filings.toolsItem 16. Form 10-K Summary.
149K characters. Original on sec.gov · Markdown
Item 16. Form 10-K Summary.
Not applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in Dallas, Texas, on the 30th day of March 2017.
| Invitation Homes Inc. | |
| By: | /s/ John B. Bartling Jr. |
| Name: John B. Bartling Jr. | |
| Title: President and Chief Executive Officer |
Pursuant to the requirements of the Securities Act of 1934, this report has been signed by the following persons in the capacities indicated on the 30th day of March 2017.
| Signature | Title | |
| /s/ John B. Bartling Jr. | President, Chief Executive Officer and Director | |
| John B. Bartling Jr. | (Principal Executive Officer) | |
| /s/ Ernest M. Freedman | Executive Vice President and Chief Financial Officer | |
| Ernest M. Freedman | (Principal Financial Officer) | |
| /s/ Kimberly K. Norrell | Senior Vice President and Chief Accounting Officer | |
| Kimberly K. Norrell | (Principal Accounting Officer) | |
| /s/ Bryce Blair | Executive Chairman and Director | |
| Bryce Blair | ||
| Signature | Title | |
| /s/ Nicholas C. Gould | Director | |
| Nicholas C. Gould | ||
| /s/ Kenneth A. Caplan | Director | |
| Kenneth A. Caplan | ||
| /s/ Jonathan D. Gray | Director | |
| Jonathan D. Gray | ||
| /s/ Robert G. Harper | Director | |
| Robert G. Harper | ||
| /s/ John B. Rhea | Director | |
| John B. Rhea | ||
| /s/ David A. Roth | Director | |
| David A. Roth | ||
| /s/ John G. Schreiber | Director | |
| John G. Schreiber | ||
| /s/ Janice L. Sears | Director | |
| Janice L. Sears | ||
| /s/ William J. Stein | Director | |
| William J. Stein |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Invitation Homes Inc.
Dallas, Texas
We have audited the accompanying balance sheet of Invitation Homes Inc. (the “Company”), as of December 31, 2016. This financial statement is the responsibility of the Company’s management. Our responsibility is to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the balance sheet is free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall balance sheet presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such balance sheet presents fairly, in all material respects, the financial position of Invitation Homes Inc. as of December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Dallas, Texas
March 30, 2017
F-1
INVITATION HOMES INC.
BALANCE SHEET
As of December 31, 2016
| Assets: | ||||
| Cash | $ | 1 | ||
| Total assets | $ | 1 | ||
| Liabilities | $ | — | ||
| Stockholder’s equity: | ||||
| Common stock, par value $0.01 per share, 1,000 shares authorized, 100 shares issued and outstanding | 1 | |||
| Additional paid-in capital | — | |||
| Total liabilities and stockholder’s equity | $ | 1 |
The accompanying notes are an integral part of this balance sheet.
F-2
INVITATION HOMES INC.
NOTES TO BALANCE SHEET
Note 1—Organization
Invitation Homes Inc. (the “Company”) was incorporated in the State of Delaware and capitalized on October 4, 2016. At December 31, 2016, under its charter, the Company was authorized to issue up to 1,000 shares of common stock, par value $0.01 per share. Since inception, and through January 30, 2017, Invitation Homes Inc. did not engage in any business or activity.
On January 31, 2017, certain transactions were effected (the “Pre-IPO Transactions”) that resulted in the Company’s ownership of Invitation Homes Operating Partnership LP (the “Operating Partnership”) which holds, indirectly or directly, a portfolio of approximately 48,000 homes previously owned by six affiliated holding entities: Invitation Homes L.P., Preeminent Holdings Inc., Invitation Homes 3 L.P., Invitation Homes 4 L.P., Invitation Homes 5 L.P., and Invitation Homes 6 L.P. (the owners of which are collectively referred to as the “Pre-IPO Owners”). The Operating Partnership is a wholly owned subsidiary of the Company directly and through Invitation Homes OP GP LLC, also a wholly owned subsidiary, which serves as the Operating Partnership’s sole general partner. The six holding entities and the Operating Partnership are collectively referred to herein as the “IH Holding Entities.” On February 6, 2017, the Company changed its jurisdiction of incorporation to Maryland. The Pre-IPO Transactions also included amendments to the Company’s charter providing for the issuance of up to 9,000,000,000 shares of common stock and 900,000,000 shares of preferred stock, $0.01 par value per share. On February 6, 2017, the Company completed an initial public offering of 88,550,000 shares of its common stock (the “IPO”). An additional 225,116,760 shares of common stock were issued to the Pre-IPO Owners, including shares held by directors, officers, and employees. The effects of these Pre-IPO Transactions and the IPO are not recognized in the accompanying balance sheet as all were effected subsequent to December 31, 2016.
The Pre-IPO Transactions will be accounted for as a reorganization of entities under common control in our 2017 financial statements which will recognize the assets and liabilities received in conjunction with the Pre-IPO Transactions at their historical carrying amounts, as reflected in the combined and consolidated financial statements of the IH Holding Entities.
The Company intends to qualify as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended. The Company will generally not be subject to federal income tax to the extent that it distributes at least 90% of its taxable income for each year to its shareholders. REITs are additionally subject to a number of organizational and operational requirements. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to federal income tax (including any applicable alternative minimum tax) on its taxable income and to federal income and excise taxes on its undistributed income.
Note 2—Summary Of Significant Accounting Policies
The accompanying balance sheet has been prepared in accordance with accounting principles generally accepted (“GAAP”) in the United States. Separate statements of operations, comprehensive income, stockholder’s equity, and cash flows have not been presented because there have been no activities of this entity as of December 31, 2016.
Use of Estimates
The preparation of the accompanying balance sheet in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the balance sheet. These estimates are inherently subjective in nature and actual results could differ from those estimates.
Organizational Costs and Offering Expenses
Through December 31, 2016, $15.9 million of costs and expenses had been incurred in connection with the IPO. These costs and expenses have been paid on the Company’s behalf by affiliates of the Company’s sole stockholder (see Note 3). When recorded in the Company’s financial statements, organizational expenses will be expensed as incurred, and direct offering costs associated with the IPO will be charged to equity.
F-3
INVITATION HOMES INC.
NOTES TO BALANCE SHEET
Commitments and Contingencies
The Company is not subject to any material litigation nor to management’s knowledge is any material litigation currently threatened against the Company.
Note 3—Stockholder’s Equity
At December 31, 2016, the Company was authorized to issue 1,000 shares of common stock, par value $0.01 per share. The Company issued 100 shares of common stock to its sole stockholder, Invitation Homes 2-A L.P., in exchange for $1.00 cash on October 4, 2016. See Note 1 for changes to authorized shares subsequent to December 31, 2016.
Note 4—Subsequent Events
In connection with the preparation of the accompanying balance sheet as of December 31, 2016, the Company has evaluated events and transactions occurring after December 31, 2016, for potential recognition or disclosure.
