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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________ 
FORM 10-Q
_______________________________________ 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number 001-35899
_______________________________________ 
AMERICAN RESIDENTIAL PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
_______________________________________ 
Maryland
 
45-4941882
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
 
 
7047 East Greenway Parkway, Suite 350
Scottsdale, AZ
 
85254
(Address of principal executive offices)
 
(Zip Code)
(480) 474-4800
(Registrant’s telephone number, including area code)
 _______________________________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
¨
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
x  (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
As of November 6, 2014, there were 32,200,480 shares of common stock, $0.01 par value per share, outstanding.



AMERICAN RESIDENTIAL PROPERTIES, INC.
INDEX
 
 
 
 
Item 1.
 
Condensed Consolidated Balance Sheets as of September 30, 2014 (unaudited) and December 31, 2013
 
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2014 and 2013 (unaudited)
 
Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2014 and 2013 (unaudited)
 
Condensed Consolidated Statement of Equity for the Nine Months Ended September 30, 2014 (unaudited)
 
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013 (unaudited)
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 


2


CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements included in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the federal securities laws. Forward-looking statements relate to expectations, beliefs, projections, forecasts, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. These statements are only predictions. We caution that forward-looking statements are not guarantees. Actual events or our investments and results of operations could differ materially from those expressed or implied in the forward-looking statements. Forward-looking statements are typically identified by the use of terms such as “may,” “will,” “should,” “expect,” “could,” “intend,” “plan,” “anticipate,” “estimate,” “believe,” “continue,” “predict,” “potential” or the negative of such terms and other comparable terminology. You can also identify forward-looking statements by discussions of strategy, plans or intentions.
The forward-looking statements included in this report reflect our current views about future events and are subject to numerous known and unknown risks, uncertainties, assumptions and changes in circumstances that may cause our actual results to differ significantly from those expressed in any forward-looking statement. Statements regarding the following subjects, among others, may be forward-looking:
our business and investment strategy;
our projected operating results;
economic, demographic or real estate developments in our markets;
home value appreciation, employment growth, residential building permits, median household income and household formation in our markets;
defaults on, early terminations of or non-renewal of leases by our tenants;
our ability to identify properties to acquire and completing acquisitions;
increased time and/or expense to gain possession and restore properties;
our ability to successfully restore, lease and manage acquired properties;
projected operating costs;
rental rates or vacancy rates;
our ability to obtain financing;
general volatility of the markets in which we participate;
our expected investments;
interest rates and the market value of our assets;
impact of changes in governmental regulations, tax law and rates and similar matters;
our ability to maintain our qualification as a real estate investment trust, or REIT, for federal income tax purposes;
availability of qualified personnel;
estimates relating to our ability to make distributions to our stockholders in the future;
our understanding of our competition; and
market trends in our industry, real estate values, the debt securities markets or the general economy.
The forward-looking statements are based on our beliefs, assumptions and expectations of future events, taking into account all information currently available to us. Forward-looking statements are not guarantees of future events or of our performance. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us. Some of these events and factors are described in “Item 1A. Risk Factors” and in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report on Form 10-Q and other risks and uncertainties detailed in this and our other reports and filings with the Securities and Exchange Commission, or the SEC. If a change occurs, our business, financial condition, liquidity, cash flows and results of operations may vary materially from those expressed in or implied by our forward-looking statements. New risks and uncertainties arise over time, and it is not possible for us to predict the occurrence of those matters or the manner in which they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. You should, therefore, not rely on these forward-looking statements as of any date subsequent to the date of this Quarterly Report on Form 10-Q.

3


PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
AMERICAN RESIDENTIAL PROPERTIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share amounts)
 
September 30, 2014 (unaudited)
 
December 31, 2013
Assets
 
 
 
Investment in real estate:
 
 
 
Land
$
227,384

 
$
158,795

Building and improvements
939,433

 
627,881

Furniture, fixtures and equipment
8,842

 
6,930

 
1,175,659

 
793,606

Less: accumulated depreciation
(45,866
)
 
(18,058
)
Investment in real estate, net
1,129,793

 
775,548

Mortgage financings
26,061

 
43,512

Cash and cash equivalents
26,850

 
24,294

Restricted cash
10,816

 

Acquisition deposits
4,401

 
282

Rents and other receivables, net
3,705

 
2,949

Deferred leasing costs and lease intangibles, net
3,432

 
2,454

Deferred financing costs, net
14,968

 
6,558

Investment in unconsolidated ventures
25,955

 
26,611

Goodwill
3,500

 
3,500

Other, net
9,795

 
8,494

Total assets
$
1,259,276

 
$
894,202

 
 
 
 
Liabilities and Equity
 
 
 
Liabilities:
 
 
 
Revolving credit facility
$
199,000

 
$
169,000

Exchangeable senior notes, net
101,455

 
99,377

Securitization loan, net
340,591

 

Accounts payable and accrued expenses
23,607

 
12,862

Security deposits
7,143

 
3,995

Prepaid rent
2,877

 
1,549

Total liabilities
674,673

 
286,783

Equity:
 
 
 
American Residential Properties, Inc. stockholders’ equity:
 
 
 
Preferred stock, $0.01 par value, 100,000,000 shares authorized; no shares issued and outstanding

 

Common stock, $0.01 par value, 500,000,000 shares authorized; 32,200,480 and 32,171,102 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively
322

 
322

Additional paid-in capital
628,605

 
628,210

Accumulated other comprehensive loss
(67
)
 

Accumulated deficit
(55,562
)
 
(31,122
)
Total American Residential Properties, Inc. stockholders’ equity
573,298

 
597,410

Non-controlling interests
11,305

 
10,009

Total equity
584,603

 
607,419

Total liabilities and equity
$
1,259,276

 
$
894,202

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

4


AMERICAN RESIDENTIAL PROPERTIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except share and per-share amounts)
(unaudited)
 
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2014
 
2013
 
2014
 
2013
Revenue:
 
 
 
 
 
 
 
 
   Self-managed rental revenue
 
$
21,078

 
$
7,520

 
$
53,818

 
$
15,430

   Preferred operator rental revenue
 
1,273

 
1,948

 
3,951

 
5,318

   Management services (related party)
 
100

 
113

 
321

 
327

   Interest and other
 
1,034

 
1,488

 
3,603

 
3,649

Total revenue
 
23,485

 
11,069

 
61,693

 
24,724

Expenses:
 
 
 
 
 
 
 
 
   Property operating and maintenance
 
5,258

 
2,489

 
14,337

 
4,915

   Real estate taxes
 
4,239

 
1,791

 
11,011

 
3,315

   Homeowners’ association fees
 
540

 
228

 
1,505

 
746

   Acquisition
 
98

 
301

 
179

 
3,750

   Depreciation and amortization
 
12,576

 
6,589

 
32,960

 
14,367

   General, administrative and other
 
4,056

 
3,105

 
11,274

 
12,319

   Interest
 
5,961

 
1,204

 
15,060

 
2,257

Total expenses
 
32,728

 
15,707

 
86,326

 
41,669

Loss from continuing operations before equity in net (loss) income of unconsolidated ventures
 
(9,243
)
 
(4,638
)
 
(24,633
)
 
(16,945
)
Equity in net (loss) income of unconsolidated ventures
 
(84
)
 
50

 
(230
)
 
110

Net loss
 
(9,327
)
 
(4,588
)
 
(24,863
)
 
(16,835
)
Net loss attributable to non-controlling interests
 
165

 
73

 
423

 
229

Net loss attributable to common stockholders
 
$
(9,162
)
 
$
(4,515
)
 
$
(24,440
)
 
$
(16,606
)
Basic and diluted loss per share:
 
 
 
 
 
 
 
 
   Net loss attributable to common stockholders
 
$
(0.28
)
 
$
(0.14
)
 
$
(0.76
)
 
$
(0.65
)
Weighted-average number of shares of common stock outstanding
 
32,153,307

 
32,124,857

 
32,139,807

 
25,447,193

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

5


AMERICAN RESIDENTIAL PROPERTIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(amounts in thousands)
(unaudited)
 
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2014
 
2013
 
2014
 
2013
Net loss
 
$
(9,327
)
 
$
(4,588
)
 
$
(24,863
)
 
$
(16,835
)
Other comprehensive loss:
 
 
 
 
 
 
 
 
   Change in unrealized loss on interest rate cap
 
(67
)
 

 
(67
)
 

Comprehensive loss
 
(9,394
)
 
(4,588
)
 
(24,930
)
 
(16,835
)
Comprehensive loss attributable to non-controlling interests
 
165

 
73

 
423

 
229

Comprehensive loss attributable to common stockholders
 
$
(9,229
)
 
$
(4,515
)
 
$
(24,507
)
 
$
(16,606
)
The accompanying notes are an integral part of these condensed consolidated financial statements.

