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As filed with the Securities and Exchange Commission on March 22, 2013

Registration No. 333-            

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

Form S-11

FOR REGISTRATION UNDER

THE SECURITIES ACT OF 1933 OF SECURITIES

OF CERTAIN REAL ESTATE COMPANIES

 

 

 

AMERICAN RESIDENTIAL PROPERTIES, INC.

(Exact name of registrant as specified in its governing instruments)

 

 

 

7047 East Greenway Parkway, Suite 350

Scottsdale, AZ 85254

(480) 474-4800

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

 

 

 

Stephen G. Schmitz

Chief Executive Officer and Chairman

7047 East Greenway Parkway, Suite 350

Scottsdale, AZ 85254

(480) 474-4800

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

 

 

 

Copies to:

 

Daniel M. LeBey, Esq.

Hunton & Williams LLP

Riverfront Plaza, East Tower

951 East Byrd Street

Richmond, VA 23219

(804) 788-8200

(804) 788-8218 (Telecopy)

 

Bartholomew A. Sheehan, Esq.

Sidley Austin LLP

787 Seventh Avenue

New York, NY 10019

(212) 839-5300

(212) 839-5599 (Telecopy)

 

 

 

Approximate date of commencement of proposed sale to public: As soon as practicable after the 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 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 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, please 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  þ    Smaller reporting company  ¨
  

(Do not check if a smaller reporting company)

 

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Securities to be Registered  

Proposed
Maximum

Aggregate
Offering Price (1)(2)

  Amount of
Registration Fee (1)

Common Stock, $0.01 par value per share

  $300,000,000   $40,920

 

 

(1)   Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) of the Securities Act of 1933, as amended.
(2)   Includes shares offered by selling stockholders and shares that the underwriters have the option to purchase to cover over-allotments, if any.

 

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

 

 


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

 

 

PROSPECTUS (Subject to Completion)

Issued March 22, 2013

            Shares

 

LOGO

Common Stock

 

 

 

This is the initial public offering of American Residential Properties, Inc., an internally managed real estate company that acquires, owns and manages single-family homes as rental properties. We are offering             shares of our common stock, $0.01 par value per share, and the selling stockholders named in this prospectus are offering              shares of our common stock. We will not receive any proceeds from the sale of our common stock by the selling stockholders.

 

We intend to elect and qualify to be taxed as a real estate investment trust, or REIT, for federal income tax purposes commencing with our short taxable year ended December 31, 2012. To assist us in complying with certain federal income tax requirements applicable to REITs, our charter generally limits beneficial and constructive ownership by any person to no more than 9.8% in value or in number of shares, whichever is more restrictive, of the outstanding shares of any class or series of our capital stock. In addition, our charter contains various other restrictions on the ownership and transfer of our common stock. See “Description of Capital Stock—Restrictions on Ownership and Transfer” for a description of the ownership and transfer restrictions applicable to our common stock.

 

Prior to this offering, there has been no public market for our common stock. The initial price to public of our common stock is expected to be between $         and $         per share. We intend to apply to list our common stock on the New York Stock Exchange, or the NYSE, under the symbol “            .”

 

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and we will be subject to reduced public company reporting requirements.

 

Investing in our common stock involves risks. See “ Risk Factors ” beginning on page 23.

 

 

 

PRICE $                 PER SHARE

 

 

 

     Price to
Public
   Underwriting
Discounts and
Commissions
   Proceeds,
before
Expenses, to Us
   Proceeds,
before
Expenses, to
Selling
Stockholders
Per Share    $                $                $                $            
Total    $                $                $                $            

 

We have granted the underwriters an option to purchase up to              additional shares of our common stock from us, at the initial price to public, less underwriting discounts and commissions, within 30 days after the date of this prospectus to cover over-allotments, if any.

 

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

 

The underwriters expect to deliver the shares of our common stock on                     , 2013.

 

 

 

Morgan Stanley   BofA Merrill Lynch   FBR   Jefferies

 

 

 

Raymond James    Zelman Partners LLC

 

                    , 2013


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TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

Risk Factors

     23   

Cautionary Note Regarding Forward-Looking Statements

     58   

Use of Proceeds

     60   

Distribution Policy

     61   

Capitalization

     62   

Dilution

     63   

Selected Consolidated Financial Data

     65   

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

     66   

Industry Overview and Market Opportunity

     80   

Our Business and Investments

     126   

Investment Policies and Policies with Respect to Certain Activities

     150   

Management

     153   

Principal Stockholders

     173   
     Page  

Certain Relationships and Related Party Transactions

     175   

Selling Stockholders

     177   

Description of Capital Stock

     178   

Shares Eligible for Future Sale

     183   

Certain Provisions of Maryland Law and of Our Charter and Bylaws

     185   

Operating Partnership and the Partnership Agreement

     191   

Material Federal Income Tax Considerations

     196   

ERISA Considerations

     221   

Underwriting

     224   

Legal Matters

     231   

Experts

     231   

Where You Can Find Additional Information

     231   

Index to Consolidated Financial Statements

     F-1   
 

 

Through and including                     , 2013 (the 25 th day after the date of this prospectus), all dealers that buy, sell or trade the common stock may be required to deliver a prospectus, regardless of whether they are participating in this offering. 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.

 

You should rely only on the information contained in this prospectus or in any free writing prospectus prepared by us. We, the selling stockholders and the underwriters have not authorized anyone to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We, the selling stockholders and the underwriters are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus and any free writing prospectus prepared by us is accurate only as of the respective dates of such documents or as of the date or dates which are specified therein. Our business, financial condition, liquidity, results of operations and prospects may have changed since those dates.

 

Certain Terms Used in This Prospectus

 

Except where the context suggests otherwise, we define certain terms in this prospectus as follows:

 

“We,” “our,” “us” and “our company” refer to American Residential Properties, Inc., a Maryland corporation, together with its consolidated subsidiaries, including: (1) American Residential Properties OP, L.P., a Delaware limited partnership, or our operating partnership; (2) American Residential GP, LLC, a Delaware limited liability company that is our wholly owned subsidiary and the sole general partner of our operating partnership; (3) American Residential Leasing Company, LLC, a Delaware limited liability company that is a wholly owned subsidiary of our operating partnership; and (4) American Residential Properties TRS, LLC, a Delaware limited liability company, or our TRS, that is a wholly owned subsidiary of our operating partnership and that we have elected to treat as a taxable REIT subsidiary.

 

“ARM” refers to American Residential Management, Inc., an entity that is jointly owned by our founders, Stephen G. Schmitz, our Chief Executive Officer and Chairman, and Laurie A. Hawkes, our President and Chief Operating Officer and a member of our Board of Directors. ARM holds 175,000 units of limited partnership interest in our operating partnership, or OP units.


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“Phoenix Fund” refers to ARP Phoenix Fund I, LP, a Delaware limited partnership. Phoenix Fund, which owns 606 single-family homes and 150,000 shares of our common stock, is a fully committed private investment fund that we manage.

 

“Aggregate investment” in a home represents the purchase price, broker commissions, closing costs and capital expenditures associated with the home, including restoration costs incurred to prepare the home for rent.

 

Market, Industry and Other Data

 

We disclose estimates, forecasts and projections throughout this prospectus, in particular in the sections entitled “Prospectus Summary,” “Industry Overview and Market Opportunity” and “Our Business and Investments.” We have obtained substantially all of this information from a market study prepared for us in connection with this offering by John Burns Real Estate Consulting, LLC, or JBREC, a real estate consulting firm. We have agreed to pay JBREC a total fee of $38,610 for that market study, of which $16,202 has been paid and $22,408 will be paid upon completion of this offering. Such information is included in this prospectus in reliance on JBREC’s authority as an expert on such matters. The estimates, forecasts and projections prepared by JBREC are based on data (including third-party data), significant assumptions, proprietary methodologies, and the experience and judgment of JBREC. No assurance can be given regarding the accuracy or appropriateness of the assumptions and judgments made, or the methodologies used, by JBREC. There is no assurance that any of the forecasted or projected outcomes will be achieved, and investors should not place undue reliance on them. Except as required by law, we are not obligated to, and do not intend to, update the statements in this prospectus to conform to actual outcomes or changes in our or JBREC’s expectations. See “Experts.”

 

In addition, we have obtained certain market and industry data from publicly available industry publications. These sources generally state that the information they provide has been derived from sources believed to be reliable, but that the accuracy and completeness of the information are not guaranteed. We believe that these data are generally reliable, but we have not independently verified this information.

 

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PROSPECTUS SUMMARY

 

This prospectus summary highlights some of the information contained elsewhere in this prospectus. Because it is a summary, it does not contain all of the information you should consider before investing in our common stock. You should read the entire prospectus carefully, including the information set forth under the caption “Risk Factors,” as well as the financial statements and related notes included elsewhere in this prospectus. Unless indicated otherwise, the information in this prospectus assumes (1) the shares of our common stock to be sold in this offering will be sold at an initial price to public of $ per share, which is the mid-point of the price range set forth on the front cover page of this prospectus, and (2) no exercise of the over-allotment option described on the front cover page of this prospectus.

 

Our Company

 

American Residential Properties, Inc. is an internally managed real estate company that acquires, owns and manages single-family homes as rental properties. In 2008, our founders, Stephen G. Schmitz, our Chief Executive Officer and Chairman, and Laurie A. Hawkes, our President and Chief Operating Officer and a member of our Board of Directors, identified a unique opportunity to acquire homes at distressed pricing and lease them at attractive rental rates. They subsequently began developing a vertically integrated platform to acquire and manage single-family homes on an institutional scale. We were formed to expand upon our founders’ vision, strategy and platform, through which they have acquired, as of December 31, 2012, 2,381 homes since 2008.

 

As of December 31, 2012, we owned 1,775 properties in Arizona, California, Florida, Georgia, Illinois, Nevada and Texas with an aggregate investment of $220.6 million, and we managed an additional 606 properties for Phoenix Fund in Arizona and Nevada. For the period from January 1, 2013 to March 20, 2013, we acquired or have contracted to acquire 1,056 single-family homes for a total purchase price of approximately $100 million, of which 72 homes are located in Arizona, 3 homes are located in California, 64 homes are located in Florida, 114 homes are located in Georgia, 135 homes are located in Illinois, 266 homes are located in Indiana, 295 homes are located in North Carolina, 15 homes are located in Nevada, 16 homes are located in South Carolina and 76 homes are located in Texas. We actively evaluate new markets to identify investment opportunities that we believe can generate attractive risk-adjusted returns for our stockholders. There is no assurance that we will close on the properties we have under contract.

 

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

 

In addition to our primary business strategy of acquiring, restoring, leasing and managing single-family homes, we have a private mortgage financing strategy that generates attractive returns on invested capital and provides us access to acquisition opportunities and valuable market data. As of December 31, 2012, our private mortgage portfolio had an aggregate outstanding principal balance of $12.2 million, a weighted-average interest rate of 12.1% per annum and a weighted-average remaining term of 155 days. We also owned an additional $0.8 million in long-term mortgage investments. Additionally, for the period from January 1, 2013 to March 20, 2013, we funded or committed to fund approximately $25 million in private mortgage loans. There is no assurance that we will close on the loans we have under contract.

 

 

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Our History and Capitalization

 

In October 2008, Mr. Schmitz and Ms. Hawkes co-founded American Residential Properties, LLC, or ARP LLC, a private investment firm, to capitalize on the extraordinary price deterioration in the single-family housing sector following the collapse in the housing and mortgage industries. Using their own capital, Mr. Schmitz and Ms. Hawkes began acquiring single-family homes with the intent of managing them as rental properties and developing a vertically integrated real estate acquisition and management platform. In February 2010, Mr. Schmitz and Ms. Hawkes launched Phoenix Fund, a private investment fund formed to invest opportunistically in single-family homes as rental properties, which is now fully committed and has purchased 606 homes. We were formed in March 2012 to expand upon our founders’ vision, strategy and platform. As part of our formation transactions, we completed an initial private offering of our common stock in May 2012, raising gross proceeds of approximately $223.9 million and acquired the proprietary, vertically integrated real estate acquisition and management platform developed by our founders. In December 2012, we raised an additional approximately $147.3 million of gross proceeds in a follow-on private offering of our common stock. In January 2013, we raised an additional approximately $0.8 million of gross proceeds in a direct private placement of our common stock. We are in the process of deploying the net proceeds from the follow-on private offering and the private placement to acquire, restore, lease and manage single-family homes and to provide short-term private mortgage financing in accordance with our business strategy.

 

Industry Overview and Market Opportunity

 

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

 

While a large and growing asset class, single-family rental properties have historically been managed by relatively small-scale, “mom and pop” owner-operators or by a limited number of local and regional property management organizations. More recently, the ownership profile of single-family rental properties has shifted to larger investors and national owner-operators, including our company, seeking to efficiently acquire large numbers of homes at distressed values, generate attractive rental cash flow streams and benefit from any potential future home price appreciation. We believe the return profile, from rental yields and the potential for home price appreciation, is significant enough to encourage investment in the systems, structures and technologies that can make possible economies of scale, resulting in an opportunity for broader industry consolidation by larger and better-capitalized investors that are introducing a higher standard of institutional management to this asset class.

 

After nearly a decade of solid home price appreciation from 1998 to 2006, which we believe in many markets was in excess of underlying fundamentals, a significant over-correction has occurred in the pricing of the single-family housing sector. Home prices declined approximately 35% in some of the largest U.S. housing markets (as measured by the not-seasonally adjusted S&P/Case-Shiller Composite 20 Home Price Index from its peak on July 1, 2006 to its trough on March 1, 2012). We believe that home prices continue to be significantly below replacement costs in many of these markets. Additionally, over the next five years, a substantial number of non-performing loans will need to be resolved, including through foreclosure, short sale or conversion through a bank deed-for-lease program. As a result, we believe there may be the opportunity for experienced and well-capitalized operators to acquire large volumes of single-family rental homes at attractive pricing and generate operational efficiencies. We believe these dynamics will result in the emergence of a small number of leaders in a fragmented market.

 

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

 

 

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downturn. Specifically, the recent drop in home prices, constraints on mortgage lending, job volatility requiring greater geographic mobility, economic uncertainty, evolving demographics and expanded rental options are changing the way many Americans live. Many people, who in the past might have become homeowners, are instead becoming long-term renters of single-family homes. According to JBREC, for every 1.0% decline in the homeownership rate, the occupants of approximately 1.1 million homes become prospective tenants, and JBREC believes that the homeownership rate will continue to decrease through 2015 and then begin to increase again. While single-family prices are in the early stages of recovery, multi-family prices have been improving during the last two years and have returned to levels on par with early 2006, as measured by the National Council of Real Estate Investment Fiduciaries, or NCREIF, Index. Although multi-family and single-family homes do not generally compete for the same tenants due to demographic and preference differences, we believe that many of the same characteristics that make multi-family properties attractive to investors apply to single-family homes.

 

We believe that there has been an over-correction in housing prices in certain housing markets, which has led to home prices being significantly below replacement cost in many of these markets. As the economy slowly strengthens and the housing market returns to long-term pricing norms or reverts to mean pricing levels, we believe there is the potential for home price appreciation. We also believe that there continues to be a large amount of potential supply that we can purchase at potentially attractive pricing. According to Mortgage Bankers Association data, a total of 4.9 million single-family residential mortgage loans are currently non-performing.

 

We believe these factors taken together contribute to the single-family rental asset class potentially generating attractive risk-adjusted returns to investors through both current and growing yield as well as through home price appreciation. Furthermore, we believe that by acquiring, restoring, leasing and managing homes in markets that meet our selection criteria we can provide attractive risk-adjusted returns to our stockholders.

 

Our Competitive Strengths

 

Our company is differentiated from others in the market by the following strengths, which we believe provide us with a formidable competitive advantage to successfully execute our business strategy:

 

   

Pioneer in Institutionalizing the Single-Family Rental Sector . Our founders were early to recognize a unique opportunity to institutionalize ownership and management of the single-family rental sector. Mr. Schmitz and Ms. Hawkes successfully acted on this foresight by founding ARP LLC in 2008, launching Phoenix Fund in 2010 and forming our company in 2012. Through our company and Phoenix Fund, our founders have raised a total of approximately $416.1 million of equity capital and, as of December 31, 2012, acquired 2,381 homes. We believe that the expertise, experience and innovative thinking of our founders provide us the foundation necessary to successfully execute our business strategy with institutional quality on a national scale.

 

   

Proven Track Record Operating in the Single-Family Rental Sector . Our founders have over four years of direct experience acquiring, restoring, leasing and managing single-family rental homes, which we believe is one of the longest track records of any large-scale operator in the single-family rental sector. Specifically, our founders have been instrumental in all activities related to the underwriting, acquisition, restoration, leasing and management of single-family homes. Given the scale, geographic dispersion and asset granularity necessary to successfully operate in the single-family rental sector, we believe our experience and established platform provide us with a meaningful competitive advantage.

 

   

Internally Managed Company with an Aligned Governance Structure . We believe that our internally managed structure aligns management and stockholder interests, avoiding the conflicts of interest and additional fees common in many externally managed companies . Additionally, we believe that we will achieve greater operational efficiencies and realize superior economies of scale as compared to externally managed companies, as our portfolio grows. By performing property management functions internally for our self-managed properties, we establish direct relationships with our tenants and have

 

 

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tighter control over the quality and the cost of restoration, ongoing resident services and re-tenanting . In addition, we believe that we will benefit from the significant public REIT experience and other public company experience of our executive team and independent directors.

 

   

Scalable, Vertically Integrated Real Estate Acquisition and Management Platform . We have a scalable, institutional-quality real estate acquisition and management platform that we believe is one of the most established in the single-family rental sector. We believe our platform is critical to growing a high-volume acquisition business and achieving the national scale contemplated for our company. Our platform integrates proprietary processes and technology that support the functions necessary to grow and manage a large portfolio of single-family rental homes, including: property-sourcing research and analytics; property underwriting; property restoration evaluation, cost budgeting, workflow monitoring and quality control; prospective tenant credit underwriting; property leasing; and ongoing property management and resident services.

 

   

Portfolio of Scale in Markets with Attractive Investment Characteristics . We invest in markets that we believe possess attractive housing and rental fundamentals . As of December 31, 2012, we had purchased 1,775 homes in Arizona, California, Florida, Georgia, Illinois, Nevada and Texas. For the period from January 1, 2013 to March 20, 2013, we acquired or have contracted to acquire 1,056 single-family homes for a total purchase price of approximately $100 million, of which 72 homes are located in Arizona, 3 homes are located in California, 64 homes are located in Florida, 114 homes are located in Georgia, 135 homes are located in Illinois, 266 homes are located in Indiana, 295 homes are located in North Carolina, 15 homes are located in Nevada, 16 homes are located in South Carolina and 76 homes are located in Texas. We actively evaluate new markets to identify investment opportunities that we believe can generate attractive risk-adjusted returns for our stockholders. There is no assurance that we will close on the properties we have under contract.

 

   

Disciplined Investment Strategy and Key Strategic Relationships . We will seek to continue acquiring properties to create a substantial portfolio of appealing, affordable and well-managed single-family homes for rent. We focus on markets that we believe have strong near- and long-term supply and demand fundamentals for rental housing, and we focus on properties that we believe can be rented to qualified tenants at attractive yields. In addition, through our founders’ four years of “hands-on” experience in the single-family rental sector, we have a deep network of relationships with portfolio owner-operators across the country. Through these owner-operators, we have been able to source attractive portfolio acquisitions, and we believe they may provide us with additional attractive privately negotiated acquisition opportunities that in some cases may not be available to other market participants.

 

   

Demonstrated Ability to Access Institutional Debt and Equity Capital . We believe the ability to access and secure institutional capital is an increasingly important driver of success in the single-family rental sector, and our founders have demonstrated their ability to access and secure significant amounts of institutional debt and equity capital. For example, they secured for Phoenix Fund one of the first institutional asset-based debt financing facilities in the single-family rental sector, and we have obtained a $150 million senior secured revolving credit facility from a syndicate of major national banks with an accordion feature that allows us, assuming our compliance with applicable covenants and at the lenders’ discretion, to borrow up to $300 million thereunder if certain criteria are met. In addition, we have raised approximately $372.0 million in gross proceeds from diversified groups of institutional investors and others: approximately $223.9 million in gross proceeds in our initial private offering completed in May 2012, approximately $147.3 million in gross proceeds in our follow-on private offering completed in December 2012 and approximately $0.8 million in gross proceeds in a direct private placement completed in January 2013. We believe that our founders’ extensive capital-raising track record since 2009 and our senior officers’ strong institutional relationships will provide us access to significant amounts of capital, across a wide variety of sources and structures, and at attractive terms, to facilitate our growth.

 

 

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Senior Management Team Depth and Experience . We believe the extensive single-family rental sector experience of our executive team coupled with their relationships and expertise in real estate, public and private capital markets, finance, information technology, systems development and operations will drive our business and growth. Both Mr. Schmitz, our Chief Executive Officer and Chairman, and Ms. Hawkes, our President and Chief Operating Officer and a member of our Board of Directors, have more than 30 years of experience originating, underwriting, financing, acquiring and managing various classes of commercial and residential real estate, as both intermediaries and principals, together completing more than $25 billion of commercial and residential real estate transactions. Shant Koumriqian, our Chief Financial Officer, has over 17 years of experience, including experience as a chief financial officer and a senior executive of a publicly traded REIT. Andrew G. Kent, our Senior Vice President, Investments, Chief Compliance Officer, General Counsel and Secretary, has over 22 years of experience, including senior management and legal roles at a publicly traded REIT, and has participated in the origination of several billion dollars in real estate and structured finance transactions. Lani B Porter, our Senior Vice President, Operations, has spent over 17 years working on technology-oriented real estate solutions, particularly in the context of high-volume, small-asset business models.

 

Our Business and Growth Strategies

 

Our primary objective is to be a leader in the creation and expansion of the single-family rental business as an institutional-quality asset class with national scale. We believe we can achieve this objective through the following strategies:

 

   

Active Property Management . We seek to ensure tenant satisfaction by providing high-quality service at our self-managed properties. Our internally managed and vertically integrated property management platform allows us to control all aspects of a rental home, including restoring a newly acquired home, actively supervising its leasing, maintaining property quality and opportunistically selling it when appropriate. Our founders have direct field experience with all aspects of the acquisition, restoration and management of single-family homes and provide “hands-on” oversight to all facets of our business. We believe that our ability to improve asset quality and tenant retention, increase our homes’ useful lives and decrease turnover costs is an important element of our business and is instrumental in driving stockholder returns.

 

   

Disciplined Acquisition Strategy and Expertise in Privately Negotiated Sourcing . We plan to continue acquiring high-quality, single-family homes in select submarkets that meet our disciplined market selection criteria, such as above-average median household incomes, well-regarded school districts and low crime levels. We believe these characteristics will attract creditworthy tenants, produce high rental rates and occupancy levels, help to generate long-term home price appreciation and provide our stockholders with attractive risk-adjusted returns.

 

We source acquisition opportunities through a variety of channels. We source individual property purchases through auction, short-sale, real estate owned, or REO, and traditional multiple-listing services, or MLS, processes. We source portfolios of leased and vacant properties through brokerages or directly from operators, investors or banks. Due to the depth of our industry knowledge, experience, relationships and position as a prominent industry operator, we believe we have access to investment opportunities that are “privately negotiated” and not available to other industry participants or capital providers.

 

In new markets, we sometimes acquire portfolios of leased properties from established and well-respected local operators who share our philosophy of intensive asset management and tenant service through our “preferred operator” program. In this program, we acquire portfolios of leased properties for which the operator retains day-to-day management responsibilities pursuant to a longer-term lease.

 

 

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In these arrangements, the operator is responsible for all property-related expenses and we receive payments from the operator that escalate over the term of the lease. As of December 31, 2012, 547 of our properties were leased to and managed by local operators through our preferred operator program.

 

   

Targeted Geographic Expansion . Our portfolio is diversified across several geographic markets, and we have properties under contract in several new markets. We continually monitor the markets in which we operate and evaluate new markets on an ongoing basis to identify investment opportunities that we believe can generate attractive risk-adjusted returns for our stockholders. Currently, we are evaluating markets in the following states for investment, each of which we believe meets our investment criteria: Florida, Illinois, Indiana, North Carolina and South Carolina. We believe that our strategy to have and grow a geographically diverse investment portfolio provides us with the ability to expand our market presence where the supply and demand characteristics create the most compelling acquisition and rental opportunities. As further described under “Our Business and Investments—Investment Criteria for Market Selection,” we select our markets based a comprehensive set of investment criteria, including strength of rental demand and rates of job growth, population growth and unemployment.

 

   

Capitalize on an Industry Consolidation Opportunity . According to JBREC, as of February 2013, approximately 10.5% of the single-family residential market was comprised of single-family rental housing, representing approximately 14.0 million homes. Historically, most of these single-family rental homes have been owned either by local “mom and pop” operators or, more recently, short-term, trade-oriented asset accumulators. Due to our extensive experience in the single-family rental sector and our vertically integrated, internally managed structure, together with the depth of our network of relationships and financial resources, we believe that we are well-positioned as an early-moving industry consolidator to capitalize on this opportunity.