In addition to the Pre-IPO Transactions and the IPO more fully described in Note 1, an additional approximate$9.6 million of costs and expenses have been incurred in connection with the IPO subsequent to December 31, 2016.
F-4
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and shareholders of
Invitation Homes Inc.
Dallas, Texas
We have audited the accompanying combined and consolidated balance sheets of Invitation Homes and subsidiaries (the “Company”), as of December 31, 2016 and 2015, and the related combined and consolidated statements of operations, equity, and cash flows for each of the three years in the period ended December 31, 2016. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such combined and consolidated financial statements present fairly, in all material respects, the financial position of Invitation Homes and subsidiaries at December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic combined and consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
Dallas, Texas
March 30, 2017
F-5
INVITATION HOMES
COMBINED AND CONSOLIDATED BALANCE SHEETS
As of December 31, 2016 and 2015
(in thousands)
| 2016 | 2015 | |||||||
| Assets: | ||||||||
| Investments in single-family residential properties: | ||||||||
| Land | $ | 2,703,388 | $ | 2,640,615 | ||||
| Building and improvements | 7,091,457 | 6,955,784 | ||||||
| 9,794,845 | 9,596,399 | |||||||
| Less: accumulated depreciation | (792,330 | ) | (543,698 | ) | ||||
| Investments in single-family residential properties, net | 9,002,515 | 9,052,701 | ||||||
| Cash and cash equivalents | 198,119 | 274,818 | ||||||
| Restricted cash | 222,092 | 219,174 | ||||||
| Other assets, net | 309,625 | 250,285 | ||||||
| Total assets | $ | 9,732,351 | $ | 9,796,978 | ||||
| Liabilities: | ||||||||
| Credit facilities, net | $ | 2,315,541 | $ | 2,347,741 | ||||
| Mortgage loans, net | 5,254,738 | 5,264,193 | ||||||
| Warehouse loans | — | 114,023 | ||||||
| Accounts payable and accrued expenses | 88,052 | 82,817 | ||||||
| Resident security deposits | 86,513 | 81,169 | ||||||
| Other liabilities | 30,084 | 20,004 | ||||||
| Total liabilities | 7,774,928 | 7,909,947 | ||||||
| Equity: | ||||||||
| Combined equity | 1,957,423 | 1,887,031 | ||||||
| Total equity | 1,957,423 | 1,887,031 | ||||||
| Total liabilities and equity | $ | 9,732,351 | $ | 9,796,978 |
The accompanying notes are an integral part of these combined and consolidated financial statements.
F-6
INVITATION HOMES
COMBINED AND CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
| For the Years Ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| Revenues: | ||||||||||||
| Rental revenues | $ | 877,991 | $ | 800,210 | $ | 631,115 | ||||||
| Other property income | 44,596 | 35,839 | 27,607 | |||||||||
| Total revenues | 922,587 | 836,049 | 658,722 | |||||||||
| Operating expenses: | ||||||||||||
| Property operating and maintenance | 360,327 | 347,962 | 320,658 | |||||||||
| Property management expense | 30,493 | 39,459 | 62,506 | |||||||||
| General and administrative | 69,102 | 79,428 | 88,177 | |||||||||
| Depreciation and amortization | 267,681 | 250,239 | 215,808 | |||||||||
| Impairment and other | 4,207 | 4,584 | 3,396 | |||||||||
| Total operating expenses | 731,810 | 721,672 | 690,545 | |||||||||
| Operating income (loss) | 190,777 | 114,377 | (31,823 | ) | ||||||||
| Other income (expenses): | ||||||||||||
| Interest expense | (286,048 | ) | (273,736 | ) | (235,812 | ) | ||||||
| Other | (1,558 | ) | (3,121 | ) | (1,991 | ) | ||||||
| Total other income (expenses) | (287,606 | ) | (276,857 | ) | (237,803 | ) | ||||||
| Loss from continuing operations | (96,829 | ) | (162,480 | ) | (269,626 | ) | ||||||
| Gain (loss) on sale of property | 18,590 | 2,272 | (235 | ) | ||||||||
| Net loss | $ | (78,239 | ) | $ | (160,208 | ) | $ | (269,861 | ) |
The accompanying notes are an integral part of these combined and consolidated financial statements.
F-7
INVITATION HOMES
COMBINED AND CONSOLIDATED STATEMENTS OF EQUITY
For the Years Ended December 31, 2016, 2015, and 2014
(in thousands)
| Combined Equity | ||||
| Balance as of January 1, 2014 | $ | 2,949,807 | ||
| Net loss | (269,861 | ) | ||
| Contributions | 557,516 | |||
| Issuance of Series A Preferred Stock | 1,130 | |||
| Note receivable issued to Class B unitholders | (18,728 | ) | ||
| Distributions and dividends | (787,471 | ) | ||
| Series A Preferred Stock dividends | (127 | ) | ||
| Noncash incentive compensation expense | 24,335 | |||
| Balance as of December 31, 2014 | $ | 2,456,601 | ||
| Net loss | (160,208 | ) | ||
| Contributions | 246,820 | |||
| Note receivable issued to Class B unitholders | (1,500 | ) | ||
| Distributions and dividends | (682,470 | ) | ||
| Series A Preferred Stock dividends | (136 | ) | ||
| Noncash incentive compensation expense | 27,924 | |||
| Balance as of December 31, 2015 | $ | 1,887,031 | ||
| Net loss | (78,239 | ) | ||
| Contributions | 138,002 | |||
| Accrued interest on Class B notes | (972 | ) | ||
| Notes receivable repaid by Class B unitholders | 1,527 | |||
| Series A Preferred Stock dividends | (136 | ) | ||
| Noncash incentive compensation expense | 10,210 | |||
| Balance as of December 31, 2016 | $ | 1,957,423 |
The accompanying notes are an integral part of these combined and consolidated financial statements.
