seven
components, the Class A, B, C, D, E, and G certificates were sold at par; however, the Class F certificates were sold at a total discount of
$0.6 million
.
The unamortized balance of this discount is included in mortgage loans, net on our condensed consolidated balance sheets as of
June 30, 2017
and
December 31, 2016
. We are obligated to make monthly payments of interest with the first payment being due upon the closing of the loan, and subsequent payments beginning March 9, 2015 and continuing monthly thereafter.
IH2 2015-2: In April 2015, we completed our sixth securitization transaction (“IH2 2015-2”), in which 2015-2 IH2 Borrower L.P. (“S6 Borrower”), a newly-formed special purpose entity and wholly owned subsidiary of IH2, executed a loan agreement with a third-party lender. The third-party lender made a
seven
component term loan to S6 Borrower in the amount of
$636.7 million
. All of the components of the loan were sold at par. We are obligated to make monthly payments of interest with the first payment being due upon the closing of the loan, and subsequent payments beginning June 9, 2015 and continuing monthly thereafter.
IH2 2015-3: In June 2015, we completed our seventh securitization transaction (“IH2 2015-3”), in which 2015-3 IH2 Borrower L.P. (“S7 Borrower”), a newly-formed special purpose entity and wholly owned subsidiary of IH2, executed a loan agreement with a third-party lender. The third-party lender made a
seven
component term loan to S7 Borrower in the amount of
$1,194.0 million
. All of the components of the loan were sold at par. We are obligated to make monthly payments of interest with the first payment being due upon the closing of the loan, and subsequent payments beginning August 7, 2015 and continuing monthly thereafter.
IH1 2017-1: In April 2017, we completed our eighth securitization transaction (“IH1 2017-1”), in which 2017-1 IH Borrower L.P. (“S9 Borrower”), a special purpose entity previously formed in connection with IH1 2014-1 and wholly owned subsidiary of IH1, entered into a loan agreement with Wells Fargo Bank, National Association (the “FNMA Loan”), providing for a
ten
-year, fixed rate mortgage loan comprised of
two
components with a total principal amount of
$1,000.0 million
, secured by first priority mortgages on a portfolio of
7,204
of our homes. The Class A certificates, which benefit from Fannie Mae’s guaranty of timely payment of principal and interest, were sold at par. The Class B certificates represent a beneficial interest in the most subordinate component of the FNMA Loan and were sold at a total discount of
$3.6 million
. The unamortized balance of this discount is included in mortgage loans, net on our condensed consolidated balance sheets as of
June 30, 2017
. We are obligated to make monthly payments of interest with the first payment being due upon the closing of the loan, and subsequent payments beginning June 9, 2017 and continuing monthly thereafter.
Concurrent with the execution of each loan agreement, the respective third-party lender sold each loan it originated with us to individual depositor entities (the “Depositor Entities”) who subsequently transferred each loan to Securitization-specific trust entities (the “Trusts”). The Depositor Entities associated with the IH1 2014-2, IH1 2014-3 and IH1 2017-1 securitizations are wholly owned subsidiaries of IH1, the Depositor Entities associated with the IH2 2015-1, IH2 2015-2, and
IH2 2015-3 securitizations are wholly owned subsidiaries of IH2, and the Depositor Entities associated with the IH1 2013-1 and IH1 2014-1 securitizations were wholly owned by unaffiliated third parties.
As consideration for the transfer of each loan to the Trusts, the Trusts issued certificate classes which mirror the components of the individual loan agreements (collectively, the “Certificates”) to the Depositor Entities, except that Class R certificates do not have related loan components as they represent residual interests in the Trusts. The Certificates represent the entire beneficial interest in the Trusts. Following receipt of the Certificates, the Depositor Entities sold the Certificates to investors using the proceeds as consideration for the loans sold to the Depositor Entities by the lenders. These transactions had
no
effect on our condensed consolidated financial statements other than with respect to the Class B certificates purchased by the Operating Partnership, and the Class G certificates purchased by IH1 and IH2.
For IH1 2014-2, IH1 2014-3, IH2 2015-1, IH2 2015-2, and IH2 2015-3, the Trusts made the Class A through Class F certificates available for sale to both domestic and foreign investors. With the introduction of foreign investment, IH1 and IH2, as sponsors of the respective loans, are required to retain a portion of the risk that represents a material net economic interest in each loan. The Class G certificates for IH1 2014-2, IH1 2014-3, IH2 2015-1, IH2 2015-2, and IH2 2015-3 are equal to
5%
of the original principal amount of the loans in accordance with the agreements. Per the terms of the Securitization agreements, the Class G certificates are restricted certificates and were made available exclusively to IH1 and IH2, as applicable. The Class G certificates are principal only and bear a stated annual interest rate of
0.0005%
.
The Class G certificates are classified as held to maturity investments and are recorded in other assets, net on the condensed consolidated balance sheets
.
For IH1 2017-1, the Trust made the Class A certificates available for sale to both domestic and foreign investors. In accordance with risk retention requirements of Regulation RR (the “Risk Retention Rules”) under the Exchange Act, the Operating Partnership, as the loan sponsor, is required to retain a portion of the credit risk that represents not less than
5%
of the aggregate fair value of the loan as of the closing date. Per the terms of the agreement, the Class B certificates are restricted certificates that were made available exclusively to the Operating Partnership. The Class B certificates pay interest and bear a stated annual interest rate of
4.17%
plus applicable servicing fees. The Class B certificates are classified as held to maturity investments and are recorded in other assets, net on the condensed consolidated balance sheets
.
