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Section 1: 10-K (10-K)

sfr-10k_20161231.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-K

 

 

(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2016

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to            

Commission file number 001- 36163

 

 

Colony Starwood Homes

(Exact name of registrant as specified in its charter)

 

 

Maryland

 

80-6260391

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

8665 East Hartford Drive

Scottsdale, AZ

 

85255

(Address of principal executive offices)

 

(Zip Code)

 

(480) 362-9760

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Each Exchange on Which Registered

Common Share, $0.01 par value

 

New York Stock Exchange

 

Securities registered pursuant to section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes     No  

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   Yes     No  

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes      No  

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 

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

 

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

 

Smaller reporting company

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).   Yes     No  

As of June 30, 2016, the aggregate market value of the voting shares held by non-affiliates was $2.0 billion based on the last reported sales price of our common shares on the New York Stock Exchange on June 30, 2016.

As of February 23, 2017, there were 101,495,759 of the registrant’s common shares outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Documents Incorporated By Reference: The information required by Part III of this Annual Report on Form 10-K, to the extent not set forth herein or by amendment, is incorporated by reference from the registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A on or prior to April 30, 2016.

 

 

 

 


TABLE OF CONTENTS

 

 

 

Page

Part I

 

 

Item 1. Business

 

1

Item 1A. Risk Factors

 

9

Item 1B. Unresolved Staff Comments

 

35

Item 2. Properties

 

35

Item 3. Legal Proceedings

 

36

Item 4. Mine Safety Disclosures

 

36

Part II

 

 

Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of
Equity Securities

 

37

Item 6. Selected Financial Data

 

39

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

41

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

 

57

Item 8. Financial Statements and Supplementary Data

 

58

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

98

Item 9A. Controls and Procedures

 

98

Item 9B. Other Information

 

99

Part III

 

 

Item 10. Directors, Executive Officers and Corporate Governance

 

100

Item 11. Executive Compensation

 

100

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

 

100

Item 13. Certain Relationships and Related Transactions, and Trustee Independence

 

100

Item 14. Principal Accountant Fees and Services

 

100

Part IV

 

 

Item 15. Exhibits, Financial Statement Schedules

 

101

Item 16. Form 10-K Summary

  

104

Signatures

 

105

 

 

i


Except where the context suggests otherwise, the terms “we,” “us,” and “our” refer to Colony Starwood Homes (formerly Starwood Waypoint Residential Trust (“SWAY”)), a Maryland real estate investment trust, together with its consolidated subsidiaries, including Colony Starwood Partnership, L.P. (formerly Starwood Waypoint Residential Partnership, L.P.), a Delaware limited partnership through which we conduct substantially all of our business, which we refer to as “our operating partnership”; the term “CAH” refers to Colony American Homes, Inc., our predecessor for accounting purposes; the term “the Manager” refers to SWAY Management LLC, a Delaware limited liability company, our former external manager; and the term “Starwood Capital Group” refers to Starwood Capital Group Global, L.P. (and its predecessors), together with all of its affiliates and subsidiaries, including the Manager prior to its internalization (the “Internalization”), other than us.

CAUTIONARY STATEMENTS

Forward-Looking Statements

This Annual Report on Form 10-K contains, in addition to historical information, certain forward-looking statements that involve significant risks and uncertainties, which are difficult to predict, and are not guarantees of future performance. Such statements can generally be identified by words such as “anticipates,” “expects,” “intends,” “will,” “could,” “believes,” “estimates,” “continue,” and similar expressions. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements are based on certain assumptions and discuss future expectations, describe future plans and strategies, and contain financial and operating projections or state other forward-looking information. Our ability to predict results or the actual effect of future events, actions, plans or strategies is inherently uncertain. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in, or implied by, the forward-looking statements. Factors that could materially and adversely affect our business, financial condition, liquidity, results of operations and prospects, as well as our ability to make distributions to our shareholders, include, but are not limited to:

 

the factors referenced in this Annual Report on Form 10-K, including those set forth in Item 1A. Risk Factors;

 

unanticipated increases in financing and other costs, including a rise in interest rates;

 

the availability, terms and our ability to effectively deploy short-term and long-term capital;

 

the possibility that unexpected liabilities may arise from the Internalization or our merger with CAH (the “Merger”), including the outcome of any legal proceedings that have been or may be instituted against us, CAH or others following the announcement or the completion of the Internalization or the Merger;

 

changes in our business and growth strategies;

 

our ability to hire and retain highly skilled managerial, investment, financial and operational personnel;

 

volatility in the real estate industry, interest rates and spreads, the debt or equity markets, the economy generally or the rental home market specifically, whether the result of market events or otherwise;

 

events or circumstances that undermine confidence in the financial markets or otherwise have a broad impact on financial markets, such as the sudden instability or collapse of large financial institutions or other significant corporations, terrorist attacks, natural or man-made disasters, or threatened or actual armed conflicts;

 

declines in the value of single-family residential homes, and macroeconomic shifts in demand for, and competition in the supply of, rental homes;

 

the availability of attractive investment opportunities in homes that satisfy our investment objective and business and growth strategies;

 

our ability to convert the properties we acquire into rental homes generating attractive returns and to effectively control the timing and costs relating to the renovation and operation of the properties;

 

our ability to complete our exit from the non-performing loan (“NPL”) (and related real estate owned, or REO”) business in the anticipated time period on acceptable terms and to re-deploy net cash proceeds therefrom;

 

our ability to lease or re-lease our rental homes to qualified residents on attractive terms or at all;

 

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

 

our ability to effectively manage our portfolio of rental homes;

 

the concentration of credit risks to which we are exposed;

ii


 

the rates of default or decreased recovery rates on our target assets;

 

the adequacy of our cash reserves and working capital;

 

potential conflicts of interest with Starwood Capital Group, Colony Capital, LLC (“Colony Capital”), Colony NorthStar, Inc. (“Colony NorthStar”) and their affiliates and managed investment activities;

 

the timing of cash flows, if any, from our investments;

 

our expected leverage;

 

financial and operating covenants contained in our credit facilities and securitizations that could restrict our business and investment activities;

 

effects of derivative and hedging transactions;

 

our ability to maintain effective internal controls as required by the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) and to comply with other public company regulatory requirements;

 

our ability to maintain our exemption from registration as an investment company under the Investment Company Act of 1940, as amended;

 

actions and initiatives of the U.S., state and municipal governments and changes to governments’ policies that impact the economy generally and, more specifically, the housing and rental markets;

 

changes in governmental regulations, tax laws (including changes to laws governing the taxation of real estate investment trusts (“REITs”)) and rates, and similar matters;

 

limitations imposed on our business and our ability to satisfy complex rules in order for us and, if applicable, certain of our subsidiaries to qualify as a REIT for U.S. federal income tax purposes and the ability of certain of our subsidiaries to qualify as taxable REIT subsidiaries (“TRSs”) for U.S. federal income tax purposes, and our ability and the ability of our subsidiaries to operate effectively within the limitations imposed by these rules; and

 

estimates relating to our ability to make distributions to our shareholders in the future.

When considering forward-looking statements, keep in mind the risk factors and other cautionary statements in this Annual Report on Form 10-K. Readers are cautioned not to place undue reliance on any of these forward-looking statements, which reflect our views as of the date of this Annual Report on Form 10-K. Our actual results and performance may differ materially from those set forth in, or implied by, our forward-looking statements. Accordingly, we cannot guarantee future results or performance. Furthermore, except as required by law, we are under no duty to, and we do not intend to, update any of our forward-looking statements after the date of this Annual Report on Form 10-K, whether as a result of new information, future events or otherwise.

Merger and Internalization

On September 21, 2015, we and CAH announced the signing of an agreement (the “Merger Agreement”) to combine the two companies in a stock-for-stock transaction.  In connection with the transaction, we internalized the Manager. The Merger and the Internalization were completed on January 5, 2016.

Upon consummation of the Internalization, Starwood Capital Group contributed the outstanding equity interests of the Manager to our operating partnership in exchange for 6,400,000 OP Units. The OP Units are redeemable at the election of the holder and we have the option, at our sole discretion, to redeem any such OP Units for cash or exchange such OP Units for common shares, on a one-for-one basis. Subsequent to the Internalization and the Merger, we own all material assets and intellectual property rights of the Manager.

Under the Merger Agreement, CAH shareholders received an aggregate of 64,869,526 of our common shares in exchange for all shares of CAH. Upon completion of the transaction, our existing shareholders and the former owner of the Manager owned approximately 41% of our common shares, while former CAH shareholders owned approximately 59% of our common shares. The terms of the Internalization were negotiated and approved by a special committee of our board of trustees. The share allocation was determined based on each company’s net asset value. Upon the closing of the Internalization and the Merger, we changed our name to Colony Starwood Homes and our common shares are listed and traded on the New York Stock Exchange (“NYSE”) under the ticker symbol “SFR.”  

Since both SWAY and CAH had significant pre-combination activities, the Merger was accounted for as a business combination by the combined company in accordance with Accounting Standards Codification (“ASC”) Topic 805, Business Combinations. Based upon consideration of a number of factors, CAH was designated as the accounting acquirer in the Merger (although SWAY was the

iii


legal acquirer), which resulted in a reverse acquisition of SWAY for accounting purposes. Consequently, the historical consolidated financial statements included herein as of any date, or for any periods, prior to January 5, 2016, the closing date of the Merger, represent only the pre-Merger consolidated financial position, results of operations, other comprehensive income and cash flows of CAH. SWAY’s assets, liabilities and non-controlling interests were recorded at fair value as of January 5, 2016, and its results of operations are included in our consolidated statements of operations beginning on that date. The historical financial information included herein as of any date, or for any periods, prior to January 5, 2016 do not reflect the consolidated financial position, results of operations, other comprehensive income or cash flows of the combined companies had the Merger been completed during the historical periods presented.

In addition to the financial statements included herein, you should read and consider the audited financial statements and notes thereto of SWAY included in our Form 10-K for the year ended December 31, 2015 filed with the Securities and Exchange Commission (the “SEC”) on February 29, 2016 and the CAH audited financial statements and notes thereto and the unaudited pro forma financial information included in our Current Report on Form 8-K filed with the SEC on January 5, 2016, as amended on March 22, 2016, March 25, 2016 and October 11, 2016.

 

 

 

iv


PART I

 

 

Item 1.  Business.

Our Company

We are an internally managed Maryland real estate investment trust and commenced operations in March 2012 primarily to acquire, renovate, lease and manage residential assets in select markets throughout the United States. Our objective is to generate attractive risk-adjusted returns for our shareholders over the long-term through dividends and capital appreciation. Our primary strategy is to acquire single-family rental (“SFR”) homes through a variety of channels, renovate these homes to the extent necessary and lease them to qualified residents. We measure homes by the number of rental units as compared to number of properties, taking into account our limited investments in multi-unit properties. We seek to take advantage of macroeconomic trends in favor of leasing homes by acquiring, owning, renovating and managing homes that we believe will generate substantial current rental revenue, which we expect to grow over time.

When pursuing home acquisitions, we focus on markets that we believe present the greatest opportunities for home price appreciation, that have strong rental demand and where we can attain property operating efficiencies as a result of geographic concentration of assets in our portfolio. We identify and pursue individual home acquisition opportunities through a number of sources, including multiple listing services (“MLS”) listings, foreclosure auctions and short sales. In addition, we may opportunistically identify and pursue bulk portfolios of homes from banks, mortgage servicers, other SFR companies, government sponsored enterprises, private investors and other financial institutions.

Our operating partnership was formed as a Delaware limited partnership in May 2012. Our wholly-owned subsidiary is the sole general partner of our operating partnership, and we conduct substantially all of our business through our operating partnership. We owned 94.0% of the outstanding operating partnership units in our operating partnership (“OP Units”) as of December 31, 2016.

We intend to operate and to be taxed as a REIT for U.S. federal income tax purposes. We generally will not be subject to U.S. federal income taxes on our REIT taxable income to the extent that we annually distribute all of our REIT taxable income to shareholders and maintain our qualification as a REIT.

As of December 31, 2016, we maintained 24 regional offices and resident service centers. The regional offices house our regional managers and construction teams, and, if applicable, our local acquisition, marketing and leasing, property management and repairs and maintenance teams. The resident service centers serve as localized customer-facing offices aimed at ensuring resident satisfaction and retention, as well as to integrate all local operations.

Proprietary Technology

We believe that achieving consistent operational excellence is crucial to the success of acquiring, renovating, leasing and managing a geographically dispersed portfolio of homes. The backbone of our operations is formed by a proprietary property management platform that has been continually refined and enhanced. Our proprietary property management platform is built on a cloud-based operating platform powered by leading technology companies, which provides us with the ability to achieve scalability, security and redundancy in a cost-effective manner.

Our platform integrates our operations by providing applications that cover all stages of the SFR life-cycle, from acquisitions to renovation, marketing, pricing, leasing, maintenance and the complete resident experience – all the way through the renewal and turn process. It enables us to have real-time oversight of all aspects of our business, while maintaining the flexibility to evolve quickly as our business grows and additional functionality is needed. Managers, field personnel and technologists work together to continually define and automate business processes based on the latest data-driven analyses as well as to upgrade existing features and generate new applications.

Our Portfolio

As of December 31, 2016, our SFR portfolio consisted of 31,684 owned homes, including 31,065 rental homes and 619 homes that we do not intend to hold for the long term. As of December 31, 2016, approximately 94.3% of our rental homes were occupied and approximately 95.6% of our stabilized rental homes were occupied.  Approximately 89.2% of our rental homes are located in the ten markets in which we own the greatest number of our owned homes, which we refer to as our top ten markets.

1


Segment Information

As of December 31, 2016, we are comprised of two operating segments and reporting units, which are represented by (1) our portfolio of SFR homes and (2) our portfolio of NPLs owned in the joint venture with Prime.  However, for financial reporting purposes, we are comprised of one reporting segment, because the Prime joint venture’s revenues, net loss and total assets are each less than 10% of our consolidated total.

As of December 31, 2015 and during the years ended December 31, 2015 and 2014, CAH determined that it had two reportable segments: (1) its portfolio of SFR homes; and (2) single-family real estate loans, which included originated and acquired debt issued to single-family residential property investors through its Colony American Finance (“CAF”) subsidiary.  As a result of the Merger, the CAF subsidiary was spun out to CAH’s investors effective as of the Merger date. Therefore, we have reclassified CAF’s historical revenues and expenses as discontinued operations, net in the consolidated statements of operations (see Item 8. Financial Statements and Supplementary Data, Note 15. Discontinued Operations.)