 

   

Maintain Conservative Growth-Oriented Capital Structure . We believe that having a flexible and conservative capital structure provides us with an advantage over many of our competitors. We have obtained a $150 million senior secured revolving credit facility from a syndicate of major national banks with an accordion feature that allows us, assuming our compliance with applicable covenants and at the lenders’ discretion, to borrow up to $300 million thereunder if certain criteria are met. The credit facility matures in January 2015, has an optional one-year extension (assuming our compliance with applicable covenants) and bears interest at a rate of LIBOR plus a spread ranging from 2.50% to 3.25% based on a ratio of total indebtedness to total asset value (each as defined in the credit agreement that governs the credit facility) ranging from less than or equal to 45% to greater than 55%. While we expect that debt will be an important component of our capital structure over time, we plan to maintain a conservative balance sheet to facilitate execution of our business strategy.

 

Our Business Activities and Operations

 

Since we commenced investment activities in May 2012, we have acquired, restored, leased and operated a significant portfolio of single-family homes. As of December 31, 2012, we owned 1,775 properties in Arizona, California, Florida, Georgia, Illinois, Nevada and Texas.

 

 

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States in Which We Own Single-Family Homes

(as of December 31, 2012)

 

LOGO

 

The following three tables present summary statistics of our single-family homes by metropolitan statistical area, or MSA, and metro division, as of December 31, 2012. The first table includes our entire portfolio of single-family homes. The second table includes only the single-family homes that we manage. The third table includes only the single-family homes that our preferred operators manage.

 

Total Portfolio of Single-Family Homes—Summary Statistics

(as of December 31, 2012)

 

MSA / Metro Division

  Number of
Homes
    Aggregate
Investment
    Average
Investment
Per  Home (1)
    Percent
Leased (2)
    Average  Age
(years)
    Average Size
(square feet)
 

Phoenix, AZ (3)

    979      $ 126,994,567      $ 129,719        86     16.2        1,698   

Riverside-San Bernandino, CA (4)

    211        34,752,966      $ 164,706        16     15.2        1,916   

Chicago, IL (5)

    204        27,569,988      $ 135,147        100     54.1        1,384   

Dallas, TX (6)

    42        5,844,132      $ 139,146        74     14.9        2,088   

Atlanta, GA (7)

    73        5,243,827      $ 71,833        99     18.5        1,496   

Las Vegas, NV (8)

    47        4,994,157      $ 106,259        49     8.9        1,580   

Other

    219        15,189,825      $ 69,360        67     18.6        1,203   
 

 

 

   

 

 

         

Total / Weighted Average

    1,775      $ 220,589,462      $ 124,276        76     20.6        1,625   
 

 

 

   

 

 

         

 

(1)  

For self-managed homes, represents average purchase price (including broker commissions and closing costs) plus average capital expenditures. For preferred operator program homes, represents purchase price (including broker commissions and closing costs) paid by us for the portfolio divided by the number of homes in the portfolio and does not include past, expected or budgeted general and administrative expenses

 

 

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  associated with ongoing monitoring activities of our investment. The preferred operator is obligated to pay for all taxes, insurance, other expenses and capital expenditures (including significant capital improvements) required for the management, operation and maintenance of the properties. Accordingly, absent a default by the preferred operator under a long-term lease agreement with us, we expect to incur no expenses related to properties under our preferred operator program, other than general and administrative expenses associated with ongoing monitoring activities of our investment.
(2)   Includes both self-managed homes and preferred operator program homes. We classify homes in our preferred operator program as 100% leased, because each preferred operator is obligated to pay us 100% of the base rent specified in the applicable lease irrespective of whether or not the homes are occupied by residential sub-tenants. This does not mean that 100% of the homes leased to preferred operators are occupied by residential sub-tenants. If a preferred operator is unable to lease a material portion of the homes it leases from us to residential sub-tenants, it may adversely affect such operator’s ability to pay rent to us under the lease. We are also eligible to receive percentage rents on a quarterly basis equal to a fixed percentage of gross revenue that the preferred operator collects from its residential sub-tenants who occupy the homes.
(3)   Phoenix-Mesa-Glendale, AZ MSA.
(4)   Riverside-San Bernardino-Ontario, CA MSA.
(5)   Chicago-Joliet-Naperville, IL Metropolitan Division.
(6)   Dallas-Plano-Irving, TX Metropolitan Division.
(7)   Atlanta-Sandy Springs-Marietta, GA MSA.
(8)   Las Vegas-Paradise, NV MSA.

 

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

(as of December 31, 2012)

 

                                                    Leased Homes  

MSA / Metro Division

  Number of
Homes
    Average
Purchase
Price Per
Home (1)
    Average
Capital
Expenditures
Per Home (2)
    Average
Investment
Per
Home (3)
    Aggregate
Investment
    Percentage
Leased
    Average
Age
(years)
    Average
Size
(square
feet)
    Average
Monthly
Rent
Per
Leased
Home
    Annual
Average
Rent per
Leased
Home as a
Percentage
of Average
Investment
Per Leased
Home (4)
 

Phoenix, AZ

    838      $ 139,194      $ 895      $ 140,089      $ 117,394,582        84     11.0        1,772      $ 1,031        9.0

Riverside-San Bernandino, CA

    211      $ 154,154      $ 10,552      $ 164,706        34,752,966        13     15.2        1,916      $ 1,464        11.7

Dallas, TX

    42      $ 139,023      $ 123      $ 139,146        5,844,132        74     14.9        2,088      $ 1,439        12.6

Las Vegas, NV

    43      $ 102,549      $ 8,002      $ 110,551        4,753,693        44     6.1        1,624      $ 1,039        12.4

Atlanta, GA

    13      $ 61,747      $ 72      $ 61,819        803,647        92     23.3        1,343      $ 769        16.4

Other

    81      $ 107,619      $ 1,386      $ 109,005        8,829,405        10     35.4        1,334      $ 1,086        12.3
 

 

 

         

 

 

           

Total / Weighted Average

    1,228      $ 137,573      $ 2,800      $ 140,373      $ 172,378,425        65     13.4        1,769      $ 1,120        9.9
 

 

 

         

 

 

           

 

(1)   Average purchase price includes broker commissions and closing costs.
(2)   Represents average capital expenditures per home as of December 31, 2012. Does not include additional expected or future capital expenditures.
(3)   Represents average purchase price plus average capital expenditures.
(4)  

Represents annualized average monthly rent per leased home as a percentage of our average investment (average purchase price per home plus average capital expenditures) per leased home. Does not include a provision for payment of ongoing property expenses (such as insurance, taxes, HOA fees and maintenance) or an allocation of our general and administrative expense, all of which materially impact our results.

 

 

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Accordingly, it should not be interpreted as a measure of profitability, and its utility in evaluating our business is limited. Average monthly rent for leased homes may not be indicative of average rents we may achieve on our vacant homes.

 

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

(as of December 31, 2012)

 

MSA / Metro Division

  Number of
Homes
    Average
Investment
Per
Home (1)
    Aggregate
Investment
    Percent
Leased (2)
    Average
Age
(years)
    Average
Size
(square
feet)
    Average
Monthly
Rent Per
Home
Paid by
Preferred
Operator
to Us (3)
    Annual
Rent as a
Percentage
of Average
Investment
Per
Home (4)
 

Chicago, IL

    204      $ 135,147      $ 27,569,988        100     54.1        1,384      $ 788        7.0

Phoenix, AZ

    141      $ 68,085        9,599,985        100     47.1        1,256      $ 454        8.0

Atlanta, GA

    60      $ 74,003        4,440,180        100     17.5        1,529      $ 493        8.0

Las Vegas, NV

    4      $ 60,116        240,464        100     39.8        1,106      $ 401        8.0

Other

    138      $ 46,090        6,360,420        100     8.7        1,126      $ 307        8.0
 

 

 

     

 

 

           

Total / Weighted Average

    547      $ 88,137      $ 48,211,037        100     36.7        1,300      $ 546        7.4
 

 

 

     

 

 

           

 

(1)   Represents purchase price (including broker commissions and closing costs) paid by us for the portfolio divided by the number of homes in the portfolio and does not include past, expected or budgeted general and administrative expenses associated with ongoing monitoring activities of our investment. The preferred operator is obligated to pay for all taxes, insurance, other expenses and capital expenditures (including significant capital improvements) required for the management, operation and maintenance of the properties. Accordingly, absent a default by the preferred operator under a long-term lease agreement with us, we expect to incur no expenses related to properties under our preferred operator program, other than general and administrative expenses associated with ongoing monitoring activities of our investment.
(2)   We classify homes in our preferred operator program as 100% leased, because each preferred operator is obligated to pay us 100% of the base rent specified in the applicable lease irrespective of whether or not the homes are occupied by residential sub-tenants. This does not mean that 100% of the homes leased to preferred operators are occupied by residential sub-tenants. If a preferred operator is unable to lease a material portion of the homes it leases from us to residential sub-tenants, it may adversely affect such operator’s ability to pay rent to us under the lease. We are also eligible to receive percentage rents on a quarterly basis equal to a fixed percentage of gross revenue that the preferred operator collects from its residential sub-tenants who occupy the homes.
(3)   Represents the initial annual base rent payable to us by the preferred operate pursuant to the portfolio lease divided by 12 and then divided by the number of homes included in the lease. Does not include percentage rents we are also eligible to receive in addition to base rents on a quarterly basis equal to a fixed percentage of gross revenue that the preferred operator collects from its residential sub-tenants who occupy the homes. The percentage rents we are eligible to receive fluctuate based on both the occupancy rates of the underlying homes and the rental rates paid by the residential sub-tenants.
(4)   Represents annualized average monthly rent paid by preferred operator to us as a percentage of our average investment per home.

 

 

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The following charts present our homes as of December 31, 2012 by purchase price and by square footage.

 

LOGO    LOGO

 

Stabilized Properties

 

When we acquire a property that is not leased, we must possess, restore, market and lease the property before it becomes a revenue generating asset. We refer to this process as property stabilization. Based on our founders’ prior experience, we anticipate that, on average, the stabilization period for each non-leased property will range from 90 to 180 days, depending on factors such as the channel through which the property was acquired, the age and condition of the property and whether the property was vacant when we acquired it. Similarly, the time to market and lease a property is driven by local demand, our marketing techniques and the size of our available inventory. Consequently, we expect that most properties that were not leased at the time of acquisition should be stabilized within six months thereafter and that properties owned for more than six months provide the best indication of how our portfolio will perform over the long-term. As of December 31, 2012, we had 70 properties owned for six months or longer, 79% of which were leased.

 

 

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The following table presents summary statistics of our portfolio of self-managed single-family homes we had owned for at least six months as of December 31, 2012.

 

Portfolio of Self-Managed Properties Owned for Six Months or Longer—Summary Statistics

(as of December 31, 2012)

 

                                              Leased Homes  

MSA / Metro Division

  Number
of Homes
    Average
Purchase
Price Per
Home (1)
    Average
Capital
Expenditure
Per Home (2)
    Average
Investment
Per
Home (3)
    Homes
Leased
    Homes
Vacant (4)
    Percentage
Leased
    Average
Monthly
Rent
Per
Leased
Home
    Annual
Average
Rent Per
Leased
Home as a
Percentage
of Average
Investment
Per Leased
Home (5)
 

Phoenix, AZ

    57      $ 126,106      $ 1,835      $ 127,941        50        7        88   $ 1,040        9.8

Riverside-San Bernandino, CA

    12      $ 174,318      $ 9,648      $ 183,966        4        8        33   $ 1,659        10.8

Las Vegas, NV

    1      $ 134,044      $ 5,316      $ 139,360        1               100   $ 1,350        11.6
 

 

 

         

 

 

   

 

 

       

Total / Weighted Average

    70      $ 134,484      $ 3,224      $ 137,708        55        15        79   $ 1,089        9.9
 

 

 

         

 

 

   

 

 

       

 

(1)   Average purchase price includes broker commissions and closing costs.
(2)   Represents average capital expenditures per home as of December 31, 2012. Does not include additional expected or future capital expenditures.
(3)   Represents average purchase price plus average capital expenditures.
(4)   As of March 20, 2013, eight homes were available for rent and three homes were undergoing renovation.
(5)   Represents annualized average monthly rent per leased home as a percentage of our average investment (average purchase price per home plus average capital expenditures) per leased home. Does not include a provision for payment of ongoing property expenses (such as insurance, taxes, HOA fees and maintenance) or an allocation of our general and administrative expense, all of which materially impact our results. Accordingly, it should not be interpreted as a measure of profitability, and its utility in evaluating our business is limited. Average monthly rent for leased homes may not be indicative of average rents we may achieve on our vacant homes.

 

Private Mortgage Portfolio

 

As a supplement to our primary business strategy of acquiring, restoring, leasing and managing single-family homes, we also have a private mortgage financing strategy that generates attractive returns on invested capital and provides us access to acquisition opportunities and valuable market data. Private mortgage financings are generally secured by first mortgage liens on single-family homes and are generally structured as interest only notes with short-term balloon maturities. Proceeds from these loans generally are used to finance the acquisition of homes for short-term resale or to provide temporary financing to investors who intend to refinance their acquisition of homes with longer term bank financing. As of December 31, 2012, our private mortgage portfolio had an aggregate outstanding principal balance of $12.2 million, a weighted-average interest rate of 12.1% per annum and a weighted-average remaining term of 155 days. We also owned an additional $0.8 million in long-term mortgage investments. To date, the properties securing the mortgage loans we have funded have been in Arizona, California and Nevada.

 

 

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Acquisition Activity

 

We have aggressively grown our portfolio of single-family homes and our portfolio of private mortgage loans in a disciplined manner and intend to continue to do so. The following chart illustrates our monthly acquisition activity for the period from June 1, 2012 through December 31, 2012.

 

Acquisition Activity (June 1, 2012 through December 31, 2012)

 

LOGO

 

(1)   Represents purchase price (including broker commissions and closing costs) plus capital expenditures for self-managed homes plus the purchase price (including broker commissions and closing costs) paid by us for homes in the preferred operator program.
Note:   Items marked “(LHS)” in graph above are measured against the left-hand-side vertical axis, and items marked “(RHS)” are measured against the right-hand-side vertical axis.

 

Our Investment Process

 

We have a scalable real estate acquisition and management platform that we believe is among the most advanced in the single-family rental sector. Our founders began developing our platform in 2008, and the platform has been expanded and refined based upon actual operating experience over the past four years. Our platform integrates proprietary processes and technology that support the functions necessary for the acquisition and management of single-family homes on an institutional scale. We use our proven technology to identify attractive markets and investments and to restore and manage our properties.

 

Investment Criteria for Market Selection

 

Our acquisition strategy is based upon extensive market research. Notwithstanding the large number of homeowners experiencing financial distress, not all regions of the country offer attractive investment opportunities. When identifying desirable markets, we focus on factors such as the magnitude of housing price

 

 

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declines, strength of rental demand and rates of job growth, population growth and unemployment. We use data from a variety of sources and evaluate macroeconomic and microeconomic inputs (including housing market, demographic and economic data). Within markets that meet our selection criteria, we seek to identify the submarkets, subdivisions and neighborhoods that offer the most attractive mix of housing prices, rental demand and rental rates, which are often characterized by good access to transportation networks and employment centers, good schools and low levels of crime.

 

Our Property Management Process

 

We have the infrastructure, systems and personnel to provide the continuum of property management services, including securing a property upon acquisition, coordinating with utility companies, controlling the restoration process, managing the leasing process, communicating with tenants, collecting rents, conducting periodic inspections, managing routine property maintenance and repair, paying sales taxes and homeowners’ association, or HOA, fees and interfacing with vendors and contractors.

 

We currently manage properties in seven states, and we have a total of approximately 27 employees (25 in Arizona, one in Texas and one in Illinois) who perform property management functions. We are directing several hundred restoration and re-tenancy projects, supervising the efforts of general contractors and sub-contractors nationwide and managing HOA memberships and utility services of all of our self-managed properties. By performing these functions internally with respect to our self-managed portfolio, we believe that we establish improved communications, foster direct relationships with tenants and gain tighter control over the quality and cost of restorations and property maintenance. In addition, we believe that our bottom-line focus will allow us to provide property management services for our self-managed portfolio more efficiently than other market participants who may contract with third parties on a fee-for-services approach.

 

Additionally, our tenants can make maintenance requests on a 24-hour basis through our website or emergency telephone hotline, both of which are administered and managed from our headquarters office. Upon receiving a maintenance request, our maintenance personnel and systems quickly identify an appropriate service provider from our network of vendor relationships and dispatch repair personnel to the home. We continually strive to exceed our tenants’ expectations with respect to maintenance and service in an effort to retain tenants and maintain the value of our properties.

 

Technology and Systems

 

We believe that robust information technology is essential to efficiently acquire and manage a large-scale portfolio of single-family rental homes. We have a scalable real estate acquisition and management platform, which our founders began developing in 2008 and have been expanding and refining over the past four years, that we believe is among the most advanced in the single-family rental sector. This technology is critical to expanding our business, seeking to maximize revenues and minimize expenses and achieving economies of scale. Our systems are designed to enable us to gather and evaluate large amounts of housing, demographic and economic data to support our ongoing acquisition activities. We are able to quickly evaluate opportunities presented through our various acquisition channels and adjust to rapidly changing market conditions. Additionally, the economic and market data captured by our systems allow us to evaluate potential mortgage investments as a supplement to our home acquisition activities as a means of seeking enhanced current return. Our systems also accumulate and analyze data at the individual property and portfolio levels. We capture, update and monitor economic and physical information about a property throughout the period of our ownership and management. This allows us to efficiently develop a restoration program, negotiate with and engage third-party vendors and service providers, market and lease our properties and monitor the value, market position and physical condition of our properties on an ongoing basis.

 

 

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Technology is also essential to enhance tenant satisfaction, which we believe is an important means of reducing tenant turnover. In addition to offering 24-hour maintenance requests by telephone or through our website, we offer our tenants convenient ways to pay rent, including electronically.

 

Management of Phoenix Fund

 

As of December 31, 2012, we managed 606 properties for Phoenix Fund, a fully committed private investment fund formed by Mr. Schmitz and Ms. Hawkes in 2010 to invest opportunistically in single-family homes as rental properties. From the completion of our initial private offering through February 11, 2013, our TRS managed Phoenix Fund for a fee pursuant to a sub-management agreement with ARM. Since February 11, 2013, our TRS has managed Phoenix Fund for a fee pursuant to a management agreement with Phoenix Fund. See “Certain Relationships and Related Party Transactions.”

 

Our Financing Strategy

 

To date, all of our assets were purchased with cash, but, in the future, we may incur various types of indebtedness. We have obtained a $150 million senior secured revolving credit facility from a syndicate of major national banks with an accordion feature that allows us, assuming our compliance with applicable covenants and at the lenders’ discretion, to borrow up to $300 million thereunder if certain criteria are met. The credit facility is secured by our ownership interest in American Residential Leasing Company, LLC, which is a wholly owned subsidiary of our operating partnership. The credit facility matures in January 2015, has an optional one-year extension (assuming our compliance with applicable covenants) and bears interest at a rate of LIBOR plus a spread ranging from 2.50% to 3.25% based on a ratio of total indebtedness to total asset value (each as defined in the credit agreement that governs the credit facility) ranging from less than or equal to 45% to greater than 55%. In addition to customary affirmative and negative covenants, the credit agreement requires us to comply with various financial covenants, including a maximum leverage ratio, a minimum fixed charge coverage ratio, a minimum tangible net worth and a minimum liquidity amount.

 

Our Formation Transactions and Structure

 

We were incorporated in Maryland in March 2012. Our initial stockholders were Mr. Schmitz, our Chief Executive Officer and Chairman, and Ms. Hawkes, our President and Chief Operating Officer and a member of our Board of Directors, each of whom purchased 500 shares of our common stock upon our incorporation for a price of $1.00 per share.

 

We own all of our assets and conduct substantially all of our operations through American Residential Properties OP, L.P., or our operating partnership, and its subsidiaries, including American Residential Leasing Company, LLC. Our wholly owned subsidiary, American Residential GP, LLC, is the sole general partner of our operating partnership and the entity through which we have the exclusive power to manage and conduct the business and affairs of our operating partnership.

 

Upon closing our initial private offering in May 2012, we issued 11,198,757 shares of our common stock to various institutional investors and accredited investors at an offering price of $20.00 per share, and we received approximately $209.9 million of net proceeds, before expenses. Upon closing our follow-on private offering in December 2012, we issued 7,187,500 shares of our common stock to various institutional investors and accredited investors at an offering price of $20.50 per share, and we received approximately $139.2 million of net proceeds, before expenses. Upon closing our direct private placement in January 2013, we issued 37,600 shares of our common stock at a price of $20.50 per share, and we received approximately $0.8 million of gross proceeds, before expenses. We contributed the net proceeds from these offerings and our incorporation to our operating partnership in exchange for an aggregate of 18,424,857 OP units. In addition, upon closing our initial

 

 

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private offering, we acquired substantially all of the assets of ARM, a company co-owned by Mr. Schmitz and Ms. Hawkes, pursuant to a contribution and sale agreement between our operating partnership and ARM. ARM is the vehicle within which our founders further developed our proprietary real estate acquisition and management platform. Our operating partnership issued 175,000 OP units to ARM and we paid $85,000 in cash as consideration for our acquisition of the ARM assets. As a result, upon completion of our initial private offering, we owned our founders’ proprietary real estate acquisition and management platform. We consider May 11, 2012, the closing date of our initial private offering and of our acquisition of the ARM assets, to be the date on which we first commenced investment activities. See “Certain Relationships and Related Party Transactions.” In our initial private offering in May 2012, Phoenix Fund purchased 150,000 shares of our common stock at the offering price.

 

We have granted a total of 522,297 long-term incentive plan units, or LTIP units, and restricted shares of our common stock to our officers, employees and directors under the American Residential Properties, Inc. 2012 Equity Incentive Plan, or our 2012 Equity Incentive Plan. Giving effect to these outstanding vested and unvested awards, upon completion of this offering, we will have a     % partnership interest (including our 1.0% general partnership interest) in our operating partnership, our officers, employees and directors as a group will have a     % partnership interest in our operating partnership and ARM will have a     % partnership interest in our operating partnership.

 

 

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The following chart illustrates our organizational structure, after giving effect to this offering:

LOGO

 

(1)   Includes investors from our initial private offering, our follow-on private offering and our direct private placement.
(2)   Includes 18,375 restricted shares of our common stock held by our employees and 150,000 shares of our common stock held by Phoenix Fund.
(3)   After giving effect to an aggregate of 503,922 vested and unvested LTIP units that have been granted to our officers, employees and directors.
(4)   This entity is the borrower under our $150 million senior secured credit facility.

 

 

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Summary Risk Factors

 

An investment in our common stock is subject to significant risks. Listed below are some of the most significant risks relating to an investment in our common stock.

 

   

We are an early entrant in an emerging industry, and the long-term viability of our business strategy on an institutional scale is unproven.

 

   

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

 

   

Our success depends to a significant degree upon the continued contributions of certain key personnel, each of whom would be difficult to replace. If we were to lose the benefit of the experience, efforts and abilities of one or more of these individuals, particularly our founders, our operating results could suffer.

 

   

Our investments are, and will continue to be, concentrated in the single-family housing sector and in a number of markets nationally. This exposes us to the risk of downturns in that sector or in such markets, and we would be adversely affected by an economic downturn or other adverse events impacting the single-family housing sector or any of such markets.

 

   

Our dependence upon local, third-party service providers may harm our financial results or reputation if the third parties fail to perform.

 

   

Our long-term growth will depend significantly upon future acquisitions of single-family homes that meet our acquisition criteria.

 

   

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

 

   

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

 

   

We may be unable to renew leases and our occupancy rate could decline.

 

   

The large supply of single-family homes becoming available for purchase as a result of the heavy volume of foreclosures, combined with historically low residential mortgage rates, may cause some potential renters to seek to purchase residences rather than lease them and, as a result, cause a decline in the number and quality of potential tenants.

 

   

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

 

   

Mr. Schmitz and Ms. Hawkes have duties to Phoenix Fund which may create conflicts of interest, and these conflicts may not be resolved in our favor, which could adversely affect us.

 

   

Our fiduciary duties to the limited partners of our operating partnership could create conflicts of interest, which may impede business decisions that could benefit our stockholders.

 

   

There is currently no public market for our common stock, an active trading market for our common stock may never develop and our common stock price may be volatile and could decline substantially following this offering.

 

   

The price to public per share of our common stock offered by this prospectus may not accurately reflect the value of your investment.

 

 

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The availability and timing of cash distributions are uncertain.

 

   

Members of our senior management team, our Board of Directors, continuing investors and Phoenix Fund collectively own a significant amount of our common stock, or OP units or LTIP units exchangeable for shares of our common stock, and future sales by these holders of shares of our common stock, or the perception that such sales could occur in the future, could have a material adverse effect on the market price of our common stock.

