Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q

 


 

(Mark One)

 

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

 

For the quarterly period ended March 31, 2015

 

or

 

o         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 001-36013

 


 

AMERICAN HOMES 4 RENT

(Exact name of registrant as specified in its charter)

 


 

 

Maryland

 

46-1229660

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

30601 Agoura Road, Suite 200

Agoura Hills, California 91301

(Address of principal executive offices) (Zip Code)

 

(805) 413-5300

(Registrant’s telephone number, including area code)

 


 

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.    x  Yes    o  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).    x  Yes    o  No

 

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

 

Large accelerated filer  x

 

Accelerated filer  o

 

 

 

Non-accelerated filer  o

 

Smaller reporting company  o

(Do not check if a smaller reporting company)

 

 

 

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

 

There were 210,852,089 Class A common shares of beneficial interest, $0.01 par value per share, and 635,075 Class B common shares of beneficial interest, $0.01 par value per share, outstanding on May 6, 2015.

 

 

 



Table of Contents

 

American Homes 4 Rent

Form 10-Q

INDEX

 

 

 

Page

PART I

FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

1

 

 

 

Item 2.

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

16

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

27

 

 

 

Item 4.

Controls and Procedures

27

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

28

 

 

 

Item 1A.

Risk Factors

28

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

28

 

 

 

Item 3.

Defaults Upon Senior Securities

28

 

 

 

Item 4.

Mine Safety Disclosures

28

 

 

 

Item 5.

Other Information

28

 

 

 

Item 6.

Exhibits

28

 

 

 

 

Signatures

29

 

 

 

 

Exhibit Index

 

 



Table of Contents

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Various statements contained in this Quarterly Report on Form 10-Q of American Homes 4 Rent (the “Company,” “we,” “our” and “us”), including those that express a belief, expectation or intention, as well as those that are not statements of historical fact, are forward-looking statements. These forward-looking statements may include projections and estimates concerning the timing and success of specific projects and our future revenues, income and capital spending. Our forward-looking statements are generally accompanied by words such as “estimate,” “project,” “predict,” “believe,” “expect,” “intend,” “anticipate,” “potential,” “plan,” “goal” or other words that convey the uncertainty of future events or outcomes. We have based these forward-looking statements on our current expectations and assumptions about future events. While our management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond our control. These and other important factors, including those discussed or incorporated by reference under Part II, Item 1A.”Risk Factors”, Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report and in our Annual Report on Form 10-K for the year ended December 31, 2014, filed with the Securities and Exchange Commission, may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements.

 

While forward-looking statements reflect our good faith beliefs, assumptions and expectations, they are not guarantees of future performance, and you should not unduly rely on them. The forward-looking statements in this Quarterly Report on Form 10-Q speak only as of the date of this report. We are not obligated to update or revise these statements as a result of new information, future events or otherwise, unless required by applicable law.

 



Table of Contents

 

PART I

FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

American Homes 4 Rent

Condensed Consolidated Balance Sheets

(Amounts in thousands, except share and per share data)

 

 

 

March 31, 2015

 

December 31, 2014

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Single-family properties:

 

 

 

 

 

Land

 

$

1,166,186

 

$

1,104,409

 

Buildings and improvements

 

5,117,269

 

4,808,706

 

Single-family properties held for sale

 

5,428

 

3,818

 

 

 

6,288,883

 

5,916,933

 

Less: accumulated depreciation

 

(251,528

)

(206,262

)

Single-family properties, net

 

6,037,355

 

5,710,671

 

Cash and cash equivalents

 

115,693

 

108,787

 

Restricted cash

 

86,446

 

77,198

 

Rent and other receivables, net

 

11,289

 

11,009

 

Escrow deposits, prepaid expenses and other assets

 

114,179

 

118,783

 

Deferred costs and other intangibles, net

 

65,267

 

54,582

 

Asset-backed securitization certificates

 

25,666

 

25,666

 

Goodwill

 

120,655

 

120,655

 

Total assets

 

$

6,576,550

 

$

6,227,351

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Credit facility

 

$

45,000

 

$

207,000

 

Asset-backed securitizations

 

2,068,389

 

1,519,390

 

Secured note payable

 

51,417

 

51,644

 

Accounts payable and accrued expenses

 

141,382

 

149,706

 

Amounts payable to affiliates

 

2,609

 

 

Contingently convertible Series E units liability

 

70,219

 

72,057

 

Preferred shares derivative liability

 

57,840

 

57,960

 

Total liabilities

 

2,436,856

 

2,057,757

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Class A common shares, $0.01 par value per share, 450,000,000 shares authorized, 210,852,089 and 210,838,831 shares issued and outstanding at March 31, 2015, and December 31, 2014, respectively

 

2,108

 

2,108

 

Class B common shares, $0.01 par value per share, 50,000,000 shares authorized, 635,075 shares issued and outstanding at March 31, 2015, and December 31, 2014

 

6

 

6

 

Preferred shares, $0.01 par value per share, 100,000,000 shares authorized, 17,060,000 issued and outstanding at March 31, 2015, and December 31, 2014

 

171

 

171

 

Additional paid-in capital

 

3,618,769

 

3,618,207

 

Accumulated deficit

 

(198,526

)

(170,162

)

Accumulated other comprehensive loss

 

(229

)

(229

)

Total shareholders’ equity

 

3,422,299

 

3,450,101

 

 

 

 

 

 

 

Noncontrolling interest

 

717,395

 

719,493

 

Total equity

 

4,139,694

 

4,169,594

 

 

 

 

 

 

 

Total liabilities and equity

 

$

6,576,550

 

$

6,227,351

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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American Homes 4 Rent

Condensed Consolidated Statements of Operations

(Amounts in thousands, except share and per share data)

(Unaudited)

 

 

 

For the Three Months

 

 

 

Ended March 31,

 

 

 

2015

 

2014

 

Revenues:

 

 

 

 

 

Rents from single-family properties

 

$

120,680

 

$

73,761

 

Fees from single-family properties

 

1,331

 

1,358

 

Tenant charge-backs

 

8,372

 

1,890

 

Other

 

1,365

 

269

 

Total revenues

 

131,748

 

77,278

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

Property operating expenses

 

 

 

 

 

Leased single-family properties

 

53,930

 

29,266

 

Vacant single-family properties and other

 

5,972

 

9,043

 

General and administrative expense

 

6,131

 

5,074

 

Interest expense

 

15,670

 

1,502

 

Noncash share-based compensation expense

 

696

 

532

 

Acquisition fees and costs expensed

 

5,908

 

452

 

Depreciation and amortization

 

53,664

 

35,131

 

Total expenses

 

141,971

 

81,000

 

 

 

 

 

 

 

Remeasurement of Series E units

 

1,838

 

(2,756

)

Remeasurement of Preferred shares

 

120

 

(457

)

 

 

 

 

 

 

Net loss

 

(8,265

)

(6,935

)

 

 

 

 

 

 

Noncontrolling interest

 

3,956

 

3,620

 

Dividends on preferred shares

 

5,569

 

3,121

 

 

 

 

 

 

 

Net loss attributable to common shareholders

 

$

(17,790

)

$

(13,676

)

 

 

 

 

 

 

Weighted-average shares outstanding—basic and diluted

 

211,481,727

 

185,504,294

 

 

 

 

 

 

 

Net loss attributable to common shareholders per share—basic and diluted

 

$

(0.08

)

$

(0.07

)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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American Homes 4 Rent

Condensed Consolidated Statements of Comprehensive Income

(Amounts in thousands)

(Unaudited)

 

 

 

For the Three Months

 

 

 

Ended March 31,

 

 

 

2015

 

2014

 

Net loss

 

$

(8,265

)

$

(6,935

)

Other comprehensive loss

 

 

 

Comprehensive loss

 

(8,265

)

(6,935

)

Comprehensive income attributable to noncontrolling interests

 

3,956

 

3,620

 

Dividends on preferred shares

 

5,569

 

3,121

 

Comprehensive loss attributable to common shareholders

 

$

(17,790

)

$

(13,676

)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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American Homes 4 Rent

Condensed Consolidated Statement of Equity

(Amounts in thousands, except share data)

(Unaudited)

 

 

 

Class A common shares

 

Class B common shares

 

Preferred shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Accumulated other

 

 

 

 

 

 

 

 

 

Number

 

 

 

Number

 

 

 

Number

 

 

 

paid-in

 

Accumulated

 

comprehensive

 

Shareholders’

 

Noncontrolling

 

Total

 

 

 

of shares

 

Amount

 

of shares

 

Amount

 

of shares

 

Amount

 

capital

 

deficit

 

loss

 

equity

 

interest

 

equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2014

 

210,838,831

 

$

2,108

 

635,075

 

$

6

 

17,060,000

 

$

171

 

$

3,618,207

 

$

(170,162

)

$

(229

)

$

3,450,101

 

