S-11 1 d486994ds11.htm FORM S-11 Form S-11
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As filed with the Securities and Exchange Commission on May 21, 2013

Registration No. 333-            

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM S-11

FOR REGISTRATION

UNDER

THE SECURITIES ACT OF 1933

OF SECURITIES OF CERTAIN REAL ESTATE COMPANIES

 

Waypoint Homes Realty Trust, Inc.

(Exact name of registrant as specified in governing instruments)

 

1999 Harrison Street

Oakland, California 94612

(510) 250-2200

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

Gary Beasley, President & Chief Executive Officer

Waypoint Homes Realty Trust, Inc.

1999 Harrison Street

Oakland, California 94612

(510) 250-2200

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

Copies to:

Julian T.H. Kleindorfer

Latham & Watkins LLP

355 South Grand Avenue

Los Angeles, California 90071

(213) 485-1234

 

Mark Schonberger

Goodwin Procter LLP

620 Eighth Avenue

New York, New York 10018

(212) 813-8800

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

If any of the Securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

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

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

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

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

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

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

 

CALCULATION OF REGISTRATION FEE

 

Title of

Securities to be registered

 

Proposed maximum

aggregate

offering price(1)

 

Amount of

registration fee

Common Stock, par value $0.01 per share

  $100,000,000   $13,640

 

 

(1)   Estimated solely for the purpose of determining the registration fee in accordance with Rule 457(o) of the Securities Act of 1933, as amended. Includes additional shares of common stock that the underwriters have the option to purchase, if any.

 

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

 

 


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

 

SUBJECT TO COMPLETION, DATED                     , 2013

 

PRELIMINARY PROSPECTUS

 

             Shares

 

LOGO

 

Common Stock

 

$                 per share

 

 

 

Waypoint Homes Realty Trust, Inc. is a recently formed Maryland corporation focused on the acquisition, renovation, leasing, maintenance and management of single-family homes to generate attractive risk-adjusted returns over the long-term through capital appreciation and dividend growth.

 

This is the initial public offering of our common stock. We are selling              shares of our common stock. We currently expect the initial public offering price to be between $                 and $                 per share of common stock.

 

We have granted the underwriters an option to purchase up to              additional shares of common stock.

 

We intend to apply to have the common stock listed on the NASDAQ Global Market under the symbol “WAY.”

 

We will be externally managed by Waypoint Real Estate Group, LLC and Waypoint Homes, Inc., or, collectively, WREG, entities with significant experience in the acquisition, renovation, leasing, maintenance and management of single-family homes on an institutional scale. See “Our Manager and the Management Agreement.”

 

We intend to elect to be taxed and to operate in a manner that will allow us to qualify as a real estate investment trust, or REIT, for U.S. federal income tax purposes commencing with our taxable year ending December 31, 2013. To assist us in qualifying as a REIT, stockholders are generally restricted from actually, beneficially or constructively owning more than 9.8% in value or number of shares, whichever is more restrictive, of the outstanding shares of our common stock or more than 9.8% in value of the aggregate outstanding shares of all classes and series of our stock. In addition, our charter contains various other restrictions on ownership and transfer of our common stock. See “Description of Capital Stock—Restrictions on Ownership and Transfer.”

 

 

 

We are an “emerging growth company” under the federal securities laws. Investing in our common stock involves risks. See “Risk Factors” beginning on page 19 for a discussion of the following and other risks:

 

   

We are a recently organized corporation with a limited operating history and have only identified a small portion of the properties we intend to acquire. Investors will not be able to evaluate the economic merits of any investments we make with the net proceeds prior to purchasing shares in this offering.

 

   

Acquiring homes during periods when substantial inflows of capital are creating intense competition in the single-family home sector may result in inflated purchase prices that may reduce our net rental yields and, in the event we elect to sell homes, our gains, if any, on any such sales.

 

   

We are externally managed and are dependent upon WREG and its key personnel to provide services to us. The loss of WREG’s services or the inability of WREG to effectively manage our growth could have an adverse impact on our business.

 

   

Failure to qualify or maintain our qualification as a REIT would have significant adverse consequences to us and the per share trading price of our common stock.

 

 

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

 

     Per Share      Total  

Public Offering Price

   $                        $                   

Underwriting Discount

   $         $    

Proceeds to Waypoint Homes Realty Trust, Inc. (before expenses)

   $         $    

 

The underwriters expect to deliver the shares to purchasers on or about                     , 2013 through the book-entry facilities of The Depository Trust Company.

 

 

 

Joint Book-Running Managers

Citigroup    Jefferies


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TABLE OF CONTENTS

 

     Page  

PROSPECTUS SUMMARY

     1   

RISK FACTORS

     19   

FORWARD-LOOKING STATEMENTS

     54   

USE OF PROCEEDS

     55   

CAPITALIZATION

     56   

DILUTION

     57   

DISTRIBUTION POLICY

     59   

SELECTED FINANCIAL DATA

     60   

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

     61   

INDUSTRY OVERVIEW AND MARKET OPPORTUNITY

     65   

BUSINESS AND PROPERTIES

     120   

MANAGEMENT

     141   

OUR MANAGER AND THE MANAGEMENT AGREEMENT

     150   

STRUCTURE AND FORMATION OF OUR COMPANY

     172   

PRINCIPAL STOCKHOLDERS

     175   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     177   

POLICIES WITH RESPECT TO CERTAIN ACTIVITIES

     179   

DESCRIPTION OF CAPITAL STOCK

     180   

SHARES ELIGIBLE FOR FUTURE SALE

     186   

CERTAIN PROVISIONS OF THE MARYLAND GENERAL CORPORATION LAW AND OUR CHARTER AND BYLAWS

     189   

THE OPERATING PARTNERSHIP AND THE PARTNERSHIP AGREEMENT

     196   

FEDERAL INCOME TAX CONSIDERATIONS

     210   

ERISA CONSIDERATIONS

     232   

UNDERWRITING

     235   

LEGAL MATTERS

     238   

EXPERTS

     238   

WHERE YOU CAN FIND MORE INFORMATION

     238   

INDEX TO FINANCIAL STATEMENTS

     F-1   

 

 

 

You should rely only on the information contained in this prospectus or in any free writing prospectus prepared by us. We have not, and the underwriters have not, authorized any other person to provide you with different or additional information. If anyone provides you with different or additional information, you should not rely on it. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give to you. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus or in any free writing prospectus are accurate only as of their respective dates or such other date as is specified in these documents; provided that we will update this prospectus to the extent required by applicable law.

 

Industry and Market Data

 

We disclose estimates, forecasts and projections throughout this prospectus, in particular in the sections entitled “Prospectus Summary,” “Industry Overview and Market Opportunity” and “Business and Properties.” We have obtained substantially all of this information from a market study prepared for us in connection with this offering by John Burns Real Estate Consulting, LLC, or JBREC, a real estate consulting firm. We have


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agreed to pay JBREC a total fee of $56,000 for the market study, of which $28,000 has been paid and $28,000 will be paid upon completion of this offering. Such information is included in this prospectus in reliance on JBREC’s authority as an expert on such matters. The estimates, forecasts and projections prepared by JBREC are based on data (including third-party data), significant assumptions, proprietary methodologies and the experience and judgment of JBREC. No assurance can be given regarding the accuracy or appropriateness of the assumptions and judgments made, or the methodologies used, by JBREC. There is no assurance that any of the forecasted or projected outcomes or expectations will be achieved, and investors should not place undue reliance on them. Except as required by law, we are not obligated to, and do not intend to, update the statements in this prospectus to conform to actual outcomes or changes in our or JBREC’s expectations.

 

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PROSPECTUS SUMMARY

 

This summary highlights some of the information in this prospectus. It does not contain all of the information that you should consider before investing in our common stock. You should read carefully the more detailed information set forth under “Risk Factors” and the other information included in this prospectus. Except where the context suggests otherwise, the terms “our company,” “we,” “us,” and “our” refer to Waypoint Homes Realty Trust, Inc., a Maryland corporation. References to “our operating partnership” refer to Waypoint Fund XI, LLC, or “WLLC,” a Delaware limited liability company that will convert into a Delaware limited partnership and be renamed Waypoint Homes Realty Trust, L.P. prior to the completion of this offering, and its subsidiaries. Except where the context suggests otherwise, the terms “WREG” or “our Manager” collectively refer to our external manager, Waypoint Real Estate Group, LLC, a California limited liability company, its subsidiaries and predecessor entities, and Waypoint Homes, Inc., a California corporation, and its subsidiaries. References to “single-family homes” refer to detached single-family residences and, to a much lesser extent, condominiums, townhomes and two- to four-unit dwellings.

 

Our Company

 

Waypoint Homes Realty Trust, Inc. is a recently formed Maryland corporation focused on the acquisition, renovation, leasing, maintenance and management of single-family homes. Our principal objective is to generate attractive risk-adjusted returns for our stockholders over the long-term through capital appreciation and dividend growth. We generate revenue by leasing our portfolio of single-family homes and, from this revenue, expect to pay the operating costs associated with our business and any distributions to our stockholders.

 

We will be externally managed by WREG. WREG is a vertically integrated operating company that maintains in-house operations associated with every stage of the life cycle of a single-family rental home. Since beginning operations in January 2009, WREG has developed an advanced, technology driven operating platform that provides the backbone for deal sourcing, property underwriting, acquisitions, asset protection, renovations, marketing and leasing, repairs and maintenance, portfolio reporting and property management of single-family homes. We believe that WREG’s proprietary technology will enable us to rapidly achieve significant scale in our target markets and efficiently manage our homes. As of the date of this prospectus, WREG has assembled a portfolio of over 3,500 homes, representing over $550 million of total investment (including actual purchase price, transaction costs and renovation costs). As of March 15, 2013, WREG’s team consisted of over 370 employees. WREG is also our promoter.

 

We and WREG are striving to build a leading, nationally recognized brand that is based on a foundation of respect for our residents and the communities in which we operate. Our combined mission is to reinvent the home rental experience by providing quality homes, great service and rewarding lease programs that offer valuable benefits to our residents while generating attractive returns for our investors.

 

We believe that the current housing market environment presents an unprecedented opportunity for those who have the expertise, operating platform, technology systems and capital in place to execute an acquisition and operating strategy in a cost-effective manner. We intend to build a geographically diversified portfolio of single-family homes in target markets that we believe exhibit favorable demographics and long-term economic trends, healthy demand for rental homes and attractive acquisition prices, rental yields and appreciation potential. These markets include the San Francisco Bay Area, Sacramento, the Inland Empire, Los Angeles, Chicago, Atlanta, Phoenix, Central Florida and South Florida. As of [·], 2013, WLLC, the entity that will become our operating partnership, has acquired [·] single-family homes in our target markets, including [·] homes in April and [·] homes in May, for an estimated total investment (including actual purchase price, transaction costs and anticipated renovation costs) of $[·].

 

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Our Initial Portfolio

 

Our initial portfolio will consist of a diversified pool of single-family homes. The table below provides a summary of our initial portfolio as of [·], 2013:

 

Our Initial Portfolio as of [·], 2013

 

Market

  Total
Number of
Homes(1)
  Average
Acquisition
Costs per
Home(2)
  Average
Estimated

Renovation
Costs per
Home(3)
  Average
Estimated

Total
Investment
per Home(4)
  Average
Year
Built
  Average
Square
Footage
  Average
Underwritten

Rent per
Home(5)
  Estimated
Average
Gross
Yield(6)

San Francisco Bay Area(7)

               

Sacramento, CA

               

Inland Empire, CA

               

Los Angeles, CA

               

Chicago, IL

               

Atlanta, GA

               

Phoenix, AZ

               

Central Florida(8)

               

South Florida

               
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total/Weighted Average

               
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)   

Detached single-family residences account for approximately [·]% of our homes, and condominiums, townhomes and two- to four-unit dwellings collectively account for approximately [·]% of our homes. As of [·], 2013, we have acquired an additional [·] homes, and we are under contract to acquire an additional [·] homes.

(2)   

Based on the actual purchase price plus transaction costs (including broker commissions and closing costs) of the home.

(3)   

Based on the renovation costs we have incurred or expect to incur in preparing the home for rent.

(4)   

Represents the sum of the average acquisition costs per home and the average estimated renovation costs per home.

(5)   

Represents rent estimates generated by WREG in connection with the underwriting of home purchases. No assurances can be given that we will achieve underwritten rents.

(6)   

Represents annualized underwritten rent per home as a percentage of the average estimated total investment per home. No assurances can be given that we will achieve estimated gross yields.

(7)   

Includes Oakland metro division and Vallejo metropolitan statistical area, or MSA, in California.

(8)   

Includes Tampa and Orlando MSAs in Florida.

 

Our History and Manager

 

We were formed in March 2013. In April 2013, WLLC completed a private placement for $35 million of equity capital from investors, including GI Partners and certain employees and officers of WREG, and closed a $65 million bridge facility, or the bridge facility. We refer to these transactions as the initial financing. Upon the closing of the initial financing, WLLC began acquiring and renovating single-family homes consistent with our investment strategy. We expect $[·] of the initial financing to have been invested by [·] 2013, representing the acquisition and renovation of more than [·] homes. We expect to repay the bridge facility in full with a portion of the proceeds from this offering.

 

WREG began operations in January 2009 to take advantage of an opportunity to bring institutional practices to a highly fragmented real estate asset class. Since that time, WREG has actively developed a vertically integrated, highly scalable operating platform for single-family home rentals. Prior to our formation, WREG successfully closed nine private funds, which we refer to as its legacy funds, with equity commitments totaling over $300 million from high net worth investors, certain officers of WREG and, more recently, institutional investors, including a major university endowment, and GI Partners.

 

Through [·], 2013, WREG’s legacy funds had commitments for over $700 million of equity and debt capital to acquire, renovate and improve single-family homes. As of the date of this prospectus, WREG has

 

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deployed over $550 million of this capital, assembling a portfolio of over 3,500 homes in the San Francisco Bay Area, Sacramento, the Inland Empire, Los Angeles, Chicago, Atlanta, Phoenix, Central Florida and South Florida. Upon the completion of this offering, WREG’s legacy funds will no longer contract to acquire additional homes, and we will be WREG’s sole investment vehicle for acquiring single-family homes, subject to certain limited exceptions. WREG will continue to manage its legacy funds and may provide management services to third-parties in the future. See “Our Manager and the Management Agreement—Management Agreement.”

 

Homes that WREG has previously acquired and leased have the characteristics set forth below. None of these homes will be owned by us upon the completion of this offering.

 

Legacy Funds Portfolio as of March 1, 2013

 

    Total Homes     Homes Owned Greater Than Six Months  

Market

  Total
Number
of
Homes
    Average
Acquisition
Costs
per
Home(1)
    Average
Estimated
Renovation
Costs
per
Home(2)
    Average
Estimated
Total
Investment
per
Home(3)
    Average
Year
Built
    Average
Square
Footage
    Average
Number of
Bedrooms/

Bathrooms
    Total
Number
of Homes
    Average
Acquisition
Costs
per
Home(1)
    Average
Estimated
Renovation
Costs
per
Home(2)
    Average
Estimated
Total
Investment
per
Home(3)
    Average
Rent
per
Home(4)
    Average
Estimated
Gross
Yield(5)
    Leased  

San Francisco Bay Area(6)

    1479      $ 139,021      $ 23,917      $ 162,938        1971        1504        3.4/2.0        1146        $136,901        $23,229      $ 160,129      $ 1,785        13.4     94.0

Sacramento, CA

    176      $ 98,373      $ 18,602      $ 116,976        1958        1182        3.0/1.6        67        $93,313        $22,329      $ 115,643      $ 1,307        13.6     88.2

Inland Empire, CA

    1007      $ 141,307      $ 24,483      $ 165,789        1975        1544        3.6/2.2        625        $138,157        $24,479      $ 162,636      $ 1,736        12.8     91.4

Los Angeles, CA

    228      $ 158,316      $ 23,520      $ 181,837        1973        1541        3.4/2.2        70        $152,228        $24,391      $ 176,619      $ 1,875        12.7     85.5

Chicago, IL

    233      $ 100,655      $ 20,577      $ 121,233        1973        1507        3.4/1.8        15        $110,310        $18,390      $ 128,700      $ 1,714        16.0     75.0

Atlanta, GA

    201      $ 94,812      $ 19,293      $ 114,105        1984        1865        3.5/2.3        18        $87,514        $19,083      $ 106,597      $ 1,316        14.8     81.8

Phoenix, AZ

    131      $ 129,064      $ 14,180      $ 143,244        1973        1761        3.6/2.1        48        $131,039        $11,076      $ 142,115      $ 1,368        11.5     80.0

Central Florida(7)

    54      $ 90,723      $ 26,750      $ 117,473        1977        1522        3.1/1.9        N/A        N/A        N/A        N/A        N/A        N/A        N/A   

South Florida

    43      $ 130,158      $ 15,262      $ 145,420        1967        1489        3.3/2.0        N/A        N/A        N/A        N/A        N/A        N/A        N/A   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total/Weighted Average

    3,552      $ 132,666      $ 22,887      $ 155,553        1972        1532        3.4/2.1        1,989        $135,578        $23,265      $ 158,843      $ 1,742        13.2     92.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)   

Based on the actual purchase price plus transaction costs (including broker commissions and closing costs) of the home.

(2)   

Based on the renovation costs we have incurred or expect to incur in preparing the home for rent.

(3)   

Represents the sum of the average acquisition costs per home and the average estimated renovation costs per home.

(4)   

Represents average monthly contractual rent.

(5)   

Represents annualized average rent per home as a percentage of the average estimated total investment per home.

(6)   

Includes Oakland metro division and Vallejo MSA in California.

(7)   

Includes Tampa and Orlando MSAs in Florida.

 

Our Business Strengths and Differentiated Strategies

 

Proprietary Technology Embedded in All Aspects of Our Organization

 

The backbone of WREG’s operations is formed by a proprietary technology system, which we refer to as Compass, that has been continually refined and enhanced since WREG began operations. Compass is built on a cloud-based operating platform powered by leading technology companies, including Salesforce.com and Google, which has enabled WREG to quickly achieve scalability, security and redundancy in a cost-effective manner. WREG specifically designed Compass to be intuitive to employees across all functional areas within the organization, which has enabled WREG to quickly and effectively grow its operating platform.

 

The table below sets forth several of the functional components of Compass that help us to achieve key operational goals throughout the life cycle of a single-family rental home. Compass provides work-flow

 

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management oversight that links all of the functional areas of WREG that are involved in the home life cycle. Compass is a key component in minimizing the time from the purchase of a home to move-in as well as facilitating necessary communication throughout the process. In addition, Compass is designed to provide an iterative feedback loop such that data learned in the process is easily shared and utilized across departments and regions to continually improve workstreams and implement best practices. Because the architecture of Compass is such that all operational information is housed in one system, managers have real-time access to information across all parts of the business and can continually make informed decisions that have meaningful impact on operations.

 

LOGO

 

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Vertically Integrated and Highly Scalable, In-House Operating Platform

 

We believe WREG’s vertically integrated, in-house platform provides us with a critical competitive advantage. First, it provides control over all aspects of the business, which is essential to hold all parties accountable for quality and performance and to support the reputation of our brand. Through the consistent use of Compass, WREG ensures management’s visibility into our operations and creates the ability to efficiently scale our business as it grows. WREG’s over 370 employees allow it to internally conduct all aspects of our business, other than construction labor on initial property renovations, where WREG’s in-house construction management team leverages a stable of qualified third-party general contractors through an automated competitive bidding process. We believe vertical integration affords long-term efficiencies by eliminating costs associated with profit margin required by third parties for the various services provided.

 

Experienced Management Team with Proven Track Record of Single-Family Home Operations

 

WREG has been operating single-family rental homes since 2009, longer than many of our institutional competitors. WREG’s senior management team has been a driving force of WREG’s success, providing the leadership necessary to create and operate what we believe is an industry leading platform. WREG’s senior management team possesses a complementary blend of professional backgrounds, with valuable investment, operational and managerial experience across the real estate, hospitality and technology sectors.

 

Disciplined, Technology Driven Acquisition Strategy

 

WREG has developed a proprietary approach to acquiring homes based on extensive experience that includes “top-down” and “bottom-up” analyses and is supported by Compass, market analytics and in-house acquisitions teams in our target markets. This approach identifies homes in carefully chosen sub-markets, derives a maximum bid based on a target return, estimates rent and total investment costs, and is supplemented with additional checks and balances to ensure discipline in acquiring homes. While we believe many of our competitors focus primarily on newer homes, WREG’s experience has demonstrated that older homes can also represent attractive value-added opportunities as they often benefit from higher quality construction, better proximity to employment and transportation, mature neighborhoods and superior school districts. We believe this proprietary approach to acquiring homes provides appropriate parameters and checks and balances for assembling a portfolio of select homes that deliver superior risk-adjusted returns for our investors. During the final two months of 2012, WREG acquired approximately 1.3% of the total homes screened that met our initial investment criteria and 6% of the homes underwritten.

 

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Branded Strategy Through Differentiated Product and Service Offerings

 

We strive to be recognized as the leading brand in the emerging single-family rental industry by combining a technology focused operating platform with best practices used in the multi-family and hospitality industries. WREG has trademarked the slogan “Reinventing Renting™” to demonstrate our combined mission to reinvent the renting experience by making many of the traditional benefits of homeownership available to our residents. As depicted in the graphic below, this mission is supported by three pillars—quality homes, great service and rewarding leases—all of which are built on a foundation of respect.

 

LOGO

 

Market Opportunity(*)

 

While a large and growing asset class, single-family rentals have historically been managed by relatively small-scale, “mom and pop” owner-operators or by a limited number of local and regional property management organizations. More recently, the ownership profile of single-family rentals has shifted to larger investors and institutional owner-operators seeking to efficiently acquire large numbers of homes at distressed values, generate attractive rental cash flow streams and benefit from potential home price appreciation.

 

After nearly a decade of solid home price appreciation from 1998 to 2006, a significant over-correction occurred in the pricing of the single-family home sector. Home values declined approximately 30% from peak to trough nationally and approximately [·]% in our markets as measured by the Burns Home Value Index. Due to significant distress in the housing market and additional macroeconomic factors, demand for rental housing has been increasing at a strong rate. The ability to acquire single-family homes at reduced prices, combined with improving housing demand characteristics, may offer a significant opportunity to those with a scalable real estate acquisition and operational platform and access to capital.

 

Single-Family Rental Supply

 

Following the eight-year period of solid price appreciation that ended in late 2006, home prices fell precipitously. This sudden decrease in home values has contributed to approximately 11.5 million home borrowers with negative equity or in some stage of delinquency as of the fourth quarter of 2012.

 

Foreclosure-related activity peaked in 2009 and has since begun to decline but is still substantially above historical averages. From September 2008 through December 2012, there were approximately 4.1 million completed loan foreclosures (according to CoreLogic). While an unprecedented number of foreclosures have

 

(*)   

Source: JBREC (unless otherwise indicated).

 

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occurred, a large number of delinquent loans remain outstanding. As of December 31, 2012, approximately 11.3% of all mortgage loans (measured by loan count based on Mortgage Bankers Association data) in the nation are in some level of non-performance.

 

Over the next five years, a substantial number of non-performing loans will need to be resolved, including through foreclosure, short sale or conversion through a bank deed-for-lease program. At the current rate of delinquency and non-performance, it appears that over 4.7 million homeowners in the United States will be affected. Even if fewer than half of the delinquent or non-performing loans proceed through the foreclosure process or are sold through the short sale process, the supply of inventory available for acquisition could be large.

 

Single-Family Rental Demand

 

Over the past two years, the U.S. rental housing market has begun a sustained recovery. In many markets, rental vacancy has fallen and rents have risen, even in areas hardest hit during the housing and economic downturn.

 

Many homeowners who have been displaced by the housing bubble are looking to live in a home with similar characteristics and amenities to their former home and, for this population, single-family rentals may present the best available option. In the wake of the worst housing downturn in history, renting has, in many cases, become more compelling for consumers, and, with the growth of the single-family rental market, these consumers are now offered alternative rental options.

 

While multi-family and single-family housing seem to be natural competitors in the rental sector, each generally appeals to a different type of resident. The two rental markets are largely segmented by stage of life. Singles, couples without children, people with roommates, newly divorced individuals and empty nesters dominate the multi-family market because they have smaller space needs, less demand for associated acreage and generally prefer denser, transit-centric submarkets. On the other hand, the single-family market (both owner-occupied and resident-occupied) serves larger households that are primarily families with children whose preferences tend to focus on the need for additional space, quality of schools and neighborhood safety.

 

Within the broader rental market, the single-family rental segment has continued to grow its relative market share compared to other types of rental housing.

 

Single-Family Home Prices

 

The correction in housing prices in certain housing markets has led to home prices being significantly below replacement cost in many markets across the country. As the economy slowly strengthens and the housing market returns to long-term pricing norms, or reverts to mean pricing levels, the potential for home price appreciation exists. The table below illustrates the magnitude of the decrease in home prices and the subsequent rebound, which remains significantly below the peak.

 

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Changes in Burns Home Value Index

(January 2002 to March 2013)(1)

 

LOGO

 

Source:   JBREC, March 2013.

