INVITATION HOMES INC. The following discussion and analysis of our financial condition and results of operations should be read together with Part I. Item 6. "Selected Financial Data," Part I. Item 1. "Business," and the consolidated financial statements, including the notes thereto, that are included elsewhere in this Annual Report on Form 10-K. 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 forth under Part I. Item 1A. "Risk Factors," "Forward-Looking Statements," or in other parts of this report For similar operating and financial data and discussion of our year endedDecember 31, 2018 results compared to our year endedDecember 31, 2017 results, refer to Part II. Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K which was filed with theSEC onFebruary 28, 2019 (the "2018 10-K"). The sections entitled "Result of Operations - Year EndedDecember 31, 2018 Compared to Year EndedDecember 31, 2017 " and "Cash Flows - Year EndedDecember 31, 2018 Compared to Year EndedDecember 31, 2017 " in Part II. Item 7. "Management's Discussion and Analysis of Financial Condition and Result of Operations" of our 2018 10-K are incorporated herein by reference. Capitalized terms used without definition have the meaning provided elsewhere in this Annual Report on Form 10-K.
Overview
Invitation Homes is a leading owner and operator of single-family homes for lease, offering residents high-quality homes in sought-after neighborhoods across America. With approximately 80,000 homes for lease in 16 markets across the country as ofDecember 31, 2019 ,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 statement, "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 operate in markets with strong demand drivers, high barriers to entry, and high rent growth potential, primarily in theWestern United States ,Florida , and theSoutheast United States . Through disciplined market and asset selection, as well as through the Mergers, 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 enables us to effectively and efficiently acquire, renovate, lease, maintain, and manage our homes. 48 -------------------------------------------------------------------------------- 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 broaderUnited States housing and rental market. Within our 16 markets, we target attractive neighborhoods in in-fill locations with multiple demand drivers, such as proximity to major employment centers, desirable schools, and transportation corridors. Our homes average approximately 1,870 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 invest in the upfront renovation of homes in our portfolio 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. 49 -------------------------------------------------------------------------------- Our Portfolio The following table provides summary information regarding our total and Same Store portfolios as of and for the year endedDecember 31, 2019 as noted below: Number of Average Average Monthly Average Monthly % of Market Homes(1) Occupancy(2) Rent(3) Rent PSF(3) Revenue(4)Western United States : Southern California 8,071 95.0%$2,411 $1.42 13.4 % Northern California 4,390 95.1% 2,087 1.35 6.6 % Seattle 3,531 93.4% 2,198 1.15 5.3 % Phoenix 7,741 94.8% 1,362 0.84 7.4 % Las Vegas 2,998 94.7% 1,608 0.81 3.3 % Denver 2,314 90.7% 1,989 1.11 3.1 %Western United States Subtotal 29,045 94.4% 1,945 1.13 39.1 % Florida: South Florida 8,567 93.7% 2,186 1.18 12.9 % Tampa 8,121 94.6% 1,668 0.90 9.5 % Orlando 6,082 93.8% 1,654 0.89 6.8 % Jacksonville 1,865 95.2% 1,672 0.84 2.2 % Florida Subtotal 24,635 94.1% 1,847 0.99 31.4 % Southeast United States: Atlanta 12,494 94.7% 1,504 0.73 12.8 % Carolinas 4,702 94.7% 1,583 0.73 5.1 %Southeast United States Subtotal 17,196 94.7% 1,526 0.73 17.9 % Texas: Houston 2,229 92.7% 1,556 0.80 2.4 % Dallas 2,323 91.7% 1,786 0.84 2.7 % Texas Subtotal 4,552 92.2% 1,668 0.82 5.1 % MidwestUnited States : Chicago 2,848 91.1% 1,983 1.21 4.0 % Minneapolis 1,142 95.9% 1,885 0.96 1.5 % MidwestUnited States Subtotal 3,990 92.4% 1,955 1.13 5.5 % Announced Market-in-Exit: Nashville(5) 87 95.2% 1,835 0.86 1.0 % Total / Average 79,505 94.2%$1,809 $0.97 100.0 % Same Store Total / Average 70,799 96.3%$1,812 $0.97 90.1 % (1) As ofDecember 31, 2019 .
(2) Represents average occupancy for the year ended
(3) Represents average monthly rent for the year ended
(4) Represents the percentage of rental revenues and other property income
generated in each market for the year ended
(5) In
sold 708 homes in
of the remaining 87 homes in the market.
50-------------------------------------------------------------------------------- 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. See Part I. Item 1A. "Risk Factors" for more information regarding factors that could materially adversely affect our results of operations and financial condition. Key factors that impact our results of operations and financial condition include market fundamentals, rental rates and occupancy levels, turnover rates and days to re-resident homes, property improvements and maintenance, property acquisitions and renovations, and financing arrangements. Market Fundamentals: Our results are impacted by housing market fundamentals and supply and demand conditions in our markets, particularly in theWestern United States andFlorida , which represented 70.5% of our rental revenues and other property income during the year endedDecember 31, 2019 . In recent periods, ourWestern United States andFlorida markets have experienced favorable demand fundamentals with employment growth, strong household formation rates, and favorable supply fundamentals such as the rate of new supply delivery. We believe these supply and demand fundamentals have driven favorable rental rate growth and home price appreciation for ourWestern United States andFlorida 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 Rates and Days to Re-Resident: Other drivers of rental revenues and property operating and maintenance expense include the length of stay of our residents, resident turnover rates, and the number of days a home is unoccupied between residents. Our operating results are also 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, economic conditions, and economic outlook. Increases in turnover rates and the average number of days to re-resident 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 other property 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. The scope of 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. 51 -------------------------------------------------------------------------------- Financing Arrangements: Financing arrangements directly impact our interest expense, mortgage loans, secured term loan, term loan facility, revolving facility, and convertible debt, as well as our ability to acquire and renovate homes. We have historically utilized indebtedness to fund the acquisition and renovation of new homes. Our current financing arrangements contain financial covenants, and certain financing arrangements contain variable interest rate terms. Interest rates are impacted by market conditions, and the terms of the underlying financing arrangements. See Part II. Item 7A. "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. Components of Revenues and Expenses The following is a description of the components of our revenues and expenses. Revenues Rental Revenues and Other Property Income Rental revenues, net of any concessions and uncollectible amounts, consist of rents collected under lease agreements related to our single-family homes for lease. We enter into leases directly with our residents, and the leases typically have a term of one to two years. 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 late fees and lease termination fees, among others. 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, marketing expenses, and property administration. 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. General and administrative expense also includes merger and transaction-related expenses that are of a non-recurring nature. Share-Based Compensation Expense All share-based compensation expense is recognized in our consolidated statements of operations as components of general and administrative expense and property management expense. We issue share-based awards to align our employees' interests with those of our investors. We also assumed share-based awards in connection with the Mergers. Interest Expense Interest expense includes interest payable on our debt instruments, payments and receipts related to our interest rate swap agreements, related amortization of discounts and deferred financing costs, unrealized gains (losses) on non-designated hedging instruments, and noncash interest expense related to our interest rate swap agreements. 52 -------------------------------------------------------------------------------- Depreciation and Amortization We recognize depreciation and amortization expense associated 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. Other, net Other, net includes interest income, third party management fee income, equity in earnings from an unconsolidated joint venture, unrealized gains from an investment in equity securities, and other miscellaneous income and expenses. Gain on Sale of Property, net of tax Gain on sale of property, net of tax consists of net gains and losses resulting from sales of our homes. 53
