In this report, the
terms “we,” “our,” “us” and “Company” refer to Reven Housing REIT, Inc., a Maryland
corporation, together with its wholly-owned subsidiaries.
Overview
We are an internally managed
Maryland corporation that engages in the acquisition, ownership and operation of portfolios of leased single family homes in the
United States. We operate our portfolio properties as single family rentals, or SFRs, and we generate most of our revenue from
rental income from the existing tenants of the SFRs we have acquired. We intend to elect and qualify to be taxed as a real estate
investment trust, or REIT, for federal income tax purposes commencing with our taxable year ended December 31, 2016.
As of December 31, 2016,
we have invested an aggregate of approximately $48.0 million and own a total of 624 homes, of which 265 homes are in the Houston,
Texas metropolitan area, 256 homes are in the Jacksonville, Florida metropolitan area, 94 homes are in the Memphis, Tennessee metropolitan
area (with two of the Memphis homes located just across the border in Mississippi) and nine homes are in the Atlanta, Georgia metropolitan
area. Subsequent to year end on March 15, 2017, we purchased 38 additional homes in the Atlanta, Georgia metropolitan area for
approximately $2,663,000 plus closing and acquisition costs. As of the date of this report, we have entered into purchase agreements
for the acquisition of up to 72 additional homes in the Birmingham, Alabama metropolitan area for the aggregate purchase price
of up to approximately $5,550,000, and up to 27 additional homes in the Memphis, Tennessee metropolitan area for the aggregate
purchase price of up to approximately $2,140,000. Our acquisition of these additional 99 homes is subject to our ongoing due diligence
inspection of the properties. There can be no assurance we will be able to consummate the acquisitions.
We intend to expand our
acquisitions to other select markets in the United States that fit our investment criteria as we continue to evaluate new investment
opportunities in different markets. As of December 31, 2016, our portfolio properties were 94.7% occupied. All of our portfolio
properties have been acquired from available cash and with the proceeds from four secured loan transactions with a bank pursuant
to which we had an outstanding principal amount owed of $19,814,025 as of December 31, 2016. Our loan transactions are secured
by first priority liens and related rents on 168 homes in the Houston, Texas metropolitan area, 256 homes in the Jacksonville,
Florida metropolitan area and 92 homes in the Memphis, Tennessee metropolitan area. In addition, in January 2017, we borrowed $5,020,000
from another bank, which we intend to use for financing additional acquisitions. The loan is secured by a first priority liens
on 97 homes in the Houston, Texas metropolitan area and is further guaranteed by the Company.
Our principal objective
is to generate cash flow and distribute resulting profits to our stockholders in the form of distributions, while gaining home
price appreciation, or HPA, at the same time through the ownership of our portfolio properties. With this objective in mind, we
have developed our primary business strategy of acquiring portfolios of stabilized or leased SFRs. We believe the execution of
this strategy will allow us to generate immediate and steady cash flow from the rental income from the SFRs that we acquire while
potentially gaining significant HPA over time. HPA is a metric most of our competitors use to project total returns. We believe
cash flow is a better metric to project returns because cash flow is realized currently while HPA is unrealized and deferred until
the assets are sold. While our goal is to grow our company and generate available cash flow from the rental income of our SFRs
that will allow us to pay all of our operating costs for the operation of our portfolio properties and distribute profits to our
stockholders in the form of quarterly dividends, there can be no assurance we will be able to do so.
Our History and Structure
In 2012, Chad M. Carpenter,
our Chairman of the Board, President and Chief Executive Officer, recognized an opportunity to acquire portfolios of leased homes
with positive cash flow and then distribute resulting profits to stockholders. To capitalize on this opportunity, Mr. Carpenter
acquired a majority of the issued and outstanding shares of our common stock in July 2012 and founded Reven Housing REIT. Since
then, we have been engaged in our current business of acquiring, owning and operating portfolios of leased single family homes
as rental properties.
Our company was originally
incorporated on April 26, 1995. On April 1, 2014, we converted from a Colorado corporation to a Maryland corporation pursuant to
applicable state conversion statutes to better position our company to qualify and operate as a REIT. In connection with our conversion
to a Maryland corporation, we adopted our current charter and bylaws in accordance with the laws of the State of Maryland.
Reven Housing REIT, Inc.
serves as a holding company for our various operating subsidiaries through which we conduct our acquisitions and hold our properties
and applicable secured debt. These operating subsidiaries include Reven Housing REIT OP, L.P., a Delaware limited partnership that
is our wholly-owned operating partnership; Reven Housing GP, LLC, a Delaware limited liability company that is our wholly-owned
subsidiary and the sole general partner of our operating partnership; Reven Housing REIT TRS, LLC, a Delaware limited liability
company that is the wholly-owned subsidiary of our operating partnership and that we intend will elect to be treated as a taxable
REIT subsidiary; and the following Delaware limited companies each of which is wholly-owned by our operating partnership: Reven
Housing Georgia, LLC, Reven Housing Texas, LLC, Reven Housing Florida, LLC, Reven Housing Tennessee, LLC, Reven Housing Florida
2, LLC, and Reven Housing Texas 2, LLC.
Development of Our Business
Since January 1, 2016,
we have undertaken the following material transactions and general development of our business:
Public Offering
.
Between February 2016 and December 2016, we conducted a direct public offering of our common shares pursuant to a registration
statement on Form S-11. In the offering, we sold a total of 3,694,620 common shares at $5.00 per share for the gross proceeds of
$18,473,100. The net proceeds are being utilized to finance the acquisition of homes and for general working capital.
Houston, Texas -
On
November 29, 2016, we closed on the acquisition of 97 homes located in the Houston, Texas, metropolitan area, for the purchase
price of $9,091,000, exclusive of closing costs. We funded 100% of the purchase with cash on hand. The acquired properties average
1,482 square feet and are mostly three-bedroom, two bath homes. At the time of closing, 55 of the homes were subject to one-year
leases, five were vacant, and 37 were subject to month-to-month leases.
Birmingham, Alabama
-
On December 9, 2016, we entered into a Single Family Homes Real Estate Purchase and Sale Agreement, as amended, for the purchase
of a portfolio of up to 72 single-family homes located in the Birmingham, Alabama, metropolitan area for the purchase price of
up to $5,550,000. As of the execution date of the agreement, 65 properties were subject to one-year leases with tenants, one property
was subject to a month-to-month lease with the tenant and six properties were vacant.
For a period commencing
on the effective date of the agreement and ending on the 45
th
day following seller’s delivery of certain specified
property information to us, we are allowed to retain a contractor or home inspector mutually acceptable to us and the seller to
identify any necessary repairs and the cost to make such repairs. The seller will be responsible for paying for all repairs identified
by such third-party inspector. The agreement contains customary representations and warranties by the seller, and we will be obligated
to purchase the properties only after satisfaction of agreed upon closing conditions. We may terminate the agreement for any or
no reason by giving written notice of such termination to the seller on or before the expiration of the due diligence period. The
agreement provides that the termination of our due diligence period and the closing date shall be to no later than March 31,
2017 and April 10, 2017, respectively. There can be no assurance that we will consummate the acquisition.
Lubbock National Bank
Credit Facility -
On January 31, 2017, we borrowed $5,020,000 from Lubbock National Bank pursuant to our issuance of a promissory
note secured by deeds of trust in the principal amount of $5,020,000. Principal and accrued interest are payable in 60 consecutive
monthly installments of $31,759 on the first day of the month until January 31, 2022 when the entire amount of principal and interest
remaining unpaid will be payable. Interest accrues and is payable monthly on the loan at the rate equal to four and one-half percent
(4.50%) per annum until maturity. The loan is secured by first priority liens on 97 homes in the Houston, Texas metropolitan area.
The note and the deeds of trust contain customary terms and conditions, including, without limitation, customary events of default
and acceleration upon default, including defaults in the payment of principal or interest, defaults in compliance with the covenants
and bankruptcy or other insolvency events.
Memphis, Tennessee -
On February 16, 2017, we entered into a Single Family Homes Real Estate Purchase and Sale Agreement for the purchase of a portfolio
of up to 27 single-family homes located in the Memphis, Tennessee, metropolitan area for the purchase price of up to $2,140,000.
As of the execution date of the agreement, 16 properties were subject to one-year leases with tenants, four properties were subject
to month-to-month leases with the tenants and seven properties were vacant.
For a period commencing
on the effective date of the agreement and ending on the 30
th
day following seller’s delivery of certain
specified property information to us, we are allowed to retain a contractor or home inspector mutually acceptable to us and the
seller to identify any necessary repairs and the cost to make such repairs. The seller will be responsible for paying for all repairs
identified by such third-party inspector. The agreement contains customary representations and warranties by the seller, and we
will be obligated to purchase the properties only after satisfaction of agreed upon closing conditions. We may terminate the agreement
for any or no reason by giving written notice of such termination to the seller on or before the expiration of the due diligence
period. The agreement provides that the closing for the purchase of the properties is to occur no later than 30 days following
the expiration of the due diligence period. There can be no assurance that we will consummate the acquisition.
Atlanta, Georgia -
On
March 15, 2017, we closed on the acquisition of 38 single-family homes located in the Atlanta, Georgia, metropolitan area for the
purchase price of approximately $2,663,000 not including closing expenses and acquisition costs.
Our Competitive Advantages
We believe that our competitive
advantages include the following:
Our Business Strategy
Our business strategy of
acquiring stabilized or leased portfolios of single-family homes and operating them as rental properties allows us to focus on
generating positive cash flow and distributing the resulting profits to our stockholders. Our business strategy differentiates
us from most of our competitors because they are buying empty homes individually as opposed to purchasing rented homes in bulk
or are focused on generating home price appreciation. In the institutional investment sector, our strategy is generally known as
a core strategy while most of our competitors are executing opportunistic strategies. We believe that core strategies generally
involve less risk than opportunistic strategies due to the stabilized and cash flow nature of the SFRs acquired and are more in
line with the strategies of public REITs in other asset classes. We believe our business strategy is efficient and cost effective
because we do not need a large staff or to incur significant overhead costs in order to grow and execute our business plan.
Internal Management
As an internally-managed
REIT, our executives are dedicated to our business allowing us to maintain greater control over the management and operation of
our business than externally-managed REITs. Our management’s interests are aligned with those of our stockholders and we
are exposed to fewer conflicts of interest than those typically faced by externally-managed REITs. Additionally, as our portfolio
grows, we believe that we will achieve greater operational efficiencies and realize superior economies of scale as compared to
externally-managed companies.
Experienced Management
Team
We believe the real estate
and institutional investment experience of our management team will lead our company to achieve our growth goals. Our management
team is led by our founder, Chad M. Carpenter, our Chairman, President and Chief Executive Officer. Mr. Carpenter, along with Thad
L. Meyer, our Chief Financial Officer, Chief Operating Officer and Secretary, are both experienced institutional real estate veterans,
each with more than 25 years of residential and commercial real estate experience in both public and private real estate companies.
Along with Michael P. Soni, our Senior Advisor of Investments, who also serves as our asset manager, our seasoned management team
has more than 55 years of collective commercial and residential real estate investment, leasing and operational experience and
has been involved in over $3.0 billion of real estate transactions. Members of our management team, including their experiences
prior to joining our company, have inspected over 3,000 single-family residences and acquired approximately 800 single-family residences
to rent or rehabilitate and sell in 12 states, including Arizona, California, Florida, Georgia, Indiana, Michigan, Mississippi,
New York, Ohio, Pennsylvania, Tennessee and Texas. Our management team has established excellent relationships with brokers, sellers,
institutional investors, policymakers, lenders, and aggregators of residential assets and has a proven track record in acquiring,
managing and selling residential and commercial real estate.
Disciplined Acquisition
Strategy
We have developed a disciplined,
efficient, and cost-effective process to acquire assets that meet or exceed our conservative underwriting criteria, a thorough
due diligence process and financial return requirements. We seek to continue acquiring portfolios of occupied single family homes
in bulk from investors who acquired, rehabilitated and rented them to qualified tenants and that have the potential for increased
yield and appreciation. In addition, we believe we can achieve greater economies of scale by focusing our acquisitions in select
markets and communities where there are established property management, general contractor and vendor relationships, and greater
concentration of assets.
Extensive Sourcing
Network
Our management team has
cultivated and developed a wide network of industry relationships over the years, which we believe provides our company with a
distinct competitive advantage to source a greater number of off-market transactions. Through this network, we have been able to
source attractive portfolio acquisitions, and we believe they may provide us with additional attractive privately negotiated acquisition
opportunities that in some cases may not be available to other market participants. We believe that this can result in more favorable
pricing for acquisitions than if we were bidding on fully marketed deals. Our acquisitions team is in regular communication with
sourcing contacts and sends out frequent and regular emails to update our underwriting criteria and to account for changes in current
market and economic conditions. We provide agents and investors with specific acquisition criteria regarding the type of dwelling,
location, condition of property, and price points so that they can concentrate their efforts exclusively on properties that meet
our criteria. We maintain a database of potential sourcing contacts that is updated on a regular basis.
Our Business and Growth Strategies
Our objective is to be
a leader in the single family rental business as an institutional-quality operator on a national scale. Our focus is on cash flow
and profitability while generating meaningful distributions from rental income and the potential for capital appreciation. We believe
we can achieve this objective through the following strategies:
Disciplined Investment
Strategy and Institutional Platform
We intend to grow by acquiring
portfolios of single-family homes with cash flow in place in portfolios in select markets throughout the United States where economic
forecasts are favorable for our business. Such forecasts include increasing rental rate growth and home price appreciation, increasing
population migration and increasing job growth. Other factors that are as important are decreasing unemployment rates, decreasing
cap rates and vacancies. We have strict investment criteria and detailed due diligence policies for each acquisition with formal
investment committee meetings for review and approvals which creates an institutional culture and platform.
Create a Diversified
Stabilized Portfolio
We currently own leased
portfolios in the Atlanta, Georgia, Houston, Texas, Jacksonville, Florida, and Memphis, Tennessee metropolitan areas and intend
to expand into other select markets in the United States that fit our strict investment criteria. These targeted markets include
selected cities in Arizona, California, Colorado, Illinois, Indiana, Kentucky, Nevada, North Carolina, Oklahoma, Utah and Virginia.
We believe that our planned expansion into these markets will help us achieve a diversified portfolio.
Keep a Low Cost and
Efficient Overhead Structure
Our business strategy and
platform allow us to maintain a lean, qualified team, keeping overhead costs down while efficiently managing vendors on an outsourced
basis through active oversight and reporting. Unlike many of our competitors, we do not require nor maintain a large staff for
acquisitions because we acquire investments through purchases of portfolios, not individual homes. Similarly, because we target
and acquire homes that are leased and are otherwise in rent-ready condition, we do not require nor maintain a large staff for asset
management or significant resources for renovating the homes. Additionally, by outsourcing property management functions to qualified
and locally based property managers, we can focus our capital, resources and efforts that would otherwise be used to build in-house
property management on operations and growth.