 

(1)   

Current represents estimated Burns Home Value Index as of March 2013. Peak to trough and current recovery of peak to trough changes are based on monthly values for the time period January 2002 to March 2013. Burns Home Value Index estimates all home values in a market, not just recent sale transactions.

(2)   

Peak for each market presented occurred as follows: Oakland (March 2006), Vallejo (November 2005), Sacramento (August 2005), Los Angeles (April 2006), Riverside-San Bernardino (April 2006), Las Vegas (February 2006), Phoenix (February 2006), Dallas (May 2007), Houston (May 2008), Chicago (March 2007), Atlanta (March 2007), Tampa (March 2006), Orlando (April 2006), Miami (December 2006) and National (April 2006). Trough for each market presented occurred as follows: Oakland (June 2012), Vallejo (January 2012), Sacramento (November 2011), Los Angeles (December 2011), Riverside-San Bernardino (November 2011), Las Vegas (November 2011), Phoenix (November 2011), Dallas (December 2011), Houston (December 2008), Chicago (December 2011), Atlanta (December 2011), Tampa (September 2011), Orlando (November 2011), Miami (December 2011) and National (November 2011).

 

Investment Guidelines

 

Upon the completion of this offering, we will enter into a management agreement, or the management agreement, with WREG. The management agreement provides for investment guidelines that WREG will follow in assembling our portfolio of single-family homes. These guidelines may be revised from time to time by our board of directors, as it deems appropriate or necessary, and it will review our investment portfolio and WREG’s compliance with our investment guidelines. These investment guidelines may be changed or waived from time to time by our board of directors without the approval of our stockholders. For a discussion of our investment policies, please refer to “Policies With Respect to Certain Activities.”

 

Use of Leverage

 

We may use leverage to increase potential returns to our stockholders in the future. Our decision to use leverage will be based on WREG’s prudent assessment of a variety of factors, including the anticipated liquidity and price volatility of the assets in our investment portfolio, the cash flow generation capability of our assets, the availability of credit on favorable terms, any prepayment penalties and restrictions on refinancing, the credit quality of our assets and our outlook for borrowing costs relative to the unlevered yields on our assets. Our

 

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decision to use leverage will not be subject to the approval of our stockholders. We are not restricted by our governing documents in the amount of leverage that we may use. We may, however, be limited or restricted in the amount of leverage we may employ by the terms and provisions of any financing or other agreements that we may enter into in the future.

 

Structure and Formation of Our Company

 

Formation Transactions

 

Prior to or concurrently with the completion of this offering, WLLC will convert into a Delaware limited partnership, be renamed Waypoint Homes Realty Trust, L.P. and become our operating partnership, and we will become the general partner of our operating partnership. The equity investors in the initial financing, which include certain executives and employees of WREG and others not affiliated with WREG, will be issued [·] common units of limited partnership interest, or common units, and [·] warrants exercisable for a total of [·] shares of our common stock at an exercise price of $[·] per share. We will sell [·] shares of our common stock in this offering and additional [·] shares if the underwriters exercise their option to purchase additional shares in full, and we will contribute the net proceeds from this offering to our operating partnership in exchange for common units. We expect our operating partnership to use substantially all of the net proceeds received by us to acquire and renovate single-family homes in accordance with our business and growth strategies described in this prospectus, to repay the bridge facility and for general business purposes, including the payment of fees and expense reimbursement to WREG. See “Use of Proceeds.” In addition, we will enter into the management agreement with WREG.

 

Following the completion of the formation transactions and this offering, substantially all of our assets will be held by, and our operations will be conducted through, Waypoint Homes Realty Trust, L.P., our operating partnership. Our interest in our operating partnership will generally entitle us to share in cash distributions from, and in the profits and losses of, our operating partnership in proportion to our percentage ownership. As the sole general partner of our operating partnership, we will generally have the exclusive power under the partnership agreement to manage and conduct its business and affairs, subject to certain limited approval and voting rights of the limited partners, which are described more fully below in “The Operating Partnership and the Partnership Agreement.”

 

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Corporate Structure

 

The chart below reflects our organization immediately following the completion of this offering and the formation transactions.

 

LOGO

 

(*)   Includes (a) [·] shares of our common stock that will be issued in the formation transactions to certain employees and executive officers of WREG who were equity investors in the initial financing and (b) [·] shares of restricted stock to be granted to our directors, director nominees and executive officers and WREG’s executive officers, other employees and consultants concurrently with the completion of this offering. Excludes (i) [·] shares of our common stock available for future issuance under our 2013 Equity Incentive Plan, (ii) [·] shares of our common stock that may be issued, at our option, upon exchange of [·] common units that will be issued in the formation transactions to certain employees and executive officers of WREG who were equity investors in the initial financing and (iii) [·] shares of our common stock that may be issued upon the exercise of warrants at an exercise price of $[·] per share that will be issued in the formation transactions to certain employees and executive officers of WREG.

 

(**)   Includes [·] common units that will be issued in the formation transactions to certain employees and executive officers of WREG who were equity investors in the initial financing.

 

(***)   Includes [·] shares of our common stock that will be issued in the formation transactions to certain equity investors in the initial financing. Excludes (i) [·] shares of our common stock that may be issued, at our option, upon exchange of common units that will be issued in the formation transactions to certain equity investors in the initial financing and (ii) [·] shares of our common stock that may be issued upon the exercise of warrants at an exercise price of $[·] per share that will be issued in the formation transactions to certain equity investors in the initial financing.

 

(****)   Includes [·] common units that will be issued in the formation transactions to certain equity investors in the initial financing.

 

(*****)   Waypoint Real Estate Group, LLC and Waypoint Homes, Inc. are wholly owned, direct subsidiaries of Waypoint Real Estate Group Holdco, LLC, a Delaware limited liability company, or WREG Holdco. The interests in WREG Holdco are beneficially owned by affiliates of GI Partners (approximately 24%), Colin Wiel (approximately 20%), Doug Brien (approximately 20%) and certain other investors (approximately 36%), including certain of our executive officers and employees. See “Our Manager and the Management Agreement—Ownership of WREG.”

 

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Related Party Transactions and Conflicts of Interest

 

Management Agreement

 

Under the management agreement, WREG will implement our business strategy and administer our business activities and day-to-day operations, subject to oversight by our board of directors. WREG will be responsible for, among other things, deal sourcing, property underwriting, acquisitions, asset protection, renovations, marketing and leasing, repairs and maintenance, portfolio reporting and property management of our single-family homes. The management agreement provides us with access to WREG’s personnel and its experience in real estate, capital markets, credit analysis, debt structuring and risk and asset management, as well as assistance with corporate operations, legal, tax, accounting and compliance functions and governance.

 

The initial term of the management agreement will end on [·], 201[·], with up to a maximum of two, one-year automatic extensions if we have not yet completed the internalization of WREG by the end of such term, as extended. Following the end of such extended term, we may terminate the management agreement upon payment of the termination fee.

 

The following table summarizes the fees and expense reimbursements that we will pay to WREG (or persons affiliated with or related to WREG, including certain of its executive officers and other employees) pursuant to the management agreement:

 

Type of Compensation

  

Determination of Amount

  

Payment

Management Fee   

We will pay WREG a management fee in an amount equal to [·]% per year of our consolidated undepreciated gross assets; provided that, if the trigger for the internalization of WREG has occurred but the internalization has not yet been consummated by [·], the management fee percentage applicable to our consolidated undepreciated gross assets in excess of $[·] will be [·]% per year. For purposes of calculating the management fee, “undepreciated gross assets” is the book value of our total assets before deducting accumulated depreciation, all as determined in accordance with U.S. generally accepted accounting principles.

   Calculated within 30 days after the end of each month and payable in cash no later than the 10th business day following the day we received the calculation from WREG.
Reimbursement of Expenses/Overhead Allocation   

We will reimburse WREG for all expenses incurred on our behalf or otherwise in connection with the operation of our business, including an allocation of overhead expenses.

   Calculated within 30 days after the end of each month and payable in cash no later than the 10th business day following the day we received the calculation from WREG.
Accrued Fees Upon Termination    If the management agreement is terminated, WREG will be entitled to receive payment of any earned but unpaid compensation and expense reimbursements accrued as of the date of termination.    Payable in cash upon termination of the management agreement.

 

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Type of Compensation

  

Determination of Amount

  

Payment

Management Agreement Termination Fee    We may only terminate the management agreement for cause (in which event no termination fee is payable) unless the internalization of WREG has not been consummated within [·] years after our initial right to trigger such internalization occurs. If we exercise such termination right, WREG will be entitled to receive a termination fee equal to [·].    Payable in cash upon termination of the management agreement.
Internalization of Our Manager    WREG has agreed that upon the earlier to occur of (a) the date our consolidated undepreciated gross assets exceed $[·] or (b) [·], 201[·], WREG will present to us a proposal to acquire WREG and its affiliates related to our growth and management for a price equal to an amount no greater than [·]% of our [·]. Acceptance of such proposal will be conditioned upon (x) receipt by us of a fairness opinion from an investment banking firm of national reputation to the effect that the consideration to be paid by us to WREG will be fair, from a financial point of view, to the holders of our common stock (other than WREG and its affiliates) and (y) the approval of the acquisition by (i) a special committee comprised solely of independent directors of our board of directors and (ii) stockholders holding a majority of all the votes cast at a meeting of stockholders duly called and at which a quorum is present. The assets of WREG and its affiliates that will be subject to internalization will not include any promoted interest WREG carries in any of its legacy funds. No assurances can be given that we will internalize WREG on the foregoing terms or at all.   

We will have the option to pay the acquisition price in cash or in shares of our common stock based on a per share price equal to the [·]-day trailing average stock price and any such shares will also be subject to a [·]-day lock-up; provided WREG will be entitled to receive sufficient cash to pay its tax liability in connection with the transaction.

 

See “Our Manager and the Management Agreement” for more information about the management agreement and the costs and expenses under the management agreement.

 

Other Benefits to Related Parties

 

In connection with this offering and the formation transactions, certain of our directors, director nominees and executive officers and WREG, and its executive officers, employees and affiliates, will receive material benefits described in “Certain Relationships and Related Party Transactions,” including the compensation summarized in the following table. All amounts are based on the mid-point of the price range set forth on the cover page of this prospectus:

 

Type of Compensation

  

Determination of Amount

  

Payment

Organizational and Offering Expenses    We will reimburse WREG for certain expenses incurred in connection with our formation, the formation transactions and this offering. Organizational and offering expenses include all expenses (other than underwriting discounts and commissions) to be paid by us in connection with the offering, such as the legal, accounting, printing, mailing and filing fees, charges of our transfer agent and exchange listing fees. To date, we have incurred approximately $[·] of organizational and offering expenses. We anticipate that our estimated payments upon the completion of this offering and the formation transactions will be $[·].    Payable in cash upon consummation of this offering.

 

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Type of Compensation

  

Determination of Amount

  

Payment

Common Units and Warrants    Certain executives and employees of WREG and others who were equity investors in the initial financing will be issued [·] common units and [·] warrants exercisable for a total of [·] shares of our common stock at an exercise prices of $[·] per share.   

Common units and warrants to be issued in the formation transactions.

Awards Under Our 2013 Equity Incentive Plan   

Prior to the completion of this offering, we will adopt the 2013 Equity Incentive Plan, which is intended to align the interests of our directors and key personnel with those of our stockholders. Pursuant to this plan, our independent directors, officers, advisors, consultants and other personnel, including personnel of WREG and its affiliates, may receive grants of stock options, restricted shares of common stock, restricted stock units, phantom stock, dividend equivalent rights, and other equity-based awards. Our compensation committee will administer the 2013 Equity Incentive Plan. We have reserved [·] shares of common stock for issuance under our 2013 Equity Incentive Plan.

 

  

Concurrently with the completion of this offering, we will grant, in aggregate, [·] shares of restricted stock to our directors, director nominees and executive officers and WREG’s executive officers, other employees and consultants.

Compensation to Independent Directors    Upon the completion of this offering, we will pay to each of our independent directors an annual fee of $[·]. We will also pay an annual fee to each standing committee chair.   

Payable in cash or shares of restricted stock quarterly in arrears.

 

See “Management—2013 Equity Incentive Plan” for more information about stock-based compensation.

 

Tax Status

 

We intend to elect to be taxed and to operate in a manner that will allow us to qualify as a REIT for federal income tax purposes commencing with our taxable year ending December 31, 2013. We believe that our organization and proposed method of operation will enable us to meet the requirements for qualification and taxation as a REIT. To maintain REIT qualification, we must meet a number of organizational and operational requirements, including a requirement that we annually distribute at least 90% of our taxable income to our stockholders. As a REIT, we generally will not be subject to federal income tax on our taxable income we currently distribute to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax at regular corporate rates. Even if we qualify for taxation as a REIT, we may be subject to some federal, state and local taxes on our income or property. In addition, the income of any taxable REIT subsidiary that we own will be subject to taxation at regular corporate rates. See “Federal Income Tax Considerations.”

 

Distribution Policy

 

We are a recently formed company. As a result, we have not paid any distributions as of the date of this prospectus. U.S. federal income tax laws generally require that a REIT distribute annually at least 90% of its REIT taxable income, determined without regard to the deduction for dividends paid and excluding any net capital gains. For more information, please see “Federal Income Tax Considerations.” To satisfy the

 

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requirements to qualify as a REIT and generally not be subject to U.S. federal income tax, we intend to make quarterly distributions of all or substantially all of our net income to holders of our common stock out of assets legally available therefor.

 

Any distributions we make will be at the discretion of our board of directors and will depend upon our earnings and financial condition, maintenance of REIT qualification, the applicable restrictions contained in the Maryland General Corporation Law, or the MGCL, and such other factors as our board may determine in its sole discretion. We anticipate that our estimated cash available for distribution will exceed the annual distribution requirements applicable to REITs. However, under some circumstances, we may be required to pay distributions in excess of cash available for distribution in order to meet these distribution requirements and may need to use the proceeds from future equity and debt offerings, sell assets or borrow funds to make some distributions. Although we have no intention to use the net proceeds of this offering to make distributions or to make distributions using shares of common stock, we may do so. See “Distribution Policy.” We cannot assure you that our distribution policy will not change in the future.

 

Restrictions on Ownership of Our Stock

 

Due to limitations on the concentration of ownership of REIT stock imposed by the Internal Revenue Code of 1986, or the Code, our charter provides that no person may actually, beneficially or constructively own more than 9.8% in value or number of shares, whichever is more restrictive, of the outstanding shares of our common stock or more than 9.8% in value of the aggregate outstanding shares of all classes and series of our stock. We refer to these restrictions as the “ownership limits.” Our charter permits our board of directors, in its sole and absolute discretion, to exempt a person, prospectively or retroactively, from one or both of the ownership limits if, among other limitations, the person’s ownership of our stock in excess of the ownership limits could not cause us to fail to qualify as a REIT.

 

Lock-Up Agreements

 

We, our directors, director nominees and executive officers, WREG’s senior management and other equity investors in the initial financing have agreed that we and they will not, during the period ending (1) 180 days, in the case of us, our directors, director nominees and executive officers and WREG’s senior management, or (2) 90 days, in the case of other equity investors in the initial financing, without the prior written consent of Citigroup Capital Markets Inc. and Jefferies LLC, dispose of or hedge any shares or any securities convertible into or exchangeable for our common stock, subject to certain exceptions.

 

Emerging Growth Company Status

 

We currently qualify as an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We have not made a decision whether to take advantage of certain of these exemptions. If we do take advantage of any of these exemptions, we do not know if some investors will find our common stock less attractive as a result. The result may be a less active trading market for our common stock and our stock price may be more volatile.

 

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In addition, Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we are choosing to “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for all public companies that are not emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

 

We could remain an “emerging growth company” for up to five years, or until the earliest of (i) the last day of the first fiscal year in which our annual gross revenues exceed $1 billion, (ii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, or the Exchange Act, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three year period.

 

Summary Risk Factors

 

An investment in our common stock involves material risks. You should consider carefully the risks described below and under “Risk Factors” before purchasing shares of our common stock in this offering:

 

   

We are a recently organized corporation with a limited operating history and have only identified a small portion of the properties we intend to acquire. Investors will not be able to evaluate the economic merits of any investments we make with the net proceeds prior to purchasing shares in this offering.

 

   

Acquiring homes during periods when substantial inflows of capital are creating intense competition in the single-family home sector may result in inflated purchase prices that may reduce our net rental yields and, in the event we elect to sell homes, our gains, if any, on any such sales.

 

   

Our investment criteria and our evaluation of homes involve a number of assumptions that may prove inaccurate; any such inaccuracies may cause us to overpay for homes or incur significant unanticipated costs to renovate, market and lease homes.

 

   

We are dependent on investments in a single asset class. Many factors, including local and national employment rates and other economic trends, may impact the supply of, demand for and operating expenses associated with single-family rental homes. If rents in our target markets do not increase sufficiently to keep pace with rising costs of operations, our income and our ability to make or sustain distributions will decline.

 

   

Our portfolio consists of homes geographically concentrated in certain markets, and our geographic concentration may cause unfavorable economic trends, natural disasters, acts of terrorism or acts of war in certain markets to have a greater adverse effect on our operating results than if our portfolio was more geographically diversified.

 

   

We will need additional capital for future capital improvements and to expand our portfolio, which may include the use of leverage, the amount of which is not restricted by our governing documents. Our debt service obligations may adversely affect our operating results, may require us to sell homes and may adversely affect our ability to make or sustain distributions to our stockholders.

 

   

We are externally managed by WREG and are dependent upon WREG and its key personnel to provide services to us. The loss of WREG’s services or the inability of WREG to effectively manage our growth could have an adverse impact on our business.

 

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WREG’s operations are dependent upon Compass. The interruption of WREG’s ability to use Compass may have an adverse impact on our business.

 

   

The management agreement with WREG was not negotiated on an arm’s-length basis and may not be as favorable to us as if it had been negotiated with unaffiliated third parties. Our management agreement includes certain provisions that may restrict our ability or reduce our inclination to end our relationship with WREG.

 

   

The management agreement requires us to pay WREG a substantial fee in the event we terminate the management agreement for any reason other than cause (or upon a termination by WREG due to our material breach), which may adversely affect our ability to end our relationship with WREG.

 

   

Certain provisions of Maryland law and certain provisions of our charter and bylaws may limit ownership of our common stock and delay, defer or prevent a change of control transaction; these provisions could prevent our stockholders from realizing a potential premium over the market price of our stock in a proposed acquisition.

 

   

Failure to qualify or maintain our qualification as a REIT would have significant adverse consequences to us and the per share trading price of our common stock.

 

Corporate Information

 

Our principal executive office is located at 1999 Harrison Street, Oakland, California, 94612. Our telephone number is (510) 250-2200. Our web address is www.waypointhomesrealtytrust.com. The information on, or otherwise accessible through, our website does not constitute a part of this prospectus or any other report or document we file with or furnish to the Securities and Exchange Commission, or the SEC.

 

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THE OFFERING

 

Common stock offered by us

             shares (plus up to an additional              shares of our common stock that we may issue and sell if the underwriters exercise their option to purchase up to an additional              shares of our common stock in full)

 

Common stock to be outstanding immediately after this offering

             shares(1)

 

Common stock and common units to be outstanding immediately after this offering

             shares and common units(1)(2)

 

Use of proceeds

We estimate that the net proceeds to us from this offering, after deducting underwriting discounts and commissions and estimated offering expenses, will be approximately $         million ($         million if the underwriters exercise their option to purchase up to an additional              shares of our common stock in full).

 

  We will contribute the net proceeds from this offering to our operating partnership in exchange for common units. We expect our operating partnership to use substantially all of the net proceeds received from us to acquire and renovate single-family homes in accordance with our business and growth strategies described in this prospectus, to pay off the bridge facility, and for general business purposes, including the payment of fees and expense reimbursement to WREG. See “Use of Proceeds.”

 

Proposed NASDAQ Global Market Symbol

“WAY”

 

(1)   

Includes (a) [·] shares of our common stock to be issued in this offering, (b) [·] shares of our common stock to be issued in the formation transactions and (c) [·] shares of restricted stock to be granted to our directors, director nominees and executive officers and WREG’s executive officers, other employees and consultants concurrently with the completion of this offering. Excludes (i) [·] shares if the underwriters exercise their option to purchase additional shares of our common stock in full, (ii) [·] shares of our common stock available for future issuance under our 2013 Equity Incentive Plan, (iii) [·] shares of our common stock that may be issued, at our option, upon exchange of [·] common units that will be issued in the formation transactions and (iv) [·] shares of our common stock that may be issued upon the exercise of warrants to be issued in the formation transactions at an exercise price of $[·] per share.

(2)   

Includes [·] common units to be issued in the formation transactions.

 

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SUMMARY FINANCIAL DATA

 

We are a newly formed company that has not commenced operations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

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RISK FACTORS

 

Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors and all other information contained in this prospectus before purchasing our common stock. If any of the following risks occur, our business, financial condition or results of operations could be materially and adversely affected. In that case, the trading price of our common stock could decline, and you may lose some or all of your investment.

 

Risks Related to Our Business

 

We are an early entrant in a new sector, which makes our business difficult to evaluate.

 

The institutional single-family home rental sector is relatively new in the United States. Single-family rentals are a highly fragmented real estate asset class, consisting primarily of private and individual investors in local markets and managed by small, local property managers or by individuals. We have been formed on the assumption that an institutional operator can provide attractive returns by using technology and economies of scale to achieve a competitive advantage in sourcing, underwriting, protecting, renovating, marketing, leasing, repairing and maintaining and managing single-family rental homes. Our business plan has been developed recently and our assumptions are unproven. If our assumptions are incorrect we may fail to provide the financial returns that investors hope or expect to receive.

 

Our business plan involves building a geographically diversified portfolio of homes in selected target markets, renovating and improving those homes where necessary, and then leasing homes to suitable residents. While there are a handful of REITs pursuing similar strategies that either have recently conducted initial public offerings, or IPOs, or are in the process of pursuing IPOs, no companies exist in our sector with a sufficient track record from which to make predictions as to whether our investment strategy can be implemented successfully over time. While past performance is not indicative of future results, it will be difficult for you to evaluate our potential future performance without the benefit of sufficient track records from companies implementing a similar investment strategy.

 

Our value proposition is multi-faceted, and we may encounter unanticipated problems executing some or many portions of our business plan. Any such problems may have a material adverse effect on our results of operations and our ability to make distributions on our common stock and may cause our stock price to decline significantly. Accordingly, no assurance can be given that we will be successful in implementing our business plan or that we will be successful in achieving our objective of providing attractive risk-adjusted returns to our stockholders over the long term.

 

We believe that the most comparable model to our business plan is the acquisition, operation and management of multi-family residential real estate. Nevertheless, there are many material distinctions between our business plan and the multi-family residential model. Although we may cluster our homes in certain target markets, the relatively wide geographic dispersion of our homes as compared to the relatively concentrated location of rental units in a multi-family property, may lead to significantly greater operational and maintenance challenges and could potentially create significantly higher per-unit operating expenses. In addition, despite our efforts to create a construction and renovation process that is as standardized as possible, each home has and will continue to have unique characteristics, systems, building materials, appliances and other features, and our deal sourcing, property underwriting, acquisitions, asset protection, renovations, marketing and leasing, repairs and maintenance, portfolio reporting and property management will each be far more varied and demanding than in a typical multi-family setting. We cannot provide any assurance that operating a large portfolio of single-family rentals can be executed in a cost-effective and profitable manner or that our business plan will succeed.

 

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

 

We were organized in March 2013 and have a limited operating history. As of the date of this prospectus, we do not own any homes. There is no long-term historical financial data for our operations. We cannot assure you that we will be able to operate our business successfully or implement our strategies as described in this prospectus. The results of our operations and our ability to make or sustain distributions to our stockholders will depend on many factors, including:

 

   

the availability of additional homes that are consistent with our investment strategy and our ability to invest in such homes on favorable terms;

 

   

our ability to contain renovation, marketing and leasing, repair and maintenance and other operating expenses;

 

   

our ability to maintain low delinquency rates, high occupancy rates and achieve target rent levels;

 

   

real estate appreciation or depreciation in our target markets;

 

   

the level and volatility of interest rates, and our access to short- and long-term financing on favorable terms;

 

   

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

 

   

our ability to absorb or pass on costs that are beyond our control, including, but not limited to costs associated with permitting and licensing, title litigation, litigation with residents or resident organizations, other legal and compliance, real estate taxes, homeowners’ association, or HOA, fees and insurance;

 

   

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

 

   

our ability to adapt to judicial and regulatory developments affecting banks’ and other mortgage holders’ ability to foreclose on delinquent borrowers and the attendant impacts on the real estate market in the jurisdictions in which we operate;

 

   

our ability to respond to changes in population, employment or homeownership trends in our target markets; and

 

   

our ability to compete with other investors entering the single-family rental sector.

 

We intend to make acquisitions and expand our scale of operations, including potential expansions into new geographical markets; however, rapid price appreciation for single-family homes may limit our ability to acquire homes on attractive terms, which could reduce our returns.