Homes

The following table provides a summary of our portfolio of homes as of December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

 

 

Average

 

 

Weighted

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

Non-

 

 

Number

 

 

 

 

Total

 

 

Acquisition

 

 

Average

 

 

Aggregate

 

 

Home Size

 

 

Average

 

 

Average

 

 

Monthly Rent

 

 

 

Stabilized

 

 

Stabilized

 

 

of

 

 

Stabilized

 

 

Portfolio

 

 

Cost

 

 

Investment

 

 

Investment

 

 

(square

 

 

Age

 

 

Year

 

 

Per Occupied

 

Markets

 

Homes(1)

 

 

Homes

 

 

Homes(2)(3)

 

 

Occupancy

 

 

Occupancy

 

 

Per Home(4)

 

 

Per Home

 

 

(in millions)

 

 

feet)

 

 

(years)

 

 

Purchased(5)

 

 

Home(6)

 

Atlanta

 

 

5,531

 

 

 

9

 

 

 

5,540

 

 

 

96.6

%

 

 

96.5

%

 

$

128,666

 

 

$

146,511

 

 

$

812

 

 

 

2,007

 

 

 

22

 

 

 

2014

 

 

$

1,307

 

Tampa

 

 

3,713

 

 

 

0

 

 

 

3,713

 

 

 

94.7

%

 

 

94.7

%

 

$

157,065

 

 

$

180,206

 

 

 

664

 

 

 

1,717

 

 

 

28

 

 

 

2014

 

 

$

1,478

 

Miami

 

 

3,674

 

 

 

7

 

 

 

3,681

 

 

 

95.8

%

 

 

95.6

%

 

$

208,516

 

 

$

226,863

 

 

 

831

 

 

 

1,723

 

 

 

39

 

 

 

2015

 

 

$

1,826

 

Southern California

 

 

2,776

 

 

 

5

 

 

 

2,781

 

 

 

96.8

%

 

 

96.7

%

 

$

273,838

 

 

$

309,113

 

 

 

853

 

 

 

1,713

 

 

 

41

 

 

 

2013

 

 

$

2,054

 

Houston

 

 

2,714

 

 

 

0

 

 

 

2,714

 

 

 

94.0

%

 

 

94.0

%

 

$

152,325

 

 

$

156,346

 

 

 

424

 

 

 

1,941

 

 

 

20

 

 

 

2015

 

 

$

1,506

 

Dallas

 

 

2,080

 

 

 

25

 

 

 

2,105

 

 

 

94.7

%

 

 

93.6

%

 

$

180,353

 

 

$

187,388

 

 

 

394

 

 

 

2,116

 

 

 

21

 

 

 

2015

 

 

$

1,650

 

Denver

 

 

1,992

 

 

 

48

 

 

 

2,040

 

 

 

94.5

%

 

 

92.3

%

 

$

208,912

 

 

$

227,357

 

 

 

463

 

 

 

1,765

 

 

 

34

 

 

 

2015

 

 

$

1,763

 

Orlando

 

 

1,939

 

 

 

0

 

 

 

1,939

 

 

 

95.3

%

 

 

95.3

%

 

$

141,763

 

 

$

167,648

 

 

 

325

 

 

 

1,727

 

 

 

30

 

 

 

2014

 

 

$

1,400

 

Las Vegas

 

 

1,719

 

 

 

0

 

 

 

1,719

 

 

 

95.6

%

 

 

95.6

%

 

$

187,944

 

 

$

204,505

 

 

 

352

 

 

 

2,034

 

 

 

17

 

 

 

2013

 

 

$

1,420

 

Phoenix

 

 

1,389

 

 

 

95

 

 

 

1,484

 

 

 

95.9

%

 

 

89.8

%

 

$

144,507

 

 

$

159,148

 

 

 

236

 

 

 

1,708

 

 

 

25

 

 

 

2014

 

 

$

1,189

 

Top 10 Markets

 

 

27,527

 

 

 

189

 

 

 

27,716

 

 

 

95.5

%

 

 

94.9

%

 

$

175,144

 

 

$

193,677

 

 

 

5,354

 

 

 

1,851

 

 

 

28

 

 

 

2014

 

 

$

1,561

 

Charlotte-Raleigh

 

 

933

 

 

 

146

 

 

 

1,079

 

 

 

95.4

%

 

 

82.5

%

 

$

195,168

 

 

$

214,134

 

 

 

231

 

 

 

2,338

 

 

 

13

 

 

 

2015

 

 

$

1,620

 

Northern California

 

 

965

 

 

 

6

 

 

 

971

 

 

 

97.3

%

 

 

96.7

%

 

$

239,910

 

 

$

258,907

 

 

 

250

 

 

 

1,410

 

 

 

48

 

 

 

2014

 

 

$

1,778

 

Nashville

 

 

269

 

 

 

71

 

 

 

340

 

 

 

97.4

%

 

 

77.1

%

 

$

279,691

 

 

$

294,956

 

 

 

100

 

 

 

2,503

 

 

 

11

 

 

 

2015

 

 

$

2,036

 

Other Markets

 

 

959

 

 

 

0

 

 

 

959

 

 

 

94.0

%

 

 

94.0

%

 

$

155,910

 

 

$

161,446

 

 

 

156

 

 

 

1,613

 

 

 

36

 

 

 

2015

 

 

$

1,629

 

Total / Average

 

 

30,653

 

 

 

412

 

 

 

31,065

 

 

 

95.6

%

 

 

94.3

%

 

$

178,413

 

 

$

196,539

 

 

$

6,091

 

 

 

1,854

 

 

 

28

 

 

 

2014

 

 

$

1,576

 

 

(1)

We define stabilized homes as homes from the first day of initial occupancy or subsequent occupancy after a renovation. Homes are considered stabilized even after subsequent resident turnover. However, homes may be removed from the stabilized home portfolio and placed in the non-stabilized home portfolio due to renovation during the home lifecycle.

(2)

Excludes 619 homes that we do not intend to hold for the long-term.

(3)

We measure homes by the number of rental units as compared to number of properties. Although historically we have primarily invested in SFRs, and expect to continue to do so in the foreseeable future, this takes into account our limited investments in multi-family properties and, we believe, provides a more meaningful measure to investors.

(4)

Homes acquired as a result of the Merger reflect the fair value step-up as of January 5, 2016.

(5)

Homes acquired as a result of the Merger reflect an acquisition date of January 5, 2016.

(6)

Represents average monthly contractual cash rent. Average monthly cash rent is presented before rent concessions and incentives (e.g., free rent and other concessions). To date, rent concessions and incentives have been utilized on a limited basis and have not had a significant impact on our average monthly rent. If the use of rent concessions or other leasing incentives increases in the future, they may have a greater impact by reducing the average monthly rent we receive from leased homes.

Our Business Strategy

Home Acquisition

We acquire homes in our core markets through all customary home acquisition channels. We use a multi-market and multi-channel investment strategy to provide flexibility in deploying capital and to diversify our portfolio, mitigate risk and avoid overexposure to any single market. We continue to seek expansion of our investment channels to acquire and sell homes both from a single and bulk asset perspective. Acquisitions may be financed from various sources, including proceeds from the sale of equity and debt securities, the sale of assets, retained cash flow or our existing credit facilities.

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When pursuing home acquisitions, we focus on markets that we believe present the greatest opportunities for rent and home price appreciation We seek to acquire and operate in markets that we expect to have population and household growth. We also evaluate other positive economic fundamentals that we believe will lead to sustained periods of rental demand and rent growth and where we can attain property operating efficiencies as a result of geographic concentration of assets in our portfolio. We believe that we can achieve improved operating efficiencies by pursuing a market density strategy within core markets. These markets are also characterized by proximity to quality school districts, work centers, retail services and transportation infrastructure, low crime rates and other factors which we utilize in determining our proprietary neighborhood score. Our core markets currently include: Miami, Orlando and Tampa, Florida; Atlanta, Georgia; Chicago Illinois; Dallas and Houston, Texas; Denver, Colorado; Southern California; Las Vegas, Nevada, Charlotte and Raleigh, North Carolina; Nashville, Tennessee and Phoenix, Arizona. We identify and pursue home acquisition opportunities through a number of sources, including MLS listings, our strategic relationships in our core markets, home builders, foreclosure auctions and short sales. In addition, we may opportunistically identify and pursue bulk portfolios of homes from other SFR companies, government sponsored enterprises, private investors, banks, mortgage servicers and other financial institutions. We also have acquired, and expect to continue to acquire, homes through build-to-rent arrangements with home builders.

Our current core markets are illustrated below:

 

Our SFR portfolio is characterized by a significant number of homes in each of its markets. As of December 31, 2016, our SFR portfolio had an average of approximately 2,800 homes in each of our 10 largest markets. Management believes this market density creates operating efficiencies due to economies of scale. Over time, management expects to further expand our depth in markets currently represented in our SFR portfolio and to target select additional high-growth markets, with a focus on markets where we will be able to establish the requisite critical mass of homes that management believes is necessary to maximize operational efficiency.

We seek to continue to build our high-quality, diversified portfolio of homes through local team members who are experts in their markets and provide real-time portfolio intelligence feedback to our investments team. In doing so, we generally focus on

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acquiring homes meeting targeted return objectives with the following characteristics: (1) desirable locations; (2) three or more bedrooms; (3) two or more bathrooms; and (4) underwritten price range of $100,000 to $400,000. We expect that certain homes we will purchase will be outside of these parameters, and these parameters may be revised by us from time to time.

Our executive team has extensive experience buying, renovating, leasing and managing homes of diverse vintages. While many of our competitors focus primarily on newer homes, our executive team has had success buying and renovating both newer and older homes, with the latter often benefiting from higher quality construction, better proximity to employment and transportation and superior school districts. Many of these more established neighborhoods are in desirable locations in premier school districts. Our executive team’s experience has demonstrated that it is generally not the age of the house that most influences long-term maintenance costs. Rather, such costs are often more impacted by the condition and remaining useful life of the building systems (such as electrical, heating, ventilation and air conditioning (“HVAC”), roofing and plumbing systems). We have found that when these systems are addressed comprehensively during the initial renovation, the result can be an attractive, well located home in an established neighborhood that can be very desirable for families, creating strong leasing demand.

Recently, a higher percentage of our home acquisitions have been, and are expected to continue to be, new build-to-rent homes. These homes are often built to our specifications and purchased in a single negotiated transaction providing for staged deliveries from a home builder counterparty. These build-to-rent projects are often fully-contained rental neighborhoods that may be part of a large single-family residential development.

NPLs

As a result of the Merger, we have a joint venture with Prime Asset Fund VI, LLC (“Prime”), an entity managed by Prime Finance, an asset manager that specializes in acquisition, resolution and disposition of NPLs. We own a greater than 98.75% interest in the joint venture. We have determined to exit the NPL business and have sold substantially all of the assets of the joint venture, with the remaining assets currently being marketed for disposition (see Item 8. Financial Statements and Supplementary Data, Note 15. Discontinued Operations.) Prime earns a one-time fee from us, equal to a percentage of the value (as determined pursuant to the Amended and Restated Limited Partnership Agreement (the “Amended JV Partnership Agreement” of PrimeStar Fund I, L.P.) of the NPLs and homes we originally designated as rental pool assets upon disposition or resolution of such assets. Prime also earns a fee in connection with the asset management services that Prime provides to the joint venture and additional incentive fees related to the sale of assets in connection with our exit from the NPL business.

Acquisition Sourcing and Property Management Arrangements

We undertake most of our property management services internally. However, in certain markets where we do not own a large number of homes, we utilize strategic relationships with local property management companies that are recognized leaders in their markets to provide property management, rehabilitation and leasing services for our homes. In addition, we utilize strategic relationships with regional and local partners to assist us in identifying individual home acquisition and build-to-rent opportunities within our target parameters in our target markets.

Any relationships with third-party property management companies are based on our contractual arrangements, which provide that we will pay the property managers a percentage of the rental revenue and other fees collected from our residents. As of December 31, 2016, less than 1% of our homes are serviced by third-party property management companies. We expect that our third-party property management expenses will account for a smaller percentage of our revenue as we expand our portfolio and perform a larger percentage of the property management function internally. Acquisition sourcing also will be based on our contractual arrangements, which usually provide that we will pay a commission for each home acquired for our portfolio.

Property Stabilization

Before an acquired property becomes an income-producing, or rent-ready, asset, we must take possession of the property (to the extent it remains occupied by a hold-over property owner), and often renovate, then market and lease the property. We refer to this process as property stabilization. The acquisition of homes often involves the outlay of capital beyond payment of the purchase price, which may include payments for property inspections, closing costs, title insurance, transfer taxes, recording fees, broker commissions, property taxes and homeowners association (“HOA”) fees in arrears. The time and cost involved in stabilizing our newly acquired homes will affect our financial performance and will be affected by the time it takes for us to take possession of the home, the time involved and cost incurred for renovations, and time needed for leasing the home for rental, as applicable.

Possession can be delayed by factors such as the exercise of applicable statutory or rescission rights by hold-over owners or unauthorized occupants living in the home at the time of purchase and legal challenges to our ownership. The cost associated with transitioning an occupant from an occupied home varies significantly depending on the steps taken to transition the occupant (i.e.,

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willfully vacate, cash for keys, court-ordered vacancy). In some instances, where we have purchased a home that is occupied, we have been able to convert the occupant to a short-term or long-term resident.

As part of our underwriting criteria in evaluating homes, we typically estimate upfront renovation costs to be 10% to 20% of the purchase price. Although actual costs may vary significantly on an asset-by-asset basis based on markets and the age and condition of the property, in the aggregate, our actual renovation costs tend to be consistent with underwriting.

Our Field Project Managers (as defined below) are responsible for managing the day-to-day operations of our home renovation process. This includes the overall supervision and management of home renovations, including conducting pre-acquisition diligence, developing scopes of work, cost estimating and value engineering, directing the bid award process, managing the scope verification process, performing inspections and, ultimately, bringing the renovations to completion. At least one Field Project Manager is assigned to each region in which we operate and, depending on the volume of work in the region, may receive additional in-house support from our construction administration personnel. This in-house team manages a network of independent general and specialty contractors located in the various markets.

Our proprietary property management platform plays a critical role in the home renovation process. Whether a home is newly acquired or has become vacant following a resident move-out, we follow a standardized process to prepare the home for residency to our “rent-ready” standards. The renovation scope for each home is developed through a technology enabled process that incorporates proprietary systems, home level data, pre-established specifications, standards and pricing and expertise from our in market personnel.

Once the renovation scope and associated costs are finalized and approved by our internal renovation team, we promptly initiate the construction process utilizing proprietary technology to streamline the approval communication directing our contractors and vendors to commence the renovation. We believe this coordinated and seamless effort reduces the potential down time before initiating construction and improves our cycle times. Each individual renovation is jointly managed by both an in-house team of “central office” project managers as well as “in field” project managers (“Field Project Managers”), each of whom are our employees and work directly with our local contractors and vendors throughout the construction process. In order to achieve efficiencies and ensure a standardized renovation approach, we utilize a “central office” team to facilitate vendor dispatch, national and regional procurement and purchasing, standardization of pricing, as well as overall project management and coordination.  This “central office” team provides the back office support and works collaboratively with the local Field Project Managers that serve as the “boots-on-the-ground” field management allowing us to achieve scale, control and standardization of our renovation process across multiple markets simultaneously.

Throughout the renovation process we regularly monitor the project and timelines to ensure we are meeting our operational standards and that the home is being managed efficiently through to completion.

While minimizing costs is an essential component of our renovation strategy, we believe that making informed and necessary upfront renovations not only attracts quality residents and enhances rental rates but also reduces future maintenance expense and generally increases the long-term value of a home. Our executive team has developed proprietary policies and procedures to guide employees to make good value judgments during the renovation process.

 

Improvement guidelines. Our improvement guidelines detail the standards and specification criteria for scoping a home for renovation. These guidelines cover essential topics, including landscaping, painting, plumbing, electricity, roofing, HVAC and appliances. These guidelines help us focus on making strategic improvements and ensuring that our homes are both functionally sound and aesthetically appealing.

 

Standard Product SKUs. Our improvement plan uses an automated proprietary scoping application with built in standard product SKUs based on our improvement guidelines. This automated improvement plan helps our construction teams develop a standardized and comprehensive scope of work, which allows us to establish a detailed cost estimate for each renovation.

