American Homes 4 Rent - Quarter Report: 2015 June (Form 10-Q)

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2015

 

or

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                      to                     

 

COMMISSION FILE NUMBER 001-36013

 

 

AMERICAN HOMES 4 RENT

(Exact name of registrant as specified in its charter)

 

 

 

30601 Agoura Road, Suite 200

Agoura Hills, California 91301

(Address of principal executive offices) (Zip Code)

 

(805) 413-5300

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    o  No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    o  No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    o  Yes    x  No

 

There were 210,852,089 Class A common shares of beneficial interest, $0.01 par value per share, and 635,075 Class B common shares of beneficial interest, $0.01 par value per share, outstanding on August 5, 2015.

 

 

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American Homes 4 Rent

Form 10-Q

INDEX

 

		Page
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29
Item 4.	Controls and Procedures	29
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	30
Item 1A.	Risk Factors	30
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30
Item 3.	Defaults Upon Senior Securities	30
Item 4.	Mine Safety Disclosures	30
Item 5.	Other Information	30
Item 6.	Exhibits	30
	Signatures	31
	Exhibit Index

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Various statements contained in this Quarterly Report on Form 10-Q of American Homes 4 Rent (the “Company,” “we,” “our” and “us”), including those that express a belief, expectation or intention, as well as those that are not statements of historical fact, are forward-looking statements. These forward-looking statements may include projections and estimates concerning the timing and success of specific projects and our future revenues, income and capital spending. Our forward-looking statements are generally accompanied by words such as “estimate,” “project,” “predict,” “believe,” “expect,” “intend,” “anticipate,” “potential,” “plan,” “goal” or other words that convey the uncertainty of future events or outcomes. We have based these forward-looking statements on our current expectations and assumptions about future events. While our management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond our control. These and other important factors, including those discussed or incorporated by reference under Part II, Item 1A.”Risk Factors”, Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report and in our Annual Report on Form 10-K for the year ended December 31, 2014, filed with the Securities and Exchange Commission, may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements.

 

While forward-looking statements reflect our good faith beliefs, assumptions and expectations, they are not guarantees of future performance, and you should not unduly rely on them. The forward-looking statements in this Quarterly Report on Form 10-Q speak only as of the date of this report. We are not obligated to update or revise these statements as a result of new information, future events or otherwise, unless required by applicable law.

 

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PART I

FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

American Homes 4 Rent

Condensed Consolidated Balance Sheets

(Amounts in thousands, except share and per share data)

 

		June 30, 2015			December 31, 2014
		(Unaudited)
Assets
Single-family properties:
Land		$	1,192,335		$	1,104,409
Buildings and improvements		5,263,599			4,808,706
Single-family properties held for sale		6,387			3,818
		6,462,321			5,916,933
Less: accumulated depreciation		(300,173		)	(206,262		)
Single-family properties, net		6,162,148			5,710,671
Cash and cash equivalents		90,657			108,787
Restricted cash		94,837			77,198
Rent and other receivables, net		12,184			11,009
Escrow deposits, prepaid expenses and other assets		118,516			118,783
Deferred costs and other intangibles, net		62,299			54,582
Asset-backed securitization certificates		25,666			25,666
Goodwill		120,655			120,655
Total assets		$	6,686,962		$	6,227,351
Liabilities
Credit facility		$	177,000		$	207,000
Asset-backed securitizations		2,063,663			1,519,390
Secured note payable		51,200			51,644
Accounts payable and accrued expenses		158,037			149,706
Amounts payable to affiliates		1,863			—
Contingently convertible Series E units liability		68,076			72,057
Preferred shares derivative liability		57,260			57,960
Total liabilities		2,577,099			2,057,757
Commitments and contingencies
Equity
Shareholders’ equity:
Class A common shares, $0.01 par value per share, 450,000,000 shares authorized, 210,852,089 and 210,838,831 shares issued and outstanding at June 30, 2015, and December 31, 2014, respectively		2,108			2,108
Class B common shares, $0.01 par value per share, 50,000,000 shares authorized, 635,075 shares issued and outstanding at June 30, 2015, and December 31, 2014		6			6
Preferred shares, $0.01 par value per share, 100,000,000 shares authorized, 17,060,000 issued and outstanding at June 30, 2015, and December 31, 2014		171			171
Additional paid-in capital		3,619,503			3,618,207
Accumulated deficit		(226,797		)	(170,162		)
Accumulated other comprehensive loss		(199		)	(229		)
Total shareholders’ equity		3,394,792			3,450,101
Noncontrolling interest		715,071			719,493
Total equity		4,109,863			4,169,594
Total liabilities and equity		$	6,686,962		$	6,227,351