 

Our long-term growth depends in large part on our ability to invest in homes at prices that meet our investment criteria and, after the consummation of this offering, we plan to rapidly acquire such homes. We believe that in certain markets, homes have been available at prices that are below their value as rentals, based on anticipated cash flows. However, we expect that the housing market may recover, and future investments may become more costly. There are many factors that may lead to a recovery in the housing market and a concomitant increase in the price of future investments, which may make future purchases less attractive than current opportunities, including:

 

   

improvements in the overall economy and job market;

 

   

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

 

   

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

 

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

 

   

tax or other government incentives that encourage homeownership.

 

Although we believe there will be benefits to increasing our scale of operations, WREG’s acquisition platform and property management operations represent a significant ongoing expense to us. These expenses include, among others, costs associated with establishing and maintaining fully staffed regional offices, property inspection and due diligence costs, transaction costs, legal and compliance expenses, including landlord-tenant issues, and renovation, marketing and leasing costs. In addition, we expect that some recently acquired homes in the process of stabilization will be unproductive assets generating no revenue for six months or more after acquisition. A recovery in housing prices could cause our future investments to have lower returns than our current portfolio, and may reduce the value of our common stock.

 

WREG may not be able to effectively manage our growth, which will require significant resources, and our results may be adversely affected.

 

The rapid acquisition of homes will demand significant resources and attention from WREG and may affect our financial performance. Our future operating results depend on WREG’s ability to effectively manage this rapid growth, which will be dependent upon the ability of WREG to:

 

   

source, underwrite and acquire a large number of homes that meet our investment criteria;

   

protect, renovate, lease and manage a rapidly increasing number of homes, while maintaining a high level of customer service to strengthen relationships with our residents and build and enhance our brand;

 

   

hire and train additional employees to continue to support its vertically integrated operating platform;

 

   

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

 

   

scale its technology and other infrastructure platforms to adequately service new homes.

 

We cannot assure you that WREG will be able to achieve these results or otherwise be able to manage our growth effectively. Any failure by WREG to do so may have an adverse effect on our business and financial results.

 

Acquiring homes during periods when substantial inflows of capital are creating intense competition in the single-family home sector may result in inflated purchase prices that may reduce our net rental yields and, in the event we elect to sell homes, our gains, if any, on any such sales.

 

The allocation of substantial amounts of capital for investment in the single-family home sector and significant competition for income producing real estate may inflate the purchase prices for such assets. To the extent WREG purchased or in the future purchases single-family homes in such an environment, it is possible that the value of our homes may not appreciate and may, instead, decrease, perhaps significantly below the amount we paid for such homes. In addition to macro and local economic factors, technical factors, such as a decrease in the amount of capital allocated to the single-family home sector and the number of investors participating in the sector, could cause the value of our homes to decline.

 

As purchase prices increase, our net rental yields may decline unless rental rates increase at a rate equal to or greater than the rate of home price appreciation. In addition, competition in the single-family rental sector may increase demand for contractors and other vendors, which could increase our operating expenses and may cause our net rental yields to decline. Lower than expected net rental yields may limit our ability to generate sufficient cash flows required to pay attractive dividends.

 

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We have many competitors and may not become an industry leader.

 

Traditionally, private home buyers and small-scale investors competed to acquire foreclosed single-family homes, but recently, operators have begun acquiring single-family homes on an institutional scale. The entry into this market of large, well-capitalized institutional operators, including us, and the sales of single-family homes in bulk pools by financial institutions and government sponsored entities, or GSEs, are relatively recent trends, which we expect to intensify in the near future. Several REITs and other investment funds have recently deployed, or are expected to deploy in the near future, significant amounts of capital to acquire single-family homes, and may have investment objectives that overlap with ours. We will compete with a variety of institutional operators, including other REITs, specialty finance companies, public and private funds and other financial institutions, to source and acquire single-family homes. Many of our competitors may be larger and have greater financial resources than we do. Some competitors may have a lower cost of funds and access to funding sources that may not be available to us. At this time, neither we nor any other entity has established a market-leading position, and even if we succeed in becoming an industry leader there can be no assurance that this would confer any long-term competitive advantage or positive financial results.

 

Our investment criteria and evaluation of homes involves a number of assumptions that may prove inaccurate; any such inaccuracies may cause us to overpay for homes or incur significant unanticipated costs to renovate, market and lease our homes.

 

In determining whether a particular home meets our investment criteria, we make a number of assumptions, including assumptions related to estimated renovation costs and time frames, annual operating expenses, market rental rates and potential rent amounts, time from purchase to move-in and resident default rates. Single-family homes have unique characteristics, and our assumptions may prove inaccurate, causing us to pay too much for homes we acquire, provide too few reserves for renovations, repairs and maintenance, seek higher rents than the market will bear, or otherwise result in our homes not performing as we expect.

 

Upon acquiring a new home, we may have to evict residents who are in unlawful possession before we can secure possession and control of the home. The holdover occupants may be the former owners or residents of a home, or they may be squatters or others who are illegally in possession. Securing control and possession from these occupants can be both costly and time-consuming. Furthermore, the market and regulatory environments relating to single-family homes have been changing rapidly, making future trends difficult to forecast. For example, an increasing number of homeowners now wait for an eviction notice or eviction proceedings to commence before vacating foreclosed premises. If these costs and delays exceed our expectations in a large proportion of our newly acquired homes, our financial performance may suffer because of the increased expenses incurred or the unexpected delays in turning the homes into revenue-producing rented homes.

 

In the future, we may need to adjust the assumptions we make in evaluating potential purchases, which may result in fewer homes qualifying under our investment criteria, making it more difficult for us to continue to expand our scale of operations. Our success will depend on WREG’s ability to identify and acquire homes that can be quickly possessed, renovated, repaired, upgraded and maintained at manageable expense and rented at attractive rates. Inaccurate underwriting assumptions or reductions in the supply of homes that meet our investment criteria may adversely affect our operating results and ability to implement our business plan.

 

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

 

Most of the expenses associated with our business, such as acquisition costs, renovation and maintenance costs, property management expenses, marketing and leasing expenses, real estate taxes, HOA fees, property and ad valorem taxes, insurance, utilities, employee wages and benefits and other general corporate expenses are fixed and do not necessarily decrease with a reduction in our revenue. Our assets also depreciate over time and will require ongoing capital expenditures. Our expenses and ongoing capital expenditures will also be affected by

 

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inflationary increases and certain of our cost increases may exceed the rate of inflation in any given period. In contrast, our rental income will be affected by independent factors beyond our control, such as the availability of alternative rental housing and economic conditions in our target markets. As a result, we may not be able to fully offset rising expenses and capital expenditures with higher revenues from increasing lease rates, which could have a material adverse effect on our results of operations and cash available for distribution. In addition, state and local regulations may require us to maintain homes that we own, even if the cost of maintenance is greater than the value of the home or any potential benefit from renting the home.

 

We are dependent on investments in a single asset class. A number of factors may impact the market for single-family rentals, some of which may have impacts that are not necessarily intuitive. While recent economic trends have been positive for us, our ability to execute our business model may be negatively impacted by either positive or negative economic trends.

 

We concentrate our investments in single-family homes and as a result we will be subject to risks inherent in investments in a single type of property. The risks associated with our business are more severe during periods of economic slowdown or recession. For example, the ability of residents to pay their rent typically depends on the income or assets of the resident. During an economic slowdown, unemployment rises and increasing numbers of residents have difficulty making payments on their obligations, including rent. An economic slowdown could also result in a reduction in the demand for single-family rentals or in the price for which we may sell any of our homes in the event we choose to do so. Any sustained period of increased payment delinquencies or defaults or reduced rental rates could adversely affect our revenues, results of operations, financial condition, business prospects and ability to make distributions to stockholders. Thus any prolonged economic slowdown or a lengthy or severe recession, whether caused by acts of God, global unrest, acts or threats of terrorism, breakdowns in the financial system or otherwise, could impair our assets or the performance of our assets and harm our operations.

 

Our asset acquisitions will be premised on assumptions about, among other things, occupancy and rent levels, and if those assumptions prove inaccurate, our cash flows and profitability will be reduced. Rental rates and occupancy levels have benefited in recent periods from macro-economic trends in the U.S. and residential real estate markets in particular, including:

 

   

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

 

   

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

 

   

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

 

   

the unprecedented level of vacant housing comprising real estate owned, or REO, inventory (as further described below) held for sale by banks, GSEs and other mortgage lenders or guarantors.

 

We do not expect these favorable trends in the residential rental market to continue indefinitely. As investors like us increasingly seek to capitalize on opportunities to purchase undervalued housing assets and convert them to productive uses, the supply of single-family homes that meet our investment criteria may decrease and the competition for residents may intensify. A strengthening of the U.S. economy and job growth, coupled with government programs designed to keep homeowners in their homes and/or other factors may contribute to a reversal of the current trend that favors renting rather than homeownership and certain potential residents, who may have been some of our most financially qualified residents, may choose to purchase residences rather than lease them, thereby causing a decline in the number and quality of potential residents available to us. A softening of the rental market in our target areas for any reason would reduce our rental income and profitability.

 

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

 

We anticipate that substantially all of our leases will be of a duration of two or fewer years. As these leases permit the residents to leave at the end of the lease term without penalty, we anticipate our rental revenues may be affected by declines in market rents more quickly than if our leases were for longer terms. Short-term leases may result in high turnover, which may involve additional costs for renovation, marketing and leasing and repairs and maintenance, and may also reduce our occupancy levels thus reducing our cash flow. WREG’s average turnover for 2012 was approximately 25%. This limited track record is not an indication of our future results.

 

We may be unable to renew our leases or re-lease our homes at current rates.

 

Our residents may choose to not renew their leases once their lease term is complete or to abandon their leases during their lease term. Their decisions may be impacted by the availability of lower priced housing options, economic conditions, both in our target markets and in the U.S. as a whole, the desirability of our homes compared to other rental properties in our target markets or the desirability of our homes compared to condominiums or single-family homes available for purchase in our target markets. Non-renewals or abandonment may lead to lower than expected occupancy rates and some homes may remain vacant for extended periods of time. Extended vacancy terms may apply downward pressure to rental rates as we may accept rental rates below our targets in order to incentivize residents to choose our homes or prevent the value of our homes from becoming impaired as a result of extended vacancy periods. If either our occupancy rates or rental rates decrease, it may have a negative effect on our ability to generate positive cash flows.

 

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

 

We will periodically review the value of our homes to determine whether their value, based on market factors, projected income and generally accepted accounting principles, has permanently decreased such that it is necessary or appropriate to take an impairment loss in the relevant accounting period. Such a loss would cause an immediate reduction of net income in the applicable accounting period and would be reflected in a decrease in assets on our balance sheet. The reduction of net income from an impairment loss could lead to a reduction in our ability to pay dividends, both in the relevant accounting period and in future periods. The evaluation of anticipated cash flows is highly subjective and is based in part on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results in future periods. A deteriorating real estate market may cause us to reevaluate the assumptions used in our impairment analysis. Even if we do not determine that it is necessary or appropriate to record an impairment loss, a reduction in the intrinsic value of a home would become manifest over time through reduced income from the home and would therefore affect our earnings and financial condition.

 

Our single-family homes may be unable to compete successfully for residents.

 

Our homes compete for residents with other single-family homes, including those owned by WREG’s legacy funds, and multi-family housing options, such as rental apartments and condominiums. Some of these competitors may offer more attractive properties or lower rents than we do, and they may attract the high-quality residents to whom we seek to lease our homes. Additionally, some competing housing options may qualify for governmental subsidies that may make such options more affordable and therefore more attractive than our homes. Competition for residents could reduce our occupancy and rental rates and adversely affect us.

 

Our portfolio will consist of homes geographically concentrated in certain markets and any adverse developments in local economic conditions, the demand for single-family rentals in these markets or natural disasters may have a greater adverse effect on our operating results than if our portfolio was more geographically diversified.

 

We expect that our portfolio will consist of homes that initially will be geographically concentrated in the San Francisco Bay Area, Sacramento, the Inland Empire, Los Angeles, Chicago, Atlanta, Phoenix, Central

 

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Florida and South Florida, and, even as we pursue our strategy to expand into new geographical markets, our homes will remain geographically concentrated. As such, we are susceptible to local economic conditions, other regulations, the supply of and demand for single-family rentals and natural disasters in these areas. If there is a downturn in the economy, an oversupply of or decrease in demand for single-family rentals or a natural disaster in these geographical areas, our business could be materially adversely affected to a greater extent than if we owned a real estate portfolio that was more geographically diversified.

 

WREG relies on information supplied by prospective residents in managing our business; inaccurate information provided by residents may negatively affect our financial performance and reputation.

 

Our success will depend in large part upon WREG’s ability to attract and retain qualified residents for our homes. WREG relies and will continue to rely on information supplied to them by prospective residents in their rental applications to make leasing decisions, and we cannot be certain that this information is accurate. In particular, we rely on information submitted by prospective residents regarding their household income, tenure at current job, number of children and size of household. If resident-supplied information is inaccurate our portfolio may contain more credit risk than we believe.

 

Our residents may default on or fail to comply with the terms of their leases or HOA regulations, and this may negatively affect our financial performance, our reputation and the quality and value of our homes. For example, residents may default on payment of rent, make unreasonable and repeated demands for service or improvements, make unsupported or unjustified complaints to regulatory or political authorities, make use of our homes for illegal purposes, damage or make unauthorized structural changes to our homes which may not be fully covered by security deposits, refuse to leave the home when the lease is terminated, engage in domestic violence or similar disturbances, disturb nearby residents with noise, trash, odors or eyesores, sublet to less desirable individuals in violation of our leases or permit unauthorized persons to live with them. In addition, defaulting residents will often be effectively judgment-proof. The process of evicting a defaulting resident from a family residence can be adversarial, protracted and costly. Furthermore, some residents facing eviction may damage or destroy the property. Damage to our homes may significantly delay re-leasing after eviction, necessitate expensive repairs or impair the rental income or value of the home, resulting in a lower than expected rate of return. In addition, we will likely incur turnover costs associated with re-leasing the homes such as marketing and brokerage commissions and will not collect revenue while the home sits vacant. Although WREG has in place programs to work with residents to prevent such damage or destruction, there can be no assurance that WREG will be successful in all or most cases. Such residents will not only cause us not to achieve our financial objectives for the homes in which they live, but may subject us to liability, and may damage our reputation with our other residents and in the communities where we do business.

 

Our operating results will be adversely affected if our residents fail to meet their obligations under their leases.

 

Our residents have certain obligations under their leases, including the obligation to pay their rent and the obligation to perform certain recurring home maintenance tasks. Their ability to meet these obligations will be subject to many factors, including their individual financial condition, high unemployment or other adverse conditions in our target markets or a general economic downturn.

 

The vast majority of our revenue comes from our rental operations, which are subject to many risks, including decreasing rental rates, increased competition for residents, increased lease default rates and increased resident turnover. If our residents are unable to meet their obligations we may see an increase in resident defaults or bankruptcies which may cause us to experience delays in enforcing our rights as landlord and obtaining possession of the premises, incur legal, maintenance and other costs in protecting our investment and re-leasing the home or impair our ability to re-lease the home at the rental rate previously received.

 

While WREG will manage renovations and significant repairs and maintenance issues, we will nevertheless depend on our residents for certain recurring home maintenance tasks, including certain landscaping tasks, such

 

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as keeping any lawns watered and in good condition. In addition, in the event that a resident goes into default under a lease or becomes subject to eviction proceedings, such resident may choose to cease maintaining their home and we may become responsible for fines levied by an HOA or municipality for failure to meet local ordinances, additional renovation costs or diminution in the value of the home. While issues at an individual home are unlikely to have a material impact on our financial condition, recurring issues at multiple homes across our portfolio could reduce the amount of distributions available to our stockholders, reduce the value of our homes and cause the value of your investment to decline.

 

In the event that we elect to sell any of our homes, we may have difficulty selling such homes, and our ability to distribute all or a portion of the net proceeds from such sales to our stockholders may be limited.

 

Real estate investments are relatively illiquid, and, as a result, we may have a limited ability to sell our homes should the need arise. When we sell our homes, we may not realize gains on such sales. We may elect not to distribute any proceeds from the sales of homes to our stockholders; for example, we may use such proceeds to:

 

   

purchase additional homes;

 

   

repay debt, if any;

 

   

buy out interests of any co-venturers or other partners in any joint venture in which we are a party;

 

   

create working capital reserves;

 

   

complete repairs, maintenance or other capital improvements or expenditures to our remaining homes; or

 

   

for general corporate purposes.

 

Our ability to sell our homes may also be limited by our need to avoid the 100% prohibited transactions tax that is imposed on gain recognized by a REIT from the sale of property characterized as dealer property (that is, certain property held as inventory or primarily for sale to customers in the ordinary course of business). In order to ensure that we avoid such characterization, we may be required to hold our properties for a minimum period of time and comply with certain other requirements in the Code or dispose of our properties through a taxable REIT subsidiary, which will be subject to federal and state income taxation as a corporation.

 

Our debt service obligations could adversely affect our operating results, require us to sell homes and adversely affect our ability to make or sustain distributions to our stockholders and the market price of our common stock.

 

We expect to finance our future business activities in part with indebtedness. We may borrow for a number of reasons, such as to finance acquisitions or capital expenditures or to make distributions necessary for us to qualify as a REIT. We are not restricted by our governing documents in the amount of leverage that we may use. We may, however, be limited or restricted in the amount of leverage we may employ by the terms and provisions of any financing or other agreements that we may enter into in the future.

 

Incurring debt could subject us to many risks, including the risks that:

 

   

our cash flows from operations will be insufficient to make required payments of principal and interest;

 

   

our debt may increase our vulnerability to adverse economic and industry conditions;

 

   

we will be subject to restrictive covenants that require us to satisfy and remain in compliance with certain financial requirements, or that impose limitations on the type or extent of activities we conduct;

 

   

we may be required to dedicate a substantial portion of our cash flows from operations to payments on our debt, thereby reducing cash available for distribution to our stockholders, funds available for operations and capital expenditures, future business opportunities or other purposes; and

 

   

the terms of any refinancing may not be as favorable as the terms of the debt being refinanced.

 

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If we do not have sufficient funds to repay any debt we incur when it matures, we may need to refinance the debt or raise additional equity. If, at the time of any refinancing, prevailing interest rates or other factors result in higher interest rates on re-financings, increases in interest expense could adversely affect our cash flows, and, consequently, cash available for distribution to our stockholders. To the extent we are required to raise additional equity to satisfy such debt obligations, existing stockholders could see their interests diluted. If we are unable to refinance our debt or raise additional equity on acceptable terms, we may be forced to dispose of substantial numbers of homes on disadvantageous terms, potentially resulting in losses. To the extent we cannot meet any future debt service obligations, we will risk losing to foreclosure some or all of our homes that may be pledged to secure our obligations. Any unsecured debt agreements we enter into may contain specific cross-default provisions with respect to specified other indebtedness, giving the unsecured lenders the right to declare a default if we are in default under other loans in some circumstances.

 

We will need additional capital to expand our portfolio and for future capital improvements; if such capital is not available our ability to grow our business or to attract or replace residents may be limited.

 

To qualify as a REIT, we generally must distribute to our stockholders at least 90% of our REIT taxable income each year, determined without regard to the dividends paid deduction and excluding net capital gains, and we will be subject to regular corporate income taxes to the extent that we distribute less than 100% of our REIT taxable income each year. As a result, we will have a limited ability to fund investments or other capital expenditures with retained earnings and we will be dependent on capital markets to finance future capital improvements or growth. We currently do not have commitments to provide debt or equity financing, and may not be able to obtain such commitments in the future.

 

When residents do not renew their leases or otherwise vacate their space, we often are required to expend funds for home renovation, repairs and maintenance may be required to expend funds for leasing commissions in order to re-lease the home. If we have not established reserves for such expenditures, we will have to obtain financing from other sources. We may also have future financing needs for other capital improvements to restore our homes. If we need to secure financing for capital improvements in the future but are unable to secure such financing or are unable to secure financing on terms we feel are acceptable, we may be unable to make capital improvements or we may be required to defer such improvements. If this happens, it may cause our homes to suffer from a greater risk of obsolescence or a decline in value, or a greater risk of decreased cash flow as a result of fewer potential residents being attracted to the home or existing residents not renewing their leases.

 

If financing is available, it may not be available on favorable terms. Difficulties in obtaining financing will limit our ability to grow our business and may adversely impact our ability to generate positive cash flows.

 

Single-family homes that are being sold through foreclosure have an increased risk of damage due to vandalism, mold and infestation, which may require extensive renovation prior to renting.

 

Our acquisition strategy targets distressed single-family homes that often involve defaults by homeowners on their home loan obligations. For multiple reasons, distressed homes may be in worse physical condition than other similar homes. When homeowners fall behind on their mortgage payments, they may cease to maintain the home in good condition, vandalize the home or may abandon the home altogether. Vacant and neglected homes are subject to increased risks of vandalism, theft, mold, infestation, general deterioration and other maintenance problems that may worsen without appropriate attention and remediation. While WREG’s acquisition employees conduct detailed exterior and interior visual inspections when possible prior to purchase and our homes are periodically inspected after purchase as part of our asset protection program, we may not become aware of conditions such as water infiltration, mold or infestation until significant damage has been done to a home. Such damage may require extensive remediation and repairs and may require us to provide substitute housing for a resident.

 

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We expect to purchase a portion of our homes at auction, where we generally are not able to conduct a thorough inspection before purchasing the homes, and we may not accurately assess the extent of renovations required.

 

Although the percentage of homes that WREG has historically purchased at auction is expected to continue to decline, we expect that WREG will continue to evaluate homes available for purchase at auction and we expect to invest in such homes where they meet our investment criteria. When WREG purchases homes at auction, it generally does not have the opportunity to conduct interior inspections and may not be able to access a home to conduct more than the most cursory of exterior inspections. These inspection processes may fail to reveal major defects associated with homes we acquire, which may result in renovation and maintenance costs and time frames that far exceed our estimates and negatively affect our financial results and earnings.

 

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

 

We expect to perform detailed assessments of each home after our initial investment and after re-taking possession upon the departure of our residents. As a result of the assessment we may choose to perform customary repairs or significant improvements designed to optimize the rental value of the home. We expect that nearly all of our homes will require some level of renovation immediately upon their acquisition or in the future following expiration of a lease or otherwise. We may acquire homes that we plan to extensively renovate. We may also acquire homes that we expect to be in good condition only to discover unforeseen defects and problems that require extensive renovation and capital expenditures. In addition, we will be required to make ongoing capital improvements and may need to perform significant renovations from time to time to reposition homes in the rental market. Our homes will have infrastructure and appliances of varying ages and conditions. Consequently, we expect that WREG will routinely, at our cost, either utilize its internal maintenance personnel or retain independent contractors and trade professionals to perform physical repair work and we will be exposed to all of the risks inherent in home renovation, including potential cost overruns, increases in labor and materials costs, delays by contractors in completing work, delays in the timing of receiving necessary work permits, certificates of occupancy and poor workmanship. Although we do not expect that renovation difficulties on any individual home will be significant to our overall results, if our assumptions regarding the costs or timing of renovation across our portfolio prove to be materially inaccurate, our earnings and distributable cash may be adversely affected.

 

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

 

Many homes in our target markets were built prior to 1978, and those premises may contain lead-based paint. The existence of lead-based paint is especially a concern in residential units and can cause health problems, particularly for children. A structure built prior to 1978 may contain lead-based paint and may present a potential exposure to lead; however, structures built after 1978 are not likely to contain lead-based paint. Federal and state laws impose certain disclosure requirements and restrict and regulate renovation activities on housing built before 1978. Violation of these restrictions could result in fines or criminal liability, and we could be subject to liability arising from lawsuits alleging personal injury or related claims. Although we and WREG will attempt to comply with all such regulations, we cannot guarantee that we will not incur any material liabilities as a result of the presence of lead-based paint in our homes.

 

We may purchase homes that are part of HOAs, and we and our residents may be subject to the rules and regulations of such HOAs, which may be arbitrary or restrictive, and violations of such rules may subject us to additional fees and penalties and litigation with such HOAs that would be costly.

 

We may invest in homes that are located within HOAs, which are private entities that regulate the activities of residents and levy assessments on properties in a residential subdivision. HOAs may have or enact onerous or arbitrary rules that restrict our ability to renovate, market or lease our homes or require us to renovate or maintain

 

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

 

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

 

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

 

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

 

We will attempt to ensure that all of the homes we acquire are adequately insured to cover casualty losses. Nevertheless, our homes may be damaged by adverse weather conditions and natural disasters such as earthquakes, wind, floods, landslides, fires and tsunamis or by acts of war, terrorism or riots. In addition, our homes may be subject to environmental liabilities and we will be exposed to personal liability for accidents that may occur at our homes. Our insurance may not be adequate to cover all damages or losses from these events, or it may not be economically prudent to purchase insurance for certain types of losses, such as earthquakes or hurricanes. As a result, we may be required to incur significant costs in the event of adverse weather conditions and natural disasters or events which result in environmental or personal liability. We may not carry or may discontinue certain types of insurance coverage on some or all of our homes in the future if the cost of premiums for any of these policies in our judgment exceeds the value of the coverage discounted for the risk of loss. Because we intend to concentrate ownership in target markets, if we own numerous homes in a geographic area affected by a natural disaster or similar catastrophic event, it could damage or destroy a substantial portion of our real estate assets, and expose us to liabilities to our affected residents to immediately repair or replace their leaseholds on non-economic terms. If we experience losses that are uninsured or exceed policy limits, we could incur significant uninsured costs or liabilities, lose the capital invested in the homes, lose the anticipated future cash flows from those homes, and remain obligated under any recourse debt associated with those homes.

