10-Q 1 arpi-3312015x10q.htm 10-Q ARPI-3.31.2015-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________ 
FORM 10-Q
_______________________________________ 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2015
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number 001-35899
_______________________________________ 
AMERICAN RESIDENTIAL PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
_______________________________________ 
Maryland
 
45-4941882
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
 
 
7047 East Greenway Parkway, Suite 350
Scottsdale, AZ
 
85254
(Address of principal executive offices)
 
(Zip Code)
(480) 474-4800
(Registrant’s telephone number, including area code)
 _______________________________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See 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
ý
 
 
 
 
 
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
As of May 6, 2015, there were 32,195,280 shares of common stock, $0.01 par value per share, outstanding.



AMERICAN RESIDENTIAL PROPERTIES, INC.
INDEX
 
 
 
 
Item 1.
 
Condensed Consolidated Balance Sheets as of March 31, 2015 (unaudited) and December 31, 2014
 
Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2015 and 2014 (unaudited)
 
Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2015 and 2014 (unaudited)
 
Condensed Consolidated Statement of Equity for the Three Months Ended March 31, 2015 (unaudited)
 
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2015 and 2014 (unaudited)
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 


2


CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements included in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the federal securities laws. Forward-looking statements relate to expectations, beliefs, projections, forecasts, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. These statements are only predictions. We caution that forward-looking statements are not guarantees. Actual events or our investments and results of operations could differ materially from those expressed or implied in the forward-looking statements. Forward-looking statements are typically identified by the use of terms such as "may," "will," "should," "expect," "could," "intend," "plan," "anticipate," "estimate," "believe," "continue," "predict," "potential" or the negative of such terms and other comparable terminology. You can also identify forward-looking statements by discussions of strategy, plans or intentions.
The forward-looking statements included in this report 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:
our business and investment strategy;
our projected operating results;
economic, demographic or real estate developments in our markets;
home value appreciation, employment growth, residential building permits, median household income and household formation in our markets;
defaults on, early terminations of or non-renewal of leases by our tenants;
our ability to identify properties to acquire and complete acquisitions;
increased time and/or expense to gain possession and restore properties;
our ability to successfully restore, lease and manage our properties;
projected operating costs;
rental rates or vacancy rates;
our ability to obtain financing;
general volatility of the markets in which we participate;
our expected investments;
interest rates and the market value of our assets;
impact of changes in governmental regulations, tax law and rates and similar matters;
our ability to maintain our qualification as a real estate investment trust ("REIT") for federal income tax purposes;
availability of qualified personnel;
estimates relating to our ability to make distributions to our stockholders in the future;
our understanding of our competition; and
market trends in our industry, real estate values, the debt securities markets or the general United States economy.
The forward-looking statements are based on our beliefs, assumptions and expectations of future events, taking into account all information currently available to us. Forward-looking statements are not guarantees of future events or of our performance. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us. Some of these events and factors are described in "Item 1A. Risk Factors" and in "Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations" in this Quarterly Report on Form 10-Q and other risks and uncertainties detailed in this and our other reports and filings with the Securities and Exchange Commission ("SEC"). If a change occurs, our business, financial condition, liquidity, cash flows and results of operations may vary materially from those expressed in or implied by our forward-looking statements. New risks and uncertainties arise over time, and it is not possible for us to predict the occurrence of those matters or the manner in which they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. You should, therefore, not rely on these forward-looking statements as of any date subsequent to the date of this Quarterly Report on Form 10-Q.

3


PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
AMERICAN RESIDENTIAL PROPERTIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share amounts)
 
March 31, 2015 (unaudited)
 
December 31, 2014
Assets
 
 
 
Investment in real estate:
 
 
 
Land
$
254,557

 
$
249,151

Building and improvements
1,075,715

 
1,042,954

Furniture, fixtures and equipment
10,136

 
9,508

 
1,340,408

 
1,301,613

Less: accumulated depreciation
(71,316
)
 
(58,010
)
Investment in real estate, net
1,269,092

 
1,243,603

Mortgage financings
19,458

 
21,097

Cash and cash equivalents
23,144

 
21,270

Restricted cash
15,381

 
11,473

Acquisition deposits
4

 
2,561

Rents and other receivables, net
4,406

 
4,583

Deferred leasing costs and lease intangibles, net
3,454

 
3,391

Deferred financing costs, net
13,101

 
13,037

Investment in unconsolidated ventures
25,427

 
25,691

Goodwill
3,500

 
3,500

Other, net
10,196

 
10,567

     Total assets
$
1,387,163

 
$
1,360,773

 
 
 
 
Liabilities and Equity
 
 
 
Liabilities:
 
 
 
Revolving credit facility
$
350,000

 
$
311,000

Exchangeable senior notes, net
102,898

 
102,188

Securitization loan, net
340,757

 
340,675

Accounts payable and accrued expenses
19,104

 
23,507

Security deposits
9,008

 
7,919

Prepaid rent
3,288

 
2,919

     Total liabilities
825,055

 
788,208

 
 
 
 
Equity:
 
 
 
American Residential Properties, Inc. stockholders’ equity:
 
 
 
Preferred stock, $0.01 par value, 100,000,000 shares authorized; no shares issued and outstanding

 

Common stock, $0.01 par value, 500,000,000 shares authorized; 32,195,280 and 32,195,280 shares issued and outstanding at March 31, 2015 and December 31, 2014, respectively
322

 
322

Additional paid-in capital
628,758

 
628,662

Accumulated other comprehensive loss
(139
)
 
(96
)
Accumulated deficit
(79,003
)
 
(68,101
)
Total American Residential Properties, Inc. stockholders’ equity
549,938

 
560,787

Non-controlling interests
12,170

 
11,778

     Total equity
562,108

 
572,565

Total liabilities and equity
$
1,387,163

 
$
1,360,773

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

4


AMERICAN RESIDENTIAL PROPERTIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except share and per-share amounts)
(unaudited)
 
 
 
Three Months Ended 
 March 31,
 
 
2015
 
2014
Revenue:
 
 
 
 
   Self-managed rental revenue
 
$
25,289

 
$
14,562

   Local operator rental revenue
 
1,353

 
1,368

   Management services (related party)
 
68

 
113

   Interest and other
 
782

 
1,411

Total revenue
 
27,492

 
17,454

Expenses:
 
 
 
 
   Property operating and maintenance
 
6,207

 
4,146

   Real estate taxes
 
5,009

 
3,111

   Homeowners’ association fees
 
658

 
460

   Acquisition
 
57

 
67

   Depreciation and amortization
 
15,145

 
9,464

   General, administrative and other
 
4,220

 
3,720

   Interest
 
7,316

 
4,230

Total expenses
 
38,612

 
25,198

Loss from continuing operations before equity in net income (loss) of unconsolidated ventures
 
(11,120
)
 
(7,744
)
Equity in net income (loss) of unconsolidated ventures
 
10

 
(50
)
Net loss
 
(11,110
)
 
(7,794
)
Net loss attributable to non-controlling interests
 
208

 
125

Net loss attributable to common stockholders
 
$
(10,902
)
 
$
(7,669
)
Basic and diluted loss per share:
 
 
 
 
   Net loss attributable to common stockholders
 
$
(0.34
)
 
$
(0.24
)
Weighted-average number of shares of common stock outstanding - basic and diluted
 
32,160,983

 
32,130,733

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

5


AMERICAN RESIDENTIAL PROPERTIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(amounts in thousands)
(unaudited)
 
 
 
Three Months Ended 
 March 31,
 
 
2015
 
2014
Net loss
 
$
(11,110
)
 
$
(7,794
)
Other comprehensive loss:
 
 
 
 
   Change in unrealized loss on interest rate cap
 
(43
)
 

Comprehensive loss
 
(11,153
)
 
(7,794
)
Comprehensive loss attributable to non-controlling interests
 
208

 
125

Comprehensive loss attributable to common stockholders
 
$
(10,945
)
 
$
(7,669
)
The accompanying notes are an integral part of these condensed consolidated financial statements.

6


AMERICAN RESIDENTIAL PROPERTIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
(amounts in thousands, except share amounts)
(unaudited)
 
 
 
Number of
Shares
Common
Stock
 
Common
Stock
 
Preferred
Stock
 
Additional
Paid-In
Capital
 
 Accumulated Other Comprehensive Loss
 
Accumulated
Deficit
 
Non-
Controlling
Interests
 
Total
Equity
Balance at December 31, 2014
 
32,195,280

 
$
322

 
$

 
$
628,662

 
$
(96
)
 
$
(68,101
)
 
$
11,778

 
$
572,565

Net loss
 

 

 

 

 

 
(10,902
)
 
(208
)
 
(11,110
)
Other comprehensive loss
 

 

 

 

 
(43
)
 

 

 
(43
)
Stock-based compensation
 

 

 

 
96

 

 

 
600

 
696

Balance at March 31, 2015
 
32,195,280

 
$
322

 
$

 
$
628,758

 
$
(139
)
 
$
(79,003
)
 
$
12,170

 
$
562,108

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

7


AMERICAN RESIDENTIAL PROPERTIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
(unaudited)
 
Three Months Ended 
 March 31,
 
2015
 
2014
Operating activities:
 
 
 
Net loss
$
(11,110
)
 
$
(7,794
)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
 
 
 
Depreciation and amortization
15,145

 
9,464

Amortization of stock-based compensation
696

 
667

Amortization of deferred financing costs
1,264

 
1,034

Accretion of discount on exchangeable senior notes
710

 
664

Accretion of discount on securitization loan
82

 

Bad debt expense
522

 
545

Straight line rental revenue
120

 
(67
)
Equity in net (income) loss of unconsolidated ventures
(10
)
 
50

Distributions on returns of unconsolidated ventures
10

 

Net (gain) on dispositions of real estate and other assets
(40
)
 

Changes in operating assets and liabilities:
 
 
 
Restricted cash
(3,908
)
 

Rent and other receivables, net
(465
)
 
(712
)
Deferred leasing costs and lease intangibles, net
(1,883
)
 
(1,778
)
Other assets, net
328

 
3,627

Accounts payable, accrued expenses and other liabilities
(2,753
)
 
1,388

Net cash (used in) provided by operating activities
(1,292
)
 