$

719,493

 

$

4,169,594

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation

 

 

 

 

 

 

 

696

 

 

 

696

 

 

696

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued under share-based compensation plans, net of shares withheld for employee taxes

 

13,258

 

 

 

 

 

 

(134

)

 

 

(134

)

 

(134

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions to equity holders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred shares

 

 

 

 

 

 

 

 

(5,569

)

 

(5,569

)

 

(5,569

)

Noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

(6,054

)

(6,054

)

Common shares

 

 

 

 

 

 

 

 

(10,574

)

 

(10,574

)

 

(10,574

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

 

 

 

 

 

 

 

(12,221

)

 

(12,221

)

3,956

 

(8,265

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at March 31, 2015

 

210,852,089

 

$

2,108

 

635,075

 

$

6

 

17,060,000

 

$

171

 

$

3,618,769

 

$

(198,526

)

$

(229

)

$

3,422,299

 

$

717,395

 

$

4,139,694

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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American Homes 4 Rent

Condensed Consolidated Statements of Cash Flows

(Amounts in thousands)

(Unaudited)

 

 

 

For the Three Months

 

 

 

Ended March 31,

 

 

 

2015

 

2014

 

Operating activities

 

 

 

 

 

Net loss

 

$

(8,265

)

$

(6,935

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

53,664

 

35,131

 

Noncash amortization of deferred financing costs

 

1,377

 

163

 

Noncash share-based compensation

 

696

 

532

 

Provision for bad debt

 

1,271

 

1,423

 

Remeasurement of Series E units

 

(1,838

)

2,756

 

Remeasurement of Preferred shares

 

(120

)

457

 

Equity in net loss of unconsolidated ventures

 

96

 

 

Other changes in operating assets and liabilities:

 

 

 

 

 

Rent and other receivables

 

(2,578

)

(445

)

Restricted cash for resident security deposits

 

(4,209

)

(6,156

)

Prepaid expenses and other assets

 

(2,819

)

3,237

 

Deferred leasing costs

 

(2,410

)

(972

)

Accounts payable and accrued expenses

 

(17,117

)

3,972

 

Resident security deposit liability

 

4,209

 

6,156

 

Amounts payable to affiliates

 

6,957

 

7,872

 

Net cash provided by operating activities

 

28,914

 

47,191

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

Cash paid for single-family properties

 

(292,735

)

(341,064

)

Escrow deposits for purchase of single-family properties

 

(2,259

)

7,378

 

Increase in restricted cash related to lender requirements

 

(5,039

)

 

Investment in unconsolidated joint ventures

 

(2

)

 

Investments in mortgage financing receivables

 

(6,633

)

 

Initial renovations to single-family properties

 

(60,047

)

(45,388

)

Other capital expenditures for single-family properties

 

(6,457

)

 

Net cash used for investing activities

 

(373,172

)

(379,074

)

 

 

 

 

 

 

Financing activities

 

 

 

 

 

Net proceeds from issuance of Preferred shares

 

 

9,162

 

Proceeds from asset-backed securitizations

 

552,830

 

 

Payments on asset-backed securitizations

 

(3,831

)

 

Proceeds from credit facility

 

346,000

 

321,000

 

Payments on credit facility

 

(508,000

)

(25,000

)

Payments on secured note

 

(227

)

 

Distributions to noncontrolling interests

 

(6,054

)

(5,975

)

Distributions to common shareholders

 

(10,574

)

(9,274

)

Distributions to preferred shareholders

 

(5,569

)

(3,121

)

Deferred financing costs paid

 

(13,411

)

(649

)

Net cash provided by financing activities

 

351,164

 

286,143

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

6,906

 

(45,740

)

Cash and cash equivalents, beginning of period

 

108,787

 

148,989

 

Cash and cash equivalents, end of period

 

$

115,693

 

$

103,249

 

 

 

 

 

 

 

Supplemental cash flow information

 

 

 

 

 

Cash payments for interest

 

$

(13,895

)

$

(3,202

)

 

 

 

 

 

 

Supplemental schedule of noncash investing and financing activities

 

 

 

 

 

Accounts payable and accrued expenses related to property acquisitions

 

$

4,450

 

$

(943

)

Amounts payable to affiliates related to property acquisitions

 

$

 

$

2,565

 

Accrued distribution to Series C convertible units

 

$

4,698

 

$

5,196

 

Accrued distribution to common shareholders

 

$

 

$

9,275

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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American Homes 4 Rent

Notes to Unaudited Condensed Consolidated Financial Statements

 

Note 1. Organization and operations

 

American Homes 4 Rent (the “Company,” “we,” “our” and “us”) is a Maryland real estate investment trust (“REIT”) formed on October 19, 2012. We are focused on acquiring, renovating, leasing and operating single-family homes as rental properties. As of March 31, 2015, the Company held 36,588 single-family properties in 22 states, including 35 properties held for sale.

 

From our formation through June 10, 2013, we were externally managed and advised by American Homes 4 Rent Advisor, LLC (the “Advisor”) and the leasing, managing and advertising of our properties was overseen and directed by American Homes 4 Rent Management Holdings, LLC (the “Property Manager”), both of which were subsidiaries of American Homes 4 Rent, LLC (“AH LLC”). On June 10, 2013, we acquired the Advisor and the Property Manager from AH LLC in exchange for 4,375,000 Series D units and 4,375,000 Series E units in American Homes 4 Rent, L.P. (the “Operating Partnership”) (the “Management Internalization”). Under the terms of the contribution agreement, all administrative, financial, property management, marketing and leasing personnel, including executive management, became fully dedicated to us. Since the date of the Management Internalization, the Company has consolidated the Advisor and the Property Manager and the results of these operations are reflected in the condensed consolidated financial statements.

 

Prior to the Management Internalization, AH LLC exercised control over the Company through the contractual rights provided to the Advisor through an advisory management agreement. Accordingly, the contribution of certain properties by AH LLC to the Company prior to the Management Internalization have been deemed to be transactions between entities under common control, and as such, the accounts relating to the properties contributed have been recorded by us as if they had been acquired by us on the dates such properties were acquired by AH LLC. Accordingly, the condensed consolidated financial statements include AH LLC’s historical carrying values of the properties that had been acquired by AH LLC.

 

Note 2. Significant accounting policies

 

Basis of Presentation

 

The condensed consolidated financial statements are unaudited and include the accounts of the Company, the Operating Partnership and its consolidated subsidiaries. Intercompany accounts and transactions have been eliminated. The Company consolidates real estate partnerships and other entities that are not variable interest entities (“VIEs”) when it owns, directly or indirectly, a majority interest in the entity or is otherwise able to control the entity. The Company consolidates VIEs in accordance with Accounting Standards Codification (“ASC”) No. 810, Consolidation, if it is the primary beneficiary of the VIE as determined by its power to direct the VIE’s activities and the obligation to absorb its losses or the right to receive its benefits, which are potentially significant to the VIE. Entities for which the Company owns an interest, but does not consolidate, are accounted for under the equity method of accounting as an investment in unconsolidated subsidiary and are included in escrow deposits, prepaid expenses and other assets within the condensed consolidated balance sheets. Ownership interests in certain consolidated subsidiaries of the Company held by outside parties are included in noncontrolling interest in the condensed consolidated financial statements.

 

The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and in conjunction with the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures required for annual financial statements have been condensed or excluded pursuant to SEC rules and regulations. Accordingly, the condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. In the opinion of management, all adjustments of a normal and recurring nature necessary for a fair presentation of the condensed consolidated financial statements for the interim periods have been made. The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

There have been no changes to our significant accounting policies that have had a material impact on our condensed consolidated financial statements and related notes, compared to those policies disclosed in our Annual Report on Form 10-K for the

 

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fiscal year ended December 31, 2014. Therefore, notes to the condensed consolidated financial statements that would substantially duplicate the disclosures contained in our most recent audited consolidated financial statements have been omitted.

 

Recent Accounting Pronouncements

 

In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-08, Presentation of Financial Statements, Reporting Discontinued Operations and Disclosure of Disposals of Components of an Entity, which changes the criteria for reporting discontinued operations. Under the new guidance, only disposals representing a strategic shift in operations such as a major line of business, major geographic area or a major equity method investment, should be presented as discontinued operations. In addition the new guidance requires expanded disclosures about discontinued operations that will provide more information about the assets, liabilities, income and expenses of discontinued operations. The guidance is effective for all disposals of components (or classifications as held for sale) that occur within annual periods beginning on or after December 15, 2014. The Company’s adoption of this guidance did not have a material impact on our financial statements.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which provides guidance on revenue recognition and supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, most industry-specific guidance and some cost guidance included in Subtopic 605-35, “Revenue Recognition—Construction-Type and Production-Type Contracts.” The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under current guidance. These judgments may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The guidance will be effective for the Company for annual reporting periods beginning after December 15, 2017, and for interim periods within those annual periods. At that time, the Company may adopt the full retrospective approach or the modified retrospective approach. Early adoption is not permitted. The Company is currently evaluating the method of adoption of this guidance and does not anticipate that the adoption of this guidance will have a material impact on the Company’s financial statements.