 

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Inflation, changes in building codes and ordinances, environmental considerations, increased insurance premiums or other factors might also keep us from using insurance proceeds to replace or restore a home after it has been damaged or destroyed. Under those circumstances, the insurance proceeds we receive may be inadequate to restore our economic position on the damaged or destroyed home, we may have no other source of funding to repair or restore the home, and we cannot guarantee that other sources of funding would become available in the future. In addition, our environmental or personal liability may result in losses substantially in excess of the value of the related property. Any such losses could adversely affect us and the market price of our common stock.

 

Title defects and eminent domain could lead to material losses on our investments in single-family homes.

 

Although we currently intend to acquire title insurance on the majority of our homes when it is available, we may also acquire a number of homes on an “as is” basis at auctions, without the benefit of title insurance prior to closing. Increased scrutiny of title matters, particularly in the case of foreclosures, could lead to legal challenges with respect to the validity of the sale. In the absence of title insurance, the sale may be rescinded and we may be unable to recover our purchase price, resulting in a complete loss. Title insurance obtained subsequent to purchase offers little protection against discoverable defects as they are typically excluded from such policies. Although WREG has in place policies, procedures and practices to assess the state of title prior to purchase, there can be no assurance that these policies and procedures will be completely effective, which could lead to a material if not complete loss on our investment in such homes. In addition, even if we are able to acquire title insurance on a property, the title insurance provider may assert that we are not entitled to coverage under the policy and deny any claims we have thereunder, or, the insurance may not cover all defects or the significant legal costs associated with obtaining clear title.

 

Our title to a property, especially those acquired at auction, may be challenged for a variety of reasons including allegations of defects in the foreclosure process. Title insurance may not prove adequate in these instances.

 

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

 

We anticipate being involved in a variety of legal actions and administrative proceedings as a result of which we may incur significant costs.

 

We anticipate involvement in a variety of legal actions and administrative proceedings that arise from time to time in the ordinary course of business. These matters may include eviction proceedings and other landlord-tenant disputes, challenges to title and ownership rights (including actions brought by prior owners alleging wrongful foreclosure by their lender or servicer), liability claims related to incidents which may occur at our homes involving our residents and their guests and issues with local housing officials arising from the condition or maintenance of the property. While we intend to vigorously defend any non-meritorious claim or proceeding, no assurance can be given that we will not incur significant costs or be subject to material losses as a result.

 

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

 

As a result of our substantial real estate holdings, the cost of real estate taxes and insuring our homes is a significant component of our expenses. In addition, a portion of our homes may be subject to HOAs, which have the power to increase monthly charges and make assessments for capital improvements and common area repairs. Real estate taxes, HOA fees and insurance premiums are subject to significant increases, which can be outside of

 

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our control. If the costs associated with real estate taxes, HOA fees and assessments or insurance should rise significantly and we are unable to raise rents to offset such increases, our results of operations would be negatively impacted.

 

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

 

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

 

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

 

We will incur significant legal, accounting, insurance and other expenses as a result of being a public company. The Dodd-Frank Act and the Sarbanes-Oxley Act, as well as related rules implemented by the SEC and the NASDAQ Global Market, have required changes in corporate governance practices of public companies. In addition, rules that the SEC is implementing or is required to implement pursuant to the Dodd-Frank Act are expected to require additional changes. We expect that compliance with these and other similar laws, rules and regulations, including compliance with Section 404 of the Sarbanes-Oxley Act, will substantially increase our expenses, including our legal and accounting costs, and make some activities more time-consuming and costly. We also expect these laws, rules and regulations to make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage, which may make it more difficult for us to attract and retain qualified persons to serve on our board of directors or as officers. We will face increased costs regardless of whether we are able to expand our scale of operations and our financial performance may suffer if we do not grow our revenue sufficiently to offset these costs.

 

We may be required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting for the first fiscal year beginning after the effective date of this offering. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting, as well as a statement that our independent registered public accounting firm has issued an opinion on our internal control over financial reporting.

 

We have not yet commenced the costly and challenging process of compiling the system and processing documentation necessary to perform the evaluation needed to comply with Section 404. We may not be able to complete our evaluation, testing and any required remediation in a timely fashion. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal controls are effective.

 

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If we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal controls, investors could lose confidence in the accuracy and completeness of our financial reports, which could cause the price of our common stock to decline, and we may become subject to investigation or sanctions by the SEC. We will be required to disclose changes made in our internal control system and procedures on a quarterly basis. However, our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 until the later of the year following our first annual report required to be filed with the SEC or the date we are no longer an “emerging growth company,” as defined in the JOBS Act, if we take advantage of the exemptions contained in the JOBS Act. Although the JOBS Act may, for a limited period of time, somewhat lessen the cost of complying with these additional regulatory and other requirements, we nonetheless expect a substantial increase in legal, accounting, insurance and certain other expenses in the future, which will negatively impact our results of operations and financial condition. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

 

The recently enacted JOBS Act will allow us to postpone the date by which we must comply with certain laws and regulations intended to protect investors and to reduce the amount of information we provide in our reports filed with the SEC.

 

The recently enacted JOBS Act is intended to reduce the regulatory burden on “emerging growth companies.” As defined in the JOBS Act, a public company whose initial public offering of common equity securities occurred after December 8, 2011 and whose annual gross revenues are less than $1.0 billion will, in general, qualify as an “emerging growth company” until the earliest of:

 

   

the last day of its fiscal year following the fifth anniversary of the date of its initial public offering of common equity securities;

 

   

the last day of its fiscal year in which it has annual gross revenue of $1.0 billion or more;

 

   

the date on which it has, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; and

 

   

the date on which it is deemed to be a “large accelerated filer,” which will occur at such time as the company (1) has an aggregate worldwide market value of common equity securities held by non-affiliates of $700 million or more as of the last business day of its most recently completed second fiscal quarter, (2) has been required to file annual and quarterly reports under the Exchange Act for a period of at least 12 months and (3) has filed at least one annual report pursuant to the Exchange Act.

 

Under this definition, we will be an “emerging growth company” upon the completion of this offering and could remain an “emerging growth company” until as late as December 31, 2018.

 

The JOBS Act provides that, so long as a company qualifies as an “emerging growth company,” it will, among other things:

 

   

be exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring that its independent registered public accounting firm provide an attestation report on the effectiveness of its internal control over financial reporting;

 

   

be exempt from the “say on pay” provisions (requiring a non-binding stockholder vote to approve compensation of certain executive officers) and the “say on golden parachute” provisions (requiring a non-binding stockholder vote to approve golden parachute arrangements for certain executive officers in connection with mergers and certain other business combinations) of the Dodd-Frank Act and certain disclosure requirements of the Dodd-Frank Act relating to compensation of its chief executive officer;

 

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be permitted to omit the detailed compensation discussion and analysis from proxy statements and reports filed under the Exchange Act and instead provide a reduced level of disclosure concerning executive compensation; and

 

   

be exempt from any rules that may be adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotation or a supplement to the auditor’s report on the financial statements.

 

Although we are still evaluating the JOBS Act, we currently may take advantage of some or all of the reduced regulatory and reporting requirements that will be available to us so long as we qualify as an “emerging growth company.” Among other things, this means that our independent registered public accounting firm will not be required to provide an attestation report on the effectiveness of our internal control over financial reporting so long as we qualify as an “emerging growth company,” which may increase the risk that weaknesses or deficiencies in our internal control over financial reporting go undetected. Likewise, so long as we qualify as an “emerging growth company,” we may elect not to provide you with certain information, including certain financial information and certain information regarding compensation of our executive officers, that we would otherwise have been required to provide in filings we make with the SEC, which may make it more difficult for investors and securities analysts to evaluate our company. As a result, investor confidence in our company and the market price of our common stock may be adversely affected.

 

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

 

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

 

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

 

In addition, the U.S. Congress and numerous state legislatures have considered, proposed or adopted legislation to constrain foreclosures, or may do so in the future. For example, in 2012, California, one of our major target markets, enacted a law imposing new limitations on foreclosures while a request for a loan

 

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modification is pending. The Dodd-Frank Act also created the Consumer Financial Protection Bureau, which supervises and enforces federal consumer protection laws as they apply to banks, credit unions and other financial companies, including mortgage servicers. It remains uncertain as to whether any of these measures will have a significant impact on foreclosure volumes or what the timing of that impact would be. If foreclosure volumes were to decline significantly, we would expect single-family housing inventory levels to decline or to grow at a slower pace, which would make it more difficult to find target assets at attractive prices and might constrain our growth or reduce our long-term profitability. Also, the number of families seeking rental housing might be reduced by such legislation, reducing rental housing demand in our target markets.

 

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

 

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

 

Each state has its own laws governing the procedures to foreclose on mortgages and deeds of trust, and state laws generally require strict compliance with these laws in both judicial and non-judicial foreclosures. Recently, courts and administrative agencies have been more actively involved in enforcing state laws governing foreclosures, and in some circumstances, have imposed new rules and requirements regarding foreclosures. Some courts have delayed or prohibited foreclosures based on alleged failures to comply with proper transfers of title, notice, identification of parties in interest, documentation and other legal requirements. Further, foreclosed owners and their legal representatives, including some prominent and well-financed legal firms, have brought litigation questioning the validity and finality of foreclosures that have already occurred. These developments may slow or reduce the supply of foreclosed houses available to us for purchase and may call into question the validity of our title to houses acquired at foreclosure, or result in rescission rights or other borrower remedies, which could result in a loss of a home purchased by us that may not be covered by title insurance, an increase in litigation costs incurred with respect to homes obtained through foreclosure, or delays in stabilizing and leasing such homes promptly after acquisition.

 

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

 

Our homes are subject to various covenants and local laws and regulatory requirements, including permitting and licensing requirements. Local regulations, including building codes and other municipal or local ordinances, zoning restrictions and restrictive covenants imposed by community developers or HOAs, may restrict our use of our homes and may require us to obtain approval from local officials or community standards organizations at any time with respect to our homes, including prior to acquiring a home or when undertaking renovations of any of our existing homes. Among other things, these restrictions may relate to fire and safety, seismic, asbestos cleanup or hazardous material abatement requirements. We cannot assure you that existing regulatory policies will not adversely affect us or the timing or cost of any future acquisitions or renovations, or that additional regulations will not be adopted that would increase such delays or result in additional costs. Our failure to obtain permits, licenses and zoning approvals on a timely basis could have a material adverse effect on our business, financial condition and results of operations.

 

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

 

Distressed homes that are purchased at auction are often occupied and may require us to evict the prior occupant of the premises. Additionally, as landlord of numerous homes, we may regularly be in the situation of

 

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having to evict residents who are not paying their rent or are otherwise in material violation of the terms of their lease. Eviction activities will impose legal and managerial expenses that will raise our costs. The eviction process is typically subject to legal barriers, mandatory “cure” policies and other sources of delay, each of which may increase our expenses and delay our ability to gain possession and stabilize the home. Additionally, state and local landlord-tenant laws may impose legal duties to assist residents in relocating to new housing, or restrict the landlord’s ability to recover certain costs or charge residents for damage residents cause to the landlord’s premises. Because such laws vary by state and locality, WREG and its employees will need to be familiar with and take all appropriate steps to comply with all applicable landlord-tenant laws, and we will incur supervisory and legal expenses to insure such compliance. To the extent that WREG does not comply with state or local laws, we may be subjected to civil litigation filed by individuals, in class actions or by state or local law enforcement. We may be required to pay our adversaries’ litigation fees and expenses if judgment is entered against us in such litigation, or if we settle such litigation.

 

Furthermore, rent control laws may affect our rental income. Especially in times of recession and economic slowdown, rent control initiatives can acquire significant political support. Were rent control to unexpectedly become applicable to certain of our homes, the effects on both our rental income and the value of such homes could be material and adverse.

 

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

 

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

 

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

 

Real estate investments are subject to various risks and fluctuations and cycles in value and demand, many of which are beyond our control. Certain events may decrease cash available for dividends as well as the value of our homes. These events include, but are not limited to:

 

   

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

 

   

adverse changes in financial conditions of buyers, sellers and residents of homes;

 

   

acts beyond our control which may result in uninsured losses, such as civil unrest, acts of God, including earthquakes, hurricanes, tornadoes, floods, volcanic activity, major storms and other natural disasters and acts of war or terrorism, including the consequences of terrorist acts such as those that occurred on September 11, 2001;

 

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the safety, convenience and attractiveness of our homes to potential residents compared against other homes;

 

   

increases in supply of, or decreases in demand for, single-family rentals and other competing properties in our target markets;

 

   

changes in the relative popularity of properties and neighborhoods;

 

   

inability to collect rent from residents due to resident bankruptcies, lease defaults, financial difficulties or other factors;

 

   

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

 

   

the inability or unwillingness of residents to pay increased rents;

 

   

changes in interest rates, availability and terms of debt financing;

 

   

general illiquidity of real estate investments;

 

   

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

 

   

changes in the deductibility of mortgage interest;

 

   

changes in the structure or policies of GSEs;

 

   

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

 

   

changes in, changes in enforcement of, increased cost of compliance with laws, or increased potential liability under, regulations and governmental policies, including health, safety, environmental, rental property, zoning and tax laws, governmental fiscal policies and the Americans with Disabilities Act of 1990.

 

In addition to the occurrence of these events, the public perception that any of these events may occur, could result in a general decline in rents or an increased incidence of defaults under existing leases. If we cannot lease our homes to meet our financial expectations, our financial condition, results of operations, cash flows, the market price of our common stock, ability to satisfy our debt service obligations and ability to pay dividends to you could be adversely affected.

 

We may obtain only limited warranties when purchasing a home and would have only limited recourse in the event our due diligence did not identify any issues that lower the value of our home.

 

The seller of a property often sells such property in its “as is” condition on a “where is” basis and “with all faults” without any warranties of merchantability or fitness for a particular use or purpose. In addition, purchase and sale agreements may contain only limited warranties, representations and indemnifications that will only survive for a limited period after the closing. The purchase of homes with limited warranties increases the risk that we may lose some or all of our invested capital in the home, as well as the loss of rental revenue from that home.

 

Environmentally hazardous conditions may adversely affect our operating results.

 

Under various federal, state and local environmental laws, a current or previous owner or operator of real property may be liable for the cost of removing or remediating hazardous or toxic substances on such property. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. Even if more than one person may have been responsible for the contamination, each person covered by applicable environmental laws may be held responsible for all of the clean-up costs incurred. In addition, third parties may sue the owner or operator of a site for damages based on personal injury, natural resources or property damage or other costs, including investigation and clean-up costs,

 

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resulting from the environmental contamination. The presence of hazardous or toxic substances at one of our homes, or the failure to properly remediate a contaminated home, could give rise to a lien in favor of the government for costs it may incur to address the contamination or otherwise adversely affect our ability to sell or lease the home or borrow using the home as collateral. A property owner who violates environmental laws may be subject to sanctions which may be enforced by governmental agencies or, in certain circumstances, private parties. In connection with the acquisition and ownership of our homes, we may be exposed to such costs. The cost of defending against environmental claims, of compliance with environmental regulatory requirements or of remediating any contaminated property could materially and adversely affect us.

 

Compliance with new or more stringent environmental laws or regulations or stricter interpretation of existing laws may require material expenditures by us. We may be subject to environmental laws or regulations relating to our homes, such as those concerning lead-based paint, mold, asbestos, proximity to power lines or other issues. We cannot assure you that future laws, ordinances or regulations will not impose any material environmental liability or that the current environmental condition of our homes will not be affected by the activities of residents, existing conditions of the land, operations in the vicinity of the homes or the activities of unrelated third parties. In addition, there are various local, state and federal fire, health, life-safety and similar regulations that we may be required to comply with. Failure to comply with applicable laws and regulations could result in fines and/or damages, suspension of personnel, civil liability and/or other sanctions.

 

Risks Related to Our Relationship with WREG

 

We are dependent upon WREG and its key personnel, who provide services to us through the management agreement, and we may not find suitable replacements if these agreements are terminated or these key personnel leave WREG or otherwise become unavailable to us.

 

We have no employees and no separate facilities. Our President and Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, Chief Technology Officer and Chief Legal Officer are employees of WREG. We are completely dependent upon WREG, which has significant discretion as to the implementation and execution of our investment and operating policies and business strategies. Our success will depend upon the efforts, experience, diligence, skill and network of business contacts of the officers and key personnel of WREG. WREG does not have employment agreements with any of our executive officers and we cannot guarantee that all, or any particular one, will remain affiliated with us or WREG. The departure of any of our executive officers or key personnel of WREG could have a material adverse effect on our performance.

 

We can offer no assurance that WREG will remain our manager or that we will continue to have access to WREG’s principals and professionals. WREG will not be obligated to dedicate any specific personnel exclusively to us, nor will they be obligated to dedicate any specific portion of time to our business, and none of WREG’s employees are contractually dedicated to us under our management agreement with WREG. Some of the officers and employees of WREG have significant responsibilities associated with WREG’s management of its legacy funds and as a result, these individuals may not always be willing or able to devote sufficient time to the management of our business.

 

The initial term of the management agreement with WREG only extends until [·] years after the close of this offering, subject to extension in the event we have not completed the internalization of WREG. WREG may terminate the management agreement either annually upon [·] days’ notice or at the end of the [·] extension term in the event that we choose not to internalize WREG. If the management agreement is terminated and no suitable replacement is found to manage us, we may not be able to execute our business plan.

 

WREG’s operations are dependent upon Compass. The interruption of WREG’s ability to use Compass may have an adverse impact on our business.

 

WREG is dependent upon Compass, which includes certain automated processes that require access to telecommunications or the internet, each of which is subject to system security risks. Certain critical components

 

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of Compass are dependent upon third-party providers and a significant portion of WREG’s business operations are conducted over the internet. As a result, we could be severely impacted by a catastrophic occurrence, such as a natural disaster or a terrorist attack, or a circumstance that disrupted access to telecommunications, the internet or operations at our third-party providers, including viruses or experienced computer programmers that could penetrate network security defenses cause system failures and disruptions of operations. Even though WREG believes it utilizes appropriate duplication and back-up procedures, a significant outage in telecommunications, the internet or at WREG’s third-party providers could negatively impact our operations.

 

WREG is still building its operational expertise and infrastructure, and it is dependent upon new employees to manage and operate our homes.

 

Since the beginning of its operations in 2009, WREG has been steadily growing its capabilities in the management of single-family homes owned by the legacy funds. WREG has been hiring new employees to provide a variety of services and establishing mutually beneficial relationships with third-party service providers. Nevertheless, most of these employees and relationships are relatively new to WREG, and as we grow and expand into new markets, WREG will need to hire and train additional employees, and may elect to hire additional third-party resources. In addition, WREG will need to continually evaluate and improve infrastructure and processes including those related to our initial investment, construction and renovation, repairs and maintenance, residential management and leasing, brand development, accounting systems and billing and payment processing.

 

Building operational expertise, establishing infrastructure, and training employees to use the infrastructure are difficult, expensive and time-consuming tasks, and we can expect problems to arise despite the best efforts of WREG. There is a significant risk that any operational problems encountered by WREG will have an adverse effect upon our financial performance, especially in newer markets that WREG has recently entered.

 

From beginning operations in 2009, WREG has grown to 374 employees as of March 15, 2013, with 137 employees having been hired in the last six months.

 

WREG may have interests that diverge from the interests of our stockholders.

 

We are subject to conflicts of interest arising out of our relationship with WREG. Each of Gary Beasley, our President and Chief Executive Officer; Nina Tran, our Chief Financial Officer; Scott Gable, our Chief Operating Officer; Ali Nazar, our Chief Technology Officer; and Tamra Browne, our Chief Legal Officer owns an indirect beneficial ownership interest in WREG. These individuals, as well as other employees of WREG on whom we rely, could make substantial profits as a result of opportunities or management resources allocated to entities other than us. Our executive officers and other employees of WREG may face conflicts between their duties to us and their duties to WREG. The ability of our executive officers and other employees of WREG to engage in other business activities may reduce the time WREG devotes to managing our business. For instance, when there are turbulent conditions in the real estate markets or distress in the credit markets, the attention of our executive officers and other WREG personnel and the resources of WREG will also be required by the legacy funds and other investment vehicles managed by WREG. In such situations, we may not receive the level of support and assistance that we may receive if we were internally managed.

 

Concurrently with the completion of this offering, we will grant to our executive officers and WREG’s employees [·] shares of restricted stock. This award will vest ratably in [·] installments over a [·]-year period beginning on [·]. In evaluating assets and other management strategies, these awards may lead WREG to drive the price of our common stock higher in the short-term by placing emphasis on the maximization of revenues at the expense of other criteria, such as preservation of capital. Once vested, to the extent WREG sells some of the shares, its interests may be less aligned with the interests of our stockholders.

 

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The historical returns attributable to WREG’s legacy funds should not be considered indicative of our future results or of any returns expected on an investment in shares of our common stock.

 

We have presented in this prospectus under the section entitled “Our Manager and the Management Agreement—Historical Performance of WREG” information relating to the historical performance of WREG’s legacy funds. Investors should not assume that they will experience returns, if any, comparable to those experienced by investors in WREG’s legacy funds. In reviewing the historical performance of WREG’s legacy funds, you should consider that these funds are not subject to the income, asset and other limitations imposed by the REIT provisions of the Code. Moreover, we and WREG’s legacy funds are different in that:

 

   

we have different investment focuses, targeting different geographical regions, although some of the regions overlap;

 

   

we may use leverage and hedging strategies in a different manner than WREG’s legacy funds;

 

   

our fee structure is different from that of WREG’s legacy funds;

 

   

WREG’s legacy funds have operated under market conditions that may differ materially from market conditions that will exist at the time we make investments; and

 

   

WREG’s legacy funds have an established portfolio of assets, while we do not.

 

Additionally, the past performance of WREG’s legacy funds is not a guarantee or prediction of the returns that we may achieve in the future. Accordingly, the historical returns of WREG’s legacy funds will not be indicative of the performance of our investment strategy, and we can offer no assurance that WREG will replicate the historical performance of WREG’s investment professionals in their previous endeavors.

 

WREG currently manages and will continue to manage the single-family rental portfolios of its legacy funds and may manage additional single-family rentals for third parties. WREG’s outside management obligations may result in certain conflicts of interest that could have an adverse effect on our business.

 

WREG manages single-family real estate portfolios owned by WREG’s legacy funds and is not restricted from managing additional single-family rentals on behalf of third parties. As a result, WREG may compete directly with us for financing opportunities, residents and in other aspects of our business, which could have an adverse effect on our business. WREG has no fiduciary duties to us and there is no assurance that any conflicts of interest between WREG and us will be resolved in favor of our stockholders.

 

In contrast to many publicly traded REITs owning more traditional real estate asset classes or real estate-related securities portfolios, we believe that the success of our business will require a significantly higher level of hands-on day-to-day attention from WREG. Because WREG will continue to manage WREG’s legacy funds and may manage third parties’ single-family rental portfolios, WREG’s employees will have less time available to devote to our business and may be unable to effectively allocate their time and other resources among multiple portfolios. Accordingly, the quality of services provided to us by WREG could decline, which could adversely impact all aspects of our business, including our growth prospects, resident retention, occupancy and/or our results of operations.

 

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

 

Our President and Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, Chief Technology Officer and Chief Legal Officer will also serve as employees of WREG. In addition, certain of our directors are employees and/or indirect minority owners of WREG. The management agreement with WREG was negotiated between related parties, and its terms, including fees and reimbursements payable to WREG, may not be as favorable to us as if they had been negotiated with unaffiliated third parties. The terms of the management agreement may not solely reflect your best interest and may be overly favorable to WREG,

 

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including in terms of the substantial compensation to be paid to WREG. Further, we may choose not to enforce, or to enforce less vigorously, our rights under the management agreement because of our desire to maintain our ongoing relationships with WREG.

 

WREG and its employees and members have a conflict of interest because the management fee is based on our consolidated undepreciated gross assets, not our financial performance, and because WREG passes through a certain percentage of its costs and expenses to us regardless of performance or efficiency.

 

In contrast to other asset and property managers that receive a success fee based on financial performance, WREG is entitled to receive a management fee that is based on our consolidated undepreciated gross assets at the end of each quarter, regardless of our financial performance. Accordingly, significant management fees will be payable to WREG even if we experience net losses. The management fee structure gives WREG the incentive to maximize our consolidated undepreciated gross assets by the acquisition of homes, the issuance of new common stock, the incurrence of debt and the expansion of our scale of operations, regardless of the effect of this action on existing stockholders. In other words, the management fee structure rewards WREG primarily based on our consolidated undepreciated gross assets, and not on our returns to stockholders.

 

Pursuant to the management agreement we must reimburse WREG for all expenses incurred on our behalf or otherwise included in the operation of our business, including an allocation of its overhead expenses. The right of WREG to such reimbursements reduces its incentive to negotiate favorable contracts with third parties and minimize costs and expenses in operating our business, including the salaries of WREG’s employees, which could negatively affect our financial results.

