S-11 1 d506077ds11.htm S-11 S-11
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As filed with the Securities and Exchange Commission on May 2, 2013

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM S-11

FOR REGISTRATION UNDER

THE SECURITIES ACT OF 1933 OF SECURITIES

OF CERTAIN REAL ESTATE COMPANIES

 

 

COLONY AMERICAN HOMES, INC.

(Exact Name of Registrant as Specified in Governing Instruments)

c/o Colony Capital, LLC 2450 Broadway, 6th Floor, Santa Monica, California 90404

(310) 282-8820

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

 

Ronald M. Sanders

660 Madison Avenue, Suite 1600

New York, NY 10065

(212) 230-3300

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

 

 

Copies to:

 

Jay L. Bernstein, Esq.    Julian Kleindorfer, Esq.
Andrew S. Epstein, Esq.    Latham & Watkins LLP
Clifford Chance US LLP    355 South Grand Ave
31 West 52nd Street    Los Angeles, CA 90071
New York, NY 10019    Phone: (213) 485-1234
Phone: (212) 878-8000    Facsimile: (213) 891-8763
Facsimile: (212) 878-8375   

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the Securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box:    ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box.    ¨

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. (Check One):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (do not check if a smaller reporting company)    Smaller reporting company   ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Securities to be Registered  

Proposed

Maximum
Aggregate

Offering Price(1)(2)

  Amount of
Registration Fee(1)

Common Stock, par value $0.01

  $100,000,000   $13,640

 

 

 

(1)

Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.

(2)

Includes shares of common stock that the underwriters have the option to purchase solely to cover over-allotments, if any.

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any state where the offer or sale of the securities is not permitted.

 

PROSPECTUS (Subject to Completion)

Issued                     , 2013

             Shares

LOGO

COMMON STOCK

 

 

Colony American Homes, Inc. focuses on the acquisition, ownership, renovation, leasing and management of single-family properties across eight states, 25 metropolitan statistical areas, or MSAs, and 63 counties. We are a market leader in the single-family residential rental market and currently hold what we believe is one of the largest portfolios of single-family rental homes in the United States, consisting of more than 8,200 homes as of March 31, 2013.

 

 

We are externally managed and advised by our Manager, CAH Manager, LLC. Our Manager was formed by Colony Capital, LLC, or Colony, a privately held independent global real estate investment firm founded in 1991, to manage a market-leading, single-family residential rental platform with a national footprint.

 

 

Colony American Homes, Inc. is offering              shares of its common stock. All of the shares of common stock offered by this prospectus are being sold by us. This is our initial public offering, and no public market currently exists for our common stock. We expect the initial public offering price of our common stock to be between $         and $         per share.

 

 

We will apply to list our common stock on the New York Stock Exchange under the symbol “            .”

 

 

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012.

 

 

We intend to elect and qualify to be taxed as a real estate investment trust, or REIT, for U.S. federal income tax purposes, commencing with our taxable year ended December 31, 2012. To assist us in qualifying as a REIT, stockholders are generally restricted from owning more than 9.8% by value or number of shares, whichever is more restrictive, of our outstanding shares of common or preferred stock. See “Description of Capital Stock—Restrictions on Ownership and Transfer.”

 

 

Investing in our common stock involves risks. See “Risk Factors” beginning on page 22 of this prospectus for a discussion of the risks that you should consider before investing in our common stock.

 

 

PRICE $             A SHARE

 

 

 

     Price to
     Public    
     Underwriting
Discounts and
     Commissions    
     Proceeds to
     Company    
 

Per Share

     $                      $                      $                

Total

     $                      $                      $                

Colony American Homes, Inc. has granted the underwriters the right to purchase up to an additional              shares of common stock to cover over-allotments.

The Securities and Exchange Commission and state securities regulators have not approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of common stock to purchasers on or about                     , 2013.

 

 

 

Credit Suisse

  Morgan Stanley  

BofA Merrill Lynch

 

 

                    , 2013.


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You should rely only on the information contained in this prospectus, any free writing prospectus prepared by us or information to which we have referred you. We have not, and the underwriters have not, authorized anyone to provide you with additional information or information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of shares of our common stock.

Through and including                     , 2013 (25 days after the date of this prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.

 

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MARKET AND INDUSTRY DATA AND FORECASTS

Certain market and industry data included in this prospectus has been obtained from third party sources that we believe to be reliable. Market estimates are calculated by using independent industry publications, government publications and third party forecasts in conjunction with our assumptions about our markets. We have not independently verified such third party information. While we are not aware of any material misstatements regarding any market, industry or similar data presented herein, such data involves risks and uncertainties and is subject to change based on various factors, including those discussed under the headings “Forward-Looking Statements” and “Risk Factors” in this prospectus.

 

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SUMMARY

This summary highlights some of the information in this prospectus. It does not contain all of the information that you should consider before investing in our common stock. You should read carefully the more detailed information set forth under “Risk Factors” and the other information included in this prospectus. Except where the context suggests otherwise, the terms “company,” “we,” “us” and “our” refer to Colony American Homes, Inc., a Maryland corporation, together with its consolidated subsidiaries, including its predecessor, CSFR ColFin American Investors, LLC, which was acquired by us in a series of transactions that were completed as of October 5, 2012; “CAH” refers to Colony American Homes, Inc., excluding its consolidated subsidiaries; our “operating partnership” refers to our operating partnership subsidiary, CAH Operating Partnership, L.P., excluding its consolidated subsidiaries, a Delaware limited partnership; “our Manager” refers to our external manager, CAH Manager, LLC, a Delaware limited liability company; and “Colony” refers to Colony Capital, LLC, together with its affiliates. Unless indicated otherwise, the information in this prospectus assumes (1) the common stock to be sold in this offering is sold at $         per share, the midpoint of the initial public offering price range set forth on the cover page of this prospectus, (2) the completion of the recapitalization transactions described under “History and Formation of Our Company” and (3) no exercise by the underwriters of their over-allotment option to purchase up to an additional                  shares of our common stock. The term “home” is used in this prospectus to mean a housing unit, which is leased separately from any other housing unit. No property with a single deed has more than four housing units, and less than 2% of our wholly owned properties have more than one housing unit.

Our Company

Colony American Homes, Inc. is a market leader in the acquisition, ownership, renovation, leasing and management of single-family properties in the United States. Our growing portfolio consisted of 8,236 homes as of March 31, 2013, which we believe is one of the largest portfolios of single-family homes in the United States. We are externally managed by CAH Manager, LLC, or our Manager, a subsidiary of Colony Capital, LLC, a leading real estate private equity firm that has established 44 investment vehicles and raised over $20 billion of equity capital since its founding in 1991.

As of March 31, 2013, our portfolio consisted of 7,059 wholly owned homes and 1,177 homes owned in a joint venture, which are concentrated in attractive sub-markets within Arizona, California, Colorado, Delaware, Florida, Georgia, Nevada and Texas, offering us significant operating efficiencies and economies of scale. Our portfolio is comprised of homes acquired from a variety of sourcing channels by means of various types of transactions, including trustee auctions, Multiple Listing Service, or MLS, short sales, “mini-bulk” portfolios ranging from five to 500 homes, government-sponsored entities, or GSEs, and real estate owned, or REO, from banks. Our strategy is to continue to grow our portfolio in our existing sub-markets and also to strategically expand our footprint to additional markets where conditions support attractive investment returns.

The estimated total cost basis for our wholly owned homes as of March 31, 2013 was $1.1 billion, inclusive of acquisition and actual and estimated upfront renovation costs. The average total cost basis per home, inclusive of acquisition and actual and estimated upfront renovation costs, was approximately $159,000, representing an average estimated investment cost per square foot of approximately $90. For vacant homes, through March 31, 2013, we have incurred, on average, actual and estimated upfront renovation costs of approximately $20,000 per home. In the period from April 1, 2013 through April 21, 2013, we acquired 1,309 homes with an estimated total cost basis of $         million, inclusive of actual and estimated upfront renovation costs. In addition to our portfolio of owned properties, as of                     , we had          homes under contract, representing a total purchase price of $         million.

Upon completion of this offering, we expect to have approximately $         million in cash on hand, including $                 in net proceeds from this offering, available for future acquisitions and working capital. We

 

 

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are targeting to deploy this capital within      to      months following the completion of this offering. In addition, we currently have no outstanding indebtedness, but are in the process of negotiating to obtain a credit facility to provide us with additional capital to support further growth in our business.

Central to our investment philosophy is the belief that investing in and managing a large portfolio of single-family properties across diverse geographic locations require a fully institutionalized infrastructure and substantial scale. Colony, through our Manager, is the architect of our proprietary acquisition, renovation, leasing and management processes. We believe that Colony’s experience building integrated investment platforms to underwrite, acquire and manage complex real estate investments provides us with a significant competitive advantage. We believe that our Manager’s established, vertically integrated infrastructure, which includes in-house acquisitions and renovation and property management capabilities, will enable us to remain a market-leading firm in the single-family rental industry.

We are organized as a Maryland corporation and intend to elect and qualify to be taxed as a REIT for U.S. federal income tax purposes, commencing with our taxable year ended December 31, 2012. We generally will not be subject to U.S. federal income tax on our net taxable income to the extent that we annually distribute all of our net taxable income to our stockholders and maintain our intended qualification as a REIT.

Our Manager

Our Manager was established by Colony in March 2012 to build a large-scale platform to acquire single-family homes and execute a residential rental strategy in select markets across the United States. Our Manager was formed as a natural outgrowth from Colony’s well-established distress investing philosophy that recognizes and capitalizes upon market inefficiencies and emerging opportunities. Colony formed our Manager as a focused platform, fully dedicated to the single-family rental opportunity and has positioned our Manager to lead the institutionalization of the fragmented and historically inefficient single-family rental industry.

Colony is a privately held independent global real estate investment firm founded in 1991 by Thomas J. Barrack, Jr. Colony and its affiliates have an extensive global footprint and corresponding infrastructure, with over 400 employees operating in 12 offices in nine countries: China, France, Italy, Lebanon, South Korea, Spain, Taiwan, the United Kingdom and the United States. This global infrastructure has provided Colony with proprietary market knowledge, sourcing capabilities and the local presence required to identify and execute complex transactions. Since its founding, Colony has established 44 investment vehicles, including a publicly traded mortgage REIT, global investment funds, dedicated regional investment funds and investment-specific co-investment vehicles, raising an aggregate of approximately $20 billion of equity capital, which has been invested in most major sectors of real estate, with particularly active participation in acquiring assets from distressed sellers, the primary target investment theme of our acquisition strategy. During this period, Colony has acquired over $50 billion in real estate, comprising over 24,000 assets across all major property types. Our Manager is a vertically integrated company with in-house expertise in acquisitions, property renovation, property management, leasing and sales. As of March 31, 2013, approximately 270 full-time employees and consultants from our Manager and its affiliates were dedicated to the single-family rental business. As Colony has formed our Manager to be its sole management vehicle focusing primarily on the single-family rental opportunity, this vehicle comprises substantially all of Colony’s experience in the single-family rental business.

As a result of a 22-year heritage of real estate investing, and in particular the expansion of its investment activity in the wake of the recent financial crisis, we believe Colony has developed one of the strongest commercial real estate asset management platforms in the industry. Colony’s investment platform is vertically integrated across its investment strategies and the firm maintains significant infrastructure that it believes improves its underwriting capabilities and local market knowledge, providing a strong competitive advantage relative to its competition.

 

 

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Our Manager applies a similar vertically integrated strategy to the single-family residential business and expects to capitalize on substantial operational and financial advantages, which we believe has enabled us to build a single-family home rental business of critical mass.

Our Manager’s headquarters are located in Scottsdale, Arizona.

Our Portfolio

We focus on high-quality assets in attractive sub-markets, as evidenced by our existing portfolio. We have acquired this portfolio using only equity. As discussed in more detail under “Business—Our Target Market Selection,” our portfolio strategy is focused on acquiring properties in locations characterized by proximity to good school districts, work centers and transportation infrastructure. By targeting these characteristics, our portfolio is highly focused on infill sub-markets within our target metropolitan statistical areas, or MSAs. As a result, our properties tend to be located in more established neighborhoods, which results in an older average age of our targeted rental properties. Furthermore, given the demographics and amenities of the neighborhoods, many of our homes located in infill sub-markets have had substantial renovations by prior owners and in combination with the substantial improvements made by our Manager upon acquisition, reflect updated systems and finishes. A summary of our portfolio as of March 31, 2013 is as follows:

Portfolio as of March 31, 2013

 

Market

  Number
of
Homes(1)
    % of
Total
    % of
Homes
Leased
    Total
Purchase
Price (in
millions)
    Estimated
Total
Cost
Basis(2)
(in
millions)
    Average
Cost
Basis Per
Home(2)
    Average
Home
Size
(Square
Feet)*
    Estimated
Average
Cost
Basis (Per
Square
Foot)
    Average
Age
(Years)*
    Average
In-
Place
Rent*
    Estimated
Average
Cost

Basis
Per
Leased

Home
    Number
of
Homes
Owned
180 Days
or
Longer(4)
    %
Leased
of
Homes
Owned
180 Days
Or
Longer(5)
 

Wholly Owned

                         

Arizona

    838        10     88   $ 87      $ 94      $ 112,000        1,555      $ 72        25      $ 965      $ 112,000        801        91

California

    2,035        25     38     462        506        249,000        1,688        147        40        1,745        225,000        775        74

Colorado

    278        3     37     35        39        141,000        1,685        83        39        1,314        137,000        67        85

Delaware

    2        0     0     0.3        0.3        131,000        1,550        84        61        —          —          —          0

Florida

    603        7     2     86        97        161,000        1,838        87        22        1,767        212,000        —          0

Georgia

    1,848        22     33     170        204        110,000        1,906        58        23        1,083        95,000        270        78

Nevada

    405        5     40     55        59        146,000        1,761        83        15        1,214        138,000        94        96

Texas

    1,050        13     91     119        120        115,000        1,775        65        11        1,267        115,000        459        98
 

 

 

   

 

 

     

 

 

   

 

 

               

 

 

   

Subtotal Wholly Owned**

    7,059        86     47   $ 1,014      $ 1,120      $ 159,000        1,760      $ 90        26      $ 1,277      $ 138,000        2,466        86
 

 

 

   

 

 

     

 

 

   

 

 

               

 

 

   

Jointly Owned(3)

                         

Arizona

    368        4     47                    

California

    579        7     62                    

Nevada

    230        3     55                    
 

 

 

   

 

 

                       

Subtotal Jointly Owned

    1,177        14     56                    
 

 

 

   

 

 

                       

Total Owned

    8,236        100     55                    
 

 

 

   

 

 

                       

 

  * The subtotal and total amounts in this column are calculated using a weighted average.
  ** Any discrepancies are due to rounding.
  (1) Represents total housing units, which are leased separately from any other housing units. No property with a single deed has more than four housing units, and less than 2% of our wholly owned properties have more than one housing unit.
  (2)

Includes acquisition costs and actual and estimated upfront renovation costs for vacant homes purchased and homes purchased with in-place tenants where an initial renovation was not performed. For vacant homes, through March 31, 2013, we have incurred, on average, actual and estimated upfront renovation costs of approximately

 

 

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  $20,000 per home. Acquisition costs include asset management fees paid to our Manager of 0.5% of the capitalization of our investments payable at the time an acquisition was made, as well as broker fees, ranging from 2-5% of the acquisition price, paid to third parties that assist with sourcing acquisitions. Our Manager will no longer receive any asset management fees for homes acquired after the completion of this offering.
  (3) In October 2012, we completed a joint venture agreement with Fannie Mae, in which we invested approximately $35 million to own an interest in 1,177 homes. We serve as managing member of this joint venture with responsibility for operations and management of the venture, subject to Fannie Mae’s approval on major decisions. As of March 31, 2013, the average home size and age of our jointly owned homes was 1,713 square feet per home and 30 years, respectively.
  (4) Represents number of homes owned for 180 days or longer, excluding 37 homes that are not available for lease, which includes homes that are listed for sale, being used as model homes for lease showings and homes acquired at auction for which our Manager has taken legal action to confirm our ownership. As of March 31, 2013, 2,466 of our wholly owned and jointly owned homes were owned for 180 days or longer.
  (5) Represents percentage of homes owned for 180 days or longer that are leased as of March 31, 2013. Leased homes include homes purchased with in-place leases.

Market Opportunity

We believe current market conditions present a unique opportunity to consolidate the ownership of single-family homes in the United States at distressed prices, rent them to tenants, manage and position the assets for revenue growth, stability and capital appreciation, and thereby achieve attractive rates of return. We believe this opportunity exists due, in large part, to the following key factors:

Opportunity to Institutionalize the Largest Asset Class in the U.S. Economy

The housing market is the largest asset class in the U.S. economy. Based on data from John Burns Real Estate Consulting and the U.S. Census Bureau, the total value of all residential housing in the United States is greater than $20 trillion with the single-family rental portion of the market estimated to comprise approximately 11% of all existing homes, as of December 31, 2012. As a result of the decline in homeownership rates, demographic changes and the continued distress in the U.S. housing market, as well as the supply constraints limiting the ability of multi-family rental properties to accommodate the increasing number of renters, we believe there is significant potential for an increase in the size of the single-family home rental market as a proportion of total U.S. housing, as single-family rental homes are a better match for involuntary owner-turned-renters and the growing population of renters-by-choice.

This significant single-family home rental market has historically been extremely fragmented, comprised primarily of private and individual property investors in local markets. Until recently, there have been no large-scale, national owner-operators due primarily to the challenge of efficiently compiling a portfolio of many individual homes. We believe the size of the market, its historical ownership structure and current highly attractive acquisition dynamics present us with the opportunity to lead the institutionalization of the single-family rental market in the United States.

Severe Supply and Demand Imbalance for Rental Properties

We believe a fundamental imbalance exists between the supply and demand for rental housing. Following a severe decline in household formation during the recession, household formation is expected to outpace housing starts by over two million households through 2015 according to John Burns Real Estate Consulting. However, limited new supply of competing rental properties has come on line as evidenced by housing starts in 2012 that were 50% below levels seen in 2000 and continued low vacancy rates at multi-family properties. Further, according to John Burns Real Estate Consulting, total renter households are expected to increase 22% from 2010 to 2015. We believe strong rental market demand fundamentals combined with supply constraints create a compelling opportunity to aggregate a portfolio of homes in scale and to do so at purchase prices that can provide

 

 

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attractive current yields and total returns. We intend to meet this market demand by delivering quality rental housing solutions to this rapidly growing population of renters.

The fundamental supply and demand imbalance is further accentuated by the rapid decline in home ownership. The recent credit crisis, high national unemployment, national and international political issues and a general lack of consumer confidence have resulted in a meaningful decline in homeownership and a marked increase in the demand for single-family home rentals. According to John Burns Real Estate Consulting, the U.S. homeownership rate reached a peak of 69% in 2004 and is expected to fall to 63% by 2015. The decline in homeownership rates in the United States is exacerbated by demographic trends, continued limited credit availability, liquidity constraints and changing preferences and lifestyles of consumers. According to John Burns Real Estate Consulting, this decline is expected to create more than nine million new renter households from 2010 through 2015 and in combination with household growth outpacing new supply, is estimated to drive continued strong rental property occupancy. Further supporting the need for single-family rentals, the decline in homeownership has caused a spike in multi-family apartment rents and historically low vacancies while little new multi-family product has been built since 2007.

Historically Attractive Pricing of Single-Family Assets

Throughout the United States, home prices fell precipitously during the recent financial crisis. According to the Case-Shiller Home Price Index, the average sales price nationwide declined 33% from 2006 to 2009, resulting in about $7 trillion in lost household wealth. Compared with the long-run averages and based on the Case-Shiller Home Price Index, homes are significantly undervalued relative to rents, disposable incomes and other assets such as commercial real estate and equities. While home prices seem to have begun to stabilize and show modest gains, the recent market dislocation has greatly impacted the composition of the housing industry, the financial profile of the American family, individual viewpoints on the merits of homeownership and the lending practices of banks. We believe many of these effects may be long-lasting and have created the opportunity to acquire large volumes of single-family homes at attractive prices with significant rental income potential. We expect housing prices to remain under pressure due to the perceived abundant shadow supply from looming additional foreclosures, financing challenges for prospective homeowners and diminishing enthusiasm for homeownership. According to CoreLogic, 22% of all U.S. homeowners had negative equity in their homes in the fourth quarter of 2012, with much higher percentages within our target markets. We believe many of these homes are or will be available for purchase under distressed circumstances and below replacement cost.

Attractive Financial Model

We believe present economic conditions provide favorable circumstances to generate meaningful current returns. We are focused on building a large, diversified portfolio of single-family rental homes with the potential for yield expansion with future rental growth and operating efficiencies. We also believe that the average tenant profile of single-family rental homes results in attractive yields from stable revenue streams. According to a single-family rental management survey from Zelman & Associates, during the 12 months ended February 2013, annual turnover in single-family rental properties was 27% compared to 54% for apartments in 2012. In addition, because we are currently acquiring these assets in a distressed environment at prices significantly below peak levels, we believe there is also significant capital appreciation potential from these purchases should home prices recover moderately.

Competitive Strengths

We believe the following strengths serve as the foundation for the implementation of our business strategy and will provide us with a sustainable competitive advantage:

Substantial Existing Operating Scale and Vertical Integration. As of March 31, 2013, we owned over 8,200 homes, which provides meaningful initial critical mass for operations and an early indication of the long-term portfolio opportunity. Furthermore, we believe operating scale is a significant competitive advantage in the

 

 

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single-family rental business. We have demonstrated success underwriting highly complex investments under accelerated timeframes due to our large and institutionalized platform. We have demonstrated the ability to acquire, renovate and manage properties across eight states, 25 MSAs, and 63 counties. We believe we can expand these efforts into additional markets with limited incremental investment due to our integrated, institutionalized, scalable platform. This vertical integration provides numerous advantages, including lower overall costs, rapid cycle times, consistency across homes and markets, strong quality control and versatile resource allocation. As of March 31, 2013, approximately 270 full-time employees and consultants from our Manager and its affiliates were dedicated to the single-family rental business. This broad team combines institutional-grade management and control functions with local, “boots-on-the-ground” expertise needed to effectively acquire and manage a broad portfolio of single-family homes. By operating an institutionalized, vertically integrated platform, our Manager is able to drive meaningful operating efficiencies and offer high-quality rental options to prospective tenants nationwide.

Deep Industry Expertise and Institutional Track Record of Distressed Investing. Our Manager benefits from Colony’s deep expertise in distressed investing, entering into complex transactions with government and financial institutions and developing large-scale asset management capabilities around themes and events. Colony is one of the largest real estate private equity investment firms in the world. Over its 22-year history, Colony has acquired over $50 billion in real estate, comprising over 24,000 assets across all major property types, including single-family rental properties. Colony has previously created vertically integrated businesses across several of its real estate investment strategies. Colony has been a major investor in homebuilders, multi-family platforms, commercial banks (nationally and internationally) in the residential lending business and a variety of public REITs. Our Manager, a subsidiary of Colony, is led by a management team with substantial experience in sourcing, acquiring, renovating and managing single-family rental homes. These individuals have direct experience in building and operating successful single-family rental and renovation platforms.

Proven Multi-Channel Sourcing Capabilities. Our Manager pursues acquisitions through multiple channels within each market in which it currently operates by means of a variety of types of transactions. As of March 31, 2013, we have acquired over 8,200 homes across Arizona, California, Colorado, Delaware, Florida, Georgia, Nevada and Texas. Our Manager’s acquisition platform sourced this portfolio through four primary channels: (i) trustee auctions, (ii) single asset sales, which involve transactions through MLS, short sales and individual REO from banks, (iii) purchases of more than one property in a single transaction directly from the owner, often an investor group, developer, bank, financial institution or governmental agency, and which may include acquisitions of entire legal entities holding single-family properties, which we refer to in this prospectus as “mini-bulk” sales, which involve transactions with brokers and REO from banks and (iv) GSEs. We believe this diversified sourcing strategy has enabled us to acquire a large number of homes at attractive prices that will generate meaningful yields. Importantly, our Manager has developed the requisite underwriting tools and capabilities that incorporate local market expertise when evaluating acquisition opportunities. We believe these skills and experience are critical when assessing the attractiveness of potential rental assets by determining expected rental rates and home values. During the period from          to         , we reviewed in excess of      single-family properties across our four channels. Furthermore, we believe our integrated platform provides a competitive advantage underwriting acquisitions in less competitive, highly complex channels, as evidenced by our strength in trustee sale acquisitions, which represented approximately 63% of our portfolio, as of March 31, 2013. As of March 31, 2013, 13% and 24% of our wholly owned properties were sourced from single-asset sales and “mini-bulk” sales, respectively. Our average monthly acquisition pace over the            months ended               , 2013 was approximately $         million per month. The following table summarizes our wholly owned property acquisitions by channel during the period from March 2012, the month of our inception, through March 31, 2013.

 

 

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LOGO

*Cost basis includes acquisition costs and actual and estimated upfront renovation costs for vacant homes purchased and homes purchased with in-place tenants where an initial renovation was not performed.

Does not include jointly owned homes acquired.

Extensive Network with Access to Leading Vendors and Service Providers. Within each of our primary markets, our Manager has an exclusive team of local experts who employ or maintain relationships with a wide range of influential industry participants, including sellers, potential partners, lenders, contractors, service providers, brokers and other intermediaries that augment our Manager’s business development and operational capabilities. These field personnel not only provide market feedback to the acquisitions team but they also provide management oversight of local vendors in an effort to ensure value maximization and timeline management. We are able to leverage our Manager’s supplier relationships as well as those of our exclusive partners to negotiate attractive rates on items such as appliances, hardware, paint and carpeting, which we believe will lower our overall renovation and maintenance costs.

Scalable Technology Infrastructure. We believe our Manager’s technology infrastructure, applications and operations are a key differentiator for us. Our Manager uses a combination of custom and off-the-shelf products to drive efficiency. By utilizing an agile approach to implementation and a mixture of on-premises and cloud-based technologies, our Manager is able to scale its technology to meet the needs of its business in real-time. The key components of our Manager’s technology include Mobile Technology, Construction Management, Property Management, and an industry leading customer relationship management, or CRM, system.

 

 

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Ancillary Business Opportunities. We believe there are numerous additional business opportunities that are a natural outgrowth from our core business of owning and operating a portfolio of single-family rental homes. Our portfolio, both on a national basis and within our target markets, provides access to a large and highly attractive tenant base which presents the opportunity for complementary activities. We expect to negotiate and establish strategic relationships with service providers, home goods manufacturers, local utilities and other related businesses to provide a source of ancillary revenue for our company while enhancing our ability to provide leading rental housing for our residents. We expect these ancillary opportunities to improve our economic returns on our portfolio and enhance our competitive positioning. We also expect to implement revenue-enhancing strategies that will result in lower occupancy costs for our tenants, providing a more competitive rental proposition relative to other housing alternatives. Although we are in the early stages of implementing these strategies, our Manager’s founder has significant experience successfully implementing similar initiatives across its other investment platforms, including its investments in the hotel and entertainment industries. We expect to benefit substantially from Colony’s expertise in building revenue enhancing strategies across its more than 20-year investment history.

Branding Initiative. We expect our integrated acquisition, renovation and property management platform and our high-quality rental homes will provide the opportunity to establish strong awareness for the Colony American Homes brand. Furthermore, we believe that there exists an opportunity to attract specific renter demographics within our target markets by differentiating rental home types within and under the Colony American Homes brand. We believe there is significant value in establishing a brand name in the single-family sector at this early stage in the institutionalization of the industry and over time we expect to create brand loyalty among our tenant base and attract new tenants as a result.

Business and Growth Strategy

Our strategy is to continue to grow our single-family residential property rental business in existing and additional markets in order to generate meaningful dividends from rental income and create the potential for significant capital appreciation. Key elements of our strategy include:

Construct a large portfolio of single-family homes through multiple sourcing channels. We intend to use our robust and flexible acquisition platform to continue to build our portfolio in key markets that we believe are well-positioned for strong single-family rental demand and provide potential home price appreciation, or HPA. Through our multiple sourcing channels, our acquisition platform enables us to underwrite a large volume of potential investment opportunities, as evidenced by our average monthly acquisition pace over the            months ending             , 2013 of approximately $       million per month. Upon completion of this offering, we expect to have approximately $     million in cash on hand, including $     in net proceeds from this offering, available for future acquisitions and working capital. We are targeting to deploy this cash within      to      months following the completion of this offering. In addition, we currently have no outstanding indebtedness, but are in the process of negotiating to obtain a credit facility to provide us with additional capital to support further growth in our business.

Diversify our portfolio across select U.S. markets. We currently own a portfolio of homes concentrated in attractive sub-markets within Arizona, California, Colorado, Delaware, Florida, Georgia, Nevada and Texas. In addition to the MSAs in which we already own homes, we are constantly analyzing new markets to enter; we have identified Jacksonville, Florida and Charlotte, North Carolina, as potential expansion markets, as we believe conditions in these MSAs support attractive investment returns. We select markets based upon the three primary investment considerations: whether the market (i) suffered significant declines in value such that homes are trading well below peak pricing and current replacement cost; (ii) possesses compelling fundamental rental economics and other favorable characteristics that can generate stable and attractive cash flow streams; and/or (iii) demonstrates prospects for long-term economic recovery, job growth and net in-migration to support strong capital appreciation potential.

 

 

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Acquire properties that have strong rental characteristics. Our portfolio is comprised of single-family homes that we believe appeal to a large cross-section of likely renters. We target properties that are appealing to middle income families due to their configuration (typically three bedrooms and two baths) and proximity to good school districts, work centers and transportation infrastructure. By targeting these characteristics, our portfolio is focused on high quality, infill sub-markets and established neighborhoods within our target MSAs. We utilize a disciplined underwriting approach to evaluate the attractiveness of each property we review in terms of rental occupancy rates, expected income-generating capability and future price appreciation potential.

Combine centralized decision-making with local market expertise. We have developed centralized infrastructure, systems and management oversight around the key aspects of our business: property acquisition, property rehabilitation and property management. At the same time, we recognize the critical importance of understanding local market nuances and conditions when evaluating assets to purchase and when working with tenants once homes are leased. As such, we partner with local market operators to broaden our market expertise when beneficial to our objectives. We believe this model provides us with the ability to execute on a cohesive, disciplined business plan while also gaining the benefit of local market expertise from a diverse group of partners across the United States as necessary.

Target Market Selection and Investment Guidelines

We utilize a macroeconomic and demographic-based selection process in identifying attractive markets. Specifically, we jointly developed a scoring model, Colony Market Score, or CMS, with an industry leading real estate consulting firm, to identify the most attractive single-family rental markets in the United States. In developing the CMS model, we analyzed 65 major MSAs, and further analyzed sub-markets within these MSAs, to determine the attractiveness of each market for a rentership strategy, focusing on factors such as the supply/demand equation of homes, population growth, job growth, unemployment trends and mortgage delinquency. We have identified Jacksonville, Florida and Charlotte, North Carolina, in addition to the 25 MSAs in which we currently own properties, that we believe represent attractive investment opportunities for our single-family platform.