7,088

Investing activities:
 
 
 
Improvements of real estate
(12,568
)
 
(8,272
)
Property acquisitions, including acquired in-place leases
(26,646
)
 
(108,619
)
Proceeds from sale of real estate
248

 

Investment in mortgage financings
(1,154
)
 
(5,407
)
Repayments from mortgage financings
2,793

 
12,263

Distributions from unconsolidated ventures
264

 

Decrease (increase) in acquisition deposits
2,557

 
(4,327
)
Net cash used in investing activities
(34,506
)
 
(114,362
)
Financing activities:
 
 
 
Borrowings under revolving credit facility
39,000

 
144,000

Repayments of revolving credit facility

 
(10,000
)
Deferred financing costs
(1,328
)
 
(165
)
Net cash provided by financing activities
37,672

 
133,835

Net increase in cash and cash equivalents
1,874

 
26,561

Cash and cash equivalents—beginning of period
21,270

 
24,294

Cash and cash equivalents—end of period
$
23,144

 
$
50,855

Supplemental schedule of noncash investing and financing activities:
 
 
 
Accounts payable and accrued expenses for additions to investments in real estate
$
1,667

 
$
1,607

Cash paid for interest, net of amount capitalized
$
4,204

 
$
1,301

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

8


AMERICAN RESIDENTIAL PROPERTIES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
(unaudited)
 
1.
Organization and Operations
As used in these unaudited condensed consolidated financial statements and related notes, the terms "American Residential Properties, Inc., " the "Company," "us," "we," and "our" refer to American Residential Properties, Inc. We are an internally managed real estate company organized as a REIT that acquires, owns and manages single-family homes as rental properties. We own all of our assets and conduct substantially all of our operations through (i) American Residential Properties OP, L.P., a Delaware limited partnership ("our Operating Partnership"), in which we have a 98.1% interest as of March 31, 2015 and for which, through our wholly owned subsidiary, American Residential GP, LLC, we serve as sole general partner, and (ii) American Residential Properties TRS, LLC ("TRS"), which is our taxable REIT subsidiary. We have elected to be taxed as a REIT for federal income tax purposes. As a REIT, we will generally not be subject to federal income taxes to the extent that we currently distribute all of our taxable income to our stockholders and meet other specific requirements.
We were incorporated in Maryland in March 2012 and did not have any meaningful operating activity until the consummation of our initial private offering of our common stock in May 2012. We completed a follow-on private offering and a separate private placement of our common stock in December 2012 and January 2013, respectively, and completed our initial public offering ("IPO") in May 2013.
As of March 31, 2015, we owned 9,038 properties in Arizona, California, Colorado, Florida, Georgia, Illinois, Indiana, Nevada, North Carolina, Ohio, South Carolina, Tennessee and Texas.
2.
Summary of Significant Accounting Policies
Basis of Accounting and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial information and with the rules and regulations of the SEC. Certain information and footnote disclosures required for annual financial statements have been condensed or excluded pursuant to the SEC rules and regulations. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring entries), considered necessary for a fair presentation of our results have been included. Results of operations for interim periods are not necessarily indicative of results to be expected for the entire year.
The accompanying unaudited condensed consolidated financial statements include the accounts of American Residential Properties, Inc., our Operating Partnership and the wholly owned subsidiaries of our Operating Partnership. All majority-owned subsidiaries are consolidated and included in our unaudited condensed consolidated financial statements. All intercompany accounts and transactions have been eliminated in consolidation.
These financial statements should be read in conjunction with our audited consolidated financial statements and footnotes in our Annual Report on Form 10-K for the year ended December 31, 2014, filed with the SEC on March 16, 2015.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that may affect the amounts reported in these financial statements and accompanying footnotes. Actual results could differ materially from those estimates.
Investment in Real Estate
Property acquired not subject to an existing lease is accounted for as an asset acquisition, with the property recorded at the purchase price, including acquisition costs, and allocated between land and building and improvements based upon their relative fair values at the date of acquisition. Property acquired with an existing lease is recorded as a business combination. For properties acquired through portfolio transactions, we determine whether the acquisition qualifies as a business combination based on the nature and status of the properties as of the acquisition date. A portfolio comprised of properties that are substantially leased at acquisition is treated as a business combination. A portfolio comprised of properties that are substantially vacant at acquisition is treated as an asset acquisition. For property acquisitions accounted for as business combinations, the land, building and improvements and the existing lease are recorded at fair value at the date of acquisition, with acquisition costs expensed as incurred.

9


Fair value is determined under the guidance of Accounting Standards Codification ("ASC") Topic 820, Fair Value Measurements, primarily based on unobservable market data inputs, which are categorized as Level 3 inputs. In making estimates of fair values for purposes of allocating purchase price, we utilize our market knowledge and published market data. Our real estate portfolio is depreciated using the straight-line method over the estimated useful lives of the respective assets, ranging from 5 to 27.5 years.
We have acquired portfolios of leased properties from established local operators ("local operators"), that retain day-to-day management responsibilities pursuant to a longer-term net lease. In these arrangements, the local operator is responsible for all property-related expenses and we receive rental payments from the local operator that escalate over the term of the net lease. In-place lease intangibles associated with homes managed by local operators are valued based on management’s estimates of lost rent and carrying costs. In-place lease intangibles associated with the acquisition of self-managed homes are valued based on management’s estimate of lost rent during the time it would take to locate a tenant and execute a lease if the property were vacant, considering current market conditions and costs to execute similar leases. In estimating lost rent and carrying costs, management considers market rents, real estate taxes, insurance, costs to execute similar leases (including leasing commissions) and other related costs. The value assigned to in-place leases is amortized on a straight-line basis as a component of depreciation and amortization expense over the remaining initial term of the related lease. The leases reflect market rental rates.
We incur costs to prepare our acquired properties to be rented. These costs (including direct internal costs) are capitalized and allocated to building costs. Costs related to the restoration or improvement of our properties (including direct internal costs) that improve and extend their useful lives are capitalized and depreciated over their estimated useful lives. The Company capitalizes interest during the restoration period on newly acquired properties. Expenditures for ordinary repairs and maintenance are expensed as incurred.
Revenue Recognition
We lease single-family residences we own and manage directly to tenants who occupy the properties under operating leases, generally, with terms of one year. We perform credit investigations on prospective tenants and obtain security deposits. Rental revenue, net of any concessions, is recognized on a straight-line basis over the term of the lease, which is not materially different than if it were recorded when due from tenants and recognized monthly as it is earned. Properties that are subject to longer-term operating arrangements with local operators are leased to the operator for a minimum of five to ten years with renewal options. These local operators are responsible for all taxes, insurance, maintenance and capital expenses (including significant capital improvements) of the properties under the terms of the operating arrangements. Under our local operator net lease agreements, we earn base rental revenue paid monthly, with contractual minimum annual rent increases on each anniversary of the lease commencement date. We recognize rental revenue on a straight-line basis over the term of the lease. We also earn percentage rents on a quarterly basis equal to a fixed percentage of the gross revenue the local operator collects from its residential sub-tenants who occupy the homes. Percentage rental revenue is recorded when the gross revenue collected from the sub-tenants is known and the amount can be calculated.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in GAAP when it becomes effective. ASU 2014-09 is effective for reporting periods beginning after December 15, 2016; however, the FASB has issued an exposure draft regarding the deferral of the effective date of the standard. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its financial statements.

In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis ("ASU 2015-02"). ASU 2015-02 makes targeted amendments to the current consolidation guidance and ends the deferral granted to investment companies from applying the existing variable interest entity guidance. ASU 2015-02 will be effective for public entities for annual and interim reporting periods beginning after December 15, 2015 with early adoption allowed in any interim period. We have not yet selected a transition method nor have we determined the effect of ASU 2015-02 on our ongoing financial reporting.

In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs ("ASU 2015-03"). ASU 2015-03 will require that debt issuance costs related to a recognized debt liability, which are currently presented as

10


deferred charges (assets), be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. ASU 2015-03 will be effective for financial statements issued for fiscal years beginning after December 15, 2015, and for interim periods within those fiscal years.
3.
Mortgage Financings
Mortgage loans as of March 31, 2015 and December 31, 2014 include approximately $19.4 million and $21.0 million of short-term loans with weighted-average annual interest rates of approximately 12.0% and 11.9%, and weighted-average remaining terms of approximately 83 and 100 days, respectively.
4.
Rents and Other Receivables
Our rents and other receivables are reported net of allowances for doubtful accounts, which are summarized as follows (in thousands):
 
 
March 31, 2015
 
December 31, 2014
Self-managed allowance for doubtful accounts
 
$
563

 
$
535

Local operator allowance for doubtful accounts
 
609

 
579

   Total allowance for doubtful accounts
 
$
1,172

 
$
1,114

Our provisions for doubtful accounts for self-managed homes and local operator homes are included as components of rental revenue on our condensed consolidated statements of operations, and are summarized as follows (in thousands):
 
 
March 31, 2015
 
March 31, 2014
Self-managed bad debt expense
 
$
428

 
$
372

Local operator bad debt expense
 
94

 
173

   Total bad debt expense
 
$
522

 
$
545

5.
Lease Intangibles
Our identifiable intangible assets as of March 31, 2015 and December 31, 2014 are summarized as follows (amounts in thousands):
 
March 31, 2015
 
December 31, 2014
Acquired in-place leases
$
91

 
$
327

Less: accumulated amortization
(69
)
 
(222
)
Intangible lease assets, net
$
22

 
$
105

The impact of the amortization of acquired in-place leases on our depreciation and amortization expense is approximately $0.1 million and $0.5 million for the three months ended March 31, 2015 and 2014, respectively.
6.
Debt
The following table details the Company's debt as of March 31, 2015 and December 31, 2014 (in thousands):
 
March 31, 2015
 
December 31, 2014
Credit Facility
$
350,000

 
$
311,000

Exchangeable senior notes
115,000

 
115,000

Securitization Loan
342,241

 
342,241

Total debt before unamortized discount
807,241

 
768,241

Less: Total unamortized discount on debt
(13,586
)
 