6


AMERICAN RESIDENTIAL PROPERTIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
(amounts in thousands, except share amounts)
(unaudited)
 
 
 
Number of
Shares
Common
Stock
 
Common
Stock
 
Preferred
Stock
 
Additional
Paid-In
Capital
 
 Accumulated Other Comprehensive Loss
 
Accumulated
Deficit
 
Non-
Controlling
Interests
 
Total
Equity
Balance at December 31, 2013
 
32,171,102

 
$
322

 
$

 
$
628,210

 
$

 
$
(31,122
)
 
$
10,009

 
$
607,419

Issuance of common stock
 
32,735

 

 

 
164

 

 

 
(164
)
 

Repurchase of common stock
 
(3,357
)
 

 

 
(61
)
 

 

 

 
(61
)
Net loss
 

 

 

 

 

 
(24,440
)
 
(423
)
 
(24,863
)
Other comprehensive loss
 

 

 

 

 
(67
)
 

 

 
(67
)
Stock-based compensation
 

 

 

 
292

 

 

 
1,883

 
2,175

Balance at September 30, 2014
 
32,200,480

 
$
322

 
$

 
$
628,605

 
$
(67
)
 
$
(55,562
)
 
$
11,305

 
$
584,603

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

7


AMERICAN RESIDENTIAL PROPERTIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
(unaudited)
 
Nine Months Ended 
 September 30,
 
2014
 
2013
Operating activities:
 
 
 
Net loss
$
(24,863
)
 
$
(16,835
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization
32,960

 
14,367

Amortization of stock-based compensation
2,175

 
4,783

Amortization of deferred financing costs
3,928

 
911

Accretion of discount on senior exchangeable notes
2,078

 

Accretion of discount on securitization loan
32

 

Bad debt expense
1,742

 
1,229

Straight line rental revenue
179

 
(519
)
Equity in net loss (income) of unconsolidated ventures
230

 
(110
)
Distributions from unconsolidated ventures

 
110

Changes in operating assets and liabilities:
 
 
 
Restricted cash
(10,816
)
 

Rent and other receivables, net
(2,677
)
 
(1,758
)
Deferred leasing costs and lease intangibles, net
(5,118
)
 
(1,133
)
Other assets, net
(1,996
)
 
(2,455
)
Accounts payable, accrued expenses and other liabilities
14,122

 
10,464

Net cash provided by operating activities
11,976

 
9,054

Investing activities:
 
 
 
Improvements of real estate
(34,635
)
 
(14,492
)
Property acquisitions, including acquired in-place leases
(346,703
)
 
(458,542
)
Investment in mortgage financings
(13,243
)
 
(48,942
)
Repayments from mortgage financings
30,694

 
22,494

Contributions to unconsolidated ventures

 
(18,000
)
Distributions from unconsolidated ventures
426

 
948

Increase in acquisition deposits
(4,119
)
 
(1,189
)
Net cash used in investing activities
(367,580
)
 
(517,723
)
Financing activities:
 
 
 
Borrowings under revolving credit facility
358,000

 
279,000

Repayments of revolving credit facility
(328,000
)
 
(109,000
)
Proceeds from issuance of securitization loan
340,559

 

Deferred financing costs
(12,338
)
 
(4,628
)
Repurchase of common stock
(61
)
 

Proceeds from issuance of common stock

 
288,471

Common stock issuance transaction costs

 
(22,578
)
Net cash provided by financing activities
358,160

 
431,265

Net increase (decrease) in cash and cash equivalents
2,556

 
(77,404
)
Cash and cash equivalents—beginning of period
24,294

 
101,725

Cash and cash equivalents—end of period
$
26,850

 
$
24,321

Supplemental schedule of noncash investing and financing activities:
 
 
 
Accounts payable and accrued expenses for additions to investments in real estate
$
2,313

 
$
1,042

Cash paid for interest, net of amount capitalized
$
7,497

 
$
1,201

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

8


AMERICAN RESIDENTIAL PROPERTIES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
(unaudited)
 
1.
Company’s Organization and Operations
As used in these condensed consolidated financial statements and related notes, the terms “American Residential Properties, Inc.,” the “Company,” “us,” “we” and “our” refer to American Residential Properties, Inc. We are an internally managed real estate company organized as a real estate investment trust, or REIT, that acquires, owns and manages single-family homes as rental properties. We own all of our assets and conduct substantially all of our operations through (i) American Residential Properties OP, L.P., a Delaware limited partnership, or our Operating Partnership, in which we have a 98.2% interest as of September 30, 2014 and for which, through our wholly owned subsidiary, American Residential GP, LLC, we serve as sole general partner, and (ii) American Residential Properties TRS, LLC, or our TRS, which is our taxable REIT subsidiary. We have elected to be taxed as a REIT for federal income tax purposes. As a REIT, we will generally not be subject to federal income taxes to the extent that we currently distribute all of our taxable income to our stockholders and meet other specific requirements.
We were incorporated in Maryland in March 2012 and completed our initial private offering of our common stock in May 2012, raising net proceeds of approximately $208.7 million. In December 2012 and January 2013, we raised an additional approximately $139.1 million of net proceeds from a follow-on private offering of our common stock and a private placement of our common stock.
We completed our initial public offering, or our IPO, in May 2013, in which we issued and sold 13,700,000 shares of our common stock at a public offering price of $21.00 per share, and we received approximately $265.1 million of net proceeds.
As of September 30, 2014, we owned 8,223 properties in Arizona, California, Colorado, Florida, Georgia, Illinois, Indiana, Nevada, North Carolina, Ohio, South Carolina, Tennessee and Texas.
2.
Summary of Significant Accounting Policies
Basis of Accounting and Principles of Consolidation
The accompanying interim unaudited condensed consolidated financial statements of the Company have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission, or the SEC. Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles, or GAAP, have been condensed or omitted according to such SEC rules and regulations. Management believes, however, that the disclosures included in these interim condensed consolidated financial statements are adequate to make the information presented not misleading. The accompanying condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC on March 31, 2014. In the opinion of management, the unaudited condensed consolidated financial statements include the normal, recurring adjustments necessary for a fair statement of the information required to be set forth therein. The results of operations for the three and nine months ended September 30, 2014 are not necessarily indicative of the results to be expected for the entire year.
The accompanying condensed consolidated financial statements include the accounts of American Residential Properties, Inc., our Operating Partnership and the wholly owned subsidiaries of our Operating Partnership. All majority-owned subsidiaries are consolidated and included in our condensed consolidated financial statements. All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.
Investment in Real Estate
Property acquired not subject to an existing lease is accounted for as an asset acquisition, with the property recorded at the purchase price, including acquisition costs, and allocated between land and building and improvements based upon their relative fair values at the date of acquisition. Property acquired with an existing lease is recorded as a business combination. For properties acquired through portfolio transactions, we determine whether the acquisition qualifies as a business combination based on the nature and status of the properties as of the acquisition date. A portfolio comprised of properties that

9


are substantially leased at acquisition is treated as a business combination. A portfolio comprised of properties that are substantially vacant at acquisition is treated as an asset acquisition. For property acquisitions accounted for as business combinations, the land, building and improvements and the existing lease are recorded at fair value at the date of acquisition, with acquisition costs expensed as incurred.
Fair value is determined under the guidance of Accounting Standards Codification, or ASC, Topic 820, Fair Value Measurements, primarily based on unobservable market data inputs, which are categorized as Level 3 inputs. In making estimates of fair values for purposes of allocating purchase price, we utilize our market knowledge and published market data. Our real estate portfolio is depreciated using the straight-line method over the estimated useful lives of the respective assets, ranging from 5 to 27.5 years.
We have acquired portfolios of leased properties from established local operators through our “preferred operator” program. In this program, we acquired portfolios of leased properties for which the operator retains day-to-day management responsibilities pursuant to a longer-term lease. In these arrangements, the operator is responsible for all property-related expenses and we receive payments from the operator that escalate over the term of the lease. In-place lease intangibles associated with the preferred operator program are valued based on management’s estimates of lost rent and carrying costs. In-place lease intangibles associated with the acquisition of self-managed homes are valued based on management’s estimate of lost rent during the time it would take to locate a tenant and execute a lease if the property were vacant, considering current market conditions and costs to execute similar leases. In estimating lost rent and carrying costs, management considers market rents, real estate taxes, insurance, costs to execute similar leases (including leasing commissions) and other related costs. The value assigned to in-place leases is amortized on a straight-line basis as a component of depreciation and amortization expense over the remaining initial term of the related lease. The leases reflect market rental rates.
We incur costs to prepare our acquired properties to be rented. These costs (including direct internal costs) are capitalized and allocated to building costs. Costs related to the restoration or improvement of our properties (including direct internal costs, primarily comprised of payroll expense) that improve and extend their useful lives are capitalized and depreciated over their estimated useful lives. The Company capitalizes interest during the restoration period on newly acquired properties. Expenditures for ordinary repairs and maintenance are expensed as incurred.
Impairment of Long-Lived Assets
We evaluate our long-lived assets for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Significant indicators of impairment may include, but are not limited to, declines in home values, rental rates and occupancy percentages and significant changes in the economy. We make our assessment at the individual property level because it represents the lowest level of cash flows. If an impairment indicator exists, we compare the expected future undiscounted cash flows from the property against its net carrying amount. We prepare our future undiscounted cash flow analysis using estimates based on current rental rates, renewals and occupancy, operating expenses and inputs from our annual planning process and historical performance. When preparing these estimates, we consider each property’s historical results, current operating trends and current market conditions. These estimates may be impacted by variable factors, including inflation, expected rental rates, the general health of the economy and market competition. If the sum of the estimated undiscounted cash flows is less than the net carrying amount of the property, we record an impairment loss for the difference between the estimated fair value of the individual property and the carrying amount of the property at that date. To determine the estimated fair value, we consider both recent comparable homes sales and the use of discounted projected future cash flows. The rates used to discount projected future cash flows reflect market discount rates. No impairments were recorded during the nine months ended September 30, 2014 or 2013.
Revenue Recognition
We lease single-family residences we own and manage directly to tenants who occupy the properties under operating leases, generally, with terms of one year. We perform credit investigations on prospective tenants and obtain security deposits. Rental revenue, net of any concessions, is recognized on a straight-line basis over the term of the lease, which is not materially different than if it were recorded when due from tenants and recognized monthly as it is earned. Properties that are subject to longer-term operating arrangements with preferred operators are leased to the operator for a minimum of five to ten years with renewal options. These operators are responsible for taxes, insurance and maintenance of the properties under the terms of the operating arrangements. Under our preferred operator program, we earn base rental revenue paid monthly, with contractual minimum annual rent increases on each anniversary of the lease commencement date. We recognize rental revenue on a straight-line basis over the term of the lease. We also earn percentage rents on a quarterly basis equal to a fixed percentage of the gross revenue the preferred operator collects from its residential sub-tenants who occupy the homes. Percentage rental revenue is recorded when the gross revenue collected from the sub-tenants is known and the amount can be calculated.

