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ARPI > SEC Filings for ARPI > Form 10-Q on 14-Aug-2013All Recent SEC Filings

Show all filings for AMERICAN RESIDENTIAL PROPERTIES, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for AMERICAN RESIDENTIAL PROPERTIES, INC.


14-Aug-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations should be read together with the financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. This report, including the following Management's Discussion and Analysis of Financial Condition and Results of Operations, 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 "Cautionary Note Regarding Forward-Looking Statements," as well as the risk factors described in "Item IA. Risk Factors," of this report.

Overview

We are an internally managed real estate company that acquires, owns and manages single-family homes as rental properties. In 2008, our founders, Stephen G. Schmitz, our Chief Executive Officer and Chairman, and Laurie A. Hawkes, our President and Chief Operating Officer and a member of our Board of Directors, identified a unique opportunity to acquire homes at distressed pricing and lease them at attractive rental rates. They subsequently began developing a vertically integrated platform to acquire and manage single-family homes on an institutional scale. We were formed to expand upon our founders' vision, strategy and platform.

As of June 30, 2013, we owned 4,089 properties in Arizona, California, Colorado, Florida, Georgia, Illinois, Indiana, Nevada, North Carolina, Ohio, South Carolina, Tennessee and Texas with an aggregate investment of $486.6 million, and we managed an additional 609 properties for ARP Phoenix Fund I, LP, or Phoenix Fund, in Arizona and Nevada. For the period from July 1, 2013 to July 31, 2013, we acquired 446 single-family homes for a total purchase price of approximately $64.2 million and have contracted to acquire 760 single-family homes for a total purchase price of approximately $108.4 million, of which 749 homes are in Texas, 155 homes are in North Carolina, 109 homes are in Arizona, 74 homes are in Illinois, 44 homes are in Indiana, 42 homes are in Ohio, 17 homes are in Florida, 8 homes are in Georgia, 6 homes are in Nevada, 1 home is in California and 1 home is in South Carolina. We actively evaluate new markets to identify investment opportunities that we believe can generate attractive risk-adjusted returns for our stockholders. There is no assurance that we will close on the properties we have under contract.

Our primary business strategy is to acquire, restore, lease and manage single-family homes as well-maintained investment properties to generate attractive risk-adjusted returns over the long-term. We believe our founders' nearly five years of direct experience in the single-family rental sector provides us with the expertise to successfully execute our business strategy nationally to institutional standards. We have the infrastructure to acquire large numbers of properties through multiple acquisition channels. We source individual properties through auctions and brokers, and portfolios of properties through brokerages or directly from operators, investors or banks, and, in the future, we may source assets from these channels and government-sponsored entities, or GSEs. We have the experience and resources necessary to restore homes to "rent-ready" condition in an efficient and cost-effective manner, to a standard that we believe appeals to our target tenants' preferences, enabling us to attract qualified tenants and to provide a high level of service to retain our tenants. We believe that our vertically integrated acquisition and management platform is critical to executing our strategy.

In addition to our primary business strategy of acquiring, restoring, leasing and managing single-family homes, we have a private mortgage financing strategy that generates attractive returns on invested capital and provides us access to acquisition opportunities and valuable market data. As of June 30, 2013, our private mortgage portfolio had an aggregate outstanding principal balance of $36.4 million, a weighted-average interest rate of 12.2% per annum and a weighted-average remaining term of 125 days. We also owned an additional $1.2 million in long-term mortgage investments. Additionally, for the period from July 1, 2013 to July 31, 2013, we funded approximately $8.5 million in private mortgage loans.

We plan to continue acquiring single-family homes and other residential real estate related assets in markets that satisfy our investment criteria. Over time, we expect that the proportion of our total assets invested in self-managed properties, properties leased to and managed by third-party preferred operators and in private mortgage financings will vary depending upon available investment opportunities and other factors. We conduct substantially all of our operations through our Operating Partnership, in which we own a 96.7% interest, including the sole 0.4% general partnership interest that we hold through a subsidiary as of June 30, 2013 after giving effect to vested and unvested LTIP awards, including those we committed to award upon completion of the IPO.


Table of Contents

We intend to make an election to qualify, and believe we are operating so as to qualify, as a real estate investment trust, or REIT, for federal income tax purposes beginning with our short taxable year ended December 31, 2012. Assuming that we qualify for taxation as a REIT, we will generally not be subject to federal income taxes to the extent that we distribute substantially all of our taxable income to our stockholders and meet other specific requirements. If we fail to qualify as a REIT in any taxable year, we will be subject to federal and state income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate tax rates, and we may be ineligible to qualify as a REIT for four subsequent tax years. Even if we qualify as a REIT, we may be subject to certain state or local income taxes, and our TRS, which is our taxable REIT subsidiary, will be subject to federal, state and local taxes on its income. In addition, the income of any TRS that we own will be subject to taxation at regular corporate rates.