Locally-Based Property
Management
Property management is
a critical part of our business, and we believe this important function is a low margin and local business given the disparate
nature of our assets and the unique characteristics of each home and the markets in which they are located. We believe that keeping
maintenance and other operating costs under strict control and supervision is paramount to generating acceptable rental yields
and maximizing the price appreciation of our assets. As such, we outsource our property management functions to independent, qualified,
locally based property management teams who are experienced and familiar with the local markets in which they operate. We in turn
manage the outsourced property managers to operate within our policies, procedures and budgets. By outsourcing the property management
function of our business, our executives can better utilize their efforts, time and resources to focus on acquisitions and asset
management rather than building a low-margin in-house property management arm, which we believe will allow us to achieve higher
returns for our stockholders. We believe this is an efficient strategy for us at this stage of our development and furthers our
growth.
Reporting for Operations
We utilize currently available
cloud-based management information systems that will enable comprehensive tracking, management and control of all required functions
within a cost-efficient and scalable environment as recommended by our select outside property management professionals. We believe
that these tools will facilitate effective and cost-efficient management of disparate assets, scale our platform, and sustain operating
margins as we continue to grow. These systems will also enable management to comply with strict regulatory compliance and governance
requirements and will empower field personnel to respond autonomously within established corporate and budgetary parameters.
Our Business Activities and Operations
As of December 31, 2016,
we have invested an aggregate of approximately $48.0 million and own a total of 624 homes, of which 265 homes are in the Houston,
Texas metropolitan area, 256 homes are in the Jacksonville, Florida metropolitan area, 94 homes are in the Memphis, Tennessee metropolitan
area (with two of the Memphis homes located just across the border in Mississippi) and nine homes are in the Atlanta, Georgia metropolitan
area. Subsequent to year end on March 15, 2017 we purchased 38 additional homes in the Atlanta, Georgia metropolitan area for approximately
$2,663,000 plus closing and acquisition costs. As of the date of this report, we have entered into purchase agreements for the
acquisition of up to 72 additional homes in the Birmingham, Alabama metropolitan area for the aggregate purchase price of up to
approximately $5,550,000, and up to 27 additional homes in the Memphis, Tennessee metropolitan area for the aggregate purchase
price of up to approximately $2,140,000. Our acquisition of these additional 99 homes is subject to our ongoing due diligence inspection
of the properties. There can be no assurance we will be able to consummate the acquisitions. In addition, we evaluate new markets
on an ongoing basis to identify investment opportunities that we believe can generate attractive risk-adjusted returns for our
stockholders.
States in Which We Own
Single-Family Homes
(as of December 31, 2016)
NOTE: States shaded as “Owned”
are states in which we own homes. However, we only own nine homes in Georgia and two homes in Mississippi.
The following table presents
statistics of our single-family homes by Metropolitan Statistical Area, or MSA, and metro division as of December 31, 2016.
Total Portfolio of Single-Family Homes — Summary
Statistics
(as of December 31, 2016)
Market
|
|
No. of Homes
|
|
|
Aggregate Investment
|
|
|
Average Investment per Home
|
|
|
Properties Leased
|
|
|
Properties Vacant
|
|
|
Portfolio Occupancy Rate
|
|
|
Average Age (years)
|
|
|
Average Size (sq. ft.)
|
|
|
Average Monthly Rent
|
|
|
Average Remaining Lease Term (Months)
|
|
Atlanta,
Georgia
|
|
|
9
|
|
|
$
|
668,469
|
|
|
$
|
74,274
|
|
|
|
9
|
|
|
|
0
|
|
|
|
100.0
|
%
|
|
|
22
|
|
|
|
1,450
|
|
|
$
|
964
|
|
|
|
7.5
|
|
Houston,
Texas
|
|
|
265
|
|
|
|
22,242,834
|
|
|
|
83,935
|
|
|
|
260
|
|
|
|
5
|
|
|
|
98.0
|
%
|
|
|
46
|
|
|
|
1,452
|
|
|
|
1,069
|
|
|
|
6.4
|
|
Jacksonville,
Florida
|
|
|
256
|
|
|
|
17,703,457
|
|
|
|
69,154
|
|
|
|
235
|
|
|
|
21
|
|
|
|
92.0
|
%
|
|
|
52
|
|
|
|
1,327
|
|
|
|
888
|
|
|
|
4.8
|
|
Memphis,
Tennesee
|
|
|
94
|
|
|
|
7,383,828
|
|
|
|
78,551
|
|
|
|
87
|
|
|
|
7
|
|
|
|
93.0
|
%
|
|
|
40
|
|
|
|
1,636
|
|
|
|
990
|
|
|
|
10.5
|
|
Totals
|
|
|
624
|
|
|
$
|
47,998,588
|
|
|
$
|
76,921
|
|
|
|
591
|
|
|
|
33
|
|
|
|
94.7
|
%
|
|
|
47
|
|
|
|
1,428
|
|
|
$
|
981
|
|
|
|
6.4
|
|
In reviewing the above table, please note:
|
•
|
We purchase homes that have been previously renovated and are currently leased. Since our initial
purchase, we have incurred a total of approximately $830,000 of post-acquisition improvement costs, primarily related to releasing
properties upon turnover of the existing tenants. These costs are included in the “Aggregate Investment” and “Average
Investment per Home” metrics above.
|
|
•
|
Acquisition and transaction costs are expensed as incurred. These costs are not included in our
“Aggregate Investment” or our “Average Investment per Home” metrics.
|
|
•
|
“Average Monthly Rent” is calculated by dividing the sum of monthly rent for each
home by the total number of homes. Our use of rent concessions is extremely limited and has little to no impact on rental figures
disclosed herein. We do not have a policy of offering rent concessions.
|
|
•
|
Our policy is to acquire homes that are entirely leased. Of the 624 properties we have acquired
as of December 31, 2016, only seven were vacant upon acquisition.
|
Our Investment Process
Our investment strategy
is to acquire portfolios of tenant-occupied houses with cash and/or limited partnership interests of our operating partnership,
or OP units, from investors who have accumulated homes and who are now looking for an exit strategy. The evaluation and execution
of our portfolio acquisitions are subject to the review and approval by our investment committee, which operates under the oversight
of our Board of Directors and is currently comprised of Chad M. Carpenter, our Chairman and Chief Executive Officer, Xiaofan (Fred)
Bai, a member of our Board of Directors, Xiahang (Jake) Bai, a member of our Board of Directors, Thad L. Meyer, our Chief Financial
Officer and Chief Operating Officer, and Michael P. Soni, our Senior Advisor of Investments. We have developed and integrated
the following proprietary processes in the implementation of our investment strategy.
Balanced Value Approach
for Investing
Our acquisition strategy
is based upon extensive research and utilizes a proprietary acquisitions algorithm that focuses on acquiring a balance of Class
“A” and “B” portfolios of rented homes that have the potential for both increased yield and appreciation.
To date, we have acquired mostly Class “B” homes and as we grow over time we intend to acquire more Class “A”
homes to achieve our balanced value approach strategy, described below. Typically, Class “A” homes are homes that are
generally larger and built after the year 2000, have a current rental yield of 12%+ with higher mid-term appreciation potential,
and are generally in markets with the strongest economies and/or those that did not suffer recessionary effects to the extent experienced
by other parts of the country. Class “B” homes are homes that are typically smaller and built before the year 2000,
have a current rental yield of approximately 14% with lower mid-term appreciation potential, and are generally in markets with
recovering economies. We invest in markets that demonstrate strong and/or improving economic performance which will support the
potential for rent increases and home appreciation. When approaching a market, we focus on factors such as the strength of rental
demand, rates of job growth, population growth and unemployment. Within markets that meet our investment criteria, we seek to identify
the neighborhoods that offer the most attractive mix of rental demand and rental rates, which are often characterized by good access
to transportation networks and employment centers, good schools and low levels of crime. We believe this “balanced value”
approach towards investing will help our investments achieve sustainable profitability at all times and through all cycles. This
balanced value approach is intended to offer stockholders diversification, distributions, appreciation, liquidity and a lower risk
investment.
|
•
|
Types of houses
. In terms of the structural or physical characteristics of the houses we
acquire, we typically buy single-family residences with at least three bedrooms and at least two bathrooms. Houses are built with
a combination of brick, stone, stucco, siding, and wood with updated windows and young to medium age roofs.
|
|
•
|
Market selection process
. To gather market research we use Local Market Monitor, a third-party
service founded in 1990, which is updated monthly with market data. Local Market Monitor began as a quarterly publication, stemming
from the National Review of Real Estate Markets which analyzed conditions in 100 residential U.S. markets, using such economic
data as home values, employment growth, population growth, and developed the concept of Equilibrium Home Prices, which has proved
valuable in assessing real estate market risk during the last two economic cycles.
|
Local Market Monitor currently monitors
the 315 major real estate markets in the United States. We focus on markets that have the following characteristics:
|
o
|
Projected real estate appreciation over the next three years
|
|
o
|
Lower current unemployment than the national average
|
|
o
|
Stable and/or growing population with a minimum population of 500,000
|
|
o
|
Stable and/or dropping vacancy rates
|
|
•
|
Target markets
. We invest in markets that we believe have more upside value through the
potential for rent increases and appreciation of the homes due to the dislocation caused by the recent economic downturn and the
current positive economic drivers in these markets. We are currently targeting the following markets, which include new markets
and existing markets for further expansion:
|
Phoenix, AZ
|
Atlanta, GA
|
Memphis, TN
|
Tucson, AZ
|
Chicago, IL
|
Nashville, TN
|
Central California
|
Indianapolis, IN
|
Dallas, TX
|
Birmingham, AL
|
Louisville, KY
|
Fort Worth-Arlington, TX
|
Denver, CO
|
Las Vegas, NV
|
Houston, TX
|
Fort Lauderdale, FL
|
Charlotte, NC
|
Irving, TX
|
Jacksonville, FL
|
Raleigh, NC
|
San Antonio, TX
|
Miami, FL
|
Virginia Beach, NC
|
Salt Lake City, UT
|
Orlando, FL
|
Oklahoma City, OK
|
Richmond, VA
|
Tampa, FL
|
Tulsa, OK
|
|
Using the 3-year aggregate home value
forecast from Local Market Monitor, we sort markets (as listed above) based on projected growth. Those markets that have higher
projected growth are perceived to be lower risk, and yield a lower cap rate per class, than those markets that have lower or no
growth projection over the next three years.
|
•
|
Zip code analysis
. Our properties are intended to appeal to the following tenant profile:
|
|
o
|
Middle-income blue-collar/gray-collar/semi-professional individuals and families
|
|
o
|
Incomes ranging from $25,000 to $50,000 per year
|
|
o
|
Aged 30 years and above
|
|
o
|
Preference for families to reduce turnover and related expenses
|
Since we target only tenant-occupied properties,
we focus on submarkets where we expect that the majority of tenants will fit this profile. In the event that they do not, we will
replace them with our targeted tenant profile on lease renewal.
Our zip code analysis focuses on the following metrics:
|
o
|
Average household income
|
|
o
|
Total crime risk (including utilizing FBI statistics)
|
Sourcing and Evaluation of Assets for
Acquisition
Our management executives
and investment professionals maintain existing relationships and continually develop new relationships in our network of contacts
providing us access to potential portfolios of properties that meet our investment criteria. We provide contacts in our sourcing
network with our specific investment criteria regarding the type of dwelling and specific home characteristics, location, condition
of property, and price points so that efforts are concentrated solely on the properties that are potentially viable for investment
by us. We are in regular communication with portfolio sourcing contacts and send out frequent and regular emails updating investment
criteria to adapt to changes due to market fluctuations or other factors affecting our acquisitions model. All contacts and communications
with them are logged in a central database to ensure we have current and correct sourcing information as we continually build and
maintain our sourcing network. We believe the vast majority of SFR portfolios are available on an off-market basis due to the fragmentation
of the SFR income-producing asset market, lack of institutional and other large buyers, and the local vs. national nature of the
assets.
|
•
|
Sources of deal flow
. We source potential SFR portfolios from a variety of sources
in our network to optimize deal flow of our target assets, which sources include:
|
|
o
|
Residential brokers specializing in income-producing properties:
|
|
o
|
Loopnet — online database of properties and brokers
|
|
o
|
Trulia — online database of properties and brokers
|
|
o
|
Existing SFR funds attempting to liquidate holdings and/or realize profits on flips
|
|
o
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Property Wholesalers — groups that acquire damaged homes and/or foreclosed homes
in order to rehabilitate, rent, flip, and manage
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Fannie Mae/Freddie Mac for tenant-occupied portfolios available for bid
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Building a network
. Our executives maintain existing relationships with a wide variety of
relevant contacts that will allow access for many potential portfolios of properties. In addition, these agents, investors and
other contacts are supplied with our specific investment criteria regarding type of dwelling and specific home characteristics,
location, condition of property, and price points so that efforts are concentrated solely on the properties that are potentially
viable for investment by us.
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Managing the network
. We are in continuous communication with portfolio sourcing contacts
and send out frequent and regular emails updating investment criteria when there are changes due to market fluctuations or other
factors affecting our acquisitions model. All contacts are logged in our proprietary contact database to ensure we have correct
contact information. Further, each contact receives their own email file and all communications are filed appropriately in order
to keep records of all conversations.
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Initial informational requirement
. All sourcing contacts in our network are requested to
provide us with the following information for each house to ensure that we can quickly and productively qualify a portfolio for
acquisition: market, address, zip code, type (SFR or town homes), rent, actual taxes, insurance, year built, square footage, #
of bedrooms, # of bathrooms, asking price, lease expiry, Section 8/non-Section 8, and one exterior picture of the house. Based
on the foregoing information we are able to verify whether the portfolio is in one of our target markets, assign housing classes
based on year built, beds, baths, and pictures, sum actual tax and insurance expenses, and determine average rent for the portfolio.
We can also determine from the above information the duration for current leases.
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Once a portfolio has been identified as appropriate
for acquisition based on our investment criteria it is subjected to a rigorous evaluation process. This process includes a multi-tiered
investment committee process ranging from pre-committee to final committee meetings. This process will ensure that all members
of the investment committee agree with the findings from the due diligence period and that the portfolio in question is an appropriate
investment for the company and its stockholders. The due diligence process includes case scenario financial modeling and sensitivity
analysis, zip-code and neighborhood analysis, physical inspections by qualified engineers, broker price opinion “BPO”
analysis to verify valuations are consistent with the purchase price, title and legal review, and finally property manager vetting
and qualification.
Acquisition and Underwriting
We have developed a disciplined,
efficient, and cost-effective process to acquire assets that meet or exceed our conservative underwriting criteria, a thorough
due diligence process and financial return requirements. We acquire properties via portfolio purchases or in bulk sourced from
our network discussed above. Once we have qualified potential portfolios for purchase based on our acquisition criteria, we proceed
with discussions with the seller in negotiating and executing a letter of intent setting forth the general terms for the purchase.
Once we have the letter of intent executed from the seller, we prepare documentation for review by our investment committee, including
members of our executive management, where the entire initial underwriting is reviewed for approval. If and when approved, then
we commence negotiation of the purchase contract with the seller and commence due diligence. Our acquisitions team continuously
audits our underwriting assumptions, establishes property-specific business plans and tours and inspects each property before closing.