(14,378
)
Total debt
$
793,655

 
$
753,863




11


Senior Secured Revolving Credit Facility
We have a $500 million senior secured revolving credit facility (the "Credit Facility") with an uncommitted accordion feature that permits us to increase the size of the facility to $750 million, subject to meeting certain criteria and obtaining additional commitments from the lending banks. The amount available for us to borrow under the Credit Facility is subject to limitations governed by calculations based on the cost, value and debt yield supported by our properties that form the borrowing base of the Credit Facility. The credit agreement requires us to comply with various financial covenants as well as customary affirmative and negative covenants that restrict our ability to, among other things, incur debt and liens, make investments, dispose of properties and make distributions. The Credit Facility is secured by our ownership interest in American Residential Leasing Company, LLC, which is a wholly owned subsidiary of our Operating Partnership. The Credit Facility contains certain financial covenants, including a maximum leverage ratio, a minimum tangible net worth, a minimum fixed charge coverage ratio and a minimum liquidity. In January 2015, we exercised our option to extend the maturity date of our Credit Facility by one year to January 2016, pursuant to the terms of the Credit Facility. At March 31, 2015, we were in compliance with all of the financial covenants under the Credit Facility.
As of March 31, 2015, $350.0 million was outstanding under the Credit Facility, bearing interest at a weighted-average annual rate of 3.0%, with remaining availability of $125.3 million.
We have incurred a total of approximately $8.0 million in financing costs in connection with the Credit Facility, of which $1.1 million and $0.3 million are included in deferred financing costs, net on the accompanying condensed consolidated balance sheets at March 31, 2015 and December 31, 2014, respectively. These costs are being amortized to interest expense over the remaining term of the Credit Facility.
Exchangeable Senior Notes
In November 2013, we issued and sold $115.0 million aggregate principal amount of 3.25% Exchangeable Senior Notes due 2018 (the "Notes"). The Notes are senior unsecured obligations of the Operating Partnership and rank equally in right of payment with all other existing and future senior unsecured indebtedness of the Operating Partnership. Interest is payable in arrears on May 15 and November 15 of each year, beginning May 15, 2014, until the maturity date of November 15, 2018. The Operating Partnership’s obligations under the Notes are fully and unconditionally guaranteed by the Company. The Notes bear interest at a rate of 3.25% per annum and contain an exchange settlement feature, which provides that the Notes may, under certain circumstances, be exchangeable for cash, shares of our common stock or a combination of cash and shares of our common stock, at the option of the Operating Partnership. We incurred $3.8 million in financing costs, of which $2.4 million and $2.6 million are included in deferred financing costs, net on the accompanying condensed consolidated balance sheets as of March 31, 2015 and December 31, 2014, respectively, to be amortized to interest expense over the term of the Notes.
In connection with the issuance of the Notes, we recorded approximately $99.1 million within exchangeable senior notes, net on the accompanying condensed consolidated balance sheets, based on the fair value of the instrument using a straight-debt rate of 6.5% at the time of issuance, and approximately $15.4 million in additional paid-in-capital, net of $0.5 million in financing costs, in the accompanying condensed consolidated statement of equity. The difference between the $115.0 million face amount and the $99.1 million will be accreted over the five-year period ending November 15, 2018.
The following table details the debt and equity components recognized related to the 3.25% Notes (in thousands)
 
March 31, 2015
 
December 31, 2014
Principal amount
$
115,000

 
$
115,000

Unamortized discount
(12,102
)
 
(12,812
)
Net carrying amount
102,898

 
102,188

Additional paid in capital
15,360

 
15,360

Securitization Loan
In August 2014, the Company completed a securitization transaction resulting in $340.6 million in total gross proceeds. The transaction involves the issuance and sale of single-family rental pass-through certificates that represents beneficial ownership interests in a loan (the "Securitization Loan"), secured by 2,876 homes transferred to an affiliate from the Company's portfolio of single-family properties. The loan has an initial term of two years, with three, 12-month extension options, resulting in a fully extended maturity date of September 9, 2019 and requires that we maintain certain covenants, including but not limited to, a minimum debt yield on the collateral pool of properties. The effective weighted average of the fixed-rate spreads is 2.11% plus 1-month London Interbank Offered Rate ("LIBOR"), or 2.28%. As of March 31, 2015, we were in compliance with all covenants under the loan agreement. The net balance at March 31, 2015 was $340.8 million, which

12


is net of unamortized discount of $1.5 million. We incurred approximately $11 million in financing costs, of which $9.6 million and $10.2 million are included in deferred financing costs, net on the accompanying condensed consolidated balance sheets as of March 31, 2015 and December 31, 2014, respectively, to be amortized over five years.
Derivative and Hedging Activities
As part of certain lender requirements in connection with the Securitization Loan, we entered into an interest rate cap agreement with an aggregate notional amount of $342.2 million and LIBOR based strike rate equal to 3.12% for the initial two-year term of the Securitization Loan to hedge against interest rate fluctuations. This interest rate cap agreement has been formally designated as a cash flow hedge at inception and will be regularly assessed for effectiveness on an on-going basis. During the three months ended March 31, 2015, our interest rate cap agreement was 100% effective as a cash flow hedge and, as a result, changes in fair value have been classified in accumulated other comprehensive loss. These amounts will subsequently be reclassified into earnings in the period which the hedged transaction affects earnings. The fair value of our interest rate cap agreement is estimated to be approximately $16,000 as of March 31, 2015 and has been included in other assets, net in the accompanying consolidated condensed balance sheets. The interest rate cap is valued using Level 2 observable market-based inputs, including interest rate curves.
7.
Taxes
We have elected to be taxed as a REIT for federal income tax purposes. As a REIT, we are generally not subject to federal income taxes to the extent that we currently distribute all of our taxable income to our stockholders and meet other specific requirements. Management believes the Company has qualified and will continue to qualify as a REIT and therefore, no provision has been made for federal income taxes in the accompanying consolidated financial statements. If we fail to qualify as a REIT in any taxable year, we will be subject to federal and state income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate tax rates, and we may be ineligible to qualify as a REIT for four subsequent tax years. Even if we continue to qualify as a REIT, we may be subject to certain state or local income taxes, and our TRS, which is our taxable REIT subsidiary, will be subject to federal, state and local taxes on its income at regular corporate rates.
Federal and state tax returns filed for 2012 and 2013 are still subject to examination. We believe that we have appropriate support for the income tax positions taken on our tax returns. We determine whether any tax positions taken or expected to be taken meet the "more-likely-than-not" threshold of being sustained by the applicable federal, state or local tax authority. As of March 31, 2015, we concluded that there is no tax liability relating to uncertain income tax positions. Our policy is to recognize interest related to any underpayment of income taxes as interest expense and to recognize any penalties as operating expenses. There was no accrual for interest or penalties at March 31, 2015 or 2014.
8.
Earnings (Loss) Per Share
A reconciliation of our net loss per share is as follows (amounts in thousands, except share and per-share amounts):
 
 
Three Months Ended 
 March 31,
 
 
2015
 
2014
Net loss attributable to common stockholders
 
$
(10,902
)
 
$
(7,669
)
Weighted-average number of shares of common stock outstanding:
 
 
 
 
Basic and diluted
 
32,160,983

 
32,130,733

Net loss per share of common stock, basic and diluted
 
$
(0.34
)
 
$
(0.24
)
For all periods presented, no potentially dilutive securities were included in computing loss per share of common stock as their effect would be anti-dilutive. Potentially dilutive securities excluded were Operating Partnership ("OP") units, vested long-term incentive plan ("LTIP") units, unvested LTIP units, and unvested restricted shares of common stock. The weighted-average number of shares of potentially dilutive securities were as follows:
 
Three Months Ended 
 March 31,
 
2015
 
2014
OP and vested LTIP units
613,318

 
524,941

Unvested LTIP units
511,236

 
520,830

Unvested restricted stock
34,297

 
40,369

Potentially dilutive shares
1,158,851

 
1,086,140


13


9.
Stock Compensation
We recorded stock-based compensation cost as part of general, administrative and other expense in the condensed consolidated statements of operations and are summarized as follows (in thousands):
 
March 31, 2015
 
March 31, 2014
Stock-based compensation costs
$
696

 
$
667

LTIP Units
Service-Based LTIP Units
The following table summarizes information about the service-based LTIP units outstanding as of March 31, 2015:
 
Total Vested
Units
 
Total Unvested
Units
 
Total
Outstanding
Units
 
Weighted-Average
Grant Date Fair
Value (Per Unit)
Balance, December 31, 2014
422,441

 
149,883

 
572,324

 
$
16.67

Granted

 

 

 
$

Vested
16,044

 
(16,044
)
 

 
$
15.78

Converted

 

 

 
$

Canceled

 

 

 
$

Balance, March 31, 2015
438,485

 
133,839

 
572,324

 
$
16.67

Unrecognized compensation cost related to unvested service-based LTIP units totaled approximately $0.9 million as of March 31, 2015, and is expected to be recognized in general, administrative and other expense over a weighted-average period of approximately 1.5 years, subject to the stated vesting conditions.
Market-Based LTIP Units
The following table summarizes information about the market-based LTIP units outstanding as of March 31, 2015:
 
Total Vested
Units
 
Total Unvested
Units
 
Total
Outstanding
Units
 
Weighted-Average
Grant Date Fair
Value (Per Unit)
Balance, December 31, 2014

 
377,230

 
377,230

 
$
6.05

Granted

 

 

 
$

Vested

 

 

 
$

Converted

 

 

 
$

Forfeited

 

 

 
$

Balance, March 31, 2015

 
377,230

 
377,230

 
$
6.05

Total unrecognized compensation cost related to unvested market-based LTIP units totaled approximately $1.1 million as of March 31, 2015, and is expected to be recognized in general, administrative and other expense over a weighted-average period of approximately 2.9 years, subject to stated vesting conditions.
Restricted Stock
The following table summarizes information about the shares of restricted common stock outstanding as of March 31, 2015:
 
Number of
Shares
 
Weighted-Average
Grant Date Fair
Value (Per Share)
Unvested at December 31, 2014
34,297