10


Mortgage Financings
We hold mortgage financing receivables for investment. The receivables are carried at cost, net of related unamortized premiums or discounts, if any. The mortgage loans are secured by single-family homes.
Interest income on mortgage financings is recognized on the effective interest method applied on a loan-by-loan basis. Direct costs, if any, associated with funding loans are offset against any related fees received and the balance, along with any premium or discount, is deferred and amortized as an adjustment to interest income over the terms of the related loans using the effective interest method.
Mortgage loans as of September 30, 2014 include approximately $25.4 million of short-term loans with a weighted-average interest rate of approximately 11.8% and a weighted-average remaining term of approximately 100 days and approximately $0.7 million in long-term loans with a weighted-average interest rate of approximately 8.0% and a weighted-average remaining term of approximately 28.5 years.
Cash and Cash Equivalents
Cash and cash equivalents are held in depository accounts with financial institutions that are members of the Federal Deposit Insurance Corporation, or the FDIC. Cash balances with institutions may be in excess of federally insured limits or may be invested in time deposits that are not insured by the institution or the FDIC or any other government agency. We have not realized any losses in such cash investments and we believe that these investments are not exposed to any significant credit risk. Cash equivalents consist of highly liquid investments with original maturities of three months or less when acquired. Such investments are stated at cost, which approximates fair value.
Included in the cash and cash equivalents balance is approximately $3.9 million of cash held with designated brokers to facilitate the acquisition of properties as of September 30, 2014. There was no cash held with designated brokers as of December 31, 2013.
Restricted Cash
Restricted cash primarily consists of funds that are restricted as to withdrawal or use under the terms of certain contractual agreements, which include payments of real estate taxes, insurance, interest, management fees and tenant security deposits.
Rents and Other Receivables, Net
We maintain an allowance for doubtful accounts for estimated losses that may result from the inability of tenants, preferred operators or borrowers to make required rent or other payments. This allowance is estimated based on payment history and current credit status. If a tenant, preferred operator or borrower fails to make contractual payments beyond any allowance, we may recognize bad debt expense in future periods equal to the amount of unpaid rent, interest or principal and deferred rent. We generally do not require collateral or other security from our tenants, other than security deposits. Mortgage loans are secured by single-family homes. If estimates of collectibility differ from the cash received, then the timing and amount of our reported revenue could be impacted.
Our rents and other receivables for self-managed and preferred operator program homes are presented net of an allowance for doubtful accounts in our condensed consolidated balance sheet of approximately $0.6 million and $0.5 million, respectively, for a total of $1.1 million as of September 30, 2014. The allowance for doubtful accounts was $1.7 million as of December 31, 2013.
We recorded a provision for doubtful accounts for self-managed and preferred operator homes of approximately $0.4 million and $0.2 million, respectively, for a total of $0.6 million for the three months ended September 30, 2014. We recorded a provision for doubtful accounts for self-managed and preferred operator program homes of approximately $1.2 million and $0.6 million, respectively, for a total of $1.8 million for the nine months ended September 30, 2014. We recorded a provision for doubtful accounts for self-managed and preferred operator homes of approximately $0.4 million and $0.4 million, respectively, for a total of $0.8 million for the three months ended September 30, 2013. We recorded a provision for doubtful accounts for self-managed and preferred operator homes of approximately $0.8 million and $0.4 million, respectively, for a total of $1.2 million for the nine months ended September 30, 2013.

11


Deferred Leasing Costs and In-Place Lease Intangibles, Net
Deferred leasing commissions and other direct costs associated with leasing our properties (including direct internal costs) and in-place lease intangibles are capitalized and amortized on a straight-line basis over the terms of the related leases.
Deferred Financing Costs, Net
Financing costs are recorded at cost and consist of loan fees and other costs incurred in connection with obtaining debt. Amortization of deferred financing costs is computed using a method, which approximates the effective interest method over the remaining life of the debt, and is included in interest expense in the accompanying condensed consolidated statements of operations.
Investments in Unconsolidated Ventures
Investments in ventures are generally accounted for under the equity method of accounting when we exercise significant influence over the venture but we do not serve as managing member or control the venture. Net income/loss allocations are included in the investment balance along with the contributions made and distributions received over the life of the investment. In October 2012, we invested approximately $5.5 million in Flat Iron VI LLC, a joint venture in which our equity interest is approximately 78% of the total amount invested. In December 2012, we invested approximately $4.7 million in Siphon Draw LLC, a joint venture in which our equity interest is approximately 80% of the total amount invested. In May 2013, we invested approximately $18.0 million in Red Rock River LLC, a joint venture in which our equity interest is approximately 62% of the total amount invested. Each of these joint ventures used invested funds to purchase portfolios of residential mortgage loans.
Other Assets, Net
Other assets include prepaid expenses, deposits, other receivables and other miscellaneous assets, including office property and equipment. Office property and equipment is recorded at cost and depreciated using the straight-line method over the estimated useful lives of the respective assets of three to seven years.
Income Taxes
We have elected to be taxed as a REIT under Sections 856 to 860 of the Internal Revenue Code of 1986, as amended, or the Code. We believe that we have operated in such a manner as to satisfy the requirements for qualification as a REIT. Accordingly, we will not be subject to federal income tax, provided that we qualify as a REIT and our distributions to our stockholders equal or exceed our REIT taxable income.
Qualification and taxation as a REIT depend upon our ability to meet the various qualification tests imposed under the Code related to the percentage of income that we earn from specified sources, the percentage of our assets that fall within specified categories, the diversity of our capital stock ownership and the percentage of our earnings that we distribute. Accordingly, no assurance can be given that we will be organized or be able to operate in a manner so as to qualify or remain qualified as a REIT. If we fail to qualify as a REIT in any taxable year, we will be subject to federal and state income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate tax rates, and we may be ineligible to qualify as a REIT for four subsequent tax years. Even if we qualify as a REIT, we may be subject to certain state and local income and franchise taxes, and our TRS will be subject to federal, state and local taxes on its income. Franchise taxes are included in general and administrative expenses on the accompanying condensed consolidated statements of operations and comprehensive loss.
We have elected to treat our TRS as a taxable REIT subsidiary. Certain activities that we undertake will be conducted in our TRS, such as third-party property management, non-customary services for our tenants and holding assets that we cannot hold directly. Our TRS is subject to both federal and state income taxes.
We determine whether any tax positions taken or expected to be taken meet the "more-likely-than-not" threshold of being sustained by the applicable federal, state or local tax authority. As of September 30, 2014, we concluded that there is no tax liability relating to uncertain income tax positions. Our policy is to recognize interest related to any underpayment of income taxes as interest expense and to recognize any penalties as operating expenses. There was no accrual for interest or penalties at September 30, 2014.
We file federal, state and local income tax returns. Federal and state tax returns filed for 2012 and 2013 are still subject to examination. We believe that we have appropriate support for the income tax positions taken on our tax returns. We had net operating loss carryforwards for income tax purposes at December 31, 2013 and 2012. These losses will be available to reduce future taxable income or distribution requirements until they expire, which varies by jurisdiction but generally is not more than

12


20 years from the tax year in which they originate. Based on all available evidence, we cannot conclude it is more likely than not these attributes will be utilized in the future and thus a valuation allowance has been recorded against them.
Earnings (Loss) Per Share
Basic earnings (loss) per share, or EPS, is computed by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding for the period. Diluted EPS is computed by dividing net loss attributable to common stockholders as adjusted for dilutive securities, by the weighted-average number of shares of common stock outstanding plus dilutive securities. Any anti-dilutive securities are excluded from the diluted per-share calculation. Potentially dilutive securities include unvested restricted shares of our common stock, Operating Partnership units, or OP units, vested and unvested Long Term Incentive Plan units, or LTIP units, and exchangeable senior notes. We intend to satisfy our exchange obligation for the principal amount of the exchangeable senior notes to the exchanging note holders entirely in cash. As we intend to settle the principal amount of the exchangeable senior notes in cash, the "if-converted" method to include debt in diluted EPS is not applicable and the treasury stock method is being used and as our stock price is below the conversion price, there is no impact.
Recent Accounting Pronouncements
In April 2014, the FASB issued ASU 2014-08 Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which changes the criteria for determining which disposals are presented as discontinued operations and modifies related disclosure requirements. This standard is effective for fiscal years beginning after December 15, 2014 and for interim periods within those fiscal years with early adoption permitted. The Company has adopted the provisions of this ASU and anticipates that the majority of property sales will not be classified as discontinued operations.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. The new standard is effective for the Company on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its financial statements.
In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued and provides guidance on determining when and how to disclose going concern uncertainties in the financial statements. Certain disclosures will be required if conditions give rise to substantial doubt about an entity’s ability to continue as a going concern. This guidance is effective for the Company on January 1, 2017 and will not have an impact on the Company’s financial position, results of operations or cash flows.
3.
Lease Intangibles
Our identifiable intangible assets as of September 30, 2014 and December 31, 2013 are summarized as follows (amounts in thousands):
 
September 30, 2014
 
December 31, 2013
Acquired in-place leases
$
456

 
$
1,823

Less: accumulated amortization
(251
)
 