-------------------------------------------------------------------------------- Results of Operations Year EndedDecember 31, 2019 Compared to Year EndedDecember 31, 2018 The following table sets forth a comparison of the results of operations for the years endedDecember 31, 2019 and 2018: For the Years Ended December 31, ($ in thousands) 2019 2018 $ Change % Change Rental revenues and other property income$ 1,764,685 $ 1,722,962 $ 41,723 2.4 % Expenses: Property operating and maintenance 669,987 655,411 14,576 2.2 % Property management expense 61,614 65,485 (3,871 ) (5.9 )% General and administrative 74,274 98,764 (24,490 ) (24.8 )% Interest expense 367,173 383,595 (16,422 ) (4.3 )% Depreciation and amortization 533,719 560,541 (26,822 ) (4.8 )% Impairment and other 18,743 20,819 (2,076 ) (10.0 )% Total expenses 1,725,510 1,784,615 (59,105 ) (3.3 )% Other, net 11,600 6,958 4,642 66.7 % Gain on sale of property, net of tax 96,336 49,682 46,654 93.9 % Net income (loss) $ 147,111$ (5,013 ) $ 152,124 N/M Portfolio Information As ofDecember 31, 2019 and 2018, we owned 79,505 and 80,807 single-family rental homes, respectively, in our total portfolio. During the years endedDecember 31, 2019 and 2018, we acquired 2,153 and 938 homes, respectively, and sold 3,455 and 2,701 homes, respectively. During the years endedDecember 31, 2019 and 2018, we owned an average of 80,372 and 82,171 single-family rental homes, respectively. We believe presenting information about the portion of our total portfolio that has been fully operational for the entirety of a given reporting period and its prior year comparison period provides investors with meaningful information about the performance of our comparable homes across periods, and about trends in our organic business. To do so, we provide information regarding the performance of our Same Store portfolio. As ofDecember 31, 2019 , our Same Store portfolio consisted of 70,799 single-family rental homes. Rental Revenues and Other Property Income For the years endedDecember 31, 2019 and 2018, total portfolio rental revenues and other property income totaled$1,764.7 million and$1,723.0 million , respectively, an increase of 2.4%, driven by an increase in average monthly rent per occupied home and an increase in utilities reimbursements, partially offset by a slight decrease in average occupancy and a 1,799 home decrease between periods in the average number of homes owned. Average occupancy for the years endedDecember 31, 2019 and 2018 for the total portfolio was 94.2% and 94.6%, respectively. Average monthly rent per occupied home for the total portfolio for the years endedDecember 31, 2019 and 2018 was$1,809 and$1,735 , respectively, a 4.3% increase. For our Same Store portfolio, average occupancy was 96.3% and 95.8% for the years endedDecember 31, 2019 and 2018, respectively, and average monthly rent per occupied home for the years endedDecember 31, 2019 and 2018 was$1,812 and$1,741 , respectively, a 4.1% increase. To monitor prospective changes in average monthly 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 non-service concessions, to calculate net effective rental rate growth. Leases are either renewal leases, where our current resident stays for 54 -------------------------------------------------------------------------------- a subsequent lease term, or new leases, where our previous resident moves out and a new resident signs a lease to occupy the same home. Renewal lease net effective rental rate growth for the total portfolio averaged 5.0% and 4.8% for the years endedDecember 31, 2019 and 2018, respectively, and new lease net effective rental rate growth for the total portfolio averaged 3.8% and 3.3% for the years endedDecember 31, 2019 and 2018, respectively. For our Same Store portfolio, renewal lease net effective rental rate growth averaged 5.0% and 4.8% for the years endedDecember 31, 2019 and 2018, respectively, and new lease net effective rental rate growth averaged 3.8% and 3.4% for the years endedDecember 31, 2019 and 2018, respectively. The annual turnover rate for the Same Store portfolio for the years endedDecember 31, 2019 and 2018 was 30.1% and 32.5%, respectively. For the Same Store portfolio, an average home remained unoccupied for 46 days between residents for each of the years endedDecember 31, 2019 and 2018. The increase in other property income during the year endedDecember 31, 2019 was driven by utilities reimbursements, which increased as more utilities remained in our name compared to prior year. Additionally, the terms of new leases require residents to reimburse us for those costs. This increase was partially offset by a decrease in the average number of homes owned during 2019. Expenses For the years endedDecember 31, 2019 and 2018, total expenses were$1,725.5 million and$1,784.6 million , respectively. Set forth below is a discussion of changes in the individual components of total expenses. Property operating and maintenance expense increased to$670.0 million for the year endedDecember 31, 2019 from$655.4 million for the year endedDecember 31, 2018 , driven by increases related to utilities, property taxes, HOA assessments and fines, and insurance premiums, partially offset by decreases in certain controllable expenses created by continued process improvements, lower turnover, property-level synergies from the Mergers, and a decrease in average home count. Property management expense and general and administrative expense decreased to$135.9 million for the year endedDecember 31, 2019 from$164.2 million for the year endedDecember 31, 2018 , primarily due to decreases in share-based compensation expense of$11.3 million and a decrease in merger and transaction-related expenses of$12.5 million . Interest expense was$367.2 million and$383.6 million for the years endedDecember 31, 2019 and 2018, respectively. The decrease in interest expense was primarily due to a decrease in the average debt balance outstanding due to prepayments made on the mortgage loans and redemption of convertible debt for common equity during the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 . Debt outstanding, net of deferred financing costs and discounts, decreased to$8,467.5 million as ofDecember 31, 2019 from$9,249.8 million as ofDecember 31, 2018 . Additionally, the weighted average spread (inclusive of servicing fees) over LIBOR decreased as a result of refinancing activity and prepayments made on the mortgage loan during the year endedDecember 31, 2019 . These items were partially offset by an increase in the average one month LIBOR rate of 20 bps from 2.02% during the year endedDecember 31, 2018 to 2.22% during the year endedDecember 31, 2019 . Depreciation and amortization expense decreased to$533.7 million for the year endedDecember 31, 2019 from$560.5 million for the year endedDecember 31, 2018 , primarily due to$37.5 million of amortization of in-place leases from the Mergers that were fully amortized during the year endedDecember 31, 2018 . Additionally, the average number of homes owned during the year endedDecember 31, 2019 decreased as compared to the year endedDecember 31, 2018 . These decreases were partially offset by an increase in depreciation due to additional capital expenditures. Impairment and other expenses were$18.7 million and$20.8 million for the years endedDecember 31, 2019 and 2018, respectively. During the year endedDecember 31, 2019 , impairment and other expenses was comprised of impairment losses of$14.2 million on our single-family residential properties and casualty losses of$4.5 million . During the year endedDecember 31, 2018 , impairment and other expenses was comprised of impairment losses of$6.7 million on our single-family residential properties and casualty losses of$14.1 million , including losses and damages related to Hurricanes Irma and Harvey of$8.0 million . 55 -------------------------------------------------------------------------------- Other, net Other, net increased to$11.6 million for the year endedDecember 31, 2019 from$7.0 million for the year endedDecember 31, 2018 , due to changes in the components of our miscellaneous income and expenses and$6.5 million in unrealized gains on investment in equity securities. Gain on Sale of Property, net of tax Gain on sale of property, net of tax was$96.3 million and$49.7 million for the years endedDecember 31, 2019 and 2018, respectively. The increased gain on sale was driven by an increase in the number of homes sold and an increase in the average gain per home during the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 . For the years endedDecember 31, 2019 and 2018, the number of homes sold was 3,455 and 2,701, respectively. Year EndedDecember 31, 2018 Compared to Year EndedDecember 31, 2017 For similar operating and financial data and discussion of our year endedDecember 31, 2018 results compared to our year endedDecember 31, 2017 results, refer to Part II. Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our 2018 10-K . Liquidity and Capital Resources Our liquidity and capital resources as ofDecember 31, 2019 and 2018 includes unrestricted cash and cash equivalents of$92.3 million and$144.9 million , respectively, a 36.3% decrease. We use excess cash flows for the repayment of outstanding indebtedness and strive to minimize the level of cash held for working capital requirements. Additionally, our$1,000.0 million revolving credit facility (the "Revolving Facility") remains undrawn as ofDecember 31, 2019 . OnAugust 22, 2019 , we entered into distribution agreements with a syndicate of banks (the "Agents"), pursuant to which we may sell, from time to time, up to an aggregate sales price of$800.0 million of our common stock through the Agents (the "ATM Equity Program"). The ATM Equity Program was established in order to use the net proceeds from sales under the program for general corporate purposes, which may include, without limitation, working capital, repayment of indebtedness, acquisitions and renovations of single-family properties, and for related activities in accordance with our business strategy. During the year endedDecember 31, 2019 , we sold 1,957,139 shares of our common stock under our ATM Equity Program, generating net proceeds of$55.3 million after giving effect to Agent commissions and other costs totaling$1.7 million . As ofDecember 31, 2019 ,$743.0 million remains available for future offerings under the ATM Equity Program. Liquidity is a measure of our ability to meet potential cash requirements, maintain our assets, fund our operations, make dividend payments to our stockholders, 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), property taxes, insurance premiums, and the ongoing maintenance of 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 intend 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 believe our rental income, net of total expenses, will generally provide cash flow sufficient to fund operations 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 which had an undrawn balance of$1,000.0 million as ofDecember 31, 2019 . As a REIT, we are required to distribute to our stockholders at least 90% of our 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 from our annual taxable income that could be used to meet our liquidity needs. 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. 56
-------------------------------------------------------------------------------- Certain Securitizations, the Secured Term Loan, the Term Loan Facility, and the Revolving Credit Facility (all defined below, and collectively the "LIBOR-Based Loans") use LIBOR as a benchmark for establishing interest rates. Our derivative instruments are also indexed to LIBOR.The Financial Conduct Authority in theUnited Kingdom , the governing body responsible for regulating LIBOR, announced that it will no longer compel or persuade financial institutions and panel banks to make LIBOR submissions after 2021. Once LIBOR is phased out, the interest rates for our LIBOR-Based Loans will be based on a comparable or successor rate as provided for in our loan agreements. We will work with the counterparties to our swap and cap agreements to adjust each floating rate to a comparable or successor rate. While we do not expect that the transition from LIBOR and risks related thereto will have a material adverse effect on our financing costs, the ultimate outcome of this change is uncertain at this time, and significant management time and attention may be required to transition to using the new benchmark rates and to implement necessary changes to our financial models. The following describes the key terms of our current indebtedness. Mortgage Loans Our securitization transactions (the "Securitizations" or the "mortgage loans") are collateralized by certain homes owned by wholly owned subsidiaries ofINVH LP that were formed to facilitate certain of our financing arrangements (the "Borrower Entities"). We utilize the proceeds from our securitizations to fund: (i) repayments of then-outstanding indebtedness; (ii) initial deposits into Securitization reserve accounts; (iii) closing costs in connection with the mortgage loans; and (iv) general costs associated with our operations. The following table sets forth a summary of our mortgage loan indebtedness as ofDecember 31, 2019 and 2018: Outstanding Principal Balance(5) Maturity Maturity Date if Interest Range of December 31, December 31, ($ in thousands) Date(1) Fully Extended(2) Rate(3) Spreads(4) 2019 2018 CSH 2016-2 June 7, 2019 N/A -% N/A $ -$ 442,614 IH 2017-1(6) June 9, 2027 June 9, 2027 4.23% N/A 995,520 995,826 SWH 2017-1(7) October 9, 2020 January 9, 2023 3.32% 102-347 bps 744,092 764,685 IH 2017-2(7) December 9, 2020 December 9, 2024 2.90% 91-186 bps 624,475 856,238
IH 2018-1(7)(8)
793,720 911,827
IH 2018-2(7)(9)
957,135 1,035,749
IH 2018-3(7)(9)
1,296,959
IH 2018-4(7)
938,430 959,578
Total Securitizations 6,266,407 7,263,476
Less: deferred financing costs, net (27,946 ) (61,822 )
Total $ 6,238,461 $ 7,201,654 (1) Maturity date represents repayment date for mortgage loans which have been
repaid in full prior to
maturity dates above reflect 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) Except for IH 2017-1, interest rates are based on a weighted average spread
over LIBOR, plus applicable servicing fees; as of
was 1.76%. Our IH 2017-1 mortgage loan bears interest at a fixed rate of
4.23% per annum, equal to the market determined pass-through rate payable on
the certificates including applicable servicing fees.
(4) Range of spreads is based on outstanding principal balances as of
(5) Outstanding principal balance is net of discounts and does not include
deferred financing costs, net.
(6) Net of unamortized discount of
(7) The initial maturity term of each of these mortgage loans is two years,
individually subject to three to five, one year extension options at the
Borrower Entity's discretion (provided that there is no continuing event of
default under the mortgage loan agreement and the Borrower Entity obtains and
delivers a replacement interest rate cap agreement from an
57--------------------------------------------------------------------------------
approved counterparty within the required timeframe to the lender). Our
SWH 2017-1 and IH 2017-2 mortgage loans have exercised the first extension
option. The maturity dates above reflect all extensions that have been
exercised.
(8) On
the maturity of the IH 2018-1 mortgage loan from
2021 upon approval.
(9) On
against the outstanding balances of IH 2018-2 and IH 2018-3, respectively.
Securitization Transactions For each Securitization transaction, the Borrower Entity executed a loan agreement with a third party lender. Except for IH 2017-1, each outstanding mortgage loan originally consisted of six floating rate components. The two year initial terms are individually subject to three to five, one year extension options at the Borrower Entity's discretion. Such extensions are available provided there is no continuing event of default under the respective mortgage loan agreement and the Borrower Entity obtains and delivers a replacement interest rate cap agreement from an approved counterparty within the required timeframe to the lender. IH 2017-1 is a 10 year, fixed rate mortgage loan comprised of two components. Certificates issued by the trust in connection with Component A of IH 2017-1 benefit from the Federal National Mortgage Association's guaranty of timely payment of principal and interest. Each mortgage loan is secured by a pledge of the equity in the assets of the respective Borrower Entities, as well as first-priority mortgages on the underlying properties and a grant of security interests in all of the related personal property. As ofDecember 31, 2019 and 2018, a total of 37,040 and 41,644 homes, respectively, with a net book value of$7,137.6 million and$8,385.4 million , respectively, are pledged pursuant to the mortgage loans. Each Borrower Entity has the right, subject to certain requirements and limitations outlined in the respective loan agreements, to substitute properties. We are obligated to make monthly payments of interest for each mortgage loan. Transactions with Trusts Concurrent with the execution of each mortgage loan agreement, the respective third party lender sold each loan it originated to individual depositor entities (the "Depositor Entities") who subsequently transferred each loan to Securitization-specific trust entities (the "Trusts"). The Depositor Entities for our currently outstanding Securitizations are wholly owned subsidiaries. As consideration for the transfer of each loan to the Trusts, the Trusts issued classes of certificates which mirror the components of the individual loans (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 and used the proceeds as consideration for the loans sold to the Depositor Entities by the lenders. These transactions had no effect on our consolidated financial statements other than with respect to Certificates we retained in connection with Securitizations or purchased at a later date. The Trusts are structured as pass-through entities that receive interest payments 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 consolidated financial statements. We have evaluated our interests in certain certificates of the Trusts held by us (discussed below) and determined that they do not create a more than insignificant variable interest in the Trusts. Additionally, the retained 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. Retained Certificates As the Trusts made Certificates available for sale to both domestic and foreign investors, sponsors of the mortgage loans are required to retain a portion of the risk that represents a material net economic interest in each loan pursuant to Regulation RR (the "Risk Retention Rules") under the Securities Exchange Act of 1934, as amended. As such, loan sponsors are 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. 