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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American Homes 4 Rent

Condensed Consolidated Statements of Operations

(Amounts in thousands, except share and per share data)

(Unaudited)

 

		For the Three Months Ended						For the Six Months Ended
		June 30,						June 30,
		2015			2014			2015			2014
Revenues:
Rents from single-family properties		$	137,818		$	88,871		$	258,498		$	162,632
Fees from single-family properties		2,204			1,889			3,535			3,247
Tenant charge-backs		11,962			3,138			20,334			5,028
Other		1,644			406			3,009			675
Total revenues		153,628			94,304			285,376			171,582
Expenses:
Property operating expenses
Leased single-family properties		67,823			37,299			121,753			66,565
Vacant single-family properties and other		4,456			5,842			10,428			14,885
General and administrative expense		6,276			5,703			12,407			10,777
Interest expense		22,003			3,888			37,673			5,390
Noncash share-based compensation expense		734			612			1,430			1,144
Acquisition fees and costs expensed		4,236			919			10,144			1,371
Depreciation and amortization		59,221			38,325			112,885			73,456
Total expenses		164,749			92,588			306,720			173,588
Remeasurement of Series E units		2,143			(4,944		)	3,981			(7,700		)
Remeasurement of preferred shares		580			(141		)	700			(598		)
Net loss		(8,398		)	(3,369		)	(16,663		)	(10,304		)
Noncontrolling interest		3,730			4,212			7,686			7,832
Dividends on preferred shares		5,569			4,669			11,138			7,790
Net loss attributable to common shareholders		$	(17,697	)	$	(12,250	)	$	(35,487	)	$	(25,926	)
Weighted-average shares outstanding—basic and diluted		211,487,164			185,515,651			211,484,461			185,510,004
Net loss attributable to common shareholders per
share—basic and diluted		$	(0.08	)	$	(0.07	)	$	(0.17	)	$	(0.14	)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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American Homes 4 Rent

Condensed Consolidated Statements of Comprehensive Income

(Amounts in thousands)

(Unaudited)

 

		For the Three Months Ended						For the Six Months Ended
		June 30,						June 30,
		2015			2014			2015			2014
Net loss		$	(8,398	)	$	(3,369	)	$	(16,663	)	$	(10,304	)
Other comprehensive income (loss):
Unrealized gain (loss) on interest rate cap agreement:
Unrealized interest rate cap agreement gain (loss) arising during the period		30			(212		)	30			(212		)
Unrealized gain (loss) on interest rate cap agreement		30			(212		)	30			(212		)
Other comprehensive income (loss)		30			(212		)	30			(212		)
Comprehensive loss		(8,368		)	(3,581		)	(16,633		)	(10,516		)
Comprehensive income attributable to noncontrolling interests		3,728			4,227			7,684			7,847
Dividends on preferred shares		5,569			4,669			11,138			7,790
Comprehensive loss attributable to common shareholders		$	(17,665	)	$	(12,477	)	$	(35,455	)	$	(26,153	)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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American Homes 4 Rent

Condensed Consolidated Statement of Equity

(Amounts in thousands, except share data)

(Unaudited)

 