F-8
INVITATION HOMES
COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| For the Years Ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| Operating Activities: | ||||||||||||
| Net loss | $ | (78,239 | ) | $ | (160,208 | ) | $ | (269,861 | ) | |||
| Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||||||
| Depreciation and amortization | 267,681 | 250,239 | 215,808 | |||||||||
| Noncash incentive compensation expense | 10,210 | 27,924 | 24,335 | |||||||||
| Amortization of deferred leasing costs | 13,756 | 20,003 | 27,258 | |||||||||
| Amortization of deferred financing costs | 45,819 | 64,186 | 63,357 | |||||||||
| Amortization of discount on mortgage loans | 4,900 | 5,663 | 1,209 | |||||||||
| Accretion of discount on investments in debt securities | (256 | ) | — | — | ||||||||
| Provision for (recovery of) uncollectible resident receivables | 44 | (332 | ) | 1,471 | ||||||||
| Provisions for impairment | 2,282 | 1,448 | 423 | |||||||||
| (Gain) loss on sale of property | (18,590 | ) | (2,272 | ) | 235 | |||||||
| Paid in kind interest on warehouse loans | 1,238 | 3,779 | 10,512 | |||||||||
| Paid in kind interest on Class B notes receivable | (972 | ) | — | — | ||||||||
| Change in fair value of derivative instruments | 9,260 | 2,110 | — | |||||||||
| Straight-line rent | (736 | ) | (760 | ) | (1,643 | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Restricted cash related to security deposits | (5,928 | ) | (9,600 | ) | (30,386 | ) | ||||||
| Other assets, net | (14,531 | ) | (18,407 | ) | (26,105 | ) | ||||||
| Accounts payable and accrued expenses | 6,936 | (1,097 | ) | 6,785 | ||||||||
| Resident security deposits | 5,344 | 10,061 | 30,235 | |||||||||
| Other liabilities | 1,908 | 4,737 | (5,182 | ) | ||||||||
| Net cash provided by operating activities | 250,126 | 197,474 | 48,451 | |||||||||
| Investing Activities: | ||||||||||||
| Changes in amounts deposited and held by others | 5,718 | 10,275 | 22,473 | |||||||||
| Acquisition of single-family residential properties | (284,224 | ) | (790,583 | ) | (1,404,985 | ) | ||||||
| Initial renovations to single-family residential properties | (56,802 | ) | (111,260 | ) | (334,142 | ) | ||||||
| Other capital expenditures for single-family residential properties | (45,936 | ) | (49,773 | ) | (56,952 | ) | ||||||
| Corporate capital expenditures | (3,857 | ) | (2,031 | ) | (4,011 | ) | ||||||
| Proceeds from sale of residential properties | 143,090 | 135,570 | 20,116 | |||||||||
| Purchases of investments in debt securities | (16,036 | ) | (118,576 | ) | (74,469 | ) | ||||||
| Changes in restricted cash | 3,010 | 66,545 | (67,727 | ) | ||||||||
| Net cash used in investing activities | (255,037 | ) | (859,833 | ) | (1,899,697 | ) | ||||||
| Financing Activities: | ||||||||||||
| Contributions | 138,002 | 246,792 | 557,381 | |||||||||
| Issuance of Series A Preferred Stock | — | — | 1,130 | |||||||||
| Notes receivable (issued to) repaid by Class B unitholders | 1,527 | (1,500 | ) | (18,728 | ) |
F-9
INVITATION HOMES
COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(in thousands)
| For the Years Ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| Distributions and dividends | — | (682,470 | ) | (787,471 | ) | |||||||
| Series A Preferred Stock dividends | (136 | ) | (136 | ) | (127 | ) | ||||||
| Offering costs paid | (2,969 | ) | — | — | ||||||||
| Proceeds from credit facilities | 184,682 | 901,572 | 1,341,751 | |||||||||
| Repayments on credit facilities | (219,045 | ) | (1,955,018 | ) | (1,648,037 | ) | ||||||
| Proceeds from mortgage loans | — | 2,370,867 | 2,471,790 | |||||||||
| Repayments on mortgage loans | (46,817 | ) | (17,964 | ) | (4,791 | ) | ||||||
| Proceeds from warehouse loans | — | 144,698 | 292,000 | |||||||||
| Repayments on warehouse loans | (115,261 | ) | (305,129 | ) | (441,000 | ) | ||||||
| Purchase of interest rate caps | (577 | ) | (2,189 | ) | — | |||||||
| Deferred financing costs paid | (11,194 | ) | (47,942 | ) | (58,621 | ) | ||||||
| Net cash (used in) provided by financing activities | (71,788 | ) | 651,581 | 1,705,277 | ||||||||
| Change in cash and cash equivalents | (76,699 | ) | (10,778 | ) | (145,969 | ) | ||||||
| Cash and cash equivalents, beginning of period | 274,818 | 285,596 | 431,565 | |||||||||
| Cash and cash equivalents, end of period | $ | 198,119 | $ | 274,818 | $ | 285,596 | ||||||
| Supplemental cash flow disclosures: | ||||||||||||
| Interest paid, net of amounts capitalized | $ | 223,237 | $ | 203,694 | $ | 163,145 | ||||||
| Non-cash investing and financing activities: | ||||||||||||
| Accrued renovation improvements | $ | 4,962 | $ | 8,582 | $ | 16,077 | ||||||
| Accrued residential property capital improvements | 3,847 | 1,906 | 2,418 | |||||||||
| Accrued acquisition costs | — | 22 | 120 | |||||||||
| Residential properties classified as held for sale in other assets, net | 45,062 | — | — | |||||||||
| Reclassification of deferred financing costs upon loan funding | — | 3,398 | — | |||||||||
| Reduction of Class A subscription receivable in lieu of distribution | — | 28 | 135 |
The accompanying notes are an integral part of these combined and consolidated financial statements.
F-10
INVITATION HOMES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands)
Note 1—Organization and Formation
Invitation Homes (the “Company” or “Invitation Homes”) is a combination of entities formed by Blackstone Real Estate Partners VII L.P. (“BREP VII”), an investment fund sponsored by The Blackstone Group L.P., along with BREP VII’s affiliated side-by-side funds and co-investment vehicles (“BREP VII and Affiliates”).
The first Invitation Homes partnership was formed on June 12, 2012, through the establishment of Invitation Homes L.P. (“IH1”) and its wholly-owned subsidiary, THR Property Management L.P. (the “Manager”). Preeminent Holdings, Inc. (“IH2”) was created on February 14, 2013, Invitation Homes 3 L.P. (“IH3”) on August 8, 2013, Invitation Homes 4 L.P. (“IH4”) on January 10, 2014, Invitation Homes 5 L.P. (“IH5”) on August 22, 2014, and Invitation Homes 6 L.P. (“IH6”) on June 15, 2015 (collectively with IH1, the “Invitation Homes Partnerships”). The Company is a combination of the Invitation Homes Partnerships and the Operating Partnership as defined below.
We were formed for the purpose of owning, renovating, leasing, and operating single-family residential properties. Moreover, through the Manager, we provide all management and other administrative services with respect to the properties we own.
IH1 is owned by Invitation Homes GP LLC as general partner and, collectively, THR Investor LLC and certain management individuals as limited partners. IH2, a Delaware corporation, is owned by Preeminent Parent L.P. and IH2 Property Holdings Inc. IH3 is owned by Invitation Homes 3 GP LLC as general partner and, collectively, BREP IH3 Co-Investment Partners, L.P., BREP IH3 Holdings LLC, BTO IH3 Holdings L.P., Blackstone Real Estate Holdings VII—ESC L.P., and Blackstone Family Tactical Opportunities Investment Partnership ESC L.P. as limited partners. IH4 is owned by Invitation Homes 4 GP LLC as general partner and, collectively, BREP IH4 Holdings LLC, BTO IH3 Holdings L.P., Blackstone Real Estate Holdings VII—ESC L.P., and Blackstone Family Tactical Opportunities Investment Partnership ESC L.P., and certain management individuals as limited partners. IH5 is owned by Invitation Homes 5 GP LLC as general partner and, collectively, BREP IH5 Holdings LLC, Blackstone Total Alternatives Solution 2014 L.P., Blackstone Real Estate Holdings VII—ESC L.P., and certain management individuals as limited partners. IH6 is owned by Invitation Homes 6 GP LLC as general partner and BREP IH6 Holdings LLC as limited partner. These owner entities of the Invitation Homes Partnerships are collectively referred to as the “Pre-IPO Owners.”