 
$
20.14

Granted

 
$

Vested

 
$

Canceled

 
$

Unvested at March 31, 2015
34,297

 
$
20.14


14


Total unrecognized compensation cost related to unvested shares of restricted common stock totaled approximately $0.4 million as of March 31, 2015, and is expected to be recognized in general, administrative and other expense over a weighted-average period of approximately 1.3 years, subject to stated vesting conditions.
10.
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The three levels of fair value defined in ASC Topic 820, Fair Value Measurements, are as follows:
Level 1—Valuations based on quoted market prices in active markets for identical assets or liabilities that the reporting entity has the ability to access.
Level 2—Valuations based on quoted market prices for similar assets or liabilities, quoted market prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.
Level 3—Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities, which are typically based on the reporting entity’s own assumptions.
Companies are required to disclose the estimated fair values of all financial instruments, even if they are not carried at their fair value. The fair values of financial instruments are estimates based upon market conditions and perceived risks as of March 31, 2015 and December 31, 2014. These estimates require management’s judgment and may not be indicative of the future fair values of the assets and liabilities.
Our financial instruments include cash and cash equivalents, restricted cash, acquisition deposits, rents and other receivables, accounts payable, accrued expenses, security deposits and prepaid rent. Due to the short-term nature of these financial assets and liabilities, we consider the carrying amounts to approximate fair value.
Our mortgage financings, the Credit Facility, the Notes and the Securitization Loan are also financial instruments, and we estimated their fair value based on market quotes for comparable instruments or discounted cash flow analysis using estimates of the amount and timing of future cash flows, market rates and credit spreads. The estimated fair values of the Credit Facility using Level 2 assumptions approximate the carrying amounts. The estimated fair values of our mortgage financing receivables using Level 3 assumptions approximate the carrying amounts. We have entered into an interest rate cap designated as a cash flow hedge to reduce our exposure to interest rate risk. See Derivative and Hedging Activities in Note 6 for disclosures on the fair value of our interest rate cap.
The fair value of our Notes and the Securitization Loan using Level 2 assumptions is as follows (amounts in thousands):
 
 
March 31, 2015
 
December 31, 2014
 
 
Fair Value
 
Carrying Value
 
Fair Value
 
Carrying Value
Exchangeable Senior Notes (1)
 
$
116,294

 
$
102,898

 
$
116,581

 
$
102,188

Securitization Loan(2)
 
$
340,757

 
$
340,757

 
$
340,675

 
$
340,675

 ______________
(1) The carrying amount of the exchangeable senior notes includes a discount of $12.1 million and $12.8 million at March 31, 2015 and December 31, 2014, respectively.
(2) The fair value of the Securitization Loan approximates carrying value and includes a discount of $1.5 million and $1.6 million at March 31, 2015 and December 31, 2014, respectively.
11.
Transactions With Related Parties
Upon closing our initial private offering, we acquired the proprietary, vertically integrated real estate acquisition and management platform of American Residential Management, Inc. ("ARM"), a company co-owned by our founders, Stephen G. Schmitz, our Chief Executive Officer and Chairman, and Laurie A. Hawkes, our President and Chief Operating Officer, pursuant to a contribution and sale agreement between our Operating Partnership and ARM. As consideration for our acquisition, our Operating Partnership issued 175,000 OP units, valued at $3.5 million, representing a 1.5% limited partnership interest in our Operating Partnership at that time, and we paid approximately $85,000 in cash. The OP units were valued at $20 per unit, equivalent to the offering price per share of our common stock sold in our initial private offering.
In February 2013, our TRS entered into a management agreement directly with ARP Phoenix Fund I, LP ("Phoenix Fund"). The general partner of Phoenix Fund is ARP Phoenix Fund I GP, LLC, which is owned by Mr. Schmitz and Ms. Hawkes. The services our TRS provides to Phoenix Fund include property restoration, leasing and property management

15


and disposition services with respect to the properties owned by Phoenix Fund. Our TRS provides these services to Phoenix Fund for a fee in an amount equal to 6.0% of the gross rental revenue received by Phoenix Fund with respect to the properties managed by our TRS. Property management fees earned under the management agreement with Phoenix Fund are reported in management services (related party) in our condensed consolidated statements of operations.
Accounts receivable of approximately $23,000 and $20,000 due from Phoenix Fund are included in rents and other receivables, net in our condensed consolidated balance sheets at March 31, 2015 and December 31, 2014, respectively.
Phoenix Fund purchased 150,000 shares of our common stock in our initial private offering.
12.
Non-Controlling Interests
Non-controlling common units of our Operating Partnership relate to the interest in our Operating Partnership that is not owned by us and are presented as non-controlling interests in the equity section of our condensed consolidated balance sheets.
Non-controlling common units of our Operating Partnership have essentially the same economic characteristics as shares of our common stock as they share equally in the net income or loss and distributions of our Operating Partnership. Our limited partners have the right to redeem all or part of their non-controlling common units of our Operating Partnership following the one-year anniversary of issuance. At the time of redemption, we have the right to determine whether to redeem the non-controlling common units of our Operating Partnership for cash, based upon the fair value of an equivalent number of shares of our common stock at the time of redemption, or exchange them for unregistered shares of our common stock on a one-for-one basis, subject to adjustment in the event of stock splits, stock dividends, issuance of stock rights, specified extraordinary distribution and similar events. In the event of a termination or liquidation of us and our Operating Partnership, it is expected that in most cases each common unit would be entitled to a liquidating distribution equal to the amount payable with respect to each share of our common stock. As of March 31, 2015, there were 613,485 outstanding non-controlling common units of our Operating Partnership, representing an approximate 1.9% ownership interest in our Operating Partnership. These units are comprised of 175,000 units issued in connection with our acquisition of the assets and management platform from ARM and 438,485 vested LTIP units.
Net income or loss attributable to non-controlling common units of our Operating Partnership is allocated based on their relative ownership percentage of the Operating Partnership during the period. The non-controlling ownership interest percentage is determined by dividing the number of non-controlling common units outstanding by the total of the shares of our common stock and non-controlling units outstanding at the balance sheet date. The issuance or redemption of additional shares of our common stock or common units results in changes to our limited partners’ ownership interest in our Operating Partnership, as well as our net assets. As a result, all equity-related transactions result in an allocation between stockholders’ equity and the non-controlling common units of our Operating Partnership in the condensed consolidated balance sheets to account for any change in ownership percentage during the period. Our limited partners’ weighted-average share of our net loss was 1.9% and 1.6% for the three months ended March 31, 2015 and 2014, respectively.
13.
Commitments and Contingencies
Litigation
From time to time, we are subject to potential liability under various claims and legal actions arising in the ordinary course of business. Liabilities are established for legal claims when payments associated with the claims become probable and the costs can be reasonably estimated. The actual costs of resolving legal claims may be substantially higher or lower than the amounts established for those claims. Based on information currently available, management is not aware of any legal claims that would have a material effect on our condensed consolidated financial statements and therefore no accrual is required as of March 31, 2015.
Homeowners’ Association Fees
Certain of our properties are located in communities that are subject to homeowners’ association ("HOA") fees. The fees are generally billed monthly and subject to annual adjustments. The fees cover the costs of maintaining common areas and are generally paid for by us. HOA fees were approximately $0.7 million and $0.5 million for the three months ended March 31, 2015 and 2014, respectively.
Concentrations
As of March 31, 2015, approximately 56% of our properties were located in Texas, Arizona and Georgia. This concentration may expose us to greater economic risks than if we owned a more geographically dispersed portfolio.

16


Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read together with the consolidated financial statements and related notes included in this quarterly report and with our Annual Report on Form 10-K for the year ended December 31, 2014. This report, including the following Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements based upon our current expectations that involve risks and uncertainties. Actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under "Cautionary Note Regarding Forward-Looking Statements,” as well as the risk factors described in "Item 1A. Risk Factors,” in Part II of this report.
Overview
We are an internally managed real estate company that acquires, owns and manages single-family homes as rental properties. In 2008, our founders, Stephen G. Schmitz, our Chief Executive Officer and Chairman, and Laurie A. Hawkes, our President and Chief Operating Officer and a member of our Board of Directors, identified a unique opportunity to acquire homes at distressed pricing and lease them at attractive rental rates. They subsequently began developing a vertically integrated platform to acquire and manage single-family homes on an institutional scale. We were formed to expand upon our founders’ vision, strategy and platform.
As of March 31, 2015, we owned 9,038 properties in Arizona, California, Colorado, Florida, Georgia, Illinois, Indiana, Nevada, North Carolina, Ohio, South Carolina, Tennessee and Texas with an aggregate investment of $1.35 billion, and we managed an additional 362 properties for Phoenix Fund in Arizona and Nevada.
Our primary business strategy is to acquire, restore, lease and manage single-family homes as well-maintained investment properties to generate attractive risk-adjusted returns over the long-term. We employ a disciplined and focused approach to evaluating acquisition opportunities, considering the mix of rent yield and future home price appreciation potential when selecting a market and investment. Our strategic aggregation of single-family homes provides a strong foundation for creating long-term home price appreciation in our portfolio. We have the infrastructure to acquire large numbers of properties through multiple acquisition channels, including sourcing individual properties through auctions and brokers and purchasing portfolios of properties through brokerages or directly from operators, investors or banks. We restore homes to “rent-ready” condition in an efficient and cost-effective manner, to a standard that we believe appeals to our target tenants’ preferences, enabling us to attract qualified tenants and provide a high level of service to retain our tenants. We believe that our vertically integrated acquisition and management platform is critical to executing our strategy.
In addition to our primary business strategy of acquiring, restoring, leasing and managing single-family homes, we have a private mortgage financing business that generates attractive returns on invested capital and provides us access to acquisition opportunities and valuable market data. As of March 31, 2015, our private mortgage portfolio had an aggregate outstanding principal balance of $19.4 million, a weighted-average interest rate of 12.0% per annum and a weighted-average remaining term of 83 days.
We plan to continue acquiring single-family homes and other residential real estate related assets in markets that satisfy our investment criteria. We conduct substantially all of our operations through our Operating Partnership, in which we own a 96.7% interest, including the sole 0.4% general partnership interest that we hold through a subsidiary as of March 31, 2015, after giving effect to vested and unvested LTIP awards.
We have elected to be taxed as a REIT for federal income tax purposes. As a REIT, we are generally not subject to federal income taxes to the extent that we currently distribute all of our taxable income to our stockholders and meet other specific requirements. If we fail to qualify as a REIT in any taxable year, we will be subject to federal and state income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate tax rates, and we may be ineligible to qualify as a REIT for four subsequent tax years. Even if we continue to qualify as a REIT, we may be subject to certain state or local income taxes, and our TRS, which is our taxable REIT subsidiary, will be subject to federal, state and local taxes on its income at regular corporate rates.
Industry Outlook
Residential housing is the largest real estate asset class in the United States with a size of approximately $20.6 trillion, according to the 2014 fourth quarter Federal Reserve Flow of Funds release. Historically, according to the U.S. Census Bureau, approximately one-third of this asset class has been rented and single-family homes currently comprise roughly one-third of all residential rental housing.
We believe that an over-correction in residential housing prices in certain housing markets from their historic peak occurred as a result of the housing and mortgage crisis in 2008, creating the potential for home price appreciation. We also believe that there continues to be a large supply of single-family homes that we can acquire at favorable pricing.

