Colony Starwood Homes (EPA:SFR) Files An 8-K Other Events
Item 8.01.Other Events.
Private Offering of Convertible Senior Notes
On January 3, 2017, Colony Starwood Homes (we, us, our and the
Company) issued a press release announcing that it has commenced
a private offering of $250 million aggregate principal amount of
its convertible senior notes due 2022 (the Convertible Senior
Notes). The Company plans to grant the initial purchasers a
30-day option to purchase up to an additional $37.5 million
aggregate principal amount of Convertible Senior Notes. The
Company intends to use the net proceeds from this offering to
repurchase, in privately negotiated transactions, certain of its
4.50% Convertible Senior Notes due 2017, to repay a portion of
the borrowings outstanding under its credit facilities, to fund
potential future acquisitions and for general corporate purposes.
A copy of the press release is attached as Exhibit 99.1 hereto
and incorporated herein by reference.
Neither the Convertible Senior Notes nor the common shares of
beneficial interest (our common shares) that may be issued upon
conversion thereof will be registered under the Securities Act of
1933, as amended (the Securities Act). Neither the Convertible
Senior Notes nor our common shares that may be issued upon
conversion thereof may be offered or sold in the United States
absent registration or an applicable exemption from the
registration requirements of the Securities Act.
This Current Report on Form 8-K shall not constitute an offer to
sell or a solicitation of an offer to buy nor shall there be any
sale of these securities in any state in which such offer,
solicitation or sale would be unlawful prior to registration or
qualification under the securities laws of any state.
Recent Developments
Portfolio and Operating Metrics as of November 30, 2016
As of November 30, 2016, the Companys portfolio consisted of
31,191 Owned Homes (as defined below) including 30,864 rental
homes (Rental Homes) and 327 homes that the Company does not
intend to hold for the long term. As of November 30, 2016,
approximately 94.3% of our Owned Homes were occupied and, for the
Companys Full Year Same Store (as defined below) portfolio of
22,384 homes, approximately 95.5% of the homes were occupied. As
of November 30, 2016, approximately 89.2% of our Rental Homes
were located in our top ten markets (Atlanta, Tampa, Miami,
Southern California, Houston, Dallas, Denver, Orlando, Las Vegas
and Phoenix).The following provides a summary of the Companys
updated operating metrics for the Full Year Same Store portfolio
of homes as of November 30, 2016:
Full Year Same Store Homes(1)
22,384
Full Year Same Store Average Monthly Rent(2)
$1,523
Full Year Same Store Home Occupancy(3)
95.5%
Full Year Same Store Year-to-date Renewal Rent
Growth(4)
5.0%
Full Year Same Store Year-to-date Replacement Rent
Growth(5)
4.6%
Full Year Same Store Year-to-date Blended Rent
Growth(6)
4.8%
Full Year Same Store Year-to-date Annualized
Turnover(7)
36.5%
(1)
Same Store Homes represents homes that have been
stabilized for at least 15 months prior to the start of
the measurement period, excluding any homes that have
been disposed of, removed from service or returned to the
development home pool for significant renovation.Full
Year Same Store represents homes that met the definition
of Same Store Homes as of January 1, 2016.
(2)
Average Monthly Rent represents (a) the aggregate monthly
contractual cash rent (excluding rent concessions and
incentives) for an identified population of occupied
rental units by (b) the number of rental units in the
identified population.
(3)
Occupancy represents the percentage of an identified
rental unit population occupied as of the measurement
period and is calculated by dividing (a) the number of
occupied units in such identified population of rental
units as of the last day of the measurement period by (b)
the number of rental units in such identified population
of rental units.
(4)
Renewal Rent Growth represents the percentage change in
monthly contractual rent resulting from all lease
renewals that became effective during a measurement
period for an identified population of rental units and
is calculated by dividing (a) the aggregate contractual
first month rent (excluding rent concessions and
incentives) on lease renewals executed during the
applicable measurement period for an identified
population of rental units by (b) the aggregate
contractual last month rent for such identified
population of rental units before renewal.
(5)
Replacement Rent Growth represents the percentage change
in monthly contractual rent resulting from new leases on
properties previously leased to different residents
during a measurement period for an identified population
of rental units and is calculated by dividing (a) the
aggregate contractual first month rent (excluding rent
concessions and incentives) on new leases signed during
the applicable measurement period for an identified
population of occupied rental units by (b) the aggregate
contractual last month rent for such identified
population of occupied rental units under the prior lease
on such properties.