 

Note 3. Single-family properties

 

Single-family properties, net, consists of the following as of March 31, 2015, and December 31, 2014 (dollars in thousands):

 

 

 

March 31, 2015

 

 

 

Number of properties

 

Net book value

 

Leased single-family properties

 

31,183

 

$

5,112,511

 

Single-family properties being renovated

 

1,863

 

293,221

 

Single-family properties being prepared for re-lease

 

838

 

136,905

 

Vacant single-family properties available for lease

 

2,669

 

489,290

 

Single-family properties held for sale

 

35

 

5,428

 

Total

 

36,588

 

$

6,037,355

 

 

 

 

December 31, 2014

 

 

 

Number of properties

 

Net book value

 

Leased single-family properties

 

28,250

 

$

4,631,797

 

Single-family properties being renovated

 

2,886

 

476,120

 

Single-family properties being prepared for re-lease

 

630

 

104,974

 

Vacant single-family properties available for lease

 

2,807

 

493,962

 

Single-family properties held for sale

 

26

 

3,818

 

Total

 

34,599

 

$

5,710,671

 

 

Single-family properties, net at March 31, 2015, and December 31, 2014, included $40.1 million and $114.6 million, respectively, related to properties for which the recorded grant deed has not been received. For these properties, the trustee or seller has warranted that all legal rights of ownership have been transferred to us on the date of the sale, but there is a delay for the deeds to be recorded.

 

Depreciation expense related to single-family properties was $48.7 million and $31.0 million for the three months ended March 31, 2015 and 2014, respectively.

 

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Note 4. Rent and Other Receivables

 

Included in rent and other receivables, net is an allowance for doubtful accounts of $1.7 million and $0.5 million as of March 31, 2015, and December 31, 2014, respectively. Also included in rent and other receivables, net, are receivables related to payments made on single-family properties for which sales have been rescinded or unwound due to legal issues beyond our control, which totaled $0.5 million and $1.1 million as of March 31, 2015, and December 31, 2014, respectively, and other non-tenant receivables, which totaled $3.8 million and $2.4 million as of March 31, 2015, and December 31, 2014, respectively.

 

Note 5. Deferred costs and other intangibles

 

Deferred costs and other intangibles, net, consists of the following as of March 31, 2015, and December 31, 2014 (in thousands):

 

 

 

March 31, 2015

 

December 31, 2014

 

Deferred leasing costs

 

$

12,108

 

$

18,307

 

Deferred financing costs

 

66,424

 

53,013

 

Intangible assets:

 

 

 

 

 

Value of in-place leases

 

3,724

 

10,468

 

Trademark

 

3,100

 

3,100

 

Database

 

2,100

 

2,100

 

 

 

87,456

 

86,988

 

Less: accumulated amortization

 

(22,189

)

(32,406

)

Total

 

$

65,267

 

$

54,582

 

 

Amortization expense related to deferred leasing costs, the value of in-place leases, trademark and database was $3.2 million and $4.1 million for the three months ended March 31, 2015 and 2014, respectively, which has been included in depreciation and amortization in the condensed consolidated statements of operations. Amortization of deferred financing costs was $2.0 million and $0.6 million for the three months ended March 31, 2015 and 2014, respectively, which has been included in gross interest, prior to interest capitalization (see Note 6).

 

The following table sets forth the estimated annual amortization expense related to deferred costs and other intangibles, net as of March 31, 2015, for future periods (in thousands):

 

Year

 

Deferred Leasing 
Costs

 

Deferred Financing
Costs

 

Value of In-place
Leases

 

Trademark

 

Database

 

Remaining 2015

 

$

3,492

 

$

6,921

 

$

1,814

 

$

495

 

$

225

 

2016

 

284

 

9,258

 

7

 

660

 

300

 

2017

 

66

 

7,864

 

 

660

 

300

 

2018

 

 

7,387

 

 

91

 

300

 

2019

 

 

5,234

 

 

 

300

 

Thereafter

 

 

19,477

 

 

 

132

 

Total

 

$

3,842

 

$

56,141

 

$

1,821

 

$

1,906

 

$

1,557

 

 

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Note 6. Debt

 

The following table presents the Company’s debt as of March 31, 2015, and December 31, 2014 (in thousands):

 

 

 

 

 

 

 

Outstanding Principal Balance

 

 

 

Interest Rate (1)

 

Maturity Date

 

March 31, 2015

 

December 31, 2014

 

2014-SFR1 securitization (2)

 

1.79%

 

June 9, 2019

 

$

477,363

 

$

478,565

 

2014-SFR2 securitization

 

4.42%

 

October 9, 2024

 

511,151

 

512,435

 

2014-SFR3 securitization

 

4.40%

 

December 9, 2024

 

527,097

 

528,390

 

2015-SFR1 securitization (3)

 

4.14%

 

April 9, 2045

 

552,778

 

 

Total asset-backed securitizations

 

 

 

 

 

2,068,389

 

1,519,390

 

Secured note payable

 

4.06%

 

July 1, 2019

 

51,417

 

51,644

 

Credit facility (4)

 

2.93%

 

September 30, 2018

 

45,000

 

207,000

 

Total debt

 

 

 

 

 

$

2,164,806

 

$

1,778,034

 

 

(1)         Interest rates are as of March 31, 2015. Unless otherwise stated, interest rates are fixed percentages.

(2)         The 2014-SFR1 securitization bears interest at a duration-weighted blended interest rate of LIBOR plus 1.54%. The maturity date of June 9, 2019, reflects the fully extended maturity date based on an initial two-year loan term and three, 12-month extension options, at the Company’s election, provided there is no event of default and compliance with certain other terms.

(3)         The 2015-SFR1 securitization has a maturity date of April 9, 2045, with an anticipated repayment date of April 9, 2025.

(4)         The credit facility provides for a borrowing capacity of up to $800 million through March 2016 and bears interest at LIBOR plus 2.75% (3.125% beginning in March 2017). Any outstanding borrowings upon expiration of the credit facility period in March 2016 will become due in September 2018.

 

Asset-Backed Securitization

 

In March 2015, we completed a private securitization transaction (the “2015-SFR1 securitization”), in which a newly-formed special purpose entity (the “Borrower”) entered into a loan with a third-party lender for $552.8 million represented by a promissory note. The Borrower under the loan is wholly owned by another special purpose entity (the “Equity Owner”) and the Equity Owner is wholly owned by the Operating Partnership. The loan is a fixed rate loan with a 30 year term, maturity date of April 9, 2045, and a duration-adjusted weighted-average interest rate of 4.14%. The loan requires monthly payments of interest together with principal payments representing one-twelfth of one percent of the original principal amount. The loan has an anticipated repayment date of April 9, 2025. In the event the loan is not repaid on April 9, 2025, the interest rate on each component is increased to a rate per annum equal to the sum of 3% plus the greater of: (a) the initial interest rate and (b) a rate equal to the sum of (i) the bid side yield to maturity for the “on the run” United States Treasury note with a 10 year maturity plus the mid-market 10 year swap spread, plus (ii) the component rate spread for each component.

 

The note was immediately transferred by the third-party lender to a subsidiary of the Company and then to a REMIC trust in exchange for eight classes of single-family rental pass-through certificates representing all the beneficial ownership interests in the loan and the trust. Upon receipt of the certificates, a subsidiary of the Company sold the certificates to investors for gross proceeds of $552.8 million, before issuance costs of $13.3 million. Proceeds from this transaction were used to pay down the outstanding balance on the credit facility and for general corporate purposes. The principal amount of each class of certificates corresponds to the corresponding principal amount of the loan components with an additional class to hold the residual REMIC interest.

 

The loan is secured by first priority mortgages on a pool of 4,661 single-family residential properties transferred to the Borrower from the Company’s portfolio of properties. The Borrower’s homes were substantially similar to the other properties owned by the Company and were leased to tenants underwritten on substantially the same basis as the tenants in the Company’s other properties. During the duration of the loan, the Borrower’s properties may not generally be transferred, sold or otherwise securitized, the Company can substitute properties only if a property owned by the Borrower becomes a disqualified property under the terms of the loan, and the Borrower is limited in its ability to incur any additional indebtedness.

 

The loan is also secured by a security interest in all of the Borrower’s personal property and a pledge of all of the assets of the Equity Owner, including a security interest in its membership interest in the Borrower. The Company provides a limited guaranty (i) for certain losses arising out of designated acts of intentional misconduct and (ii) for the principal amount of the loan and all other obligations under the loan agreement in the event of insolvency or bankruptcy proceedings.