		Class A common shares					Class B common shares					Preferred shares
																	Additional						Accumulated other
		Number					Number					Number					paid-in			Accumulated			comprehensive			Shareholders’			Noncontrolling			Total
		of shares		Amount			of shares		Amount			of shares		Amount			capital			deficit			loss			equity			interest			equity
Balances at December 31, 2014		210,838,831		$	2,108		635,075		$	6		17,060,000		$	171		$	3,618,207		$	(170,162	)	$	(229	)	$	3,450,101		$	719,493		$	4,169,594
Share-based compensation		—		—			—		—			—		—			1,430			—			—			1,430			—			1,430
Common stock issued under share-based compensation plans, net of shares withheld for employee taxes		13,258		—			—		—			—		—			(134		)	—			—			(134		)	—			(134		)
Distributions to equity holders:
Preferred shares		—		—			—		—			—		—			—			(11,138		)	—			(11,138		)	—			(11,138		)
Noncontrolling interests		—		—			—		—			—		—			—			—						—			(12,108		)	(12,108		)
Common shares		—		—			—		—			—		—			—			(21,148		)	—			(21,148		)	—			(21,148		)
Net (loss) income		—		—			—		—			—		—			—			(24,349		)	—			(24,349		)	7,686			(16,663		)
Total other comprehensive income		—		—			—		—			—		—			—			—			30			30			—			30
Balances at June 30, 2015		210,852,089		$	2,108		635,075		$	6		17,060,000		$	171		$	3,619,503		$	(226,797	)	$	(199	)	$	3,394,792		$	715,071		$	4,109,863

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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American Homes 4 Rent

Condensed Consolidated Statements of Cash Flows

(Amounts in thousands)

(Unaudited)

 

		For the Six Months Ended
		June 30,
		2015			2014
Operating activities
Net loss		$	(16,663	)	$	(10,304	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		112,885			73,456
Noncash amortization of deferred financing costs		3,500			446
Noncash share-based compensation		1,430			1,144
Provision for bad debt		2,785			2,385
Remeasurement of Series E units		(3,981		)	7,700
Remeasurement of preferred shares		(700		)	598
Equity in net loss (income) of unconsolidated ventures		273			(17		)
Other changes in operating assets and liabilities:
Rent and other receivables		(5,305		)	(2,029		)
Restricted cash for resident security deposits		(9,223		)	(10,281		)
Prepaid expenses and other assets		2,546			6,028
Deferred leasing costs		(5,421		)	(3,503		)
Accounts payable and accrued expenses		6,267			7,884
Resident security deposit liability		9,223			10,281
Amounts payable to affiliates		6,211			4,882
Net cash provided by operating activities		103,827			88,670
Investing activities
Cash paid for single-family properties		(438,689		)	(597,717		)
Escrow deposits for purchase of single-family properties		(3,113		)	6,044
Increase in restricted cash related to lender requirements		(8,416		)	(10,201		)
Investment in unconsolidated joint ventures		(10,003		)	(12,191		)
Investments in mortgage financing receivables		(7,731		)	(17,465		)
Initial renovations to single-family properties		(93,655		)	(91,427		)
Other capital expenditures for single-family properties		(15,925		)	—
Net cash used for investing activities		(577,532		)	(722,957		)
Financing activities
Net proceeds from issuance of preferred shares		—			189,433
Proceeds from exercise of stock options		—			431
Proceeds from asset-backed securitizations		552,830			480,970
Payments on asset-backed securitizations		(8,557		)	—
Proceeds from credit facility		628,000			837,909
Payments on credit facility		(658,000		)	(731,909		)
Payments on secured note		(444		)	—
Distributions to noncontrolling interests		(12,108		)	(11,805		)
Distributions to common shareholders		(21,148		)	(18,551		)
Distributions to preferred shareholders		(11,138		)	(7,790		)
Deferred financing costs paid		(13,860		)	(14,315		)
Net cash provided by financing activities		455,575			724,373
Net (decrease) increase in cash and cash equivalents		(18,130		)	90,086
Cash and cash equivalents, beginning of period		108,787			148,989
Cash and cash equivalents, end of period		$	90,657		$	239,075
Supplemental cash flow information
Cash payments for interest		$	(33,431	)	$	(8,473	)
Supplemental schedule of noncash investing and financing activities
Accounts payable and accrued expenses related to property acquisitions		$	(344	)	$	(4,076	)
Amounts payable to affiliates related to property acquisitions		$	—		$	647
Accrued distribution to Series C convertible units		$	4,698		$	4,698

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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American Homes 4 Rent

Notes to Unaudited Condensed Consolidated Financial Statements

 

Note 1. Organization and Operations

 

American Homes 4 Rent (the “Company,” “we,” “our” and “us”) is a Maryland real estate investment trust (“REIT”) formed on October 19, 2012. We are focused on acquiring, renovating, leasing and operating single-family homes as rental properties. As of June 30, 2015, the Company held 37,491 single-family properties in 22 states, including 44 properties held for sale.