58 -------------------------------------------------------------------------------- To fulfill these requirements, Class G certificates for CSH 2016-2 were issued in an amount equal to 5% of the original principal amount of the loans. Per the terms of the CSH 2016-2 mortgage loan agreement, the Class G certificates were restricted certificates that were made available exclusively to the sponsor. We retained these Class G certificates during the time the related Securitization was outstanding, and they were principal only, bearing a stated interest rate of 0.0005%. For IH 2017-1, the Class B certificates are restricted certificates that were made available exclusively toINVH LP in order to comply with the Risk Retention Rules. The Class B certificates bear a stated annual interest rate of 4.23%, including applicable servicing fees. For SWH 2017-1, IH 2017-2, IH 2018-1, IH 2018-2, IH 2018-3, and IH 2018-4, we retain 5% of each class of certificates to meet the Risk Retention Rules. These retained certificates accrue interest at a floating rate of LIBOR plus a spread ranging from 0.76% to 3.47%. The retained certificates total$317.0 million and$366.6 million as ofDecember 31, 2019 and 2018, respectively, and are classified as held to maturity investments and recorded in other assets, net on the consolidated balance sheets. Loan Covenants The general terms that apply to all of the mortgage loans require each Borrower Entity to maintain compliance with certain affirmative and negative covenants. Affirmative covenants include each Borrower Entity's, and certain of their respective affiliates', compliance with (i) licensing, permitting and legal requirements specified in the mortgage loan agreements, (ii) organizational requirements of the jurisdictions in which they are organized, (iii) federal and state tax laws, and (iv) books and records requirements specified in the respective mortgage loan agreements. Negative covenants include each Borrower Entity's, and certain of their affiliates', compliance with limitations surrounding (i) the amount of each Borrower Entity's indebtedness and the nature of their investments, (ii) the execution of transactions with affiliates, (iii) the Manager, (iv) the nature of each Borrower Entity's business activities, and (v) the required maintenance of specified cash reserves. As ofDecember 31, 2019 , and through the date our consolidated financial statements were issued, we believe each Borrower Entity is in compliance with all affirmative and negative covenants. Prepayments For the mortgage loans, prepayments of amounts owed by us are generally not permitted under the terms of the respective mortgage loan agreements unless such prepayments are made pursuant to the voluntary election or 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 or two year anniversary of the closing dates of each of the mortgage loans except for IH 2017-1. For IH 2017-1, prepayments on or beforeDecember 2026 will require a yield maintenance premium. For the years endedDecember 31, 2019 and 2018, we made voluntary and mandatory prepayments of$997.4 million and$4,579.6 million , respectively, under the terms of the mortgage loan agreements. During the year endedDecember 31, 2019 , prepayments included the full repayment of the CSH 2016-2 mortgage loan. During the year endedDecember 31, 2018 , prepayments included full repayment of the CAH 2014-1, CAH 2014-2, CAH 2015-1, CSH 2016-1, IH 2015-1, IH 2015-2, and IH 2015-3 mortgage loans. 59 -------------------------------------------------------------------------------- Secured Term Loan OnJune 7, 2019 , 2019-1IH Borrower LP , a consolidated subsidiary ("2019-1 IH Borrower" and one of our Borrower Entities), entered into a 12 year loan agreement with a life insurance company (the "Secured Term Loan"). The Secured Term Loan bears interest at a fixed rate of 3.59%, including applicable servicing fees, for the first 11 years and bears interest at a floating rate based on a spread of 147 bps, including applicable servicing fees, over one month LIBOR (subject to certain adjustments as outlined in the loan agreement) for the twelfth year. The Secured Term Loan is secured by first priority mortgages on a portfolio of single-family rental properties as well as a first priority pledge of the equity interests of 2019-1 IH Borrower. We utilized the proceeds from the Secured Term Loan to fund: (i) repayments of then-outstanding indebtedness; (ii) initial deposits into the Secured Term Loan's reserve accounts; (iii) transaction costs related to the closing of the Secured Term Loan; and (iv) general corporate purposes. The following table sets forth a summary of our Secured Term Loan indebtedness as ofDecember 31, 2019 and 2018: Maturity Interest December 31, December
31,
($ in thousands) Date Rate(1) 2019 2018 Secured Term Loan June 9, 2031 3.59%$ 403,464 $ - Deferred financing costs, net (2,486 ) - Secured Term Loan, net$ 400,978 $ -
(1) The Secured Term Loan bears interest at a fixed rate of 3.59% per annum
including applicable servicing fees for the first 11 years and for the
twelfth year bears interest at a floating rate based on a spread of 147 bps
over one month LIBOR (or a comparable or successor rate as provided for in
our loan agreement), including applicable servicing fees, subject to certain
adjustments as outlined in the loan agreement. Interest payments are made
monthly.
Collateral
As ofDecember 31, 2019 , a total of 3,333 homes with a net book value of$734.8 million are included in the Secured Term Loan's collateral pool. 2019-1 IH Borrower has the right, subject to certain requirements and limitations outlined in the loan agreement, to substitute properties representing up to 20% of the collateral pool annually, and to substitute properties representing up to 100% of the collateral pool over the life of the Secured Term Loan. In addition, four times after the first anniversary of the closing date, 2019-1 IH Borrower has the right, subject to certain requirements and limitations outlined in the loan agreement, to execute a special release of collateral representing up to 15% of the then-outstanding principal balance of the Secured Term Loan in order to bring the loan-to-value ratio back in line with the Secured Term Loan's loan-to-value ratio as of the closing date. Any such special release of collateral would not change the then-outstanding principal balance of the Secured Term Loan, but rather would reduce the number of single-family rental homes included in the collateral pool. Loan Covenants The Secured Term Loan requires 2019-1 IH Borrower to maintain compliance with certain affirmative and negative covenants. Affirmative covenants include 2019-1 IH Borrower's, and certain of its affiliates', compliance with (i) licensing, permitting and legal requirements specified in the mortgage loan agreements, (ii) organizational requirements of the jurisdictions in which they are organized, (iii) federal and state tax laws, and (iv) books and records requirements specified in the respective mortgage loan agreements. Negative covenants include 2019-1 IH Borrower's, and certain of its affiliates', compliance with limitations surrounding (i) the amount of 2019-1 IH Borrower's indebtedness and the nature of its investments, (ii) the execution of transactions with affiliates, (iii) the Manager, (iv) the nature of 2019-1 IH Borrower's business activities, and (v) the required maintenance of specified cash reserves. As ofDecember 31, 2019 , and through the date our consolidated financial statements were issued, we believe 2019-1 IH Borrower is in compliance with all affirmative and negative covenants. 60 --------------------------------------------------------------------------------
Prepayments
Prepayments of the Secured Term Loan are generally not permitted unless such prepayments are made pursuant to the voluntary election or mandatory provisions specified in the loan agreement. 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 yield maintenance premium if prepayment occurs beforeJune 9, 2030 . As ofDecember 31, 2019 , no such prepayments have been made. Term Loan Facility and Revolving Facility OnFebruary 6, 2017 , we entered into a credit agreement with a syndicate of banks, financial institutions, and institutional lenders for a credit facility (the "Credit Facility"), which was amended onDecember 18, 2017 to include entities and homes acquired in the Mergers. The Credit Facility provides$2,500.0 million of borrowing capacity and consists of a$1,000.0 million Revolving Facility, which will mature onFebruary 6, 2021 , with a one year extension option, and a$1,500.0 million term loan facility (the "Term Loan Facility"), which will mature onFebruary 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 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$1,500.0 million ), subject to certain limitations. Proceeds from the Term Loan Facility were used to repay then-outstanding indebtedness and for general corporate purposes. Proceeds from the Revolving Facility are used for general corporate purposes. The following table sets forth a summary of the outstanding principal amounts under the Credit Facility as ofDecember 31, 2019 and 2018: Maturity Interest December 31, December 31, ($ in thousands) Date Rate(1) 2019 2018
Term Loan Facility
(6,253 ) (9,140 )
Term Loan Facility, net $ 1,493,747 $ 1,490,860
Revolving Facility
-
(1) Interest rates for the Term Loan Facility and the Revolving Facility are
based on LIBOR plus an applicable margin. As of
applicable margins were 1.70% and 1.75%, respectively, and LIBOR was 1.76%.