 

The loan agreement provides that the Borrower maintain covenants typical for securitization transactions including maintaining certain reserve accounts and a debt service coverage ratio of at least 1.20 to 1.00. The loan agreement defines the debt service coverage ratio as of any determination date as a ratio in which the numerator is the net cash flow divided by the aggregate debt service

 

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for the twelve month period following the date of determination. As of March 31, 2015, the Company was in compliance with all covenants under the loan agreement.

 

The Company has accounted for the transfer of the note from its subsidiary to the trust as a sale under ASC 860, Transfers and Servicing, with no resulting gain or loss as the note was both originated by the third party lender and immediately transferred at the same fair market value. The Company has also evaluated and not identified any variable interests in the trust. Accordingly, the Company continues to consolidate, at historical cost basis, the 4,661 homes placed as collateral for the note. The principal balance outstanding on the note was $552.8 million as of March 31, 2015, and included in asset-backed securitizations within the condensed consolidated balance sheets. The 4,661 collateral homes had a net book value of $751.2 million as of March 31, 2015.

 

Credit Facility

 

In March 2013, the Company entered into a $500 million senior secured revolving credit facility with a financial institution, which was subsequently amended in September 2013 to, among other things, expand our borrowing capacity to $800 million and extend the repayment period to September 30, 2018. Borrowings under the credit facility are available through March 7, 2016, at which point, any outstanding borrowings will convert to a term loan through September 30, 2018. All borrowings under the credit facility bear interest at 30 day LIBOR plus 2.75% until March 2017, and thereafter at 30 day LIBOR plus 3.125%. The credit facility is secured by our Operating Partnership’s membership interests in entities that own certain of our single-family properties and requires that we maintain certain financial covenants. As of March 31, 2015, the Company was in compliance with all loan covenants. The Company had $45.0 million and $207.0 million in total outstanding borrowings under the credit facility at March 31, 2015, and December 31, 2014, respectively.

 

Interest Expense

 

The following table outlines our total gross interest, including unused commitment and other fees and amortization of deferred financing costs, and capitalized interest for the three months ended March 31, 2015 and 2014 (in thousands):

 

 

 

For the Three Months Ended,

 

 

 

March 31, 2015

 

March 31, 2014

 

Gross interest cost

 

$

20,239

 

$

4,430

 

Capitalized interest

 

(4,569

)

(2,928

)

Interest expense

 

$

15,670

 

$

1,502

 

 

Note 7. Accounts payable and accrued expenses

 

The following table summarizes accounts payable and accrued expenses as of March 31, 2015, and December 31, 2014 (in thousands):

 

 

 

March 31, 2015

 

December 31, 2014

 

Accounts payable

 

$

149

 

$

4,925

 

Accrued property taxes

 

45,953

 

49,018

 

Other accrued liabilities

 

24,946

 

28,972

 

Accrued construction and maintenance liabilities

 

23,231

 

23,914

 

Resident security deposits

 

47,103

 

42,877

 

Total

 

$

141,382

 

$

149,706

 

 

Note 8. Shareholders’ equity

 

Participating Preferred Shares

 

As of March 31, 2015, the initial liquidation preference on the Company’s participating preferred shares, as adjusted by an amount equal to 50% of the cumulative change in value of an index based on the purchase prices of single-family properties located in our top 20 markets, for all of the Company’s outstanding 5.0% Series A participating preferred shares, 5.0% Series B participating preferred shares and 5.5% Series C participating preferred shares was $442.4 million.

 

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Distributions

 

Our board of trustees declared distributions that totaled $0.05 per share on our Class A and Class B common shares during the quarters ended March 31, 2015 and 2014. Distributions declared on our 5.0% Series A participating preferred shares, 5.0% Series B participating preferred shares and 5.5% Series C participating preferred shares during the quarter ended March 31, 2015, totaled $0.3125 per share, $0.3125 per share and $0.34375 per share, respectively. Distributions declared on our 5.0% Series A participating preferred shares and 5.0% Series B participating preferred shares during the quarter ended March 31, 2014, totaled $0.3125 per share and $0.3500 per share, respectively. Our board of trustees declared distributions that totaled $0.15113 per share on our Series C convertible units during the quarters ended March 31, 2015 and 2014.

 

Noncontrolling Interest

 

Noncontrolling interest as reflected in the Company’s condensed consolidated balance sheets primarily consists of the interest held by AH LLC in units in the Company’s Operating Partnership. AH LLC owned 14,440,670, or approximately 6.4% of the total 225,927,834 and 225,914,576 Class A units in the Operating Partnership as of March 31, 2015, and December 31, 2014, respectively. Additionally, AH LLC owned all 31,085,974 Series C convertible units and all 4,375,000 Series D convertible units in the Operating Partnership as of March 31, 2015, and December 31, 2014. Also included in noncontrolling interest are outside ownership interests in certain consolidated subsidiaries of the Company.

 

Noncontrolling interest as reflected in the Company’s condensed consolidated statements of operations for the three months ended March 31, 2015, primarily consisted of $4.7 million of preferred income allocated to Series C convertible units, $0.8 million of net loss allocated to Class A units and $0.1 million of net income allocated to noncontrolling interests in certain of the Company’s consolidated subsidiaries. Noncontrolling interest for the three months ended March 31, 2014, primarily consisted of $4.5 million of preferred income allocated to Series C convertible units, $0.8 million of net loss allocated to Class A units and $0.1 million of net loss allocated to noncontrolling interests in certain of the Company’s consolidated subsidiaries.

 

2012 Equity Incentive Plan

 

During the three months ended March 31, 2015 and 2014, the Company granted stock options for 553,500 and 970,000 Class A common shares, respectively, and 42,000 and 92,000 restricted stock units, respectively, to certain employees of the Company under the 2012 Equity Incentive Plan. The options and restricted stock units granted during the three months ended March 31, 2015 and 2014, vest over four years and expire 10 years from the date of grant.

 

The following table summarizes stock option activity under the plan for the three months ended March 31, 2015 and 2014:

 

 

 

Shares

 

Weighted-
Average
Exercise Price

 

Weighted-
Average
Remaining
Contractual Life
(in years)

 

Aggregate
Intrinsic Value (1)
(in thousands)

 

Options outstanding at January 1, 2014

 

1,190,000

 

$

15.48

 

9.3

 

$

862

 

Granted

 

970,000

 

16.63

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

Forfeited

 

(41,250

)

16.18

 

 

 

 

 

Options outstanding at March 31, 2014

 

2,118,750

 

$

15.99

 

9.4

 

$

1,532

 

Options exercisable at March 31, 2014

 

160,000

 

$

15.00

 

8.5

 

$

274

 

 

 

 

 

 

 

 

 

 

 

Options outstanding at January 1, 2015

 

2,165,000

 

$

16.17

 

8.8

 

$

1,890

 

Granted

 

553,500

 

16.48

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

Forfeited

 

(110,500

)

16.57

 

 

 

 

 

Options outstanding at March 31, 2015

 

2,608,000

 

$

16.22

 

8.7

 

$

1,064

 

Options exercisable at March 31, 2015

 

597,500

 

$

15.80

 

7.8

 

$

466

 

 

(1)               Intrinsic value for activities other than exercises is defined as the difference between the grant price and the market value on the last trading day of the period for those stock options where the market value is greater than the exercise price. For exercises, intrinsic value is defined as the difference between the grant price and the market value on the date of exercise.

 

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The following table summarizes the Black-Scholes Option Pricing Model inputs used for valuation of the stock options for Class A common shares issued during the three months ended March 31, 2015 and 2014:

 

 

 

2015

 

2014

 

Weighted-average fair value

 

$

4.57

 

$

5.01

 

Expected term (years)

 

7.0

 

7.0

 

Dividend yield

 

3.0

%

3.0

%

Volatility

 

36.0

%

38.5

%

Risk-free interest rate

 

1.9

%

2.2

%

 

The following table summarizes the activity that relates to the Company’s restricted stock units under the Plan for the three months ended March 31, 2015 and 2014:

 

 

 

 

 

 

 

 

2015

 

2014

 

Restricted stock units at beginning of period

 

85,000

 

 

Units awarded

 

42,000

 

92,000

 

Units vested

 

(21,250

)

 

Units forfeited

 

(6,000

)

(2,000

)

Restricted stock units at end of the period

 

99,750

 

90,000

 

 

Total non-cash share-based compensation expense related to stock options and restricted stock units was $0.7 million and $0.5 million for the three months ended March 31, 2015 and 2014, respectively.

 

Note 9. Related party transactions

 

As of March 31, 2015, and December 31, 2014, AH LLC owned approximately 3.3% of our outstanding Class A common shares. On a fully-diluted basis, AH LLC held (including consideration of 635,075 Class B common shares as of March 31, 2015, and December 31, 2014, 14,440,670 Class A common units as of March 31, 2015, and December 31, 2014, 31,085,974 Series C convertible units as of March 31, 2015, and December 31, 2014, 4,375,000 Series D units as of March 31, 2015, and December 31, 2014 and 4,375,000 Series E units as of March 31, 2015, and December 31, 2014) an approximate 21.8% interest at March 31, 2015, and December 31, 2014.