 

   

Failure to qualify as a REIT, or failure to remain qualified as a REIT, would cause us to be taxed as a regular corporation, which would substantially reduce funds available for distribution to our stockholders.

 

   

You may be restricted from acquiring or transferring certain amounts of our common stock.

 

Restrictions on Ownership and Transfer

 

Due to limitations on the concentration of ownership of REIT stock imposed by the Internal Revenue Code of 1986, as amended, or the Code, subject to certain exceptions, our charter provides that no person may beneficially or constructively own, more than 9.8% in value or in number of shares, whichever is more restrictive, of the outstanding shares of any class or series of our capital stock. See “Description of Capital Stock—Restrictions on Ownership and Transfer.”

 

Our charter also prohibits any person from, among other matters:

 

   

beneficially or constructively owning or transferring shares of our capital stock if such ownership or transfer would result in our being “closely held” within the meaning of Section 856(h) of the Code (without regard to whether the ownership interest is held during the last half of a year);

 

   

transferring shares of our capital stock if such transfer would result in our capital stock being owned by fewer than 100 persons, effective beginning on the date on which we first have 100 stockholders;

 

   

beneficially or constructively owning shares of our capital stock to the extent such beneficial or constructive ownership would cause us to constructively own 10% or more of the ownership interests in a tenant (other than a taxable REIT subsidiary) of our real property within the meaning of Section 856(d)(2)(B) of the Code; or

 

   

beneficially or constructively owning or transferring shares of our capital stock if such beneficial or constructive ownership or transfer would otherwise cause us to fail to qualify as a REIT under the Code.

 

Our Board of Directors, in its sole discretion, may exempt (prospectively or retroactively) a person from the 9.8% ownership limit and other restrictions in our charter and may establish or increase an excepted holder percentage limit for such person if our Board of Directors obtains such representations, covenants and undertakings as it deems appropriate in order to conclude that granting the exemption and/or establishing or increasing the excepted holder percentage limit will not cause us to fail to qualify as a REIT.

 

Our charter also provides that any ownership or purported transfer of our stock in violation of the foregoing restrictions will result in the shares owned or transferred in such violation being automatically transferred to one or more charitable trusts for the benefit of a charitable beneficiary and the purported owner or transferee acquiring no rights in such shares, except that any transfer that results in the violation of the restriction relating to shares of our capital stock being beneficially owned by fewer than 100 persons will be void ab initio . If the transfer to the trust is ineffective for any reason to prevent a violation of the restriction, the transfer that would have resulted in such violation will be void ab initio .

 

 

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Distribution Policy

 

We intend to make quarterly cash distributions to our stockholders, consistent with our intention to qualify as a REIT for federal income tax purposes. The amount, timing and frequency of any distributions will be determined by our Board of Directors in its sole discretion. Our Board of Directors will consider such factors as it deems relevant when authorizing any distributions, which may include, among others: our actual and projected results of operations; our liquidity, cash flows and financial condition; the revenue from our properties and other investments; our operating expenses; economic conditions; the timing of the investment of the net proceeds from this offering; applicable law; any debt service requirements; our capital expenditures; prohibitions and other limitations under our financing arrangements; our REIT taxable income; the annual distribution requirements under the REIT provisions of the Code; and other factors as our Board of Directors may deem relevant. We cannot guarantee whether or when we will be able to make distributions or that any distributions will be sustained over time. See “Distribution Policy.”

 

Our Tax Status

 

We intend to elect and qualify to be taxed as a REIT for federal income tax purposes commencing with our short taxable year ended December 31, 2012. We believe that we have been organized and have operated in a manner that will allow us to qualify as a REIT for federal income tax purposes commencing with such taxable year, and we intend to continue operating in such a manner. To qualify and maintain our qualification as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we annually distribute to our stockholders at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain. See “Material Federal Income Tax Considerations.”

 

Emerging Growth Company Status

 

We are an “emerging growth company,” as defined in the JOBS Act, and we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies.” These exemptions provide that, so long as a company qualifies as an “emerging growth company,” it will, among other things:

 

   

be exempt from the “say on pay” provisions (requiring a non-binding stockholder vote to approve compensation of certain executive officers) and the “say on golden parachute” provisions (requiring a non-binding stockholder vote to approve golden parachute arrangements for certain executive officers in connection with mergers and certain other business combinations) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, and certain disclosure requirements of the Dodd-Frank Act relating to compensation of its chief executive officer;

 

   

be permitted to omit the detailed compensation discussion and analysis from proxy statements and reports filed under the Securities Exchange Act of 1934, as amended, or the Exchange Act, and instead provide a reduced level of disclosure concerning executive compensation; and

 

   

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

 

Although we are still evaluating the JOBS Act, we currently may take advantage of some or all of the reduced regulatory and reporting requirements that will be available to us so long as we qualify as an “emerging growth company,” except that we have irrevocably elected not to take advantage of the extension of time to comply with new or revised financial accounting standards available under Section 102(b) of the JOBS Act.

 

 

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We will, in general, qualify as an “emerging growth company” until the earliest of:

 

   

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

 

   

the last day of our fiscal year in which we have annual gross revenue of $1.0 billion or more;

 

   

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

 

   

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

 

Selling Stockholders

 

Pursuant to, and subject to the terms and conditions of, the registration rights agreements described below, persons who purchased shares of our common stock in our initial private offering in May 2012 and their respective transferees have the right to sell their common stock in this offering, subject to customary terms and conditions including underwriter cutback rights. We are including              shares of our common stock in this offering to be sold by selling stockholders.

 

Registration Rights and Lock-Up Agreements

 

Pursuant to registration rights agreements between us and the initial purchaser/placement agent for our initial private offering in May 2012 and our follow-on private offering in December 2012, which we refer to as the registration rights agreements, we are required, among other things, to:

 

   

file with the Securities and Exchange Commission, or the SEC, a resale shelf registration statement registering all of the shares of our common stock sold in our private offerings that are not sold by selling stockholders in this offering no later than April 30, 2013; and

 

   

use our commercially reasonable efforts to cause the resale shelf registration statement to become effective under the Securities Act of 1933, as amended, or the Securities Act, as promptly as practicable after the filing (such time of effectiveness may be deferred until up to 60 days after completion of this offering), and to maintain the resale shelf registration statement continuously effective under the Securities Act for a specified period.

 

Subject to certain exceptions, each of our officers, directors and Phoenix Fund has entered into a lock-up agreement with respect to shares of our common stock and securities exchangeable or exercisable for shares of our common stock, restricting the direct or indirect sale of such securities for 180 days after the date of this prospectus without the prior written consent of the representatives of the underwriters of this offering. Additionally, all of our other stockholders have agreed with us not to directly or indirectly sell, offer to sell, grant any option or otherwise transfer or dispose of our common stock for 180 days, in the case of holders who are selling stockholders in this offering, and 60 days, in the case of holders who are not selling stock in this offering, in each case after the date of this prospectus. We have agreed not to waive or otherwise modify this agreement without the prior written consent of the representatives of the underwriters of this offering.

 

Corporate Information

 

Our principal executive offices are located at 7047 East Greenway Parkway, Suite 350, Scottsdale, Arizona 85254. Our main telephone number is (480) 474-4800. Our Internet website is www.americanresidentialproperties.com . Information on our website is not incorporated into or a part of this prospectus.

 

 

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The Offering

 

Common stock offered by us

                shares (plus up to an additional              shares of our common stock that we may issue and sell upon the exercise of the underwriters’ over-allotment option in full).

Common stock offered by selling stockholders

                shares

Common stock to be outstanding after this offering

                shares (1)

Common stock and OP units to be outstanding after this offering

  

             shares and OP units (1)(2)

Use of proceeds

  

We estimate that the net proceeds to us from this offering, after deducting underwriting discounts and commissions and other estimated offering expenses payable by us, will be approximately $         million, based on the mid-point of the price range set forth on the front cover page of this prospectus ($         million if the underwriters exercise their over-allotment option in full). We will use these net proceeds to acquire, restore, lease and manage single-family homes as rental properties, to provide short-term private mortgage financing secured by interests in single-family homes and for general business purposes. Prior to the full deployment of the net proceeds of this offering as described above, we may invest the undeployed net proceeds in interest-bearing, short-term, investment-grade securities or money market accounts that are consistent with our intention to qualify as a REIT. We expect that these initial investments will provide a lower net return than we expect to receive from the investments described above.

 

We will not receive any proceeds from the sale of our common stock by the selling stockholders.

Listing

   We intend to apply to list our common stock on the NYSE under the symbol “    .”

 

(1)   Excludes              shares of our common stock that we may issue and sell upon the exercise of the underwriters’ over-allotment option. Includes 18,375 restricted shares of our common stock issued to certain of our employees pursuant to our 2012 Equity Incentive Plan. Excludes              shares of our common stock that will be available for future issuance under our 2012 Equity Incentive Plan upon completion of this offering.
(2)   Includes (a) 175,000 OP units issued to ARM, an entity co-owned by Mr. Schmitz and Ms. Hawkes, in connection with our acquisition of the ARM assets, which units may, subject to certain limitations, be redeemed for cash or, at our option, exchanged for shares of our common stock on a one-for-one basis and (b) 503,922 shares of our common stock underlying an aggregate of 503,922 LTIP units issued to our executive officers, certain of our employees and our independent directors pursuant to our 2012 Equity Incentive Plan.

 

 

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Summary Selected Consolidated Financial Data

 

The following tables present selected historical consolidated financial data and selected portfolio data for the period from March 30, 2012 (inception) through December 31, 2012 and as of December 31, 2012. The selected historical consolidated financial data presented below under the captions “Consolidated Statement of Operations Data” and “Consolidated Balance Sheet Data” have been derived from our audited consolidated financial statements. Since the information presented below is only a summary and does not provide all of the information contained in our historical 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” and our historical consolidated financial statements, including the related notes, included elsewhere in this prospectus.

 

Consolidated Statement of Operations Data

 

     Period from
March 30, 2012
(inception) through
December 31, 2012
 
     ($ in thousands)  

Revenue:

  

Rental

   $ 2,195   

Other

     735   
  

 

 

 

Total revenue

     2,930   

Expenses:

  

Property operating and maintenance

     912   

Real estate taxes

     608   

Homeowners’ association fees

     330   

Acquisition

     760   

Depreciation and amortization

     1,804   

General, administrative and other

     4,837   
  

 

 

 

Total expenses

     9,251   
  

 

 

 

Loss from continuing operations before equity in net income of unconsolidated ventures

     (6,321

Equity in net income of unconsolidated ventures

     83   
  

 

 

 

Net loss and comprehensive loss

   $ (6,238
  

 

 

 

 

Consolidated Balance Sheet Data

 

     As of December 31, 2012  
     ($ in thousands)  

Investment in real estate, net

   $ 216,696   

Cash and cash equivalents

   $ 101,725   

All other assets

   $ 31,006   

Total assets

   $ 349,427   

Total liabilities

   $ 3,196   

Total equity

   $ 346,231   

 

Selected Portfolio Data

 

     As of December 31, 2012  

Total properties owned

     1,775   

Properties owned for at least six months

     70   

Leased properties owned for at least six months

     55   

Occupancy percentage of properties owned for at least six months

     79

 

 

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RISK FACTORS

 

Investing in our common stock involves risks. Before you invest in our common stock, you should carefully consider the risk factors below together with all of the other information included in this prospectus. The occurrence of any of the following risks could materially and adversely affect our business, prospects, ability to implement our investment strategy, financial condition, liquidity, cash flows, results of operations and our ability to make or sustain distributions to our stockholders, which could result in a partial or complete loss of your investment in our common stock. Some statements in this prospectus, including statements in the following risk factors, constitute forward-looking statements. See “Cautionary Note Regarding Forward-Looking Statements.”

 

Risks Related to Our Business

 

We are an early entrant in an emerging industry, and the long-term viability of our business strategy on an institutional scale is unproven.

 

Large-scale institutional investment in single-family residential homes as investment properties for rent is a relatively recent phenomenon that has emerged out of the mortgage and housing crisis that began in late 2007. Prior to that time, single-family homes were generally not viewed as a viable asset for investment on a large scale by institutional investors. Consequently, the long-term viability of single-family residential investment strategies at an institutional scale has not yet been proven. As an early entrant in this emerging industry, we are subject to the risk that single-family rental homes may not prove to be a viable long-term business strategy for a permanent capital vehicle at an institutional scale. If it turns out that our strategy is not a viable long-term business strategy for a permanent capital vehicle at an institutional scale, we may not be able to sustain the growth of our assets and our operations that we seek.

 

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

 

We were incorporated in March 2012 and commenced investment activities in May 2012, and we have a limited operating history. Our financial condition, results of operations and ability to make or sustain distributions to our stockholders will depend on many factors, including:

 

   

our ability to identify attractive acquisition opportunities that are consistent with our investment strategy;

 

   

our ability to consummate acquisitions on favorable terms;

 

   

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

 

   

our ability to contain restoration, maintenance, marketing and other operating costs;

 

   

real estate appreciation or depreciation in our markets;

 

   

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

 

   

our ability to absorb costs that are beyond our control, such as real estate taxes, HOA fees, insurance premiums, litigation costs and compliance costs;

 

   

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

 

   

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

 

   

economic conditions in our markets, as well as the condition of the financial and real estate markets and the economy generally.

 

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

 

Recently, several institutional investors have begun acquiring single-family homes on a large scale. Traditionally, foreclosed properties and loans secured by properties in pre-foreclosure were sold individually to private home buyers and small-scale investors. The sale of these assets in portfolios and the entry into this market of large, well-capitalized institutional investors, including us, are relatively recent trends, which we expect to intensify in the near future. Other REITs and investment funds have recently deployed, or are expected to deploy in the near future, significant amounts of capital in the single-family housing sector and may have investment objectives that overlap with ours. In acquiring our target assets, we will compete with a variety of well-capitalized real estate investors, including pension funds, individual home buyers, banks, insurance companies, public and private real estate investors, such as REITs, real estate limited partnerships and other entities engaged in real estate investment activities. Some of our competitors may be larger and have greater financial, technical, leasing, marketing and other resources than we do. Some competitors may have a lower cost of capital and access to capital sources that may not be available to us. At this time, neither we nor any other company has established a market-leading position, and, even if we succeed in becoming an industry leader, there can be no assurance that it will confer any long-term competitive advantage or positive financial results.

 

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

 

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

 

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

 

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

 

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

 

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

 

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We intend to rapidly expand our scale of operations and make acquisitions even if the rental and housing markets are not as favorable as they have been in recent months, which could adversely impact anticipated yields.

 

Our long-term growth depends on the availability of acquisition opportunities in our current markets and other markets at attractive pricing levels. We believe various factors and market conditions have made homes available for purchase at prices that are significantly below replacement cost in many markets. However, we expect that in the future housing prices will stabilize and return to more normalized levels, and therefore future acquisitions may be more costly and result in lower yields. See “Industry Overview and Market Opportunity.” There are many factors that may cause a recovery in the housing market that would result in future acquisitions becoming more expensive and possibly less attractive than recent past and present opportunities, including:

 

   

improvements in the overall economy and job market;

 

   

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

 

   

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

 

   

increasing competition for single-family assets from private investors, entities with similar investment objectives to ours and owner-occupants; and

 

   

tax or other government incentives that encourage homeownership.

 

We will 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 cash available for distribution per share will be reduced and the market price of our common stock may decline.

 

The past performance of our senior management and our limited operating history may not be indicative of our future results.

 

You should not rely upon the past performance of our senior management, as their past performance at Phoenix Fund, ARM or in their other prior professional endeavors may not be indicative of our future results. Furthermore, we only commenced our investment activities in May 2012, and our limited operating history and the prior operating history of our senior management may not be indicative of our future results.

 

Our success depends to a significant degree upon the continued contributions of certain key personnel, each of whom would be difficult to replace. If we were to lose the benefit of the experience, efforts and abilities of one or more of these individuals, particularly our founders, our operating results could suffer.

 

As an internally managed company, our ability to achieve our investment objective and to make distributions to our stockholders depends upon the performance of our management team. We rely on our management team to, among other things, identify and consummate acquisitions, design and implement our financing strategies, manage our investments and conduct our day-to-day operations. We are dependent upon the performance of our senior executive team, which is comprised of Mr. Schmitz, our Chief Executive Officer and Chairman, Ms. Hawkes, our President and Chief Operating Officer and a member of our Board of Directors, Mr. Koumriqian, our Chief Financial Officer, Mr. Kent, our Senior Vice President, Investments, Chief Compliance Officer, General Counsel and Secretary, and Ms. Porter, our Senior Vice President, Operations. We cannot guarantee the continued employment of any of our key executives who may choose to leave our company for any number of reasons, such as other business opportunities, differing views on our strategic direction or other disagreements. We rely on the experience, efforts and abilities of these individuals, each of whom would be difficult to replace. We do not have any “key-man” life insurance on any of our employees. We have entered into employment agreements with Mr. Schmitz and Ms. Hawkes and expect to enter into an employment agreement with Mr. Koumriqian; however, the employment agreements do not guarantee the continued service of our key employees.

 

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Our future success depends, in part, upon our ability to efficiently hire and retain highly skilled managerial, investment, financial and operational personnel.

 

The growth of our business will require us to hire additional qualified personnel. Competition for highly skilled managerial, investment, financial and operational personnel is intense. As a recently formed company, we cannot assure you that we will be successful in attracting and retaining such skilled personnel or in integrating any new personnel into our organization. Moreover, additional employees could result in a substantial increase in compensation expense that may not be offset with additional revenue.

 

Operating our business on a larger scale could result in substantial increases in our expenses.

 

One of our goals is to implement our single-family rental business nationally. Our business model assumes that we can successfully use our vertically integrated platform to acquire and manage single-family homes on a larger scale than we have done to date without a directly proportional increase in our expenses. As our business grows in size and complexity, we can provide no assurance that our management platform will ultimately prove to be “scalable,” we will be able to achieve economies of scale or we will be able to manage additional properties in our current markets, successfully enter new markets or grow our business without incurring significant additional expenses.

 

Our investments are, and will continue to be, concentrated in the single-family housing sector and in a number of markets nationally. This exposes us to the risk of downturns in that sector or in such markets, and we would be adversely affected by an economic downturn or other adverse events impacting the single-family housing sector or any of such markets.

 

Our investment and geographic concentrations expose us to the risk of economic downturns and adverse regulatory, environmental or other developments in the single-family housing sector or any of the markets in which our properties are located, to a greater extent than if our strategy encompassed other sectors of the real estate industry and additional markets.

 

In addition to general, regional, national and international economic conditions, our business will be impacted by the economic conditions in the specific geographic areas and markets in which we operate. We intend to continue to acquire and manage single-family homes and to provide short-term private mortgage financing secured by single-family homes located in markets where we are currently invested, which, as of December 31, 2012, included Phoenix, Arizona; Las Vegas, Nevada; the Inland Empire and Central Valley regions of California; Atlanta, Georgia; Chicago, Illinois; and Dallas, Texas. We intend to invest in other markets as well. A significant assumption underlying our investment strategy is our belief that property values and operating fundamentals for single-family homes in these markets will improve significantly over the next several years. We can provide no assurance that this assumption will prove to be correct, and each of these markets has experienced substantial economic downturns in recent years and could experience similar economic downturns in the future. It is possible that the recent economic downturn in these markets could persist, and we may not accurately predict the timing of any economic improvement in these markets.

 

Our dependence upon local, third-party service providers may harm our financial results or reputation if the third parties fail to perform.

 

Though we are internally managed, we use local, third-party vendors and service providers to provide certain services for our properties. For example, we regularly rely on third-party home improvement professionals, leasing agents and property management companies to provide services to many of our properties. Selecting, managing and supervising these third-party service providers requires significant resources and expertise. We do not have exclusive or long-term contractual relationships with any of 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

 

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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, 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 third-party service providers will reflect poorly on us and could significantly damage our reputation among desirable tenants. In the event of fraud or misconduct by a third party, we could also be exposed to material liability and be held responsible for damages, fines and/or penalties.

 

Through our preferred operator program, we lease a significant number of our properties to third-party property operators pursuant to master leases that have longer terms than our leases with individual tenants who occupy our properties directly.

 

As of December 31, 2012, 547 of our properties were leased to third-party property operators pursuant long-term agreements. These operators in turn sub-lease these properties to tenants, and the operators are obligated to pay us rent and bear all costs associated with the properties, such as insurance, real estate taxes, HOA fees and maintenance costs. To the extent these operators do not maintain sufficient occupancy or rental rates at the properties, it is possible that they will not meet their obligations to pay rent to us. Moreover, if an operator defaults on its lease with us or chooses not to extend or renew its lease, we would be required to find a replacement operator or operate the properties ourselves. No assurance can be given that operators will choose to extend or renew their leases with us or that we would be able to locate acceptable replacement operators on terms as favorable as we previously did. Moreover, if we choose to operate the properties ourselves it could increase our costs, especially if we were required to expand our operations to a new geographic area. We have agreed to pay each third-party operator a portion of the net proceeds in excess of our initial purchase price if we sell a property that the third-party operator operates during the lease term. Though we believe this provides third-party operators an incentive to maintain these properties, we will not be able to capture all of any home price appreciation that these assets may experience.

 

Long-term leases may not result in fair market lease rates over time; therefore, our income and cash available for distribution to our stockholders could be lower than if we did not enter into long-term leases.

 

Through our preferred operator program, we enter into long-term leases with third-party property operators relating to portfolios of properties. These operators, in turn, lease the properties out to individual tenants. Our longer-term leases with third-party operators provide for rent increases over time and require that the operators pay us a portion of their gross sub-lease revenue to us in the form of percentage rent. If we do not accurately judge the potential for increases in market rental rates, the rent under our long-term leases with operators may be significantly less than then-current market rental rates, even after contractual rental increases and applicable percentage rents. Further, we may have no ability to terminate those leases or to adjust the rent to then-current market rates, or, for certain long-term leases with third-party operators, we may have termination rights but may be required to pay a termination payment to the operators in connection therewith. As a result, our revenues and cash available for distribution to our stockholders could be lower than if we did not enter into long-term leases relating to portfolios of properties.

 

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

 

We anticipate that a majority of our leases to tenant-occupants will be for a term of one year. As these leases permit the residents to leave at the end of the lease term without penalty, we anticipate our rental revenues may be affected by declines in market rents more quickly than if our leases were for longer terms. Short-term leases may result in high turnover, which involves costs such as restoring the properties, marketing costs and lower occupancy levels. Because we have a limited operating history, our tenant turnover rate and related cost estimates may be less accurate than if we had more operating data upon which to base these estimates.

 

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

 

We rely on information supplied to us by prospective tenants in their rental applications to make leasing decisions, and we cannot be certain that this information is accurate. In particular, we rely on information submitted by prospective tenants regarding household income, tenure at current job, number of children and size of household. Moreover, these applications are submitted to us at the time we evaluate a prospective tenant, and we do not require tenants 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. Even though this information is not updated, we use it to evaluate the overall average credit characteristics of our portfolio over time. If tenant-supplied information is inaccurate or our tenants’ creditworthiness declines over time, we may make poor leasing or underwriting decisions and our portfolio may contain more credit risk than we believe. When we purchase properties that are subject to existing leases, we are not able to collect any information on tenant creditworthiness in connection with such purchases.

 

We may be unable to secure funds for future tenant or other capital improvements, which could limit our ability to attract or replace tenants.

 

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

 

When evaluating a property for acquisition, we make a number of significant estimates and assumptions that may prove to be inaccurate. This could cause us to overpay for a property or incur restoration and marketing costs significantly in excess of our estimates.

 

In determining whether a particular property meets our investment criteria, we make a number of significant estimates and assumptions, including the amount of time it will take us to gain possession of the property, estimated restoration costs, the amount of time between acquiring the property and leasing it, annual operating costs, rental rates and tenant default rates. These estimates and assumptions may prove to be inaccurate and cause us to overpay for properties or overvalue our properties. If we determine to make the estimates and assumptions used in evaluating potential properties for purchase more stringent, it would likely reduce the number of properties that we deem acceptable for purchase. Increases in the market prices for or decreases in the inventory of single-family homes in our markets could also reduce the number of properties that meet our investment criteria. These factors could adversely affect our ability to deploy the net proceeds from this offering in accordance with our investment strategy.

 

Furthermore, we expect that there will be a significant degree of variability in the amount of time it takes us to gain possession of a property, the amount of restoration required at a property, the quality of construction of a property, the desirability of a property’s location and other property-specific issues. Our success will depend, to a significant degree, on our ability to evaluate these factors and identify and acquire properties that can be restored, rented and maintained at attractive yields. To the extent our evaluation of these factors or our assumptions are inaccurate, our investments may not meet our expectations.

 

In addition, the market and regulatory environments relating to single-family homes have been changing rapidly, making future trends difficult to forecast. For example, an increasing number of homeowners now wait

 

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for an eviction notice or eviction proceedings to commence before vacating a foreclosed property, which significantly increases the time period between the acquisition and leasing of a property. Such changes affect the accuracy of our assumptions and, in turn, may adversely affect us.