 

From our formation through June 10, 2013, we were externally managed and advised by American Homes 4 Rent Advisor, LLC (the “Advisor”) and the leasing, managing and advertising of our properties was overseen and directed by American Homes 4 Rent Management Holdings, LLC (the “Property Manager”), both of which were subsidiaries of American Homes 4 Rent, LLC (“AH LLC”). On June 10, 2013, we acquired the Advisor and the Property Manager from AH LLC in exchange for 4,375,000 Series D units and 4,375,000 Series E units in American Homes 4 Rent, L.P. (the “Operating Partnership”) (the “Management Internalization”). Under the terms of the contribution agreement, all administrative, financial, property management, marketing and leasing personnel, including executive management, became fully dedicated to us. Since the date of the Management Internalization, the Company has consolidated the Advisor and the Property Manager and the results of these operations are reflected in the condensed consolidated financial statements.

 

Prior to the Management Internalization, AH LLC exercised control over the Company through the contractual rights provided to the Advisor through an advisory management agreement. Accordingly, the contribution of certain properties by AH LLC to the Company prior to the Management Internalization have been deemed to be transactions between entities under common control, and as such, the accounts relating to the properties contributed have been recorded by us as if they had been acquired by us on the dates such properties were acquired by AH LLC. Accordingly, the condensed consolidated financial statements include AH LLC’s historical carrying values of the properties that had been acquired by AH LLC.

 

Note 2. Significant Accounting Policies

 

Basis of Presentation

 

The condensed consolidated financial statements are unaudited and include the accounts of the Company, the Operating Partnership and its consolidated subsidiaries. Intercompany accounts and transactions have been eliminated. The Company consolidates real estate partnerships and other entities that are not variable interest entities (“VIEs”) when it owns, directly or indirectly, a majority interest in the entity or is otherwise able to control the entity. The Company consolidates VIEs in accordance with Accounting Standards Codification (“ASC”) No. 810, Consolidation, if it is the primary beneficiary of the VIE as determined by its power to direct the VIE’s activities and the obligation to absorb its losses or the right to receive its benefits, which are potentially significant to the VIE. Entities for which the Company owns an interest, but does not consolidate, are accounted for under the equity method of accounting as an investment in unconsolidated subsidiary and are included in escrow deposits, prepaid expenses and other assets within the condensed consolidated balance sheets. Ownership interests in certain consolidated subsidiaries of the Company held by outside parties are included in noncontrolling interest within the condensed consolidated financial statements.

 

The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and in conjunction with the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures required for annual financial statements have been condensed or excluded pursuant to SEC rules and regulations. Accordingly, the condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. In the opinion of management, all adjustments of a normal and recurring nature necessary for a fair presentation of the condensed consolidated financial statements for the interim periods have been made. The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

There have been no changes to our significant accounting policies that have had a material impact on our condensed consolidated financial statements and related notes, compared to those policies disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014. Therefore, notes to the condensed consolidated financial statements that would substantially duplicate the disclosures contained in our most recent audited consolidated financial statements have been omitted.

 

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Recent Accounting Pronouncements

 

In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts, rather than as an asset. The recognition and measurement guidance for debt issuance costs is not affected and amortization of such costs will continue to be reported as interest expense. The guidance will be effective for the Company for annual reporting periods beginning after December 15, 2015, and for interim periods within those annual periods, with early adoption permitted and retrospective application required. The Company expects to adopt the guidance effective January 1, 2016, and the impact will be a reduction of deferred costs and other intangibles, net, as well as a corresponding reduction of the associated debt liability.