Each of the Invitation Homes Partnerships is comprised of wholly-owned subsidiaries that were formed for specific operating purposes and several wholly-owned subsidiaries that were formed to facilitate our financing arrangements (the “Borrower Entities”). These Borrower Entities are used to align the ownership of our single-family residential properties with individual debt instruments. Collateral for the individual debt instruments is in the form of equity interests in the Borrower Entities or in pools of single-family residential properties owned either directly by the Borrower Entities or indirectly by their wholly-owned subsidiaries (see Note 6).
On October 4, 2016, Invitation Homes Inc. was incorporated in the State of Delaware and was capitalized as of that date by an investment from one of our Pre-IPO Owners. Since inception, and through January 30, 2017, Invitation Homes Inc. did not engage in any business or activity.
On December 14, 2016, Invitation Homes Operating Partnership LP (the “Operating Partnership”) and its general partner, Invitation Home OP GP LLC (the “OP General Partner”), were formed by one of our Pre-IPO Owners. The Operating Partnership began negotiating and entering into certain debt and hedge instruments upon its inception, as more fully described in Notes 7 and 14. As these activities were integrally related to our operations, the Operating Partnership has been included in our combined and consolidated financial statements since its inception.
The Invitation Homes Partnerships and the Operating Partnership are under the common control of BREP VII and Affiliates. BREP VII and Affiliates have the ability to control each of the Invitation Homes Partnerships and manage and operate the Invitation Homes Partnerships through the Manager and a common board of directors. The historical financial statements of the Operating Partnership and the Invitation Homes Partnerships and their consolidated subsidiaries have been combined in these financial statements.
References to “Invitation Homes,” or the “Company,” “we,” “our,” and “us” refer, collectively, to IH1, IH2, IH3, IH4, IH5, IH6, the Manager, and the Operating Partnership.
F-11
INVITATION HOMES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands)
Reorganization and Initial Public Offering
On January 31, 2017, we, our Pre-IPO Owners, and Invitation Homes, Inc. effected certain transactions (the “Pre-IPO Transactions”) that resulted in the Operating Partnership holding, directly or indirectly, all of the assets, liabilities, and results of operations reflected in our combined and consolidated financial statements, including the full portfolio of homes held by the Invitation Homes Partnerships. As a result of the Pre-IPO Transactions, the Operating Partnership is wholly owned by Invitation Homes Inc. directly and through its wholly owned subsidiary, the OP General Partner. More specifically:
| • | Invitation Homes Inc. acquired all of the assets, liabilities, and operations held directly or indirectly by Preeminent Holdings Inc. through certain mergers and related transactions as follows: |
| • | IH2 Property Holdings Inc., a parent entity of Preeminent Holdings Inc., merged with and into Invitation Homes Inc., with Invitation Homes Inc. as the entity surviving the merger (the “IH2 Property Holdings Merger”), and the issued and outstanding shares of IH2 Property Holdings Inc., all of which are held by certain of the Pre-IPO Owners, were converted into newly issued shares of common stock of Invitation Homes Inc.; and |
| • | following the IH2 Property Holdings Merger, Preeminent Holdings Inc. merged with and into Invitation Homes Inc., with Invitation Homes Inc. as the entity surviving the merger (the “Preeminent Holdings Merger”). In the Preeminent Holdings Merger, all of the shares of common stock of Preeminent Holdings Inc. issued and outstanding immediately prior to such merger, other than the shares held by Invitation Homes Inc., were converted into shares of newly issued common stock of Invitation Homes Inc. As a result of the Preeminent Holdings Merger, Invitation Homes Inc. holds all of the assets and operations held directly or indirectly by Preeminent Holdings Inc. prior to such merger; |
| • | prior to the Preeminent Holdings Merger, our Pre-IPO Owners contributed to Invitation Homes Inc. their interests in each of the other Invitation Homes Partnerships (other than Preeminent Holdings Inc.) in exchange for newly-issued shares of Invitation Homes Inc.; and |
| • | Invitation Homes Inc. contributed to the Operating Partnership all of the interests in the Invitation Homes Partnerships (other than Preeminent Holdings Inc., the assets, liabilities and operations of which were contributed to the Operating Partnership). |
The Pre-IPO Transactions will be accounted for as a reorganization of entities under common control utilizing historical cost basis in our 2017 financial statements.
On February 6, 2017, Invitation Homes Inc. changed its jurisdiction of incorporation to Maryland. The Pre-IPO Transactions also included amendments to the Invitation Homes Inc. charter which provide for the issuance of up to 9,000,000,000 shares of common stock. IH2 Property Holdings Inc. elected to qualify as a real estate investment trust (“REIT”) for United States federal income tax purposes commencing with its taxable year ended December 31, 2013. Effective upon consummation of the IH2 Property Holdings Merger pursuant to the Pre-IPO Transactions, Invitation Homes Inc. will be subject to such REIT election.
On February 6, 2017, Invitation Homes Inc. completed an initial public offering (“IPO”) of 88,550,000 shares of common stock at a price to the public of $20.00 per share. An additional 225,116,760 shares of common stock were issued to the Pre-IPO Owners, including shares held by directors, officers, and employees. See Note 14 for additional information.
Note 2—Significant Accounting Policies
Basis of Presentation
The accompanying combined and consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and in conjunction with the rules and regulations of the Securities and Exchange Commission. The combined and consolidated financial statements include the accounts of the Operating Partnership, the Invitation Homes Partnerships, and their consolidated wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in the combined and consolidated financial statements.
We consolidate entities when we own, directly or indirectly, a majority interest in the entity or are otherwise able to control the entity. We consolidate variable interest entities (“VIEs”) in accordance with Accounting Standards Codification
F-12
INVITATION HOMES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands)
(“ASC”) 810, Consolidation, as amended by Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2015-02, Consolidation (Topic 810)—Amendments to the Consolidation Analysis (“ASU 2015-02”), if we are the primary beneficiary of the VIE as determined by our power to direct the VIE’s activities and the obligation to absorb its losses or the right to receive its benefits, which are potentially significant to the VIE. A VIE is broadly defined as an entity with one or more of the following characteristics: (a) the total equity investment at risk is insufficient to finance the entity’s activities without additional subordinated financial support; (b) as a group, the holders of the equity investment at risk lack (i) the ability to make decisions about the entity’s activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity; or (c) the equity investors have voting rights that are not proportional to their economic interests, and substantially all of the entity’s activities either involve, or are conducted on behalf of, an investor that has disproportionately few voting rights.
