S-11/A 1 d260125ds11a.htm S-11/A S-11/A
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As filed with the Securities and Exchange Commission on January 23, 2017.

Registration No. 333-215452

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 1

to

FORM S-11

FOR REGISTRATION

UNDER

THE SECURITIES ACT OF 1933

OF SECURITIES OF CERTAIN REAL ESTATE COMPANIES

 

 

Invitation Homes Inc.

(Exact name of registrant as specified in governing instruments)

 

 

Invitation Homes Inc.

1717 Main Street, Suite 2000

Dallas, TX 75201

Telephone: (972) 421-3600

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

 

 

Mark A. Solls

Executive Vice President and Chief Legal Officer

Invitation Homes Inc.

1717 Main Street, Suite 2000

Dallas, TX 75201

Telephone: (972) 421-3600

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

 

 

COPIES TO:

 

Joshua Ford Bonnie

Edgar J. Lewandowski

Simpson Thacher & Bartlett LLP

425 Lexington Avenue

New York, NY 10017

Telephone: (212) 455-2000

Facsimile: (212) 455-2502

 

Gilbert G. Menna

Scott C. Chase

Goodwin Procter LLP

The New York Times Building

620 Eighth Avenue

New York, NY 10018

Telephone: (212) 813-8800

Facsimile: (212) 355-3333

 

 

Approximate date of commencement of proposed sale to the public: As soon as is 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, check the following box.  ☐

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

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

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

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

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

 

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

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of securities to be registered   Amount to be
registered(1)
 

Proposed maximum
aggregate offering

price per share

  Proposed maximum
aggregate offering
price(1)(2)
  Amount of
registration fee

Common Stock, par value $0.01 per share

  88,550,000   $21.00(2)   $1,859,550,000   $203,931.85(3)

 

(1) Includes shares of common stock subject to the underwriters’ option to purchase additional shares of common stock.
(2) Estimated solely for the purpose of determining the amount of the registration fee in accordance with Rule 457(a) under the Securities Act of 1933.
(3) $11,590 previously paid.

 

 

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 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. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale thereof is not permitted.

 

Subject to Completion

Preliminary Prospectus dated January 23, 2017

PROSPECTUS

 

LOGO

77,000,000 Shares

Invitation Homes Inc.

Common Stock

 

 

This is an initial public offering of shares of common stock of Invitation Homes Inc. We are offering all of the 77,000,000 shares of common stock to be sold in this offering.

It is currently estimated that the initial public offering price per share will be between $18.00 and $21.00 per share. Prior to this offering there has been no public market for the common stock. Our common stock has been approved for listing, subject to official notice of issuance, on the New York Stock Exchange, or NYSE, under the symbol “INVH.”

Upon the completion of this offering, we will be a Maryland corporation. We have elected to qualify as a real estate investment trust, or REIT, for U.S. federal income tax purposes. Shares of our common stock are subject to limitations on ownership and transfer that are primarily intended to assist us in maintaining our qualification as a REIT. Our charter will contain certain restrictions relating to the ownership and transfer of our common stock, including, subject to certain exceptions, a 9.8% limit, in value or by number of shares, whichever is more restrictive, on the ownership of outstanding shares of our common stock and a 9.8% limit, in value, on the ownership of shares of our outstanding stock. See “Description of Stock—Restrictions on Ownership and Transfer.”

After the completion of this offering, affiliates of The Blackstone Group L.P. will continue to own a majority of the voting power of shares eligible to vote in the election of our directors. As a result, we will be a “controlled company” within the meaning of the corporate governance standards of the NYSE. See “Management—Controlled Company Exception” and “Principal Stockholders.”

We are an “emerging growth company” as defined under the federal securities laws and, as such, may elect to comply with certain reduced public company reporting requirements for future filings. See “Summary—Implications of Being an Emerging Growth Company.”

 

 

See “Risk Factors” beginning on page 21 to read about certain factors you should consider before buying shares of common stock.

 

 

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

     Per Share      Total  

Initial public offering price

   $                    $                

Underwriting discount

   $         $     

Proceeds, before expenses, to Invitation Homes Inc.

   $         $     

Please see the section entitled “Underwriting” for a complete description of the compensation payable to the underwriters.

To the extent that the underwriters sell more than 77,000,000 shares of our common stock, the underwriters have the option to purchase up to an additional 11,550,000 shares from us at the initial public offering price less the underwriting discount.

The underwriters expect to deliver the shares against payment in New York, New York on                     , 2017.

 

 

 

Deutsche Bank Securities   J.P. Morgan

 

BofA Merrill Lynch   Goldman, Sachs & Co.   Wells Fargo Securities
Credit Suisse   Morgan Stanley   RBC Capital Markets

 

 

Blackstone Capital Markets   BTIG   Evercore ISI
FBR   JMP Securities  

Keefe, Bruyette & Woods

                A Stifel Company

                  Raymond James    Siebert Cisneros Shank & Co., L.L.C.   Zelman Partners LLC              

Prospectus dated                     , 2017.


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Table of Contents

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Table of Contents

TABLE OF CONTENTS

 

     Page  

Summary

     1   

Risk Factors

     21   

Forward-Looking Statements

     52   

Organizational Structure

     53   

Use of Proceeds

     57   

Distribution Policy

     58   

Capitalization

     59   

Dilution

     61   

Unaudited Pro Forma Financial Information

     62   

Selected Financial Information

     76   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     77   

Industry Overview

     105   

Business

     113   

Management

     129   

Certain Relationships and Related Person Transactions

     158   
 

 

 

Neither we nor the underwriters have authorized anyone to provide you with information different from that contained or incorporated by reference in this prospectus, any amendment or supplement to this prospectus or in any free writing prospectus prepared by us or on our behalf. Neither we nor the underwriters take any responsibility for, or can provide any assurance as to the reliability of, any information other than the information contained in this prospectus, any amendment or supplement to this prospectus or in any free writing prospectus prepared by us or on our behalf. We and the underwriters are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. You should assume that the information appearing in this prospectus or in any free writing prospectus prepared by us is accurate only as of their respective dates or on the date or dates which are specified in such documents. Our business, financial condition, liquidity, results of operations and prospects may have changed since those dates.

Through and including             , 2017 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

 

This prospectus includes market and industry data and forecasts that we have derived from independent consultant reports, publicly available information, various industry publications, other published industry sources and our internal data and estimates. Independent consultant reports, industry publications and other published industry sources generally indicate that the information contained therein was obtained from sources believed to be reliable. In addition, we have obtained a significant amount of such information, including the information under “Summary—Industry Overview” and “Industry Overview,” from a market study prepared for us in connection with this offering by John Burns Real Estate Consulting, or JBREC. 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. The assumptions and judgments made,

 

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and the methodologies used, by JBREC may not be accurate. Further, there will usually be differences between projected and actual outcomes, because events and circumstances frequently do not occur as expected, and the differences may be material. Accordingly, the forecasts and projections included in this prospectus might not occur or might occur to a different extent or at a different time. For the foregoing reasons, neither we nor JBREC can provide any assurance that the estimates, forecasts and projections contained in this prospectus are accurate, actual outcomes may vary significantly from those contained or implied by the forecasts and projections, and you should not place undue reliance on these estimates, forecasts and projections. 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. See “Experts.”

Our internal data and estimates are based upon information obtained from trade and business organizations and other contacts in the markets in which we operate and our management’s understanding of industry conditions.

 

 

Our business is currently owned by six holding entities: Invitation Homes L.P., Preeminent Holdings Inc., Invitation Homes 3 L.P., Invitation Homes 4 L.P., Invitation Homes 5 L.P. and Invitation Homes 6 L.P. We refer to these six holding entities collectively as the “IH Holding Entities.” Unless the context suggests otherwise, references to “IH1,” “IH2,” “IH3,” “IH4,” “IH5” and “IH6” refer to Invitation Homes L.P., Preeminent Holdings Inc., Invitation Homes 3 L.P., Invitation Homes 4 L.P., Invitation Homes 5 L.P. and Invitation Homes 6 L.P., respectively, in each case including any wholly owned subsidiaries, if applicable. The IH Holding Entities are under the common control of Blackstone Real Estate Partners VII L.P., an investment fund sponsored by The Blackstone Group L.P., and its general partner and certain affiliated funds and investment vehicles. Investment funds and vehicles associated with or designated by The Blackstone Group L.P. are referred to herein as “Blackstone” or “our Sponsor.” We refer to Blackstone, together with our management and other equity holders, collectively as our “pre-IPO owners.” Unless the context suggests otherwise, references in this prospectus to “Invitation Homes,” the “Company,” “we,” “our” and “us” refer (1) prior to the consummation of the reorganization transactions described in “Organizational Structure—Pre-IPO Transactions” (the “Pre-IPO Transactions”), to the combined IH Holding Entities and their consolidated subsidiaries and (2) after the consummation of the Pre-IPO Transactions, to Invitation Homes Inc. and its consolidated subsidiaries, including Invitation Homes Operating Partnership LP (our “Operating Partnership”).

In this prospectus:

 

    “Adjusted EBITDA” is a supplemental, non-GAAP measure often utilized to evaluate the performance of real estate companies. We define Adjusted EBITDA as EBITDA before the following items: noncash incentive compensation expense; impairment and other; acquisition costs; gain (loss) on sale of property; and interest income and other miscellaneous income and expenses. Adjusted EBITDA is used as a supplemental financial performance measure by management and by external users of our financial statements, such as investors and commercial banks. The GAAP measure most directly comparable to Adjusted EBITDA is net income or loss. Adjusted EBITDA is not used as a measure of our liquidity and should not be considered an alternative to net income or loss or any other measure of financial performance presented in accordance with GAAP. Our Adjusted EBITDA may not be comparable to the Adjusted EBITDA of other companies due to the fact that not all companies use the same definition of Adjusted EBITDA. Accordingly, there can be no assurance that our basis for computing this non-GAAP measure is comparable with that of other companies. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Measures” for additional information regarding our use of Adjusted EBITDA;

 

   

“Adjusted FFO” is a supplemental, non-GAAP measure often utilized to evaluate the performance of real estate companies. We define Adjusted FFO as Core FFO less recurring capital expenditures that are necessary to help preserve the value of and maintain functionality of our homes. The GAAP

 

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measure most directly comparable to Adjusted FFO is net income or loss. Adjusted FFO is not used as a measure of our liquidity and should not be considered an alternative to net income or loss or any other measure of financial performance presented in accordance with GAAP. Our Adjusted FFO may not be comparable to the Adjusted FFO of other companies due to the fact that not all companies use the same definition of Adjusted FFO. Accordingly, there can be no assurance that our basis for computing this non-GAAP measure is comparable with that of other companies. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Measures” for additional information regarding our use of Adjusted FFO;

 

    “average capital expenditures per home” for an identified population of homes represents (i) costs and expenditures that must be capitalized in accordance with GAAP related to general repairs and maintenance, pool service and maintenance costs (excluding any costs incurred during the upfront renovation of homes), and making a home ready to be re-leased after a resident moves out divided by (ii) the number of homes in such population;

 

    “average cost to maintain a home (gross)” represents the summation of average maintenance and turnover expense per home and average capital expenditures per home, in each case before giving effect to any offsetting income received directly from residents or withheld out of resident security deposits;

 

    “average maintenance and turnover expense per home” for an identified population of homes represents (i) costs and expenditures that must be expensed (rather than capitalized) in accordance with GAAP related to general repairs and maintenance, pool service and maintenance costs (excluding any costs incurred during the upfront renovation of homes), and making a home ready to be re-leased after a resident moves out divided by (ii) the number of homes in such population;

 

    “average monthly rent” represents the average of the contracted monthly rent for occupied properties in an identified population of homes for the relevant period and reflects rent concessions amortized over the life of the related lease;

 

    “average occupancy” for an identified population of homes represents (i) the number of days that the homes available for lease in such population were occupied, divided by (ii) the total number of available days in the measurement period for the homes in that population;

 

    “Case Shiller Index” refers to the S&P CoreLogic Case-Shiller U.S. National Home Price Index, a repeat sales, value and interval weighted, econometric home price index model that measures changes in U.S. single-family housing market prices;

 

    “Core FFO” is a supplemental, non-GAAP measure often utilized to evaluate the performance of real estate companies. We define Core FFO as FFO adjusted for amortization of deferred financing costs and discounts related to our financing arrangements, expenses related to this offering, noncash incentive compensation expense, severance expenses and acquisition costs, as applicable. The GAAP measure most directly comparable to Core FFO is net income or loss. Core FFO is not used as a measure of our liquidity and should not be considered an alternative to net income or loss or any other measure of financial performance presented in accordance with GAAP. Our Core FFO may not be comparable to the Core FFO of other companies due to the fact that not all companies use the same definition of Core FFO. Accordingly, there can be no assurance that our basis for computing this non-GAAP measure is comparable with that of other companies. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Measures” for additional information regarding our use of Core FFO;

 

    “Core NOI margin” for an identified population of homes is calculated by dividing NOI by total revenues, net of resident concessions and recoveries attributable to such population;

 

   

“days to re-resident” for an individual home represents the number of days a home is unoccupied between residents, calculated as the number of days between (i) the date the prior resident moves out of

 

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a home, and (ii) the date the next resident is granted access to the same home, which is deemed to be the earlier of (x) the next resident’s contractual lease start date and (y) the next resident’s move-in date;

 

    “EBITDA” is a supplemental, non-GAAP measure often utilized to evaluate the performance of real estate companies. We define EBITDA as net income or loss (computed in accordance with GAAP) before the following items: interest expense; income tax expense; and depreciation and amortization. EBITDA is used as a supplemental financial performance measure by management and by external users of our financial statements, such as investors and commercial banks. The GAAP measure most directly comparable to EBITDA is net income or loss. EBITDA is not used as a measure of our liquidity and should not be considered an alternative to net income or loss or any other measure of financial performance presented in accordance with GAAP. Our EBITDA may not be comparable to the EBITDA of other companies due to the fact that not all companies use the same definition of EBITDA. Accordingly, there can be no assurance that our basis for computing this non-GAAP measure is comparable with that of other companies. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Measures” for additional information regarding our use of EBITDA;

 

    “FFO” is a supplemental, non-GAAP measure often utilized to evaluate the performance of real estate companies. FFO is defined by NAREIT as net income or loss (computed in accordance with GAAP) excluding gains or losses from sales of previously depreciated real estate assets, plus depreciation, amortization and impairment of real estate assets, and adjustments for unconsolidated partnerships and joint ventures. The GAAP measure most directly comparable to FFO is net income or loss. FFO is not used as a measure of our liquidity and should not be considered an alternative to net income or loss or any other measure of financial performance presented in accordance with GAAP. Our FFO may not be comparable to the FFO of other companies due to the fact that not all companies use the same definition of FFO. Accordingly, there can be no assurance that our basis for computing this non-GAAP measure is comparable with that of other companies. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Measures” for additional information regarding our use of FFO;

 

    “GAAP” refers to generally accepted accounting principles in the United States;

 

    “in-fill” refers to markets, MSAs, submarkets, neighborhoods or other geographic areas that are typified by significant population densities and low availability of land suitable for being developed into competitive properties, resulting in limited opportunities for new construction;

 

    “Metropolitan Statistical Area” or “MSA” is defined by the U.S. Office of Management and Budget as a region associated with at least one urbanized area that has a population of at least 50,000 and comprises the central county or counties containing the core, plus adjacent outlying counties having a high degree of social and economic integration with the central county or counties as measured through commuting;

 

    “Multifamily REIT Comparison Set” means the following publicly traded U.S. apartment REITs, each of which (i) had a market capitalization in excess of $1.0 billion based on the last reported sale price of their listed common stock on November 17, 2016, and (ii) reported both same store occupancy and turnover rate for the nine months ended September 30, 2016: AvalonBay Communities, Inc.; Equity Residential; Essex Property Trust, Inc.; UDR, Inc.; Camden Property Trust; Mid-America Apartment Communities, Inc.; and Post Properties, Inc. Average occupancy and annualized same store turnover is calculated for the Multifamily REIT Comparison Set based on publicly reported results;

We present Multifamily REIT performance data because we believe many investors consider and compare single-family rental REITs and multifamily REITs when considering exposure to the U.S. housing and rental market. In addition, we believe there are many similarities between these two sectors with respect to key industry drivers, operating techniques and metrics used to measure operating performance. For example, both sectors are impacted by many of the same macroeconomic

 

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and demographic drivers, offer leases that are similar in duration and are priced using similar tools and methodologies and have cost structures that require similar categories of operating and capital expenditure;

 

    “NAREIT” is the National Association of Real Estate Investment Trusts;

 

    “net effective rental rate growth” for any home represents the difference between the monthly rent from an expiring lease and the monthly rent from the next lease, in each case, net of any amortized concessions. Leases are either renewal leases, where our current resident chooses to stay for a subsequent lease term, or a new lease, where our previous resident moves out and a new resident signs a lease to occupy the same home;

 

    “net operating income” or “NOI” is a non-GAAP measure often used to evaluate the performance of real estate companies. We define NOI for an identified population of homes as rental revenues and other property income less property operating and maintenance expense (which consists primarily of property taxes, insurance, homeowners’ association fees (when applicable), market-level personnel expenses, repairs and maintenance, leasing costs and marketing). NOI excludes: interest expense; depreciation and amortization; general and administrative expense; property management expense; impairment and other; acquisition costs; (gain) loss on sale of property; and interest income and other miscellaneous income and expenses. NOI is not used as a measure of our liquidity and should not be considered as an alternative to net income or loss or any other measure of financial performance presented in accordance with GAAP. Our NOI may not be comparable to the NOI of other companies due to the fact that not all companies use the same definition of NOI. Accordingly, there can be no assurance that our basis for computing this non-GAAP measure is comparable with that of other companies. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Measures” for additional information regarding our use of NOI;

 

    “New Home Replacement Cost” includes, at an MSA level, JBREC’s estimate of the total cost to acquire a finished lot with all impact and building fees paid, direct and indirect construction costs and soft costs including financing, warranty, overhead, builder’s fee and other costs. All costs assume a production builder’s economies of scale. JBREC notes that the cost to build a single house may be higher if constructed individually and without the benefit from a production builder’s economies of scale;

 

    “Northern California” includes Modesto, CA, Napa, CA, Oakland-Fremont-Hayward, CA, Sacramento-Arden-Arcade-Roseville, CA, San Jose-Sunnyvale-Santa Clara, CA, Stockton-Lodi, CA, Vallejo-Fairfield, CA and Yuba City, CA;

 

    “PSF” means per square foot;

 

    “Same Store” or “Same Store portfolio” includes, for a given reporting period, homes that have been stabilized (defined as homes that have (i) completed an upfront renovation and (ii) entered into at least one post-renovation Invitation Homes lease) for at least 90 days prior to the first day of the prior-year measurement period and excludes homes that have been sold and homes that have been designated for sale but have not yet entered into a written sale agreement during such reporting period. Same Store portfolios are established as of January 1st of each calendar year. Therefore, any home included in the Same Store portfolio will have satisfied the conditions described in clauses (i) and (ii) above prior to October 3rd of the year prior to the first year of the comparison period. We believe presenting information about the portion of our portfolio that has been fully operational for the entirety of a given reporting period and its prior year comparison period provides investors with meaningful information about the performance of our comparable homes across periods and about trends in our organic business;

 

    “South Florida” includes Fort Lauderdale-Pompano Beach-Deerfield Beach, FL, Key West, FL, Miami-Miami Beach-Kendall, FL and West Palm Beach-Boca Raton-Delray Beach, FL;

 

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    “Southern California” includes Anaheim-Santa Ana-Irvine, CA, Los Angeles-Long Beach-Glendale, CA, Oxnard-Thousand Oaks-Ventura, CA, Riverside-San Bernardino-Ontario, CA and San Diego-Carlsbad-San Marcos, CA;

 

    “total homes” or “total portfolio” refers to the total number of homes we own, whether or not stabilized, and excludes any properties previously acquired in purchases that have been subsequently rescinded or vacated. Unless the context otherwise requires, all measures in this prospectus are presented on a total portfolio basis;

 

    “turnover rate” represents the number of instances that homes in an identified population become unoccupied in a given period, divided by the number of homes in such population. To the extent the measurement period shown is less than 12 months, the turnover rate will be reflected on an annualized basis; and

 

    “Western United States” includes our Southern California, Northern California, Seattle, Phoenix and Las Vegas markets.

 

 

Except where the context requires otherwise, the information in this prospectus assumes no exercise by the underwriters of their option to purchase up to an additional 11,550,000 shares from us and that the shares to be sold in this offering are sold at $19.50 per share, which is the midpoint of the price range indicated on the front cover of this prospectus.

 

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SUMMARY

This summary does not contain all of the information that you should consider before investing in shares of our common stock. You should read the entire prospectus and any free writing prospectus prepared by us or on our behalf carefully before making an investment decision, especially the risks discussed under “Risk Factors,” “Unaudited Pro Forma Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our combined and consolidated financial statements and the related notes included elsewhere in this prospectus.

Invitation Homes

We are a leading owner and operator of single-family homes for lease in the United States. Our portfolio of nearly 50,000 high quality homes is wholly owned and is concentrated in attractive in-fill submarkets of major MSAs. We have selected locations with strong demand drivers, high barriers to entry and high rent-growth potential. We are highly concentrated in the Western United States and Florida, with 72% of our revenues generated in those regions and 54% of revenues coming from California and Florida alone during the three months ended September 30, 2016. Through disciplined market and asset selection, we designed our portfolio to capture the operating benefits of local density as well as economies of scale that we believe cannot be readily replicated. Since our founding in 2012, we have built a proven, vertically integrated operating platform that allows us to effectively and efficiently acquire, renovate, lease, maintain and manage our homes. We believe that the investments we make, and the high standard to which we renovate our homes, improve our local communities both by offering residents choice and access to a superior quality of living and by driving local employment. Our world-class portfolio and differentiated, vertically integrated platform have enabled us to achieve strong operating results and we believe create significant opportunities for future growth.

We invest in markets that we expect will exhibit lower new supply, stronger job and household formation growth and superior NOI growth relative to the broader U.S. housing and rental market. Within our 13 markets, we target attractive neighborhoods in in-fill locations with multiple demand generators, such as proximity to major employment centers, desirable schools and transportation corridors. More than 95% of our revenue for the three months ended September 30, 2016 was earned in markets where we have at least 2,000 homes, driving significant operational efficiency. Our homes average approximately 1,850 square feet with three bedrooms and two bathrooms and an average monthly rent of $1,623 for the three months ended September 30, 2016, appealing to a resident base that we believe is less transitory than the typical multifamily resident. We have made approximately $1.2 billion of upfront renovation investment in the homes in our portfolio, representing approximately $25,000 per home, in order to address capital needs, reduce ongoing maintenance costs and drive resident demand. As a result, our portfolio benefits from high occupancy and low turnover rates, and we are well positioned to drive strong rent growth, attractive margins and predictable cash flows.

Through our disciplined operating and investment expertise, we:

 

    generated $905 million in total revenues for the twelve months ended September 30, 2016;

 

    increased net effective rental rates on leases signed in the quarter ended September 30, 2016 by 6.1% over the prior lease rates;

 

    achieved average occupancy of 96.1% for our 36,569 home Same Store portfolio (consisting of homes which had commenced their initial post-renovation lease prior to October 3, 2014) for the nine months ended September 30, 2016;

 

    grew total revenues for our Same Store portfolio by 5.0% for the nine months ended September 30, 2016 as compared to the nine months ended September 30, 2015;

 



 

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    grew NOI for our Same Store portfolio by 7.4% for the nine months ended September 30, 2016 as compared to the nine months ended September 30, 2015; and

 

    experienced home price appreciation of 6.2% in our markets for the twelve months ended September 30, 2016 (weighted by revenue contribution) based on the September 2016 Case Shiller Index, compared to growth in the broader U.S. market of 5.5%.

We believe we are well positioned to achieve organic growth through a combination of rent increases driven by strong market fundamentals (including demographic shifts), new ancillary revenue opportunities and increasing operational efficiencies. We continue to identify and implement new opportunities to drive revenue in the near and longer term by applying proven approaches of multifamily rental providers. We also see opportunities to expand margins by centralizing additional support and administrative functions and continuing to optimize our platform. In addition, we intend to capitalize on a highly fragmented market by utilizing our proven acquisition capability and flexible balance sheet to make attractive investments.

Our Portfolio

The following table provides summary information regarding our total and Same Store portfolios (consisting of homes which had commenced their initial post-renovation lease prior to October 3, 2014) as of and for the periods indicated.

 

Market

   Number
of Homes(1)
     Average
Occupancy(2)
    Average In-Place
Monthly Rent(3)
     Average
Monthly
Rent PSF(3)
     % of
    Revenue(4)    
 

Western United States

             

Southern California

     4,633         94.8   $ 2,148       $ 1.27         12.4

Northern California

     2,892         96.4     1,680         1.07         6.7

Seattle

     3,177         94.2     1,847         0.97         7.9

Phoenix

     5,636         95.0     1,112         0.71         8.2

Las Vegas

     940         95.2     1,417         0.74         1.8
  

 

 

            

 

 

 

Western United States Subtotal

     17,278         95.1     1,638         0.97         37.0
  

 

 

            

 

 

 

Florida

             

South Florida

     5,588         94.9     2,118         1.10         14.7

Tampa

     4,997         94.9     1,540         0.79         9.8

Orlando

     3,734         95.1     1,465         0.76         7.0

Jacksonville

     2,018         94.8     1,536         0.77         3.9
  

 

 

            

 

 

 

Florida Subtotal

     16,337         94.9     1,719         0.89         35.4
  

 

 

            

 

 

 

Southeast United States

             

Atlanta

     7,537         94.0     1,336         0.65         12.5

Charlotte

     3,123         94.4     1,348         0.68         5.3
  

 

 

            

 

 

 

Southeast United States Subtotal

     10,660         94.2     1,339         0.66         17.8
  

 

 

            

 

 

 

Midwest United States

             

Chicago

     2,973         92.3     1,997         1.18         7.2

Minneapolis

     1,183         94.0     1,734         0.87         2.6
  

 

 

            

 

 

 

Midwest United States Subtotal

     4,156         92.8     1,922         1.08         9.8
  

 

 

            

 

 

 

Total / Average

     48,431         94.6 %    $ 1,623       $ 0.88         100.0 % 
  

 

 

            

 

 

 

Same Store Portfolio Total / Average

     36,569         96.1 %    $ 1,623       $ 0.87         76.5 % 
  

 

 

            

 

 

 

 

(1) As of September 30, 2016.
(2) Represents average occupancy for the nine months ended September 30, 2016.
(3) Represents average rent for the three months ended September 30, 2016.
(4) Represents the percentage of revenue generated in each market for the three months ended September 30, 2016.

 



 

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Our Platform

Our vertically integrated, scalable platform allows greater influence over the experience of our residents while enabling us to better control operating costs and continuously share best practices across functional areas of the business. Our differentiated platform is built upon:

 

    Resident-centric focus. Our high-touch business model enables us to continuously solicit and integrate resident feedback into our operations and tailor our approach to address their preferences, providing a superior living experience and fostering customer loyalty. We believe this, in turn, drives rent growth, occupancy and low turnover rates and will enable us to develop significant brand equity in the longer term.

 

    Local presence and expertise. We employ a differentiated “Community Model” whereby in-market managers oversee the operations of local leasing management, property management and maintenance teams, enabling us to provide outstanding resident service, leverage local expertise in managing rental, occupancy rates and turnover rates, and improve cost and oversight over renovations and ongoing maintenance. As a result of our concentrated footprint within our markets, our regional managers and in-market teams are able to realize local-operator advantages, while still benefiting from significant economies of scale.

 

    Scalable, centralized infrastructure. We support local market operations with national strategy, infrastructure and standards to drive efficiency, consistency and cost savings. We utilize our extensive scale to ensure the consistent quality of our resident experience and maximize cost efficiencies and purchasing power. On a national level we are also able to standardize resident leases, employ a consistent approach to resident screening and leasing operations, and utilize dynamic, rules-based pricing tools informed by local market conditions.

Our approach to asset management similarly combines local presence and expertise with national oversight. Our investment and asset management teams are located in-market and apply their local market knowledge within the framework of a proprietary and consistent underwriting methodology. Through the integration of investment management and property management functions, our platform enables our asset management teams to incorporate real time information regarding leasing activity, property operations, maintenance and capital spending into asset selection. We believe the advantages of our integrated acquisition platform and local market expertise have driven the quality of our existing portfolio of 48,431 homes as of September 30, 2016, over 94% of which were acquired in single-asset transactions. We believe that employing experienced, in-house acquisitions teams at the local level gives us a competitive advantage in selectively acquiring homes that will maximize risk-adjusted total return.