 

Our long-term growth will depend significantly upon future acquisitions of single-family homes that meet our acquisition criteria.

 

The acquisition of single-family homes entails various risks, including the risks that we may overvalue a home, our homes may not perform as we expect, we may be unable to quickly and efficiently restore and lease our self-managed homes, our tenants may default and our cost estimates for restoring an acquired home may prove inaccurate. In addition, we cannot assure you of the continued availability of acquisition opportunities in our markets at attractive pricing levels.

 

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

 

Many of the expenses associated with our business, such as acquisition costs, restoration and maintenance costs, HOA fees, personal and real property taxes, insurance, compensation and other general expenses are fixed and would not necessarily decrease proportionally with any decrease in revenue. Our assets also require a significant amount of ongoing capital expenditure. Our expenses, including capital expenditures, will be affected by, among other things, any inflationary increases, and cost increases may exceed the rate of inflation in any given period. Certain expenses incurred on a per-unit basis are recurring in nature, such as HOA fees, taxes, insurance and restoration and maintenance costs, which may not decrease on a per-unit basis as our portfolio grows through additional property acquisitions. By contrast, our revenue is affected by many factors beyond our control, such as the availability and price of alternative rental housing and economic conditions in our markets. As a result, we may not be able to fully, or partially, offset any increase in our expenses with a corresponding increase in our revenues. In addition, state and local regulations may require us to maintain our properties, even if the cost of maintenance is greater than the value of the property or any potential benefit we may receive from renting the property.

 

If we cannot obtain financing, our growth may be limited.

 

To qualify as a REIT, we will be required to distribute at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain, each year to our stockholders. As a result, our ability to retain earnings to fund acquisitions, restorations or other capital expenditures will be limited. To date, all of our properties have been purchased for cash and we have no outstanding indebtedness. However, over time, we may determine that it is appropriate to use leverage as a component of our financing strategy in an effort to increase our return potential. We can provide no assurance that we will be able to obtain debt financing on favorable terms or at all.

 

Recent events in the financial markets have had an adverse impact on the credit markets, and, as a result, credit has become significantly more expensive and difficult to obtain, if available at all. Some lenders are imposing more stringent credit terms and there has been and may continue to be a general reduction in the amount of credit available. Many banks are either unable or unwilling to provide new asset-based lending. Tightening credit markets may have an adverse effect on our ability to obtain financing on favorable terms, thereby increasing financing costs and/or requiring us to accept financing with increasing restrictions. If adverse conditions in the credit markets—in particular with respect to single-family home finance—materially deteriorate, our business could be materially and adversely affected. Our long-term ability to grow through additional investments will be limited if we cannot obtain additional financing. Market conditions may make it difficult to obtain financing, and we cannot assure you that we will be able to obtain debt or equity financing or that we will be able to obtain it on favorable terms.

 

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We may also be limited in the amount of leverage that we may incur by the terms of various financing arrangements, including our $150 million senior secured revolving credit facility. The credit facility has an accordion feature that allows us, assuming our compliance with applicable covenants and at the lenders’ discretion, to borrow up to $300 million thereunder if certain criteria are met. The credit facility matures in January 2015, has an optional one-year extension (assuming our compliance with applicable covenants) and bears interest at a rate of LIBOR plus a spread ranging from 2.50% to 3.25% based on a ratio of total indebtedness to total asset value (each as defined in the credit agreement that governs the credit facility) ranging from less than or equal to 45% to greater than 55%.

 

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

 

Though we have not done so to date, we may finance future activities with indebtedness and we may be more likely to do so as our business grows. We may borrow for a number of reasons, such as financing acquisitions, capital expenditures or distributions necessary to qualify as a REIT. Our governing documents contain no limitations on the amount of debt that we may incur. As a result, we may incur substantial debt in the future.

 

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

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

 

The joint venture investments that we have made and the joint venture investments we may make in the future could be adversely affected by our lack of sole decision-making authority, our reliance on our co-venturer’s financial condition and disputes between us and our co-venturer.

 

On October 10, 2012, we invested approximately $5.5 million in Flat Iron VI LLC, a joint venture in which our equity interest is approximately 78% of the total amount invested. On December 31, 2012, we invested approximately $4.7 million in Siphon Draw LLC, a joint venture in which our equity interest is approximately 80% of the total amount invested. Both of these joint ventures used invested funds to purchase portfolios of performing residential mortgage loans. We may continue to co-invest in the future with third parties through

 

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partnerships, joint ventures or other entities, acquiring non-controlling interests in or sharing responsibility for a property, partnership, joint venture or other entity. Under these circumstances, we may not be in a position to exercise sole decision-making authority regarding the assets held through the venture or the venture itself. Investments through joint ventures involve risks not present were a third party not involved in the investment, including the possibility that co-venturers may have rights that are superior to ours, become bankrupt, fail to fund their share of required capital contributions, make poor business decisions or block or delay actions that we believe are necessary or desirable. Co-venturers may have economic or other business interests or goals which are inconsistent with ours, including inconsistent goals relating to the sale of assets or properties held in a joint venture or the timing of the termination and liquidation of the venture, and may be in a position to take actions contrary to our policies or objectives. Such investments may also have the potential risk of impasses on decisions, such as a sale, in circumstances in which neither we nor our co-venturer have full control over the partnership or joint venture. Disputes between us and co-venturers may result in litigation or arbitration that would increase our expenses and prevent our officers and/or directors from focusing their time and effort on our business. Consequently, action by or disputes with co-venturers might result in subjecting properties owned by the joint venture to additional risk. In addition, we may under certain circumstances be liable for the actions of our co-venturers.

 

Our Board of Directors may change our investment strategy, financing strategy or leverage policies without stockholder consent.

 

Our Board of Directors may change any of our strategies, policies or procedures with respect to property acquisitions and divestitures, asset allocation, growth, operations, indebtedness, financing and distributions at any time without the consent of our stockholders, which could result in our acquiring properties that are different from, and possibly riskier than, the types of single-family residential real estate and related investments described in this prospectus. These changes could adversely affect us.

 

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

 

Our financial results in the fiscal periods immediately following completion of this offering may not be representative of our future potential. Prior to the full deployment of the net proceeds from this offering, we may invest the undeployed net proceeds in interest-bearing, short-term, investment-grade securities or money market accounts that are consistent with our intention to qualify as a REIT. We expect that these initial investments will provide a lower net return than we expect to receive from the investments described in this prospectus. In addition, since we expect to experience rapid growth following this offering, we will have a greater percentage of our portfolio invested in assets in the process of stabilization than we would expect to have as a more mature operation. It will take time and significant cash resources to restore, reposition and lease these properties in the process of stabilization. As a result, newly acquired properties, that are not leased at the time of acquisition, will not begin generating revenue for some period of time following this offering and will reduce our overall financial performance. In addition, future equity or debt financings may impact our financial results in the fiscal periods following such financings for the same reasons listed above.

 

We anticipate being involved in a variety of litigation.

 

We anticipate being involved in a range of court proceedings in the ordinary course of business. These actions may include eviction proceedings and other landlord-tenant disputes, challenges to title and ownership rights (including actions brought by prior owners alleging wrongful foreclosure by their lender or loan servicer) and issues with local housing officials arising from the condition or maintenance of a property. While we intend to vigorously defend any non-meritorious action or challenge, no assurance can be given that we will not incur significant expense relating to these matters or that they will not require significant management attention and adversely affect us.

 

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

 

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

 

We will incur significant expenses as a result of being a public company, which will negatively impact our financial performance.

 

We will incur significant legal, accounting, insurance and other expenses as a result of being a public company. The Dodd-Frank Act and the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, as well as related rules implemented by the SEC and the NYSE, have required changes in corporate governance practices of public companies. In addition, rules that the SEC is implementing or is required to implement pursuant to the Dodd-Frank Act are expected to require additional changes. We expect that compliance with these and other similar laws, rules and regulations, including compliance with Section 404 of the Sarbanes-Oxley Act, will substantially increase our expenses, including our legal and accounting costs, and make some activities more time-consuming and costly. We also expect these laws, rules and regulations to make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage, which may make it more difficult for us to attract and retain qualified persons to serve on our Board of Directors or as officers. Although the JOBS Act recently enacted by the U.S. Congress and discussed in the next risk factor may for a limited period of time somewhat lessen the cost of complying with these additional regulatory and other requirements, we nonetheless expect a substantial increase in legal, accounting, insurance and certain other expenses in the future, which will negatively impact our results of operations and financial condition.

 

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

 

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

 

   

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

 

   

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

 

   

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

 

   

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

 

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

 

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

 

   

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

 

   

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

 

   

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

 

   

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

 

Although we are still evaluating the JOBS Act, we currently may take advantage of some or all of the reduced regulatory and reporting requirements that will be available to us so long as we qualify as an “emerging growth company,” except that we have irrevocably elected not to take advantage of the extension of time to comply with new or revised financial accounting standards available under Section 102(b) of the JOBS Act. Among other reduced requirements available to us, our independent registered public accounting firm will not be required to provide an attestation report on the effectiveness of our internal control over financial reporting so long as we qualify as an “emerging growth company,” which may increase the risk that weaknesses or deficiencies in our internal control over financial reporting go undetected. Likewise, so long as we qualify as an “emerging growth company,” we may elect not to provide you with certain information, including certain financial information and certain information regarding compensation of our executive officers, that we would otherwise have been required to provide in filings we make with the SEC, which may make it more difficult for investors and securities analysts to evaluate our company. As a result, investor confidence in our company and the market price of our common stock may be adversely affected.

 

As a public reporting company, we will be subject to rules and regulations established from time to time by the SEC and the NYSE regarding our internal control over financial reporting. We may not complete needed improvements to our internal control over financial reporting in a timely manner, or these internal controls may not be determined to be effective, which may adversely affect investor confidence in our company and, as a result, the market price of our common stock and your investment.

 

Upon completion of this offering, we will become a public reporting company subject to the rules and regulations established from time to time by the SEC and the NYSE. These rules and regulations will require, among other things, that we establish and periodically evaluate procedures with respect to our internal controls over financial reporting. Reporting obligations as a public company are likely to place a considerable strain on our financial and management systems, processes and controls, as well as on our personnel. In addition, as a public company we will be required to document and test our internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act so that our management can certify as to the effectiveness of our internal controls over financial reporting by the time our annual report for the year ending December 31, 2014 is due and thereafter, which will require us to document and make significant changes to our internal controls over financial reporting. Likewise, our independent registered public accounting firm will be required to provide an

 

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attestation report on the effectiveness of our internal control over financial reporting at such time as we cease to be an “emerging growth company,” as defined in the JOBS Act, although, as described in the preceding risk factor, we could potentially qualify as an “emerging growth company” until December 31, 2018. As a result, we will be required to improve our financial and managerial controls, reporting systems and procedures, to incur substantial expenses to test our systems and to make such improvements and to hire additional personnel. If our management is unable to certify the effectiveness of our internal controls, if our independent registered public accounting firm cannot deliver (at such time as it is required to do so) a report attesting to the effectiveness of our internal control over financial reporting or if we identify or fail to remediate material weaknesses in our internal controls, we could be subject to regulatory scrutiny and a loss of public confidence, which could harm our reputation and the market price of our common stock. In addition, if we do not maintain adequate financial and management personnel, processes and controls, we may not be able to manage our business effectively or accurately report our financial performance on a timely basis, which could cause a decline in our common stock price and adversely affect our results of operations and financial condition.

 

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

 

This prospectus contains estimates, forecasts and projections relating to our primary markets that were prepared for us for use in connection with this offering by JBREC, a real estate consulting firm. See “Industry Overview and Market Opportunity.” The estimates, forecasts and projections relate to, among other things, replacement cost, home value indices, payroll employment growth, median household income, housing permits and household formation. No assurance can be given that these estimates are, or that the forecasts and projections will prove to be, accurate. These estimates, forecasts and projections are based on data (including third-party data), significant assumptions, proprietary methodologies and the experience and judgment of JBREC. No assurance can be given regarding the accuracy or appropriateness of the assumptions and judgments made, or the methodologies used, by JBREC. The application of alternative assumptions, judgments or methodologies could result in materially less favorable estimates, forecasts and projections than those contained in this prospectus. Other real estate experts have different views regarding these forecasts and projections that may be more positive or negative, including in terms of the timing, magnitude and direction of future changes.

 

The forecasts and projections are forward-looking statements and involve risks and uncertainties that may cause actual results to be materially different from the projections. JBREC has made these forecasts and projections based on studying the historical and current performance of the residential housing market and applying JBREC’s qualitative knowledge about the residential housing market. The future is difficult to predict, particularly given that the economy and housing markets can be cyclical, subject to changing consumer and market psychology, and governmental policies related to mortgage regulations and interest rates. There will usually be differences between projected and actual 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.

 

Risks Related to Single-Family Housing

 

The value and operating fundamentals of single-family housing in our markets may not improve.

 

A substantial part of our business plan is based on our belief that the value and operating fundamentals of single-family housing in our markets will improve significantly over the next several years. We cannot assure

 

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you as to whether, when or to what extent property values and operating fundamentals will improve. In addition, it is possible that our belief is incorrect and that the value and operating fundamentals of single-family housing in our markets will not improve and may deteriorate.

 

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

 

The success of our business model will substantially depend on conditions in the single-family rental market in our geographic markets. Our asset acquisitions are premised on assumptions about, among other things, occupancy and rent levels, and if those assumptions prove to be inaccurate our cash flows will be lower than expected. Rental rates and occupancy levels have benefited in recent periods from macroeconomic trends affecting the U.S. economy and residential real estate markets in particular, including:

 

   

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

 

   

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

 

   

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

 

   

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

 

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

 

Acquiring properties during periods when the single-family home sector is experiencing substantial inflows of capital and intense competition may result in inflated purchase prices and increase the likelihood that our properties will not appreciate in value and may, instead, decrease in value.

 

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

 

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

 

The U.S. government, through the Federal Reserve, the Federal Housing Administration and the Federal Deposit Insurance Corporation, has implemented a number of programs designed to provide homeowners with assistance in avoiding residential mortgage loan foreclosures, including the Home Affordable Modification Program, which seeks to provide relief to homeowners whose mortgages are in or may be subject to foreclosure,

 

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and the Home Affordable Refinance Program, which allows certain borrowers who are underwater on their mortgage but current on their mortgage payments to refinance their loans. Several states, including states in which our current markets are located, have adopted or are considering similar legislation. These programs and other loss mitigation programs may involve, among other things, the modification or refinancing of mortgage loans or providing homeowners with additional relief from loan foreclosures. Such programs are intended to lead to fewer foreclosures and, if successful, will decrease the supply of properties that meet our investment criteria.

 

The pace of residential foreclosures is unpredictable and subject to numerous factors. In recent periods there has been a backlog of foreclosures, due to a combination of volume constraints and legal actions, including those brought by the U.S. Department of Justice, or the DOJ, the Department of Housing and Urban Development, or HUD, State Attorneys General, the office of the Comptroller of the Currency, or the OCC, and the Federal Reserve Board against mortgage servicers alleging wrongful foreclosure practices. Financial institutions have also been subjected to regulatory restrictions and limitations on foreclosure activity by the Federal Deposit Insurance Corporation. Legal claims brought or threatened by the DOJ, HUD and 49 State Attorneys General against the five largest residential mortgage servicers in the country were settled in 2012 for approximately $25 billion, and an enforcement action threatened by the OCC against ten residential mortgage servicers was settled in 2013 for approximately $8.5 billion. A portion of the funds from each settlement will be directed to homeowners seeking to avoid foreclosure through mortgage modifications, and servicers are required to adopt specified measures to reduce mortgage obligations in certain situations. It is expected that the settlements will help many homeowners avoid foreclosures that would otherwise have occurred in the near-term. It is also possible that other residential mortgage servicing companies will agree to similar settlements. These developments will reduce the number of homes in the process of foreclosure and decrease the supply of properties that meet our investment criteria.

 

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

 

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

 

Allegations of deficiencies in foreclosure practices could result in claims challenging the validity of some foreclosures that have occurred, potentially placing our claim of ownership to some of our properties at risk. We cannot be assured that our title insurance policies would provide protection in such instances or that such proceedings would not result in a complete dispossession of property from us without compensation.

 

Each state has its own laws governing the procedures to foreclose on mortgages and deeds of trust, and state laws generally require strict compliance with these laws in both judicial and non-judicial foreclosures. Recently, courts and administrative agencies have been more actively involved in enforcing state laws governing foreclosures, and, in some circumstances, have imposed new rules and requirements regarding foreclosures. Some courts have delayed or prohibited foreclosures based on alleged failures to comply with proper transfers of title, notice, identification of parties in interest, documentation and other legal requirements. The increase in the number of foreclosures since 2007 has led legislatures in many states to consider modifications to foreclosure laws to restrict and reduce foreclosures. For example, in 2012, California enacted a law imposing new limitations on foreclosures while a request for a loan modification is pending. Further, foreclosed owners and their legal representatives, including some prominent and well-financed legal firms, have brought litigation questioning the

 

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validity and finality of foreclosures that have already occurred. These developments may reduce, or slow the rate of growth in, the supply of foreclosed homes available to us for purchase. They may also call into question the validity of our title to homes acquired at foreclosure, or result in rescission rights or other borrower remedies, which could result in a loss of a property purchased by us that may not be covered by title insurance. This could result in an increase in litigation and property maintenance costs incurred with respect to properties obtained through foreclosure, or delays in stabilizing and leasing such properties promptly after acquisition.

 

Single-family homes that are being sold through foreclosure or short-sales are subject to risks of theft, vandalism or other damage that could impair their value.

 

When a single-family home is put into foreclosure, due to a default by the homeowner on mortgage obligations, or a homeowner seeks a short sale, due to the value of the property being substantially below the outstanding principal balance of the mortgage, it is possible that the homeowner may cease to maintain the property adequately, or that the property may be abandoned by the homeowner and become susceptible to theft or vandalism. Lack of maintenance, theft and vandalism can substantially impair the value of the property. If we purchase a large number of properties in foreclosure in bulk sales and are not able to inspect each property before closing or we are unable to rent the properties quickly after purchase and restoration, some of our properties could be impaired.

 

We generally are not able to conduct a thorough inspection before purchasing properties at auction or in bulk sales.

 

We have purchased and expect to continue to purchase properties at auction and in bulk sales. When we purchase properties in these manners, we generally do not have the opportunity to conduct interior inspections or conduct more than cursory exterior inspections on a portion of the properties. These inspection processes may fail to reveal major defects associated with such properties, which may cause the amount of time and expense required to restore such properties to substantially exceed our estimates.

 

Properties acquired in bulk may subject us to a variety of risks.

 

A substantial portion of our properties were, and we expect that a substantial portion of any future property acquisitions will be, purchased as portfolios in bulk from other owners of single-family homes. 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 tenants and compliance with applicable laws, among others. In addition, financial and other information provided to us regarding such portfolios during our due diligence may not be accurate, and we may not discover such inaccuracies until it is too late to seek remedies against such sellers. To the extent we timely pursue such remedies, we may not be able to successfully prevail against the seller in an action seeking damages for such inaccuracies.

 

We incur significant costs in restoring our properties, and we may underestimate the costs or amount of time necessary to complete restorations.

 

Before renting a home, we typically perform a detailed assessment, with an on-site review of the home, to identify the scope of restoration to be completed. Beyond customary repairs, we often undertake improvements designed to optimize overall property appeal and increase the value of the property when such improvements can be done cost effectively. To the extent properties are occupied by existing tenants, restorations may be postponed until the tenant vacates the premises.

 

We expect that nearly all of our properties will require some level of restoration immediately upon their acquisition or in the future following expiration of a lease or otherwise. We may acquire properties that we plan to extensively restore. We may also acquire properties that we expect to be in good condition only to discover

 

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unforeseen defects and problems that require extensive restoration and capital expenditures. In addition, in order to reposition properties in the rental market, we will be required to make ongoing capital improvements and may need to perform significant restorations and repairs from time to time that tenant deposits and insurance may not cover. Our properties have infrastructure and appliances of varying ages and conditions. Consequently, we routinely retain third-party contractors and trade professionals to perform repair work and are exposed to the risks inherent in property restoration, 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 and certificates of occupancy and poor workmanship. If our assumptions regarding the cost or timing of restorations across our properties prove to be materially inaccurate, we will be adversely affected.

 

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

 

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

 

We depend on our tenants for a substantial majority of our revenues.

 

We depend on tenants for a substantial portion of our revenues. Our operating results and cash available for distribution would be adversely affected if a significant number of our tenants were unable to meet their lease obligations or failed to renew their leases with us. Widespread lay-offs and other adverse changes in the economic conditions in our markets could result in substantial tenant defaults or non-renewals. In the event of a tenant default or bankruptcy, we may experience delays in enforcing our rights as landlord at that property and may incur costs in protecting our investment and re-leasing the property. We may be unable to re-lease the property for the rent previously received.

 

Through our preferred operator program, we often acquire portfolios of properties that are master leased to a third-party operator. Under these arrangements, the revenue we derive from these properties comes entirely from lease payments made by the third-party operator to us. If the third-party operator is unable to generate sufficient revenue from the operation of these properties to meet its obligations, including its obligation to pay rent to us, it is likely that the operator will not meet its lease obligations to us. This could result in the reduction or elimination of revenue relating to a large number of our properties. A third-party operator’s ability to make lease payments to us would be adversely affected if a significant number of the occupants of the properties were unable to meet their obligations to the operator, which could make it difficult for the operator to meet its obligations to us. The occupants’ ability to meet their obligations to our third-party operator is affected by the same factors that affect our tenants’ ability to meet their obligations to us with respect to our self-managed portfolio, such as local economic and employment conditions.

 

We may be unable to renew leases and our occupancy rate could decline.

 

We cannot assure you that tenants will renew their leases with us. If the rental rates for our properties decrease or our tenants do not renew their leases, our financial condition, results of operations, cash flow, cash available for distribution, market price of our common stock and our ability to satisfy our debt service obligations could be materially adversely affected.

 

Some or all of our properties may become vacant either by a default of tenants under their leases or the expiration or termination of tenant leases. If vacancies continue for a long period of time, we may suffer reduced revenues resulting in less cash available for distribution. In addition, the resale value of the property could be reduced because the market value of a particular property may deteriorate if it remains unoccupied for an extended period of time.

 

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A significant number of our properties are part of HOAs, and we and our tenants are subject to the rules and regulations of such HOAs, which may be arbitrary or restrictive. Violations of such rules may subject us to additional fees, 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. HOAs in which we own properties may have or may enact onerous or arbitrary rules that restrict our ability to restore, market or lease our properties or require us to restore or maintain such properties at standards or costs that are in excess of our planned budgets. Such rules may include requirements for landscaping, limitations on signage promoting a property for lease or sale or the requirement that specific construction materials be used in restorations. Some HOAs also impose limits on the number of property owners who may rent their homes, which, if met or exceeded, would cause us to incur additional costs to sell the property and opportunity costs of lost rental revenue. Furthermore, many HOAs impose restrictions on the conduct of occupants of homes and the use of common areas, and we may have tenants who violate HOA rules and for which we may be liable as the property owner. Additionally, the boards of directors 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.

 

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

 

When we acquire distressed properties, we often will need to evict the occupant of the premises. Additionally, as an owner of many rental properties, we will regularly be seeking to evict tenants who are not paying their rent or are otherwise in material violation of the terms of their lease. Eviction activities will result in additional legal costs and require the time and attention of our management. The eviction process is typically subject to numerous legal requirements and mandatory “cure” policies, which may increase our costs and delay our ability to gain possession of and stabilize a property. Additionally, state and local landlord-tenant laws may impose legal duties on us to assist tenants in relocating to new housing, or restrict our ability to recover certain costs or charge tenants for damage tenants cause to our property. Because such laws vary by state and locality, we will need to be familiar with and take appropriate steps to comply with applicable landlord-tenant laws in the jurisdictions in which we operate, and we will 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, a class of plaintiffs or by state or local law enforcement. We may be required to pay our adversaries’ litigation fees and expenses if judgment is entered against us in such litigation or if we settle such litigation.

 

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

 

Class action, tenants’ rights and consumer rights litigation may result in increased expenses and harm our results.

 

There are numerous tenants’ rights and consumer rights organizations that operate in our markets, and, as we grow in scale, we may attract attention from some of these organizations and become a target of legal demands or litigation. Many such organizations have become more active and better funded in connection with mortgage foreclosure-related issues, and, with the large settlements identified above and the increased market for single-family rentals arising from former homeowners, some of these organizations may shift their litigation,

 

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lobbying, fundraising and grass roots organizing activities to focus on landlord-tenant issues. While we intend to conduct our business lawfully and in compliance with applicable landlord-tenant and consumer laws, such organizations might work in conjunction with trial and pro bono lawyers in one state or multiple states to attempt to bring claims against us on a class action basis for damages or injunctive relief. We cannot anticipate what form such legal actions might take or what remedies they may seek. Additionally, these organizations may lobby local county and municipal attorneys or state attorneys general to pursue enforcement or litigation against us or may lobby state and local legislatures to pass new laws and regulations to constrain our business operations. If they are successful in any such endeavors, they could limit our business operations and may impose on us significant litigation expenses, including settlements to avoid continued litigation or judgments for damages or injunctions.