Industry Outlook

Residential housing is the largest real estate asset class in the United States with a size of approximately $17.7 trillion, according to the 2012 fourth quarter Federal Reserve Flow of Funds release. Historically, according to the U.S. Census Bureau, approximately one-third of this asset class has been rented and single-family homes currently comprise roughly one-third of all residential rental housing.

We believe that there has been an over-correction in residential housing prices in certain housing markets, creating the potential for home price appreciation. We also believe that there continues to be a large supply of single-family homes that we can purchase at potentially attractive pricing. The current housing market environment across our current markets, Arizona, California, Colorado, Florida, Georgia, Illinois, Indiana, North Carolina, Nevada, Ohio, South Carolina, Tennessee and Texas, remains highly attractive for single-family home acquisition and rental. We are able to acquire homes at favorable pricing, and the potential supply remains strong.

Property Portfolio

The following three tables present summary statistics of our single-family homes by metropolitan statistical areas, or MSAs, and metro division as of June 30, 2013. The first table includes our entire portfolio of single-family homes. The second table includes only the single-family homes that we manage. The third table includes only the single-family homes that our preferred operators manage.


Table of Contents

           Total Portfolio of Single-Family Homes-Summary Statistics

                                (June 30, 2013)



                                                                                                                          Average
                                                                          Average                            Average        Size
                                      Number of        Aggregate         Investment        Percentage          Age        (square
MSA/Metro Division                      Homes         Investment        Per Home (1)       Leased (2)        (years)       feet)
Phoenix, AZ                                1,224     $ 163,560,212     $      133,628               79 %           16        1,687
Houston, TX                                  410     $  55,105,800     $      134,404               69 %            5        1,799
Chicago, IL                                  360     $  47,268,558     $      131,302              100 %           55        1,417
Inland Empire, CA                            213     $  37,047,841     $      173,934               88 %           15        1,915
Dallas-Fort Worth, TX                        203     $  30,965,781     $      152,541               44 %           11        2,064
Winston-Salem, NC                            188     $  23,192,460     $      123,364               73 %           11        1,355
Indianapolis, IN                             437     $  22,567,714     $       51,642               98 %           60        1,216
Atlanta, GA                                  222     $  17,290,373     $       77,885               90 %           20        1,584
Other Texas                                   95     $  14,494,838     $      152,577                8 %            9        1,875
Raleigh, NC                                  101     $  12,838,202     $      127,111               53 %           10        1,676
Nashville, TN                                120     $  11,132,086     $       92,767               93 %            9        1,457
Other Florida                                217     $  15,639,984     $       72,074               88 %           11        1,285
Other California                              82     $  10,083,223     $      122,966               71 %           35        1,336
Charlotte, NC-SC                              65     $   8,875,046     $      136,539               25 %            8        1,888
Las Vegas, NV                                 64     $   6,592,232     $      103,004               95 %           14        1,536
Other MSA/Metro Divisions                     88     $   9,955,174     $      113,127               45 %            9        1,473

Total/Weighted Average                     4,089     $ 486,609,524     $      119,005               78 %           22        1,599

(1) For self-managed homes, represents average purchase price (including broker commissions and closing costs) plus average capital expenditures. For preferred operator program homes, represents purchase price (including broker commissions and closing costs) paid by us for the portfolio divided by the number of homes in the portfolio and does not include past, expected or budgeted general and administrative expenses associated with ongoing monitoring activities of our investment. The preferred operator is obligated to pay for all taxes, insurance, other expenses and capital expenditures (including significant capital improvements) required for the management, operation and maintenance of the properties. Accordingly, absent a default by the preferred operator under a long-term lease agreement with us, we expect to incur no expenses related to properties under our preferred operator program, other than general and administrative expenses associated with ongoing monitoring activities of our investment.

(2) Includes both self-managed homes and preferred operator program homes. We classify homes in our preferred operator program as 100% leased, because each preferred operator is obligated to pay us 100% of the base rent specified in the applicable lease irrespective of whether or not the homes are occupied by residential sub-tenants. This does not mean that 100% of the homes leased to preferred operators are occupied by residential sub-tenants. If a preferred operator is unable to lease a material portion of the homes it leases from us to residential sub-tenants, it may adversely affect such operator's ability to pay rent to us under the lease. We are also eligible to receive percentage rents on a quarterly basis equal to a fixed percentage of gross revenue that the preferred operator collects from its residential sub-tenants who occupy the homes.