Our Competitive Strengths

We believe our position as a leading single-family residential owner and operator is founded on the following competitive strengths:

Large vertically integrated owner and operator with unmatched scale in attractive markets

We own and operate the largest portfolio of single-family homes for lease in the United States based on revenue. Our extensive scale enhances diversification, predictability of cash flows and cost savings. Over 95% of our portfolio, on a revenue basis for the three months ended September 30, 2016, is located in markets where we have at least 2,000 homes. This local density and scale allows us to achieve greater operational efficiency, reduce operating costs and gain superior local market knowledge. In addition, this scale increases our ability to optimize our portfolio through the selective disposition of non-core assets without impacting our ability to operate

 



 

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efficiently. Across markets, we leverage preferred national and local vendors to ensure consistent quality and maximize purchasing power, employ standardized resident screening practices and leases, control our leasing approach through the use of exclusive broker arrangements, and adhere to dynamic, rules-based pricing tools informed by our community presence. Our integrated, scalable platform offers in-house capability at every phase of our business, including acquisition underwriting and execution, upfront capital investment and renovation, ongoing leasing and maintenance operations, and dispositions. We believe this allows us greater ability to control and improve our residents’ experience and manage operating costs, while providing detailed market intelligence that we utilize to drive occupancy, low turnover rates and rent growth.

Quality homes located in high growth markets with low new supply

We have selected markets that we believe will experience strong population, household formation and employment growth and exhibit constrained levels of new home construction. As a result, we believe our markets have and will continue to outperform the broader U.S. housing and rental market in rent growth and home price appreciation. As measured by the September 2016 Case Shiller Index, home price appreciation in our markets was 6.2% for the twelve months ended September 30, 2016, compared to growth in the broader U.S. market over the same period of 5.5%. We believe home price appreciation is a leading indicator of future rental growth. Within our markets, we have focused on highly desirable in-fill locations with multiple demand drivers, such as proximity to major employment centers, attractive schools and transportation corridors. We have largely avoided bulk portfolio acquisitions, choosing instead to construct our portfolio mainly through individual acquisitions by our local teams, who seek to identify the assets in our markets with the strongest demand and return profiles according to our rigorous underwriting criteria.

When we acquire a home, we make disciplined capital investments designed to enhance its desirability and minimize the need for ongoing maintenance. Since our inception in 2012, we have made upfront renovation investments in our portfolio totaling more than $1.2 billion, or an average of $25,000 per home. Through our disciplined market focus and differentiated approach to acquisitions and renovations, we believe we have assembled a portfolio of single-family homes for lease that cannot be readily replicated by new entrants, commands premium rents per square foot and which positions us well for future internal growth.

Proven asset management and portfolio optimization capabilities

Our portfolio was strategically assembled by in-house property acquisition teams operating locally in each of our markets with national oversight. Our acquisition teams have acquired 94% of our 48,431 homes as of September 30, 2016 in single-asset acquisitions. Today, we have a 25-member asset management team, 22 of whom operate in our local markets and source and underwrite acquisition opportunities by applying local expertise within the parameters of a disciplined and proprietary underwriting methodology. In evaluating acquisitions, we analyze 64 factors, including neighborhood desirability, proximity to employment centers, schools, transportation corridors, community amenities, construction type and the extent of ongoing capital needs, among others. We have developed an extensive network of local market relationships, which coupled with our ability to provide speed and certainty of closing to sellers, affords us enhanced access to acquisition opportunities across multiple channels, including local and national brokers, banks, contractors, homebuilders and other single-family home rental operators. The depth and breadth of our local broker networks, our deep understanding of local markets and our ability to effectively leverage technology to gather and analyze market data have enabled us to underwrite more than one million individual homes since our inception, from which we have assembled our high quality portfolio of nearly 50,000 homes.

We also maintain a sophisticated process to identify and efficiently dispose of homes that no longer fit our investment objectives. We believe we have a proven ability to maximize sales prices while reducing time to sale and selling costs by utilizing multiple distribution channels, including bulk portfolio sales, our new “Resident

 



 

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First Look” program, which facilitates home sales to our current residents, direct-to-market sales and multiple listings services (“MLS”). As of September 30, 2016, we have sold 2,491 properties in 589 individual transactions across these channels.

Superior property management and resident-centric approach drive strong performance

We believe our Community Model, supported by national infrastructure and standards, offers residents a differentiated value proposition and provides us enhanced control and efficiency in operating our portfolio. Our Community Model is a localized approach to property management that seeks an optimal balance between operating scale and local control and expertise. In order to monitor their satisfaction and improve service, we maintain regular contact with our residents through our in-market maintenance teams, property management personnel and resident polling. We have achieved an “A+” rating with the Better Business Bureau. We believe our high resident satisfaction has driven strong occupancy and low turnover rates. For the nine months ended September 30, 2016, our Same Store portfolio (consisting of homes which had commenced their initial post-renovation lease prior to October 3, 2014) experienced 96.1% average occupancy and an annualized turnover rate of 37.2%, as compared to the average Multifamily REIT Comparison Set same store occupancy rate and same store annualized turnover rate of 96.1% and 55.2%, respectively, for the same period. In addition, by responding to maintenance requests primarily with in-house technicians, we believe we can more effectively control the cost and time of maintenance. In 2015, more than 50% of our maintenance calls were addressed with in-house technicians. To support and guide our community teams, we have developed robust national infrastructure and standards to drive consistency, efficiency and cost savings. We believe our operating platform enables us to drive NOI growth and margins in our portfolio. For the nine months ended September 30, 2016, we grew NOI of our 36,569 home Same Store portfolio by 7.4%, as compared to the nine months ended September 30, 2015.

Experienced management team leading an industry innovator

We are led by a seasoned management team with extensive residential and public company leadership experience whose interests are highly aligned with those of our stockholders. We have been a pioneer in the institutional single-family rental industry since its emergence and have taken a leadership role in its evolution. We helped develop the financing and securitization markets for the asset class by executing the first single-family rental securitized financing. In addition, we were a founding member of the National Rental Home Council, the single-family rental industry trade association, which is currently led by our President and Chief Executive Officer.

We have received a number of industry awards, including International Financing Review’s 2013 Structured Finance Deal of the Year, NREI/IMN’s 2016 Commercial Real Estate Award for “Innovation in Property Management,” and Satisfacts’ 2015 “Superior Resident Satisfaction” company award.

Our Business and Growth Strategies

Our primary objective is to offer our residents a superior living experience by combining high-quality homes with outstanding resident service, creating a differentiated value proposition whose success inures to the benefit of our stockholders. We believe we can achieve our goal to create value for our residents and investors through the following business and growth strategies:

Drive revenue growth and capitalize on attractive fundamentals in our markets

We believe our markets will continue to exhibit lower new supply, stronger job and household formation growth and superior NOI growth relative to the broader U.S. housing and rental markets. We intend to capitalize on these favorable market dynamics to drive growth by optimizing rents while maintaining occupancy and

 



 

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growing complementary revenue streams. We believe we can outperform market rental growth by continuing to develop and implement sophisticated revenue management processes and systems to produce and analyze more insightful market intelligence. In addition, given our high-touch, resident-centric approach to property management, we believe we can offer tailored revenue-enhancing capital investment and other upgrades in exchange for rent premiums. We also continue to identify and implement complementary income opportunities, including preferred vendor and referral arrangements for the provision of various residential services, such as telephone, cable and internet service, landscaping and security systems.

Further expand margins by enhancing our operational efficiency

We believe we can continue to expand margins not only by capitalizing on our significant revenue growth opportunities, but also through continuing efforts to improve efficiency and reduce cost. Our extensive portfolio size and local market density create significant opportunities for us to capture additional economies of scale and operational efficiencies to drive profitability. We will seek to continue to reduce the time and cost of maintenance and resident turnover through proven initiatives, such as the optimization of pre-leasing programs, preventative maintenance and the use of more durable products like hard flooring instead of carpet. We will continue to standardize our leasing process by leveraging best practices developed from executing more than 136,500 leases since our inception. In addition, we believe we can achieve additional cost reductions while maintaining the quality and consistency of the resident experience by continuing to centralize select administrative functions, such as leasing and maintenance call centers and lease administration and procurement operations. Finally, we see opportunities for cost savings through improved property management technology, such as systems to more efficiently process maintenance requests.

Continue to grow and optimize our portfolio through disciplined acquisitions and selective dispositions

With the experience and expertise gained through over 45,000 single-asset acquisitions, we have developed and implemented an investment strategy designed to maximize risk-adjusted total return. Within markets where we see rent growth potential, we focus on in-fill locations with multiple demand drivers, such as proximity to major employment centers, attractive schools and transportation corridors. We select high quality homes with appeal for broad segments of rental demand, averaging approximately 1,850 square feet with three bedrooms and two bathrooms and an average monthly rent of $1,623 for the three months ended September 30, 2016. Leveraging our market density, relationships, local knowledge and scale, we intend to continue to execute this strategy to grow our portfolio in our markets. The single-family rental market is highly fragmented with only one percent of the approximately 15.8 million single-family rental units in the United States owned by institutional owners, according to JBREC. We believe we are well positioned to be a consolidator given our position as the largest owner of single-family homes for lease, proven capital allocation strategies and financial flexibility. Since our inception, we have also disposed of approximately 2,500 homes that did not meet our long term investment criteria, demonstrating our ability to employ multiple disposition channels to optimize our portfolio and redeploy capital into more attractive investment opportunities without relinquishing the benefits of in-market scale.

Maintain a strong and flexible capital structure to support our growth

As a publicly traded company, we believe we will have enhanced access to multiple forms of cost-efficient capital, further enhancing our ability to effectively manage our balance sheet and financial profile. Since our inception, we have built strong relationships with numerous lenders, investors and other capital providers. We believe these relationships, coupled with our demonstrated financing track record, will provide us with significant financial flexibility and capacity to fund future growth. We intend to be disciplined with our financial management and continue to enhance our financial flexibility through the ongoing reduction of our debt over time.

 



 

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Industry Overview

Residential housing is the largest real estate asset class in the United States, with 121 million total housing units and a total value of nearly $23.0 trillion, according to the Federal Reserve Flow of Funds report for the third quarter of 2016. The single-family rental market has grown in recent years as the homeownership rate has declined following the global financial crisis. The number of single-family rental units increased 35% from 11.7 million as of September 30, 2006 to 15.8 million as of September 30, 2016, as the homeownership rate fell from a high of 69.2% as of December 31, 2004 to 63.5% as of September 30, 2016.

New single and multifamily housing supply is significantly below long-term average levels. Since the start of the housing crisis in 2007, new housing completions as a share of households in the U.S. have averaged 43% below the 1984-2015 average and current 2016 levels are 36% below the 1984-2015 average. This decline in supply has been even more pronounced in Invitation Homes’ markets: new housing completions as a share of households for 2007-2015 and September 2016 were 60% below and 49% below the 1984-2015 averages, respectively. This persistent level of supply below historical averages has primarily been caused by rising costs of land, labor and materials, as well as limited debt and equity capital available for new construction. Single-family construction activity is expected to remain low over the near and intermediate term. In addition to overall levels of housing supply below long term averages, new entry-level single-family housing supply has declined significantly. Notably, the share of new homes 1,800 square feet or less (the typical size of entry-level homes) has fallen from an average of 34% of new single-family housing supply in 1999-2004 (prior to the housing downturn) to 21% in 2015, a nearly 40% decline.

JBREC believes that the typical single-family rental resident prefers single-family homes over apartments due to lifestyle differences (e.g., families with children, space requirements and quality of schools). The propensity to rent has increased for every age group due to factors including delaying of major life events, increasing student loan burdens, reduced availability of mortgage credit and lifestyle preference for renting. Consequently, the national rentership rate, which is the inverse of the homeownership rate, reached 37% in the third quarter of 2016, a level not seen since 1973, and is forecast by JBREC to continue to climb through 2025. Limited new supply, when combined with forecast demand growth, should drive increased occupancy and rental rates for single-family homes for lease.

Job growth has continuously improved since 2011 and household formation is accelerating. Thirteen million total new jobs have been added since 2011, or an average of 2.6 million jobs per year through 2015 (1.8% annual job growth). Due to job growth and demographics, JBREC forecasts that an estimated 4.8 million net new households will be formed from 2017 to 2020, or 1.2 million annually. The majority of these new households are expected to be renter households. In addition, demographic shifts are forecast to increase the 35-44 year old cohort (a primary driver of household formation) by 5.4 million people from 2015-2025. While the United States as a whole is expected to continue to experience job and household growth, trends in Invitation Homes’ markets have been stronger than the U.S. average and this outperformance is expected to continue. Invitation Homes’ markets are forecast to experience household growth of 1.8% per year over 2016-2018 and job growth of 1.6% per year over the same time period. These levels are 86% and 60% higher, respectively, than the projected U.S. average over the same time period. Superior growth fundamentals in Invitation Homes’ markets have contributed to new lease net effective rental rate growth of 6.2% for the nine months ended September 30, 2016 based on data provided by Invitation Homes on its portfolio, compared to 4.1% for the United States on average over the same time period.

Rising interest rates may result in greater rental demand, as the increasing cost of homeownership may make rental housing relatively more attractive. While rising interest rates increase the cost of homeownership, rising rates have not historically been linked to falling home prices, especially during periods of economic growth and wage growth. The demand created by a growing economy (increased jobs, income growth, and increased consumer confidence) has historically offset the increased cost of housing caused by rising mortgage rates.

 



 

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Meanwhile, we believe home prices still appear attractive compared to multifamily prices. Home prices in Invitation Homes’ markets are still 11% below 2006 pricing levels as measured by the Case Shiller Index, while multifamily property prices are 36% above 2006 levels in these same markets based on the Green Street Advisors Apartment Commercial Property Price Index. Home price appreciation growth was 5.5% year-over-year for the United States on average as of September 2016, while home prices in Invitation Homes’ markets grew at 6.2% on average for the same period. Due to continued favorable housing fundamentals, JBREC expects home price appreciation to continue over the near term.

We believe that the value of our portfolio represents a significant discount to the replacement cost of a comparable portfolio today. JBREC estimates that the total New Home Replacement Cost of Invitation Homes’ portfolio of 48,431 homes is approximately $15.4 billion, or $318,500 per home, as of December 30, 2016. We believe we will continue to experience below-average levels of new housing supply in our markets which will support future rental rate growth and home price appreciation.

Implications of Being an Emerging Growth Company

As a company with less than $1.0 billion in revenue during our most recently completed fiscal year as of the initial filing date of the registration statement of which this prospectus forms a part, we qualify as an ‘‘emerging growth company’’ as defined in Section 2(a) of the Securities Act of 1933, as amended (the “Securities Act”), as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). As an emerging growth company, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable generally to public companies that are not emerging growth companies. These provisions include, among other things:

 

    presentation of only two years of audited financial statements and only two years of related management’s discussion and analysis of financial condition and results of operations;

 

    reduced disclosure about our executive compensation arrangements;

 

    no non-binding stockholder advisory votes on executive compensation or golden parachute arrangements; and

 

    exemption from the auditor attestation requirement in the assessment of our internal controls over financial reporting.

We may take advantage of these exemptions for up to five years or such earlier time that we are no longer an emerging growth company. We will cease to be an emerging growth company upon the earliest of: (1) the end of the fiscal year following the fifth anniversary of this offering; (2) the last day of the first fiscal year during which our annual gross revenue was $1.0 billion or more; (3) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt securities; or (4) the date on which we are deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We have taken advantage of reduced disclosure regarding executive compensation arrangements and the presentation of certain historical financial information in this prospectus, and we may choose to take advantage of some but not all of these reduced disclosure obligations in future filings. If we do, the information that we provide stockholders may be different than you might get from other public companies in which you hold stock.

The JOBS Act permits an emerging growth company such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We are choosing to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.

 



 

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Organizational Structure

In connection with this offering, we will effect the Pre-IPO Transactions as described in greater detail in “Organizational Structure—Pre-IPO Transactions.” Following the Pre-IPO Transactions, all of our assets will be held, and our operations conducted, by Invitation Homes Operating Partnership LP, our “Operating Partnership.” We will initially own 100% of our Operating Partnership. Following this offering, we may from time to time issue common units of partnership interest in our Operating Partnership (“OP Units”) to third parties, which, subject to the terms of the partnership agreement of our Operating Partnership, may be redeemed by holders for cash based upon the market value of an equivalent number of shares of our common stock or, at our election, exchanged for shares of our common stock on a one-for-one basis subject to customary conversion rate adjustments for splits, unit distributions and reclassifications.

The following simplified diagram depicts our organizational structure and equity ownership immediately following this offering. This chart is provided for illustrative purposes only and does not show all of our legal entities or ownership percentages of such entities.

 

LOGO

 

(1)  Includes 3,678,842 shares (1.22%) that will be held by our directors, officers and employees, including shares underlying 71,666 restricted stock units (based on an assumed initial public offering price of $19.50, which is the midpoint of the price range set forth on the cover page of this prospectus) that we expect to grant to our non-employee directors (other than directors affiliated with Blackstone) at the time of this offering. In addition, at the time of this offering we may grant additional discretionary awards under our supplemental bonus plan to executives and employees with an aggregate value based on the initial public offering price of up to $10.0 million. Any such grants would impact the relative ownership of our directors, officers and employees, on the one hand, and our other pre-IPO owners, on the other, but would not impact the aggregate shares held by our pre-IPO owners or total shares outstanding. See “Management—Executive Compensation—Actions Taken in Connection with this Offering.”
(2)  Invitation Homes Inc. will initially own 100% of the Operating Partnership directly and through its wholly owned subsidiary, Invitation Homes OP GP LLC, which will serve as the Operating Partnership’s sole general partner.

 



 

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Our Sponsor

Blackstone (NYSE: BX) is one of the world’s leading investment firms. Blackstone’s alternative asset management businesses include the management of corporate private equity funds, real estate funds, hedge funds solutions, credit-oriented funds and closed-end mutual funds. Through its different businesses, Blackstone had total assets under management of approximately $361.0 billion as of September 30, 2016. Blackstone’s global real estate group is the largest private equity real estate manager in the world with $101.9 billion of investor capital under management as of September 30, 2016.

Summary Risk Factors

Investing in our common stock involves substantial risks, and our ability to successfully operate our business is subject to numerous risks, including those that are generally associated with operating in the real estate industry. Some of the more significant challenges and risks include the following:

 

    our operating results are subject to general economic conditions and risks associated with our real estate assets;

 

    we are employing a business model with a limited track record, which may make our business difficult to evaluate, and we have a limited operating history;

 

    we may not be able to effectively manage our growth, and any failure to do so may have an adverse effect on our business and operating results;

 

    a significant portion of our costs and expenses are fixed and we may not be able to adapt our cost structure to offset declines in our revenue;

 

    increasing property taxes, homeowners’ association (“HOA”) fees and insurance costs may negatively affect our financial results;

 

    our investments are and will continue to be concentrated in our markets and in the single-family properties sector of the real estate industry, which exposes us to seasonal fluctuations in rental demand and downturns in our markets or in the single-family properties sector;

 

    we face significant competition in the leasing market for quality residents, which may limit our ability to lease our single-family homes on favorable terms;

 

    we intend to continue to acquire properties from time to time consistent with our investment strategy even if the rental and housing markets are not as favorable as they have been in the recent past, which could adversely impact anticipated yields;

 

    our evaluation of properties involves a number of assumptions that may prove inaccurate, which could result in us paying too much for properties we acquire and/or overvaluing our properties or our properties failing to perform as we expect;

 

    our dependence upon third parties for key services may have an adverse effect on our operating results or reputation if the third parties fail to perform;

 

    we are subject to certain risks associated with bulk portfolio acquisitions and dispositions;

 

    a significant number of our residential properties are part of HOAs and we and our residents are subject to the rules and regulations of such HOAs, which are subject to change and which may be arbitrary or restrictive, and violations of such rules may subject us to additional fees and penalties and litigation with such HOAs, which would be costly;

 

    declining real estate valuations and impairment charges could adversely affect our financial condition and operating results;

 



 

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    we may suffer losses that are not covered by insurance;

 

    we may have difficulty selling our real estate investments and our ability to distribute all or a portion of the net proceeds from any such sale to our stockholders may be limited;

 

    we utilize a significant amount of indebtedness in the operation of our business and our cash flows and operating results could be adversely affected by required payments of debt or related interest and other risks of our debt financing;

 

    we may be unable to obtain financing through the debt and equity markets, which would have a material adverse effect on our growth strategy and our financial condition and results of operations;

 

    we are controlled by our Sponsor and its interests may conflict with ours or yours in the future; and

 

    if we do not maintain our qualification as a REIT, we will be subject to tax as a regular corporation and could face a substantial tax liability and maintaining our REIT status may hinder our ability to operate solely on the basis of maximizing profits.

Before you participate in this offering, you should carefully consider all of the information in this prospectus, including matters set forth under the heading “Risk Factors.”

Distribution Policy

The Internal Revenue Code of 1986, as amended (the “Code”), generally requires that a REIT distribute annually at least 90% of its REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains, and imposes tax on any taxable income retained by a REIT, including capital gains. To satisfy the requirements for qualification as a REIT and generally not be subject to U.S. federal income and excise tax, we intend to make quarterly distributions of all or substantially all of our REIT taxable income to holders of our common stock out of assets legally available for such purposes. Our future distributions will be at the sole discretion of our board of directors.

To the extent we are prevented by provisions of our financing arrangements or otherwise from distributing 100% of our REIT taxable income or otherwise do not distribute 100% of our REIT taxable income, we will be subject to income tax, and potentially excise tax, on the retained amounts. If our operations do not generate sufficient cash flow to allow us to satisfy the REIT distribution requirements, we may be required to fund distributions from working capital, borrow funds, sell assets or reduce such distributions. Our board of directors reviews the alternative funding sources available to us from time to time.

REIT Qualification

We have elected to qualify as a REIT for U.S. federal income tax purposes. So long as we qualify as a REIT, we generally will not be subject to U.S. federal income tax on net taxable income that we distribute annually to our stockholders. In order to qualify as a REIT for U.S. federal income tax purposes, we must continually satisfy tests concerning, among other things, the real estate qualification of sources of our income, the composition and values of our assets, the amounts we distribute to our stockholders and the diversity of ownership of our stock. In order to comply with REIT requirements, we may need to forego otherwise attractive opportunities and limit our expansion opportunities and the manner in which we conduct our operations. See “Risk Factors—Risks Related to our REIT Status and Certain Other Tax Items.”

 



 

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Restrictions on Ownership of our Stock

Subject to certain exceptions, our charter will provide that no person may own, or be deemed to own by virtue of the attribution provisions of the Code, more than 9.8% (in value or by number of shares, whichever is more restrictive) of our outstanding common stock or more than 9.8% in value of our outstanding stock, which we refer to as the “ownership limit,” and will impose certain other restrictions on ownership and transfer of our stock. We expect that, upon completion of this offering, our board of directors will grant an exemption from the ownership limit to our Sponsor and its affiliates.

Our charter will also prohibit any person from, among other things:

 

    owning shares of our stock that would (or, in the sole judgment of the board of directors, could) result in our being “closely held” under Section 856(h) of the Code (without regard to whether the ownership interest is held during the last half of the taxable year) or otherwise cause us to fail to qualify as a REIT;

 

    transferring shares of our stock if the transfer would (or, in the sole judgment of the board of directors, could) result in shares of our stock being beneficially owned by fewer than 100 persons; and

 

    beneficially owning shares of our stock to the extent such ownership would (or, in the sole judgment of the board of directors, could) result in our failing to qualify as a “domestically controlled qualified investment entity” within the meaning of Section 897(h) of the Code.

Any attempted transfer of our stock which, if effective, would result in violation of the above limitations or the ownership limit (except for a transfer which results in shares being owned by fewer than 100 persons, in which case such transfer will be void and of no force and effect and the intended transferee shall acquire no rights in such shares) will cause the number of shares causing the violation, rounded up to the nearest whole share, to be automatically transferred to a trust for the exclusive benefit of one or more charitable beneficiaries designated by us, and the intended transferee will not acquire any rights in the shares.

These restrictions, including the ownership limit, are intended to assist with our REIT compliance under the Code and otherwise to promote our orderly governance, among other purposes. See “Description of Stock—Restrictions on Ownership and Transfer.”

 

 

Invitation Homes Inc. was incorporated in Delaware on October 4, 2016. Prior to the completion of this offering, we intend to change the jurisdiction of incorporation of Invitation Homes Inc. to Maryland. Through certain of the IH Holding Entities, we commenced operations in 2012. Invitation Homes Inc. has not commenced operations and has no significant assets or liabilities. Our principal executive offices are located at 1717 Main Street, Suite 2000, Dallas, Texas 75201 and our telephone number is (972) 421-3600.

 



 

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The Offering

 

Common stock offered

77,000,000 shares (plus up to an additional 11,550,000 shares at the option of the underwriters).

 

Common stock outstanding after this offering

302,116,760 shares (or 313,666,760 shares if the underwriters exercise in full their option to purchase additional shares).

 

Use of proceeds

We intend to use the net proceeds from this offering, together with the borrowings under the term loan facility (the “Term Loan Facility”) of our anticipated new credit facility (the “New Credit Facility”), to repay our existing credit facilities and our mortgage loan relating to the IH1 2013-1 securitization and a portion of the mortgage loan relating to the IH1 2014-1 securitization transaction, and to pay fees and expenses related to this offering. See “Use of Proceeds” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—New Credit Facility.”

 

Listing

Our common stock has been approved for listing, subject to official notice of issuance, on the NYSE under the symbol “INVH.”

 

Ownership and transfer restrictions

Subject to certain exceptions, our charter will provide that no person may own, or be deemed to own by virtue of the attribution provisions of the Code, more than 9.8% (in value or by number of shares, whichever is more restrictive) of our outstanding common stock or more than 9.8% in value of our outstanding stock, which we refer to as the “ownership limit,” and will impose certain other restrictions on ownership and transfer of our stock. We expect that, upon completion of this offering, our board of directors will grant an exemption from the ownership limit to our Sponsor and its affiliates. See “Description of Stock—Restrictions on Ownership and Transfer.”

 

Distribution policy

We have elected to qualify as a REIT for U.S. federal income tax purposes. The Code generally requires that a REIT annually distribute at least 90% of its REIT taxable income, determined without regard to the deduction for dividends paid and excluding any net capital gain, and imposes tax on any REIT taxable income retained by a REIT, including capital gains. To satisfy the requirements to qualify as a REIT and to avoid paying tax on our income, we intend to make quarterly distributions of all, or substantially all, of our REIT taxable income (excluding net capital gains) to our stockholders. See “Distribution Policy.”

 

Risk Factors

Investing in shares of our common stock involves a high degree of risk. You should carefully read the information set forth under “Risk Factors” and all other information in this prospectus before investing in shares of our common stock.

 



 

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In this prospectus, unless otherwise indicated, the number of shares of common stock outstanding and the other information based thereon does not reflect (based on an assumed initial public offering price of $19.50, which is the midpoint of the price range set forth on the cover page of this prospectus):

 

    11,550,000 shares issuable upon exercise of the underwriters’ option to purchase additional shares of our common stock from us; or

 

    12,673,640 additional shares issuable pursuant to the Omnibus Incentive Plan (after giving effect to the issuance of awards covering an aggregate of 3,326,360 shares of common stock expected to be made at the time of this offering and assuming the issuance of the maximum number of discretionary awards under the supplemental bonus plan described below).

At the time of this offering, we may grant discretionary awards under our supplemental bonus plan to executives and employees with an aggregate value based on the initial public offering price of up to $10.0 million. Any such grants would impact the relative ownership of our directors, officers and employees, on the one hand, and our other pre-IPO owners, on the other, but would not impact the aggregate shares held by our pre-IPO owners or total shares outstanding. See “Management—Executive Compensation—Actions Taken in Connection with this Offering.”

 



 

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Summary Condensed Combined and Consolidated Financial and Other Data

The summary combined and consolidated financial and operating data set forth below as of December 31, 2015 and 2014 and for each of the years ended December 31, 2015 and 2014 has been derived from our audited combined and consolidated financial statements included elsewhere in this prospectus. The summary condensed combined and consolidated financial and operating data set forth below as of September 30, 2016 and for the nine months ended September 30, 2016 and 2015 has been derived from our unaudited condensed combined and consolidated financial statements included elsewhere in this prospectus. Results for the nine months ended September 30, 2016 are not necessarily indicative of results that may be expected for the entire year.