17


Property Portfolio
The following table presents summary statistics of our single-family homes, including both our self-managed homes and local operator homes, by metropolitan statistical area ("MSA") and metropolitan division ("metro division") as of March 31, 2015.
Total Portfolio of Single-Family Homes—Summary Statistics
March 31, 2015
(dollar amounts in thousands, except average monthly rent)
(unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Leased Homes
MSA/Metro Division
 
 Number of Homes
 
 Average Purchase Price Per Home(1)
 
 Average Capital Expenditures Per Home(2)
 
 Average Investment Per Home(3)
 
 Aggregate Investment (thousands)(4)
 
 Percentage Leased(5)
 
 Average Age (years)
 
 Average Size
(square feet)
 
 Average Monthly Rent(6)
 
Annual Average Rent as a Percentage of Average Investment(7)
Self-Managed Portfolio
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Phoenix, AZ
 
1,380

 
$
138,109

 
$
9,349

 
$
147,458

 
$
203,492

 
97.5
%
 
17

 
1,713

 
$
1,044

 
8.5
%
Dallas-Fort Worth, TX
 
1,119

 
$
153,478

 
$
12,634

 
$
166,112

 
$
185,879

 
88.9
%
 
11

 
2,103

 
$
1,507

 
11.0
%
Houston, TX
 
1,106

 
$
141,260

 
$
7,981

 
$
149,241

 
$
165,061

 
90.2
%
 
7

 
1,934

 
$
1,419

 
11.4
%
Atlanta, GA
 
1,089

 
$
136,919

 
$
14,622

 
$
151,541

 
$
165,028

 
79.0
%
 
16

 
2,080

 
$
1,258

 
10.2
%
Nashville, TN
 
833

 
$
166,175

 
$
12,278

 
$
178,453

 
$
148,651

 
84.3
%
 
11

 
1,864

 
$
1,433

 
9.7
%
Florida
 
623

 
$
127,630

 
$
13,943

 
$
141,573

 
$
88,200

 
86.7
%
 
14

 
1,726

 
$
1,184

 
10.2
%
Other Texas
 
375

 
$
166,908

 
$
12,260

 
$
179,168

 
$
67,188

 
88.8
%
 
10

 
1,978

 
$
1,630

 
11.0
%
Charlotte, NC-SC
 
379

 
$
153,571

 
$
8,347

 
$
161,918

 
$
61,367

 
76.5
%
 
10

 
2,047

 
$
1,248

 
9.6
%
Inland Empire, CA
 
213

 
$
156,562

 
$
24,494

 
$
181,056

 
$
38,565

 
97.2
%
 
16

 
1,915

 
$
1,431

 
9.5
%
Raleigh, NC
 
241

 
$
145,303

 
$
8,564

 
$
153,867

 
$
37,082

 
82.6
%
 
9

 
1,746

 
$
1,233

 
9.8
%
Indianapolis, IN
 
455

 
$
65,441

 
$
10,675

 
$
76,116

 
$
34,633

 
91.0
%
 
50

 
1,351

 
$
802

 
12.5
%
Winston-Salem, NC
 
234

 
$
122,619

 
$
4,005

 
$
126,624

 
$
29,630

 
85.5
%
 
12

 
1,426

 
$
1,106

 
10.6
%
Other California
 
80

 
$
110,754

 
$
22,159

 
$
132,913

 
$
10,633

 
98.8
%
 
36

 
1,335

 
$
1,068

 
9.7
%
Las Vegas, NV
 
68

 
$
97,738

 
$
12,938

 
$
110,676

 
$
7,526

 
97.1
%
 
15

 
1,553

 
$
1,055

 
11.3
%
Other MSAs/Metro Divisions
 
249

 
$
140,949

 
$
8,280

 
$
149,229

 
$
37,158

 
87.6
%
 
10

 
1,639

 
$
1,248

 
10.2
%
Self-Managed Portfolio Total/Weighted Average
 
8,444

 
$
140,199

 
$
11,399

 
$
151,598

 
$
1,280,093

 
88.2
%
 
15

 
1,855

 
$
1,272

 
10.2
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Local Operator Portfolio
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Chicago, IL
 
511

 
 
 
 
 
$
130,705

 
$
66,790

 
100.0
%
 
55

 
1,406

 
$
794

 
7.3
%
Indianapolis, IN
 
83

 
 
 
 
 
$
47,302

 
$
3,926

 
100.0
%
 
59

 
1,160

 
$
354

 
9.0
%
Local Operator Portfolio Total/Weighted Average
 
594

 
 
 
 
 
$
119,051

 
$
70,716

 
100.0
%
 
56

 
1,372

 
$
733

 
7.4
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Portfolio
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Portfolio Total/Weighted Average
 
9,038

 
 
 
 
 
$
149,459

 
$
1,350,809

 
89.0
%
 
17

 
1,823

 
$
1,232

 
 
______________
(1)
Average purchase price includes acquisition costs.

18


(2)
Represents average capital expenditures per home as of March 31, 2015. Does not include additional expected or future capital expenditures.
(3)
For self-managed homes, represents average purchase price plus average capital expenditures. For homes leased to our local operators, represents purchase price paid by us for the portfolio divided by the number of homes in the portfolio and does not include past, expected or budgeted general and administrative expenses associated with ongoing monitoring activities of our investment. The local operator is obligated to pay for all taxes, insurance, other expenses and capital expenditures required for the management, operation and maintenance of the properties. If a local operator defaulted on its contractual obligations to pay any of the foregoing expenses, we could incur unexpected significant costs related to our investment.
(4)
Represents purchase price including acquisition costs and purchase price allocated to lease intangibles and acquisition costs expensed, if any, as incurred for homes acquired with an existing lease or homes acquired in portfolios comprised of properties substantially leased, and recorded as a business combination.
(5)
We classify homes leased to our local operators as 100% leased, because each local operator is obligated to pay us 100% of the base rent specified in the applicable lease irrespective of whether or not the homes are occupied by residential sub-tenants. This does not mean that 100% of the homes leased to local operators are occupied by residential sub-tenants. If a local operator is unable to lease a material number of the homes it leases from us to residential sub-tenants, it may adversely affect the operator’s ability to pay rent to us under the lease.
(6)
For self-managed homes, represents the average monthly rent per leased home. For homes leased to our local operators, represents the initial annual base rent payable to us by the local operator pursuant to the portfolio lease divided by 12 and then divided by the number of homes included in the lease. Average monthly rent for leased homes may not be indicative of average rents we may achieve on our vacant homes.
(7)
For self-managed homes, represents annualized average monthly rent per leased home as a percentage of our average investment (average purchase price per home plus average capital expenditures) per leased home. Does not include a provision for payment of ongoing property expenses. Accordingly, it should not be interpreted as a measure of profitability, and its utility in evaluating the Company’s business is limited. Average annual rent for leased homes may not be indicative of average rents we may achieve on our vacant homes.


19


Stabilized Properties
We acquire both vacant homes and homes subject to existing leases. When we acquire a property that is not leased, we must possess, restore, market and lease the property before it becomes a revenue generating asset. We refer to this process as property stabilization. Stabilized properties include properties in which we have (i) completed restorations and the property has been leased for the first time, (ii) completed restorations and the property has been listed for the first time for a period of greater than 90 days and (iii) acquired a property with an existing lease. Properties acquired with existing leases may require future renovations to restore a property to our standards prior to re-leasing. We expect that stabilized properties provide an indication of how our portfolio will perform over the long-term.
The following table presents summary statistics of our portfolio of stabilized single-family homes, including our self-managed and our local operator homes, by MSA and metro division as of March 31, 2015.

Total Portfolio of Stabilized(1) Single-Family Homes—Summary Statistics
March 31, 2015
(dollar amounts in thousands)
(unaudited)
MSA/Metro Division
 
 Number of Homes
 
 Average Investment Per Home (2)
 
 Homes Leased
 
 Homes Vacant (3)
 
 Percentage Leased
Self-Managed Portfolio
 
 
 
 
 
 
 
 
 
 
Phoenix, AZ
 
1,379

 
$
147,506

 
1,345

 
34

 
97.5
%
Houston, TX
 
1,101

 
$
149,157

 
998

 
103

 
90.6
%
Dallas-Fort Worth, TX
 
1,074

 
$
165,461

 
995

 
79

 
92.6
%
Atlanta, GA
 
942

 
$
148,629

 
860

 
82

 
91.3
%
Nashville, TN
 
751

 
$
176,737

 
702

 
49

 
93.5
%
Florida
 
589

 
$
139,452

 
540

 
49

 
91.7
%
Indianapolis, IN
 
444

 
$
76,614

 
414

 
30

 
93.2
%
Other Texas
 
371

 
$
178,815

 
333

 
38

 
89.8
%
Charlotte, NC-SC
 
336

 
$
159,242

 
290

 
46

 
86.3
%
Winston-Salem, NC
 
234

 
$
126,625

 
200

 
34

 
85.5
%
Raleigh, NC
 
231

 
$
152,268

 
199

 
32

 
86.1
%
Inland Empire, CA
 
213

 
$
181,055

 
207

 
6

 
97.2
%
Other California
 
80

 
$
132,911

 
79

 
1

 
98.8
%
Las Vegas, NV
 
68

 
$
110,676

 
66

 
2

 
97.1
%
Other MSAs/Metro Divisions
 
246

 
$
149,069

 
218

 
28

 
88.6
%
Self-Managed Portfolio Total/Weighted Average
 
8,059

 
$
150,425

 
7,446

 
613

 
92.4
%
 
 
 
 
 
 
 
 
 
 
 
Local Operator Portfolio
 
 
 
 
 
 
 
 
 
 
Chicago, IL
 
511

 
$
130,705

 
511

 

 
100.0
%
Indianapolis, IN
 
83

 
$
47,302

 
83

 

 
100.0
%
Local Operator Portfolio Total/Weighted Average
 
594

 
$
119,051

 
594

 

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
Total Portfolio
 
 
 
 
 
 
 
 
 
 
Total Portfolio Total/Weighted Average
 
8,653

 
$
148,271

 
8,040

 
613

 
92.9
%
______________
(1)
Properties are considered stabilized when renovations have been completed and the properties have been leased or available for rent for a period of greater than 90 days. Properties with in-place leases at the date of acquisition are also considered stabilized even though these properties have not been renovated by us and may require future renovations to meet our standards.
(2)
Represents average purchase price plus average capital expenditures.
(3)
As of March 31, 2015, 548 homes were available for rent and 65 homes were undergoing renovation.