(1,039
)
Intangible lease assets, net
$
205

 
$
784

The impact of the amortization of acquired in-place leases on our depreciation and amortization expense is approximately $0.1 million and $1.2 million for the three months ended September 30, 2014 and 2013, respectively, and approximately $1.0 million and $3.4 million for the nine months ended September 30, 2014 and 2013, respectively.
4.
Debt
Senior Secured Revolving Credit Facility
In 2013, we entered into an amended and restated $380 million senior secured revolving credit facility, or the Credit Facility, with a syndicate of major national banks. The Credit Facility has an accordion feature that allows us, assuming our compliance with applicable covenants and at the lenders’ discretion, to borrow up to $500 million, subject to meeting certain criteria. In June 2014, we exercised the accordion feature, increasing our borrowing capacity to $500 million. In June 2014, we also amended the Credit Facility, increasing the size of the accordion feature to allow further increases of the borrowing capacity to an aggregate maximum of $750 million, subject to meeting certain criteria and obtaining additional commitments from the lenders. The amount available for us to borrow under the Credit Facility is subject to limitations governed by calculations based on the cost, value and debt yield supported by our properties that form the borrowing base of the Credit Facility. The credit agreement requires us to comply with various financial covenants as well as customary affirmative and negative covenants that restrict our ability to, among other things, incur debt and liens, make investments, dispose of properties and make distributions. The Credit Facility is secured by our ownership interest in American Residential Leasing Company, LLC, which is a wholly owned subsidiary of our Operating Partnership. The Credit Facility contains certain financial covenants, including a maximum leverage ratio, a minimum tangible net worth, a minimum fixed charge coverage ratio and a minimum liquidity. As of September 30, 2014, we were in compliance with all of the financial covenants of the Credit Facility.

13


The Credit Facility matures in January 2015 and has an optional one-year extension (assuming our compliance with applicable covenants). Borrowings under the Credit Facility bear interest, at our option, at either the one-month, two-month, three-month or six-month Eurodollar rate or the base rate, plus, in each case, a spread based on a ratio of total indebtedness to total asset value (each as defined in the credit agreement that governs the Credit Facility) ranging from less than or equal to 45% to greater than 55%. The Eurodollar rate for an interest period is the London Interbank Offered Rate, or LIBOR, for a term equivalent to such period plus a spread ranging from 2.50% to 3.25% (determined as described in the preceding sentence) and the base rate for any day is a fluctuating rate per annum equal to the highest of (a) the Federal Funds Rate plus 0.50%, (b) Bank of America's "prime rate" for such day and (c) the one-month Eurodollar rate plus 1.00% plus a spread ranging from 1.50% to 2.25% (determined as described in the preceding sentence). We are also required to pay a quarterly fee on the unused portion of the Credit Facility at a rate of between 0.35% and 0.45% per annum, based on the actual daily unused balance during a fiscal quarter. For the three and nine months ended September 30, 2014, we incurred non-utilization fees of $0.2 million and $0.5 million, respectively. For the three and nine months ended September 30, 2013 we incurred non-utilization fees of $0.1 million and $0.4 million, respectively.
As of September 30, 2014, $199.0 million was outstanding under the Credit Facility, bearing interest at a weighted-average rate of 2.9%, with remaining availability of $165.5 million.
We have incurred $6.7 million in financing costs in connection with the Credit Facility, which are included in deferred financing costs, net on the accompanying condensed consolidated balance sheets. These costs are being amortized to interest expense over the remaining initial term of the Credit Facility.
Exchangeable Senior Notes
In November 2013, we issued and sold $115.0 million aggregate principal amount of 3.25% Exchangeable Senior Notes due 2018, or the Notes. The Notes are senior unsecured obligations of the Operating Partnership and rank equally in right of payment with all other existing and future senior unsecured indebtedness of the Operating Partnership. Interest is payable in arrears on May 15 and November 15 of each year, beginning May 15, 2014, until the maturity date of November 15, 2018. The Operating Partnership’s obligations under the Notes are fully and unconditionally guaranteed by the Company. The Notes bear interest at a rate of 3.25% per annum and contain an exchange settlement feature, which provides that the Notes may, under certain circumstances, be exchangeable for cash, shares of our common stock or a combination of cash and shares of our common stock, at the option of the Operating Partnership, based on an initial exchange rate of 46.9423 shares of our common stock per $1,000 principal amount of Notes, which rate is subject to adjustment under certain circumstances up to a maximum of 57.5043 shares of our common stock per $1,000 principal amount of Notes. At the initial exchange rate, the Notes are exchangeable for our common stock at an exchange price of approximately $21.30 per share of our common stock, representing an approximately 22.5% premium over the last reported sale price of our common stock on November 21, 2013, which was $17.39 per share.
In connection with the issuance of the Notes, we recorded approximately $99.1 million within exchangeable senior notes, net on the accompanying condensed consolidated balance sheets, based on the fair value of the instrument using a straight-debt rate of 6.5% at the time of issuance, and approximately $15.4 million in additional paid-in-capital, net of $0.5 million in financing costs, in the accompanying condensed consolidated statement of equity. The difference between the $115.0 million face amount and the $99.1 million will be accreted over the five-year period ended November 15, 2018. As of September 30, 2014, the unaccreted discount was $13.5 million. We incurred $3.8 million in financing costs, of which $3.3 million are included in deferred financing costs, net on the accompanying condensed consolidated balance sheets to be amortized to interest expense over the term of the Notes.

14


Securitization Loan
In August 2014, the Company completed a securitization transaction resulting in $340.6 million in total gross proceeds. The transaction involves the issuance and sale of single-family rental pass-through certificates that represents beneficial ownership interests in a loan, or the Securitization Loan, secured by 2,876 homes sold to an affiliate from the Company's portfolio of single-family properties. The loan has an initial term of two years, with three, 12-month extension options, resulting in a fully extended maturity date of September 9, 2019 and requires that we maintain certain covenants, including but not limited to, a minimum debt yield on the collateral pool of properties. The effective weighted average of the fixed-rate spreads is 2.11% plus 1-month LIBOR. As of September 30, 2014, the Company was in compliance with all covenants under the loan agreement. The net balance at September 30, 2014 was $340.6 million, which is net of unamortized discount of $1.6 million. We incurred approximately $11 million in financing costs, which are included in deferred financing costs, net on the accompanying condensed consolidated balance sheets to be amortized over five years.
Derivative and Hedging Activities
Additionally, as part of certain lender requirements in connection with the Securitization Loan, we entered into an interest rate cap agreement with an aggregate notional amount of $342.2 million and LIBOR based strike rate equal to 3.12% for the initial two year term of the Securitization Loan to hedge against interest rate fluctuations. This interest rate cap agreement has been formally designated as a cash flow hedge at inception and will be regularly assessed for effectiveness on an on-going basis. During the three months ended September 30, 2014, our interest rate cap agreement was 100% effective as a cash flow hedge and, as a result, changes in fair value have been classified in accumulated other comprehensive loss. These amounts will subsequently be reclassified into earnings in the period which the hedged transaction affects earnings. The fair value of our interest rate cap agreement is estimated to be $0.1 million as of September 30, 2014 and has been included in other assets, net in the accompanying consolidated condensed balance sheets. The interest rate cap is valued using Level 2 observable market-based inputs, including interest rate curves.
5.
Earnings (Loss) Per Share
A reconciliation of our net loss per share is as follows (amounts in thousands, except share and per-share amounts):
 
Three Months Ended 
 September 30,
 
Nine Months 
 Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
Net loss attributable to common stockholders
$
(9,162
)
 
$
(4,515
)
 
$
(24,440
)
 
$
(16,606
)
Weighted-average number of shares of common stock outstanding:
 
 
 
 
 
 
 
Basic and diluted
32,153,307

 
32,124,857

 
32,139,807

 
25,447,193

Net loss per share of common stock, basic and diluted
$
(0.28
)
 
$
(0.14
)
 
$
(0.76
)
 
$
(0.65
)
For all periods presented, no potentially dilutive securities were included in computing loss per share of common stock as their effect would be anti-dilutive. Potentially dilutive securities excluded were Operating Partnership units, or OP units, and vested LTIP units, or Long Term Incentive Plan units, unvested LTIP units, and unvested restricted stock. The weighted-average number of shares of potentially dilutive securities were as follows:
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
OP and vested LTIP units
592,995

 
520,274

 
560,383

 
357,969

Unvested LTIP units
149,479

 
182,577

 
162,116

 
333,540

Unvested restricted stock
45,995

 
46,827

 
44,716

 
23,842

Unvested market-based LTIP units
377,230

 

 
354,293

 

Potentially dilutive shares
1,165,699

 
749,678

 
1,121,508

 
715,351


6.
Stock Compensation
We award stock-based compensation to certain employees, executives and members of our Board of Directors under the American Residential Properties, Inc. 2012 Equity Incentive Plan, or our 2012 Equity Incentive Plan. Under our 2012 Equity Incentive Plan, the Compensation Committee of our Board of Directors has the ability to grant nonqualified stock options, incentive stock options, restricted shares of our common stock, restricted stock units, dividend equivalents, stock appreciation rights and other awards to our officers, employees, directors and other persons providing services to our Operating Partnership and its subsidiaries. The number of shares of our common stock available for grant under our 2012 Equity Incentive Plan is subject to an aggregate limit of 1,500,000 shares. Our 2012 Equity Incentive Plan expires on May 11, 2022, except as to any grants which are then outstanding. As of September 30, 2014, there were 475,639 shares of our common stock available for grant under our 2012 Equity Incentive Plan.
We recorded stock-based compensation cost of approximately $0.8 million and $2.2 million as part of general, administrative and other expense in the condensed consolidated statement of operations during each of the three and nine months ended September 30, 2014, respectively. The stock-based compensation cost recorded during the three and nine months ended September 30, 2013 was $0.5 million and $4.8 million, respectively.
LTIP Units
Under our 2012 Equity Incentive Plan, we may grant LTIP units. LTIP units are a special class of partnership interests in our Operating Partnership with certain restrictions, which are convertible into OP units subject to satisfying vesting and other