 

As of March 31, 2015, the Company had a net payable of $2.6 million due to AH LLC, which has been included in amounts payable to affiliates within the condensed consolidated balance sheets. This amount primarily consisted of Series C distributions payable to AH LLC, partially offset by receivables from affiliates related to fees and reimbursable expenditures. As of December 31, 2014, the Company had a net receivable of $4.0 million due from AH LLC, which has been included in escrow deposits, prepaid expenses and other assets within the condensed consolidated balance sheets. This amount primarily consisted of receivables due from AH LLC related to working capital settlement items.

 

Agreement on Investment Opportunities

 

In November 2012, the Company entered into an Agreement on Investment Opportunities with AH LLC under which we paid an acquisition and renovation fee equal to 5% of all costs and expenses we incur in connection with the initial acquisition, repair and renovation of single-family properties (net of any broker fees received by the Property Manager) for its services in identifying, evaluating, acquiring and overseeing the renovation of the properties we purchase. In connection with the Management Internalization on June 10, 2013, we entered into an Amended and Restated Agreement on Investment Opportunities. Under the terms of the Amended and Restated Agreement on Investment Opportunities, on December 10, 2014, AH LLC ceased providing acquisition and renovation services for us, we stopped paying AH LLC an acquisition and renovation fee, we hired all of AH LLC’s acquisition and renovation personnel necessary for our operations and AH LLC ceased paying the Company a monthly fee of $0.1 million for the maintenance and use of certain intellectual property transferred to us in the Management Internalization.

 

During the three months ended March 31, 2014, we incurred $17.6 million in aggregate acquisition and renovation fees to AH LLC prior to the termination of the Amended and Restated Agreement on Investment Opportunities, of which $17.3 million was capitalized related to asset acquisitions and included in the cost of the single-family properties and $0.3 million was expensed related to property acquisitions with in-place leases.

 

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Table of Contents

 

Employee Administration Agreement

 

In connection with the Management Internalization on June 10, 2013, we entered into an employee administration agreement with Malibu Management, Inc. (“MMI”), an affiliate of AH LLC, to obtain the exclusive services of personnel of the Advisor and the Property Manager, who were previously employees of MMI under the direction of AH LLC. Under the terms of the agreement, we obtained the exclusive service of the employees dedicated to us for all management and other personnel dedicated to our business and were able to direct MMI to implement employment decisions with respect to the employees dedicated to us. We were required to reimburse MMI for all compensation and benefits and costs associated with the employees dedicated to us. We did not pay any fee or any other form of compensation to MMI. The agreement with MMI terminated on December 31, 2014. Effective January 1, 2015, all employees previously employed by MMI and performing services on our behalf became our employees. Total compensation and benefit costs paid by MMI and passed through to us under the agreement during the three months ended March 31, 2014, were $9.0 million.

 

Note 10. Earnings per share

 

The following table reflects the computation of net loss per share on a basic and diluted basis for the three months ended March 31, 2015 and 2014 (in thousands, except share data):

 

 

 

For the Three Months

 

 

 

Ended March 31,

 

 

 

2015

 

2014

 

Income / (loss) (numerator):

 

 

 

 

 

Loss from continuing operations

 

$

(8,265

)

$

(6,935

)

Noncontrolling interest

 

3,956

 

3,620

 

Dividends on preferred shares

 

5,569

 

3,121

 

Net loss attributable to common shareholders

 

$

(17,790

)

$

(13,676

)

 

 

 

 

 

 

Weighted-average shares (denominator)

 

211,481,727

 

185,504,294

 

 

 

 

 

 

 

Net loss per share—basic and diluted

 

$

(0.08

)

$

(0.07

)

 

Total weighted-average shares for the three months ended March 31, 2015 and 2014, excludes an aggregate of 74,044,394 and 65,292,016, respectively, of shares or units in our Operating Partnership, Series A, B and C preferred shares, common shares issuable upon exercise of stock options, and restricted stock units because they were antidilutive.

 

Note 11. Commitments and contingencies

 

In connection with the renovation of single-family properties after they are purchased, the Company enters into contracts for the necessary improvements. As of March 31, 2015, and December 31, 2014, the Company had aggregate outstanding commitments of $4.1 million in connection with these contracts.

 

As of March 31, 2015, and December 31, 2014, we had commitments to acquire 119 and 703 single-family properties, respectively, with an aggregate purchase price of $17.3 million and $110.9 million, respectively.

 

We are involved in various legal and administrative proceedings that are incidental to our business. We believe these matters will not have a materially adverse effect on our financial position.

 

Note 12. Fair value

 

The carrying amount of rents and other receivables, restricted cash, escrow deposits, prepaid expenses and other assets, and accounts payable and accrued expenses approximate fair value because of the short maturity of these amounts. The Company’s interest rate cap agreement, contingently convertible Series E units liability and preferred shares derivative liability are the only financial instruments recorded at fair value on a recurring basis in the condensed consolidated financial statements.

 

As our securitization transactions were recently entered into, management believes that the carrying values of the securitization transactions reasonably approximate their fair values as of March 31, 2015, which have been estimated by discounting future cash

 

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flows at market rates (Level 2). These market rates have been estimated based on recent market activity, including our own securitization transactions. As our credit facility bears interest at a floating rate based on an index plus a spread, which is 30 day LIBOR plus 2.75%, and the credit spread is consistent with those demanded in the market for credit facilities with similar risks and maturities, management believes that the carrying value of the credit facility as of March 31, 2015, reasonably approximates fair value, which has been estimated by discounting future cash flows at market rates (Level 2).

 

Inputs to the model used to value the contingently convertible Series E units liability include a risk-free rate corresponding to the assumed timing of the conversion date and a volatility input based on the historical volatilities of selected peer group companies. The starting point for the simulation is the most recent trading price in the Company’s Class A common shares, into which the Series E units are ultimately convertible. The timing of such conversion is based on the provisions of the contribution agreement and the Company’s best estimate of the events that trigger such conversions.

 

Valuation of the preferred shares derivative liability considers scenarios in which the preferred shares would be redeemed or converted into Class A common shares by the Company and the subsequent payoffs under those scenarios. The valuation also considers certain variables such as the risk-free rate matching the assumed timing of either redemption or conversion, volatility of the underlying home price appreciation index, dividend payments, conversion rates, the assumed timing of either redemption or conversion and an assumed drift factor in home price appreciation across certain metropolitan statistical areas, or MSAs, as outlined in the agreement.

 

The fair value of our interest rate cap agreement is determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates rise above the strike rate of the interest rate cap. The variable interest rates used in the calculation of projected receipts on the cap are based on an expectation of future interest rates derived from observable market interest rate curves and volatilities. To comply with the provisions of ASC 820, Fair Value Measurements and Disclosures, the Company incorporates credit valuation adjustments to appropriately reflect the respective counterparty’s nonperformance risk in the fair value measurements.

 

The following tables set forth the fair value of our interest rate cap agreement, the contingently convertible Series E units liability and preferred shares derivative liability as of March 31, 2015, and December 31, 2014 (in thousands):

 

 

 

March 31, 2015

 

Description

 

Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

Interest rate cap agreement

 

$

 

$

3

 

$

 

$

3

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Contingently convertible Series E units liability

 

$

 

$

 

$

70,219

 

$

70,219

 

Preferred shares derivative liability

 

$

 

$

 

$

57,840

 

$

57,840

 

 

 

 

December 31, 2014

 

Description

 

Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

Interest rate cap agreement

 

$

 

$

14

 

$

 

$

14

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Contingently convertible Series E units liability

 

$

 

$

 

$

72,057

 

$

72,057

 

Preferred shares derivative liability

 

$

 

$

 

$

57,960

 

$

57,960

 

 

14



Table of Contents

 

The following table presents changes in the fair values of our Level 3 financial instruments, consisting of our contingently convertible series E units liability and preferred shares derivative liability, which are measured on a recurring basis with changes in fair value recognized in remeasurement of Series E units and remeasurement of preferred shares, respectively, in the condensed consolidated statements of operations for the three months ended March 31, 2015 and 2014 (in thousands):

 

Description

 

January 1, 2015

 

Issuances

 

Remeasurement
included in
earnings

 

March 31, 2015

 

Liabilities:

 

 

 

 

 

 

 

 

 

Contingently convertible Series E units liability

 

$

72,057

 

$

 

$

(1,838

)

$

70,219

 

Preferred shares derivative liability

 

$

57,960

 

$

 

$

(120

)

$

57,840

 

 

Description

 

January 1, 2014

 

Issuances

 

Remeasurement
included in
earnings

 

March 31, 2014

 

Liabilities:

 

 

 

 

 

 

 

 

 

Contingently convertible Series E units liability

 

$

66,938

 

$

 

$

2,756

 

$

69,694

 

Preferred shares derivative liability

 

$

28,150

 

$

1,242

 

$

457

 

$

29,849

 

 

Changes in inputs or assumptions used to value the contingently convertible Series E units liability and preferred shares derivative liability may have a material impact on the resulting valuation.