General Terms
The general terms that apply to all of the mortgage loans require us to maintain compliance with certain affirmative and negative covenants. Affirmative covenants with which we must comply include our, and certain of our affiliates’, compliance with (i) licensing, permitting and legal requirements specified in the loan agreement, (ii) organizational requirements of the jurisdictions in which we, and certain of our affiliates, are organized, (iii) federal and state tax laws, and (iv) books and records requirements specified in the respective loan agreements. Negative covenants with which we must comply include our, and certain of our affiliates’, compliance with limitations surrounding (i) the amount of our indebtedness and the nature of our investments, (ii) the execution of transactions with affiliates, (iii) the Manager, and (iv) the nature of our business activities. At
June 30, 2017
,
and through the date our financial statements were issued, we believe we were in compliance with all affirmative and negative covenants.
Prepayments
For the mortgage loans, prepayments of amounts owed are generally not permitted by us under the terms of the respective loan agreements unless such prepayments are made pursuant to the voluntary election and mandatory provisions specified in such agreements. The specified mandatory provisions become effective to the extent that a property becomes characterized as a disqualified property, a property is sold, and/or upon the occurrence of a condemnation or casualty event associated with a property. To the extent either a voluntary election is made, or a mandatory prepayment condition exists, in addition to paying all interest and principal, we must also pay certain breakage costs as determined by the loan servicer and a spread maintenance premium if prepayment occurs before the month following the one year anniversary of the closing dates of each of the mortgage loans except for IH1 2017-1. For IH1 2017-1, prepayments on or before December 2026 will require a yield maintenance premium. For the
six months ended
June 30, 2017
and
2016
, voluntary and mandatory prepayments totaling
$2,083.0 million
and
$30.7 million
, respectively, were made under the terms of the loan agreements.
New Credit Facility
On February 6, 2017, we entered into a loan agreement with a syndicate of banks, financial institutions and institutional lenders for a new credit facility (the “New Credit Facility”). The New Credit Facility provides
$2,500.0 million
of borrowing capacity and consists of a
$1,000.0 million
revolving facility (the “Revolving Facility”), which will mature
on February 6, 2021, with a
one
-year extension option, and
$1,500.0 million
term loan facility (the “Term Loan Facility”), which will mature
on February 6, 2022. The Revolving Facility also includes borrowing capacity available for letters of credit and for short-term borrowings referred to as swing line borrowings, in each case subject to certain sublimits. The New Credit Facility provides us with the option to enter into additional incremental credit facilities (including an uncommitted incremental facility that provides us with the option to increase the size of the Revolving Facility and/or the Term Loan Facility by an aggregate amount of up to
$1,500.0 million
),
subject to certain limitations. Proceeds from the Term Loan Facility were used to repay existing indebtedness and for general corporate purposes.
The following table sets forth a summary of the new credit facility indebtedness as of
June 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Principle Balance
|
($ in thousands)
|
|
Origination Date
|
|
Maturity Date
|
|
Interest Rate
(1)
|
|
June 30,
2017
|
Term loan facility
|
|
February 6, 2017
|
|
February 6, 2022
|
|
3.03%
|
|
$
|
1,500,000
|
|
Revolving facility
|
|
February 6, 2017
|
|
February 6, 2021
|
|
N/A
|
|
—
|
|
Total
|
|
1,500,000
|
|
Less deferred financing costs, net
|
|
(13,471
|
)
|
Total
|
|
$
|
1,486,529
|
|
|
|
(1)
|
Interest rate for the Term Loan Facility is based on LIBOR plus an applicable margin of
1.80%
; as of
June 30, 2017
, LIBOR was
1.23%
.
|
Interest Rate and Fees
Borrowings under the New Credit Facility bear interest, at our option, at a rate equal to a margin over either (a) a LIBOR rate determined by reference to the Bloomberg LIBOR rate (or comparable or successor rate) for the interest period relevant to such borrowing or (b) a base rate determined by reference to the highest of (1) the administrative agent’s prime lending rate, (2) the federal funds effective rate plus
0.50%
,
and (3) the LIBOR rate that would be payable on such day for a LIBOR rate loan with a one-month interest period plus
1.00%
.
The margin is based on a total leverage based grid. The margin for the Revolving Facility ranges from
0.75%
to
1.30%
, in the case of base rate loans, and
1.75%
to
2.30%
,
in the case of LIBOR rate loans. The margin for the Term Loan Facility ranges from
0.70%
to
1.30%
, in the case of base rate loans, and
1.70%
to
2.30%
,
in the case of LIBOR rate loans. In addition, the New Credit Facility provides that, upon receiving an investment grade rating on its non-credit enhanced, senior unsecured long term debt of BBB- or better from Standard & Poor’s Rating Services, a division of The McGraw-Hill Companies, Inc., or Baa3 or better from Moody’s Investors Service, Inc. (an “Investment Grade Rating Event”), we may elect to convert to a credit rating based pricing grid.
In addition to paying interest on outstanding principal under the New Credit Facility, we are required to pay a facility fee to the lenders under the Revolving Facility in respect of the unused commitments thereunder. The facility fee rate is based on the daily unused amount of the Revolving Facility and is either
0.350%
or
0.200%
per annum based on the unused facility amount. Upon converting to a credit rating pricing based grid, the unused facility fee will no longer apply; and we will be required to pay a facility fee ranging from
0.125%
to
0.300%
.
We are also required to pay customary letter of credit fees.
Prepayments and Amortization
No
prepayment or amortization is required under the New Credit Facility. We are permitted to voluntarily repay amounts outstanding under the Term Loan Facility at any time without premium or penalty, subject to certain minimum amounts and
the payment of customary “breakage” costs with respect to LIBOR loans. Once repaid,
no
further borrowings will be permitted under the Term Loan Facility.