Statements of comprehensive loss have not been included in these combined and consolidated financial statements due to there being no items of other comprehensive loss that would cause a difference between our net loss and our comprehensive loss.
Reclassifications
Certain amounts in the combined and consolidated balance sheets for the previously reported year ended December 31, 2015 have been reclassified to conform to the current period presentation. Amounts deposited and held by others of $6,978 were reclassified from amounts deposited and held by others, to other assets, net on the combined and consolidated balance sheet. The reclassification did not affect the Company’s financial position, results of operations, or its cash flows.
Adoption of New Accounting Standards
On January 1, 2014, we early adopted the provisions of ASU 2015-02. The amended guidance of ASU 2015-02 modifies the analysis that companies must perform in order to determine whether a legal entity should be consolidated. The amended guidance simplifies current consolidation rules by (i) reducing the number of consolidation models, (ii) reducing the circumstances in which a reporting entity may have to consolidate a legal entity solely based on a fee arrangement with another legal entity, (iii) placing more weight on the risk of loss in order to identify the party that has a controlling financial interest, (iv) reducing the number of instances that related party guidance needs to be applied when determining the party that has a controlling financial interest, and (v) changing rules for companies in certain industries that ordinarily employ limited partnership or VIE structures. The retrospective adoption of ASU 2015-02 did not have an impact on our combined and consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”), which resulted in the reclassification of debt issuance costs related to a recognized debt liability from deferred financing costs, net to a reduction of our reportable credit facilities, net and mortgage loans, net balances on our combined and consolidated balance sheets. Subsequently, the FASB issued ASU No. 2015-15, Interest—Imputation of Interest: Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements (“ASU 2015-15”), in August 2015 to address deferred issuance costs attributable to line of credit arrangements. ASU 2015-15 allows a company to defer debt issuance costs associated with line-of-credit arrangements, including arrangements with no substantial outstanding borrowings, classify them as an asset, and amortize them over the term of the arrangements. Effective January 1, 2015, we adopted ASU 2015-03 and ASU 2015-15, with full retrospective application as required by the guidance. This adoption had no impact on our net loss or cash flows provided by operations for any period presented.
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 provides guidance with respect to management’s responsibility related to evaluating whether there is a substantial doubt about an entity’s ability to continue as a going concern as well as to provide related footnote disclosures. Effective December 31, 2016, we adopted ASU 2014-15. This adoption had no impact on our combined and consolidated financial statements for any period presented.
Use of Estimates
The preparation of the combined and consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
F-13
INVITATION HOMES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands)
liabilities at the date of the combined and consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. These estimates are inherently subjective in nature and actual results could differ from those estimates.
Investments in Single-Family Residential Properties
Upon acquisition, we evaluate our acquired single-family residential properties for purposes of determining whether a transaction should be accounted for as an asset acquisition or business combination. In general, acquisitions of single-family residential properties with an in-place lease are treated as a business combination under ASC 805, Business Combinations.
Substantially all of our transactions are asset acquisitions recorded at their purchase price, and the purchase price is allocated between land and building and improvements based upon their relative fair values at the date of acquisition. The purchase price for purposes of this allocation is inclusive of acquisition costs which typically include legal fees, bidding service and title fees, payments made to cure tax, utility, homeowners’ association (“HOA”), and other mechanic’s and miscellaneous liens, as well as other closing costs.
Transactions determined to be business combinations are recorded at the purchase price (which approximates fair value), and the purchase price is allocated to land, building and improvements, and the in-place lease intangibles based upon their fair values at the date of acquisition. Acquisition costs are expensed in the period in which they are incurred and are reflected in other expenses in the accompanying combined and consolidated statements of operations. The fair values of acquired in-place lease intangibles are based on the costs to execute similar leases, including commissions and other related costs. The origination value of in-place lease intangibles also includes an estimate of lost rent revenue at in-place rental rates during the estimated time required to lease the property. The in-place lease intangibles are amortized over the life of the leases and are recorded in other assets, net in our combined and consolidated balance sheets (see Note 5).
Cost Capitalization
We incur costs to acquire, stabilize and prepare our single-family residential properties to be rented. We capitalize these costs as a component of our investment in each single-family residential property, using specific identification and relative allocation methodologies, including renovation costs and other costs associated with activities that are directly related to preparing our properties for use as rental real estate. Other costs include interest costs, property taxes, property insurance, utilities, HOA fees, and the salaries and benefits of the Manager’s employees who are directly responsible for the execution of our stabilization activities. The capitalization period associated with our stabilization activities begins at such time that activities commence and concludes at the time that a single-family residential property is available to be leased.
Once a property is ready for its intended use, expenditures for ordinary maintenance and repairs thereafter are expensed to operations as incurred, and we capitalize expenditures that improve or extend the life of a home and for certain furniture and fixtures additions. The determination of which costs to capitalize requires significant judgment. Accordingly, many factors are considered as part of our evaluation processes with no one factor necessarily determinative.
Depreciation
Costs capitalized in connection with single-family residential property acquisitions, stabilization activities, and on an ongoing basis are depreciated over their estimated useful lives on a straight line basis. The depreciation period commences upon the cessation of stabilization related activities or upon the completion of improvements made on an ongoing basis. For those costs capitalized in connection with residential property acquisitions and stabilization activities and those capitalized on an ongoing basis, the useful lives range from 7 years to 28.5 years.
Provisions for Impairment
We continuously evaluate, by property, whether there are any events or changes in circumstances indicating that the carrying amount of our single-family residential properties may not be recoverable. Examples of such events and changes in circumstances that we consider include significant and persistent declines in an individual property’s net operating income, regional changes in home price appreciation as measured by certain independently developed indices, change in expected use of the property, significant adverse legal factors, substantive damage to the individual property as a result of natural disasters and other risks inherent in our business not covered by insurance proceeds, or a current expectation that a property will be disposed of prior to the end of its estimated useful life.
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INVITATION HOMES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands)
To the extent an event or change in circumstance is identified, a residential property is considered to be impaired only if its carrying value cannot be recovered through estimated future undiscounted cash flows from the use and eventual disposition of the property. Cash flow projections are prepared using internal analyses based on current rental, renewal, and occupancy rates, operating expenses, and inputs from our annual planning process that give consideration to each property’s historical results, current operating trends, and current market conditions. To the extent an impairment has occurred, the carrying amount of our investment in a property is adjusted to its estimated fair value. To determine the estimated fair value, we primarily consider local broker price opinions (“BPOs”). In order to validate the BPOs received and used in our assessment of fair value of real estate, we perform an internal review to determine if an acceptable valuation approach was used to estimate fair value in compliance with guidance provided by ASC 820, Fair Value Measurements. Additionally, we undertake an internal review to assess the relevance and appropriateness of comparable transactions that have been used by the broker in its BPO and any adjustments to comparable transactions made by the broker in reaching its value opinion.