Interest Rate and Fees Borrowings under the 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 a comparable or successor rate as provided for in our loan agreement) 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 Credit Facility provides that, upon receiving an investment grade rating on its non-credit enhanced, senior unsecured long term debt of BBB- or better fromStandard & Poor's Rating Services , a division of The McGraw-Hill Companies, Inc., or Baa3 or better fromMoody's Investors Service, Inc. (an "Investment Grade Rating Event"), we may elect to convert to a credit rating based pricing grid. 61
-------------------------------------------------------------------------------- In addition to paying interest on outstanding principal under the 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 0.35% or 0.20% 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 principal reductions are required under the 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. Loan Covenants The 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 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 Credit Facility. The 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 Credit Facility are entitled to take various actions, including the acceleration of amounts due under the Credit Facility and all actions permitted to be taken by a secured creditor. As ofDecember 31, 2019 , and through the date our consolidated financial statements were issued, we believe we were in compliance with all affirmative and negative covenants. Guarantees and Security The obligations under the 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 Credit Facility. In addition, INVH may be required to provide a guarantee of the Credit Facility under certain circumstances, including if INVH does not maintain its qualification as a REIT. The 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 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. Convertible Senior Notes In connection with the Mergers, we assumed SWH's convertible senior notes. InJuly 2014 , SWH issued$230.0 million in aggregate principal amount of 3.00% convertible senior notes due 2019 (the "2019 Convertible Notes"). Interest on the 2019 Convertible Notes was payable semiannually in arrears onJanuary 1st andJuly 1st of each year. OnDecember 28, 2018 , we notified note holders of our intent to settle conversions of the 2019 Convertible Notes in shares of common stock. The notes matured onJuly 1, 2019 , and we settled substantially all of the outstanding balance of the 2019 Convertible Notes through the issuance of 12,553,864 shares of our common stock. 62 -------------------------------------------------------------------------------- InJanuary 2017 , SWH issued$345.0 million in aggregate principal amount of 3.50% convertible senior notes due 2022 (the "2022 Convertible Notes" and together with the 2019 Convertible Notes, the "Convertible Senior Notes"). Interest on the 2022 Convertible Notes is payable semiannually in arrears onJanuary 15th andJuly 15th of each year. The 2022 Convertible Notes will mature onJanuary 15, 2022 . The following table summarizes the terms of the Convertible Senior Notes outstanding as ofDecember 31, 2019 and 2018: Principal Amount Remaining Coupon Effective Conversion Maturity Amortization December 31, December 31, ($ in thousands) Rate Rate(1) Rate(2) Date Period 2019 2018 2019 Convertible Notes -% -% N/A July 1, 2019 N/A $ -$ 229,993 2022 Convertible Notes 3.50% 5.12% 43.7694 January 15, 2022 2.04 years 345,000 345,000 Total 345,000 574,993 Net unamortized fair value adjustment (10,701 ) (17,692 ) Total$ 334,299 $ 557,301
(1) Effective rate includes the effect of the adjustment to the fair value of the
debt as of the Merger Date, the value of which reduced the initial liability
recorded to
Convertible Notes, the effective interest rate was 4.92%. This rate included
the effect of the adjustment to the fair value of the debt as of the Merger
Date and reduced the initial liability recorded to
(2) The conversion rate as of
of common stock issuable per
Convertible Notes converted on such date, as adjusted in accordance with the
indenture as a result of cash dividend payments and the effects of the
Mergers. As of
criteria for conversion. We have the option to settle the 2022 Convertible
Notes in cash, common stock, or a combination thereof.
Terms of Conversion At the settlement date, the conversion rate applicable to the 2019 Convertible Notes was 54.5954 shares of our common stock per$1,000 principal amount (actual $) of the 2019 Convertible Notes (equivalent to a conversion price of approximately$18.32 per common share - actual $). OnJuly 1, 2019 , we settled substantially all of the outstanding balance of the 2019 Convertible Notes with the issuance of 12,553,864 shares of our common stock. For the years endedDecember 31, 2019 and 2018, interest expense for the 2019 Convertible Notes, including non-cash amortization of discounts, was$5.6 million and$11.1 million , respectively. 63 -------------------------------------------------------------------------------- As ofDecember 31, 2019 , the conversion rate applicable to the 2022 Convertible Notes is 43.7694 shares of our common stock per$1,000 principal amount (actual $) of the 2022 Convertible Notes (equivalent to a conversion price of approximately$22.85 per common share - actual $). The conversion rate for the 2022 Convertible Notes is subject to adjustment in some events, but will not be adjusted for any accrued and unpaid interest. In addition, following certain events that occur prior to the maturity date, we will adjust the conversion rate for a holder who elects to convert its 2022 Convertible Notes in connection with such an event in certain circumstances. At any time prior toJuly 15, 2021 , holders may convert the 2022 Convertible Notes at their option only under specific circumstances as defined in the indenture agreement, dated as ofJanuary 10, 2017 , between us and our trustee,Wilmington Trust National Association (the "Convertible Notes Trustee"). On or afterJuly 15, 2021 and until maturity, holders may convert all or any portion of the 2022 Convertible Notes at any time. Upon conversion, we will pay or deliver, as the case may be, cash, common stock, or a combination of cash and common stock, at our election. The "if-converted" value of the 2022 Convertible Notes exceeds their principal amount by$107.6 million as ofDecember 31, 2019 as the closing market price of our common stock of$29.97 per common share (actual $) exceeds the implicit conversion price. For the years endedDecember 31, 2019 and 2018, interest expense for the 2022 Convertible Notes, including non-cash amortization of discounts, was$16.9 million and$16.7 million , respectively. General Terms We may not redeem the 2022 Convertible Notes prior to their maturity date except to the extent necessary to preserve our status as a REIT forUnited States federal income tax purposes, as further described in the indenture. If we undergo a fundamental change as defined in the indenture, holders may require us to repurchase for cash all or any portion of their 2022 Convertible Notes at a fundamental change repurchase price equal to 100% of the principal amount of the 2022 Convertible Notes to be repurchased, plus accrued and unpaid interest up to, but excluding, the fundamental change repurchase date. The indenture contains customary terms and covenants and events of default. If an event of default occurs and is continuing, the Convertible Notes Trustee, by notice to us, or the holders of at least 25% in aggregate principal amount of the outstanding 2022 Convertible Notes, by notice to us and the Convertible Notes Trustee, may, and the Convertible Notes Trustee at the request of such holders shall, declare 100% of the principal of and accrued and unpaid interest on all the 2022 Convertible Notes to be due and payable. In the case of an event of default arising out of certain events of bankruptcy, insolvency or reorganization in respect to us (as set forth in the indenture), 100% of the principal of and accrued and unpaid interest on the 2022 Convertible Notes will automatically become due and payable. Certain Hedging Arrangements From time to time, we enter into derivative instruments 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 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 did not elect to designate as hedges. Designated Hedges We have entered into various interest rate swap agreements, which are used to hedge the variable cash flows associated with variable-rate interest payments. Currently, each of our swap agreements is indexed to LIBOR and is designated for hedge accounting purposes. LIBOR is set to expire at the end of 2021, and we will work with the counterparties to our swap agreements to adjust each floating rate to a comparable or successor rate. Changes in the fair value of these swaps are recorded in other comprehensive income and are subsequently reclassified into earnings in the period in which the hedged forecasted transactions affect earnings. Prior toJanuary 31, 2017 , all swaps were accounted for as non-designated hedges as the criteria for designation had not been met at that time. In addition, in connection with the Mergers, we acquired various interest rate swap instruments, which we designated for hedge accounting purposes. On the Merger Date, we recorded these interest rate swaps at their aggregate estimated fair value of$21.1 million . Over the terms of each of these swaps, an amount equal to the Merger Date fair value will be amortized and reclassified into earnings. 64 --------------------------------------------------------------------------------
The table below summarizes our interest rate swap instruments as of
Forward Maturity Strike Notional
Agreement Date Effective Date Date Rate Index Amount
December 21,
2016 February 28, 2017 January 31, 2022 1.97% One month LIBOR $ 750,000
December 11,
2019(1) February 28, 2017 December 31, 2024 1.74% 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
January 10,
2017 January 15, 2019 January 15, 2020 1.93% One month LIBOR 550,000
April 19, 2018 January 31, 2019 January 31, 2025 2.86% One month LIBOR 400,000
February 15,
2019(2) March 15, 2019 March 15, 2022 2.23% One month LIBOR 800,000
April 19, 2018 March 15, 2019 November 30, 2024 2.85% One month LIBOR 400,000
April 19, 2018 March 15, 2019 February 28, 2025 2.86% One month LIBOR 400,000
June 3, 2016 July 15, 2019 July 15, 2020 1.30% One month LIBOR 450,000
January 10,
2017 January 15, 2020 January 15, 2021 2.13% One month LIBOR 550,000
May 8, 2018 March 9, 2020 June 9, 2025 2.99% One month LIBOR 325,000
May 8, 2018 June 9, 2020 June 9, 2025 2.99% One month LIBOR 595,000
June 3, 2016 July 15, 2020 July 15, 2021 1.47% One month LIBOR 450,000
June 28, 2018 August 7, 2020 July 9, 2025 2.90% One month LIBOR 1,100,000
January 10,
2017 January 15, 2021 July 15, 2021 2.23% One month LIBOR 550,000
December 9,
2019(3) July 15, 2021 November 30, 2024 2.90% One month LIBOR 400,000
November 7,
2018 March 15, 2022 July 31, 2025 3.14% One month LIBOR 400,000
November 7,
2018 March 15, 2022 July 31, 2025 3.16% One month LIBOR 400,000
(1) On
the maturity date from
in the strike rate from 1.97% to 1.74%.