 

The management agreement requires us to pay WREG a substantial fee in the event we terminate the management agreement for any reason other than cause (or upon a termination by WREG due to our material breach), which may adversely affect our ability to end our relationship with WREG.

 

The initial term of the management agreement will end on [·], with up to two, one-year automatic extensions if we have not yet completed the internalization of WREG by the end of such term, as extended. After the second extended term of the management agreement (if the internalization of WREG has not occurred), we may, with not less than [·] days prior written notice, terminate the management agreement upon payment of a termination fee equal to [·]. While the management agreement is in effect, it is terminable by us after 30 days’ prior written notice without payment of any termination fee in the case of, and only in the case of:

 

   

WREG’s gross negligence, bad faith, fraud or willful misconduct;

 

   

WREG’s continued material breach of the advisory management agreement following a period of 30 days after written notice thereof;

 

   

the occurrence of certain events with respect to the bankruptcy or insolvency of WREG, including an order for relief in an involuntary bankruptcy case or WREG authorizing or filing a voluntary bankruptcy petition;

 

   

a change of control of WREG, as defined in the management agreement, if a majority of our independent directors reasonably determines that the change of control is materially detrimental to us;

 

   

WREG’s conviction (including a plea of nolo contendere) of a felony; or

 

   

the dissolution of WREG.

 

These provisions increase the effective cost to us of terminating our relationship with WREG. Consequently, we may not be able to terminate our relationship with WREG even if our board of directors believes WREG is not properly executing our business strategy. If the management agreement is terminated and no suitable replacement is found to manage us, we may not be able to execute our business plan.

 

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If we internalize WREG, we will become exposed to new and additional costs and risks and may pay substantial consideration to WREG.

 

If we internalize WREG, we will become exposed to new and additional costs and risks. For example, while we would no longer bear the external costs of the management fee paid to WREG if we become internally managed, our direct overhead may increase, as we would be responsible for 100% of the compensation and benefits of our officers and other employees, including the portion of compensation and benefits of WREG’s officers and other employees allocated to its legacy funds, which we may not be able to fully recoup. If the homes we acquire do not perform as anticipated or if we fail to raise additional financing, we may not be able to cover such additional overhead. As a direct employer, we would also be subject to those potential liabilities that are commonly faced by employers, such as workers disability and compensation claims, potential labor disputes and other employee-related liabilities and grievances. In addition, internalizing WREG may require that we pay substantial consideration to WREG. This could require that we obtain additional financing, which may not be available on favorable terms or at all. Accordingly, if we internalize WREG, our financial condition and operating results may be adversely affected.

 

We may choose to not internalize WREG despite the fact that we may have the right and the ability to internalize it; if we choose to not internalize, WREG may have the right to terminate the management agreement.

 

Pursuant to the management agreement, WREG is obligated to present to us a proposal to internalize WREG following the initial term of the management agreement, the first extension term and the second extension term and upon the occurrence of certain other pre-determined events. While WREG’s proposed internalization price will be subject to a cap of [·], WREG is only obligated to propose an internalization price no higher than such cap. No assurances can be given that we will internalize WREG on the foregoing terms or at all. After the initial term and, if applicable, an extension term of the management agreement, in the event that we, for any reason whatsoever, choose to not internalize WREG, WREG will continue to collect its management fee and any reimbursements to which it is entitled. After the second extension term of the management agreement, if we choose to not acquire WREG, WREG will then have the right to terminate the management agreement.

 

The liability of WREG is limited under the management agreement, and we have agreed to indemnify WREG and its affiliates and advisers, against certain liabilities. As a result, we could experience poor performance or losses for which WREG would not be liable.

 

Pursuant to the management agreement, WREG does not assume any responsibility other than to render the services called for thereunder and will not be responsible for any action of our board of directors in following or declining to follow its advice or recommendations. WREG and its officers, stockholders, members, managers, personnel and directors, any person controlling or controlled by WREG and any person providing sub-advisory services to WREG will not be liable to us, any of our subsidiaries, any of our directors, stockholders or partners or any subsidiary’s stockholders, members or partners for acts or omissions performed in accordance with or pursuant to the management agreement, except by reason of acts constituting reckless disregard of WREG’s duties under the management agreement that have a material adverse effect on us, bad faith, fraud, willful misconduct or gross negligence, as determined by a final non-appealable order of a court of competent jurisdiction. We have agreed to indemnify WREG and its affiliates with respect to all expenses, losses, damages, liabilities, demands, charges and claims arising from acts or omissions of such indemnified parties not constituting reckless disregard of WREG’s duties under the management agreement that have a material adverse effect on us, bad faith, fraud, willful misconduct or gross negligence. As a result, if we experience poor performance or losses, WREG would not be liable.

 

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We expect our board of directors to approve very broad investment guidelines and to not review or approve each acquisition decision made by WREG.

 

WREG will be authorized to follow very broad investment guidelines. Our board of directors will periodically review and update our investment guidelines and will also review our portfolio of homes and short-term investments, but it will not review or approve specific home acquisitions. In addition, in conducting periodic reviews, our board of directors may rely primarily on information provided to them by WREG. WREG has great latitude within the broad parameters of the investment guidelines set by our board of directors in determining our acquisition strategies, which could result in net returns that are substantially below expectations or that result in material losses. Furthermore, WREG may use complex strategies, and transactions entered into by WREG may be costly, difficult or impossible to unwind by the time they are reviewed by our board of directors. Moreover, decisions made by WREG may not be in your best interest.

 

The conflicts of interest policy we will adopt may not adequately address all of the conflicts of interest that may arise with respect to our investment activities and also may limit the allocation of investments to us.

 

In order to avoid any actual or perceived conflicts of interest with WREG, its subsidiaries and affiliates, we will adopt a conflicts of interest policy prior to the closing of this offering to specifically address some of the conflicts relating to our investment opportunities. Although under this policy the approval of a majority of our independent directors will be required to approve (i) any purchase of our assets by any of WREG’s subsidiaries or affiliates and (ii) any purchase by us of any assets of any of WREG’s subsidiaries or affiliates, there is no assurance that this policy will be adequate to address all of the conflicts that may arise or will address such conflicts in a manner that results in the allocation of a particular investment opportunity to us or is otherwise favorable to us. Since our executives are also executives of WREG, the same personnel may determine the timing, price and terms for the investments for both us and other subsidiaries or affiliates and there can be no assurance that any procedural protections, such as obtaining market prices or other reliable indicators of fair market value, will ensure that we receive the same opportunities to purchase certain desirable homes as other of WREG’s subsidiaries or affiliates.

 

Under our management agreement, WREG has a contractually defined duty to us rather than a fiduciary duty, which may cause WREG to devote fewer resources to managing us than if it had a statutory duty.

 

Under the management agreement, WREG maintains a contractual as opposed to a fiduciary relationship with us, which limits WREG’s obligations to us to those specifically set forth in the management agreement. The ability of WREG (or its personnel) and its officers and employees to engage in other business activities may reduce the time WREG spends managing us. In addition, unlike for directors, there is no statutory standard of conduct under the MGCL, for officers of a Maryland corporation. Instead, officers of a Maryland corporation, including our officers who are employees of WREG, are subject to general agency principals, including the exercise of reasonable care and skill in the performance of their responsibilities, as well as the duties of loyalty, good faith and candid disclosure.

 

Risks Related to This Offering and Ownership of Our Common Stock

 

We have not identified specific acquisitions or other uses for the net proceeds from this offering. Therefore, you will be unable to evaluate the allocation of the net proceeds from this offering or the economic merits of our investments before making an investment decision to purchase our common stock.

 

We have broad authority to invest the net proceeds from this offering in any real estate investments that we may identify in the future, and we may use those proceeds to make investments with which you may not agree. You will be unable to evaluate the economic merit of our homes before we invest in them and will be relying on our ability to select attractive investments. We also have broad discretion in implementing policies regarding resident creditworthiness, and you will not have the opportunity to evaluate our residents. In addition, our investment policies may be amended or revised from time to time at the discretion of our board of directors, without a vote of our stockholders. These factors will increase the uncertainty, and thus the risk, of investing in our common stock.

 

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Although we intend to use the net proceeds from this offering to acquire, restore, manage and lease single-family homes, we cannot assure you that we will be able to do so. Our failure to apply the net proceeds from this offering effectively or find suitable assets to acquire in a timely manner or on acceptable terms could result in losses or returns that are substantially below expectations.

 

Prior to the full deployment of the net proceeds of this offering as described above, we may invest the undeployed net proceeds in interest-bearing, short-term, investment-grade securities or money market accounts that are consistent with our intention to qualify as a REIT. We expect that these initial investments will provide a lower net return than we expect to receive from the investments described above. We may not be successful in completing any investments we identify and the single-family homes and other investments we acquire may not produce our anticipated, or any, positive returns.

 

There is no public market for our common stock and a market may never develop, which could cause our common stock to trade at a discount and make it difficult for holders of our common stock to sell their shares.

 

Our shares of common stock are newly issued securities for which there is no established trading market. Prior to the completion of this offering we intend to apply to have our common stock listed on the NASDAQ Global Market under the trading symbol “WAY.” However, there can be no assurance that such listing will be approved, or, if approved, that an active trading market for our common stock will develop, or if one develops, be maintained. If an active market does not develop or is not maintained, the market price of our common stock may decline and you may not be able to sell your shares. Even if an active trading market develops for our common stock subsequent to this offering, the market price of our common stock may be highly volatile and subject to wide fluctuations. Our financial performance, government regulatory action, tax laws, interest rates and market conditions in general could have a significant impact on the future market price of our common stock.

 

Some of the factors that could negatively affect the market price of our common stock include:

 

   

our actual or projected operating results, financial condition, cash flows and liquidity or changes in business strategy or prospects, and the operating performance of similar companies;

 

   

equity issuances by us, share re-sales by our stockholders, the conversion of common units in our operating partnership into shares of our common stock or the perception that such issuances, re-sales or conversions may occur;

 

   

actions by our stockholders;

 

   

failure to maintain our REIT qualification;

 

   

actual or anticipated accounting problems, including changes in accounting principles;

 

   

our failure to meet, or the lowering of, our earnings estimates or those of any securities analysts;

 

   

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

 

   

publication of news stories or other reports about us or the single-family rental sector;

 

   

changes in market valuations of similar companies and the stock market generally;

 

   

adverse market reaction to any increased indebtedness we incur in the future;

 

   

speculation in the press or investment community;

 

   

actual or perceived conflicts of interest with WREG or its employees and affiliates, including our executives and certain of our directors;

 

   

additions to or departures of WREG’s key personnel;

 

   

the process surrounding and the impact of the potential internalization of WREG;

 

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passage of legislation or other regulatory developments that adversely affect us or our industry;

 

   

increases in market interest rates, which may lead investors to seek alternative investments paying higher dividends or interest, or to demand a higher distribution yield for our common stock, if we have begun to make distributions to our stockholders, and would result in increased interest expense on our variable rate debt, if any;

 

   

price and volume fluctuations in the stock market generally; and

 

   

general market and economic conditions, including the current state of the credit and capital markets.

 

The price you pay for the common stock in this offering may exceed the fair market value of the underlying assets represented by your ownership stake.

 

We do not plan to obtain third party appraisals of any homes or other assets that we acquire in connection with this offering. The initial public offering price of our common stock will be determined by a negotiation between us and the representatives of the underwriters based on the information presented in this prospectus, the history and prospects for the industry and sector in which we compete, the ability of WREG to manage our business, prospects for our future earnings, the present state of our development and current financial condition, the recent market prices of, and the demand for, publicly traded shares of generally comparable companies and the general condition of the securities markets at the time of this offering. The initial public offering price of our common stock will be higher than the net tangible book value per share of our common stock immediately after the consummation of this offering. Therefore, if you purchase our common stock in this offering, you will incur an immediate dilution of $ (or approximately             %) in net tangible book value per share from the price you paid, based upon an assumed initial public offering price of $             per share, the midpoint of the range shown on the front cover of this prospectus.

 

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

 

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

 

Sales of common stock in the future may have adverse effects on our share price.

 

Subject to applicable law, our board of directors has the authority, without further stockholder approval, to issue additional authorized shares of common stock and preferred stock (or securities which are convertible or exchangeable for common stock or preferred stock), options, warrants and other rights on the terms and for the consideration it, in its sole discretion, deems appropriate. We may choose to expand the scale of our operations and may utilize the proceeds of future equity offerings to accomplish such expansion. Future sales of substantial amounts of our common stock could cause the market price of our common stock to decrease significantly. We cannot predict the effect, if any, that future sales of our common stock will have on the liquidity of our common stock. To the extent the proceeds of any future equity offering are invested in residential assets that have less favorable yield characteristics than our then existing portfolio, our stockholders will suffer dilution in their yield and distributable cash per share.

 

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We, our directors, director nominees and executive officers, WREG’s senior management and other equity investors in the initial financing have agreed that we and they will not, during the period ending (1) 180 days, in the case of us, our directors, director nominees and executive officers and WREG’s senior management, or (2) 90 days, in the case of other equity investors in the initial financing, without the prior written consent of Citigroup Capital Markets Inc. and Jefferies LLC, dispose of or hedge any shares or any securities convertible into or exchangeable for our common stock, subject to certain exceptions. While we have agreed not to waive or otherwise modify the provisions of the lock-up agreements, Citigroup Capital Markets Inc. and Jefferies LLC may, at any time, release all or a portion of our common stock subject to the foregoing lock-up provisions. If all or any of the restrictions under the lock-up agreements are waived, shares of our common stock may become available for sale into the market, subject to applicable law. Following the expiration of or the full or partial release of the lock-up agreements, all, in the event of the expiration of or the full release of the lock-up agreements, or a portion, in the event of a partial release of the lock-up agreements, of these shares will be freely transferable without restriction. In addition, under our partnership agreement, holders of common units (other than equity investors in the initial financing who receive common units in connection with the formation transactions) do not have redemption or exchange rights, except under limited circumstances, for a period of 14 months and may not otherwise transfer their common units, except under certain limited circumstances, for a period of 14 months, from the later of completion of this offering or the date on which a person first became a holder of common units. After the expiration of this period, transfers of common units by limited partners and their assignees are subject to various conditions, including our right of first refusal, described under “The Operating Partnership and the Partnership Agreement—Transfers and Withdrawals.” Sales of substantial amounts of common stock, the perception that such sales could occur or the lapse of restrictions on resale of our common stock by certain of our stockholders may adversely affect the prevailing market price for our common stock. Sales of substantial amounts of common stock or the perception that such sales could occur may adversely affect the prevailing market price for our common stock.

 

We have not established a minimum distribution payment level and we cannot assure you of our ability to pay distributions in the future.

 

We are generally required to distribute to our stockholders at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding net capital gains, each year for us to qualify as a REIT under the Code, which requirement we currently intend to satisfy through quarterly cash distributions of all or substantially all of our REIT taxable income in such year, subject to certain adjustments. We have not established a minimum distribution payment level and our ability to pay distributions may be adversely affected by a number of factors, including the risk factors described in this prospectus.

 

All distributions will be made at the discretion of our board of directors and will depend on our earnings, financial condition, maintenance of our REIT qualification and other factors that our board of directors may deem relevant from time to time. Since we are contractually obligated to pay a fee to WREG and reimburse WREG for certain operating expenses, there may be times when the funds generated by our operations, after deducting these expenses, may not be sufficient to cover desired levels of distributions to our stockholders. In addition, our board of directors, at its discretion, may retain any portion of such cash in excess of our REIT taxable income for working capital. As a result, no assurance can be given that we will be able to make distributions to our stockholders at any time or that the level of any distributions will achieve any specific market yield or will increase or be maintained over time. Any failure to achieve expected distributions could materially and adversely affect the price of our common stock.

 

There are many factors that can affect the availability and timing of cash distributions to stockholders. Because we may receive rents and income from our homes at various times during our fiscal year, distributions paid may not reflect our income earned in that particular distribution period. The amount of cash available for distribution will be affected by many factors, including without limitation, the amount of time it takes for us to deploy the net proceeds from this offering into our target assets, the amount of income we will earn from those investments, the amount of our operating expenses and many other variables. Actual cash available for distribution may vary substantially from our expectations.

 

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While we intend to fund the payment of quarterly distributions to our stockholders entirely from distributable cash flows, we may fund our quarterly distributions to our stockholders from a combination of available net cash flows, equity capital and proceeds from borrowings. In the event we are unable to consistently fund future quarterly distributions to our stockholders entirely from distributable cash flows, the value of our shares may be negatively impacted.

 

If our common stock trades at a discount to the fair market value of our homes we may become the target of a potential business combination transaction.

 

We intend to acquire a large number of homes in a short period of time during a period in which a significant amount of capital has come into the single-family rental sector. Neither we nor any other entity has established a market-leading position. Our competitors may view a company whose common stock is trading at a discount to the fair market value of its homes as a means to acquire a large number of homes at a discounted price and we may become the target of a potential business combination transaction. If we become such a target, our executive officers may be required to devote a substantial portion of their time managing a potential business combination transaction, which may adversely affect their ability to manage our operations. If we complete a business combination transaction, it is possible that, following the closing of any such transaction neither our executive officers nor WREG will have any involvement in our operations on a go-forward basis.

 

We may use a portion of the net proceeds from this offering to make distributions, which would, among other things, reduce our cash available for investing.

 

Prior to the time we have fully invested the net proceeds of this offering or are generating positive cash flow from operations, we may fund our quarterly distributions out of the net proceeds of the offering, which would reduce the amount of cash we have available for investing and other purposes. Although we currently do not intend to use the proceeds from this offering to make distributions to our stockholders, if we do, such distributions could be dilutive to our financial results. In addition, funding our distributions from our net proceeds may constitute a return of capital to our investors, which would have the effect of reducing each stockholder’s basis in its shares of our common stock.

 

Future offerings of debt securities, which would rank senior to our common stock upon our bankruptcy or liquidation, and future offerings of equity securities that may be senior to our common stock for the purposes of dividend and liquidating distributions, may adversely affect the market price of our common stock.

 

In the future, we may attempt to increase our capital resources by making offerings of debt securities or additional offerings of equity securities. Upon bankruptcy or liquidation, holders of our debt securities and shares of preferred stock and lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of our common stock. Our preferred stock, if issued, could have a preference on liquidating distributions or a preference on dividend payments or both that could limit our ability to pay a dividend or other distribution to the holders of our common stock. Our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control. As a result, we cannot predict or estimate the amount, timing or nature of our future offerings, and purchasers of our common stock in this offering bear the risk of our future offerings reducing the market price of our common stock and diluting their ownership interest in our company.

 

An increase in market interest rates may have an adverse effect on the market price of our common stock and our ability to make distributions to our stockholders.

 

One of the factors that investors may consider in deciding whether to buy or sell shares of our common stock is our distribution rate as a percentage of our share price, relative to market interest rates. If market interest rates increase, prospective investors may demand a higher distribution rate on shares of our common stock or

 

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seek alternative investments paying higher distributions or interest. As a result, interest rate fluctuations and capital market conditions can affect the market price of shares of our common stock. For instance, if interest rates rise without an increase in our distribution rate, the market price of shares of our common stock could decrease because potential investors may require a higher distribution yield on shares of our common stock as market rates on our interest-bearing instruments such as bonds rise. In addition, to the extent we have variable rate debt, rising interest rates would result in increased interest expense on our variable rate debt, thereby adversely affecting our cash flow and our ability to service our indebtedness and make distributions to our stockholders.

 

Risks Related to Our Organization and Structure

 

Certain provisions of Maryland law could inhibit changes in control, preventing our stockholders from realizing a potential premium over the market price of our stock in a proposed acquisition.

 

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

 

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

 

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The “unsolicited takeover” provisions of the MGCL permit our board of directors, without stockholder approval and regardless of what is currently provided in our charter or bylaws, to implement certain provisions if we have a class of equity securities registered under the Exchange Act (which we will have upon the completion of this offering), and at least three independent directors. These provisions may have the effect of inhibiting a third party from making an acquisition proposal for us or of delaying, deferring or preventing a change in control of us under the circumstances that otherwise could provide the holders of shares of common stock with the opportunity to realize a premium over the then current market price. Our charter contains a provision whereby we have elected to be subject to the provisions of Title 3, Subtitle 8 of the MGCL relating to the filling of vacancies on our board of directors. See “Certain Provisions of the Maryland General Corporation Law and Our Charter and Bylaws—Subtitle 8.”

 

In addition, certain other provisions of Maryland law and our charter and bylaws may inhibit changes in control. See “Certain Provisions of the Maryland General Corporation Law and Our Charter and Bylaws.”

 

Our charter contains provisions that may delay, defer or prevent a change of control transaction.

 

Our charter, subject to certain exceptions, authorizes our board of directors to take such actions as it determines are advisable to preserve our qualification as a REIT. Our charter also prohibits the actual, beneficial or constructive ownership by any person of more than 9.8% in value or number of shares, whichever is more restrictive, of the outstanding shares of our common stock or more than 9.8% in value of the aggregate outstanding shares of all classes and series of our stock, in each case excluding any shares that are not treated as outstanding for federal income tax purposes. Our board of directors, in its sole and absolute discretion, may exempt a person, prospectively or retroactively, from these ownership limits if certain conditions are satisfied. The restrictions on ownership and transfer of our stock may:

 

   

discourage a tender offer or other transactions or a change in management or of control that might involve a premium price for our common stock or that our stockholders otherwise believe to be in their best interests; or

 

   

result in the transfer of shares acquired in excess of the restrictions to a trust for the benefit of a charitable beneficiary and, as a result, the forfeiture by the acquirer of the benefits of owning the additional shares.

 

See “Description of Capital Stock—Restrictions on Ownership and Transfer.”

 

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

 

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

 

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

 

Under Maryland law, generally, a director will not be liable if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in our best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. In addition, our charter limits the liability of our directors and officers to us and our stockholders for money damages, except for liability resulting from:

 

   

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

 

   

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

 

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Our charter authorizes us to indemnify our directors and officers for actions taken by them in those capacities to the maximum extent permitted by Maryland law. Our bylaws require us to indemnify each director and officer, to the maximum extent permitted by Maryland law, in the defense of any proceeding to which he or she is made, or threatened to be made, a party by reason of his or her service to us. In addition, we may be obligated to advance the defense costs incurred by our directors and officers. As a result, we and our stockholders may have more limited rights against our directors and officers than might otherwise exist absent the current provisions in our charter and bylaws or that might exist with other companies. See “Certain Provisions of the Maryland General Corporation Law and Our Charter and Bylaws—Indemnification and Limitation of Directors’ and Officers’ Liability.”

 

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

 

Our charter provides that a director may be removed only for cause (as defined in our charter) and then only by the affirmative vote of holders of shares entitled to cast at least two-thirds of all the votes entitled to be cast generally in the election of directors. Our charter also provides that vacancies on our board of directors may be filled only by a majority of the remaining directors in office, even if less than a quorum. These requirements prevent stockholders from removing directors except for cause and with a substantial affirmative vote and from replacing directors with their own nominees and may prevent a change in control of our company that is in the best interests of our stockholders.

 

The ability of our board of directors to change our major policies without the consent of stockholders may not be in your interest.

 

Our board of directors determines our major policies, including policies and guidelines relating to our acquisitions, leverage, financing, growth, operations and distributions to stockholders. Our board of directors may amend or revise these and other policies and guidelines from time to time without the vote or consent of our stockholders. Accordingly, our stockholders will have limited control over changes in our policies and those changes could adversely affect our financial condition, results of operations and our ability to make distributions to our stockholders. We intend to notify our stockholders of significant changes to our investment guidelines or other major policies that may affect them consistent with our reporting obligations under the Exchange Act.

 

We may structure acquisitions of property in exchange for limited partnership units in our operating partnership on terms that could limit our liquidity or our flexibility.

 

We may acquire homes by issuing limited partnership units in our operating partnership in exchange for a property owner contributing property to the partnership. If we enter into such transactions, in order to induce the contributors of such homes to accept units in our operating partnership, rather than cash, in exchange for their homes, it may be necessary for us to provide them additional incentives. For instance, our operating partnership’s limited partnership agreement provides that any holder of units may exchange limited partnership units for cash equal to the value of an equivalent number of shares of our common stock or, at our option, for shares of our common stock on a one-for-one basis. Finally, in order to allow a contributor of a home to defer taxable gain on the contribution of property to our operating partnership, we might agree not to sell a contributed property for a defined period of time or until the contributor exchanged the contributor’s units for cash or shares. Such an agreement would prevent us from selling those homes, even if market conditions made such a sale favorable to us.

 

Risks Related to Our Taxation as a REIT

 

Failure to qualify or maintain our qualification as a REIT would have significant adverse consequences to us and the per share trading price of our common stock.