 

Stress tests and quality control inspection. We perform stress tests and quality control inspections at the end of the renovation process in order to confirm that all systems in the home are operating properly and that the home is in rent-ready condition.

 

National Procurement Relationships. We have contractual relationships with some of our most important vendors to obtain favorable pricing terms and to achieve consistency in the quality and availability of the products we use. We receive rebates from some of these vendors when we or our contractors purchase products from them for our projects.

Renovating a home to our standards typically requires expenditures on kitchen remodeling, flooring, painting, plumbing, electrical, heating and landscaping. We also make targeted capital improvements, such as electrical, plumbing, HVAC and roofing work, that we believe increase resident satisfaction and lower future repair and maintenance costs.

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We also generally include the installation of a smart home technology package in our renovations. Our smart home technology provides residents with home management tools to control temperature, home monitoring and other features which allows the resident to save on their utility bills. The smart home technology package also aids us in turn management and provides us an ancillary revenue stream through a monthly resident fee over the term of the lease.

We expect to continue to control renovation as well as repair and maintenance costs by leveraging our supplier relationships to negotiate attractive rates and rebates on items such as appliances, flooring, hardware, paint and other material components. The time to renovate a newly acquired property may vary significantly among homes depending on the acquisition channel by which it was acquired and the age and condition of the property. Upon completion of construction, we perform rigorous quality control and scope verification with our Field Project Managers to ensure our homes have been completed to a rent-ready standard and are deemed ready for occupancy. During this process, we coordinate and communicate with our local property management and leasing teams on the timing and availability of the homes so that marketing and leasing activities can begin while the home is being prepared for occupancy.

Marketing and Leasing

Our revenue is generated primarily from rents collected under lease agreements for our homes. The most important drivers of our 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 resident defaults, the amount of time that it takes us to renovate, if necessary, and lease homes upon acquisition and the amount of time it takes us to renovate and re-lease vacant homes.

We utilize a fully-integrated marketing and leasing strategy that leverages technology in an effort to maximize occupancy, resident quality and rental rates. Our marketing teams actively source leads through various channels, including yard signs, third-party websites, MLS, e-mail marketing and social media. In addition, we showcase our available homes on our website, which is integrated with our proprietary platform to ensure that available homes are marketed upon becoming rent-ready. Each visit to the website deepens our knowledge of prospective residents’ preferences, allowing us to adapt our targeted messaging at each stage of the decision process to more fully engage potential leads. Our marketing team focuses on improving lead volume and quality, and continually monitors and analyzes lead volume and quality from each marketing channel relative to actual leasing opportunities and conversions.

In each of our markets, we monitor a number of factors that may affect the single-family real estate market and our residents’ 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 affect our rental revenue.

In the near term, our ability to drive revenue growth will depend in large part on our ability to efficiently renovate and lease newly acquired homes, maintain occupancy in the rest of our portfolio, increase monthly rental rates upon renewal and rollover, and acquire additional homes, both leased and vacant.

Home Services

We believe that home maintenance is essential not only to protecting our homes but also to ensuring resident satisfaction and retention. Our repairs and maintenance program leverages technology and enables our in-house team of experienced and knowledgeable industry personnel to deliver a high level of service not typically seen in the rental home management industry. We believe our maintenance solution powered by mobile and cloud-based technology has transformed our maintenance operation improving our resident experience while generating operational efficiencies and cost savings.  

Our residents have the option to submit home maintenance requests in one of two ways—by phone or online through a designated resident maintenance portal. Each maintenance request is systematically created following a standardized creation process that provides the resident the opportunity to troubleshoot the issue and then helps to correctly categorize and prioritize any resulting maintenance request.  Upon creation of the maintenance request, the resident is able to schedule a preferred date and time for service. If we do not have the in-house capability to resolve the maintenance issue with one of our in-house service technicians, we dispatch the scope of work to our pre-approved list of independent general contractors and specialty contractors. We are focused on ensuring that our residents’ maintenance concerns are resolved quickly and efficiently. Our technology platform is utilized to manage our residents’ maintenance requests from creation to resolution and to schedule and route our in-house service technicians to ensure that their daily drive time is minimized and that they are servicing the greatest possible number of residents. In addition, our resident maintenance portal allows our residents to schedule and confirm their own appointments, rate the quality of our maintenance services, track their maintenance requests and access easy to use troubleshooting videos and other maintenance related information.

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Our employees include experienced and knowledgeable industry personnel across a variety of trades, who are trained to assess maintenance problems, draft scopes of work, estimate costs and negotiate pricing with vendors. We also train our employees in customer service skills so that they are equipped to interface with our residents directly. By having experienced and knowledgeable in-house maintenance and service teams, we are better able to manage our resident maintenance issues while controlling the scope of work and costs.

The performance of our portfolio will also be impacted by turnover rates, which affect both lease rates and maintenance costs, with lower turnover resulting in higher operating income from increased occupancy and reduced expenses. Turnover can be caused by a number of factors, including customer dissatisfaction, lease defaults leading to eviction and change in family, financial or employment status of the resident. For the year ended December 31, 2016, our average annualized turnover rate was 34.2%. In addition, as of December 31, 2016, approximately 94.3% of our rental homes were occupied and approximately 95.6% of our stabilized rental homes were occupied, in each case exclusive of 619 homes not intended to be held for the long term. Overall, the quality of our property management execution, including resident screening designed to attract a loyal and mature resident base, other ongoing customer service efforts and marketing efficacy will be important occupancy drivers and enable lower turnover.

We believe our integrated proprietary platform will allow us to achieve strong resident retention and lease renewal rates. For the year ended December 31, 2016, we had a 69.2% retention rate. Average rent growth was 4.3% during that same period (excludes month-to-month or renewals still in process). This performance may not be indicative of future renewals and rent growth in those markets or of renewals and rent growth in other markets.

Our Financing Strategy

Subject to maintaining our status as a REIT, we intend to employ prudent leverage, to the extent available, to fund the acquisition of assets, refinance existing debt and for other corporate and business purposes deemed advisable by us. In determining to use leverage, we assess a variety of factors, including without limitation the anticipated liquidity and price volatility of the assets in our investment portfolio, the cash flow generation capability of our assets, the availability of credit on favorable terms, any prepayment penalties and restrictions on refinancing, the credit quality of our assets and our outlook for borrowing costs relative to the unlevered yields on our assets. We may continue to employ portfolio financing and expect to utilize credit facilities or other bank or capital markets debt financing, if available. We may consider seller financing, if available, from sellers of portfolios of residential assets and potentially financing from government sponsored enterprises if attractive programs are available. We may also utilize other financing alternatives such as securitizations, depending upon market conditions, and other capital raising alternatives such as follow-on offerings of our common shares, preferred shares and hybrid equity, among others. We have in the past and may in the future employ interest rate swaps and other hedging instruments from time to time in an effort to manage our exposure to rising interest rates.

Our secured and unsecured aggregate borrowings are intended to be reasonable in relation to our net assets and are reviewed by us at least quarterly and in all cases prior to executing any financing transaction. In determining whether our borrowings are reasonable in relation to our net assets, we consider many factors, including, without limitation, debt service cash flow coverage, leverage ratios including how such ratios compare to publicly-traded and non-traded REITs with similar investment strategies, the ability to refinance, whether we have positive leverage (i.e., capitalization rates of our residential assets that exceed the interest rates on the related borrowings) and general market and economic conditions. We have no limitation under our organizational documents or any contract on the amount of funds that we may borrow for any single investment or that may be outstanding at any one time in the aggregate.

See Item 8. Financial Statements and Supplementary Data, Note 7. Debt for further detailed discussion of our financing activities as of December 31, 2016.

Prime Joint Venture

As a result of the Merger, we have a joint venture with Prime, an entity managed by Prime Finance, an asset manager that specializes in acquisition, resolution and disposition of NPLs. We own a greater than 98.75% interest in the joint venture, which owns all of our NPLs. We have determined to exit the NPL business and have sold substantially all of the assets of the joint venture, with the remaining assets currently being marketed for disposition. The joint venture exists for the purposes of: (1) converting NPLs to performing residential mortgage loans through modifications, holding such loans, selling such loans or converting such loans to homes; (2) acquiring homes through foreclosure, deed-in-lieu of foreclosure or other similar process; and (3) selling homes. Prime has contributed less than 1.26% of the cash equity to the joint venture (“Prime’s Percentage Interest”) and Prime, in accordance with our instructions (which are based in part on the use of certain analytic tools included in our proprietary platform), coordinates the resolution or disposition of loans for the joint venture. Our NPLs are serviced by Prime’s team of asset managers or licensed third-party mortgage loan servicers. We have exclusive management decision making control with respect to various matters of the joint venture and control over all decisions of the joint venture through our veto power. We may elect, in our sole and absolute discretion,

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to delegate certain ministerial or day-to-day management rights related to the joint venture to employees, affiliates or agents of us or Prime.

We also have the exclusive right under the joint venture, exercisable in our sole and absolute discretion, to designate NPLs and homes as rental pool assets (“Rental Pool Assets”). We will be liable for all expenses and benefit from all income from any Rental Pool Assets. The joint venture will be liable for all expenses and benefit from all income from all NPLs and homes not segregated into Rental Pool Assets (“Non-Rental Pool Assets”). Although we have the exclusive right to transfer any Rental Pool Assets from the joint venture to us, we intend to sell all remaining homes converted from loans through the joint venture. Prime earns a one-time fee from us (the “Prime Transfer Fee”), equal to a percentage of the value (as determined pursuant to the Amended JV Partnership Agreement) of the NPLs and homes we originally designated as Rental Pool Assets upon disposition or resolution of such assets and additional incentive fees related to the sale of assets in connection with our exit from the NPL business.

In connection with the asset management services that Prime provides to the joint venture’s Non-Rental Pool Assets, the joint venture pays Prime a monthly asset management fee in arrears for all Non-Rental Pool Assets acquired.

Regulation

Our operations are subject, in certain instances, to supervision and regulation by state and federal governmental authorities and may be subject to various laws and judicial and administrative decisions imposing various requirements and restrictions. We intend to conduct our business so that neither we nor any of our subsidiaries are required to register as an investment company under the Investment Company Act of 1940, as amended. In the judgment of management, existing statutes and regulations have not had a material adverse effect on our business.

Environmental Matters

As a current or prior owner of real estate, we are subject to various federal, state and local environmental laws, regulations and ordinances and also could be liable to third parties as a result of environmental contamination or noncompliance at our homes even if we no longer own such homes. These and other risks related to environmental matters are described in more detail in Item 1A. Risk Factors.

Competition

In acquiring our homes, we compete with a variety of institutional investors, including other REITs, specialty finance companies, public and private funds, savings and loan associations, banks, mortgage bankers, insurance companies, institutional investors, investment banking firms, financial institutions, governmental bodies, SFR companies and other entities. Certain of our competitors may be larger and may have considerably greater financial or other resources than we do. Some competitors may have a lower cost of funds and access to funding sources that may not be available to us. In addition, any potential competitor may have higher risk tolerances or different risk assessments and may not be subject to the operating constraints associated with qualification for taxation as a REIT, which could allow them to consider a wider variety of investments. Competition may result in fewer investments, higher prices, a broadly dispersed portfolio of properties that does not lend itself to efficiencies of concentration, acceptance of greater risk, lower yields and a narrower spread of yields over our financing costs. In addition, competition for desirable investments could delay the investment of our capital, which could adversely affect our results of operations and cash flows.

In the face of this competition, our professionals and their industry expertise provide us with a competitive advantage and help us assess investment risks and determine appropriate pricing for certain potential investments. These relationships enable us to compete more effectively for attractive investment opportunities. However, we may not be able to achieve our business goals or expectations due to the competitive risks that we face.

REIT Qualification

We intend to operate and to be taxed as a REIT for federal income tax purposes. Our qualification as a REIT depends on our satisfaction of certain asset, income, organizational, distribution, shareholder ownership and other requirements on a continuing basis. Our ability to satisfy the asset tests depends upon our analysis of the characterization and fair values of our assets, some of which are not susceptible to a precise determination, and for which we will not obtain independent appraisals. Our compliance with the REIT income and quarterly asset requirements also depends upon our ability to successfully manage the composition of our income and assets on an ongoing basis.

If we were to fail to qualify as a REIT in any taxable year, we would be subject to federal income tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates, and dividends paid to our shareholders would not be deductible by us in computing our taxable income. Any resulting corporate tax liability could be substantial and would reduce the

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amount of cash available for distribution to our shareholders, which in turn could have an adverse impact on the value of our common shares. Unless we were entitled to relief under certain Internal Revenue Code of 1986, as amended (the “Code”), provisions, we also would be disqualified from taxation as a REIT for the four taxable years following the year in which we failed to qualify as a REIT.

Employees

As of December 31, 2016, we had 585 employees, with 304 employees in operations, including property operating and maintenance functions, 60 employees in sales and marketing and 221 employees in general and administrative functions. We have never had a work stoppage and none of our employees are covered by collective bargaining agreements or represented by a labor union. We believe our employee relations are good.

General Information

Our principal corporate offices are located at 8665 East Hartford Drive, Scottsdale, AZ 85255 and our telephone number is (480) 362-9760. Our website address is www.colonystarwood.com. The information contained on, or that can be accessed through, our website is not part of this Annual Report on Form 10-K.

We make available free of charge through our website our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. You may obtain a free copy of these reports in the “Investors, Company Information, Governance Documents” and “Investors, SEC Filings” sections of our website, www.colonystarwood.com.  The reports filed with the SEC are also available at www.sec.gov.

 

 

Item 1A.  Risk Factors.

Risks Related to Our Business, Properties and Growth Strategies

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

Until 2014, the SFR business consisted primarily of private and individual investors in local markets and was managed individually or by small, non-institutional owners and property managers. Our business strategy involves purchasing, renovating, maintaining and managing a large number of homes and leasing them to qualified residents. A limited number of peer companies exist with an established track record to enable us to predict whether our investment strategy can be implemented successfully over time. It will be difficult for you to evaluate our potential future performance without the benefit of established track records from companies implementing a similar investment strategy. We may encounter unanticipated problems implementing our investment strategy, which may materially and adversely affect us and cause the value of our common shares to decline. We can provide no assurance that we will be successful in implementing our investment strategy or that we will be successful in achieving our objective of generating attractive risk-adjusted returns for our shareholders.

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

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

 

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

 

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

 

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

 

our ability to compete with other investors entering the SFR sector;

 

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

 

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

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judicial and regulatory developments affecting banks’ and other mortgage holders’ ability to foreclose on delinquent borrowers as well as rules, regulations and/or policy initiatives by government and private actors, including HOAs, to discourage or deter the purchase of single-family properties by entities owned or controlled by institutional investors;

 

population, employment or homeownership trends in target markets;

 

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

 

economic conditions in our existing and target markets, including changes in employment and household earnings and expenses, as well as the condition of the financial and real estate markets and the economy generally.

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

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

Our success is largely dependent on the efforts and abilities of our senior executive group and other key personnel. The loss of the services of one or more of our executive officers or personnel could adversely impact our financial and operational performance and our ability to execute our strategies.

In addition, our future success depends on our ability to attract, train, manage and retain qualified personnel. Competition for highly skilled managerial, investment, financial and operational personnel is intense. As additional large real estate investors enter into and expand their scale within the SFR business, we have faced increased challenges in hiring and retaining personnel, and we cannot assure our stockholders that we will be successful in attracting and retaining such skilled personnel. If we are unable to hire and retain qualified personnel as required, our growth and operating results could be adversely affected.