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Professional BPO and valuation verification
. During the preliminary underwriting phase we
use Zillow and CMA analysis to arrive at valuations for market value. In addition, we utilize professional real estate firms to
provide us with broker price opinions, or BPO, for valuations for each house. Each BPO is completed in a manner to ensure confidence
in investment and pricing decisions. Two levels of technology-driven checks are used — data validation and a quality
control rules engine — to identify duplicates and bring data together helping valuation professionals make accurate
decisions. Each BPO is reviewed by staff analysts prior to delivery. This provides a final check against our valuation assumptions.
We will only commence legal review of title and inspections if the valuation based on the BPOs are more than the total purchase
price, otherwise we will endeavor to renegotiate the purchase price prior to incurring further due diligence costs.
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Physical inspection and quality control
. Once the professional BPOs have been received,
and our existing valuation assumptions are proven correct, we utilize third-party professional engineers to conduct physical inspections
of each house. The engineers provide us with reports based on the results of their inspections. These reports primarily focus on
the following elements: site and pavements; structure; building envelope; mechanical, electrical and plumbing, or MEP; life safety;
and interior. The reports also provide commentary regarding the tenant and the neighborhood.
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Purchase and sale contract renegotiation
. Once the inspection period has ended and all of
the diligence has been reviewed, including title and legal review, if certain aspects of the contract require further attention,
we will then renegotiate those aspects of the contract. These items may include valuation problems that require a price deduction,
unexpected deferred maintenance that must be deducted from the price, or dropping properties due to quality or other issues.
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Closing
. Within 30 days of the end of the inspection period we will close on the transaction.
All rents will be pro-rated, tenant leases converted, service contracts cancelled, and deposits and keys delivered.
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Proactive Asset Management
Each time we acquire a
portfolio of assets, we prepare portfolio specific budgets that provides clear instructions to, and parameters for, our asset management
personnel. Michael P. Soni, our Senior Advisor of Investments, currently serves as our asset manager. We expect to hire additional
asset managers and other asset management personnel as we continue to expand our operations. The asset management team’s
primary responsibility will be to execute and adhere to these budgets. Our asset managers will utilize our property managers’
offices as required for meetings that will limit the need for regional offices and related expenses. Our asset managers will proactively
manage the property managers to reduce expenses and implement customer retention plans to keep our tenants in place for longer
periods to reduce turns, vacancy, releasing costs and increase stockholder returns. We also intend to hire third-party tax advisors
to review and, if appropriate, appeal property tax bills every year to effectively manage our property tax expense.
The principal responsibilities of our asset
management personnel will include:
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Managing the budget for each asset and portfolios of assets
. These budgets include occupancy
goals, rent escalation objectives, asset improvements, leasing plans, return expectations, and recommendations as to which property
management company to contract.
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Managing the property managers
. Asset managers will be responsible for training and
managing the property managers. Asset managers will meet with each property manager to deliver and review the
portfolios’ budgets to ensure that all parties who are involved in that portfolio understand our investment objectives
and goals. Asset managers will meet or have a conference call monthly to review each property management report to help the
property managers’
solve problems or issues.
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Leasing
. Asset managers will monitor occupancy for each portfolio on a weekly basis.
Asset managers will be tasked to keep their respective portfolios leased at all times and ensure that tenants’ leases
are being renewed prior to expiration. Asset managers will ensure that property managers maintain homes in rent-ready
condition and begin the search for prospective tenants well before tenants vacate a property. Our property managers utilize
a standard form
lease that has been
reviewed and approved by us. Each budget plan
will outline the leasing terms under which leases can be
approved.
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Rent collection
. Asset managers will monitor accounts receivable for each portfolio. In
the event that tenants miss rent deadlines, the asset managers will follow up with the property managers to ensure that they have
contacted the tenants to expedite the resolution of any issues.
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Reporting
. Asset managers will review property management reports for each portfolio on
a monthly basis and prepare monthly asset management reports. Asset managers will use property management reports to ensure that
the property managers adhere to the portfolio’s budget and provide recommendations that add value to the asset or portfolio.
Asset managers will monitor occupancy, rent collection, expenses, insurance, maintenance and other cap-ex closely and will ensure
that property managers take all necessary steps to keep budgets on track. Asset managers will meet quarterly with senior management
to review the performance of each portfolio.
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Disposition
. Asset managers will review and consider all purchase offers we receive on any
asset in our portfolio and then in turn provide the terms of the offer and their evaluation to senior management. In evaluating
whether to sell any such asset, we will consider, among other things, tax considerations in respect of our qualification and compliance
as a REIT, the capital appreciation of the asset, and the gain from the disposition. In the event proposed offers and dispositions
are approved by us, our asset managers will sell houses through a listing process with instructions that are previously approved
by us.
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Property Management
We generally outsource
our property management function to the existing property managers that are in place when we acquire a portfolio of assets. All
of our properties are managed by third-party property managers, with the same property manager managing all of the properties that
are located within the same metropolitan area. In obtaining these services, we first determine that these property managers can
provide the services we need and operate under our oversight and within the budget developed specifically for that portfolio. Our
property managers provide services to us pursuant to management agreements that provide for one-year terms and are mutually terminable
with 30 days’ prior notice. For their services, we pay our property managers management fees ranging from 7 – 8%
of gross rental receipts from the properties they manage plus leasing fees for renewing tenants and new tenants, as well as 50%
of any late fees assessed on the tenants. Property managers assist us in executing the budgets we have developed for each portfolio
they manage.
The principal responsibilities of our property managers include:
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Leasing
. Property managers monitor occupancy for each portfolio on a daily basis. Property
managers are tasked to keep their respective portfolios leased at all times and will ensure that tenants’ leases are being
renewed prior to expiration. Property managers will ensure that the homes they manage are maintained in rent-ready condition if
vacated. Property managers serve as our local leasing agents if they are qualified and have a proven track record. Additionally,
property managers are instructed to use their best efforts to encourage tenants to renew leases with annual rental increases. If
the situation warrants we will approve and provide certain incentives such as free rent or minor improvements in an effort to encourage
tenants to enter into leases more quickly and to enter into leases with longer lease terms.
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Tenant retention
. We regularly work with the property managers in implementing tenant retention
programs. We believe that satisfied tenants will be more inclined to sign long-term leases and will provide a higher level of care
for the property.
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Rent collection
. Property managers monitor accounts receivable for each portfolio on a daily
basis. Property managers are instructed to contact tenants and collect late charges quickly if tenants do not make their payments
on time. Property managers are tasked to expedite the resolution of any issues and will be able to provide certain tenants with
payment options upon approval from asset management. Property managers are instructed to evict tenants, if necessary, in a socially
responsible and ethical process that is adapted and appropriate for each market.
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Regular home inspections
. Property managers are required to perform drive-by inspections
of all properties they manage and perform interior inspections every six months to ensure all homes are being well maintained by
the tenants in order to avoid any serious and costly issues. Property managers document all interior inspections and submit photographs
and focus on the property’s structure, foundation, roof, plumbing, furnace, water heaters, air conditioners, mechanical systems
and appliances.
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Reporting
. Property managers prepare property management reports for each portfolio of assets
that they manage to provide to the asset manager on a monthly basis. These reports focus on occupancy, rent collection, actual
expenses incurred vs. budget, and cap-ex requirements/budgets.
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Managing the tenant and vendor relationships
. Property managers manage the tenant and vendor
relationships for our company. We strive to ensure that each property manager adheres to our professional values, ethics, conduct
and decorum when interacting with tenants and vendors on our behalf. We are committed to responsibility and responsiveness in providing
landlord services to our tenants and endeavor to create and maintain positive relationships with our tenants and service providers.
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Maintenance calls
. Property managers field all maintenance calls. Property managers are
empowered to hire vendors to address issues and are tasked to keep repair and/or maintenance costs within predefined and approved
budgets. For items and actions that fall outside pre-approved expenditures, property managers are required to discuss with asset
management to determine and take the appropriate action. Property managers are also required to respond to emergency calls.
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Management Information Systems and Technology
We utilize currently available
cloud-based management information systems that enable comprehensive tracking, management and control of all required functions
within a cost-efficient and scalable environment as recommended by our select outside property management professionals. We believe
that these tools facilitate effective and cost-efficient management of disparate assets, scale its platform, and sustain operating
margins as we continue to grow. These systems enable management to comply with strict regulatory compliance and governance requirements
and empower field personnel to respond autonomously within established corporate and budgetary parameters. Corporate email and
business productivity tools are deployed under SaaS (software-as-a-service) licensing arrangements to eliminate hardware and maintenance
costs while improving performance and reliability.
Competition
We face competition from
many entities engaged in real estate investment activities, including individuals, other real estate investment companies, including
newly formed REITs, and real estate limited partnerships. Our competitors may enjoy significant competitive advantages that result
from, among other things, having substantially more available capital, a lower cost of capital and enhanced operating efficiencies.
Further, the market for the rental of properties is highly competitive. We also face competition from new home builders, investors
and speculators, as well as homeowners renting their properties.
Risk Management
We face various forms of
risk in our business ranging from broad economic, housing market and interest rate risks, to more specific factors, such as credit
risk related to our tenants, re-leasing of properties and competition for properties. We believe that the systems and processes
developed by our experienced executive team since commencing our real estate investment operations in July 2012 will allow us to
monitor, manage and ultimately navigate these risks.
Insurance
We maintain property and
liability insurance coverage related to our SFR properties, and workers’ compensation coverage for our employees. We believe
the policy specifications and insured limits under our insurance program are appropriate and adequate for our business and properties
given the relative risk of loss, the cost of the coverage and industry practice. However, our insurance coverage is subject to
substantial deductibles and carve outs, and we will be self-insured up to the amount of such deductibles and carve outs.
Regulation
General
Our properties are subject
to various covenants, laws and ordinances and certain of our properties are also subject to the rules of the various HOAs where
such properties are located. We believe that we are in compliance with such covenants, laws, ordinances and rules, and we also
require that our tenants agree to comply with such covenants, laws, ordinances and rules in their leases with us.
Fair Housing Act
The Fair Housing Act, or
FHA, its state law counterparts and the regulations promulgated by HUD and various state agencies, prohibit discrimination in housing
on the basis of race or color, national origin, religion, sex, familial status (including children under the age of 18 living with
parents or legal custodians, pregnant women and people securing custody of children under the age of 18), handicap or, in some
states, financial capability. We believe that our properties are in substantial compliance with the FHA and other regulations.
Environmental Matters
As a current or prior owner
of real estate, we are subject to various federal, state and local environmental laws, regulations and ordinances, and we could
be liable to third parties as a result of environmental contamination or noncompliance at our properties, even if we no longer
own such properties. See “Risk Factors — Risks Related to the Real Estate Industry Generally — Contingent
or unknown liabilities could adversely affect our financial condition.”
REIT Qualification
We intend to elect to qualify
as a REIT commencing with our taxable year ending December 31, 2016. Our qualification as a REIT depends upon our ability to meet
on a continuing basis, through actual investment and operating results, various complex requirements under the Code relating to,
among other things, the percentage of income that we earn from specified sources, the percentage of our assets that fall within
specified categories, the diversity of our capital stock ownership, and the percentage of our earnings that we distribute. We believe
that we have been organized in conformity with the requirements for qualification and taxation as a REIT under the Code, and that
our intended manner of operation will enable us to meet the requirements for qualification and taxation as a REIT.
So long as we qualify as
a REIT, we generally will not be subject to federal income tax on our REIT taxable income that we distribute currently to our stockholders.
If we fail to qualify as a REIT in any taxable year and do not qualify for certain statutory relief provisions, we will be subject
to federal income tax at regular corporate rates and may be precluded from qualifying as a REIT for the subsequent four taxable
years following the year during which we fail to qualify as a REIT. Even if we qualify as a REIT, we may be subject to certain
federal, state and local taxes on our income or property.
Investment Company Act of 1940
We intend to conduct our
operations so that neither we nor any of our subsidiaries are required to register as an investment company under the Investment
Company Act of 1940, as amended, or the 1940 Act.
Employees
As of December 31, 2016,
we had three full-time employees. Additionally, Michael P. Soni, our Senior Advisor of Acquisitions and our asset manager, provides
full-time services to us on a consultancy basis.
Available Information
Our website is located
at www.revenhousingreit.com. The information on or accessible through our website is not part of this annual report on Form 10-K.
A copy of this annual report on Form 10-K is located at the SEC’s Public Reference Room at 100 F Street, NE, Washington,
D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The
SEC also maintains an internet site that contains reports and other information regarding our filings at www.sec.gov.
We have a limited
operating history and therefore we cannot ensure, either in the near- or long-term, that we will be able to generate cash flow
or profit or execute our business plan.
We commenced our current business operations in July 2012. As a result, our company
has a limited operating history upon which you may evaluate our business and prospects and an investment in our common stock may
entail significantly more risk than the securities of a company with a substantial operating history. Our business operations are
subject to numerous risks, uncertainties, expenses and difficulties associated with early stage enterprises. You should consider
an investment in our company in light of these risks, uncertainties, expenses and difficulties. Such risks include:
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the absence of a lengthy operating history;
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insufficient capital to fully realize our operating plan;
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our ability to anticipate and adapt to a developing market;
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a competitive environment characterized by well-capitalized competitors;
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our ability to identify, attract and retain qualified personnel;
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our reliance on key management personnel;
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our ability to qualify and thereafter continually operate as a REIT;
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our ability to operate as a NASDAQ-listed public company; and
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our ability to identify and complete future acquisitions of single-family homes that meet our acquisition
criteria.
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Because we are subject
to these risks, evaluating our business may be difficult. We may be unable to successfully overcome these risks, which could harm
our business and prospects. Our business strategy may be unsuccessful and we may be unable to address the risks we face in a cost-effective
manner, if at all. If we are unable to successfully address these risks, there may be an adverse effect on our business, results
of operations, financial condition and cash flows.
We have a history
of net operating losses, and we may never achieve profitability from operations or generate sufficient cash flows to make or sustain
distributions to our shareholders.
We have a history of net operating losses. For the years ended December 31, 2016 and
2015, we had a net loss of $1,772,354 and $1,795,861, respectively. We may never achieve profitability from operations. Even if
we do achieve profitability, we cannot assure you that we will be able to sustain or increase profitability on a quarterly or annual
basis in the future. There can be no assurance that future operations will be profitable or that we will be able to make or sustain
distributions to our shareholders from cash from operations. Revenues and profits, if any, will depend upon various factors, including
whether we will be able to successfully implement our acquisition strategy. We may not achieve our business objectives and the
failure to achieve such goals would have an adverse impact on us. In addition, an inability to achieve profitability could have
a detrimental effect on the long term capital appreciation of our common stock.
We are an early entrant
in an emerging industry, and the long-term viability of our business strategy on an institutional scale is unproven.
Large-scale
institutional investment in single-family residential homes as investment properties for rent is a relatively recent phenomenon
that has emerged out of the mortgage and housing crisis that began in late 2007. Previously, single-family homes were generally
not viewed as a viable asset for investment on a large scale by institutional investors. Consequently, the long-term viability
of single-family residential investment strategies at an institutional scale has not yet been proven. As an early entrant in this
emerging industry, we are subject to the risk that single-family rental homes may not prove to be a viable long-term business strategy
for a permanent capital vehicle at an institutional scale. If it turns out that our strategy is not a viable long-term business
strategy at an institutional scale, we may not be able to generate meaningful cash flows, which would materially and adversely
affect the viability of our business and stock price.