(2) On
simultaneously entered into a new interest rate swap instrument with
identical economic terms, except that the strike rate increased 2 bps, from
2.21% to 2.23%, and collateral posting requirements were removed.
(3) On
instrument from
During the years endedDecember 31, 2019 and 2018, such derivatives were used to hedge the variable cash flows associated with existing variable-rate interest payments. 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 12 months, we estimate that$44.9 million will be reclassified to earnings as a decrease in interest expense. Non-Designated Hedges Concurrent with entering into certain of the mortgage loan agreements and in connection with the Mergers, we entered into or acquired and maintain interest rate cap agreements with terms and notional amounts equivalent to the terms and amounts of the mortgage loans made by the third party lenders. Currently, each of our cap agreements is indexed to LIBOR, which is set to expire at the end of 2021. We will work with the counterparties to our cap agreements to adjust each floating rate to a comparable or successor rate. To the extent that the maturity date of one or more of the mortgage loans is extended through an exercise of one or more 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 interest rate cap strike price 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 counterparties and all other rights, 65
-------------------------------------------------------------------------------- have been pledged as additional collateral for the mortgage loans. Additionally, in certain instances, in order to minimize the cash impact of purchasing required interest rate caps, we simultaneously sell interest rate caps (which have identical terms and notional amounts) such that the purchase price and sales proceeds of the related interest rate caps are intended to offset each other. The purchased and sold interest rate caps have strike prices ranging from approximately 3.24% to 5.31%. Purchase ofOutstanding Debt Securities or Loans As market conditions warrant, we, our equity investors, our and their respective 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 consolidated 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 forUnited States federal income tax purposes) may result in taxable cancellation of indebtedness income to us, which amounts may be material, and in related adverse tax consequences to us. Cash Flows Year EndedDecember 31, 2019 Compared to Year EndedDecember 31, 2018 The following table summarizes our cash flows for the years endedDecember 31, 2019 and 2018: For the Years Ended December 31, ($ in thousands) 2019 2018 $ Change % Change Net cash provided by operating activities$ 662,130 $ 561,241 $ 100,889 18.0 % Net cash provided by investing activities 102,226 62,993 39,233 62.3 % Net cash used in financing activities (838,102 ) (680,805 ) (157,297 ) (23.1 )% Change in cash, cash equivalents, and restricted cash$ (73,746 ) $ (56,571 ) $ (17,175 ) (30.4 )% Operating Activities 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. Net cash provided by operating activities was$662.1 million and$561.2 million for the years endedDecember 31, 2019 and 2018, respectively, an increase of 18.0%. The increase in cash provided by operating activities was driven by improved operational profitability and an increase in net working capital created by changes in operating assets and liabilities. 66 -------------------------------------------------------------------------------- Investing Activities Net cash provided by investing activities consists primarily of the acquisition costs of homes, capital improvements, proceeds from property sales, and purchases of and repayments proceeds from investments in debt securities. Net cash provided by investing activities was$102.2 million and$63.0 million for the years endedDecember 31, 2019 and 2018, respectively, an increase of$39.2 million . The increase in net cash provided by investing activities primarily resulted from the combined effect of the following: (1) an increase in proceeds from the sale of homes during the year endedDecember 31, 2019 compared to the year endedDecember 31, 2018 ; (2) an increase in net cash flows from our investments in debt securities from period to period; and (3) an increase in cash used for the acquisition of homes during the year endedDecember 31, 2019 compared to the year endedDecember 31, 2018 . More specifically, proceeds from sales of homes increased$364.9 million from the year endedDecember 31, 2018 to the year endedDecember 31, 2019 due to a significant increase in the number of homes sold from 2,701 to 3,455, respectively, and an increase in the average proceeds per home sold. Net cash flows from our purchases of/receipt of repayment proceeds from investments in debt securities increased by$37.7 million from the year endedDecember 31, 2018 to the year endedDecember 31, 2019 , primarily due to entering into our IH 2018-1, IH 2018-2, IH 2018-3, and IH 2018-4 mortgage loans during the year endedDecember 31, 2018 , offset by the refinancing of our CSH 2016-2 mortgage loan and voluntary mortgage loan prepayments made during the year endedDecember 31, 2019 . Acquisition spend increased$333.7 million due to a significant increase in the number of homes acquired from 938 homes during the year endedDecember 31, 2018 to 2,153 homes during the year endedDecember 31, 2019 . Financing Activities Net cash used in financing activities was$838.1 million and$680.8 million for the years endedDecember 31, 2019 and 2018, respectively. During the year endedDecember 31, 2019 , proceeds from our Secured Term Loan of$403.5 million , proceeds from our ATM Equity Program, net of commissions, of$55.3 million , along with proceeds from home sales and operating cash flows were used (1) to repay$997.4 million of our mortgage loans, including full repayment of CSH 2016-2 and partial repayments of IH 2017-2, IH 2018-1, IH 2018-2, and IH 2018-3, and (2) to fund$276.7 million of dividend and distribution payments. For the year endedDecember 31, 2018 , proceeds from our IH 2018-1, IH 2018-2, IH 2018-3, and IH 2018-4 mortgage loans of$4,234.5 million , along with proceeds from home sales and operating cash flows, were used (1) to repay$4,579.6 million of our mortgage loans, including full repayment of the CAH 2014-1, CAH 2014-2, CAH 2015-1, CSH 2016-1, IH 2015-1, IH 2015-2, and IH 2015-3 mortgage loans and partial repayments of CSH 2016-2, (2) to repay$35.0 million , net, of Revolving Facility borrowings, (3) to fund$55.7 million of deferred financing costs associated with the IH 2018-1, IH 2018-2, IH 2018-3, and IH 2018-4 mortgage loans, and (4) to fund$230.1 million of dividend and distribution payments. Year EndedDecember 31, 2018 Compared to Year EndedDecember 31, 2017 For similar operating and financial data and discussion of our year endedDecember 31, 2018 results compared to our year endedDecember 31, 2017 results, refer to Part II. Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our 2018 10-K . Off-Balance Sheet Arrangements We have no material off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K. 67
-------------------------------------------------------------------------------- Contractual Obligations Our contractual obligations as ofDecember 31, 2019 , consist of the following: ($ in thousands) Total 2020 2021-2022 2023-2024 Thereafter Mortgage loans, net(1)(2)$ 7,431,161 $ 208,580 $ 416,020 $ 1,734,444 $ 5,072,117 Secured Term Loan 569,158 14,515 28,951 28,991 496,701 Term Loan Facility, net(1) 1,610,720 52,765 1,557,955 - - Revolving Facility(1)(2)(3) 7,467 3,558 3,909 - -
2022 Convertible Notes(4) 375,188 12,075 363,113
- -
Derivative instruments(5) 257,287 33,324 98,447
106,221 19,295
Purchase commitments(6) 38,197 38,197 - - -
Operating leases(7) 17,982 4,632 7,969 4,306 1,075
Finance leases(8) 11,265 3,048 5,415 2,802 -
Total $ 10,318,425 $ 370,694 $ 2,481,779 $ 1,876,764 $ 5,589,188
(1) Includes estimated interest payments on the respective debt based on amounts
outstanding as of
(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. See Part IV. Item 15. "Exhibits and Financial Statement Schedules -
Note 6 of Notes to Consolidated Financial Statements" for a description of
maturity dates without consideration of extension options.
(3) Includes the related unused commitment fee.
(4) Represents the principal amount of the 2022 Convertible Notes and interest
obligation which is calculated using the coupon rate of the 2022 Convertible
Notes.
(5) Includes interest rate swap and interest rate cap obligations calculated
using LIBOR as of
(6) Represents commitments to acquire 144 single-family rental homes as of
(7) Includes approximately
which have been entered into and are anticipated to commence during the next
12 months.