 

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

 

Our success will depend, in large part, upon our ability to attract and retain qualified tenants for our properties. This will depend, in turn, upon our ability to screen applicants, identify good tenants and avoid tenants who may default. We will inevitably make mistakes in our selection of tenants, and we may rent to tenants whose default on our leases or failure to comply with the terms of the lease or HOA regulations negatively affect our financial performance, reputation and the quality and value of our properties. For example, tenants may default on payment of rent, make unreasonable and repeated demands for service or improvements, make unsupported or unjustified complaints to regulatory or political authorities, make use of our properties for illegal purposes, damage or make unauthorized structural changes to our properties which may not be fully covered by security deposits, refuse to leave the property when the lease is terminated, engage in domestic violence or similar disturbances, disturb nearby residents with noise, trash, odors or eyesores, fail to comply with HOA regulations, sub-let to less desirable individuals in violation of our leases or permit unauthorized persons to live with them. In addition, defaulting tenants will often be effectively judgment-proof. The process of evicting a defaulting tenant from a family residence can be adversarial, protracted and costly. Furthermore, some tenants facing eviction may damage or destroy the property. Damage to our properties may significantly delay re-leasing after eviction, necessitate expensive repairs or impair the rental revenue or value of the property, resulting in a lower than expected rate of return. In addition, we will incur turnover costs associated with re-leasing the properties, such as marketing expense and brokerage commissions, and will not collect revenue while the property is vacant. Although we will attempt to work with tenants to prevent such damage or destruction, there can be no assurance that we will be successful in all or most cases. Such tenants will not only cause us not to achieve our financial objectives for the properties in which they live, but may subject us to liability, and may damage our reputation with our other tenants and in the communities where we do business.

 

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

 

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

 

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

 

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

 

The large supply of single-family homes becoming available for purchase as a result of the heavy volume of foreclosures, combined with historically low residential mortgage rates, may cause some potential renters to seek to purchase residences rather than lease them and, as a result, cause a decline in the number and quality of potential tenants.

 

The large supply of foreclosed homes, along with the low residential mortgage interest rates currently available and government sponsored programs to promote home ownership, has made home ownership more affordable and more accessible for potential renters who have strong credit. The foregoing factors may encourage certain potential renters to purchase residences rather than lease them, thereby causing a decline in the number and quality of potential tenants available to us.

 

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

 

We intend to review the carrying value of our long-lived assets (including our real estate properties) for impairment whenever events or changes in circumstances, such as adverse market conditions, indicate that their carrying amount may not be recoverable. If our evaluation indicates that we may be unable to recover the carrying value of a material portion of our real estate investments, an impairment loss will be recorded to the extent that the carrying value exceeds the estimated fair value of the properties. These losses would have a direct impact on our net income, because recording an impairment loss results in an immediate negative adjustment to net income. They would also be reflected as a decrease in assets on our balance sheet. The evaluation of anticipated cash flows is highly subjective and is based in part on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results in future periods. A deteriorating real estate market may cause us to reevaluate the assumptions used in our impairment analysis. Impairment charges could adversely affect our financial condition, results of operations, cash available for distribution and market price of our common stock.

 

Risks Related to Short-Term Private Mortgage Financing

 

The short-term private mortgage financings we provide are subject to risks of delinquency, default and loss.

 

Mortgage loans are subject to risks of delinquency, default and loss. The ability of a borrower to repay a loan secured by residential property typically is dependent primarily upon the income or assets of the borrower. In addition, the ability or motivation of the borrower to repay its mortgage loan may be affected by, among other things: changes in zoning laws for the property or its surrounding area; the condition of the property and neighborhood; environmental contamination at the property; the occurrence of any uninsured casualty at the property; changes in national, regional or local economic conditions; declines in regional or local real estate values; increases in interest rates; real estate tax rates; changes in governmental rules, regulations and fiscal policies, including environmental legislation; acts of God; terrorism; social unrest; and civil disturbances.

 

To the extent that the borrower purchased a property with the intent of rehabilitating and “flipping” the property to a third party, such borrower may not have adequate funds to complete the rehabilitation or otherwise may not be able to complete such rehabilitation prior to the maturity of the mortgage note. The inability to

 

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complete such improvements or an inability to sell the property to a third party upon completion of such rehabilitation may impair the borrower’s ability to repay the loan and may result in an event of default under such mortgage loan.

 

In the event of a default under a mortgage loan held by us, we will bear a risk of loss of principal to the extent of any deficiency between the value of the collateral that we can realize upon foreclosure and sale and the principal and accrued interest of the mortgage loan, which could have a material adverse effect on our cash flow from operations and could limit the amount of cash available for distribution. In the event of the bankruptcy of a mortgage loan borrower, the mortgage loan to such borrower will be deemed to be secured only to the extent of the value of the underlying collateral at the time of bankruptcy (as determined by the bankruptcy court), and the lien securing the mortgage loan will be subject to the avoidance powers of the bankruptcy trustee or debtor-in-possession to the extent the lien is unenforceable under state law. Foreclosure on a mortgage loan can be an expensive and lengthy process that can have a substantial negative effect on our originally anticipated return on the foreclosed mortgage loan.

 

We may be subject to losses due to fraudulent and negligent acts on the part of loan applicants, mortgage brokers, other vendors and our employees.

 

With respect to our investments in mortgage loans, we rely upon information supplied by borrowers and other third parties, including financial and other information provided by the applicant in connection with our funding of the loan, property appraisal reports or valuations, title information and other appropriate documentation. If any of this information is misrepresented or falsified and if we do not discover it prior to funding a loan, the actual value of such loan may be significantly lower than anticipated. As a practical matter, we generally bear the risk of loss associated with a misrepresentation, whether it is made by the borrower, the mortgage broker, another third party or one of our employees. Although we may have rights against persons and entities who made or knew about the misrepresentation, those persons and entities may be difficult to locate, and it is often difficult to collect any monetary losses that we may have suffered.

 

Our mortgage lending activities are subject to a body of complex laws and regulation at the federal, state and local levels.

 

In connection with our mortgage lending activities, we are required to comply with applicable laws, rules and regulations, as well as judicial and administrative decisions, of all jurisdictions in which we fund mortgage loans, as well as an extensive body of federal laws, rules and regulations. The volume of new or modified laws, rules and regulations applicable to our business has increased in recent years. The laws, rules and regulations of each of these jurisdictions are different, complex and, in some cases, in direct conflict with each other. It may be more difficult to identify comprehensively, to interpret accurately, to program properly our information systems and to effectively train our personnel with respect to all of these laws, rules and regulations, thereby potentially increasing the risks of non-compliance with these laws, rules and regulations. Our failure to comply with these laws, rules and regulations could prevent us from funding mortgage loans and could lead to civil and criminal liability, including potential monetary penalties, and negatively impact our ability to enforce loans or give borrowers the right to rescind or cancel loan transactions.

 

Risks Related to the Real Estate Industry Generally

 

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

 

The investment returns available from equity investments in real estate depend on the amount of income earned and capital appreciation generated by the properties, as well as the expenses incurred in connection with the properties. If the properties we acquire do not generate income sufficient to meet operating expenses, including any debt service and capital expenditures, then our ability to make distributions to our stockholders could be adversely affected. In addition, there are significant expenditures associated with an investment in real

 

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estate (such as debt service (to the extent we borrow funds in the future), real estate taxes, HOA fees, insurance and maintenance costs) that generally do not decline when circumstances reduce the income from the property. Income from and the value of the properties we acquire may be adversely affected by the factors listed below, some of which are described in greater detail in the pages that follow:

 

   

downturns in international, national, regional and local economic conditions (particularly increases in unemployment);

 

   

the attractiveness of the properties we acquire to potential tenants and competition from other properties;

 

   

changes in supply of or demand for similar or competing properties in our markets;

 

   

bankruptcies, financial difficulties or lease defaults by our tenants;

 

   

inability to collect rent from tenants;

 

   

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

 

   

changes in operating costs and expenses and our ability to control rents;

 

   

changes in, or increased costs of compliance with, governmental laws, rules, regulations and fiscal policies, including changes in tax, real estate, environmental and zoning laws, and our potential liability thereunder;

 

   

political, regulatory or other factors including terrorism;

 

   

illiquidity of real estate investments generally;

 

   

tenants’ perceptions of the safety, convenience and attractiveness of our properties and the neighborhoods in which our properties are located;

 

   

ongoing needs for capital improvements, particularly in older properties;

 

   

our ability to provide adequate maintenance and obtain adequate insurance;

 

   

changes in the cost or availability of insurance, including coverage for mold or asbestos;

 

   

environmental conditions or retained liabilities for such conditions;

 

   

unanticipated changes in costs associated with known adverse environmental conditions or retained liabilities for such conditions;

 

   

periods of high interest rates and tight money supply;

 

   

tenant turnover;

 

   

general overbuilding or excess supply in our markets;

 

   

disruptions in the global supply chain;

 

   

the ability or unwillingness of tenants to pay rent increases;

 

   

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

 

   

rent control or rent stabilization or other housing laws, which could prevent us from raising rents; and

 

   

increases in property-level maintenance and operating expenses.

 

For these and other reasons, we cannot assure you that we will become profitable or that we will realize growth in the value of our real estate properties.

 

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Uninsured or underinsured losses relating to real property may adversely affect our returns.

 

We attempt to ensure that all of the properties we acquire are adequately insured to cover casualty losses. However, there are certain losses, including losses from floods, fires, earthquakes, acts of war, acts of terrorism or riots, that may not always be insured against or that are not generally fully insured against because it is not deemed economically feasible or prudent to do so. In addition, changes in the cost or availability of insurance could expose us to uninsured casualty losses. In the event that any of the properties we acquire incurs a casualty loss that is not fully covered by insurance, the value of our assets will be reduced by the amount of any such uninsured loss, and we could experience a significant loss of capital invested and potential revenues in these properties and could potentially remain obligated under any recourse debt associated with the property. Inflation, changes in building codes and ordinances, environmental considerations and other factors might also keep us from using insurance proceeds to replace or restore a 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 the market price of our common stock. In addition, we may have no source of funding to repair or reconstruct the damaged property, and we cannot assure you that any such sources of funding will be available to us for such purposes in the future.

 

Contingent or unknown liabilities could adversely affect our financial condition.

 

Our acquisition activities are subject to many risks. We may acquire properties that are subject to unknown or contingent liabilities, including liabilities for or with respect to liens attached to properties, unpaid real estate taxes, utilities or HOA charges for which a prior owner remains liable, clean-up or remediation of environmental conditions or code violations, claims of vendors or other persons dealing with the acquired properties and tax liabilities, among other things. In each case, our acquisition may be without any, or with only limited, recourse with respect to unknown or contingent liabilities or conditions. As a result, if any such liability were to arise relating to our properties, or if any adverse condition exists with respect to our properties that is in excess of our insurance coverage, we might have to pay substantial sums to settle or cure it, which could adversely affect us. The properties we acquire may also be subject to covenants, conditions or restrictions that restrict the use or ownership of such properties, including prohibitions on leasing or requirements to obtain the approval of HOAs prior to leasing. We may not discover such restrictions during the acquisition process and such restrictions may adversely affect our ability to operate such properties as we intend.

 

In addition, purchases of single-family homes acquired at auction, in short sales, from lenders or in bulk purchases typically involve few or no representations or warranties with respect to the properties and may allow us limited or no recourse against the sellers of such properties. Such properties also often have unpaid tax, utility and HOA liabilities for which we may be obligated but fail to anticipate.

 

Environmentally hazardous conditions may adversely affect our operating results.

 

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

 

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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, there are various local, state and federal fire, health, life-safety and similar regulations that we may be required to comply with. Failure to comply with applicable laws and regulations could result in fines and/or damages, suspension of personnel, civil liability and/or other sanctions.

 

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

 

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

 

We may have difficulty selling real estate investments, and our ability to distribute all or a portion of the net proceeds from such sales to our stockholders may be limited.

 

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

 

   

purchase additional properties;

 

   

repay debt, if any;

 

   

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

 

   

create working capital reserves;

 

   

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

 

   

for general corporate purposes.

 

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. In order to ensure that we avoid such characterization, we may be required to hold our properties for a minimum period of time and comply with certain other requirements in the Code or dispose of our properties through our TRS, which will be subject to federal and state income taxation as a corporation.

 

Our real properties are subject to property taxes that may increase in the future, which could adversely affect us.

 

Our real 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. Our leases with preferred operators provide

 

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that property taxes are the responsibility of the preferred operators, while our leases for our self-managed properties provide that we are responsible for such taxes. In any case, as the owner of the properties, we are ultimately responsible for payment of the taxes to the applicable government authorities. If real property taxes increase, our expenses will increase. Moreover, if our preferred operators do not pay real estate taxes pursuant to the terms of their leases with us, we will be responsible for such taxes. 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, at our self-managed properties, we are responsible for real property taxes.

 

Risks Related to Conflicts of Interest

 

Mr. Schmitz, our Chief Executive Officer and Chairman, and Ms. Hawkes, our President and Chief Operating Officer and a member of our Board of Directors, exercised significant influence with respect to the terms of the contribution of the ARM assets to us in our formation transactions that took place in May 2012, including the economic benefits they received, and as a result, the consideration paid by us for the ARM assets may have exceeded the fair market value of the ARM assets.

 

We did not conduct arm’s-length negotiations with respect to the terms of the contribution by Mr. Schmitz, our Chief Executive Officer and Chairman, and Ms. Hawkes, our President and Chief Operating Officer and a member of our Board of Directors, of the ARM assets to us in our formation transactions that took place in May 2012. In the course of structuring the contribution, Mr. Schmitz and Ms. Hawkes had the ability to influence the terms and conditions of the transaction and the benefits that they have received.

 

Mr. Schmitz and Ms. Hawkes also obtained certain other benefits in connection with our formation, such as employment agreements and LTIP unit grants and other compensation. The terms of the formation transactions may not reflect your best interest and may be overly favorable to Mr. Schmitz and Ms. Hawkes.

 

Mr. Schmitz and Ms. Hawkes have duties to Phoenix Fund which may create conflicts of interest, and these conflicts may not be resolved in our favor, which could adversely affect us.

 

Each of Mr. Schmitz and Ms. Hawkes owns a 50% interest in the general partner of Phoenix Fund. They also jointly own ARM, the former property manager of Phoenix Fund, which holds the 175,000 OP units that our operating partnership issued in connection with our acquisition of the ARM assets upon completion of our initial private offering and formation transactions in May 2012. They may have conflicting duties because they have a duty to both us and to the limited partners of Phoenix Fund (which will retain ownership of its properties and continue as a private fund until liquidated). Upon completion of our formation transactions in May 2012, Phoenix Fund agreed not to commit to purchase any additional single-family homes and, as a result, Phoenix Fund is not expected to compete with us for investments in single-family homes in our markets. However, some of Phoenix Fund’s properties may compete with our properties, including with respect to tenants. Our TRS is party to a management agreement with Phoenix Fund, pursuant to which it provides services, including, among other things, leasing management services, to Phoenix Fund for a fee in an amount equal to 6.0% of Phoenix Fund’s gross rental revenue.

 

It is possible that the duties owed by Mr. Schmitz and Ms. Hawkes to the limited partners of Phoenix Fund may conflict with the duties they owe to us. In addition, Mr. Schmitz and Ms. Hawkes are required to spend a portion of their working time attending to the obligations of the general partner of Phoenix Fund, which may detract from the amount of time and attention they are able to devote to us. Finally, Mr. Schmitz and Ms. Hawkes are entitled to receive certain compensation from Phoenix Fund in the event of a sale of the assets of Phoenix Fund, which could create incentives for them that are in conflict with our interests, particularly if we have an interest in buying those assets.

 

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Our fiduciary duties to the limited partners of our operating partnership could create conflicts of interest, which may impede business decisions that could benefit our stockholders.

 

We, through our wholly owned subsidiary that serves as the sole general partner of our operating partnership, have a fiduciary duty to the other limited partners in our operating partnership, the discharge of which may conflict with the interests of our stockholders. The limited partners of our operating partnership (other than us) are Mr. Schmitz and Ms. Hawkes, as well as other members of our management and our Board of Directors who have received LTIP units. The limited partners of our operating partnership have agreed that, in the event of a conflict between the duties owed by us to our stockholders and to such limited partners, we are under no obligation to give priority to the interests of such limited partners.

 

In addition, Mr. Schmitz and Ms. Hawkes, as well as any other limited partners (other than us), have and will have the right to vote on certain amendments to the partnership agreement and to approve certain amendments that would adversely affect their rights. These voting rights may be exercised in a manner that conflicts with your interests.

 

We may also experience conflicts of interest with several members of our senior management team who are or may become limited partners in our operating partnership through the receipt of LTIP units granted under our equity incentive plan. See “Management—2012 Equity Incentive Plan.”

 

Risks Related to Our Organization and Structure

 

Provisions of our charter may limit the ability of a third party to acquire control of us by authorizing our Board of Directors to issue additional securities.

 

Our Board of Directors may, without stockholder approval, amend our charter to increase or decrease the aggregate number of our shares or the number of shares of any class or series that we have the authority to issue and to classify or reclassify any unissued shares of our common or preferred stock, and set the preferences, rights and other terms of the classified or reclassified shares. As a result, our Board of Directors may authorize the issuance of additional shares or establish a series of common or preferred stock that may have the effect of delaying or preventing a change in control of our company, including transactions at a premium over the market price of our shares, even if stockholders believe that a change in control is in their interest. These provisions, along with the restrictions on ownership and transfer contained in our charter and certain provisions of Maryland law described below, could discourage unsolicited acquisition proposals or make it more difficult for a third party to gain control of us, which could adversely affect the market price of our securities. See “Certain Provisions of Maryland Law and of Our Charter and Bylaws.”

 

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, or the MGCL, applicable to Maryland corporations 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, including:

 

   

“business combination” provisions that, subject to limitations, prohibit certain business combinations between us and an “interested stockholder” (defined generally as any person (other than us or any subsidiary) who beneficially owns 10% or more of the voting power of our outstanding voting stock after the date on which we first had 100 or more beneficial owners of our stock, or an affiliate or associate of us 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 stock after the date on which we first had 100 or more beneficial owners of our stock) or an affiliate of any interested

 

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stockholder for five years after the most recent date on which the interested stockholder became an interested stockholder, and, thereafter, any such business combination between us and an interested stockholder generally must be recommended by our Board of Directors and approved by the affirmative vote of at least (1) 80% of the votes entitled to be cast by holders of our outstanding voting stock and (2) two-thirds of the votes entitled to be cast by holders of our outstanding voting stock other than shares held by the interested stockholder with whom (or with whose affiliate) the business combination is to be effected or held by an affiliate or associate of the interested stockholder, unless, among other conditions, our 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; and

 

   

“control shares” provisions provide that holders of our “control shares” (defined as shares of stock which, if aggregated with all other such shares of stock owned by the acquirer or in respect of which the acquirer is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquirer to exercise voting power in electing directors within one of three ranges) acquired in a “control share acquisition” have no voting rights except to the extent approved by the affirmative vote of at least two-thirds of the votes entitled to be cast by our stockholders entitled to vote generally in the election of directors, excluding votes cast by (1) the person who makes or proposes to make a control share acquisition, (2) an officer or (3) an employee of us who is also a director of the corporation.

 

By resolution of our Board of Directors, we have opted out of the business combination provisions of the MGCL and provided that any business combination between us and any other person is exempt from the business combination provisions of the MGCL, provided that the business combination is first approved by our Board of Directors (including a majority of directors who are not affiliates or associates of such persons). In addition, pursuant to a provision in our bylaws, we have opted out of the control share provisions of the MGCL. However, our Board of Directors may by resolution elect to opt in to the business combination provisions of the MGCL, and we may, by amendment to our bylaws, opt in to the control share provisions of the MGCL at any time in the future, whether before or after an acquisition of control shares. See “Certain Provisions of Maryland Law and of Our Charter and Bylaws—Business Combinations” and “Certain Provisions of Maryland Law and of Our Charter and Bylaws—Control Share Acquisitions.”

 

Certain provisions of the MGCL permit our Board of Directors, without stockholder approval and regardless of what is currently provided in our charter or bylaws, to implement certain corporate governance provisions, some of which (for example, a classified board) are not currently applicable to us. These provisions may have the effect of limiting or precluding a third party from making an unsolicited acquisition proposal for us or of delaying, deferring or preventing a change in control of us under circumstances that otherwise could be in the best interests of our stockholders. Our charter contains a provision whereby we elect, at such time as we become eligible to do so, to be subject to the provisions of Title 3, Subtitle 8 of the MGCL relating to the filling of vacancies on our Board of Directors. See “Certain Provisions of Maryland Law and of Our Charter and Bylaws—Maryland Unsolicited Takeovers Act.”

 

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

 

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

 

   

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

 

   

active and deliberate dishonesty that is established by a final judgment and is material to the cause of action.

 

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

 

Our charter contains provisions that make removal of our directors difficult, and the employment agreements we have with some of our executives contain severance provisions that make termination of their employment under certain circumstances expensive for us, which could make it difficult for our stockholders to effect changes to our Board of Directors and our management.

 

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

 

We have entered into employment agreements with certain of our executive officers containing severance provisions that could make it difficult and costly for us to terminate their employment.

 

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

 

Our Board of Directors determines our major policies, including policies and guidelines relating to our acquisitions, leverage, financing, growth, operations and distributions to stockholders. Our Board of Directors may amend or revise these and other policies and guidelines from time to time without the vote or consent of our stockholders. Accordingly, our stockholders will have limited control over changes in our policies and those changes could adversely affect our financial condition, results of operations and our ability to make distributions to our stockholders.

 

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

 

We may acquire properties by issuing limited partnership units in our operating partnership in exchange for a property owner contributing property to the partnership. If we enter into such transactions, in order to induce the contributors of such properties to accept units in our operating partnership, rather than cash, in exchange for their properties, it may be necessary for us to provide them additional incentives. For instance, our operating partnership’s limited partnership agreement provides that any holder of units may exchange limited partnership units for cash equal to the value of an equivalent number of shares of our common stock or, at our option, for shares of our common stock on a one-for-one basis. We may, however, enter into additional contractual arrangements with contributors of property under which we would agree to repurchase a contributor’s units for shares of our common stock or cash, at the option of the contributor, at set times. If the contributor required us to repurchase units for cash pursuant to such a provision, it would limit our liquidity and thus our ability to use cash to make other investments, satisfy other obligations or make distributions to stockholders. Moreover, if we were required to repurchase units for cash at a time when we did not have sufficient cash to fund the repurchase, we might be required to sell one or more properties to raise funds to satisfy this obligation. Furthermore, we might

 

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agree that if distributions the contributor received as a limited partner in our operating partnership did not provide the contributor with a defined return, then upon redemption of the contributor’s units we would pay the contributor an additional amount necessary to achieve that return. Such a provision could further negatively impact our liquidity and flexibility. Finally, in order to allow a contributor of a property to defer taxable gain on the contribution of property to our operating partnership, we might agree not to sell a contributed property for a defined period of time or until the contributor exchanged the contributor’s units for cash or shares. Such an agreement would prevent us from selling those properties, even if market conditions made such a sale favorable to us.

 

Risks Related to This Offering and Ownership of Our Common Stock

 

There is currently no public market for our common stock, an active trading market for our common stock may never develop and our common stock price may be volatile and could decline substantially following this offering.

 

Shares of our common stock are newly issued securities for which there is no established trading market. We intend to apply to list our common stock on the NYSE under the symbol “            .” However, there can be no assurance that such listing will be approved or, if approved:

 

   

that an active trading market for our common stock will develop or be sustained;

 

   

that a liquid market for our common stock will develop or be sustained;

 

   

that our stockholders will be able to sell their common stock; or

 

   

the price that our stockholders may obtain for their common stock.

 

If an active market does not develop or is not maintained, the market price of our common stock may decline and you may not be able to sell your shares. Even if an active trading market develops for our common stock subsequent to this offering, the market price of our common stock may be highly volatile and subject to wide fluctuations. Our financial performance, government regulatory action, tax laws, interest rates and market conditions in general could have a significant impact on the future market price of our common stock.

 

Some of the factors that could negatively affect or result in fluctuations in the market price of our common stock include:

 

   

actual or anticipated variations in our quarterly operating results;

 

   

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

 

   

our financial condition, cash flows and liquidity or changes in our business strategy or prospects;

 

   

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

 

   

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

 

   

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

 

   

future equity issuances by us, or share resales by our stockholders, or the perception that such issuances or resales may occur;

 

   

additions or departures of company personnel who are key to us;

 

   

actions by our stockholders;

 

   

speculation in the press or investment community;

 

   

general market, economic and political conditions, including an economic slowdown or dislocation in the global credit markets;

 

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our operating performance and the performance of other similar companies;

 

   

failure to qualify or maintain our qualification as a REIT;

 

   

changes in accounting principles; and

 

   

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

 

The NYSE or another nationally recognized exchange may not continue to list our securities, which could limit investors’ ability to make transactions in our securities and subject us to additional trading restrictions.