(6)
Blended Rent Growth represents the weighted average rent
growth on all new leases (replacement leases) and
renewals during a measured period, and is calculated by
dividing (a) the aggregate contractual first month rent
on all new leases and lease renewals executed during the
applicable period for an identified population of
occupied rental units by (b) the aggregate contractual
last month rent for such identified population of
occupied rental units before renewal or new lease. This
calculation does not include lease escalations / step-ups
for multi-year leases.
(7)
Annualized Turnover is calculated by dividing (a) the
number of homes that become unoccupied during a period of
time by (b) the number of homes that had completed
initial renovation/rehabilitation and were leasable
during the specified period, expressed as an annualized
percentage (e.g., multiplying a three month turnover
measurement by four).
Owned Homes represents wholly-owned single family rental (SFR)
properties, is measured by the number of total rental units and
excludes real estate owned (REO) homes.
Acquisition and Disposition Activity
For the period from September 30, 2016 to November 30, 2016, the
Company purchased 321 homes with an aggregate acquisition cost of
$82.0 million (inclusive of capitalized acquisition and
renovation costs) and sold 140 homes for a gross aggregate
selling price of $21.4 million.
For the period from November 30, 2016 to December 31, 2016, the
Company anticipates total acquisitions of approximately 226 homes
with an aggregate acquisition cost of approximately $50.5 million
(inclusive of capitalized acquisition and renovation costs) and
anticipates selling approximately 83 homes for a gross aggregate
selling price of approximately $16.8 million.There is no
guarantee that such homes will be purchased or sold at the
expected prices, within the expected timeframe or at all.
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, local property management companies.
Our investment strategy involves purchasing a large number of
homes, renovating them to the extent necessary and leasing them
to qualified residents. No 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 and may not be able to
operate our business successfully or implement our operating
policies and business and growth strategies as described in this
offering memorandum. Our executive team only began managing the
particular assets in our portfolio upon completion of the merger
(the Merger) with
Colony American Homes, Inc. In addition, we significantly changed
the way our operations are managed upon completion of the
internalization of our former manager (the Internalization) and
the Merger. 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 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 contain 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
single-family sector
costs that are beyond our control, including title
litigation, litigation with residents or resident
organizations, legal compliance, real estate taxes,
homeowners association (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
judicial and regulatory developments affecting banks and
other mortgage holders ability to foreclose on delinquent
borrowers
reversal of 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 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 key executives, regional managers and other
personnel and may not be able to retain or replace these
employees or recruit additional qualified personnel, which could
harm our business.
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 key executives or personnel
could adversely impact our financial performance and our ability
to execute our strategies. In addition, our future success
depends on our ability to attract, train, manage and retain
highly skilled regional managers and qualified field personnel
such as construction and property management employees. There is
a high level of competition for these employees and our ability
to operate and expand our portfolio depends on our ability to
attract and retain these personnel. Competition for qualified
management and field personnel could require us to pay higher
wages or other compensation to attract a sufficient number of
employees. Turnover, which has historically been high among
entry-level or part-time personnel, increases the risk that our
employees will not have the training and experience needed to
provide competitive, high-quality services. 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 expand our scale of operations and make
acquisitions even if the rental and housing markets are not as
favorable as they have been in recent past, which could adversely
impact anticipated yields.
Our long-term growth depends on the availability of acquisition
opportunities within our target parameters in our target markets
at attractive pricing levels. We believe various factors and
market conditions have made single-family assets available for
purchase at prices that are below replacement costs. We expect
that in the future housing prices will continue to stabilize and
return to more normalized levels and therefore future
acquisitions may be more costly. The following factors, among
others, are making acquisitions more expensive:
improvements in the overall economy and job market
a resumption of consumer lending activity and greater
availability of consumer credit
improvements in the pricing and terms of mortgage-backed
securities
the emergence of increased competition for single-family
assets from private investors and entities with similar
investment objectives to ours and
tax or other government incentives that encourage
homeownership.
We have not adopted and do not expect to adopt a policy of making
future acquisitions only if they are accretive to existing yields
and distributable cash. We plan to continue acquiring homes 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
target markets and in the SFR sector of the real estate industry,
which exposes us to downturns in our target markets or in the SFR
sector.