 

We intend to elect to be taxed and to operate in a manner that will allow us to qualify as a REIT for federal income tax purposes commencing with our taxable year ending December 31, 2013. We have not requested and

 

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do not plan to request a ruling from the Internal Revenue Service, or the IRS, that we qualify as a REIT, and the statements in this prospectus are not binding on the IRS or any court. Therefore, we cannot assure you that we will qualify as a REIT, or that we will remain qualified as such in the future. If we lose our REIT qualification, we will face serious tax consequences that would substantially reduce the funds available for distribution to you for each of the years involved because:

 

   

we would not be allowed a deduction for distributions to stockholders in computing our taxable income and would be subject to federal income tax at regular corporate rates;

 

   

we also could be subject to the federal alternative minimum tax and possibly increased state and local taxes; and

 

   

unless we are entitled to relief under applicable statutory provisions, we could not elect to be taxed as a REIT for four taxable years following the year during which we were disqualified.

 

Any such corporate tax liability could be substantial and would reduce our cash available for, among other things, our operations and distributions to stockholders. In addition, if we fail to qualify as a REIT, we will not be required to make distributions to our stockholders. As a result of all these factors, our failure to qualify as a REIT also could impair our ability to expand our business and raise capital, and could materially and adversely affect the per share trading price of our common stock.

 

Qualification as a REIT involves highly technical and complex provisions of the Code.

 

Qualification as a REIT involves the application of highly technical and complex Code provisions for which there are only limited judicial and administrative interpretations. The complexity of these provisions and of the applicable Treasury regulations that have been promulgated under the Code, or the Treasury Regulations, is greater in the case of a REIT that, like us, holds its assets through a partnership. The determination of various factual matters and circumstances not entirely within our control may affect our ability to qualify as a REIT. In order to qualify as a REIT, we must satisfy a number of requirements, including requirements regarding the ownership of our stock, requirements regarding the composition of our assets and a requirement that at least 95% of our gross income in any year must be derived from qualifying sources, such as “rents from real property.” Also, we must make distributions to stockholders aggregating annually at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding net capital gains. In addition, legislation, new regulations, administrative interpretations or court decisions may materially adversely affect our investors, our ability to qualify as a REIT for federal income tax purposes or the desirability of an investment in a REIT relative to other investments.

 

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

 

Even if we qualify for taxation as a REIT, we may be subject to certain federal, state and local taxes on our income and assets, including taxes on any undistributed income, tax on income from some activities conducted as a result of a foreclosure, alternative minimum taxes and property and transfer taxes. In addition, in certain circumstances, we could be required to pay an excise or penalty tax (which could be significant in amount) in order to utilize one or more relief provisions under the Code to maintain our qualification as a REIT. Any of these taxes would decrease cash available for distribution to our stockholders. In addition, in order to meet the REIT qualification requirements, or to avert the imposition of a 100% penalty tax that applies to certain gains derived by a REIT from dealer property or inventory, we may hold some of our assets through one or more taxable REIT subsidiaries or other subsidiary corporations that will be subject to corporate-level income tax at regular corporate rates. Any of our taxable REIT subsidiaries may have tax liability with respect to “phantom income” if it is treated as a “dealer” for federal income tax purposes, which would require it to mark to market its assets at the end of each taxable year. Payment of these taxes could materially and adversely affect our income, cash flow, results of operations, financial condition, liquidity and prospects, and could adversely affect the per share trading price of our common stock and our ability to make distributions to our stockholders.

 

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If our operating partnership fails to qualify as a partnership for federal income tax purposes, we would cease to qualify as a REIT and suffer other adverse consequences.

 

We believe that our operating partnership will be treated as a partnership, and not an association or a publicly traded partnership taxable as a corporation, for federal income tax purposes. As a partnership, our operating partnership will not be subject to federal income tax on its income. Instead, each of its partners, including us, will be allocated, and may be required to pay tax with respect to, its share of our operating partnership’s income. We cannot assure you, however, that the IRS will not challenge the status of our operating partnership or any other subsidiary partnership in which we own an interest as a partnership for federal income tax purposes, or that a court would not sustain such a challenge. If the IRS were successful in treating our operating partnership or any such other subsidiary partnership as an association or publicly traded partnership taxable as a corporation for federal income tax purposes, we would fail to meet the gross income tests and certain of the asset tests applicable to REITs and, accordingly, we would likely cease to qualify as a REIT. Also, the failure of our operating partnership or any subsidiary partnership to qualify as a partnership would cause it to become subject to federal and state corporate income tax, which would reduce significantly the amount of its cash available for debt service and for distribution to its partners, including us.

 

Our taxable REIT subsidiaries will be subject to federal income tax, and we will be required to pay a 100% penalty tax on certain income or deductions if our transactions with our taxable REIT subsidiaries are not conducted on arm’s-length terms.

 

We will own an interest in one or more taxable REIT subsidiaries, and may acquire securities in additional taxable REIT subsidiaries in the future. A taxable REIT subsidiary is a corporation other than a REIT in which a REIT directly or indirectly holds stock, and that has made a joint election with such REIT to be treated as a taxable REIT subsidiary. If a taxable REIT subsidiary owns more than 35% of the total voting power or value of the outstanding securities of another corporation, such other corporation will also be treated as a taxable REIT subsidiary. Other than some activities relating to lodging and health care facilities, a taxable REIT subsidiary may generally engage in any business, including the provision of customary or non-customary services to tenants of its parent REIT. A taxable REIT subsidiary is subject to federal income tax as a regular C corporation. In addition, a 100% excise tax will be imposed on certain transactions between a taxable REIT subsidiary and its parent REIT that are not conducted on an arm’s-length basis.

 

To maintain our REIT qualification, we may be forced to borrow funds during unfavorable market conditions.

 

To qualify as a REIT, we generally must distribute to our stockholders at least 90% of our REIT taxable income each year, determined without regard to the dividends paid deduction and excluding net capital gains, and we will be subject to regular corporate income taxes to the extent that we distribute less than 100% of our REIT taxable income each year. In addition, we will be subject to a 4% nondeductible excise tax on the amount, if any, by which distributions paid by us in any calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income and 100% of our undistributed income from prior years. Accordingly, we may not be able to retain sufficient cash flow from operations to meet our debt service requirements and repay our debt. Therefore, we may need to raise additional capital for these purposes, and we cannot assure you that a sufficient amount of capital will be available to us on favorable terms, or at all, when needed, which would materially adversely affect our financial condition, results of operations, cash flows and ability to pay distributions on, and the per share trading price of, our common stock. Further, in order to maintain our REIT qualification and avoid the payment of income and excise taxes, we may need to borrow funds to meet the REIT distribution requirements even if the then prevailing market conditions are not favorable for these borrowings. These borrowing needs could result from, among other things, differences in timing between the actual receipt of cash and inclusion of income for federal income tax purposes, or the effect of non-deductible capital expenditures, the creation of reserves or required debt or amortization payments. These sources, however, may not be available on favorable terms or at all. Our access to third-party sources of capital depends on a number of factors, including the market’s perception of our growth

 

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potential, our current debt levels, the per share trading price of our common stock, and our current and potential future earnings. We cannot assure you that we will have access to such capital on favorable terms at the desired times, or at all, which may cause us to curtail our investment activities and/or to dispose of assets at inopportune times, and could adversely affect our financial condition, results of operations, cash flows and our ability to pay distributions on, and the per share trading price of, our common stock.

 

Dividends payable by REITs do not generally qualify for the reduced tax rates available for some dividends.

 

The maximum tax rate applicable to income from “qualified dividends” payable to U.S. stockholders that are individuals, trusts and estates is 20%. Dividends payable by REITs, however, generally are not eligible for the reduced rates. Although these rules do not adversely affect the taxation of REITs or dividends payable by REITs, to the extent that the reduced rates continue to apply to regular corporate qualified dividends, investors that are individuals, trusts and estates may perceive investments in REITs to be relatively less attractive than investments in the stock of non-REIT corporations that pay dividends, which could adversely affect the value of the stock of REITs, including the per share trading price of our common stock.

 

The tax imposed on REITs engaging in “prohibited transactions” may limit our ability to engage in transactions which would be treated as sales for federal income tax purposes.

 

From time to time, we may choose to transfer or dispose of some of the homes in our portfolio. A REIT’s net income from prohibited transactions is subject to a 100% penalty tax. In general, “prohibited transactions” are sales or other dispositions of property, other than foreclosure property, held as inventory or primarily for sale to customers in the ordinary course of business. Although we do not intend to hold a significant number of homes as inventory or primarily for sale to customers in the ordinary course of business, the characterization of an asset sale as a prohibited transaction depends on the particular facts and circumstances. The Code provides a safe harbor that, if met, allows a REIT to avoid being treated as engaged in a prohibited transaction. In order for the safe harbor to apply to a sale of property, among other things, (i) the REIT must have held the property for at least two years for the production of rental income, (ii) the expenditures that the REIT capitalized with respect to the property during the two years preceding the sale must be less than 30% of the net selling price of the property and (iii) the REIT’s sales of other properties during the taxable year of the sale must not exceed certain thresholds. It may not be possible to satisfy this safe harbor with respect to certain activities, such as if we were to acquire, renovate and sell the property in a short period of time.

 

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

 

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

 

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Complying with REIT requirements may affect our profitability and may force us to liquidate or forego otherwise attractive investments.

 

To qualify as a REIT, we must continually satisfy tests concerning, among other things, the nature and diversification of our assets, the sources of our income and the amounts that we distribute to our stockholders. We may be required to liquidate or forego otherwise attractive investments in order to satisfy the asset and income tests or to qualify under certain statutory relief provisions. We also may be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution. As a result, having to comply with the distribution requirement could cause us to: (1) sell assets in adverse market conditions; (2) borrow on unfavorable terms; or (3) distribute amounts that would otherwise be invested in future acquisitions, capital expenditures or repayment of debt. Accordingly, satisfying the REIT requirements could have an adverse effect on our business results, profitability and ability to execute our business plan. Moreover, if we are compelled to liquidate our investments to meet any of these asset, income or distribution tests, or to repay obligations to our lenders, we may be unable to comply with one or more of the requirements applicable to REITs or may be subject to a 100% penalty tax on any resulting gain if such sales constitute prohibited transactions.

 

Legislative or other actions affecting REITs could have a negative effect on us.

 

The rules dealing with federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Department of the Treasury. Changes to the tax laws, with or without retroactive application, could adversely affect our investors or us. We cannot predict how changes in the tax laws might affect our investors or us. New legislation, Treasury Regulations, administrative interpretations or court decisions could significantly and negatively affect our ability to qualify as a REIT or the federal income tax consequences of such qualification.

 

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FORWARD-LOOKING STATEMENTS

 

Some of the statements contained in this prospectus constitute forward-looking statements within the meaning of the federal securities laws. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. When used, the words “anticipate,” “believe,” “expect,” “intend,” “may,” “might,” “plan,” “estimate,” “project,” “should,” “will,” “would,” “result” and similar expressions that do not relate solely to historical matters are intended to identify forward-looking statements. You can also identify forward-looking statements by discussions of strategy, plans or intentions.

 

Forward-looking statements are subject to risks, uncertainties and assumptions and may be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. We caution you therefore against relying on any of these forward-looking statements.

 

Some of the risks and uncertainties that may cause our actual results, performance, liquidity or achievements to differ materially from those expressed or implied by forward-looking statements include, among others, the following:

 

   

adverse economic or real estate developments in our target markets;

 

   

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

 

   

difficulties in identifying homes to acquire and completing acquisitions;

 

   

increased time and/or expense to gain possession and renovate homes;

 

   

our failure to successfully operate acquired homes and operations;

 

   

projected operating costs;

 

   

rental rates or vacancy rates;

 

   

our ability to obtain financing arrangements;

 

   

proposed internalization of WREG;

 

   

general volatility of the markets in which we participate;

 

   

our expected investments;

 

   

interest rates and the market value of our target assets;

 

   

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

 

   

our ability to maintain our qualification as a REIT for U.S. 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 economy.

 

While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. They are based on estimates and assumptions only as of the date of this prospectus. We undertake no obligation to update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, new information, data or methods, future events or other changes, except as required by applicable law. For a further discussion of these and other factors that could cause our future results to differ materially from any forward-looking statements, see the section above entitled “Risk Factors.”

 

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USE OF PROCEEDS

 

We estimate that the net proceeds to us from this offering, after deducting underwriting discounts and commissions and estimated offering expenses, will be approximately $         million ($         million if the underwriters exercise their option to purchase up to an additional              shares of our common stock in full).

 

We will contribute the net proceeds from this offering to our operating partnership in exchange for common units. We expect our operating partnership to use substantially all of the net proceeds received from us to acquire and renovate single-family homes in accordance with our business and growth strategies described in this prospectus, to pay off the bridge facility and for general business purposes, including the payment of fees and expense reimbursement to WREG.

 

The net proceeds from the bridge facility were used to acquire and renovate single-family homes consistent with our investment strategy. The bridge facility currently bears interest at LIBOR plus 350 basis points and matures on October 1, 2014.

 

Pending application of any portion of the net proceeds, we or the operating partnership will invest such funds in interest-bearing accounts and short-term, interest-bearing securities as is consistent with our intention to qualify for taxation as a REIT. These investments are expected to provide lower net return than what we will seek to achieve from our target assets.

 

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CAPITALIZATION

 

The following table sets forth:

 

   

our cash and cash equivalents and capitalization as of March 21, 2013; and

 

   

our cash and cash equivalents and capitalization as of March 21, 2013, pro forma as adjusted to give effect to the formation transactions and the sale of              shares of common stock in this offering at an assumed offering price of $         per share (based on the midpoint of the price range set forth on the front cover of this prospectus) and net of the underwriting discounts and commissions and other estimated offering expenses payable by us.

 

The following table should be read in conjunction with the section captioned “Management Discussion and Analysis of Financial Condition and Results of Operations.”

 

     As of March 21, 2013  
     Actual      Pro Forma
As Adjusted
 
            (Unaudited)  
     (in thousands, except per
share amounts)
 

Cash and cash equivalents

   $                 1       $                    
  

 

 

    

 

 

 

Stockholders’ equity:

     

Preferred stock—par value $0.01 per share, zero shares authorized, no shares issued and outstanding

     —           —    

Common stock—par value $0.01 per share, 100,000 shares authorized, 1,000 shares issued and outstanding, actual;                  shares issued and outstanding, pro forma as adjusted(1)

     —        

Additional paid-in capital

     1      

Retained earnings

     —        
  

 

 

    

 

 

 

Total stockholders’ equity

     1      

Noncontrolling interests—operating partnership

     —        
  

 

 

    

 

 

 

Total equity(deficit)

     1      
  

 

 

    

 

 

 

Total capitalization

   $ 1       $     
  

 

 

    

 

 

 

 

(1)   

Includes (a) [·] shares of our common stock to be issued in this offering, (b) [·] shares of our common stock to be issued in the formation transactions and (c) [·] shares of restricted stock to be granted to our directors, director nominees and executive officers and WREG’s executive officers, other employees and consultants concurrently with the completion of this offering. Excludes (i) [·] shares if the underwriters exercise their option to purchase additional shares of our common stock in full, (ii) [·] shares of our common stock available for future issuance under our 2013 Equity Incentive Plan, (iii) [·] shares of our common stock that may be issued, at our option, upon exchange of [·] common units that will be issued in the formation transactions and (iv) [·] shares of our common stock that may be issued upon the exercise of warrants to be issued in the formation transactions at an exercise price of $[·] per share.

 

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DILUTION

 

Purchasers of our common stock offered in this prospectus will experience an immediate and substantial dilution of the net tangible book value of our common stock from the initial public offering price. As of [·], 2013, we had a pro forma net tangible book value of approximately $         million, or $         per share of our common stock held by existing investors, assuming the exchange of common units into shares of our common stock on a one-for-one basis. After giving effect to the sale of the shares of our common stock offered hereby, including the use of proceeds as described under “Use of Proceeds,” the formation transactions and the deduction of underwriting discounts and commissions and estimated offering and formation expenses payable by us, the pro forma net tangible book value as of [·], 2013 attributable to common stockholders would have been $        , or $         per share of our common stock, assuming the exchange of common units into shares of our common stock on a one-for-one basis. This amount represents an immediate increase in net tangible book value of $         per share to existing investors and an immediate dilution in pro forma net tangible book value of $         per share from the assumed public offering price of $         per share of our common stock to new public investors. The following table illustrates this per share dilution:

 

Assumed initial public offering price per share

   $                
  

 

 

 

Net tangible book value per share before this offering(1)

  

Net increase in pro forma net tangible book value per share attributable to the formation transactions

  
  

 

 

 

Net increase in pro forma net tangible book value per share attributable to this offering

  
  

 

 

 

Pro forma net tangible book value per share after the formation transactions and this offering(2)

  
  

 

 

 

Dilution in pro forma net tangible book value per shares to new investors(3)

   $     
  

 

 

 

 

(1)  

Net tangible book value per share of our common stock before this offering is determined by dividing net tangible book value based on [·], 2013 net book value of our tangible assets (consisting of total assets less intangible assets) of our predecessor by the number of shares of our common stock held by existing investors after this offering, assuming the exchange of the common units issued to existing investors for shares of our common stock on a one-for-one basis and excluding common stock issuable upon exercise of warrants.

(2)   

Based on pro forma net tangible book value of approximately $         divided by the sum of shares of our common stock and common units to be outstanding after the formation transactions and this offering, excluding common stock issuable upon exercise of warrants.

(3)   

Dilution is determined by subtracting pro forma net tangible book value per share of our common stock after giving effect to the formation transactions and this offering from the initial public offering price paid by a new investor for a share of our common stock.

 

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

 

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The table below summarizes (i) the difference between the number of shares of common stock and common units issued to existing investors in the formation transactions and the number of shares to be received by new investors purchasing shares in this offering, and (ii) the difference between our pro forma net tangible book value as of [·], 2013 after giving effect to the formation transactions but prior to this offering and the total consideration paid in cash by the new investors purchasing shares in this offering (based on the midpoint of the range set forth on the cover of this prospectus) on an aggregate and per share/unit basis.

 

     Shares/Common Units
Issued
    Pro Forma Net Tangible
Book Value of

[·]/Cash
    Average
Price Per
Share/Unit
 
     Number    Percentage     Amount     Percentage    

Shares of common stock and common units issued to existing investors in the formation transactions

               $              (1)             $                

New investors in this offering

               $                            $                
  

 

  

 

 

   

 

 

   

 

 

   
               $                           
  

 

  

 

 

   

 

 

   

 

 

   

 

(1)   

Represents our pro forma net tangible book value as of [·], 2013 after giving effect to the formation transactions but prior to this offering.

 

If the underwriters exercise their option to purchase additional share in full, the pro forma net tangible book value will increase to $         per share, representing an immediate increase to existing stockholders of $         per share and an immediate dilution of $         per share to new investors. To the extent that outstanding warrants are exercised, new investors will experience further dilution. If all our outstanding warrants had been exercised as of [·], 2013, assuming the treasury stock method, our pro forma net tangible book value as of [·], 2013 would have been approximately $         million or $         per share of our common stock, and the pro forma net tangible book value after giving effect to the formation transactions and this offering would have been $         per share, representing dilution in our pro forma net tangible book value per share to new investors of $        .

 

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DISTRIBUTION POLICY

 

We are a newly formed company that has not commenced operations. As a result, we have not paid any distributions as of the date of this prospectus. U.S. federal income tax laws generally require that a REIT distribute annually at least 90% of its REIT taxable income, determined without regard to the deduction for dividends paid and excluding any net capital gains. For more information, please see “Federal Income Tax Considerations.” To satisfy the requirements to qualify as a REIT and generally not be subject to U.S. federal income tax, we intend to make quarterly distributions of all or substantially all of our net income to holders of our common stock out of assets legally available therefor.

 

Any distributions we make will be at the discretion of our board of directors and will depend upon our earnings and financial condition, maintenance of REIT qualification, the applicable restrictions contained in the MGCL and such other factors as our board may determine in its sole discretion. We anticipate that our estimated cash available for distribution will exceed the annual distribution requirements applicable to REITs. However, under some circumstances, we may be required to pay distributions in excess of cash available for distribution in order to meet these distribution requirements and may need to use the proceeds from future equity and debt offerings, sell assets or borrow funds to make some distributions. Although we have no intention to use the net proceeds of this offering to make distributions or to make distributions using shares of common stock, we may do so. See “Risk Factors—Risks Related to This Offering and Ownership of Our Common Stock—We may use a portion of the net proceeds from this offering to make distributions, which would, among other things, reduce our cash available for investing.” We cannot assure you that our distribution policy will not change in the future.

 

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SELECTED FINANCIAL DATA

 

We are a newly formed company that has not commenced operations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

 

You should read the following discussion in conjunction with the information provided under the section of this prospectus entitled “Risk Factors,” “Forward-looking Statements,” and “Business and Properties” and our audited balance sheet and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements reflecting current expectations that involve risks and uncertainties. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in the section entitled “Risk Factors” and elsewhere in this prospectus.

 

Overview

 

We are a recently formed, externally managed REIT focused on the acquisition, renovation, leasing, maintenance and management of single-family homes. Our principal objective is to generate attractive risk-adjusted returns for our stockholders over the long term through capital appreciation and dividend growth. We generate revenue by leasing our portfolio of single-family homes and, from this revenue, expect to pay the operating costs associated with our business and any distributions to our stockholders.

 

Under our charter, we are authorized to issue up to 100,000 shares of common stock. We were initially capitalized by issuing 1,000 shares of stock. WLLC, the entity that will become our operating partnership, completed a private placement for $35 million of equity capital from investors, including GI Partners and certain officers of WREG, and closed a $65 million bridge facility. We refer to these transactions as the initial financing. Upon the closing of the initial financing, WLLC began acquiring and renovating single-family homes consistent with our investment strategy. We expect $[·] of the initial financing to have been invested by [·] 2013, representing the acquisition and renovation of more than [·] homes.

 

Following the completion of this offering and the formation transactions, our operating partnership will, directly or indirectly through its wholly owned subsidiaries, hold substantially all of our assets and conduct substantially all of our operations. We will contribute the net proceeds from this offering to our operating partnership in exchange for common units in our operating partnership. As the sole general partner of our operating partnership, we will generally have the exclusive power under the partnership agreement to manage and conduct its business, subject to limited approval and voting rights of the limited partners described more fully below in “The Operating Partnership and the Partnership Agreement.” Our board of directors will manage the business and affairs of our company by directing the business and affairs of our operating partnership and interfacing with WREG.

 

We intend to elect to be taxed and to operate in a manner that will allow us to qualify as a REIT for federal income tax purposes commencing with our taxable year ending December 31, 2013. For more information related to the consequences of this election, please see “Federal Income Tax Considerations.”

 

Factors Expected to Affect Our Results and Financial Condition

 

We expect our results of operations and financial condition will be affected by numerous factors, many of which will be beyond our control. Key factors that will impact our results of operations and financial condition include our home acquisition pace, the time and cost required to renovate and lease newly acquired homes, rental rates, occupancy levels, resident turnover rates, the time and cost required to re-lease vacated homes, our expense ratios, our ability to raise capital and our capital structure.

 

Results of Operations

 

As of the date of this prospectus, we have not commenced any operations and WLLC does not have meaningful operating results.

 

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Critical Accounting Policies

 

Below is a discussion of the accounting policies that we believe will be critical once we commence operations. We consider these policies critical because they require estimates about matters that are inherently uncertain, involve various assumptions and require significant management judgment and because they are important for understanding and evaluating our reported financial results. These judgments will affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Applying different estimates or assumptions may result in materially different amounts reported in our financial statements.

 

Investments in Real Estate

 

We evaluate each purchase transaction to determine whether the acquired assets meet the definition of a business. Transaction costs related to acquisitions that are not deemed to be businesses are included in the cost basis of the acquired assets, while transaction costs related to acquisitions that are deemed to be businesses are expensed as incurred. Fair value is determined under the guidance of ASC 820, Fair Value Measurements and Disclosures, primarily based on unobservable market data inputs, which are categorized as Level 3 valuation measurements. In making estimates of fair values for purposes of asset acquisition and purchase accounting, we utilize our own market knowledge and published market data.

 

Depreciation of Investment in Real Estate

 

Building depreciation is calculated on a straight-line basis over the estimated useful lives of the assets. We will generally use a 40 year estimated life with no salvage value.

 

Impairment of Real Estate

 

We evaluate our long-lived assets for impairment periodically or whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. If an impairment indicator exists, we will compare the expected future undiscounted cash flows against the net carrying amount of a property. Significant indicators of impairment may include declines in home values, rental rate and occupancy and significant changes in the economy. We plan to make our assessment at the individual property level because it represents the lowest level of cash flows. If the sum of the estimated undiscounted cash flows is less than the net carrying amount of the property, we will record an impairment loss for the difference between the estimated fair value of the individual property and the carrying amount of the property at that date.

 

Revenue Recognition

 

We lease our single family residences under operating leases. The lease periods will generally be short-term in nature (one or two years) and reflect market rental rates. Rental income, net of concessions, is recognized on a straight-line basis over the term of the lease.

 

Recently Issued Accounting Pronouncements

 

Effective March 18, 2013, we adopted Accounting Standards Update No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards, or IFRS, which generally aligns the principles for fair value measurements and the related disclosure requirements under U.S. GAAP and IFRS. This standard requires new disclosures, with a particular focus on Level 3 measurements, including quantitative information about the significant unobservable inputs used for all Level 3 measurements and qualitative discussion about the sensitivity of recurring Level 3 measurements to changes in the unobservable inputs disclosed, including the interrelationship between inputs and a description of our valuation processes. This standard also requires disclosure of any transfers between Levels 1 and 2 of the fair value hierarchy, information about when the current use of a non-financial asset measured at fair

 

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value differs from its highest and best use and the hierarchy classification for items whose fair value is not recorded on the balance sheet but is disclosed in the notes. We have incorporated the requirements of this guidance in our disclosures from inception.