15


conditions. LTIP unit holders are entitled to receive the same distributions as holders of our OP units (only if we pay such distributions) on the unvested portion of their LTIP units. The vesting of LTIP units is determined at the time of the grant and may be based on performance criteria. Any unvested LTIP units are forfeited, except in limited circumstances, as determined by the Compensation Committee of our Board of Directors, when the recipient is no longer employed by us or when a director leaves our Board of Directors for any reason. LTIP units may be subject to full or partial accelerated vesting under certain circumstances, as described in the applicable award agreement.
Service-Based LTIP Units
Service-based LTIP units are valued at fair value on the date of grant and compensation expense is recognized over the vesting period, which approximates a straight-line basis. These shares generally vest over three years based on continued service or employment. We valued the service-based LTIP units at a per-unit value equivalent to the per-share offering price of our common stock sold in our private and public offerings less a discount for lack of marketability estimated with the assistance of a third-party consultant for grants issued prior to our IPO. Subsequent to our IPO, we valued the service-based LTIP units at the per-share market close trading price of our common stock on the date of grant less a discount for lack of marketability estimated with the assistance of a third-party consultant.
The following table summarizes information about the service-based LTIP units outstanding as of September 30, 2014:
 
Total Vested
Units
 
Total Unvested
Units
 
Total
Outstanding
Units
 
Weighted-Average
Grant Date Fair
Value (Per Unit)
Balance, December 31, 2013
349,941

 
174,242

 
524,183

 
$
16.98

Granted

 
64,592

 
64,592

 
$
15.68

Vested
84,966

 
(84,966
)
 

 
$
16.74

Converted
(17,967
)
 

 
(17,967
)
 
$
17.00

Canceled

 
(4,166
)
 
(4,166
)
 
$
17.00

Balance, September 30, 2014
416,940

 
149,702

 
566,642

 
$
16.83

Total unrecognized compensation cost related to unvested service-based LTIP units totaled approximately $1.7 million as of September 30, 2014, and is expected to be recognized in general, administrative and other expense over a weighted-average period of approximately 1.4 years, subject to the stated vesting conditions.
Market-Based LTIP Units
In November 2013, we issued 338,094 LTIP units, of which up to 50% will vest based on the percentage increase of the Company’s total stockholder return, or TSR, beginning on May 14, 2013 (the date of the closing of our initial public offering), and up to 50% will vest based on the relative outperformance of our TSR as compared to the percentage change of the SNL US REIT Equity Index, or the Index, over the same period. The market-based LTIP awards were valued on the date of grant using a Monte Carlo simulation method. The aggregate grant date fair value of the market-based LTIP units was $1.9 million.
In June 2014, we issued 39,136 LTIP units, of which up to 100% will vest based on the percentage increase of the Company's TSR beginning on January 1, 2014. The market-based LTIP awards were valued on the date of grant using a Monte Carlo simulation method. The aggregate grant date fair value of the market-based LTIP units was $0.4 million.
The following table summarizes information about the market-based LTIP units outstanding as of September 30, 2014:
 
Total Vested
Units
 
Total Unvested
Units
 
Total
Outstanding
Units
 
Weighted-Average
Grant Date Fair
Value (Per Unit)
Balance, December 31, 2013

 
338,094

 
338,094

 
$
5.58

Granted

 
39,136

 
39,136

 
$
10.12

Vested

 

 

 
$

Converted

 

 

 
$

Forfeited

 

 

 
$

Balance, September 30, 2014

 
377,230

 
377,230

 
$
6.05

Total unrecognized compensation cost related to unvested market-based LTIP units totaled approximately $1.5 million as of September 30, 2014, and is expected to be recognized in general, administrative and other expense over a weighted-average period of approximately 3.4 years, subject to stated vesting conditions.

16


Restricted Stock
Under our 2012 Equity Incentive Plan, we may grant restricted shares of our common stock. Restricted shares of our common stock are valued at the per-share market close trading price of our common stock on the date of grant and compensation expense is recognized over the vesting period, which approximates a straight-line basis. These shares generally vest over three years based on continued service or employment. We valued the restricted shares of our common stock based on the closing price of our common stock on the grant date.
The following table summarizes information about the shares of restricted common stock outstanding as of September 30, 2014:
 
Number of
Shares
 
Weighted-Average
Grant Date Fair
Value (Per Share)
Unvested at December 31, 2013
40,369

 
$
21.00

Granted
17,944

 
$
17.98

Vested
(10,651
)
 
$
20.91

Canceled
(1,667
)
 
$
21.00

Unvested at September 30, 2014
45,995

 
$
19.84

Total unrecognized compensation cost related to unvested shares of restricted common stock totaled approximately $0.7 million as of September 30, 2014, and is expected to be recognized in general, administrative and other expense over a weighted-average period of approximately 1.8 years, subject to stated vesting conditions.
7.
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The three levels of fair value defined in ASC Topic 820, Fair Value Measurements, are as follows:
Level 1—Valuations based on quoted market prices in active markets for identical assets or liabilities that the reporting entity has the ability to access.
Level 2—Valuations based on quoted market prices for similar assets or liabilities, quoted market prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.
Level 3—Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities, which are typically based on the reporting entity’s own assumptions.
Companies are required to disclose the estimated fair values of all financial instruments, even if they are not carried at their fair value. The fair values of financial instruments are estimates based upon market conditions and perceived risks as of September 30, 2014 and December 31, 2013. These estimates require management’s judgment and may not be indicative of the future fair values of the assets and liabilities.
Our financial instruments include cash and cash equivalents, acquisition deposits, rents and other receivables and accounts payable and accrued expenses. The carrying amount of these instruments approximates fair value because of their short-term nature.
Our mortgage financings, the Credit Facility, the Notes and the Securitization Loan are also financial instruments, and we estimated their fair value based on market quotes for comparable instruments or discounted cash flow analysis using estimates of the amount and timing of future cash flows, market rates and credit spreads. The estimated fair values of the Credit Facility using Level 2 assumptions approximate the carrying amounts. The estimated fair values of our mortgage financing receivables using Level 3 assumptions approximate the carrying amounts. We entered into an interest rate cap designated as a cash flow hedge to reduce our exposure to interest rate risk. See Note 4 for disclosures on the fair value of our interest rate cap.
The fair value of our Notes and the Securitization Loan using Level 2 assumptions is as follows (amounts in thousands):
 
 
September 30, 2014
 
 
Fair Value
 
Carrying Value
Exchangeable senior notes (1)
 
$
120,319

 
$
101,455

Securitization Loan(2)
 
$
340,591

 
$
340,591

 ______________
(1)    The carrying amount of the exchangeable senior notes includes a discount of $13.5 million.
(2)    The fair value of the securitization loan approximates carrying value and includes a discount of $1.6 million.

8.
Transactions With Related Parties
Upon closing our initial private offering, we acquired the proprietary, vertically integrated real estate acquisition and management platform of American Residential Management, Inc., or ARM, a company co-owned by our founders, Stephen G.

17


Schmitz, our Chief Executive Officer and Chairman, and Laurie A. Hawkes, our President and Chief Operating Officer, pursuant to a contribution and sale agreement between our Operating Partnership and ARM. As consideration for our acquisition, our Operating Partnership issued 175,000 OP units, valued at $3.5 million, representing a 1.5% limited partnership interest in our Operating Partnership at that time, and we paid approximately $85,000 in cash. The OP units were valued at $20 per unit, equivalent to the offering price per share of our common stock sold in our initial private offering.
In February 2013, our TRS entered into a management agreement directly with ARP Phoenix Fund I, LP, or Phoenix Fund. The general partner of Phoenix Fund is ARP Phoenix Fund I GP, LLC, which is owned by Mr. Schmitz and Ms. Hawkes. The services our TRS provides to Phoenix Fund include property restoration, leasing and property management and disposition services with respect to the properties owned by Phoenix Fund. Our TRS provides these services to Phoenix Fund for a fee in an amount equal to 6.0% of the gross rental revenue received by Phoenix Fund with respect to the properties managed by our TRS.
We earned approximately $0.1 million and $0.1 million in property management fees during the three months ended September 30, 2014 and 2013, respectively, and $0.3 million and $0.3 million during the nine months ended September 30, 2014 and 2013, respectively.
Accounts receivable of approximately $0.1 million and $43,000 due from Phoenix Fund and ARM are included in rents and other receivables, net in our condensed consolidated balance sheets at September 30, 2014 and December 31, 2013, respectively.
Phoenix Fund purchased 150,000 shares of our common stock in our initial private offering.
9.
Non-Controlling Interests
Non-controlling common units of our Operating Partnership relate to the interest in our Operating Partnership that is not owned by us and are presented as non-controlling interests in the equity section of our condensed consolidated balance sheets.
Non-controlling common units of our Operating Partnership have essentially the same economic characteristics as shares of our common stock as they share equally in the net income or loss and distributions of our Operating Partnership. Our limited partners have the right to redeem all or part of their non-controlling common units of our Operating Partnership following the one-year anniversary of issuance. At the time of redemption, we have the right to determine whether to redeem the non-controlling common units of our Operating Partnership for cash, based upon the fair value of an equivalent number of shares of our common stock at the time of redemption, or exchange them for unregistered shares of our common stock on a one-for-one basis, subject to adjustment in the event of stock splits, stock dividends, issuance of stock rights, specified extraordinary distribution and similar events. In the event of a termination or liquidation of us and our Operating Partnership, it is expected that in most cases each common unit would be entitled to a liquidating distribution equal to the amount payable with respect to each share of our common stock. As of September 30, 2014, there were 591,940 outstanding non-controlling common units of our Operating Partnership, representing an approximate 1.8% ownership interest in our Operating Partnership. These units are comprised of 175,000 units issued in connection with our acquisition of the assets and management platform from ARM and 416,940 vested LTIP units.
Net income or loss attributable to non-controlling common units of our Operating Partnership is allocated based on their relative ownership percentage of the Operating Partnership during the period. The non-controlling ownership interest percentage is determined by dividing the number of non-controlling common units outstanding by the total of the shares of our common stock and non-controlling units outstanding at the balance sheet date. The issuance or redemption of additional shares of our common stock or common units results in changes to our limited partners’ ownership interest in our Operating Partnership, as well as our net assets. As a result, all equity-related transactions result in an allocation between stockholders’ equity and the non-controlling common units of our Operating Partnership in the condensed consolidated balance sheet to account for any change in ownership percentage during the period. Our limited partners’ weighted-average share of our net loss was 1.8% and 1.6% for the three months ended September 30, 2014 and 2013, respectively, and 1.7% and 1.4% for the nine months ended September 30, 2014 and 2013, respectively.
10.
Commitments and Contingencies
Litigation
From time to time, we are subject to potential liability under various claims and legal actions arising in the ordinary course of business. Liabilities are established for legal claims when payments associated with the claims become probable and the costs can be reasonably estimated. The actual costs of resolving legal claims may be substantially higher or lower than the amounts established for those claims. Based on information currently available, management is not aware of any legal claims that would have a material effect on our condensed consolidated financial statements and therefore no accrual is required as of September 30, 2014.
Accepted Purchase Offers
As of September 30, 2014, we have committed to purchase single-family homes for a total purchase price of approximately $50.4 million. These are offers to purchase properties that were accepted by the sellers but had not closed as of September 30, 2014.
Homeowners’ Association Fees
Certain of our properties are located in communities that are subject to homeowners’ association, or HOA, fees. The fees are generally billed monthly and subject to annual adjustments. The fees cover the costs of maintaining common areas and are generally paid for by us.
Concentrations
Approximately 46% of our properties are located in Arizona and Texas, which exposes us to greater economic risks than if we owned a more geographically dispersed portfolio.
11.
Subsequent Events
For the period from October 1, 2014 to October 31, 2014, we acquired 337 single-family homes for a total purchase price of approximately $51.0 million and contracted to acquire 240 single-family homes for a total purchase price of approximately $39.8 million.