20


Highlights of First Quarter of 2015
Leased Rate, Rent and Retention
As of March 31, 2015, we reached a 93% leased rate on stabilized properties, up from 92% as of December 31, 2014, and increased the leased rate on the total portfolio to 89%, up from 81% as of December 31, 2014. We also achieved rent increases averaging 3.8% on renewals during the quarter with an overall resident retention rate of 72%.
Acquisitions
From January 1, 2015 to March 31, 2015, we closed on prior commitments to acquire 149 single-family homes, of which 89 are in Tennessee, 28 are in Georgia, 26 are in Texas, 4 are in North Carolina and 2 are in Florida and incurred renovation costs on our acquired homes and existing portfolio, for a total capital investment of approximately $38.8 million. During the quarter, 4 properties were sold in Florida. As of March 31, 2015, we had no homes under contract.
Extension of Credit Facility
In January 2015, we exercised our option to extend the maturity date of our Credit Facility by one year to January 2016, pursuant to the terms of the Credit Facility.
Factors Expected to Affect Our Results and Financial Condition
Our results of operations and financial condition are affected by numerous factors, many of which are beyond our control. Key factors that impact our results of operations and financial condition include our pace of acquisitions and ability to deploy our capital, the amount of time and cost required to stabilize newly acquired properties and convert them to revenue generating assets, rental rates, occupancy levels, rates of tenant turnover, the success of our local operators, our expense ratios and capital structure.
Property Acquisitions
We have aggressively but prudently grown our portfolio of single-family homes. Our ability to identify and acquire single-family homes that meet our investment criteria is impacted by home prices in our markets, the inventory of properties available for sale through our acquisition channels and competition for our target assets.
Property Stabilization
The time and cost involved in stabilizing our newly acquired properties impacts our financial performance and is affected by the amount of time it takes us to gain possession of a property, the amount of time and cost associated with property restoration and the amount of time it takes to market and lease the property. The possession of each property we acquire can be delayed for a multitude of reasons beyond our control, including applicable statutory rights of redemption, rescission rights and legal challenges to our ownership or unauthorized occupants living in the property at the time of purchase. As part of our underwriting criteria, we typically estimate restoration costs to be 5% to 15% of the purchase price, although actual costs may vary significantly based on market, age and condition of the property and other factors. The time to restore a newly acquired property can vary significantly among properties for several reasons, including the channel through which the property was acquired, the age and condition of the property and whether the property was vacant when we acquired it. Similarly, the time to market and lease a property is driven by local demand, our marketing techniques and the size of our available inventory. We actively monitor these measures and trends.
We anticipate that, on average, the stabilization period for each non-leased property we acquire will range from 90 to 180 days. As of March 31, 2015, we had 8,653 properties owned in our portfolio of stabilized single-family homes, of which 92.9% were leased. We acquire both vacant homes and homes subject to existing leases. Homes acquired with existing leases may require future renovations to restore a property to our standards prior to re-leasing, which will impact the turnover time and may not be fully indicative of how we expect our stabilized portfolio to perform over time. We continually track key metrics such as average time to obtain possession, restore and lease our properties.
Revenue
Our revenue comes primarily from rents collected under lease agreements for our properties. These include both short-term leases that we enter into directly with tenants, which typically have a term of one year, and longer-term net leases, which typically have a term of five to ten years, that we enter into with local operators who sub-lease the properties to sub-tenants. For the three months ended March 31, 2015, approximately 96.9% of our total revenue was attributable to rental activity, 0.3% was attributable to management services and the remaining 2.8% was attributable to interest earned on our portfolio of private mortgage financings and on cash balances. Over time, we expect most of our revenue to be derived from leasing our properties.

21


The most important drivers of revenue (aside from portfolio growth) are rental and occupancy rates. Our rental and occupancy rates are affected by macroeconomic factors and local and property-level factors, including, market conditions, seasonality, tenant defaults, the amount of time that it takes us to restore properties upon acquisition and the amount of time it takes us to restore and re-lease vacant properties.
In each of our markets, we monitor a number of factors that may impact the single-family real estate market and our tenants’ finances, including the unemployment rate, household formation and net population growth, income growth, size and make-up of existing and anticipated housing stock, prevailing market rental and mortgage rates, rental vacancies and credit availability. Growth in demand for rental housing in excess of the growth of rental housing supply, among other factors, will generally drive higher occupancy and rental rates. Negative trends in our markets with respect to these metrics or others could adversely impact our rental revenue. The growth of our portfolio has been significant during the past 12 months, increasing 34% to 9,038 homes in 13 states.
We expect that the occupancy of our portfolio will increase as the proportion of recently acquired properties declines relative to the size of our entire portfolio. Nevertheless, in the near term, our ability to drive revenue growth will depend in large part on our ability to efficiently restore and lease newly acquired properties, maintain occupancy in the rest of our portfolio and acquire additional properties.
The following table summarizes portfolio and operating metrics as of March 31, 2015 and December 31, 2014.
 
 
As of March 31, 2015
 
As of December 31, 2014
 
 
Number of Homes
 
% Leased
 
Number of Homes
 
% Leased
Portfolio of single-family homes
 
 
 
 
 
 
 

Self-managed (1)
 
8,444

 
88.2
%
 
8,299

 
79.3
%
Local operator(2)
 
594

 
100.0
%
 
594

 
100.0
%
Total properties
 
9,038

 
89.0
%
 
8,893

 
80.7
%
 
 
 
 
 
 
 
 
 
Portfolio of stabilized single-family homes (3)
 
 
 
 
 
 
 
 
Self-managed (1)
 
8,059

 
92.4
%
 
7,247

 
90.8
%
Local operator(2)
 
594

 
100.0
%
 
594

 
100.0
%
Total properties
 
8,653

 
92.9
%
 
7,841

 
91.5
%
______________
(1)
The amount presented represents the properties that were leased as of the end of the period.
(2)
We classify homes leased to our local operators as 100% leased, because each local operator is obligated to pay us 100% of the base rent specified in the applicable lease irrespective of whether or not the homes are occupied by residential sub-tenants. This does not mean that 100% of the homes leased to local operators are occupied by residential sub-tenants. If a local operator is unable to lease a material portion of the homes it leases from us to residential sub-tenants, it may adversely affect the operator’s ability to pay rent to us under the lease.
(3)
Properties are considered stabilized when renovations have been completed and the properties have been leased or available for rent for a period of greater than 90 days. Properties with in-place leases at the date of acquisition are also considered stabilized even though these properties have not been renovated and may require future renovations to meet our standards.

22


The following table summarizes our acquisition activity by quarter from December 31, 2013 through March 31, 2015.
 
 
 
Three Months Ended
 
 
Total Owned Properties as of March 31, 2015
 
March 31, 2015
 
December 31, 2014
 
September 30, 2014
 
June 30, 2014
 
March 31, 2014
 
Total Owned Properties as of December 31, 2013
Portfolio of self-managed single-family homes
 
 
 
 
 
 
 
 
 
 
 
 
 
Homes acquired

 
149

 
688

 
1,019

 
443

 
674

 
 
Homes sold

 
(4
)
 
(2
)
 
(1
)
 

 

 
 
Total self-managed properties
8,444

 
145

 
686

 
1,018

 
443

 
674

 
5,478

Portfolio of local operator single-family homes
 
 
 
 
 
 
 
 
 
 
 
 
 
Homes acquired

 

 

 

 

 
15

 
 
Homes sold

 

 
(16
)
 

 

 

 
 
Total local operator properties
594

 

 
(16
)
 

 

 
15

 
595

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total properties
9,038

 
145

 
670

 
1,018

 
443

 
689

 
6,073


Expenses
Our ability to acquire, restore, lease and maintain our portfolio in a cost-effective manner is a key driver of our operating performance. We monitor the following categories of expenses that we believe most significantly affect our results of operations.
Property-Related Expenses
Once we acquire and restore a self-managed property, we have ongoing property-related expenses, including HOA fees (when applicable), real estate taxes, insurance, ongoing costs to market and maintain the property and expenses associated with tenant turnover. 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, including insurance costs and property management costs, will account for a smaller percentage of our revenue as we expand our portfolio, achieve larger scale and negotiate volume discounts with third-party service providers and vendors. For properties leased to local operators, we have no day-to-day operating responsibilities or property-related expenses, because such responsibilities and expenses are obligations of the operators pursuant to the terms of the leases. As of March 31, 2015, 594 of our properties were managed by two local operators.
Property Management
We provide all property management functions for our self-managed properties. For the properties we manage, these functions include: securing the property upon acquisition; coordinating with the utilities; controlling the restoration process; managing the leasing process; communicating with tenants; collecting rents; conducting periodic inspections, routine property maintenance and repairs; paying HOA fees; interfacing with vendors and contractors; and accounting and compliance.
By performing these functions internally for our self-managed properties, we believe that we establish improved communications, foster direct relationships with tenants, gain tighter control over the quality and cost of restorations and property maintenance, gain increased attention and focus of third-party leasing agents and improve the timeliness of rental receipts.
Overhead
We will incur expenses associated with our vertically integrated real estate acquisition and management platform, such as compensation expense and other general and administrative costs. In the near term, as our business grows, we expect to hire additional employees, which will increase our general and administrative costs. In addition, we will incur additional costs related to operating as a public company due to increased legal, insurance, accounting and other expenses related to corporate governance, SEC reporting and other compliance matters. Over time, we expect these costs to decline as a percentage of revenue as our portfolio grows.