(8) Includes approximately
which have been entered into and are anticipated to commence during the next
three months.
Critical Accounting Policies and Estimates Our discussion and analysis of our historical financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP and in conjunction with the rules and regulations of theSEC . The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions about the effect of matters that are inherently uncertain and that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could ultimately differ from those estimates. For a discussion of recently issued and adopted accounting standards, see Part IV. Item 15. "Exhibits and Financial Statement Schedules - Note 2 of Notes to Consolidated Financial Statements." 68
-------------------------------------------------------------------------------- Investments inSingle-Family Residential Properties The following significant accounting policies affect the acquisition, disposition, recognition, classification, and fair value measurements (on a nonrecurring basis) related to our portfolio of approximately 80,000 single-family residential properties in 16 markets acrossthe United States . For a complete discussion of our accounting policy and other factors related to each category below, see Part IV. Item 15. "Exhibits and Financial Statement Schedules - Note 2 of Notes to Consolidated Financial Statements." • Acquisition of Real Estate Assets: Our purchases of homes are generally treated as asset acquisitions unless acquired in connection with a business combination. For asset acquisitions, homes are recorded at their purchase price, which is allocated between land, building and improvements, and in-place lease intangibles (when a resident 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, HOA, and other
mechanic's and miscellaneous liens, as well as other closing costs. If the
percentage allocated to buildings and improvements versus land for the
homes acquired during the year ended December 31, 2019 was increased or
decreased by 500 bps, our annualized depreciation expense would have
changed by approximately $1.0 million .
• Cost Capitalization: We incur costs to acquire, stabilize, and prepare our
single-family residential properties to be leased. We capitalize these
costs as a component of our investment in each single-family residential
property, using specific identification and relative allocation
methodologies. The capitalization period associated with our stabilization
activities begins at the time that such activities commence and concludes
at the time that a single-family residential property is available to be
leased.
Once a property is ready for its intended use, expenditures for ordinary maintenance and repairs thereafter are expensed to operations as incurred, and we capitalize expenditures that improve or extend the life of a home and for certain furniture and fixtures additions. The capitalized costs are depreciated over their estimated useful lives on a straight-line basis. The weighted average useful lives range from 7 years to 28.5 years. If the useful lives for costs capitalized during the year endedDecember 31, 2019 were increased or decreased by 10%, our annualized depreciation expense would have changed by approximately$5.0 million . • Provisions for Impairment: We continuously evaluate, by property, whether there are any events or changes in circumstances indicating that the carrying amount of our single-family residential properties may not be recoverable. To the extent an event or change in circumstance is identified, a residential property is considered to be impaired only if its carrying value cannot be recovered through estimated future undiscounted cash flows from the use and eventual disposition of the
property. To the extent an impairment has occurred, the carrying amount of
our investment in a property is adjusted to its estimated fair value. The
process whereby we assess our single-family residential properties for
impairment requires significant judgment and assessment of factors thatare, at times, subject to significant uncertainty. We evaluate multiple
information sources and perform a number of internal analyses, each of
which are important components of our process with no one information
source or analysis being necessarily determinative. For those homes for
which a change in an event or circumstance was identified in the most
recent impairment analysis, a 5% change in the estimated fair value ofthose homes may have resulted in a decrease or increase in impairment
expense of less than
• Single-Family Residential Properties Held for Sale: From time to time, we
may identify single-family residential properties to be sold. Once we
identify a property to be sold pursuant to GAAP requirements, we
discontinue depreciating the property, measure the property at the lower
of its carrying amount or its fair value less estimated costs to sell, and
present the property separately within other assets, net on our
consolidated balance sheets. If market values less disposal costs for our
properties that were classified as held for sale as of December 31, 2019
were 10% lower, our impairment expense related to those properties would
have increased by approximately $5.0 million . If the market values less
disposal costs were 10% higher, our impairment expense would have been
approximately $2.0 million lower.
69--------------------------------------------------------------------------------
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 in our 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. We utilize third party specialists who use modeling techniques and assumptions to estimate the fair value of derivative instruments. Assumptions include forward yield curves and nonperformance risk. If interest rates had increased or decreased by 50 bps, the termination value of our net derivative asset/liability would have changed by approximately$150.0 million . As our interest rate swap agreements are designated as hedges, this change would be reflected in other comprehensive income and subsequently reclassified into earnings in the period in which the hedged forecasted transactions affect earnings. Our interest rates caps would not be materially affected. Segment Reporting Operating segments are defined as components of an enterprise for which discrete financial information is available that is evaluated regularly by the 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. The CODM evaluates operating performance and allocates resources on a total portfolio basis. The CODM utilizes NOI 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 with a focus on growing accretively in high-growth locations where we have greater scale and density. Non-GAAP Measures EBITDA, EBITDAre, and Adjusted EBITDAre EBITDA, EBITDAre, and Adjusted EBITDAre are supplemental, non-GAAP measures often utilized to evaluate the performance of real estate companies. We define EBITDA as net income or loss computed in accordance with GAAP before the following items: interest expense; income tax expense; and depreciation and amortization.The National Association of Real Estate Investment Trusts ("Nareit") recommends as a best practice that REITs that report an EBITDA performance measure also report EBITDAre. We define EBITDAre, consistent with the Nareit definition, as EBITDA, further adjusted for gain on sale of property, net of tax and impairment on depreciated real estate investments. Adjusted EBITDAre is defined as EBITDAre before the following items: share-based compensation expense; IPO related expenses; merger and transaction-related expenses; severance; casualty losses, net; interest income; unrealized gains from an investment in equity securities; and other miscellaneous income and expenses. EBITDA, EBITDAre, and Adjusted EBITDAre 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, EBITDAre, and Adjusted EBITDAre as measures of performance. Our management uses EBITDA, EBITDAre, and Adjusted EBITDAre in a number of ways to assess our consolidated financial and operating performance, and we believe these measures are helpful to management and external users in identifying trends in our performance. EBITDA, EBITDAre, and Adjusted EBITDAre 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. 70 -------------------------------------------------------------------------------- We believe that the presentation of EBITDA, EBITDAre, and Adjusted EBITDAre provides information useful to investors in assessing our financial condition and results of operations. The GAAP measure most directly comparable to EBITDA, EBITDAre, and Adjusted EBITDAre is net income or loss. EBITDA, EBITDAre, and Adjusted EBITDAre 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, EBITDAre, and Adjusted EBITDAre may not be comparable to the EBITDA, EBITDAre, and Adjusted EBITDAre of other companies due to the fact that not all companies use the same definitions of EBITDA, EBITDAre, and Adjusted EBITDAre. 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 net income (loss) (as determined in accordance with GAAP) to EBITDA, EBITDAre, and Adjusted EBITDAre for each of the periods indicated: For the Years Ended December 31, ($ in thousands) 2019 2018
2017
Net income (loss) available to common stockholders$ 145,068 $ (5,744 ) $ (105,952 ) Net income available to participating securities 395 817 615 Non-controlling interests 1,648 (86 ) (489 ) Interest expense 367,173 383,595 256,970 Depreciation and amortization 533,719 560,541
309,578
EBITDA 1,048,003 939,123
460,722
Gain on sale of property, net of tax (96,336 ) (49,682 ) (33,896 ) Impairment on depreciated real estate investments 14,210 6,709
2,231
EBITDAre 965,877 896,150
429,057
Share-based compensation expense(1) 18,158 29,499
81,203
IPO related expenses(2) - -
8,287
Merger and transaction-related expenses(3) 4,347 16,895 29,802 Severance 8,465 8,238 12,048 Casualty losses, net(4) 4,533 14,110 21,862 Other, net(5) (11,600 ) (6,958 ) 959 Adjusted EBITDAre$ 989,780 $ 957,934 $ 583,218
(1) For the years ended
expense, respectively.
(2) For the year ended
general and administrative expense.
(3) Includes merger and transaction-related expenses included within general and
administrative.
(4) Includes
Harvey for the years ended
were no such losses during the year ended
(5) Includes interest income, unrealized gains from an investment in equity
securities, and other miscellaneous income and expenses.