 

Liquidity and Capital Resources

 

In April 2013, WLLC completed a private placement for $35 million of equity capital from investors, including GI Partners and certain officers of WREG, and closed a $65 million bridge facility. WLLC is using the proceeds from the initial financing to acquire and renovate single-family homes. Upon the completion of this offering and after repaying the bridge facility in full, we expect to have remaining net proceeds of approximately $         million.

 

Following the completion of this offering, we expect our near-term liquidity needs will consist primarily of funds necessary to acquire, renovate and lease homes, fund our operations and make distributions to our stockholders. We believe that the remaining net proceeds of this offering, combined with the cash provided by our operations, will be sufficient to fund our operations and the payment of distributions to our stockholders required for us to qualify as a REIT in the near term. However, until we acquire and stabilize a portfolio of homes, there may be times when we experience shortfalls. Because our assets are illiquid by their nature, a timely liquidation of assets might not be a viable source of short-term liquidity, and we may be required to fund our operations from other financing alternatives. Furthermore, the execution of our business and growth strategies, particularly our acquisition strategy, may require that we access additional financing sources in the near term, including long-term secured and unsecured indebtedness or the issuance of debt and equity securities, including units in our operating partnership.

 

Our long-term liquidity needs will consist primarily of funds necessary to acquire, renovate and lease homes, fund non-recurring capital expenditures and repay indebtedness at maturity to the extent we incur indebtedness, make quarterly dividends to our stockholders and pay general and administrative expenses and overhead, including fees to WREG. Our business and growth strategies and the requirement that we distribute at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding any net capital gain, to our stockholders, may cause us to have substantial liquidity needs over the long-term. We will seek to satisfy our long-term liquidity needs through cash provided by our operations, long-term secured and unsecured indebtedness, the issuance of debt and equity securities, including units in our operating partnership and property dispositions.

 

In connection with the formation transactions, our operating partnership will issue an aggregate of [·] common units to equity investors in the initial financing transactions. Beginning on or after the date which is 14 months after the later of the completion of this offering or the date on which such person first became a holder of common units (or immediately in the case of equity investors in the initial financing who receive common units in connection with the formation transactions), limited partners of our operating partnership and certain qualifying assignees of a limited partner will have the right to require our operating partnership to redeem part or all of their common units for cash or, at our election, exchange their common units for shares of our common stock (except in the case of equity investors in the initial financing receiving common units in connection with the formation transactions, who, during the first year after completion of this offering, will only have the right to exchange their common units for shares of our common stock), based upon the fair market value of an equivalent number of shares of our common stock at the time of the redemption, subject to certain adjustments and the restrictions on ownership and transfer of our stock set forth in our charter and described under the section entitled “Description of Capital Stock—Restrictions on Ownership and Transfer.” These shares are “restricted securities” as defined in Rule 144 under the Securities Act and do not have registration rights. Restricted securities may be sold in the public market only if the sale is registered under the Securities Act or qualifies for an exemption from registration, including an exemption under Rule 144, as described in “Shares Eligible for Future Sale—Rule 144.” To the extent that we redeem common units for cash, our liquidity will be decreased.

 

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Quantitative and Qualitative Disclosure About Market Risk

 

Market risk refers to the risk of loss from adverse changes in market prices and interest rates. Our future income, cash flows and fair values relevant to financial instruments will depend upon prevalent market interest rates. We may in the future 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. We do not currently have any market risk sensitive instruments.

 

Off-balance Sheet Arrangements

 

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

 

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INDUSTRY OVERVIEW AND MARKET OPPORTUNITY

 

Unless otherwise indicated, all information in this Industry Overview and Market Opportunity section is derived from a market study prepared for us in connection with this offering by John Burns Real Estate Consulting, LLC, or JBREC, a real estate consulting firm. You should read the following discussion together with the information under the caption “Risk Factors.”

 

Industry Overview

 

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

 

The following chart provides information about the inventory of U.S. housing as of February 2013 by unit.

 

U.S. Housing Inventory

(as of February 2013)

 

LOGO

 

Source:   JBREC, February 2013.

 

Market Opportunity

 

While a large and growing asset class, single-family rental properties have historically been managed by relatively small-scale, “mom and pop” owner-operators or by a limited number of local and regional property management organizations. More recently, the ownership profile of single-family rental properties has shifted to larger investors and national owner-operators seeking to efficiently acquire large numbers of homes at distressed values, generate attractive rental cash flow streams and benefit from potential home price appreciation.

 

After nearly a decade of solid home price appreciation from 1998 to 2006, a significant over-correction occurred in the pricing of the single-family housing sector. Home values declined approximately 30% from peak to trough nationally and approximately [·]% in [·], as measured by the Burns Home Value Index. Due to

 

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significant distress in the housing market and additional macroeconomic factors, demand for rental housing has been increasing at a strong rate. The ability to acquire single-family homes at reduced prices, combined with improving housing demand characteristics, may offer a significant opportunity to those with a scalable real estate acquisition and operational platform and access to capital.

 

Over the next five years, a substantial number of non-performing loans will need to be resolved, including through foreclosure, short sale or conversion through a bank deed-for-lease program.

 

Single-Family Rental Supply

 

Following the eight-year period of solid price appreciation that ended in late 2006, home prices fell precipitously. This sudden decrease in home values has contributed to approximately 11.5 million home borrowers with negative equity or in some stage of delinquency as of the fourth quarter of 2012.

 

Foreclosure-related activity peaked in 2009 and has since begun to decline, but is still substantially above historical averages. From September 2008 through December 2012, there were approximately 4.1 million completed loan foreclosures (according to CoreLogic). While an unprecedented number of foreclosures have occurred, a large number of delinquent loans remain outstanding. As of December 31, 2012, approximately 11.3% of all mortgage loans (measured by loan count based on Mortgage Bankers Association data) in the nation are in some level of non-performance.

 

Non-Performing Single-Family Residential Mortgage Loans

(as of December 2012)

(Total Non-Performing Loans: 4.7 million)

 

LOGO

 

Source:   MBA Mortgage Bankers Association—4th Quarter 2012 National Delinquency Survey.

 

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The chart below illustrates the increase in the level of delinquency to relatively high levels. According to Mortgage Bankers Association data, a total of 4.7 million single-family residential mortgage loans are currently non-performing.

 

U.S. Single-Family Residential Mortgage Delinquency and Foreclosure Units

(Q4 1990—Q4 2012)

 

LOGO

 

Source:   MBA Mortgage Bankers Association—4th Quarter 2012 National Delinquency Survey.

 

Over the next five years, a substantial number of non-performing loans will need to be resolved, including through foreclosure, short sale or conversion through a bank deed-for-lease program. At the current rate of delinquency and non-performance, it appears that over 4.7 million homeowners in the United States will be affected. Even if fewer than half of the delinquent or non-performing loans proceed through the foreclosure process or are sold through the short sale process, the supply of inventory available for acquisition could be large.

 

Rental Market Demand Overview

 

Over the past two years, the U.S. rental housing market has begun a sustained recovery. In many markets, rental vacancy has fallen and rents have risen, even in areas hardest hit during the housing and economic downturn.

 

In addition to a growing trend of a mobile workforce, America is undergoing a shift in demographics. Core baby boomer households are becoming empty nesters, and the number of 20- to 34-year-olds is growing at an accelerated pace, as members of “Generation Y” come of home buying age. In the context of high unemployment, labor insecurity and a desire to maintain mobility, “Generation Y,” defined as those born between 1980 and 1999, numbers more than 80 million members, and is likely to show a higher tendency to rent rather than own residential housing. Additionally, the rising cost of college education and the corresponding burden of student loans leave many young people deep in debt and less willing or able to take on mortgage debt.

 

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The chart below illustrates the strength of the overall rental market (including both single-family and multi-family rental housing), which has seen increases in occupancy and rental rates (despite the macroeconomic headwinds that the United States economy has been facing). According to the U.S. Census Bureau, out of the total 78 million family households in the United States, 32 million have two members, and are more likely candidates for multi-family rentals, whereas 46 million have three or more members, and are more likely candidates for single-family rentals.

 

Single-Family and Multi-Family Rental Occupancy and Rental Rate (as of December 31, 2011)

 

LOGO

 

Source: U.S. Census Bureau.

 

Single-Family Rental Demand

 

Many homeowners who have been displaced by the housing bubble are looking to live in a home with similar characteristics and amenities to their former home and, for this population, single-family rentals may present the best available option. In the wake of the worst housing downturn in history, renting has, in many cases, become more compelling for consumers, and, with the growth of the single-family rental market, these consumers are now offered alternative rental options.

 

While multi-family and single-family housing seem to be natural competitors in the rental sector, each generally appeals to a different type of tenant. The two rental markets are largely segmented by stage of life. Singles, couples without children, people with roommates, newly divorced individuals and empty nesters dominate the multi-family market, because they have smaller space needs, less demand for associated acreage and generally prefer denser, transit-centric submarkets. On the other hand, the single-family market (both owner-occupied and tenant-occupied) serves larger households that are primarily families with children, whose preferences tend to focus on the need for additional space, quality of schools and neighborhood safety.

 

Within the broader rental market, the single-family rental segment has continued to grow its relative market share compared to other types of rental housing.

 

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Relative Size of the Single-Family Rental Market

(as of December 31, 2011)

 

LOGO

 

Source: U.S. Census Bureau.

 

Two of the primary factors driving the increase in demand for single-family rental properties are constraints on home mortgage financing and the displacement of homeowners.

 

Constraints on Home Mortgage Financing

 

Even with the increased affordability of homes, many would-be home buyers—including some with no history of foreclosure—are finding it difficult to qualify for a mortgage. Lenders have reverted to more stringent underwriting standards (such as limitations on aggregate indebtedness and restrictions on the percentage of income allocable to mortgage payments) and require larger down payments, which together have made it difficult for many potential home buyers to obtain mortgage financing.

 

Displaced Owners Forced to Rent

 

In some cases, the shift from owning to renting is a function of foreclosure, short sales, or other adverse credit or economic events. A home foreclosure, for example, can have a significant adverse effect on credit status and can limit the ability to obtain mortgage debt to finance future homeownership for up to seven years. Distressed owners are effectively converted to renters, many of whom prefer to live in a single-family unit, which has characteristics and amenities similar to their former homes, as opposed to an apartment.

 

The recent drop in home prices, constraints on mortgage lending, job volatility requiring greater geographic mobility, economic uncertainty, evolving demographics and expanded rental options are changing the way many Americans live. Many people, who in the past might have become homeowners, are instead becoming long-term renters of single-family homes. According to JBREC, for every 1.0% decline in the homeownership rate, the occupants of approximately 1.1 million homes become prospective tenants, and JBREC believes that the homeownership rate will continue to decrease through 2015 and then begin to increase again.

 

Single-Family Home Affordability

 

Affordability in the existing home market is at historically favorable levels nationally, looking back over the last 30 years. The ratio of annual housing costs (which is mortgage payment plus a portion of the down payment)

for the median-priced resale home to the median household income is near an all-time low, dating back to 1981.

 

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Due to rising mortgage rates coupled with expected home price appreciation, affordability conditions nationally are expected to weaken gradually in the coming years, reaching their historical median levels in 2016. While affordability conditions vary by market, most markets have experienced their most favorable historical affordability during this cycle.

 

The Burns Affordability Index measures the relationship between the median household income and the annual housing costs for the median-priced home, dating to 1981. An index rating of 0 indicates the best historical affordability during this time, and a rating of 10 indicates the worst historical affordability; an index value of 5 indicates the median historical affordability from 1981 through 2012.

 

Burns Affordability Index—National

(January 1981 to December 2017P)

 

LOGO

 

Source: JBREC, March 2013.

 

(P)   JBREC projection; actual values may differ materially from those projected.

 

Markets: Economic and Demographic Fundamentals

 

Projections and Assumptions

 

The following discussion contains projections regarding home price appreciation, employment growth, residential building permit activity, median household income and household formation. JBREC has made these projections based on studying the historical and current performance of the residential housing market and applying JBREC’s qualitative knowledge about the residential housing market. The future is difficult to predict, particularly given that the economy and housing markets can be cyclical, subject to changing consumer and market psychology, and governmental policies related to mortgage regulations and interest rates. There will usually be differences between projected and actual results because events and circumstances frequently do not occur as expected, and the differences may be material. JBREC does not express any form of assurance that these projections will come true. See “Risk Factors—Risks Related to Our Business—The estimates, forecasts and

 

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projections relating to our markets prepared by JBREC are based upon numerous assumptions and may not prove to be accurate.”

 

Home Value Appreciation

 

The Burns Home Value Index seeks to provide a reasonable estimate of home value trends in an MSA. The index is calculated based on an “electronic appraisal” of every home in the market, rather than just the small sample of homes that are actually transacting. The index provides home value trends by analyzing transactions as they are negotiated, not closed, which eliminates the data lag embedded in other home value indices that are based only on completed transactions. The index does not measure the change in the median price of homes sold, which may be subject to the mix of homes being sold and differences by geography. Appreciation projections are highly dependent on JBREC’s assumptions of job growth by market, and mortgage rates staying below 6.0% through 2017.

 

Employment Growth

 

JBREC forecasts the Bureau of Labor Statistics’ wage and salary employment totals. Employment growth conditions vary by market, but JBREC believes that an economic recovery that involves global debt reduction is likely to be a slow-growth recovery. Among other things, JBREC has assumed that the economy is gradually expanding, albeit at a slower pace than prior economic recoveries.

 

Residential Building Permit Activity

 

JBREC’s residential building permit forecasts consider job growth in each market, as well as home sales activity, household formation and home price appreciation.

 

Median Household Income

 

JBREC’s household income assumptions take into account generally improving job growth, and assume that incomes are generally rising after declining during the recent economic downturn. As with job growth, the recovery in the rate of household income growth is generally expected to occur at a slower pace in the near term than in previous economic recoveries.

 

Household Formation

 

JBREC’s household formation assumptions are based on forecasted changes in population, as well as a return to more normal headship rates, or the percentage of people in an age group who head a household. Headship rates fell for nearly all age groups from 2000 to 2010, particularly in the younger age groups, mostly caused by the economic distress in the latter half of the last decade. JBREC assumes immigration occurs at levels consistent with the 2000s and continued growth in multi-generational families.

 

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Overview

 

The following tables provide summaries of economic and housing industry data and estimates, forecasts, projections and assumptions for selected Metro Areas categorized into the following regions: West Coast, Central and East Coast.

 

     Metro Areas—West Coast  
     Oakland, CA
Metro
Division
    Vallejo, CA
MSA
    Sacramento,
CA MSA
    Los Angeles,
CA Metro
Division
    Riverside-
San
Bernardino,
CA MSA
    United States  

Economic Data

            

MSA Rank by Population(1)

     11 (11)      123        24        2 (12)      13     

Unemployment Rate(2)

     8.2     9.3     9.8     10.2     10.9     7.6

December 31, 2012

            

Average Annual Employment Growth Forecast(3)(4)

     1.7     2.1     1.8     1.6     1.8     1.6

2013 to 2017

            

Average Annual Median Income Growth Forecast(3)(4)

     1.7     3.7     2.4     1.9     2.3     2.0

2013 to 2017

            

Average Annual Population Growth Forecast(3)(5)

     1.0     0.3     1.2     1.0     1.2     1.0

2013 to 2017

            

Housing Industry Data

            

Average Annual Home Value Appreciation Forecast(3)(6)

     5.9     12.5     8.8     5.2     8.3     5.5

2013 to 2017

            

Peak to Current Home Value
Change(3)(6)(7)

     -31     -58     -48     -37     -51     -25

Shadow Inventory Estimate(3)(8)

     19,400        5,200        23,400        58,800        48,300        3.4 million   

Shadow Inventory % of Housing Units Estimate(3)(9)

     2.0     3.4     2.7     1.7     3.2     2.6

Total Replacement Cost Per Square Foot—2011 Estimate(3)(10)

   $ 164.76      $ 146.99      $ 114.74      $ 170.03      $ 103.76     

 

(1)  

Source: 2012 U.S. Census Bureau, Statistical Abstract of the United States.

(2)   

Source: Bureau of Labor Statistics. Monthly rate for December 2012.

(3)   

JBREC estimate; actual values may differ materially from those estimated.

(4)   

Source: JBREC.

(5)   

Source: Moody’s Analytics (September 2012).

(6)   

Source: JBREC—Burns Home Value Index.

(7)  

Current represents JBREC estimate as of March 2013.

(8)  

Shadow inventory includes homes that are not currently listed for sale but are in various stages of distress (i.e., mortgages that are 30 or more days delinquent or are in foreclosure). Estimates shown are as of the fourth quarter of 2012.

(9)  

Based on 2011 housing stock. Source: 2011 U.S. Census Bureau American Community Survey.

(10)  

The JBREC total replacement cost estimates are for 2011 (most current period data available). The estimate is based on each MSA’s median new home size and direct construction cost estimate, and includes a finished lot value estimate (lot ratio that varies by market multiplied by the median new home price), financing costs at 3% of the median new home price (revenue), selling, general and administrative (SG&A) costs of 12% of revenue and developer profit of 8% of revenue. These estimates do not include permits and fees because they may vary greatly by city or other jurisdiction within an MSA.

(11)  

Population rank represents entire San Francisco-Oakland-Fremont, CA Metropolitan Statistical Area.

(12)  

Population rank represents entire Los Angeles-Long Beach-Santa Ana, CA Metropolitan Statistical Area.

  Note:   JBREC estimates the following blended assumptions and forecasts for the combined Oakland metro division and Vallejo MSA: Average Annual Employment Growth Forecast (2013 to 2017): 1.8%; Average Annual Home Value Appreciation Forecast (2013 to 2017): 6.5%; Peak to Current Home Value Change: -35%.

 

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     Metro Areas—Central  
     Las Vegas,
NV MSA
    Phoenix, AZ
MSA
    Dallas, TX
Metro
Division
    Houston, TX
MSA
    Chicago, IL
Metro
Division
    United States  

Economic Data

            

MSA Rank by Population(1)

     30        14        4 (13)      6        3 (14)   

Unemployment Rate(2)

     10.0     6.7     5.9     6.0     8.8     7.6

December 31, 2012

            

Average Annual Employment Growth Forecast(3)(4)

     2.1     2.3     2.4     2.6     1.4     1.6

2013 to 2017

            

Average Annual Median Income Growth Forecast(3)(4)

     2.0     3.0     2.8     2.0     2.0     2.0

2013 to 2017

            

Average Annual Population Growth Forecast(3)(5)

     3.0     2.6     2.1     1.9     0.4     1.0

2013 to 2017

            

Housing Industry Data

            

Average Annual Home Value Appreciation Forecast(3)(6)

     12.1     9.0     5.8     4.3     7.6     5.5

2013 to 2017

            

Peak to Current Home Value Change(3)(6)(7)

     -56     -44     -9     +4     -34     -25

Shadow Inventory Estimate(3)(8)

     32,400        38,600        43,600        56,800        152,000        3.4 million   

Shadow Inventory % of Housing Units Estimate(3)(9)

     3.8     2.1     2.6     2.4     4.8     2.6

Total Replacement Cost Per Square Foot—2011 Estimate(3)(10)

   $ 87.14      $ 81.20      $ 78.85      $ 79.50      $ 99.38     

 

(13)  

Population rank represents entire Dallas-Fort Worth-Arlington, TX Metropolitan Statistical Area.

(14)  

Population rank represents entire Chicago-Joliet-Naperville, IL-IN-WI Metropolitan Statistical Area.

 

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     Metro Areas—East Coast  
     Atlanta, GA
MSA
    Tampa, FL
MSA
    Orlando, FL
MSA
    Miami, FL
Metro
Division
    United States  

Economic Data

          

MSA Rank by Population(1)

     9        19        26        8 (15)   

Unemployment Rate(2)

     8.4     7.9     7.6     7.9     7.6

December 31, 2012

          

Average Annual Employment Growth Forecast(3)(4)

     2.0     1.6     2.2     1.3     1.6

2013 to 2017

          

Average Annual Median Income Growth Forecast(3)(4)

     2.2     2.5     1.2     1.9     2.0

2013 to 2017

          

Average Annual Population Growth Forecast(3)(5)

     1.9     1.4     2.7     1.4     1.0

2013 to 2017

          

Housing Industry Data

          

Average Annual Home Value Appreciation Forecast(3)(6)

     9.5     6.4     8.4     8.0     5.5

2013 to 2017

          

Peak to Current Home Value Change(3)(6)(7)

     -31     -45     -50     -52     -25

Shadow Inventory Estimate(3)(8)

     87,500        66,100        50,900        65,900        3.4 million   

Shadow Inventory % of Housing Units Estimate(3)(9)

     4.0     4.9     5.4     6.7     2.6

Total Replacement Cost Per Square Foot—2011 Estimate(3)(10)

   $ 81.61      $ 80.69      $ 70.89      $ 91.42     

 

(15)  

Population rank represents entire Miami-Fort Lauderdale-Pompano Beach, FL Metropolitan Statistical Area.

 

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Changes in Burns Home Value Index

(January 2002 to March 2013) (1)

 

LOGO

 

Source:   JBREC, March 2013.

 

(1)   

Current represents estimated Burns Home Value Index as of March 2013. Peak to trough and current recovery of peak to trough changes are based on monthly values for the time period January 2002 to March 2013. Burns Home Value Index estimates all home values in a market, not just recent sale transactions.

(2)   

Peak for each market presented occurred as follows: Oakland (March 2006), Vallejo (November 2005), Sacramento (August 2005), Los Angeles (April 2006), Riverside-San Bernardino (April 2006) and National (April 2006). Trough for each market presented occurred as follows: Oakland (June 2012), Vallejo (January 2012), Sacramento (November 2011), Los Angeles (December 2011), Riverside-San Bernardino (November 2011) and National (November 2011).

 

Burns Home Value Index—with Year-Over-Year Change

(indexed to 100 in January 2002)(1)

 

     Metro Areas—West Coast        
     Oakland, CA
Metro
Division
    Vallejo, CA
MSA
    Sacramento,
CA MSA
    Los Angeles,
CA Metro
Division
    Riverside-
San
Bernardino,
CA  MSA
    National  

Jan. 2002

     100           100           100           100           100           100      

2002

     108           109           110           111           108           105      

2003

     120         10.6     126         16.0     132         19.8     134         21.7     132         21.6     116         10.1

2004

     143         19.3     156         23.7     167         26.8     174         29.6     178         35.1     132         14.1

2005

     170         19.0     188         20.3     199         19.2     212         21.8     223         25.0     152         14.7

2006

     175         2.9     188         0.1     191         -4.3     229         8.0     242         8.8     159         5.2

2007

     170         -2.8     162         -14.0     169         -11.6     216         -5.7     214         -11.5     153         -3.8

2008

     146         -14.1     105         -35.0     132         -21.9     163         -24.7     151         -29.7     135         -11.9

2009

     131         -10.2     83         -21.3     111         -15.5     139         -14.7     118         -21.8     124         -8.4

2010

     128         -2.4     80         -3.7     102         -8.2     139         0.0     111         -5.8     119         -3.7

2011

     123         -3.6     73         -8.3     94         -8.3     137         -1.4     107         -3.7     114         -4.0

2012

     117         -5.4     74         1.9     97         3.7     138         0.8     111         3.5     116         1.8

2013P

     125         7.4     86         16.2     109         12.7     150         9.0     125         12.8     125         7.2

2014P

     137         9.1     105         21.0     125         14.0     163         8.2     141         13.3     136         8.7

2015P

     147         7.3     121         15.4     137         10.2     171         4.9     154         9.1     145         6.5

2016P

     153         4.1     130         7.9     145         5.5     175         2.8     162         5.0     150         3.9

2017P

     155         1.5     134         2.9     148         2.1     177         1.1     165         1.9     152         1.5

Average Growth, 2013-2017(2)

                              
        5.9        12.5        8.8        5.2        8.3        5.5

Cumulative Growth, 2013-2017(3)

  

                           
        32.9%           80.2        52.5        28.6        49.1        30.9

 

Source:   JBREC, March 2013.

 

(P)  

JBREC projection; actual values may differ materially from those projected.

(1)  

Peak occurred in either 2005 or 2006 for all markets. Trough occurred during 2011 or 2012 for all markets. Burns Home Value Index estimates all home values in a market, not just recent transactions (sales).

(2)  

Average growth represents the compound annual growth rate for 2013 through 2017, measured from the 2012 index base.

(3)  

Cumulative growth represents the total change in the Burns Home Value Index measured from the 2012 index base through 2017P.

 

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Changes in Burns Home Value Index

(January 2002 to March 2013) (1)

 

LOGO

 

Source: JBREC, March 2013.

 

(1)   

Current represents estimated Burns Home Value Index as of March 2013. Peak to trough and current recovery of peak to trough changes are based on monthly values for the time period January 2002 to March 2013. Burns Home Value Index estimates all home values in a market, not just recent sale transactions.