General Terms
The New Credit Facility contains certain customary affirmative and negative covenants and events of default. Such covenants will, among other things, restrict, subject to certain exceptions, our ability and that of the Subsidiary Guarantors (as defined below) and their respective subsidiaries to (i) engage in certain mergers, consolidations or liquidations, (ii) sell, lease or transfer all or substantially all of their respective assets, (iii) engage in certain transactions with affiliates, (iv) make changes to the our fiscal year, (v) make changes in the nature of our business and our subsidiaries and (vi) incur additional indebtedness that is secured on a pari passu basis with the New Credit Facility.
The New Credit Facility also requires us, on a consolidated basis with our subsidiaries, to maintain a (i) maximum total leverage ratio, (ii) maximum secured leverage ratio, (iii) maximum unencumbered leverage ratio, (iv) minimum fixed charge coverage ratio, (v) minimum unencumbered fixed charge coverage ratio and (vi) minimum tangible net worth. If an event of default occurs, the lenders under the New Credit Facility are entitled to take various actions, including the acceleration of amounts due under the New Credit Facility and all actions permitted to be taken by a secured creditor. At
June 30, 2017
,
and through the date our financial statements were issued, we believe we were in compliance with all affirmative and negative covenants.
Guarantees and Security
The obligations under the New Credit Facility are guaranteed on a joint and several basis by each of our direct and indirect domestic wholly owned subsidiaries that own, directly or indirectly, unencumbered assets (the “Subsidiary Guarantors”), subject to certain exceptions. The guarantee provided by any Subsidiary Guarantor will be automatically released upon the occurrence of certain events, including if it no longer has a direct or indirect interest in an unencumbered asset or as a result of certain non-recourse refinancing transactions pursuant to which such Subsidiary Guarantor becomes contractually prohibited from providing its guaranty of the New Credit Facility. In addition, INVH may be required to provide a guarantee of the New Credit Facility under certain circumstances, including if INVH does not maintain its qualification as a REIT.
The New Credit Facility is collateralized by first priority or equivalent security interests in all the capital stock of, or other equity interests in any Subsidiary Guarantor, held by us and each of the Subsidiary Guarantors. The security interests granted under the New Credit Facility will be automatically released upon the occurrence of certain events, including upon an Investment Grade Rating Event or if the total net leverage ratio is less than or equal to
8.00
:
1.00
for
four
consecutive fiscal quarters.
Credit Facilities
All of the then-existing credit facilities were paid in full on February 6, 2017 in connection with the closing of our IPO. The following table sets forth a summary of the outstanding principal amounts of these credit facilities as of
June 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Principal Balance
(1)
|
($ in thousands)
|
|
Origination
Date
|
|
Range of Spreads
|
|
June 30,
2017
|
|
December 31,
2016
|
IH1 2015
|
|
April 3, 2015
|
|
325 bps
|
|
$
|
—
|
|
|
$
|
85,492
|
|
IH2 2015
|
|
September 29, 2015
|
|
275 bps
|
|
—
|
|
|
43,859
|
|
IH3 2013
|
|
December 19, 2013
|
|
300-425 bps
|
|
—
|
|
|
932,583
|
|
IH4 2014
|
|
May 5, 2014
|
|
300-425 bps
|
|
—
|
|
|
529,866
|
|
IH5 2014
|
|
December 5, 2014
|
|
275-400 bps
|
|
—
|
|
|
564,348
|
|
IH6 2016
|
|
April 13, 2016
|
|
250-375 bps
|
|
—
|
|
|
165,437
|
|
Total
|
|
—
|
|
|
2,321,585
|
|
Less deferred financing costs, net
|
|
—
|
|
|
(6,044
|
)
|
Total
|
|
$
|
—
|
|
|
$
|
2,315,541
|
|
|
|
(1)
|
Outstanding Principal Balance does not include capitalized deferred financing costs, net.
|
Certain Hedging Arrangements
Designated Hedges
We have entered into various interest rate swap agreements, as outlined in the table below. Each of these swaps were accounted for as non-designated hedges until January 31, 2017, when the criteria for hedge accounting were met as a result of the Pre-IPO Transactions described in “—Overview”. At that time, we designated these swaps for hedge accounting purposes; and the effective portion thereof is recorded in other comprehensive income subsequent to that date.
The table below summarizes our interest rate swap instruments as of
June 30, 2017
($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agreement Date
|
|
Forward
Effective Date
|
|
Maturity Date
|
|
Strike Rate
|
|
Index
|
|
Notional Amount
|
December 21, 2016
|
|
February 28, 2017
|
|
January 31, 2022
|
|
1.97%
|
|
One-month LIBOR
|
|
$
|
750,000
|
|
December 21, 2016
|
|
February 28, 2017
|
|
January 31, 2022
|
|
1.97%
|
|
One-month LIBOR
|
|
750,000
|
|
January 12, 2017
|
|
February 28, 2017
|
|
August 7, 2020
|
|
1.59%
|
|
One-month LIBOR
|
|
1,100,000
|
|
January 13, 2017
|
|
February 28, 2017
|
|
June 9, 2020
|
|
1.63%
|
|
One-month LIBOR
|
|
595,000
|
|
January 20, 2017
|
|
February 28, 2017
|
|
March 9, 2020
|
|
1.60%
|
|
One-month LIBOR
|
|
325,000
|
|
The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income on the condensed consolidated balance sheets and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the
six months ended
June 30, 2017
, such derivatives were used to hedge the variable cash flows associated with existing variable-rate interest payments. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. Changes in fair value related to the ineffective portion of our Designated Hedges resulted in an unrealized gain of
less than
$0.1 million
for the
six months ended
June 30, 2017
, which is included in interest expense in our condensed consolidated statements of operations.