We have limited experience
operating as a REIT, and we cannot assure you that we will be successful operating as a REIT.
We have limited operating
history as a REIT. Our Board of Directors and executive officers will have overall responsibility for the management of our company.
While certain of our officers and directors have extensive experience in real estate marketing, development, management, and finance,
they had not previously engaged in operating a business in accordance with the requirements of the Code for achieving and maintaining
qualification as a REIT prior to joining us. We cannot assure you that the past experience of our Board of Directors and executive
officers will be sufficient to successfully operate our company as a REIT. Our failure to qualify and maintain REIT status would
have an adverse effect on the cash available for distribution to our stockholders, as well as our business, results of operations,
financial condition and cash flows.
We have many competitors
and may not be able to adequately compete in the SFR market.
Recently, several institutional investors have begun acquiring
single-family homes on a large scale. Traditionally, foreclosed properties and loans secured by properties in pre-foreclosure were
sold individually to private home buyers and small-scale investors. The sale of these assets in portfolios and the entry into this
market of large, well-capitalized institutional investors are relatively recent trends, which we expect to intensify in the near
future. Other REITs and investment funds have recently deployed, or are expected to deploy in the near future, significant amounts
of capital in the single-family housing sector and may have investment objectives that overlap with ours. In acquiring our target
assets, we will compete with a variety of well-capitalized real estate investors, including pension funds, individual home buyers,
banks, insurance companies, public and private real estate investors, such as REITs, real estate limited partnerships and other
entities engaged in real estate investment activities. We also face competition from new home builders, investors and speculators,
as well as homeowners renting their properties. Most of our competitors are larger and have greater financial, technical, leasing,
marketing and other resources than we do. Some competitors may enjoy significant competitive advantages that result from, among
other things, having substantially more available capital, having a lower cost of capital and enhanced operating efficiencies.
At this time, neither we nor any other company has established a market-leading position, and, even if we succeed in becoming an
industry leader, there can be no assurance that it will confer any long-term competitive advantage or positive financial results.
Our long-term growth
will depend significantly upon future acquisitions of single-family homes that meet our acquisition criteria.
The acquisition
of single-family homes (which is the central element of our growth strategy) entails various risks, including the risks that we
may overvalue a home or portfolio of homes, our homes may not perform as we expect, our tenants may default and our cost estimates
for restoring an acquired home may prove inaccurate, and we may be unable to quickly and efficiently renew leases of our acquired
homes upon their expiration. If any of these should occur, it may have a material adverse effect on our business, results of operations,
financial condition and cash flows. In addition, we cannot assure you of the continued availability of acquisition opportunities
in our markets at attractive pricing levels. If such opportunities are not available, our revenue and growth potential may be adversely
affected.
Our single-family
homes may be unable to compete successfully for tenants.
Our single-family homes compete for tenants with other single-family
homes and multi-family housing options, such as apartments and condominiums. Some of our competitors may offer more attractive
properties or lower rents than we do, and they may attract the high-quality tenants to whom we seek to lease our properties. Additionally,
some competing housing options may qualify for governmental subsidies that may make such options more affordable and therefore
more attractive than our properties. Competition for tenants could reduce our occupancy and rental rates and adversely affect our
business, results of operations, financial condition and cash flows and our ability to pay distributions to our stockholders.
We intend to rapidly
expand our scale of operations and make acquisitions even if the rental and housing markets are not as favorable as they had been
in 2012 when we first began our real estate operations, which could adversely impact anticipated yields.
Our long-term
growth depends on the availability of acquisition opportunities in our current markets and other markets at attractive pricing
levels. In many markets housing prices have already begun returning to more normalized levels from the low prices we saw in recent
years due to the downturn in the housing market, and we expect that in the future housing prices will continue to rise or stabilize
at its current levels, and therefore future acquisitions may be more costly and result in lower yields. There are many factors
that may result in future acquisitions becoming more expensive and possibly less attractive than recent past and present opportunities,
including:
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improvements in the overall economy and job market;
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a resumption of consumer lending activity and greater availability of consumer credit;
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improvements in the pricing and terms of mortgage-backed securities;
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increasing competition for single-family assets from private investors, entities with similar investment
objectives to ours and owner-occupants; and
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tax or other government incentives that encourage homeownership.
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We will continue acquiring
properties as long as we believe such properties offer an attractive total return opportunity. Accordingly, future acquisitions
may have lower yield characteristics than recent past and present opportunities, and if such future acquisitions are funded through
equity issuances, the yield and cash available for distribution per share will be reduced and the market price of our common stock
may decline.
Our limited asset
class and geographic diversification increases the risk of loss.
Our portfolio is not fully diversified into a wide variety
of properties or holdings. All of our real estate assets are of a single asset class (namely SFRs) and are currently located in
the following markets: the Atlanta, Georgia, metropolitan area; the Houston, Texas, metropolitan area; the Jacksonville, Florida,
metropolitan area; and the Memphis, Tennessee, metropolitan area. Accordingly, any adverse effects on the SFR sector specifically
or the real estate industry in general or limited to such geographic markets, may have a disproportionate negative effect on our
company and the value of our common stock. Additionally, we do not have geographic or product diversification or concentration
as an investment objective. As a result, we could have (i) exposure to a limited number of regional and even local markets; and/or
(ii) a limited number of real estate-related investments. The aggregate yields generated by our company may be negatively affected
by adverse regional or local economic conditions in these geographic markets.
We are dependent
on our executive officers and dedicated personnel, and the departure of any of our key personnel could materially and adversely
affect us.
We rely on a small number of persons to carry out our business and investment strategies. Any member of our
senior management may cease to provide services to us at any time. The loss of the services of any of our key management personnel,
or our inability to recruit and retain qualified personnel in the future, could have an adverse effect on our business and financial
results. As we expand, we will continue to need to attract and retain qualified additional senior management but may not be able
to do so on acceptable terms or at all.
Our success depends,
in part, upon our ability to hire and retain highly skilled managerial, investment and operational personnel, and the past performance
of our senior management may not be indicative of future results.
The implementation of our business plan may require that
we employ additional qualified personnel. Competition for highly skilled managerial, investment, financial and operational personnel
is intense, and we cannot assure our stockholders that we will be successful in attracting and retaining such skilled personnel.
If we are unable to hire and retain qualified personnel as required, our growth and operating results could be adversely affected.
Our dependence upon
local, third-party service providers may harm our financial results or reputation if the third parties fail to perform.
We
use local, third-party vendors and service providers to provide certain services for our properties. For example, we regularly
rely on third-party property management companies, home improvement professionals and leasing agents to provide services to many
of our properties. Selecting, managing and supervising these third-party service providers require significant resources and expertise.
We do not have exclusive or long-term contractual relationships with any of these third-party providers, and we can provide no
assurance that we will have uninterrupted or unlimited access to their services. If we do not select, manage and supervise appropriate
third parties to provide these services, our reputation and financial results may suffer. Notwithstanding our efforts to implement
and enforce strong policies and practices regarding service providers, we may not successfully detect and prevent fraud, incompetence
or theft by our third-party service providers. In addition, any removal or termination of third-party service providers would require
us to seek new vendors or providers, which would create delays and adversely affect our operations. Poor performance by third-party
service providers will reflect poorly on us and could significantly damage our reputation among desirable tenants. In the event
of fraud or misconduct by a third party, we could also be exposed to material liability and be held responsible for damages, fines
and/or penalties.
Short-term leases
of residential property may expose us to the effects of declining market rents.
We anticipate that a majority of our leases
to tenant-occupants will be for a term of one year. As these leases permit the tenants to leave at the end of the lease term without
penalty, we anticipate our rental revenues may be affected by declines in market rents more quickly than if our leases were for
longer terms. Short-term leases may result in high turnover, which involves costs such as restoring the properties, marketing costs
and lower occupancy levels. Because we have a limited operating history, our tenant turnover rate and related cost estimates may
be less accurate than if we had more operating data upon which to base these estimates.
We depend on the
accuracy and completeness of information from third parties, and inaccuracies in such information could adversely affect profitability.
In connection with making and managing our investments, we rely heavily upon information supplied by third parties, including
the information contained in tenant applications, property appraisals or other indicators of property value, title information
and employment and income documentation. If any of this information is intentionally or negligently misrepresented and the misrepresentation
is not detected prior to making an investment or execution of a lease, the value of the investment may be significantly less than
expected. Whether a misrepresentation is made by seller of a property, the rental applicant, another third party or one of our
own employees, we generally bear the risk of loss associated with the misrepresentation. Although we may have rights against persons
and entities who made or knew or should have known about the misrepresentation, it will likely be difficult to recover any monetary
losses that we have suffered as a result of their actions.
We may be unable
to secure funds for future tenant or other capital improvements, which could limit our ability to attract or replace tenants.
When
tenants do not renew their leases or otherwise vacate their space, we often are required to expend funds for property restoration
and leasing commissions in order to re-lease the property. If we have not established sufficient reserves for such expenditures,
we will have to obtain financing from other sources. We may also have future financing needs for other capital improvements to
restore our properties. If we need to secure financing for capital improvements in the future but are unable to secure such financing
or are unable to secure financing on terms we feel are acceptable, we may be unable to make capital improvements or we may be required
to defer such improvements. If this happens, it may cause our properties to suffer from a greater risk of obsolescence or a decline
in value, or a greater risk of decreased cash flow as a result of fewer potential tenants being attracted to the property or existing
tenants not renewing their leases. If we do not have access to sufficient funding in the future, we may not be able to make necessary
capital improvements to our properties, and our properties’ ability to generate revenue may be significantly impaired.
Our revenue and expenses
are not directly correlated, and, because a large percentage of our costs and expenses are fixed and some variable expenses may
not decrease over time, we may not be able to adapt our cost structure to offset any declines in our revenue.
Many of the
expenses associated with our business, such as acquisition costs, restoration and maintenance costs, homeowner’s association,
or HOA, fees, personal and real property taxes, insurance, compensation and other general expenses are fixed and would not necessarily
decrease proportionally with any decrease in revenue. Our assets also require a significant amount of ongoing capital expenditure.
Our expenses, including capital expenditures, will be affected by, among other things, any inflationary increases, and cost increases
may exceed the rate of inflation in any given period. Certain expenses incurred on a per-unit basis are recurring in nature, such
as HOA fees, taxes, insurance and restoration and maintenance costs, which may not decrease on a per-unit basis as our portfolio
grows through additional property acquisitions. By contrast, our revenue is affected by many factors beyond our control, such as
the availability and price of alternative rental housing and economic conditions in our markets. As a result, we may not be able
to fully, or partially, offset any increase in our expenses with a corresponding increase in our revenues. In addition, state and
local regulations may require us to maintain our properties, even if the cost of maintenance is greater than the value of the property
or any potential benefit we may receive from renting the property.
If we cannot obtain
financing, our growth may be limited.
To qualify as a REIT, we will be required to distribute at least 90% of our REIT
taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain, each year to our
stockholders. As a result, our ability to retain earnings to fund acquisitions or other capital expenditures will be limited. As
of December 31, 2016, most of our assets were purchased with available cash and the proceeds from loan transactions with a bank
pursuant to which we owe an aggregate of $19,814,025 as of December 31, 2016. Our loan transactions are secured by first priority
liens and related rents on our homes. Over time, we may determine that it is appropriate to increase our use of leverage as a component
of our financing strategy in an effort to increase our return potential. We can provide no assurance that we will be able to obtain
future debt financing on favorable terms or at all.
Recent events in the financial
markets have had an adverse impact on the credit markets, and, as a result, credit has become significantly more expensive and
difficult to obtain, if available at all. Some lenders are imposing more stringent credit terms and there has been and may continue
to be a general reduction in the amount of credit available. Many banks are either unable or unwilling to provide new asset-based
lending. Tightening credit markets may have an adverse effect on our ability to obtain financing on favorable terms, thereby increasing
financing costs and/or requiring us to accept financing with increasing restrictions. If adverse conditions in the credit markets — in
particular with respect to single-family home finance — materially deteriorate, our business could be materially
and adversely affected. Our long-term ability to grow through additional investments will be limited if we cannot obtain additional
financing. Market conditions may make it difficult to obtain financing, and we cannot assure you that we will be able to obtain
debt or equity financing or that we will be able to obtain it on favorable terms.
We anticipate being
involved in a variety of litigation.
Although we have not been subject to any litigation to date, we anticipate being involved
in a range of court proceedings in the ordinary course of business as we continue to operate our business. These actions may include
eviction proceedings and other landlord-tenant disputes, challenges to title and ownership rights (including actions brought by
prior owners alleging wrongful foreclosure by their lender or loan servicer) and issues with local housing officials arising from
the condition or maintenance of a property. While we intend to vigorously defend any non-meritorious action or challenge, no assurance
can be given that we will not incur significant expense relating to these matters or that they will not require significant management
attention and adversely affect us.
Our underwriting
criteria and evaluation of properties involves a number of assumptions that may prove inaccurate, which may cause us to overpay
for our properties or incur significant costs to operate a property.
In determining whether a particular property or portfolio
of properties meets our investment criteria, we make a number of assumptions, including assumptions related to estimated time of
possession, annual operating costs, market rental rates and potential rent amounts, time from purchase to leasing and tenant default
rates. These assumptions may prove inaccurate, causing us to pay too much for properties we acquire, overvalue our properties or
our properties not to perform as we expect, and adjustments to the assumptions we make in evaluating potential purchases may result
in fewer properties qualifying under our investment criteria. Improvements in the market prices for single-family homes in our
target markets or decreases in the available inventory could also reduce the supply of properties that meet our investment criteria.
Reductions in the supply of properties that meet our investment criteria may adversely affect our operating results and ability
to implement our business plan.
Certain of our older
properties may contain lead-based paint, which we may be required to remove or could expose us to liability, either of which would
adversely affect our operating results.
The existence of lead paint is especially a concern in residential units and can
cause health problems, particularly for children. A structure built prior to 1978 may contain lead-based paint and may present
a potential exposure to lead; however, structures built after 1978 are not likely to contain lead-based paint. Federal and state
laws impose certain disclosure requirements and restrict and regulate renovation activities on housing built before 1978. Violation
of these restrictions could result in fines or criminal liability, and we could be subject to liability arising from lawsuits alleging
personal injury or related claims. Although we attempt to comply with all such regulations, we have not conducted tests on our
properties to determine the presence of lead-based paint and we cannot guarantee that we will not incur any material liabilities
as a result of the presence of lead paint in our properties.
Operating our business
on a larger scale could result in substantial increases in our expenses.
One of our goals is to implement our single-family
rental business nationally. Our business model assumes that we can successfully use our vertically integrated platform to acquire
and manage single-family homes on a larger scale than we have done to date without a directly proportional increase in our expenses.
As our business grows in size and complexity, we can provide no assurance that our management platform will ultimately prove to
be “scalable,” we will be able to achieve economies of scale or we will be able to manage additional properties in
our current markets, successfully enter new markets or grow our business without incurring significant additional expenses.