Our ability to meet our labor needs while controlling our labor costs is subject to numerous external factors, including unemployment levels, prevailing wage rates, changing demographics and changes in employment legislation. If we are unable to retain qualified personnel or our labor costs increase significantly, our business operations and our financial performance could be adversely impacted.

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

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

 

improvements in the overall economy and employment levels;

 

greater availability of consumer credit;

 

improvements in the pricing and terms of mortgages;

 

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

 

tax or other government incentives that encourage homeownership.

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

Our investments are and will continue to be concentrated in our core markets and in the SFR sector of the real estate industry, which exposes us to downturns in our core markets or in the SFR sector.

Our investments in homes are and will continue to be concentrated in our core markets and in the SFR sector of the real estate industry. A downturn or slowdown in the rental demand for SFR housing caused by adverse economic, regulatory or environmental conditions, or other events, in our core markets may have a greater impact on the value of our properties or our operating results than

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if we had more fully diversified our investments. We believe that there are seasonal fluctuations in rental demand with demand higher in the spring and summer than in the fall and winter. Such seasonal fluctuations may impact our operating results.

In addition to general, regional, national and international economic conditions, our operating performance will be impacted by the economic conditions in our core markets. A significant portion of our SFR portfolio is located in Florida, Georgia, Texas and California, although we have made, and/or intend to pursue, acquisitions in other states as well, including, among others, Colorado, Nevada, Arizona, North Carolina, Illinois and Tennessee. We base a substantial part of our business plan on our belief that home values and operating fundamentals for homes in these markets will improve significantly over the near to intermediate term. However, each of these markets experienced substantial economic downturns in recent years and could experience similar or worse economic downturns in the future. We can provide no assurance as to the extent home values and operating fundamentals in these markets will improve, if at all. If the recent economic downturn in these markets returns or we fail to accurately predict the timing of economic improvement in these markets, the value of our homes could decline and our ability to execute our business plan may be adversely affected to a greater extent than if we owned a real estate portfolio that was more geographically diversified, which could adversely affect our financial condition, operating results and ability to make distributions to our shareholders and cause the value of our common shares to decline.

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

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

We face significant competition in the leasing market for quality residents, which may limit our ability to rent our homes on favorable terms or at all.

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

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

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

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

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If we fail to maintain an effective system of internal controls, we may not be able to accurately present our financial statements, which could materially and adversely affect us.

We are subject to Section 404 of Sarbanes-Oxley and the related rules of the SEC, which generally require our management and independent registered public accounting firm to report on the effectiveness of our internal controls over financial reporting. Section 404 requires an annual management assessment of the effectiveness of our internal control over financial reporting, and we are required to include an opinion from our independent registered public accounting firm on the effectiveness of our internal controls over financial reporting. In connection with our testing and evaluation of the design and operating effectiveness of our internal controls over financial reporting as of December 31, 2016, we identified certain deficiencies related to information technology (“IT”) controls over our change management process and access to our general ledger system which we and our independent registered public accounting firm have concluded, constituted a material weakness in our internal controls over financial reporting as of such date. We have taken measures to remediate these deficiencies, including implementing and enhancing existing policies and procedures with respect to our change management process and access to our general ledger system, hiring additional personnel with appropriate managerial and technical experience and training in IT controls and hiring a third-party consultant to assist us with the implementation, testing and maintenance of our IT controls. These measures have been implemented. However, even if our remedial measures are effective, we cannot assure you that we will be successful in maintaining adequate internal controls over financial reporting in the future. As we grow our business, our internal controls will become more complex, and we may require significantly more resources to ensure our internal controls remain effective. In addition, while our independent registered public accounting firm have expressed an unqualified opinion on our consolidated financial statements for the year ended December 31, 2016, the continued existence of a material weakness or significant deficiency or the development of one in the future could result in errors in our financial statements that could require a restatement, cause us to fail to meet our public company reporting obligations and/or cause investors to lose confidence in our reported financial information, which could materially and adversely affect us.

Compliance with governmental laws, regulations and covenants that are applicable to our homes may adversely affect our business and growth strategies.

Rental homes are subject to various covenants and local laws and regulatory requirements, including permitting, licensing and zoning requirements. Local regulations, including municipal or local ordinances, restrictions and restrictive covenants imposed by community developers may restrict our use of our homes and may require us to obtain approval from local officials or community standards organizations at any time with respect to our homes, including prior to acquiring any of our homes or when undertaking renovations of any of our existing homes. Among other things, these restrictions may relate to fire and safety, seismic, asbestos cleanup or hazardous material abatement requirements. Additionally, such local regulations may cause us to incur additional costs to renovate or maintain our properties in accordance with the particular rules and regulations. We cannot assure you that existing regulatory policies will not adversely affect us or the timing or cost of any future acquisitions or renovations, or that additional regulations will not be adopted that would increase such delays or result in additional costs. Our business and growth strategies may be materially and adversely affected by our ability to obtain permits, licenses and approvals. Our failure to obtain such permits, licenses and approvals could have a material adverse effect on us and cause the value of our common shares to decline.

The acquisition of homes may be costly and unsuccessful, and, when acquiring portfolios of homes we may acquire some assets that we would not otherwise purchase.

Our primary strategy is to acquire homes through a variety of channels, renovate these homes to the extent necessary and lease them to qualified residents. When acquiring homes on an individual basis through foreclosure sales or other transactions, these acquisitions of homes may be costly and may be less efficient than acquisitions of portfolios of homes. Alternatively, portfolio acquisitions are more complex than single-home acquisitions, and we may not be able to implement this strategy successfully. The costs involved in locating and performing due diligence (when feasible) on portfolios of homes as well as negotiating and entering into transactions with potential portfolio sellers could be significant, and there is a risk that either the seller may withdraw from the entire transaction for failure to come to an agreement or the seller may not be willing to sell us the portfolio on terms that we view as favorable. In addition, a seller may require that a group of homes be purchased as a package even though we may not want to purchase certain individual assets in the portfolio.

If we acquire a portfolio of leased homes, to the extent the management and leasing of such homes has not been consistent with our property management and leasing standards, we may be subject to a variety of risks, including risks relating to the condition of the properties, the credit quality and employment stability of the residents and compliance with applicable laws, among others. In addition, financial and other information provided to us regarding such portfolios during our due diligence may be inaccurate, and we may not discover such inaccuracies until it is too late to seek remedies against such sellers. To the extent we timely pursue such remedies, we may not be able to successfully prevail against the seller in an action seeking damages for such inaccuracies. If we conclude that certain assets purchased in bulk portfolios do not fit our target investment criteria, we may decide to sell these assets, which could take an extended period of time and may not result in a sale at an attractive price.

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Our evaluation of homes involves a number of assumptions that may prove inaccurate, which could result in us paying too much for any such assets we acquire or overvaluing such assets or such assets failing to perform as we expect.

In determining whether particular homes meet our investment criteria, we make a number of assumptions, including, in the case of homes, assumptions related to estimated time of possession and estimated renovation costs and time frames, annual operating costs, market rental rates and potential rent amounts, time from purchase to leasing and resident default rates. These assumptions may prove inaccurate. As a result, we may pay too much for homes we acquire or overvalue such assets, or our homes may fail to perform as we expect. Adjustments to the assumptions we make in evaluating potential purchases may result in fewer homes qualifying under our investment criteria, including assumptions related to our ability to lease homes we have purchased. Reductions in the supply of homes that meet our investment criteria may adversely affect our ability to implement our investment strategy and operating results.

Furthermore, the homes that we acquire vary materially in terms of time to possession, renovation, quality and type of construction, location and hazards. Our success depends on our ability to acquire homes that can be quickly possessed, renovated, repaired, upgraded and rented with minimal expense and maintained in rentable condition. Our ability to identify and acquire such homes is fundamental to our success. In addition, the recent market and regulatory environments relating to homes and residential mortgage loans have been changing rapidly, making future trends difficult to forecast. For example, an increasing number of homeowners now wait for an eviction notice or eviction proceedings to commence before vacating foreclosed premises, which significantly increases the time period between the acquisition of, and the leasing of, a home. Such changes affect the accuracy of our assumptions and, in turn, may adversely affect us.

We have in the past and may from time to time acquire properties through the foreclosure auction process, which could subject us to significant risks that could adversely affect us.

Our investment strategy may involve acquiring homes through the foreclosure auction process in a number of markets, which may involve our or our affiliates participation in monthly foreclosure auctions on the same day of the month in certain markets. When purchasing through foreclosure auctions, we may only able to visually inspect properties from the street and must purchase these homes without a contingency or inspection period and in “as is” condition with the risk that unknown defects in the property may exist. We also may encounter unexpected legal challenges and expenses in the foreclosure process. Upon acquiring a new home, we may have to evict residents who are in unlawful possession before we can secure possession and control of the home. The holdover occupants may be the former owners or residents of a property, or they may be squatters or others who are illegally in possession of the property. Securing control and possession from these occupants can be both costly and time-consuming.

Each state has its own laws governing the procedures to foreclose on mortgages and deeds of trust, and states generally require strict compliance with these laws in both judicial and non-judicial foreclosures. Courts and administrative agencies have in the past, and may in the future, impose new rules and requirements regarding foreclosures in order to restrict and reduce foreclosures. Allegations of deficiencies in auction practices could result in claims challenging the validity of some auctions, potentially placing our claim of ownership to the properties at risk. Further, foreclosed owners and their legal representatives, including some prominent and well-financed law firms, have brought litigation questioning the validity and finality of foreclosures that have already occurred. Any such developments may slow or reduce the supply of foreclosed homes available to us for purchase and may 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 home purchased by us, an increase in litigation and property maintenance costs incurred with respect to homes obtained through foreclosure, or delays in stabilizing and leasing such homes promptly after acquisition.

Further, when acquiring properties on an “as is” basis, title commitments are often not available prior to purchase, and title reports or title information may not reflect all senior liens, which may increase the possibility of acquiring homes outside predetermined acquisition and price parameters, purchasing residences with title defects and deed restrictions, HOA restrictions on leasing or underwriting or purchasing the wrong residence. The policies, procedures and practices we implement to assess the state of title and leasing restrictions prior to purchase may not be effective, which could lead to a material if not complete loss on our investment in such homes. For homes we acquire through the foreclosure auction process, we do not obtain title commitments prior to purchase, and we are not able to perform the type of title review that is customary in acquisitions of real property. As a result, our knowledge of potential title issues will be limited, and no title insurance protection will be in place. This lack of title knowledge and insurance protection may result in third parties having claims against our title to such homes that may materially and adversely affect the values of the homes or call into question the validity of our title to such homes. Without title insurance, we are fully exposed to, and would have to defend ourselves against, such claims. Further, if any such claims are superior to our title to the home we acquired, we risk loss of the home purchased. Any of these risks could materially and adversely affect us.

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Properties that are being sold through short sales or foreclosure sales are subject to risks of theft, mold, infestation, vandalism, deterioration or other damage that could require extensive renovation prior to renting and adversely impact operating results.

When a property is put into foreclosure due to a default by the owner on its mortgage obligations or the value of the property is substantially below the outstanding principal balance on the mortgage and the owner decides to seek a short sale, the owner may abandon the home or cease to maintain the home as rigorously as the owner normally would. Neglected and vacant properties are subject to increased risks of theft, mold, infestation, vandalism, general deterioration and other maintenance problems that may persist without appropriate attention and remediation. If we begin to purchase a large volume of properties in bulk sales and are not able to inspect them immediately before closing on the purchase, we may purchase properties that may be subject to these problems, which may result in maintenance and renovation costs and time frames that far exceed our estimates. These circumstances could substantially impair our ability to quickly renovate and lease such homes in a cost efficient manner or at all, which would adversely impact our operating results.

We may not perform on-site inspections of all properties in a bulk portfolio sale until we acquire such assets, and we may face unanticipated costly repairs at such properties.

When we acquire a portfolio of properties we may not be permitted, or it may not be feasible for us, to perform on-site inspections of all or any of the properties in the portfolio (or, if applicable, underlying the loans in the portfolio) prior to our acquisition of the portfolio. As a result, the value of any such properties could be lower than we anticipated at the time of acquisition, and/or such properties could require substantial and unanticipated renovations prior to their conversion into rental homes.

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

We may acquire properties that are subject to contingent or unknown liabilities, including liabilities for or with respect to liens attached to properties, unpaid real estate tax, utilities or HOA charges for which a subsequent owner remains liable, clean-up or remediation of environmental conditions or code violations, claims of customers, vendors or other persons dealing with the acquired entities and tax liabilities, among other things. Purchases of properties acquired at auction, in short sales, from lenders or in bulk purchases typically involve few or no representations or warranties with respect to the properties. In each case, our acquisition may be without any, or with only limited, recourse against the sellers with respect to unknown liabilities or conditions. As a result, if any such liability were to arise relating to our homes, or if any adverse condition exists with respect to our homes that is in excess of our insurance coverage, we might have to pay substantial amounts to settle or cure it, which could adversely affect our financial condition, cash flows and operating results. In addition, the properties we acquire may be subject to covenants, conditions or restrictions that restrict the use or ownership of such properties, including prohibitions on leasing or requirements to obtain the approval of HOAs prior to leasing. We may not discover such restrictions during the acquisition process, and such restrictions may adversely affect our ability to utilize such homes as we intend.

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

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

The properties we acquire may often be vacant at the time of closing, and we may acquire multiple vacant properties in close geographic proximity to one another. We may not be successful in locating residents to lease the individual properties that we acquire as quickly as we had expected or at all. Even if we are able to place residents as quickly as we had expected, we may incur vacancies in the future and may not be able to re-lease those properties without longer-than-assumed delays. In addition, the value of a vacant property could be substantially impaired. If vacancies continue for a longer period of time than we expect or indefinitely, we may suffer reduced revenues, which may have a material adverse effect on us and cause the value of our common shares to decline.

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

Though we are internally managed, we use local and national third-party vendors and service providers to provide certain services for our properties or subcontract for such services. For example, we typically engage third-party home improvement professionals with respect to certain maintenance and specialty services, such as HVAC, roofing, painting and floor installations.

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Selecting, managing and supervising these third-party service providers requires significant resources and expertise, and because our portfolio consists of geographically dispersed properties, our ability to adequately select, manage and supervise such third parties may be more limited or subject to greater inefficiencies than if our properties were more geographically concentrated. We generally do not have exclusive, direct or long-term contractual relationships with the third-party providers performing the ultimate services, and we can provide no assurance that we will have uninterrupted or unlimited access to their services. If we do not select, manage and supervise appropriate third parties to provide these services, our reputation and financial results may suffer. Notwithstanding our efforts to implement and enforce strong policies and practices regarding service providers, we may not successfully detect and prevent fraud, misconduct, incompetence or theft by our third-party service providers, including our general contractors. In addition, any removal or termination of third-party service providers would require us to seek new vendors or providers, which would create delays and adversely affect our operations. Poor performance by such third-party service providers will reflect poorly on us and could significantly damage our reputation among desirable residents. In the event of fraud or misconduct by a third party, we could also be exposed to material liability and be held responsible for damages, fines or penalties and our reputation may suffer. In the event of failure by our general contractors to pay their subcontractors, our properties may be subject to filings of mechanics or materialmen liens, which we may need to resolve to remain in compliance with certain debt covenants, and for which indemnification from the general contractors may not be available.