When considering an acquisition, our Manager uses its proprietary underwriting model to identify assets that can be purchased at discounts to replacement value with strong in-place cash flow characteristics, or near term potential to generate meaningful cash flow, and attractive potential returns. Each home is underwritten using a “bottom-up” approach, meaning that we analyze projected cash flows for each asset on an individual basis. We conduct extensive due diligence on individual assets utilizing in-house acquisitions and property renovation teams. Our proprietary underwriting model factors in a large number of variables including property location, physical structure, age, school district and local economic drivers. In addition to building a “bottom-up” cash flow analysis for each asset, field experts perform site visits and estimate property renovation costs.

We have constructed an integrated operating platform, and for each of our target markets, we have a dedicated acquisitions team, renovations team and asset management team. Upon completion of an acquisition, we develop a comprehensive renovation, leasing and asset management plan, or rehab plan, to implement in order to efficiently and cost-effectively prepare the property for tenancy.

Property Management

Our Manager has substantial property management resources, which enable us to achieve significant scalability and nationwide consistency through a core focus on leading property management technology and the utilization of local property management partners where appropriate. Consistent with its approach to acquisitions, our Manager supplements its in-house property management team with a network of select local property management groups across the country. Our Manager’s in-house property management capabilities include

 

 

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employees dedicated to managing our properties, including directing property leasing, corresponding with in-field property managers and monitoring lease terms in order to reduce vacancies upon lease expiration and provide our customers a positive housing experience. As of March 31, 2013, our Manager had 77 employees dedicated to performing property management and construction management functions, located in Arizona, California, Florida, Georgia, Nevada and Texas.

Our Manager’s property management employees are located in each of our target markets and directly oversee the core components of property management. We utilize select local partners to manage specific areas of property management in order to benefit from their local market expertise and improve cost efficiency. For example, while our local partners are typically responsible for on-site maintenance of the properties, our Manager must approve any property maintenance expenditure exceeding $200 and will coordinate selection of bids for any material service performed. In addition, with our Manager’s oversight and monitoring of the leasing process, our local partners market a rehabilitated home, conduct property tours with potential residents, underwrite each applicant to confirm such applicant meets the requisite resident credit and background criteria established by our Manager, and notify our Manager’s property management team when a qualified resident has executed a lease.

Our Manager’s property management infrastructure follows a hub-and-spoke model, where all information is centrally aggregated for processing. This provides significant efficiencies and streamlines the critical aspects of property management, including homeowners’ association, or HOA, payments, review of violations, utilities management, invoice processing, vendor payments, rental cash collections, and maintenance. Using integrated property management technology, including Yardi, combined with a customized workflow CRM system through Microsoft Dynamics, our Manager is able to maintain transparency of data down to the individual home and ensure compliance from partners and vendors in the field. This gives our Manager a daily view into operations, enhanced exception management and the ability to monitor performance on a real-time basis.

Use of Leverage and Financing Strategy

As of December 31, 2012, we had no outstanding indebtedness. However, we plan to use leverage in the future and are currently in the process of negotiating to obtain a credit facility to provide us with additional capital. Any decision to use leverage will be based on our Manager’s assessment of a variety of factors, including the anticipated liquidity and price volatility of the assets in our investment portfolio, the cash flow generation capability of assets, the availability of credit on favorable terms, any prepayment penalties and restrictions on financing, the credit quality of our assets and our outlook for borrowing costs relative to the unlevered yields on our assets.

Formation Transactions and Recapitalization Transactions

Formation Transactions. Colony established ColFin American Investors, LLC in early 2012 to focus on the acquisition, renovation, leasing and management of single-family properties across select target markets in the United States. CSFR ColFin American Investors, LLC succeeded to the business of ColFin American Investors, LLC in October 2012. We were organized as a Maryland corporation on July 5, 2012 to continue the business being conducted through CSFR ColFin American Investors, LLC.

On July 31, 2012, we entered into a management agreement and an investment allocation agreement with our Manager, and our operating partnership issued partnership interests to certain institutional investors and affiliates of our Manager. See “Our Manager and the Management Agreement” and “Description of the Operating Partnership Agreement.”

 

 

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From July 31, 2012 through March 4, 2013, through a series of private placement transactions, we received approximately $2.2 billion in capital commitments from institutional and other investors, including certain affiliates of Colony. Prior to or concurrently with the completion of this offering, all of these capital commitments will have been fully funded.

Investors in these private placements received shares of one or more of our existing outstanding classes of common stock or one or more of the existing series or classes of operating partnership units in our operating partnership, including, in the case of the associate general partner in our operating partnership, CFI CSR Investor, LLC, AGP units.

We refer to the foregoing transactions in this prospectus as our formation transactions. For additional detail regarding these transactions, see “History and Formation of Our Company—Formation Transactions.”

Recapitalization Transactions. Immediately prior to the completion of this offering, we will engage in a series of transactions intended to (A) consolidate within our company certain of the entities through which our investors initially contributed their capital to fund our business, and (B) simplify our capital structure by converting (1) the different classes of outstanding common stock that were issued to investors in the private placements into a single class of common stock to be designated and referred to in this prospectus as our common stock, and (2) the different classes of outstanding operating partnership units that were issued to investors in the private placements, other than AGP units, into a single class of units of limited partnership interest to be designated and referred to in this prospectus as OP units. As a result of these transactions, our existing investors will hold an aggregate of              shares of our common stock,              OP units and              AGP units, which OP units and AGP units are redeemable for cash in an amount equal to the market value of an equivalent number of shares of our common stock, or at the Company’s option, an equivalent number of shares of our common stock. For additional detail regarding these transactions, which we refer to in this prospectus as the recapitalization transactions, see “History and Formation of Our Company—Recapitalization Transactions.”

 

 

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Our Structure

The following chart shows our anticipated structure after giving effect to this offering and the recapitalization transactions.

 

LOGO

Our Management Agreement

We are externally managed and advised by our Manager. All of our officers are employees of our Manager or its affiliates, and we do not expect to have any employees upon completion of this offering. We expect to benefit from the experience, skill, resources, relationships and contacts of the executive officers and key personnel of our Manager and its affiliates.

Pursuant to our management agreement with our Manager, our Manager provides for the day-to-day management of CAH and its subsidiaries and is responsible for (1) the selection, purchase and sale of our portfolio

 

 

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investments, (2) our and our subsidiaries’ financing activities, and (3) providing us and our affiliates with investment advisory services. Our Manager’s role as manager is under the supervision of our board of directors. The management agreement requires our Manager to manage our and our subsidiaries’ business affairs in conformity with our investment guidelines and other policies that are approved and monitored by our board of directors.

The initial term of the management agreement expires on the third anniversary of the completion of this offering and will be automatically renewed for a one-year term each anniversary date thereafter unless previously terminated as described below. Our independent directors will review our Manager’s performance and the fees that may be payable to our Manager annually and, following the initial term, the management agreement may be terminated annually upon the affirmative vote of at least two-thirds of our independent directors, based upon (1) unsatisfactory performance that is materially detrimental to us or (2) our determination that the management fees payable to our Manager are not fair, subject to our Manager’s right to prevent such termination due to unfair fees by accepting a reduction of management fees agreed to by at least two-thirds of our independent directors. We must provide 180 days prior written notice of any such termination. We may also terminate the management agreement at any time, including during the initial term, without the payment of any termination fee, with at least 30 days prior written notice from our board of directors for cause, as defined in the management agreement. Our Manager may terminate the management agreement if we become required to register as an investment company under the Investment Company Act, with such termination deemed to occur immediately before such event, in which case we would not be required to pay a termination fee. Our Manager may decline to renew the management agreement by providing us with 180 days prior written notice, in which case we would not be required to pay a termination fee. In connection with a termination of the management agreement, unless the termination is for cause, CAH will pay our Manager a termination fee as described in the table below.

The following table summarizes the fees, distributions and expense reimbursements that our Manager will be entitled to receive effective upon completion of this offering. Our Manager will not be paid any incentive-based fees under our management agreement.

 

Type of
Compensation/

Distributions

  

Description of Amount

  

Payment

Base Management Fee:   

CAH will pay our Manager         % of the daily average for each trading day of its fully diluted market capitalization for the preceding quarter (a     % annual rate).

   Quarterly in arrears in cash or, at our Manager’s election under certain circumstances, shares of our common stock.
Reimbursement of
Expenses:
   We are required to reimburse our Manager for its documented expenses incurred in performing services for us in connection with the operation of our business, including legal, accounting, due diligence and property management services. These reimbursement obligations are not subject to any dollar limitation. The payment of these reimbursable expenses has been pre-approved and will not be subject to our related party transaction policy.    Calculated within 30 days after the end of each quarter and payable in cash no later than the 15th business day following the date that we receive the calculation from our Manager.

 

 

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Type of
Compensation/

Distributions

  

Description of Amount

  

Payment

Termination Fee    CAH will pay our Manager a termination fee equal to three times the average annual base management fee earned by our Manager, during the 24-month period immediately preceding such termination, calculated as of the end of the most recently completed fiscal quarter before the date of termination.    Payable in cash upon termination by CAH of the management agreement unless terminated by us for cause.
Awards Under Our 2013 Equity Incentive Plan   

Prior to the completion of this offering, we will adopt the Colony American Homes, Inc. 2013 Equity Incentive Plan, or our 2013 Equity Incentive Plan, which is intended to align the interests of our officers and directors, and certain personnel of our Manager and its affiliates, with those of our stockholders. Our 2013 Equity Incentive Plan provides for grants of stock options, stock appreciation rights, dividend equivalent rights, restricted stock, restricted stock units, performance based awards, unrestricted stock, equity awards in our subsidiaries, including long-term incentive units in our operating partnership, or LTIP units, and other awards. Our compensation committee will administer the equity incentive plan.

   We will reserve         % of our shares of common stock issued and outstanding from time to time on a fully diluted basis for issuance under our 2013 Equity Incentive Plan.

Conflicts of Interest

We are externally managed and advised by our Manager. Our executive officers and certain of our directors are employees of our Manager. Related parties participated in the negotiation of our management agreement, and its terms, including fees payable to our Manager, may not be as favorable to us if such related parties did not participate in such negotiations. In addition, we may choose not to enforce, or to enforce less vigorously, our rights under the management agreement because of our desire to maintain our ongoing relationship with our Manager and its affiliates. Pursuant to the management agreement, our Manager is obligated to supply us with all of our management team. Subject to the direction and oversight of our board of directors, our Manager has significant discretion regarding the implementation of our investment and operating policies and strategies. Our Manager does not manage or advise any other entities and is not actively seeking new advisory clients; however, neither our Manager nor Colony is obligated to dedicate any specific personnel exclusively to us, nor will they or their personnel be obligated to dedicate any specific portion of their time to the management of our business. See “Business—Conflicts of Interest and Related Policies” for more information regarding these conflicts of interest and other related policies.

Emerging Growth Company Status

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, which permits us to elect not to be subject to certain disclosure and other requirements that otherwise would have been applicable to us had we not been an “emerging growth company.” The requirements that we may opt not to comply with include the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, certain disclosure requirements regarding executive compensation in our periodic reports and proxy statements and the requirement to hold nonbinding advisory votes on executive compensation and golden parachute payments. We have not yet made a determination whether to take advantage of any or all of these exemptions.

 

 

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We expect to remain an “emerging growth company” for up to five years, or until the earliest of (1) the last day of the first fiscal year in which we achieve annual gross revenues of $1.0 billion or more, (2) the last day of the fiscal year in which we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, or the Exchange Act, which would occur if the market value of our common equity that is held by non-affiliates exceeds $700.0 million as of the last business day of our most recently completed second fiscal quarter and we have been publicly reporting for at least 12 months and have filed at least one annual report or (3) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the preceding three-year period.

In addition, Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably opted-out of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. As a result, we will comply with new or revised accounting standards on the same time frames as other public companies that are not “emerging growth companies.”

Summary Risk Factors

An investment in shares of our common stock involves various risks. You should consider carefully the risks discussed below and under “Risk Factors” before purchasing our common stock. If any of the following risks occur, our business, financial condition or results of operations could be materially and adversely affected. In that case, the trading price of our common stock could decline, and you may lose some or all of your investment.

Risks Related to Our Business

 

   

We are an early entrant employing a new and untested business model in a new industry with no established track record, which makes our business difficult to evaluate.

 

   

We have a limited operating history and may not be able to operate our business successfully or generate sufficient cash flows to make or sustain distributions to our stockholders.

 

   

We may not be able to effectively manage our growth, which requires significant resources, or realize any significant benefit from the economies of scale we expect to achieve in our operations, and as a result, our results may be adversely affected.

 

   

Our Manager is still building its operational expertise and infrastructure, and it depends on new employees and third-party service providers to manage and operate our properties.

 

   

Our investments are concentrated in a single asset class, and downturns or slowdowns in the housing sector or other economic factors could reduce the rent we receive, decrease the value of our properties and adversely affect our financial condition.

 

   

Our tenants may be unable to meet their lease obligations, which would harm our financial results.

 

   

We operate in a highly competitive market for investment opportunities, and competition may limit our ability to continue to acquire properties on favorable terms or at all, which could have a material adverse effect on our business, financial condition and results of operations.

 

   

Mortgage loan modification programs and future legislative action may adversely affect the number of available properties that meet our investment criteria.

 

 

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Our underwriting criteria and evaluation of properties involves a number of assumptions that may prove inaccurate, which may cause us to overpay for our properties or incur significant costs to renovate and market a property.

 

   

Our portfolio consists of properties geographically concentrated in certain markets and any adverse developments in local economic conditions, the demand for single-family rental homes in these markets or natural disasters may negatively affect our operating results.

 

   

We may be subject to losses that are uninsurable or not economically insurable or that are in excess of our insurance coverage.

 

   

We may be subject to tenant relief laws and rent control laws, which will negatively impact our rental income and profitability.

 

   

The types of properties on which our acquisition strategy focuses have an increased risk of damage and may require extensive renovation prior to renting, the timing and costs of which may adversely affect our earnings and our ability to make distributions to our stockholders.

 

   

Our current and future joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on joint venture partners’ financial condition and liquidity and disputes between us and our joint venture partners.

 

   

The large quantity of foreclosed houses and low residential mortgage rates may result in potential renters purchasing residences rather than leasing them and, as a result, may cause a decline in the number and quality of potential tenants.

Risks Related to Our Management and Our Relationship with Our Manager

 

   

We are dependent on our Manager, who provides services to us through the management agreement, and its key personnel for our success. We may not find a suitable replacement for our Manager if the management agreement is terminated, or for these key personnel if they leave our Manager or otherwise become unavailable to us, which would materially and adversely affect us.

 

   

There are various conflicts of interest in our relationship with our Manager and its affiliates, which could result in decisions that are not in the best interests of our stockholders.

Risks Related to Our Common Stock

 

   

There is currently no public market for our common stock, and an active trading market may never develop, which could make it difficult for holders of our common stock to sell their shares.

 

   

Our ability to pay distributions depends on a number of factors and is not assured.

 

   

Future issuances and sales of shares of our common stock by certain holders of our common stock (including affiliates of Colony and other stockholders that were investors in our formation transactions) may depress the market price of our common stock or have adverse consequences for our stockholders.

 

   

If you purchase shares of common stock in this offering, you will experience immediate dilution.

 

   

We may employ leverage in the future, which could expose us to additional risks, may impair our ability to pay dividends and may adversely affect the market price of our common stock.

Risks Related to Our Organization and Structure

 

   

Conflicts of interest could arise as a result of our UPREIT structure.

 

 

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Certain provisions of Maryland law could inhibit changes in control.

 

   

The stock ownership limits imposed by the Code for REITs and by our charter may restrict our business combination opportunities.

 

   

Provisions of the partnership agreement may restrict our business operations.

 

   

We may change our business, investment, leverage and financing strategies without stockholder consent.

Risks Related to Our Qualification as a REIT

 

   

Our failure to qualify or remain qualified as a REIT would subject us to U.S. federal income tax and applicable state and local taxes, which would reduce the amount of cash available for distribution to our stockholders.

REIT Qualification/Tax Status

We were incorporated as a Maryland corporation on July 5, 2012 and intend to elect and qualify to be taxed as a REIT for U.S. federal income tax purposes, commencing with our taxable year ended December 31, 2012. We believe that our organization, investments and proposed method of operation will enable us to meet the requirements for qualification as a REIT for U.S. federal income tax purposes. As a REIT, we are required to satisfy a number of organizational and operational requirements, including a requirement that we annually distribute at least 90% of our net taxable income (excluding net capital gains) to our stockholders. In addition, we are generally not subject to U.S. federal income tax on our net taxable income (including net capital gains) that we currently distribute to our stockholders. If we fail to qualify as a REIT in any taxable year and do not qualify for certain statutory relief provisions, we would be subject to U.S. federal income tax at regular corporate rates and may not be able to re-elect to be taxed as a REIT for the four taxable years following the year in which we lost our REIT qualification. Even if we qualify as a REIT, we may be subject to some U.S. federal, state and local taxes on our income and property and, in certain cases, a 100% penalty tax, in the event we sell property as a dealer, and our taxable REIT subsidiaries, or TRSs, will be subject to tax at regular corporate rates.

Restrictions on Ownership of Our Stock

In order to assist us in complying with the limitations on the concentration of ownership of REIT stock imposed by the U.S. Internal Revenue Code of 1986, as amended, which we refer to as the Code, our charter generally prohibits, with certain exceptions, any stockholder from beneficially or constructively owning (as determined by applying certain attribution rules of the Code) more than 9.8% (by value or by number of shares, whichever is more restrictive) of our outstanding common stock or more than 9.8% (by value or by number of shares, whichever is more restrictive) of any class or series of our preferred stock. We refer to these restrictions, collectively, as the ownership limits. Our charter permits our board of directors to exempt a stockholder from these ownership limits and establish a different limit on ownership, or excepted holder limit, with respect to such stockholder if the stockholder seeking the exemption makes certain representations and agreements. Our board of directors may not make an exception to the ownership limits or create an excepted holder limit if ownership by the excepted holder in excess of the ownership limit would cause us to fail to qualify as a REIT. In addition, different ownership limits will apply to             ,             . These limits will allow             , as an excepted holder, to hold up to     % (by value or by number of shares, whichever is more restrictive) of our common stock or up to     % (by value or by number of shares, whichever is more restrictive) of a class or series of our preferred stock. See “Description of Capital Stock—Restrictions on Ownership and Transfer.”

 

 

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Corporate Information

Our corporate offices are located at 9305 East Via de Ventura Boulevard, Scottsdale, AZ 85258. Our telephone number is             . Our internet website is http://www.                    .com. The information contained on, or accessible through, our website is not incorporated by reference into this prospectus and should not be considered a part of this prospectus.

 

 

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THE OFFERING

 

Common stock we are offering

  

            shares

Common stock to be outstanding upon completion of this offering and the recapitalization transactions(1)

  

            shares

Use of proceeds

  

We will contribute the net proceeds of this offering to our operating partnership, which will use substantially all the net proceeds from this offering to acquire and renovate single-family homes for rental to tenants.

Risk factors

  

An investment in our common stock involves significant risks. You should carefully consider the matters discussed in the section “Risk Factors” beginning on page 22 prior to deciding whether to invest in our common stock.

Distribution policy

  

We intend to make regular quarterly distributions to holders of our common stock, beginning at such time as our board of directors determines that we have sufficient cash flow to do so and as required to maintain our REIT qualification for U.S. federal income tax purposes.

New York Stock Exchange symbol

  

We will apply to list our common stock on the New York Stock Exchange, which we refer to as the NYSE, under the symbol “            ”.

 

  (1) Includes (a) an estimated              shares of our common stock to be issued in the recapitalization transactions, (b)              shares of our common stock assuming the exchange of all OP units and AGP units for shares of our common stock on a one-for-one basis, excluding OP units held by us, and (c) the issuance of an aggregate of              shares of our restricted common stock, and shares of our common stock issuable upon exercise of stock options and redemptions of equity interests in our operating partnership (including OP units), to our directors, officers, Manager and certain other personnel of our Manager and its affiliates in connection with the completion of this offering. See “History and Formation of Our Company—Recapitalization Transactions.” Excludes (a)              shares of our common stock that may be issued by us upon exercise of the underwriters’ option to purchase up to              shares of our common stock to cover over-allotments, if any, and (b)              shares of common stock available for future issuance under our 2013 Equity Incentive Plan.

 

 

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SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA

Summary Financial Data

The following summary historical combined consolidated financial and operating data reflects our historical consolidated financial position at December 31, 2012 and the historical combined consolidated operations of CAH and its predecessor for the period from March 13, 2012 (commencement of operations) through December 31, 2012. The combined consolidated pro forma financial data for the year ended December 31, 2012 reflects the combined results of operations of us and a portfolio of single-family homes we acquired from Triton Interests, Ltd. and Camillo Properties, Ltd. (collectively, the “Triton Entities”) for the nine months ended September 30, 2012, as if such acquisition had occurred on January 1, 2012. The unaudited pro forma combined consolidated statements of operations data is presented for illustrative purposes only and are not necessarily indicative of what the actual results of operations would have been had the transactions referred to above occurred on January 1, 2012, nor does it purport to represent the future results of operations of our company. You should read the following summary financial data in conjunction with our financial statements and the related notes, which are included elsewhere in this prospectus, and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which are included elsewhere in this prospectus.

 

      Colony 
American
Homes,  Inc.

Pro Forma
    Combined
Consolidated
Historical
 
(Dollar amounts in thousands)    Year Ended
December 31,
2012
    For the period from
March 13, 2012
(commencement of
operations) through
December 31, 2012
 
    

(unaudited)

       

Statement of Operations Data:

    

Revenue:

    

Rental income

   $ 15,742      $ 9,599   

Other income

     559        359   
  

 

 

   

 

 

 

Total revenue

     16,301        9,958   
  

 

 

   

 

 

 

Expenses:

    

Property maintenance expenses

     2,915        1,785   

Real estate taxes

     3,885        2,661   

Homeowner’s association fees

     499        499   

Property management fees

     779        779   

Insurance

     489        489   

Other direct expenses

     390        390   

Depreciation and amortization

     4,009        2,845   

Management fee

     570        570   

General and administrative

     7,204        6,015   
  

 

 

   

 

 

 

Total expenses

     20,740        16,033   

Equity in losses from unconsolidated joint venture

     (41     (41
  

 

 

   

 

 

 

Net loss

     (4,480     (6,116

Net loss attributable to noncontrolling interests

     (2,380     (3,669
  

 

 

   

 

 

 

Net loss attributable to Colony American Homes, Inc. 

   $ (2,100   $ (2,447
  

 

 

   

 

 

 

 

 

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     As of December 31, 2012  
    

Consolidated

Historical

 

Balance Sheet Data:

  

Investment in real estate, net

   $ 542,896   

Cash and cash equivalents

     20,246   

Purchase and escrow deposits

     43,524   

Investment in unconsolidated joint venture

     35,472   

Other assets

     15,197   
  

 

 

 

Total assets

     657,335   

Total liabilities

     8,618   

Total equity

     648,717   

 

     As of March 31, 2013  
    

Combined

Historical

 
     (Unaudited)  
Wholly Owned Data:   

Total wholly owned properties

     7,059   

Properties owned for 180 days or longer

     2,466   

Leased Properties owned for 180 days or longer

     2,109   

Leased Occupancy percentage of properties owned for 180 days or longer

     86

Average monthly rent per wholly owned leased property

   $ 1,277   

 

 

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RISK FACTORS

An investment in shares of our common stock involves a high degree of risk. Before making an investment decision, you should carefully consider the following risk factors, together with the other information contained in this prospectus. If any of the risks discussed in this prospectus occurs, our business, financial condition, liquidity and results of operations could be materially and adversely affected. If this were to happen, the price of our common stock could decline significantly and you could lose a part or all of your investment.

Risks Related to Our Business

We are an early entrant employing a new and untested business model in a new industry with no established track record, which makes our business difficult to evaluate.

The large-scale single-family rental industry is relatively new in the United States. Until very recently, the single-family rental business consisted primarily of private and individual investors in local markets and was managed individually or by small, local property managers. We have been formed on the assumption that a company can acquire and operate single-family properties on a large-scale basis and achieve attractive yields employing technology through a disciplined approach to acquisitions and renovations, economies of scale in marketing and management and developing a brand-name presence. This is a new business model that has not been tested on a national scale. Our assumptions are unproven, and we may fail to provide the financial returns that investors hope or expect to receive if such assumptions prove to be incorrect.

Our investment strategy involves purchasing a large number of residential properties and leasing them to suitable tenants. No peer companies exist with an established track record from which to predict whether our investment strategy can be implemented successfully over time. While past performance is not indicative of future results, it will be difficult for you to evaluate our potential future performance without the benefit of established track records from companies implementing a similar investment strategy. We may encounter unanticipated problems implementing our investment strategy, which may have a material adverse effect on our results of operations, ability to make distributions on our common stock and cause our stock price to decline significantly. Accordingly, we may be unsuccessful in implementing our investment strategy and achieving our objective of providing attractive risk-adjusted returns to our stockholders over the long term.

We believe the acquisition, operation and management of multi-family residential real estate is the most comparable established model for our business, but in contrast to multi-family operations, the geographic dispersion of single-family properties creates significantly greater operational and maintenance challenges and, potentially, significantly higher per-unit operating costs. In addition, since each home has unique features, appliances and building materials, renovations, maintenance, marketing and operational tasks will be far more varied and demanding than in a typical multi-family setting. We may be unable to operate a large portfolio of single-family rental properties in a cost-effective and profitable manner and our business plan may not succeed.

We have a limited operating history and may not be able to operate our business successfully or generate sufficient cash flows to make or sustain distributions to our stockholders.

Our predecessors were formed in March 2012, and we were organized to succeed to their business in July 2012 and have a limited operating history. We will depend on the experience and expertise of the senior management of our Manager in administering our day-to-day operations. We may be unable to implement successfully the investment strategies that we intend to pursue. Furthermore, we depend on our Manager for all of its investment, asset management and other decisions, made on our behalf, exposing us to the risks involved with a newly formed organization.

We may be unable to operate our business successfully or implement our operating policies and strategies as described in this prospectus. The results of our operations will depend on many factors, including:

 

   

the availability of, and our ability to identify, additional properties that meet our criteria and our ability to purchase such properties on favorable terms;

 

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real estate appreciation or depreciation in our target markets;

 

   

defaults on, early terminations of or non-renewal of leases by tenants;

 

   

our ability to contain renovation, maintenance, marketing and other operating costs for our properties;

 

   

our ability to maintain high occupancy rates and target rent levels;

 

   

general economic conditions in our target markets, such as changes in employment and household earnings and expenses;

 

   

costs that are beyond our control, including title litigation, litigation with tenants or tenant organizations, legal compliance, real estate taxes, HOA fees and insurance;

 

   

judicial and regulatory developments affecting landlord-tenant relations that may affect or delay our ability to dispossess or evict occupants or increase rents;

 

   

judicial and regulatory developments affecting banks’ and other mortgage holders’ ability to foreclose on delinquent borrowers;

 

   

interest rate levels and volatility, such as the accessibility of short- and long-term financing on desirable terms;

 

   

reversal of population, employment or homeownership trends in target markets; and

 

   

competition from other investors entering the single-family rental market.

Our Manager is still building its operational expertise and infrastructure, and it depends on new employees and third-party service providers to manage and operate our properties.

Our Manager was formed in March 2012 and is continuing to build its operational expertise by hiring new employees and establishing relationships with third-party service providers. Further, Colony and its personnel have and continue to provide significant resources and support to our Manager. Most of these employees and relationships are relatively new to our Manager, and as we grow and expand into new markets, our Manager will need to hire additional employees and find additional third-party resources and to retain these employees and third-party resources. In addition, our Manager is establishing new infrastructure and processes including those related to residential management and leasing, tracking, accounting systems and billing and payment processing.

Building operational expertise and establishing infrastructure are difficult, expensive and time-consuming tasks, and we can expect problems to arise despite the best efforts of our Manager and its affiliates. Operational problems may have an adverse effect upon our financial performance, especially in newer markets that our Manager has recently entered. In addition, if our Manager ceases to receive support from Colony or its affiliates, any of these problems would be exacerbated.

Our investments are concentrated in a single asset class, making our profitability and balance sheet more vulnerable to a downturn or slowdown in the housing sector or other economic factors.

We expect to concentrate our investments in single-family properties. As a result, we will be subject to risks inherent in investments in a single type of property. A downturn or slowdown in the rental demand for single-family housing may have more pronounced effects on the cash available for distribution or on the value of our assets than if we had more fully diversified our investments.

Virtually all of our revenues consist of rental revenues, which are subject to many risks, including decreasing rental rates, increased competition for tenants, increased lease default rates, longer-than-anticipated vacancies, and increased tenant turnover. As a result of various factors, including competitive pricing pressure or adverse conditions in our target markets, a general economic downturn and the desirability of our properties compared to other properties in our target markets, we may be unable to realize our asking rents across the

 

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properties in our portfolio, which will negatively affect our ability to generate cash flow. In addition, rental rates for expiring leases may be higher than starting rental rates for new leases, which would reduce our revenues over time. We also compete for tenants with numerous other housing alternatives. We anticipate that our properties will compete directly with multi-family properties as well as condominiums and other single-family homes which are available for rent or purchase in the markets in which our properties are located. The ownership and management of such properties is diffused and often highly localized, and some operators may have lower operating costs than we do.

Our tenants may be unable to meet their lease obligations, which would harm our financial results.

Our operating results and cash flows would suffer if a significant number of our tenants were unable to meet their lease obligations. High unemployment and other adverse changes in the economic conditions in our target markets could result in substantial tenant defaults. In the event of a tenant default or bankruptcy, we may experience delays in enforcing our rights as landlord and obtaining possession of the premises, may incur legal, maintenance and other costs in protecting our investment and re-leasing the property and may be unable to re-lease the property at or above the rental rate previously received. These events and others could reduce the amount of distributions available to our stockholders, reduce the value of our properties and cause the value of your investment to decline.

We intend to continue to expand our scale of operations and make acquisitions even if the rental and housing markets are not as favorable as they have been in recent months, which could reduce our return on investment.

We have benefited in the purchase of the properties currently in our portfolio from a confluence of factors and market conditions that have resulted in homes being available to us at prices that are below replacement cost and, we believe, below their value as rental properties, based on anticipated cash flows. We expect that in the future housing prices will stabilize and return to more normalized levels. Accordingly, future acquisitions may be more costly than the cost of homes that comprise our portfolio as of the date of this prospectus. There are many factors that may cause a recovery in the housing market that would result in future acquisitions becoming more expensive and possibly less attractive than recent past and present opportunities, including:

 

   

improvements in the overall economy and job market;

 

   

a resumption of consumer lending activity and greater availability of consumer credit;

 

   

improvements in the pricing and terms of, and market for, mortgage-backed securities;

 

   

the emergence of increased competition for single-family assets from private investors and entities with similar investment objectives to ours; and

 

   

tax or other government incentives that encourage homeownership.