The unaudited summary condensed combined and consolidated pro forma financial data gives pro forma effect to the transactions described in “Unaudited Pro Forma Financial Information,” including this offering and the intended application of the net proceeds therefrom as described in “Use of Proceeds.” The pro forma adjustments associated with the foregoing transactions assume that each transaction was completed as of January 1, 2015 for purposes of the unaudited pro forma condensed combined and consolidated statements of operations information and as of September 30, 2016 for purposes of the unaudited pro forma condensed combined and consolidated balance sheet information. The following unaudited summary condensed combined and consolidated pro forma statement of operations and balance sheet data is presented for illustrative purposes only and is not necessarily indicative of the operating results or financial position that would have occurred if the relevant transactions had been consummated on the date indicated, nor is it indicative of future operating results.

 



 

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Because the information presented below is only an unaudited summary and does not provide all of the information contained in our historical combined and consolidated financial statements, including the related notes, you should read it in conjunction with “Selected Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Unaudited Pro Forma Financial Information” and our historical combined and consolidated financial statements, including the related notes, included elsewhere in this prospectus.

 

Summary Statement of Operations
Data:

   Pro Forma Nine
Months Ended
September 30,

2016
    Pro Forma
Year Ended
December 31,

2015
    Nine Months Ended
September 30,
    Year Ended
December 31,
 
       2016     2015     2015     2014  
($ in thousands)    (unaudited)     (unaudited)        

Revenues:

            

Rental revenues

   $ 654,726      $ 800,210      $ 654,726      $ 587,913      $ 800,210      $ 631,115   

Other property income

     33,310        35,839        33,310        31,451        35,839        27,607   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     688,036        836,049        688,036        619,364        836,049        658,722   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

            

Property operating and maintenance

     270,494        347,962        270,494        257,130        347,962        320,658   

Property management expense

     22,638        39,459        22,638        31,568        39,459        62,506   

General and administrative

     49,579        79,428        49,579        59,534        79,428        88,177   

Depreciation and amortization

     198,261        250,239        198,261        186,448        250,239        215,808   

Impairment and other

     1,642        4,584        1,642        3,943        4,584        3,396   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     542,614        721,672        542,614        538,623        721,672        690,545   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     145,422        114,377        145,422        80,741        114,377        (31,823
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expenses):

            

Interest expense

     (147,636     (163,585     (209,165     (204,130     (273,736     (235,812

Other

     (1,025     (3,121     (1,025     (552     (3,121     (1,991
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expenses)

     (148,661     (166,706     (210,190     (204,682     (276,857     (237,803
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations

     (3,239     (52,329     (64,768     (123,941     (162,480     (269,626

Gain (loss) on sale of property

     13,178        2,272        13,178        2,275        2,272        (235
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 9,939      $ (50,057   $ (51,590   $ (121,666   $ (160,208   $ (269,861
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per share

            

Net income (loss)

            

Basic

   $ 0.03      $ (0.17        
  

 

 

   

 

 

         

Diluted

   $ 0.03      $ (0.17        
  

 

 

   

 

 

         

Weighted average shares

            

Basic

     302,116,760        302,116,760           
  

 

 

   

 

 

         

Diluted

     302,116,760        302,116,760           
  

 

 

   

 

 

         

 



 

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Summary Balance Sheet Data:    Pro Forma as of
September 30,

2016
     As of
September 30,
2016
     As of
December 31,
2015
 
($ in thousands)    (unaudited)      (unaudited)         

Investments in single-family residential properties, net

   $ 9,034,666      $ 9,067,075       $ 9,052,701   

Cash and cash equivalents

     92,574         274,140         274,818   

Other assets, net

     488,220         569,218         469,459   
  

 

 

    

 

 

    

 

 

 

Total assets

   $ 9,615,460      $ 9,910,433       $ 9,796,978   
  

 

 

    

 

 

    

 

 

 

Total debt

     5,980,829         7,680,956         7,725,957   

Total liabilities

     6,215,694         7,923,967         7,909,947   

Total equity

     3,399,766         1,986,466         1,887,031   
  

 

 

    

 

 

    

 

 

 

Total liabilities and equity

   $ 9,615,460      $ 9,910,433       $ 9,796,978   
  

 

 

    

 

 

    

 

 

 

 

Summary Statement of Cash Flows Data:

   Nine Months Ended
September 30,
     Year Ended
December 31,
 
   2016      2015      2015      2014  
($ in thousands)    (unaudited)         

Net cash provided by operating activities

   $ 247,709       $ 196,089       $ 197,474       $ 48,451   

Net cash used in investing activities

     (298,785      (695,307      (859,833      (1,899,697

Net cash provided by financing activities

     50,398         490,409         651,581         1,705,277   

 

Summary Operational and Other
Data (Total Portfolio):
  Pro Forma
as of and for
Nine Months
Ended September 30,

2016
    Pro Forma as
of and for
Year Ended
December 31,

2015
    As of and for
Nine Months Ended
September 30,
    As of and for
Year Ended
December 31,
 
      2016     2015     2015     2014  
($ in thousands, unless otherwise
indicated)
  (unaudited)     (unaudited)     (unaudited)  

Number of homes

    N/A        N/A        48,431        47,454        48,138        46,043   

Average occupancy

    N/A        N/A        94.6     93.3     93.4     85.9

Average monthly rent ($)

    N/A        N/A      $ 1,600      $ 1,502      $ 1,515      $ 1,424   

NOI(1)

    N/A        N/A      $ 417,542      $ 362,234      $ 488,087      $ 338,064   

Core NOI margin

    N/A        N/A        61.4     59.1     59.0     51.8

Adjusted EBITDA(2)

  $ 358,348     $ 397,124      $ 358,348      $ 293,399      $ 397,124      $ 211,716   

FFO(3)

    192,986        194,785        131,457        60,674        84,634        (56,769

Core FFO(3)

    246,322        273,070        192,369        142,457        190,229        49,074   

Adjusted FFO(3)

    210,868        223,297        156,915        102,392        140,456        (7,878

 

Summary Operational and Other Data (Same Store Portfolio(a)):   As of and for
Nine Months Ended
September 30,
    As of and for
Year Ended
December 31,
 
  2016     2015     2015     2014  
($ in thousands, unless otherwise indicated)   (unaudited)     (unaudited)  

Number of homes

    36,569        36,569        18,762        18,762   

Average occupancy

    96.1     96.1     96.2     95.6

Turnover rate (annualized)

    37.2     36.4     34.4     32.8

Average monthly rent ($)

  $ 1,603      $ 1,538      $ 1,502      $ 1,451   

Net effective rental rate growth

    5.7     5.1     5.0     4.3

NOI(1)

  $ 325,124      $ 302,727      $ 209,499      $ 180,937   

Core NOI margin

    62.1     60.6     62.6     56.5

Average cost to maintain a home (gross)

       

Average maintenance and turnover expense per home ($)

  $ 1,146      $ 960      $ 1,341      $ 1,362   

Average capital expenditures per home ($)

    830        873        1,143        1,195   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 1,976      $ 1,833      $ 2,484      $ 2,557   
 

 

 

   

 

 

   

 

 

   

 

 

 

 



 

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(a) Consisting of homes which had commenced their initial post-renovation lease prior to October 3rd of the year prior to the first year of the comparison period.

As explained in the glossary of this prospectus, our definition of Same Store portfolio includes only those homes that have both completed an upfront renovation and entered into at least one post-renovation Invitation Homes lease at least 90 days prior to the first day of the prior-year measurement period. Accordingly, our Same Store portfolio excludes homes that had completed an upfront renovation, but which had not yet commenced an initial Invitation Homes lease at or prior to the applicable determination date. As disclosed in “Business—Our Business Activities—Property Renovations,” for initial Invitation Homes leases starting in the nine months ended September 30, 2016, the average time between renovation completion and initial lease start was 38 days and was 53 days for leases starting in the nine months ended September 30, 2015. As a result, homes that had not commenced an initial post-renovation lease by the determination date in respect of the first year of a two-year Same Store comparison period will typically have been leased for the entirety of the second year of such comparison period, and the inclusion of such homes may render less comparable the results of the periods within the Same Store comparison period and overstate certain items such as revenue growth and NOI growth. Accordingly, we believe that our presentation of Same Store results enhances a reader’s understanding of trends in our organic business. A definition of Same Store portfolio that included all homes that had completed an upfront renovation and had been available for lease for at least 90 days prior to the applicable determination date would not have resulted in material differences from the Same Store presentation included in this prospectus. For example, utilization of this alternative definition of Same Store portfolio would have resulted in Same Store number of homes, average occupancy and average monthly rent as of and for the nine months ended September 30, 2016 of 36,958, 96.1% and $1,607, respectively, as compared to actual Same Store number of homes, average occupancy and average monthly rent of 36,569, 96.1% and $1,603, respectively. As of and for the nine months ended September 30, 2015, utilization of this alternative definition would have resulted in Same Store number of homes, average occupancy and average monthly rent of 36,958, 96.1% and $1,541, respectively, as compared to actual Same Store number of homes, average occupancy and average monthly rent of 36,569, 96.1% and $1,538, respectively.

 

(1) The following table provides a reconciliation of NOI for our total portfolio and NOI for our Same Store portfolio to net loss (computed in accordance with GAAP) for the periods presented. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Measures” for additional information regarding our use of NOI.

 

     Nine Months Ended
September 30,
    Year Ended
December 31,
 
     2016     2015     2015     2014  
($ in thousands)    (unaudited)              

Net loss

   $ (51,590   $ (121,666   $ (160,208   $ (269,861

Interest expense

     209,165        204,130        273,736        235,812   

Depreciation and amortization

     198,261        186,448        250,239        215,808   

General and administrative(a)

     49,579        59,534        79,428        88,177   

Property management expense(b)

     22,638        31,568        39,459        62,506   

Impairment and other

     1,642        3,943        4,584        3,396   

Acquisition costs

     42        243        275        1,384   

(Gain) loss on sale of property

     (13,178     (2,275     (2,272     235   

Other(c)

     983        309        2,846        607   
  

 

 

   

 

 

   

 

 

   

 

 

 

NOI (total portfolio)

     417,542        362,234        488,087        338,064   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-Same Store NOI

     (92,418     (59,507     (278,588     (157,127
  

 

 

   

 

 

   

 

 

   

 

 

 

NOI (Same Store portfolio(d))

   $ 325,124      $ 302,727      $ 209,499      $ 180,937   
  

 

 

   

 

 

   

 

 

   

 

 

 

 



 

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  (a) Includes $12,724 and $18,161 of noncash incentive compensation expense for the nine months ended September 30, 2016 and 2015, respectively, and $23,758 and $19,318 for the years ended December 31, 2015 and 2014, respectively.

 

  (b) Includes $299 and $4,106 of noncash incentive compensation expense for the nine months ended September 30, 2016 and 2015, respectively, and $4,166 and $5,017 for the years ended December 31, 2015 and 2014, respectively.

 

  (c) Includes interest income and other miscellaneous income and expenses.

 

  (d) Consisting of homes which had commenced their initial post-renovation lease prior to October 3rd of the year prior to the first year of the comparison period.

 

(2) The following table provides a reconciliation of EBITDA and Adjusted EBITDA to net loss (computed in accordance with GAAP) for the periods presented. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Measures” for additional information regarding our use of EBITDA and Adjusted EBITDA.

 

     Pro Forma Nine
Months Ended
September 30,

2016
    Pro Forma
Year Ended
December 31,
2015
    Nine Months Ended
September 30,
    Year Ended
December 31,
 
         2016     2015     2015     2014  
($ in thousands)    (unaudited)     (unaudited)        

Net income (loss)

   $ 9,939     $ (50,057)      $ (51,590   $ (121,666   $ (160,208   $ (269,861

Interest expense

     147,636        163,585        209,165        204,130        273,736        235,812   

Depreciation and amortization

     198,261        250,239        198,261        186,448        250,239        215,808   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

     355,836        363,767        355,836        268,912        363,767        181,759   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Noncash incentive compensation expense(a)

     13,023        27,924        13,023        22,267        27,924        24,335   

Impairment and other

     1,642        4,584        1,642        3,943        4,584        3,396   

Acquisition costs

     42        275        42        243        275        1,384   

(Gain) loss on sale of property

     (13,178     (2,272     (13,178     (2,275     (2,272     235   

Other(b)

     983        2,846        983        309        2,846        607   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 358,348      $ 397,124     $ 358,348      $ 293,399      $ 397,124      $ 211,716   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) For the nine months ended September 30, 2016 and 2015, $12,724 and $18,161 was recorded in general and administrative expense, respectively, and $299 and $4,106 was recorded in property management expense, respectively. For the years ended December 31, 2015 and 2014, $23,758 and $19,318 was recorded in general and administrative expense, respectively, and $4,166 and $5,017 was recorded in property management expense, respectively.
(b) Includes interest income and other miscellaneous income and expenses.

 



 

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(3) The following table provides a reconciliation of FFO, Core FFO and Adjusted FFO to net loss (computed in accordance with GAAP) for the periods presented. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Measures” for additional information regarding our use of FFO, Core FFO and Adjusted FFO. See footnote (N) to the unaudited pro forma condensed combined and consolidated statements of operations for additional information.

 

     Pro Forma Nine
Months Ended
September 30,

2016
     Pro Forma
Year Ended

December 31,
2015
     Nine Months Ended
September 30,
    Year Ended
December 31,
 
           2016     2015     2015     2014  
($ in thousands)    (unaudited)      (unaudited)        

Net income (loss)

   $ 9,939       $ (50,057)       $ (51,590   $ (121,666   $ (160,208   $ (269,861

Add (deduct) adjustments from net loss to derive FFO:

              

Depreciation and amortization on real estate assets

     194,630         245,666         194,630        183,167        245,666        212,434   

Impairment on depreciated real estate investments

     1,595         1,448         1,595        1,448        1,448        423   

(Gain) loss on sale of previously depreciated investments in real estate

     (13,178)         (2,272)         (13,178     (2,275     (2,272     235   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

FFO

     192,986         194,785         131,457        60,674        84,634        (56,769
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Noncash interest expense related to amortization of deferred financing costs and mortgage loan discounts

     33,905         42,539         41,481        52,737        69,849        64,566   

Noncash incentive compensation expense(a)

     13,023         27,924         13,023        22,267        27,924        24,335   

Offering related expenses

     4,081         —           4,081        —          —          —     

Severance expense

     2,285         7,547         2,285        6,536        7,547        15,558   

Acquisition costs

     42         275         42        243        275        1,384   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Core FFO

     246,322         273,070         192,369        142,457        190,229        49,074   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Recurring capital expenditures

     (35,454)         (49,773)         (35,454     (40,065     (49,773     (56,952
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted FFO

   $ 210,868       $ 223,297       $ 156,915      $ 102,392      $ 140,456      $ (7,878
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) For the nine months ended September 30, 2016 and 2015, $12,724 and $18,161 was recorded in general and administrative expense, respectively, and $299 and $4,106 was recorded in property management expense, respectively. For the years ended December 31, 2015 and 2014, $23,758 and $19,318 was recorded in general and administrative expense, respectively, and $4,166 and $5,017 was recorded in property management expense, respectively.

 



 

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RISK FACTORS

An investment in our shares involves risks. You should carefully consider the following information about these risks, together with the other information contained in this prospectus, before investing in our shares.

Risks Related to Our Business and Industry

Our operating results are subject to general economic conditions and risks associated with our real estate assets.

Our operating results are subject to risks generally incident to the ownership and rental of residential real estate, many of which are beyond our control, including, without limitation:

 

    changes in national, regional or local economic, demographic or real estate market conditions;

 

    changes in job markets and employment levels on a national, regional and local basis;

 

    declines in the value of residential real estate;

 

    overall conditions in the housing market, including:

 

    macroeconomic shifts in demand for rental homes;

 

    inability to lease or re-lease homes to residents on a timely basis, on attractive terms or at all;

 

    failure of residents to pay rent when due or otherwise perform their lease obligations;

 

    unanticipated repairs, capital expenditures or other costs;

 

    uninsured damages; and

 

    increases in property taxes, HOA fees and insurance costs;

 

    level of competition for suitable rental homes;

 

    terms and conditions of purchase contracts;

 

    costs and time period required to convert acquisitions to rental homes;

 

    changes in interest rates and availability of financing that may render the acquisition of any homes difficult or unattractive;

 

    the illiquidity of real estate investments, generally;

 

    the short-term nature of most residential leases and the costs and potential delays in re-leasing;

 

    changes in laws, including those that increase operating expenses or limit our ability to increase rental rates;

 

    the impact of potential reforms relating to government-sponsored enterprises involved in the home finance and mortgage markets;

 

    rules, regulations and/or policy initiatives by government and private actors, including HOAs, to discourage or deter the purchase of single-family properties by entities owned or controlled by institutional investors;

 

    disputes and potential negative publicity in connection with eviction proceedings;

 

    overbuilding;

 

    costs resulting from the clean-up of, and liability to third parties for damages resulting from, environmental problems, such as indoor mold;

 

    casualty or condemnation losses;

 

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    the geographic mix of our properties;

 

    the cost, quality and condition of the properties we are able to acquire; and

 

    our ability to provide adequate management, maintenance and insurance.

Any one or more of these factors could adversely affect our business, financial condition and results of operations.

We are employing a business model with a limited track record, which may make our business difficult to evaluate.

Until recently, the single-family rental business consisted primarily of private and individual investors in local markets and was managed individually or by small, non-institutional owners and property managers. Our business strategy involves purchasing, renovating, maintaining and managing a large number of residential properties and leasing them to qualified residents. Entry into this market by large, well-capitalized investors is a relatively recent trend, so few peer companies exist and none have yet established long-term track records that might assist us in predicting whether our business model and investment strategy can be implemented and sustained over an extended period of time. It may be difficult for you to evaluate our potential future performance without the benefit of established long-term track records from companies implementing a similar business model. We may encounter unanticipated problems as we continue to refine our business model, which may adversely affect our results of operations and ability to make distributions to our stockholders and cause our share price to decline significantly.

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

We have a limited operating history. As a result, an investment in our common stock may entail more risk than an investment in the common stock of a real estate company with a substantial operating history. If we are unable to operate our business successfully, we would not be able to generate sufficient cash flow to make or sustain distributions to our stockholders, and you could lose all or a portion of the value of your ownership in our common stock. Our ability to successfully operate our business and implement our operating policies and investment strategy depends on many factors, including:

 

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

 

    economic conditions in our markets, including changes in employment and household earnings and expenses, as well as the condition of the financial and real estate markets and the economy, in general;

 

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

 

    the availability of, and our ability to identify, attractive acquisition opportunities consistent with our investment strategy;

 

    our ability to compete with other investors entering the sector for single-family properties;

 

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

 

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

 

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

 

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

 

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In addition, we face significant competition in acquiring attractive properties on advantageous terms, and the value of the properties that we acquire may decline substantially after we purchase them.

We may not be able to effectively manage our growth, and any failure to do so may have an adverse effect on our business and operating results.

Since commencing operations in 2012, we have grown rapidly, assembling a portfolio of nearly 50,000 homes as of September 30, 2016. Our future operating results may depend on our ability to effectively manage our growth, which is dependent, in part, upon our ability to:

 

    stabilize and manage an increasing number of properties and resident relationships across our geographically dispersed portfolio while maintaining a high level of resident satisfaction, and building and enhancing our brand;

 

    identify and supervise a number of suitable third parties on which we rely to provide certain services outside of property management to our properties;

 

    attract, integrate and retain new management and operations personnel; and

 

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

We can provide no assurance that we will be able to manage our properties or grow our business efficiently or effectively, or without incurring significant additional expenses. Any failure to do so may have an adverse effect on our business and operating results.

A significant portion of our costs and expenses are fixed and we may not be able to adapt our cost structure to offset declines in our revenue.

Many of the expenses associated with our business, such as real estate taxes, HOA fees, personal and property taxes, insurance, utilities, acquisition, renovation and maintenance costs, and other general corporate expenses are relatively inflexible and will not necessarily decrease with a reduction in revenue from our business. Some components of our fixed assets depreciate more rapidly and require ongoing capital expenditures. Our expenses and ongoing capital expenditures are also affected by inflationary increases and certain of our cost increases may exceed the rate of inflation in any given period or market. By contrast, our rental income is affected by many factors beyond our control, such as the availability of alternative rental housing and economic conditions in our markets. In addition, state and local regulations may require us to maintain properties that we own, even if the cost of maintenance is greater than the value of the property or any potential benefit from renting the property, or pass regulations that limit our ability to increase rental rates. As a result, we may not be able to fully offset rising costs and capital spending by increasing rental rates, which could have a material adverse effect on our results of operations and cash available for distribution.

Increasing property taxes, HOA fees and insurance costs may negatively affect our financial results.

As a result of our substantial real estate holdings, the cost of property taxes and insuring our properties is a significant component of our expenses. Our properties are subject to real and personal property taxes that may increase as tax rates change and as the real properties are assessed or reassessed by taxing authorities. As the owner of our properties, we are ultimately responsible for payment of the taxes to the applicable government authorities. If real property taxes increase, our expenses will increase. If we fail to pay any such taxes, the applicable taxing authority may place a lien on the real property and the real property may be subject to a tax sale.

In addition, a significant portion of our properties are located within HOAs and we are subject to HOA rules and regulations. HOAs have the power to increase monthly charges and make assessments for capital improvements and common area repairs and maintenance. Property taxes, HOA fees, and insurance premiums

 

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are subject to significant increases, which can be outside of our control. If the costs associated with property taxes, HOA fees and assessments or insurance rise significantly and we are unable to increase rental rates due to rent control laws or other regulations to offset such increases, our results of operations would be negatively affected.

We have recorded net losses in the past and we may experience net losses in the future.

We have recorded consolidated net losses in the nine months ended September 30, 2016 and 2015 and in the years ended December 31, 2015 and 2014. These net losses were inclusive in each period of significant non-cash charges, consisting primarily of depreciation and amortization expense. We expect such non-cash charges to continue to be significant in future periods and, as a result, we may likely continue to record net losses in future periods.

We are dependent on our executive officers and dedicated personnel, and the departure of any of our key personnel could materially and adversely affect us. We also face intense competition for the employment of highly skilled managerial, investment, financial and operational personnel.

We rely on a small number of persons to carry out our business and investment strategies, and the loss of the services of any of our key management personnel, or our inability to recruit and retain qualified personnel in the future, could have an adverse effect on our business and financial results.

In addition, the implementation of our business plan may require that we employ additional qualified personnel. Competition for highly skilled managerial, investment, financial and operational personnel is intense. As additional large real estate investors enter into and expand their scale within the single-family rental business, we have faced increased challenges in hiring and retaining personnel, and we cannot assure our stockholders that we will be successful in attracting and retaining such skilled personnel. If we are unable to hire and retain qualified personnel as required, our growth and operating results could be adversely affected.

Our investments are and will continue to be concentrated in our markets and in the single-family properties sector of the real estate industry, which exposes us to seasonal fluctuations in rental demand and downturns in our markets or in the single-family properties sector.

Our investments in real estate assets are and will continue to be concentrated in our markets and in the single-family properties sector of the real estate industry. A downturn or slowdown in the rental demand for single-family housing caused by adverse economic, regulatory or environmental conditions, or other events, in our markets may have a greater impact on the value of our properties or our operating results than if we had more fully diversified our investments. We believe that there are seasonal fluctuations in rental demand with demand higher in the spring and summer than in the late fall and winter. Such seasonal fluctuations may impact our operating results.

In addition to general, regional, national and international economic conditions, our operating performance will be impacted by the economic conditions in our markets. We base a substantial part of our business plan on our belief that property values and operating fundamentals for single-family properties in our markets will continue to improve over the near to intermediate term. However, these markets have experienced substantial economic downturns in recent years and could experience similar or worse economic downturns in the future. We can provide no assurance as to the extent property values and operating fundamentals in these markets will improve, if at all. If the recent economic downturn in these markets returns or if we fail to accurately predict the timing of economic improvement in these markets, the value of our properties could decline and our ability to execute our business plan may be adversely affected to a greater extent than if we owned a real estate portfolio that was more geographically diversified, which could adversely affect our financial condition, operating results and ability to make distributions to our stockholders.

 

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We may not be able to effectively control the timing and costs relating to the renovation and maintenance of our properties, which may adversely affect our operating results and ability to make distributions to our stockholders.

Nearly all of our properties require some level of renovation either immediately upon their acquisition or in the future following expiration of a lease or otherwise. We may acquire properties that we plan to extensively renovate. We may also acquire properties that we expect to be in good condition only to discover unforeseen defects and problems that require extensive renovation and capital expenditures. To the extent properties are leased to existing residents, renovations may be postponed until the resident vacates the premises, and we will pay the costs of renovating. In addition, from time to time, we may perform ongoing maintenance or make ongoing capital improvements and replacements and perform significant renovations and repairs that resident deposits and insurance may not cover. Because our portfolio consists of geographically dispersed properties, our ability to adequately monitor or manage any such renovations or maintenance may be more limited or subject to greater inefficiencies than if our properties were more geographically concentrated.

Our properties have infrastructure and appliances of varying ages and conditions. Consequently, we routinely retain independent contractors and trade professionals to perform physical repair work and are exposed to all of the risks inherent in property renovation and maintenance, including potential cost overruns, increases in labor and materials costs, delays by contractors in completing work, delays in the timing of receiving necessary work permits, certificates of occupancy and poor workmanship. If our assumptions regarding the costs or timing of renovation and maintenance across our properties prove to be materially inaccurate, our operating results and ability to make distributions to our stockholders may be adversely affected.

We face significant competition in the leasing market for quality residents, which may limit our ability to lease our single-family homes on favorable terms.

We depend on rental income from residents for substantially all of our revenues. As a result, our success depends in large part upon our ability to attract and retain qualified residents for our properties. We face competition for residents from other lessors of single-family properties, apartment buildings and condominium units. Competing properties may be newer, better located and more attractive to residents. Potential competitors may have lower rates of occupancy than we do or may have superior access to capital and other resources, which may result in competing owners more easily locating residents and leasing available housing at lower rental rates than we might offer at our homes. Many of these competitors may successfully attract residents with better incentives and amenities, which could adversely affect our ability to obtain quality residents and lease our single-family properties on favorable terms. Additionally, some competing housing options may qualify for government subsidies that may make such options more accessible and therefore more attractive than our properties. This competition may affect our ability to attract and retain residents and may reduce the rental rates we are able to charge.

In addition, increases in unemployment levels and other adverse changes in economic conditions in our markets may adversely affect the creditworthiness of potential residents, which may decrease the overall number of qualified residents for our properties within such markets. We could also be adversely affected by overbuilding or high vacancy rates of homes in our markets, which could result in an excess supply of homes and reduce occupancy and rental rates. Continuing development of apartment buildings and condominium units in many of our markets will increase the supply of housing and exacerbate competition for residents.

In addition, improving economic conditions, along with the availability of low residential mortgage interest rates and government sponsored programs to promote home ownership, have made home ownership more accessible for potential renters who have strong credit. These factors may encourage potential renters to purchase residences rather than lease them, thereby causing a decline in the number and quality of potential residents available to us.

 

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No assurance can be given that we will be able to attract and retain suitable residents. If we are unable to lease our homes to suitable residents, we would be adversely affected and the value of our common stock could decline.

We intend to continue to acquire properties from time to time consistent with our investment strategy even if the rental and housing markets are not as favorable as they have been in the recent past, which could adversely impact anticipated yields.

We intend to continue to acquire properties from time to time consistent with our investment strategy, even if the rental and housing markets are not as favorable as they have been in the recent past. Future acquisitions of properties may be more costly than those we have acquired previously. The following factors, among others, may make acquisitions more expensive:

 

    improvements in the overall economy and employment levels;

 

    greater availability of consumer credit;

 

    improvements in the pricing and terms of mortgages;

 

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

 

    tax or other government incentives that encourage homeownership.

We plan to continue acquiring properties as long as we believe such properties offer an attractive total return opportunity. Accordingly, future acquisitions may have lower yield characteristics than recent past and present opportunities and, if such future acquisitions are funded through equity issuances, the yield and distributable cash per share will be reduced, and the value of our common stock may decline.

Competition in identifying and acquiring our properties could adversely affect our ability to implement our business and growth strategies, which could materially and adversely affect us.