(2)   

Peak for each market presented occurred as follows: Las Vegas (February 2006), Phoenix (February 2006), Dallas (May 2007), Houston (May 2008), Chicago (March 2007) and National (April 2006). Trough for each market presented occurred as follows: Oakland (June 2012), Vallejo (January 2012), Sacramento (November 2011), Los Angeles (December 2011), Riverside-San Bernardino (November 2011), Las Vegas (November 2011), Phoenix (November 2011), Dallas (December 2011), Houston (December 2008), Chicago (December 2011) and National (November 2011).

 

Burns Home Value Index—with Year-Over-Year Change

(indexed to 100 in January 2002)(1)

 

     Metro Areas—Central         
     Las Vegas,
NV MSA
    Phoenix, AZ
MSA
    Dallas, TX
Metro
Division
    Houston,
TX MSA
     Chicago, IL
Metro
Division
     National  

Jan. 2002

     100           100           100           100            100            100      

2002

     103           103           101           102            104            105      

2003

     117         13.1     108         5.7     103         2.0     107         4.1      113         8.8      116         10.1

2004

     168         43.9     122         13.0     108         4.6     112         5.0      122         7.5      132         14.1

2005

     194         15.6     173         41.4     109         0.9     112         0.0      133         9.3      152         14.7

2006

     200         3.2     189         9.4     113         3.7     118         5.1      140         5.1      159         5.2

2007

     180         -10.0     170         -10.2     113         0.1     120         1.9      139         -1.0      153         -3.8

2008

     136         -24.5     134         -21.3     108         -4.9     120         0.1      124         -10.8      135         -11.9

2009

     99         -27.0     105         -21.4     107         -0.5     117         -2.7      110         -11.3      124         -8.4

2010

     88         -11.0     93         -11.5     106         -1.1     120         2.6      99         -9.6      119         -3.7

2011

     79         -10.0     85         -8.7     101         -5.1     120         -0.3      92         -7.4      114         -4.0

2012

     82         3.5     98         15.4     101         0.2     123         2.9      90         -2.5      116         1.8

2013P

     95         14.9     116         18.0     107         6.6     132         7.3      96         7.7      125         7.2

2014P

     114         20.1     133         14.8     117         8.7     141         6.7      109         12.9      136         8.7

2015P

     131         15.5     143         7.5     125         7.1     146         3.9      120         10.2      145         6.5

2016P

     142         8.0     149         4.1     131         4.7     150         2.7      127         5.5      150         3.9

2017P

     146         2.9     151         1.6     133         1.9     152         1.1      129         2.1      152         1.5

Average Growth, 2013-2017(2)

  

                             
        12.1        9.0        5.8        4.3         7.6         5.5

Cumulative Growth, 2013-2017(3)

  

                             
        77.2        54.0        32.4        23.5         44.3         30.9

 

Source:   JBREC, March 2013.

 

(P)  

JBREC projection; actual values may differ materially from those projected.

(1)  

Peak occurred in either 2005 or 2006 for all markets. Trough occurred during 2011 or 2012 for these markets, with the exception of the Houston, TX MSA. Burns Home Value Index estimates all home values in a market, not just recent transactions (sales).

(2)  

Average growth represents the compound annual growth rate for 2013 through 2017, measured from the 2012 index base.

(3)  

Cumulative growth represents the total change in the Burns Home Value Index measured from the 2012 index base through 2017P.

 

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Changes in Burns Home Value Index

(January 2002 to March 2013) (1)

 

LOGO

 

Source: JBREC, March 2013.

 

(1)  

Current represents estimated Burns Home Value Index as of March 2013. Peak to trough and current recovery of peak to trough changes are based on monthly values for the time period January 2002 to March 2013. Burns Home Value Index estimates all home values in a market, not just recent sale transactions.

(2)  

Peak for each market presented occurred as follows: Atlanta (March 2007), Tampa (March 2006), Orlando (April 2006), Miami (December 2006) and National (April 2006). Trough for each market presented occurred as follows: Atlanta (December 2011), Tampa (September 2011), Orlando (November 2011), Miami (December 2011) and National (November 2011).

 

Burns Home Value Index—with Year-Over-Year Change

(indexed to 100 in January 2002)(1)

 

     Metro Areas—East Coast               
     Atlanta, GA
MSA
    Tampa, FL
MSA
    Orlando, FL
MSA
    Miami, FL
Metro
Division
    National  

Jan. 2002

     100           100           100           100           100      

2002

     102           105           104           107           105      

2003

     106         3.7     116         10.7     114         9.5     124         16.5     116         10.1

2004

     111         4.7     136         17.2     133         16.2     151         21.7     132         14.1

2005

     116         4.9     173         27.0     178         34.3     196         29.8     152         14.7

2006

     120         3.8     190         9.6     204         14.8     228         16.6     159         5.2

2007

     121         0.1     170         -10.1     185         -9.3     219         -4.1     153         -3.8

2008

     111         -8.2     139         -18.5     147         -20.7     161         -26.4     135         -11.9

2009

     100         -9.3     119         -14.6     118         -20.0     119         -26.0     124         -8.4

2010

     92         -7.9     110         -7.3     105         -11.0     107         -10.1     119         -3.7

2011

     82         -11.8     100         -8.9     95         -9.1     103         -4.0     114         -4.0

2012

     80         -1.8     102         1.9     97         2.3     105         2.2     116         1.8

2013P

     88         9.8     110         7.4     107         9.9     117         10.8     125         7.2

2014P

     101         15.4     121         10.0     122         13.8     132         13.3     136         8.7

2015P

     114         12.1     131         8.5     135         10.8     144         9.2     145         6.5

2016P

     122         7.6     137         4.7     143         5.8     151         5.0     150         3.9

2017P

     126         3.0     140         1.8     146         2.2     154         1.9     152         1.5

Average Growth, 2013-2017(2)

                         
        9.5        6.4        8.4        8.0        5.5

Cumulative Growth, 2013-2017(3)

                         
        57.4        36.6        49.8        46.6        30.9

 

Source:   JBREC, March 2013.

 

(P)  

JBREC projection; actual values may differ materially from those projected.

(1)  

Peak occurred in either 2005 or 2006 for these markets, with the exception of the Atlanta, GA MSA. Trough occurred during 2011 or 2012 for all markets. Burns Home Value Index estimates all home values in a market, not just recent transactions (sales).

(2)  

Average growth represents the compound annual growth rate for 2013 through 2017, measured from the 2012 index base.

(3)  

Cumulative growth represents the total change in the Burns Home Value Index measured from the 2012 index base through 2017P.

 

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Oakland-Fremont-Hayward, CA Metropolitan Division: “Oakland”

 

Oakland Economic Overview

 

According to the U.S. Census Bureau, 2011 American Community Survey, the Oakland metropolitan division, which consists of Alameda and Contra Costa counties, has 2.6 million people. When combined with the San Francisco-San Mateo-Redwood City metropolitan division, the overall MSA is the eleventh-largest MSA in the United States by population, according to the 2012 U.S. Census Bureau, Statistical Abstract of the United States. Following several years of declining employment, employment growth was positive in the year ended December 31, 2012, which has resulted in a decrease in the unemployment rate. The population in Oakland is projected to grow at an average annual rate of 1.0% from 2013-2017, which is on par with the projected national average of 1.0% for the same period, according to Moody’s Analytics (September 2012); Moody’s Analytics / Précis U.S. Macro (December 2012).

 

Annual Employment Growth and Unemployment Rate.    Employment growth is positive and improving in Oakland, with 15,100 jobs added in the 12 months ended December 31, 2012. The unemployment rate has declined from 11.2% in 2010 to 8.2% as of December 31, 2012. JBREC assumes employment growth will average 17,100 jobs annually from 2013 through 2017, or annual growth of 1.7%.

 

Median Household Income.    After decreasing in 2009 and 2010, the median household income in Oakland has fluctuated, rising an estimated 2.1% for the year ended December 31, 2011 and declining 0.4% for the year ended December 31, 2012. JBREC assumes the median income in Oakland will decrease slightly in 2013 and increase to $77,811 by 2017, which is a 1.7% average annual increase.

 

Annual Average Employment Growth and

Unemployment Rate—Oakland, CA Metro Division

   Annual Median Household Income—Oakland, CA
Metropolitan Division
LOGO    LOGO

Sources: Bureau of Labor Statistics, JBREC.

   Sources: Moody’s Analytics, JBREC.

 

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Oakland Housing Market Overview

 

The total market size of housing stock in Oakland is estimated by the U.S. Census to be $273 billion (approximately 986,000 homes according to the U.S. Census Bureau, 2011 American Community Survey), with annual sales, according to DataQuick, in 2012 of 36,790 homes. In addition to the improving economic conditions discussed above, the Oakland housing market has begun to improve. Household formation has increased from its 2011 trough, and permits to build new single-family and multi-family homes have increased. While construction levels are beginning to increase, the decline in the homeownership rate from a peak of 63.4% in 2006 to 58.1% for 2011 (the latest data available from the Census Bureau’s American Community Survey) suggests that many traditional homeowners continue to seek housing alternatives, including through single-family rentals.

 

The JBREC total replacement/new construction cost estimate for the Oakland metro division is $164.76 per square foot for 2011. The estimate is based on the Oakland metro division median new home size and direct construction cost estimate, and includes a finished lot value estimate (equal to 41% of the median new home price), financing costs at 3% of the median new home price; selling, general and administrative (SG&A) costs of 12% of the median new home price; and developer profit of 8% of the median new home price. This estimate does not include permitting costs and fees because they may vary greatly within a MSA. Additionally, JBREC estimates that there is a “shadow inventory” of approximately 19,400 homes as of December 31, 2012, representing approximately $7.4 billion in value (assuming the December 31, 2012 median sales price of $382,500 per home). “Shadow inventory” includes homes that are not currently listed for sale but are in various stages of distress (i.e., mortgages that are 30 or more days delinquent or are in foreclosure). JBREC assigns a probability of sale to these homes in order to estimate the shadow inventory of homes becoming available for purchase due to financial distress.

 

Supply and Demand Dynamics.    The level of issuance of single-family and multi-family housing permits has begun to rise from its lowest levels in more than 30 years, with 5,063 permits issued during the 12 months ended December 31, 2012. During the same time period, Oakland added an estimated 9,000 households. From 2008 through 2012, household formation has outpaced new housing permits by more than 34,000, resulting in favorable supply and demand dynamics for rental housing and existing housing stock. JBREC assumes that households will grow by an average of 11,160 annually from 2013 through 2017. Total permits in Oakland are projected to reach 9,500 units by 2016, according to JBREC, which would be the highest level since 2006 in this market.

 

Homeownership Levels.    The Oakland metro division witnessed a steady decline in the homeownership rate from 63.4% in 2006 to 58.1% in 2011, which is the latest data available from the Census Bureau’s American Community Survey.

 

Annual Household Formation and Housing
Permits—Oakland, CA Metropolitan Division

  Annual Average Homeownership Rate—Oakland,
CA Metropolitan Division
LOGO   LOGO

Sources: Moody’s Analytics, U.S. Census Bureau, JBREC.

  Source: U.S. Census Bureau, American Community Survey, 2005-2011.

 

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Burns Home Value Index.    According to JBREC, home values in Oakland are estimated to have bottomed in 2012 after several years of significant decline, and are poised to show improvement in the next several years. The Burns Home Value Index was down 5.4% in 2012 from 2011. Home values in the Oakland metropolitan division are projected to show an average annual increase of 5.9% from 2013 to 2017, according to the Burns Home Value Index, with stronger growth in the near term.

 

Single-Family Rental and Vacancy Rates.    Single-family home average monthly rents bottomed in 2010 in Oakland, and have increased each subsequent year. Additionally, the vacancy rate has decreased from 6.7% to 4.1% from 2009 to February 28, 2013.

 

Burns Home Value Index—Oakland, CA
Metropolitan Division

Indexed to 100 for January 2002

  Single-Family Rental and Vacancy Rates—
Oakland, CA Metropolitan Division
LOGO   LOGO

Source: JBREC.

  Source: RentRange, LLC.

 

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Table of Contents

Vallejo-Fairfield, CA MSA: “Vallejo”

 

Vallejo Economic Overview

 

According to the U.S. Census Bureau, 2011 American Community Survey, the Vallejo MSA, which consists of Solano County, has more than 416,000 people. Following several years of declining employment, employment growth was positive in the year ended December 31, 2011 and in the year ended December 31, 2012, which has resulted in a decrease in the unemployment rate. The population in Vallejo is projected to grow at an average annual rate of 0.3% from 2013-2017, which is below the projected national average of 1.0% for the same period, according to Moody’s Analytics (September 2012); Moody’s Analytics/Précis U.S. Macro (December 2012).

 

Annual Employment Growth and Unemployment Rate.    Employment growth is positive and improving in Vallejo, with 400 jobs added in the 12 months ended December 31, 2011, rising to 2,800 jobs added in the 12 months ended December 31, 2012. The unemployment rate has declined from 12.0% in 2010 to 9.3% as of December 31, 2012. JBREC assumes employment growth will average of 2,700 jobs annually from 2013 through 2017, or annual growth of 2.1%.

 

Median Household Income.    After decreasing in 2009 and 2010, the median household income in Vallejo has risen, with an estimated 2.9% gain for the year ended December 31, 2011 and an estimated 1.8% gain for the year ended December 31, 2012. JBREC assumes the median income in Vallejo will continue to show solid improvement, rising to $81,007 by 2017, which is a 3.7% average annual increase.

 

Annual Average Employment Growth and
Unemployment Rate—Vallejo, CA MSA

  Annual Median Household Income—Vallejo, CA
MSA
LOGO   LOGO

Sources: Bureau of Labor Statistics, JBREC.

  Sources: Moody’s Analytics, JBREC.

 

Vallejo Housing Market Overview

 

The total market size of housing stock in Vallejo is estimated by the U.S. Census to be $25 billion (approximately 153,000 homes according to the U.S. Census Bureau, 2011 American Community Survey), with annual sales, according to DataQuick, in 2012 of 7,285 homes. In addition to the improving economic conditions discussed above, the Vallejo housing market has begun to improve. Permits to build new single-family and multi-family homes have increased from their lowest levels in more than 30 years. While construction levels are beginning to increase, the decline in the homeownership rate from a peak of 67.1% in 2007 to an average of 61.2% for 2011 (the latest data available for this MSA) suggests that many traditional homeowners continue to seek housing alternatives, including through single-family rentals.

 

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The JBREC total replacement/new construction cost estimate for the Vallejo MSA is $146.99 per square foot for 2011. The estimate is based on the Vallejo MSA median new home size and direct construction cost estimate, and includes a finished lot value estimate (equal to 35% of the median new home price), financing costs at 3% of the median new home price; selling, general and administrative (SG&A) costs of 12% of the median new home price; and developer profit of 8% of the median new home price. This estimate does not include permitting costs and fees because they may vary greatly within a MSA. Additionally, JBREC estimates that there is a “shadow inventory” of approximately 5,200 homes as of December 31, 2012, representing approximately $1.1 billion in value (assuming the December 31, 2012 median sales price of $212,000 per home). “Shadow inventory” includes homes that are not currently listed for sale but are in various stages of distress (i.e., mortgages that are 30 or more days delinquent or are in foreclosure). JBREC assigns a probability of sale to these homes in order to estimate the shadow inventory of homes becoming available for purchase due to financial distress.

 

Supply and Demand Dynamics.    The level of issuance of single-family and multi-family housing permits has begun to rise from its lowest levels in more than 30 years, with 475 permits issued during the 12 months ended December 31, 2012. However, during the same time period, Vallejo is estimated to have seen a decline in the number of households added. JBREC assumes that households will grow by an average of 500 annually from 2013 through 2017, although this will lag the pace of homebuilding permits. Total permits in Vallejo are projected to reach 1,900 units by 2016, according to JBREC, which would be the highest level since 2005 in this market.

 

Homeownership Levels.    The Vallejo MSA witnessed a general decline in the homeownership rate from 67.1% in 2006 to 61.2% in 2011, which is the latest data available from the Census Bureau’s American Community Survey.

 

Annual Household Formation and Housing
Permits—Vallejo, CA MSA
  Annual Average Homeownership Rate—Vallejo,
CA MSA
LOGO   LOGO

Sources: Moody’s Analytics, U.S. Census Bureau, JBREC.

  Source: U.S. Census Bureau, American Community Survey, 2005-2011.

 

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Burns Home Value Index.    According to JBREC, home values in the Vallejo MSA are on the rise following several years of significant decline. The Burns Home Value Index was up 1.9% in 2012 from 2011, and the median resale price for a detached home had risen to $212,000 as of December 31, 2012. Home values in the Vallejo MSA are projected to show an average annual increase of 12.5% from 2013 to 2017, according to the Burns Home Value Index, with stronger growth in the near term.

 

Single-Family Rental and Vacancy Rates.    Single-family home average monthly rents have increased in Vallejo from the trough in 2010. Additionally, the vacancy rate has generally decreased to a rate of 6.9% as of February 28, 2013.

 

Burns Home Value Index—Vallejo, CA MSA

Indexed to 100 for January 2002

  Single-Family Rental and Vacancy Rates—Vallejo,
CA MSA
LOGO   LOGO

Source: JBREC.

  Source: RentRange, LLC.

 

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Sacramento-Arden-Arcade-Roseville, CA MSA: “Sacramento”

 

Sacramento Economic Overview

 

According to the U.S. Census Bureau, 2011 American Community Survey, the Sacramento metropolitan area had nearly 2.2 million people and, according to the 2012 U.S. Census Bureau, Statistical Abstract of the United States, is the twenty-fourth-largest in the nation by population. The Sacramento metropolitan area consists of Sacramento, Placer, El Dorado and Yolo counties, and the City of Sacramento is the state capital. Following several years of declining employment, employment growth was positive for the year ended December 31, 2012 and the MSA’s unemployment rate is declining while the median household income is rising. In addition, the Sacramento MSA is projected to experience population growth of 1.2% from 2013-2017, in excess of the projected national average of 1.0% for the same period, according to Moody’s Analytics (September 2012); Moody’s Analytics / Précis U.S. Macro (December 2012).

 

Annual Employment Growth and Unemployment Rate.    Employment growth is positive and improving in Sacramento, with 7,400 jobs added in the 12 months ended December 31, 2012. The unemployment rate has declined from 12.5% in 2010 to 9.8% as of December 31, 2012. The Sacramento economy appears to be improving, albeit at a slower pace than other parts of the country. JBREC assumes employment will grow by an average of 15,100 jobs annually from 2013 through 2017, or annual growth of 1.8%, with growth peaking in 2015 at 20,000 jobs added.

 

Median Household Income.    After decreasing in 2009 and 2010, the median household income in Sacramento has been gradually increasing, experiencing an estimated 2.2% period-over-period growth rate for the year ended December 31, 2011 and growth of 1.1% for the 12 months ended December 31, 2012, respectively. JBREC assumes the median income in Sacramento will increase to $66,240 by 2017, which is a 2.4% average annual increase.

 

Annual Average Employment Growth and
Unemployment Rate—Sacramento, CA MSA
  Annual Median Household Income—Sacramento,
CA MSA
LOGO   LOGO

Sources: Bureau of Labor Statistics, JBREC.

  Sources: Moody’s Analytics, JBREC.

 

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Sacramento Housing Market Overview

 

The total market size of housing stock in the Sacramento is estimated by the U.S. Census to be $139 billion (approximately 875,000 homes according to the U.S. Census Bureau, 2011 American Community Survey), with annual sales, according to DataQuick, in 2012 of 38,377 homes. In addition to the improving economic conditions discussed above, the Sacramento housing market has begun to improve. Permits to build new single-family and multi-family homes have increased from their 2011 issuance level, and home values have begun to appreciate, with an estimated home value increase of 3.7% for 2012, according to JBREC’s Burns Home Value Index. Despite this recovery, the homeownership rate, at 58.0% as of December 31, 2012, remains well below the peak level of 65.3% in 2003. This lower level suggests that many traditional homeowners have sought out housing alternatives, including through single-family rentals.

 

The JBREC total replacement/new construction cost estimate for the Sacramento MSA is $114.74 per square foot for 2011. The estimate is based on the Sacramento MSA median new home size and direct construction cost estimate, and includes a finished lot value estimate (equal to 30% of the median new home price), financing costs at 3% of the median new home price; selling, general and administrative (SG&A) costs of 12% of the median new home price; and developer profit of 8% of the median new home price. This estimate does not include permitting costs and fees because they may vary greatly within a MSA. Additionally, JBREC estimates that there is a “shadow inventory” of approximately 23,400 homes as of December 31, 2012, representing approximately $5.1 billion in value (assuming the median sales price of $217,500 per home as of December 31, 2012).

 

Supply and Demand Dynamics.    The level of issuance of single-family and multi-family housing permits is rising from its lowest levels in more than 30 years, with 3,420 permits issued during the 12 months ended December 31, 2012. During the same time period, the Sacramento MSA added an estimated 6,500 households. From January 1, 2008 to December 31, 2012, household formation has outpaced new housing permits by more than 23,000, resulting in favorable supply and demand dynamics for rental housing and existing housing stock. Household formation is assumed to outpace permit activity in the near term, adding an average of nearly 11,400 households per year between 2013 and 2017. JBREC expects that, by 2016, total permit activity will return to 10,000 units issued, which is a significant improvement from the lows of this recent downturn, but significantly lower than the market’s peak.

 

Homeownership Levels.    The homeownership rate in the Sacramento MSA averaged 58.6% during 2012, and as of December 31, 2012, was 58.0%, which is down from a high of 66.4% in 2001.

 

Annual Household Formation and Housing
Permits—Sacramento, CA MSA
  Annual Average Homeownership Rate—
Sacramento, CA MSA
LOGO   LOGO

Sources: Moody’s Analytics, U.S. Census Bureau, JBREC.

  Source: U.S. Census Bureau.

 

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Burns Home Value Index.    According to JBREC, home prices in the Sacramento MSA are showing growth following several years of significant decline. The Burns Home Value Index was up an estimated 3.7% in 2012 from 2011, and the median resale price for a detached home was $217,500 as of December 31, 2012. Home values in the Sacramento MSA are projected to show an average annual increase of 8.8% from 2013 to 2017, according to the Burns Home Value Index.

 

Single-Family Rental and Vacancy Rates.    Single-family home average monthly rents in Sacramento bottomed in 2010 and 2011, and have increased through February 28, 2013. Additionally, the vacancy rate decreased from 10.6% in 2009 to 6.1% as of February 28, 2013.

 

Burns Home Value Index—Sacramento, CA MSA

Indexed to 100 for January 2002

  Single-Family Rental and Vacancy Rates—
Sacramento, CA MSA
LOGO   LOGO

Source: JBREC.

  Source: RentRange, LLC.

 

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Los Angeles-Long Beach-Glendale, CA Metropolitan Division: “Los Angeles”

 

Los Angeles Economic Overview

 

According to the U.S. Census Bureau, 2011 American Community Survey, the Los Angeles metropolitan division, which consists of Los Angeles County, has 9.9 million people. When combined with the Santa Ana-Anaheim-Irvine, CA metropolitan division, the overall MSA is the second-largest MSA in the United States by population, according to the 2012 U.S. Census Bureau, Statistical Abstract of the United States. Following several years of declining employment, employment growth was positive in the year ended December 31, 2011 and in the year ended December 31, 2012, which has resulted in a decrease in the unemployment rate. The population in Los Angeles is projected to grow at an average annual rate of 1.0% from 2013-2017, which is on par with the projected national average of 1.0% for the same period, according to Moody’s Analytics (September 2012); Moody’s Analytics / Précis U.S. Macro (December 2012).

 

Annual Employment Growth and Unemployment Rate.    Employment growth is positive and improving in Los Angeles, with 21,000 jobs added in the 12 months ended December 31, 2011 and 52,300 jobs added in the 12 months ended December 31, 2012. The unemployment rate has declined from 12.6% in 2010 to 10.2% as of December 31, 2012. JBREC assumes employment growth will average of 64,300 jobs annually from 2013 through 2017, or annual growth of 1.6%.

 

Median Household Income.    After decreasing in 2009 and 2010, the median household income in Los Angeles has fluctuated, rising an estimated 2.0% for the year ended December 31, 2011 and declining 0.4% for the year ended December 31, 2012. JBREC assumes the median income in Los Angeles will remain essentially flat in 2013 and increase to $59,034 by 2017, which is a 1.9% average annual increase.

 

Annual Average Employment Growth and
Unemployment Rate—Los Angeles, CA Metro
Division
  Annual Median Household Income—Los Angeles,
CA Metropolitan Division
LOGO   LOGO

Sources: Bureau of Labor Statistics, JBREC.

  Sources: Moody’s Analytics, JBREC.

 

Los Angeles Housing Market Overview

 

The total market size of housing stock in Los Angeles is estimated by the U.S. Census to be $790 billion (approximately 3.4 million homes according to the U.S. Census Bureau, 2011 American Community Survey), with annual sales, according to DataQuick, in 2012 of 84,497 homes. In addition to the improving economic conditions discussed above, the Los Angeles metro division housing market has begun to improve. Household formation is increasing after the county lost residents from 2005 through 2007, and permits to build new single-

 

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