These and other factors could increase our costs over time and harm our profitability.

We may not be able to effectively manage our growth, which requires significant resources, or realize any significant benefit from the economics of scale we expect to achieve in our operations, and as a result, our results may be adversely affected.

Although we believe there will be benefits to increasing our scale of operations, our Manager’s acquisition platform and property management operations represent a significant ongoing expense to us. These expenses include, among others, costs relating to leasing, property management, accounting and finances, information technology and field staff. In addition, due to these ongoing expenses and the operational inefficiencies inherent in the single-family rental business, there is no assurance that we will realize any significant benefit from economies of scale as we continue to acquire additional properties. Moreover, we expect that recently acquired properties in the process of renovation in preparation for lease will be unproductive assets generating no revenue for up to three months or longer after acquisition.

 

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We have not adopted and do not expect to adopt a policy of making future acquisitions only if they are accretive to existing yields and distributable cash. We plan to continue to invest significant resources developing our Manager’s acquisition and property management platforms and we plan to continue acquiring properties as long as we believe such properties offer an attractive total return opportunity. Accordingly, future acquisitions may have lower yield characteristics than our current portfolio and if such future acquisitions are funded through equity issuances, the yield and distributable cash per share will be reduced and the value of our common stock may decline.

Our plan to continue our acquisition strategy and grow our operations will demand significant resources and attention from our Manager and may affect our financial performance. Our future operating results depend on our ability to effectively manage this growth, which depends, in part, upon the ability of our Manager to:

 

   

stabilize and manage an increasing number of properties and tenant relationships while maintaining a high level of customer service and building and enhancing our brand;

 

   

identify and supervise an increasing number of suitable third parties on which our Manager relies to provide certain services to our properties;

 

   

continue to improve our operational and financial controls and reporting procedures and systems; and

 

   

scale our technology and other infrastructure platforms to adequately service new properties.

Our Manager may be unable to achieve these results, and we may otherwise be unable to manage our growth effectively. Any failure to do so may have an adverse effect on our business and financial results.

We may need additional capital or may seek to employ leverage to expand our portfolio, and such financing may not be available.

To date, all of our properties have been purchased for cash and we had no outstanding indebtedness. However, we plan to use leverage in the future and are currently in the process of negotiating to obtain a credit facility to provide us with additional capital. This may enhance returns and increase the number of investments that can be made, but may also substantially increase the risk of loss. Additionally, use of leverage on any particular investment will increase the exposure of such investment to adverse economic factors such as rising interest rates, severe economic downturns or deterioration in the condition of the investment or its market. In the event an investment is unable to generate sufficient cash flow to meet the principal and interest obligations on its indebtedness, the value of our equity investment in such investment could be significantly reduced or even eliminated.

In addition, we may be unable to leverage our assets or obtain additional financing. We may also be limited or restricted in the amount of leverage we may employ by the terms and provisions of any financing or other agreements that we may enter into in the future. The loan agreements that we may enter into in the future may contain covenants restricting our operating flexibility, including covenants that restrict our ability to make certain payments, incur additional indebtedness, sell assets or enter into certain transactions with affiliates. These restrictions may prohibit us from engaging in transactions that may otherwise have been beneficial to us.

Interest expense on our debt may limit our cash available to fund our growth strategies and our ability to make distributions to our stockholders.

To the extent we use leverage in the future, we may incur variable rate indebtedness. In that case, increases in interest rates would increase interest costs, thereby, among other things, decreasing the amount of available funds for distribution. Increases in interest rates also may cause a reduction in the value of our investments. Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control. Subject to maintaining our qualification as a REIT, we may employ a hedging strategy to limit the effects of changes in interest rates on our operations, including engaging in interest rate swaps, caps, floors and other interest rate exchange contracts. The use of these types of derivatives to hedge our assets and liabilities involves costs. Moreover, there is no perfect hedge for any investment, and a hedge may not perform its intended use of

 

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offsetting losses on an investment. Certain potential hedge instruments may expose us to the risk that the counterparties with which we trade may cease making markets and quoting prices in such instruments, which may render us unable to enter into an offsetting transaction with respect to an open position. Consequently, our profitability may be adversely affected during any period as a result of changing interest rates.

We operate in a highly competitive market for investment opportunities, and competition may limit our ability to continue to acquire properties on favorable terms or at all, which could have a material adverse effect on our business, financial condition and results of operations.

Recently, several REITs and institutional investors have begun acquiring single-family homes on a large scale. Traditionally, foreclosed properties and loans in respect of properties in pre-foreclosure were sold individually to private home buyers and small-scale investors. The sale of these assets in bulk pools and the entry into this market by large, well-capitalized institutional investors, are relatively recent trends, which we expect to intensify in the near future. Several other REITs and other funds have recently deployed, or are expected to deploy in the near future, significant amounts of capital to these asset categories and may have investment objectives that overlap with ours. In acquiring our target assets, we will compete with a variety of institutional investors, including other REITs, specialty finance companies, public and private funds and other financial institutions. Many of our competitors may be larger and have greater financial, technical, leasing, marketing and other resources than we do. Some competitors may have a lower cost of funds and access to funding sources that may not be available to us. As a result, the purchase price of potential acquisition properties may be significantly elevated, or we may be unable to acquire properties on desirable terms or at all.

Our dependence upon third parties for key services may harm our financial results or reputation if the third parties fail to perform.

Our Manager has entered into agreements with third parties to provide some of the services required under the management agreement, including property management, leasing, renovation and maintenance. Selecting, managing and supervising these third-party service providers require significant management resources and expertise. Poor performance by third-party service providers, especially those who interact with tenants in our properties, will reflect poorly on us and could significantly damage our reputation among desirable tenants. In the event of fraud or misconduct by a third-party property manager, we could also be exposed to material liability and be held responsible for damages, fines and/or penalties. If our Manager does not select, manage and supervise appropriate third parties for these services, our reputation and financial results may suffer. Furthermore, if our Manager is not able to continue to build successfully its own internal property management function, we will continue to depend on these third parties for property management.

Notwithstanding our efforts to implement and enforce strong policies and practices regarding service providers, we may not successfully detect and prevent fraud, incompetence or theft by our third-party service providers. In addition, any delay in identifying a third-party service provider or removal or termination of existing third-party service providers would require us to seek new vendors or providers, which would create delays and adversely affect our operations.

Many factors impact the single-family residential rental market, and if rents in our target markets do not increase sufficiently to keep pace with rising costs of operations, our income and distributable cash will decline.

The success of our business model will depend, in part, on conditions in the single-family rental market in our target markets. Our asset acquisitions will be premised on assumptions about occupancy and rent levels, and if those assumptions prove to be inaccurate, our cash flows and profitability will be reduced. Rental rates and occupancy levels have benefited in recent periods from macro trends affecting the U.S. economy and residential real estate markets in particular, including:

 

   

a tightening of credit that has made it more difficult to finance a home purchase, combined with efforts by consumers generally to reduce their exposure to credit;

 

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weak economic and employment conditions that have increased foreclosure rates and made it more difficult for families to remain in their homes that were purchased prior to the housing market downturn;

 

   

declining real estate values that have challenged the traditional notion that homeownership is a stable investment; and

 

   

the unprecedented level of vacant housing comprising the REO inventory held for sale by banks, GSEs, and other mortgage lenders or guarantors.

We do not expect these favorable trends in the residential rental market to continue indefinitely. Eventually, a strengthening of the U.S. economy and job growth, coupled with government programs designed to keep home owners in their homes and other factors may contribute to a stabilization or reversal of the current trend that favors renting rather than homeownership. In addition, we expect that as investors like us increasingly seek to capitalize on opportunities to purchase undervalued housing assets and convert them to productive uses, the supply of single-family rental properties will decrease, resulting in an increase in the price we are required to pay to acquire single-family homes for rent and the competition for tenants may intensify. A softening of the rental market in our target areas would reduce our rental income and profitability.

Mortgage loan modification programs and future legislative action may adversely affect the number of available properties that meet our investment criteria.

The U.S. government, through the Federal Reserve, the Federal Housing Administration and the Federal Deposit Insurance Corporation, has implemented a number of programs designed to provide homeowners with assistance in avoiding residential mortgage loan foreclosures, including the Home Affordable Modification Program, which seeks to provide relief to homeowners whose mortgages are in or may be subject to foreclosure, and the Home Affordable Refinance Program, which allows certain borrowers who are underwater on their mortgage but current on their mortgage payments to refinance their loans. Several states, including certain of the states in which our current and target markets are located, have adopted or are considering similar legislation. These programs and other loss mitigation programs may involve, among other things, the modification or refinancing of mortgage loans or providing homeowners with additional relief from loan foreclosures. Such loan modifications and other measures are intended and designed to lead to fewer foreclosures, which will decrease the supply of properties that meet our investment criteria.

The pace of residential foreclosures is unpredictable and subject to numerous factors. In recent periods there has been a backlog of foreclosures due to a combination of volume constraints and legal actions, including those brought by the U.S. Department of Justice, or DOJ, the Department of Housing and Urban Development, or HUD, and State Attorneys General against mortgage servicers alleging wrongful foreclosure practices. Financial institutions have also been subjected to regulatory restrictions and limitations on foreclosure activity by the Federal Deposit Insurance Corporation. Legal claims brought or threatened by the DOJ, HUD and 49 State Attorneys General against the five largest residential mortgage servicers in the country were settled in 2012. As part of this approximately $25 billion settlement, a portion of the settlement funds will be directed to homeowners seeking to avoid foreclosure through mortgage modifications, and servicers are required to adopt specified measures to reduce mortgage obligations in certain situations. It is expected that the settlement will help many homeowners avoid foreclosures that would otherwise have occurred in the near term, and with lower monthly payments and mortgage debts, for years to come. Other residential mortgage servicing companies that were not among the five included in the initial $25 billion settlement may also agree to similar settlements that will further reduce the supply of houses in the process of foreclosure.

In addition, numerous federal and state legislatures have considered, proposed or adopted legislation to constrain foreclosures, or may do so in the future. For example, in 2012, California enacted a law imposing new limitations on foreclosures while a request for a loan modification is pending. The Dodd-Frank Act also created the Consumer Financial Protection Bureau, which supervises and enforces federal consumer protection laws as

 

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they apply to banks, credit unions, and other financial companies, including mortgage servicers. It remains uncertain as to whether any of these measures will have a significant impact on foreclosure volumes or what the timing of that impact would be. If foreclosure volumes were to decline significantly, we would expect REO inventory levels to decline or to grow at a slower pace, which would make it more difficult to find target assets at attractive prices and might constrain our growth or reduce our long-term profitability. Also, the number of families seeking rental housing might be reduced by such legislation, reducing rental housing demand in our target markets.

Claims of deficiencies in the foreclosure process may result in rescission of our purchases at auction or reduce the supply of foreclosed properties available to us.

Allegations of deficiencies in foreclosure practices could result in claims challenging the validity of some foreclosures that have occurred to date, potentially placing our claim of ownership to the properties at risk. Our title insurance policies may not provide adequate protection in such instances, and such proceedings may result in a complete loss without compensation.

Each state has its own laws governing the procedures to foreclose on mortgages and deeds of trust, and state laws generally require strict compliance with these laws in both judicial and non-judicial foreclosures. Recently, courts and administrative agencies have been more actively involved in enforcing state laws governing foreclosures, and in some circumstances have imposed new rules and requirements regarding foreclosures. Some courts have delayed or prohibited foreclosures based on alleged failures to comply with proper transfers of title, notice, identification of parties in interest, documentation and other legal requirements. Further, foreclosed owners and their legal representatives, including some prominent and well-financed legal firms, have brought litigation questioning the validity and finality of foreclosures that have already occurred. These developments may:

 

   

slow or reduce the supply of foreclosed houses available to us for purchase;

 

   

call into question the validity of our title to houses acquired at foreclosure; and

 

   

result in rescission rights or other borrower remedies, which could result in a loss of a property purchased by us that may not be covered by title insurance, an increase in litigation costs incurred with respect to properties obtained through foreclosure or delays in stabilizing and leasing such properties promptly after acquisition.

Our underwriting criteria and evaluation of properties involves a number of assumptions that may prove inaccurate, which may cause us to overpay for our properties or incur significant costs to renovate and market a property.

In determining whether a particular property meets our investment criteria, we make a number of assumptions, including assumptions related to estimated time of possession and estimated renovation costs and time frames, annual operating costs, market rental rates and potential rent amounts, time from purchase to leasing and tenant default rates. These assumptions may prove inaccurate, causing us to pay too much for properties we acquire, overvalue our properties or our properties not to perform as we expect. Also, adjustments to the assumptions we make in evaluating potential purchases may result in fewer properties qualifying under our investment criteria. Improvements in the market prices for single-family homes in our target markets or decreases in the available inventory could also reduce the supply of properties that meet our investment criteria, which may adversely affect our operating results and ability to implement our business plan.

In addition, the recent market and regulatory environments relating to single-family residential properties have been changing rapidly, making future trends difficult to forecast. For example, an increasing number of homeowners now wait for an eviction notice or eviction proceedings to commence before vacating foreclosed premises, which significantly increases the time period between the acquisition and leasing of a property. Historically, a significant portion of the properties we have acquired at auction were occupied, requiring us to transition the prior occupants before we begin our renovations. The accuracy of the assumptions we use in our underwriting criteria will affect our operating results.

 

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The types of properties on which our acquisition strategy focuses have an increased risk of damage due to vandalism, mold and infestation, which may require extensive renovation prior to renting.

Our acquisition strategy predominately targets distressed single-family properties that often involve defaults by homeowners on their home loan obligations. For multiple reasons, distressed properties may be in worse physical condition than other similar properties. When homeowners fall behind on their mortgage payments, they may cease to maintain the property in good condition, vandalize it or abandon the property altogether. Vacant and neglected homes are subject to increased risks of vandalism, theft, mold, infestation, general deterioration and other maintenance problems that may worsen without appropriate attention and remediation. We generally do not hire independent third-party home inspectors to inspect properties before purchase and instead rely on the acquisition employees of our Manager to conduct interior visual inspections when possible. Furthermore, although we intend to inspect our portfolio properties periodically, we may not become aware of conditions such as water infiltration, mold or infestation until significant damage has been done to our property, requiring extensive remediation and repairs as well as providing substitute housing for a tenant until the damage has been repaired.

Certain of our older properties may contain lead-based paint, which we may be required to remove or could expose us to liability, either of which would adversely affect our operating results.

Although our portfolio is comprised predominantly of assets that were constructed since 1980, there are homes that we acquire that may be constructed prior to that date. A structure built prior to 1978 may contain lead-based paint and may present a potential exposure to lead. However, structures built after 1978 are not likely to contain lead-based paint. The existence of lead paint is especially a concern in residential units and can cause health problems, particularly for children. Federal and state laws impose certain disclosure requirements and restrict and regulate renovation activities on housing built before 1978. Violation of these restrictions could result in fines or criminal liability, and we could be subject to liability arising from lawsuits alleging personal injury or related claims. Although we attempt to comply with all such regulations, we have not conducted tests on the properties in our portfolio to determine the presence of lead-based paint, and we may incur material liabilities as a result of the presence of lead paint in our properties.

Approximately 63% of our properties as of March 31, 2013 were purchased at auction, where we generally are not able to conduct a thorough inspection before purchasing the properties, and we may not accurately assess the extent of renovations required.

Approximately 63% of the properties in our portfolio as of March 31, 2013 were purchased at auction. When we purchase properties at auction, we generally do not have the opportunity to conduct interior inspections and may not be able to access the property to conduct more than the most cursory of exterior inspections. These inspection processes may fail to reveal major defects associated with properties we acquire, which may result in renovation and maintenance costs and time frames that far exceed our estimates and negatively affect our financial results and earnings.

The costs and time to secure possession and control of a newly acquired property may exceed our current assumptions, which would increase the costs and delay our receipt of revenue from the property.

Upon acquiring a new property, we may have to evict residents who are in unlawful possession before we can secure possession and control of the property. The holdover occupants may be the former owners or tenants of a property or squatters or others who are illegally in possession. Securing control and possession from these occupants can be both costly and time-consuming. If these costs and delays exceed our expectations, our financial performance may suffer because of the increased expenses incurred or the unexpected delays in turning the properties into revenue-producing assets.

 

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We may not have control over the timing and costs arising from renovation of properties, which may adversely affect our earnings and distributable cash.

We expect that nearly all of our properties will require some level of renovation immediately upon their acquisition or in the future following expiration of a lease or otherwise. We may acquire properties that we plan to extensively renovate. We may also acquire properties that we expect to be in good condition only to discover unforeseen defects and problems that require extensive renovation and capital expenditures. In addition, we will be required to make ongoing capital improvements and replacements and may need to perform significant renovations from time to time to reposition properties in the rental market. Our homes will have infrastructure and appliances of varying ages and conditions. Consequently, we expect that our Manager will routinely retain third party vendors to perform physical repair work and we will be exposed to all of the risks inherent in property renovation, including potential cost overruns, increases in labor and materials costs, delays by contractors in completing work, delays in the timing of receiving necessary work permits, certificates of occupancy and poor workmanship. If our assumptions regarding the costs or timing of renovation across our portfolio prove to be materially inaccurate, our earnings and distributable cash may be adversely affected.

We may be subject to unknown or contingent liabilities or restrictions related to properties that we acquire for which we may have limited or no recourse.

Assets and entities that we have acquired or may acquire in the future, may be subject to unknown or contingent liabilities for which we may have limited or no recourse against the sellers. Unknown or contingent liabilities might include liabilities for or with respect to liens attached to properties, unpaid real estate tax, utilities or HOA charges for which a subsequent owner remains liable, clean-up or remediation of environmental conditions or code violations, claims of customers, vendors or other persons dealing with the acquired entities and tax liabilities, among other things. Purchases of single-family properties acquired at auction, in short sales, from lenders or in bulk purchases typically involve few or no representations or warranties with respect to the properties and may allow us limited or no recourse against the sellers of such properties. Such properties also often have unpaid tax, utility and HOA liabilities for which we may be obligated but that we fail to anticipate. As a result, the total amount of costs and expenses that we may incur with respect to liabilities associated with acquired properties and entities may exceed our expectations, which may adversely affect our operating results and financial condition. Additionally, these properties may be subject to covenants, conditions or restrictions that restrict the use or ownership of such properties, including prohibitions on leasing or requirements to obtain the approval of HOAs prior to leasing. We may not discover such restrictions during the acquisition process, and such restrictions may adversely affect our ability to operate such properties as we intend.

Our operating performance is subject to risks associated with the real estate industry that could reduce the rent we receive, decrease the value of our properties and adversely affect our financial condition.

Real estate investments are subject to various risks and fluctuations and cycles in value and demand, many of which are beyond our control. Certain events may decrease cash available for dividends as well as the value of our properties. These events include:

 

   

adverse changes in national or local real estate, economic and demographic conditions;

 

   

vacancies or our inability to rent our homes on favorable terms or at favorable rental rates;

 

   

adverse changes in financial conditions of buyers, sellers and tenants of properties;

 

   

inability to collect rent from tenants;

 

   

reduced demand for single-family home rentals and changes in the relative popularity of properties and neighborhoods;

 

   

increased supply of single-family homes and availability of financing;

 

   

increases in expenses, including insurance costs, labor costs, energy prices, real estate assessments and other taxes and costs of compliance with laws, regulations and governmental policies to the extent that we are unable to pass on these increases to our tenants;

 

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the effects of rent controls, stabilization laws and other laws or covenants regulating rental rates; and

 

   

changes in, and changes in enforcement of, laws, regulations and governmental policies, including health, safety, environmental, rental property, zoning and tax laws, governmental fiscal policies and the Americans with Disabilities Act of 1990.

In addition, periods of economic slowdown or recession, rising interest rates or declining demand for real estate, or the public perception that any of these events may occur, could result in a general decline in rents or an increased incidence of defaults under existing leases. If we cannot operate our properties to meet our financial expectations, our financial condition, results of operations, cash flow, per share trading price of our common stock, ability to satisfy our debt service obligations and ability to pay dividends to you could be adversely affected.

Short-term leases of residential property may expose us to the effects of declining market rents.

We anticipate that substantially all of our leases will be of a duration of one year. As these leases permit the residents to leave at the end of the lease term without penalty, we anticipate our rental revenues may be affected by declines in market rents more quickly than if our leases were for longer terms. Short-term leases may result in high turnover, which involves additional costs, such as restoration and marketing expenses, and result in lower occupancy levels. Because we have no track record, we cannot accurately predict our turnover rate or the associated costs we will incur.

Our revenue and expenses are not directly correlated, and because a large percentage of our costs and expenses are fixed, we may not be able to adapt our cost structure to offset declines in our revenue.

Most of the expenses associated with our business, such as acquisition costs, renovation and maintenance costs, real estate taxes, HOA fees, personal and ad valorem taxes, insurance, utilities, employee wages and benefits and other general corporate expenses, are fixed and do not necessarily decrease with a reduction in revenue from our business. Our assets are also prone to depreciation and will require ongoing capital expenditures. Our expenses and ongoing capital expenditures will also be affected by inflationary increases and certain of our cost increases may exceed the rate of inflation in any given period. By contrast, as described above, our rental income will be affected by many factors beyond our control, such as the availability of alternative housing, including other rental options, and economic conditions in our target markets. As a result, we may not be able to fully offset rising costs and capital spending by higher lease rates, which could have a material adverse effect on our results of operations and cash available for distribution. In addition, state and local regulations may require us to maintain properties that we own, even if the cost of maintenance is greater than the value of the property or any potential benefit from renting the property.

Our portfolio consists of properties geographically concentrated in certain markets and any adverse developments in local economic conditions, the demand for single-family rental homes in these markets or natural disasters may negatively affect our operating results.

Unless and until we expand our portfolio of assets, our homes will be geographically concentrated in Arizona, California, Colorado, Delaware, Florida, Georgia, Nevada and Texas. As such, we are susceptible to local economic conditions, other regulations, the supply of and demand for single-family rental properties and natural disasters in these areas. If there is a downturn in the economy, an oversupply of or decrease in demand for single-family rental properties in these markets or natural disasters in these geographical areas, our business could be materially adversely affected to a greater extent than if we owned a real estate portfolio that was more geographically diversified.

A number of our residential properties are part of HOAs and we and our tenants are subject to the rules and regulations of such HOAs, which may be arbitrary or restrictive, and violations of such rules may subject us to additional fees, penalties and litigation, which could be costly.

As of                 , 2013, less than     % of our wholly owned properties were located within HOAs, which are private entities that regulate the activities of and levy assessments on properties in a residential subdivision.

 

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HOAs in which we own properties may have or enact onerous or arbitrary rules that restrict our ability to renovate, market or lease our properties or require us to renovate or maintain such properties at standards or costs that are in excess of our planned operating budgets. Such rules may include requirements for landscaping, limitations on signage promoting a property for lease or sale or the use of specific construction materials for renovations. Some HOAs also impose limits on the number of property owners who may rent their homes, which, if met or exceeded, would cause us to incur additional costs to resell the property and opportunity costs of lost rental income. Furthermore, many HOAs impose restrictions on the conduct of occupants of homes and the use of common areas, and we may have tenants who violate HOA rules and for which we may be liable as the property owner. Additionally, the governing bodies of the HOAs in which we own property may not disclose to us any or all important restrictions on the related properties, block our access to HOA records, initiate litigation, restrict our ability to sell our properties, impose assessments or arbitrarily change the HOA rules. We may be unaware of or unable to review or comply with HOA rules before purchasing a property, and any such excessively restrictive or arbitrary regulations may cause us to sell such property at a loss, prevent us from renting such property or otherwise reduce our cash flow from such property, which would have an adverse effect on our returns on such property.

We may be subject to losses that are uninsurable or not economically insurable or that are in excess of our insurance coverage.

Our properties may be damaged by adverse weather conditions and natural disasters, such as earthquakes, hurricanes, tornados, wind, floods, landslides and fires. In addition, our properties may be subject to environmental liabilities, and we will be exposed to personal liability for accidents that may occur on our properties. Our insurance may not be adequate to cover all damages or losses from these events, or we may view it as not economically prudent to purchase insurance for certain types of losses, such as hurricanes or earthquakes. As a result, we may be required to incur significant costs in the event of adverse weather conditions and natural disasters or events that result in environmental or personal liability. We may not carry or may discontinue or self insure certain types of insurance coverage on some or all of our properties in the future if the cost of premiums for any of these policies in our judgment exceeds the value of the coverage discounted for the risk of loss. Because we tend to concentrate ownership in target markets, if we own numerous properties in a geographic area affected by a natural disaster or similar catastrophic event, it could damage or destroy a substantial portion of our real estate assets and expose us to liabilities to our affected tenants to immediately repair or replace their leaseholds on non-economic terms. If we experience losses that are uninsured or exceed policy limits, we could incur significant uninsured costs or liabilities, lose the capital invested in the properties and lose the anticipated future cash flows from those properties. These costs or liabilities may result in losses substantially in excess of the value of the related property.

Compliance with new or existing laws, regulations and covenants that are applicable to our properties, including permit, license and zoning requirements, may adversely affect our ability to make future acquisitions or renovations, result in significant costs or delays and adversely affect our growth strategy.

Our properties are subject to various covenants and local laws and regulatory requirements, including permitting and licensing requirements. Local regulations, including municipal or local ordinances, zoning restrictions and restrictive covenants imposed by community developers or HOAs, may restrict our use of our properties and may require us to obtain approval from local officials or community standards organizations at any time with respect to our properties, including prior to acquiring a property or when undertaking renovations of any of our existing properties. Among other things, these restrictions may relate to fire and safety, seismic, asbestos cleanup or hazardous material abatement requirements. Existing regulatory policies may adversely affect us or the timing or cost of any future acquisitions or renovations, and additional regulations may be adopted that would increase such delays or result in additional costs. Our failure to obtain permits, licenses and zoning approvals on a timely and cost-effective basis could have a material adverse effect on our business, financial condition and results of operations.

 

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We are subject to tenant relief laws and rent control laws, which may negatively impact our rental income and profitability.

When we acquire distressed properties at auction, we may need to evict the prior occupant of the premises, and, as landlord of numerous properties, we will regularly have to evict tenants who are not paying their rent or are otherwise violating the terms of their lease. Eviction activities impose legal and managerial expenses that raise our costs. The eviction process is typically subject to legal barriers, mandatory “cure” policies and other sources of expense and delay, each of which may delay our ability to gain possession and stabilize the property. Additionally, state and local landlord-tenant laws may impose legal duties to assist tenants in relocating to new housing, or restrict the landlord’s ability to recover certain costs or charge tenants for damage tenants cause to the landlord’s premises. Because such laws vary by state and locality, our regional and local property managers will need to be familiar with and take all appropriate steps to comply with all applicable landlord-tenant laws, and we will need to incur supervisory and legal expenses to insure such compliance. To the extent that we do not comply with state or local laws, we may be subjected to litigation filed by individuals, including in class actions, or by state or local law enforcement. We may be required to pay our adversaries’ litigation fees and expenses if judgment is entered against us in such litigation, or if we settle such litigation.

Furthermore, rent control laws may affect our rental income. Especially in times of recession and economic slowdown, rent control initiatives can acquire significant political support. As of                 , 2013, less than     % of our homes were subject to rent control or tenant relief laws. For these properties and, if rent control unexpectedly becomes applicable to certain of our other properties, such other properties, the effects on both our rental income and the value of such properties could be material and adverse.

Class action, tenant rights and consumer demands and litigation may result in increased expenses and harm our financial results.

There are numerous tenants’ rights and consumer rights organizations throughout the country that operate in our target markets, and as we grow in scale, we may attract attention from some of these organizations and become a target of legal demands or litigation. Many such consumer organizations have become more active and better funded in connection with mortgage foreclosure-related issues, and with the large settlements received by the DOJ, HUD and 49 State Attorneys General from the five largest residential mortgage servicers in 2012 and the increased market for single-family rentals arising from displaced homeownership, some of these organizations may shift their litigation, lobbying, fundraising and grass roots organizing activities to focus on landlord-tenant issues. While we intend to conduct our business lawfully and in compliance with applicable landlord-tenant and consumer laws, such organizations might work in conjunction with trial and pro bono lawyers in one state or multiple states to attempt to bring claims against us on a class action basis for damages or injunctive relief. We cannot anticipate what form such legal actions might take, or what remedies they may seek. Additionally, these organizations may lobby local county and municipal attorneys or state attorneys general to pursue enforcement or litigation against us, or may lobby state and local legislatures to pass new laws and regulations to constrain our business operations. If they are successful in any such endeavors, they could directly limit and constrain our business operations, and may impose on us significant litigation expenses, including settlements to avoid continued litigation or judgments for damages or injunctions.

Poor tenant selection and defaults by renters may negatively affect our financial performance and reputation.

Our success will depend in large part upon our ability to attract and retain qualified tenants for our properties. This will depend, in turn, upon our ability to screen applicants, identify good tenants and avoid tenants who may default. We will inevitably make mistakes in our selection of tenants, and we may rent to tenants whose default on our leases or failure to comply with the terms of the lease or HOA regulations negatively affect our financial performance, reputation and the quality and value of our properties. For example, tenants may default on payment of rent, make unreasonable and repeated demands for service or improvements, make unsupported or unjustified complaints to regulatory or political authorities, make use of our properties for

 

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illegal purposes, damage or make unauthorized structural changes to our properties which may not be fully covered by security deposits, refuse to leave the property when the lease is terminated, engage in domestic violence or similar disturbances, disturb nearby residents with noise, trash, odors or eyesores, fail to comply with HOA regulations, sublet to less desirable individuals in violation of our leases, or permit unauthorized persons to live with them. In addition, defaulting renters of our residential real properties will often be effectively judgment-proof. The process of evicting a defaulting renter from a family residence can be adversarial, protracted and costly. Furthermore, some tenants facing eviction may damage or destroy the property. Damage to our properties may significantly delay re-leasing after eviction, necessitate expensive repairs or impair the rental income or value of the property, resulting in a lower than expected rate of return. In addition, we will incur turnover costs associated with re-leasing the properties such as marketing and brokerage commissions and will not collect revenue while the property sits vacant. Although our Manager attempts to work with tenants to prevent such damage or destruction, our Manager may not be successful in all or most cases. Such tenants may also subject us to liability and damage our reputation with our other tenants and in the communities where we do business.

Declining real estate valuations and impairment charges could adversely affect our earnings and financial condition.

Our success will depend upon our ability to acquire rental properties at attractive valuations, such that we can earn a satisfactory return on the investment primarily through rental income and secondarily through increases in the value of the properties. If we overpay for properties or if their value subsequently drops or fails to rise because of market factors, we will not achieve our financial objectives.

We will periodically review the value of our properties to determine whether their value, based on market factors, projected income and generally accepted accounting principles, has permanently decreased such that it is necessary or appropriate to take an impairment loss in the relevant accounting period. Such a loss would cause an immediate reduction of net income in the applicable accounting period and would be reflected in a decrease in our balance sheet assets. The reduction of net income from an impairment loss could lead to a reduction in our dividends, both in the relevant accounting period and in future periods. Even if we do not determine that it is necessary or appropriate to record an impairment loss, a reduction in the intrinsic value of a property would become manifest over time through reduced income from the property and would therefore affect our earnings and financial condition.