Table of Contents

        Portfolio of Self-Managed Single-Family Homes-Summary Statistics

                                (June 30, 2013)



                                                                                                                                                                                           Leased Homes
                                                                                                                                                                                                      Annual
                                                                                                                                                                                                   Average Rent
                                                                                                                                                                                                    per Leased
                                                                                                                                                                                                    Home as a
                                                                                                                                                                                   Average        Percentage  of
                                                               Average          Average                                                                              Average       Monthly           Average
                                                               Purchase         Capital            Average                                              Average        Size        Rent Per       Investment Per
                                               Number of      Price Per       Expenditures        Investment         Aggregate        Percentage          Age        (square        Leased         Leased Home
MSA/Metro Division                               Homes         Home (1)       Per Home (2)       Per Home (3)       Investment          Leased          (years)       feet)          Home              (4)
Phoenix, AZ                                         1,058     $  141,219     $        2,817     $      144,036     $ 152,389,847               76 %           11        1,758     $    1,032                  8.7 %
Houston, TX                                           410     $  134,107     $          298     $      134,404     $  55,105,800               69 %            5        1,799     $    1,211                 11.2 %
Inland Empire, CA                                     213     $  155,636     $       18,298     $      173,934     $  37,047,841               88 %           15        1,915     $    1,332                  9.3 %
Dallas-Fort Worth, TX                                 203     $  151,103     $        1,437     $      152,541     $  30,965,781               44 %           11        2,064     $    1,433                 11.2 %
Winston-Salem, NC                                     188     $  122,632     $          733     $      123,364     $  23,192,460               73 %           11        1,355     $    1,102                 10.7 %
Other Texas                                            95     $  152,571     $            7     $      152,577     $  14,494,838                8 %            9        1,875     $    1,230                 10.6 %
Raleigh, NC                                           101     $  124,892     $        2,219     $      127,111     $  12,838,202               53 %           10        1,676     $      944                 11.0 %
Nashville, TN                                         120     $   92,716     $           51     $       92,767     $  11,132,086               93 %            9        1,457     $    1,108                 14.4 %
Other California                                       82     $  107,776     $       15,190     $      122,966     $  10,083,223               71 %           35        1,336     $    1,073                 10.3 %
Atlanta, GA                                            59     $   98,491     $        2,834     $      101,325     $   5,978,202               61 %           20        1,790     $    1,060                 11.5 %
Charlotte, NC-SC                                       54     $  143,219     $          391     $      143,610     $   7,754,946                9 %            8        1,893     $    1,557                 10.9 %
Other Florida                                          79     $  116,141     $        1,486     $      117,628     $   9,292,602               67 %           15        1,564     $    1,054                 10.9 %
Indianapolis, IN                                       33     $   99,447     $           39     $       99,486     $   3,283,042               73 %           11        1,569     $    1,134                 14.1 %
Las Vegas, NV                                          50     $  103,084     $        9,701     $      112,784     $   5,639,221               94 %            6        1,620     $    1,032                 11.0 %
Other MSA/Metro Divisions                              88     $  112,728     $          399     $      113,127     $   9,955,174               45 %            9        1,473     $      887                 12.4 %

Total/Weighted Average                              2,833     $  133,929     $        3,436     $      137,364     $ 389,153,265               68 %           11        1,731     $    1,116                  9.9 %

(1) Average purchase price includes broker commissions and closing costs.

(2) Represents average capital expenditures per home as of June 30, 2013. Does not include additional expected or future capital expenditures.

(3) Represents average purchase price plus average capital expenditures.

(4) Represents annualized average monthly rent per leased home as a percentage of our average investment (average purchase price per home plus average capital expenditures) per leased home. Does not include a provision for payment of ongoing property expenses (such as insurance, taxes, HOA fees and maintenance) or an allocation of our general and administrative expense, all of which materially impact our results. Accordingly, it should not be interpreted as a measure of profitability, and its utility in evaluating our business is limited. Average monthly rent for leased homes may not be indicative of average rents we may achieve on our vacant homes.


Table of Contents

 Portfolio of Preferred Operator Program Single-Family Homes-Summary Statistics

                                (June 30, 2013)



                                                                                                                                                                   Annual Rent
                                                                                                                                                 Average              as a
                                                                                                                                              Monthly Rent         Percentage
                                                               Average                                                         Average        Per Home Paid        of Average
                                                              Investment                                          Average        Size         by Preferred         Investment
                                              Number of        Per Home        Aggregate        Percentage          Age        (square       Operator to  Us        Per Home
MSA/Metro Division                              Homes            (1)           Investment       Leased (2)        (years)       feet)              (3)                 (4)
Chicago, IL                                          360     $    131,302     $ 47,268,558              100 %           55        1,417     $             789               7.2 %
Indianapolis, IN                                     404     $     47,734     $ 19,284,672              100 %           64        1,187     $             358               9.0 %
Atlanta, GA                                          163     $     69,400     $ 11,312,171              100 %           21        1,509     $             463               8.0 %
Phoenix, AZ                                          166     $     67,291     $ 11,170,365              100 %           47        1,236     $             449               8.0 %
Other Florida                                        138     $     45,996     $  6,347,382              100 %            9        1,126     $             307               8.0 %
Charlotte, NC-SC                                      11     $    101,827     $  1,120,100              100 %            6        1,859     $             636               7.5 %
Las Vegas, NV                                         14     $     68,072     $    953,011              100 %           41        1,236     $             454               8.0 %