Debt service obligations
could adversely affect our operating results, may require us to sell properties and could adversely affect our ability to make
or sustain distributions to our stockholders and the market price of our common stock.
We have entered into loan agreements
with a bank pursuant to which we owe an aggregate of $19,814,025 as of December 31, 2016. The proceeds of which we used to purchase
additional homes. Our loan transactions are secured by first priority liens and related rents on our homes. We may finance future
activities with additional indebtedness and we may be more likely to do so as our business grows. We may borrow for a number of
reasons, such as financing acquisitions, capital expenditures or distributions necessary to qualify as a REIT. Our governing documents
contain no limitations on the amount of debt that we may incur. As a result, we may incur substantial debt at our parent company
and or at our subsidiary levels in the future.
Incurring debt could subject
us to many risks, including the risks that:
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our cash flows from operations will be insufficient to make required payments of principal and
interest;
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our debt may increase our vulnerability to adverse economic and industry conditions;
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we will be subject to restrictive covenants that require us to satisfy and remain in compliance
with certain financial requirements or that impose limitations on the type or extent of activities we conduct;
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we may be required to dedicate a substantial portion of our cash flows from operations to payments
on our debt, thereby reducing cash available for distribution to our stockholders, funds available for operations and capital expenditures,
future business opportunities or other purposes; and
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the terms of any refinancing may not be as favorable as the terms of the debt being refinanced.
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If we do not have sufficient
funds to repay any debt we incur when it matures, we may need to refinance the debt or raise additional equity. If, at the time
of any refinancing, prevailing interest rates or other factors result in higher interest rates on refinancing, increases in interest
expense could adversely affect our cash flows and, consequently, cash available for distribution to our stockholders. To the extent
we are required to raise additional equity to satisfy such debt, existing stockholders would see their interests diluted. If we
are unable to refinance our debt or raise additional equity on acceptable terms, we may be forced to dispose of substantial numbers
of properties on disadvantageous terms, potentially resulting in losses or the incurrence of special taxes that apply to dispositions
by REITs of properties that are considered to be inventory or dealer property. To the extent we cannot meet any existing or future
debt service obligations, we will risk losing some or all of our properties that may be pledged to secure our obligations to foreclosure.
Any unsecured debt agreements we enter into may contain specific cross-default provisions with respect to specified other indebtedness,
giving the unsecured lenders the right to declare a default if we are in default under other loans in some circumstances.
Security breaches
and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation
to suffer.
In the ordinary course of our business, we acquire and store sensitive data, including intellectual property,
our proprietary business information and personally identifiable information of our prospective and current tenants, our employees
and third-party service providers on our networks and website. The secure processing and maintenance of this information is critical
to our operations and business strategy. Despite our security measures, our information technology and infrastructure may be vulnerable
to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our
networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or
other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal
information, regulatory penalties, disruption to our operations and the services we provide to customers or damage our reputation,
which could adversely affect our results of operations and competitive position.
Risks Related to the Single-Family Rental
Housing Market
If rents in our markets
do not increase sufficiently to keep pace with rising costs of operations, our cash available for distribution will be adversely
impacted.
The success of our business model will substantially depend on conditions in the single-family rental market
in our geographic markets. Our asset acquisitions are premised on assumptions about, among other things, occupancy and rent levels,
and if those assumptions prove to be inaccurate our cash flows will be lower than expected. When we first began executing our business
plan, rental rates and occupancy levels benefited from macroeconomic trends affecting the U.S. economy and residential real estate
markets in particular, including:
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a tightening of credit that has made it more difficult to finance a home purchase, combined with
efforts by consumers generally to reduce their exposure to credit;
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weak economic and employment conditions that have increased foreclosure rates and made it more
difficult for families to remain in homes that were purchased prior to the economic downturn;
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declining real estate values that have challenged the traditional notion that homeownership is
a stable investment; and
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the unprecedented level of vacant housing comprising the real estate owned, or REO, by banks, government-sponsored
enterprises, or GSEs, and other mortgage lenders or guarantors, and inventory held for sale by banks, GSEs, and other mortgage
lenders or guarantors.
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In recent periods, however,
we have seen a reversal of these trends in the residential rental market. Eventually, the continued 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 trends that favor homeownership rather than renting. A softening of the rental market in our markets would reduce our rental
revenue, which could adversely impact our cash available for distribution.
Acquiring properties
during periods when the single-family home sector is experiencing substantial inflows of capital and intense competition may result
in inflated purchase prices and increase the likelihood that our properties will not appreciate in value and may, instead, decrease
in value.
The allocation of substantial amounts of capital for investment in the single-family home sector and significant
competition for income producing real estate may inflate the purchase prices for such assets. To the extent we purchased or in
the future purchase real estate in such an environment, it is possible that the value of our properties may not appreciate and
may, instead, decrease in value, perhaps significantly, below the amount we paid for such properties. In addition to macroeconomic
and local economic factors, technical factors, such as a decrease in the amount of capital allocated to the single-family home
sector and the number of investors participating in the sector, could cause the value of our properties to decline.
We may engage in
expedited transactions that increase the risk of loss.
Our underwriting guidelines require a thorough analysis of many
factors, including, among others, the underlying property’s financial performance and condition, geographic market assessment
and future prospects of the property within the market. Investment analyses and decisions by us may frequently be required to be
undertaken on an expedited basis to take advantage of investment opportunities. In such cases, the information available to us
at the time of making an investment decision may be limited, and we may not have access to detailed information regarding the investment
property, such as physical characteristics, environmental matters, zoning regulations or other local conditions affecting an investment
property. If we make the decision to purchase a property prior to the full completion of one or more of these analyses, we may
fail to identify certain risks that we would otherwise have identified and suffer significant losses as a result. Therefore, no
assurance can be given that we will have knowledge of all circumstances that may adversely affect an investment. Additionally,
we expect to rely upon independent consultants in connection with its evaluation of proposed investments, and no assurance can
be given as to the accuracy or completeness of the information provided by such independent consultants or to our right of recourse
against them in the event errors or omissions do occur.
Properties acquired
as part of portfolios or in bulk may subject us to a variety of risks.
All of our properties have been, and we expect that
a substantial portion of any future property acquisitions will be, purchased as portfolios in bulk from owners of portfolios of
single-family homes. To the extent the management and leasing of such properties have not been consistent with our property management
and leasing standards, we may be subject to a variety of risks, including risks relating to the condition of the properties, the
credit quality and employment stability of the tenants and compliance with applicable laws, among others. In addition, financial
and other information provided to us regarding such portfolios during our due diligence may not be accurate, and we may not discover
such inaccuracies until it is too late to seek remedies against such sellers. To the extent we timely pursue such remedies, we
may not be able to successfully prevail against the seller in an action seeking damages for such inaccuracies.
We may be unable
to keep or attract tenants.
We may not be able to retain current, or attract new, tenants for the properties we may acquire.
We may make substantial concessions in terms of rent and lease incentives, and construct tenant improvements, to attract new tenants
or keep existing tenants. The operating results and financial viability of any property could be substantially and materially affected
by any inability to retain and attract tenants. Additionally, there is the risk that tenants may break their leases before those
leases expire. Any of such properties may not be able to retain or increase its current occupancy at projected rents. If that occurs,
our operations and our ability to make distributions to stockholders may be adversely affected.
Lease terminations
or tenant defaults could reduce our income and limit our ability to make distributions.
The success of our investments
will materially depend on the financial stability of our tenants. The inability of tenants to meet their rental obligations would
lower our net income. A default by a significant number of tenants on their lease payments would cause us to lose the revenue associated
with such leases and require us to find an alternative source of revenue to meet operating expenses. We may fail to, or may not
be able to, discover factors that would indicate a heightened level of uncertainty with respect to tenant defaults when performing
due diligence on prospective investments. Tenant defaults increase the risk that we, and our stockholders, could suffer a loss.
If a tenant defaults or
goes bankrupt, we may experience delays in enforcing our rights as landlord and may incur substantial costs in protecting our investment
and re-letting the property. If a defaulting tenant does not cooperate in vacating the property, we would have to engage in time-consuming
and costly prosecution and enforcement of eviction proceedings, during which time there would be no rental revenues from such unit
and no likely recovery of damages from the defaulting tenant. These events could limit our ability to make distributions to stockholders
and decrease the value of our common stock.
If and when residents of
our portfolio properties decide not to renew their leases upon expiration, we may be unable to relet such residents’ properties.
Even if the residents do renew or we can relet the properties, the terms of renewal or reletting may be less favorable than current
lease terms. If we are unable to promptly renew the leases or relet the properties, or if the rental rates upon renewal or reletting
are significantly lower than expected rates, then our results of operations and financial condition will be adversely affected.
A number of our properties
are part of HOAs, and we and our tenants are subject to the rules and regulations of such HOAs, which may be arbitrary or restrictive.
Violations of such rules may subject us to additional fees, penalties and litigation with such HOAs which would be costly.
As
of December 31, 2016, approximately 19.6% of our properties are located within HOAs, which are private entities that regulate the
activities of owners and occupants of, and levy assessments on, properties in a residential subdivision. We pay all HOA fees and
assessments directly. The majority of the HOA fees due on our properties are billed annually. The fees are paid when due by our
property managers and are included in our property and operating expenses. HOAs in which we own properties may have or may enact
onerous or arbitrary rules that restrict our ability to restore, market or lease our properties or require us to restore or maintain
such properties at standards or costs that are in excess of our planned budgets. Such rules may include requirements for landscaping,
limitations on signage promoting a property for lease or sale or the requirement that specific construction materials be used in
restorations. Some HOAs also impose limits on the number of property owners who may rent their homes, which, if met or exceeded,
would cause us to incur additional costs to sell the property and opportunity costs of lost rental revenue. Furthermore, many HOAs
impose restrictions on the conduct of occupants of homes and the use of common areas, and we may have tenants who violate HOA rules
and for which we may be liable as the property owner. Additionally, the boards of directors of the HOAs in which we own property
may not make important disclosures about the properties or may block our access to HOA records, initiate litigation, restrict our
ability to sell our properties, impose assessments or arbitrarily change the HOA rules. We may be unaware of or unable to review
or comply with HOA rules before purchasing a property, and any such excessively restrictive or arbitrary regulations may cause
us to sell such property at a loss, prevent us from renting such property or otherwise reduce our cash flow from such property,
which would have an adverse effect on our returns on these properties.
We are subject to
tenant relief laws and may be subject to rent control laws, which could negatively impact our rental revenue.
As an owner
of rental properties, we expect that we will regularly be seeking to evict tenants who are not paying their rent or are otherwise
in material violation of the terms of their lease. Eviction activities will result in additional legal costs and require the time
and attention of our management. The eviction process is typically subject to numerous legal requirements and mandatory “cure”
policies, which may increase our costs and delay our ability to gain possession of and stabilize a property. Additionally, state
and local landlord-tenant laws may impose legal duties on us to assist tenants in relocating to new housing, or restrict our ability
to recover certain costs or charge tenants for damage tenants cause to our property. Because such laws vary by state and locality,
we will need to be familiar with and take appropriate steps to comply with applicable landlord-tenant laws in the jurisdictions
in which we operate, and we will need to incur supervisory and legal expenses to ensure such compliance. To the extent that we
do not comply with state or local laws, we may be subjected to civil litigation filed by individuals, a class of plaintiffs or
by state or local law enforcement. We may be required to pay our adversaries’ litigation fees and expenses if judgment is
entered against us in such litigation or if we settle such litigation.
Furthermore, rent control
laws may affect our rental revenue. Especially in times of recession and economic slowdown, rent control initiatives can receive
significant political support. If rent control becomes applicable to certain of our properties, the effects on both our rental
revenue and the value of such properties could be material and adverse.
Class action, tenants’
rights and consumer rights litigation may result in increased expenses and harm our results.
There are numerous tenants’
rights and consumer rights organizations that operate in our markets, and, as we grow in scale, we may attract attention from some
of these organizations and become a target of legal demands or litigation. With the increased market for single-family rentals
arising from former homeowners who may have lost their properties, some of these organizations may shift their litigation, lobbying,
fundraising and grass roots organizing activities to focus on landlord-tenant issues, including issues relating to the Fair Housing
Act, or FHA, and its state law counterparts. While we intend to conduct our business lawfully and in compliance with applicable
landlord-tenant and consumer laws, such organizations might work in conjunction with trial and pro bono lawyers in one state or
multiple states to attempt to bring claims against us on a class action basis for damages or injunctive relief. We cannot anticipate
what form such legal actions might take if initiated or what remedies they may seek. Additionally, these organizations may lobby
local county and municipal attorneys or state attorneys general to pursue enforcement or litigation against us or may lobby state
and local legislatures to pass new laws and regulations to constrain our business operations. If they are successful in any such
endeavors, they could limit our business operations and may impose on us significant litigation expenses, including settlements
to avoid continued litigation or judgments for damages or injunctions.
Poor tenant selection
and defaults by our tenants may negatively affect our financial performance and reputation.
Our success will depend, in
large part, upon our ability to attract and retain qualified tenants for our properties. This will depend, in turn, upon our ability
to screen applicants, identify good tenants and avoid tenants who may default. We will inevitably make mistakes in our selection
of tenants, and we may rent to tenants whose default on our leases or failure to comply with the terms of the lease or HOA regulations
negatively affect our financial performance, reputation and the quality and value of our properties. For example, tenants may default
on payment of rent, make unreasonable and repeated demands for service or improvements, make unsupported or unjustified complaints
to regulatory or political authorities, make use of our properties for illegal purposes, damage or make unauthorized structural
changes to our properties which may not be fully covered by security deposits, refuse to leave the property when the lease is terminated,
engage in domestic violence or similar disturbances, disturb nearby residents with noise, trash, odors or eyesores, fail to comply
with HOA regulations, sub-let to less desirable individuals in violation of our leases or permit unauthorized persons to live with
them. In addition, defaulting tenants will often be effectively judgment-proof. The process of evicting a defaulting tenant from
a family residence can be adversarial, protracted and costly. Furthermore, some tenants facing eviction may damage or destroy the
property. Damage to our properties may significantly delay re-leasing after eviction, necessitate expensive repairs or impair the
rental revenue or value of the property, resulting in a lower than expected rate of return. In addition, we will incur turnover
costs associated with re-leasing the properties, such as marketing expense and brokerage commissions, and will not collect revenue
while the property is vacant. Although we will attempt to work with tenants to prevent such damage or destruction, there can be
no assurance that we will be successful in all or most cases. Such tenants will not only cause us not to achieve our financial
objectives for the properties in which they live, but may subject us to liability, and may damage our reputation with our other
tenants and in the communities where we do business.