 

Note 13. Subsequent events

 

Subsequent Acquisitions

 

From April 1, 2015, through April 30, 2015, we acquired 213 properties with an aggregate purchase price of approximately $28.4 million. We expect that our level of acquisition activity will fluctuate based on the number of suitable investments and on the level of funds available for investment.

 

Borrowings on Credit Facility

 

From April 1, 2015, through April 30, 2015, the Company borrowed an additional $89.0 million under the credit facility and made payments on the credit facility totaling $40.0 million, resulting in an outstanding balance of $94.0 million as of April 30, 2015.

 

Declaration of Dividends

 

On May 7, 2015, our board of trustees declared quarterly dividends of $0.05 per Class A common share payable on June 30, 2015, to shareholders of record on June 15, 2015, and $0.05 per Class B common share payable on June 30, 2015, to shareholders of record on June 15, 2015. Additionally, our board of trustees also declared quarterly dividends of $0.3125 per share on the Company’s 5.0% Series A Participating Preferred Shares payable on June 30, 2015, to shareholders of record on June 15, 2015, $0.3125 per share on the Company’s 5.0% Series B Participating Preferred Shares payable on June 30, 2015, to shareholders of record on June 15, 2015, and $0.34375 per share on the Company’s 5.5% Series C Participating Preferred shares payable on June 30, 2015, to shareholders of record on June 15, 2015.

 

15



Table of Contents

 

Item 2.      Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q.

 

Overview

 

We are a Maryland REIT focused on acquiring, renovating, leasing and operating single-family homes as rental properties. We commenced operations in November 2012 to continue the investment activities of AH LLC, which was founded by our chairman, B. Wayne Hughes, in 2011 to take advantage of the dislocation in the single-family home market.

 

As of March 31, 2015, we owned 36,588 single-family properties in selected sub-markets of MSAs in 22 states, compared to 34,599 single-family properties in 22 states as of December 31, 2014, and 25,505 single-family properties in 22 states as of March 31, 2014. As of March 31, 2015, we had an additional 119 properties in escrow that we expected to acquire, subject to customary closing conditions, for an aggregate purchase price of approximately $17.3 million. As of March 31, 2015, 31,183, or 85.2%, of our total properties were leased, compared to 20,666, or 81.0%, of our total properties as of March 31, 2014. As of March 31, 2015, our entire portfolio of single-family properties was internally managed through our proprietary property management platform.

 

Our Properties and Key Operating Metrics

 

The following table provides a summary of our single-family properties as of March 31, 2015:

 

 

 

Properties (1)

 

Gross Book Value

 

Averages Per Property

 

Market

 

Number of
Properties

 

% of
Total

 

($ millions)

 

% of
Total

 

Avg. per
Property

 

Square
Footage

 

Property
Age
(years)

 

Avg. Year
Purchased

 

Dallas-Fort Worth, TX

 

3,013

 

8.2

%

$

480.0

 

7.6

%

$

159,310

 

2,136

 

11.4

 

2013

 

Indianapolis, IN

 

2,760

 

7.5

%

419.5

 

6.7

%

151,993

 

1,935

 

12.6

 

2013

 

Atlanta, GA

 

2,407

 

6.6

%

388.8

 

6.2

%

161,529

 

2,106

 

14.3

 

2013

 

Charlotte, NC

 

2,151

 

5.9

%

370.9

 

5.9

%

172,431

 

2,004

 

12.0

 

2013

 

Greater Chicago area, IL and IN

 

2,009

 

5.5

%

352.2

 

5.6

%

175,311

 

1,899

 

13.5

 

2013

 

Houston, TX

 

1,928

 

5.3

%

332.3

 

5.3

%

172,355

 

2,229

 

10.6

 

2013

 

Cincinnati, OH

 

1,814

 

5.0

%

311.5

 

5.0

%

171,720

 

1,846

 

13.0

 

2013

 

Tampa, FL

 

1,520

 

4.2

%

286.1

 

4.5

%

188,224

 

1,986

 

11.3

 

2013

 

Jacksonville, FL

 

1,436

 

3.9

%

214.6

 

3.4

%

149,443

 

1,916

 

11.1

 

2013

 

Nashville, TN

 

1,423

 

3.9

%

295.5

 

4.7

%

207,660

 

2,212

 

10.7

 

2013

 

All Others (2)

 

16,127

 

44.0

%

2,837.5

 

45.1

%

175,948

 

1,886

 

10.9

 

2013

 

Total / Average

 

36,588

 

100.0

%

$

6,288.9

 

100.0

%

$

171,885

 

1,966

 

12.3

 

2013

 

 

(1)  Includes 377 properties in which we hold an approximate one-third interest.

(2)  Represents 31 markets in 19 states.

 

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Table of Contents

 

The following table summarizes certain key leasing metrics as of March 31, 2015:

 

 

 

Total Portfolio

 

Stabilized Properties (3)

 

 

 

 

 

 

 

Avg. Scheduled

 

Avg. Original

 

Avg. Remaining

 

 

 

 

 

Total

 

 

 

Leased

 

Occupancy

 

Monthly Rent

 

Lease Term

 

Lease Term

 

Leased

 

Occupancy

 

Stabilized

 

Market

 

Percentage (1)

 

Percentage (2)

 

Per Property

 

(months)

 

(months)

 

Percentage (1)

 

Percentage (2)

 

Properties

 

Dallas-Fort Worth, TX

 

90.4

%

87.5

%

$

1,509

 

12.2

 

7.1

 

96.0

%

92.9

%

2,800

 

Indianapolis, IN

 

84.1

%

81.0

%

1,285

 

13.6

 

7.1

 

90.1

%

86.7

%

2,566

 

Atlanta, GA

 

83.4

%

81.8

%

1,318

 

12.3

 

7.0

 

95.0

%

93.2

%

2,081

 

Charlotte, NC

 

81.4

%

79.1

%

1,352

 

12.5

 

7.3

 

93.7

%

91.1

%

1,852

 

Greater Chicago area, IL and IN

 

84.8

%

81.5

%

1,664

 

14.1

 

6.6

 

94.1

%

90.4

%

1,788

 

Houston, TX

 

80.9

%

78.1

%

1,582

 

12.4

 

7.0

 

92.6

%

89.3

%

1,640

 

Cincinnati, OH

 

89.6

%

85.6

%

1,420

 

13.4

 

7.2

 

92.9

%

88.7

%

1,736

 

Tampa, FL

 

92.2

%

89.9

%

1,524

 

12.1

 

7.1

 

94.6

%

92.2

%

1,468

 

Jacksonville, FL

 

83.6

%

81.3

%

1,306

 

12.1

 

6.8

 

95.0

%

92.4

%

1,245

 

Nashville, TN

 

86.8

%

83.8

%

1,559

 

12.5

 

6.7

 

95.2

%

91.8

%

1,274

 

All Other (4)

 

84.7

%

82.0

%

1,367

 

12.5

 

7.3

 

92.8

%

89.8

%

14,537

 

Total / Average

 

85.2

%

82.5

%

$

1,411

 

12.7

 

7.1

 

93.4

%

90.4

%

32,987

 

 

(1)                   A property is classified as leased upon the execution (i.e., the signature) of a lease agreement.

(2)                   A property is classified as occupied upon commencement (i.e., start date) of a lease agreement, which can occur contemporaneously with or subsequent to execution (i.e., signature)

(3)                   A property is classified as stabilized once it has been renovated and then initially leased or available for rent for a period greater than 90 days.

(4)                   Represents 31 markets in 19 states.

 

Factors That Affect Our Results of Operations and Financial Condition

 

Our results of operations and financial condition are affected by numerous factors, many of which are beyond our control. Key factors that impact our results of operations and financial condition include our ability to identify and acquire properties; our pace of property acquisitions; the time and cost required to gain access to the properties and then to renovate and lease a newly acquired property at acceptable rental rates; occupancy levels; rates of tenant turnover; the length of vacancy in properties between tenant leases; our expense ratios; our ability to raise capital; and our capital structure.

 

Property Acquisitions

 

Since our formation, we have rapidly but systematically grown our portfolio of single-family homes. Our ability to identify and acquire single-family homes that meet our investment criteria is impacted by home prices in our target markets, the inventory of properties available for sale through our acquisition channels, competition for our target assets and our available capital. We expect that our level of acquisition activity will fluctuate based on the number of suitable investments and the level of capital available to invest. During the quarter ended March 31, 2015, our total portfolio increased by 1,989 homes, including 1,220 homes acquired through broker acquisitions and 769 homes acquired through trustee acquisitions.