18


Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion of our financial condition and results of operations should be read together with the financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. This report, including the following Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements based upon our current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Cautionary Note Regarding Forward-Looking Statements,” as well as the risk factors described in “Item IA. Risk Factors,” of this report.
Overview
We are an internally managed real estate company that acquires, owns and manages single-family homes as rental properties. In 2008, our founders, Stephen G. Schmitz, our Chief Executive Officer and Chairman, and Laurie A. Hawkes, our President and Chief Operating Officer and a member of our Board of Directors, identified a unique opportunity to acquire homes at distressed pricing and lease them at attractive rental rates. They subsequently began developing a vertically integrated platform to acquire and manage single-family homes on an institutional scale. We were formed to expand upon our founders’ vision, strategy and platform.
As of September 30, 2014, we owned 8,223 properties in Arizona, California, Colorado, Florida, Georgia, Illinois, Indiana, Nevada, North Carolina, Ohio, South Carolina, Tennessee and Texas with an aggregate investment of $1.2 billion, and we managed an additional 499 properties for ARP Phoenix Fund I, LP, or Phoenix Fund, in Arizona and Nevada. For the period from October 1, 2014 to October 31, 2014, we acquired 337 single-family homes for a total purchase price of approximately $51.0 million and contracted to acquire 240 additional homes for a total purchase price of approximately $39.8 million. Of the 577 homes the Company acquired or contracted to acquire during this period, 282 are in Georgia, 119 are in Texas, 67 are in North Carolina, 62 are in Tennessee and 47 are in Florida. There is no assurance that the Company will close on the properties it has under contract.
Our primary business strategy is to acquire, restore, lease and manage single-family homes as well-maintained investment properties to generate attractive risk-adjusted returns over the long-term. We employ a disciplined and focused approach to evaluating acquisition opportunities, considering the mix of rent yield and future home price appreciation potential when selecting a market and investment. Our strategic aggregation of single-family homes provides a strong foundation for creating long-term home price appreciation in our portfolio. We have the infrastructure to acquire large numbers of properties through multiple acquisition channels, including sourcing individual properties through auctions and brokers and purchasing portfolios of properties through brokerages or directly from operators, investors or banks. We restore homes to “rent-ready” condition in an efficient and cost-effective manner, to a standard that we believe appeals to our target tenants’ preferences, enabling us to attract qualified tenants and provide a high level of service to retain our tenants. We believe that our vertically integrated acquisition and management platform is critical to executing our strategy.
In addition to our primary business strategy of acquiring, restoring, leasing and managing single-family homes, we have a private mortgage financing business that generates attractive returns on invested capital and provides us access to acquisition opportunities and valuable market data. As of September 30, 2014, our private mortgage portfolio had an aggregate outstanding principal balance of $25.4 million, a weighted-average interest rate of 11.8% per annum and a weighted-average remaining term of 100 days.
We plan to continue acquiring single-family homes and other residential real estate related assets in markets that satisfy our investment criteria. We conduct substantially all of our operations through our Operating Partnership, in which we own, as of September 30, 2014, after giving effect to vested and unvested LTIP awards, a 96.7% interest, including the sole 0.4% general partnership interest that we hold through a subsidiary.
We have elected to be taxed as a REIT for federal income tax purposes. As a REIT, we will generally not be subject to federal income taxes to the extent that we currently distribute all of our taxable income to our stockholders and meet other specific requirements. If we fail to qualify as a REIT in any taxable year, we will be subject to federal and state income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate tax rates, and we may be ineligible to qualify as a REIT for four subsequent tax years. Even if we qualify as a REIT, we may be subject to certain state or local income taxes, and our TRS, which is our taxable REIT subsidiary, will be subject to federal, state and local taxes on its income at regular corporate rates.
Industry Outlook
Residential housing is the largest real estate asset class in the United States with a size of approximately $20.2 trillion, according to the 2014 second quarter Federal Reserve Flow of Funds release. Historically, according to the U.S. Census

19


Bureau, approximately one-third of this asset class has been rented and single-family homes currently comprise roughly one-third of all residential rental housing.
We believe that an over-correction in residential housing prices in certain housing markets from their historic peak occurred as a result of the housing and mortgage crisis in 2008, creating the potential for home price appreciation. We also believe that there continues to be a large supply of single-family homes that we can acquire at favorable pricing.
Property Portfolio
The following three tables present summary statistics of our single-family homes by metropolitan statistical area, or MSA, and metropolitan division, or metro division, as of September 30, 2014, in descending order of aggregate investment. The first table includes our entire portfolio of single-family homes. The second table includes only the single-family homes that we manage. The third table includes only the single-family homes that our preferred operators manage.
Total Portfolio of Single-Family Homes - Summary Statistics
(As of September 30, 2014)
 
MSA/Metro Division
 
 Number of Homes
 
 Aggregate Investment (thousands)
 
 Average Investment Per Home(1)
 
 Percentage Leased(2)
 
 Average Age (years)
 
 Average Size (square feet)
Phoenix, AZ
 
1,381

 
$
202,005

 
$
146,274

 
92.7
%
 
17

 
1,713

Houston, TX
 
1,098

 
$
162,475

 
$
147,974

 
92.7
%
 
7

 
1,932

Dallas-Fort Worth, TX
 
954

 
$
154,746

 
$
162,208

 
78.2
%
 
11

 
2,100

Nashville, TN
 
651

 
$
112,401

 
$
172,659

 
77.0
%
 
10

 
1,901

Atlanta, GA
 
775

 
$
106,017

 
$
136,796

 
53.5
%
 
16

 
2,051

Florida
 
577

 
$
76,039

 
$
131,783

 
56.7
%
 
13

 
1,706

Chicago, IL
 
511

 
$
66,787

 
$
130,699

 
100.0
%
 
55

 
1,406

Other Texas
 
360

 
$
63,811

 
$
177,253

 
83.3
%
 
10

 
1,977

Charlotte, NC-SC
 
309

 
$
48,998

 
$
158,570

 
71.2
%
 
9

 
2,062

Inland Empire, CA
 
213

 
$
38,652

 
$
181,465

 
96.2
%
 
16

 
1,915

Indianapolis, IN
 
554

 
$
37,683

 
$
68,020

 
78.0
%
 
52

 
1,317

Raleigh, NC
 
231

 
$
34,863

 
$
150,922

 
81.0
%
 
9

 
1,734

Winston-Salem, NC
 
234

 
$
29,428

 
$
125,761

 
93.6
%
 
12

 
1,426

Other California
 
82

 
$
10,811

 
$
131,841

 
89.0
%
 
36

 
1,336

Las Vegas, NV
 
68

 
$
7,511

 
$
110,456

 
92.6
%
 
15

 
1,553

Other MSAs/Metro Divisions
 
225

 
$
33,124

 
$
147,218

 
94.7
%
 
9

 
1,605

Total/Weighted Average
 
8,223

 
$
1,185,351

 
$
144,151

 
81.6
%
 
18

 
1,802

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




20


Portfolio of Self-Managed Single-Family Homes - Summary Statistics
(As of September 30, 2014)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Leased Homes
MSA/Metro Division
 
 Number of Homes
 
 Average Purchase Price Per Home(1)
 
 Average Capital Expenditures Per Home(2)
 
 Average Investment Per Home(3)
 