 

In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, which changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. Among other changes, it modifies the criteria used in the variable interest model and eliminates the presumption that a general partner should consolidate a limited partnership in the voting model. The guidance will be effective for the Company for annual reporting periods beginning after December 15, 2015, and for interim periods within those annual periods, with early adoption permitted. The Company does not anticipate that the adoption of this guidance will have a material impact on its financial statements.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which provides guidance on revenue recognition and supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, most industry-specific guidance and some cost guidance included in Subtopic 605-35, “Revenue Recognition—Construction-Type and Production-Type Contracts.” The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under current guidance. These judgments may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The guidance will be effective for the Company for annual reporting periods beginning after December 15, 2017, and for interim periods within those annual periods. At that time, the Company may adopt the full retrospective approach or the modified retrospective approach. Early adoption is not permitted. The Company is currently evaluating the method of adoption of this guidance and does not anticipate that the adoption of this guidance will have a material impact on its financial statements.

 

Note 3. Single-Family Properties

 

Single-family properties, net, consists of the following as of June 30, 2015, and December 31, 2014 (dollars in thousands):

 

		June 30, 2015
		Number of properties		Net book value
Leased single-family properties		34,903		$	5,746,687
Single-family properties being renovated		686		98,435
Single-family properties being prepared for re-lease		355		56,788
Vacant single-family properties available for lease		1,503		253,851
Single-family properties held for sale		44		6,387
Total		37,491		$	6,162,148

 

		December 31, 2014
		Number of properties		Net book value
Leased single-family properties		28,250		$	4,631,797
Single-family properties being renovated		2,886		476,120
Single-family properties being prepared for re-lease		630		104,974
Vacant single-family properties available for lease		2,807		493,962
Single-family properties held for sale		26		3,818
Total		34,599		$	5,710,671

 

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Single-family properties, net at June 30, 2015, and December 31, 2014, included $21.7 million and $114.6 million, respectively, related to properties for which the recorded grant deed has not been received. For these properties, the trustee or seller has warranted that all legal rights of ownership have been transferred to us on the date of the sale, but there is a delay for the deeds to be recorded.

 

Depreciation expense related to single-family properties was $53.2 million and $34.8 million for the three months ended June 30, 2015 and 2014, respectively, and $101.9 million and $65.8 million for the six months ended June 30, 2015 and 2014, respectively.

 

Note 4. Rent and Other Receivables

 

Included in rent and other receivables, net is an allowance for doubtful accounts of $1.7 million and $0.5 million as of June 30, 2015, and December 31, 2014, respectively. Also included in rent and other receivables, net, are receivables related to payments made on single-family properties for which sales have been rescinded or unwound due to legal issues beyond our control, which totaled $0.2 million and $1.1 million as of June 30, 2015, and December 31, 2014, respectively, and other non-tenant receivables, which totaled $2.5 million and $2.4 million as of June 30, 2015, and December 31, 2014, respectively.

 

Note 5. Deferred Costs and Other Intangibles

 

Deferred costs and other intangibles, net, consists of the following as of June 30, 2015, and December 31, 2014 (in thousands):

 

		June 30, 2015			December 31, 2014
Deferred leasing costs		$	12,581		$	18,307
Deferred financing costs		66,873			53,013
Intangible assets:
In-place lease values		3,712			10,468
Trademark		3,100			3,100
Database		2,100			2,100
		88,366			86,988
Less: accumulated amortization		(26,067		)	(32,406		)
Total		$	62,299		$	54,582

 

Amortization expense related to deferred leasing costs, the value of in-place leases, trademark and database was $4.0 million and $3.5 million for the three months ended June 30, 2015 and 2014, respectively, and $7.2 million and $7.7 million for the six months ended June 30, 2015 and 2014, respectively, which has been included in depreciation and amortization within the condensed consolidated statements of operations. Amortization of deferred financing costs was $2.4 million and $0.9 million for the three months ended June 30, 2015 and 2014, respectively, and $4.4 million and $1.5 million for the six months ended June 30, 2015 and 2014, respectively, which has been included in gross interest, prior to interest capitalization (see Note 6).