Title defects and eminent domain could lead to material losses on our investments in our target assets.

Although we currently intend to acquire title insurance on the majority of our residential properties when it is available, we will also acquire a number of our homes on an “as is” basis at auctions, without the benefit of title insurance prior to closing. Increased scrutiny of title matters, particularly in the case of foreclosures, could lead to legal challenges, including allegations of defects in the foreclosure process, with respect to the validity of the sale. In the absence of title insurance, the sale may be rescinded and we may be unable to recover our purchase price, resulting in a complete loss. Title insurance obtained subsequent to purchase offers little protection against discoverable defects as they are typically excluded from such policies. Although our Manager has policies, procedures and practices to assess the state of title prior to purchase, these policies and procedures may not be completely effective, which could lead to a material if not complete loss on our investment in such properties. In addition, even if we are able to acquire title insurance on a property, the insurance may not cover all defects or the significant legal costs associated with obtaining clear title.

It is also possible that governmental authorities may exercise eminent domain to acquire land on which our properties are built in order to build roads and other infrastructure. Any such exercise of eminent domain would allow us to recover only the fair value of the affected properties. Our acquisition strategy is premised on the concept that this “fair value” will be substantially less than the real value of the property for a number of years, and we could effectively have no profit potential from properties acquired by the government through eminent domain. Several cities are also exploring proposals to use eminent domain to acquire mortgages to assist homeowners to remain in their homes, potentially reducing the supply of single-family properties in our markets.

 

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Increasing real estate taxes, HOA fees and insurance costs may negatively impact our financial results.

As a result of our substantial real estate holdings, the cost of real estate taxes and insuring our properties is a significant component of our expenses. In addition, a substantial portion of the properties in our portfolio are subject to HOAs, which have the power to increase monthly charges and make assessments for capital improvements and common area repairs. Real estate taxes, HOA fees and insurance premiums are subject to significant increases, which can be outside of our control. If the costs associated with real estate taxes, HOA fees and assessments or insurance should rise significantly and we are unable to raise rents to offset such increases, our results of operations would be negatively impacted.

Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer.

In the ordinary course of our business, we acquire and store sensitive data, including intellectual property, our proprietary business information and personally identifiable information of our prospective and current tenants, our employees and third-party service providers in our branch offices and on our networks and website. The secure processing and maintenance of this information is critical to our operations and business strategy. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, regulatory penalties, disruption to our operations and the services we provide to customers or damage our reputation, which could adversely affect our results of operations and competitive position.

As a result of becoming a public company, we will be obligated to develop and maintain proper and effective internal control over financial reporting. We may not complete our analysis of our internal control over financial reporting in a timely manner, or these internal controls may not be determined to be effective, which may adversely affect investor confidence in our company and, as a result, the value of our common stock.

Upon completion of this offering, we will be subject to section 404 of The Sarbanes-Oxley Act of 2002 and the related rules of the SEC, which generally require our management to report on the effectiveness of our internal control over financial reporting. Our management may have to provide the first such report with our annual report for the fiscal year ending December 31, 2014. To date, we have never conducted a review of our internal control for the purpose of providing the reports required by these rules. During the course of our review and testing, we may identify deficiencies and be unable to remediate them before we must provide the required reports.

If we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal controls, investors could lose confidence in the accuracy and completeness of our financial reports, which could cause the price of our common stock to decline, and we may become subject to investigation or sanctions by the SEC. We will be required to disclose in the reports that we file or submit under the Exchange Act changes made in our internal control and procedures on a quarterly basis. However, our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 until the later of (1) the fiscal year following our first annual report required to be filed with the SEC and (2) the date we are no longer an “emerging growth company,” as defined in the JOBS Act, if we take advantage of the exemptions contained in the JOBS Act, assuming we are neither a large accelerated filer nor an accelerated filer. We expect to remain an “emerging growth company” for up to five years, or until the earliest of (1) the last day of the first fiscal year in which we achieve annual gross revenues of $1.0 billion or more, (2) the last day of the fiscal year in which we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common equity that is held by non-affiliates exceeds $700.0 million as of the last business day of our most recently completed second fiscal quarter and we

 

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have been publicly reporting for at least 12 months and have filed at least one annual report or (3) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the preceding three-year period. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed or operating. Our remediation efforts may not enable us to avoid a material weakness in the future. In addition, to comply with the requirements of being a public company, we may need to undertake various actions, such as implementing new internal controls and procedures and hiring accounting or internal audit staff.

Our financial results in the period or periods immediately following the consummation of this offering may not be reflective of our earnings potential and may cause our stock price to decline.

Our financial results in the fiscal periods immediately following the consummation of this offering may not be representative of our future potential. Until we are able to fully deploy the proceeds of this offering, we will invest such funds in interest-bearing accounts and short-term, interest-bearing securities, with lower yield than we would expect to receive once these funds have been fully invested in our core single-family residential properties. In addition, since a significant portion of our portfolio was acquired within the past 12 months, and we expect to experience growth following this offering, we will have a greater percentage of our portfolio invested in assets in the process of stabilization than we would expect to have as a more mature operation. It will take time and significant cash resources to renovate, reposition and lease these properties in the process of stabilization. As a result, newly acquired properties will remain unproductive for some period of time following the offering and will reduce our overall financial performance. Our Manager will also incur additional reimbursable expenses to expand our operations, systems and infrastructure to support our growth. If we experience lower-than-expected financial results, our stock price and the value of your investment may decline.

Our current and future joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on joint venture partners’ financial condition and liquidity and disputes between us and our joint venture partners.

We have entered into a structured joint venture transaction with Fannie Mae, and may in the future enter into other joint ventures with Fannie Mae, as well as other GSEs and financial institutions, to access large portfolios of homes in our target markets. Such joint venture investments may involve risks not otherwise present when we acquire our target assets without partners, including the following:

 

   

we do not have exclusive control over the asset or joint venture, which may prevent us from taking actions that are in our best interest;

 

   

joint venture agreements often restrict the transfer of a partner’s interest or may otherwise restrict our ability to sell the interest when we desire or on advantageous terms;

 

   

joint venture agreements may contain buy-sell provisions pursuant to which one partner may initiate procedures requiring the other partner to choose between buying the other partner’s interest or selling its interest to that partner;

 

   

a partner may, at any time, have economic or business interests or goals that are, or that may become, inconsistent with our business interests or goals;

 

   

a partner may be in a position to take action contrary to our instructions, requests, policies or objectives, including our current policy with respect to maintaining our qualification as a REIT and our exemption from registration under the Investment Company Act;

 

   

our relationships with our partners are contractual in nature and may be terminated or dissolved under the terms of the applicable joint venture agreements and, in such event, we may not continue to own or operate the interests or assets underlying such relationship or may need to purchase such interests or assets at a premium to the market price to continue ownership;

 

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disputes between us and a partner may result in litigation or arbitration that would increase our expenses and prevent our officers and directors from focusing their time and efforts on our business and could result in subjecting the assets owned by the joint venture to additional risk; or

 

   

we may, in certain circumstances, be liable for the actions of a partner, and the activities of a partner could adversely affect our ability to qualify as a REIT or remain exempt from registration under the Investment Company Act, even though we do not control the joint venture.

Any of the above might subject us and our assets to liabilities in excess of those contemplated and adversely affect the value of our current and future joint venture investments.

We have diverse investors in our business who may have conflicting investment, tax and other interests with respect to their investments in our company.

Our investors are expected to include U.S. taxable and tax-exempt entities, and institutions from non-U.S. jurisdictions. Such investors may have conflicting investment, tax and other interests with respect to their investments in our company. The conflicting interests of individual investors may relate to or arise from, among other things, the nature of our investments, the structuring of the acquisition of investments and the timing of the disposition of investments. As a consequence, conflicts of interest may arise in connection with decisions made by our Manager (including, for example, with respect to the nature, structuring or timing of investments) that may be more beneficial for certain investors than for others, particularly with respect to individual tax situations. In selecting and structuring investments appropriate for us, our Manager will consider our investment and tax objectives and our investors as a whole, rather than the investment, tax or other objectives of any investor individually.

Our properties are subject to risks particular to real property, any of which could reduce our return from an affected property or asset and reduce or eliminate our ability to make distributions to our stockholders.

Our properties are subject to various real estate risks, including:

 

   

acts of God, including earthquakes, floods and other natural disasters, which may result in uninsured losses;

 

   

acts of war or terrorism, including the consequences of terrorist attacks, such as those that occurred on September 11, 2001;

 

   

adverse changes in national and local economic and market conditions;

 

   

changes in, and related costs of compliance with, governmental laws and regulations, fiscal policies and zoning ordinances;

 

   

costs of remediation and liabilities associated with environmental conditions such as indoor mold; and

 

   

the potential for uninsured or under-insured property losses.

If any of these or similar events occurs, it may reduce our return from an affected property or asset and reduce or eliminate our ability to make distributions to stockholders.

In addition, under various U.S. federal, state and local laws, an owner or operator of real property may become liable for the costs of removal of certain hazardous substances released on its property. These laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the release of such hazardous substances. The presence of hazardous substances may adversely affect an owner’s ability to sell real estate or borrow using real estate as collateral. If we acquire a property through foreclosure or otherwise, the presence of hazardous substances on such property may adversely affect our ability to sell the property and we may incur substantial remediation costs, which could have a material adverse effect on our results of operations, financial condition and our ability to make distributions to our stockholders.

 

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The large quantity of foreclosed houses and low residential mortgage rates may result in potential renters purchasing residences rather than leasing them and, as a result, may cause a decline in the number and quality of potential tenants.

Some of our target markets have a large quantity of foreclosed houses, and there are currently low residential mortgage interest rates and government-sponsored programs to promote home ownership. These factors may encourage potential renters to purchase residences rather than lease them, thereby causing a decline in the number and quality of potential tenants available to us.

Risks Related to Our Management and Our Relationship with Our Manager

We are dependent on our Manager, who provides services to us through the management agreement, and its key personnel for our success. We may not find a suitable replacement for our Manager if the management agreement is terminated, or for these key personnel if they leave our Manager or otherwise become unavailable to us, which would materially and adversely affect us.

We are externally advised by our Manager, and all of our officers are employees of our Manager or its affiliates, with many of such persons being employed by and made available to our Manager by Colony. Pursuant to our management agreement, our Manager is obligated to supply us with substantially all of our senior management team. Subject to investment, leverage and other guidelines or policies adopted by our board of directors, our Manager has significant discretion regarding the implementation of our investment and operating policies and strategies. Accordingly, we believe that our success depends significantly upon the experience, skill, resources, relationships and contacts of the executive officers and key personnel of our Manager and its affiliates, including many of such personnel who are made available to our Manager by Colony. Executive officers and key personnel of our Manager and its affiliates evaluate, negotiate, close and monitor our investments; therefore, our success depends on their continued service. The departure of any member of our management from our Manager, particularly Thomas J. Barrack, Jr., our Chairman, Richard B. Saltzman, our Vice Chairman, Justin Chang, our Chief Executive Officer, President and a director, and Arik Prawer, our Chief Financial Officer, or such other officers or personnel of our Manager that become unavailable to manage our business, or the failure of Colony to continue to make its employees available to our Manager, could have a material adverse effect on our performance.

Our Manager is not obligated to dedicate any specific personnel exclusively to us, nor is it or its personnel obligated to dedicate any specific portion of their time to the management of our business. Colony is not obligated to make available to our Manager any of its specific personnel and any personnel it does provide to our Manager are not obligated to dedicate any specific portion of their time to our Manager. As a result, we cannot provide any assurances regarding the amount of time our Manager will dedicate to the management of our business or the resources our Manager will have available to it. Moreover, as many of our officers and all of our non-independent directors are also employees of Colony, and have significant responsibilities for other investment vehicles currently managed by Colony, such officers and directors may not be able to devote sufficient time to the management of our business. Consequently, we may not receive the level of support and assistance that we otherwise might receive if we were internally managed.

In addition, our Manager may not remain our Manager, and we may not continue to have access to our Manager’s principals and professionals. Further, our Manager may not continue to have access to employees of Colony. The management agreement has an initial term expiring three years after the completion of this offering and will be renewed for additional one-year terms thereafter unless terminated by either us or our Manager. If the management agreement is terminated or not renewed and no suitable replacement is found to manage us, we may not be able to execute our business plan, which could have a material adverse effect on our results of operations and our ability to make distributions to our stockholders. Our Manager may be sold at any time, in which case we would cease to receive any benefit from being associated with the current beneficial owners of our Manager, including their investment expertise and resources.

 

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Under our management agreement, our Manager has a contractually defined duty to us rather than a fiduciary duty.

Under our management agreement, our Manager maintains a contractual as opposed to a fiduciary relationship with us that limits its obligations to us to those specifically set forth in this agreement. The ability of our Manager and its personnel to engage in other business activities may reduce the time our Manager spends advising and managing us. In addition, unlike those applicable to our directors, there is no statutory standard of conduct under the Delaware Limited Liability Company Act, or the DLLCA, for officers of a Delaware limited liability company like our Manager. Instead, officers of a Delaware limited liability company, including officers who are employees of our Manager, are subject to general agency principals, including the exercise of reasonable care and skill in the performance of their responsibilities, as well as the duties of loyalty, good faith and candid disclosure.

There are various conflicts of interest in our relationship with our Manager and its affiliates, which could result in decisions that are not in the best interests of our stockholders.

We are subject to conflicts of interest arising out of our relationship with our Manager and its affiliates. Each of our officers and non-independent directors are employees of our Manager and certain of its affiliates, and may have conflicts between their duties to us and their duties to, and interests in, our Manager and its other investment funds, including indirect investments in certain of our assets. The activities of other investment funds managed by our Manager or its affiliates could restrict our ability to pursue certain asset acquisitions or take other actions related to our business. Our Manager does not manage or advise any other entities and is not actively seeking new advisory clients; however, neither our Manager nor Colony is obligated to dedicate any specific personnel exclusively to us, nor will they or their personnel be obligated to dedicate any specific portion of their time to the management of our business. As a result, there may be certain situations where our officers allocate assets that may be suitable for us to such other funds. The investment allocation agreement that addresses some of the conflicts relating to our assets may not adequately address all of the conflicts that may arise. See “Business—Investment Allocation.”

Our Manager receives substantial base management fees regardless of the performance of our portfolio and, as a result, our Manager might not have an adequate incentive to devote its time and effort to seeking investments that provide attractive risk-adjusted returns for our portfolio. Consequently, CAH may be required to pay our Manager amounts in a particular quarter despite experiencing a decline in the value of our portfolio during that quarter.

The management agreement with our Manager was not negotiated on an arm’s length basis and may not be as favorable to us as if it had been negotiated with an unaffiliated third party.

Our executive officers and three of our directors are executives of our Manager or its affiliates. CAH’s management agreement was negotiated between related parties, and its terms, including fees payable to our Manager, may not be as favorable to us as if it had been negotiated with an unaffiliated third party. In addition, we may choose not to enforce, or to enforce less vigorously, our rights under the management agreement because of our desire to maintain our ongoing relationship with our Manager and its affiliates.

Termination of our management agreement could be costly.

Termination of the management agreement with our Manager without cause may be difficult and costly. Our independent directors review our Manager’s performance and the fees that may be payable to our Manager annually and, following the initial three-year term, the management agreement may be terminated annually by us, upon no less than 180 days’ prior written notice, if at least two-thirds of our board of directors, including a majority of our independent directors, determines that: (1) our Manager’s unsatisfactory performance has been materially detrimental to us, or (2) the management fees payable to our Manager are not fair, subject to our Manager’s right to prevent termination based on unfair fees by accepting a reduction of management fees agreed to by at least two-thirds of our board of directors, including a majority of our independent directors. Additionally,

 

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upon such a termination, the management agreement provides that CAH will pay our Manager a termination fee equal to three times the average annual base management fee earned by our Manager, during the 24-month period immediately preceding such termination, calculated as of the end of the most recently completed fiscal quarter before the date of termination. In addition, CAH would be required to pay our Manager such termination fee if our Manager terminates the management agreement after we breach the management agreement in any material respect or are otherwise unable to perform our obligations thereunder and the breach continues for a period of 30 days after written notice to us.

Moreover, our Manager may terminate the management agreement at any time upon 180 days’ prior written notice. If the management agreement is terminated and we are unable to identify a suitable replacement to manage us, we may not be able to execute our business plan.

Our Manager manages our portfolio pursuant to very broad investment guidelines, and our board of directors does not approve each investment and financing decision made by our Manager unless required by our investment guidelines.

Our Manager is authorized to follow very broad investment guidelines established by our board of directors. Our board of directors periodically reviews our investment guidelines and our portfolio of assets but does not, and is not required to, review all of our proposed investments, except in limited circumstances as set forth in our investment guidelines. In addition, in conducting periodic reviews, our board of directors may rely primarily on information provided to them by our Manager. Furthermore, transactions entered into by our Manager may be costly or difficult or impossible to unwind by the time they are reviewed by our board of directors. Our Manager has great latitude within the broad parameters of our investment guidelines in determining the types and amounts of assets in which to invest on our behalf, including making investments that may result in returns that are substantially below expectations or result in losses, which would materially and adversely affect our business and results of operations, or may otherwise not be in the best interests of our stockholders.

Moreover, stockholders have virtually no contractual rights to affect our management or our investments. Therefore, our stockholders will be relying entirely on our board of directors and our Manager to conduct and manage our affairs and will be relying on our Manager to select and manage our investments.

Our Manager’s liability is limited under the management agreement, and we have agreed to indemnify our Manager against certain liabilities.

Pursuant to the management agreement, our Manager will not assume any responsibility other than to render the services called for thereunder and will not be responsible for any action of our board of directors in following or declining to follow its advice or recommendations. Our Manager maintains a contractual as opposed to a fiduciary relationship with us. Under the terms of the management agreement, our Manager, its officers, members and personnel, any person controlling or controlled by our Manager and any person providing sub-advisory services to our Manager will not be liable to us, any subsidiary of ours, our directors, our stockholders or any subsidiary’s stockholders or partners for acts or omissions performed in accordance with and pursuant to the management agreement, except those resulting from acts constituting gross negligence, willful misconduct, bad faith or reckless disregard of our Manager’s duties under the management agreement. In addition, we have agreed to indemnify our Manager and each of its officers, directors, members, managers and employees from and against any claims or liabilities, including reasonable legal fees and other expenses reasonably incurred, arising out of or in connection with our business and operations or any action taken or omitted on our behalf pursuant to authority granted by the management agreement, except where attributable to gross negligence, willful misconduct, bad faith or reckless disregard of such person’s duties under the management agreement.

 

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We do not own the Colony name, but we will enter into a license agreement with an affiliate of Colony granting us the right to use the Colony name. Use of the name by other parties or the termination of our license agreement may harm our business.

Concurrently with the closing of our initial public offering, we will enter into a license agreement pursuant to which we will have a non-exclusive, royalty-free license to use the name “Colony.” Under this agreement, we will have a right to use the “Colony” name as long as our Manager remains our Manager pursuant to the management agreement. Colony will retain the right to continue using the “Colony” name. We also are unable to preclude Colony from licensing or transferring the ownership of the “Colony” name to third parties, some of whom may compete against us. Consequently, we will be unable to prevent any damage to goodwill that may occur as a result of the activities of Colony or others. Furthermore, in the event the license agreement is terminated, we will be required to change our name and cease using the “Colony” name. Any of these events could disrupt our recognition in the market place, damage any goodwill we may have generated and otherwise harm our business.

Risks Related to Our Common Stock

There is currently no public market for our common stock, and an active trading market may never develop, which could make it difficult for holders of our common stock to sell their shares.

Our shares of common stock are newly issued securities for which there is currently no established trading market. We will apply to list our common stock on the NYSE under the trading symbol “        .” However, an active trading market for our common stock may not develop or, if one develops, it may not be sustained. The initial public offering price of our common stock has been determined by agreement among us and the underwriters, but our common stock may trade below the initial public offering price following the completion of this offering. See “Underwriting.” The market value of our common stock could be substantially affected by general market conditions, including the extent to which a secondary market develops for our common stock following the completion of this offering, the extent of institutional investor interest in us, the general reputation of REITs and the attractiveness of their equity securities in comparison to other equity securities (including securities issued by other real estate-based companies), our financial performance and general stock and bond market conditions. Accordingly, no assurance can be given as to the ability of our stockholders to sell their common stock or the price that our stockholders may obtain for their common stock.

The market price and trading volume of our common stock may vary substantially.

The stock markets, including the NYSE on which we intend our common stock to be listed, historically have experienced significant price and volume fluctuations. As a result, the market price of our common stock is likely to be similarly volatile, and investors in our common stock may experience a decrease in the value of their shares, including decreases unrelated to our operating performance or prospects. The price of our common stock could be subject to wide fluctuations in response to a number of factors, including those listed in this “Risk Factors” section of this prospectus and others, such as:

 

   

our operating performance and the performance of other similar companies;

 

   

actual or anticipated changes in our business strategy or prospects;

 

   

actual or anticipated variations in our quarterly operating results or dividends;

 

   

changes in our earnings estimates;

 

   

publication of research reports about us or the real estate industry;

 

   

equity issuances by us, stock resales by our stockholders or the perception that such issuances or resales could occur;

 

   

the passage of legislation or other regulatory developments that adversely affect us or the assets in which we seek to invest;

 

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increases in market interest rates that lead purchasers of our common stock to demand a higher yield;

 

   

the use of significant leverage to finance our assets;

 

   

changes in market valuations of similar companies;

 

   

additions to or departures of our Manager’s or its affiliates’ key personnel;

 

   

actions by our stockholders;

 

   

changes in accounting principles;

 

   

speculation in the press or investment community;

 

   

the realization of any of the other risk factors presented in this prospectus; and

 

   

general market and economic conditions.

In the past, securities class action litigation has often been instituted against companies following periods of volatility in the price of their common stock. This type of litigation could result in substantial costs and divert our management’s attention and resources, which could have a material adverse effect on our cash flows, our ability to execute our business strategy and our ability to make distributions to our stockholders.

Our ability to pay distributions depends on a number of factors and is not assured.

Our ability to make distributions will depend upon a variety of factors, including efficient management of our properties and our ability to continue to grow and lease our portfolio successfully, and may be adversely affected by the risks described elsewhere in this prospectus.

All distributions will be made at the discretion of our board of directors. Our board of directors will make determinations regarding distributions based upon, among other factors, our historical and projected results of operations, financial condition, cash flows and liquidity, maintenance of our REIT qualification and other tax considerations, capital expenditure and other expense obligations, debt covenants, contractual prohibitions or other limitations and applicable law and such other matters as our board of directors may deem relevant from time to time. Among the factors that could impair our ability to make distributions to our stockholders are:

 

   

our inability to realize attractive risk-adjusted returns on our investments;

 

   

unanticipated expenses that reduce our cash flow or non-cash earnings;

 

   

tenant default rates or decreases in the value of our properties; and

 

   

the fact that anticipated operating expense levels may not prove accurate, as actual results may vary from estimates.

As a result, no assurance can be given that we will be able to make distributions to our stockholders in the future or that the level of any distributions we do make to our stockholders will achieve a market yield or increase or even be maintained over time, any of which could materially and adversely affect the market price of our common stock.

In addition, distributions that we make to our stockholders will generally be taxable to our stockholders as ordinary income. However, a portion of our distributions may be designated by us as capital gain dividends, which will generally be taxable to our stockholders as long-term capital gains, to the extent that they are attributable to capital gain income recognized by us or may constitute a return of capital to the extent that they exceed our earnings and profits as determined for tax purposes. A return of capital is not taxable, but has the effect of reducing the basis of a stockholder’s investment in our common stock.

 

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Future offerings of debt or equity securities, which could rank senior to our common stock, may adversely affect the market price of our common stock.

If we decide to issue debt or equity securities in the future, which could rank senior to our common stock, it is likely that they will be governed by an indenture or other instrument containing covenants restricting our operating flexibility. Additionally, upon liquidation, holders of our debt securities and other loans and preferred stock will receive a distribution of our available assets before common stockholders. Any series or class of our preferred stock would likely have a preference on distribution payments, periodically or upon liquidation, which could eliminate or otherwise limit our ability to make distributions to common stockholders. We and, indirectly, our stockholders, will bear the cost of issuing and servicing such securities. Because our decision to issue debt or equity securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, holders of our common stock will bear the risk of our future offerings reducing the market price of our common stock and diluting the value of their stock holdings in us.

Future issuances and sales of shares of our common stock may depress the market price of our common stock or have adverse consequences for our stockholders.

The market price of our common stock could decline as a result of sales of a large number of shares of our common stock available for sale after completion of this offering (including upon the redemption of OP units), or the perception that such sales could occur. These sales, or the possibility that these sales may occur, also may make it more difficult for us to raise additional capital by selling equity securities in the future, at a time and price that we deem appropriate.

We cannot predict the size of future issuances of our common stock or the effect, if any, that future issuances and sales of shares of our common stock may have on the market price of our common stock. Sales or distributions of substantial amounts of our common stock, including shares issued in connection with an acquisition, or the perception that such sales or distributions could occur, may cause the market price of our common stock to decline. In addition, future sales of shares of our common stock by us, whether directly or through convertible or exchangeable securities (including OP units and convertible preferred units), warrants or options, may be dilutive to existing stockholders.

After the expiration of the lock-up agreements executed by certain of our stockholders, including certain of our stockholders that were investors in our formation transactions, those holders may sell a significant amount of our common stock pursuant to Rule 144 of the Securities Act or otherwise. See “Shares Eligible for Future Sale.” Moreover, following the recapitalization transactions and upon completion of this offering, affiliates of Colony will own approximately          AGP units and          OP units, which are redeemable for cash or, at the election of CAH exchangeable for shares of our common stock on a one-for-one basis. If any or all of these holders exchange their AGP units or OP units for shares of our common stock and/or cause a large number of their shares to be sold in the public market, any such sales could reduce the trading price of our common stock and could impede our ability to raise future capital.

Upon completion of the recapitalization transactions and this offering, affiliates of Colony, and certain of our officers and directors will own an aggregate of         % of our outstanding common stock on a fully diluted basis, which will enable these affiliates and officers to exert significant influence over our affairs.

Upon completion of the recapitalization transactions and this offering, affiliates of Colony will own approximately          AGP units and          OP units, which, represent         % of our outstanding common stock on a fully diluted basis. If any or all of these Colony affiliates exchange their AGP units or OP units for shares of our common stock, these affiliates would be able to exert significant influence over our affairs. Moreover, certain of our officers and directors will receive          restricted shares of our common stock, representing         % of our outstanding common stock. There can be no assurance that these affiliates, officers, directors and stockholders will act in accordance with our interests when exercising the voting power of their shares.

 

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If you purchase shares of common stock in this offering, you will experience immediate dilution to the extent of the difference between the public offering price per share and our pro forma as adjusted combined net tangible book value per share of our common stock immediately after the recapitalization transactions and this offering.

We expect the initial public offering price of our common stock to be higher than the book value per share of our outstanding common stock immediately after this offering. If you purchase our common stock in this offering, you will incur immediate dilution of approximately $         per share of our common stock, which represents the difference between the price you pay for our common stock in this offering and our pro forma as adjusted combined net tangible book value per share. This means that investors who purchase shares in this offering:

 

   

will pay a price per share that exceeds the per share value of our tangible assets after subtracting our liabilities; and

 

   

will have contributed         % of the total amount of our equity funding since inception but will only own         % of the shares outstanding.

See “Dilution.”

Increases in market interest rates may have an adverse effect on the value of our common stock as prospective purchasers of our common stock may expect a higher dividend yield and increased borrowing costs may decrease our funds available for distribution.

One of the factors that will influence the price of our common stock will be the dividend yield on our common stock (as a percentage of the price of our common stock) relative to market interest rates. An increase in market interest rates, which are currently at low levels relative to historical rates, may lead prospective purchasers of our common stock to expect a higher dividend yield. Higher interest rates would likely increase our borrowing costs and potentially decrease funds available for distribution. Thus, higher market interest rates could cause the market price of our common stock to decrease.

We may employ leverage in the future, which could expose us to additional risks, may impair our ability to pay dividends and may adversely affect the market price of our common stock.

If we incur indebtedness in the future to fund our growth and lease of homes or operations, the instruments governing such indebtedness will likely contain covenants restricting our operating flexibility. We may incur debt that is secured by all or a portion of the residences in our portfolio. We will bear the costs and fees associated with any such incurrence and ongoing interest expense, which will reduce the amount of funds available to common stockholders. Because our decision to issue debt will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future incurrence, and any such incurrence could reduce the market price of our common stock.

Risks Related to Our Organization and Structure

Conflicts of interest could arise as a result of our UPREIT structure.

Conflicts of interest could arise in the future as a result of the relationships between us and our affiliates, on the one hand, and our operating partnership or any partner thereof, on the other. Our directors and officers have duties to our company under applicable Maryland law in connection with our management. At the same time, we have fiduciary duties, as a general partner, to our operating partnership and to the limited partners under Delaware law in connection with the management of our operating partnership. Our duties, as the general partner of our operating partnership, to our operating partnership and its limited partners may come into conflict with the duties of our directors and officers to us. The partnership agreement of our operating partnership does not require us to resolve such conflicts in favor of either our stockholders or the limited partners in our operating partnership.

 

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Unless otherwise provided for in the relevant partnership agreement, Delaware law generally requires a general partner of a Delaware limited partnership to adhere to fiduciary duty standards under which it owes its limited partners the highest duties of good faith, fairness and loyalty and that generally prohibit such general partner from taking any action or engaging in any transaction as to which it has a conflict of interest.

Additionally, the partnership agreement of our operating partnership expressly limits our liability by providing that neither we, as the general partner of the operating partnership, nor any of our directors or officers, will be liable or accountable in damages to our operating partnership, the limited partners or assignees for errors in judgment, mistakes of fact or law or for any act or omission if the general partner, director or officer, acted in good faith. In addition, our operating partnership is required to indemnify us, our affiliates and each of our respective officers, directors, employees and agents to the fullest extent permitted by applicable law against any and all losses, claims, damages, liabilities (whether joint or several), expenses (including, without limitation, attorneys’ fees and other legal fees and expenses), judgments, fines, settlements and other amounts arising from any and all claims, demands, actions, suits or proceedings, civil, criminal, administrative or investigative, that relate to the operations of the operating partnership, provided that our operating partnership will not indemnify any such person for (1) willful misconduct or a knowing violation of the law, (2) any transaction for which such person received an improper personal benefit in violation or breach of any provision of the partnership agreement of our operating partnership, or (3) in the case of a criminal proceeding, the person had reasonable cause to believe the act or omission was unlawful.

The provisions of Delaware law that allow the common law fiduciary duties of a general partner to be modified by a partnership agreement have not been resolved in a court of law, and we have not obtained an opinion of counsel covering the provisions set forth in the partnership agreement of our operating partnership that purport to waive or restrict our fiduciary duties that would be in effect under common law were it not for the partnership agreement of our operating partnership.