 Aggregate Investment (thousands)
 
 Percentage Leased
 
 Average Age (years)
 
 Average Size (square feet)
 
 Average Monthly Rent Per Leased Home
 
Annual Average Rent per Leased Home as a Percentage of Average Investment Per Leased Home(4)
Phoenix, AZ
 
1,381

 
$
138,068

 
$
8,206

 
$
146,274

 
$
202,005

 
92.7
%
 
17

 
1,713

 
$
1,044

 
8.6
%
Houston, TX
 
1,098

 
$
140,945

 
$
7,029

 
$
147,974

 
$
162,475

 
92.7
%
 
7

 
1,932

 
$
1,390

 
11.3
%
Dallas-Fort Worth, TX
 
954

 
$
151,971

 
$
10,237

 
$
162,208

 
$
154,746

 
78.2
%
 
11

 
2,100

 
$
1,457

 
10.8
%
Nashville, TN
 
651

 
$
162,000

 
$
10,659

 
$
172,659

 
$
112,401

 
77.0
%
 
10

 
1,901

 
$
1,383

 
9.9
%
Atlanta, GA
 
775

 
$
127,730

 
$
9,066

 
$
136,796

 
$
106,017

 
53.5
%
 
16

 
2,051

 
$
1,163

 
10.6
%
Florida
 
577

 
$
123,575

 
$
8,208

 
$
131,783

 
$
76,039

 
56.7
%
 
13

 
1,706

 
$
1,075

 
10.4
%
Other Texas
 
360

 
$
166,626

 
$
10,627

 
$
177,253

 
$
63,811

 
83.3
%
 
10

 
1,977

 
$
1,567

 
10.7
%
Charlotte, NC-SC
 
309

 
$
152,128

 
$
6,442

 
$
158,570

 
$
48,998

 
71.2
%
 
9

 
2,062

 
$
1,204

 
9.5
%
Inland Empire, CA
 
213

 
$
157,045

 
$
24,420

 
$
181,465

 
$
38,652

 
96.2
%
 
16

 
1,915

 
$
1,405

 
9.3
%
Raleigh, NC
 
231

 
$
143,820

 
$
7,102

 
$
150,922

 
$
34,863

 
81.0
%
 
9

 
1,734

 
$
1,223

 
9.8
%
Indianapolis, IN
 
455

 
$
65,440

 
$
7,241

 
$
72,681

 
$
33,070

 
73.2
%
 
50

 
1,351

 
$
836

 
13.1
%
Winston-Salem, NC
 
234

 
$
122,618

 
$
3,143

 
$
125,761

 
$
29,428

 
93.6
%
 
12

 
1,426

 
$
1,086

 
10.4
%
Other California
 
82

 
$
110,013

 
$
21,828

 
$
131,841

 
$
10,811

 
89.0
%
 
36

 
1,336

 
$
1,058

 
9.6
%
Las Vegas, NV
 
68

 
$
98,095

 
$
12,361

 
$
110,456

 
$
7,511

 
92.6
%
 
15

 
1,553

 
$
1,034

 
11.1
%
Other MSAs/Metro Divisions
 
225

 
$
139,781

 
$
7,437

 
$
147,218

 
$
33,124

 
94.7
%
 
9

 
1,605

 
$
1,245

 
10.2
%
Total/Weighted Average
 
7,613

 
$
137,323

 
$
8,999

 
$
146,322

 
$
1,113,951

 
80.1
%
 
15

 
1,837

 
$
1,236

 
10.2
%
 ______________
(1)
Average purchase price includes broker commissions and closing costs.
(2)
Represents average capital expenditures per home as of September 30, 2014. Does not include additional expected or future capital expenditures.
(3)
Represents average purchase price plus average capital expenditures.
(4)
Represents annualized average monthly rent per leased home as a percentage of our average investment (average purchase price per home plus average capital expenditures) per leased home. Does not include a provision for payment of ongoing property expenses (such as insurance, taxes, HOA fees and maintenance) or an allocation of our general and administrative expense, all of which materially impact our results. Accordingly, it should not be interpreted as a measure of profitability, and its utility in evaluating our business is limited. Average monthly rent for leased homes may not be indicative of average rents we may achieve on our vacant homes.
Portfolio of Preferred Operator Program Single-Family Homes - Summary Statistics
(As of September 30, 2014)
MSA/Metro Division
 
 Number of Homes
 
 Average Investment Per Home(1)
 
 Aggregate Investment (thousands)
 
 Percentage Leased(2)
 
 Average Age (years)
 
 Average Size (square feet)
 
 Average Monthly Rent Per Home Paid by Preferred Operator to Us(3)
 
 Annual Rent as a Percentage of Average Investment Per Home(4)
Chicago, IL
 
511

 
$
130,698

 
$
66,787

 
100
%
 
55

 
1,406

 
$
794

 
7.3
%
Indianapolis, IN
 
99

 
$
46,595

 
$
4,613

 
100
%
 
62

 
1,162

 
$
348

 
9.0
%
Total/Weighted Average
 
610

 
$
117,048

 
$
71,400

 
100
%
 
56

 
1,366

 
$
722

 
7.4
%
 ______________
(1)
Represents purchase price (including broker commissions and closing costs) paid by us for the portfolio divided by the number of homes in the portfolio and does not include past, expected or budgeted general and administrative expenses associated with ongoing monitoring activities of our investment. The preferred operator is obligated to pay for all taxes, insurance, other expenses and capital expenditures (including significant capital improvements) required for the management, operation and maintenance of the properties. Accordingly, absent a default by the preferred operator under a long-term lease agreement with us, we expect to incur no expenses related to properties under our preferred operator program, other than general and administrative expenses associated with ongoing monitoring activities of our investment.
(2)
We classify homes in our preferred operator program as 100% leased, because each preferred operator is obligated to pay us 100% of the base rent specified in the applicable lease irrespective of whether or not the homes are occupied by residential sub-tenants. This does not mean that 100% of the homes leased to preferred operators are occupied by residential sub-tenants. If a preferred operator is unable to lease a material portion of the homes it leases from us to residential sub-tenants, it may adversely affect such operator’s ability to pay rent to us under the lease. We are also eligible to receive

21


percentage rents on a quarterly basis equal to a fixed percentage of gross revenue that the preferred operator collects from its residential sub-tenants who occupy the homes.
(3)
Represents the initial annual base rent payable to us by the preferred operator pursuant to the portfolio lease divided by 12 and then divided by the number of homes included in the lease.
(4)
Represents annualized average monthly rent paid by preferred operator to us as a percentage of our average investment per home. The rent paid by the preferred operator is net of all taxes, insurance, other expenses and capital expenses (including significant capital improvements) for which the preferred operator is responsible.
Stabilized Properties
We acquire both vacant homes and homes subject to existing leases. When we acquire a property that is not leased, we must possess, restore, market and lease the property before it becomes a revenue generating asset. We refer to this process as property stabilization. Stabilized properties include properties in which we have (i) completed restorations and the property has been leased for the first time, (ii) completed restorations and the property has been listed for the first time for a period of greater than 90 days and (iii) acquired a property with an existing lease. Properties acquired with existing leases may require future renovations to restore a property to our standards prior to re-leasing. We expect that stabilized properties provide an indication of how our portfolio will perform over the long-term.
The following table presents summary statistics of the our portfolio of stabilized single-family homes by MSA and metro division as of September 30, 2014, in descending order of number of homes.

Total Portfolio of Stabilized(1) Single-Family Homes—Summary Statistics
(As of September 30, 2014)

MSA/Metro Division
 
 Number of Homes
 
 Average Investment Per Home (2)
 
 Homes Leased
 
 Homes Vacant (3)
 
 Percentage Leased
Phoenix, AZ
 
1,380

 
$
146,321

 
1,280

 
100

 
92.8
%
Houston, TX
 
1,074

 
$
147,672

 
1,018

 
56

 
94.8
%
Dallas-Fort Worth, TX
 
788

 
$
161,821

 
746

 
42

 
94.7
%
Nashville, TN
 
513

 
$
167,322

 
501

 
12

 
97.7
%
Chicago, IL
 
511

 
$
130,698

 
511

 

 
100.0
%
Indianapolis, IN
 
507

 
$
69,257

 
432

 
75

 
85.2
%
Atlanta, GA
 
463

 
$
126,707

 
415

 
48

 
89.6
%
Florida
 
376

 
$
118,948

 
327

 
49

 
87.0
%
Other Texas
 
313

 
$
175,191

 
300

 
13

 
95.8
%
Winston-Salem, NC
 
234

 
$
125,763

 
219

 
15

 
93.6
%
Charlotte, NC-SC
 
229

 
$
152,856

 
220

 
9

 
96.1
%
Inland Empire, CA
 
213

 
$
181,466

 
205

 
8

 
96.2
%
Raleigh, NC
 
207

 
$
149,204

 
187

 
20

 
90.3
%
Other California
 
82

 
$
131,841

 
73

 
9

 
89.0
%
Las Vegas, NV
 
67

 
$
110,970

 
63

 
4

 
94.0
%
Other MSAs/Metro Divisions
 
225

 
$
147,218

 
213

 
12

 
94.7
%
Total/Weighted Average
 
7,182

 
$
141,930

 
6,710

 
472

 
93.4
%
 ______________
(1)
Properties are considered stabilized when renovations have been completed and the properties have been leased or available for rent for a period of greater than 90 days. Properties with in-place leases at the date of acquisition are also considered stabilized even though these properties have not been renovated by us and may require future renovations to meet our standards.
(2)
Represents average purchase price plus average capital expenditures.
(3)
As of September 30, 2014, 234 homes were available for rent, 216 homes were undergoing renovation and 22 homes were occupied with no lease.