The process whereby we assess our single-family residential properties for impairment requires significant judgment and assessment of factors that are, at times, subject to significant uncertainty. We evaluate multiple information sources and perform a number of internal analyses, each of which are important components of our process with no one information source or analysis being necessarily determinative.
Single-Family Residential Properties Held for Sale and Discontinued Operations
From time to time we may identify single-family residential properties to be sold. At the time that any such properties are identified, we perform an evaluation to determine whether or not such properties should be classified as held for sale or presented as discontinued operations in accordance with GAAP.
Factors considered as part of our held for sale evaluation process include whether the following conditions have been met: (i) we have committed to a plan to sell a property that is immediately available for sale in its present condition;(ii) an active program to locate a buyer and other actions required to complete the plan to sell a property have been initiated; (iii) the sale of a property is probable within one year (generally determined based upon the execution of a sales contract); (iv) the property is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and (v) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. To the extent that these factors are all present, we discontinue depreciating the property, measure the property at the lower of its carrying amount or its fair value less estimated costs to sell, and present the property separately within other assets, net on our combined and consolidated balance sheets.
In connection with the held for sale evaluation described above, we also perform an evaluation to determine whether the results of operations associated with such property, or properties, should be classified as discontinued operations within our combined and consolidated statements of operations. Factors considered as part of our discontinued operations evaluation process include whether a property or a group of properties that are disposed of or classified as held for sale represent a strategic shift that has or will have a major effect on our financial results. As of December 31, 2016 and 2015, we classified $45,062 and $0, respectively, as held for sale assets in our combined and consolidated financial statements (See Note 5). As of and for the years ended December 31, 2016, 2015, and 2014, no properties have been classified as discontinued operations in our combined and consolidated financial statements.
Cash and Cash Equivalents
For purposes of presentation on both the combined and consolidated balance sheets and statements of cash flows, we consider financial instruments with an original maturity of three months or less to be cash and cash equivalents. Cash balances are held with a single financial institution in an amount that exceeds the Federal Deposit Insurance Corporation insurance coverage, and, as a result, there is a concentration of credit risk related to amounts on deposit. We believe any risks are mitigated through the size of the financial institution at which our cash balances are held.
Restricted Cash
Restricted cash represents cash deposited in accounts related to rent deposits and collections, security deposits, property taxes, insurance premiums and deductibles, capital expenditures, and prepayments (see Note 4). Amounts deposited in these accounts can only be used as provided for in the credit facility and mortgage loan agreements (see Note 6), and, therefore, are separately presented within our combined and consolidated balance sheets. For purposes of classification within the
F-15
INVITATION HOMES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands)
combined and consolidated statements of cash flows, amounts deposited in these accounts are classified as investing activities other than those related to resident security deposits, which are classified as operating activities.
Held to Maturity Investments
Investments in debt securities that we have a positive intent and ability to hold to maturity are classified as held to maturity and are presented within other assets, net on our combined and consolidated balance sheets (see Note 5). These investments are recorded at amortized cost. Investments are reviewed at each reporting period for declines in fair value below the amortized cost basis that are other than temporary. Interest income, including amortization of any premium or discount, is classified as other in the combined and consolidated statements of operations. For purposes of classification within the combined and consolidated statements of cash flows, amounts paid for these securities are classified as investing activities.
Deferred Financing Costs
Costs incurred that are directly attributable to procuring external financing are deferred and amortized over the term of the related financing arrangement as interest expense on the combined and consolidated statements of operations. Costs that are deferred for the procurement of such financing are presented either as an asset in other assets, net when associated with a revolving debt instrument and prior to funding of a loan or as a liability in credit facilities, net or mortgage loans, net when associated with other indebtedness. Unamortized financing costs are charged to earnings when debt is retired before the maturity date.
Revenue Recognition and Resident Receivables
Rental revenue, net of any concessions, is recognized monthly as it is earned on a straight-line basis over the term of the lease. Other property income is recognized when earned and realized or realizable.
We maintain an allowance for doubtful accounts for estimated losses that may result from the inability of residents to make required rent or other payments. This allowance is estimated based on, among other considerations, payment histories, and overall delinquencies. The provision for doubtful accounts is recorded as a reduction of rental revenues and other property income in our combined and consolidated statements of operations.
Deferred Leasing Costs
Costs associated with leasing our single family residential properties, which consist of commissions paid to leasing agents and costs associated with evaluating a resident’s financial condition, are deferred in the period in which they are incurred as a component of deferred leasing costs and are subsequently amortized over the lease term. Deferred leasing costs are included as a component of other assets, net within our combined and consolidated balance sheets and their amortization is classified as property operating and maintenance within the combined and consolidated statements of operations (see Note 5). Costs incurred in connection with our leasing activities that do not result in the execution of a lease are expensed in the period incurred.
Noncash Incentive Compensation Expense
We recognize noncash incentive compensation expense based on the estimated fair value of the incentive compensation units and vesting conditions of the related incentive unit agreements. IH1’s incentive units were granted to employees of the Manager, our wholly owned subsidiary. Therefore, the noncash incentive compensation expense is based on the grant-date fair value of the units and recognized in expense over the service period. Additional compensation expense is recognized if modifications to existing incentive unit agreements result in an increase in the post-modification fair value of the units that exceeds their pre-modification fair value. Because units in IH2, IH3, IH4, and IH5 were granted to non-employees of those respective partnerships, fair value is re-measured for unvested units at the end of each reporting period. The fair value of all incentive units is determined based on a valuation model that takes into account discounted cash flows and a market approach based on comparable companies and transactions (see Note 10). Noncash incentive compensation expense is presented as a component of general and administrative expense and property management expense in our combined and consolidated statements of operations.
F-16
INVITATION HOMES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands)
Fair Value Measurements
The fair value of a financial instrument is the amount at which the instrument could be exchanged in an orderly transaction between two willing parties. This amount is determined based on an exit price approach, which contemplates 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. GAAP has established a valuation hierarchy based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels are defined as follows:
Level 1—Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets;
Level 2—Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument; and
Level 3—Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
See Note 11 for further information related to our fair value measurements.
Derivatives
We enter into interest rate swap and interest rate cap agreements (collectively, “Hedging Derivatives”) for interest rate risk management purposes. We do not enter into Hedging Derivative transactions for trading or other speculative purposes. Pursuant to the terms of our credit facilities and mortgage loans, we are required to maintain certain interest rate caps. We enter into interest rate swap agreements to hedge the risk arising from changes in the one-month London Interbank Offered Rate (“LIBOR”). The effect of these interest rate cap agreements and interest rate swap agreements is to reduce the variability of interest payments due to changes in LIBOR. As of December 31, 2016, we have not elected to designate these Hedging Derivatives as effective hedging instruments. The fair value of Hedging Derivatives that are in an asset position are included in other assets and those in a liability position are included in accrued expenses and other liabilities on our combined and consolidated balance sheets. The related changes in fair value of these investments are reflected within interest expense in the combined and consolidated statements of operations. See Note 7 for further discussion of derivative financial instruments.