Certain provisions of Maryland law could inhibit changes in control.

Certain provisions of the Maryland General Corporation Law, or the MGCL, may have the effect of deterring a third party from making a proposal to acquire us or of impeding a change in control under circumstances that otherwise could provide the holders of our common stock with the opportunity to realize a premium over the then-prevailing market price of our common stock. We are subject to the “business combination” provisions of the MGCL that, subject to limitations, prohibit certain business combinations (including a merger, consolidation, share exchange or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities) between us and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of our then-outstanding voting stock or an affiliate or associate of ours who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of our then outstanding voting stock) or an affiliate thereof for five years after the most recent date on which the stockholder becomes an interested stockholder. After the five-year prohibition, any business combination between us and an interested stockholder generally must be recommended by our board of directors and approved by the affirmative vote of at least (1) 80% of the votes entitled to be cast by holders of outstanding shares of our voting stock; and (2) two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the interested stockholder with whom or with whose affiliate the business combination is to be effected or held by an affiliate or associate of the interested stockholder. These super-majority vote requirements do not apply if, among other conditions, our common stockholders receive a minimum price, as defined under Maryland law, for their shares in the form of cash or other consideration in the same form as previously paid by the interested stockholder for its shares. These provisions of the MGCL do not apply, however, to business combinations that are approved or exempted by a board of directors prior to the time that the interested stockholder becomes an interested stockholder.

 

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Our board of directors has by resolution opted out of the business combination provisions of the MGCL with regard to any person who becomes an interested stockholder only after approval of our board of directors and, consequently, the five-year prohibition and the supermajority vote requirements will not apply to (1) business combinations between us and our Manager or any of their affiliates or associates, (2) business combinations between us and any person who becomes an interested stockholder with the approval of our board of directors, provided that any business combination with such person is first approved by our board of directors (including a majority of our directors who are not affiliates or associates of such person), and (3) business combinations between us and any person acting in concert with any of the foregoing, unless our board of directors in the future alters or repeals this resolution. As a result, any of these persons may be able to enter into business combinations with us that may not be in the best interest of our stockholders, without compliance by us with the supermajority vote requirements and the other provisions of the statute. There can be no assurance that our board of directors will not amend or revoke the exemption at any time.

The “control share” provisions of the MGCL provide that “control shares” of a Maryland corporation (defined as shares which, when aggregated with all other shares controlled by the stockholder (except solely by virtue of a revocable proxy), entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of issued and outstanding “control shares”) have no voting rights with respect to such shares except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding votes entitled to be cast by the acquirer of control shares, our officers and our personnel who are also our directors. Our bylaws contain a provision exempting from the control share acquisition statute any and all acquisitions by any person of shares of our stock. There can be no assurance that this provision will not be amended or eliminated at any time in the future.

Certain provisions of the MGCL permit our board of directors, without stockholder approval and regardless of what is currently provided in our charter or bylaws, to adopt certain mechanisms, some of which (for example, a classified board) we do not yet have. Our charter contains a provision whereby we have elected to be subject to the provisions of Title 3, Subtitle 8 of the MGCL relating to (1) fixing the number of directorships and the filling of vacancies on our board of directors pursuant to which our board of directors has the exclusive power to fix the number of directorships, subject to limitations set forth in our charter and bylaws, and to fill vacancies on our board of directors, (2) the removal of any director from the board, which removal is allowed only for cause, requiring the affirmative vote of the holders of not less than two-thirds of all of the votes entitled to be cast on the matter, and (3) calling a special meeting, which, unless called by the chairman of our board of directors, our president or chief executive officer or a majority of our board of directors, requires the written request of stockholders entitled to cast not less than a majority of all votes entitled to be cast at such meeting to call a special meeting. These provisions may have the effect of limiting or precluding a third party from making an acquisition proposal for us or of delaying, deferring or preventing a change in control of us under circumstances that otherwise could provide the holders of shares of our common stock with the opportunity to realize a premium over the then current market price.

Our authorized but unissued shares of common and preferred stock may prevent a change in our control.

Our charter permits our board of directors to authorize us to issue additional authorized but unissued shares of common or preferred stock. In addition, our board of directors may, without stockholder approval, amend our charter to increase the aggregate number of shares of our common stock or the number of shares of stock of any class or series that we have the authority to issue and classify or reclassify any unissued shares of common or preferred stock and set the preferences, rights and other terms of the classified or reclassified shares. As a result, our board of directors may establish a series of shares of common or preferred stock that could delay or prevent a transaction or a change in control that might involve a premium price for shares of our common stock or otherwise be in the best interest of our stockholders.

 

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Our rights and the rights of our stockholders to take action against our directors and officers are limited, which could limit your recourse in the event of actions not in your best interests.

Under Maryland law generally, a director is required to perform his or her duties in good faith, in a manner he or she reasonably believes to be in our best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. Directors are presumed to have acted with this standard of care under Maryland law. In addition, our charter limits the liability of our present and former directors and officers to us and our stockholders for money damages, to the maximum extent permitted under Maryland law. As permitted by Maryland law, our charter limits the liability of our directors and officers to us and our stockholders for money damages, except for liability resulting from:

 

   

actual receipt of an improper benefit or profit in money, property or services; or

 

   

active and deliberate dishonesty by the director or officer that was established by a final judgment as being material to the cause of action adjudicated.

Our charter obligates us to indemnify our directors and officers for actions taken by them in those capacities to the maximum extent permitted by Maryland law. Our bylaws require us to indemnify each director or officer, to the maximum extent permitted by Maryland law, in the defense of any proceeding to which he or she is made, or threatened to be made, a party by reason of his or her service to us. In addition, we may be obligated to advance the defense costs incurred by our directors and officers. As a result, we and our stockholders may have more limited rights against our directors and officers than might otherwise exist absent the current provisions in our charter and bylaws or that might exist with other companies.

Our charter contains provisions that make removal of our directors difficult, which could make it difficult for our stockholders to effect changes to our management.

Our charter provides that a director may only be removed for cause upon the affirmative vote of holders of two-thirds of the votes entitled to be cast in the election of directors. Vacancies may be filled only by a majority of the remaining directors in office, even if less than a quorum. These requirements make it more difficult to change our management by removing and replacing directors and may prevent a change in control of our company that is in the best interests of our stockholders.

The stock ownership limits imposed by the Code for REITs and by our charter may restrict our business combination opportunities.

In order for us to maintain our qualification as a REIT under the Code, not more than 50% in value of our outstanding stock may be owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include certain entities) at any time during the last half of each taxable year following our first taxable year. Additionally, at least 100 persons must beneficially own our stock during at least 335 days of a taxable year (other than our first taxable year). Our charter, with certain exceptions, authorizes our board of directors to take the actions that are necessary and desirable to preserve our qualification as a REIT. Our charter also provides that, unless exempted by our board of directors, no person, including a “group,” as defined in Section 13(d)(3) of the Exchange Act, may beneficially or constructively own, as determined by applying certain attribution rules of the Code, more than 9.8%, by value or by number of shares, whichever is more restrictive, of the aggregate of the outstanding shares of our common stock or more than 9.8%, by value or by number of shares, whichever is more restrictive, of the aggregate of the outstanding shares of any series or class of our preferred stock. Our board of directors may, in its sole discretion, grant, and has in certain circumstances granted, an exemption, prospectively or retroactively, from these stock ownership limits, subject to certain conditions and the receipt by our board of directors of certain representations and undertakings. Our charter also prohibits any person from (a) beneficially or constructively owning, as determined by applying certain attribution rules of the Code, our stock to the extent that such ownership would result in us being “closely held” under Section 856(h) of the Code, or such ownership would otherwise cause us to fail to qualify as a REIT or to have significant non-qualifying income from “related”

 

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parties, or such ownership would prevent us from qualifying as a “domestically controlled REIT” within the meaning of the Code, or (b) transferring stock if such transfer would result in our stock being owned by fewer than 100 persons. Although the ownership limits imposed under the Code are based upon direct or indirect ownership by individuals (as defined in the Code to include certain entities) during the last half of a tax year, the ownership limits contained in our charter are based on the ownership at any time by any person, which term includes entities. These ownership limitations in our charter are common in REIT charters and are intended to provide added assurance of compliance with certain of the requirements for qualification as a REIT under the Code, and to minimize administrative burdens. However, the ownership limit on our common stock might also delay, defer or prevent a transaction or a change in our control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders.

Provisions of the partnership agreement may restrict our business operations.

As the general partner of our operating partnership, we have full, exclusive and complete responsibility and discretion in the management and control of our operating partnership, including the ability to cause our operating partnership to enter into certain major transactions, including acquisitions, dispositions and refinancings, to make distributions to partners, and to cause changes in our operating partnership’s business activities. However, the approval of CFI Sub, the associate general partner of our operating partnership and an affiliate of our Manager, is required for certain actions by us, as the general partner of our operating partnership, including causing our operating partnership to enter into certain major transactions, the assumption or guarantee of indebtedness, a merger of our operating partnership, a sale of our operating partnership’s assets to the extent it involves greater than 10% of the our operating partnership’s aggregate assets, the enforcement of rights against any partner in the our operating partnership, the issuance by our operating partnership of additional partnership units, the selection and termination of property managers to manage any of the properties held by our operating partnership and the development and approval of annual operating budgets for our operating partnership. Therefore, unless the AGP units are exchanged for OP units, the approval of the associate general partner will be required before any such actions or transactions can be implemented by us. Beginning immediately prior to the completion of this offering, we, as the general partner of our operating partnership, have the right to cause such a redemption, in which case CFI Sub would withdraw as the associate general partner of our operating partnership and would no longer have these consent rights. However, due to our relationship with our manager and CFI Sub, we may not be inclined to cause such a redemption, and CFI Sub may not provide the required consent for any proposed transaction of the type described above, even if that transaction were otherwise favorable to our public stockholders. For more details regarding these provisions in the partnership agreement, see “Certain Relationships and Related Transactions” and “Description of the Operating Partnership Agreement.”

Pursuant to the recently enacted JOBS Act, we are permitted to elect not to be subject to certain disclosure and other requirements that otherwise would have been applicable to us had we not been an “emerging growth company.”

We are an “emerging growth company” as defined in the JOBS Act, which permits us to elect not to be subject to certain disclosure and other requirements that otherwise would have been applicable to us had we not been an “emerging growth company.” The requirements that we may opt not to comply with include the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, certain disclosure requirements regarding executive compensation in our periodic reports and proxy statements and the requirement to hold nonbinding advisory votes on executive compensation and golden parachute payments. We have not yet made a determination whether to take advantage of any or all of these exemptions. We may take advantage of these exemptions for up to five years or such earlier time that we are no longer an “emerging growth company.” We would cease to be an “emerging growth company” if we achieve more than $1 billion (subject to adjustment) in annual gross revenues, we have more than $700 million in market value of our common equity held by non-affiliates, or we issue more than $1 billion of non-convertible debt over a three-year period. If we do take advantage of any or all of these exceptions, we cannot predict whether some investors will

find our common stock less attractive because of our reliance on these exemptions. If we do take advantage of

 

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any or all of these exemptions, we do not know whether some investors will find our common stock less attractive as a result. The result may be a less active trading market for our common stock and our stock price may be more volatile.

We may change our business, investment, leverage and financing strategies without stockholder consent.

As the market evolves, we may change our business, investment, leverage and financing strategies without a vote of, or notice to, our stockholders, which could, among other things, result in us making investments and engaging in business activities that are different from, and possibly riskier than, the investments and business described in this prospectus. In particular, a change in our investment strategy, including the manner in which we allocate our resources across our portfolio, may increase our exposure to interest rate risk, default risk and real estate market fluctuations. In addition, we may in the future use leverage at times and in amounts deemed prudent by our Manager in its discretion, and such decision would not be subject to stockholder approval. Furthermore, as the market evolves, our board of directors may determine that the single-family residential real estate market does not offer the potential for attractive risk-adjusted returns for an investment strategy that is consistent with our intention to elect and qualify to be taxed as a REIT and to operate in a manner to maintain our exemption from registration under the Investment Company Act. For example, if our board of directors believes it would be advisable for us to be a more active buyer and seller of properties, our board of directors may determine that we should conduct such business through a TRS or that we should cease to maintain our REIT qualification. Changes to our strategies with regards to the foregoing could materially and adversely affect our financial condition and results of operations and our ability to make distributions to our stockholders.

Moreover, our board of directors has the exclusive authority to approve or consent to amendments, waivers and other actions proposed to be taken with respect to the investment allocation agreement between us and our Manager, the management agreement (including the investment guidelines set forth therein) and our related party transaction policy. Our stockholders will not have the ability to consent to or approve of such amendments or actions and will rely on the decisions of our board of directors. In approving any such amendments, waivers or actions, our board of directors will take into consideration our interests and objectives as a whole and not the interests or objectives of any individual stockholder.

Risks Related to Our Qualification as a REIT

Our failure to qualify or remain qualified as a REIT would subject us to U.S. federal income tax and applicable state and local taxes, which would reduce the amount of cash available for distribution to our stockholders.

We believe that we have been organized and have operated, and we intend to continue to be organized and to operate, in a manner that will enable us to qualify as a REIT for U.S. federal income tax purposes commencing with our taxable year ended December 31, 2012. We have not requested and do not intend to request a ruling from the Internal Revenue Service, or the IRS, that we qualify as a REIT. Qualification as a REIT involves the application of highly technical and complex Code provisions and Treasury Regulations promulgated thereunder for which there are limited judicial and administrative interpretations. The complexity of these provisions and of applicable Treasury Regulations is greater in the case of a REIT that, like us, holds its assets through a partnership, and judicial and administrative interpretations of the U.S. federal income tax laws governing REIT qualification are limited. To qualify as a REIT, we must meet, on an ongoing basis, various tests regarding the nature and diversification of our assets and our income, the ownership of our outstanding shares and the amount of our distributions. Our compliance with the REIT income and quarterly asset requirements also depends upon our ability to manage successfully the composition of our income and assets on an ongoing basis. In particular, since it is anticipated that we will hold substantially all of our assets through CAH Subsidiary REIT, Inc., or CAH Subsidiary REIT, the failure of CAH Subsidiary REIT to qualify as a REIT would make it difficult or impossible for us to qualify as a REIT. Our ability to satisfy these asset tests depends upon our analysis of the characterization and fair market values of our assets, some of which are not susceptible to a precise

 

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determination, and for which we will not obtain independent appraisals. Moreover, new legislation, court decisions or administrative guidance may, in each case possibly with retroactive effect, make it more difficult or impossible for us to qualify as a REIT. Thus, while we believe that we have been organized and operated and we intend to continue to operate so that we will qualify as a REIT, given the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations and the possibility of future changes in our circumstances, no assurance can be given that we have qualified or will so qualify for any particular year. These considerations also might restrict the types of assets that we can acquire in the future.

If we fail to qualify as a REIT in any taxable year, and we do not qualify for certain statutory relief provisions, we would be required to pay U.S. federal income tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates, and distributions to our stockholders would not be deductible by us in determining our taxable income. In such a case, we might need to borrow money, sell assets, or reduce or even cease making distributions in order to pay our taxes. Our payment of income tax would reduce significantly the amount of cash available for distribution to our stockholders. Furthermore, if we fail to maintain our qualification as a REIT, we no longer would be required to distribute substantially all of our net taxable income to our stockholders. In addition, unless we were eligible for certain statutory relief provisions, we could not re-elect to be taxed as a REIT until the fifth calendar year following the year in which we failed to qualify.

Even if we qualify as a REIT, we may face other tax liabilities that reduce our cash flow.

Even if we qualify for taxation as a REIT, we may be subject to certain U.S. federal, state and local taxes on our income and assets, including taxes on any undistributed income, alternative minimum taxes, state or local income and property and transfer taxes, including real property transfer taxes. In addition, we could, in certain circumstances, be required to pay an excise or penalty tax (which could be significant in amount) in order to utilize one or more relief provisions under the Code to maintain our qualification as a REIT. See “U.S. Federal Income Tax Considerations—Taxation of REITs in General.” Such taxes may also apply to CAH Subsidiary REIT. Any of these taxes would decrease cash available for distribution to our stockholders. In addition, in order to meet the REIT qualification requirements, or to avert the imposition of a 100% tax that applies to certain gains derived by a REIT from dealer property or inventory, we intend to hold some of our assets through one or more TRSs or other subsidiary corporations that will be subject to corporate-level income tax at regular corporate rates. Any TRSs or other taxable corporations in which we invest will be subject to U.S. federal, state and local corporate taxes. Payment of these taxes generally would materially and adversely affect our income, cash flow, results of operations, financial condition, liquidity and prospects, and could adversely affect the value of our common stock and our ability to make distributions to our stockholders.

Failure to make required distributions would subject us to tax, which would reduce the cash available for distribution to its stockholders.

In order to qualify as a REIT, we must distribute to our stockholders each calendar year at least 90% of our net taxable income (excluding net capital gain). To the extent that we satisfy the 90% distribution requirement, but distribute less than 100% of our net taxable income (including net capital gain), we would be subject to U.S. federal corporate income tax on our undistributed net taxable income. In addition, we will incur a 4% non-deductible excise tax on the amount, if any, by which our distributions in any calendar year are less than a minimum amount specified under U.S. federal income tax laws. Although we intend to distribute our net taxable income to our stockholders in a manner intended to satisfy the REIT 90% distribution requirement and to avoid the 4% non-deductible excise tax, it is possible that we, from time to time, may not have sufficient cash to distribute 100% of our net taxable income. There may be timing differences of our or CAH Subsidiary REIT’s actual receipt of cash and the inclusion of items in our or CAH Subsidiary REIT’s income for U.S. federal income tax purposes. Under certain circumstances, we may elect with CAH Subsidiary REIT to receive a consent dividend from CAH Subsidiary REIT in order to allow CAH Subsidiary REIT to meet the annual distribution requirements or avoid paying corporate tax on any undistributed net taxable income. When a REIT makes a consent dividend, the REIT and its stockholders are generally treated for U.S. federal income tax purposes as if

 

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the REIT distributed cash to the stockholders and the stockholders immediately recontributed the cash to the REIT as a contribution to capital. As a result, we would recognize income as if an actual distribution had been made, but without any distribution of cash. Accordingly, there can be no assurance that we or CAH Subsidiary REIT will be able to distribute net taxable income to stockholders in a manner that satisfies the REIT distribution requirements and avoids the 4% non-deductible excise tax.

Complying with the REIT requirements may cause us to forgo and/or liquidate otherwise attractive investments.

To qualify as a REIT, we must ensure that at least 75% of our gross income for each taxable year, excluding certain amounts, is derived from certain real property-related sources, and at least 95% of our gross income for each taxable year, excluding certain amounts, is derived from certain real property-related sources and passive income such as dividends and interest. In addition, we must ensure that, at the end of each calendar quarter, at least 75% of the value of our total assets consists of cash, cash items, U.S. government securities and qualified real estate assets. The remainder of our investment in securities generally cannot include more than 10% of the outstanding voting securities of any one issuer (other than U.S. government securities, securities of corporations that are treated as TRSs and qualified real estate assets) or more than 10% of the total value of the outstanding securities of any one issuer (other than government securities, securities of corporations that are treated as TRSs and qualified real estate assets). In addition, in general, no more than 5% of the value of our assets can consist of the securities of any one issuer (other than U.S. government securities, securities of corporations that are treated as TRSs and qualified real estate assets), and no more than 25% of the value of our total assets can be represented by securities of one or more TRSs. See “U.S. Federal Income Tax Considerations—Requirements for Qualification—General—Asset Tests.” If we fail to comply with these asset requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences.

To meet these tests, we may be required to take or forgo taking actions that we would otherwise consider advantageous. For instance, in order to satisfy the gross income or asset tests applicable to REITs under the Code, we may be required to forgo investments that we otherwise would make. Furthermore, we may be required to liquidate from our portfolio otherwise attractive investments. In addition, we may be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution. These actions could reduce our income and amounts available for distribution to our stockholders. Thus, compliance with the REIT requirements may hinder our investment performance.

We may be subject to a 100% tax on income from “prohibited transactions,” and this tax may limit our ability to sell assets or require us to restructure certain of our activities in order to avoid being subject to the tax.

We and CAH Subsidiary REIT will be subject to a 100% tax on any income from a prohibited transaction. “Prohibited transactions” generally include sales or other dispositions of property (other than property treated as foreclosure property under the Code) that is held as inventory or primarily for sale to customers in the ordinary course of a trade or business by a REIT, either directly or indirectly through certain pass-through subsidiaries. Although we do not intend to hold a significant amount of assets as inventory or primarily for sale to customers in the ordinary course of our business, the characterization of an asset sale as a prohibited transaction depends on the particular facts and circumstances. The Code provides a safe harbor that, if met, allows a REIT to avoid being treated as engaged in a prohibited transaction. In order for the safe harbor to apply to a sale of property, among other things, (i) the REIT must have held the property for at least two years for the production of rental income, (ii) the expenditures that the REIT capitalized with respect to the property during the two years preceding the sale must be less than 30% of the net selling price of the property, and (iii) the REIT’s sales of other properties during the taxable year of the sale must not exceed certain thresholds. It may not be possible to satisfy this safe harbor with respect to certain activities, such as if we were to acquire, renovate and sell the property in a short period of time.

 

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The 100% tax will not apply to gains from the sale of property that is held through a TRS or other taxable corporation, although such income will be subject to tax in the hands of the corporation at regular corporate income tax rates. Accordingly, if we intend to sell an asset, directly or through CAH Subsidiary REIT, and are not able to satisfy the safe harbor described above, we may hold the asset through a TRS. In addition, it is likely that we will sell certain properties that will not have met all of the requirements of the safe harbor, and that are not held through a TRS, if we believe that the sale would not be a prohibited transaction based on a facts-and-circumstances analysis. If the IRS were to successfully argue that such a sale was in fact a prohibited transaction, we would be subject to the 100% penalty tax with respect to such sale. The avoidance of the tax on prohibited transactions could cause us to undertake less substantial sales of property than we would otherwise undertake in order to maximize our profits. In addition, we may have to sell numerous properties to a single or a few purchasers, which could cause us to be less profitable than would be the case if we sold properties on a property-by-property basis.

The 100% tax described above may limit our ability to enter into certain transactions that would otherwise be beneficial to us. For example, if circumstances make it unprofitable or otherwise uneconomical for us to remain in certain states or geographical markets, the 100% tax could delay our ability to exit those states or markets by selling our assets located in those states or markets other than through a TRS, which could harm our operating profits and the trading price of our common stock.

Our ownership of and relationship with our TRSs will be subject to limitations, a failure to comply with such limitations would jeopardize our REIT qualification, and our transactions with our TRSs may result in the application of a 100% excise tax if such transactions are not conducted on arm’s-length terms.

A TRS is a corporation other than a REIT in which a REIT directly or indirectly holds stock, and that has made a joint election with such REIT to be treated as a TRS. If a TRS owns more than 35% of the total voting power or value of the outstanding securities of another corporation, such other corporation will also be treated as a TRS. Other than some activities relating to lodging and health care facilities, a TRS may generally engage in any business, including the provision of customary or non-customary services to tenants of its parent REIT. A TRS is subject to U.S. federal income tax as a regular C corporation.

No more than 25% of the value of a REIT’s total assets may consist of stock or securities of one or more TRSs. This requirement limits the extent to which we can conduct our activities through TRSs. The values of some of our assets, including assets that we hold through TRSs, may not be subject to precise determination, and values are subject to change in the future. In addition, we and CAH Subsidiary REIT may make certain loans to one or more of its TRSs that are secured by real property or interests in partnerships or limited liability companies that hold real property, or “mezzanine loans,” and may treat these loans as qualifying assets for purposes of the REIT assets tests. In this case, we may treat these loans as not subject to the limitation that securities from TRSs must constitute not more than 25% of the assets of a REIT. While we believe that loans to a TRS are treated as qualifying real estate assets for purposes of the REIT asset tests to the extent they are secured by real property, or to the extent that they are mezzanine loans that satisfy a safe harbor with respect to such loans provided by the IRS in Revenue Procedure 2003-65, the U.S. federal income tax treatment of such loans is not entirely clear. In addition, we or CAH Subsidiary REIT may make mezzanine loans to a TRS that do not meet all of the requirements of the Revenue Procedure. If the IRS were to successfully challenge the treatment of any of these TRS loans as qualifying real estate assets, our ability, and the ability of CAH Subsidiary REIT, to meet the REIT asset tests and other REIT requirements could be adversely affected. Accordingly, there can be no assurance that we or CAH Subsidiary REIT have met or will be able to continue to comply with such requirements.

Furthermore, if a REIT lends money to a TRS, the TRS may be unable to deduct all or a portion of the interest paid to the REIT, which could increase the tax liability of the TRS. In addition, the Code imposes a 100% tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s length basis. We intend to structure transactions with any TRS on terms that we believe are arm’s length to avoid incurring the 100% excise tax described above. There can be no assurances, however, that we will be able to avoid application of the 100% tax.

 

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If our operating partnership is treated as a corporation for U.S. federal income tax purposes, we will cease to qualify as a REIT.

We believe our operating partnership qualifies as a partnership for U.S. federal income tax purposes. As a partnership for U.S. federal income tax purposes, our operating partnership will not be subject to U.S. federal income tax on its income. Instead, each of its partners, including us, will be required to pay tax on its allocable share of the operating partnership’s income. No assurance can be provided, however, that the IRS will not challenge our operating partnership’s status as a partnership for U.S. federal income tax purposes, or that a court would not sustain such a challenge. If the IRS were successful in treating our operating partnership as a corporation for U.S. federal income tax purposes, we would fail to meet the gross income tests and certain of the asset tests applicable to REITs. As a result, we would cease to qualify as a REIT and our operating partnership would become subject to U.S. federal, state and local income tax. The payment by our operating partnership of income tax would reduce significantly the amount of cash available to our operating partnership to satisfy obligations to make principal and interest payments on its debt and to make distribution to its partners, including us.

Dividends payable by REITs do not qualify for the reduced tax rates on dividend income from regular corporations, which could adversely affect the value of our common stock.

The maximum U.S. federal income tax rate for certain qualified dividends payable to U.S. stockholders that are individuals, trusts and estates is 20%. Dividends payable by REITs, however, are generally not eligible for the reduced rates and therefore may be subject to up to a 39.6% maximum U.S. federal income tax rate on ordinary income. Although the reduced U.S. federal income tax rate applicable to dividend income from regular corporate dividends does not adversely affect the taxation of REITs or dividends paid by REITs, the more favorable rates applicable to regular corporate dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the shares of REITs, including our common stock.

Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities.

The REIT provisions of the Code may limit our ability to hedge our assets and operations. Under these provisions, any income that we generate from transactions intended to hedge our interest rate risk will be excluded from gross income for purposes of the REIT 75% and 95% gross income tests if the instrument hedges interest rate risk on liabilities used to carry or acquire real estate assets, and such instrument is properly identified under applicable Treasury Regulations. Income from hedging transactions that do not meet these requirements will generally constitute non-qualifying income for purposes of both the REIT 75% and 95% gross income tests. See “U.S. Federal Income Tax Considerations—Requirements for Qualification—General—Gross Income Tests” and “U.S. Federal Income Tax Considerations—Requirements for Qualification—General—Hedging Transactions.” As a result of these rules, we may have to limit our use of hedging techniques that might otherwise be advantageous or implement those hedges through a TRS. This could increase the cost of our hedging activities because our TRS would be subject to tax on gains or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear. In addition, losses in our TRS will generally not provide any tax benefit, except for being carried back or forward against past or future taxable income in the TRS.

The ability of our board of directors to revoke our REIT election without stockholder approval may cause adverse consequences to our stockholders.

Our charter provides that the board of directors may revoke or otherwise terminate our REIT election, without the approval of our stockholders, if the board determines that it is no longer in our best interest to continue to qualify as a REIT. If we cease to qualify as a REIT, we would become subject to U.S. federal income tax on our net taxable income and we generally would no longer be required to distribute any of our net taxable income to our stockholders, which may have adverse consequences on our total return to our stockholders.

 

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Legislative or regulatory tax changes related to REITs could materially and adversely affect our business.

At any time, the U.S. federal income tax laws or regulations governing REITs or the administrative interpretations of those laws or regulations may be changed, possibly with retroactive effect. We cannot predict if or when any new U.S. federal income tax law, regulation or administrative interpretation, or any amendment to any existing U.S. federal income tax law, regulation or administrative interpretation, will be adopted, promulgated or become effective or whether any such law, regulation or interpretation may take effect retroactively. We and our stockholders could be adversely affected by any such change in, or any new, U.S. federal income tax law, regulation or administrative interpretation.

Your investment has various tax risks.

Although provisions of the Code generally relevant to an investment in shares of our common stock are described in “U.S. Federal Income Tax Considerations,” you should consult your tax advisor concerning the effects of U.S. federal, state, local and foreign tax laws to you with regard to an investment in shares of our common stock.

 

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FORWARD-LOOKING STATEMENTS

Some of the statements contained in this prospectus constitute forward-looking statements within the meaning of the federal securities laws. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward-looking statements by the use of forward-looking terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “continue,” “anticipates,” “believes,” “estimates,” “predicts,” or “potential” or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters. You can also identify forward-looking statements by discussions of strategy, plans or intentions.

The forward-looking statements contained in this prospectus reflect our current views about future events and are subject to numerous known and unknown risks, uncertainties, assumptions and changes in circumstances that may cause our actual results to differ significantly from those expressed in any forward-looking statement. Statements regarding the following subjects, among others, may be forward-looking:

 

   

the use of proceeds of this offering;

 

   

our business and investment strategy;

 

   

our expectations regarding U.S. demand for single-family home rental properties;

 

   

our relationships with government agencies, such as the Federal Housing Finance Agency, or FHFA, and GSEs, such as Fannie Mae and the Federal Home Loan Mortgage Corporation, or Freddie Mac;

 

   

our ability to source and enter into definitive agreements for the purchase of single-family homes;

 

   

our ability to locate tenants for our unleased homes;

 

   

our ability to rehabilitate and renovate homes in a cost-effective and timely manner;

 

   

our ability to manage our portfolios of homes across different geographic regions of the United States;

 

   

our projected operating results; adverse economic, demographic or real estate developments in our target markets;

 

   

defaults on, early terminations of or non-renewal of leases by tenants;

 

   

adverse changes in financial conditions of buyers and sellers of properties;

 

   

difficulties in identifying properties to acquire and completing acquisitions;

 

   

our failure to successfully operate acquired properties and operations; projected operating costs; rental rates or vacancy rates;

 

   

our ability to obtain financing arrangements;

 

   

our expected leverage;

 

   

general volatility of the markets in which we participate;

 

   

our expected investments;

 

   

changes in interest rates and the market value of our target assets;

 

   

impact of changes in governmental regulations, tax law and rates, and similar matters;

 

   

effects of rent controls, stabilization laws and other laws or covenants regulating rental rates;

 

   

our ability to maintain our qualification as a REIT for U.S. federal income tax purposes;

 

   

availability of qualified personnel;

 

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estimates relating to our ability to make distributions to our stockholders;

 

   

our understanding of our competition; and

 

   

market trends in our industry, real estate values, the debt securities markets or the general economy.