Non-Designated Hedges
Concurrent with entering into certain of the mortgage loan agreements, we entered into and maintain interest rate cap agreements with terms and notional amounts equivalent to the terms and amounts of the loans made by the third-party lenders and strike prices ranging from approximately
2.52%
to
3.09%
(collectively, the “Strike Prices”). To the extent that the maturity date of one or more of the loans is extended through an exercise of one or more of the extension options, replacement or extension interest rate cap agreements must be executed with terms similar to those associated with the initial interest rate cap agreements and strike prices equal to the greater of the Strike Prices and the interest rate at which the debt service coverage ratio (as defined) is not less than
1.2
to
1.0
. The interest rate cap agreements, including all of our rights to payments owed by the counterparty and all other rights, have been pledged as additional collateral for the loans.
Purchase of Outstanding Debt Securities or Loans
As market conditions warrant, we and our equity investors, including our Sponsor, its affiliates, and members of our management, may from time to time seek to purchase our outstanding debt, including borrowings under our credit facilities and mortgage loans or debt securities that we may issue in the future, in privately negotiated or open market transactions, by tender offer or otherwise. Subject to any applicable limitations contained in the agreements governing our indebtedness, any purchases made by us may be funded by the use of cash on our balance sheet or the incurrence of new secured or unsecured debt, including borrowings under our credit facilities and mortgage loans. The amounts involved in any such purchase transactions, individually or in the aggregate, may be material. Any such purchases may be with respect to a substantial amount of a particular class or series of debt, with the attendant reduction in the trading liquidity of such class or series. In addition, any such purchases made at prices below the “adjusted issue price” (as defined for U.S. federal income tax purposes) may result in taxable cancelation of indebtedness income to us, which amounts may be material, and in related adverse tax consequences to us.
Cash Flows
Six Months Ended
June 30, 2017
Compared to
Six Months Ended
June 30, 2016
The following table summarizes our cash flows for the
six months ended
June 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
($ in thousands)
|
2017
|
|
2016
|
|
$ Change
|
|
% Change
|
Net cash provided by operating activities
|
$
|
167,226
|
|
|
$
|
156,125
|
|
|
$
|
11,101
|
|
|
7.1
|
%
|
Net cash provided by (used in) investing activities
|
74,499
|
|
|
(206,449
|
)
|
|
280,948
|
|
|
136.1
|
%
|
Net cash (used in) provided by financing activities
|
(280,910
|
)
|
|
75,060
|
|
|
(355,970
|
)
|
|
N/M
|
|
Change in cash and cash equivalents
|
$
|
(39,185
|
)
|
|
$
|
24,736
|
|
|
$
|
(63,921
|
)
|
|
(258.4
|
)%
|
Operating Activities
Net cash provided by operating activities
was
$167.2 million
and
$156.1 million
for the
six months ended
June 30, 2017
and
2016
, respectively, an
increase
of
7.1%
. The
increase
was primarily driven by an increase in net operating income from
$278.8 million
for the
six months ended
June 30, 2016
to
$300.0 million
for the
six months ended
June 30, 2017
due to revenue growth higher than operating expense growth. Our net loss increased from
$(29.6) million
for the
six months ended
June 30, 2016
to
$(36.9) million
for the
six months ended
June 30, 2017
, which was offset by a
$44.1 million
increase
in share-based compensation expense. Our cash flows provided by operating activities depend on numerous factors, including the occupancy level of our homes, the rental rates achieved on our leases, the collection of rent from our residents, and the amount of our operating and other expenses.
Investing Activities
Net cash provided by (used in) investing activities
primarily consists of the acquisition costs of homes, capital improvements, changes in restricted cash, and proceeds from property sales. Net cash provided by (used in) investing
activities was
$74.5 million
and
$(206.4) million
for the
six months ended
June 30, 2017
and
2016
, respectively, leading to an
increase
in cash provided by investing activities of
$280.9 million
between the periods. The
increase
was partially due to the release of restricted cash in connection with the repayment of our credit facilities and the IH1 2013-1 and IH1 2014-1 mortgage loans during
six months ended
June 30, 2017
resulting in an increase of
$98.8 million
. Additionally, there was a decrease in the number homes acquired, from
926
homes during the
six months ended
June 30, 2016
to
350
homes during the
six months ended
June 30, 2017
, which resulted in
$142.9 million
less in acquisition, renovation and capital expenditure spend. The increase in number of homes sold during
2017
of
923
compared to
711
homes during the
six months ended
June 30, 2016
resulted in an increase in the amount of proceeds from sale of residential properties of
$45.3 million
.
Financing Activities
Net cash (used in) provided by financing activities
was
$(280.9) million
and
$75.1 million
for the
six months ended
June 30, 2017
and
2016
, respectively, or a decrease of
$356.0 million
. For the
six months ended
June 30, 2017
we received
$1,692.1 million
in proceeds, net of underwriting discounts, from our IPO, while during the
six months ended
June 30, 2016
equity investors contributed
$138.0 million
of capital. Proceeds from our IPO, Term Loan Facility and the IH1 2017-1 mortgage loan of
$4,188.5 million
, along with proceeds from home sales and operating cash flows, were used to repay
$2,321.6 million
of then-outstanding credit facilities and
$2,083.0 million
of mortgage loans, including full repayment of the IH1 2013-1 and IH1 2014-1 mortgage loans, and $610.0 million on the IH1 2014-3 mortgage loan, and to fund
$42.1 million
of deferred financing costs associated with the Term Loan Facility and IH1 2017-1 mortgage loan.