We rent homes to tenants who rely
on Section 8 housing credits and any cutback in the section 8 housing programs could adversely affect our operations
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Section 8 of the Housing
Act of 1937, often called Section 8, authorizes the payment of rental housing assistance to private landlords on behalf of approximately
4.8 million low-income households in the United States. The largest part of the section is the housing choice voucher program which
pays a large portion of the rents and utilities of about 2.1 million U.S. households. The U.S. Department of Housing and Urban
Development, or HUD, manages Section 8 programs. As of December 31, 2016, approximately 21% of our homes were leased to Section
8 tenants. The current administration has voiced its support for cutbacks in various federal programs, including up to $6 billion
of cutbacks in the budget for HUD and its related housing programs. A material cutback in the funding for Section 8 housing programs
could result in increased delinquencies and defaults by our Section 8 tenants. Any such cutback could also materially adversely
affect the housing values in the real estate markets in which we operate. There can be no assurance that the Section 8 housing
programs will continue to be funded as they have in recent years.
Declining real estate
values and impairment charges could adversely affect our earnings and financial condition.
We intend to review the carrying
value of our long-lived assets for impairment whenever events or changes in circumstances, such as adverse market conditions, indicate
that their carrying amount may not be recoverable. If our evaluation indicates that we may be unable to recover the carrying value
of a material portion of our real estate investments, an impairment loss will be recorded to the extent that the carrying value
exceeds the estimated fair value of the properties. These losses would have a direct impact on our net income, because recording
an impairment loss results in an immediate negative adjustment to net income. They would also be reflected as a decrease in assets
on our balance sheet. The evaluation of anticipated cash flows is highly subjective and is based in part on assumptions regarding
future occupancy, rental rates and capital requirements that could differ materially from actual results in future periods. A deteriorating
real estate market may cause us to reevaluate the assumptions used in our impairment analysis. Impairment charges could adversely
affect our financial condition, results of operations, cash available for distribution and market price of our common stock.
Risks Related to the Real Estate Industry
Generally
There are significant
risks involved with any investment in real estate.
The performance of our investments, and the performance of our company
and our ability to make distributions, is subject to those risks typically associated with investments in real estate. Any change
in operating expenses and tax rates could adversely affect operating results or render the sale, financing, or refinancing of a
portfolio of properties difficult or unattractive. Certain expenditures associated with the properties will be fixed (principally
real estate taxes and maintenance costs) and will be payable even if the properties do not generate sufficient income, which could
have a negative impact on us. No assurance can be given that certain assumptions as to future costs of operating any of our properties
will be accurate, since such matters will depend on events and factors beyond our control. These factors include, among others:
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changes in national, regional, or local economic conditions, including economic slowdowns or recessions
and national and international political and socioeconomic circumstances, which could negatively impact our ability to lease vacancies
or to sell properties on favorable terms and the ability of any tenant to pay rent;
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changes in local market conditions or characteristics, including construction of new residential
housing properties that compete with a particular property;
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changes in interest rates and in the availability, costs, and terms of borrowings, including recent
unprecedented volatility and disruption in the credit markets, which may make the sale, financing, or refinancing of a portfolio
of properties difficult and/or costly;
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changes in federal, state, or local regulations and controls affecting rents, prices of goods,
fuel and energy consumption, environmental restrictions, real estate taxes, and other factors affecting real property;
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federal, state, and local regulatory requirements, including state and local fire and life-safety
requirements, zoning and permitted use laws;
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continued validity and enforceability of leases;
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the vacancy rate and the length of any vacancy for a property;
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the financial condition of tenants;
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the ongoing need for capital improvements and our ability to control the costs, plans, specifications,
and timing in connection with such improvements;
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changes in operating costs such as utilities;
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costs of remediation and liabilities associated with environmental conditions;
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the perceptions of prospective tenants and residents of the safety, convenience, and attractiveness
of the properties and surrounding areas;
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acts of nature, such as earthquakes, tornadoes, and floods; and
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utility and other easements in favor of third parties may exist on and encumber a particular property.
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A worsening of current
financial market conditions or events negatively impacting the U.S. banking system could adversely affect our operations and our
ability to make distributions.
Uninsured or underinsured
losses relating to real property may adversely affect our returns.
We attempt to ensure that all of the properties we acquire
are adequately insured to cover casualty losses. However, there are certain losses, including losses from floods, fires, earthquakes,
acts of war, acts of terrorism or riots, that may not always be insured against or that are not generally fully insured against
because it is not deemed economically feasible or prudent to do so. In addition, changes in the cost or availability of insurance
could expose us to uninsured casualty losses. In the event that any of the properties we acquire incurs a casualty loss that is
not fully covered by insurance, the value of our assets will be reduced by the amount of any such uninsured loss, and we could
experience a significant loss of capital invested and potential revenues in these properties and could potentially remain obligated
under any recourse debt associated with the property. Inflation, changes in building codes and ordinances, environmental considerations
and other factors might also keep us from using insurance proceeds to replace or restore a property after it has been damaged or
destroyed. Under those circumstances, the insurance proceeds we receive might be inadequate to restore our economic position on
the damaged or destroyed property. Any such losses could adversely affect us and the market price of our common stock. In addition,
we may have no source of funding to repair or reconstruct the damaged property, and we cannot assure you that any such sources
of funding will be available to us for such purposes in the future.
Due diligence on
properties may not reveal all conditions that may adversely affect the value of our investments.
We perform due diligence
on each investment prior to its acquisition. Regardless of the thoroughness of the due diligence process, not all circumstances
affecting the value of an investment can be ascertained through the due diligence process. If the due diligence materials provided
to us are inaccurate, if we do not sufficiently investigate or follow up on matters brought to our attention as part of the due
diligence process, or if the due diligence process fails to detect material facts that impact the value determination, we may acquire
an investment that results in significant losses to us or may overpay for an investment, which would cause our financial results
to suffer.
Contingent or unknown
liabilities could adversely affect our financial condition.
Our acquisition activities are subject to many risks. We may
acquire properties that are subject to unknown or contingent liabilities, including liabilities for or with respect to liens attached
to properties, unpaid real estate taxes, utilities or HOA charges for which a prior owner remains liable, clean-up or remediation
of environmental conditions or code violations, claims of vendors or other persons dealing with the acquired properties and tax
liabilities, among other things. In each case, our acquisition may be without any, or with only limited, recourse with respect
to unknown or contingent liabilities or conditions. As a result, if any such liability were to arise relating to our properties,
or if any adverse condition exists with respect to our properties that is in excess of our insurance coverage, we might have to
pay substantial sums to settle or cure it, which could adversely affect us. The properties we acquire may also be subject to covenants,
conditions or restrictions that restrict the use or ownership of such properties, including prohibitions on leasing or requirements
to obtain the approval of HOAs prior to leasing. We may not discover such restrictions during the acquisition process and such
restrictions may adversely affect our ability to operate such properties as we intend.
In addition, purchases of single-family homes acquired as part of a portfolio or in bulk purchases typically
involve few or no representations or warranties with respect to the properties and may allow us limited or no recourse against
the sellers of such properties. Such properties also often have unpaid tax, utility and HOA liabilities for which we may be obligated
but fail to anticipate.
Costs of complying
with governmental laws and regulations may reduce our income and cash available for distributions.
Real property and the
operations conducted on real property are subject to federal, state and local laws and regulations relating to, among other things,
environmental protection, human health and safety and access by persons with disabilities. We could be subject to liability in
the form of fines or damages for noncompliance with these laws and regulations, even if we did not cause the events(s) resulting
in liability.
Environmental Laws Generally.
Environmental
laws and regulations generally govern wastewater discharges, air emissions, the operation and removal of underground and above-ground
storage tanks, the use, storage, treatment, transportation and disposal of solid hazardous materials, the remediation of contaminated
property associated with the disposal of solid and hazardous materials and other health and safety-related concerns. Some of these
laws and regulations may impose joint and several liability on tenants, owners or operators of real property for the costs to investigate
or remediate contaminated properties, regardless of fault, whether the acts causing the contamination were legal, regardless of
whether the contamination was present prior to a purchaser’s acquisition of a property, and whether an owner knew of such
contamination. The conditions of investments at the time we acquire them, operations in the vicinity of our investments, such as
the presence of underground tanks, or activities of unrelated third parties may affect the value or performance of our investments.
Hazardous Substances.
The
presence of hazardous substances on owned real estate owned by us, or the failure to properly remediate these substances, may hinder
our ability to sell, rent or pledge investments as collateral for future borrowings. Any material expenditures, fines, or damages
that we must pay will reduce our ability to make distributions to stockholders and may reduce the value of an investment in our
common stock.
Other Regulations.
We
may be required to operate our properties in compliance with fire and safety regulations, building codes and other land use regulations,
as they may be adopted by governmental agencies and bodies and become applicable to our properties. We may be required to make
substantial capital expenditures to comply with those requirements, and these expenditures could adversely affect our performance
and ability to make distributions to stockholders.
We may obtain only
limited warranties when we purchase a property and would have only limited recourse in the event our due diligence did not identify
any issues that lower the value of our property.
The seller of a property often sells such property in its “as is”
condition on a “where is” basis and “with all faults” without any warranties of merchantability or fitness
for a particular use or purpose. In addition, purchase and sale agreements may contain only limited warranties, representations
and indemnifications that will only survive for a limited period after the closing. The purchase of properties with limited warranties
increases the risk that we may lose some or all of our invested capital in the property, as well as the loss of rental revenue
from that property.
We may have difficulty
selling real estate investments, and our ability to distribute all or a portion of the net proceeds from such sales to our stockholders
may be limited.
Real estate investments are relatively illiquid, and, as a result, we may have a limited ability to sell
our properties should the need arise. When we sell our properties, we may not realize gains on such sales. We may elect not to
distribute any proceeds from the sales of properties to our stockholders; for example, we may use such proceeds to:
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purchase additional properties;
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create working capital reserves;
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complete repairs, maintenance or other capital improvements or expenditures to our remaining properties;
or
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for general corporate purposes.
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Our ability to sell our
properties may also be limited by our need to avoid the 100% prohibited transactions tax that is imposed on gain recognized by
a REIT from the sale of property characterized as dealer property. In order to ensure that we avoid such characterization, we may
be required to hold our properties for a minimum period of time and comply with certain other requirements in the Code or dispose
of our properties through our TRS, which will be subject to federal and state income taxation as a corporation.
Increases in property
taxes could adversely affect the value of a property or our ability to hold the property long enough to realize the desired return
on its investment.
Property taxes may increase as tax rates change and as the properties are assessed or reassessed by
taxing authorities. As the owner of real estate properties, we will be responsible for payment of the taxes to the applicable government
authorities. If real property taxes increase, we may or may not be able to raise rents to offset such increased taxes. Because
such changes in property taxes are difficult to predict when a property is acquired, the financial results projected at the time
of our investment may be realized during the period of our ownership and, therefore, cash flows and property values could be materially
and negatively affected in a manner that we cannot foresee. If we fail to pay any such taxes, the applicable taxing authority may
place a lien on the property and the property may be subject to a tax sale.
Our properties may
be or become subject to condemnation or eminent domain proceedings.
A governmental authority could bring an eminent domain
or inverse condemnation action against a property. Such an action could have a material adverse effect on the financial viability
and marketability of that property, and, as a result, the results of our operations and our ability to make distributions to stockholders.
Risks Related to Our Organization and Structure
Provisions of our
charter may limit the ability of a third party to acquire control of us by authorizing our Board of Directors to issue additional
securities.
Our Board of Directors may, without stockholder approval, approve an amendment to our charter to increase or
decrease the aggregate number of our shares or the number of shares of any class or series that we have the authority to issue,
and classify or reclassify any unissued shares of our common or preferred stock, and set the preferences, rights and other terms
of the classified or reclassified shares. As a result, our Board of Directors may authorize the issuance of additional shares or
establish a series of common or preferred stock that may have the effect of delaying or preventing a change in control of our company,
including transactions at a premium over the market price of our shares, even if stockholders believe that a change in control
is in their interest. These provisions, along with the restrictions on ownership and transfer contained in our charter and certain
provisions of Maryland law described below, could discourage unsolicited acquisition proposals or make it more difficult for a
third party to gain control of us, which could adversely affect the market price of our securities.
Provisions of Maryland
law may limit the ability of a third party to acquire control of us by requiring our Board of Directors or stockholders to approve
proposals to acquire our company or effect a change in control.
Certain provisions of the Maryland General Corporation
Law, or the MGCL, applicable to Maryland corporations may have the effect of inhibiting a third party from making a proposal to
acquire us or of impeding a change in control under circumstances that otherwise could provide our stockholders with the opportunity
to realize a premium over the then-prevailing market price of their shares, including:
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“business combination” provisions that, subject to limitations, prohibit certain business
combinations between us and an “interested stockholder” (defined generally as any person (other than us or any subsidiary)
who beneficially owns 10% or more of the voting power of our outstanding voting stock after the date on which we first had 100
or more beneficial owners of our stock, or an affiliate or associate of us who, at any time within the two-year period immediately
prior to the date in question, was the beneficial owner of 10% or more of the voting power of our then outstanding stock after
the date on which we first had 100 or more beneficial owners of our stock) or an affiliate of any interested stockholder for five
years after the most recent date on which the interested stockholder became an interested stockholder, and, thereafter, any such
business combination between us and an interested stockholder generally must be recommended by our Board of Directors and approved
by the affirmative vote of at least (1) 80% of the votes entitled to be cast by holders of our outstanding voting stock and (2)
two-thirds of the votes entitled to be cast by holders of our outstanding voting stock other than shares held by the interested
stockholder with whom (or with whose affiliate) the business combination is to be effected or held by an affiliate or associate
of the interested stockholder, unless, among other conditions, our stockholders receive a minimum price (as defined in the MGCL)
for their shares and the consideration is received in cash or in the same form as previously paid by the interested stockholder
for its shares; and
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“control shares” provisions that provide that holders of our “control shares”
(defined as shares of stock which, if aggregated with all other such shares of stock owned by the acquirer or in respect of which
the acquirer is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle
the acquirer to exercise voting power in electing directors within one of three ranges) acquired in a “control share acquisition”
have no voting rights except to the extent approved by the affirmative vote of at least two-thirds of the votes entitled to be
cast on the matter, excluding votes cast by (1) the person who makes or proposes to make a control share acquisition, (2) an officer
or (3) an employee of us who is also a director of the corporation.
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By resolution of our Board
of Directors, we have opted out of the business combination provisions of the MGCL and provided that any business combination between
us and any other person is exempt from the business combination provisions of the MGCL, provided that the business combination
is first approved by our Board of Directors (including a majority of directors who are not affiliates or associates of such persons).
In addition, pursuant to a provision in our bylaws, we have opted out of the control share provisions of the MGCL. However, our
Board of Directors may by resolution elect to opt in to the business combination provisions of the MGCL, and we may, by amendment
to our bylaws, opt in to the control share provisions of the MGCL at any time in the future, whether before or after an acquisition
of control shares.
Certain provisions of the
MGCL permit our Board of Directors, without stockholder approval and regardless of what is currently provided in our charter or
bylaws, to implement certain corporate governance provisions, some of which (for example, a classified board) are not currently
applicable to us. These provisions may have the effect of limiting or precluding a third party from making an unsolicited acquisition
proposal for us or of delaying, deferring or preventing a change in control of us under circumstances that otherwise could be in
the best interests of our stockholders. Our charter contains a provision whereby we elect, at such time as we become eligible to
do so, to be subject to the provisions of Title 3, Subtitle 8 of the MGCL relating to the filling of vacancies on our Board of
Directors.