Our investments in homes are and will continue to be concentrated
in our target 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 target markets may have a
greater impact on the value of our homes or our operating results
than if we had more fully diversified our investments. While we
have limited experience in this sector, we believe that there may
be some 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 target markets. A signification
portion of our home 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 homes values and operating fundamentals for homes in
these markets will improve significantly over the next several
years. 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 homes values and operating
fundamentals in these markets will improve, if at all. If 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, which could
adversely affect us and cause the value of our common shares to
decline.
Competition in identifying and acquiring homes could adversely
affect our ability to implement our business and growth
strategies, which could materially and adversely affect us.
Our profitability will depend, to a large extent, on our ability
to acquire homes on an individual basis and/or in portfolios at
attractive prices that we can successfully convert into rental
homes. Traditionally, foreclosed homes and loans in respect of
homes in pre-foreclosure were sold individually to private home
buyers and small scale investors. The entry into this market of
large, well-capitalized institutional investors, including us, is
a relatively recent trend. Several other real estate investment
trusts (REITs) and private funds have recently deployed, or are
expected to deploy, significant amounts of capital to the
acquisition of homes and may have investment objectives that
overlap with ours. 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 are larger and may
have considerably greater financial, technical, leasing,
marketing and 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 homes 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 objective 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.
Our homes face substantial competition for suitable residents.
Competing homes may be newer, better located and more attractive
to residents. Potential competitors may have lower rates of
occupancy than we do and/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
rents than we might offer at our homes. This competition may
affect our ability to attract and retain residents and may reduce
the rents we are able to charge. We could also be adversely
affected by any overbuilding or high vacancy rates of homes in
markets where we acquire homes, which could result in an excess
supply of homes and reduce occupancy and rental rates. In
addition, if improvements in the economy and housing market
permit would-be buyers, who had turned to the rental market, to
acquire homes, we may experience increased difficulty in locating
a sufficient number of suitable residents to lease our homes. 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.
Improving economic conditions, combined with low residential
mortgage rates, may cause some potential renters to seek to
purchase residences rather than lease them and, as a result,
cause a decline in the number and quality of potential residents.
Improving economic conditions, along with low residential
mortgage interest rates currently available and government
sponsored programs to promote home ownership, has made home
ownership more affordable and more accessible for potential
renters who have strong credit. 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.
Mortgage loan modification programs and future legislative action
may adversely affect the number of available homes that meet our
investment criteria.
The U.S. government, through the Federal Reserve, the Federal
Housing Administration and the Federal Deposit Insurance
Corporation (FDIC) has implemented a number of programs designed
to provide homeowners
with assistance in avoiding residential mortgage loan
foreclosures, including the Home Affordable Modification Program,
which seeks to provide relief to homeowners whose mortgages are
in or may be subject to foreclosure, and the Home Affordable
Refinance Program, which allows certain borrowers who are
underwater on their mortgage but current on their mortgage
payments to refinance their loans. Several states, including
states in which our current target markets are located, have
adopted or are considering similar legislation. These programs
and other loss mitigation programs may involve, among other
things, modifying or refinancing mortgage loans or providing
homeowners with additional relief from loan foreclosures. Such
loan modifications and other measures are intended and designed
to lead to fewer foreclosures and may decrease the supply of
homes that meet our investment criteria. The pace of residential
foreclosures is subject to numerous factors. Recently, there has
been a backlog of foreclosures due to a combination of volume
constraints and legal actions, including those brought by the
U.S. Department of Justice, the Department of Housing and Urban
Development, and State Attorneys General against mortgage
servicers alleging wrongful foreclosure practices. Financial
institutions also have been subjected to regulatory restrictions
and limitations on foreclosure activity by the FDIC. Settlements
of legal actions such as these may help homeowners avoid
foreclosure through mortgage modifications, and servicers may be
required to adopt specified measures to reduce mortgage
obligations in certain situations. As a result, settlements such
as these may help many homeowners to avoid foreclosures that
would otherwise have occurred in the near term, and with lower
monthly payments and mortgage debts, for years to come.
In addition, numerous federal and state legislatures have
considered, proposed or adopted legislation to constrain
foreclosures, or may do so in the future. The Dodd-Frank Wall
Street Reform and Consumer Protection Act of 2010 also created
the Consumer Financial Protection Bureau, which supervises and
enforces federal consumer protection laws as they apply to banks,
credit unions, and other financial companies, including mortgage
servicers. It remains uncertain as to whether any of these
measures will have a significant impact on foreclosure volumes or
what the timing of that impact would be. If foreclosure volumes
were to decline significantly, we would expect REO inventory
levels to decline or to grow at a slower pace, which would make
it more difficult to find target assets at attractive prices and
might constrain our growth or reduce our long-term profitability.