Off-Balance Sheet Arrangements
We have no obligations, assets, or liabilities that would be considered off-balance sheet arrangements.
Contractual Obligations
We have updated our contractual obligations previously provided in our Annual Report on Form 10-K for the year ended December 31, 2016 for material changes to our financing arrangements that occurred during the
six months ended
June 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
Total
|
|
2017
(1)
|
|
2018-2019
|
|
2020-2021
|
|
Thereafter
|
Mortgage loans
(2)
|
$
|
4,653,669
|
|
|
$
|
221,831
|
|
|
$
|
3,126,420
|
|
|
$
|
83,066
|
|
|
$
|
1,222,352
|
|
Term loan facility
(2)
|
1,709,195
|
|
|
22,912
|
|
|
90,900
|
|
|
90,900
|
|
|
1,504,483
|
|
Interest rate swap
(3)
|
232,137
|
|
|
30,972
|
|
|
123,888
|
|
|
74,814
|
|
|
2,463
|
|
Total
|
$
|
6,595,001
|
|
|
$
|
275,715
|
|
|
$
|
3,341,208
|
|
|
$
|
248,780
|
|
|
$
|
2,729,298
|
|
|
|
(1)
|
Includes estimated payments for the remaining
six
months of
2017
.
|
|
|
(2)
|
Includes estimated interest payments on the respective debt based on amounts outstanding as of
June 30, 2017
at rates in effect as of such date.
|
|
|
(3)
|
Gross obligation calculated using strike prices established by each instrument.
|
Critical Accounting Policies and Estimates
Critical accounting policies are those accounting policies that management believes are important to the portrayal of our financial condition and results and require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The critical policies and estimates are summarized in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2016 with respect to cost capitalization, provisions for impairment, and revenue recognition and resident receivables. Material changes during the
six months ended
June 30, 2017
to our critical accounting policies are presented below:
Investments in Single-Family Residential Properties
Upon acquisition, we evaluate our acquired single-family residential properties for purposes of determining whether a transaction should be accounted for as an asset acquisition or business combination. Upon adoption of ASU 2017-01, our purchases of homes are treated as acquisitions and are recorded at their purchase price which is allocated between land, building and improvements, and in-place lease intangibles (when a tenant is in place at the acquisition date) based upon their relative fair values at the date of acquisition. The purchase price for purposes of this allocation is inclusive of acquisition costs which typically include legal fees, bidding service and title fees, payments made to cure tax, utility, homeowners’ association (“HOA”), and other mechanic’s and miscellaneous liens, as well as other closing costs. The fair values of acquired in-place lease intangibles, if any, are based on the costs to execute similar leases, including commissions and other related costs. The origination value of in-place lease intangibles also includes an estimate of lost rent revenue at in-place rental rates during the estimated time required to lease the property. The in-place lease intangibles are amortized over the life of the leases and are recorded in other assets, net on our condensed consolidated balance sheets.
Prior to our adoption of ASU 2017-01 effective January 1, 2017, acquisition costs for transactions accounted for as business combinations were expensed in the period in which they were incurred and were reflected in other expenses in the accompanying condensed consolidated statements of operations.
Derivatives
We enter into interest rate swap and interest rate cap agreements (collectively, “Hedging Derivatives”) for interest rate risk management purposes. We do not enter into Hedging Derivatives for trading or other speculative purposes, and all of our Hedging Derivatives are carried at fair value on our condensed consolidated balance sheets. Designated hedges are derivatives that meet the criteria for hedge accounting and that we have elected to designate as hedges. Non-designated hedges are derivatives that do not meet the criteria for hedge accounting or that we have not elected to designate as hedges.
Pursuant to the terms of certain of our mortgage loans, we are required to maintain interest rate caps. We have elected not to designate these interest cap agreements for hedge accounting (collectively, the “Non-Designated Hedges”). We enter into interest rate swap agreements to hedge the risk arising from changes in our interest payments on variable-rate debt due to changes in the one-month London Interbank Offered Rate (“LIBOR”). In connection with the Pre-IPO Transactions, as of January 31, 2017, we have elected to account for our interest rate swap agreements as effective cash flow hedges (collectively, the “Designated Hedges”). We assess the effectiveness of these interest rate swap cash flow hedging relationships on an ongoing basis. The effect of these interest rate cap agreements and interest rate swap agreements is to reduce the variability of interest payments due to changes in LIBOR.
The fair value of Hedging Derivatives that are in an asset position are included in other assets, net and those in a liability position are included in other liabilities on our condensed consolidated balance sheets. For Non-Designated Hedges, the related changes in fair value are reflected within interest expense in the condensed consolidated statements of operations. For Designated Hedges, the effective portion of the related changes in fair value is reported as a component of other comprehensive income (loss) on our condensed consolidated balance sheets and reclassified into earnings as interest expense in our condensed consolidated statements of operations when the hedged transactions affect earnings; the ineffective portion of the changes in fair value is reflected directly within interest expense in the condensed consolidated statements of operations.
See
“—Liquidity and Capital Resources”
for further discussion of derivative financial instruments.
Share-Based Compensation Expense
Prior to the IPO, we recognized share-based compensation expense for incentive compensation units granted by the Invitation Homes Partnerships (the “Class B Units”). In connection with and subsequent to the IPO, we issued restricted stock units (“RSUs”) that settle in shares of common stock and restricted shares of common stock (“RSAs”) for which share-based compensation expense is recognized.