Our rights and the
rights of our stockholders to take action against our directors and officers are limited, which could limit your recourse in the
event of actions not in your best interests.
Under Maryland law, generally, a director will not be liable if he or she
performs his or her duties in good faith, in a manner he or she reasonably believes to be in our best interests and with the care
that an ordinarily prudent person in a like position would use under similar circumstances. In addition, our charter limits the
liability of our directors and officers to us and our stockholders for money damages, except for liability resulting from:
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actual receipt of an improper benefit or profit in money, property or services; or
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active and deliberate dishonesty that is established by a final judgment and is material to the
cause of action.
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Our charter authorizes
us to obligate ourselves to, and our bylaws require us to, indemnify our directors and officers for actions taken by them in those
capacities to the maximum extent permitted by Maryland law. Our bylaws require us to indemnify each director and officer, to the
maximum extent permitted by Maryland law, in the defense of any proceeding to which he or she is made, or threatened to be made,
a party to, or witness in, by reason of his or her service to us. In addition, we may be obligated to advance the defense costs
incurred by our directors and officers. As a result, we and our stockholders may have more limited rights against our directors
and officers than might otherwise exist absent the current provisions in our charter and bylaws or that might exist with other
companies.
Our charter contains
provisions that make removal of our directors difficult, and the employment agreements we have with some of our executives contain
severance provisions that make termination of their employment under certain circumstances expensive for us, which could make it
difficult for our stockholders to effect changes to our Board of Directors and our management.
Our charter provides that
a director may be removed only for cause (as defined in our charter) and then only by the affirmative vote of holders of shares
entitled to cast at least two-thirds of all the votes entitled to be cast generally in the election of directors. Our charter also
provides that vacancies on our Board of Directors may be filled only by a majority of the remaining directors in office, even if
less than a quorum. These requirements prevent stockholders from removing directors except for cause and with a substantial affirmative
vote and from replacing directors with their own nominees and may prevent a change in control of our company that is in the best
interests of our stockholders.
We have entered into employment
agreements with each of our executive officers containing severance provisions that could make it difficult and costly for us to
terminate their employment.
Our Board of Directors
may change our investment strategy, financing strategy or leverage policies, or any of our other major policies, without the consent
of stockholders.
Our Board of Directors determines our major strategies and policies, including policies and guidelines
relating to our acquisitions and divestitures, asset allocation, leverage, financing, growth, operations, indebtedness and distributions
to stockholders. Our Board of Directors may amend or revise these and other policies and guidelines from time to time without the
vote or consent of our stockholders, which could result in our acquiring properties that are different from, and possibly riskier
than, the types of single-family residential real estate and related investments described in this report. Accordingly, our stockholders
will have limited control over changes in our policies, and those changes could adversely affect our business, results of operations,
financial condition and cash flows and our ability to make distributions to our stockholders.
We may structure
acquisitions of property in exchange for OP units on terms that could limit our liquidity or our flexibility.
We may acquire
properties by issuing OP units in exchange for a property owner contributing property to the operating partnership. If we enter
into such transactions, in order to induce the contributors of such properties to accept OP units, rather than cash, in exchange
for their properties, it may be necessary for us to provide them additional incentives. For instance, our operating partnership’s
limited partnership agreement provides that any holder of units may exchange limited partnership units for cash equal to the value
of an equivalent number of shares of our common stock or, at our option, for shares of our common stock on a one-for-one basis.
We may, however, enter into additional contractual arrangements with contributors of property under which we would agree to repurchase
a contributor’s units for shares of our common stock or cash, at the option of the contributor, at set times. If the contributor
required us to repurchase units for cash pursuant to such a provision, it would limit our liquidity and thus our ability to use
cash to make other investments, satisfy other obligations or make distributions to stockholders. Moreover, if we were required
to repurchase units for cash at a time when we did not have sufficient cash to fund the repurchase, we might be required to sell
one or more properties to raise funds to satisfy this obligation. Furthermore, we might agree that if distributions the contributor
received as a limited partner in our operating partnership did not provide the contributor with a defined return, then upon redemption
of the contributor’s units we would pay the contributor an additional amount necessary to achieve that return. Such a provision
could further negatively impact our liquidity and flexibility. Finally, in order to allow a contributor of a property to defer
taxable gain on the contribution of property to our operating partnership, we might agree not to sell a contributed property for
a defined period of time or until the contributor exchanged the contributor’s units for cash or shares. Such an agreement
would prevent us from selling those properties, even if market conditions made such a sale favorable to us.
If our operating
partnership fails to qualify as a partnership for federal income tax purposes, we could fail to qualify as a REIT and suffer other
adverse consequences.
Our operating partnership will initially be wholly-owned, directly and indirectly, by us, and will
be classified for U.S. federal income tax purposes as a disregarded entity. Once our operating partnership has more than one other
member apart from us and our wholly-owned subsidiaries, we believe that it will then be treated as a partnership and not an association
or a publicly traded partnership taxable as a corporation, for U.S. federal income tax purposes. As a disregarded entity or partnership,
our operating partnership will not be subject to U.S. federal income tax on its income. Instead, each of the partners will be allocated
its share of our operating partnership’s income. No assurance can be provided, however, that the IRS will not challenge our
operating partnership’s status as a partnership for U.S. federal income tax purposes, or that a court would not sustain such
a challenge. If the IRS were successful in treating our operating partnership as an association or publicly traded partnership
taxable as a corporation for U.S. federal income tax purposes, we would fail to meet the gross income tests and certain of the
asset tests applicable to REITs and, accordingly, would not qualify as a REIT. In that case, our income would be subject to corporate
income tax without any tax deduction for dividends that we pay. Also, the failure of the operating partnership to qualify as a
partnership would cause it to become subject to U.S. federal corporate income tax, which would reduce significantly the amount
of its cash available for distribution to its partners, including us.
Risks Related to Qualification and Operation
as a REIT
Failure to qualify
as a REIT could adversely affect our operations and our ability to make distributions.
We intend to be treated as a REIT
for U.S. federal income tax purposes. However, there can be no assurance that we will be successful in obtaining and maintaining
REIT status. Our ability to qualify as a REIT will depend on our satisfaction of numerous requirements (some on an annual and quarterly
basis) established under highly technical and complex provisions of the Code, for which there may be only limited judicial or administrative
interpretations. Qualification and maintenance of REIT status involves the determination of various factual matters and circumstances
not entirely within our control, including requirements related to the nature of our gross assets, gross income, the composition
of our shareholders and the distribution of our income. No assurance can be given that legislation, new regulations, administrative
interpretations or court decisions will not change the tax laws with respect to qualification as a REIT or the U.S. federal income
tax consequences of that qualification.
If we were to fail to qualify
as a REIT for any taxable year, we would be subject to U.S. federal income tax on our taxable income at corporate rates (currently
35%). In addition, we would generally be disqualified from treatment as a REIT for the four taxable years following the year in
which we lose our REIT status. Losing our REIT status would reduce our net earnings available for investment or distribution to
stockholders because of the additional tax liability. In addition, distributions to stockholders would no longer be deductible
in computing our taxable income and we would no longer be required to make distributions. To the extent that distributions had
been made in anticipation of our qualifying as a REIT, we might be required to borrow funds or liquidate some investments in order
to pay the applicable corporate income tax. In addition, although we intend to elect for qualification as a REIT, it is possible
that future economic, market, legal, tax, or other considerations may cause our Board of Directors to determine that it is no longer
in our best interest to be qualified as a REIT and recommend that we do not proceed with our proposed REIT election or otherwise
revoke our REIT election.
To qualify as a REIT,
we must meet annual distribution requirements, which could result in us distributing amounts that may otherwise be used for our
operations.
To obtain the favorable tax treatment accorded to REITs, we normally will be required each year to distribute
to our stockholders at least 90% of our REIT taxable income, determined without regard to the deduction for distributions paid
and by excluding net capital gains. We will be subject to U.S. federal income tax on our undistributed taxable income and net capital
gain and to a 4% nondeductible excise tax on any amount by which distributions we pay with respect to any calendar year are less
than the sum of 85% of our ordinary income, 95% of our capital gain net income and 100% of our undistributed income from prior
years. These requirements could cause us to distribute amounts that otherwise would be spent on acquisitions of properties and
it is possible that we might be required to borrow funds or sell assets to fund these distributions. It is possible that we might
not always be able to continue to make distributions sufficient to meet the annual distribution requirements required to maintain
our REIT status, avoid corporate tax on undistributed income and/or avoid the 4% excise tax.
From time to time, we may
generate taxable income that is greater than our income for financial reporting purposes, or differences in timing between the
recognition of taxable income and the actual receipt of cash may occur. If we do not have other funds available in these situations,
we could be required to borrow funds on unfavorable terms, sell investments at disadvantageous prices or distribute amounts that
would otherwise be invested in future acquisitions to make distributions sufficient to enable us to pay out enough of our taxable
income to satisfy the REIT distribution requirement and to avoid corporate income tax and the 4% excise tax in a particular year.
These alternatives could increase our costs or reduce our equity. Thus, compliance with the REIT requirements may hinder our ability
to grow, which could adversely affect our value.
Distributions to
tax-exempt investors may be classified as unrelated business taxable income.
Neither ordinary nor capital gain distributions
with respect to our common stock nor gain from the sale of common stock should generally constitute unrelated business taxable
income to a tax-exempt investor. However, there are certain exceptions to this rule. In particular:
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Part of the income and gain recognized by certain qualified employee pension trusts with respect
to our common stock may be treated as unrelated business taxable income if shares of our common stock are predominately held by
qualified employee pension trusts, and we are required to rely on a special look-through rule for purposes of meeting one of the
REIT share ownership tests, and we are not operated in a manner that prevents treatment of such income or gain as unrelated business
taxable income;
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Part of the income and gain recognized by a tax-exempt investor with respect to our common stock
would constitute unrelated business taxable income if the investor incurs debt in order to acquire the common stock; and
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Part or all of the income or gain recognized with respect to our common stock by social clubs,
voluntary employee benefit associations, supplemental unemployment benefit trusts and qualified group legal services plans which
are exempt from federal income taxation under Sections 501(c)(7), (9), (17), or (20) of the Code may be treated as unrelated business
taxable income.
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The prohibited transactions
tax may limit our ability to dispose of our properties.
A REIT’s net income from prohibited transactions is subject
to a 100% tax. In general, prohibited transactions are sales or other dispositions of property other than foreclosure property
held primarily for sale to customers in the ordinary course of business. We may be subject to the prohibited transactions tax in
an amount equal to 100% of net gain upon a disposition of real property. Although a safe harbor to the characterization of the
sale of real property by a REIT as a prohibited transaction is available, we cannot assure you that we will be able to comply with
the safe harbor or that we will avoid owning property that may be characterized as held primarily for sale to customers in the
ordinary course of business. Consequently, we may choose not to engage in certain sales of our properties or may conduct such sales
through a taxable REIT subsidiary (our TRS), which would be subject to federal and state income taxation as a corporation. For
example, if we decide to acquire properties opportunistically to restore in anticipation of immediate resale, we will need to conduct
that activity through our TRS to avoid the 100% prohibited transactions tax. No assurance can be given, however, that the U.S.
Internal Revenue Service (the IRS) will respect a transaction by which any such properties are contributed to our TRS, and, even
if the contribution transaction is respected, our TRS may incur a significant tax liability as a result of any such sales.
We may pay taxable
dividends of our common stock and cash, in which case stockholders may sell shares of our common stock to pay tax on such dividends,
placing downward pressure on the market price of our common stock.
We may distribute taxable dividends that are payable
in cash and common stock at the election of each stockholder. The IRS has issued private letter rulings to other REITs treating
certain distributions that are paid partly in cash and partly in stock as taxable dividends that would satisfy the REIT annual
distribution requirement and qualify for the dividends paid deduction for federal income tax purposes. Those rulings may be relied
upon only by taxpayers to whom they were issued, but we could request a similar ruling from the IRS. Accordingly, it is unclear
whether and to what extent we will be able to make taxable dividends payable in cash and common stock.
If we made a taxable dividend
payable in cash and common stock, taxable stockholders receiving such dividends will be required to include the full amount of
the dividend as ordinary income to the extent of our current and accumulated earnings and profits, as determined for federal income
tax purposes. As a result, stockholders may be required to pay income tax with respect to such dividends in excess of the cash
dividends received. If a U.S. stockholder sells the common stock that it receives as a dividend in order to pay this tax, the sales
proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our common
stock at the time of the sale. Furthermore, with respect to certain non-U.S. stockholders, we may be required to withhold federal
income tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in common
stock. If we made a taxable dividend payable in cash and our common stock and a significant number of our stockholders determine
to sell shares of our common stock in order to pay taxes owed on dividends, it may be viewed as economically equivalent to a dividend
reduction and put downward pressure on the market price of our common stock. We do not currently intend to pay taxable dividends
in the form of our common stock and cash, although we may choose to do so in the future.
Our ownership of
our TRS is subject to limitations, and our transactions with our TRS could cause us to be subject to a 100% penalty tax on certain
income or deductions if those transactions are not conducted on arm’s-length terms.
In general, no more than 25%
of the value of a REIT’s assets may consist of stock or securities of one or more taxable REIT subsidiaries. The percentage
is reduced to 20% commencing for tax years after 2017. In addition, the Code limits the deductibility of interest paid or accrued
by a taxable REIT subsidiary to its parent REIT to assure that the taxable REIT subsidiary is subject to an appropriate level of
corporate taxation. The Code also imposes a 100% excise tax on REITs for certain transactions between a taxable REIT subsidiary
and its parent REIT that are not conducted on an arm’s-length basis. We intend to monitor the value of our respective investments
in our TRS for the purpose of ensuring compliance with the REIT asset requirements and to structure our transactions with our TRS
on terms that we believe are arm’s length to avoid incurring the 100% excise tax described above.
There can be no assurance,
however, that we will be able to comply with the REIT asset requirements or avoid application of the 100% excise tax.
You may be restricted
from acquiring or transferring certain amounts of our common stock.
The stock ownership restrictions of the Code for REITs
and the 9.8% stock ownership limits in our charter may inhibit market activity in our capital stock and restrict our business combination
opportunities.
In order to qualify as
a REIT for each taxable year after 2016, five or fewer individuals, as defined in the Code, may not own, beneficially or constructively,
more than 50% in value of our issued and outstanding stock at any time during the last half of a taxable year. Attribution rules
in the Code determine if any individual or entity beneficially or constructively owns our capital stock under this requirement.
Those attribution rules provide, among other things, for the look-through of any of our common shares held by entities to the natural
persons who own those entities. For example, for purposes of calculating ownership under Code’s attribution rules, our largest
shareholder, King Apex Group Holdings IV Limited, is not considered to be an owner of our shares. Instead, those natural persons
who own King Apex Group Holdings IV Limited are counted as our shareholders, with our common shares held by the Fund attributed
to each of those natural persons based on their ownership of the Fund. In addition, shares are attributed among certain family
members, and shares underlying certain stock options are attributed to the option holder. As of December 31, 2016, the top five
owners of our common shares, calculated in accordance with the attribution rules under the Code, collectively own approximately
40% of our common shares.