Also, the number of families seeking rental housing might be
reduced by such legislation, reducing rental housing demand in
our target markets.
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, become more actively
involved in enforcing state laws governing foreclosures and
imposing new rules and requirements regarding foreclosures in
order to restrict and reduce foreclosures. As an example, some
courts have delayed or prohibited foreclosures based on alleged
failures to comply with proper transfers of title, notice,
identification of parties in interest, documentation and other
legal requirements. Further, foreclosed owners and their legal
representatives, including some prominent and well-financed 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.
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 and licensing
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. 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.
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.
Purchasing homes through the foreclosure auction process will
subject us to significant risks that could adversely affect us.
Our business plan involves acquiring homes through the
foreclosure auction process simultaneously in a number of
markets, which involves monthly foreclosure auctions on the same
day of the month in certain markets. As a result, we are only
able to visually inspect properties from the street and must
purchase these homes without a contingency 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. Securing control and possession from these occupants
can be both costly and time-consuming.
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.
Homes 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 home is put into foreclosure due to a default by the
homeowner on its mortgage obligations or the value of the home is
substantially below the outstanding principal balance on the
mortgage and the homeowner decides to seek a short sale, the
homeowner may abandon the home or cease to maintain the home as
rigorously as the homeowner normally would. Neglected and vacant
homes 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 homes 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 be permitted to perform on-site inspections of homes
in a bulk portfolio sale until we acquire such assets, and we may
face unanticipated costly repairs at such homes.
When we acquire a portfolio of homes, we may not be permitted, or
it may not be feasible for us, to perform on-site inspections of
all or any of the homes in the portfolio prior to our acquisition
of the portfolio. As a result, the value of any such homes could
be lower than we anticipated at the time of acquisition, and/or
such homes 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 homes that are subject to contingent or unknown
liabilities, including liabilities for or with respect to liens
attached to homes, 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 homes acquired at
auction, in short sales, from lenders or in bulk purchases
typically involve few or no representations or warranties with
respect to the homes. 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 homes we acquire may be subject to covenants,
conditions or restrictions that restrict the use or ownership of
such homes, 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 a Florida statutory scheme implemented by certain Florida
jurisdictions, a violation of the relevant building codes, zoning
codes or other similar regulations applicable to a property may
result in a lien on that property and all other properties owned
by the same violator and located in the same county as the
property with the code violation, even though the other
properties might not be in violation of any code. Until a
municipal inspector verifies that the violation has been remedied
and any applicable fines have been paid, additional fines accrue
on the amount of the lien and lien may not be released, in each
case even at those properties that are not in violation. As a
practical matter, it might be possible to obtain a release of
these liens without remedying the 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 homes could be difficult to lease, which could adversely
affect our revenues.
The homes we acquire may often be vacant at the time of closing
and we may not be successful in locating residents to lease the
individual homes 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 homes without longer-than-assumed delays.
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. In addition, the value of a vacant home could
be substantially impaired.
We rely on information supplied by prospective residents in
managing our business.
We rely on information supplied to us by prospective residents in
their rental applications as part of our due diligence process 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. 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 leasing
decisions and our portfolio may contain more credit risk than we
believe.
We depend on our residents and their willingness to renew their
leases for a substantial portion 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 residents for a substantial portion of our revenues.
As a result, our success depends in large part upon our ability
to attract and retain qualified residents for our homes. 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 homes for illegal purposes, damage or make unauthorized
structural changes to our homes that are not covered by security
deposits, refuse to leave the home upon termination of the lease,
engage in domestic violence or similar disturbances, disturb
nearby residents with noise, trash, odors or eyesores, fail to
comply with HOA regulations, sublet to less desirable individuals
in violation of our lease or permit
unauthorized persons to live with them. Damage to our homes may
delay re-leasing after eviction, necessitate expensive repairs or
impair the rental revenue or value of the home resulting in a
lower-than-expected rate of return. Widespread unemployment and
other adverse changes in the economic conditions in our target
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 home and will
incur costs in protecting our investment and re-leasing the home.