 

We intend to apply to list our common stock on the NYSE under the symbol “            ,” subject to official notice of issuance. In order to remain listed, we will be required to meet the continued listing requirements of the NYSE or, in the alternative, any other nationally recognized exchange to which we may apply. We may be unable to satisfy these listing requirements, and there is no guarantee that our common stock will remain listed on a nationally recognized exchange. If our common stock is delisted from the NYSE or any other nationally recognized exchange, we could face significant material adverse consequences, including:

 

   

a limited availability of market quotations for our common stock;

 

   

reduced liquidity with respect to the market for our common stock;

 

   

a determination that our common stock is “penny stock,” which will require brokers trading in our common stock to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for our common stock;

 

   

a limited amount of news and analyst coverage; and

 

   

a decreased ability to issue additional shares of our common stock or obtain additional financing in the future.

 

The price to public per share of our common stock offered by this prospectus may not accurately reflect the value of your investment.

 

Immediately prior to this offering, there was no public market for our common stock. The initial price to public was determined by negotiations between us and the representatives of the underwriters of this offering. Among the factors considered in determining the initial price to public were our future prospects and those of our industry in general, our revenues, results of operations and certain other financial and operating information in recent periods, and the valuation measures, market prices of securities and certain financial and operating information of companies engaged in activities similar to ours.

 

You will experience immediate and substantial dilution from the purchase of our common stock sold in this offering.

 

The per-share offering price to public of our common stock is higher than what our net tangible book value per share will be immediately after this offering. Accordingly, purchasers of our common stock in this offering will incur immediate dilution of approximately     % per share, based on the mid-point of the price range set forth on the front cover page of this prospectus.

 

The availability and timing of cash distributions is uncertain.

 

We are generally required to distribute to our stockholders at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain, each year in order for us to qualify as a REIT under the Code, which requirement we currently intend to satisfy through quarterly cash distributions of all or substantially all of our REIT taxable income in such year, subject to certain

 

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adjustments. We have not established a minimum distribution payment level, and our ability to make distributions may be adversely affected by a number of factors, including the risk factors described in this prospectus.

 

Our Board of Directors will determine the amount and timing of any distributions. In making such determinations, our directors will consider all relevant factors, including the amount of cash available for distribution, capital expenditures, general operational requirements and applicable law. We intend over time to make regular quarterly distributions to holders of our common stock. However, we bear all expenses incurred by our operations, and the funds generated by our operations, after deducting these expenses, may not be sufficient to cover desired levels of distributions to our stockholders. In addition, our Board of Directors, in its discretion, may retain any portion of such cash in excess of our REIT taxable income for working capital. We cannot assure you how long it may take to generate sufficient available cash flow to fund distributions, nor can we assure you that sufficient cash will be available to make distributions to you. With a limited operating history, we cannot predict the amount of distributions you may receive, and we may be unable to make, maintain or increase distributions over time.

 

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

 

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

 

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

 

Prior to the time we have fully invested the net proceeds from this offering or are generating positive cash flow from operations, we may fund any quarterly distributions out of the net proceeds from this offering, which would reduce the amount of cash we have available for investing and other purposes. The use of these net proceeds for distributions could be dilutive to our financial results. In addition, funding our distributions from our net proceeds may constitute a return of capital to our investors, which would have the effect of reducing each stockholder’s basis in its shares of our common stock.

 

Future sales of our common stock or other securities convertible into our common stock could cause the market price of our common stock to decline and could result in dilution of your shares.

 

Our Board of Directors is authorized, without your approval, to cause us to issue additional shares of our common stock or to raise capital through the issuance of preferred stock (including equity or debt securities convertible into common stock), options, warrants and other rights, on terms and for consideration as our Board of Directors in its sole discretion may determine. Sales of substantial amounts of our common stock could cause the market price of our common stock to decrease significantly. To the extent the proceeds of any future equity offering are invested in residential assets that have less favorable yield characteristics than our then-existing portfolio, our stockholders will suffer dilution in their yield and distributable cash per share. We cannot predict the effect, if any, of future sales of our common stock, or the availability of our common stock for future sales, on the market price of our common stock. Sales of substantial amounts of our common stock, or the perception that such sales could occur, may adversely affect the market price of our common stock.

 

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Subject to certain exceptions, each of our officers, directors and Phoenix Fund has entered into a lock-up agreement with respect to shares of our common stock and securities exchangeable or exercisable for shares of our common stock, restricting the direct or indirect sale of such securities for 180 days after the date of this prospectus without the prior written consent of the representatives of the underwriters of this offering. Additionally, all of our other stockholders have agreed with us not to directly or indirectly sell, offer to sell, grant any option or otherwise transfer or dispose of our common stock for 180 days, in the case of holders who are selling stockholders in this offering, and 60 days, in the case of holders who are not selling stock in this offering, in each case after the date of this prospectus. We have agreed not to waive or otherwise modify this agreement without the prior written consent of the representatives of the underwriters of this offering. The representatives of the underwriters of this offering may, at any time, release, or authorize us to release, as the case may be, all or a portion of our common stock subject to the foregoing lock-up provisions. If the restrictions under the lock-up agreements are waived, shares of our common stock may become available for sale into the market, subject to applicable law, which could reduce the market price for our common stock.

 

Members of our senior management team, our Board of Directors, continuing investors and Phoenix Fund collectively own a significant amount of our common stock, or OP units or LTIP units exchangeable for shares of our common stock, and future sales by these holders of shares of our common stock, or the perception that such sales could occur in the future, could have a material adverse effect on the market price of our common stock.

 

Mr. Schmitz, Ms. Hawkes and other members of our senior management team, our Board of Directors, continuing investors and Phoenix Fund will beneficially own, upon completion of this offering, an aggregate of approximately     % of our outstanding shares of common stock (assuming the exchange of all outstanding OP units and LTIP units beneficially owned by them into shares of our common stock on a one-for-one basis). Future sales by these holders of shares of our common stock, or the perception that such sales could occur in the future, could have a material adverse effect on the market price of our common stock.

 

Holders of 18,423,857 shares of our common stock have registration rights that obligate us to register the offer and sale of their shares under the Securities Act. Once we register the offer and sale of shares for the holders of registration rights, the shares can be freely sold in the public market, subject to any applicable lock-up agreements or unless they are held by “affiliates,” as that term is defined in Rule 144 of the Securities Act.

 

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

 

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

 

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

 

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

 

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

 

Risks Related to Qualification and Operation as a REIT

 

Failure to qualify as a REIT, or failure to remain qualified as a REIT, would cause us to be taxed as a regular corporation, which would substantially reduce funds available for distribution to our stockholders.

 

We believe that our organization and proposed method of operation will enable us to meet the requirements for qualification and taxation as a REIT commencing with our short taxable year ended December 31, 2012. However, we cannot assure you that we will qualify and remain qualified as a REIT. In connection with this offering, we will receive an opinion from Hunton & Williams LLP that we qualified to be taxed as a REIT under the federal income tax laws for our short taxable year ended December 31, 2012, and our current and proposed method of operations will enable us to continue to satisfy the requirements for qualification and taxation as a REIT under the federal income tax laws for our taxable year ending December 31, 2013 and subsequent taxable years. Investors should be aware that Hunton & Williams LLP’s opinion will be based upon customary assumptions, will be conditioned upon certain representations made by us as to factual matters, including representations regarding the nature of our assets and the conduct of our business, is not binding upon the Internal Revenue Service, or the IRS, or any court and speaks as of the date issued. In addition, Hunton & Williams LLP’s opinion will be based on existing federal income tax law governing qualification as a REIT, which is subject to change either prospectively or retroactively. Moreover, our qualification and taxation as a REIT depend upon our ability to meet on a continuing basis, through actual annual operating results, certain qualification tests set forth in the federal tax laws. Hunton & Williams LLP will not review our compliance with those tests on a continuing basis. Accordingly, no assurance can be given that our actual results of operations for any particular taxable year will satisfy such requirements.

 

If we fail to qualify as a REIT in any taxable year, we will face serious tax consequences that will substantially reduce the funds available for distribution to our stockholders because:

 

   

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

 

   

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

 

   

unless we are entitled to relief under certain federal income tax laws, we could not re-elect REIT status until the fifth calendar year after the year in which we failed to qualify as a REIT.

 

In addition, if we fail to qualify as a REIT, we will no longer be required to make distributions. As a result of all these factors, our failure to qualify as a REIT could impair our ability to expand our business and raise capital, and it would adversely affect the market price of our common stock. See “Material Federal Income Tax Considerations.”

 

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

 

Even if we qualify as a REIT, we may be subject to certain federal, state and local taxes on our income and assets, including taxes on any undistributed income, tax on income from some activities conducted as a result of

 

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a foreclosure and state or local income, property and transfer taxes. In addition, we could, in certain circumstances, be required to pay an excise or penalty tax (which could be significant in amount) in order to utilize one or more relief provisions under the Code to maintain our qualification as a REIT. In addition, in order to meet the REIT qualification requirements, or to avert the imposition of a 100% tax that applies to certain gains derived by a REIT from dealer property or inventory, we may hold and/or dispose of some of our assets through our TRS or other subsidiary corporations that will be subject to regular corporate federal, state and local taxes.

 

Failure to make required distributions would subject us to federal corporate income tax.

 

We intend to continue to operate in a manner so as to qualify as a REIT for federal income tax purposes. In order to qualify as a REIT, we generally are required to distribute at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain, each year to our stockholders. To the extent that we satisfy this distribution requirement, but distribute less than 100% of our REIT taxable income, we will be subject to federal corporate income tax on our undistributed taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we pay out to our stockholders in a calendar year is less than a minimum amount specified under the Code.

 

The prohibited transactions tax may limit our ability to dispose of our properties.

 

A REIT’s net income from prohibited transactions is subject to a 100% tax. In general, prohibited transactions are sales or other dispositions of property other than foreclosure property held primarily for sale to customers in the ordinary course of business. We may be subject to the prohibited transactions tax in an amount equal to 100% of net gain upon a disposition of real property. Although a safe harbor to the characterization of the sale of real property by a REIT as a prohibited transaction is available, we cannot assure you that we can comply with the safe harbor or that we will avoid owning property that may be characterized as held primarily for sale to customers in the ordinary course of business. Consequently, we may choose not to engage in certain sales of our properties or may conduct such sales through our TRS, which would be subject to federal and state income taxation as a corporation. For example, if we decide to acquire properties opportunistically to restore in anticipation of immediate resale, we will need to conduct that activity through our TRS to avoid the 100% prohibited transactions tax. No assurance can be given, however, that the IRS will respect the transaction by which any such properties are contributed to our TRS, and, even if the contribution transaction is respected, our TRS may incur a significant tax liability as a result of any such sales.

 

We may pay taxable dividends of our common stock and cash, in which case stockholders may sell shares of our common stock to pay tax on such dividends, placing downward pressure on the market price of our common stock.

 

We may distribute taxable dividends that are payable in cash and common stock at the election of each stockholder. The IRS has issued private letter rulings to other REITs treating certain distributions that are paid partly in cash and partly in stock as taxable dividends that would satisfy the REIT annual distribution requirement and qualify for the dividends paid deduction for federal income tax purposes. Those rulings may be relied upon only by taxpayers to whom they were issued, but we could request a similar ruling from the IRS. In addition, the IRS previously issued a revenue procedure authorizing publicly traded REITs to make elective cash/stock dividends, but that revenue procedure does not apply to our 2012 and future taxable years. Accordingly, it is unclear whether and to what extent we will be able to make taxable dividends payable in cash and common stock.

 

If we made a taxable dividend payable in cash and common stock, taxable stockholders receiving such dividends will be required to include the full amount of the dividend as ordinary income to the extent of our current and accumulated earnings and profits, as determined for federal income tax purposes. As a result, stockholders may be required to pay income tax with respect to such dividends in excess of the cash dividends received. If a U.S. stockholder sells the common stock that it receives as a dividend in order to pay this tax, the

 

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sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our common stock at the time of the sale. Furthermore, with respect to certain non-U.S. stockholders, we may be required to withhold federal income tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in common stock. If we made a taxable dividend payable in cash and our common stock and a significant number of our stockholders determine to sell shares of our common stock in order to pay taxes owed on dividends, it may be viewed as economically equivalent to a dividend reduction and put downward pressure on the market price of our common stock. We do not currently intend to pay taxable dividends in the form of our common stock and cash, although we may choose to do so in the future.

 

Our ownership of our TRS is subject to limitations, and our transactions with our TRS will cause us to be subject to a 100% penalty tax on certain income or deductions if those transactions are not conducted on arm’s-length terms.

 

Overall, no more than 25% of the value of a REIT’s assets may consist of stock or securities of one or more taxable REIT subsidiaries. In addition, the Code limits the deductibility of interest paid or accrued by a taxable REIT subsidiary to its parent REIT to assure that the taxable REIT subsidiary is subject to an appropriate level of corporate taxation. The Code also imposes a 100% excise tax on REITs for certain transactions between a taxable REIT subsidiary and its parent REIT that are not conducted on an arm’s-length basis. Furthermore, we monitor the value of our respective investments in our TRS for the purpose of ensuring compliance with taxable REIT subsidiary ownership limitations and structure our transactions with our TRS on terms that we believe are arm’s length to avoid incurring the 100% excise tax described above. There can be no assurance, however, that we will be able to comply with the 25% REIT subsidiaries limitation or to avoid application of the 100% excise tax.

 

You may be restricted from acquiring or transferring certain amounts of our common stock.

 

The stock ownership restrictions of the Code for REITs and the 9.8% stock ownership limit in our charter may inhibit market activity in our capital stock and restrict our business combination opportunities.

 

In order to qualify as a REIT for each taxable year after 2012, five or fewer individuals, as defined in the Code, may not own, beneficially or constructively, more than 50% in value of our issued and outstanding stock at any time during the last half of a taxable year. Attribution rules in the Code determine if any individual or entity beneficially or constructively owns our capital stock under this requirement. Additionally, at least 100 persons must beneficially own our capital stock during at least 335 days of a taxable year for each taxable year after 2012. To help insure that we meet these tests, our charter restricts the acquisition and ownership of shares of our capital stock.

 

Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT. Unless exempted by our Board of Directors, our charter prohibits any person from beneficially or constructively owning more than 9.8% in value or number of shares, whichever is more restrictive, of the outstanding shares of any class or series of our capital stock. Our Board of Directors may not grant an exemption from these restrictions to any proposed transferee whose ownership in excess of 9.8% of the value of our outstanding shares would result in our failing to qualify as a REIT. These restrictions on ownership and transfer will not apply, however, if our Board of Directors determines that it is no longer in our best interest to continue to qualify as a REIT or that compliance with the restrictions is no longer necessary in order for us to qualify as a REIT.

 

Complying with REIT requirements may cause us to forgo otherwise attractive opportunities.

 

To qualify as a REIT for federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts that we distribute to our stockholders and the ownership of our stock. We may be required to make distributions to

 

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stockholders at disadvantageous times or when we do not have funds readily available for distribution and may be unable to pursue investments that would be otherwise advantageous to us in order to satisfy the source-of-income or asset-diversification requirements for qualifying as a REIT. Thus, compliance with the REIT requirements may hinder our ability to make certain attractive investments.

 

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

 

The maximum tax rate applicable to “qualified dividend income” payable to U.S. stockholders that are taxed at individual rates is 20%. Dividends payable by REITs, however, generally are not eligible for the reduced rates on qualified dividend income. The more favorable rates applicable to regular corporate qualified dividends could cause investors who are taxed at individual rates 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 may be subject to adverse legislative or regulatory tax changes that could reduce the market price of our common stock.

 

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

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Some of the statements included in this prospectus constitute forward-looking statements within the meaning of the federal securities laws. Forward-looking statements relate to expectations, beliefs, projections, forecasts, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. These statements are only predictions. We caution that forward-looking statements are not guarantees. Actual events or our investments and results of operations could differ materially from those expressed or implied in the forward- looking statements. Forward-looking statements are typically identified by the use of terms such as “may,” “will,” “should,” “expect,” “could,” “intend,” “plan,” “anticipate,” “estimate,” “believe,” “continue,” “predict,” “potential” or the negative of such terms and other comparable terminology. You can also identify forward-looking statements by discussions of strategy, plans or intentions.

 

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

 

   

our ability to effectively deploy the net proceeds from this offering;

 

   

our business and investment strategy;

 

   

our projected operating results;

 

   

economic, demographic or real estate developments in our markets;

 

   

home value appreciation, employment growth, residential building permits, median household income and household formation in our markets;

 

   

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

 

   

our ability to identify properties to acquire and completing acquisitions;

 

   

increased time and/or expense to gain possession and restore properties;

 

   

our ability to successfully operate acquired properties;

 

   

projected operating costs;

 

   

rental rates or vacancy rates;

 

   

our ability to obtain financing arrangements;

 

   

general volatility of the markets in which we participate;

 

   

our expected investments;

 

   

interest rates and the market value of our target assets;

 

   

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

 

   

our ability to qualify and maintain our qualification as a REIT;

 

   

availability of qualified personnel;

 

   

estimates relating to our ability to make distributions to our stockholders in the future;

 

   

our understanding of our competition; and

 

   

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

 

The forward-looking statements are based on our beliefs, assumptions and expectations of future events, taking into account all information currently available to us. Forward-looking statements are not guarantees of future events or of our performance. These beliefs, assumptions and expectations can change as a result of many

 

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possible events or factors, not all of which are known to us. Some of these events and factors are described in this prospectus under the headings “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Our Business and Investments.” If a change occurs, our business, financial condition, liquidity, cash flows and results of operations may vary materially from those expressed in or implied by our forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made. New risks and uncertainties arise over time, and it is not possible for us to predict the occurrence of those matters or the manner in which they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

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USE OF PROCEEDS

 

We estimate that the net proceeds to us from this offering will be approximately $         million, based on the mid-point of the price range set forth on the front cover page of this prospectus ($         million if the underwriters exercise their over-allotment option in full), after deducting underwriting discounts and commissions and approximately $         million of other offering expenses payable by us. We will contribute the net proceeds from this offering to our operating partnership, and we expect to cause our operating partnership to use these net proceeds to acquire, restore, lease and manage single-family homes as rental properties, to provide short-term private mortgage financing secured by interests in single-family homes and for general business purposes. Prior to the full deployment of the net proceeds of this offering as described above, we may invest the undeployed net proceeds in interest-bearing, short-term, investment-grade securities or money market accounts that are consistent with our intention to qualify as a REIT. We expect that these initial investments will provide a lower net return than we expect to receive from the investments described above.

 

We will not receive any proceeds from the sale of our common stock by the selling stockholders.

 

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DISTRIBUTION POLICY

 

We intend to make quarterly cash distributions to our stockholders, consistent with our intention to qualify as a REIT for federal income tax purposes. To qualify as a REIT, we must distribute annually to our stockholders an amount at least equal to 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding any net capital gain. We will be subject to income tax on our taxable income that is not distributed and to an excise tax to the extent that certain percentages of our taxable income are not distributed by specified dates. See “Material Federal Income Tax Considerations—Distribution Requirements.” Income as computed for purposes of the foregoing tax rules will not necessarily correspond to our income as determined for financial reporting purposes.

 

The amount, timing and frequency of any distributions will be determined by our Board of Directors in its sole discretion. Our Board of Directors will consider such factors as it deems relevant when authorizing any distributions, which may include:

 

   

our actual and projected results of operations;

 

   

our liquidity, cash flows and financial condition;

 

   

the revenue from our properties and other investments;

 

   

our operating expenses;

 

   

economic conditions;

 

   

the timing of the investment of the net proceeds from this offering;

 

   

applicable law;

 

   

any debt service requirements;

 

   

our capital expenditures;

 

   

prohibitions and other limitations under our financing arrangements;

 

   

our REIT taxable income;

 

   

the annual distribution requirements under the REIT provisions of the Code; and

 

   

other factors that our Board of Directors may deem relevant.

 

Any distributions we make in the future will depend significantly upon our actual results of operations, which may differ materially from our current expectations. For more information regarding risks that could materially and adversely affect our actual results of operations, see “Risk Factors.” We cannot assure you that distributions will be made or sustained or that our Board of Directors will not change our distribution policy in the future.

 

To the extent that our cash available for distribution is less than the amount required to be distributed under the REIT provisions of the Code, we may consider various funding sources to cover any shortfall, including selling certain of our assets, borrowing funds or using a portion of the net proceeds we receive in this offering or future offerings (and thus all or a portion of such distributions may constitute a return of capital for federal income tax purposes). We also may elect to pay all or a portion of any distribution in the form of a taxable distribution of our stock or debt securities.

 

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

 

Our charter allows us to issue preferred stock that could have a preference on distributions. We currently have no intention to issue any preferred stock, but, if we do, the distribution preference on the preferred stock could limit our ability to make distributions to the holders of our common stock.

 

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CAPITALIZATION

 

The following table sets forth our cash and cash equivalents and capitalization as of December 31, 2012 (1) on a historical basis and (2) as adjusted to give effect to (a) the sale by us of 37,600 shares of our common stock in the direct private placement at a price of $20.50 per share and (b) the sale by us of             shares of our common stock in this offering at an assumed initial price to public of $         per share, which is the mid-point of the price range set forth on the front cover page of this prospectus, less underwriting discounts and commissions and other estimated offering expenses payable by us. You should read this table together with “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

     December 31, 2012  
     Historical     As Adjusted  
     ($ in thousands)  

Cash and cash equivalents

   $ 101,725      $     
  

 

 

   

 

 

 

Debt:

   $ —        $ —     
  

 

 

   

 

 

 

Equity:

    

American Residential Properties, Inc. stockholders’ equity

    

Common stock, $0.01 par value; 500,000,000 shares authorized, 18,387,257 shares issued and outstanding, historical and             shares issued and outstanding, as adjusted (1)

   $ 184      $     

Preferred stock, $0.01 par value; 100,000,000 shares authorized, no shares issued and outstanding, historical and as adjusted

    

Additional paid-in capital

     346,851     

Accumulated deficit

     (6,139  
  

 

 

   

 

 

 

Total American Residential Properties, Inc. stockholders’ equity

   $ 340,896      $     

Non-controlling interests (2)

   $ 5,335      $     
  

 

 

   

 

 

 

Total equity

   $ 346,231      $     
  

 

 

   

 

 

 

Total capitalization

   $ 349,427      $                
  

 

 

   

 

 

 

 

(1)   Includes 18,375 restricted shares of our common stock issued to certain of our employees pursuant to our 2012 Equity Incentive Plan. Excludes: (a)             shares of our common stock that we may issue and sell upon the exercise of the underwriters’ over-allotment option in full; (b) 503,922 shares of our common stock underlying an aggregate of 503,922 LTIP units previously granted or approved for grant to our officers, employees and directors pursuant to our 2012 Equity Incentive Plan; and (c)             shares of our common stock that will be available for future issuance under our 2012 Equity Incentive Plan upon completion of this offering.
(2)   Includes 175,000 OP units held by ARM and 10,490 vested LTIP units that we have granted to Mr. Schmitz and Ms. Hawkes.

 

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DILUTION

 

Our net tangible book value as of December 31, 2012 was approximately $         million, or $         per share of our common stock (assuming the exchange of outstanding OP units and LTIP units for common stock on a one-for-one basis). Net tangible book value per share represents the amount of our consolidated total tangible assets minus our consolidated total liabilities, divided by the shares of our common stock that were outstanding on the date of calculation. Our as adjusted net tangible book value on December 31, 2012 would have been approximately $         million, or $         per share, after giving effect to (1) the sale by us of 37,600 shares of our common stock in the direct private placement at a price of $20.50 per share and (2) the sale by us of              shares of our common stock in this offering at an assumed initial price to public of $         per share, which is the mid-point of the price range set forth on the front cover page of this prospectus, less underwriting discounts and commissions and other estimated offering expenses payable by us. This amount represents an immediate increase in net tangible book value of $         per share to our existing stockholders and an immediate dilution in as adjusted net tangible book value of $         per share to new investors who purchase our common stock in this offering at an assumed initial price to public of $         per share. The following table shows this immediate per-share dilution:

 

Initial price to public per share

   $               

Net tangible book value per share as of December 31, 2012, before giving effect to the direct private placement and this offering (1)

   $    

Increase in net tangible book value per share attributable to the direct private placement and this offering

   $    

As adjusted net tangible book value per share as of December 31, 2012, after giving effect to the direct private placement and this offering

   $    

Dilution in as adjusted net tangible book value per share to new investors (2)

   $    

 

(1)   Includes our common stock outstanding as of December 31, 2012, assuming the exchange of outstanding OP units and LTIP units for common stock on a one-for-one basis.
(2)   Dilution is determined by subtracting as adjusted net tangible book value per share after giving effect to the direct private placement and this offering from the initial price to public paid by a new investor for our common stock.