Additionally, at least
100 persons must beneficially own our capital stock during at least 335 days of a taxable year for each taxable year after 2016.
To help ensure that we meet these tests, our charter restricts the acquisition and ownership of shares of our capital stock. If
we fail to qualify as a REIT, we would be subject to U.S. federal income tax on our taxable income, if any, at corporate rates
(currently 35%) for our 2016 tax year and all subsequent tax years until such time as we qualify as a REIT.
Our charter, with certain
exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT.
Unless exempted by our Board of Directors, our charter prohibits any person from beneficially or constructively owning more than
9.8% in value or number of shares, whichever is more restrictive, of our outstanding shares of common stock or more than 9.8% in
value or number of shares, whichever is more restrictive, of the aggregate outstanding shares of all classes and series of our
capital stock. Our Board of Directors may not grant an exemption from these restrictions to any proposed transferee whose ownership
in excess of 9.8% of the value of our outstanding shares would result in our failing to qualify as a REIT. These restrictions on
ownership and transfer will not apply, however, if our Board of Directors determines that it is no longer in our best interest
to continue to qualify as a REIT or that compliance with the restrictions is no longer necessary in order for us to qualify as
a REIT.
Complying with REIT
requirements may cause us to forgo otherwise attractive opportunities.
To qualify as a REIT for federal income tax purposes,
we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of
our assets, the amounts that we distribute to our stockholders and the ownership of our stock. We may be required to make distributions
to stockholders at disadvantageous times or when we do not have funds readily available for distribution and may be unable to pursue
investments that would be otherwise advantageous to us in order to satisfy the source-of-income or asset-diversification requirements
for qualifying as a REIT. Thus, compliance with the REIT requirements may hinder our ability to make certain attractive investments.
Complying with the
REIT requirements may force us to liquidate otherwise attractive investments.
To qualify as a REIT, we must ensure that
at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities
and qualified REIT real estate assets. The remainder of our investments (other than governmental securities and qualified real
estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of
the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets
(other than government securities and qualified real estate assets) can consist of the securities of any one issuer, and no more
than 25% of the value of our assets can be represented by securities of one or more taxable REIT subsidiaries together with any
other non-qualifying assets. If we fail to comply with these requirements at the end of any calendar quarter, we must correct such
failure within 30 days after the end of the calendar quarter to avoid losing our REIT status and suffering adverse tax consequences.
As a result, we may be required to liquidate otherwise attractive investments.
Dividends payable
by REITs do not qualify for the reduced tax rates available for some dividends.
The maximum tax rate applicable to “qualified
dividend income” payable to U.S. stockholders that are taxed at individual rates is currently 20%. Dividends payable by REITs,
however, generally are not eligible for the reduced rates on qualified dividend income. The more favorable rates applicable to
regular corporate qualified dividends could cause investors who are taxed at individual rates to perceive investments in REITs
to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely
affect the value of the shares of REITs, including our common stock.
Liquidation of assets
may jeopardize our REIT status.
To qualify as a REIT, we must comply with requirements regarding our assets and our sources
of income. If we are compelled to liquidate our investments to satisfy our obligations to our lenders, we may be unable to comply
with these requirements, ultimately jeopardizing our status as a REIT, or we may be subject to a 100% tax on any resultant gain
if we sell assets that are treated as dealer property or inventory.
Qualifying as a REIT
involves highly technical and complex provisions of the Code.
Qualification as a REIT involves the application of highly
technical and complex Code provisions for which only limited judicial and administrative authorities exist. Even a technical or
inadvertent violation could jeopardize our proposed REIT qualification. Our qualification as a REIT will depend on our satisfaction
of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis. In
addition, our ability to satisfy the requirements to qualify as a REIT may depend in part on the actions of third parties over
which we have no control or only limited influence, including in cases where we own a non-controlling equity interest in an entity
that is classified as a partnership for U.S. federal income tax purposes.
Foreign investors
may be subject to FIRPTA on the sale of common stock if we are unable to qualify as a domestically controlled REIT.
A foreign
person disposing of a U.S. real property interest, including shares of a U.S. corporation whose assets consist principally of U.S.
real property interests, is generally subject to a tax known as the Foreign Investment in Real Property Tax Act (“FIRPTA”)
on the gain recognized on the disposition. FIRPTA does not apply, however, to the disposition of stock in a REIT if the REIT is
a domestically controlled REIT. A domestically controlled REIT is a REIT in which, at all times during a specified testing period,
less than 50% in value of its shares is held directly or indirectly by non-U.S. holders. We are not currently domestically-controlled,
and may never become domestically-controlled, and so there can be no assurance that foreign investors will be able to rely on this
exemption under FIRPTA. Another FIRPTA exemption is potentially available in the case of gain realized by a foreign investor on
a sale of our common stock if our common stock is traded on an established securities market and the foreign investor did not at
any time during a specified testing period directly or indirectly own more than five percent of the value of our outstanding common
stock. Although we believe that our stock is currently considered under the applicable Treasury regulations to be regularly traded
on an established securities market, there can be no assurance that it will continue to be so treated in the future.
We may be subject
to adverse legislative or regulatory tax changes that could reduce the market price of our common stock.
At any time, the
federal income tax laws governing REITs or the administrative interpretations of those laws may be amended. We cannot predict when
or if any new federal income tax law, regulation or administrative interpretation, or any amendment to any existing federal income
tax law, regulation or administrative interpretation, will be adopted, promulgated or become effective, and any such law, regulation,
or interpretation may take effect retroactively. We and our stockholders could be adversely affected by any such change in the
federal income tax laws, regulations or administrative interpretations.
Risks Related to Ownership of Our Common
Stock
The availability
and timing of our anticipated cash distributions are uncertain.
We are generally required to distribute to our stockholders
at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital
gain, each year in order for us to qualify as a REIT under the Code, which requirement we currently intend to satisfy through quarterly
cash distributions of all or substantially all of our REIT taxable income in such year, subject to certain adjustments. However,
due to our net losses to date and our limited operating history, we currently do not have the ability to fund distributions from
cash flow from operations and we cannot assure you how long it may take to generate sufficient available cash flow to fund distributions
nor can we assure you that sufficient cash will be available to make distributions to you.
Our Board of Directors
will determine the amount and timing of any distributions. In making such determinations, our directors will consider all relevant
factors, including the amount of cash available for distribution, capital expenditures, general operational requirements and restrictions
under applicable law. We bear all expenses incurred by our operations, and the funds generated by our operations, after deducting
these expenses, are currently estimated to not be sufficient to allow for distributions to our stockholders. We cannot assure you
how long it may take to generate sufficient available cash flow to fund distributions, nor can we assure you that sufficient cash
will be available to make distributions to you. With a limited operating history, we may be unable to make, maintain or increase
distributions over time.
There are many factors
that can affect the availability and timing of cash distributions to stockholders, including the risk factors described in this
report. Because we may receive rents and income from our properties at various times during our fiscal year, distributions paid
may not reflect our income earned in that particular distribution period. The amount of cash available for distribution will be
affected by many factors, including without limitation, the amount of time it takes for us to deploy the net proceeds from our
recently completed public offering into our target assets, the amount of income we will earn from those investments, the amount
of our operating expenses and many other variables. Actual cash available for distribution may vary substantially from our expectations.
Certain of our existing
stockholders affiliated with Mr. Xiaofan Bai have substantial influence over our company, and their interests may not be aligned
with the interests of our other stockholders and sales of their shares could cause the market price of our common stock to decrease.
As of December 31, 2016, Mr. Xiaofan Bai, a member of our Board of Directors, and three of our stockholders affiliated
with Mr. Bai collectively own approximately 55% of our outstanding voting securities. These three stockholders are private equity
funds managed and controlled by Mr. Bai. As a result of this ownership interest, Mr. Bai has significant influence over our company
and our business, including decisions regarding mergers, consolidations and the sale of all or substantially all of our assets,
election of directors, any amendments to our articles of incorporation and bylaws, and other significant corporate actions requiring
stockholder approval. This concentration of ownership may also have the effect of discouraging, delaying or preventing a future
change of control, which could deprive our stockholders of an opportunity to receive a premium for their shares as part of a sale
of our company and might reduce the price of our shares. The interests of Mr. Bai and his affiliates may not always be aligned
with the interests of our other stockholders. Furthermore, any sales of substantial amounts of shares of our common stock in the
public market by Mr. Bai or the other stockholders affiliated with Mr. Bai, or the perception that such sales might occur,
could result in significant downward pressure on the market price of our common stock. In addition, Mr. Xiaofan Bai and Mr. Xiaohang
Bai, who is also a member of our Board of Directors, are cousins and Mr. Xiaofan Bai is married to Ms. Siyu Lan, who is also
a member of our Board.
An active trading
market for our common stock may never develop.
Prior the filing of this report, trading in our common stock on the Nasdaq
Capital Market has been limited and sporadic. An active trading market for our common stock may never develop or be sustained,
which may affect your ability to sell your common stock and could depress the market price of your common stock. As a result, no
assurances can be given that you will be able to readily sell your common stock at a price equal to or above the price you paid.
There can be no assurance
that we will ever provide liquidity to our investors through a sale of our company.
Potential investors are cautioned that
no assurances can be given that any form of merger, combination, or sale of our company or any of our real estate assets will take
place, or that any merger, combination, or sale, even if consummated, would provide liquidity or a profit for our investors. You
should not invest in our company with the expectation that we will be able to sell our company or any of our assets in order to
provide liquidity or a profit for our investors.
If a market for our
stock develops, the trading and price of our common stock may be volatile and could decline substantially.
The stock markets,
including the NASDAQ Capital Market, have experienced significant price and volume fluctuations. As a result, the market price
of our common stock is likely to be similarly volatile, and investors in our common stock may experience a decrease in the value
of their shares, including decreases unrelated to our operating performance or prospects. The price of our common stock could be
subject to wide fluctuations in response to a number of factors, including those listed in this “Risk Factors” section,
and others such as:
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our operating performance and the performance of other similar companies;
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actual or anticipated changes in our business strategy prospects;
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actual or anticipated valuations in our quarterly operating results or dividends;
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changes in our earnings estimates;
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publication of research reports about the real estate industry;
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the passage of legislation or other regulatory developments that adversely affect us or the assets
in which we seek to invest;
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the use of significant leverage to finance our assets;
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changes in market valuations of similar companies;
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actions by our stockholders;
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the realization of any other risk factor in this report; and
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general economic conditions.
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If the market price of
our common stock declines significantly, you may be unable to resell your shares at or above the price you paid for them. We cannot
assure you that the market price of our common stock will not fluctuate or decline significantly.
Reports published
by analysts, including projections in those reports that exceed our actual results, could adversely affect our common stock price
and trading volume.
Securities research analysts may establish and publish their own periodic projections for our business.
These projections may vary widely and may not accurately predict the results we actually achieve. Our stock price may decline if
our actual results do not match the projections of these securities research analysts. Similarly, if one or more of the analysts
who write reports on us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price
could decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, our stock price
or trading volume could decline. If no analysts commence coverage of us, the trading price for our stock and the trading volume
could be adversely affected.
Future sales of our
common stock or other securities convertible into our common stock could cause the market price of our common stock to decline
and could result in the dilution of your shares.
Our Board of Directors is authorized, without your approval, to cause
us to issue additional shares of our common stock (including equity or debt securities convertible into common stock) or to raise
capital through the issuance of preferred stock, options, warrants and other rights, on terms and for consideration as our Board
of Directors in its sole discretion may determine. Sales of substantial amounts of our common stock could cause the market price
of our common stock to decrease significantly. To the extent the proceeds of any future equity offering are invested in residential
assets that have less favorable yield characteristics than our then-existing portfolio, our stockholders will suffer dilution in
their yield and distributable cash per share. We cannot predict the effect, if any, of future sales of our common stock, or the
availability of our common stock for future sales, on the market price of our common stock. Sales of substantial amounts of our
common stock, or the perception that such sales could occur, may adversely affect the market price of our common stock.
Future offerings
of debt securities, which would rank senior to our common stock upon our bankruptcy or liquidation, and future offerings of equity
securities that may be senior to our common stock for the purposes of dividend and liquidating distributions, may adversely affect
the market price of our common stock.
In the future, we may attempt to increase our capital resources by making offerings
of debt securities or additional offerings of equity securities. Upon bankruptcy or liquidation, holders of our debt securities
and shares of preferred stock and lenders with respect to other borrowings will receive a distribution of our available assets
prior to the holders of our common stock. Our preferred stock, if issued, could have a preference on liquidating distributions
or a preference on dividend payments or both that could limit our ability to pay a dividend or other distribution to the holders
of our common stock. Our decision to issue securities in any future offering will depend on market conditions and other factors
beyond our control. As a result, we cannot predict or estimate the amount, timing or nature of our future offerings, and purchasers
of our common stock in this offering bear the risk of our future offerings reducing the market price of our common stock and diluting
their ownership interest in our company.
An increase in market
interest rates may have an adverse effect on the market price of our common stock and our ability to make or sustain distributions
to our stockholders.
One of the factors that investors may consider in deciding whether to buy or sell shares of our common
stock is our ability to make or sustain distributions and the rate of our distributions, if any, as a percentage of our share price,
relative to market interest rates. If market interest rates increase, prospective investors may demand a higher distribution rate
on shares of our common stock or seek alternative investments paying higher distributions or interest. As a result, interest rate
fluctuations and capital market conditions can affect the market price of shares of our common stock. For instance, if interest
rates rise without an increase in our distribution rate, the market price of shares of our common stock could decrease because
potential investors may require a higher distribution yield on shares of our common stock as market rates on our interest-bearing
instruments such as bonds rise. In addition, to the extent we have variable rate debt, rising interest rates would result in increased
interest expense on our variable rate debt, thereby adversely affecting our cash flow and our ability to service our indebtedness
and make distributions to our stockholders.
ERISA imposes additional
obligations on us.
In considering an investment in our common stock, trustees, custodians, investment managers, and fiduciaries
of retirement and other plans subject to the fiduciary responsibility provisions of the Employee Retirement Income Security Act
of 1974, as amended (“ERISA”), or the prohibited transaction provisions of Section 4975 of the Code (including IRAs),
should consider among other things: (i) whether an investment in the common stock is in accordance with plan documents and
satisfies the diversification requirements of Section 404(a) of ERISA, if applicable; (ii) whether an investment in the common
stock will result in unrelated business taxable income to the plan; (iii) whether the investment is prudent under Section 404(a)
of ERISA, if applicable; and (iv) whether we or any of our affiliates is a fiduciary or party in interest to the plan. Fiduciaries
and other persons responsible for the investment of certain governmental and church plans that are subject to any provision of
federal, state, or local law that is substantially similar to the fiduciary responsibility provisions of Title I of ERISA or the
prohibited transaction provisions of Section 4975 of the Code that are considering the purchase of the common stock should consider
the applicability of the provisions of such similar law and whether the common stock would be an appropriate investment under such
similar law. The responsible fiduciary must take into account all of the facts and circumstances of the plan and of the investment
when determining if a particular investment satisfies its fiduciary responsibility under ERISA. Other investors must consider the
potential impact that benefit plan investments could have on our operations.