We recognized share-based compensation expense for the Class B Units based on the estimated fair value of the Class B Units and vesting conditions of the related incentive unit agreements. Since the Class B Units granted by IH1 were granted to employees of the Manager, a wholly owned subsidiary of IH1, the related share-based compensation expense was based on the grant-date fair value of the units and recognized in expense over the service period. Because units in IH2, IH3, IH4, IH5, and IH6 were granted to non-employees of those respective partnerships, fair value was remeasured for non-vested units at the end of each reporting period. The fair value of the Class B Units was determined based on a valuation model that took into account discounted cash flows and a market approach based on comparable companies and transactions.
We recognize share-based compensation expense for the RSUs and RSAs based on their grant-date fair value, net of expected forfeitures, over the service period from the grant date to vest date for each tranche or when any applicable performance conditions are met in accordance with the related RSU and RSA agreements. The grant-date fair value of RSUs and RSAs is generally based on the closing price of our common stock on the grant date except for market based RSU grant‑date fair values which are based on Monte-Carlo option pricing models.
Additional compensation expense is recognized if modifications to existing incentive compensation unit, RSU, or RSA agreements result in an increase in the post-modification fair value of the units that exceeds their pre-modification fair value.
Segment Reporting
Operating segments are defined as components of an enterprise for which discrete financial information is available that is evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate resources and in assessing performance. Our CODM is the Chief Executive Officer.
Under the provision of ASC 280,
Segment Reporting
, we have determined that we have one reportable segment related to acquiring, renovating, leasing, and operating single-family homes as rental properties, including single-family homes in planned unit developments. The CODM evaluates operating performance and allocates resources on a total portfolio basis. The CODM utilizes net operating income as the primary measure to evaluate performance of the total portfolio. The aggregation of individual homes constitutes the total portfolio. Decisions regarding acquisitions and dispositions of homes are made at the individual home level.
Non-GAAP Measures
EBITDA and Adjusted EBITDA
EBITDA and Adjusted EBITDA are supplemental, non-GAAP measures often utilized to evaluate the performance of real estate companies. We define EBITDA as net income (loss) computed in accordance with accounting principles generally accepted in the United States (“GAAP”) before the following items: interest expense; income tax expense; and depreciation and amortization. Adjusted EBITDA is defined as EBITDA before the following items: share-based compensation expense; offering related expenses, impairment and other; acquisition costs; gain (loss) on sale of property, net of tax; and interest income and other miscellaneous income and expenses. EBITDA and Adjusted EBITDA are used as supplemental financial performance measures by management and by external users of our financial statements, such as investors and commercial banks. Set forth below is additional detail on how management uses EBITDA and Adjusted EBITDA as measures of performance.
Our management uses EBITDA and Adjusted EBITDA in a number of ways to assess our condensed consolidated financial and operating performance, and we believe these measures are helpful to management and external users in identifying trends in our performance. EBITDA and Adjusted EBITDA help management identify controllable expenses and make decisions designed to help us meet our current financial goals and optimize our financial performance, while
neutralizing the impact of capital structure on results. Accordingly, we believe these metrics measure our financial performance based on operational factors that management can impact in the short-term, namely our cost structure and expenses.
We believe that the presentation of EBITDA and Adjusted EBITDA provides information useful to investors in assessing our financial condition and results of operations. The GAAP measure most directly comparable to EBITDA and Adjusted EBITDA is net income or loss. EBITDA and Adjusted EBITDA are not used as measures of our liquidity and should not be considered alternatives to net income or loss or any other measure of financial performance presented in accordance with GAAP. Our EBITDA and Adjusted EBITDA may not be comparable to the EBITDA and Adjusted EBITDA of other companies due to the fact that not all companies use the same definitions of EBITDA and Adjusted EBITDA. Accordingly, there can be no assurance that our basis for computing these non-GAAP measures is comparable with that of other companies.
The following table presents a reconciliation of GAAP net income (loss) to EBITDA and Adjusted EBITDA on a historical basis for each of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
($ in thousands)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net income (loss) available to common shareholders
|
|
$
|
5,420
|
|
|
$
|
(19,666
|
)
|
|
$
|
(36,971
|
)
|
|
$
|
(29,641
|
)
|
Net income (loss) available to participating securities
|
|
109
|
|
|
—
|
|
|
109
|
|
|
—
|
|
Interest expense
|
|
57,358
|
|
|
70,523
|
|
|
125,930
|
|
|
140,800
|
|
Depreciation and amortization
|
|
67,515
|
|
|
66,079
|
|
|
135,092
|
|
|
131,781
|
|
EBITDA
|
|
130,402
|
|
|
116,936
|
|
|
224,160
|
|
|
242,940
|
|
Share-based compensation expense
(1)
|
|
8,216
|
|
|
4,106
|
|
|
52,460
|
|
|
8,312
|
|
Offering related expenses
|
|
656
|
|
|
—
|
|
|
8,287
|
|
|
—
|
|
Impairment and other
|
|
706
|
|
|
546
|
|
|
1,910
|
|
|
363
|
|
Acquisition costs
|
|
—
|
|
|
7
|
|
|
—
|
|
|
42
|
|
Gain on sale of property, net of tax
|
|
(10,162
|
)
|
|
(1,020
|
)
|
|
(24,483
|
)
|
|
(10,212
|
)
|
Other, net
(2)
|
|
869
|
|
|
(192
|
)
|
|
1,095
|
|
|
(74
|
)
|
Adjusted EBITDA
|
|
$
|
130,687
|
|
|
$
|
120,383
|
|
|
$
|
263,429
|
|
|
$
|
241,371
|
|
|
|
(1)
|
For the
three months ended
June 30, 2017 and 2016
,
$6,880
and
$4,008
was recorded in general and administrative expense, respectively, and
$1,336
and
$98
was recorded in property management expense, respectively. For the
six months ended
June 30, 2017 and 2016
,
$47,151
and
$8,059
was recorded in general and administrative expense, respectively, and
$5,309
and
$253
was recorded in property management expense, respectively.
|
|
|
(2)
|
Includes interest income and other miscellaneous income and expenses.
|
Net Operating Income (“NOI”)
NOI is a non-GAAP measure often used to evaluate the performance of real estate companies. We define NOI for an identified population of homes as rental revenues and other property income less property operating and maintenance expense (which consists primarily of property taxes, insurance, HOA fees (when applicable), market-level personnel expenses, repairs and maintenance, leasing costs and marketing). NOI excludes: interest expense; depreciation and amortization; general and administrative expense; property management expense; impairment and other; acquisition costs; (gain) loss on sale of property, net of tax; and interest income and other miscellaneous income and expenses.