While forward-looking statements reflect our good faith beliefs, assumptions and expectations, they are not guarantees of future performance. Furthermore, we disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, of new information, data or methods, future events or other changes, except to the extent required by applicable laws. For a further discussion of these and other factors that could cause our future results to differ materially from any forward-looking statements, see the section above entitled “Risk Factors.”

 

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USE OF PROCEEDS

We are offering all of the shares of our common stock in this offering. We estimate that the net proceeds we will receive from this offering will be approximately $     million (or, if the underwriters exercise their over-allotment option in full, approximately $     million), assuming an initial public offering price of $     per share (the midpoint of the initial public offering price range set forth on the cover page of this prospectus) and after deducting the underwriting discounts and commissions and estimated offering expenses of approximately $     million.

We will contribute the net proceeds of this offering to our operating partnership, which will use substantially all the net proceeds from this offering as described above to acquire and renovate single-family homes for rental to tenants. See “Business—Business and Growth Strategy”.

Until appropriate investments can be identified, our Manager may invest the net proceeds from this offering in interest-bearing short-term investments, including money market accounts and/or U.S. treasury securities, that are consistent with our intention to qualify as a REIT and maintain our exemption from registration under the Investment Company Act. These investments are expected to provide a lower net return than we will seek to achieve from our target assets. We currently expect to use substantially all of the net proceeds from this offering within      to      months from the completion of this offering.

 

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DISTRIBUTION POLICY

We intend to make regular quarterly distributions to holders of our common stock, beginning at such time as our board of directors determines that we have sufficient cash flow to do so and as required to maintain our REIT qualification for U.S federal income tax purposes. U.S. federal income tax law requires that a REIT distribute annually at least 90% of its net taxable income, excluding net capital gains, and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its net taxable income, including net capital gains. In addition, a REIT is required to pay a 4% non-deductible excise tax on the amount, if any, by which the distributions it makes in a calendar year are less than the sum of 85% of its ordinary income, 95% of its capital gain net income and 100% of its undistributed income from prior years. For more information, please see “U.S. Federal Income Tax Considerations.” To satisfy the requirements to qualify as a REIT and generally not be subject to U.S. federal income and excise tax, we generally intend over time to pay quarterly distributions in an amount equal to our taxable income, which would be reduced by, among other things, the amount of the base management fee payable, and our allocable share of expenses reimbursable, to our Manager. We currently do not intend to use the proceeds of this offering to make distributions to our stockholders. Although we anticipate making quarterly distributions to our stockholders over time, our board of directors has the sole discretion to determine the timing, form (including cash and shares of our common stock at the election of each of our stockholders) and amount of any distributions to our stockholders, and the amount of such distributions may be limited, if at all, until we have a portfolio of income-generating assets. Although not currently anticipated, in the event that our board of directors determines to make distributions in excess of the income or cash flow generated from our portfolio of assets, we may make such distributions from the proceeds of this or future offerings of equity or debt securities or other forms of debt financing or the sale of assets.

If we pay a taxable stock distribution, our stockholders would be sent a form that would allow each stockholder to elect to receive its proportionate share of such distribution in all cash or in all stock, and the distribution will be made in accordance with such elections, provided that if the stockholders’ elections, in the aggregate, would result in the payment of cash in excess of the maximum amount of cash to be distributed, then cash payments to stockholders who elected to receive cash will be prorated, and the excess of each such stockholder’s entitlement in the distribution, less such prorated cash payment, would be paid to such stockholder in shares of our common stock.

To the extent that in respect of any calendar year, cash available for distribution is less than our taxable income, we could be required to sell assets or borrow funds to make cash distributions or make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities. In addition, we could be required to utilize the net proceeds of this offering to fund our quarterly distributions, which would reduce the amount of cash we have available for investing and other purposes. We generally will not be required to make distributions with respect to activities conducted through any TRS that is formed or that we form following the completion of this offering (except to the extent of dividends paid to us by the TRS). For more information, see “U.S. Federal Income Tax Considerations—Requirements for Qualification as a REIT.”

Dividends and other distributions made by us will be authorized and determined by our board of directors in its sole discretion out of funds legally available therefor and will be dependent upon a number of factors, including restrictions under applicable law and other factors described below. We cannot assure you that our distributions will be made or sustained or that our board of directors will not change our distribution policy in the future. Any dividends or other distributions we pay in the future will depend upon our actual results of operations, economic conditions, debt service requirements and other factors that could differ materially from our current expectations. Our actual results of operations will be affected by a number of factors, including the revenue we receive from our assets, our operating expenses, interest expense and unanticipated expenditures. For more information regarding risk factors that could materially adversely affect our actual results of operations, please see “Risk Factors.”

 

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We anticipate that our distributions generally will be taxable as ordinary income to our stockholders, although a portion of the distributions may be designated by us as qualified dividend income or a capital gain dividend, or may constitute a return of capital. We will furnish annually to each of our stockholders a statement setting forth distributions paid during the preceding year and their characterization as ordinary income, return of capital, qualified dividend income or capital gain dividend. For a more complete discussion of the tax treatment of distributions to holders of shares of our common stock, see “U.S. Federal Income Tax Considerations.”

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and our capitalization as of December 31, 2012 (1) on an actual basis, (2) on a pro forma basis to give effect to (i) the reclassification of the different classes of outstanding common stock that were issued to investors in our formation transactions into a single class of common stock, and (ii) the funding of all unfunded capital commitments, which will occur immediately before the closing of this offering, and (3) on a pro forma as adjusted basis to give further effect to (a) the sale of              shares of our common stock in this offering at an assumed public offering price of $             per share (the midpoint of the initial public offering price range set forth on the cover page of this prospectus), after deducting underwriting discounts and commissions and our estimated offering expenses; and (b) the issuance of an aggregate of              shares of restricted common stock, and shares of our common stock issuable upon exercise of stock options and redemptions of equity interests in our operating partnership (including OP units) to our directors, officers, Manager and certain other personnel of our Manager and its affiliates concurrently with the completion of this offering. You should read this table together with “Use of Proceeds” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

     As of December 31, 2012  
(Dollar amounts in thousands, except per share data)    Actual     Pro Forma      Pro Forma  as
Adjusted(1)
 
           (Unaudited)  

Cash and cash equivalents(2)

   $ 20,246      $              $          
  

 

 

   

 

 

    

 

 

 

Debt

   $      $       $   
  

 

 

   

 

 

    

 

 

 

Stockholders’ equity:

       

Common stock, par value $0.01 per share; no shares authorized, or issued and outstanding, actual; 450,000,000 shares authorized, and              shares issued and outstanding, pro forma; 450,000,000 shares authorized and              shares issued and outstanding, pro forma as adjusted(1)

            

Class A common stock, par value $0.01 per share; 26,075,000 shares authorized and 26,075,000 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

     261                  

Class B common stock, par value $0.01 per share; 423,925,000 shares authorized and 4,100,010 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

     41                  

Preferred Stock, par value $0.01 per share; 50,000,000 shares authorized and no shares issued and outstanding, actual; 50,000,000 shares authorized and no shares issued and outstanding, pro forma and pro forma as adjusted(3)

                      

Additional paid in capital(2)

     297,531        

Accumulated deficit

     (2,447     
  

 

 

   

 

 

    

 

 

 

Total stockholder’s equity(2)

     295,386        

Non-controlling interests

     353,331        
  

 

 

   

 

 

    

 

 

 

Total capitalization(2)

   $ 648,717      $              $          
  

 

 

   

 

 

    

 

 

 

 

  (1)

The common stock outstanding on a pro forma as adjusted for this offering basis reflects the reclassification of the different classes of outstanding common stock that were issued to investors in our formation transactions into a single class of common stock. The common stock outstanding on a pro forma as adjusted for this offering basis excludes (a)              shares of our common stock that may be issued by us upon redemption of              OP units and              AGP units outstanding,

 

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  (b)              shares of our common stock that may be issued by us upon exercise of the underwriters’ option to purchase up to              shares of our common stock to cover over-allotments, if any, and (c)              shares of common stock available for future issuance under our 2013 Equity Incentive Plan.
  (2) Each $1.00 increase (decrease) in the initial public offering price per share would increase (decrease) each of pro forma as adjusted cash and cash equivalents, additional paid in capital, stockholders’ equity and total capitalization by approximately $         million, assuming that the number of shares we are offering, as set forth on the cover page of this prospectus, remains the same and that the underwriters do not exercise their over-allotment option. An increase (decrease) of 1,000,000 shares we are offering would increase (decrease) each of pro forma as adjusted cash and cash equivalents, additional paid in capital, stockholders’ equity and total capitalization by approximately $         million, assuming the initial public offering price per share remains the same.
  (3) In January 2013, we issued and sold 125 shares of our 12.5% Series A Cumulative Non-Preferred Voting Stock. Upon completion of this offering, we intend to redeem all of the outstanding shares of our Series A preferred stock.

 

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DILUTION

Purchasers of shares of our common stock in this offering will experience immediate dilution of net tangible book value per share of our common stock to the extent of the difference between the initial public offering price and our historical combined net tangible book value per share as of December 31, 2012. Historical combined net tangible book value per share is equal to total tangible assets (as adjusted to include cash funded through capital commitments drawn after December 31, 2012 and prior to the completion of this offering) minus total liabilities, all divided by the sum of the number of shares of our common stock and OP units (not held by us) and AGP units of our operating partnership outstanding. As of December 31, 2012, our historical combined net tangible book value was $         million, or $         per share of our common stock. Our historical combined net tangible book value per share as of December 31, 2012 is expected to be reduced by approximately $         per share as a result of the grant of shares of restricted common stock, stock options and equity interests in our operating partnership (including OP units) to our directors, officers, Manager and certain other personnel of our Manager and its affiliates in connection with the completion of this offering but not by the recapitalization transactions. After giving effect to the sale of the shares of our common stock offered hereby, the receipt by us of the net proceeds from this offering, the deduction of underwriting discounts and commissions and estimated offering expenses, our pro forma combined net tangible book value as of December 31, 2012 (after giving effect to such grants) would have been $         million, or $         per share of our common stock. This amount represents an immediate increase in combined net tangible book value of $         per share to existing investors and an immediate dilution of $         per share from the initial public offering price of $         per share (assuming an offering price at the midpoint of the initial public offering price range set forth on the cover page of this prospectus) to new public investors. The following table illustrates this per share dilution:

 

Assumed initial public offering price per share of common stock

      $        

Historical combined net tangible book value per share(1)

   $           

Pro forma combined net tangible book value per share (after giving effect to the grant of shares of restricted common stock, stock options or equity interests in our operating partnership (including OP units))

     

Net increase in pro forma combined net tangible book value per share attributable to this offering(2)

     
  

 

 

    

Pro forma combined net tangible book value per share after giving effect to this offering and the grants described above

     
     

 

 

 

Dilution per share to new public investors

      $        
     

 

 

 

 

(1) 

Historical combined net tangible book value per share is based on our historical book value as of December 31, 2012 (as adjusted to include cash funded through capital commitments drawn after December 31, 2012 and prior to the completion of this offering) divided by the sum of the number of shares of common stock and OP units (not held by us) and AGP units of our operating partnership outstanding as of December 31, 2012. Such number of shares does not include the issuance of restricted shares of common stock, stock options and equity interests in our operating partnership (including OP units) to our directors, officers, Manager and certain other personnel of our Manager and its affiliates in connection with the completion of this offering.

 

(2) 

This amount is calculated after deducting underwriting discounts and commissions and estimated offering expenses, but includes the issuance of shares of restricted common stock, and shares of our common stock issuable upon exercise of stock options and redemptions of equity interests in our operating partnership (including OP units) to our directors, officers, Manager and certain other personnel of our Manager and its affiliates in connection with the completion of this offering.

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share (the midpoint of the initial public offering price range set forth on the cover page of this prospectus) would increase (decrease) our pro forma combined net tangible book value by $         million, or $         per share, and (decrease) increase the dilution to new investors by $         per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. An increase of 1,000,000 shares we are offering would increase our pro forma combined net tangible book value by $         million, or $         per share, and decrease dilution to investors in this offering by $         per share, assuming the initial public offering price per share remains the same. A decrease of 1,000,000 shares we are offering would decrease our pro forma combined

 

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net tangible book value by $         million, or $         per share, and increase dilution to investors in this offering by $         per share, assuming the initial public offering price per share remains the same.

The table below summarizes (1) the difference between the number of shares of common stock and OP units in our operating partnership received by continuing investors in the formation transaction, the number of shares of restricted common stock, and shares of our common stock issuable upon exercise of stock options and redemptions of equity interests in our operating partnership (including OP units) granted to our directors, officers, Manager and certain other personnel of our Manager and its affiliates in connection with the completion of this offering and the number of shares of common stock to be received by new investors purchasing shares in this offering, and (2) the difference between our combined historical net tangible book value as of December 31, 2012 and the total consideration paid in cash by the new investors purchasing shares in this offering (based on the midpoint of the initial public offering price range set forth on the cover page of this prospectus) on an aggregate and per share/OP Unit basis.

 

     Shares/OP units
Issued
    Historical /
Pro Forma Combined
Net Tangible Book Value
of Contribution / Cash
 
     Number    Percentage     Amount     Percentage  

Shares of common stock, and shares of our common stock issuable upon exercise of stock options and redemptions of equity interests in our operating partnership (including OP units) issued to continuing investors in connection with the formation transactions(1)

               $      (2)          

Shares of restricted common stock, and shares of our common stock issuable upon exercise of stock options and redemptions of equity interests in our operating partnership (including OP units) to be granted to our directors, officers, Manager and certain other personnel of our Manager and its affiliates in connection with the completion of this offering

               $                 

New investors in this offering

               $                 
  

 

  

 

 

   

 

 

   

Total pro forma

               $                 
  

 

  

 

 

   

 

 

   

 

  (1) 

We do not anticipate the total number of shares of our common stock, OP units or AGP units or the pro forma combined net tangible book value attributable to such shares of common stock, OP units or AGP units will be impacted by the recapitalization transactions.

  (2) 

Represents our pro forma combined net tangible book value as of December 31, 2012 (as adjusted to include cash funded through capital commitments drawn after December 31, 2012 and prior to the completion of this offering) after giving effect to the pro forma adjustments described above.

A $1.00 increase in the initial public offering price per share would increase total cash paid by new investors and total pro forma combined net tangible book value of contribution/cash for all stockholders by $         million and $         million, respectively, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same. A $1.00 decrease in the initial public offering price per share would decrease total cash paid by new investors and total pro forma combined net tangible book value of contribution/cash for all stockholders by $         million and $         million, respectively, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same. An increase of 1,000,000 shares we are offering would increase total cash paid by new investors and total pro forma combined net tangible book value of contribution/cash for all stockholders by $         million and $         million, respectively, assuming the initial public offering price stays the same. A decrease of 1,000,000 shares we are offering would decrease total cash paid by new investors, total pro forma combined net tangible book value of contribution/cash for all stockholders and the average price per share/OP unit for all stockholders by $         million, $         million and $        , respectively, assuming the initial offering price stays the same.

 

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SELECTED PRO FORMA FINANCIAL AND OPERATING DATA

The following historical combined consolidated financial and operating data reflects our historical consolidated financial position at December 31, 2012 and the historical combined consolidated operations of our company and our predecessor for the period from March 13, 2012 (commencement of operations) through December 31, 2012. The combined consolidated pro forma financial data for the year ended December 31, 2012 reflects the combined results of operations of us and a portfolio of single-family homes we acquired from Triton Entities for the nine months ended September 30, 2012, as if such acquisition had occurred on January 1, 2012. The unaudited pro forma combined consolidated statements of operations data is presented for illustrative purposes only and are not necessarily indicative of what the actual results of operations would have been had the transactions referred to above occurred on January 1, 2012, nor does it purport to represent the future results of operations of our company. You should read the following summary financial data in conjunction with our financial statements and the related notes, which are included elsewhere in this prospectus, and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which are included elsewhere in this prospectus.

 

     Colony American
Homes,  Inc.

Pro Forma
    Combined Consolidated
Historical
 
(Dollar amounts in thousands)    Year Ended
December 31, 2012
    For the period from
March 13, 2012
(commencement of
operations) through
December 31, 2012
 
     (unaudited)        

Statement of Operations Data:

    

Revenue:

    

Rental income

   $ 15,742      $ 9,599   

Other income

     559        359   
  

 

 

   

 

 

 

Total revenue

     16,301        9,958   
  

 

 

   

 

 

 

Expenses:

    

Property maintenance expenses

     2,915        1,785   

Real estate taxes

     3,885        2,661   

Homeowner’s association fees

     499        499   

Property management fees

     779        779   

Insurance

     489        489   

Other direct expenses

     390        390   

Depreciation and amortization

     4,009        2,845   

Management fee

     570        570   

General and administrative

     7,204        6,015   
  

 

 

   

 

 

 

Total expenses

     20,740        16,033   

Equity in losses from unconsolidated joint venture

     (41     (41
  

 

 

   

 

 

 

Net loss

     (4,480     (6,116

Net loss attributable to noncontrolling interests

     (2,380     (3,669
  

 

 

   

 

 

 

Net loss attributable to colony American Homes, Inc.

   $ (2,100   $ (2,447
  

 

 

   

 

 

 

 

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     As of
December 31,
2012
 
     Consolidated
Historical
 
        
Balance Sheet Data:   

Investment in real estate, net

   $ 542,896   

Cash and cash equivalents

     20,246   

Purchase and escrow deposits

     43,524   

Investment in unconsolidated joint venture

     35,472   

Other assets

     15,197   
  

 

 

 

Total assets

     657,335   

Total liabilities

     8,618   

Total equity

     648,717   

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the financial statements and related notes appearing elsewhere in this prospectus. Where appropriate, the following discussion includes analysis of the effects of the recapitalization transactions and this offering. These effects are reflected in the pro forma condensed consolidated financial statements located elsewhere in this prospectus. As used in this section, unless the context otherwise requires, “we,” “us,” “our,” and “company” refer to Colony American Homes, Inc., a Maryland corporation, together with its consolidated subsidiaries, as well as its predecessor, CSFR ColFin American Investors, LLC, which succeeded to the business of ColFin American Investors, LLC, which began operations in March 2012. We acquired CSFR ColFin American Investors, LLC in a series of transactions that were completed on October 5, 2012.

Overview

Our Company

Colony American Homes, Inc. is a market leader in the acquisition, ownership, renovation, leasing and management of single-family properties in the United States. Virtually all of our revenue is generated by leasing our portfolio of single-family homes, which we believe is one of the largest portfolios of single-family homes in the United States, consisting of over 8,200 homes as of March 31, 2013.

We intend to elect and qualify to be taxed as a REIT for U.S. federal tax purposes, commencing with our taxable year ended December 31, 2012. For more information related to the consequences of this election, please see “U.S. Federal Income Tax Considerations.”

We are externally managed by CAH Manager, LLC, a subsidiary of Colony. We will rely on our Manager to provide or obtain on our behalf the personnel and services necessary for us to conduct our business as we have no employees. CAH Operating Partnership, L.P. is our operating partnership subsidiary, of which we are the sole general partner. Our Manager provides us with a comprehensive suite of investment, acquisition and property management services, utilizing the expertise of our Manager.

Upon completion of this offering, we expect to have approximately $         million in cash on hand, including $         in net proceeds from this offering, available for future acquisitions and working capital. We are targeting to deploy this capital within      to      months following the completion of this offering. In addition, we currently have no outstanding indebtedness, but are in the process of negotiating to obtain a credit facility to provide us with additional capital to support further growth in our business. We will seek to deploy borrowings in a manner intended to enhance our ability to generate returns for our stockholders and further expand our operations portfolio.

We will hold our properties in subsidiaries of our operating partnership. We serve as the general partner of our operating partnership and will, as of the completion of this offering and the recapitalization transactions, own approximately     % of the OP units issued by our operating partnership.

The historical financial statements included in this prospectus reflect the combined operating results of our company and our predecessor, ColFin American Investors, LLC, which began operations in March 2012. During the period in which historical financial information is presented, we acquired approximately 4,229 homes. A majority of these homes we acquired were not leased at the time of the acquisition and were in the process of renovations or lease-up during the period we owned the homes in 2012. As a consequence, we do not consider the historical financial statements presented in this prospectus as being indicative of our future operating results.

 

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Background of our Manager and our Predecessor

Our Manager, CAH Manager, LLC, was established by Colony in March 2012 to pursue large-scale acquisitions of single-family homes and execute a residential rental strategy across the United States. Our Manager was formed as an outgrowth from Colony’s well-established distress investing program that recognizes and capitalizes upon market inefficiencies and emerging opportunities. Colony formed our Manager as a focused platform, fully dedicated to the single-family rental opportunity and has positioned our Manager to lead the institutionalization of the fragmented and historically inefficient single-family rental industry.

CAH has entered into a management agreement with our Manager pursuant to which our Manager provides for the day-to-day management of CAH and its subsidiaries’ operations. The management agreement requires our Manager to manage CAH and its subsidiaries’ business affairs in conformity with our investment guidelines and other policies that are approved and monitored by our board of directors. Our Manager’s role as manager is under the supervision and direction of our board of directors.

Our Portfolio and Target Markets

We focus on high-quality assets in attractive sub-markets, as evidenced by our existing portfolio. We have acquired this portfolio using only equity. As discussed in more detail under “Business—Our Target Market Selection,” our portfolio strategy is focused on acquiring properties in locations characterized by proximity to good school districts, work centers and transportation infrastructure. By targeting these characteristics, our portfolio is highly focused on infill sub-markets within our target MSAs. As a result, our properties tend to be located in more established neighborhoods, which results in an older average age of our targeted rental properties. Furthermore, given the demographics and amenities of the neighborhoods, many of our homes located in infill sub-markets have had substantial renovations by prior owners and in combination with the substantial improvements made by our Manager upon acquisition, reflect updated systems and finishes. As of March 31, 2013, we owned a portfolio of single-family homes in 25 MSAs across eight states. Our portfolio of 8,236 homes, consists of 7,059 wholly owned homes, and 1,177 homes owned in a joint venture. The estimated total cost basis for our wholly owned homes as of March 31, 2013 was $1.1 billion, inclusive of acquisition and actual and estimated upfront renovation costs.

As of March 31, 2013, the average total cost basis per home, inclusive of acquisition and actual and estimated upfront renovation costs, was approximately $159,000, representing an average estimated investment cost per square foot of approximately $90. For vacant homes, through March 31, 2013, we have incurred, on average, actual and estimated upfront renovation costs of approximately $20,000 per home. In the period from April 1, 2013 through April 21, 2013, we acquired 1,309 homes with an estimated total cost basis of $         million, inclusive of actual and estimated upfront renovation costs. In addition to our portfolio of owned properties, as of                     , we had          homes under contract, representing a total purchase price of $         million.

Our existing portfolio provides for significant diversification both across markets and within markets and provides for substantial tenant diversification. Given that our properties are all separate physical properties, we believe that the risk that any adverse developments to any single property or group of properties would impact our overall portfolio is very minimal.

 

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A summary of our portfolio as of March 31, 2013 is as follows:

 

Market

  Number
of
Homes(1)
    %
of
Total
    % of
Homes
Leased
    Total
Purchase
Price

(in
millions)
    Estimated
Total
Cost
Basis(2)

(in
millions)
    Average
Cost
Basis

Per
Home (2)
    Average
Home
Size
(Square
Feet)*
    Estimated
Average
Cost
Basis

(Per
Square
Foot)
    Average
Age
(Years)*
    Average
In-Place
Rent*
    Estimated
Average
Cost

Basis
Per
Leased

Home
    Number
of
Homes
Owned
180 Days
or
Longer(4)
    %
Leased
of
Homes
Owned
180 Days
Or
Longer(5)
 

Wholly Owned

                         

Arizona

    838        10     88   $ 87      $ 94      $ 112,000        1,555      $ 72        25      $ 965      $ 112,000        801        91

California

    2,035        25     38     462        506        249,000        1,688        147        40        1,745        225,000        775        74

Colorado

    278        3     37     35        39        141,000        1,685        83        39        1,314        137,000        67        85

Delaware

    2        0     0     0.3        0.3        131,000        1,550        84        61        —          —          —          0

Florida

    603        7     2     86        97        161,000        1,838        87        22        1,767        212,000        —          0

Georgia

    1,848        22     33     170        204        110,000        1,906        58        23        1,083        95,000        270        78

Nevada

    405        5     40     55        59        146,000        1,761        83        15        1,214        138,000        94        96

Texas

    1,050        13     91     119        120        115,000        1,775        65        11        1,267        115,000        459        98
 

 

 

       

 

 

   

 

 

               

 

 

   

Subtotal Wholly Owned**

    7,059        86     47   $ 1,014      $ 1,120      $ 159,000        1,760      $ 90        26      $ 1,277      $ 138,000        2,466        86
 

 

 

   

 

 

     

 

 

   

 

 

               

 

 

   
Jointly Owned(3)                                                                              

Arizona

    368        4     47                    

California

    579        7     62                    

Nevada

    230        3     55                    
 

 

 

   

 

 

                       

Subtotal Jointly Owned

    1,177        14     56                    
 

 

 

   

 

 

                       

Total Owned

    8,236        100     55                    
 

 

 

   

 

 

                       

 

  * The subtotal and total amounts in this column are calculated using a weighted average.
  ** Any discrepancies are due to rounding.
  (1) Represents total housing units, which are leased separately from any other housing units. No property with a single deed has more than four housing units, and less than 2% of our wholly owned properties have more than one housing unit.
  (2) Includes acquisition costs and actual and estimated upfront renovation costs for vacant homes purchased and homes purchased with in-place tenants where an initial renovation was not performed. For vacant homes, through March 31, 2013, we have incurred, on average, actual and estimated upfront renovation costs of approximately $20,000 per home. Acquisition costs include asset management fees paid to our Manager of 0.5% of the capitalization of our investments payable at the time an acquisition was made, as well as broker fees, ranging from 2-5% of the acquisition price, paid to third parties that assist with sourcing acquisitions. Our Manager will no longer receive any asset management fees for homes acquired after the completion of this offering.
  (3) In October 2012, we completed a joint venture agreement with Fannie Mae in which we invested approximately $35 million to own 1,177 homes. We serve as managing member of this joint venture with responsibility for operations and management of the venture, subject to Fannie Mae’s approval on major decisions. As of March 31, 2013, the average home size and age of our jointly owned homes was 1,713 square feet per home and 30 years, respectively.
  (4) Represents number of homes owned for 180 days or longer as of March 31, 2013, excluding 37 homes that are not available for lease, which includes homes that are listed for sale, being used as model homes for lease showings and homes acquired at auction for which our Manager has taken legal action to confirm our ownership. As of March 31, 2013, 2,466 of our wholly owned and jointly owned homes were owned for 180 days or longer.
  (5) Represents percentage of homes owned for 180 days or longer that are leased as of March 13, 2013. Leased homes include homes purchased with in-place leases.

Factors Expected to Affect Our Operating Results and Financial Condition

Our results of operations and financial condition will be affected by numerous factors, many of which are beyond our control. The key factors we expect to impact our results of operations and financial condition include our pace of acquisitions and ability to deploy our capital, the time and cost required to stabilize and enter into leases for newly acquired homes, rental rates, occupancy levels, rates of tenant turnover, our expense ratios and capital structure, and economic conditions in our target markets.

 

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Property Acquisitions

Upon completion of this offering and the recapitalization transactions, we plan to continue to grow our portfolio of single-family properties. Our Manager’s ability to identify and acquire single-family properties that meet our investment criteria will be impacted by home prices in our target markets, the inventory of properties available through our acquisition channels and competition for our target assets.

Given our demonstrated growth, we have accumulated a substantial amount of recent data on acquisition costs, actual and estimated upfront renovation costs and time frames for the conversion of single-family properties to rental. Throughout the acquisition process, our Manager closely monitors the pace and source of these purchases, providing real-time informational advantages relative to our competition.

Property Stabilization

Before an acquired property becomes an income-producing asset, we must take possession of the property (to the extent it remains occupied by a hold-over property owner), renovate, market and lease the property, to the extent there is not an existing tenant. We refer to this process as property stabilization. The acquisition of properties involves the outlay of capital beyond payment of the purchase price, including payments for property inspections, closing costs, title insurance, transfer taxes, recording fees, broker commissions, property taxes and HOA fees in arrears. The time and cost involved in stabilizing our newly acquired properties will impact our financial performance and will be affected by the time it takes for us to take possession of the property, the time involved and cost incurred for renovations and time needed for leasing the property for rental. Possession can be delayed by factors such as the exercise of applicable statutory or recession rights by hold-over owners or unauthorized occupants living in the property at the time of purchase and legal challenges to our ownership.

As part of our underwriting criteria in evaluating properties, we typically estimate upfront renovation costs to be 10% to 20% of the purchase price, although actual costs may vary significantly based on markets and the age and condition of the property. For vacant homes, through March 31, 2013, we have incurred, on average, upfront renovation costs of approximately $20,000 per home. For homes which our Manager had to transition an occupant, we have incurred, on average, costs to vacate the home of approximately $2,000 per home. However, the cost associated with transitioning an occupant from an occupied home varies significantly depending on the steps taken to transition the occupant (i.e., willfully vacate, cash for keys, court-ordered vacancy). In some instances where we have purchased a home that is occupied, our Manager has been able to convert the occupant to a short-term or long-term tenant.

We expect to control renovation costs by leveraging our Manager’s supplier relationships, as well as those of our exclusive partners, to negotiate attractive rates on items such as appliances, hardware, paint, and carpeting. The time to renovate a newly acquired property can vary significantly among properties depending on the acquisition channel by which it was acquired, the age and condition of the property and our then current acquisition pace. We expect to reduce the time required to complete renovations through our Manager’s relationship with what we consider to be best-in-class single-family home renovation companies. Similarly, the time to market and lease a property will be driven by local demand, our marketing techniques and the size of our available inventory. We will drive to lower lease-up time for our properties through our Manager’s relationships with local brokers and other intermediaries established in the markets where our homes are located.

Of the homes we have owned for 180 days or longer, as of March 31, 2013, approximately 86% were leased, which includes homes that had in-place tenants at the time of our acquisition, but excludes homes that are not available for lease, such as homes that are listed for sale, being used as model homes for lease showings and homes acquired at auction for which our Manager has taken legal action to confirm our ownership. For homes which were vacant at the time of our acquisition but were subsequently leased by                 , 2013, we have averaged                  days from acquisition to property lease-up. As of                 , 2013, the overall weighted average cycle time for properties in our portfolio, including properties which were leased at the time of acquisition, was                  days from acquisition to lease-up.

 

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Of the leased homes that we have owned for 180 days or longer,          were acquired with an in-place tenant and have not yet been renovated by our Manager. Upon expiration of the existing tenant’s in-place lease most of these properties will undergo a renovation consistent with that of the rest of the homes in our portfolio upon their initial acquisition. The re-leasing time for this sub-set of homes will likely be longer than the normal cycle time for a vacant home because these homes will need to be renovated before they can be re-leased to tenants.