Our leases are relatively short-term in nature, which exposes us
to the risk that we may have to re-lease our rental homes
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 to
two years and in certain cases month-to-month, which exposes us
to the risk that we may have to re-lease our rental homes
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. 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 to two years, we may
miss out on the ability to raise rents in an appreciating market
and be locked into a lower rent until such lease expires. If the
rental rates for our rental homes decrease or our residents do
not renew their leases, we could be materially and adversely
affected.
Many factors impact the SFR market, and if rents in our target
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 target markets. Our home acquisitions
are premised on assumptions about occupancy levels and rental
rates, 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 homes will decrease and the
competition for residents may intensify. A softening of the
rental market in our target areas would reduce our rental revenue
and profitability.
We may not have control over timing and costs arising from
renovating our homes, and the cost of maintaining rental homes 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 home
and its contents and generally do not participate in any
appreciation of the home. Accordingly, renters may damage a home
and its contents, and may not be forthright in reporting damages
or amenable to repairing them completely or at all. A rental home
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 home was
originally leased. Accordingly, the cost of maintaining rental
homes 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 homes are built in order to build roads and
other infrastructure. Any such exercise of eminent domain would
allow us to recover only the fair value of the affected homes.
Our investment strategy is premised on the concept that this fair
value will be substantially less than the real value of the home
for a number of years, and we could effectively have no profit
potential from properties acquired by the government through
eminent domain. Several cities also are exploring
proposals to use eminent domain to acquire mortgages to assist
homeowners to remain in their homes, potentially reducing the
supply of homes in our target markets.
A significant number of our homes 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 or enact onerous or arbitrary rules
that restrict our ability to renovate, market or lease our homes
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. Additionally, the boards of directors of
the HOAs in which we own homes may not make important disclosures
about the homes or may block our access to HOA records, initiate
litigation, restrict our ability to sell our homes, impose
assessments or arbitrarily change the HOA rules. We may be
unaware of or unable to review or comply with HOA rules before
purchasing the home, and any such excessively restrictive or
arbitrary regulations may cause us to sell such home at a loss,
prevent us from renting such home or otherwise reduce our cash
flow from such home, which would have an adverse effect on our
returns on these homes.
Our revenue and expenses are not directly correlated, and,
because a large percentage of our costs and expenses are fixed,
we may not be able to adapt our cost structure to offset declines
in our revenue.
Most of the expenses associated with our business, such as
acquisition costs, renovation and maintenance costs, real estate
taxes, HOA fees, personal and ad valorem taxes, insurance,
utilities, employee wages and benefits and other general
corporate expenses, are relatively inflexible and will not
necessarily decrease with reduction in revenue from our business.
Our assets also are prone to depreciation and will require a
significant amount of ongoing capital expenditures. Our expenses
and ongoing capital expenditures also will be affected by
inflationary increases, and certain of our cost increases may
exceed the rate of inflation in any given period. By contrast,
our rental revenue is affected by many factors beyond our control
such as the availability of alternative rental housing and
economic conditions in our target markets. In addition, state and
local regulations may require us to maintain homes that we own,
even if the cost of maintenance is greater than the value of the
home or any potential benefit from renting the home. As a result,
we may not be able to fully offset rising costs and capital
spending by higher rental rates, which could have a material
adverse effect on our results of operations and cash available
for distribution.
Fair values of our investments are imprecise and may materially
and adversely affect our operating results and credit
availability, which, in turn, would materially and adversely
affect us.
The values of our investments may not be readily determinable. We
evaluate our loans held for investment for impairment whenever
events or changes in circumstances indicate that their carrying
amount may not be recoverable. Ultimate realization of the value
of an investment depends to a great extent on economic and other
conditions that are beyond our control. Further, fair value is
only an estimate based on good faith judgment of the price at
which an investment can be sold since market prices of
investments can only be determined by negotiation between a
willing buyer and seller. In certain cases, our estimation of the
fair value of our investments will include inputs provided by
third-party dealers and pricing services, and valuations of
certain securities or other assets in which we invest are often
difficult to obtain and are subject to judgments that may vary
among market participants. If we were to liquidate a particular
investment, the realized value may be more than or less than the
amount at which such investment was recorded. Accordingly, in
either event, we could be materially and adversely affected by
our determinations regarding the fair value of our investments,
and such valuations may fluctuate over short periods of time.
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)
and issues with local housing officials arising from the
condition or maintenance of the home. 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 target 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 large settlements
identified below and 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 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 a