23


Based on our experience, we believe that the property-related expenses for vacancy, bad debt, property taxes, insurance, HOA fees, repairs and maintenance and capital expenditure reserves and the costs for property management services, such as managing the process of restoring, marketing, leasing and maintaining our stabilized single-family homes, will average between 40% and 45% of gross rental revenue. Variations in asset level returns will be due to a variety of factors, including location, age and condition of the property and the efficiency of our property management services.
Results of Operations for the Three Months Ended March 31, 2015 Compared to the Three Months Ended March 31, 2014
We believe our financial results during the three months ended March 31, 2015 are not representative of our future financial results. As we have been experiencing rapid growth since the commencement of our investment activities, we have a greater percentage of our portfolio invested in assets in the process of stabilization than we would expect to have as our company continues to mature. Newly acquired properties that are not leased at the time of acquisition will not begin generating revenue during this process of stabilization to offset fixed expenses incurred and, therefore, will reduce our overall financial performance in the near term. Accordingly, our operating margin has an opportunity to improve as vacant properties in our self-managed portfolio are leased and begin generating rental revenue. The following are our results of operations for the three months ended March 31, 2015 and 2014:
Income Statement Data
(amounts in thousands)
(unaudited)
 
Three Months Ended 
 March 31,
 
$ Change
 
% Change
 
2015
 
2014
 
 
 
 
Revenue:
 
 
 
 
 
 
 
Rental revenue
$
26,642

 
$
15,930

 
$
10,712

 
67.2
 %
Management services (related party)
68

 
113

 
(45
)
 
(39.8
)%
Interest and other
782

 
1,411

 
(629
)
 
(44.6
)%
Total revenue
27,492

 
17,454

 
10,038

 
57.5
 %
Expenses:
 
 
 
 
 
 
 
Property operating and maintenance
6,207

 
4,146

 
2,061

 
49.7
 %
Real estate taxes
5,009

 
3,111

 
1,898

 
61.0
 %
Homeowners’ association fees
658

 
460

 
198

 
43.0
 %
Acquisition
57

 
67

 
(10
)
 
(14.9
)%
Depreciation and amortization
15,145

 
9,464

 
5,681

 
60.0
 %
General, administrative and other
4,220

 
3,720

 
500

 
13.4
 %
Interest
7,316

 
4,230

 
3,086

 
73.0
 %
Total expenses
38,612

 
25,198

 
13,414

 
53.2
 %
Loss from continuing operations before equity in net (loss) income of unconsolidated ventures
(11,120
)
 
(7,744
)
 
(3,376
)
 
43.6
 %
Equity in net income (loss) of unconsolidated ventures
10

 
(50
)
 
60

 
(120.0
)%
Net loss
(11,110
)
 
(7,794
)
 
(3,316
)
 
42.5
 %
Net loss attributable to non-controlling interests
208

 
125

 
83

 
66.4
 %
Net loss attributable to common stockholders
$
(10,902
)
 
$
(7,669
)
 
$
(3,233
)
 
42.2
 %
Rental Revenue
Rental revenue includes rental revenue from our residential properties, application fees and lease termination fees. Our rental revenue of approximately $26.6 million for the three months ended March 31, 2015 was comprised of approximately $25.3 million of rental revenue from self-managed properties and approximately $1.4 million of revenue from local operator properties. As of March 31, 2015, approximately 89.0% of our properties were leased. Rental revenue for the three months ended March 31, 2014 was $15.9 million, consisting of approximately $14.6 million from self managed properties and $1.4 million from local operator properties. The increase in total revenue is primarily attributable to growth in our real estate portfolio from 6,762 homes to 9,038 homes as of March 31, 2014 and 2015, respectively, and higher rental income generated from the leases of an additional 2,540 homes.


24


Management Services Revenue
Management services revenue was $0.1 million for each of the three months ended March 31, 2015 and 2014 for income from property restoration, leasing and property management and disposition services provided to Phoenix Fund, a related party, under a management agreement between Phoenix Fund and our TRS.
Interest and Other Revenue
Interest and other revenue was $0.8 million and $1.4 million for the three months ended March 31, 2015 and 2014, respectively, and includes interest income earned on private mortgage financings and interest income earned on cash balances held with financial institutions. The decrease of $0.6 million in interest and other revenue is primarily due to the decrease in our mortgage portfolio balance.
Property Operating and Maintenance
Property operating and maintenance expenses were $6.2 million and $4.1 million for the three months ended March 31, 2015 and 2014, respectively, and include all direct and indirect costs related to operating our residential properties, including management personnel, insurance, utilities, landscaping and general repairs and maintenance, other than real estate taxes and HOA fees, which are presented separately in our unaudited condensed consolidated statement of operations. The increase of $2.1 million in property operating and maintenance expenses is primarily attributable to the growth in our real estate portfolio.
Real Estate Taxes
Real estate taxes were $5.0 million and $3.1 million for the three months ended March 31, 2015 and 2014, respectively. Upon acquisition of a home, its real estate taxes are set based upon municipal and state laws. These costs generally remain constant throughout the year and have little variation. Because these expenses are relatively fixed during each year, our operating margin has an opportunity to improve as vacant properties in our self-managed portfolio are leased and begin generating rental revenue. In subsequent years, real estate taxes will fluctuate based on changes in municipal and state real estate tax rates and the number of homes in our portfolio. The increase of $1.9 million in real estate taxes is primarily attributable to the growth in our real estate portfolio.
Homeowners’ Association Fees
HOA fees were $0.7 million and $0.5 million for the three months ended March 31, 2015 and 2014, respectively. Like real estate taxes, these fees are determined upon each property’s acquisition and generally remain fixed thereafter based upon the existing HOA agreements. The increase of $0.2 million in HOA fees is primarily attributable to the growth in our real estate portfolio.
Acquisition
Acquisition expenses were $0.1 million for both the three months ended March 31, 2015 and 2014, respectively. These expenses are primarily transaction costs incurred in connection with the acquisition of properties with existing leases, including, but not limited to, payments for property inspections, closing costs, title insurance, transfer taxes, recording fees and broker commissions. For properties that are leased at the time of acquisition, these costs are expensed, rather than capitalized as a component of the acquisition cost (which is the accounting treatment of these costs for properties that are vacant at the time of acquisition).
Depreciation and Amortization
Depreciation and amortization includes depreciation expense on our real estate portfolio using the straight-line method over the estimated useful lives of the respective assets, ranging from 5 to 27.5 years, from the date of acquisition. Depreciation and amortization also includes amortization expense related to in-place lease intangibles, deferred leasing costs and other direct costs capitalized associated with leasing our properties, amortized over the remaining term of the related leases. The increase in depreciation and amortization is primarily attributable to the growth in our real estate portfolio. The following table summarizes our depreciation and amortization expense (amounts in thousands):

25


 
Three Months Ended March 31,
 
2015
 
2014
Depreciation of real estate portfolio
$
13,041

 
$
7,938

Depreciation of other assets
284

 
172

Amortization of in-place lease intangibles and other direct costs
1,820

 
1,354

Total depreciation and amortization
$
15,145

 
$
9,464

General, Administrative and Other
General, administrative and other expense was $4.2 million and $3.7 million for the three months ended March 31, 2015 and 2014, respectively. These expenses include payroll expense, stock-based compensation expense, professional fees, insurance expense and office expenses. The increase of $0.5 million in general, administrative and other expense was primarily attributable to additional headcount and overhead costs to support the growth and size of our real estate portfolio operations.
Interest Expense
Interest expense includes interest on outstanding debt, non-utilization fees for unused portions of our Credit Facility, amortization of deferred financing costs incurred in connection with the issuance of our outstanding debt, non-cash charges related to the accretion of the discounts on the exchangeable senior notes and the Securitization Loan, net of amounts capitalized during the restoration period on newly acquired properties. Interest expense was $7.3 million and $4.2 million for the three months ended March 31, 2015 and 2014, respectively, an increase of $3.1 million. The increase in interest expense is primarily due to higher average outstanding debt balances from an increase in borrowings under the Credit Facility and the issuance of the Securitization Loan in August 2014 to fund our acquisition activities.
Critical Accounting Policies and Estimates
Our discussion and analysis of our historical financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make judgments, estimates and assumptions that may affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates. A summary of critical accounting policies is included in our Annual Report on Form 10-K for the year ended December 31, 2014 under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations". There have been no significant changes to our policies in 2015.
Recent Accounting Pronouncements
See Note 2 in the accompanying notes to unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
Liquidity and Capital Resources
Liquidity is a measure of our ability to meet potential cash requirements, maintain our assets, fund our operations and make distributions to our stockholders and other general business needs. Our liquidity, to a certain extent, is subject to general economic, financial, competitive and other factors that are beyond our control. Our near-term liquidity requirements consist primarily of purchasing our target assets, restoring and leasing properties and funding our operations.
Our long-term liquidity needs consist primarily of funds necessary to pay for the acquisition, restoration and maintenance of properties, HOA fees, real estate taxes, non-recurring capital expenditures, interest and principal payments on incurred indebtedness, payment of quarterly distributions to our stockholders to the extent declared by our Board of Directors and general and administrative expenses. We expect to incur between 5% and 15% of the total purchase price of vacant homes acquired on restorations in order to prepare the acquired home for rental activities. The nature of our business, our growth plans and the requirement that we distribute at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain, to our stockholders, may cause us to have substantial liquidity needs over the long-term, although we have not had any taxable income to date. We will seek to satisfy our long-term liquidity needs through cash flow from operations, long-term secured and unsecured indebtedness, the issuance of debt and equity securities, including OP units, property dispositions and joint venture transactions. We have financed our operations and acquisitions to date through the issuance of equity securities, the Notes, the Securitization Loan and borrowings under the Credit Facility. We expect to meet our operating liquidity requirements generally through cash on hand and cash provided by operations (as we lease acquired single-family homes). We anticipate that cash on hand, cash provided by operations and borrowings under the Credit Facility will be sufficient to meet our liquidity requirements for at least the next 12 months. Our assets are illiquid by