 

Assuming the underwriters fully exercise their over-allotment option, our as adjusted net tangible book value as of December 31, 2012 would have been approximately $         million, or $         per share. This represents an immediate dilution in as adjusted net tangible book value of $         per share to new investors in this offering (assuming the exchange of outstanding OP units and LTIP units for common stock on a one-for-one basis).

 

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Differences Between New Investors and Continuing Investors

 

The following table summarizes, as of December 31, 2012, the differences between the average price per share paid by our existing stockholders and by new investors purchasing shares of our common stock in this offering at an assumed initial price to public of $         per share, which is the mid-point of the price range set forth on the front cover page of this prospectus, before deducting underwriting discounts and commissions and estimated offering expenses payable by us in this offering, in each case assuming the exchange of all outstanding OP units and LTIP units for shares of our common stock on a one-for-one basis:

 

     Shares / OP Units / LTIP Units
Issued / Granted (1)
    Total
Consideration
    Average Price
Per  Share
 
     Number    Percentage     Amount      Percentage    

Continuing investors

               $                             $                

Selling stockholders

            

New investors

            
  

 

  

 

 

   

 

 

    

 

 

   

 

 

 

Total

        100   $           100   $     
  

 

  

 

 

   

 

 

    

 

 

   

 

 

 

 

(1)   Assumes no exercise of the underwriters’ option to cover over-allotments.

 

If the underwriters fully exercise their over-allotment option, the number of shares of our common stock held by existing holders will be reduced to     % of the aggregate number of shares of our common stock outstanding after this offering, and the number of shares of our common stock held by new investors will be increased to             , or     %, of the aggregate number of shares of our common stock outstanding after this offering.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

 

The following tables present selected historical consolidated financial data and selected portfolio data for the period from March 30, 2012 (inception) through December 31, 2012 and as of December 31, 2012. The selected historical consolidated financial data presented below under the captions “Consolidated Statement of Operations Data” and “Consolidated Balance Sheet Data” have been derived from our audited consolidated financial statements. Since the information presented below is only a summary and does not provide all of the information contained in our historical 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” and our historical consolidated financial statements, including the related notes, included elsewhere in this prospectus.

 

Consolidated Statement of Operations Data

 

     Period from
March 30, 2012
(inception) through
December 31, 2012
 
     ($ in thousands)  

Revenue:

  

Rental

   $ 2,195   

Other

     735   
  

 

 

 

Total revenue

     2,930   

Expenses:

  

Property operating and maintenance

     912   

Real estate taxes

     608   

Homeowners’ association fees

     330   

Acquisition

     760   

Depreciation and amortization

     1,804   

General, administrative and other

     4,837   
  

 

 

 

Total expenses

     9,251   
  

 

 

 

Loss from continuing operations before equity in net income of unconsolidated ventures

     (6,321

Equity in net income of unconsolidated ventures

     83   
  

 

 

 

Net loss and comprehensive loss

   $ (6,238
  

 

 

 

 

Consolidated Balance Sheet Data

 

     As of
December 31, 2012
 
     ($ in thousands)  

Investment in real estate, net

   $ 216,696   

Cash and cash equivalents

   $ 101,725   

All other assets

   $ 31,006   

Total assets

   $ 349,427   

Total liabilities

   $ 3,196   

Total equity

   $ 346,231   

 

Selected Portfolio Data

 

     As of
December 31, 2012
 

Total properties owned

     1,775   

Properties owned for at least six months

     70   

Leased properties owned for at least six months

     55   

Occupancy percentage of properties owned for at least six months

     79

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

The following discussion of our financial condition and results of operations should be read together with the “Selected Consolidated Financial Data,” “Our Business and Investments” and consolidated financial statements and related notes that are included elsewhere in this prospectus. Where appropriate, the following discussion includes the effects of completion of this offering and the use of the net proceeds. This discussion 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,” “Cautionary Note Regarding Forward-Looking Statements” or in other parts of this prospectus.

 

Overview

 

Our Company

 

We are an internally managed real estate company that acquires, owns and manages single-family homes as rental properties. In 2008, our founders, Stephen G. Schmitz, our Chief Executive Officer and Chairman, and Laurie A. Hawkes, our President and Chief Operating Officer and a member of our Board of Directors, identified a unique opportunity to acquire homes at distressed pricing and lease them at attractive rental rates. They subsequently began developing a vertically integrated platform to acquire and manage single-family homes on an institutional scale. We were formed to expand upon our founders’ vision, strategy and platform, through which they have acquired, as of December 31, 2012, 2,381 homes since 2008.

 

As of December 31, 2012, we owned 1,775 properties in Arizona, California, Florida, Georgia, Illinois, Nevada and Texas with an aggregate investment of $220.6 million, and we managed an additional 606 properties for Phoenix Fund in Arizona and Nevada. For the period from January 1, 2013 to March 20, 2013, we acquired or have contracted to acquire 1,056 single-family homes for a total purchase price of approximately $100 million, of which 72 homes are located in Arizona, 3 homes are located in California, 64 homes are located in Florida, 114 homes are located in Georgia, 135 homes are located in Illinois, 266 homes are located in Indiana, 295 homes are located in North Carolina, 15 homes are located in Nevada, 16 homes are located in South Carolina and 76 homes are located in Texas. We actively evaluate new markets to identify investment opportunities that we believe can generate attractive risk-adjusted returns for our stockholders. There is no assurance that we will close on the properties we have under contract.

 

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

 

In addition to our primary business strategy of acquiring, restoring, leasing and managing single-family homes, we have a private mortgage financing strategy that generates attractive returns on invested capital and provides us access to acquisition opportunities and valuable market data. As of December 31, 2012, our private mortgage portfolio had an aggregate outstanding principal balance of $12.2 million, a weighted-average interest rate of 12.1% per annum and a weighted-average remaining term of 155 days. We also owned an additional $0.8

 

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million in long-term mortgage investments. Additionally, for the period from January 1, 2013 to March 20, 2013, we funded or committed to fund approximately $25 million in private mortgage loans. There is no assurance that we will close on the loans we have under contract.

 

We plan to continue acquiring single-family homes and other residential real estate related assets in markets that satisfy our investment criteria with the net proceeds from this offering. We currently have no indebtedness and have acquired all our properties and other assets to date without the use of debt.

 

Over time, we expect that the proportion of our total assets invested in self-managed properties, properties leased to and managed by third-party preferred operators and in private mortgage financings will vary depending upon available investment opportunities and other factors. In general, after investing the net proceeds from this offering, we expect that a substantial percentage of our total assets will be invested in self-managed properties and properties leased to and managed by third-party preferred operators and that the remaining portion of our total assets will be invested in private mortgage financings. The allocation of our total assets among self-managed properties, properties leased to and managed by preferred operators and private mortgage financings is likely to vary significantly over time.

 

We conduct substantially all of our operations through our operating partnership, in which we will own a     % interest, including the sole 1.0% general partnership interest that we hold through a subsidiary, upon completion of this offering.

 

Formation Transactions

 

We were incorporated in Maryland in March 2012. Our initial stockholders were Mr. Schmitz, our Chief Executive Officer and Chairman, and Ms. Hawkes, our President and Chief Operating Officer and a member of our Board of Directors, each of whom purchased 500 shares of our common stock upon our incorporation for a price of $1.00 per share. Our operating partnership was formed as a Delaware limited partnership in April 2012. Its general partner, American Residential GP, LLC, our wholly owned subsidiary, was formed as a Delaware limited liability company in April 2012.

 

On May 11, 2012, as part of our formation transactions and in exchange for 175,000 OP units and approximately $85,000 in cash, we acquired from ARM the proprietary, vertically integrated real estate acquisition and management platform that our founders developed.

 

The platform we acquired from ARM enabled Phoenix Fund to purchase 606 homes in the greater Phoenix, Arizona and Las Vegas, Nevada markets in various subdivisions with an aggregate purchase price in excess of $72.3 million since February 2010. Our acquisition of this platform, along with key employees we hired from ARM, provided us with an established and scalable infrastructure, including extensive research and high-volume acquisition and property management capabilities, which we believe positions us well for growth. Phoenix Fund purchased 150,000 shares of our common stock in our initial private offering and agreed not to commit to purchase any additional single-family homes.

 

On May 11, 2012, upon completion of our initial private offering and the contribution to our operating partnership of the ARM assets as described above, our TRS entered into a cancelable sub-management agreement with ARM pursuant to which, from May 11, 2012 through February 11, 2013, our TRS provided services to ARM to enable ARM to perform its obligations under the management agreement between ARM and Phoenix Fund. These services included property restoration, leasing, management and disposition services with respect to the properties owned by Phoenix Fund. These were essentially the same services that the ARM employees whom we hired in connection with the contribution transaction referenced above provide to us with respect to our self-managed properties. Under the sub-management agreement, ARM was required to reimburse our TRS for the actual expenses incurred by our TRS to perform its obligations under the sub-management agreement, plus a fee in an amount equal to 1.0% of the gross rental revenue earned by Phoenix Fund with

 

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respect to the properties managed by ARM. In order to simplify the relationships among these parties, on February 11, 2013, ARM, Phoenix Fund and our TRS terminated these arrangements, and our TRS entered into a management agreement directly with Phoenix Fund, pursuant to which our TRS provides the same services to Phoenix Fund for a fee in an amount equal to 6.0% of the gross rental revenue received by Phoenix Fund with respect to the properties managed by our TRS.

 

Factors Expected to Affect Our Results and Financial Condition

 

Our results of operations and financial condition are affected by numerous factors, many of which are beyond our control. Key factors that impact our results of operations and financial condition include our pace of acquisitions and ability to deploy our capital, the amount of time and cost required to stabilize newly acquired properties and convert them to revenue generating assets, rental rates, occupancy levels, rates of tenant turnover, our expense ratios and capital structure.

 

Property Acquisitions

 

We have aggressively but prudently grown our portfolio of single-family homes and intend to continue to do so. Our ability to identify and acquire single-family homes that meet our investment criteria is impacted by home prices in our markets, the inventory of properties available for sale through our acquisition channels and competition for our target assets.

 

We have accumulated a substantial amount of recent data on acquisition costs, restoration costs and the amount of time required to convert an acquired single-family home to a rental property through our management platform and the experience of our founders over the past four years.

 

Property Stabilization

 

Unless it is already leased, before an acquired property becomes a revenue generating asset, we must possess, restore, market and lease the property. We refer to this process as property stabilization. The acquisition of properties involves the expenditure of capital in addition to payment of the purchase price, including payments for property inspections, closing costs, title insurance, transfer taxes, recording fees, broker commissions, property taxes, HOA fees (when applicable) and restoration costs. The time and cost involved in stabilizing our newly acquired properties impacts our financial performance and is affected by the amount of time it takes us to gain possession of a property, the amount of time and cost associated with property restoration and the amount of time it takes to market and lease the property. Our possession can be delayed for a multitude of reasons beyond our control, including applicable statutory rights of redemption, rescission rights and legal challenges to our ownership or unauthorized occupants living in the property at the time of purchase. As part of our underwriting criteria, we typically estimate restoration costs to be 7.5% to 15% of the purchase price, although actual costs may vary significantly based on market, age and condition of the property and other factors. The time to restore a newly acquired property can vary significantly among properties for several reasons, including the channel through which the property was acquired, the age and condition of the property and whether the property was vacant when we acquired it. Similarly, the time to market and lease a property is driven by local demand, our marketing techniques and the size of our available inventory. We actively monitor these measures and trends.

 

Based on our founders’ prior experience, we anticipate that, on average, the stabilization period for each non-leased property that we acquire will range from 90 to 180 days. We expect that most properties that were not leased at the time of acquisition should be stabilized within six months thereafter and that properties owned for more than six months provide the best indication of how our portfolio will perform over the long-term. As of December 31, 2012, we had 70 properties owned for six months or longer, of which 79% were leased. We continually track key metrics such as average time to obtain possession, restore, and lease our properties.

 

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Revenue

 

Our revenue comes primarily from rents collected under lease agreements for our properties. These include both short-term leases that we enter into directly with tenants, which typically have a term of one year, and longer-term net leases, which typically have a term of five to ten years, that we enter into with preferred operators who sub-lease the properties to sub-tenants. Our rental revenue of approximately $2,195,000 for the period from March 30, 2012 (inception) through December 31, 2012 was comprised of approximately $1,746,000 of rental revenue from self-managed properties and of approximately $449,000 of revenue from preferred operator program properties. We also receive fees for providing management services to Phoenix Fund and interest on our portfolio of private mortgage financings. For the period from March 30, 2012 (inception) through December 31, 2012, approximately 74.9% of our total revenue was attributable to rental activity, 8.1% was attributable to management services and the remaining 17.0% was attributable to interest earned on our portfolio of private mortgage financings and on cash balances. Over time, we expect most of our revenue to be derived from leasing our properties. The most important drivers of revenue (aside from portfolio growth) are rental and occupancy rates. Our rental and occupancy rates are affected by macroeconomic factors and local and property-level factors, including market conditions, seasonality and tenant defaults, and the amount of time that it takes us to restore properties upon acquisition and the amount of time it takes us to restore and re-lease vacant properties.

 

In each of our markets, we monitor a number of factors that may impact the single-family real estate market and our tenants’ finances, including the unemployment rate, household formation and net population growth, income growth, size and make-up of existing and anticipated housing stock, prevailing market rental and mortgage rates, rental vacancies and credit availability. Growth in demand for rental housing in excess of the growth of rental housing supply, among other factors, will generally drive higher occupancy and rental rates. Negative trends in our markets with respect to these metrics or others could adversely impact our rental revenue. For a more detailed discussion of important factors that impact our revenue, see “Our Business and Investments.”

 

The growth of our portfolio has been significant in recent months, as we have increased the rate at which we acquire properties. When we commenced investment activities in May 2012, we began acquiring properties in Arizona, California and Nevada. More recently, we have also acquired properties in Florida, Georgia, Illinois and Texas, and we are actively identifying other markets in which to invest.

 

We expect that the occupancy of our portfolio will increase as the proportion of recently acquired properties declines relative to the size of our entire portfolio. Nevertheless, in the near term, our ability to drive revenue growth will depend in large part on our ability to efficiently restore and lease newly acquired properties, maintain occupancy in the rest of our portfolio and acquire additional properties, both leased and vacant.

 

The following table summarizes our acquisition and leasing activity from our commencement of investment activity in May 2012 through December 31, 2012.

 

            Acquisitions (1)                
     Total Owned
Properties

as of
May 31, 2012
     One Month
Ended
June 30, 2012
     Three Months
Ended
September 30,
2012
     Three Months
Ended
December 31,
2012
     Total Owned
Properties as of
December 31, 2012
     Percent of
Properties
Leased as of
December 31,
2012 (2)
 

Properties

     —           70         659         1,046         1,775         76

 

(1)   We acquired our first property in June 2012.
(2)   It may take up to six months to stabilize a property that was vacant at the time of its acquisition and for it to begin generating revenue. In addition, properties may be leased more than once in a given period. The amount presented represents the properties that were leased as of the end of the period.

 

From March 30, 2012 (inception) through December 31, 2012, we acquired a total of 1,775 properties for an aggregate investment of $220.6 million. Before a vacant or foreclosure property is leased, we must possess,

 

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restore and market it. We typically estimate restoration costs on such properties to be 7.5% to 15% of the purchase price, although actual costs may vary significantly based on the market, age and condition of the property. For the period from January 1, 2013 to March 20, 2013, we acquired or have contracted to acquire 1,056 single-family homes for a total purchase price of approximately $100 million, of which 72 homes are located in Arizona, 3 homes are located in California, 64 homes are located in Florida, 114 homes are located in Georgia, 135 homes are located in Illinois, 266 homes are located in Indiana, 295 homes are located in North Carolina, 15 homes are located in Nevada, 16 homes are located in South Carolina and 76 homes are located in Texas. There is no assurance that we will close on properties we have under contract.

 

Expenses

 

Our ability to acquire, restore, lease and maintain our portfolio in a cost-effective manner will be a key driver of our operating performance. We monitor the following categories of expenses that we believe most significantly affect our results of operations.

 

Property-Related Expenses

 

Once we acquire and restore a self-managed property, we have ongoing property-related expenses, including HOA fees (when applicable), taxes, insurance, ongoing costs to market and maintain the property and expenses associated with tenant turnover. Certain of these expenses are not subject to our control, including HOA fees, property insurance and real estate taxes. We expect that certain of our costs, including insurance costs and property management costs, will account for a smaller percentage of our revenue as we expand our portfolio, achieve larger scale and negotiate volume discounts with third-party service providers and vendors. For properties leased to preferred operators, we have no day-to-day operating responsibilities or property-related expenses, because such responsibilities and expenses are obligations of the operators pursuant to the terms of the leases. As of December 31, 2012, 547 of our properties were managed by local operators through our preferred operator program.

 

Property Management

 

We provide all property management functions for our self-managed properties. For the properties we manage, these functions include: securing the property upon acquisition; coordinating with the utilities; controlling the restoration process; managing the leasing process; communicating with residents; collecting rents; conducting periodic inspections, routine property maintenance and repairs; paying HOA fees; interfacing with vendors and contractors; and accounting and compliance.

 

By performing these functions internally for our self-managed properties, we believe that we establish improved communications, foster direct relationships with residents, gain tighter control over the quality and cost of restorations and property maintenance, gain increased attention and focus of third-party leasing agents and improve the timeliness of rental receipts. In addition, we believe that our internal management structure will allow us to manage properties more efficiently than many of our competitors who are externally managed.

 

Overhead

 

We will incur expenses associated with our vertically integrated real estate acquisition and management platform, such as compensation expense and other general and administrative costs. In the near term, as our business grows, we expect to hire additional employees, which will increase our general and administrative costs. In addition, we will incur additional costs related to operating as a public company due to increased legal, insurance, accounting and other expenses related to corporate governance, SEC reporting and other compliance matters. Over time, we expect these costs to decline as a percentage of revenue as our portfolio grows.

 

Based on our experience, we believe that the property-related expenses for vacancy, bad debt, property taxes, insurance, HOA fees, repairs and maintenance and capital expenditure reserves and the costs for property

 

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management services, such as managing the process of restoring, marketing, leasing and maintaining our stabilized single-family homes, will average between 55% and 60% of gross rental revenue. Variations in asset level returns will be due to a variety of factors, including location, age and condition of the property and the efficiency of our property management services.

 

Results of Operations

 

Our results of operations below are derived from the audited consolidated financial statements included elsewhere in this prospectus.

 

Consolidated Statement of Operations Information

 

     Period from
March 30, 2012
(inception)
through
December 31, 2012
 
     ($ in thousands)  

Revenue:

  

Rental

   $ 2,195   

Management services

     238   

Interest and other

     497   
  

 

 

 

Total revenue

     2,930   

Expenses:

  

Property operating and maintenance

     912   

Real estate taxes

     608   

Homeowners’ association fees

     330   

Acquisition

     760   

Depreciation and amortization

     1,804   

General, administrative and other

     4,837   
  

 

 

 

Total expenses

     9,251   
  

 

 

 

Loss from continuing operations before equity in net income of unconsolidated ventures

     (6,321

Equity in net income of unconsolidated ventures

     83   
  

 

 

 

Net loss and comprehensive loss

   $ (6,238
  

 

 

 

 

We commenced investment activities in May 2012 upon completion of our initial private offering, and through December 31, 2012, we acquired a total of 1,775 properties, with 70 homes acquired in June 2012, 659 homes acquired during the three months ended September 30, 2012 and 1,046 homes acquired during the three months ended December 31, 2012.

 

Rental Revenue

 

Rental revenue includes rental revenue from our residential properties, application fees and lease termination fees. As of December 31, 2012, approximately 76% of our properties were leased, generating rental revenue of approximately $2,195,000 for the period from March 30, 2012 (inception) through December 31, 2012.

 

Management Services Revenue

 

From the completion of our initial private offering through February 11, 2013, management services revenue represented fee income earned from ARM for property restoration, leasing and management services

 

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provided to Phoenix Fund under a sub-management agreement with ARM. Since February 11, 2013, management services revenue represents fee income earned from Phoenix Fund for property restoration, leasing and management services provided to Phoenix Fund under a management agreement between Phoenix Fund and our TRS.

 

Interest and Other Revenue

 

Interest and other revenue includes interest income earned on private mortgage financings and interest income earned on cash balances held with financial institutions.

 

Property Operating and Maintenance

 

Property operating and maintenance includes all direct and indirect costs related to operating our residential properties, including management personnel, insurance, utilities, landscaping and general repairs and maintenance, other than real estate taxes and HOA fees, which are presented separately in our consolidated statement of operations.

 

Real Estate Taxes

 

Upon acquisition of a home, its real estate taxes are set based upon municipal and state laws. These costs generally remain constant throughout the year and have little variation. Because these expenses are relatively fixed during each year, our operating margin has an opportunity to improve as vacant properties in our self-managed portfolio are leased and begin generating rental revenue.

 

Homeowners’ Association Fees

 

Like real estate taxes, these fees are determined upon acquisition and generally remain fixed based upon existing HOA agreements. Accordingly, our operating margin has an opportunity to improve as vacant properties in our self-managed portfolio are leased and begin generating rental revenue.

 

Acquisition

 

Acquisition expenses are transaction costs incurred in connection with the acquisition of properties with existing leases, including but not limited to, payments for property inspections, closing costs, title insurance, transfer taxes, recording fees and broker commissions. For properties that are leased at the time of acquisition, these costs are expensed, rather than capitalized as a component of the acquisition cost (which is the accounting treatment of these costs for properties that are vacant at the time of acquisition).

 

Depreciation and Amortization

 

Depreciation and amortization includes depreciation expense on our real estate portfolio using the straight-line method over the estimated useful lives of the respective assets, ranging from 5 to 27.5 years, from the date of acquisition. Depreciation and amortization also includes amortization expense related to in-place lease intangibles, deferred leasing costs and other direct costs capitalized associated with leasing our properties, amortized over the remaining term of the related leases.

 

General, Administrative and Other

 

General, administrative and other expense includes $1.9 million in non-cash stock compensation expense related to vesting of equity issued at the closing of our initial private offering.

 

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Equity in Net Income of Unconsolidated Joint Venture

 

Equity in net income of unconsolidated joint venture includes our proportionate share of income in Flatiron VI LLC, a Delaware limited liability company that invests in residential mortgage loans.

 

Cash Flows

 

Our cash flows from operating activities primarily depend upon the occupancy level of our portfolio, the rental rates achieved on our leases, the collectability of rent from our tenants and the level of operating expenses and other general and administrative costs. Net cash used in operating activities was $(2.8) million for the period from March 30, 2012 (inception) through December 31, 2012. We acquired 1,775 properties from March 30, 2012 (inception) through December 31, 2012. Before any property we own begins generating revenue, we must take possession of, restore, market and lease the property. In the meantime, we incur both operating and overhead expenses without corresponding revenue, which contributed to the net use of cash during the same period.

 

Our net cash used in investing activities is generally used to fund property acquisitions and recurring and non-recurring capital expenditures. Net cash used in investing activities was $(242.5) million for the period from March 30, 2012 (inception) through December 31, 2012 due to the acquisition of 1,775 properties and subsequent restoration activities totaling $219.2 million and the investment of $14.4 million in private mortgage loans. Substantially all of the additions to investment in real estate of $2.8 million for the period from March 30, 2012 (inception) through December 31, 2012 were incurred on restorations on acquired properties.

 

Our net cash related to financing activities is generally impacted by any borrowings, capital activities net of any dividends and distributions paid to common stockholders and non-controlling interests. Net cash flows provided by financing activities totaled $347.0 million for the period from March 30, 2012 (inception) through December 31, 2012 due to net proceeds, after expenses paid, received from our initial private offering on May 11, 2012 and our follow-on private offering on December 21, 2012.

 

Critical Accounting Policies and Estimates

 

Our discussion and analysis of our historical financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.

 

Investment in Real Estate

 

Property acquired not subject to an existing lease is recorded at the purchase price, including acquisition costs, allocated between land and building and improvements based upon their relative fair values at the date of acquisition. Property acquired with an existing lease is recorded as a business combination. The land, building and improvements and the existing lease are recorded at fair value at the date of acquisition, with acquisition costs expensed as incurred.

 

Fair value is determined under the guidance of Financial Accounting Standards Board, or FASB, Codification Topic 820, Fair Value Measurements , primarily based on unobservable market data inputs, which are categorized as Level 3 inputs. In making estimates of fair values for purposes of allocating purchase price, we utilize our market knowledge and published market data. Our real estate portfolio is depreciated using the straight—line method over the estimated useful lives of the respective assets, ranging from 5 to 27.5 years.

 

In-place lease intangibles associated with the preferred operator program are valued based on management’s estimates of lost rent and carrying costs while in-place lease intangibles associated with the acquisition of self-

 

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managed homes are valued based on management’s estimate of lost rent during the time it would take to locate a tenant and execute a lease if the property were vacant, considering current market conditions and costs to execute similar leases. In estimating lost rent and carrying costs, management considers market rents, real estate taxes, insurance, costs to execute similar leases (including leasing commissions) and other related costs. The value assigned to in-place leases is amortized on a straight-line basis as a component of depreciation and amortization expense over the remaining initial term of the related lease. The leases reflect market rental rates.