In acquiring our properties, we compete with a variety of institutional investors, including other REITs, specialty finance companies, public and private funds, savings and loan associations, banks, mortgage bankers, insurance companies, institutional investors, investment banking firms, financial institutions, governmental bodies and other entities. We also compete with individual private home buyers and small scale investors. Certain of our competitors may be larger in certain of our markets and may have greater financial or other resources than we do. Some competitors may have a lower cost of funds and access to funding sources that may not be available to us. In addition, any potential competitor may have higher risk tolerances or different risk assessments and may not be subject to the operating constraints associated with qualification for taxation as a REIT, which could allow them to consider a wider variety of investments. Competition may result in fewer investments, higher prices, a broadly dispersed portfolio of properties that does not lend itself to efficiencies of concentration, acceptance of greater risk, lower yields and a narrower spread of yields over our financing costs. In addition, competition for desirable investments could delay the investment of our capital, which could adversely affect our results of operations and cash flows. As a result, there can be no assurance that we will be able to identify and finance investments that are consistent with our investment objectives or to achieve positive investment results, and our failure to accomplish any of the foregoing could have a material adverse effect on us and cause the value of our common stock to decline.

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

Rental homes are subject to various covenants and local laws and regulatory requirements, including permitting, licensing and zoning requirements. Local regulations, including municipal or local ordinances,

 

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restrictions and restrictive covenants imposed by community developers may restrict our use of our properties and may require us to obtain approval from local officials or community standards organizations at any time with respect to our properties, including prior to acquiring any of our properties or when undertaking renovations of any of our existing properties. Among other things, these restrictions may relate to fire and safety, seismic, asbestos-cleanup or hazardous material abatement requirements. Additionally, such local regulations may cause us to incur additional costs to renovate or maintain our properties in accordance with the particular rules and regulations. 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 business and growth strategies may be materially and adversely affected by our ability to obtain permits, licenses and approvals. Our failure to obtain such permits, licenses and approvals could have a material adverse effect on us and cause the value of our common stock to decline.

Tenant relief laws, including laws regulating evictions, rent control laws and other regulations that limit our ability to increase rental rates may negatively impact our rental income and profitability.

As the landlord of numerous properties, we are involved from time to time in evicting residents who are not paying their rent or who are otherwise in material violation of the terms of their lease. Eviction activities impose legal and managerial expenses that raise our costs and expose us to potential negative publicity. The eviction process is typically subject to legal barriers, mandatory “cure” policies, our internal policies and procedures and other sources of expense and delay, each of which may delay our ability to gain possession and stabilize the property. Additionally, state and local landlord-tenant laws may impose legal duties to assist residents in relocating to new housing, or restrict the landlord’s ability to remove the resident on a timely basis or to recover certain costs or charge residents for damage residents cause to the landlord’s premises. Because such laws vary by state and locality, we must be familiar with and take all appropriate steps to comply with all applicable landlord-tenant laws, and need to incur supervisory and legal expenses to ensure such compliance. To the extent that we do not comply with state or local laws, we may be subjected to civil litigation filed by individuals, in class actions or actions by state or local law enforcement and our reputation and financial results may suffer. 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, state and local governmental agencies may introduce rent control laws or other regulations that limit our ability to increase rental rates, which may affect our rental income. Especially in times of recession and economic slowdown, rent control initiatives can acquire significant political support. If rent controls unexpectedly became applicable to certain of our properties, our revenue from and the value of such properties could be adversely affected.

We may become a target of legal demands, litigation (including class actions) and negative publicity by tenant and consumer rights organizations, which could directly limit and constrain our operations and may result in significant litigation expenses and reputational harm.

Numerous tenant rights and consumer rights organizations exist throughout the country and operate in our markets, and we may attract attention from some of these organizations and become a target of legal demands, litigation and negative publicity. While we intend to conduct our business lawfully and in compliance with applicable landlord-tenant and consumer laws, such organizations might work in conjunction with trial and pro bono lawyers in one or multiple states to attempt to bring claims against us on a class action basis for damages or injunctive relief and to seek to publicize our activities in a negative light. We cannot anticipate what form such legal actions might take, or what remedies they may seek.

Additionally, such organizations may lobby local county and municipal attorneys or state attorneys general to pursue enforcement or litigation against us, may lobby state and local legislatures to pass new laws and regulations to constrain or limit our business operations, adversely impact our business or may generate negative

 

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publicity for our business and harm our reputation. If they are successful in any such endeavors, they could directly limit and constrain our operations and may impose on us significant litigation expenses, including settlements to avoid continued litigation or judgments for damages or injunctions.

Our evaluation of properties involves a number of assumptions that may prove inaccurate, which could result in us paying too much for properties we acquire and/or overvaluing our properties or our properties failing to perform as we expect.

We are authorized to follow a broad investment policy established by our board of directors and subject to implementation by our management. Our board of directors periodically reviews and updates the investment policy and also reviews our portfolio of residential real estate, but it generally does not review or approve specific property acquisitions. Our success depends on our ability to acquire properties that can be quickly renovated, repaired, upgraded and rented with minimal expense and maintained in quality condition. In determining whether a particular property meets our investment criteria, we make a number of assumptions, including, among other things, assumptions related to estimated time of possession and estimated renovation costs and time frames, annual operating costs, market rental rates and potential rent amounts, time from purchase to leasing and resident default rates. These assumptions may prove inaccurate, particularly since the properties that we acquire vary materially in terms of renovation, quality and type of construction, geographic location and hazards. As a result, we may pay too much for properties we acquire and/or overvalue our properties, or our properties may fail to perform as anticipated. Adjustments to the assumptions we make in evaluating potential purchases may result in fewer properties qualifying under our investment criteria, including assumptions related to our ability to lease properties we have purchased.

Our dependence upon third parties for key services may have an adverse effect on our operating results or reputation if the third parties fail to perform.

Though we are internally managed, we use local and national third party vendors and service providers to provide certain services for our properties. For example, we typically engage third party home improvement professionals with respect to certain maintenance and specialty services, such as heating, ventilation and air conditioning systems (“HVAC”), roofing, painting and floor installations. Selecting, managing and supervising these third party service providers requires significant resources and expertise, and because our portfolio consists of geographically dispersed properties, our ability to adequately select, manage and supervise such third parties may be more limited or subject to greater inefficiencies than if our properties were more geographically concentrated. We generally do not have exclusive or long-term contractual relationships with these third party providers, and we can provide no assurance that we will have uninterrupted or unlimited access to their services. If we do not select, manage and supervise appropriate third parties to provide these services, our reputation and financial results may suffer. Notwithstanding our efforts to implement and enforce strong policies and practices regarding service providers, we may not successfully detect and prevent fraud, misconduct, incompetence or theft by our third party service providers. In addition, any removal or termination of third party service providers would require us to seek new vendors or providers, which would create delays and adversely affect our operations. Poor performance by such third party service providers will reflect poorly on us and could significantly damage our reputation among desirable residents. In the event of fraud or misconduct by a third party, we could also be exposed to material liability and be held responsible for damages, fines or penalties and our reputation may suffer.

We have in the past and may from time to time in the future acquire some of our homes through the auction process, which could subject us to significant risks that could adversely affect us.

We have in the past and may from time to time in the future acquire some of our homes through the auction process, including auctions of homes that have been foreclosed upon by third party lenders. Of the 48,431 homes in our portfolio as of September 30, 2016, approximately 29% were acquired at auction on an “as is” basis. Such auctions may occur simultaneously in a number of markets, including monthly auctions on the same day of the

 

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month in certain markets. As a result, we may only be able to visually inspect properties from the street and will purchase these homes without a contingency period and in “as is” condition with the risk that unknown defects in the property may exist. 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 property, 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 or generate negative publicity for our business and harm our reputation.

Allegations of deficiencies in auction practices could result in claims challenging the validity of some auctions, potentially placing our claim of ownership to the properties at risk. Since we do not obtain title insurance policies for properties we acquire through the auction process until we place the property into a securitization facility in connection with a mortgage loan financing, such instances or such proceedings may result in a complete loss without compensation.

Title defects could lead to material losses on our investments in our properties.

Our title to a property may be challenged for a variety of reasons, and in such instances title insurance may not prove adequate. For example, while we do not lend to homeowners and accordingly do not foreclose on a home, our title to properties we acquire at foreclosure auctions may be subject to challenge based on allegations of defects in the foreclosure process undertaken by other parties. In addition, we have in the past, and may from time to time in the future, acquire a number of our properties on an “as is” basis, at auctions or otherwise. Of the 48,431 homes in our portfolio as of September 30, 2016, approximately 29% were acquired on an “as is” basis. When acquiring properties on an “as is” basis, title commitments are often not available prior to purchase and title reports or title information may not reflect all senior liens, which may increase the possibility of acquiring houses outside predetermined acquisition and price parameters, purchasing residences with title defects and deed restrictions, HOA restrictions on leasing, or purchasing the wrong residence without the benefit of title insurance prior to closing. Although we use various policies, procedures, and practices to assess the state of title prior to purchase and obtain title insurance once an acquired property is placed into a securitization facility in connection with a mortgage loan financing, there can be no assurance that these policies and procedures will be effective, which could lead to a material if not complete loss on our investment in such properties.

For properties we acquire at auction, we similarly do not obtain title insurance prior to purchase, and we are not able to perform the type of title review that is customary in acquisitions of real property. As a result, our knowledge of potential title issues will be limited, and no title insurance protection will be in place. This lack of title knowledge and insurance protection may result in third parties having claims against our title to such properties that may materially and adversely affect the values of the properties or call into question the validity of our title to such properties. Without title insurance, we are fully exposed to, and would have to defend ourselves against, such claims. Further, if any such claims are superior to our title to the property we acquired, we risk loss of the property purchased.

Increased scrutiny of title matters 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 because they are typically excluded from such policies. In addition, any title insurance on a property, even if acquired, may not cover all defects or the significant legal costs associated with obtaining clear title.

Any of these risks could adversely affect our operating results, cash flows, and ability to make distributions to our stockholders.

We are subject to certain risks associated with bulk portfolio acquisitions and dispositions.

We have acquired and disposed of, and may continue to acquire and dispose of, properties we acquire or sell in bulk from or to other owners of single-family homes, banks and loan servicers. When we purchase properties

 

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in this manner, we often do not have the opportunity to conduct interior inspections or conduct more than cursory exterior inspections on a portion of the properties. Such inspection processes may fail to reveal major defects associated with such properties, which may cause the amount of time and cost required to renovate and/or maintain such properties to substantially exceed our estimates. Moreover, to the extent the management and leasing of such properties has not been consistent with our property management and leasing standards, we may be subject to a variety of risks, including risks relating to the condition of the properties, the credit quality and employment stability of the residents and compliance with applicable laws, among others. In addition, financial and other information provided to us regarding such portfolios during our due diligence may be inaccurate and we may not discover such inaccuracies until it is too late to seek remedies against such sellers. To the extent we pursue such remedies, we may not be able to successfully prevail against the seller in an action seeking damages for such inaccuracies. If we conclude that certain individual properties purchased in bulk portfolio sales do not fit our target investment criteria, we may decide to sell, rather than renovate and rent, such properties, which could take an extended period of time and may not result in a sale at an attractive price.

From time to time we engage in bulk portfolio dispositions of properties consistent with our business and investment strategy. With respect to any such disposition, the purchaser may default on payment or otherwise breach the terms of the relevant purchase agreement, and it may be difficult for us to pursue remedies against such purchaser or retain or resume possession of the relevant properties. To the extent we pursue such remedies, we may not be able to successfully prevail against the purchaser.

Contingent or unknown liabilities could adversely affect our financial condition, cash flows and operating results.

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

In particular, under a Florida statutory scheme implemented by certain Florida jurisdictions, a violation of the relevant building codes, zoning codes or other similar regulations applicable to a property may result in a lien on that property and all other properties owned by the same violator and located in the same county as the property with the code violation, even though the other properties might not be in violation of any code. Until a municipal inspector verifies that the violation has been remedied and any applicable fines have been paid, additional fines accrue on the amount of the lien and lien may not be released, in each case even at those properties that are not in violation. As a practical matter, it might be possible to obtain a release of these liens without remedying the property in violation through other methods, such as payment of an amount to the relevant county, although no assurance can be given that this will necessarily be an available option or how long such a process would take.

 

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

A significant number of our properties are located within HOAs, which are private entities that regulate the activities of owners and occupants of, and levy assessments on, properties in a residential subdivision. The HOAs in which we own our properties may have enacted or may from time to time enact onerous or arbitrary rules that restrict our ability to restore, market, lease or operate our properties in accordance with our investment strategy or require us to restore or maintain such properties at standards or costs that are in excess of our planned budgets. Some HOAs impose limits on the number of property owners who may rent their homes, which, if met or exceeded, would cause us to incur additional costs to sell the property and opportunity costs of lost rental revenue. Furthermore, we may have residents who violate HOA rules and incur fines for which we may be liable as the property owner and for which we may not be able to obtain reimbursement from the resident. Additionally, the governing bodies of the HOAs in which we own property may not make important disclosures about the properties or may block our access to HOA records, initiate litigation, restrict our ability to sell our properties, impose assessments or arbitrarily change the HOA rules. We may be unaware of or unable to review or comply with HOA rules before purchasing a property, and any such excessively restrictive or arbitrary regulations may cause us to sell such property at a loss, prevent us from renting such property or otherwise reduce our cash flow from such property, which would have an adverse effect on our returns on these properties.

Environmentally hazardous conditions may adversely affect us.

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, resulting from the environmental contamination. The presence of hazardous or toxic substances on one of our properties, or the failure to properly remediate a contaminated property, 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 property or borrow using the property as collateral. Environmental laws also may impose restrictions on the manner in which property may be used or businesses may be operated. 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 properties, 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 properties, 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 properties will not be affected by the activities of residents, existing conditions of the land, operations in the vicinity of the properties or the activities of unrelated third parties. In addition, we may be required to comply with various local, state and federal fire, health, life-safety and similar regulations. Failure to comply with applicable laws and regulations could result in fines and/or damages, suspension of personnel, civil liability or other sanctions.

 

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Vacant properties could be difficult to lease, which could adversely affect our revenues.

The properties we acquire may often be vacant at the time of closing and we may not be successful in locating residents to lease the individual properties that we acquire as quickly as we had expected or at all. Even if we are able to place residents as quickly as we had expected, we may incur vacancies in the future and may not be able to re-lease those properties without longer-than-assumed delays, which may result in increased renovation and maintenance costs. In addition, the value of a vacant property could be substantially impaired. As a result, if vacancies continue for a longer period of time than we expect or indefinitely, we may suffer reduced revenues, which may have a material adverse effect on us.

We rely on information supplied by prospective residents in managing our business.

We make leasing decisions based on our review of rental applications completed by the prospective resident. While we may seek to confirm or build on information provided in such rental applications through our own due diligence, including by conducting background checks, we rely on the information supplied to us by prospective residents to make leasing decisions, and we cannot be certain that this information is accurate. These applications are submitted to us at the time we evaluate a prospective resident and we do not require residents to provide us with updated information during the terms of their leases, notwithstanding the fact that this information can, and frequently does, change over time. For example, increases in unemployment levels or adverse economic conditions in certain of our markets may adversely affect the creditworthiness of our residents in such markets. Even though this information is not updated, we will use it to evaluate the characteristics of our portfolio over time. If resident-supplied information is inaccurate or our residents’ creditworthiness declines over time, we may make poor or imperfect leasing decisions and our portfolio may contain more risk than we believe.

We depend on our residents and their willingness to meet their lease obligations and renew their leases for substantially all of our revenues. Poor resident selection and defaults and nonrenewals by our residents may adversely affect our reputation, financial performance and ability to make distributions to our stockholders.

We depend on rental income from residents for substantially all of our revenues. As a result, our success depends in large part upon our ability to attract and retain qualified residents for our properties. Our reputation, financial performance and ability to make distributions to our stockholders would be adversely affected if a significant number of our residents fail to meet their lease obligations or fail to renew their leases. For example, residents may default on rent payments, make unreasonable and repeated demands for service or improvements, make unsupported or unjustified complaints to regulatory or political authorities, use our properties for illegal purposes, damage or make unauthorized structural changes to our properties that are not covered by security deposits, refuse to leave the property upon termination of the lease, engage in domestic violence or similar disturbances, disturb nearby residents with noise, trash, odors or eyesores, fail to comply with HOA regulations, sublet to less desirable individuals in violation of our lease or permit unauthorized persons to live with them. Damage to our properties may delay re-leasing after eviction, necessitate expensive repairs or impair the rental income or value of the property resulting in a lower than expected rate of return. Increases in unemployment levels and other adverse changes in economic conditions in our markets could result in substantial resident defaults. In the event of a resident default or bankruptcy, we may experience delays in enforcing our rights as landlord at that property and will incur costs in protecting our investment and re-leasing the property.

Our leases are relatively short-term, exposing us to the risk that we may have to re-lease our properties frequently, which we may be unable to do on attractive terms, on a timely basis or at all.

Substantially all of our new leases have a duration of one to two years. As such leases permit the residents to leave at the end of the lease term, we anticipate our rental revenues may be affected by declines in market rental rates more quickly than if our leases were for longer terms. Short-term leases may result in high turnover, which involves costs such as restoring the properties, marketing costs and lower occupancy levels. Our resident turnover rate and related cost estimates may be less accurate than if we had more operating data upon which to base such estimates. If the rental rates for our properties decrease or our residents do not renew their leases, our operating results and ability to make distributions to our stockholders could be adversely affected.

 

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

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

We are highly dependent on information systems and systems failures could significantly disrupt our business, which may, in turn, negatively affect us and the value of our common stock.

Our operations are dependent upon our resident portal and property management platforms, including Yardi and Salesforce, which include certain automated processes that require access to telecommunications or the internet, each of which is subject to system security risks. Certain critical components of our platform are dependent upon third party service providers and a significant portion of our 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 service providers, including viruses or experienced computer programmers that could penetrate network security defenses and cause system failures and disruptions of operations. Even though we believe we utilize appropriate duplication and back-up procedures, a significant outage in telecommunications, the internet or at our third party service providers could negatively impact our operations.

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

Information security risks have generally increased in recent years due to the rise in new technologies and the increased sophistication and activities of perpetrators of cyberattacks. In the ordinary course of our business we acquire and store sensitive data, including intellectual property, our proprietary business information and personally identifiable information of our prospective and current residents, employees and third party service providers. The secure processing and maintenance of such information is critical to our operations and business strategy. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored therein could be accessed, publicly disclosed, misused, 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, any of which could adversely affect our results of operations, reputation and competitive position.

Future joint venture investments may limit our ability to invest in certain markets and may be adversely affected by our lack of sole decision-making authority, our reliance on joint venture partners’ financial condition and disputes between us and our joint venture partners.

Although we currently wholly own and manage our properties, we may decide to co-invest in the future with third parties through partnerships, joint ventures or other entities, acquiring non-controlling interests in or sharing responsibility for managing the affairs of a property, partnership, joint venture or other entity. As a result, if we decide to make any such joint venture investments in the future, we may be subject to restrictions that prohibit us from making other investments in certain markets until all of the funds in such partnership, joint

 

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venture or other entity are invested or committed, and we would not be in a position to exercise sole decision-making authority regarding the property, partnership, joint venture or other entity which may, among other things, impact our ability to satisfy the REIT requirements. Investments in partnerships, joint ventures or other entities may, under certain circumstances, involve risks not present were a third party not involved, including the possibility that joint venture partners might become bankrupt or fail to fund their share of required capital contributions. Joint venture partners may have economic or other business interests or goals that are inconsistent with our business interests or goals, and may be in a position to take actions contrary to our policies or objectives. Such investments also may have the potential risk of impasses on decisions, such as a sale, because neither we nor our partners would have full control over the partnership or joint venture. Disputes between us and our partners may result in litigation or arbitration that would increase our expenses and prevent our officers and/or trustees from focusing their time and effort on our business. Consequently, actions by, or disputes with, any of our future partners might result in subjecting properties owned by the partnership or joint venture to additional risk. In addition, we may in certain circumstances be liable for the actions of any of our future third party partners or co-venturers.

We are involved in a variety of litigation.

We are involved in a range of legal actions in the ordinary course of business. These actions may include, among others, eviction proceedings and other landlord-tenant disputes, challenges to title and ownership rights, disputes arising over potential violations of HOA rules and regulations, issues with local housing officials arising from the condition or maintenance of the property, outside vendor disputes and trademark infringement and other intellectual property claims. These actions can be time-consuming and expensive, and may adversely affect our reputation. For example, eviction proceedings by owners and operators of single-family homes for lease have recently been the focus of negative media attention. Although we are not involved in any legal or regulatory proceedings that we expect would have a material adverse effect on our business, results of operations or financial condition, such proceedings may arise in the future.

We may suffer losses that are not covered by insurance.

We attempt to ensure that our properties are adequately insured to cover casualty losses. However, there are certain losses, including losses from floods, fires, earthquakes, wind, pollution, acts of war, acts of terrorism or riots, for which we may self-insure or which may not always or generally be insured against because it may not be deemed economically feasible or prudent to do so. Changes in the cost or availability of insurance could expose us to uninsured casualty losses. In particular, a number of our properties are located in areas that are known to be subject to increased earthquake activity or wind and/or flood risk. Properties located in active seismic areas include properties throughout California and Seattle. A number of our properties are also located in Florida and Charlotte, which are areas known to be subject to wind and/or flood risk. While we have multi-year policies for earthquakes and hurricane and/or flood risk, our properties may nonetheless incur a casualty loss that is not fully covered by insurance. In such an event, the value of the affected properties would be reduced by the amount of any such uninsured loss, and we could experience a significant loss of capital invested and potential revenues in such properties and could potentially remain obligated under any recourse debt associated with such properties. Inflation, changes in building codes and ordinances, environmental considerations and other factors might also keep us from using insurance proceeds to replace or renovate a particular property after it has been damaged or destroyed. Under those circumstances, the insurance proceeds we receive might be inadequate to restore our economic position on the damaged or destroyed property. Any such losses could adversely affect us and cause the value of our common stock to decline. In addition, we may have no source of funding to repair or reconstruct the damaged home, and we cannot assure that any such sources of funding will be available to us for such purposes in the future.

We are subject to risks from natural disasters such as earthquakes and severe weather.

Natural disasters and severe weather such as earthquakes, tornadoes, hurricanes or floods may result in significant damage to our properties. The extent of our casualty losses and loss in operating income in connection

 

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with such events is a function of the severity of the event and the total amount of exposure in the affected area. When we have geographic concentration of exposures, a single catastrophe (such as an earthquake, especially in California) or destructive weather event (such as a hurricane) affecting a region may have a significant negative effect on our financial condition and results of operations. As a result, our operating and financial results may vary significantly from one period to the next. Our financial results may be adversely affected by our exposure to losses arising from natural disasters or severe weather.

Eminent domain could lead to material losses on our investments in our properties.

Governmental authorities may exercise eminent domain to acquire the land on which our properties are built in order to build roads and other infrastructure. Any such exercise of eminent domain would allow us to recover only the fair value of the affected properties. In addition, “fair value” could be substantially less than the real market value of the property for a number of years, and we could effectively have no profit potential from properties acquired by the government through eminent domain.

We may have difficulty selling our real estate investments and our ability to distribute all or a portion of the net proceeds from any such sale 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 properties. When we sell any of our properties, we may recognize a loss on such sale. We may elect not to distribute any proceeds from the sale of properties to our stockholders. Instead, we may use such proceeds for other purposes, including:

 

    purchasing additional properties;

 

    repaying debt or buying back shares;

 

    creating working capital reserves; or

 

    making repairs, maintenance or other capital improvements or expenditures to our remaining properties.

Our ability to sell our properties 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. For example, 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 (“TRS”), in which case we will incur corporate level tax on any net gains from such dispositions.

Risks Related to Our Indebtedness

Our cash flows and operating results could be adversely affected by required payments of debt or related interest and other risks of our debt financing.

We are generally subject to risks associated with debt financing. These risks include: (1) our cash flow may not be sufficient to satisfy required payments of principal and interest; (2) we may not be able to refinance existing indebtedness or the terms of the refinancing may be less favorable to us than the terms of existing debt; (3) required debt payments are not reduced if the economic performance of any property declines; (4) debt service obligations could reduce funds available for distribution to our stockholders and funds available for capital investment; (5) any default on our indebtedness could result in acceleration of those obligations and possible loss of property to foreclosure; and (6) the risk that necessary capital expenditures cannot be financed on favorable terms. If a property is pledged to secure payment of indebtedness and we cannot make the applicable debt payments, we may have to surrender the property to the lender with a consequent loss of any prospective income and equity value from such property. Any of these risks could place strains on our cash flows, reduce our ability to grow and adversely affect our results of operations.

 

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We utilize a significant amount of indebtedness in the operation of our business.

As of September 30, 2016, as adjusted for the financing transactions described in “Unaudited Pro Forma Financial Information” (the “Financings”) and the completion of this offering and the use of proceeds therefrom, we would have had approximately $5,980.8 million aggregate principal amount of indebtedness outstanding, including $4,494.7 million of non-recourse asset-backed mortgage loans. Our leverage could have important consequences to us. For example, it could: (1) result in the acceleration of a significant amount of debt for non-compliance with the terms of such debt or, if such debt contains cross default or cross-acceleration provisions, other debt; (2) result in the loss of assets, including individual properties or portfolios, due to foreclosure or sale on unfavorable terms, which could create taxable income without accompanying cash proceeds; (3) materially impair our ability to borrow unused amounts under existing financing arrangements or to obtain additional financing or refinancing on favorable terms or at all; (4) require us to dedicate a substantial portion of our cash flow to paying principal and interest on our indebtedness, reducing the cash flow available to fund our business, to pay dividends, including those necessary to maintain our REIT qualification, or to use for other purposes; (5) increase our vulnerability to an economic downturn; (6) limit our ability to withstand competitive pressures; or (7) reduce our flexibility to respond to changing business and economic conditions.

If any of the foregoing occurs, our business, financial condition, liquidity, results of operations and prospects could be materially and adversely affected, and the trading price of our common stock could decline significantly.

We may be unable to obtain financing through the debt and equity markets, which would have a material adverse effect on our growth strategy and our financial condition and results of operations.

We cannot assure you that we will be able to access the capital and credit markets to obtain additional debt or equity financing or that we will be able to obtain financing on terms favorable to us. Our inability to obtain financing could have negative effects on our business. Among other things, we could have great difficulty acquiring, re-developing or maintaining our properties, which would materially and adversely affect our business strategy and portfolio, and may result in our: (1) liquidity being adversely affected; (2) inability to repay or refinance our indebtedness on or before its maturity; (3) making higher interest and principal payments or selling some of our assets on terms unfavorable to us to service our indebtedness; or (4) issuing additional capital stock, which could further dilute the ownership of our existing stockholders.

Secured indebtedness exposes us to the possibility of foreclosure on our ownership interests in our rental homes.

Incurring mortgage and other secured indebtedness increases our risk of loss of our ownership interests in our rental homes because defaults thereunder, and the inability to refinance such indebtedness, may result in foreclosure action initiated by lenders. For tax purposes, a foreclosure of any of our rental homes would be treated as a sale of the home for a purchase price equal to the outstanding balance of the indebtedness secured by such rental home. If the outstanding balance of the indebtedness secured by such rental home exceeds our tax basis in the rental home, we would recognize taxable income on foreclosure without receiving any cash proceeds.

Covenants in our debt agreements may restrict our operating activities and adversely affect our financial condition.

Our existing debt agreements contain, the credit facility that our Operating Partnership expects to enter into concurrently with or prior to the completion of this offering will contain and future debt agreements may contain, financial and/or operating covenants, including, among other things, certain coverage ratios, as well as limitations on the ability to incur secured and unsecured debt. These covenants may limit our operational flexibility and acquisition and disposition activities. Moreover, if any of the covenants in these debt agreements are breached and not cured within the applicable cure period, we could be required to repay the debt immediately, even in the absence of a payment default. As a result, a default under applicable debt covenants could have an adverse effect on our financial condition or results of operations.

 

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For example, our mortgage loans require, among other things, that a cash management account controlled by the lender collect all rents and cash generated by the properties securing the portfolio. Upon the occurrence of an event of default or failure to satisfy the required minimum debt yield or debt service coverage ratio, the lender may apply any excess cash as the lender elects, including prepayment of principal and amounts due under the loans. These covenants may restrict our ability to engage in transactions that we believe would otherwise be in the best interests of our stockholders. Further, such restrictions could make it difficult for us to satisfy the requirements necessary to maintain our qualification as a REIT for U.S. federal income tax purposes.