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

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

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

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

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

Our leases are relatively short-term in nature, typically one year and in certain cases month-to-month, which exposes us to the risk that we may have to re-lease our properties frequently and we may be unable to do so on attractive terms, on a timely basis or at all. Because these leases generally permit the residents to leave at the end of the lease term without penalty, our rental revenues may be impacted by declines in market rental rates more quickly than if our leases were for longer terms. Short-term leases may result in high turnover, which involves costs such as restoring the properties, marketing costs and lower occupancy levels. Our resident turnover rate and related cost estimates may be less accurate than if we had more operating data upon which to base such estimates.  In addition, to the extent that a potential resident is represented by a leasing agent, we may need to pay all or a portion of any related agent commissions, which will reduce the revenue from a particular rental home. Alternatively, to the extent that a lease term exceeds one year, we may miss out on the ability to raise rents in an appreciating market and be locked into a lower rent until such lease

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expires. If the rental rates for our properties decrease or our residents do not renew their leases, our operating results and ability to make distributions to our shareholders could be adversely affected.

Many factors impact the SFR market, and if rents in our core markets do not increase sufficiently to keep pace with rising costs of operations, our income and distributable cash will decline.

The success of our business model depends, in part, on conditions in the SFR market in our core markets. Our investment strategy is premised on assumptions about occupancy levels, rental rates, interest rates and other factors, and if those assumptions prove to be inaccurate, our cash flows and profitability will be reduced. Recent 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 an increase in homeownership rather than renting. In addition, we expect that as investors like us increasingly seek to capitalize on opportunities to purchase housing assets at below replacement costs and convert them to productive uses, the supply of SFR properties will decrease and the competition for residents may intensify. A softening of the rental market in our core areas would reduce our rental revenue and profitability.

We may not have control over timing and costs arising from renovating our properties, and the cost of maintaining rental properties is generally higher than the cost of maintaining owner-occupied homes, which will affect our costs of operations and may adversely impact our ability to make distributions to our shareholders.

Renters impose additional risks to owning real property. Renters do not have the same interest as an owner in maintaining a property and its contents and generally do not participate in any appreciation of the property. Accordingly, renters may damage a property and its contents, and may not be forthright in reporting damages or amenable to repairing them completely or at all. A rental property may need repairs and/or improvements after each resident vacates the premises, the costs of which may exceed any security deposit provided to us by the resident when the rental property was originally leased. Accordingly, the cost of maintaining rental properties can be higher than the cost of maintaining owner-occupied homes, which will affect our costs of operations and may adversely impact our ability to make distributions to our shareholders.

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

Governmental authorities may exercise eminent domain to acquire land on which our properties are built in order to build roads and other infrastructure. Any such exercise of eminent domain would allow us to recover only the fair value of the affected properties. Our investment 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.

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

A significant number of our homes are part of HOAs, which are private entities that regulate the activities of and levy assessments on properties in a residential subdivision. HOAs in which we own homes may have enacted or may from time to time enact onerous or arbitrary rules that restrict our ability to renovate, market, lease or operate our homes in accordance with our investment strategy or require us to renovate or maintain such homes at standards or costs that are in excess of our planned operating budgets. Such rules may include requirements for landscaping, limitations on signage promoting a home for lease or sale, or the use of specific construction materials in renovations. Some HOAs also impose limits on the number of homeowners who may rent their homes, which if met or exceeded, would cause us to incur additional costs to resell the home and opportunity costs of lost rental revenue. Furthermore, many HOAs impose restrictions on the conduct of residents of homes and the use of common areas, and we may have residents who violate HOA rules and for which we may be liable as the homeowner and for which we may not be able to obtain reimbursement from the resident. Additionally, the boards of directors of the HOAs in which we own homes may not make important disclosures about the homes or may block our access to HOA records, initiate litigation, restrict our ability to sell our homes, impose assessments or arbitrarily change the HOA rules. We may be unaware of or unable to review or comply with HOA rules before purchasing the 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. Several states have enacted laws that provide that a lien for unpaid monies owed to an HOA may be senior to or extinguish mortgage liens on properties. Such actions, if not cured, may give rise to events of default under certain of our indebtedness, which could have a material adverse impact upon us.

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

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

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

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

In addition, a significant portion of our properties are located within HOAs and we are subject to HOA rules and regulations. HOAs have the power to increase monthly charges and make assessments for capital improvements and common area repairs and maintenance. Property taxes, HOA fees, and insurance premiums are subject to significant increases, which can be outside of our control. If the costs associated with property taxes, HOA fees and assessments or insurance rise significantly and we are unable to increase rental rates due to rent control laws or other regulations to offset such increases, our results of operations would be negatively affected.

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

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

We are involved in a variety of litigation.

We are involved in a range of legal actions in the ordinary course of business. These actions may include eviction proceedings and other landlord-resident disputes, challenges to title and ownership rights (including actions brought by prior owners alleging wrongful foreclosure by their lender or servicer), issues with local housing officials arising from the condition or maintenance of the properties and issues with state, county and municipal authorities, HOAs, contractor and sub-contractor claims, among others. These actions can be time consuming and expensive. While we intend to vigorously defend any non-meritorious action or challenge, we cannot assure you that we will not be subject to expenses and losses that may adversely affect our operating results.

Class action, resident rights and consumer demands and litigation could directly limit and constrain our operations and may impose on us significant litigation expenses.

Numerous residents’ rights and consumers’ rights organizations exist throughout the country and operate in our core markets, and as we grow in scale, we may attract attention from some of these organizations and become a target of legal demands or litigation. Many such consumer organizations have become more active and better funded in connection with mortgage foreclosure-related issues, and with the increased market for homes arising from displaced homeownership, some of these organizations may shift their litigation, lobbying, fundraising and grass roots organizing activities to focus on landlord-resident issues. While we intend to conduct our business lawfully and in compliance with applicable landlord-resident and consumer laws, such organizations might work in

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conjunction with trial and pro bono lawyers in one state or multiple states to attempt to bring claims against us on a class action basis for damages or injunctive relief. We cannot anticipate what form such legal actions might take, or what remedies they may seek.

Additionally, these organizations may lobby local county and municipal attorneys or state attorneys general to pursue enforcement or litigation against us, or may lobby state and local legislatures to pass new laws and regulations to constrain our business operations. If they are successful in any such endeavors, they could directly limit and constrain our operations and may impose on us significant litigation expenses, including settlements to avoid continued litigation or judgments for damages or injunctions.

Our board of trustees has approved very broad investment guidelines for us and will not approve each investment and financing decision we make unless required by our investment guidelines.

We are authorized to follow very broad investment guidelines. Our board of trustees periodically reviews our investment guidelines and our investment portfolio, but it does not review or approve specific property acquisitions or dispositions below certain thresholds. In addition, in conducting periodic reviews, our board of trustees may rely primarily on information provided to them by us. Furthermore, we may use complex strategies, and transactions we enter into may be costly, difficult or impossible to unwind by the time they are reviewed by our board of trustees. We have great latitude within the broad parameters of our investment guidelines in determining the types and amounts of assets we may decide are attractive investments for us, which could result in investment returns that are substantially below expectations or that result in losses, which would materially and adversely affect us and cause the value of our common shares to decline. Further, decisions made and investments and financing arrangements we enter into may not fully reflect the best interests of our shareholders.

Our board of trustees may change any of our business and growth strategies or investment guidelines, financing strategy or leverage guidelines without shareholder consent.

Our board of trustees may change any of our business and growth strategies or investment guidelines, financing strategy or leverage guidelines with respect to acquisitions, investments, growth, operations, indebtedness, capitalization and distributions at any time without the consent of our shareholders, which could result in an investment portfolio with a different risk profile. A change in our business and growth strategies may increase our exposure to real estate market fluctuations, concentration risk and interest rate risk, among other risks. Furthermore, a change in our asset allocation could result in our making investments in asset categories different from those described in this Annual Report on Form 10-K. These changes could have a material adverse effect on us and cause the value of our common shares to decline.

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

Our operations are highly dependent upon our information systems that support our business processes, including marketing, leasing, resident and vendor communication, property management and work order processing, finance and intracompany communications throughout our operations. Certain critical components of our information systems are dependent upon third-party providers and a significant portion of our business operations are conducted over the internet. These systems and websites require access to telecommunications or the internet, each of which is subject to system security risks, cybersecurity breaches, outages, and other risks. As a result, we could be severely impacted by a catastrophic occurrence, such as a natural disaster or a terrorist attack, or a circumstance that disrupted access to telecommunications, the internet or operations at our third-party providers, including viruses or experienced computer programmers that could penetrate network security defenses and cause system failures and disruptions of operations. Even though we believe we utilize appropriate duplication and back-up procedures, a significant outage in telecommunications, the internet or at our third-party providers could negatively impact our operations.

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

Information security risks have generally increased in recent years due to the rise in new technologies and the increased sophistication and activities of perpetrators of cyber-attacks.  In the ordinary course of our business we acquire and store sensitive data, including intellectual property, our proprietary business information and personally identifiable information of our prospective and current residents, our employees and third-party service providers in our offices and on our networks and website and on third-party vendor networks. We may share some of this information with vendors who assist us with certain aspects of our business.  The secure processing and maintenance of this information is critical to our operations and business and growth strategies. Despite our security measures and those of our third-party vendors, our information technology and such 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,

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regulatory penalties, disruption to our operations and the services we provide to customers or damage our reputation, and thus could have a material adverse impact on our business, financial condition and results of operations. In addition, a security breach could require that we expend significant additional resources to enhance our information security systems and could result in a disruption to our operations.

We will rely on a joint venture with Prime to complete our exit from the NPL business line, and, if our relationship with Prime is terminated, we may not be able to replace Prime on favorable terms in a timely manner, or at all.

Prime, in accordance with our instructions (which are based in part on the use of certain of our analytic tools), coordinates the resolution or disposition of any NPLs for the joint venture. Maintaining our relationship with Prime will be critical for us to effectively complete our exit from the NPL business line. We may not be successful in maintaining our relationship with Prime. If our partnership with Prime terminates and we are unable to obtain a replacement or if Prime fails to provide quality services with respect to our remaining NPLs, our ability to resolve or dispose of our remaining NPLs could be adversely affected, which could have an adverse effect on us.

Risks Related to Sources of Financing

We expect to use leverage in executing our business strategy, which may adversely affect the return on our assets and may reduce cash available for distribution to our shareholders.

Subject to maintaining our status as a REIT, we intend to employ prudent leverage, to the extent available, to fund the acquisition of residential assets, refinancing existing debt and for other corporate and business purposes deemed advisable by us. In determining to use leverage, we assess a variety of factors, including without limitation the anticipated liquidity and price volatility of the assets in our investment portfolio, the cash flow generation capability of our assets, the availability of credit on favorable terms, any prepayment penalties and restrictions on refinancing, the credit quality of our assets and our outlook for borrowing costs relative to the unlevered yields on our assets. We may continue to employ portfolio financing and expect to utilize credit facilities or other bank or capital markets debt financing, if available. We may consider seller or in-place financing, if available, from sellers of portfolios of residential assets and potentially financing from government sponsored enterprises if attractive programs are available. We may also utilize other financing alternatives such as securitizations, depending upon market conditions, and other capital raising alternatives such as follow-on offerings of our common shares, preferred shares and hybrid equity, among others. We have no limitation under our organizational documents or any contract on the amount of funds that we may borrow for any single investment or that may be outstanding at any one time in the aggregate. We may significantly increase the amount of leverage we utilize at any time without approval of our board of trustees.

As of December 31, 2016, we have entered into or assumed, as a result of the Merger, the following debt transactions (see Item 8. Financial Statements and Supplementary Data, Note 7. Debt for a description of these transactions):

 

$300.0 million senior SFR facility. As of December 31, 2016, $108.5 million had been drawn on the senior SFR facility.

 

$19.3 million master repurchase agreement. As of December 31, 2016, $19.3 million had been drawn on the master repurchase agreement.

 

In July 2014, SWAY issued $230.0 million in aggregate principal amount of 3.00% Convertible Senior Notes due 2019 (the “2019 Convertible Notes”).

 

In October 2014, SWAY issued $172.5 million in aggregate principal amount of 4.50% Convertible Senior Notes due 2017 (the “2017 Convertible Notes” and, together with the 2019 Convertible Notes and the $300 million aggregate principal amount of our 3.50% Convertible Senior Notes due 2022 we issued in January 2017, the “Convertible Notes”) (see Item 8. Financial Statements and Supplementary Data, Note 18. Subsequent Events).

 

$300.0 million secured credit facility. As of December 31, 2016, there was no amount drawn on the secured credit facility.

 

In December 2014, SWAY completed a securitization transaction, which involved the issuance and sale in a private offering of SFR pass-through certificates issued by a trust established by us. The certificates represent beneficial ownership interests in a $531.0 million loan secured by a portfolio of 4,095 homes. In December 2014, we also repaid $2.0 million in principal and reduced the portfolio to 4,081 homes and the total proceeds of securitization to $502.5 million.

 

In April 2014, June 2014 and June 2015, CAH completed three securitization transactions, which involved the issuance and sale in private offerings of SFR pass-through certificates issued by trusts established by CAH. The certificates represent beneficial ownership interest in a $513.6 million loan secured by a portfolio of approximately 3,400 SFR homes, a $558.5 million loan secured by a portfolio of approximately 3,700 SFR homes and a $640.1 million loan secured by a portfolio of approximately 3,900 SFR homes, respectively.

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In June 2016 and November 2016, we completed two securitization transactions, which involved the issuance and sale in private offerings of SFR pass-through certificates issued by trusts established by us. The certificates represent beneficial ownership interest in a $533.9 million loan secured by a portfolio of approximately 3,600 SFR homes and a $611.3 million loan secured by a portfolio of approximately 4,000 SFR homes, respectively.

 

The outstanding balance of these six securitization transactions as of December 31, 2016 was approximately $3.4 billion.

Incurring substantial debt could subject us to many risks that, if realized, would adversely affect us, including the risk that:

 

our cash flow from operations may be insufficient to make required payments of principal and interest on the debt, which is likely to result in acceleration of such debt;

 

our debt may increase our vulnerability to adverse economic and industry conditions with no assurance that investment yields will increase with higher financing cost;

 

we may be required to dedicate a portion of our cash flow from operations to payments on our debt, thereby reducing funds available for distributions to our shareholders, operations and capital expenditures, future acquisition 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 our debt at maturity, it may be necessary to refinance the debt through additional debt financings or additional capital raising. 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 shareholders. If we are unable to refinance our debt on acceptable terms, we may be forced to dispose of substantial numbers of homes on disadvantageous terms, potentially resulting in losses. To the extent we cannot meet any future debt service obligations, we will risk losing some or all of our homes 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. Defaults under our debt agreements could materially and adversely affect us and cause the value of our common shares to decline.

Access to financing sources may not be available on favorable terms, or at all, especially in light of current market conditions, which could adversely affect our ability to maximize our returns.

We may continue to employ portfolio financing and may utilize credit facilities or other bank or capital markets debt financing, if available. We may consider seller or in-place financing, if available, from sellers of portfolios of residential assets and potentially financing from government sponsored enterprises if attractive programs are available. We may also utilize other financing alternatives such as securitizations, depending upon market conditions, and other capital raising alternatives such as follow-on offerings of our common shares, preferred shares and hybrid equity, among others.

Our access to additional third-party sources of financing will depend, in part, on:

 

general market conditions;

 

the market’s perception of our growth potential;

 

with respect to acquisition financing, the market’s perception of the value of the homes to be acquired;

 

our current debt levels;

 

our current and expected future earnings;

 

our cash flow and cash distributions; and

 

the market price of our common shares.