Revenue

We earn revenue primarily from rents collected from tenants under lease agreements for our properties. The most important drivers of revenue (aside from portfolio growth) are rental and occupancy rates. Our revenue may be impacted by macroeconomic, local and property-level factors, including market conditions, seasonality, tenant defaults or vacancies, timing of renovation activities and occupancy of properties and timing to re-lease vacant properties.

Market-specific factors, including our tenants’ finances, the unemployment rate, household formation and net population growth, income growth, size and make-up of existing and future housing stock, prevailing market rental and mortgage rates and credit availability will also impact the single-family real estate market. Growth in demand for rental housing in excess of the growth of rental housing supply will generally drive higher occupancy rates and rental price increases. Negative trends in our target markets with respect to these metrics or others could adversely impact our rental income. For a more detailed discussion of important factors that impact the single-family rental market and our revenue, see “Industry Overview and Market Opportunity.”

The performance of our portfolio will also be impacted by turnover rates, which affect both occupancy rates and maintenance costs, with lower turnover resulting in higher revenue from increased occupancy and reduced expenses. Turnover can be caused by a number of factors, including customer dissatisfaction, lease defaults leading to eviction and change in family, financial or employment status of the tenant. Overall, the quality of our property management execution, including tenant screening designed to reduce the likelihood of tenant defaults, property maintenance, other ongoing customer service efforts and marketing efficacy will be important occupancy drivers and enable lower turnover.

The table below shows the average rental rates and occupancy rates of homes in our portfolio that have been wholly owned for 180 days or longer as of March 31, 2013:

Properties Wholly Owned 180 Days or Longer(1)

 

                      Leased  Homes(2)  

Market

  Number
of
Homes
    % of
Total
    Total Cost Basis
(in millions)
    Average
Cost

Basis
Per
Home
    Weighted
Average
Home  Size
(Square
Feet)
    Average Cost
Basis  (Per

Square Foot)
    Weighted
Average
Age  (Years)
    Weighted
Average

In-Place  Rent
    Number
of
Homes
    %  of
Homes

Leased
 

Wholly Owned

                                                           

Arizona

    801        32   $ 90      $ 112,000        1,546      $ 72        25      $ 965        731        91

California

    775        31     157        202,000        1,675        121        39        1,721        571        74

Colorado

    67        3     9        131,000        1,722        76        41        1,329        57        85

Delaware

    —          —          —          —          —          —          —          —          —          —     

Florida

    —          —          —          —          —          —          —          —          —          —     

Georgia

    270        11     24        88,000        1,711        51        26        1,050        211        78

Nevada

   
94
  
    4     12        123,000        1,672        73        17        1,161        90        96

Texas

    459        19     52        113,000        1,773        64        12        1,251        449        98
 

 

 

   

 

 

   

 

 

           

 

 

   

 

 

   

Total Owned **

    2,466        100   $ 342      $ 139,000        1,656      $ 84        27      $ 1,257        2,109        86
 

 

 

   

 

 

   

 

 

           

 

 

   

 

 

   

 

  **

Any discrepancies due to rounding.

  (1) 

Includes properties acquired by our predecessor. Excludes (i) jointly owned properties, none of which have been owned for 180 days or longer, as of March 31, 2013, and (ii) homes that are not available for lease, such as homes that are listed for sale, being used as model homes for lease showings and homes acquired at auction for which our Manager has taken legal action to confirm our ownership.

  (2) 

Includes homes purchased with in-place leases.

 

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Over time, we expect that the occupancy figures for our properties owned 180 days or longer, our leased and available-for-lease properties and our aggregate portfolio will converge as the proportion of recently acquired properties declines relative to the size of the entire portfolio. Nevertheless, in the near term, our ability to drive revenue growth will be dependent on our ability to efficiently renovate and lease our newly acquired properties as well as maintain high occupancy in the rest of our portfolio.

In October 2012, we completed a joint venture agreement with Fannie Mae in which we invested approximately $35 million to own 1,177 homes in Arizona, California and Nevada. We serve as managing member of this joint venture with responsibility for operation and management of the venture, subject to Fannie Mae’s approval on major decisions, as well as asset and property management services.

Expenses

Our ability to acquire, renovate, lease and maintain our properties in a cost-effective manner will be a key driver of our ultimate success. We intend to monitor the following categories of expenses that we expect to most significantly affect our results of operations.

Property-Related Expenses. Once we have acquired and renovated a property, we will have ongoing property-related expenses, including the ongoing operating costs to market and maintain the properties, expenses associated with the turnover of tenants and depreciation and amortization. Certain of these expenses are not subject to our control, including HOA fees, property insurance and real estate taxes. We expect that certain of our costs will account for a smaller percentage of our revenue as we expand our portfolio.

Investment Management and Corporate Overhead. We will incur significant general and administrative costs, including those costs related to being a public company and costs incurred under the management agreement with our Manager. We expect these costs to decline as a percentage of revenue and a percentage of assets under management as our portfolio grows and stabilizes. We rely on our Manager to provide or obtain on our behalf the personnel and services necessary for us to conduct our business because we have no employees.

See “Our Manager and the Management Agreement” for a description of the terms of the management agreement, including the management fees payable to our Manager thereunder, and our reimbursement obligations to our Manager.

Share-Based Compensation

Prior to the completion of this offering, we will adopt our 2013 Equity Incentive Plan, which is intended to align the interests of our officers and directors, and certain personnel of our Manager and its affiliates, with those of our stockholders. Our 2013 Equity Incentive Plan provides for grants of stock options, stock appreciation rights, dividend equivalent rights, restricted stock, restricted stock units, performance based awards, unrestricted stock, equity awards in our subsidiaries, including long-term incentive units in our operating partnership, or LTIP units, and other awards. The amount of the expense may be subject to adjustment in future periods depending on the specific characteristics of the equity-based award and the application of ASC 718, Compensation—Stock Compensation.

Results of Operations

The following discussion of our results of operations reflects the operating results of our company and our predecessor, CSFR ColFin American Investors, LLC, which began operations in March 2012.

For the period from March 13, 2012 (commencement of operations) through December 31, 2012, we generated a net consolidated loss of $6.1 million, of which $2.4 million was attributable to Colony American Homes, Inc. (and the remainder to non-controlling interests), from revenues of $10.0 million.

During the period in which historical financial information is presented, we acquired approximately 4,229 homes. More than 56% of the homes we own were leased during the period we owned the homes in 2012, while

 

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approximately 44% of our homes were unleased as of December 31, 2012. Further, we have not yet achieved optimal scale in our target markets, resulting in operating costs (including start up costs) that we do not believe are proportional to the business we expect to build. As a consequence, we do not consider the historical results of operations information included in this prospectus as being indicative of our future operating results.

Our strategy is to continue to grow our portfolio in our existing sub-markets and also to strategically expand our footprint to additional markets where conditions support attractive investment returns. Because many of our homes are not leased or immediately ready for lease upon their acquisition, we evaluate our operating results by looking separately at (1) leased operations and (2) unleased operations and start-up. We include in our leased operations for each reporting period one month of operating performance for each home that was leased as of the first day of any month that occurred during such reporting period. We include in our unleased operations and start-up the operating performance of homes that were not leased as of the first day of a particular month during a reporting period, including homes that were leased for a partial month. We believe that by looking separately at our leased and unleased operations, we gain insight into the returns that may be available to us from our properties once they are leased. Although we have been successful in quickly leasing the unleased homes we have acquired, as described elsewhere in this prospectus, as a recently formed company, we have been aggressive in acquiring our target assets and as a result many of our homes are recently acquired resulting in a larger percentage of unleased homes than we expect to have in our portfolio over time as our portfolio grows in size.

The following table presents operating data for both our (1) leased operations and (2) unleased operations and start-up for the period from March 13, 2012 (commencement of operations) through December 31, 2012 and reconciles such operating data to our net loss for that period.

 

     Period from March 13, 2012
(commencement of operations) to
December 31, 2012
 
     Leased
Operations
     Unleased
Operations
and
Start-up
     Total  
     (Dollar amounts in thousands)  

Revenue:

  

Rental income

   $ 8,869       $ 730       $ 9,599   

Other income

     291         68         359   
  

 

 

    

 

 

    

 

 

 

Total revenue

   $ 9,160       $ 798         9,958   
  

 

 

    

 

 

    

 

 

 

Direct expenses:

        

Property maintenance expenses

   $ 1,074       $ 711         1,785   

Real estate taxes

     1,276         1,385         2,661   

Homeowner’s association fees

     181         318         499   

Property management fees

     530         249         779   

Insurance

     232         257         489   

Other direct expenses

     160         230         390   
  

 

 

    

 

 

    

 

 

 

Total direct expenses

   $ 3,453       $ 3,150         6,603   
  

 

 

    

 

 

    

 

 

 

Indirect expenses:

        

Depreciation and amortization

  

     2,845   

Management fee

  

     570   

General and administrative

  

     6,015   

Equity in losses from unconsolidated joint venture

  

     41   
        

 

 

 

Total indirect expenses

  

     9,471   
        

 

 

 

Net loss

  

   $ (6,116
        

 

 

 
        

 

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For the period from March 13, 2012 (commencement of operations) through December 31, 2012, leased properties generated revenues of $9.2 million and direct expenses of $3.5 million.

For the period from March 13, 2012 (commencement of operations) through December 31, 2012, unleased properties generated revenues of $0.8 million and direct expenses of $3.2 million. Management expects that this deficit will continue to be significant in the near future as we continue to acquire properties and until these properties are stabilized and leased.

Management fees payable to CAH Manager amounted to $0.6 million for this period, based on capital commitments outstanding for the period. Equity in loss from unconsolidated joint venture was $41,000 and represented our company’s share of losses from the first two months of ownership.

General and administrative expenses of $6.0 million include $2.7 million of legal, accounting and other costs associated with the start-up and formation of our business, and acquisition of the unconsolidated joint venture.

Critical Accounting Policies

Our financial statements are prepared in accordance with GAAP, which requires the use of estimates and assumptions that involve the exercise of judgment and use of assumptions as to future uncertainties. In accordance with SEC guidance, the following discussion addresses the accounting policies that we believe will apply to us based on our expectation of the nature of our initial operations. Our most critical accounting policies will involve decisions and assessments that could affect our reported assets and liabilities, as well as our reported revenues and expenses. We believe that all of the decisions and assessments upon which our financial statements will be based will be reasonable at the time made, based upon information available to us at that time. Our critical accounting policies will be expanded over time as we fully implement our strategy. Those accounting policies that we initially expect to be most critical to an investor’s understanding of our financial results and condition and require complex management judgment are discussed below.

Real Estate Acquisition Valuation

Property acquired is recorded at purchase price, allocated between land, building, improvements, in-place leases, and equipment based upon their fair values at the date of acquisition. We utilize various valuation studies, our own market knowledge, and published market data to estimate fair value of the assets acquired. The fair value of acquired in-place leases is determined based on the estimated cost to replace such leases, including foregone rents during an assumed re-lease period, as well as the impact on projected cash flow of acquired leases with rents above or below current market rents. We evaluate each purchase transaction to determine whether the acquired assets meet the definition of a business. Transaction costs related to acquisitions that are not deemed to be businesses are included in the cost basis of the acquired assets, while transaction costs related to acquisitions that are deemed to be businesses are expensed as incurred.

Subsequent to acquisition, expenditures for ordinary maintenance and repairs are expensed to operations as incurred while expenditures for significant renovations that improve or extend the life of the asset, including construction overhead and other allocated direct costs during the renovation or lease-up period, are capitalized and depreciated over their estimated useful life.

Impairment of Real Estate

We evaluate our long-lived assets for impairment at least annually or whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. If an impairment indicator exists, we will compare the expected future undiscounted cash flows against the net carrying amount of a property. Significant indicators of impairment may include declines in homes values, rental rate and occupancy and significant changes in the economy. We plan to make our assessment at the individual property level because it

 

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represents the lowest level of cash flows. We will prepare our future undiscounted cash flow analysis using estimates based on current rental rates, renewals and occupancy and using inputs from our annual long-range planning process and historical performance. When preparing these estimates, we will consider each property’s historical results, current operating trends, current market conditions, anticipated future capital expenditures and remaining useful life. These estimates may be impacted by variable factors including inflation, expected rental rates, the general health of the economy and market competition. If the sum of the estimated undiscounted cash flows is less than the net carrying amount of the property, we will record an impairment loss for the difference between the estimated fair value of the individual property and the carrying amount of the property at that date. To determine the estimated fair value, we will consider both recent comparable homes sales and the use of discounted projected future cash flows. The rates used to discount projected future cash flows will reflect a weighted average cost of capital based on our capital structure.

Depreciation of Real Estate

Depreciation on building, fixtures, improvements, and appliances is computed on a straight-line basis over the estimated useful lives of the assets, which generally range between 15 to 40 years for buildings, improvements and land improvements, and 5 to 15 years for fixtures, equipment and appliances.

Revenue Recognition

Rental income attributable to residential leases is recorded on a straight-line basis, which is not materially different than if it were recorded when due from residents and recognized monthly as it was earned. Our leases are generally for a term of one year or less, and renewable upon consent of both parties on an annual or monthly basis.

We recognize revenue from sales of real estate when the sale has occurred, title has passed, adequate initial and continuing investment by the buyer is received, possession and other attributes of ownership have been transferred to the buyer, and we are not obligated to perform significant additional activities after closing and delivery. If the buyer has provided sufficient initial and continuing investment, and all other revenue recognition criteria have been met, revenue is recognized using the full accrual method on the date of closing.

Principles of Consolidation

We consolidate entities in which we retain a controlling financial interest or entities that meet the definition of a variable interest entity (“VIE”) for which we are deemed to be the primary beneficiary. In performing our analysis of whether we are the primary beneficiary, at initial investment and at each quarterly reporting period, we consider whether we individually have the power to direct the activities of the VIE that most significantly affect the entity’s performance and also have the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. We also consider whether we are a member of a related party group that collectively meets the power and benefits criteria and, if so, whether we are most closely associated with the VIE. In making that determination, we consider both qualitative and quantitative factors, including, but not limited to: the amount and characteristics of our investment relative to other investors; the obligation or likelihood for us or other investors to fund operating losses of the VIE; our and the other investors’ ability to control or significantly influence key decisions for the VIE; and the similarity and significance of the VIE’s business activities to our business activities and those of other investors. The determination of whether an entity is a VIE, and whether we are the primary beneficiary, involves significant judgments, including the determination of which activities most significantly affect the entities’ performance, estimates about the current and future fair values and performance of assets held by the VIE and/or general market conditions.

Liquidity and Capital Resources

Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain our assets and operations, make distributions to our stockholders and other

 

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general business needs. We will use significant amounts of cash to purchase our target assets, repay principal and interest on our borrowings, make distributions to our stockholders and fund our operations. Initially, our sources of cash will consist of the net proceeds from this offering and the formation transactions, and cash generated from our operating results. In addition, we may utilize other sources of financing to the extent available to us, including public and private equity and debt issuances.

Our near-term liquidity requirements consist primarily of purchasing our target assets, renovating properties, funding our operations and making distributions to our stockholders.

To date, all of the homes acquired by us were purchased with equity and we have not yet incurred any indebtedness in acquiring our homes. Upon completion of this offering, we expect to have approximately $     million in cash on hand, including $     in net proceeds from this offering, available for future acquisitions and working capital. We are targeting to deploy this capital within      to      months following the completion of this offering. Our liquidity and capital resources as of December 31, 2012 also consisted of escrow deposits of $     million. Escrow deposits include refundable cash on deposit with financial institutions to be used for property acquisitions, actual and estimated upfront renovation costs for acquired properties, earnest money deposits for broker purchases and tenant security deposits. For vacant homes, through March 31, 2013, we have incurred, on average, actual and estimated upfront renovation costs of approximately $20,000 per home. For homes which our Manager had to transition an occupant, we have incurred, on average, costs to vacate the home of approximately $2,000 per home.

In the future, we may use leverage to supplement our capital needs and currently are in the process of negotiating to obtain a credit facility to provide us with additional capital to support further growth in our business. We may also seek borrowings through other sources.

The acquisition of properties involves the outlay of capital beyond payment of the purchase price, including payments for property inspections, closing costs, title insurance, transfer taxes, recording fees, and broker commissions and property taxes or HOA fees in arrears. Typically, these costs would be capitalized as a component of the purchase price. We will also make significant capital expenditures to renovate and maintain our properties to our standards. Our ultimate success will depend in part on our ability to make prudent, cost-effective decisions measured over the long term with respect to these expenditures.

We intend to elect and qualify to be taxed as a REIT for U.S. federal income tax purposes. As a REIT, under U.S. federal income tax law we will be required to distribute annually at least 90% of our net taxable income, excluding net capital gains, and to pay tax at regular corporate rates to the extent that we annually distribute less than 100% of our net taxable income, including net capital gains. Subject to the requirements of the Maryland General Corporation Law, we intend to pay quarterly dividends to our stockholders, if and to the extent authorized by our board of directors, which in the aggregate approximately equal our net taxable income in the relevant year. Future dividends payable are indeterminable at this time.

Initially, we intend to satisfy our near-term liquidity requirements, including purchasing our target assets, renovating properties and funding our operations with our existing cash balances, proceeds from this offering, our existing working capital, and from cash provided by our operations. We believe our rental income net of operating expenses will over time generally provide cash inflows sufficient to fund our operations and declared dividend distributions. However, there may be times when we experience shortfalls which may cause us to seek additional financing to fund our operations or result in us not making dividend distributions. Should these shortfalls occur for lengthy periods of time or be material in nature, our financial condition may be adversely affected.

Our principal long-term liquidity needs are related to the purchase of additional portfolios of homes. In addition to our portfolio of owned properties, as of                     , we had              homes under contract, with a total purchase price of $         million. In addition, we are actively seeking growth in our portfolio through one or

 

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more of our four primary sourcing channels. We expect to fund these acquisitions from our existing cash balances, proceeds from this offering, our existing working capital, and from cash provided by our operations.

Our assets are illiquid by their nature. Thus, a timely liquidation of assets might not be a viable source of short-term liquidity should a cash flow shortfall arise that causes a need for additional liquidity. It could be necessary to source liquidity from other financing alternatives should any such scenario arise.

Off-Balance Sheet Arrangements

As of the date of this prospectus, we have no off-balance sheet arrangements.

Aggregate Contractual Obligations

Other than agreements to purchase homes entered into in the ordinary course of business and obligations under our management agreement, we had no material contractual obligations as of December 31, 2012. Concurrent with the completion of this offering, CAH will enter into an amended and restated management agreement with our Manager pursuant to which our Manager will be entitled to receive a base management fee and the reimbursement of certain expenses. See “Our Manager and the Management Agreement.” Our Manager will use the proceeds from its management fee and reimbursements in part to pay compensation to its officers and personnel who, notwithstanding that certain of them also are our officers, will receive no cash compensation directly from us.

We expect to enter into certain contracts that may contain a variety of indemnification obligations, including with brokers and underwriters. The maximum potential future payment amount we could be required to pay under these indemnification obligations may be unlimited.

We expect to enter into a license agreement relating to the use of the Colony name. In addition, we may also enter into certain contracts related to office space leases.

Quantitative and Qualitative Disclosures About Market Risk

We do not currently have any market risk sensitive instruments.

 

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INDUSTRY OVERVIEW AND MARKET OPPORTUNITY

U.S. Housing Market Overview

As is illustrated below, according to John Burns Real Estate Consulting, residential housing in the United States is one of the largest asset classes in the world, providing shelter to approximately 121 million households. As of December 2012, it is estimated that 79 million households in the United States owned the home in which they reside. The remaining 42 million households are tenants who rent their house or apartment from a landlord. Of these 42 million households, 14 million households reside in a single-family home that is rented, which represents approximately one-third of all rental homes and a very meaningful share of the overall housing sector.

Housing Is The Largest Asset Class in the United States

Estimated 121 Million Residential Households = $20 Trillion+ in Value

 

LOGO

Source: John Burns Real Estate Consulting “Housing Market Opportunities”

The single-family home rental business caters to a large segment of the population that, for various reasons, is not ready, willing and/or able to purchase a home, yet still prefers to live in and rent a single-family detached home rather than an apartment unit. Historically, the ownership of homes for rent has been fragmented and lacked the operational standardization and professional management that is now prevalent in the multi-family apartment industry and other institutionalized asset classes. Single-family home rentals have steadily grown as a proportion of total rental households for the past decade as illustrated in the following chart.

 

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Single-Family Share of Rental Households

2005-2011

 

LOGO

Source: U.S. Census

Market Opportunity

We believe a number of factors have created a unique opportunity to achieve attractive risk adjusted returns for our stockholders through the consolidation of single-family homes in the United States at distressed prices, renting them to tenants and managing and positioning them for revenue growth, stability and capital appreciation.

Opportunity to Institutionalize the Largest Asset Class in the U.S. Economy

The housing market is the largest asset class in the U.S. economy. Based on data from John Burns Real Estate Consulting in April 2011 and historical homeownership rates from the U.S. Census Bureau, the total value of all residential housing in the United States is greater than $20 trillion with the single-family rental portion of the market estimated to comprise approximately 12% of all existing homes according to John Burns Real Estate Consulting, as of March 2013. As a result of the decline in homeownership rates, demographic changes and the continued distress in the U.S. housing market, we believe there is significant potential for an increase in the size of the single-family home rental market as a proportion of total U.S. housing.

Further, based on our experience, we believe the single-family home rental market has historically been extremely fragmented, comprised primarily of private and individual property investors in local markets. During 2009 and 2010, according to RealtyTrac, banks foreclosed on nearly three million homes per year, and during the first half of 2012, there were approximately 1.5 million active foreclosure filings recorded. According to John Burns Real Estate Consulting, approximately 5.7 million homes as of March 2013 were held as REO on bank balance sheets or in foreclosure or delinquency, which we expect to result in distressed liquidations through 2016. John Burns Real Estate Consulting estimates that this situation will produce an average of over one million distressed home sales per year in 2013, 2014 and 2015, compared to only approximately 400,000 annual distressed home sales from 2000 to 2007.

 

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The massive supply of homes coupled with the significant drop in prices create an opportunity for investors to acquire homes at significant discounts while delivering housing solutions for many displaced residents. We believe we can acquire homes at price points that are meaningfully below replacement costs and at steep discounts to peak values prior to the housing crisis.

The attractive entry basis for current investors in homes is further supported by the limited supply of new homes under construction. According to U.S. Census data, from 1960-2000 the housing industry developed an average of over 1.5 million homes per year, briefly climbing to over 2.0 million in 2006. Housing starts in 2012 remained 50% below levels seen in 2000. Notwithstanding the dramatic reduction in housing starts since the onset of the financial crisis, John Burns Real Estate Consulting expects housing starts to remain modest through 2015.

Until recently, there have been no large-scale, national owner-operators of single-family homes for rent due primarily to the challenge of efficiently compiling a portfolio of many individual homes. We believe the size of the market, its historical ownership structure and current highly attractive acquisition dynamics present us with the opportunity to be one of the leaders in the institutionalization of the single-family rental market in the United States.

Significant Opportunity to Purchase Distressed Homes at Attractive Prices with Strong Rental Income Potential

We believe the housing bubble in the years leading up to the subprime crisis of 2007-2008 created massive distortions in homeownership. Low interest rates, weak underwriting standards and flawed structural incentives, among other factors, enabled many residents who lacked adequate income or credit for purchasing homes (under traditional criteria) to secure mortgage financing and acquire homes previously beyond their reach. During the

 

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Great Recession, increased unemployment and the upward adjustment of below-market introductory interest rates on many loans, led to millions of homeowners being unable to support the debt service or strategically defaulting on their mortgage, resulting in such homeowners being forced to sell or give back their homes.

In those cases where home prices fell below loan balances, borrowers faced short sales or foreclosures. These distressed sales placed even further downward pressure on home prices further exacerbating the crisis. According to the Case-Shiller Home Price Index, the average sales price of single-family homes nationwide declined 33% from 2006 to 2009, resulting in about $7 trillion in lost household wealth. Certain markets experienced especially pronounced rates of foreclosure and profound declines in value. As the following chart indicates, many of our target markets witnessed declines from peak to trough prices in excess of 40%, and despite recent improvements in the housing market, current home prices in many of these markets remain substantially below historical levels.

Home Price Change

LOGO

Source: Case-Shiller

Compared with the long-run averages and based on the Case-Shiller Home Price Index, homes are undervalued relative to rents, disposable incomes and other assets such as commercial real estate and equities.

 

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Home Prices Relative to Incomes and Rents

% Over/Undervalued Versus 1985-2012 Average

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Source: Case-Shiller, BLS, BEA

 

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While home prices seem to have begun to stabilize and show modest recent gains, the overall dislocation in this market has greatly impacted the composition of the housing industry, the financial profile of the American family, individual viewpoints on the merits of homeownership, and the lending practices of banks. We believe many of these effects may be long-lasting and have created the opportunity to acquire large volumes of single-family homes at attractive prices with significant rental income and capital appreciation potential. We expect housing prices to remain under pressure due to the perceived abundant shadow supply from looming additional foreclosures, financing challenges for prospective homeowners, and diminishing enthusiasm for homeownership. In addition, according to CoreLogic, 22% of all U.S. homeowners had negative equity in their homes in the fourth quarter of 2012, and we estimate there are higher percentages within many of our target markets. We believe many of these homes will be available for purchase under distressed circumstances and below replacement cost.

Severe Supply and Demand Imbalance for Rental Properties

We believe a fundamental imbalance exists between the supply and demand for rental housing. Following a severe decline in household formation during the recession, household formation is expected to outpace housing starts by over two million households through 2015 according to John Burns Real Estate Consulting. However, limited new supply of competing rental properties has come on line as evidenced by housing starts in 2012 that were 50% below levels seen in 2000 and continued low vacancy rates at multi-family properties. Further, according to John Burns Real Estate Consulting, total renter households are expected to increase 22% from 2010 to 2015. We believe strong rental market demand fundamentals combined with supply constraints create a compelling opportunity to aggregate a portfolio of homes in scale and to do so at purchase prices that can provide attractive current yields and total returns. We intend to meet this market demand by delivering quality rental housing solutions to this rapidly growing population of renters.

 

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Decline in Homeownership Rates

The fundamental supply and demand imbalance is further accentuated by the rapid decline in home ownership. The recent credit crisis, high national unemployment, national and international political issues and a general lack of consumer confidence have resulted in a meaningful decline in homeownership and a marked increase in the demand for single-family home rentals. According to John Burns Real Estate Consulting, the U.S. homeownership rate reached a peak of 69% in 2004 and is expected to fall to 63% by 2015. The decline in homeownership rates in the United States is exacerbated by demographic trends, continued limited credit availability, liquidity constraints and changing preferences and lifestyles of consumers. According to John Burns Real Estate Consulting, this decline is expected to create more than nine million new renter households from 2010 through 2015 and in combination with household growth outpacing new supply, is estimated to drive continued strong rental property occupancy. The following chart indicates that as the decline in homeownership rates has occurred, the corresponding number of renter households has grown substantially, from less than 34 million in 2004 to over 40 million as of December 31, 2011, and grown at an annual rate of 2.7% in 2012.

LOGO

Source: John Burns Real Estate Consulting “Housing Market Opportunities”

We believe these factors have contributed to a spike in multi-family apartment rental rates and historically low vacancies which, together with little new multi-family product having been built since 2007, further support the need for single-family home rentals.

Attractive Financial Model

We are focused on building a large, diversified portfolio of single-family rental homes that is expected to yield attractive unlevered returns when stabilized and has the potential for additional yield expansion with future rental growth and operating efficiencies. In addition, because we are currently acquiring these assets in a

 

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distressed environment at prices significantly below peak levels, we believe there is also significant capital appreciation potential from these purchases should home prices recover even moderately.

Low Tenant Turnover Rates

Single-family rentals typically experience a more stable tenant base compared to renters in multi-family properties. According to a single-family rental management survey from Zelman & Associates, during the 12 months ended February 2013, annual turnover in single-family rental properties was 27% compared to 54% for apartments in 2012. Further, our tenant base has a very high concentration of families with children which we believe further diminishes turnover within the portfolio as families with children are less prone or able to move than are single renters. This lower turnover reduces capital expenditures required to prepare homes for new tenants and improves our cash flow yield.

Opportunities Within Our Target Markets

Our target markets were highly impacted by the housing bubble leading up to the subprime crisis of 2007-2008 and as such we believe they present a significant opportunity to purchase distressed homes at attractive prices with significant rental income potential. Further supporting our focus on these markets are strong economic fundamentals and population and demographic trends that support our investments in single-family housing.

Deep Supply of Distressed Homes in Our Target Markets

Despite modest HPA and a potential stabilization of the housing market in recent months, our target markets continue to exhibit high proportions of homes with negative equity. CoreLogic defines negative equity as the difference between the current value of a property and its estimated unpaid mortgage principal balance. If the mortgage balance is greater than the current value, the property is considered to be in a negative equity position. As illustrated in the following chart, the states that encompass a majority of our portfolio have a proportion of homes with negative equity substantially greater than the national average.

Negative Equity in Our Markets

 

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Source:    CoreLogic, March 2013

 

  (1)

Near negative equity defined as properties within 5% of being in a negative equity position.

 

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Strong Population Trends

Our target markets on average are expected to exhibit strong population growth through 2015. The economic conditions and expected job growth are driving a faster expansion of population relative to the rest of the United States. Population growth due to immigration also impacts many of our target markets and is a contributing factor to strong forecasted population growth. As illustrated in the following chart, in general, our target markets are expected to experience population growth faster than the national average through 2015.

Population Change

Projected Annual Average Change in Population (2010-2015)

 

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Source: John Burns Real Estate Consulting

 

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Below Average Homeownership Rates

Homeownership rates have decreased nearly 4% nationally from peak rates due to economic factors including demographic trends, continued limited credit availability, liquidity constraints and changing preferences and lifestyles of consumers. Our target markets have exhibited even greater declines in homeownership from peak rates and reflect rates below the national average as exhibited in the following chart.

Homeownership Rates

1986-2012

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Economic Fundamentals

Similarly, our target markets typically exhibit strong expected wage and employment growth. As described above, our target markets are concentrated in high growth areas of the United States and are expected to generate above average growth through 2015. This is further reflected in the following chart, showing expected growth in wage and salary employment.

Wage and Salary Employment Growth

1-Year Growth

CAGR: 2012-2015

 

LOGO

Source:    JBREC

 

  (1)

N. California reflects average of Sacramento and Oakland.

  (2)

S. California reflects average of Los Angeles, Orange County, Riverside-San Bernardino, and San Diego.

  (3)

Florida reflects average of Miami, Orlando, and Tampa.

 

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Expected HPA

John Burns Real Estate Consulting forecasts that U.S. home values on average will appreciate 27% from 2013 through 2016. The markets that experienced the most severe over-correction resulting from the subprime crisis are among those expected to generate the highest appreciation rates in the coming years. As illustrated in the following chart, most of our target markets are expected to generate HPA substantially in excess of the national average of 27%. We believe this is largely due to the over-correction resulting from the subprime crisis combined with the strong economic fundamentals and demographic trends in our target markets as discussed above. The following chart shows the expected cumulative HPA in our existing target markets.