22


AMERICAN RESIDENTIAL PROPERTIES, INC.
Portfolio of Self-Managed Stabilized(1) Single-Family Homes—Summary Statistics
(unaudited)

MSA/Metro Division
 
 Number of Homes
 
 Average Investment Per Home (2)
 
 Homes Leased
 
 Homes Vacant (3)
 
 Percentage Leased
Phoenix, AZ
 
1,380

 
$
146,321

 
1,280

 
100

 
92.8
%
Houston, TX
 
1,074

 
$
147,672

 
1,018

 
56

 
94.8
%
Dallas-Fort Worth, TX
 
788

 
$
161,821

 
746

 
42

 
94.7
%
Nashville, TN
 
513

 
$
167,322

 
501

 
12

 
97.7
%
Atlanta, GA
 
463

 
$
126,707

 
415

 
48

 
89.6
%
Indianapolis, IN
 
408

 
$
74,756

 
333

 
75

 
81.6
%
Florida
 
376

 
$
118,948

 
327

 
49

 
87.0
%
Other Texas
 
313

 
$
175,191

 
300

 
13

 
95.8
%
Winston-Salem, NC
 
234

 
$
125,763

 
219

 
15

 
93.6
%
Charlotte, NC-SC
 
229

 
$
152,856

 
220

 
9

 
96.1
%
Inland Empire, CA
 
213

 
$
181,466

 
205

 
8

 
96.2
%
Raleigh, NC
 
207

 
$
149,204

 
187

 
20

 
90.3
%
Other California
 
82

 
$
131,841

 
73

 
9

 
89.0
%
Las Vegas, NV
 
67

 
$
110,970

 
63

 
4

 
94.0
%
Other MSAs/Metro Divisions
 
225

 
$
147,218

 
213

 
12

 
94.7
%
Total/Weighted Average
 
6,572

 
$
144,239

 
6,100

 
472

 
92.8
%
______________
(1)
Properties are considered stabilized when renovations have been completed and the properties have been leased or available for rent for a period of greater than 90 days. Includes properties with in-place leases at the date of acquisition.
(2)
Represents average purchase price plus average capital expenditures.
(3)
As of September 30, 2014, 234 homes were available for rent, 216 homes were undergoing renovation and 22 homes were occupied with no lease.


Highlights of Third Quarter of 2014
Securitization
In August 2014, the Company completed a securitization transaction resulting in $340.6 million in total gross proceeds, before issuance costs of approximately $11 million. The transaction involved the issuance and sale of single-family rental pass-through certificates that represents beneficial ownership interests in a loan secured by 2,876 homes sold to an affiliate from the Company's portfolio of single-family properties. The loan has an initial term of two years, with three, 12-month extension options, resulting in a fully extended maturity date of September 9, 2019 and requires that we maintain certain covenants, including but not limited to, a minimum debt yield on the collateral pool of properties. The effective weighted average of the fixed-rate spreads is 2.11% plus 1-month LIBOR. The unamortized discount at September 30, 2014 was $1.6 million.
Additionally, as part of certain lender requirements in connection with the securitization transaction, we entered into an interest rate cap agreement for the initial two year term of the loan, with a LIBOR based strike rate equal to 3.12%. This interest rate cap agreement has been formally designated as a cash flow hedge at inception and will be regularly assessed for effectiveness on an on-going basis.
Acquisitions
From July 1, 2014 to September 30, 2014, the Company acquired 1,019 single-family homes, of which 295 are in Georgia, 281 are in Texas, 174 are in Tennessee, 158 are in Florida, 111 are in North Carolina and incurred renovation costs on the Company’s acquired homes and existing portfolio, for a total capital investment of approximately $178.5 million. During the quarter, one property was sold in Indiana.



23


Factors Expected to Affect Our Results and Financial Condition
Our results of operations and financial condition are affected by numerous factors, many of which are beyond our control. Key factors that impact our results of operations and financial condition include our pace of acquisitions and ability to deploy our capital, the amount of time and cost required to stabilize newly acquired properties and convert them to revenue generating assets, rental rates, occupancy levels, rates of tenant turnover, the success of our preferred operators, our expense ratios and capital structure.
Property Acquisitions
We have grown our portfolio of single-family homes and intend to continue to do so. Our ability to identify and acquire single-family homes that meet our investment criteria is impacted by home prices in our markets, the inventory of properties available for sale through our acquisition channels and competition for our target assets.
Property Stabilization
The time and cost involved in stabilizing our newly acquired properties impacts our financial performance and is affected by the amount of time it takes us to gain possession of a property, the amount of time and cost associated with property restoration and the amount of time it takes to market and lease the property. Our possession of each property we acquire can be delayed for a multitude of reasons beyond our control, including applicable statutory rights of redemption, rescission rights and legal challenges to our ownership or unauthorized occupants living in the property at the time of purchase. As part of our underwriting criteria, we typically estimate restoration costs to be 5% to 15% of the purchase price, although actual costs may vary significantly based on market, age and condition of the property and other factors. The time to restore a newly acquired property can vary significantly among properties for several reasons, including the channel through which the property was acquired, the age and condition of the property and whether the property was vacant when we acquired it. Similarly, the time to market and lease a property is driven by local demand, our marketing techniques and the size of our available inventory. We actively monitor these measures and trends.
As of September 30, 2014, we had 7,182 properties owned in our portfolio of stabilized single-family homes, of which 93.4% were leased. We acquire both vacant homes and homes subject to existing leases. Homes acquired with existing leases may require future renovations to restore a property to our standards prior to re-leasing, which will impact the turnover time and may not be fully indicative of how we expect our stabilized portfolio to perform over time. We continually track key metrics such as average time to obtain possession, restore and lease our properties.
Revenue
Our revenue comes primarily from rents collected under lease agreements for our properties. These include both short-term leases that we enter into directly with tenants, which typically have a term of one year, and longer-term net leases, which typically have a term of five to ten years, that we enter into with preferred operators who sub-lease the properties to sub-tenants. For the three months ended September 30, 2014, approximately 95.2% of our total revenue was attributable to rental activity, 0.4% was attributable to management services and the remaining 4.4% was attributable to interest earned on our portfolio of private mortgage financings and on cash balances. Over time, we expect most of our revenue to be derived from leasing our properties. The most important drivers of revenue (aside from portfolio growth) are rental and occupancy rates. Our rental and occupancy rates are affected by macroeconomic factors and local and property-level factors, including, market conditions, seasonality, tenant defaults, the amount of time that it takes us to restore properties upon acquisition and the amount of time it takes us to restore and re-lease vacant properties.
In each of our markets, we monitor a number of factors that may impact the single-family real estate market and our tenants’ finances, including the unemployment rate, household formation and net population growth, income growth, size and make-up of existing and anticipated housing stock, prevailing market rental and mortgage rates, rental vacancies and credit availability. Growth in demand for rental housing in excess of the growth of rental housing supply, among other factors, will generally drive higher occupancy and rental rates. Negative trends in our markets with respect to these metrics or others could adversely impact our rental revenue.
We expect that the occupancy of our portfolio will increase as the proportion of recently acquired properties declines relative to the size of our entire portfolio. Nevertheless, in the near term, our ability to drive revenue growth will depend in large part on our ability to efficiently restore and lease newly acquired properties, maintain occupancy in the rest of our portfolio and acquire additional properties, both leased and vacant.

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The following table summarizes portfolio and operating metrics as of September 30, 2014 and June 30, 2014.
 
 
As of September 30, 2014
 
As of June 30, 2014
 
 
 
Number of Homes
 
% Leased
 
Number of Homes
 
% Leased
 
Portfolio of single-family homes
 
 
 
 
 
 
 

 
Self-managed (1)
 
7,613

 
80.1
%
 
6,595

 
87.6
%
 
Preferred operator program(2)
 
610

 
100.0
%
 
610

 
100.0
%
 
Total properties
 
8,223

 
81.6
%
 
7,205

 
88.6
%
 
 
 
 
 
 
 
 
 
 
 
Portfolio of stabilized single-family homes (3)
 
 
 
 
 
 
 
 
 
Self-managed (1)
 
6,572

 
92.8
%
 
6,099

 
94.7
%
 
Preferred operator program(2)
 
610

 
100.0
%
 
610

 
100.0
%
 
Total properties
 
7,182

 
93.4
%
 
6,709

 
95.2
%
 
______________
(1)
The amount presented represents the properties that were leased as of the end of the period.
(2)
We classify homes in our preferred operator program as 100% leased, because each preferred operator is obligated to pay us 100% of the base rent specified in the applicable lease irrespective of whether or not the homes are occupied by residential sub-tenants. This does not mean that 100% of the homes leased to preferred operators are occupied by residential sub-tenants. If a preferred operator is unable to lease a material portion of the homes it leases from us to residential sub-tenants, it may adversely affect the operator’s ability to pay rent to us under the lease.
(3)
Properties are considered stabilized when renovations have been completed and the properties have been leased or available for rent for a period of greater than 90 days. Properties with in-place leases at the date of acquisition are also considered stabilized even though these properties have not been renovated and may require future renovations to meet our standards.

The following table summarizes our acquisition activity by quarter from June 30, 2013 through September 30, 2014.
 
 
 
Three Months Ended
 
 
Total Owned Properties as of September 30, 2014
 
September 30, 2014(2)
 
June 30, 2014
 
March 31, 2014
 
December 31, 2013(1)
 
September 30, 2013
 
Total Owned Properties as of June 30, 2013
Portfolio of single-family homes
 
 
 
 
 
 
 
 
 
 
 
 
 
Self-managed
7,613

 
1,018

 
443

 
674

 
1,401

 
1,244

 
2,833

Preferred operator program
610

 

 

 
15

 
(768
)
 
107

 
1,256