We have and expect to continue to utilize non-recourse long-term mortgage loans, and such structures may expose us to certain risks not prevalent in other debt financings, which could affect the availability and attractiveness of this financing option or otherwise result in losses to us.

We have and expect to continue to utilize non-recourse long-term mortgage loans relating to pools of homes which we own, if and when they become available and to the extent consistent with the maintenance of our REIT qualification, in order to generate cash for funding new investments. Mortgage loans may expose us to certain risks not prevalent in other debt financings. For example, accounting rules for mortgage loans are complex and involve significant judgment and assumptions. These complexities and possible changes in accounting rules, interpretations or our assumptions could undermine our ability to prepare timely and accurate financial statements. Moreover, we cannot be assured that we will be able to access the securitization market in the future, or be able to do so at favorable rates. The global economy recently experienced a significant recession and recent events in the real estate and securitization markets, as well as the debt markets and the economy generally, have caused significant dislocations, illiquidity and volatility in the market for asset-backed securities and mortgage-backed securities, as well as a severe, ongoing disruption in the wider global financial markets, including a significant reduction of investor demand for, and purchases of, asset-backed securities and structured financial products. Disruptions of the securitization market could preclude our ability to use mortgage loans as a financing source or could render it an inefficient source of financing, making us more dependent on alterative sourcing of financing that might not be as favorable as mortgage loans in otherwise favorable markets. In addition, in the United States and elsewhere, there is now increased political and regulatory scrutiny of the asset-backed securities industry. This has resulted in a raft of measures for increased regulation which are currently at various stages of implementation and which may have an adverse impact on the regulatory capital charge to certain investors in securitization exposures or the incentives for certain investors to hold asset-backed securities, and may thereby affect the liquidity of such securities. Any of these factors could limit our access to mortgage loans as a source of financing. The inability to consummate mortgage loans to finance our investments on a long-term basis could require us to seek other forms of potentially less attractive financing or to liquidate assets at an inopportune time or price, which could adversely affect our performance and our ability to grow our business.

Offerings of additional debt securities or equity securities that rank senior to our common stock may adversely affect the market price of our common stock.

If we decide to issue additional debt securities or equity securities that rank senior to our common stock in the future, it is likely that they will be governed by an indenture or other instrument containing covenants restricting our operating flexibility. Any additional debt or equity securities that we issue in the future may have rights, preferences and privileges more favorable than those of our common stock and, if such securities are convertible or exchangeable, the issuance of such securities may result in dilution to owners of our common stock. We and, indirectly, our stockholders, will bear the cost of issuing and servicing such securities. Because our decision to issue debt or equity securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus holders of our common stock will bear the risk of our future offerings reducing the market price of our common stock and diluting the value of their stockholdings in us.

 

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Failure to hedge effectively against interest rate changes may adversely affect our results of operations and our ability to make distributions to our stockholders.

Borrowings under our credit facilities and mortgage loans bear interest at variable rates and expose us to interest rate risk. If interest rates were to increase, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same, and our earnings and cash flows will correspondingly decrease. As of September 30, 2016, after giving effect to the Financings and the completion of this offering and the use of proceeds therefrom, each 100 basis point change in interest rates on our pro forma floating rate indebtedness would result in a $60.1 million change in pro forma annual interest expense. The foregoing does not give effect to interest rate swap agreements that we have entered into subsequent to September 30, 2016 to hedge floating rate indebtedness. See footnote (E) to our unaudited pro forma condensed combined and consolidated balance sheet for additional information.

In connection with our credit facilities and mortgage loans, we have obtained interest rate caps, and subject to complying with the requirements for REIT qualification, we may obtain in the future one or more additional forms of interest rate protection—in the form of swap agreements, interest rate cap contracts or similar agreements—to hedge against the possible negative effects of interest rate fluctuations. However, we cannot assure you that any hedging will adequately relieve the adverse effects of interest rate increases or that counterparties under these agreements will honor their obligations thereunder. In addition, we may be subject to risks of default by hedging counterparties. Adverse economic conditions could also cause the terms on which we borrow to be unfavorable. We could be required to liquidate one or more of our investments at times which may not permit us to receive an attractive return on our investments in order to meet our debt service obligations.

The REIT provisions of the Code may also limit our ability to hedge effectively. See “—Risks Related to our REIT Status and Certain Other Tax Items— Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities.”

Risks Related to Our Organization and Structure

We are controlled by our Sponsor and its interests may conflict with ours or yours in the future.

Immediately following this offering, affiliates of our Sponsor will beneficially own 73% of our common stock or 70% if the underwriters exercise in full their option to purchase additional shares. Moreover, under our bylaws and the stockholders agreement with our Sponsor and its affiliates that will be in effect as of the completion of this offering, so long as our pre-IPO owners and their affiliates together continue to beneficially own at least 5% of the shares of our common stock entitled to vote generally in the election of directors, we will agree to nominate individuals designated by our Sponsor, whom we refer to as the “Sponsor Directors,” for election to our board of directors as specified in our stockholders agreement and our Sponsor must consent to any change to the number of our directors. Even when our Sponsor and its affiliates cease to own shares of our stock representing a majority of the total voting power, for so long as our Sponsor continues to own a significant percentage of our stock, our Sponsor will still be able to significantly influence the composition of our board of directors and the approval of actions requiring stockholder approval. Accordingly, during such time, our Sponsor will have significant influence with respect to our management, business plans and policies, including the election and removal of our officers. In particular, for so long as our Sponsor continues to own a significant percentage of our stock, our Sponsor will be able to cause or prevent a change of control of our company or a change in the composition of our board of directors and could preclude any unsolicited acquisition of our company. The concentration of ownership could deprive you of an opportunity to receive a premium for your shares of common stock as part of a sale of our company and ultimately might affect the market price of our common stock.

Our Sponsor and its affiliates engage in a broad spectrum of activities, including investments in real estate generally and in the single-family rental sector in particular. In the ordinary course of their business activities, our Sponsor and its affiliates may engage in activities where their interests conflict with our interests or those of our stockholders. Our charter will provide that none of our Sponsor, any of its affiliates or any director who is not employed by us (including any non-employee director who serves as one of our officers in both his or her director and officer capacities) or his or her affiliates will have any duty to refrain from engaging, directly or

 

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indirectly, in the same business activities or similar business activities or lines of business in which we operate. Our Sponsor also may pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us. In addition, our Sponsor may have an interest in pursuing acquisitions, divestitures and other transactions that, in its judgment, could enhance its investment, even though such transactions might involve risks to you.

Upon the listing of our shares on the NYSE, we will be a “controlled company” within the meaning of the NYSE rules and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to stockholders of companies that are subject to such requirements.

After completion of this offering, affiliates of our Sponsor will continue to control a majority of the combined voting power of all classes of our stock entitled to vote generally in the election of directors. As a result, we will be a “controlled company” within the meaning of the corporate governance standards of the NYSE. Under these rules, a company of which more than 50% of the voting power in the election of directors is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including the requirements that, within one year of the date of the listing of our common stock:

 

    we have a board that is comprised of a majority of “independent directors,” as defined under the rules of such exchange;

 

    we have a compensation committee that is comprised entirely of independent directors; and

 

    we have a nominating and corporate governance committee that is comprised entirely of independent directors.

Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the NYSE.

We will incur increased costs and become subject to additional regulations and requirements as a result of becoming a public company, which could lower our profits or make it more difficult to run our business.

As a public company, we will incur additional legal, accounting and other expenses that we have not incurred as a private company, including costs associated with public company reporting requirements. We also have incurred and will incur costs associated with the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) and related rules implemented by the Securities and Exchange Commission (the “SEC”) and the NYSE. The expenses incurred by public companies generally for reporting and corporate governance purposes have been increasing. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly, although we are currently unable to estimate these costs with any degree of certainty. These laws and regulations also could make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as our executive officers. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common stock, fines, sanctions and other regulatory action and potentially civil litigation.

If we are unable to implement and maintain effective internal controls over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock may be negatively affected.

As a public company, we will be required to maintain internal controls over financial reporting and to report any material weaknesses in such internal controls. In addition, beginning with our second annual report on Form

 

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10-K under the Securities Act, we will be required to furnish a report by management on the effectiveness of our internal controls over financial reporting, pursuant to Section 404 of the Sarbanes-Oxley Act. Once we are no longer an emerging growth company, our independent registered public accounting firm will be required to formally attest to the effectiveness of our internal controls over financial reporting on an annual basis. The process of designing, implementing, and testing the internal controls over financial reporting required to comply with this obligation is time consuming, costly, and complicated. If we identify material weaknesses in our internal controls over financial reporting, if we are unable to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner or to assert that our internal controls over financial reporting is effective or if, once we are no longer an emerging growth company, our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal controls over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be negatively affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the SEC, or other regulatory authorities, which could require additional financial and management resources.

We are an “emerging growth company,” and we cannot be certain if the reduced reporting requirements applicable to emerging growth companies will make our common stock less attractive to investors.

We are an “emerging growth company” as defined in the JOBS Act. We will remain an “emerging growth company” until the earliest to occur of:

 

    the last day of the fiscal year during which our total annual revenue equals or exceeds $1 billion (subject to adjustment for inflation);

 

    the last day of the fiscal year following the fifth anniversary of this offering;

 

    the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt securities; or

 

    the date on which we are deemed to be a “large accelerated filer” under the Exchange Act.

We may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. 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 per share trading price may be adversely affected and more volatile.

Provisions of Maryland law may limit the ability of a third party to acquire control of us by requiring our board of directors or stockholders to approve proposals to acquire our company or effect a change in control.

Certain provisions of the Maryland General Corporation Law (the “MGCL”) may have the effect of inhibiting a third party from making a proposal to acquire us or of impeding a change in control under circumstances that otherwise could provide our stockholders with the opportunity to realize a premium over the then-prevailing market price of their shares of common stock, including:

 

   

“business combination” provisions that, subject to certain exceptions and limitations, prohibit certain business combinations between a Maryland corporation and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our outstanding voting stock or an affiliate or associate of ours who, at any time within the two-year period immediately prior to the date in question, was the beneficial owner of 10% or more of the voting power of our then outstanding shares of stock) or an affiliate of any interested stockholder for five years after

 

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the most recent date on which the stockholder becomes an interested stockholder, and thereafter imposes two super-majority stockholder voting requirements on these combinations, unless, among other conditions, our common stockholders receive a minimum price, as defined in the MGCL, for their shares and the consideration is received in cash or in the same form as previously paid by the interested stockholder for its shares of stock; and

 

    “control share” provisions that provide that, subject to certain exceptions, holders of “control shares” (defined as voting shares that, when aggregated with all other shares controlled by the stockholder, entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of issued and outstanding “control shares”) have no voting rights 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 shares owned by the acquirer, by our officers or by our employees who are also directors of our company.

Prior to the completion of this offering, by resolution of our board of directors, we will opt out of the business combination provisions of the MGCL and provide that any business combination between us and any other person is exempt from the business combination provisions of the MGCL. In addition, pursuant to a provision in our bylaws, we will opt out of the control share provisions of the MGCL. Provisions of our bylaws will prohibit our board of directors from revoking, altering or amending its resolution exempting any business combination from the business combination provisions of the MGCL or amending our bylaws to opt in to the control share provisions of the MGCL, in each case, without the affirmative vote of a majority of the votes cast on the matter by our stockholders entitled to vote generally in the election of directors.

In addition, the “unsolicited takeover” provisions of Title 3, Subtitle 8 of the MGCL permit our board of directors, without stockholder approval and regardless of what is provided in our charter or bylaws, to implement certain takeover defenses, including adopting a classified board or increasing the vote required to remove a director. Such takeover defenses 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 our common stockholders with the opportunity to realize a premium over the then-current market price. Our charter will provide that, without the affirmative vote of a majority of the votes cast on the matter by our stockholders entitled to vote generally in the election of directors, we may not elect to be subject to certain provisions of Subtitle 8, including the provisions relating to adopting a classified board or increasing the vote required to remove a director.

Our board of directors may approve the issuance of stock, including preferred stock, with terms that may discourage a third party from acquiring us.

Our charter will permit our board of directors, without any action by our stockholders, to authorize the issuance of stock in one or more classes or series. Our board of directors may also classify or reclassify any unissued stock and set or change the preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications and terms and conditions of redemption of any such stock, which rights may be superior to those of our common stock. Thus, our board of directors could authorize the issuance of shares of a class or series of stock with terms and conditions which could have the effect of discouraging a takeover or other transaction in which holders of some or a majority of our outstanding common stock might receive a premium for their shares over the then current market price of our common stock. See “Description of Stock—Power to Reclassify and Issue Stock.”

Our board of directors may change significant corporate policies without stockholder approval.

Our investment, financing, borrowing and dividend policies and our policies with respect to all other activities, including growth, debt, capitalization and operations, will be determined by our board of directors.

 

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These policies may be amended or revised at any time and from time to time at the discretion of our board of directors without a vote of our stockholders. Our charter will also provide that our board of directors may revoke or otherwise terminate our REIT election without approval of our stockholders if it determines that it is no longer in our best interests to attempt to qualify, or to continue to qualify, as a REIT. In addition, our board of directors may change our policies with respect to conflicts of interest provided that such changes are consistent with applicable legal requirements. A change in these policies or the termination of our REIT election could have an adverse effect on our financial condition, our results of operations, our cash flow, the per share trading price of our common stock and our ability to satisfy our debt service obligations and to pay dividends to our stockholders.

Our rights and the rights of our stockholders to take action against our directors and officers are limited.

Our charter will eliminate the liability of our directors and officers to us and our stockholders for money damages to the maximum extent permitted under Maryland law. Under current Maryland law and our charter, our directors and officers will not have any liability to us or our stockholders for money damages other than 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 and is material to the cause of action adjudicated.

Our charter will authorize us and our bylaws will obligate us to indemnify each of our directors or officers who is or is threatened to be made a party to or witness in a proceeding by reason of his or her service in those or certain other capacities, to the maximum extent permitted by Maryland law, from and against any claim or liability to which such person may become subject or which such person may incur by reason of his or her status as a present or former director or officer of us or serving in such other capacities. In addition, we may be obligated to pay or reimburse the expenses incurred by our present and former directors and officers without requiring a preliminary determination of their ultimate entitlement to indemnification. As a result, we and our stockholders may have more limited rights to recover money damages from our directors and officers than might otherwise exist absent these provisions in our charter and bylaws or that might exist with other companies, which could limit your recourse in the event of actions that are not in our best interests.

Our charter will contain a provision that expressly permits our Sponsor, our non-employee directors and certain of our pre-IPO owners, and their affiliates, to compete with us.

Our Sponsor may compete with us for investments in properties and for residents. There is no assurance that any conflicts of interest created by such competition will be resolved in our favor. Moreover, our Sponsor is in the business of making investments in companies and acquires and holds interests in businesses that compete directly or indirectly with us. Our charter will provide that, to the maximum extent permitted from time to time by Maryland law, we renounce any interest or expectancy that we have in, or any right to be offered an opportunity to participate in, any business opportunities that are from time to time presented to or developed by our directors or their affiliates, other than to those directors who are employed by us or our subsidiaries, unless the business opportunity is expressly offered or made known to such person in his or her capacity as our director, and none of our Sponsor, pre-IPO owners, or any of their respective affiliates, or any director who is not employed by us or any of his or her affiliates, will have any duty to refrain from engaging, directly or indirectly, in the same business activities or similar business activities or lines of business in which we or our affiliates engage or propose to engage or to refrain from otherwise competing with us or our affiliates. Our Sponsor also may pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us.

 

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Our charter will provide that, to the maximum extent permitted from time to time by Maryland law, our Sponsor and each of our non-employee directors (including those designated by our Sponsor), and any of their affiliates, may:

 

    acquire, hold and dispose of shares of our stock or OP Units for his, her or its own account or for the account of others, and exercise all of the rights of a stockholder of Invitation Homes Inc., or a limited partner of our Operating Partnership, to the same extent and in the same manner as if he, she or it were not our director or stockholder; and

 

    in his, her or its personal capacity or in his, her or its capacity, as applicable, as a director, officer, trustee, stockholder, partner, member, equity owner, manager, advisor or employee of any other person, have business interests and engage, directly or indirectly, in business activities that are similar to ours or compete with us, that involve a business opportunity that we could seize and develop or that include the acquisition, syndication, holding, management, development, operation or disposition of interests in mortgages, real property or persons engaged in the real estate business.

Our charter will also provide that, to the maximum extent permitted from time to time by Maryland law, in the event that our Sponsor, any non-employee director, or any of their respective affiliates, acquires knowledge of a potential transaction or other business opportunity, such person will have no duty to communicate or offer such transaction or business opportunity to us or any of our affiliates and may take any such opportunity for itself, himself or herself or offer it to another person or entity unless the business opportunity is expressly offered to such person in his or her capacity as our director.

These provisions may limit our ability to pursue business or investment opportunities that we might otherwise have had the opportunity to pursue, which could have an adverse effect on our financial condition, our results of operations, our cash flow, the per share trading price of our common stock and our ability to satisfy our debt service obligations and to pay dividends to our stockholders.

We will be required to disclose in our periodic reports filed with the SEC specified activities engaged in by our “affiliates.”

In August 2012, Congress enacted the Iran Threat Reduction and Syria Human Rights Act of 2012 (“ITRSHRA”), which expands the scope of U.S. sanctions against Iran. More specifically, Section 219 of the ITRSHRA amended the Exchange Act to require companies subject to SEC reporting obligations under Section 13 of the Exchange Act to disclose in their periodic reports specified dealings or transactions involving Iran or other individuals and entities targeted by certain Office of Foreign Assets Control sanctions engaged in by the reporting company or any of its affiliates during the period covered by the relevant periodic report. In some cases, ITRSHRA requires companies to disclose these types of transactions even if they would otherwise be permissible under U.S. law. These companies are required to separately file with the SEC a notice that such activities have been disclosed in the relevant periodic report, and the SEC is required to post this notice of disclosure on its website and send the report to the U.S. President and certain U.S. Congressional committees. The U.S. President thereafter is required to initiate an investigation and, within 180 days of initiating such an investigation, to determine whether sanctions should be imposed. Under ITRSHRA, we would be required to report if we or any of our “affiliates” knowingly engaged in certain specified activities during the period covered by the report. Because the SEC defines the term “affiliate” broadly, it includes any entity controlled by us as well as any person or entity that controls us or is under common control with us. Because we may be deemed to be a controlled affiliate of our Sponsor, affiliates of our Sponsor may also be considered our affiliates. Affiliates of our Sponsor have in the past and may in the future be required to make disclosures pursuant to ITRSHRA. Disclosure of such activity, even if such activity is not subject to sanctions under applicable law, and any sanctions actually imposed on us or our affiliates as a result of these activities, could harm our reputation and have a negative impact on our business.

 

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Risks Related to our REIT Status and Certain Other Tax Items

If we do not maintain our qualification as a REIT, we will be subject to tax as a regular corporation and could face a substantial tax liability.

We expect to continue to operate so as to qualify as a REIT under the Code. However, qualification as a REIT involves the application of highly technical and complex Code provisions for which only a limited number of judicial or administrative interpretations exist. Notwithstanding the availability of cure provisions in the Code, we could fail to meet various compliance requirements, which could jeopardize our REIT status. Furthermore, new tax legislation, administrative guidance or court decisions, in each instance potentially with retroactive effect, could make it more difficult or impossible for us to qualify as a REIT. If we fail to qualify as a REIT in any tax year, then:

 

    we would be taxed as a regular domestic corporation, which under current laws, among other things, means being unable to deduct distributions to stockholders in computing taxable income and being subject to U.S. federal income tax on our taxable income at regular corporate income tax rates;

 

    any resulting tax liability could be substantial and could have a material adverse effect on our book value;

 

    unless we were entitled to relief under applicable statutory provisions, we would be required to pay taxes, and thus, our cash available for distribution to stockholders would be reduced for each of the years during which we did not qualify as a REIT and for which we had taxable income; and

 

    we generally would not be eligible to requalify as a REIT for the subsequent four full taxable years.

REITs, in certain circumstances, may incur tax liabilities that would reduce our cash available for distribution to you.

Even if we qualify and maintain our status as a REIT, we may become subject to U.S. federal income taxes and related state and local taxes. For example, net income from the sale of properties that are “dealer” properties sold by a REIT (a “prohibited transaction” under the Code) will be subject to a 100% tax. We may not make sufficient distributions to avoid excise taxes applicable to REITs. Similarly, if we were to fail an income test (and did not lose our REIT status because such failure was due to reasonable cause and not willful neglect) we would be subject to tax on the income that does not meet the income test requirements. We also may decide to retain net capital gain we earn from the sale or other disposition of our investments and pay income tax directly on such income. In that event, our stockholders would be treated as if they earned that income and paid the tax on it directly. However, stockholders that are tax-exempt, such as charities or qualified pension plans, would have no benefit from their deemed payment of such tax liability unless they file U.S. federal income tax returns and seek a refund of such tax. We also may be subject to state and local taxes on our income or property, including income, franchise, payroll, mortgage recording and transfer taxes, either directly or at the level of the other companies through which we indirectly own our assets, such as our TRSs, which are subject to full U.S. federal, state, local and foreign corporate-level income taxes. Any taxes we pay directly or indirectly will reduce our cash available for distribution to you.

Complying with REIT requirements may cause us to forego otherwise attractive opportunities and limit our expansion opportunities.

In order to qualify as a REIT for U.S. federal income tax purposes, we must continually satisfy tests concerning, among other things, our sources of income, the nature of our investments in commercial real estate and related assets, the amounts we distribute to our stockholders and the ownership of our stock. We may also be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution. Thus, compliance with REIT requirements may hinder our ability to operate solely on the basis of maximizing profits.

 

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Complying with REIT requirements may force us to liquidate or restructure otherwise attractive investments.

In order to qualify as a REIT, we must also ensure that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified REIT real estate assets. The remainder of our investments in securities (other than qualified real estate assets and government securities) generally cannot include more than 10% of the outstanding voting securities of any one issuer or 10% of the total value of the outstanding securities of any one issuer unless we and such issuer jointly elect for such issuer to be treated as a TRS under the Code. The total value of all of our investments in taxable REIT subsidiaries cannot exceed 25% (20% for any taxable year beginning after December 31, 2017) of the value of our total assets. In addition, no more than 5% of the value of our assets (other than qualified real estate assets and government securities) can consist of the securities of any one issuer other than a TRS. If we fail to comply with these requirements, we must dispose of a portion of our assets within 30 days after the end of the calendar quarter in order to avoid losing our REIT status and suffering adverse tax consequences.

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

The REIT provisions of the Code substantially limit our ability to hedge our liabilities. Any income from a hedging transaction we enter into to manage risk of interest rate changes with respect to borrowings made or to be made to acquire or carry real estate assets (each such hedge, a “Borrowings Hedge”), or to manage risk of foreign currency exchange rate fluctuations with respect to any item of qualifying income (each such hedge, a “Currency Hedge”), if clearly identified under applicable U.S. Treasury (“Treasury”) regulations, does not constitute “gross income” for purposes of the 75% or 95% gross income tests that we must satisfy to qualify and to maintain our qualification as a REIT. This exclusion from the 95% and 75% gross income tests also will apply if we previously entered into a Borrowings Hedge or a Currency Hedge, a portion of the hedged indebtedness or property is disposed of and in connection with such extinguishment or disposition, we enter into a new properly identified hedging transaction to offset the prior hedging position. To the extent that we enter into other types of hedging transactions, the income from those transactions is likely to be treated as non-qualifying income for purposes of both of the gross income tests. See “Material U.S. Federal Income Tax Considerations—Income Tests.” As a result of these rules, we intend to limit our use of advantageous hedging techniques or, subject to the limitations on the value of and income from our TRSs, implement those hedges through a domestic TRS. This could increase the cost of our hedging activities because our TRS would be subject to tax on gains or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear. In addition, losses from hedges held in our TRS will generally not provide any tax benefit, except for being carried forward against future taxable income in the TRS.

Complying with REIT requirements may force us to borrow to make distributions to stockholders.

From time to time, our taxable income may be greater than our cash flow available for distribution to stockholders. If we do not have other funds available in these situations, we may be unable to distribute substantially all of our taxable income as required by the REIT provisions of the Code. Thus, we could be required to borrow funds, sell a portion of our assets at disadvantageous prices or find another alternative. These options could increase our costs or reduce our equity.

Even if we qualify to be subject to U.S. federal income tax as a REIT, we could be subject to tax on any unrealized net built-in gains in certain assets.

As part of our Pre-IPO Transactions, we will acquire certain appreciated assets that are held (directly or indirectly) in part by one or more C corporations in transactions in which the adjusted tax basis of the assets in our hands will be determined by reference to the adjusted basis of such assets in the hands of such C corporations. If we dispose of any such appreciated assets during the five-year period following the date we acquired those assets, we will be subject to U.S. federal income tax on the portion of such gain attributable to

 

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such C corporations at the highest corporate tax rates to the extent of the excess of the fair market value of such assets on the date that we acquired those assets over the adjusted tax basis of such assets on such date, which are referred to as built-in gains. We would be subject to this tax liability even if we qualify and maintain our status as a REIT. Any recognized built-in gain will retain its character as ordinary income or capital gain and will be taken into account in determining REIT taxable income and our distribution requirement. Any tax on the recognized built-in gain will reduce REIT taxable income. We may choose not to sell in a taxable transaction appreciated assets we might otherwise sell during the five-year period in which the built-in gain tax applies to avoid the built-in gain tax. However, there can be no assurances that such a taxable transaction will not occur. If we sell such assets in a taxable transaction, the amount of corporate tax that we will pay will vary depending on the actual amount of net built-in gain or loss present in those assets as of the time we acquired those assets and the portion of such assets which were held by C corporations prior to their contribution to us. See “Material U.S. Federal Income Tax Considerations—Built-in Gains of Former C Corporation Assets.”

Our charter will not permit any person to own more than 9.8% of our outstanding common stock or of our outstanding stock of all classes or series, and attempts to acquire our common stock or our stock of all other classes or series in excess of these 9.8% limits would not be effective without an exemption from these limits by our board of directors.

For us to qualify as a REIT under the Code, not more than 50% of the value of our outstanding stock may be owned directly or indirectly, by five or fewer individuals (including certain entities treated as individuals for this purpose) during the last half of a taxable year. For the purpose of assisting our qualification as a REIT for U.S. federal income tax purposes, among other purposes, our charter will prohibit beneficial or constructive ownership by any person of more than a certain percentage, currently 9.8%, in value or by number of shares, whichever is more restrictive, of the outstanding shares of our common stock or 9.8% in value of the outstanding shares of our stock, which we refer to as the “ownership limit.” The constructive ownership rules under the Code and our charter are complex and may cause shares of the outstanding common stock owned by a group of related persons to be deemed to be constructively owned by one person. As a result, the acquisition of less than 9.8% of our outstanding common stock or our stock by a person could cause a person to own constructively in excess of 9.8% of our outstanding common stock or our stock, respectively, and thus violate the ownership limit. There can be no assurance that our board of directors, as permitted in the charter, will not decrease this ownership limit in the future. Any attempt to own or transfer shares of our common stock in excess of the ownership limit without the consent of our board of directors will result either in the shares in excess of the limit being transferred by operation of the charter to a charitable trust, and the person who attempted to acquire such excess shares will not have any rights in such excess shares, or in the transfer being void. The ownership limit may have the effect of precluding a change in control of us by a third party, even if such change in control would be in the best interests of our stockholders or would result in receipt of a premium to the price of our common stock (and even if such change in control would not reasonably jeopardize our REIT status). In addition, we expect that, before the completion of this offering, our board of directors will grant an exemption from the ownership limit to our Sponsor and its affiliates, which may limit our board of directors’ power to increase the ownership limit or grant further exemptions in the future.

We may choose to make distributions in our own stock, in which case you may be required to pay income taxes without receiving any cash dividends.

In connection with our qualification as a REIT, we are required to annually distribute to our stockholders at least 90% of our REIT taxable income (which does not equal net income, as calculated in accordance with generally accepted accounting principles), determined without regard to the deduction for dividends paid and excluding net capital gain. In order to satisfy this requirement, we may make distributions that are payable in cash and/or shares of our common stock (which could account for up to 90% of the aggregate amount of such distributions) at the election of each stockholder. Taxable stockholders receiving such distributions will be required to include the full amount of such distributions as ordinary dividend income to the extent of our current or accumulated earnings and profits, as determined for U.S. federal income tax purposes. As a result, U.S.