Projected Cumulative Home Price Appreciation

2013-2016

 

LOGO

Source: John Burns Real Estate Consulting

 

  (1)

N. California reflects average of Sacramento and Oakland.

  (2) 

S. California reflects average of Los Angeles, Orange County, Riverside-San Bernardino, and San Diego.

  (3) 

Florida reflects average of Miami, Orlando, and Tampa.

 

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BUSINESS

Our Company

Colony American Homes, Inc. is a market leader in the acquisition, ownership, renovation, leasing and management of single-family properties in the United States. Our growing portfolio consisted of 8,236 homes as of March 31, 2013, which we believe is one of the largest portfolios of single-family homes in the United States. We are externally managed by our Manager, a subsidiary of Colony, a leading real estate private equity firm that has established 44 investment vehicles and raised over $20 billion of equity capital since its founding in 1991.

As of March 31, 2013, our portfolio consisted of 7,059 wholly owned homes and 1,177 homes owned in a joint venture, which are concentrated in attractive sub-markets within Arizona, California, Colorado, Delaware, Florida, Georgia, Nevada and Texas, offering us significant operating efficiencies and economies of scale. Our portfolio is comprised of homes acquired from a variety of sourcing channels by means of various types of transactions, including trustee auctions, MLS, short sales, “mini-bulk” portfolios ranging from five to 500 homes, GSEs, and REO from banks. Our strategy is to continue to grow our portfolio in our existing sub-markets and also to strategically expand our footprint to additional markets where conditions support attractive investment returns.

The estimated total cost basis for our wholly owned homes as of March 31, 2013 was $1.1 billion, inclusive of acquisition and actual and estimated upfront renovation costs. The average total cost basis per home, inclusive of acquisition and actual and estimated upfront renovation costs, was approximately $159,000, representing an average blended price per square foot of approximately $90. For vacant homes, through March 31, 2013, we have incurred, on average, actual and estimated upfront renovation costs of approximately $20,000 per home. In the period from April 1, 2013 through April 21, 2013, we acquired 1,309 homes with an estimated total cost basis of $         million, inclusive of actual and estimated upfront renovation costs. In addition to our portfolio of owned properties, as of                     , we had          homes under contract, representing a total purchase price of $         million.

Upon completion of this offering, we expect to have approximately $     million in cash on hand, including $     in net proceeds from this offering, available for future acquisitions and working capital. We are targeting to deploy this capital within      to      months following the completion of this offering. In addition, we currently have no outstanding indebtedness, but are in the process of negotiating to obtain a credit facility to provide us with additional capital to support further growth in our business.

Central to our investment philosophy is the belief that investing in and managing a large portfolio of single-family properties across diverse geographic locations require a fully institutionalized infrastructure and substantial scale. Colony, through our Manager, is the architect of our proprietary acquisition, renovation, leasing and management processes. We believe that Colony’s experience building integrated investment platforms to underwrite, acquire and manage complex real estate investments provides us with a significant competitive advantage. We believe that our Manager’s established, vertically integrated infrastructure, which includes in-house acquisitions and renovation and property management capabilities, will enable us to remain a market-leading firm in the single-family rental industry.

We are organized as a Maryland corporation and intend to elect and qualify to be taxed as a REIT for U.S. federal income tax purposes, commencing with our taxable year ended December 31, 2012. We generally will not be subject to U.S. federal income tax on our net taxable income to the extent that we annually distribute all of our taxable income to our stockholders and maintain our intended qualification as a REIT.

Our Manager

Our Manager was established by Colony in March 2012 to build a large-scale platform to acquire single-family homes and execute a residential rental strategy in select markets across the United States. Our Manager was formed as a natural outgrowth from Colony’s well-established distress investing philosophy that recognizes

 

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and capitalizes upon market inefficiencies and emerging opportunities. Colony formed our Manager as a focused platform, fully dedicated to the single-family rental opportunity and has positioned our Manager to lead the institutionalization of the fragmented and historically inefficient single-family rental industry.

Colony is a privately held independent global real estate investment firm founded in 1991 by Thomas J. Barrack, Jr. Colony and its affiliates have an extensive global footprint and corresponding infrastructure, with over 400 employees operating in 12 offices in nine countries: China, France, Italy, Lebanon, South Korea, Spain, Taiwan, the United Kingdom and the United States. This global infrastructure has provided Colony with proprietary market knowledge, sourcing capabilities and the local presence required to identify and execute complex transactions. Since its founding, Colony has established 44 investment vehicles, including a publicly traded mortgage REIT, global investment funds, dedicated regional investment funds and investment-specific co-investment vehicles, raising an aggregate of approximately $20 billion of equity capital, which has been invested in most major sectors of real estate, with particularly active participation in acquiring assets from distressed sellers, the primary target investment theme of our acquisition strategy. During this period, Colony has acquired over $50 billion in real estate, comprising over 24,000 assets across all major property types. Our Manager is a vertically integrated company with in-house expertise in acquisitions, property renovation, property management, leasing and sales. As of March 31, 2013, approximately 270 full-time employees and consultants from our Manager and its affiliates were dedicated to the single-family rental business. As Colony has formed our Manager to be its sole management vehicle focusing primarily on the single-family rental opportunity, this vehicle comprises substantially all of Colony’s experience in the single-family rental business.

As a result of a 22-year heritage of real estate investing, and in particular the expansion of its investment activity in the wake of the recent financial crisis, we believe Colony has developed one of the strongest commercial real estate asset management platforms in the industry. Colony’s investment platform is vertically integrated across its investment strategies and the firm maintains significant infrastructure that it believes improves its underwriting capabilities and local market knowledge, providing a strong competitive advantage relative to its competition.

Our Manager applies a similar vertically integrated strategy to the single-family residential business and expects to capitalize on substantial operational and financial advantages, which we believe has enabled us to build a single-family home rental business of critical mass.

Our Manager’s headquarters are located in Scottsdale, Arizona.

Competitive Strengths

We believe the following strengths serve as the foundation for the implementation of our business strategy and will provide us with a sustainable competitive advantage:

Substantial Existing Operating Scale and Vertical Integration. As of March 31, 2013, we owned over 8,200 homes, which provides meaningful initial critical mass for operations and an early indication of the long-term portfolio opportunity. Furthermore, we believe operating scale is a significant competitive advantage in the single-family rental business. We have demonstrated success underwriting highly complex investments under accelerated timeframes due to our large and institutionalized platform. We have demonstrated the ability to acquire, renovate and manage properties across eight states, 25 MSAs, and 63 counties. We believe we can expand these efforts into additional markets with limited incremental investment due to our integrated, institutionalized, scalable platform. This vertical integration provides numerous advantages, including lower overall costs, rapid cycle times, consistency across homes and markets, strong quality control and versatile resource allocation. As of                 , 2013, the overall weighted average cycle time for properties in our portfolio was              days from acquisition to lease-up. As of                 , 2013, our Manager had approximately 270 full-time employees and consultants as well as an extensive network of exclusive vendors to assist with acquisitions and renovation. This broad team combines institutional-grade management and control functions with local,

 

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“boots-on-the-ground” expertise needed to effectively acquire and manage a broad portfolio of single-family homes. By operating an institutionalized, vertically integrated platform, our Manager is able to drive meaningful operating efficiencies and offer high-quality rental options to prospective tenants nationwide.

Deep Industry Expertise and Institutional Track Record of Distressed Investing. Our Manager benefits from Colony’s deep expertise in distressed investing, entering into complex transactions with government and financial institutions, and developing large-scale asset management capabilities around themes and events. Colony is one of the largest real estate private equity investment firms in the world. Over its 22-year history, Colony has acquired over $50 billion in real estate, comprising over 24,000 assets across all major property types, including single-family rental properties. Colony has previously created vertically integrated businesses across several of its real estate investment strategies. Colony has been a major investor in homebuilders, multi-family platforms, commercial banks (nationally and internationally) in the residential lending business and a variety of public REITs. Our Manager, a subsidiary of Colony, is led by a management team with substantial experience in sourcing, acquiring, renovating and managing single-family rental homes. These individuals have direct experience in building and operating successful single-family rental and renovation platforms. Upon completion of this offering, we expect to have approximately $         million in cash on hand, including $         in net proceeds from this offering, available for future acquisitions and working capital. We are targeting to deploy this cash within          to          months following the completion of this offering. In addition, we currently have no outstanding indebtedness, but are in the process of negotiating to obtain a credit facility to provide us with additional capital to support further growth in our business.

Proven Multi-Channel Sourcing Capabilities. Our Manager pursues acquisitions through multiple channels within each market in which it currently operates by means of a variety of types of transactions. As of March 31, 2013, we have acquired over 8,200 homes across Arizona, California, Colorado, Delaware, Florida, Georgia, Nevada and Texas. Our Manager’s acquisition platform sourced this portfolio through four primary channels: (i) trustee auctions, (ii) single asset sales, which involve transactions through MLS, short sales and individual REO from banks, (iii) “mini-bulk” portfolios, which involve transactions with brokers and REO from banks and (iv) GSEs. We believe this diversified sourcing strategy has enabled us to acquire a large number of homes at attractive prices that will generate meaningful yields. Importantly, our Manager has developed the requisite underwriting tools and capabilities that incorporate local market expertise when evaluating acquisition opportunities. We believe these skills and experience are critical when assessing the attractiveness of potential rental assets by determining expected rental rates and home values. During the period from                      to                     , we reviewed in excess of          single-family properties across our four channels. Furthermore, we believe our integrated platform provides a competitive advantage underwriting acquisitions in less competitive, highly complex channels, as evidenced by our strength in trustee sale acquisitions, which represented approximately 63% of our portfolio, as of March 31, 2013. As of March 31, 2013, 13% and 24% of our wholly owned properties were sourced from single-asset sales and “mini-bulk” sales, respectively. Our average monthly acquisition pace over the          months ended                 , 2013 was approximately $         million per month. The following table summarizes our wholly owned property acquisitions by channel during the period from January 1, 2012 through March 31, 2013.

 

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*Cost basis includes acquisition costs and actual and estimated upfront renovation costs for vacant homes purchased and homes purchased with in-place tenants where an initial renovation was not performed.

+ Does not include jointly owned homes acquired.

Extensive Network with Access to Leading Vendors and Service Providers. Within each of our primary markets, our Manager has an exclusive team of local experts who employ or maintain relationships with a wide range of influential industry participants, including sellers, potential partners, lenders, contractors, service providers, brokers and other intermediaries that augment our Manager’s business development and operational capabilities. These field personnel not only provide market feedback to the acquisitions team but they also provide management oversight of local vendors in an effort to ensure value maximization and timeline management. We are able to leverage our Manager’s supplier relationships as well as those of our exclusive partners to negotiate attractive rates on items such as appliances, hardware, paint and carpeting, which we believe will lower our overall renovation and maintenance costs.

Scalable Technology Infrastructure. We believe our Manager’s technology infrastructure, applications and operations are a key differentiator for us. Our Manager uses a combination of custom and off-the-shelf products to drive efficiency. By utilizing an agile approach to implementation and a mixture of on-premises and cloud-based technologies, our Manager is able to scale its technology to meet the needs of its business in real-time. The key components of our Manager’s technology include Mobile Technology, Construction Management, Property Management, and an industry leading CRM system.

 

 

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Ancillary Business Opportunities. We believe there are numerous additional business opportunities that are a natural outgrowth from our core business of owning and operating a portfolio of single-family rental homes. Our portfolio, both on a national basis and within our target markets, provides access to a large and highly attractive tenant base which presents the opportunity for complementary activities. We expect to negotiate and establish strategic relationships with service providers, home goods manufacturers, local utilities and other related businesses to provide a source of ancillary revenue for our company while enhancing our ability to provide leading rental housing for our residents. We expect these ancillary opportunities to improve our economic returns on our portfolio and enhance our competitive positioning. We also expect to implement revenue-enhancing strategies that will result in lower occupancy costs for our tenants, providing a more competitive rental proposition relative to other housing alternatives. Although we are in the early stages of implementing these strategies, our Manager’s founder has significant experience successfully implementing similar initiatives across its other investment platforms, including its investments in the hotel and entertainment industries. We expect to benefit substantially from Colony’s expertise in building revenue enhancing strategies across its more than 20-year investment history.

Branding Initiative. We expect our integrated acquisition, renovation and property management platform and our high-quality rental homes will provide the opportunity to establish strong awareness for the Colony American Homes brand. Furthermore, we believe that there exists an opportunity to attract specific renter demographics within our target markets by differentiating rental home types within and under the Colony American Homes brand. We believe there is significant value in establishing a brand name in the single-family sector at this early stage in the institutionalization of the industry and over time we expect to create brand loyalty among our tenant base and attract new tenants as a result.

Business and Growth Strategy

Our strategy is to continue to grow our single-family residential property rental business in existing and additional markets in order to generate meaningful dividends from rental income and create the potential for significant capital appreciation. Key elements of our strategy include:

Construct a large portfolio of single-family homes through multiple sourcing channels. We intend to use our robust and flexible acquisition platform to continue to build our portfolio in key markets that we believe are well-positioned for strong single-family rental demand and provide potential HPA. Through our multiple sourcing channels, our acquisition platform enables us to underwrite a large volume of potential investment opportunities as evidenced by our average monthly acquisition pace over the      months ending             , 2013 of approximately $         million per month. Upon completion of this offering, we expect to have approximately $         million in cash on hand, including $         in net proceeds from this offering, available for future acquisitions and working capital. We are targeting to deploy this cash within      to      months following the completion of this offering. In addition, we currently have no outstanding indebtedness, but are in the process of negotiating to obtain a credit facility to provide us with additional capital to support further growth in our business.

Diversify our portfolio across select U.S. markets. We currently own a portfolio of homes concentrated in attractive sub-markets within Arizona, California, Colorado, Delaware, Florida, Georgia, Nevada and Texas. In addition to the MSAs in which we already own homes, we are constantly analyzing new markets to enter; we have identified Jacksonville, Florida and Charlotte, North Carolina, as potential expansion markets, as we believe conditions in these MSAs support attractive investment returns. We select markets based upon the three primary investment considerations: (i) suffered significant declines in value such that homes are trading well below peak pricing and current replacement cost; (ii) possesses compelling fundamental rental economics and other favorable characteristics that can generate stable and attractive cash flow streams; and/or (iii) demonstrates prospects for long-term economic recovery, job growth and net in-migration to support strong capital appreciation potential.

 

 

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Acquire properties that have strong rental characteristics. Our portfolio is comprised of single-family homes that we believe appeal to a large cross-section of likely renters. We target properties that are appealing to middle income families due to their configuration (typically three bedrooms and two baths) and proximity to good school districts, work centers and transportation infrastructure. By targeting these characteristics, our portfolio is focused on high quality, infill sub-markets and established neighborhoods within our target MSAs. We utilize a disciplined underwriting approach to evaluate the attractiveness of each property we review in terms of rental occupancy rates, expected income-generating capability and future price appreciation potential.

Combine centralized decision making with local market expertise. We have developed centralized infrastructure, systems and management oversight around the key aspects of our business: property acquisition, property rehabilitation and property management. At the same time, we recognize the critical importance of understanding local market nuances and conditions when evaluating assets to purchase and when working with tenants once homes are leased. As such, we partner with local market operators to broaden our market expertise when beneficial to our objectives. We believe this model provides us with the ability to execute on a cohesive, disciplined business plan while also gaining the benefit of local market expertise from a diverse group of partners across the United States as necessary.

Our Portfolio

We focus on high-quality assets in attractive sub-markets, as evidenced by our existing portfolio. We have acquired this portfolio using only equity. As discussed in more detail under “—Our Target Market Selection,” our portfolio strategy is focused on acquiring properties in locations characterized by proximity to good school districts, work centers and transportation infrastructure. By targeting on these characteristics, our portfolio is highly focused on infill sub-markets within our target MSAs. As a result, our properties tend to be located in more established neighborhoods, which results in an older average age of our targeted rental properties, reflecting the desirability of the specific neighborhoods which we target. Furthermore, given the demographics and amenities of the neighborhoods, many of our homes located in infill sub-markets have had substantial renovations by prior owners and in combination with the substantial improvements made by our Manager upon acquisition, reflect updated systems and finishes. As of March 31, 2013, we owned a portfolio of over 8,200 single-family homes in 25 MSAs across eight states. The estimated total cost basis for our wholly owned homes as of March 31, 2013 was $1.1 billion, inclusive of acquisition and actual and estimated upfront renovation costs.

As illustrated in the portfolio table below, as of March 31, 2013, the weighted average total cost basis per wholly owned home, inclusive of acquisition and actual and estimated upfront renovation costs, was approximately $159,000, representing an average blended price per square foot of approximately $90. For vacant homes, through March 31, 2013, we have incurred, on average, actual and estimated upfront renovation costs of approximately $20,000 per home. In the period from April 1, 2013 through April 21, 2013, we acquired 1,309 homes with an estimated total cost basis of $         million, inclusive of actual and estimated upfront renovation costs. In addition to our portfolio of owned properties, as of                     , we had          homes under contract, representing a total purchase price of $         million.

 

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Our existing portfolio provides for significant diversification both across markets and within markets and provides for substantial tenant diversification. Given that our properties are all separate physical properties, we believe that the risk that any adverse developments to any single property or group of properties would impact our overall portfolio is very minimal. A summary of our portfolio as of March 31, 2013 is as follows:

Portfolio as of March 31, 2013

 

Market

  Number
of
Homes(1)
    % of
Total
    % of
Homes
Leased
    Total
Purchase
Price (in
millions)
    Estimated
Total
Cost
Basis(2)
(in
millions)
    Average
Cost
Basis Per
Home(2)
    Average
Home
Size
(Square
Feet)*
    Estimated
Average
Cost
Basis (Per
Square
Foot)
    Average
Age
(Years)*
    Average
In-
Place
Rent*
    Estimated
Average
Cost

Basis
Per
Leased

Home
    Number
of
Homes
Owned
180 Days
or
Longer(4)
    %
Leased
of
Homes
Owned
180 Days
Or
Longer(5)
 

Wholly Owned

                         

Arizona

    838        10     88   $ 87      $ 94      $ 112,000        1,555      $ 72        25      $ 965      $ 112,000        801        91

California

    2,035        25     38     462        506        249,000        1,688        147        40        1,745        225,000        775        74

Colorado

    278        3     37     35        39        141,000        1,685        83        39        1,314        137,000        67        85

Delaware

    2        0     0     0.3        0.3        131,000        1,550        84        61        —          —          —          0

Florida

    603        7     2     86        97        161,000        1,838        87        22        1,767        212,000        —          0

Georgia

    1,848        22     33     170        204        110,000        1,906        58        23        1,083        95,000        270        78

Nevada

    405        5     40     55        59        146,000        1,761        83        15        1,214        138,000        94        96

Texas

    1,050        13     91     119        120        115,000        1,775        65        11        1,267        115,000        459        98
 

 

 

   

 

 

     

 

 

   

 

 

               

 

 

   

Subtotal Wholly Owned**

    7,059        86     47   $ 1,014      $ 1,120      $ 159,000        1,760      $ 90        26      $ 1,277      $ 138,000        2,466        86
 

 

 

   

 

 

     

 

 

   

 

 

               

 

 

   

Jointly Owned(3)

                         

Arizona

    368        4     47                    

California

    579        7     62                    

Nevada

    230        3     55                    
 

 

 

   

 

 

                       

Subtotal Jointly Owned

    1,177        14     55                    
 

 

 

   

 

 

                       

Total Owned

    8,236        100     55                    
 

 

 

   

 

 

                       

 

  * The subtotal and total amounts in this column are calculated using a weighted average.
  ** Any discrepancies are due to rounding.
  (1) Represents total housing units, which are leased separately from any other housing units. No property with a single deed has more than four housing units, and less than 2% of our wholly owned properties have more than one housing unit.
  (2) Includes acquisition costs and actual and estimated upfront renovation costs for vacant homes purchased and homes purchased with in-place tenants where an initial renovation was not performed. For vacant homes, through March 31, 2013, we have incurred, on average, actual and estimated upfront renovation costs of approximately $20,000 per home. Acquisition costs include asset management fees paid to our Manager of 0.5% of the capitalization of our investments payable at the time an acquisition was made, as well as broker fees, ranging from 2-5% of the acquisition price, paid to third parties that assist with sourcing acquisitions. Our Manager will no longer receive any asset management fees for homes acquired after the completion of this offering.
  (3) In October 2012, we completed a joint venture agreement with Fannie Mae in which we invested approximately $35 million to own 1,177 homes. We serve as managing member of this joint venture with responsibility for operations and management of the venture, subject to Fannie Mae’s approval on major decisions. As of March 31, 2013, the average home size and age of our jointly owned homes was 1,713 square feet per home and 30 years, respectively.
  (4) Represents number of homes owned for 180 days or longer as of March 31, 2013, excluding 37 homes that are not available for lease, which includes homes that are listed for sale, being used as model homes for lease showings and homes acquired at auction for which our Manager has taken legal action to confirm our ownership. As of March 31, 2013, 2,466 of our wholly owned and jointly owned homes were owned for 180 days or longer.
  (5) Represents percentage of homes owned for 180 days or longer that are leased as of March 31, 2013. Leased homes include homes purchased with in-place leases.

 

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In the period from April 1, 2013 through April 21, 2013, we acquired 1,309 homes with an estimated total cost basis of $         million, inclusive of actual and estimated upfront renovation costs. In addition to our portfolio of owned properties, as of                     , we had              homes under contract, with a total purchase price of $         million.

CAH Portfolio Map

As of March 31, 2013, accounting for all homes owned, we had a portfolio of 8,236 homes.

 

LOGO

 

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Table of Contents

The following table sets forth the number of wholly owned homes in each MSA as of March 31, 2013.

 

LOGO

 

(1)

Excludes six MSAs, in each of which we own less than 25 homes.

 

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Portfolio Stratifications

7,059 wholly owned homes as of March 31, 2013.

 

LOGO

 

LOGO

 

  (1) Monthly market rent reflects actual rent for currently leased homes and underwritten rent for unleased homes.

 

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Our Target Market Selection

We utilize a macroeconomic and demographic-based selection process in identifying attractive markets. Specifically, we jointly developed a scoring model, Colony Market Score, or CMS, with an industry leading real estate consulting firm, to identify the most attractive single-family rental markets in the United States. In developing the CMS model, we analyzed 65 major MSAs, and further analyzed sub-markets within these MSAs, to determine the attractiveness of each market for a rentership strategy, focusing on factors such as the supply/demand equation of homes, population growth, job growth, unemployment trends, and mortgage delinquency. A summary of our target markets, which may encompass one or more MSAs, is as follows:

Target Markets

 

    Greater
Atlanta
    Greater
Dallas
    Greater
Denver
    Greater
Houston
    Greater
Phoenix
    Greater
Las

Vegas
    N.  California(6)     S.  California(7)     Florida(8)     United States  

Population (Dec. 2012)(1)

    5,439,950        6,645,678        2,645,209        6,204,161        4,329,534        2,000,759        3,326,021        5,354,015        3,609,756        313,914,040   

Population growth (2003–2012)(1)

    21.6     22.2     16.7     25.1     25.4     31.4     9.4     8.3     14.7     9.1

Median Household Income (Dec. 2011)(1)

    52,639        55,546        59,230        54,901        50,058        48,215        63,563        60,699        45,121        50,502   

Unemployment rate (Feb. 2013)(2)

    8.4     6.5     7.7     6.4     6.9     11.6     9.0     9.7     8.4     7.9

Median Home Price (Dec. 2012)(3)

    112,493        165,593        270,168        178,766        161,509        148,714        414,953        320,812        175,000        186,204   

HPA Peak to Current (Dec. 2012)(4)

    (29.7 %)      (4.7 %)      (4.4 %)      (0.9 %)      (44.9 %)      (56.4 %)      (42.3 %)      (40.2 %)      (48.4 %)      (23.5 %) 

Total value of Housing Stock, $Bn (Dec. 2011)(1)

    250.6        269.4        NA        228.6        194.9        69.0        302.7        395.1        167.6        16,546.7   

Number of homes sold LTM (Jan. 2013)(5)

    67,217        70,268        51,307        90,690        103,390        47,820        58,047        195,438        135,110        3,679,234   

Avg. homes sold per year 2003–2012(5)

    120,643        97,957        61,425        127,996        134,117        67,428        67,404        263,178        203,254        5,556,149   

Number of Building permits LTM (Feb. 2013)(1)

    9,578        14,654        5,918        29,914        12,083        6,846        3,570        10,074        15,506        546,958   

Number of Building permits per year 2003–2012(1)

    31,445        20,018        9,562        35,938        29,006        15,444        9,748        33,265        30,955        980,972   

 

  1.   US Census Bureau
  2.   US Bureau of Labor Statistics
  3.   National Association of Realtors
  4.   S&P Case Shiller where available (Atlanta, Dallas, Denver, Phoenix, Las Vegas, San Francisco, Los Angeles, San Diego, Miami, Tampa); National Association of Realtors (Houston, Sacramento, Riverside, Orlando, US)
  5.   CoreLogic
  6.   N. California reflects total for population, homes sales, and building permits statistics and average for other statistics of Greater Sacramento and San Francisco
  7.   S. California reflects total for population, homes sales, and building permits statistics and average for other statistics of Greater Los Angeles, Riverside, Ventura, and San Diego
  8.   Florida reflects total for population, homes sales and building permits statistics and average for other statistics of Greater Miami, Orlando and Tampa

We believe our target markets described above represent attractive investment opportunities for our single-family platform. Furthermore, within our target markets our, portfolio strategy is focused on acquiring properties in locations characterized by proximity to good school districts, work centers and transportation infrastructure. By targeting these characteristics, our portfolio is highly focused on infill sub-markets within our target MSAs. As a result, our properties tend to be located in more established neighborhoods, which results in an older average age of our targeted rental properties. Furthermore, given the demographics and amenities of the

 

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neighborhoods, many of our homes located in infill sub-markets have had substantial renovations by prior owners and in combination with the substantial improvements made by our Manager upon acquisition, reflect updated systems and finishes.

Acquisition Capabilities and Process

Colony, through our Manager, has already demonstrated a strong ability to purchase portfolios of homes consistent with its long heritage of acquiring real estate related portfolios in other property types. We have constructed an integrated operating platform, and for each of our target markets, we have a dedicated acquisitions team, renovations team, and asset management team, which is designed to enable us to realize significant efficiencies in both costs and timing.

Within our target markets we identify and source investment opportunities through a variety of channels based on transaction type such as large-scale portfolio transactions, “mini bulk” transactions and individual asset acquisitions. We originate large-scale portfolio transactions from GSEs and other financial institutions. These large-scale portfolio transactions provide opportunities to achieve scale efficiently and may offer attractive pricing discounts relative to individual asset transactions. Furthermore, this diversified sourcing strategy has enabled our Manager to acquire, on our behalf, a large number of homes at attractive prices that should generate meaningful yields.

 

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Through our Manager, we have built an integrated in-house acquisition platform, which leverages advanced technology. Central to the execution of this strategy is creating a standardized underwriting process that is designed to allow us to evaluate, price and bid on multiple portfolios simultaneously without compromising underwriting quality during the due diligence process. We believe our competitive advantage is our Manager’s ability to underwrite cash flows of a target portfolio quickly, efficiently and comprehensively, which includes site visits performed by local market experts. We frequently execute the underwriting and closing of properties in compressed time frames utilizing dedicated acquisition teams and well-developed underwriting tools that maximize efficiency and accuracy. As the below chart illustrates, out of the homes we identify for purchase at auction, we generally are able to acquire one out of every three homes with minimum bids and one out of every 15 homes without minimum bids. The efficiency of our underwriting capabilities is illustrated through the following example of our screening process for a representative “super Tuesday” in connection with the monthly municipal foreclosure auction process held in Atlanta, Georgia:

 

LOGO

Our Manager enhances its competitive position in the marketplace relative to individual buyers by being an all-cash buyer who can move swiftly. Owner-occupants and other buyers who require financing are less nimble and offer sellers less certainty of execution. Accordingly, our Manager finds that certain sellers are willing to accept a lower purchase price from us than an offer from a competing purchaser who requires contingencies and/or is less established.

We believe that our Manager is uniquely positioned to acquire additional portfolios on our behalf on favorable pricing terms. As the velocity of portfolio transactions increases, we believe sellers will be increasingly

 

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likely to favor buyers who can purchase homes in scale in order to maximize REO inventory reduction and minimize closing risk. Our Manager’s asset-by-asset underwriting allows it to bid with a high degree of precision yet still evaluate large and diverse portfolios. This comprehensive valuation process combined with detailed rent, capital expenditures and expense analysis, including any costs for potential eviction proceedings, produces a competitive and informed bid price.

When considering an acquisition, our Manager uses its proprietary underwriting model to identify assets that can be purchased at discounts to replacement value with strong in-place cash flow characteristics, or near term potential to generate meaningful cash flow, and attractive potential returns. Each home is underwritten using a “bottom-up” approach, meaning that we analyze projected cash flows for each asset on an individual basis. We conduct extensive due diligence on individual assets utilizing in-house acquisitions and property renovation teams. Our proprietary underwriting model factors in a large number of variables including, property location, physical structure, age, school district, and local economic drivers. Set forth below are certain key underwriting criteria we use when evaluating the acquisition of single-family homes, although certain of our assets may fall outside one or more of these criteria:

Key Criteria

 

   

Property value between $75,000 and $300,000

 

   

Size (2-4 beds and 2-3 baths)

 

   

Square Footage (approximately 1,700 square feet, on average)

 

   

10-15% underwritten target gross revenue yield, calculated by dividing expected annual rent by total investment

 

   

Affordability and discount to replacement cost

 

   

Distressed markets

 

   

Positive demographic and employment projections

 

   

Midscale and upscale neighbourhoods in low-crime areas

 

   

Desirable school districts

Markets

 

   

Arizona (Phoenix, Tuscon)

 

   

S. California (Los Angeles, Riverside, San Diego, Ventura)

 

   

N. California (East Bay, Sacramento)

 

   

Colorado (Denver)

 

   

Delaware

 

   

Florida (Tampa, Orlando, Miami, Jacksonville, Palm Beach Counties)

 

   

Georgia (Atlanta)

 

   

Nevada (Las Vegas)

 

   

North Carolina (Charlotte)

 

   

Texas (Austin, Houston, Dallas/Ft. Worth, San Antonio)

In addition to building a “bottom-up” cash flow analysis for each asset, field experts perform site visits and estimate property renovation costs. We also conduct preliminary title work before each purchase, which is especially important in situations where a title policy will not be available prior to closing. We utilize closing agents and title insurance providers at the local level because we believe these relationships provide the most benefit as many help with services such as preliminary title checks that help us through the diligence process.

 

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Our Manager’s acquisition activities benefit from Colony’s experience in underwriting, negotiating and bidding o