26


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.
Our liquidity and capital resources as of March 31, 2015 consisted of cash and cash equivalents of $23.1 million.
As of March 31, 2015, $350.0 million was outstanding under the Credit Facility, with remaining availability of $125.3 million. In the future, we expect to finance our operations, in part, with borrowings under the Credit Facility and with various other types of indebtedness. We may raise additional capital in the future through the sale of shares of our capital stock.
To date, we have not declared any distributions. To qualify as a REIT for federal income tax purposes, we are required to distribute annually at least 90% of our REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and to pay tax at regular corporate rates to the extent that we annually distribute less than 100% of our net taxable income. Subject to the requirements of the Maryland General Corporation Law ("MGCL"), we intend to pay quarterly dividends to our stockholders, if and to the extent authorized by our Board of Directors, which in the aggregate will approximately equal our REIT taxable income in the relevant year. As of March 31, 2015, no dividends have been declared.
Operating Activities
Cash from operating activities is primarily dependent upon the number of owned properties, occupancy level of our portfolio, the rental rates specified in our leases, the collectability of rent, the interest rates specified in our portfolio of private mortgage financings and the level of our operating expenses and general and administrative costs. Cash provided by operating activities for the three months ended March 31, 2015 decreased $8.4 million to $(1.3) million, compared to cash provided by operating activities for the three months ended March 31, 2014 of $7.1 million. The decrease is primarily attributable to the decrease in cash provided by working capital due to the timing of operating cost payments and an increase in our restricted cash contractually required under the terms of our Securitization Loan. The decrease was partially offset by an increase in operating cash due to the increase in the size of our real estate portfolio, increase in the aggregate number of homes leased and increase in rents on new leases and lease renewals.
Investing Activities
Cash used in investing activities for the three months ended March 31, 2015 was $34.5 million and was primarily the result of property acquisitions and renovations on newly acquired properties. We utilized $26.6 million for property acquisitions, including the purchase price and the value of any in-place leases, $12.6 million in capital improvements. The average purchase price for newly acquired properties was approximately $180,000 for acquisitions that occurred in the three months ended March 31, 2015.
We invested $1.2 million in mortgage financings, offset by $2.8 million in repayments of mortgage financings.
Cash used in investing activities for the three months ended March 31, 2014 was $114.4 million, primarily due to property acquisitions and renovations on newly acquired properties offset by repayments of mortgage financings.
Financing Activities
Cash provided by financing activities for the three months ended March 31, 2015 was $37.7 million and was primarily attributable to borrowings of $39.0 million under the Credit Facility to fund acquisition activities, offset by $1.3 million paid in deferred financing costs.
Cash provided by financing activities for the three months ended March 31, 2014 of $133.8 million was primarily attributable to net borrowings of $134.0 million under the Credit Facility to fund acquisition activities.
Off-Balance Sheet Arrangements
We have no obligations, assets or liabilities which would be considered off-balance sheet arrangements. We have not participated in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements.
Contractual Obligations
The following table provides information with respect to our commitments as of March 31, 2015, including any guaranteed or minimum commitments under contractual obligations (amounts in thousands).

27


 
 
Payment due by period
 
 
Total
 
2015
 
2016-2017
 
2018-2019
 
After 2019
Debt obligations(1)
 
$
807,241

 
$

 
$
350,000

 
$
457,241

 
$

Interest payment obligations(2)
 
48,826

 
9,279

 
23,068

 
16,479

 

Operating lease obligations(3)
 
3,105

 
628

 
1,638

 
839

 

Total
 
$
859,172

 
$
9,907

 
$
374,706

 
$
474,559

 
$

 ______________
(1)
Represents aggregate principal amounts outstanding under the Credit Facility, the Exchangeable Senior Notes and the Securitization Loan. The Notes and Securitization Loan are recorded on the condensed consolidated balance sheet net of discount of $12.1 million and $1.5 million, respectively, as of March 31, 2015 (See Note 6). The Securitization Loan matures September 2016, with three, 12-month extension options. We assume we will exercise the Securitization Loan options to the fully extended maturity.
(2)
Interest payment obligations were calculated using interest rates applicable as of March 31, 2015.
(3)
Includes operating leases for office space in Scottsdale and Peoria, Arizona; Atlanta, Georgia; Northbrook, Illinois and Dallas, Texas.
Funds From Operations
The following is a reconciliation of net loss (which we believe is the most comparable GAAP measure) to funds from operations ("FFO"). Also presented is information regarding the weighted-average number of shares of our common stock outstanding used for the basic and diluted computation per share (amounts in thousands, expect share and per-share amounts):
 
 
Three Months Ended 
 March 31,
 
 
2015

2014
Net loss
 
$
(11,110
)

$
(7,794
)
Add: Depreciation and amortization of real estate assets
 
14,861


9,292

        Less: Gain on sale of real estate
 
(40
)
 

FFO
 
$
3,711


$
1,498

FFO attributable to common stockholders (1)
 
$
3,642


$
1,474

FFO per share of common stock
 
 
 
 
Basic
 
$
0.11

 
$
0.05

Diluted(2)
 
$
0.11

 
$
0.05

Weighted-average number of shares of common stock outstanding:
 



Basic
 
32,160,983

 
32,130,733

Diluted (2)
 
32,850,721

 
32,755,110

______________
(1)
Based on a weighted-average interest in our operating partnership of approximately 98.13% and 98.39% for the three months ended March 31, 2015 and 2014, respectively.
(2)
Assumes the issuance of potentially issuable shares unless the result would be anti-dilutive.
FFO is a widely recognized measure of REIT performance. We calculate FFO as defined by the National Association of Real Estate Investment Trusts ("NAREIT"). FFO represents net income (loss) (as computed in accordance with GAAP), excluding gains from disposition of property (but including impairments and provisions for losses on property held for sale), plus real estate-related depreciation and amortization (including capitalized leasing costs).
Management uses FFO as a supplemental performance measure because, in excluding real estate-related depreciation and amortization and gains from property dispositions, it accounts for trends in occupancy rates, rental rates and operating costs. We believe that, as a widely recognized measure of the performance of REITs, FFO will be used by investors as a basis to compare our operating performance with that of other REITs.
However, because FFO excludes depreciation and amortization and captures neither the changes in the value of our properties that result from use or market conditions nor the level of capital expenditures and leasing commissions necessary to maintain the operating performance of our properties, all of which have real economic effects and could materially impact our results of operations, the utility of FFO as a measure of our performance is limited. Other equity REITs may not calculate FFO in accordance with the NAREIT definition and, accordingly, our FFO may not be comparable to that of other REITs. As a result, FFO should be considered only as a supplement to net income (loss) as a measure of our performance. FFO should not

28


be used as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including the Company’s ability to pay dividends or make distributions. FFO also should not be used as a supplement to or substitute for net income (loss) or net cash flows from operating activities (as computed in accordance with GAAP).
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
Market Risk
Our future income, cash flows and fair values relevant to financial instruments are dependent on prevalent market interest rates. Interest rates are highly sensitive to several factors, including governmental monetary policies, domestic and global economic and political conditions and other factors which are beyond our control. We may incur additional variable rate debt in the future, including additional amounts that we may borrow under the Credit Facility. In addition, decreases in interest rates may lead to additional competition for the acquisition of single-family homes and other real estate due to a reduction in attractive alternative income-producing investments. Increased competition for the acquisition of single-family homes may lead to future acquisitions being more costly and result in lower yields on single-family homes we have targeted for acquisition. In such circumstances, if we are not able to offset the decrease in yields by obtaining lower interest costs on our borrowings, our results of operations will be adversely affected. Significant increases in interest rates may also have an adverse impact on our earnings if we are unable to acquire single-family homes with rental rates high enough to offset the increase in interest rates on our borrowings.
Market risk refers to the risk of loss from adverse changes in market prices and interest rates. We may use derivative financial instruments to manage, or hedge, interest rate risks related to any borrowings we may have. We expect to enter into such contracts only with major financial institutions based on their credit rating and other factors.
Interest Rate Risk
We have interest rate risk with respect to our debt. Our fixed rate debt consists of the Notes. Our variable rate debt consists of the Credit Facility and the Securitization Loan. Changes in interest rates have different impacts on the fixed and variable portions of our debt portfolio. A change in interest rates on the fixed portion of the debt portfolio impacts the fair value of the instrument, but has no impact on interest expense or cash flow. A change in interest rates on the variable portion of the debt portfolio impacts the interest incurred and cash flows, but does not generally impact the fair value of the instrument. The fair value of the Notes is also impacted by changes in the market price of our common stock.
As of March 31, 2015, $350.0 million was outstanding and $125.3 million was available under the Credit Facility. Amounts borrowed on the Credit Facility bear interest at variable rates based, at our option, on LIBOR plus a spread ranging from 2.50% to 3.25% or a base rate plus a spread ranging from 1.50% to 2.25%, with each spread based on a ratio of total indebtedness to total asset value (each as defined in the credit agreement that governs the Credit Facility) ranging from less than or equal to 45% to greater than 55%. If interest rates on our outstanding balance of $350.0 million under the Credit Facility were to increase or decrease by 50 basis points, our annual interest expense would increase or decrease by approximately $1.8 million, respectively.
As of March 31, 2015, the aggregate principal outstanding balance of our Securitization Loan was $342.2 million. Borrowings under our Securitization Loan bear interest at a weighted-average interest rate of 2.28%. We entered into an interest rate cap agreement as a designated cash flow hedge for the variable rate Securitization Loan with a LIBOR-based strike rate equal to 3.12% for the initial two-year term. Therefore, a change in the 1-month LIBOR of 50 basis points would increase or decrease our interest expense by $1.7 million, respectively.
The following table presents the principal amounts, weighted-average interest rates, maturities and fair values of our fixed and variable rate debt by year as of March 31, 2015 (dollar amounts in thousands).
 
 
 
 
2016
 
2017
 
2018
 
2019
 
2020
 
Thereafter
 
Total
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed rate debt
 
$

 
$

 
$
115,000

 
$

 
$