 

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stockholders may be required to pay income taxes with respect to such distributions in excess of the cash portion of the distribution received. Accordingly, U.S. holders receiving a distribution of our shares may be required to sell shares received in such distribution or may be required to sell other stock or assets owned by them, at a time that may be disadvantageous, in order to satisfy any tax imposed on such distribution. If a U.S. stockholder sells the stock that it receives as part of the distribution in order to pay this tax, the sales proceeds may be less than the amount it must include in income with respect to the distribution, depending on the market price of our stock at the time of the sale. Furthermore, with respect to certain non-U.S. holders, we may be required to withhold U.S. tax with respect to such distribution, including in respect of all or a portion of such distribution that is payable in stock, by withholding or disposing of part of the shares included in such distribution and using the proceeds of such disposition to satisfy the withholding tax imposed. In addition, if a significant number of our stockholders determine to sell shares of our common stock in order to pay taxes owed on dividend income, such sale may put downward pressure on the market price of our common stock.

Various tax aspects of such a taxable cash/stock distribution are uncertain and have not yet been addressed by the Internal Revenue Service (“IRS”). No assurance can be given that the IRS will not impose requirements in the future with respect to taxable cash/stock distributions, including on a retroactive basis, or assert that the requirements for such taxable cash/stock distributions have not been met.

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

The maximum tax rate applicable to qualified dividend income payable to certain non-corporate U.S. stockholders has been reduced by legislation to 20%. Dividends payable by REITs, however, generally are not eligible for the reduced rates. Although this legislation does not adversely affect the taxation of REITs or dividends payable by REITs, the more favorable rates applicable to regular corporate qualified dividends could cause certain non-corporate investors to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the shares of REITs, including our common stock.

We will be dependent on external sources of capital to finance our growth.

As with other REITs, but unlike corporations generally, our ability to finance our growth must largely be funded by external sources of capital because we generally will have to distribute to our stockholders 90% of our REIT taxable income in order to qualify as a REIT, including taxable income where we do not receive corresponding cash. Our access to external capital will depend upon a number of factors, including general market conditions, the market’s perception of our growth potential, our current and potential future earnings, cash distributions and the market price of our common stock.

We may be subject to adverse legislative or regulatory tax changes that could increase our tax liability, reduce our operating flexibility and reduce the price of our common stock.

In recent years, numerous legislative, judicial and administrative changes have been made in the provisions of U.S. federal income tax laws applicable to investments similar to an investment in shares of our common stock. Additional changes to the tax laws are likely to continue to occur, and we cannot assure you that any such changes will not adversely affect the taxation of a stockholder. Any such changes could have an adverse effect on an investment in our shares or on the market value or the resale potential of our assets. You are urged to consult with your tax advisor with respect to the impact of recent legislation on your investment in our shares and the status of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in our shares. Although REITs generally receive certain tax advantages compared to entities taxed as regular corporations, it is possible that future legislation would result in a REIT having fewer tax advantages, and it could become more advantageous for a company that invests in real estate to elect to be treated for U.S. federal income tax purposes as a corporation. As a result, our charter will provide our board of directors with the power, under certain circumstances, to revoke or otherwise terminate our REIT election and cause us to be taxed as a regular corporation, without the approval of our stockholders.

 

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According to publicly released statements, a top legislative priority of the Trump administration and the next Congress may be significant reform of the Code, including significant changes to taxation of business entities and the deductibility of interest expense. There is a substantial lack of clarity around the likelihood, timing and details of any such tax reform and the impact of any potential tax reform on an investment in us.

Liquidation of assets may jeopardize our REIT qualification.

To qualify as a REIT, we must comply with requirements regarding our assets and our sources of income. If we are compelled to liquidate our investments to repay obligations to our lenders, we may be unable to comply with these requirements, ultimately jeopardizing our qualification as a REIT, or we may be subject to a 100% tax on any resultant gain if we sell assets that are treated as dealer property or inventory.

Our ownership of and relationship with any TRS will be restricted, and a failure to comply with the restrictions would jeopardize our REIT status and may result in the application of a 100% excise tax.

A REIT may own up to 100% of the stock of one or more TRSs. A TRS may earn income that would not be qualifying income if earned directly by the parent REIT. Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a TRS. A corporation of which a TRS directly or indirectly owns more than 35% of the voting power or value of the stock will automatically be treated as a TRS. Overall, no more than 25% (and, for taxable years beginning after December 31, 2017, no more than 20%) of the value of a REIT’s assets may consist of stock or securities of one or more TRSs. The value of our interests in and thus the amount of assets held in a TRS may also be restricted by our need to qualify for an exclusion from regulation as an investment company under the Investment Company Act of 1940, as amended (the “Investment Company Act”). A TRS will pay U.S. federal, state and local income tax at regular corporate rates on any income that it earns. In addition, the TRS rules limit the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is subject to an appropriate level of corporate taxation. The rules also impose a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s-length basis.

Any TRS we own, as a domestic corporation, will pay U.S. federal, state and local income tax on its taxable income, and its after-tax net income is available for distribution to us but is not required to be distributed to us. The aggregate value of the TRS stock and securities owned by us cannot exceed 25% (and, for taxable years beginning after December 31, 2017, 20%) of the value of our total assets (including the TRS stock and securities). Although we plan to monitor our investments in TRSs, there can be no assurance that we will be able to comply with the 25% (or 20%, as applicable) limitation discussed above or to avoid application of the 100% excise tax discussed above.

Risks Related to this Offering and Ownership of Our Common Stock

The cash available for distribution to stockholders may not be sufficient to pay dividends at expected levels, nor can we assure you of our ability to make distributions in the future. We may use borrowed funds to make distributions.

We have elected to qualify as a REIT for U.S. federal income tax purposes. The Code generally requires that a REIT annually distribute at least 90% of its REIT taxable income, determined without regard to the deduction for dividends paid and excluding any net capital gain, and imposes tax on any REIT taxable income retained by a REIT, including capital gains. We anticipate making quarterly distributions to our stockholders. We expect that the cash required to fund our dividends will be covered by cash generated by operations. However, our ability to make distributions to our stockholders will depend upon the performance of our asset portfolio. If our operations do not generate sufficient cash flow to allow us to satisfy the REIT distribution requirements, we may be required to fund distributions from working capital, borrow funds, raise additional equity capital, sell assets or reduce such distributions. If such cash available for distribution decreases in future periods from expected levels, our inability to make the expected distributions could result in a decrease in the market price of our common

 

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stock. In addition, our charter will allow us to issue preferred stock that could have a preference over our common stock as to distributions. See “Distribution Policy.” All distributions will be made at the sole discretion of our board of directors and will depend upon a number of factors, including our actual and projected results of operations, financial condition, cash flows and liquidity, maintenance of our REIT qualification and other tax considerations, capital expenditure and other obligations, debt covenants, contractual prohibitions or other limitations and applicable law and such other matters as our board of directors may deem relevant from time to time. We may not be able to make distributions in the future. In addition, some of our distributions may include a return of capital. To the extent that we decide to make distributions in excess of our current and accumulated earnings and profits, such distributions would generally be considered a return of capital for U.S. federal income tax purposes to the extent of the holder’s adjusted tax basis in their shares. A return of capital is not taxable, but it has the effect of reducing the holder’s adjusted tax basis in its investment. To the extent that distributions exceed the adjusted tax basis of a holder’s shares, they will be treated as gain from the sale or exchange of such stock. See “Material U.S. Federal Income Tax Considerations—Taxation of U.S. Holders of Our Common Stock—Distributions Generally.” If we borrow to fund distributions, our future interest costs would increase, thereby reducing our earnings and cash available for distribution from what they otherwise would have been.

No public market for our shares currently exists, an active trading market for our shares may not develop and the market price of our shares may decline substantially and quickly.

Prior to this offering, there has been no public market for our shares. Although our shares have been approved for listing, subject to official notice of issuance, on the NYSE, we cannot predict the extent to which a trading market will develop or how liquid that market might become. The estimated initial public offering price for our shares will be determined by negotiations between us and the representatives of the underwriters and may not be indicative of prices that will prevail in the trading market. An active trading market may not develop following the closing of this offering or, if developed, may not be sustained. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the market price of your shares. An inactive market may also impair our ability to raise capital by selling shares and may impair our ability to acquire additional properties or other businesses by using our shares as consideration, which in turn could materially adversely affect our business. In addition, the stock market in general, and the NYSE and REITs in particular, have recently experienced extreme price and volume fluctuations. These broad market and industry factors may decrease the market price of our shares, regardless of our actual operating performance. For these reasons, among others, the market price of the shares you purchase in this offering may decline substantially and quickly.

Our share price may decline due to the large number of our shares eligible for future sale.

The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the market after this offering or the perception that such sales could occur. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell shares of our common stock in the future at a time and at a price that we deem appropriate. Upon completion of this offering, we will have a total of 302,116,760 shares of our common stock outstanding, or 313,666,760 shares of our common stock assuming the underwriters exercise in full their option to purchase additional shares of our common stock. All of the 77,000,000 shares of our common stock sold in this offering, or 88,550,000 shares of our common stock assuming the underwriters exercise in full their option to purchase additional shares of our common stock, will be freely tradable without restriction or further registration under the Securities Act, by persons other than our “affiliates.” See “Shares Eligible for Future Sale.”

The remaining 225,116,760 shares of our common stock outstanding held by our pre-IPO owners, other than shares underlying restricted stock units that we expect to grant to directors, officers and employees at the time of this offering issuable under our Omnibus Incentive Plan, will be “restricted securities” within the meaning of Rule 144 under the Securities Act and may not be sold in the absence of registration under the Securities Act unless an exemption from registration is available, including the exemptions contained in Rule 144. In addition,

 

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at the time of this offering we may make discretionary awards under our supplemental bonus plan to executives and employees in an amount up to $10.0 million, as awards under our Omnibus Incentive Plan. Any such grants would impact the relative ownership of our directors, officers and employees, on the one hand, and our other pre-IPO owners, on the other, but would not impact the aggregate shares held by our pre-IPO owners or total shares outstanding. The shares underlying such grants will be registered under the Securities Act as described under “Shares Eligible for Future Sale,” and will not be restricted securities. We and our directors and executive officers and our pre-IPO owners holding substantially all of the shares of our common stock outstanding immediately prior to this offering have agreed, subject to certain exceptions, not to dispose of or hedge any shares of our common stock or securities convertible into or exchangeable for shares of our common stock for 180 days from the date of this prospectus, except with the underwriters’ prior written consent. As a result of the registration rights agreement, however, all of these shares of our common stock may be eligible for future sale without restriction, subject to applicable lock-up arrangements. See “Shares Eligible for Future Sale—Registration Rights” and “Certain Relationships and Related Person Transactions—Registration Rights Agreement.”

We intend to file one or more registration statements on Form S-8 under the Securities Act to register shares of our common stock or securities convertible into or exchangeable for shares of our common stock issued pursuant to our Omnibus Incentive Plan. Any such Form S-8 registration statements will automatically become effective upon filing. Accordingly, shares registered under such registration statements will be available for sale in the open market. We expect that the initial registration statement on Form S-8 will cover 16,000,000 shares of our common stock. However, shares issued to our directors and officers and our pre-IPO owners holding substantially all of the shares of our common stock outstanding immediately prior to this offering are subject to lock-up arrangements, described above, and generally may not be sold for 180 days from the date of this prospectus, except with the underwriters’ prior written consent.

In addition, upon completion of this offering, our charter will provide that we may issue up to 9,000,000,000 shares of common stock and 900,000,000 shares of preferred stock, $0.01 par value per share. Moreover, under Maryland law and as will be provided in our charter, our board of directors will have the power to amend our charter to increase the aggregate number of shares of stock or the number of shares of stock of any class or series that we are authorized to issue without stockholder approval. Future issuances of shares of our common stock or securities convertible or exchangeable into common stock may dilute the ownership interest of our common stockholders. Because our decision to issue additional equity or convertible or exchangeable securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future issuances. In addition, we are not required to offer any such securities to existing stockholders on a preemptive basis. Therefore, it may not be possible for existing stockholders to participate in such future issuances, which may dilute the existing stockholders’ interests in us. See “Description of Stock.” Similarly, the agreement of limited partnership of our Operating Partnership authorizes us to issue an unlimited number of OP Units of our Operating Partnership, which may be exchangeable for shares of our common stock.

The market price of our common stock could be adversely affected by market conditions and by our actual and expected future earnings and level of cash dividends.

Securities markets worldwide experience significant price and volume fluctuations. This market volatility, as well as general economic, market or political conditions, could reduce the market price of shares without regard to our operating performance. For example, the trading prices of equity securities issued by REITs have historically been affected by changes in market interest rates. One of the factors that may influence the market price of our common stock is the annual yield from distributions on our common stock as compared to yields on other financial instruments. An increase in market interest rates, or a decrease in our distributions to stockholders, may lead prospective purchasers of shares of our common stock to demand a higher distribution rate or seek alternative investments. As a result, if interest rates rise, it is possible that the market price of our common stock will decrease as market rates on interest-bearing securities increase. In addition, our operating

 

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results could be below the expectations of public market analysts and investors, and in response the market price of our shares could decrease significantly. The market value of the equity securities of a REIT is also based upon the market’s perception of the REIT’s growth potential and its current and potential future cash distributions, whether from operations, sales or refinancings, and is secondarily based upon the real estate market value of the underlying assets. For that reason, our common stock may trade at prices that are higher or lower than our net asset value per share. To the extent we retain operating cash flow for investment purposes, working capital reserves or other purposes, these retained funds, while increasing the value of our underlying assets, may not correspondingly increase the market price of our common stock. Our failure to meet the market’s expectations with regard to future earnings and cash distributions likely would adversely affect the market price of our common stock and, in such instances, you may be unable to resell your shares at or above the initial public offering price.

 

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FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements, which reflect our current views with respect to, among other things, our operations and financial performance. Forward-looking statements include all statements that are not historical facts. In some cases, you can identify these forward-looking statements by the use of words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “could,” “seeks,” “approximately,” “projects,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of these words or other comparable words. Such forward-looking statements are subject to various risks and uncertainties. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. These factors include but are not limited to those described under “Risk Factors.” These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this prospectus. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by law.

 

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ORGANIZATIONAL STRUCTURE

Our Current Organizational Structure

Our business is presently owned by six holding entities: Invitation Homes L.P., Preeminent Holdings Inc., Invitation Homes 3 L.P., Invitation Homes 4 L.P., Invitation Homes 5 L.P. and Invitation Homes 6 L.P. We refer to these six holding entities collectively as the “IH Holding Entities.” The IH Holding Entities are under the common control of Blackstone Real Estate Partners VII L.P., an investment fund sponsored by The Blackstone Group L.P., and its general partner and certain affiliated funds and investment vehicles.

The following simplified diagram depicts our current organizational structure. This chart is provided for illustrative purposes only and does not show all of our legal entities or ownership percentages of such entities.

 

LOGO

Pre-IPO Transactions

Prior to the completion of this offering, we and our pre-IPO owners will effect certain transactions that will result in Invitation Homes Operating Partnership LP holding, directly or indirectly, all of the assets and operations reflected in our combined and consolidated financial statements, including the full portfolio of homes held by each of the IH Holding Entities. Invitation Homes Operating Partnership LP, in turn, will be directly and indirectly wholly owned by Invitation Homes Inc. More specifically:

 

    Invitation Homes Inc. will acquire all of the assets and operations held directly or indirectly by Preeminent Holdings Inc. through certain mergers and related transactions as follows:

 

    IH2 Property Holdings Inc., a parent entity of Preeminent Holdings Inc., will merge with and into Invitation Homes Inc., with Invitation Homes Inc. as the entity surviving the merger (the “IH2 Property Holdings Merger”), and the issued and outstanding shares of IH2 Property Holdings Inc., all of which are held by certain of the pre-IPO owners, will be converted into newly issued shares of common stock of Invitation Homes Inc. Immediately following the IH2 Property Holdings Merger, Invitation Homes Inc. will hold directly approximately 16% of the outstanding shares of common stock of Preeminent Holdings Inc. and the balance will continue to be held by certain of the pre-IPO owners; and

 

   

following the IH2 Property Holdings Merger, Preeminent Holdings Inc. will merge with and into Invitation Homes Inc., with Invitation Homes Inc. as the entity surviving the merger (the

 

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“Preeminent Holdings Merger”). In the Preeminent Holdings Merger, all of the shares of common stock of Preeminent Holdings Inc. issued and outstanding immediately prior to such merger, other than the shares held by Invitation Homes Inc., will be converted into shares of newly issued common stock of Invitation Homes Inc. As a result of the Preeminent Holdings Merger, Invitation Homes Inc. will hold all of the assets and operations held directly or indirectly by Preeminent Holdings Inc. prior to such merger;

 

    prior to the Preeminent Holdings Merger, our pre-IPO owners will contribute to Invitation Homes Inc. their interests in each of the other IH Holding Entities (other than Preeminent Holdings Inc.) in exchange for newly-issued shares of Invitation Homes Inc.; and

 

    Invitation Homes Inc. will contribute to the Operating Partnership, its wholly owned subsidiary, all of the interests in the IH Holding Entities (other than Preeminent Holdings Inc., the assets, liabilities and operations of which will be contributed to the Operating Partnership).

Accordingly, upon consummation of these transactions, our pre-IPO owners will hold an aggregate of 225,116,760 shares of common stock of Invitation Homes Inc. We refer to the above-described transactions as the “Pre-IPO Transactions.” The Pre-IPO Transactions will be accounted for as a reorganization of entities under common control. Accordingly, the consolidated financial statements of Invitation Homes Inc. will recognize the assets and liabilities received in conjunction with the Pre-IPO Transactions at their historical carrying amounts, as reflected in the combined and consolidated financial statements of the IH Holding Entities. For additional information, see “Unaudited Pro Forma Financial Information.”

IH2 Property Holdings Inc. elected to qualify as a REIT for U.S. federal income tax purposes commencing with its taxable year ended December 31, 2013. Effective upon consummation of the IH2 Property Holdings Merger pursuant to the Pre-IPO Transactions, Invitation Homes Inc. will be subject to such REIT election. See “Material U.S. Federal Income Tax Considerations.”

Our Organizational Structure Following this Offering

Following the Pre-IPO Transactions, all of our assets will be held, and our operations conducted, by our Operating Partnership. We will initially own 100% of our Operating Partnership. Following this offering, we may from time to time issue common units of partnership interest in our Operating Partnership, or “OP Units,” to third parties, which, subject to the terms of the partnership agreement of our Operating Partnership, may be redeemed by holders for cash based upon the market value of an equivalent number of shares of our common stock or, at our election, exchanged for shares of our common stock on a one-for-one basis subject to customary conversion rate adjustments for splits, unit distributions and reclassifications.

After the completion of this offering and the Pre-IPO Transactions, Invitation Homes OP GP LLC, our wholly owned subsidiary, will serve as the sole general partner of our Operating Partnership.

 

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The following simplified diagram depicts our organizational structure and equity ownership immediately following this offering. This chart is provided for illustrative purposes only and does not show all of our legal entities or ownership percentages of such entities.

 

LOGO

 

(1)  Includes 3,678,842 shares (1.22%) that will be held by our directors, officers and employees, including shares underlying 71,666 restricted stock units (based on an assumed initial public offering price of $19.50, which is the midpoint of the price range set forth on the cover page of this prospectus) that we expect to grant to our non-employee directors (other than directors affiliated with Blackstone) at the time of this offering. In addition, at the time of this offering we may grant additional discretionary awards under our supplemental bonus plan to executives and employees with an aggregate value based on the initial public offering price of up to $10.0 million. Any such grants would impact the relative ownership of our directors, officers and employees, on the one hand, and our other pre-IPO owners, on the other, but would not impact the aggregate shares held by our pre-IPO owners or total shares outstanding. See “Management—Executive Compensation—Actions Taken in Connection with this Offering.”
(2)  Invitation Homes Inc. will initially own 100% of the Operating Partnership directly and through its wholly owned subsidiary, Invitation Homes OP GP LLC, which will serve as the Operating Partnership’s sole general partner.

Other Actions Taken in Connection with the Offering

Prior to the commencement of this offering, members of our management received incentive awards in the form of direct or indirect equity interests in one or more of the IH Holding Entities, which are subject to vesting conditions and subject to forfeiture in specified circumstances, including specified terminations of employment. In connection with the Pre-IPO Transactions, except as noted below with respect to Mr. Dallas B. Tanner, our Executive Vice President and Chief Investment Officer, the incentive awards held by our executives, including those held by our named executive officers, will be converted for shares of common stock of Invitation Homes Inc. in a manner intended to replicate the respective economic benefit provided by such incentive awards based upon the valuation derived from the initial offering price. All shares received in such conversion are expected to

 

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be subject to substantially similar vesting and forfeiture conditions as were applicable to the incentive awards prior to the Pre-IPO Transactions. A portion of the incentive awards held by Mr. Tanner will be converted into shares of common stock of Invitation Homes Inc. in the manner described above, and Mr. Tanner will receive in respect of his remaining incentive awards, vested limited partner interests in partnerships that will hold shares of our common stock. See “Management—Executive Compensation—Long-Term Incentive Compensation” for additional information. See “Management—Executive Compensation” for a description of the material terms of the incentive awards in the IH Holding Entities. In addition to the foregoing, in October 2016, we established a supplemental bonus plan for several key executives and employees. The payment of a bonus under the plan is triggered upon specified events, including an initial public offering. In connection with this offering, we expect to replace awards in the supplemental bonus pool with awards of time-vesting restricted stock units. See “Management—Executive Compensation—Actions Taken in Connection with the Offering.” In addition, at the time of this offering, we expect to issue restricted stock units in conversion of certain cash bonus awards held by our executives and employees as described in “Management—Executive Compensation—Long-Term Incentive Compensation.”

 

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USE OF PROCEEDS

We estimate that the net proceeds we will receive from this offering, after deducting estimated underwriting discounts and estimated offering expenses payable by us, will be approximately $1,412.4 million, or approximately $1,627.5 million if the underwriters exercise in full their option to purchase additional shares from us, assuming an initial public offering price of $19.50 per share, which is the midpoint of the price range set forth on the cover page of this prospectus. A $1.00 increase (decrease) in the assumed initial public offering price of $19.50 per share would increase (decrease) net proceeds to us from this offering by approximately $73.5 million, assuming the number of shares offered by us as set forth on the cover page of this prospectus remains the same.

We intend to use the net proceeds from this offering, together with the borrowings under the Term Loan Facility, to repay our existing credit facilities and our mortgage loan relating to the IH1 2013-1 securitization and a portion of the mortgage loan relating to the IH1 2014-1 securitization transaction, and to pay fees and expenses related to this offering. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—New Credit Facility.”

The following table sets forth the maturity and the interest rate, as of September 30, 2016, of the indebtedness to be repaid:

 

Indebtedness to be Repaid    Maturity Date    Interest Rate

IH1 2015 Credit Facility(1)

   October 3, 2017    3.28%

IH2 2015 Credit Facility(1)

   March 29, 2017    3.28%

IH3 2013 Credit Facility(1)

   June 30, 2017    3.53%

IH4 2014 Credit Facility(1)

   May 5, 2017    3.54%

IH5 2014 Credit Facility(1)

   June 5, 2017    3.03%

IH6 2016 Credit Facility(1)

   April 13, 2018    3.13%

IH1 2013-1 Mortgage Loan(2)

   December 9, 2017    2.21%

IH1 2014-1 Mortgage Loan(2)

   June 9, 2017    2.37%

 

(1) For additional information regarding our credit facilities, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Credit Facilities.”

 

(2) For additional information regarding our mortgage loans, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Mortgage Loans.”

Certain of the underwriters and/or their respective affiliates are lenders under or hold positions in the indebtedness to be repaid and accordingly will receive a portion of the proceeds of this offering. See “Underwriting—Relationships.”

 

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DISTRIBUTION POLICY

We have elected to qualify as a REIT for U.S. federal income tax purposes. The Code generally requires that a REIT annually distribute at least 90% of its REIT taxable income, determined without regard to the deduction for dividends paid and excluding any net capital gain, and imposes tax on any REIT taxable income retained by a REIT, including capital gains. To satisfy the requirements to qualify as a REIT and to avoid paying tax on our income, we intend to make quarterly distributions of all, or substantially all, of our REIT taxable income (excluding net capital gains) to our stockholders.

Although we anticipate initially making quarterly distributions to our stockholders, the timing, form and amount of distributions, if any, to our stockholders, will be at the sole discretion of our board of directors and will depend upon a number of factors, including our actual and projected results of operations, financial condition, cash flows and liquidity, maintenance of our REIT qualification and other tax considerations, capital expenditure and other obligations, debt covenants, contractual prohibitions or other limitations and applicable law and such other matters as our board of directors may deem relevant from time to time.

If our operations do not generate sufficient cash flow to allow us to satisfy the REIT distribution requirements, we may be required to fund distributions from working capital, borrow funds, sell assets or reduce such distributions. Our board of directors reviews the alternative funding sources available to us from time to time. Our actual results of operations will be affected by a number of factors, including the revenues we receive from our properties, our operating expenses, interest expense and unanticipated expenditures, among others. For more information regarding risk factors that could materially adversely affect our actual results of operations, please see “Risk Factors.”

During the year ended December 31, 2015, we made aggregate distributions of $682.5 million to equity investors. There were no distributions made to equity investors during the nine months ended September 30, 2016.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and total capitalization as of September 30, 2016:

 

    on an actual basis;

 

    on an as adjusted basis giving effect to the Financings and Pre-IPO Transactions described in “Unaudited Pro Forma Financial Information”; and

 

    on an as further adjusted basis giving effect to this offering (at an assumed initial offering price of $19.50 per share, which is the midpoint of the price range set forth on the cover page of this prospectus) and the intended application of the net proceeds therefrom as described in “Use of Proceeds,” as set forth in “Unaudited Pro Forma Financial Information.”

The information below is illustrative only and our capitalization following this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. Cash and cash equivalents are not components of our total capitalization. You should read this table together with the other information contained in this prospectus, including “Organizational Structure,” “Use of Proceeds,” “Unaudited Pro Forma Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical combined and consolidated financial statements and related notes that appear elsewhere in this prospectus.

 

($ in thousands)    September 30, 2016  
     Actual      As adjusted      As further
adjusted
 

Cash and cash equivalents

   $ 274,140       $ 72,947       $ 92,574   
  

 

 

    

 

 

    

 

 

 

Debt:

        

Credit facilities, net

   $ 2,407,364       $ 1,136,984       $ —     

Mortgage loans, net

     5,261,832         4,786,243         4,494,743   

Term loan facility, net(1)

     —           1,486,086         1,486,086   

Warehouse loans

     11,760         —           —     
  

 

 

    

 

 

    

 

 

 

Total debt

     7,680,956         7,409,313         5,980,829   
  

 

 

    

 

 

    

 

 

 

Equity:

        

Combined equity

     1,986,466         —           —     

Common stock, par value $0.01 per share; 9,000,000,000 shares authorized, as adjusted; 302,116,760 shares issued and outstanding, as adjusted;

     —           2,251         3,021   

Additional paid-in capital

     —           1,970,017         3,420,387   

Accumulated deficit

     —           —           (23,642
  

 

 

    

 

 

    

 

 

 

Total equity(2)

     1,986,466         1,972,268         3,399,766   
  

 

 

    

 

 

    

 

 

 
  

 

 

    

 

 

    

 

 

 

Total capitalization(2)

   $ 9,667,422       $ 9,381,581       $ 9,380,595   
  

 

 

    

 

 

    

 

 

 

 

(1) Concurrently with the completion of this offering, we expect to enter into the New Credit Facility with a syndicate of lenders. The New Credit Facility will provide for $2,500.0 million of borrowing capacity, consisting of a $1,500.0 million term loan under the Term Loan Facility, with a five-year term, and a $1,000.0 million revolving credit facility (the “Revolving Credit Facility”), with an initial four-year term and a one-year extension option subject to certain conditions. We expect to utilize all of the net proceeds from the Term Loan Facility to repay existing indebtedness. We anticipate that the Revolving Credit Facility will be undrawn upon the consummation of this offering. See “Use of Proceeds,” “Unaudited Pro Forma Financial Information” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—New Credit Facility.”