 

The following table sets forth the estimated annual amortization expense related to deferred costs and other intangibles, net as of June 30, 2015, for future periods (in thousands):

 

Year		Deferred Leasing Costs			Deferred Financing Costs			Value of In-place Leases			Trademark			Database
Remaining 2015		$	3,374		$	4,753		$	217		$	330		$	150
2016		1,229			9,416			55			660			300
2017		—			7,926			—			752			300
2018		—			7,428			—			—			300
2019		—			5,257			—			—			300
Thereafter		—			19,420			—			—			132
Total		$	4,603		$	54,200		$	272		$	1,742		$	1,482

 

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Note 6. Debt

 

The following table presents the Company’s debt as of June 30, 2015, and December 31, 2014 (in thousands):

 

						Outstanding Principal Balance
		Interest Rate (1)		Maturity Date		June 30, 2015			December 31, 2014
2014-SFR1 securitization (2)		1.79	%	June 9, 2019		$	476,160		$	478,565
2014-SFR2 securitization		4.42	%	October 9, 2024		509,868			512,435
2014-SFR3 securitization		4.40	%	December 9, 2024		525,776			528,390
2015-SFR1 securitization (3)		4.14	%	April 9, 2045		551,859			—
Total asset-backed securitizations						2,063,663			1,519,390
Secured note payable		4.06	%	July 1, 2019		51,200			51,644
Credit facility (4)		2.94	%	September 30, 2018		177,000			207,000
Total debt						$	2,291,863		$	1,778,034

 

(1)               Interest rates are as of June 30, 2015. Unless otherwise stated, interest rates are fixed percentages.

(2)               The 2014-SFR1 securitization bears interest at a duration-weighted blended interest rate of LIBOR plus 1.54%, subject to a LIBOR floor of 0.25%. The maturity date of June 9, 2019, reflects the fully extended maturity date based on an initial two-year loan term and three, 12-month extension options, at the Company’s election, provided there is no event of default and compliance with certain other terms.

(3)               The 2015-SFR1 securitization has a maturity date of April 9, 2045, with an anticipated repayment date of April 9, 2025.

(4)               The credit facility provides for a borrowing capacity of up to $800.0 million through March 2016 and bears interest at LIBOR plus 2.75% (3.125% beginning in March 2017). Any outstanding borrowings upon expiration of the credit facility period in March 2016 will become due in September 2018.

 

Asset-Backed Securitization

 

In March 2015, we completed a private securitization transaction (the “2015-SFR1 securitization”), in which a newly-formed special purpose entity (the “Borrower”) entered into a loan with a third-party lender for $552.8 million represented by a promissory note. The Borrower under the loan is wholly owned by another special purpose entity (the “Equity Owner”) and the Equity Owner is wholly owned by the Operating Partnership. The loan is a fixed-rate loan with a 30 year term, maturity date of April 9, 2045, and a duration-adjusted weighted-average interest rate of 4.14%. The loan requires monthly payments of interest together with principal payments representing one-twelfth of one percent of the original principal amount. The loan has an anticipated repayment date of April 9, 2025. In the event the loan is not repaid on April 9, 2025, the interest rate on each component is increased to a rate per annum equal to the sum of 3% plus the greater of: (a) the initial interest rate and (b) a rate equal to the sum of (i) the bid side yield to maturity for the “on the run” United States Treasury note with a 10 year maturity plus the mid-market 10 year swap spread, plus (ii) the component rate spread for each component.

 

The note was immediately transferred by the third-party lender to a subsidiary of the Company and then to a REMIC trust in exchange for eight classes of single-family rental pass-through certificates representing all the beneficial ownership interests in the loan and the trust. Upon receipt of the certificates, a subsidiary of the Company sold the certificates to investors for gross proceeds of $552.8 million, before issuance costs of $13.3 million. Proceeds from this transaction were used to pay down the outstanding balance on the credit facility and for general corporate purposes. The principal amount of each class of certificates corresponds to the corresponding principal amount of the loan components with an additional class to hold the residual REMIC interest.

 

The loan is secured by first priority mortgages on a pool of 4,661 single-family residential properties transferred to the Borrower from the Company’s portfolio of properties. The Borrower’s homes were substantially similar to the other properties owned by the Company and were leased to tenants underwritten on substantially the same basis as the tenants in the Company’s other properties. During the duration of the loan, the Borrower’s properties may not generally be transferred, sold or otherwise securitized, the Company can substitute properties only if a property owned by the Borrower becomes a disqualified property under the terms of the loan, and the Borrower is limited in its ability to incur any additional indebtedness.