Potential lenders may be unwilling or unable to provide us with financing that is attractive to us or may charge us prohibitively high fees in order to obtain financing. Consequently, there is uncertainty regarding our ability to access the credit market in order to attract financing on reasonable terms. Investment returns on our assets and our ability to make acquisitions could be adversely affected by our inability to secure financing on reasonable terms, if at all.

Depending on market conditions at the relevant time, we may have to rely more heavily on additional equity issuances, which may be dilutive to our shareholders, or on less efficient forms of debt financing that require a larger portion of our cash flow from operations, thereby reducing funds available for our operations, future business opportunities, cash distributions to our shareholders and other purposes. We may not have access to such equity or debt capital on favorable terms at the desired times, or at all.

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Our financing arrangements contain restrictive covenants relating to our operations, which could limit our ability to make distributions to our shareholders.

The financing arrangements that we have entered into contain (and those we may enter into in the future likely will contain) covenants affecting our ability to incur additional debt, make certain investments, reduce liquidity below certain levels, make distributions to our shareholders and otherwise affect our distribution and operating policies. See Item 8. Financial Statements and Supplementary Data, Note 7. Debt for a description of these facilities and their covenants. If we fail to meet or satisfy any of these covenants in our debt agreements, we will be in default under these agreements, which could result in a cross-default under other debt agreements, and our lenders could elect to declare outstanding amounts due and payable, terminate their commitments, require the posting of additional collateral and enforce their respective interests against existing collateral. Additionally, borrowing base requirements associated with our financing arrangements may prevent us from drawing upon our total maximum capacity under these financing arrangements if sufficient collateral, in accordance with our facility agreements, is not available. Further, debt agreements entered into in the future may contain specific cross-default provisions with respect to other specified indebtedness, giving the lenders the right to declare a default if we are in default under other loans in some circumstances. A default also could limit significantly our financing alternatives, which could cause us to curtail our investment activities and/or dispose of assets when we otherwise would not choose to do so. If we default on several of our debt agreements or any single significant debt agreement, we could be materially and adversely affected.

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

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

The Convertible Notes are effectively subordinated to our secured debt and any liabilities of our subsidiaries.

The Convertible Notes rank senior in right of payment to any of our indebtedness that is expressly subordinated in right of payment to the Convertible Notes; equal in right of payment to any of our unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables) of our subsidiaries. In the event of our bankruptcy, liquidation, reorganization or other winding up, our assets that secure our debt will be available to pay obligations on the Convertible Notes only after the secured debt has been repaid in full from these assets. There may not be sufficient assets remaining to pay amounts due on any or all of the Convertible Notes then outstanding. The indentures governing the Convertible Notes will not prohibit us from incurring additional senior debt or secured debt, nor will it prohibit any of our subsidiaries from incurring additional liabilities. For example, nothing in the Convertible Note indentures or the Convertible Notes would prohibit our operating partnership from incurring indebtedness that would rank structurally senior to the Convertible Notes.

The Convertible Notes are our obligations only, and our operations are conducted through, and substantially all of our consolidated assets are held by, our subsidiaries.

The Convertible Notes are our obligations exclusively and are not guaranteed by any of our operating subsidiaries. Substantially all of our consolidated assets are held by our subsidiaries. Accordingly, our ability to service our debt, including the Convertible Notes, depends on the results of operations of our subsidiaries and upon the ability of such subsidiaries to provide us with cash, whether in the form of dividends, loans or otherwise, to pay amounts due on our obligations, including the Convertible Notes. Our subsidiaries are separate and distinct legal entities and have no obligation, contingent or otherwise, to make payments on the Convertible Notes or to make any funds available for that purpose. In addition, dividends, loans or other distributions to us from such subsidiaries may be subject to contractual and other restrictions and are subject to other business considerations.

Servicing our debt requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our substantial debt.

Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness, including the Convertible Notes, depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not continue to generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able

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to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations, including the Convertible Notes.

We may not have the ability to raise the funds necessary to settle conversions of the Convertible Notes or to repurchase the Convertible Notes upon a fundamental change; our future debt may contain limitations on our ability to pay cash upon conversion or repurchase of the Convertible Notes.

Holders of the Convertible Notes have the right to require us to repurchase their Convertible Notes upon the occurrence of a fundamental change at a fundamental change repurchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest, if any.  In addition, upon conversion of the Convertible Notes, unless we elect to deliver solely common shares to settle such conversion (other than paying cash in lieu of delivering any fractional share), we will be required to make cash payments in respect of the Convertible Notes being converted. However, we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of Convertible Notes surrendered therefor or to pay the cash amounts due upon conversion of the Convertible Notes. In addition, our ability to repurchase the Convertible Notes or to pay cash upon conversion of the Convertible Notes may be limited by law, by regulatory authority or by future agreements governing our indebtedness. The failure to repurchase Convertible Notes at a time when the repurchase is required by the Convertible Note indentures or to pay any cash due and payable on the Convertible Notes as required by the Convertible Note indentures would constitute a default under the indentures. A default under the Convertible Note indentures or the fundamental change itself could also lead to a default under agreements governing our existing and future indebtedness. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and repurchase the Convertible Notes or make cash payments thereon.

The conditional conversion feature of the Convertible Notes, if triggered, may adversely affect our financial condition and operating results.

In the event the conditional conversion feature of the Convertible Notes is triggered, holders of Convertible Notes will be entitled to convert the Convertible Notes at any time during specified periods at their option. If one or more holders elect to convert their Convertible Notes, unless we elect to satisfy our conversion obligation by delivering solely common shares (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity.

The accounting method for convertible debt securities that may be settled in cash could have a material effect on our reported financial results.

Under generally accepted accounting principles in the United States (“GAAP”), an entity must separately account for the debt component and the embedded conversion option of convertible debt instruments that may be settled entirely or partially in cash upon conversion, such as the Convertible Notes, in a manner that reflects the issuer’s economic interest cost. The effect of the accounting treatment for such instruments is that the value of such embedded conversion option would be treated as an original issue discount for purposes of accounting for the debt component of the Convertible Notes, and that original issue discount is amortized into interest expense over the term of the Convertible Notes using an effective yield method. As a result, we will initially be required to record a greater amount of non-cash interest expense because of the amortization of the original issue discount to the Convertible Notes’ face amount over the term of the Convertible Notes and because of the amortization of the debt issuance costs. Accordingly, we will report lower net income in our financial results because of the recognition of both the current period’s amortization of the debt discount and the Convertible Notes’ coupon interest, which could adversely affect our reported or future financial results, the trading price of our common shares and the trading price of the Convertible Notes.  Under certain circumstances, convertible debt instruments (such as the Convertible Notes) that may be settled entirely or partially in cash are evaluated for their impact on earnings per share utilizing the treasury stock method, the effect of which is that the shares issuable upon conversion of the Convertible Notes are not included in the calculation of diluted earnings per share except to the extent that the conversion value of the Convertible Notes exceeds their principal amount. Under the treasury stock method, for diluted earnings per share purposes, the Convertible Notes are accounted for as if the number of our common shares that would be necessary to settle such excess, if we elected to settle such excess in shares, are issued. We cannot be certain that the accounting standards in the future will continue to permit the use of the treasury stock method. If we are unable to use the treasury stock method in accounting for the shares issuable upon conversion of the Convertible Notes, then our diluted earnings per share could be adversely affected.

Holders of Convertible Notes will not be entitled to any rights with respect to our common shares, but they will be subject to all changes made with respect to them to the extent our conversion obligation includes our common shares.

Holders of Convertible Notes will not be entitled to any rights with respect to our common shares (including, without limitation, voting rights and rights to receive any dividends or other distributions on our common shares) prior to the conversion date relating to the Convertible Notes (if we have elected to settle the relevant conversion by delivering solely our common shares (other than paying

22


cash in lieu of delivering any fractional share), which we refer to as physical settlement) or the last trading day of the relevant observation period (if we elect to pay and deliver, as the case may be, a combination of cash and our common shares in respect of the relevant conversion, which we refer to as combination settlement), but holders of Convertible Notes will be subject to all changes affecting our common shares. For example, if an amendment is proposed to our declaration of trust or bylaws requiring shareholder approval and the record date for determining the shareholders of record entitled to vote on the amendment occurs prior to the conversion date related to a holder’s conversion of its Convertible Notes (if we have elected to physical settlement) or the last trading day of the relevant observation period (if we have elected combination settlement), such holder will not be entitled to vote on the amendment, although such holder will nevertheless be subject to any changes affecting our common shares.

Securitization markets have undergone significant periods of significant dislocation and we might not be able to access the securitization market for capital in the future.

We are party to six separate securitization transactions, which involved the issuance and sale in a private offering of SFR pass-through certificates issued by trusts established by us. The certificates represent beneficial ownership interests in $3.4 billion in loans secured by a portfolio of approximately 22,700 homes operated as rental properties contributed by us from our portfolio of homes to newly-formed special purpose subsidiaries, which then entered into the loan agreements.  The outstanding balance on the loans as of December 31, 2016 was approximately $3.4 billion. The global economy recently experienced a significant recession and recent events in the real estate and securitization markets, as well as the debt markets and the economy generally, have caused significant dislocations, illiquidity and volatility in the market for asset-backed securities and mortgage-backed securities, as well as a severe, ongoing disruption in the wider global financial markets, including a significant reduction of investor demand for, and purchases of, asset-backed securities and structured financial products.  Disruptions on the securitization market could preclude our ability to use securitization as a financing source or could render it an inefficient source of financing making us more dependent on alterative sourcing of financing that might not be as favorable as securitizations in otherwise favorable markets.

Securitization structures are subject to an evolving regulatory environment that may affect the availability and attractiveness of this financing option.

In the United States, Europe and elsewhere, following the financial crisis, there is increased political and regulatory scrutiny of the asset-backed securities industry.  This has resulted in a raft of measures for increased regulation, which are currently at various stages of implementation and which may have an adverse impact on the regulatory capital charge to certain investors in securitization exposures and/or the incentives for certain investors to hold asset-backed securities, and may thereby affect the liquidity of such securities.  Any of these could limit our access to securitization as a source of financing.  This increased regulation could also alter the structure of securitizations and could pose risks to our participation in any securitizations or could reduce or eliminate the economic incentives of participating in securitizations.

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

We were party to $3.9 billion of debt as of December 31, 2016, $3.4 billion of which is floating rate debt. Higher interest rates could increase debt service requirements on floating rate debt and could reduce funds available for operations, distributions to our shareholders, future business opportunities or other purposes. If we need to repay then-existing debt during periods of rising interest rates, we could be required to liquidate one or more of our investments at times which may not permit realization of the maximum return on such investments and could result in a loss.

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

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

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Risks Relating to Us Following the Internalization and the Merger

We may have failed to uncover all liabilities of CAH through the due diligence process prior to the Internalization and the Merger, exposing us to potentially large, unanticipated costs.

Prior to completing the Internalization and the Merger, we performed certain due diligence reviews of the business of CAH. In view of timing and other considerations relevant to successfully achieving the closing of the Internalization and the Merger, our due diligence reviews were necessarily limited in nature and may not adequately have uncovered all of the contingent or undisclosed liabilities we may incur as a consequence of the Merger. Any such liabilities could cause us to experience potentially significant losses, which could materially adversely affect our business, results of operations and financial condition.

We may incur adverse tax consequences, if we or CAH has failed or fails to qualify as a REIT for U.S. federal income tax purposes.

Through the closing of the Internalization and the Merger, each of us and CAH operated in a manner that we and CAH, as the case may be, believed allowed us and CAH, as the case may be, to qualify as a REIT for U.S. federal income tax purposes under the Code.  Subsequent to the closing of the Internalization and the Merger, we have operated and intend to continue to operate in a manner that we believe allows us to qualify as a REIT. Neither we nor CAH has requested or plans to request a ruling from the Internal Revenue Service (the “IRS”) that we or CAH qualifies as a REIT. Qualification as a REIT involves the application of highly technical and complex Code provisions for which there are only limited judicial and administrative interpretations. The complexity of these provisions and of the applicable regulations of the U.S. Department of the Treasury that have been promulgated under the Code is greater in the case of a REIT that holds its assets through a partnership (which, consistent with our past practices and those of CAH, we continue to do after the Internalization and the Merger). The determination of various factual matters and circumstances not entirely within our control or the control of CAH may affect our or its ability to qualify as a REIT. In order to qualify as a REIT, each of us and CAH must satisfy a number of requirements, including requirements regarding the ownership of our or its shares, respectively, and the composition of our or its gross income and assets. Also, a REIT must make distributions to shareholders annually of at least 90% of its net taxable income, excluding any capital gains.

If either we have failed or fail or CAH has failed to qualify as a REIT, we may inherit significant tax liabilities and could lose our REIT qualification. Even if we retain our REIT qualification, if we have not been or lose or CAH lost its REIT qualification for a taxable year before the Internalization and the Merger or that includes the Internalization and the Merger, we will face serious tax consequences that could substantially reduce our cash available for distribution to our shareholders because:

 

we, as the successor by merger to CAH, would generally inherit any corporate income tax liabilities of CAH, including penalties and interest, which inherited tax liabilities could be particularly substantial if the Merger were to fail to qualify as a reorganization within the meaning of Section 368(a) of the Code;

 

we would be subject to tax on the built-in gain on each asset of ours and of CAH existing at the time of the Internalization and the Merger; and

 

we could be required to pay a special distribution and/or employ applicable deficiency dividend procedures (including penalties and interest payments to the IRS) to eliminate any earnings and profits accumulated by us and CAH for taxable periods that we/it did not qualify as a REIT.

As a result of these factors, any failure by us or CAH before the Internalization and the Merger to qualify as a REIT could impair our ability after the Internalization and the Merger to expand our business and raise capital, and could materially adversely affect the value of our common shares.

General Risks Related to the Real Estate Industry

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

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

 

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

 

declines in the value of residential real estate;

 

overall conditions in the housing market, including:

 

macroeconomic shifts in demand for rental homes;

 

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

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

 

unanticipated repairs, capital expenditures or other costs;

 

uninsured damages;

 

increases in property taxes; and

 

increases in insurance costs;

 

pace of residential foreclosures;

 

level of competition for suitable rental homes;

 

terms and conditions of purchase contracts;

 

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

 

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

 

the illiquidity of real estate investments generally;

 

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

 

availability of new government programs to reduce foreclosure rates or facilitate a recovery in the housing market;

 

changes in laws that increase operating expenses or limit rents that may be charged;

 

limitations imposed upon us by government sponsored enterprises or other sellers on our ability to sell certain of our rental homes during a specified time period;

 

disputes and potential negative publicity in connection with the eviction of an existing resident at one of our homes;

 

damage to a rental home caused by a current or former resident;

 

overbuilding;

 

changes in laws;

 

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

 

casualty or condemnation losses;

 

fraud by borrowers, originators and/or sellers of mortgage loans;

 

undetected deficiencies and/or inaccuracies in underlying mortgage loan documentation and calculations;

 

the geographic mix of our assets;

 

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

 

our ability to provide adequate management, maintenance and insurance.

If we are unable to generate sufficient cash flows from operations to pay an attractive dividend yield to our shareholders, the value of our common shares will decline.

Environmentally hazardous conditions may adversely affect us.