Income Taxes
IH1, IH3, IH4, IH5, and IH6 are structured as partnerships and therefore are not subject to federal and state income taxes.
IH2 elected to be treated as a REIT under the Internal Revenue Code and the corresponding provisions of state law. All distributions made by IH2 during the years ended December 31, 2016, 2015, and 2014, were treated as returns of capital for income tax purposes. REITs generally are not required to pay federal income taxes on their net income that is currently distributed to shareholders if they distribute to shareholders at least 90% of their United States taxable income and meet certain income, asset and organizational tests. Accordingly, we generally will not be subject to federal income tax as long as IH2 continues to qualify as a REIT.
We have elected to treat certain of the wholly owned subsidiaries of IH2 as taxable REIT subsidiaries (“TRSs”). TRSs may participate in non-real estate related activities and/or perform non-customary services for residents and are subject to federal and state income tax at regular corporate tax rates.
We account for income taxes under the asset and liability method. For the TRSs, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using the enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. We provide a valuation allowance, from time to time, for deferred tax assets for which we do not consider realization of such assets to be more likely than not.
F-17
INVITATION HOMES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands)
Tax benefits associated with uncertain tax positions are recognized only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position.
Segment Reporting
Operating segments are defined as components of an enterprise for which discrete financial information is available that is evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate resources and in assessing performance. Our CODM is the Chief Executive Officer.
Under the provision of ASC 280, Segment Reporting, we have determined that we have one reportable segment related to acquiring, renovating, leasing, and operating single-family homes as rental properties, including single-family homes in planned unit developments. The CODM evaluates operating performance and allocates resources on a total portfolio basis. The CODM utilizes net operating income as the primary measure to evaluate performance of the total portfolio. The aggregation of individual homes constitutes the total portfolio. Decisions regarding acquisitions and dispositions of homes are made at the individual home level.
Recent Accounting Pronouncements
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which clarifies the definition of a business with the objective of evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The new standard will be effective for us for annual reporting periods beginning after December 15, 2017, and interim periods within those fiscal years with. Early adoption is permitted only for transactions that occurred before the issuance date of the guidance and has not been previously reported in issued financial statements. We do not anticipate the adoption of this standard will have a material impact on our combined and consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires that period changes in the total of cash, cash equivalents, and amounts generally described as restricted cash or cash equivalents are explained in the statement of cash flow. Thus, amounts generally described as restricted cash and restricted cash equivalents will be included with cash and cash equivalents when reconciling the beginning and ending balances shown in the statement of cash flows. The guidance will be effective for us for annual reporting periods beginning after December 15, 2017, and for interim periods within those annual periods with early adoption permitted. We are currently assessing the impact of the guidance on our combined and consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments, which clarifies the classification of certain cash receipts and cash payments including debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, proceeds from the settlement of insurance claims, and beneficial interests in securitization transactions. The new standard will be effective for us for annual reporting periods beginning after December 15, 2017, and for interim periods within those annual periods. We are currently evaluating the impact of the guidance on our combined and consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The guidance will be effective for us for annual reporting periods beginning after December 15, 2016, and for interim periods within those annual periods, with early adoption permitted. We do not anticipate the adoption of this standard will have a material impact on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which will require lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of more than one year. Lessor accounting will remain similar to lessor accounting under current GAAP, while aligning with the FASB’s new revenue recognition guidance. The new standard will be effective for us for annual reporting periods beginning after December 15, 2018, and for interim periods within those annual periods, with early adoption permitted. We are currently evaluating the impact of the guidance on our combined and consolidated financial statements.
In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which amends certain aspects of recognition, measurement, presentation and disclosure of financial instruments,
F-18
INVITATION HOMES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands)
including the requirement to measure certain equity investments at fair value with changes in fair value recognized in net income. The new standard will be effective for us for annual reporting periods beginning after December 15, 2017, and for interim periods within those annual periods. We are currently evaluating the impact of the guidance on our combined and consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which provides guidance on revenue recognition and supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, most industry-specific guidance and some cost guidance included in Subtopic 605-35, Revenue Recognition—Construction-Type and Production-Type Contracts. The standard’s core principle is that a company recognizes revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under current guidance. These judgments may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract. The guidance will be effective for us for annual reporting periods beginning after December 15, 2017, and for interim periods within those annual periods. At that time, we may adopt the full retrospective approach or the modified retrospective approach. Early adoption is permitted only as of annual reporting periods, and interim periods therein, beginning after December 15, 2016. We are currently evaluating the method of adoption of this guidance, as well as the impact of the guidance on our combined and consolidated financial statements.
Note 3—Investments in Single-Family Residential Properties
The following table sets forth the net carrying amount associated with our properties by component:
| December 31, 2016 | December 31, 2015 | |||||||
| Land | $ | 2,703,388 | $ | 2,640,615 | ||||
| Single-family residential property | 6,829,579 | 6,696,760 | ||||||
| Capital improvements | 229,890 | 226,993 | ||||||
| Equipment | 31,988 | 32,031 | ||||||
| Total gross investments in the properties | 9,794,845 | 9,596,399 | ||||||
| Less: accumulated depreciation | (792,330 | ) | (543,698 | ) | ||||
| Investments in single-family residential properties, net | $ | 9,002,515 | $ | 9,052,701 |
As of December 31, 2016 and 2015, the carrying amount of the residential property above included $122,009 and $120,477, respectively, of capitalized acquisition costs (excluding purchase price), along with $62,169 and $61,602, respectively, of capitalized interest, $26,050 and $25,880, respectively, of capitalized property taxes, $4,764 and $4,778, respectively, of capitalized insurance, and $2,890 and $2,857, respectively, of capitalized HOA fees.
During the years ended December 31, 2016, 2015, and 2014, we recognized $263,093, $245,065, and $207,289 respectively, of depreciation expense related to the components of the properties, $0, $601, and $5,145 respectively, of amortization related to in-place lease intangible assets, and $4,588, $4,573, and $3,374 respectively, of depreciation and amortization related to corporate furniture and equipment. These amounts are included in depreciation and amortization on the combined and consolidated statements of operations. Further, during the years ended December 31, 2016, 2015, and 2014, impairments totaling $2,282, $1,448, and $423 respectively, have been recognized and are included in impairment and other on the combined and consolidated statements of operations.