 

The loan is also secured by a security interest in all of the Borrower’s personal property and a pledge of all of the assets of the Equity Owner, including a security interest in its membership interest in the Borrower. The Company provides a limited guaranty (i) for certain losses arising out of designated acts of intentional misconduct and (ii) for the principal amount of the loan and all other obligations under the loan agreement in the event of insolvency or bankruptcy proceedings.

 

The loan agreement provides that the Borrower maintain covenants typical for securitization transactions including maintaining certain reserve accounts and a debt service coverage ratio of at least 1.20 to 1.00. The loan agreement defines the debt service coverage ratio as of any determination date as a ratio in which the numerator is the net cash flow divided by the aggregate debt service

 

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for the twelve month period following the date of determination. As of June 30, 2015, the Company was in compliance with all covenants under the loan agreement.

 

The Company has accounted for the transfer of the note from its subsidiary to the trust as a sale under ASC 860, Transfers and Servicing, with no resulting gain or loss as the note was both originated by the third party lender and immediately transferred at the same fair market value. The Company has also evaluated and not identified any variable interests in the trust. Accordingly, the Company continues to consolidate, at historical cost basis, the 4,661 homes placed as collateral for the note. The principal balance outstanding on the note was $551.9 million as of June 30, 2015, and was included in asset-backed securitizations within the condensed consolidated balance sheets. The 4,661 collateral homes had a net book value of $746.9 million as of June 30, 2015.

 

Credit Facility

 

In March 2013, the Company entered into a $500.0 million senior secured revolving credit facility with a financial institution, which was subsequently amended in September 2013 to, among other things, expand our borrowing capacity to $800.0 million and extend the repayment period to September 30, 2018. Borrowings under the credit facility are available through March 7, 2016, at which point, any outstanding borrowings will convert to a term loan through September 30, 2018. All borrowings under the credit facility bear interest at 30 day LIBOR plus 2.75% until March 2017, and thereafter at 30 day LIBOR plus 3.125%. The credit facility is secured by our Operating Partnership’s membership interests in entities that own certain of our single-family properties and requires that we maintain certain financial covenants. As of June 30, 2015, the Company was in compliance with all loan covenants. The Company had $177.0 million and $207.0 million in total outstanding borrowings under the credit facility at June 30, 2015, and December 31, 2014, respectively.

 

Interest Expense

 

The following table outlines our total gross interest, including unused commitment and other fees and amortization of deferred financing costs, and capitalized interest for the three and six months ended June 30, 2015 and 2014 (in thousands):

 

		Three Months Ended						Six Months Ended
		June 30, 2015			June 30, 2014			June 30, 2015			June 30, 2014
Gross interest		$	23,913		$	6,298		$	44,152		$	10,728
Capitalized interest		(1,910		)	(2,410		)	(6,479		)	(5,338		)
Interest expense		$	22,003		$	3,888		$	37,673		$	5,390

 

Note 7. Accounts Payable and Accrued Expenses

 

The following table summarizes accounts payable and accrued expenses as of June 30, 2015, and December 31, 2014 (in thousands):

 

		June 30, 2015			December 31, 2014
Accounts payable		$	92		$	4,925
Accrued property taxes		55,775			49,018
Other accrued liabilities		33,105			28,972
Accrued construction and maintenance liabilities		16,965			23,914
Resident security deposits		52,100			42,877
Total		$	158,037		$	149,706

 

Note 8. Shareholders’ Equity

 

Participating Preferred Shares

 

As of June 30, 2015, the initial liquidation preference on the Company’s participating preferred shares, as adjusted by an amount equal to 50% of the cumulative change in value of an index based on the purchase prices of single-family properties located in our top 20 markets, for all of the Company’s outstanding 5.0% Series A participating preferred shares, 5.0% Series B participating preferred shares and 5.5% Series C participating preferred shares was $444.5 million.

 

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