Under various federal, state and local environmental laws, a current or previous owner or operator of real property may be liable for the cost of removing or remediating hazardous or toxic substances on such property. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. Even if more than one person may have been responsible for the contamination, each person covered by applicable environmental laws may be held responsible for all of the clean-up costs incurred. In addition, third parties may sue the owner or operator of a site for damages based on personal injury, natural resources or property damage or other costs, including investigation and clean-up costs, resulting from the environmental contamination. The presence of hazardous or toxic substances on one of our properties, or the failure to properly remediate a contaminated property, could give rise to a lien in favor of the government for costs it may incur to address the contamination, or otherwise adversely affect our ability to sell or lease the property or borrow using the property as collateral. Environmental laws also may impose restrictions on the manner in which property may be used or businesses may be operated. A

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property owner who violates environmental laws may be subject to sanctions which may be enforced by governmental agencies or, in certain circumstances, private parties. In connection with the acquisition and ownership of our properties, we may be exposed to such costs. The cost of defending against environmental claims, of compliance with environmental regulatory requirements or of remediating any contaminated property could materially and adversely affect us.

Compliance with new or more stringent environmental laws or regulations or stricter interpretation of existing laws may require material expenditures by us. We may be subject to environmental laws or regulations relating to our properties, such as those concerning lead-based paint, mold, asbestos, and 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 operations of residents, existing conditions of the land, operations in the vicinity of the properties or the activities of unrelated third parties. In addition, we may be required to comply with various local, state and federal fire, health, life-safety and similar regulations. Failure to comply with applicable laws and regulations could result in fines and/or damages, suspension of personnel, civil liability and/or other sanctions.

Resident relief laws and rent control laws may negatively impact our rental revenue and profitability.

As landlord of numerous homes, we will be involved regularly in evicting residents who are not paying their rent or are otherwise in material violation of the terms of their lease. Eviction activities will impose legal and managerial expenses that will raise our costs. The eviction process is typically subject to legal barriers, mandatory cure policies and other sources of expense and delay, each of which may delay our ability to gain possession and stabilize the home. Additionally, state and local landlord-resident laws may impose legal duties to assist residents in relocating to new housing, or restrict the landlord’s ability to recover certain costs or charge residents for damage that residents cause to the landlord’s premises. Because such laws vary by state and locality, we will need to be familiar with and take all appropriate steps to comply with all applicable landlord-resident laws, 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, in class actions or by state or local law enforcement. We may be required to pay our adversaries’ litigation fees and expenses if judgment is entered against us in such litigation or if we settle such litigation.

Furthermore, rent control laws may affect our rental revenue. Especially in times of recession and economic slowdown, rent control initiatives can acquire significant political support. If rent controls unexpectedly became applicable to certain of our homes, our revenue from and the value of such homes could be adversely affected.

We may suffer losses that are not covered by insurance.

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

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

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

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

Real estate investments are relatively illiquid and, as a result, we may have a limited ability to sell our properties. When we sell any of our assets, we may recognize a loss on such sale. We may elect not to distribute any proceeds from the sale of assets to our shareholders. Instead, we may use such proceeds for other purposes, including:

 

purchasing additional homes;

 

repaying debt, if any;

 

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

 

creating working capital reserves; or

 

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

Our ability to sell our properties may also be limited by our need to avoid the 100% prohibited transactions tax that is imposed on gain recognized by a REIT from the sale of property characterized as dealer property. In order to ensure that we avoid such characterization, we may be required to hold our properties for a minimum period of time and comply with certain other requirements in the Code or dispose of our properties through a TRS.

Risks Related to Our Relationships with Starwood Capital Group, Colony Capital, Colony NorthStar, Inc. and the Waypoint Legacy Funds

Each of Colony NorthStar and Thomas J. Barrack, Jr. (through Colony Capital, LLC and affiliates) control a significant number of votes in any matter, including the election of trustees, presented to common shareholders for approval.

Our common shares issued in connection with the Merger resulted in Colony NorthStar and Thomas J. Barrack Jr. each controlling a significant number of votes in any matter, including the election of trustees, submitted to a vote of common shareholders. Thomas J. Barrack, Jr. is the executive chairman of Colony NorthStar and Co-Chairman of our board of trustees. Each of Colony NorthStar and Thomas J. Barrack, Jr. have interests that differ from our other shareholders, and, therefore, may exercise their respective votes on matters that may not be consistent with the interests of those other shareholders with respect to any matters.

Colony Capital, Colony NorthStar and Starwood Capital Group may engage in competitive businesses or solicit our employees for hire, and we may compete with Starwood Capital Group, Colony Capital or Colony NorthStar in ancillary lines of business, which could have an adverse effect on our business.

Colony Capital, Colony NorthStar and Starwood Capital Group may acquire or manage SFR portfolios, which could result in either or both of them competing directly with us for acquisition opportunities, financing opportunities, tenants and in other aspects of our business, and they may solicit and hire key employees, each of which could have an adverse effect on our business.

Additionally, if we were to expand our business strategy, we might compete with Starwood Capital Group, Colony Capital or Colony NorthStar in lines of business ancillary to SFR homes or other lines of business that we might consider in the future.

We own homes in some of the same geographic regions as the Waypoint Legacy Funds, may compete for residents with the Waypoint Legacy Funds and may have other conflicts of interest with the Waypoint Manager and the Waypoint Legacy Funds.

Upon completion of the separation of SWAY from Starwood Capital Group, we did not acquire DC Real Estate Fund II, LP, Wiel Brien Fund III, LP, Wiel Brien Fund IV, LP, Wiel Brien Fund IV-A, LP, Wiel Brien SCFF Fund I, LP, Waypoint Fund I, LP, Waypoint Fund I-A, LP, Waypoint Fund II-A, LP, Waypoint/GI Venture, LLC and DC Real Estate Group, LLC (the “Waypoint Legacy Funds”), or the assets thereof. Waypoint Real Estate Group HoldCo, LLC (together with its predecessors, all affiliates and subsidiaries, the “Waypoint Manager”) agreed that the Waypoint Legacy Funds and the Waypoint Manager will no longer contract to acquire additional homes and will not contract to acquire single-family NPLs, except for (1) acquisitions of homes by a Waypoint Legacy Fund funded solely using proceeds of sales of other homes owned by such Waypoint Legacy Fund or (2) the acquisition of homes or portfolios of homes that do not meet our principal investment objectives. However, we own homes in some of the same geographic regions as the Waypoint Legacy Funds, and, as a result, we may compete for residents with the Waypoint Legacy Funds. This competition may affect our ability to attract and retain residents and may reduce the rents we are able to charge. If we are unable to lease our homes to suitable residents, we would be adversely affected and the value of our common shares could decline.

In addition, our Chief Operating Officer and other of our employees continue to own an indirect beneficial ownership interest in the Waypoint Manager. These individuals could make substantial profits as a result of opportunities or management resources allocated to the Waypoint Legacy Funds or entities other than us, and they may have greater financial incentives tied to the success of

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such entities than to us. In addition, the obligations of our officers and personnel to engage in business activities for the Waypoint Manager may reduce the time that such individuals spend managing us. For instance, when there are turbulent conditions in the real estate markets or distress in the credit markets, the attention of our executive officers and other personnel and our resources will also be required by the Waypoint Legacy Funds.

The Waypoint Manager manages homes owned by the Waypoint Legacy Funds. As a result, the Waypoint Manager, and thereby certain of our employees, may compete directly with us for financing opportunities, for leasing and in other aspects of our business, which could have an adverse effect on our business. The Waypoint Manager has no fiduciary duties to us and there is no assurance that any conflicts of interest between the Waypoint Manager and us will be resolved in favor of our shareholders.

Through one or more affiliates, the Waypoint Manager (1) is owned by certain of our employees and other third parties and (2) is permitted to continue to manage the assets and properties of the Waypoint Legacy Funds and to collect and retain for the Waypoint Manager’s sole account the net fee income and promoted interests in such entities. To facilitate these efforts, appropriate Waypoint Manager affiliates have been granted, during the duration of the Waypoint Legacy Funds’ existence, (1) a license to use our technology and operational platform and know-how and (2) in order to assist in the operation of homes owned by the Waypoint Legacy Funds, access to our employees. The Waypoint Manager does not have any employees of its own. Any expenses, including personnel and employee costs related to the Waypoint Manager or the Waypoint Legacy Funds, incurred by us are either reimbursed by the Waypoint Manager at actual cost or covered (in whole or in part) pursuant to an agreed upon arrangement with the Waypoint Manager.

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

Our related party transaction policy may not adequately address all of the conflicts of interest that may arise with respect to our investment activities and also may limit the allocation of investments to us.

In order to avoid any actual or perceived conflicts of interest with Starwood Capital Group, Colony Capital, Colony NorthStar and their respective affiliates, we have adopted a policy that specifically addresses some of the conflicts relating to our investment opportunities. Although under this policy the approval of a majority of our independent trustees is required to approve (1) any purchase of our assets by any of Starwood Capital Group, Colony Capital, Colony NorthStar or their respective affiliates and (2) any purchase by us of any assets of any of Starwood Capital Group, Colony Capital, Colony NorthStar or their respective affiliates, there is no assurance that this policy will adequately address all of the conflicts that may arise or will address such conflicts in a manner that results in the allocation of a particular investment opportunity to us or is otherwise favorable to us.

Risks Related to Our Common Shares

The market price of our common shares may decline as a result of the resale of common shares issued to Colony Capital and issuable to Starwood Capital Group upon conversion of OP Units issued in connection the Internalization and the Merger.

We have filed a registration statement covering certain of the shares and OP Units issued to Colony Capital, Colony NorthStar and Starwood Capital Group in connection with the Merger and the Internalization, and these shares are freely transferable without restriction.  Resale of these shares would increase the number of our common shares available for public trading. Sales of a substantial number of common shares in the public market, or the perception that such sales might occur, could have a material adverse effect on the price of common shares.

If an active trading market is not sustained for our common shares, our shareholders’ ability to sell shares when desired and the prices obtained will be adversely affected.

Our common shares are listed on the NYSE under the trading symbol “SFR.” However, there can be no assurance that an active trading market for our common shares will be maintained. Accordingly, no assurance can be given as to the ability of our shareholders to sell their common shares or the price that our shareholders may obtain for their common shares.

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

 

our actual or projected operating results, financial condition, cash flows and liquidity, or changes in business or growth strategies or prospects;

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the process surrounding and the impact of the Merger and the Internalization;

 

actual or perceived conflicts of interest with Starwood Capital Group, Colony Capital, Colony NorthStar, the Waypoint Manager, the Waypoint Legacy Funds and individuals, including our executives;

 

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

 

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

 

changes in market valuations of similar companies;

 

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

 

speculation in the press or investment community;

 

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

 

increases in market interest rates, which may lead investors to demand a higher distribution yield for our common shares, if we have begun to make distributions to our shareholders, and would result in increased interest expenses on our debt;

 

failure to maintain our REIT qualification;

 

price and volume fluctuations in the stock market generally; and

 

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

Market factors unrelated to our performance could also negatively impact the market price of our common shares. One of the factors that investors may consider in deciding whether to buy or sell our common shares is our distribution rate as a percentage of our share price relative to market interest rates. If market interest rates increase, prospective investors may demand a higher distribution rate or seek alternative investments paying higher dividends or interest. As a result, interest rate fluctuations and conditions in the capital markets can affect the market value of our common shares. For instance, if interest rates rise, it is likely that the market price of our common shares will decrease as market rates on interest-bearing securities increase.

There may be future dilution of our common shares as a result of additional issuances of our securities, which could adversely impact our share price.

Our board of trustees is authorized to, among other things, authorize the issuance of additional common shares or the issuance of preferred shares or additional securities convertible or exchangeable into equity securities (including OP Units), without shareholder approval. Future issuances of our common shares or preferred shares or securities convertible or exchangeable into equity securities may dilute the ownership interest of our existing shareholders. Because our decision to issue additional equity or convertible or exchangeable securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future issuances. In addition, we are not required to offer any such securities units to existing shareholders on a preemptive basis. Therefore, it may not be possible for existing shareholders to participate in such future issuances, which may dilute the existing shareholders’ interests in us. Additionally, any convertible or exchangeable securities that we issue may have rights, preferences and privileges more favorable than those of our common shares. Also, we cannot predict the effect, if any, of future sales of our common shares, or the availability of shares for future sales, on the market price of our common shares. Sales of substantial amounts of our common shares or the perception that such sales could occur may adversely affect the prevailing market price for our common shares.

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

We anticipate making regular quarterly distributions to holders of our common shares. U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its REIT taxable income. We generally intend over time to make quarterly distributions in an amount at least equal to our REIT taxable income. We intend to make distributions in cash to the extent that cash is available for such purpose. Although we anticipate initially making quarterly distributions to our shareholders, the timing, form and amount of distributions to our shareholders, if any, will be at the sole discretion of our board of trustees and will depend upon a number of factors, including our actual and projected results of operations, financial condition, cash flows and liquidity, maintenance of our REIT qualification and other tax considerations, capital expenditure and other obligations, debt covenants, contractual prohibitions or other limitations and applicable law and such other matters as our board of trustees may deem relevant from time to time.

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Among the factors that could impair our ability to make distributions to our shareholders are:

 

our inability to convert the homes we acquire into rental homes and to rent our homes at the rates we anticipate;

 

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

 

decreases in the value of our portfolio; and

 

defaults under or contractual restrictions in any lending or financing arrangement that we enter into.

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

Distributions to our shareholders will be generally taxable to them as ordinary income, although a portion of our distributions may be designated by us as capital gain or qualified dividend income or may constitute a return of capital. A return of capital is not taxable, but has the effect of reducing the basis of a shareholder’s investment in our common shares.

Offerings of additional debt or equity securities, which rank senior to our common shares, may adversely affect the market price of our common shares.

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

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

One of the factors that investors may consider in deciding whether to buy or sell our common shares is our dividend rate as a percentage of our share price, relative to market interest rates. If market interest rates increase, prospective investors may demand a higher dividend rate on our common shares or seek alternative investments paying higher dividends or interest. As a result, interest rate fluctuations and capital market conditions can affect the market price of our common shares. For instance, if interest rates rise without an increase in our dividend rate, the market price of our common shares could decrease because potential investors may require a higher dividend yield on our common shares 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 shareholders.

Risks Related to Our Organization and Structure

Certain provisions of Maryland law could inhibit changes in control of us.

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

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by the interested shareholder for its shares. These provisions of the MGCL do not apply, however, to business combinations that are approved or exempted by a board of trustees prior to the time that the interested shareholder becomes an interested shareholder. Pursuant to the statute, our board of trustees has by resolution exempted business combinations between us and any other person, provided that such business combination is first approved by our board of trustees (including a majority of our trustees who are not affiliates or associates of such person). This resolution, however, may be altered or repealed in whole or in part at any time. If this resolution is repealed, or our board of trustees does not otherwise approve a business combination, this statute may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer.

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

The “unsolicited takeover” provisions of the MGCL that are applicable to Maryland real estate investment trusts permit our board of trustees, without shareholder approval and regardless of what is currently provided in our declaration of trust or bylaws, to implement certain provisions as long as we have a class of equity securities registered under the Exchange Act and at least three independent trustees. These provisions may have the effect of inhibiting a third party from making an acquisition proposal for us or of delaying, deferring or preventing a change in control of us under the circumstances that otherwise could provide the holders of our common shares with the opportunity to realize a premium over the then current market price.

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

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

Certain provisions in the indentures governing the Convertible Notes could delay or prevent an otherwise beneficial takeover or takeover attempt of us.