 

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(2) To the extent we change the number of shares of common stock sold by us in this offering from the shares we expect to sell or we change the initial public offering price from the $19.50 per share assumed initial public offering price, representing the midpoint of the price range set forth on the cover page of this prospectus, or any combination of these events occurs, the net proceeds to us from this offering and each of total stockholders’ equity and total capitalization may increase or decrease. A $1.00 increase (decrease) in the assumed initial public offering price per share of the common stock, assuming no change in the number of shares of common stock to be sold, would increase (decrease) the net proceeds that we receive in this offering and each of total stockholders’ equity and total capitalization by approximately $73.5 million. An increase (decrease) of 1,000,000 shares in the expected number of shares to be sold in the offering, assuming no change in the assumed initial offering price per share, would increase (decrease) our net proceeds from this offering and our total stockholders’ equity and total capitalization by approximately $18.6 million. If the underwriters’ option to purchase additional shares is exercised in full, the pro forma amount of each of cash, additional paid-in capital, total equity and total capitalization would increase by approximately $215.1 million, after deducting underwriting discounts and estimated operating expenses, and we would have 313,666,760 shares of our common stock issued and outstanding, as adjusted.

 

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DILUTION

If you invest in our shares, your interest will be diluted to the extent of the difference between the initial public offering price per share and the pro forma net tangible book value per share immediately after the completion of this offering.

Our pro forma net tangible book value as of September 30, 2016 was approximately $1,972.3 million or $8.76 per share. Pro forma net tangible book value represents the amount of total tangible assets less total liabilities, after giving effect to the Financings and Pre-IPO Transactions, and pro forma net tangible book value per share represents pro forma net tangible book value divided by the number of shares outstanding, after giving effect to the Financings and Pre-IPO Transactions.

After giving effect to the Financings and Pre-IPO Transactions, as well as this offering (at an assumed initial public offering price of $19.50 per share) and the intended application of the net proceeds therefrom as described in “Use of Proceeds,” our pro forma net tangible book value as of September 30, 2016 would have been $3,473.8 million, or $11.50 per share. This represents an immediate increase in the net tangible book value of $2.74 per share and an immediate dilution of $8.00 per share to new investors purchasing shares in this offering. The following table illustrates this dilution per share:

 

Assumed initial offering price per share

      $ 19.50   

Pro forma net tangible book value per share as of September 30, 2016

   $ 8.76      

Increase in pro forma net tangible book value per share attributable to investors in this offering

     2.74      
  

 

 

    

Pro forma net tangible book value per share after this offering

        11.50   
     

 

 

 

Dilution in pro forma net tangible book value per share to investors in this offering

      $ 8.00   
     

 

 

 

The following table summarizes, on the same pro forma basis as of September 30, 2016, the total number of shares purchased from us, the total consideration paid to us and the average price per share paid by our pre-IPO owners and by new investors purchasing shares in this offering.

 

($ in thousands, except per share data)    Shares Purchased     Total Consideration     Average Price
Per Share
 
     Number      Percentage     Amount      Percentage        

Pre-IPO owners

     225,116,760         74.51   $ 1,972,268         56.78   $ 8.76   

Investors in this offering

     77,000,000         25.49        1,501,500         43.22        19.50   
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

     302,116,760         100.00   $ 3,473,768         100.00   $ 11.50   
  

 

 

    

 

 

   

 

 

    

 

 

   

A $1.00 increase (decrease) in the assumed initial public offering price of $19.50 per share would increase (decrease) the total consideration paid by the investors in this offering by $77.0 million, and would increase (decrease) the percent of total consideration paid by the investors by approximately 5.13%, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and no exercise of the underwriters’ option to purchase additional shares.

If the underwriters’ option to purchase additional shares is exercised in full, the following will occur:

 

    the number of shares purchased by investors in this offering will increase to 88,550,000 shares, or approximately 28.23% of the total number of shares outstanding;

 

    the immediate dilution experienced by investors in this offering will be $7.74 per share and the pro forma net tangible book value per share will be $11.76 per share; and

 

    a $1.00 increase (decrease) in the initial offering price of $19.50 per share would increase (decrease) the dilution experienced by investors in this offering by $0.54 per share.

 

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UNAUDITED PRO FORMA FINANCIAL INFORMATION

The following unaudited pro forma condensed combined and consolidated financial statements as of and for the nine months ended September 30, 2016 and for the year ended December 31, 2015 reflect the pro forma financial condition and results of operations of Invitation Homes Inc. after giving effect to (i) the Financings, (ii) the Pre-IPO Transactions and (iii) the Offering Adjustments (collectively, the “Pro Forma Transactions,” as individually described below). The unaudited pro forma condensed combined and consolidated financial statements of Invitation Homes Inc. are derived from the combined and consolidated financial statements of the IH Holding Entities and their consolidated subsidiaries and are presented as if this offering, along with the other Pro Forma Transactions, was completed as of September 30, 2016 for purposes of the unaudited pro forma condensed combined and consolidated balance sheet and as of January 1, 2015 for purposes of the unaudited pro forma condensed combined and consolidated statements of operations.

Our unaudited pro forma condensed combined and consolidated financial statements are presented for informational purposes only and are based on information and assumptions that we consider appropriate and reasonable. These unaudited pro forma condensed combined and consolidated financial statements do not purport to (i) represent our financial position had this offering, and the other Pro Forma Transactions described in these unaudited pro forma condensed combined and consolidated financial statements, occurred on September 30, 2016, (ii) represent the results of our operations had this offering, and the other Pro Forma Transactions described in these unaudited pro forma condensed combined and consolidated financial statements, occurred on January 1, 2015, or (iii) project or forecast our financial position or results of operations as of any future date or for any future period, as applicable.

You should read the information below along with all other financial information and analysis presented in this prospectus, including the sections captioned “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our historical combined and consolidated financial statements and related notes included elsewhere in this prospectus.

Financings

Concurrently with the completion of this offering, we expect to enter into a new $2,500.0 million credit facility (the “New Credit Facility”) with a syndicate of lenders consisting of a $1,500.0 million term loan (the “Term Loan Facility”) and a $1,000.0 million revolving credit facility (the “Revolving Credit Facility”). The closing of the New Credit Facility is contingent on the consummation of this offering, and we have entered into a commitment letter with a syndicate of lenders providing for key terms, including the principal amount, base rate, credit spreads, maturity date and covenants. We expect to utilize all of the net proceeds from the Term Loan Facility to repay existing indebtedness. We anticipate that the Revolving Credit Facility will be undrawn upon the consummation of this offering. We refer to these transactions, together with the repayment of a portion of the outstanding balances related to our existing credit facilities and mortgage loans and the repayment in full of our warehouse loans with cash available and proceeds received from the disposition of certain investments in single-family residential properties as described in footnote (A) to the unaudited pro forma condensed combined and consolidated balance sheet and the entry into certain interest rate swap agreements as described in footnote (E) to the unaudited pro forma condensed combined and consolidated balance sheet, as the “Financings.”

Pursuant to a commitment letter dated January 12, 2017, Wells Fargo Bank, National Association (“Wells Fargo”) and Fannie Mae have made, subject to the satisfaction or waiver of certain conditions, a binding commitment to enter into a securitization transaction with us to fund a new ten-year fixed rate mortgage loan in a principal amount of up to $1,000.0 million (the “FNMA Loan”), collateralized by certain of our homes. The commitment letter contemplates that the FNMA Loan will be funded through the issuance and sale of (i) mortgage-backed certificates (the “Guaranteed Certificates”) that carry Fannie Mae’s guaranty of timely payment of principal and interest and (ii) certain mortgage-backed certificates that will represent a beneficial interest in the most subordinate component of the FNMA Loan (the “Subordinate Non-Guaranteed Certificates”).

 

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The FNMA Loan will bear interest at a fixed rate per annum equal to the market determined pass-through rate payable on the Guaranteed Certificates plus applicable Fannie Mae guaranty and servicing fees and include certain customary affirmative and negative covenants and events of default. The FNMA Loan would generally be non-recourse to the FNMA Loan Borrower (as defined in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Fannie Mae Securitization Transaction”), subject to certain customary carve-outs in respect of which IH1 will provide a guarantee. In order to satisfy applicable rules imposing credit risk retention requirements, we would purchase and retain the Subordinate Non-Guaranteed Certificates, which would be equal to 5% (or such other percentage necessary to ensure that such risk retention requirements are met) of the FNMA Loan. We intend to enter into the FNMA Loan following this offering and use the net proceeds to repay all remaining amounts outstanding under our mortgage loan relating to the IH1 2014-1 securitization and approximately $275.0 million of our mortgage loan relating to the IH1 2014-2 securitization. The commitment letter provides that the principal amount will be determined pursuant to a loan-to-value ratio up to the maximum of $1,000.0 million and that interest on the FNMA Loan will be in part a function of a market determined pass-through rate payable on the Guaranteed Certificates. As a result of these uncertainties, we have determined that an adjustment for the FNMA Loan cannot be factually supported. In addition, the FNMA Loan is a transaction in the normal course of business and is not contingent on completion of this offering. Accordingly, we have not reflected the impact of the FNMA Loan in the unaudited pro forma condensed combined and consolidated financial statements.

For additional information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—New Credit Facility,” “—Fannie Mae Securitization Transaction.”

Pre-IPO Transactions

Prior to the completion of this offering, we and our pre-IPO owners will effect certain mergers, contributions and related transactions with the IH Holding Entities and certain of their parent company holding entities, such that Invitation Homes Inc. will acquire all of the interests in the IH Holding Entities and our pre-IPO owners will receive newly-issued shares of Invitation Homes Inc. Accordingly, upon consummation of these transactions, our pre-IPO owners will hold an aggregate of 225,116,760 shares of common stock of Invitation Homes Inc. and Invitation Homes Inc. will hold, directly or indirectly, all of the assets and operations reflected in our combined and consolidated financial statements. The Pre-IPO Transactions will be accounted for as transactions under common control utilizing historical cost basis. We refer to the above-described reorganization transactions as the “Pre-IPO Transactions.” For additional information, see “Organizational Structure—Pre-IPO Transactions.”

Offering Adjustments

Offering Proceeds

We estimate that the net proceeds from this offering, assuming an initial offering price of $19.50 per share (which is the midpoint of the price range set forth on the cover page of this prospectus), after deducting estimated underwriting discounts, will be approximately $1,433.9 million, or $1,649.0 million if the underwriters exercise in full their option to purchase additional shares. We intend to use these proceeds to repay certain of our outstanding indebtedness and for general corporate purposes. See “Use of Proceeds.”

Other Offering Adjustments

In connection with our offering, we intend to modify certain of our incentive awards in order to align our employees’ interests with those of the investors in this offering. The modifications include the conversion of Class B Units related to certain of the IH Holding Entities into shares of common stock of Invitation Homes Inc. The impact of the modifications is reflected on the unaudited pro forma condensed combined and consolidated

 

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balance sheet as of September 30, 2016. We did not adjust the unaudited pro forma condensed combined and consolidated statements of operations for the nine months ended September 30, 2016 or the year ended December 31, 2015, as they are not reflective of our expectations regarding future incentive compensation expense. The unaudited pro forma condensed combined and consolidated balance sheet as of September 30, 2016 also reflects adjustments relating to certain other one-time expenses incurred in connection with this offering as described in the notes thereto.

 

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Invitation Homes

Unaudited Pro Forma Condensed Combined and Consolidated Balance Sheet

As of September 30, 2016

 

                                                
($ in thousands)    Invitation
Homes
Actual
     ( A )
Financings
         ( F )
Pre-IPO
Transactions
         ( I )
Offering
Adjustments
         Invitation
Homes Inc.
Pro Forma
 
     (unaudited)                                          

Assets:

                    

Investments in single-family residential properties, net

   $ 9,067,075       $ (32,409   (B)    $ —           $ —           $ 9,034,666   

Cash and cash equivalents

     274,140         (201,193   (B),(C),(D)      —             19,627      (J)      92,574   

Restricted cash

     272,690         (49,156   (D)      —             (40,618   (J)      182,916   

Amounts deposited and held by others

     4,419         —             —             —             4,419   

Other assets, net

     292,109         9,276      (C)      4,845      (G)      (5,345   (J)      300,885   
  

 

 

    

 

 

      

 

 

      

 

 

      

 

 

 

Total assets

   $ 9,910,433       $ (273,482      $ 4,845         $ (26,336      $ 9,615,460   
  

 

 

    

 

 

      

 

 

      

 

 

      

 

 

 

Liabilities:

                    

Credit facilities, net

   $ 2,407,364       $ (1,270,380   (B),(D)    $ —           $ (1,136,984   (J)    $ —     

Mortgage loans, net

     5,261,832         (475,589   (B),(D)      —             (291,500   (J)      4,494,743   

Term loan facility, net

     —           1,486,086      (C)      —             —             1,486,086   

Warehouse loans

     11,760         (11,760   (B)      —             —             —     

Accounts payable and accrued expenses

     136,838         (4,333   (D)      21,537      (G)      (25,350   (J)      128,692   

Resident security deposits

     85,781         —             —             —             85,781   

Other liabilities

     20,392         —             —             —             20,392   
  

 

 

    

 

 

      

 

 

      

 

 

      

 

 

 

Total liabilities

     7,923,967         (275,976        21,537           (1,453,834        6,215,694   
  

 

 

    

 

 

      

 

 

      

 

 

      

 

 

 

Equity:

                    

Combined equity

     1,986,466         2,494      (B),(D)      (1,988,960   (H)      —             —     

Shareholders' equity

                    

Common stock

     —           —             2,251      (H)      770      (J)      3,021   

Additional paid-in capital

     —           —             1,970,017      (G),(H)      1,450,370      (J),(K)      3,420,387   

Accumulated deficit

     —           —             —             (23,642   (J),(K)      (23,642
  

 

 

    

 

 

      

 

 

      

 

 

      

 

 

 

Total equity

     1,986,466         2,494           (16,692        1,427,498           3,399,766   
  

 

 

    

 

 

      

 

 

      

 

 

      

 

 

 

Total liabilities and equity

   $ 9,910,433       $ (273,482      $ 4,845         $ (26,336      $ 9,615,460   
  

 

 

    

 

 

      

 

 

      

 

 

      

 

 

 

 

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Invitation Homes

Unaudited Pro Forma Condensed Combined and Consolidated Statement of Operations

For the Nine Months Ended September 30, 2016

 

                                       
($ in thousands, except per share data)   Invitation
Homes
Actual
    (N)
Financings
        Pre-IPO
Transactions
    (O)
Offering
Adjustments
    Invitation
Homes Inc.
Pro Forma
     
    (unaudited)                                  

Revenues:

             

Rental revenues

  $ 654,726      $ —          $       —        $ —        $ 654,726     

Other property income

    33,310        —            —          —          33,310     
 

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

Total revenues

    688,036        —            —          —          688,036     
 

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

Operating expenses:

             

Property operating and maintenance

    270,494        —            —          —          270,494     

Property management expense

    22,638        —            —          —          22,638     

General and administrative

    49,579        —            —          —          49,579     

Depreciation and amortization

    198,261        —            —          —          198,261     

Impairment and other

    1,642        —            —          —          1,642     
 

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

Total operating expenses

    542,614        —            —          —          542,614     
 

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

Operating income (loss)

    145,422        —            —          —          145,422     
 

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

Other income (expenses):

             

Interest expense

    (209,165     17,557      (L),(M)     —          43,972        (147,636  

Other

    (1,025     —            —          —          (1,025  
 

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

Total other income (expenses)

    (210,190     17,557          —          43,972        (148,661  
 

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

Loss from continuing operations

    (64,768     17,557          —          43,972        (3,239  

Gain on sale of property

    13,178        —            —          —          13,178     
 

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

Net income (loss)

  $ (51,590   $ 17,557        $ —        $ 43,972      $ 9,939     
 

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

Net income per share

             

Basic

            $ 0.03       (P)
           

 

 

   

Diluted

            $ 0.03      (P)
           

 

 

   

Weighted average shares outstanding

             

Basic

              302,116,760      (P)
           

 

 

   

Diluted

              302,116,760      (P)
           

 

 

   

 

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Invitation Homes

Unaudited Pro Forma Condensed Combined and Consolidated Statement of Operations

For the Year Ended December 31, 2015

 

                                       
($ in thousands, except per share data)   Invitation
Homes
Actual
    (N)
Financings
        Pre-IPO
Transactions
    (O)
Offering
Adjustments
    Invitation
Homes Inc.
Pro Forma
     
    (unaudited)               

Revenues:

             

Rental revenues

  $ 800,210      $ —          $       —        $ —        $ 800,210     

Other property income

    35,839        —            —          —          35,839     
 

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

Total revenues

    836,049        —            —          —          836,049     
 

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

Operating expenses:

             

Property operating and maintenance

    347,962        —            —          —          347,962     

Property management expense

    39,459        —            —          —          39,459     

General and administrative

    79,428        —            —          —          79,428     

Depreciation and amortization

    250,239        —            —          —          250,239     

Impairment and other

    4,584        —            —          —          4,584     
 

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

Total operating expenses

    721,672        —            —          —          721,672     
 

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

Operating income (loss)

    114,377        —            —          —          114,377     
 

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

Other income (expenses):

             

Interest expense

    (273,736     27,096      (L),(M)     —          83,055        (163,585  

Other

    (3,121     —            —          —          (3,121  
 

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

Total other income (expenses)

    (276,857 )       27,096          —          83,055        (166,706 )   
 

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

Loss from continuing operations

    (162,480 )       27,096          —          83,055        (52,329 )   

Gain on sale of property

    2,272        —            —          —          2,272     
 

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

Net loss

  $ (160,208 )     $ 27,096        $ —        $ 83,055      $ (50,057 )   
 

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

Net loss per share

             

Basic

            $ (0.17 )    (P)
           

 

 

   

Diluted

            $ (0.17 )    (P)
           

 

 

   

Weighted average shares outstanding

             

Basic

              302,116,760      (P)
           

 

 

   

Diluted

              302,116,760      (P)
           

 

 

   

 

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1. Adjustments to the Unaudited Pro Forma Condensed Combined and Consolidated Balance Sheet as of September 30, 2016

Adjustments included under the heading “Financings” represent the following:

 

(A) The following table details the components of the Financings column of the unaudited pro forma condensed combined and consolidated balance sheet as of September 30, 2016 as more fully described in footnotes (B) through (D):

 

($ In thousands)

   (B)      (C)      (D)      Total
Financings
 
                          (unaudited)  

Assets:

           

Investments in single-family residential properties, net

   $ (32,409    $ —         $ —         $ (32,409

Cash and cash equivalents

     (76,884      1,476,810         (1,601,119      (201,193

Restricted cash

     —           —           (49,156      (49,156

Amounts deposited and held by others

     —           —           —           —     

Other assets, net

     —           9,276         —           9,276   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ (109,293    $ 1,486,086       $ (1,650,275    $ (273,482
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Credit facilities, net

   $ (92,370    $ —         $ (1,178,010    $ (1,270,380

Mortgage loans, net

     (13,159      —           (462,430      (475,589

Term loan facility, net

     —           1,486,086         —           1,486,086   

Warehouse loans

     (11,760      —           —           (11,760

Accounts payable and accrued expenses

     —           —           (4,333      (4,333

Resident security deposits

     —           —           —           —     

Other liabilities

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

     (117,289      1,486,086         (1,644,773      (275,976
  

 

 

    

 

 

    

 

 

    

 

 

 

Equity:

           

Combined equity

     7,996         —           (5,502      2,494   

Shareholders’ equity

              —     

Common stock

     —           —           —           —     

Additional paid-in capital

     —           —           —           —     

Accumulated deficit

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total equity

     7,996         —           (5,502      2,494   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities and equity

   $ (109,293    $ 1,486,086       $ (1,650,275    $ (273,482
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(B) Subsequent to September 30, 2016 and prior to this offering, we repaid a portion of the outstanding balances related to our existing credit facilities and mortgage loans, as well as a full repayment of our warehouse loans with cash available totaling $76.9 million together with $40.4 million of proceeds received from the disposition of certain investments in single-family residential properties, net with a carrying value of $32.4 million. The gain on disposition totaled $8.0 million and is reflected as an increase to combined equity. These repayments totaled $92.4 million for credit facilities, $13.2 million for mortgage loans and $11.8 million for warehouse loans.

 

(C) Reflects the closing of our New Credit Facility and the borrowing of $1,500.0 million through the Term Loan Facility. We expect to incur approximately $13.9 million in deferred financing costs related to the Term Loan Facility, reflected as a reduction of the Term Loan Facility balance and approximately $9.3 million in deferred financing costs related to the Revolving Credit Facility, reflected as an increase to other assets, net. We anticipate that the Revolving Credit Facility will be undrawn upon the consummation of this offering.

 

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(D) We expect to use the net proceeds from the Term Loan Facility, along with cash available, to repay certain of our existing credit facilities totaling $1,183.5 million and certain of our existing mortgage loans totaling $462.4 million. Related to the repayment of certain existing credit facilities and mortgage loans, (i) $4.3 million of accrued interest will be paid and reflected as a reduction of accounts payable and accrued expenses, (ii) $5.5 million of deferred financing costs will be written off and reflected as an increase to credit facilities, net and a reduction to combined equity and (iii) $49.2 million of restricted cash will be released.

 

(E) Prior to this offering, the Operating Partnership entered into various interest rate swap agreements with several financial institutions to hedge certain indebtedness of the IH Holding Entities and the Operating Partnership. The interest rate swaps hedge against interest rate risks related to changes in one-month LIBOR.

On December 21, 2016, the Operating Partnership entered into two interest rate swap agreements with two financial institutions for an aggregate notional amount of $1,500.0 million. The interest rate swaps are effective February 28, 2017, mature on January 31, 2022 and will effectively convert our variable base rate of one-month LIBOR to a fixed rate of 1.97%.

On January 12, 2017, the Operating Partnership entered into an interest rate swap agreement for a notional amount of $1,100.0 million. The interest rate swap is effective February 28, 2017, matures on August 7, 2020 and will effectively convert our variable base rate of one-month LIBOR to a fixed rate of 1.59%.

On January 13, 2017, the Operating Partnership entered into an interest rate swap agreement for a notional amount of $595.0 million. The interest rate swap is effective February 28, 2017, matures on June 9, 2020 and will effectively convert our variable base rate of one-month LIBOR to a fixed rate of 1.63%.

On January 20, 2017, the Operating Partnership entered into an interest rate swap agreement for a notional amount of $325.0 million. The interest rate swap is effective February 28, 2017, matures March 9, 2020 and will effectively convert our variable base rate of one-month LIBOR to a fixed rate of 1.60%.

Subsequent to the Pre-IPO Transactions, we anticipate that these interest rate swaps will meet the criteria to be accounted for as effective hedges. Any ineffectiveness would be recorded in other income (loss).

The interest rate swaps were entered into in the normal course of business and are not directly attributable to this offering. Accordingly, no adjustments have been reflected in the unaudited pro forma condensed combined and consolidated balance sheet or statements of operations.

 

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Adjustments included under the heading “Pre-IPO Transactions” represent the following:

 

(F) The following table details the components of the Pre-IPO Transactions column of the unaudited pro forma condensed combined and consolidated balance sheet as of September 30, 2016 as more fully described in footnotes (G) and (H):

 

($ In thousands)    (G)      (H)      Total
Pre-IPO
Transactions
 
                   (unaudited)  

Assets:

        

Investments in single-family residential properties, net

   $ —         $ —         $ —     

Cash and cash equivalents

     —           —           —     

Restricted cash

     —           —           —     

Amounts deposited and held by others

     —           —           —     

Other assets, net

     4,845         —           4,845   
  

 

 

    

 

 

    

 

 

 

Total assets

   $ 4,845       $ —         $ 4,845   
  

 

 

    

 

 

    

 

 

 

Liabilities:

        

Credit facilities, net

   $ —         $ —         $ —     

Mortgage loans, net

     —           —           —     

Term loan facility, net

     —           —           —     

Warehouse loans

     —           —           —     

Accounts payable and accrued expenses

     21,537         —           21,537   

Resident security deposits

     —           —           —     

Other liabilities

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total liabilities

     21,537         —           21,537   
  

 

 

    

 

 

    

 

 

 

Equity:

        

Combined equity

     —           (1,988,960      (1,988,960

Shareholders’ equity

        

Common stock

     —           2,251         2,251   

Additional paid-in capital

     (16,692      1,986,709         1,970,017   

Accumulated deficit

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total equity

     (16,692      —           (16,692
  

 

 

    

 

 

    

 

 

 

Total liabilities and equity

   $ 4,845       $ —         $ 4,845   
  

 

 

    

 

 

    

 

 

 

 

(G) In connection with the Pre-IPO Transactions, we expect to incur transaction costs of approximately $26.1 million, which relate to, among other things, organizational and offering-related costs. $4.6 million of these costs were incurred prior to September 30, 2016, of which approximately $0.5 million were capitalized as other assets, net. The additional $21.5 million in transaction costs we expect to incur will, for accounting purposes, be reflected as an increase to accounts payable and accrued expenses with an offsetting adjustment to additional paid-in capital, except for $4.8 million of costs directly attributable to the issuance of equity, which will be reflected as an increase to other assets, net.

 

(H) This adjustment reflects the allocation of the carrying value of the equity of our pre-IPO owners in the IH Holding Entities among the components of equity. The pre-IPO owners received 225,116,760 shares of common stock of Invitation Homes Inc. at a par value of $0.01, reflected as an increase in common stock of $2.3 million. The remaining carrying value of $1,986.7 million is reflected as an increase to additional paid-in capital.

As of September 30, 2016, we had approximately $9.1 million of non-recourse loans to certain directors and officers that were collateralized by Incentive Units (as defined in “Management—Executive Compensation”) held by the directors and officers. Due to the non-recourse nature of these arrangements, they are reflected in our historical combined and consolidated balance sheets as a reduction to combined equity. At inception, these loans were accounted for as a modification of the collateralized Incentive Units, resulting in incremental compensation expense being recognized upon modification and over the remaining requisite service period. Prior to January 6, 2017, we settled these loans. The settlement of the

 

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loans did not have a material impact on the unaudited pro forma condensed combined and consolidated financial statements. We purchased $1.5 million of Incentive Units from one of the loan counterparties resulting in a decrease to combined equity. That counterparty subsequently repaid an equal amount of his respective outstanding loan resulting in an increase to combined equity. The remaining $7.6 million in loans outstanding were cancelled and accounted for as a distribution, which resulted in no net impact to combined equity. As there was no net impact to combined equity, no adjustment is reflected in the unaudited pro forma condensed combined and consolidated balance sheet.

Adjustments included under the heading “Offering Adjustments” represent the following:

 

(I) The following table details the components of the Offering Adjustments column of the unaudited pro forma condensed combined and consolidated balance sheet as of September 30, 2016 as more fully described in footnotes (J) and (K):

 

($ in thousands)

   (J)      (K)      Total
Offering
Adjustments
 
                   (unaudited)  

Assets:

        

Investments in single-family residential properties, net

   $ —         $ —         $ —     

Cash and cash equivalents

     19,627         —           19,627   

Restricted cash

     (40,618      —           (40,618

Amounts deposited and held by others

     —           —           —     

Other assets, net

     (5,345      —           (5,345
  

 

 

    

 

 

    

 

 

 

Total assets

   $ (26,336    $ —         $ (26,336
  

 

 

    

 

 

    

 

 

 

Liabilities:

        

Credit facilities, net

   $ (1,136,984    $ —         $ (1,136,984

Mortgage loans, net

     (291,500      —           (291,500

Term loan facility, net

     —           —           —     

Warehouse loans

     —           —           —     

Accounts payable and accrued expenses

     (25,350      —           (25,350

Resident security deposits

     —           —           —     

Other liabilities

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total liabilities

     (1,453,834      —           (1,453,834
  

 

 

    

 

 

    

 

 

 

Equity:

        

Combined equity

     —           —           —     

Shareholders’ equity

        

Common stock

     770         —           770   

Additional paid-in capital

     1,427,818         22,552         1,450,370   

Accumulated deficit

     (1,090      (22,552      (23,642
  

 

 

    

 

 

    

 

 

 

Total equity

     1,427,498         —           1,427,498   
  

 

 

    

 

 

    

 

 

 

Total liabilities and equity

   $ (26,336      —         $ (26,336
  

 

 

    

 

 

    

 

 

 

 

(J)

Reflects gross proceeds from this offering of $1,501.5 million, which is based on an assumed price per share of $19.50 and the issuance of 77,000,000 shares. This resulted in an increase to common stock of $0.8 million. The gross proceeds will be reduced by $67.6 million of underwriting discounts, resulting in an increase to additional paid-in capital of $1,433.1 million. Additionally, $5.3 million of direct offering costs capitalized in other assets will be reflected as a reduction of additional paid-in capital. We anticipate using the net proceeds from this offering, cash available and restricted cash to (i) repay the remaining outstanding principal balance related

 

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  to certain of our credit facilities totaling $1,138.1 million and certain of our mortgage loans totaling $291.5 million, as well as a write-off of $1.1 million of deferred financing costs, which is reflected as an increase to accumulated deficit with the corresponding increase to credit facilities, net and the release of $40.6 million in restricted cash, (ii) payment of $3.9 million of accrued interest reflected as a reduction of accounts payable and accrued expenses and (iii) payment of $21.5 million in transaction costs.