Total/Weighted Average                             1,256     $     77,593     $ 97,456,259              100 %           47        1,301     $             505               7.8 %

(1) Represents purchase price (including broker commissions and closing costs) paid by us for the portfolio divided by the number of homes in the portfolio and does not include past, expected or budgeted general and administrative expenses associated with ongoing monitoring activities of our investment. The preferred operator is obligated to pay for all taxes, insurance, other expenses and capital expenditures (including significant capital improvements) required for the management, operation and maintenance of the properties. Accordingly, absent a default by the preferred operator under a long-term lease agreement with us, we expect to incur no expenses related to properties under our preferred operator program, other than general and administrative expenses associated with ongoing monitoring activities of our investment.

(2) We classify homes in our preferred operator program as 100% leased, because each preferred operator is obligated to pay us 100% of the base rent specified in the applicable lease irrespective of whether or not the homes are occupied by residential sub-tenants. This does not mean that 100% of the homes leased to preferred operators are occupied by residential sub-tenants. If a preferred operator is unable to lease a material portion of the homes it leases from us to residential sub-tenants, it may adversely affect such operator's ability to pay rent to us under the lease. We are also eligible to receive percentage rents on a quarterly basis equal to a fixed percentage of gross revenue that the preferred operator collects from its residential sub-tenants who occupy the homes.

(3) Represents the initial annual base rent payable to us by the preferred operator pursuant to the portfolio lease divided by 12 and then divided by the number of homes included in the lease. Does not include percentage rents we are also eligible to receive in addition to base rents on a quarterly basis equal to a fixed percentage of gross revenue that the preferred operator collects from its residential sub-tenants who occupy the homes. The percentage rents we are eligible to receive fluctuate based on both the occupancy rates of the underlying homes and the rental rates paid by the residential sub-tenants.

(4) Represents annualized average monthly rent paid by preferred operator to us as a percentage of our average investment per home. The rent paid by the preferred operator is net of all taxes, insurance, other expenses and capital expenses (including significant capital improvements) for which the preferred operator is responsible.

Properties Owned for Six Months or Longer

We acquire both vacant homes and homes subject to existing leases. When we acquire a property that is not leased, we must possess, restore, market and lease the property before it becomes a revenue generating asset. We refer to this process as property stabilization. We anticipate that, on average, the stabilization period for each non-leased property will range from 90 to 180 days, depending on factors such as the channel through which the property was acquired, the age and condition of the property and whether the property was vacant when we acquired it. Similarly, the time to market and lease a property is driven by local demand, our marketing techniques and the size of our available inventory. Consequently, we expect that most properties that were not leased at the time of acquisition should be stabilized within six months thereafter and that properties owned for more than six months provide an indication of how our portfolio will perform over the long-term.

For homes acquired subject to a lease, the remaining lease terms at the date of acquisition have averaged approximately six months. Accordingly, a portion of these homes are expected to become vacant within six months of acquisition due to normal tenant turnover. Therefore, our leased rate of homes owned six months or greater is not fully indicative of how we expect our stabilized portfolio to perform over time.

The following three tables present summary statistics of our portfolio of single-family homes we owned for at least six months as of June 30, 2013. The first table includes our entire portfolio of single-family homes. The second table includes only the single-family homes that we manage. The third table includes only the single-family homes that our preferred operators manage.


Table of Contents

                     Total Portfolio of Single-Family Homes

               Owned for Six Months or Longer-Summary Statistics

                                (June 30, 2013)




                                                        Average
                                                       Investment
                                      Number of         Per Home         Homes          Homes           Percentage
MSA/Metro Division                      Homes             (1)           Leased        Vacant (2)          Leased
Phoenix, AZ                                  979      $    131,513          830               149                85 %
Inland Empire, CA                            209      $    174,578          188                21                90 %
Las Vegas, NV                                 47      $    107,100           44                 3                94 %
Other California                              82      $    122,966           58                24                71 %
Dallas-Fort Worth, TX                         43      $    144,182           38                 5                88 %
Other Florida                                138      $     45,996          138                -                100 %
Atlanta, GA                                   73      $     72,663           69                 4                95 %
Chicago, IL                                  204      $    135,174          204                -                100 %

Total/Weighted Average                     1,775      $    127,201        1,569               206                88 %

. . .

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