Net Operating Income
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 expense). NOI excludes: interest expense; depreciation and
amortization; property management expense; general and administrative expense;
impairment and other; gain on sale of property, net of tax; and interest income
and other miscellaneous income and expenses.
71
--------------------------------------------------------------------------------
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 net income (loss) (as
determined in accordance with GAAP) to NOI for our total portfolio and NOI for
our Same Store portfolio for each of the periods indicated:
For the Years Ended December 31,
($ in thousands) 2019 2018 2017
Net income (loss) available to common stockholders$ 145,068 $ (5,744 ) $ (105,952 ) Net income available to participating securities 395 817 615 Non-controlling interests 1,648 (86 ) (489 ) Interest expense 367,173 383,595 256,970 Depreciation and amortization 533,719 560,541
309,578
Property management expense(1) 61,614 65,485
43,344
General and administrative(2) 74,274 98,764
167,739
Impairment and other(3) 18,743 20,819
24,093
Gain on sale of property, net of tax (96,336 ) (49,682 ) (33,896 ) Other, net(4) (11,600 ) (6,958 ) 959 NOI (total portfolio) 1,094,698 1,067,551$ 662,961 Non-Same Store NOI (97,590 ) (123,138 ) NOI (Same Store portfolio)(5)$ 997,108 $ 944,413
(1) Includes
the years ended
(2) Includes
for the years ended
(3) Includes
Harvey for the years ended
were no such losses during the year ended
(4) Includes interest income, unrealized gains from an investment in equity
securities, and other miscellaneous income and expenses.
(5)
December 31, 2019 and 2018. 72
--------------------------------------------------------------------------------
Funds from Operations, Core Funds from Operations, and Adjusted Funds from
Operations
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 Nareit as net income or loss (computed in
accordance with GAAP) excluding 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, gains or losses
related to sales of previously depreciated homes, as well non-controlling
interests, from net income or loss (computed in accordance with GAAP). 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, because 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 provide 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 the following: noncash interest expense related to amortization of
deferred financing costs, loan discounts, and noncash interest expense for
derivatives; share-based compensation expense; IPO related expenses; offering
related expenses; merger and transaction-related expenses; severance expense;
unrealized gains on investment in equity securities; and casualty losses, net,
as applicable. We define Adjusted FFO as Core FFO less recurring capital
expenditures that are necessary to help preserve the value, and maintain the
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. No adjustments
were made to the Core FFO and Adjusted FFO per common share - diluted
computations for potential shares of common stock related to the Convertible
Senior Notes. Accordingly, there can be no assurance that our basis for
computing this non-GAAP measures is comparable with that of other companies.
73
--------------------------------------------------------------------------------The following table presents a reconciliation of net income (loss) (as determined in accordance with GAAP) to FFO, Core FFO, and Adjusted FFO for each of the periods indicated:
For the Years Ended December 31,
(in thousands, except shares and per share
data) 2019 2018 2017
Net income (loss) available to common
stockholders $ 145,068 $ (5,744 ) $ (105,952 )
Add (deduct) adjustments from net income
(loss) to derive FFO:
Net income available to participating
securities 395 817 615
Non-controlling interests 1,648 (86 ) (489 )
Depreciation and amortization on real
estate assets 529,205 549,505 305,851
Impairment on depreciated real estate
investments 14,210 6,709 2,231
Net gain on sale of previously depreciated
investments in real estate (96,336 ) (49,682 ) (33,896 )
FFO 594,190 501,519 168,360
Noncash interest expense related to
amortization of deferred financing costs,
loan discounts, and noncash interest
expense from derivatives 48,515 48,354 29,506
Share-based compensation expense(1) 18,158 29,499 81,203
IPO related expenses - - 8,287
Offering related expenses(2) 2,267 - -
Merger and transaction-related expenses(3) 4,347 22,962 29,802
Severance expense 8,465 8,238 12,048
Unrealized gains on investment in equity
securities(4) (6,480 ) - -
Casualty losses, net(5) 4,533 14,110 21,862
Core FFO 673,995 624,682 351,068
Recurring capital expenditures (118,988 ) (122,733 ) (54,423 )
Adjusted FFO $ 555,007 $
501,949
Net income (loss) available to common stockholders Weighted average common shares outstanding - diluted(6)(8)(9)(10) 532,499,787
520,376,929 339,423,442
Net income (loss) per common share - diluted(7)(8)(9)(10) $ 0.27 $
(0.01 )
FFO
Numerator for FFO per common share - diluted(8)$ 599,776 $ 512,576 $ 168,360 Weighted average common shares and OP Units outstanding - diluted(8)(9)(10) 545,150,847
543,063,802 338,933,198
FFO per common share - diluted(8)(9)(10) $ 1.10
Core FFO and Adjusted FFO Weighted average common shares and OP Units outstanding - diluted(8)(9)(10) 538,925,506 530,643,789 338,933,198 Core FFO per common share - diluted(8)(9)(10) $ 1.25 $
1.18
(1) For the years ended
$15,083 ,$23,999 , and$70,906 was recorded in general and administrative expense, respectively. 74
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(2) Includes expenses associated with secondary offerings of common stock
completed during the year ended
(3) Includes Merger and transaction-related expenses included within general and
administrative. Additionally, for the year ended
accelerated depreciation and amortization of certain corporate assets
included in depreciation and amortization.
(4) Includes unrealized gains on our investment in equity securities during the
year ended
(5) Includes
Harvey for the years ended
were no such losses during the year ended
(6) Weighted average common shares outstanding - diluted is calculated in
accordance with GAAP and is used in the calculation of net income (loss) per
common share - diluted.
(7) Net income (loss) per common share - diluted is calculated based on net loss
available to common stockholders for only the period after
the date on which our common stock began trading on the NYSE. For the period
from
to common stockholders of
(8) On
Convertible Notes with the issuance of 12,553,864 shares of common stock, and
these shares of common stock are included within all net income (loss), FFO,
Core FFO, and AFFO per common share calculations subsequent to that date.
Using the "if-converted" method, the 2019 Convertible Notes are anti-dilutive
to net income per common share - diluted and are excluded from such
computation for the period prior to conversion included within the year ended
December 31, 2019 . The impact of the 2019 Convertible Notes in the period prior to conversion is reflected in the FFO per common share - diluted computation above in accordance with the "if-converted" method consistent with Nareit's guidance for calculating FFO per share. For the years endedDecember 31, 2019 and 2018, the numerator for FFO per common share - diluted is adjusted for$5,586 and$11,057 , respectively, of interest expense on the 2019 Convertible Notes, including non-cash amortization of discounts. For the years endedDecember 31, 2019 and 2018, the denominator is adjusted for 6,225,341 and 12,420,013, respectively, potential shares of common stock for the 2019 Convertible Notes for the period prior to conversion. No such adjustments were made to Core FFO and AFFO per common share - diluted for the 2019 Convertible Notes. For the years endedDecember 31, 2019 and 2018, 15,100,443 potential shares of common stock issuable upon the conversion of the 2022 Convertible Notes are also excluded from the computation of net income or loss and FFO per common share - diluted as they are anti-dilutive and are excluded from Core FFO and AFFO per common share - diluted. For the period fromFebruary 1, 2017 throughDecember 31, 2017 , we asserted our intent and ability to fully settle the Convertible Senior Notes in cash; and as a result, the Convertible Senior Notes did not impact diluted EPS during that period. (9) Incremental shares attributed to non-vested share-based awards totaling
1,263,825 shares for the year ended
denominator for net income per common share - diluted. For the years ended
shares attributed to non-vested share-based awards would be anti-dilutive to
net loss per common share - diluted. For the computations of FFO, Core FFO,
and AFFO per common share - diluted, common share equivalents of 1,748,787,
1,150,384, and 786,791 for the years ended
respectively, related to incremental shares attributed to non-vested
share-based awards are included in the denominator.
(10) Vested units of partnership interests in
excluded from the computation of net income (loss) per common share -
diluted for the periods above because all net income (loss) attributable to
the vested OP Units has been recorded as non-controlling interest and thus
excluded from net income (loss) available to common stockholders. Weighted
average vested OP Units of 5,940,757, 9,116,476, and 1,189,902 for the years
ended
denominator for the computations of FFO, Core FFO, and AFFO per common share
- diluted.
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