We consider NOI to be a meaningful supplemental financial measure of our performance when considered with the financial statements determined in accordance with GAAP. We believe NOI is helpful to investors in understanding the core performance of our real estate operations. The GAAP measure most directly comparable to NOI is net income or loss. NOI is not used as a measure of liquidity and should not be considered as an alternative to net income or loss or any other measure
of financial performance presented in accordance with GAAP. Our NOI may not be comparable to the NOI of other companies due to the fact that not all companies use the same definition of NOI. Accordingly, there can be no assurance that our basis for computing this non-GAAP measure is comparable with that of other companies.
We believe that Same Store NOI is also a meaningful supplemental measure of our operating performance for the same reasons as NOI and is further helpful to investors as it provides a more consistent measurement of our performance across reporting periods by reflecting NOI for homes in our Same Store portfolio.
The following table presents a reconciliation of GAAP net income (loss) to NOI for our total portfolio and NOI for our Same Store portfolio on a historical basis for each of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
($ in thousands)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net income (loss) available to common shareholders
|
|
$
|
5,420
|
|
|
$
|
(19,666
|
)
|
|
$
|
(36,971
|
)
|
|
$
|
(29,641
|
)
|
Net income (loss) available to participating securities
|
|
109
|
|
|
—
|
|
|
109
|
|
|
—
|
|
Interest expense
|
|
57,358
|
|
|
70,523
|
|
|
125,930
|
|
|
140,800
|
|
Depreciation and amortization
|
|
67,515
|
|
|
66,079
|
|
|
135,092
|
|
|
131,781
|
|
General and administrative
(1)
|
|
18,426
|
|
|
15,408
|
|
|
76,692
|
|
|
30,768
|
|
Property management expense
(2)
|
|
9,135
|
|
|
7,530
|
|
|
20,584
|
|
|
14,923
|
|
Impairment and other
|
|
706
|
|
|
546
|
|
|
1,910
|
|
|
363
|
|
Acquisition costs
|
|
—
|
|
|
7
|
|
|
—
|
|
|
42
|
|
Gain on sale of property, net of tax
|
|
(10,162
|
)
|
|
(1,020
|
)
|
|
(24,483
|
)
|
|
(10,212
|
)
|
Other, net
(3)
|
|
869
|
|
|
(192
|
)
|
|
1,095
|
|
|
(74
|
)
|
NOI (total portfolio)
|
|
149,376
|
|
|
139,215
|
|
|
299,958
|
|
|
278,750
|
|
Non-Same Store NOI
|
|
(13,723
|
)
|
|
(11,641
|
)
|
|
(27,572
|
)
|
|
(21,949
|
)
|
NOI (Same Store portfolio)
(4)
|
|
$
|
135,653
|
|
|
$
|
127,574
|
|
|
$
|
272,386
|
|
|
$
|
256,801
|
|
|
|
(1)
|
Includes
$6,880
and
$4,008
of share-based compensation expense for the
three months ended
June 30, 2017 and 2016
, respectively. Includes
$47,151
and
$8,059
of share-based compensation expense for the
six months ended
June 30, 2017 and 2016
, respectively.
|
|
|
(2)
|
Includes
$1,336
and
$98
of share-based compensation expense for the
three months ended
June 30, 2017 and 2016
, respectively. Includes
$5,309
and
$253
of share-based compensation expense for the
six months ended
June 30, 2017 and 2016
, respectively.
|
|
|
(3)
|
Includes interest income and other miscellaneous income and expenses.
|
|
|
(4)
|
Same Store (consisting of homes which had commenced their initial post-renovation lease prior to October 3rd of the year prior to the first year of the comparison period) homes are
42,904
.
|
Funds from Operations (“FFO”), Core Funds from Operations, and Adjusted Funds from Operations
FFO, Core FFO, and Adjusted FFO are supplemental, non-GAAP measures often utilized to evaluate the performance of real estate companies. FFO is defined by the National Association of Real Estate Investment Trusts as net income or loss (computed in accordance with GAAP) excluding net gains or losses from sales of previously depreciated real estate assets, plus depreciation, amortization and impairment of real estate assets, and adjustments for unconsolidated partnerships and joint ventures.
We believe that FFO is a meaningful supplemental measure of the operating performance of our business because historical cost accounting for real estate assets in accordance with GAAP assumes that the value of real estate assets diminishes predictably over time, as reflected through depreciation and amortization. Because real estate values have historically risen or fallen with market conditions, management considers FFO an appropriate supplemental performance measure as it excludes historical cost depreciation and amortization, impairment on depreciated real estate investments, as well as gains or losses related to sales of previously depreciated homes, from GAAP net income or loss. By excluding
depreciation and amortization and gains or losses on sales of real estate, management uses FFO to measure returns on its investments in homes. However, FFO excludes depreciation and amortization and captures neither the changes in the value of the homes that result from use or market conditions nor the level of capital expenditures to maintain the operating performance of the homes, all of which have real economic effect and could materially affect our results from operations, the utility of FFO as a measure of our performance is limited.