 

Prior to December 10, 2014, we paid an acquisition and renovation fee to AH LLC equal to 5% of all costs and expenses incurred in connection with the initial acquisition, repair and renovation of our single-family properties for its services in identifying, evaluating, acquiring and overseeing the renovation of our properties. On December 10, 2014, AH LLC ceased providing acquisition and renovation services for us, we stopped paying AH LLC an acquisition and renovation fee and we hired all of AH LLC’s acquisition and renovation personnel necessary for our operations. No termination or other fee was paid to AH LLC in connection with the termination of AH LLC providing such services. Although we anticipate the internalization of AH LLC’s acquisition and renovation personnel to be cash flow positive to the Company, we expect a larger proportion of the internalized cost structure to be expensed in accordance with GAAP, compared to the 5% acquisition and renovation fee previously paid to AH LLC, which has been primarily capitalized related to asset acquisitions and included in the cost basis of our single-family properties.

 

Property Operations

 

The acquisition of properties involves expenditures in addition to payment of the purchase price, including property inspections, closing costs, liens, title insurance, transfer taxes, recording fees, broker commissions, property taxes and homeowner association (“HOA”) fees, when applicable. In addition, we typically incur costs between $5,000 and $25,000 to renovate a home to prepare it for rental. Renovation work varies, but may include paint, flooring, carpeting, cabinetry, appliances, plumbing hardware and other items required to prepare the home for rental. The time and cost involved in initially accessing our homes to prepare them for rental can impact our financial performance and varies among properties based on several factors, including the source of acquisition channel, whether the property is located in a judicial or non-judicial foreclosure state, if applicable, and whether or not the home is occupied at the time of acquisition. This process of finalizing the acquisition and gaining initial access to the home can range from immediate access to multiple months and, on average, takes approximately 20 to 30 days. Additionally, after gaining access to the home, the time

 

17



Table of Contents

 

to renovate a property can vary significantly among properties and is most impacted by the age and condition of the property. On average, it takes approximately 50 to 60 days to complete the renovation process after gaining initial access to the home. Our operating results are also impacted by the amount of time it takes to market and lease a property, which can vary greatly among properties, and is impacted by local demand, our marketing techniques and the size of our available inventory. On average, it takes approximately 20 to 30 days to lease a property after completing the renovation process. Lastly, our operating results are impacted by the length of stay of our tenants and the amount of time it takes to prepare and re-lease a property after a tenant vacates. This process, which we refer to as “turnover,” is impacted by numerous factors, including the condition of the home upon move-out of the previous tenant, and by local demand, our marketing techniques and the size of our available inventory at the time of the turnover. On average, it takes approximately 50 to 60 days to complete the turnover process.

 

Revenue

 

Our revenue is derived primarily from rents collected under lease agreements with tenants for our single-family properties. These include short-term leases that we enter into directly with our tenants, which typically have a term of one year. Our rental rates and occupancy levels are affected by macroeconomic factors and local and property-level factors, including market conditions, seasonality and tenant defaults, and the amount of time it takes to renovate and re-lease properties when tenants vacate. We generally do not offer free rent or other concessions in connection with leasing our properties. Additionally, our ability to collect revenues and related operating results are impacted by the credit worthiness and quality of our tenants. On average, our tenants have household incomes ranging from $70,000 to $100,000 and primarily consist of families with approximately two adults and one or more children.

 

In addition to rental revenues, we receive fees and other reimbursements, referred to as “tenant charge-backs”, from our tenants, which are primarily designed to recover costs for certain items, such as utilities, damages and maintenance. In accordance with GAAP, these fees and tenant charge-backs are presented gross in the condensed consolidated statements of operations.

 

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

 

Over the longer term and as our total portfolio occupancy stabilizes, our ability to maintain and grow revenues will become more dependent on our ability to retain tenants and increase rental rates. We believe that our platform will allow us to achieve strong tenant retention and lease renewal rates at our properties. Based on 4,969 and 2,031 leases that expired during the three months ended March 31, 2015 and 2014, we experienced tenant renewal rates of 79.2% and 83.0%, respectively, at an average rental rate increase on non-month-to-month leases of 3.6% and 2.8%, respectively. Including the impact of 814 and 364 early terminated tenants during the three months ended March 31, 2015 and 2014, respectively, we experienced tenant retention rates of 68.1% and 71.8%, respectively. To date, our leasing efforts have been primarily focused on increasing our overall portfolio occupancy rather than raising rental rates. We believe that there will be significant opportunity to optimize rental rates in the future as our total portfolio occupancy stabilizes.

 

Expenses

 

We monitor the following categories of expenses that we believe most significantly affect our results of operations.

 

Property Operating Expenses

 

Once a property is available for lease, which we refer to as “rent-ready,” we incur ongoing property-related expenses, primarily HOA fees (when applicable); property taxes; insurance; marketing expenses; repairs and maintenance; and turnover costs, which may not be subject to our control.

 

Property Management Expenses

 

As we now internally manage our entire portfolio of single-family properties through our proprietary property management platform, we incur costs such as salary expenses for property management personnel, lease expenses for property management offices and technology expenses for maintaining the property management platform. As part of developing our property management platform, we have made significant investments in our infrastructure, systems and technology. We believe that these investments will enable the costs of our property management platform to become more efficient over time and as our overall portfolio grows in size.

 

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Table of Contents

 

Seasonality

 

While we still have limited operating history, we believe that our business and related operating results will be impacted by seasonal factors throughout the year. In particular, we have experienced higher levels of tenant move-outs during the summer months, which impacts both our rental revenues and related turnover costs. Further, our property operating costs are seasonally impacted in certain markets for expenses such as snow removal and heating during the winter season and HVAC repairs and expenses during the summer season.

 

General and Administrative Expense

 

General and administrative expense primarily consists of payroll and personnel costs, trustees’ and officers’ insurance expenses, audit and tax fees, state taxes, trustee fees and other expenses associated with our corporate and administrative functions.

 

Results of Operations

 

As we have rapidly grown our portfolio and have many properties in the early stages of operations, we distinguish our portfolio of initially leased homes between Same-Home properties and Non-Same-Home properties in evaluating our operating performance.  We classify a property as Same-Home if it has been stabilized longer than 90 days prior to the beginning of the earliest period presented under comparison, which allows the performance of these properties to be compared between periods. A property is considered stabilized once it has been renovated and then initially leased or available for rent for a period greater than 90 days. All other properties that have been initially leased, whether or not currently leased, are classified as Non-Same-Home.

 

One of the primary financial measures we use in evaluating the operating performance of our initially leased, whether or not currently leased, single-family properties is core net operating income (“Initially Leased Property Core NOI”), which we define as rents and fees from single-family properties, net of bad debt expense, less property operating expenses for leased single-family properties, excluding expenses reimbursed by tenant charge-backs and bad debt expense.  We use Initially Leased Property Core NOI as a primary financial measure as it reflects the economic operating performance of our properties that have been initially leased, without the impact of certain tenant reimbursed operating expenses that are presented gross in the condensed consolidated statements of operations in accordance with GAAP.

 

19



Table of Contents

 

Comparison of the Three Months Ended March 31, 2015, to the Three Months Ended March 31, 2014

 

The following table presents a summary of Initially Leased Property Core NOI for our Same-Home properties, Non-Same-Home properties and total properties for the three months ended March 31, 2015 and 2014 (in thousands):

 

 

 

For the Three Months Ended March 31, 2015

 

 

 

Same-Home
Properties

 

% of
Revenue

 

Non-Same-
Home
Properties

 

% of
Revenue

 

Total
Portfolio

 

% of
Revenue

 

Rents from single-family properties

 

$

52,368

 

 

 

$

68,312

 

 

 

$

120,680

 

 

 

Fees from single-family properties

 

476

 

 

 

855

 

 

 

1,331

 

 

 

Bad debt

 

(561

)

 

 

(710

)

 

 

(1,271

)

 

 

Core revenues from single-family properties

 

52,283

 

 

 

68,457

 

 

 

120,740

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Leased property operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Property tax expense

 

8,985

 

17.2

%

11,883

 

17.4

%

20,868

 

17.3

%

HOA fees, net of tenant charge-backs

 

1,252

 

2.4

%

1,492

 

2.2

%

2,744

 

2.3

%

Maintenance and turnover costs, net of tenant charge-backs

 

3,842

 

7.3

%

4,463

 

6.5

%

8,305

 

6.9

%

Insurance

 

870

 

1.7

%

1,088

 

1.6

%

1,958

 

1.6

%

Property management expenses

 

4,508

 

8.6

%

5,904

 

8.6

%

10,412

 

8.6

%

Core property operating expenses

 

19,457

 

37.2

%

24,830

 

36.3

%

44,287

 