Common stock has a par value of $0.01 per share, with 9,000,000,000 shares authorized and 302,116,760 shares issued and outstanding. The allocation of pro forma total equity as of September 30, 2016 is based on the issuance of 77,000,000 shares of common stock of Invitation Homes Inc. in connection with this offering.

 

(K) Prior to the Pre-IPO Transactions and this offering, Incentive Units (as defined in “Management—Executive Compensation”) were granted in one or more of IH1, the IH2 Promote Partnerships (as defined in “Management—Executive Compensation”), IH3, IH4 and IH5. On or about the consummation of this offering, we expect to convert Incentive Units previously awarded and that will have been awarded prior to the consummation of this offering into shares of common stock of Invitation Homes Inc. The number of shares received in this conversion will be determined in a manner intended to replicate the respective economic value associated with the corresponding Incentive Units converted based on the valuation derived from the initial public offering price. At an assumed initial offering price of $19.50 per share, we expect the number of shares received in this conversion to be approximately 57,000. No changes to the vesting conditions are expected in connection with the conversion. See “Management—Executive Compensation—Long-Term Incentive Compensation” for a further discussion of the long-term incentive awards.

As described in “Management—Executive Compensation—Actions Taken in Connection with the Offering,” in October 2016 we established a supplemental bonus plan for several key executives and employees. Payment of a bonus under the plan is triggered upon specified events, including an initial public offering. In conjunction with this offering, we will replace the awards associated with the supplemental bonus plan with time-vesting restricted stock units that will vest (except as to Mr. Freedman’s award and a portion of Mr. Bartling’s award) in three equal annual installments commencing on the completion of this offering. See “Management—Executive Compensation—Actions Taken in Connection with the Offering” for the vesting terms for Messrs. Bartling’s and Freedman’s awards. The number of shares received in this conversion will be determined in a manner intended to replicate the respective economic value associated with the supplemental bonus plan based on the valuation derived from the initial public offering price. At an assumed initial offering price of $19.50 per share, we expect the number of shares received in this conversion to be approximately 2,500,000. We expect to incur incremental compensation expense related to the conversion of the supplemental bonus plan awards of approximately $17.7 million, which represents the amount that immediately vests in conjunction with this offering. The adjustment is reflected as an increase to additional paid-in capital and an increase to accumulated deficit. The resulting incremental stock compensation impact would be consistent with historical expense recognized and as such no P&L adjustment has been recognized. In addition, our compensation committee may make additional discretionary awards in an amount to be determined, but which will not exceed $10.0 million and as such is not reflected in the unaudited pro forma condensed combined and consolidated financial statements.

In January 2017, we granted to management 9,650 Incentive Units that, as profits interests, had no value on the date of issuance. The IH6 Incentive Units are only entitled to participate in the distribution of IH6 profits in excess of $500 per share. Separately, we also granted management Bonus Awards in a fixed amount equal to $500 multiplied by the total number of IH6 Incentive Units (Bonus Awards as defined in “Management—Executive Compensation—Long-Term Incentive Compensation”). We expect that the IH6 Incentive Units will not have any value at the time of the conversion, as the performance return thresholds for IH6 at an assumed initial offering price of $19.50 per share will not be achieved. We expect to convert Bonus Awards previously awarded and that will be awarded prior to the consummation of this offering into restricted stock units of Invitation Homes Inc. The number of shares received in this conversion will be determined in a manner intended to replicate the respective economic value associated with the Bonus Awards based on the valuation derived from the initial public offering price. At an assumed initial offering price of $19.50 per share, we expect the number of shares received in this conversion to be approximately 250,000. The Bonus Awards would vest immediately in connection with this offering. We expect to incur

 

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one-time incremental compensation expense related to the conversion of the Bonus Awards of approximately $4.8 million. The adjustment is reflected as an increase to additional paid-in capital and an increase to accumulated deficit. See “Management—Executive Compensation—Long-Term Incentive Compensation” for a further discussion of the long-term incentive awards.

We expect to record compensation expense relating to the conversion of the supplemental bonus plan awards and Incentive Units and Bonus Awards in IH6 as described in this footnote (K) of $22.5 million on the date of the offering.

We expect to incur incremental compensation expense totaling $30.9 million over the 24-month period following the offering related to the supplemental bonus plan. Any incremental compensation expense relating to the conversion of Incentive Units in the other Promote Partnerships described in this footnote (K) will not exceed $1.1 million. The Incentive Units, Bonus Awards and supplemental bonus plan are legacy compensation programs designed and implemented for a private company. Following this offering, we anticipate implementing new compensation programs appropriate for a public company.

Therefore, we have made no adjustment to our unaudited pro forma condensed combined consolidated statements of operations for any incremental compensation expense related to the modifications of the existing awards or establishment of new awards.

2. Adjustments to the Unaudited Pro Forma Condensed Combined and Consolidated Statements of Operations

Adjustments included under the heading “Financings” represent the following:

 

(L) As described in footnote (C), we only anticipate borrowing on the Term Loan Facility at the time of this offering. We expect that borrowings under the Term Loan Facility will bear interest, at our option, at a rate equal to a margin over either (a) a LIBOR rate determined by reference to the Bloomberg LIBOR rate (or comparable or successor rate) for the interest period relevant to such borrowing or (b) a base rate determined by reference to the highest of (1) the administrative agent’s prime lending rate, (2) the federal funds effective rate plus 0.50% and (3) the LIBOR rate that would be payable on such day for a LIBOR rate loan with a one-month interest period plus 1.00%. We expect the margin for the Term Loan Facility will range from 0.70% to 1.30%, in the case of base rate loans, and 1.70% to 2.30%, in the case of LIBOR rate loans. Based on leverage ratios at the time of closing the Term Loan Facility, we expect the margin to be 1.80%. We expect to utilize one month LIBOR as the base rate. During the nine months ended September 30, 2016, one month LIBOR ranged between 0.35% and 0.51%. This would have resulted in an interest rate between 2.15% and 2.31% when calculating interest expense related to the Term Loan Facility for the nine months ended September 30, 2016. During the year ended December 31, 2015, one month LIBOR ranged between 0.17% and 0.21%. This would have resulted in an interest rate between 1.97% and 2.01% when calculating interest expense related to the Term Loan Facility for the year ended December 31, 2015. Based on the aforementioned interest rates, we recorded an adjustment to interest expense of approximately $25.2 million and $29.8 million for the nine months ended September 30, 2016 and the year ended December 31, 2015, respectively.

Additionally, amortization of deferred financing costs would have been $3.8 million and $5.1 million for the nine months ended September 30, 2016 and the year ended December 31, 2015, respectively and was recorded as an adjustment to interest expense.

Refer to footnote (N) for a table summarizing the pro forma interest expense adjustments.

 

(M) Reflects the decrease of interest expense attributable to the repayment of outstanding indebtedness with the net proceeds from our Term Loan Facility as discussed in footnote (C). Interest expense related to certain of our existing credit facilities that we expect to repay was approximately $33.7 million and $38.2 million and the interest expense related to certain of our existing mortgage loans that we expect to repay was approximately $7.9 million and $9.6 million, for the nine months ended September 30, 2016 and the year ended December 31, 2015, respectively.

 

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Amortization of the associated deferred financing costs reflected in interest expense totaled approximately $5.0 million and $14.3 million, for the nine months ended September 30, 2016 and the year ended December 31, 2015, respectively.

Refer to footnote (N) for a table summarizing the pro forma interest expense adjustments.

 

(N) The following table summarizes the impact to interest expense related to the repayment of certain of our existing credit facilities totaling $1,275.9 million, certain of our existing mortgage loans totaling $475.6 million and the expected borrowings of $1,500.0 million through the Term Loan Facility:

 

     Nine Months Ended
September 30, 2016
     Year Ended
December 31, 2015
 
($ in thousands)    Pro forma
Interest Expense
Increase /
(Decrease)
     Pro forma
Interest Expense
Increase /
(Decrease)
 

Repayment of certain outstanding credit facilities(M)

   $ (33,690    $ (38,152

Repayment of certain outstanding mortgage loans(M)

     (7,949      (9,555

Reduction of deferred financing cost amortization related to our current indebtedness(M)

     (4,960      (14,272

Borrowing of Term Loan Facility(L)

     25,216         29,781   

Amortization of new deferred financing costs for the Term Loan Facility(L)

     3,826         5,102   
  

 

 

    

 

 

 

Net adjustment to Pro Forma interest expense

   $ (17,557    $ (27,096
  

 

 

    

 

 

 

A 0.125% increase or decrease in the weighted average interest rate on our pro forma indebtedness related to the Term Loan Facility and repayments of existing indebtedness described in footnotes (L) and (M), but before giving effect to the Offering Adjustments would increase or decrease the pro forma interest expense by $1.4 million and $1.9 million for the nine months ended September 30, 2016 and the year ended December 31, 2015, respectively.

As described in footnote (E), prior to this offering we entered into various interest rate swap agreements which were in the normal course of business and therefore were not reflected as adjustments in the unaudited pro forma condensed combined and consolidated balance sheet and statements of operations. The interest rate swaps would have resulted in an increase in pro forma interest expense of $28.6 million and $48.4 million for the nine months ended September 30, 2016 and the year ended December 31, 2015, respectively, if they were reflected in the unaudited pro forma condensed combined and consolidated statements of operations.

Adjustments included under the heading “Offering Adjustments” represent the following:

 

(O) Reflects the decrease of interest expense attributable to the anticipated repayment of outstanding indebtedness with the proceeds of this offering and cash available for our remaining credit facilities totaling $1,138.1 million and certain of our mortgage loans totaling $291.5 million.

The following table summarizes the interest expense adjustments related to these repayments:

 

     Nine Months Ended
September 30, 2016
     Year Ended
December 31, 2015
 
($ in thousands)    Pro forma
Interest Expense
Decrease
     Pro forma
Interest Expense
Decrease
 

Repayment of remaining credit facilities

   $ (32,235    $ (58,698

Repayment of certain mortgage loans

     (5,294      (6,216

Reduction of deferred financing cost amortization

     (6,443      (18,141
  

 

 

    

 

 

 

Net adjustment to Pro Forma interest expense

   $ (43,972    $ (83,055
  

 

 

    

 

 

 

 

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(P) For purposes of calculating pro forma net income or loss per share of common stock, the number of shares of common stock of Invitation Homes Inc. outstanding is calculated as follows:

 

     Nine Months Ended
September 30, 2016
     Year Ended
December 31, 2015
 

Shares outstanding immediately following the Pre-IPO Transactions

     225,116,760         225,116,760   

Total shares issued in this offering

     77,000,000         77,000,000   
  

 

 

    

 

 

 

Total pro forma Invitation Homes Inc. shares outstanding

     302,116,760         302,116,760   
  

 

 

    

 

 

 

Unaudited pro forma weighted average shares outstanding is calculated assuming all shares of common stock or other equity based awards issued by us in this offering were outstanding for the entire period. The weighted-average shares of common stock outstanding are calculated as follows:

 

     Nine Months Ended
September 30, 2016
     Year Ended
December 31, 2015
 

Invitation Homes Inc. shares outstanding

     302,116,760         302,116,760   
  

 

 

    

 

 

 

Invitation Homes Inc. weighted-average shares outstanding

     302,116,760         302,116,760   
  

 

 

    

 

 

 

 

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SELECTED FINANCIAL INFORMATION

The selected combined and consolidated financial and operating data set forth below as of December 31, 2015 and 2014 and for each of the years ended December 31, 2015 and 2014 has been derived from our audited combined and consolidated financial statements included elsewhere in this prospectus. The selected condensed combined and consolidated financial and operating data set forth below as of September 30, 2016 and for the nine months ended September 30, 2016 and 2015 has been derived from our unaudited condensed combined and consolidated financial statements included elsewhere in this prospectus. Results for the nine months ended September 30, 2016 are not necessarily indicative of results that may be expected for the entire year.

Because the information presented below is only an unaudited summary and does not provide all of the information contained in our historical combined and consolidated financial statements, including the related notes, you should read it in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Unaudited Pro Forma Financial Information” and our historical combined and consolidated financial statements, including the related notes, included elsewhere in this prospectus.

 

     Nine Months Ended
September 30,
    Year Ended
December 31,
 
Selected Statement of Operations Data:    2016     2015     2015     2014  
($ in thousands)    (unaudited)        

Revenue

        

Rental revenues

   $ 654,726      $ 587,913      $ 800,210      $ 631,115   

Other property income

     33,310        31,451        35,839        27,607   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     688,036        619,364        836,049        658,722   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

        

Property operating and maintenance

     270,494        257,130        347,962        320,658   

Property management expense

     22,638        31,568        39,459        62,506   

General and administrative

     49,579        59,534        79,428        88,177   

Depreciation and amortization

     198,261        186,448        250,239        215,808   

Impairment and other

     1,642        3,943        4,584        3,396   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     542,614        538,623        721,672        690,545   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     145,422        80,741        114,377        (31,823
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expenses)

        

Interest expense

     (209,165     (204,130     (273,736     (235,812

Other

     (1,025     (552     (3,121     (1,991
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expenses)

     (210,190     (204,682     (276,857     (237,803
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations

     (64,768     (123,941     (162,480     (269,626

Gain (loss) on sale of property

     13,178        2,275        2,272        (235
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (51,590   $ (121,666   $ (160,208   $ (269,861
  

 

 

   

 

 

   

 

 

   

 

 

 

 

Selected Balance Sheet Data:    As of
September 30,
2016
     As of
December 31,
2015
 
($ in thousands)    (unaudited)         

Investments in single-family residential properties, net

   $ 9,067,075       $ 9,052,701   

Cash and cash equivalents

     274,140         274,818   

Other assets, net

     569,218         469,459   
  

 

 

    

 

 

 

Total assets

   $ 9,910,433       $ 9,796,978   
  

 

 

    

 

 

 

Total debt

   $ 7,680,956       $ 7,725,957   

Total liabilities

     7,923,967         7,909,947   

Total equity

     1,986,466         1,887,031   
  

 

 

    

 

 

 

Total liabilities and equity

   $ 9,910,433       $ 9,796,978   
  

 

 

    

 

 

 

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read together with the “Selected Financial Data,” “Business,” “Unaudited Pro Forma Financial Information,” the September 30, 2016 and 2015 condensed combined and consolidated financial statements, and the December 31, 2015 and 2014 combined and consolidated financial statements that are included elsewhere in this prospectus. This discussion and analysis contains forward-looking statements based upon our current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors,” “Forward-Looking Statements,” or in other parts of this prospectus.

Overview

We are a leading owner and operator of single-family rental homes in the United States. Our portfolio of nearly 50,000 high quality homes is wholly owned and is concentrated in attractive in-fill submarkets of major MSAs. We have selected locations with strong demand drivers, high barriers to entry, and high rent-growth potential, primarily in the Western United States and Florida. Through disciplined market and asset selection, we designed our portfolio to capture the operating benefits of local density as well as economies of scale that we believe cannot be readily replicated. Since our founding in 2012, we have built a proven, vertically integrated operating platform that allows us to effectively and efficiently acquire, renovate, lease, maintain and manage our homes.

In April 2012, we began purchasing single-family rental homes, and by December 31, 2012, we owned over 11,000 homes in 12 markets. Our rapid acquisition pace continued, and by December 31, 2013 and 2014, our portfolio included approximately 39,000 and 46,000 homes, respectively, and had expanded to 13 markets across 10 states. Since inception, we have invested approximately $1,300.0 million of additional capital in the form of improvements into our homes that we still own as part of the initial renovation of acquired homes, as well as ongoing general maintenance and upkeep.

As of September 30, 2016, we owned 48,431 single-family rental homes and had an additional 73 homes in escrow that we expected to acquire, subject to customary closing conditions. Of the 73 homes in escrow as of September 30, 2016, 14 were in Phoenix, 12 were in Southern California, 10 were in Seattle, 10 were in Orlando, 9 were in Las Vegas, 7 were in South Florida, 4 were in Tampa, 3 were in Atlanta, 3 were in Charlotte and 1 was in Northern California. As of September 30, 2016, we had 36,569 homes in our Same Store portfolio (consisting of homes which had commenced their initial post-renovation lease prior to October 3, 2014). References to our Same Store portfolio (consisting of homes which had commenced their initial post-renovation lease prior to the first year of the comparison period) for the nine month periods ended September 30, 2016 and 2015 are for these 36,569 homes, and for the years ended December 31, 2015 and 2014 are to a Same Store portfolio of 18,762 homes.

We have historically funded the purchase and renovation of our single-family rental homes with a combination of equity capital, warehouse loans from our Sponsor, and borrowings under credit facilities of up to 75% of the acquisition and renovation costs. In November 2013, we were the first single-family residential rental home owner and operator to securitize loans on certain of our homes through the creation of a new type of residential real estate asset-backed securitization class that combines characteristics of traditional residential mortgage-backed securities (“RMBS”) and commercial mortgage-backed securities (“CMBS”). Like RMBS, the underlying assets of this new type of residential real estate asset-backed securitization are single-family homes. Like CMBS, the underlying borrower for this new type of residential real estate asset-backed securitization is a business, not an individual homeowner, and the cash flow comes from rental, rather than mortgage, payments. We refer to these securitized loans as our “mortgage loans.” This initial mortgage loan financing totaled $479.1 million, and to date we have executed a total of $5,334.0 million of mortgage loan financings to refinance certain of our credit facility balances.

 

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The historical combined and consolidated financial information discussed below reflects the financial position and results of operations for the IH Holding Entities and is presented on a historical cost basis. Such historical information does not reflect the impact of certain transactions and arrangements we expect to enter into in connection with this offering, including certain financing transactions and changes to our compensation plans. Refer to “Unaudited Pro Forma Financial Information” for information regarding the financial statement impact of changes to our financing and compensation arrangements, as well as other pro forma adjustments.

Factors That Affect Our Results of Operations and Financial Condition

Our results of operations and financial condition are affected by numerous factors, many of which are beyond our control. Key factors that impact our results of operations and financial condition include market fundamentals, property acquisitions and renovations, rental rates and occupancy levels, turnover and days to re-resident homes, property improvements and maintenance, and financing arrangements.

Market Fundamentals: Our results are impacted by housing market fundamentals and supply and demand conditions in our markets, particularly in the Western United States and Florida, which represented 72% of our revenues during the three months ended September 30, 2016. In recent periods, our Western United States and Florida markets have experienced favorable demand fundamentals with employment growth and household formation rates that have exceeded the U.S. averages, while exhibiting a greater decline in the rate of new supply deliveries (measured by total housing permits as a percentage of households) from their long-term averages than the United States on the whole. We believe these favorable supply and demand fundamentals have driven strong rental rate growth and home price appreciation for our Western United States and Florida markets in recent periods compared to the U.S. average, and we expect these trends to continue in the near to intermediate term. For additional information, see “Industry Overview—Fundamentals in Invitation Homes’ Markets.”

Property Acquisitions and Renovations: Future growth in rental revenues and operating income may be impacted by our ability to identify and acquire homes, our pace of property acquisitions, and the time and cost required to renovate and lease a newly acquired home. Our ability to identify and acquire single-family homes that meet our investment criteria is impacted by home prices in targeted acquisition locations, the inventory of homes available for sale through our acquisition channels, and competition for our target assets. The acquisition of homes involves expenditures in addition to payment of the purchase price, including payments for acquisition fees, property inspections, closing costs, title insurance, transfer taxes, recording fees, broker commissions, property taxes and HOA fees (when applicable). Additionally, we typically incur costs to renovate a home to prepare it for rental. Renovation work varies, but may include paint, flooring, carpeting, cabinetry, appliances, plumbing hardware, roof replacement, HVAC replacement, and other items required to prepare the home for rental. The time and cost involved in accessing our homes and preparing them for rental can significantly impact our financial performance. The time to renovate a newly acquired property can vary significantly among homes for several reasons, including the property’s acquisition channel, the condition of the property, and whether the property was vacant when acquired. Due to our size and scale both nationally and locally, we believe we are able to purchase goods and services at favorable prices.

Rental Rates and Occupancy Levels: Rental rates and occupancy levels are primary drivers of rental revenues and other property income. Our rental rates and occupancy levels are affected by macroeconomic factors and local and property-level factors, including market conditions, seasonality, resident defaults, and the amount of time it takes to prepare a home for its next resident and re-lease homes when residents vacate. An important driver of rental rate growth is our ability to increase monthly rents from expiring leases, which typically have a term of one to two years.

Turnover and Days to Re-Resident: Other drivers of rental revenues and property operating and maintenance expense include increasing the length of stay of our residents, minimizing resident turnover rates, and reducing the number of days a home is unoccupied between residents. Our operating results also are impacted by the amount of time it takes to market and lease a property. The period of time to market and lease a

 

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property can vary greatly and is impacted by local demand, our marketing techniques, the size of our available inventory, and economic conditions and outlook. Increases in turnover rates and the average number of days to re-resident increase property operating and maintenance expenses and reduce rental revenues as the homes are not generating income during this period.

Property Improvements and Maintenance: Property improvements and maintenance impact capital expenditures, property operating and maintenance expense, and rental revenues. We actively manage our homes on a total portfolio basis to determine what capital and maintenance needs may be required, and what opportunities we may have to generate additional revenues or expense savings from such expenditures. Due to our size and scale both nationally and locally, we believe we are able to purchase goods and services at favorable prices.

Financing Arrangements: Financing arrangements directly impact interest expense, credit facilities, mortgage loans, and warehouse loans, as well as our ability to acquire and renovate homes. We have historically utilized credit facilities and warehouse loans to acquire and renovate new homes. In certain instances we have refinanced our credit facilities and warehouse loans utilizing mortgage loans. Our current financing arrangements contain variable interest rate terms, along with certain financial covenants. Interest rates are impacted by the characteristics of our homes, market conditions, and the terms of the underlying financing arrangements. See “—Quantitative and Qualitative Disclosures about Market Risk” within this section for further discussion regarding interest rate risk. Our future financing arrangements may not have similar terms with respect to amounts, interest rates, financial covenants, and durations. Refer to “Unaudited Pro Forma Financial Information” for information and the pro forma financial statement impact of changes to our financing arrangements.

Components of Revenues and Expenses

The following is a description of the components of our revenues and expenses:

Revenues

Rental Revenues

Rental revenues, net of any concessions and uncollectible amounts, consist of rents collected under lease agreements related to our single-family rental homes. These include leases that we enter into directly with our residents, which typically have a term of one to two years.

Other Property Income

Other property income is comprised of: (i) resident reimbursements for utilities, HOA fines, and other charge-backs; (ii) rent and non-refundable deposits associated with pets; and (iii) various other fees including application and lease termination fees.

Expenses

Property Operating and Maintenance

Once a property is available for its initial lease, which we refer to as “rent-ready,” we incur ongoing property-related expenses, which consist primarily of property taxes, insurance, HOA fees (when applicable), market-level personnel expenses, utility expenses, repairs and maintenance, leasing costs and marketing. Prior to a property being “rent-ready,” certain of these expenses are capitalized as building and improvements. Once a property is “rent-ready,” expenditures for ordinary maintenance and repairs thereafter are expensed as incurred and we capitalize expenditures that improve or extend the life of a home.

 

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Property Management Expense

Property management expense represents personnel and other costs associated with oversight and management of our portfolio of homes. All of our homes are managed through our internal property manager.

General and Administrative

General and administrative expense represents personnel costs, professional fees, and other costs associated with running our day to day activities. We expect to incur additional legal, accounting and other expenses that we have not incurred as a private company, including costs associated with public company reporting requirements. As a result, general and administrative expense in the historical periods discussed in “—Results of Operations” may not be comparable to general and administrative expense in periods following the offering.

Noncash Incentive Compensation Expense

Certain current and former employees, as well as certain of our founders, were granted Class B incentive units in certain of the IH Holding Entities or their parent entities. We have recognized noncash incentive compensation expense related to the value of those units in our results of operations as a component of general and administrative expense and property management expense. In connection with the offering, we may modify or make adjustments to certain of our incentive awards in order to align our employees’ interests with the investors in the offering. Such adjustments may impact noncash incentive compensation expense in periods following the offering. See “Unaudited Pro Forma Financial Information” for additional information.

Depreciation and Amortization

We recognize depreciation and amortization expense associated primarily with our homes and other capital expenditures over their expected useful lives.

Impairment and Other

Impairment and other represents provisions for impairment when the carrying amount of our single-family residential properties is not recoverable and casualty losses, net of any insurance recoveries.

Interest Expense

Interest expense includes interest expense as well as amortization of discounts and deferred financing costs from our financing arrangements. Interest expense in the historical periods discussed in “—Results of Operations” does not reflect the impact of certain financing transactions that we may complete prior to or concurrently with the completion of this offering or the repayment of certain indebtedness with a portion of the net proceeds from this offering. See “Unaudited Pro Forma Financial Information” for additional information.

Other

Other includes acquisition costs, interest income, and other miscellaneous income and expenses.

Gain (Loss) on Sale of Property

Gain (loss) on sale of property consists of gains and losses resulting from sales of our homes.

 

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Results of Operations

Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015

The following table sets forth a comparison of the results of operations for the nine months ended September 30, 2016 and the nine months ended September 30, 2015:

 

     Nine Months Ended September 30,              
($ in thousands)            2016                     2015             $ Change     % Change  
     (unaudited)              

Revenues:

        

Rental revenues

   $ 654,726      $ 587,913      $ 66,813        11.4

Other property income

     33,310        31,451        1,859        5.9
  

 

 

   

 

 

   

 

 

   

Total revenues

     688,036        619,364        68,672        11.1
  

 

 

   

 

 

   

 

 

   

Operating expenses:

        

Property operating and maintenance

     270,494        257,130        13,364        5.2

Property management expense

     22,638        31,568        (8,930     (28.3 )% 

General and administrative

     49,579        59,534        (9,955     (16.7 )% 

Depreciation and amortization

     198,261        186,448        11,813        6.3

Impairment and other

     1,642        3,943        (2,301     (58.4 )% 
  

 

 

   

 

 

   

 

 

   

Total operating expenses

     542,614        538,623        3,991        0.7
  

 

 

   

 

 

   

 

 

   

Operating income (loss)

     145,422        80,741        64,681        80.1
  

 

 

   

 

 

   

 

 

   

Other income (expenses)

        

Interest expense

     (209,165     (204,130     5,035        2.5

Other

     (1,025     (552     473        85.7
  

 

 

   

 

 

   

 

 

   

Total other income (expenses)

     (210,190 )      (204,682 )      5,508        2.7
  

 

 

   

 

 

   

 

 

   

Loss from continuing operations

   $ (64,768 )    $ (123,941 )    $ (59,173 )      (47.7 )% 
  

 

 

   

 

 

   

 

 

   

Rental Revenues

As of September 30, 2016 and 2015, we owned 48,431 and 47,454 single-family rental homes, respectively, generating rental revenue of $654.7 million and $587.9 million, respectively, for the nine months then ended. Rental revenues increased 11.4% due to an increase in both average occupancy and average monthly rent per occupied home, as well as the increase in the number of homes owned. During the nine months ended September 30, 2016 and 2015, we acquired 1,135 and 2,851 homes, respectively, and sold 842 and 1,440 homes, respectively.

Our total portfolio average occupancy for the nine months ended September 30, 2016 and 2015 was 94.6% and 93.3%, respectively. Our total portfolio average rent per occupied home in actual dollars for the nine months ended September 30, 2016 was $1,600, compared to $1,502 for the nine months ended September 30, 2015, a 6.5% increase.

For our Same Store portfolio (consisting of homes which had commenced their initial post-renovation lease prior to October 3, 2014), our average occupancy for both of the nine months ended September 30, 2016 and 2015 was 96.1%. Our Same Store portfolio average rent per occupied home in actual dollars for the nine months ended September 30, 2016 was $1,603, compared to $1,538 for the nine months ended September 30, 2015, a 4.2% increase.

To monitor prospective changes in average rent per occupied home, we compare the monthly rent from an expiring lease to the monthly rent from the next lease for the same home, in each case, net of any amortized concessions. Leases are either renewal leases, where our current resident stays for a subsequent lease term, or a