Management also believes that FFO, combined with the required GAAP presentations, is useful to investors in providing more meaningful comparisons of the operating performance of a company’s real estate between periods or as compared to other companies. The GAAP measure most directly comparable to FFO is net income or loss. FFO is not used as a measure of our liquidity and should not be considered an alternative to net income or loss or any other measure of financial performance presented in accordance with GAAP. Our FFO may not be comparable to the FFO of other companies due to the fact that not all companies use the same definition of FFO. Accordingly, there can be no assurance that our basis for computing this non-GAAP measures is comparable with that of other companies.
We believe that Core FFO and Adjusted FFO are also meaningful supplemental measures of our operating performance for the same reasons as FFO and are further helpful to investors as they provides a more consistent measurement of our performance across reporting periods by removing the impact of certain items that are not comparable from period to period. We define Core FFO as FFO adjusted for noncash interest expense related to amortization of deferred financing costs and discounts related to our financing arrangements, noncash interest expense for derivatives, share-based compensation expense, offering related expenses, severance expenses, casualty losses, net, and acquisition costs, as applicable.
We define Adjusted FFO as Core FFO less recurring capital expenditures that are necessary to help preserve the value of and maintain functionality of our homes.
The GAAP measure most directly comparable to Core FFO and Adjusted FFO is net income or loss. Core FFO and Adjusted FFO are not used as measures of our liquidity and should not be considered alternatives to net income or loss or any other measure of financial performance presented in accordance with GAAP. Our Core FFO and Adjusted FFO may not be comparable to the Core FFO and Adjusted FFO of other companies due to the fact that not all companies use the same definition of Core FFO and Adjusted FFO. Accordingly, there can be no assurance that our basis for computing this non-GAAP measures is comparable with that of other companies.
The following table presents a reconciliation of GAAP net income (loss) to FFO, Core FFO, and Adjusted FFO on a historical basis for each of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
(in thousands, except share and per share data)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net income (loss) available to common shareholders
|
|
$
|
5,420
|
|
|
$
|
(19,666
|
)
|
|
$
|
(36,971
|
)
|
|
$
|
(29,641
|
)
|
Add (deduct) adjustments from net income (loss) available to common shareholders to derive FFO:
|
|
|
|
|
|
|
|
|
Net income (loss) available to participating securities
|
|
109
|
|
|
—
|
|
|
109
|
|
|
—
|
|
Depreciation and amortization on real estate assets
|
|
66,699
|
|
|
64,775
|
|
|
133,352
|
|
|
129,184
|
|
Impairment on depreciated real estate investments
|
|
95
|
|
|
519
|
|
|
1,132
|
|
|
519
|
|
Net gain on sale of previously depreciated investments in real estate
|
|
(10,162
|
)
|
|
(1,020
|
)
|
|
(24,483
|
)
|
|
(10,212
|
)
|
FFO
|
|
62,161
|
|
|
44,608
|
|
|
73,139
|
|
|
89,850
|
|
Noncash interest expense related to amortization of deferred financing costs, mortgage loan discounts and noncash interest expense from derivatives
|
|
5,137
|
|
|
15,622
|
|
|
20,271
|
|
|
29,816
|
|
Share-based compensation expense
(1)
|
|
8,216
|
|
|
4,106
|
|
|
52,460
|
|
|
8,312
|
|
Offering related expenses
|
|
656
|
|
|
—
|
|
|
8,287
|
|
|
—
|
|
Severance expense
|
|
392
|
|
|
1,102
|
|
|
437
|
|
|
1,908
|
|
Casualty losses, net
|
|
611
|
|
|
27
|
|
|
778
|
|
|
(156
|
)
|
Acquisition costs
|
|
—
|
|
|
7
|
|
|
—
|
|
|
42
|
|
Core FFO
|
|
77,173
|
|
|
65,472
|
|
|
155,372
|
|
|
129,772
|
|
Recurring capital expenditures
|
|
(11,605
|
)
|
|
(11,495
|
)
|
|
(20,834
|
)
|
|
(22,907
|
)
|
Adjusted FFO
|
|
$
|
65,568
|
|
|
$
|
53,977
|
|
|
$
|
134,538
|
|
|
$
|
106,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2017
|
|
|
|
February 1, 2017
through
June 30, 2017
|
|
|
Weighted average common shares outstanding — diluted
(2)
|
|
312,271,578
|
|
|
|
|
311,723,463
|
|
|
|
|
|
|
|
|
|
|
|
|
FFO per common share – diluted
|
|
$
|
0.20
|
|
|
|
|
$
|
0.23
|
|
|
|
Core FFO per common share – diluted
|
|
$
|
0.25
|
|
|
|
|
$
|
0.50
|
|
|
|
AFFO per common share – diluted
|
|
$
|
0.21
|
|
|
|
|
$
|
0.43
|
|
|
|
|
|
(1)
|
For the
three months ended
June 30, 2017 and 2016
,
$6,880
and
$4,008
was recorded in general and administrative expense, respectively, and
$1,336
and
$98
was recorded in property management expense, respectively. For the
six months ended
June 30, 2017 and 2016
,
$47,151
and
$8,059
was recorded in general and administrative expense, respectively, and
$5,309
and
$253
was recorded in property management expense, respectively.
|
|
|
(2)
|
Weighted average common shares outstanding – diluted was calculated using the two-class method and represents common share equivalents that are dilutive for FFO, Core FFO, and AFFO.
|