36.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Initially Leased Property Core NOI

 

$

32,826

 

62.8

%

$

43,627

 

63.7

%

$

76,453

 

63.3

%

 

 

 

For the Three Months Ended March 31, 2014

 

 

 

Same-Home
Properties

 

% of
Revenue

 

Non-Same-
Home
Properties

 

% of
Revenue

 

Total
Portfolio

 

% of
Revenue

 

Rents from single-family properties

 

$

51,593

 

 

 

$

22,168

 

 

 

$

73,761

 

 

 

Fees from single-family properties

 

439

 

 

 

919

 

 

 

1,358

 

 

 

Bad debt

 

(1,194

)

 

 

(229

)

 

 

(1,423

)

 

 

Core revenues from single-family properties

 

50,838

 

 

 

22,858

 

 

 

73,696

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Leased property operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Property tax expense

 

8,156

 

16.1

%

3,795

 

16.6

%

11,951

 

16.2

%

HOA fees, net of tenant charge-backs

 

1,334

 

2.6

%

332

 

1.5

%

1,666

 

2.3

%

Maintenance and turnover costs, net of tenant charge-backs

 

4,102

 

8.1

%

1,388

 

6.1

%

5,490

 

7.4

%

Insurance

 

974

 

1.9

%

417

 

1.8

%

1,391

 

1.9

%

Property management expenses

 

4,288

 

8.4

%

1,167

 

5.1

%

5,455

 

7.4

%

Core property operating expenses

 

18,854

 

37.1

%

7,099

 

31.1

%

25,953

 

35.2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Initially Leased Property Core NOI

 

$

31,984

 

62.9

%

$

15,759

 

68.9

%

$

47,743

 

64.8

%

 

A reconciliation of Initially Leased Property Core NOI to net loss as determined in accordance with GAAP is located at the end of this Item 2— Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Property Revenues

 

Same-Home Properties

 

Core property revenues from Same-Home properties for the three months ended March 31, 2015, increased $1.5 million, or 2.8%, to $52.3 million from $50.8 million for the three months ended March 31, 2014. This rise was primarily attributable to higher average monthly rental rates, which increased to $1,409 per month during the first quarter of 2015, compared to $1,374 per month during the first quarter of 2014. Increased core property revenues from rental rate growth were partially offset by lower average occupancy levels, which decreased to 92.3% during the first quarter of 2015 from 94.6% during the first quarter of 2014.

 

Non-Same Home Properties

 

Core property revenues from Non-Same-Home properties were $68.5 million and $22.9 million for the three months ended March 31, 2015 and 2014, respectively. This increase was primarily attributable to growth in our average number of leased Non-Same-Home properties, which rose to 16,271 leased properties for the three months ended March 31, 2015, from 5,551 leased properties for the three months ended March 31, 2014.

 

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Core Leased Property Operating Expenses

 

Core leased property operating expenses consist of direct property operating expenses, net of tenant chargebacks, and property management costs associated with properties that have been initially leased, whether or not they are currently leased.

 

Same-Home Properties

 

Core leased property operating expenses from Same-Home properties for the three months ended March 31, 2015, increased $0.6 million, or 3.2%, to $19.5 million from $18.9 million for the three months ended March 31, 2014. This increase was primarily attributable to $0.4 million of net property tax credits that were recognized during the three months ended March 31, 2014.

 

As a percentage of total Same-Home core revenues from single-family properties, Same-Home core leased property operating expenses were 37.2% for the three months ended March 31, 2015, relatively consistent with 37.1% for the three months ended March 31, 2014.

 

Non-Same-Home Properties

 

Core leased property operating expenses from Non-Same-Home properties were $24.8 million and $7.1 million for the three months ended March 31, 2015 and 2014, respectively. This increase was primarily attributable to growth in our average number of initially leased Non-Same-Home properties, which rose to 18,161 initially leased properties for the quarter ended March 31, 2015, from 6,585 initially leased properties for the quarter ended March 31, 2014.

 

Vacant Property Operating Expenses and Other

 

Vacant property operating expenses and other, which primarily consist of direct property operating expenses and property management costs associated with properties that have been renovated, but not initially leased, were $6.0 million and $9.0 million for the first quarters of 2015 and 2014, respectively. This decrease was primarily attributable to a lower number of renovated, but not initially leased, homes during the first quarter of 2015, compared to the first quarter of 2014.

 

Additionally, during the first quarter of 2014, we incurred approximately $1.2 million of freeze-related damages as a result of severe weather conditions in certain markets. As these damages are expected to be fully recovered through insurance reimbursement, we have reflected our related aggregate insurance deductible of $0.4 million (representing our total aggregate deductible based on three separate winter storms) within vacant property operating expenses and other in the condensed consolidated statements of operations. As a result of the severe weather conditions in certain markets, we also incurred increased vacant property operating costs associated with higher utility usage and cold weather maintenance during the first quarter of 2014.

 

General and Administrative Expense

 

General and administrative expense, which primarily consists of payroll and personnel costs, trustees’ and officers’ insurance expense, audit and tax fees, state taxes, trustee fees and other expenses associated with our corporate and administrative functions, was $6.1 million for the quarter ended March 31, 2015, compared to $5.1 million for the same period in 2014. Annualized general and administrative expense for the quarter ended March 31, 2015, was 0.37% of total quarter-end assets, compared to general and administrative expense of 0.45% of total quarter-end assets for the same period in 2014.

 

Interest Expense

 

Interest expense was $15.7 million and $1.5 million for the three months ended March 31, 2015 and 2014, respectively. This increase was primarily due to a rise in aggregate borrowings to $2.2 billion at March 31, 2015, from $671.0 million at March 31, 2014.

 

Acquisition Fees and Costs Expensed

 

Prior to December 10, 2014, we paid an acquisition and renovation fee to AH LLC equal to 5% of all costs and expenses incurred in connection with the initial acquisition, repair and renovation of our single-family properties for its services in identifying, evaluating, acquiring and overseeing the renovation of our properties. For properties that were leased at the time of acquisition, these costs were expensed, rather than capitalized, as a component of the acquisition cost. On December 10, 2014, AH LLC ceased providing acquisition and renovation services for us, we stopped paying AH LLC an acquisition and renovation fee and we hired all of AH LLC’s acquisition and renovation personnel necessary for our operations. All costs of our internal acquisition function are now

 

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expensed in accordance with GAAP, compared to the 5% fee previously paid to AH LLC, which was primarily capitalized related to asset acquisitions and included in the cost basis of our single-family properties.

 

For the quarter ended March 31, 2015, acquisition fees and costs expensed included $5.1 million of costs associated with purchases of single-family properties and $0.8 million of transaction costs related to recent portfolio transactions. For the quarter ended March 31, 2014, acquisition fees and costs expensed included $0.3 million of acquisition fees and related costs associated with single-family properties acquired with in-place leases and $0.2 million of transaction costs incurred in pursuing unsuccessful single-family property acquisitions.

 

Depreciation and Amortization

 

Depreciation and amortization expense consists primarily of depreciation of buildings. Depreciation of our assets is calculated over their useful lives on a straight-line basis over 5 to 30 years. Our intangible assets are amortized on a straight-line basis over the asset’s estimated economic useful life. Depreciation and amortization expense was $53.7 million and $35.1 million for the three months ended March 31, 2015 and 2014, respectively.

 

Critical Accounting Policies and Estimates

 

Our critical accounting policies are included in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the year ended December 31, 2014. There have been no significant changes to our policies during the three months ended March 31, 2015. For a discussion of recent accounting pronouncements, see “Note 2—Significant Accounting Policies.”

 

Income Taxes

 

We have elected to be taxed as a REIT under Sections 856 to 860 of the Internal Revenue Code of 1986, as amended (the “Code”), which commenced with our taxable year ended December 31, 2012. We believe that we have operated, and continue to operate, in such a manner as to satisfy the requirements for qualification as a REIT. Accordingly, we will not be subject to federal income tax, provided that we qualify as a REIT and our distributions to our shareholders equal or exceed our REIT taxable income.

 

However, qualification and taxation as a REIT depends upon our ability to meet the various qualification tests imposed under the Code, including tests related to the percentage of income that we earn from specified sources and the percentage of our earnings that we distribute. Accordingly, no assurance can be given that we will continue to be organized or be able to operate in a manner so as to remain qualified as a REIT. If we fail to qualify as a REIT in any taxable year, we will be subject to federal and state income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate tax rates, and we may be ineligible to qualify as a REIT for four subsequent tax years. Even if we qualify as a REIT, we may be subject to certain state or local income and capital taxes and U.S. federal income and excise taxes on our undistributed taxable income, if any. Our taxable REIT subsidiary will be subject to federal, state and local taxes on its income at regular corporate rates. The tax years from 2012 through 2014 remain open to examination by the taxing jurisdictions to which the Company is subject.

 

ASC 740-10