Certain provisions in the Convertible Notes and the related indentures could make it more difficult or more expensive for a third party to acquire us. For example, if a takeover would constitute a fundamental change, holders of the Convertible Notes will have the right to require us to repurchase their Convertible Notes in cash. In addition, if a takeover constitutes a make-whole fundamental change, we may be required to increase the conversion rate for holders who convert their Convertible Notes in connection with such takeover. In either case, and in other cases, our obligations under the Convertible Notes and the indentures could increase the cost of acquiring us or otherwise discourage a third party from acquiring us or removing incumbent management.

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

Under Maryland law generally, a trustee’s actions will be upheld 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 declaration of trust limits the liability of our trustees and officers to us and our shareholders for money damages, except for liability resulting from:

 

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

 

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

Our declaration of trust authorizes us to indemnify our trustees 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 trustee or officer, to the maximum extent permitted by Maryland law, in the defense of any proceeding to which he or she is made, or threatened to be made, a party by reason

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of his or her service to us. In addition, we may be obligated to fund the defense costs incurred by our trustees and officers. As a result, we and our shareholders may have more limited rights against our trustees and officers than might otherwise exist absent the current provisions in our declaration of trust and bylaws or that might exist with other companies.

Our declaration of trust contains provisions that make removal of our trustees difficult, which could make it difficult for our shareholders to effect changes to our management.

Our declaration of trust provides that, subject to the rights of holders of any series of preferred shares, a trustee may only be removed for cause upon the affirmative vote of holders entitled to cast at least two-thirds of the votes entitled to be cast in the election of trustees. Vacancies may be filled only by a majority of the remaining trustees in office, even if less than a quorum. These requirements make it more difficult to change our management by removing and replacing trustees and may prevent a change in control of us that is in the best interests of our shareholders.

Ownership limitations may restrict changes in control of us in which our shareholders might receive a premium for their shares.

In order for us to qualify as a REIT for each taxable year, no more than 50% in value of our outstanding shares of beneficial interest may be owned, directly or indirectly, by five or fewer individuals during the last half of any calendar year. “Individuals” for this purpose include natural persons, private foundations, some employee benefit plans and trusts, and some charitable trusts. To preserve our REIT qualification, our declaration of trust generally prohibits any person from directly or indirectly owning 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 shares of beneficial interest. This ownership limitation could have the effect of discouraging a takeover or other transaction in which holders of our common shares might receive a premium for their shares over the then prevailing market price or which holders might believe to be otherwise in their best interests.

The REIT rules relating to prohibited transactions could affect our disposition of assets and adversely affect our profitability.

As described below in “—Risks Related to Our Taxation as a REIT—Gains from sales of our assets are potentially subject to the prohibited transactions tax or a corporate level income tax,” we intend to conduct our activities to avoid the prohibited transaction tax. However, the avoidance of this tax could reduce our liquidity and cause us to undertake less substantial sales of property than we would otherwise undertake in order to maximize our profits. In addition, we may have to sell numerous properties to a single or a few purchasers, which could cause us to be less profitable than would be the case if we sold properties on a property-by-property basis.

Risks Related to Our Taxation as a REIT

Our failure to qualify as a REIT in any taxable year would subject us to U.S. federal income tax and potentially state and local taxes, which would reduce the cash available for distribution to our shareholders.

We intend to operate and to be taxed as a REIT for federal income tax purposes. Our qualification as a REIT depends on our satisfaction of certain asset, income, organizational, distribution, shareholder ownership and other requirements on a continuing basis. Our ability to satisfy the asset tests depends upon our analysis of the characterization and fair values of our assets, some of which are not susceptible to a precise determination, and for which we will not obtain independent appraisals. Our compliance with the REIT income and quarterly asset requirements also depends upon our ability to successfully manage the composition of our income and assets on an ongoing basis. See “Risks Relating to Us Following the Internalization and the Merger - We may incur adverse tax consequences, if we or CAH has failed or fails to qualify as a REIT for U.S. federal income tax purposes.”

If we were to fail to qualify as a REIT in any taxable year, we would be subject to federal income tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates, and dividends paid to our shareholders would not be deductible by us in computing our taxable income. Any resulting corporate tax liability could be substantial and would reduce the amount of cash available for distribution to our shareholders, which in turn could have an adverse impact on the value of our common shares. Unless we were entitled to relief under certain Code provisions, we also would be disqualified from taxation as a REIT for the four taxable years following the year in which we failed to qualify as a REIT.

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

Dividends payable to domestic shareholders that are individuals, trusts, and estates are generally taxed at reduced tax rates. Dividends payable by REITs, however, generally are not eligible for the reduced rates. The more favorable rates applicable to regular corporate qualified dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the stock of REITs, including our common shares.

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REIT distribution requirements could adversely affect our ability to execute our business plan.

We generally must distribute annually at least 90% of our taxable income, subject to certain adjustments and excluding any net capital gain, in order for federal corporate income tax not to apply to earnings that we distribute. To the extent that we satisfy this distribution requirement, but distribute less than 100% of our 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 shareholders in a calendar year is less than a minimum amount specified under federal tax laws. We intend to make distributions to our shareholders to comply with the REIT requirements of the Code. From time to time, we may generate taxable income greater than our income for financial reporting purposes prepared in accordance with GAAP, or differences in timing between the recognition of taxable income and the actual receipt of cash may occur. As a result, we may find it difficult or impossible to meet distribution requirements in certain circumstances. In particular, where we experience differences in timing between the recognition of taxable income and the actual receipt of cash, the requirement to distribute a substantial portion of our taxable income could cause us to: (1) sell assets in adverse market conditions; (2) borrow on unfavorable terms; (3) distribute amounts that would otherwise be invested in future acquisitions, capital expenditures or repayment of debt; or (4) make a taxable distribution of shares of beneficial interest as part of a distribution in which shareholders may elect to receive shares (subject to a limit measured as a percentage of the total distribution), in order to comply with REIT requirements. These alternatives could increase our costs or reduce our equity. Thus, compliance with the REIT requirements may hinder our ability to grow, which could adversely affect the value of our common shares.

The share ownership limit imposed by the Code for REITs and our declaration of trust may restrict our business combination opportunities.

In order for us to maintain our qualification as a REIT under the Code, not more than 50% in value of our outstanding shares may be owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include certain entities) at any time during the last half of each taxable year following our first year. Our declaration of trust, with certain exceptions, authorizes our board of trustees to take the actions that are necessary and desirable to preserve our qualification as a REIT. Unless exempted by our board of trustees, no person may 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 shares of beneficial interest. Our board may grant an exemption in its sole discretion, subject to such conditions, representations and undertakings as it may determine appropriate in order to conclude that we will not lose our status as a REIT under the Code. The ownership limits imposed by the tax law are based upon direct or indirect ownership by “individuals,” but only during the last half of a tax year. The ownership limits contained in our declaration of trust are determined based on the ownership at any time by any “person,” which term includes entities. These ownership limitations in our declaration of trust are common in REIT charters and are intended to provide added assurance of compliance with the tax law requirements, and to minimize administrative burdens. However, these ownership limits might also delay or prevent a transaction or a change in our control that might otherwise be in the best interest of our shareholders.

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

Even if we remain qualified for taxation as a REIT, we may be subject to certain federal, state and local taxes on our income and assets, including taxes on any undistributed income and state or local income, property and transfer taxes, such as mortgage recording taxes. Many jurisdictions impose real property transfer taxes or recording fees on transfers of real property in a foreclosure, by a deed-in-lieu of foreclosure or by similar process, and make the transferee either jointly liable with the transferor for the tax or fee, or liable for the tax or fee in the event the transferor fails to pay it. In addition, in order to meet the REIT qualification requirements, prevent the recognition of certain types of non-cash income, 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 some of our assets through a TRS or other subsidiary corporations that will be subject to corporate-level income tax at regular rates. In addition, if we lend money to a TRS, the TRS may be unable to deduct all or a portion of the interest paid to us, which could result in an even higher corporate-level tax liability. Any of these taxes would decrease cash available for distribution to our shareholders.

Complying with REIT requirements may cause us to forego otherwise attractive investment opportunities or liquidate certain of our investments.

To qualify as a REIT for U.S. federal income tax purposes, we must on an ongoing basis satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our shareholders and the ownership of our shares of beneficial interest. We may be required to make distributions to our shareholders at disadvantageous times or when we do not have funds readily available for distribution. Thus, compliance with the REIT requirements may hinder our ability to make certain attractive investments.

33


Gains from sales of our assets are potentially subject to the prohibited transactions tax or a corporate level income tax.

Our ability to dispose of homes during the first few years following their acquisition is restricted to a substantial extent as a result of our REIT status. We will be subject to a 100% tax on any gain realized on the sale or other disposition of any homes we own, directly or through any subsidiary entity, but excluding any TRS, that is deemed to be inventory or property held primarily for sale to customers in the ordinary course of a trade or business other than “foreclosure property” as defined in the Code. Whether property is inventory or otherwise held primarily for sale to customers in the ordinary course of a trade or business depends on the particular facts and circumstances surrounding each property. To avoid the prohibited transaction tax, we may choose not to engage in certain sales at the REIT level, even though such sales might otherwise be beneficial to us. For example, we may be required to conduct acquisitions or dispositions through a TRS, which would be subject to federal corporate income tax, and our ownership of which would also be subject to certain limitations. While we intend to conduct our business to avoid the prohibited transactions tax and, where appropriate, the corporate income tax, there can be no assurance that the IRS will agree with our determinations, and that we will not be subject to the prohibited transactions tax or the corporate income tax on sales of property.

Re-characterization of leases as financings transactions may negatively affect us.

While we generally intend to use reasonable commercial efforts to structure any lease transaction so that the lease will be characterized as a “true lease,” with us treated as the owner and lessor of the property for federal income tax purposes, the IRS could challenge such characterization. In the event that any lease transaction is challenged and re-characterized as a seller-financed conditional sale transaction for federal income tax purposes, deductions for depreciation and cost recovery relating to such property would be disallowed. In addition, if we enter such transactions at the REIT level, in the event of re-characterization, the REIT could be subject to prohibited transaction taxes. Finally, the amount of our REIT taxable income could be recalculated, which might cause us to fail to meet the distribution requirement for a taxable year and require us to pay deficiency dividends, interest and penalty taxes in order to maintain REIT status.

We may choose to pay dividends in our own shares possibly requiring our shareholders to pay taxes in excess of the cash dividends they receive.

Although we have no current intention to do so, we may in the future distribute taxable dividends payable either in cash or our shares of beneficial interest at the election of each shareholder, but subject to a limitation on the amount of cash that may be distributed. Taxable shareholders receiving such dividends will be required to include the full amount of the dividend, whether received as cash or our shares of beneficial interest, as ordinary income to the extent of our current and accumulated earnings and profits for federal income tax purposes. As a result, shareholders may be required to pay income taxes with respect to such dividends in excess of the cash dividends received.

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

Qualification as a REIT involves the application of highly technical and complex Code provisions for which only limited judicial and administrative authorities exist. Even a technical or inadvertent violation could jeopardize our REIT qualification. Our qualification as a REIT depends on our satisfaction of certain asset, income, organizational, distribution, shareholder ownership and other requirements on a continuing basis. In addition, our ability to satisfy the requirements to qualify as a REIT depends in part on the actions of third parties over which we have no control or only limited influence, including in cases where we own an equity interest in an entity that is classified as a partnership for U.S. federal income tax purposes.

REIT and Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”) reform could reduce our flexibility in operating our business.

The Protecting Americans from Tax Hikes Act of 2015 (“PATH”) was enacted on December 18, 2015.  PATH includes various changes concerning REITs and with respect to FIRPTA.  Various technical changes made by PATH may affect us in future years.  In general, those changes are favorable to REITs and their shareholders, but this is not invariably the case.  For instance, for taxable years beginning after December 31, 2017, not more than 20% (25% under current law) of the value of our total assets may be represented by the securities of one or more TRSs.  We expect to continue to have one or more TRSs when this rule comes into effect, and may potentially have to modify our activities or the capital structure of those TRSs in order to comply with the new limitation and maintain our qualification as a REIT.  Although we intend to comply with this rule (and with all other PATH changes that are applicable to us) so long as we seek to maintain our qualification as a REIT, the changes required to do so could reduce our flexibility in operating our business.

34


Legislative or other actions could have a negative effect on our shareholders or us.

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

 

 

Item 1B.  Unresolved Staff Comments.

None.

 

 

Item 2.  Properties.

Our headquarters are located in Scottsdale, Arizona at 8665 East Hartford Drive.

The following table provides a summary of our portfolio of homes in our SFR segment as of December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

 

 

Average

 

 

Weighted

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

Non-

 

 

Number

 

 

 

 

Total

 

 

Acquisition

 

 

Average

 

 

Aggregate

 

 

Home Size

 

 

Average

 

 

Average

 

 

Monthly Rent

 

 

 

Stabilized

 

 

Stabilized

 

 

of

 

 

Stabilized

 

 

Portfolio

 

 

Cost

 

 

Investment

 

 

Investment

 

 

(square

 

 

Age

 

 

Year

 

 

Per Occupied

 

Markets

 

Homes(1)

 

 

Homes

 

 

Homes(2)(3)

 

 

Occupancy

 

 

Occupancy

 

 

Per Home(4)

 

 

Per Home

 

 

(in millions)

 

 

feet)

 

 

(years)

 

 

Purchased(5)

 

 

Home(6)

 

Atlanta

 

 

5,531

 

 

 

9

 

 

 

5,540

 

 

 

96.6

%

 

 

96.5

%

 

$

128,666

 

 

$

146,511

 

 

$

812

 

 

 

2,007

 

 

 

22

 

 

 

2014

 

 

$

1,307

 

Tampa

 

 

3,713

 

 

 

0

 

 

 

3,713

 

 

 

94.7

%

 

 

94.7

%

 

$

157,065

 

 

$

180,206

 

 

 

664

 

 

 

1,717

 

 

 

28

 

 

 

2014

 

 

$

1,478

 

Miami

 

 

3,674

 

 

 

7

 

 

 

3,681

 

 

 

95.8

%

 

 

95.6

%

 

$

208,516

 

 

$

226,863

 

 

 

831

 

 

 

1,723

 

 

 

39

 

 

 

2015

 

 

$

1,826

 

Southern California

 

 

2,776

 

 

 

5

 

 

 

2,781

 

 

 

96.8

%

 

 

96.7

%

 

$

273,838

 

 

$

309,113

 

 

 

853

 

 

 

1,713

 

 

 

41

 

 

 

2013

 

 

$

2,054

 

Houston

 

 

2,714

 

 

 

0

 

 

 

2,714

 

 

 

94.0

%

 

 

94.0

%

 

$

152,325

 

 

$

156,346

 

 

 

424

 

 

 

1,941

 

 

 

20

 

 

 

2015

 

 

$

1,506

 

Dallas

 

 

2,080

 

 

 

25

 

 

 

2,105

 

 

 

94.7

%

 

 

93.6

%

 

$

180,353

 

 

$

187,388

 

 

 

394

 

 

 

2,116

 

 

 

21

 

 

 

2015

 

 

$

1,650

 

Denver

 

 

1,992

 

 

 

48

 

 

 

2,040

 

 

 

94.5

%

 

 

92.3

%

 

$

208,912

 

 

$

227,357

 

 

 

463

 

 

 

1,765

 

 

 

34

 

 

 

2015

 

 

$

1,763

 

Orlando

 

 

1,939

 

 

 

0

 

 

 

1,939