 

We incur costs to prepare our acquired properties to be rented. These costs (including direct internal costs) are capitalized and allocated to building costs. Costs related to the restoration or improvement of our properties (including direct internal costs, primarily comprised of payroll expense) that improve and extend their useful lives are capitalized and depreciated over their estimated useful lives. Expenditures for ordinary repairs and maintenance are expensed as incurred.

 

Impairment of Long-Lived Assets

 

We evaluate our long-lived assets for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Significant indicators of impairment may include, but are not limited to, declines in home values, rental rates and occupancy percentages and significant changes in the economy. We make our assessment at the individual property level because it represents the lowest level of cash flows. If an impairment indicator exists, we compare the expected future undiscounted cash flows from the property against its net carrying amount. We prepare our future undiscounted cash flow analysis using estimates based on current rental rates, renewals and occupancy, operating expenses and inputs from our annual planning process and historical performance. When preparing these estimates, we consider each property’s historical results, current operating trends and current market conditions. These estimates may be impacted by variable factors including inflation, expected rental rates, the general health of the economy and market competition. If the sum of the estimated undiscounted cash flows is less than the net carrying amount of the property, we record an impairment loss for the difference between the estimated fair value of the individual property and the carrying amount of the property at that date. To determine the estimated fair value, we consider both recent comparable homes sales and the use of discounted projected future cash flows. The rates used to discount projected future cash flows reflect market discount rates. No impairments were recorded during the period from March 30, 2012 (inception) through December 31, 2012.

 

Revenue Recognition

 

We lease single-family residences we own and manage directly to tenants who occupy the properties under operating leases, generally, with terms of one year. Generally we perform credit investigations on prospective tenants and obtain security deposits. Rental revenue, net of any concessions, is recognized on a straight-line basis over the term of the lease, which is not materially different than if it were recorded when due from tenants and recognized monthly as it is earned. Properties that are subject to longer-term operating arrangements with preferred operators are leased to the operator for a minimum of five to ten years with renewal options. These operators are responsible for taxes, insurance and maintenance of the properties under the terms of the operating arrangements. Under our preferred operator program, we earn base rental revenue paid monthly, with contractual minimum annual rent increases on each anniversary of the lease commencement date. We recognize rental revenue on a straight-line basis over the term of the lease. We also earn percentage rents on a quarterly basis equal to a fixed percentage of the gross revenue the preferred operator collects from its residential sub-tenants who occupy the homes. Percentage rental revenue is recorded when the gross revenue collected from the sub-tenants is known and the amount can be calculated.

 

Mortgage Financings

 

We hold mortgage financing receivables for investment. The receivables are carried at cost, net of related unamortized premiums or discounts, if any. The mortgage loans are secured by single-family homes.

 

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Interest income on mortgage financings is recognized on the effective interest method applied on a loan-by-loan basis. Direct costs, if any, associated with funding loans are offset against any related fees received and the balance, along with any premium or discount, is deferred and amortized as an adjustment to interest income over the terms of the related loans using the effective interest method.

 

Mortgage loans as of December 31, 2012 include approximately $12.2 million of short-term loans with a weighted-average interest rate of approximately 12.1% and a weighted-average remaining term of approximately 155 days and approximately $0.8 million in long-term loans with a weighted-average interest rate of approximately 7.99% and a weighted-average remaining term of approximately 30 years.

 

Rents and Other Receivables, Net

 

We maintain an allowance for doubtful accounts for estimated losses that may result from the inability of tenants or borrowers to make required rent or other payments. This allowance is estimated based on payment history and current credit status. If a tenant or borrower fails to make contractual payments beyond any allowance, we may recognize bad debt expense in future periods equal to the amount of unpaid rent, interest or principal and deferred rent. We generally do not require collateral or other security from our tenants, other than security deposits. Mortgage loans are secured by single-family homes. If estimates of collectability differ from the cash received, then the timing and amount of our reported revenue could be impacted.

 

Deferred Leasing Costs and In-Place Lease Intangibles, Net

 

Deferred leasing commissions and other direct costs associated with leasing our properties (including direct internal costs) and in-place lease intangibles are capitalized and amortized on a straight-line basis over the terms of the related leases.

 

Investments in Unconsolidated Ventures

 

Investments in ventures are generally accounted for under the equity method of accounting when we exercise significant influence over the venture but we do not serve as managing member or control the venture. Net income/loss allocations are included in the investment balance along with the contributions made and distributions received over the life of the investment.

 

Goodwill

 

Goodwill represents the estimated fair value of the real estate acquisition and management platform acquired from ARM. Goodwill has an indefinite life and, accordingly, we do not amortize this asset but instead analyze it on an annual basis for impairment. Accounting Standards Codification 350, Intangibles – Goodwill and Other, permits us to assess qualitative factors to determine whether it is more likely than not that the fair value of the reporting units is less than the carrying amount as a basis to determine whether the two-step impairment test is necessary. The first step in the impairment test compares the fair value of the reporting unit with its carrying amount. If the carrying amount exceeds fair value, the second step is required to determine the amount of the impairment loss by comparing the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. We also have the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the first step of the two-step goodwill impairment test. Impairment charges, if any, are recognized in operating results. No impairments have been recorded for the period from March 30, 2012 (inception) through December 31, 2012.

 

Income Taxes

 

We intend to elect to be taxed as a REIT under Sections 856 to 860 of the Code commencing with our short taxable year ended December 31, 2012. We believe that we have operated in such a manner as to satisfy the

 

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requirements for qualification as a REIT. Accordingly, we will not be subject to federal income tax, provided that we qualify as a REIT and our distributions to our stockholders equal or exceed our REIT taxable income.

 

However, qualification and taxation as a REIT depend upon our ability to meet the various qualification tests imposed under the Code related to the percentage of income that we earn from specified sources, the percentage of our assets that fall within specified categories, the diversity of our capital stock ownership, and the percentage of our earnings that we distribute. Accordingly, no assurance can be given that we will be organized or be able to operate in a manner so as to qualify or remain qualified as a REIT. If we fail to qualify as a REIT in any taxable year, we will be subject to federal and state income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate tax rates, and we may be ineligible to qualify as a REIT for four subsequent tax years. Even if we qualify as a REIT, we may be subject to certain state or local income taxes, and our TRS will be subject to federal, state and local taxes on its income.

 

Stock-Based Payments

 

We have awarded stock-based compensation to certain employees and members of our Board of Directors in the form of LTIP units and restricted shares of our common stock. We estimate the fair value of the awards and recognize this value over the requisite vesting period. For LTIP units, the fair value is based on the estimated market value of our common stock on the date of grant and a discount for lack of marketability estimated by a third-party consultant.

 

Emerging Growth Company Status

 

We are an “emerging growth company,” as defined in the JOBS Act, and we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies.” These exemptions provide that, so long as a company qualifies as an “emerging growth company,” it will, among other things:

 

   

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

 

   

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

 

   

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

 

Although we are still evaluating the JOBS Act, we currently may take advantage of some or all of the reduced regulatory and reporting requirements that will be available to us so long as we qualify as an “emerging growth company,” except that we have irrevocably elected not to take advantage of the extension of time to comply with new or revised financial accounting standards available under Section 102(b) of the JOBS Act.

 

We will, in general, qualify as an “emerging growth company” until the earliest of:

 

   

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

 

   

the last day of our fiscal year in which we have annual gross revenue of $1.0 billion or more;

 

   

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

 

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

 

Liquidity and Capital Resources

 

Liquidity is a measure of our ability to meet potential cash requirements, maintain our assets, fund our operations and make distributions to our stockholders and other general business needs. Our liquidity, to a certain extent, is subject to general economic, financial, competitive and other factors that are beyond our control. Our near-term liquidity requirements consist primarily of purchasing our target assets, restoring and leasing properties and funding our operations.

 

Our long-term liquidity needs consist primarily of funds necessary to pay for the acquisition, restoration and maintenance of properties; HOA fees; real estate taxes; non-recurring capital expenditures; interest and principal payments to the extent we incur indebtedness; payment of quarterly distributions to our stockholders to the extent declared by our Board of Directors; and general and administrative expenses. We expect to incur between 7.5% and 15.0% of the total purchase price of vacant homes acquired on restorations in order to prepare the acquired home for rental activities. On homes that are currently leased or that are acquired with an in-place lease, we expect to incur between $1,500 to $2,500 in restoration costs, in order to prepare the home for rent to a new tenant if and when the existing tenant does not renew their lease and ultimately vacates the home at lease expiration. The nature of our business, our aggressive growth plans and the requirement that we distribute at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain, to our stockholders, may cause us to have substantial liquidity needs over the long-term, although we have not had any taxable income to date. We will seek to satisfy our long-term liquidity needs through cash flow from operations, long-term secured and unsecured indebtedness, the issuance of debt and equity securities, including OP units, property dispositions and joint venture transactions. We have financed our operations and acquisitions to date through the issuance of equity securities. We expect to meet our operating liquidity requirements generally through cash on hand and cash provided by operations (as we lease up acquired single-family homes). Upon completion of this offering, we anticipate that cash on hand and provided by operations will be sufficient to meet our liquidity requirements for at least the next 12 months. Our assets are illiquid by their nature. Thus, a timely liquidation of assets might not be a viable source of short-term liquidity should a cash flow shortfall arise that causes a need for additional liquidity. It could be necessary to source liquidity from other financing alternatives should any such scenario arise.

 

As of December 31, 2012, all of our properties have been acquired with cash, but, in the future, we may incur debt to fund our acquisitions and growth. We may raise additional capital in the future through the sale of shares of our capital stock.

 

We have obtained a $150 million senior secured revolving credit facility from a syndicate of major national banks with an accordion feature that allows us to increase the facility amount up to $300 million subject to meeting certain criteria and obtaining additional commitments from lenders. The credit facility is secured by our ownership interest in American Residential Leasing Company, LLC, which is a wholly owned subsidiary of our operating partnership. The credit facility matures in January 2015, has an optional one-year extension (assuming our compliance with applicable covenants) and bears interest at a rate of LIBOR plus a spread ranging from 2.50% to 3.25% based on a ratio of total indebtedness to total asset value (each as defined in the credit agreement that governs the credit facility) ranging from less than or equal to 45% to greater than 55%.

 

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The amount available for us to borrow under the credit facility is subject to limitations governed by calculations based on the cost, value and debt yield supported by our properties that form the borrowing base of the credit facility. The credit agreement requires us to comply with various financial covenants, including:

 

   

a maximum leverage ratio (defined as total indebtedness to total asset value) of 40.0%, increasing up to 60.0% once $300.0 million of our homes are designated as borrowing base properties;

 

   

a minimum fixed charge coverage ratio (defined as consolidated earnings before interest, taxes, depreciation and amortization to consolidated fixed charges) of 1.00x, stepping up over time to 1.75x;

 

   

a minimum tangible net worth equal to at least $258.8 million, plus 75.0% of the net proceeds of any additional equity issuances; and

 

   

a minimum liquidity requirement of $15.0 million in unrestricted cash, stepping down to $10.0 million after March 31, 2014.

 

In addition to these financial covenants, the credit agreement requires us to comply with various customary affirmative and negative covenants that restrict our ability to, among other things, incur debt and liens, make investments, dispose of properties and make distributions.

 

The covenant in the credit agreement that restricts the incurrence of debt permits us to incur:

 

   

unsecured, nonrecourse debt so long as after giving effect thereto we are in pro forma compliance with the financial covenants described above;

 

   

secured, nonrecourse debt so long as after giving effect thereto we are in pro forma compliance with the financial covenants described above, and subject to (1) limitations on our ability to on-lend proceeds of such debt to fund mortgage loans originated by third parties and (2) a $50 million limit on the incurrence of such debt if we have not designated at least $300.0 million of our homes as borrowing base properties; and

 

   

up to $50 million of unsecured, recourse debt, subject to satisfaction of certain specified conditions, including a condition that after giving effect to the incurrence thereof we are in pro forma compliance with the financial covenants described above.

 

The covenant in the credit agreement that restricts distributions includes a restriction that our annual distributions may not exceed the greater of (1) 95.0% of our funds from operations or (2) the amount required for us to (a) qualify and maintain our REIT status and (b) avoid the payment of federal or state income or excise tax. If certain events of default exist or would result from a distribution, or if our obligations under the credit facility are accelerated, we may be limited or precluded from making distributions.

 

Our liquidity and capital resources as of December 31, 2012 consisted of cash and cash equivalents of $101.7 million, including $0.4 million held by designated brokers to facilitate the acquisition of properties.

 

On January 25, 2013, we completed a direct private placement of 37,600 shares of our common stock, raising net proceeds of approximately $0.8 million, before expenses.

 

To date, we have not declared any distributions. To qualify as a REIT, we are required to distribute annually at least 90% of our REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and to pay tax at regular corporate rates to the extent that we annually distribute less than 100% of our net taxable income. Subject to the requirements of the MGCL, we intend to pay quarterly dividends to our stockholders, if and to the extent authorized by our Board of Directors. Any future distributions payable are indeterminable at this time.

 

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Off-Balance Sheet Arrangements

 

We have no obligations, assets or liabilities which would be considered off-balance sheet arrangements. We have not participated in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements.

 

Contractual Obligations

 

The following table provides information with respect to our commitments as of December 31, 2012, including any guaranteed or minimum commitments under contractual obligations (dollars in thousands).

 

     2013      2014      2015      2016      2017      Thereafter      Total  

Operating lease (1)

   $ 200       $ 287       $ 292       $ 298       $ 303       $ 25       $ 1,405   

Property acquisition obligations (2)

     7,486         —           —           —           —           —           7,486   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 7,686       $ 287       $ 292       $ 298       $ 303       $ 25       $ 8,891   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)   Includes operating lease for corporate office space at 7047 East Greenway Parkway, Scottsdale, Arizona.
(2)   Represents purchase offers on single-family rental homes that were accepted by the seller but not closed as of December 31, 2012. Acquisition deposits were paid through December 31, 2012 in connection with these rental home purchase commitments. There is no assurance that we will close on the properties we have under contract.

 

Quantitative and Qualitative Disclosures About Market Risk

 

Our future income, cash flows and fair values relevant to financial instruments are dependent upon prevalent market interest rates. Market risk refers to the risk of loss from adverse changes in market prices and interest rates. We may in the future use derivative financial instruments to manage, or hedge, interest rate risks related to any borrowings we may have. We expect to enter into such contracts only with major financial institutions based on their credit rating and other factors. We do not currently have any market risk sensitive instruments.

 

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INDUSTRY OVERVIEW AND MARKET OPPORTUNITY

 

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

 

Industry Overview

 

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

 

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

 

U.S. Housing Inventory

(as of February 2013)

 

LOGO

 

Source: JBREC, February 2013.

 

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Market Opportunity

 

After nearly a decade of solid home price appreciation from 1998 to 2006, which we believe in many markets was in excess of underlying fundamentals, a significant over-correction has occurred in the pricing of the single-family housing sector. Home prices declined approximately 35% in some of the largest U.S. housing markets (as measured by the not-seasonally adjusted S&P/Case-Shiller Composite 20 Home Price Index from its peak on July 1, 2006 to its trough on March 1, 2012). We believe that home prices continue to be significantly below replacement costs in many of these markets. Additionally, we believe there will continue to be a supply of homes at distressed values, as a substantial number of non-performing loans will need to be resolved, including through foreclosure, short sale or conversion through a bank deed-for-lease program. Accordingly, we believe there is an opportunity to acquire a large volume of single-family homes at attractive pricing.

 

While a large and growing asset class, single-family rental properties have historically been managed by relatively small-scale, “mom and pop” owner-operators or by a limited number of local and regional property management organizations. More recently, the ownership profile of single-family rental properties has shifted to larger investors and national owner-operators, including our company, seeking to efficiently acquire large numbers of homes at distressed values, generate attractive rental cash flow streams and benefit from any potential home price appreciation. We believe the return profile, from rental yields and potential for future home price appreciation, is significant enough to encourage investment in the systems, structures and technologies that can make possible economies of scale, resulting in an opportunity for broader industry consolidation by larger and better-capitalized investors that are introducing a higher standard of institutional management to this asset class.

 

The ability to acquire single-family homes at reduced prices, combined with improving housing demand characteristics, may offer a significant opportunity to those with a scalable real estate management and acquisitions platform and access to capital.

 

While single-family prices are in the early stages of recovery, multi-family prices have been improving during the last two years and have returned to levels on par with early 2006, as measured by the NCREIF Index.

 

Supply of Single-Family Housing

 

Following the eight-year period of solid price appreciation that ended in late 2006, home prices fell precipitously. From its peak in 2006 through the second quarter of 2010, the aggregate value of the U.S. housing market depreciated by approximately $5.5 trillion (per Case-Shiller and U.S. Census Bureau), an extraordinary reduction of value in the housing sector. This sudden decrease in home values has contributed to approximately 10.8 million home borrowers with negative equity or in some stage of delinquency as of the third quarter 2012 (according to JBREC).

 

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

 

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Non-Performing Single-Family Residential Mortgage Loans

(as of December 2012)

(Total Non-Performing Loans: 4.7 million)

 

LOGO

 

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

 

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

 

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

(Q4 1990—Q4 2012)

 

LOGO

 

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

 

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

 

Rental Market Demand Overview

 

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

 

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

 

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

 

Single-Family and Multi-Family Rental Occupancy and Rental Rate

(as of December 31, 2011)

 

Median Monthly Rent

  

% of Total Occupied Homes

LOGO

 

Source: U.S. Census Bureau.

 

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Single-Family Rental Demand

 

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

 

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

 

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

 

Relative Size of the Single-Family Rental Market

(as of December 31, 2011)

 

Single-Family Rentals as % of Total Rentals)    Total Count of Rental Units

LOGO

 

Source: U.S. Census Bureau.

 

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

 

Constraints on Home Mortgage Financing.

 

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

 

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Displaced Owners Forced to Rent

 

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

 

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

 

Single-Family Home Prices

 

We believe that there has been an over-correction in housing prices in certain housing markets, which has led to home prices being significantly below replacement cost in many of these markets. As the economy slowly strengthens and the housing market returns to long-term pricing norms, or reverts to mean pricing levels, we believe there is the potential for home price appreciation. The chart below illustrates the magnitude of the decrease in home prices in our current markets and the subsequent rebound, which remains significantly below the peak.

 

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Changes in Burns Home Value Index (1)

(December 31, 2002 to December 31, 2012)

 

LOGO

 

Source: JBREC, February 2013.

 

  (1)   Peak occurred during either 2006 or 2007 for all markets. Trough occurred during 2011 or 2012 for all markets. Burns Home Value Index estimates all home values in a market, not just recent transactions (sales).

 

Markets: Economic and Demographic Fundamentals

 

Projections and Assumptions

 

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

 

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projections will come true. See “Risk Factors—Risks Related to Our Business—The estimates, forecasts and projections relating to our markets prepared by JBREC are based upon numerous assumptions and may not prove to be accurate.”

 

Home Value Appreciation

 

The Burns Home Value Index seeks to provide a reasonable estimate of home value trends in an MSA. The index is calculated based on an “electronic appraisal” of every home in the market, rather than just the small sample of homes that are actually transacting. The index provides home value trends by analyzing transactions as they are negotiated, not closed, which eliminates the data lag embedded in other home value indices that are based only on completed transactions. The index does not measure the change in the median price of homes sold, which may be subject to the mix of homes being sold and differences by geography. Appreciation projections are highly dependent on JBREC’s assumptions of job growth by market, and mortgage rates staying below 5.2% through 2016.

 

Employment Growth

 

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

 

Residential Building Permit Activity

 

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

 

Median Household Income

 

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

 

Household Formation

 

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

 

Overview

 

As of December 31, 2012, we conducted operations in six primary markets, which we believe possess attributes that allows us to execute our single-family rental strategy. These markets have generally experienced significant price deterioration during the financial crisis, seen a decrease in homeownership and, in our view, currently have a positive economic outlook. Additionally, these are markets where we have identified partners, vendors and sub-contractors necessary to facilitate our strategy. We believe these factors allow us to acquire, restore, lease and manage homes to generate attractive risk-adjusted returns over the long-term. As of December 31, 2012, our six primary markets were located in Arizona (Phoenix-Mesa-Glendale, AZ MSA), California (Riverside-San Bernardino-Ontario, CA MSA), Georgia (Atlanta-Sandy Springs-Marietta, GA MSA), Illinois (Chicago-Joliet-Naperville, IL Metropolitan Division), Nevada (Las Vegas-Paradise, NV MSA) and Texas (Dallas-Plano-Irving, TX Metropolitan Division).

 

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The following tables provide summaries of actual economic data and estimates, forecasts and projections for these six primary markets.

 

     Metro Area  
     Phoenix, AZ
MSA
    Riverside-San
Bernardino,
CA MSA
    Atlanta, GA
MSA
    Chicago,
IL Metro
Division
    Las Vegas,
NV MSA
    Dallas, TX
Metro
Division
    United
States
 

MSA Rank by Population (1)

     14        13        9        3 (7)       30        4 (8)    

Unemployment Rate (2) December 31, 2012

     6.7     10.9     8.4     8.8     10.0     5.9     7.6

Average Annual Home Value Appreciation Forecast (3)(4) 2013 to 2016

     10.7     9.8     11.1     9.1     14.3     6.9     6.5

Average Annual Employment Growth Forecast (3)(5)
2013 to 2016

     2.6     2.0     2.1     1.6     2.1     2.5     1.8

Average Annual Median Income Growth Forecast (3)(5) 2013 to 2016

     2.9     2.3     2.2     1.9     1.9     2.7     1.8

Average Annual Population Growth Forecast (3)(6)
2013 to 2016

     2.6     1.2     1.9     0.4     3.0     2.1     1.0

Discount (Premium) of Median Home Price to Cost of Newly Constructed Home (3)(5)

     23.6     4.4     26.2     -13.6     26.3     -5.3  

 

(1)   Source: 2012 U.S. Census Bureau, Statistical Abstract of the United States.
(2)   Source: Bureau of Labor Statistics.
(3)   JBREC estimate; actual values may differ materially from those estimated.
(4)   Source: JBREC—Burns Home Value Index.
(5)   Source: JBREC.
(6)   Source: Moody’s Analytics (September 2012).
(7)   Represents entire Chicago-Joliet-Naperville, IL-IN-WI MSA.
(8)   Represents entire Dallas-Fort Worth, TX MSA.

 

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

(indexed to 100 in January 2002)

 

    Metro Area              

Period

  Phoenix, AZ
    MSA    
    Riverside-San
Bernardino,

CA  MSA
   

Atlanta,

GA MSA

    Chicago, IL
Metro
Division
    Las Vegas,
NV MSA
    Dallas, TX
Metro
Division
    6-MSA
Average
    National
Average
 

Jan. 2002

    100          100          100          100          100          100          100          100     

2002

    103          108          102          104          103          101          104          105     

2003

    108        6     132        22     106        4     114        9%        117        13     103        2     113        9     116        10

2004

    123        13     178        35     111        5     122        7%        168        44     108        5     135        19     132        14

2005

    173        41     223        25     116        5     133        9%        194        16     109        1     158        17     152        15

2006

    189        9     242        9     120        4     140        5%        200        3     113        4     168        6     159        5

2007

    170        -10     214        -12     121        0     139        -1%        180        -10     113        0     156        -7     153        -4

2008

    135        -20     152        -29     111        -8     125        -10%        138        -24     108        -5     128        -18     136        -12

2009

    105        -22     118        -22     100        -10     110        -12%        100        -28     107        0     107        -17     124        -9

2010

    93        -12     111        -6     92        -8     99        -10%        88        -11     106        -1     98        -8     119        -4

2011

    85        -9     107        -4     82        -12     92        -7%        79        -10     101        -5     91        -8     114        -4

2012

    98        15     110        3     80        -2     90        -2%        82        3     100        -1     93        3     116        2

2013E (1)

    116        18     124        12     88        10     98        9%        92        13     105        5     104        11     125        7

2014E (1)

    132        14     140        13     101        15     110        12%        110        20     114        9     118        14     136        8

2015E (1)

    141        7     153        9     113        12     121        10%        129        17     123        8     130        10     144        6

2016E (1)

    147        4     160        5     122        8     127        5%        140        9     130        5     138        6     150        4

 

Source: JBREC, Burns Home Value Index data as of February 2013.

 

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

 

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

(indexed to 100 in January 2002)

 

    Metro Area              

Period

  Phoenix, AZ
    MSA    
    Riverside-San
Bernardino,

CA MSA
    Atlanta, GA
MSA
    Chicago,  IL
Metro

Division
    Las Vegas,
NV MSA
    Dallas, TX
Metro
Division
    6-MSA
Average
    National
Average
 

Dec. 2011

    87          106          78          87          78          99          89          113     

Jan. 2012

    88        1.4     106        0.5     79        0.6     87        0.2     78        0.8     99        0.3     90        0.6     113        0.3

Feb. 2012

    90        1.8     107        0.8