F-19
INVITATION HOMES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands)
Note 4—Restricted Cash
Pursuant to the terms of the credit facility agreements and the mortgage loans described in Note 6, we are required to establish, maintain, and fund from time to time (generally either monthly or at the time borrowings are funded) certain specified reserve accounts. These reserve accounts include, but are not limited to the following types of accounts: (i) completion reserves; (ii) renovation reserves; (iii) leasing commission reserves; (iv) debt service reserves; (v) property tax reserves; (vi) insurance premium and deductible reserves; (vii) standing reserves; (viii) special reserves; (ix) termination fee reserves; (x) eligibility reserves; (xi) collections; and (xii) non-conforming property reserves. These reserve accounts are under the sole control of the Administrative Agent, as defined in the credit facility agreements, and the loan servicer of the mortgage loans. Additionally, we hold security deposits pursuant to resident lease agreements that are required to be segregated. Accordingly, amounts funded to these reserve accounts and security deposit accounts have been classified within our combined and consolidated balance sheets as restricted cash. Additionally, we hold letters of credit as required by certain of our insurance policies.
The amounts funded, and to be funded, to the reserve accounts are subject to formulae included in the credit facility agreements and mortgage loan agreements and are to be released to us subject to certain conditions (in consultation with the other named lenders to the credit facility agreements) specified therein being met. To the extent that an event of default were to occur, the loan servicer (as it relates to the Securitizations) and the Administrative Agent (in consultation with the other named lenders to the credit facilities, as it relates to the credit facilities) have discretion to use such funds to either settle the applicable operating expenses to which such reserves relate or reduce the allocated loan amount associated with a residential property of ours.
At December 31, 2016 and 2015, the balances in our restricted cash accounts are as set forth in the table below. No amounts were funded to the completion, renovation, leasing commission, debt service, termination fee, and nonconforming property reserve accounts as the conditions specified in the credit facility agreements that require such funding did not exist.
| December 31, 2016 | December 31, 2015 | |||||||
| Resident security deposits | $ | 86,239 | $ | 80,311 | ||||
| Collections | 42,767 | 47,256 | ||||||
| Property taxes | 52,256 | 44,697 | ||||||
| Insurance premium and deductible | 4,432 | 4,298 | ||||||
| Standing and capital expenditure reserves | 24,409 | 21,382 | ||||||
| Special reserves | 34 | 7,495 | ||||||
| Eligibility reserves | 9,274 | 13,735 | ||||||
| Letters of credit | 2,681 | — | ||||||
| Total | $ | 222,092 | $ | 219,174 |
F-20
INVITATION HOMES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands)
Note 5—Other Assets
At December 31, 2016 and 2015, the balances in other assets, net are as follows:
| December 31, 2016 | December 31, 2015 | |||||||
| Investments in debt securities, net | $ | 209,337 | $ | 193,045 | ||||
| Held for sale assets(1) | 45,062 | — | ||||||
| Prepaid expenses | 21,883 | 21,238 | ||||||
| Deferred leasing costs, net | 7,710 | 9,102 | ||||||
| Rent and other receivables, net | 11,604 | 8,846 | ||||||
| Corporate fixed assets, net | 6,247 | 6,980 | ||||||
| Amounts deposited and held by others | 1,260 | 6,978 | ||||||
| Other | 6,522 | 4,096 | ||||||
| Total | $ | 309,625 | $ | 250,285 |
| (1) | As of December 31, 2016, 391 properties were classified as held for sale (see Note 14). |
Investments in Debt Securities
In connection with certain of the Securitizations, as defined in Note 6, we previously acquired $193,045 of Class G certificates. In 2016, we purchased $16,423 of Class F certificates, which had a discount of $131 as of December 31, 2016. These investments in debt securities are classified as held to maturity investments (for additional information about the Securitizations, see Note 6). As of December 31, 2016 and 2015, there were no gross unrecognized holding gains or losses and there were no other than temporary impairments recognized in accumulated other comprehensive income. As of December 31, 2016, the Class F and G certificates are scheduled to mature over the next 6 to 15 months.
Rent and Other Receivables
We lease our properties to residents pursuant to leases that generally have an initial contractual term of at least 12 months, provide for monthly payments, and are cancelable by the resident and us under certain conditions specified in the related lease agreements.
Included in other assets, net within the combined and consolidated balance sheets, is an allowance for doubtful accounts of $1,183 and $1,139, as of December 31, 2016 and 2015, respectively.
F-21
INVITATION HOMES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands)
Note 6—Debt
Credit Facilities
Invitation Homes’ credit facilities were comprised of the following as of December 31, 2016 and 2015:
| Outstanding Principal Balance(3) | ||||||||||||||
| Credit Facility | Origination Date | Maturity Date(1) | Interest Rate(2) | December 31, 2016 | December 31, 2015 | |||||||||
| IH1 2015(4) | April 3, 2015 | October 3, 2017 | 4.02% | $ | 85,492 | $ | 161,105 | |||||||
| IH2 2015(5) | September 29, 2015 | March 29, 2017 | 3.52% | 43,859 | 116,109 | |||||||||
| IH3 2013(6) | December 19, 2013 | June 30, 2017 | 3.77% | 932,583 | 958,622 | |||||||||
| IH4 2014(7) | May 5, 2014 | May 5, 2017 | 3.77% | 529,866 | 556,987 | |||||||||
| IH5 2014(8) | December 5, 2014 | June 5, 2017 | 3.94% | 564,348 | 563,125 | |||||||||
| IH6 2016(9) | April 13, 2016 | April 13, 2018 | 3.28% | 165,437 | — | |||||||||
| Total | 2,321,585 | 2,355,948 | ||||||||||||
| Less deferred financing costs, net | (6,044 | ) | (8,207 | ) | ||||||||||
| Total | $ | 2,315,541 | $ | 2,347,741 |
| (1) | The maturity dates above are reflective of all extensions that have been exercised. On February 6, 2017, the outstanding balances for all six credit facilities were repaid in full. See Note 14 for activity related to credit facilities subsequent to December 31, 2016. |
| (2) | Interest rates are based on a spread to LIBOR; as of December 31, 2016, LIBOR was 0.77%. |
| (3) | Outstanding Principal Balance does not include capitalized deferred financing costs, net. |
| (4) | As of December 31, 2016, we had the right to borrow up to $85,492, bearing interest of LIBOR + 325 basis points, and an unused commitment fee of 50 basis points per year. |
| (5) | As of December 31, 2016, we had the right to borrow up to $105,800; bearing interest at LIBOR + 275 basis points, and an unused commitment fee of 50 basis points per year. |
| (6) | As of December 31, 2016, we had the right to borrow up to $932,583, bearing interest at either LIBOR + 300 or 425 basis points (depending on the nature of the financed property), and an unused commitment fee of 50 basis points per year. |
| (7) | As of December 31, 2016, we had the right to borrow up to $529,866, bearing interest at either LIBOR + 300 or 425 basis points (depending on the nature of the financed property), and an unused commitment fee of 50 basis points. |
| (8) | As of December 31, 2016, we had the right to borrow up to $564,348, bearing interest at either LIBOR + 275 or + 400 basis points (depending on the nature of the financed property), and an unused commitment fee of 50 basis points per year. |
| (9) | As of December 31, 2016, we had the right to borrow up to $550,000, bearing interest at either LIBOR + 250 or 375 basis points (depending on the nature of the financed property), and an unused commitment fee of 50 basis points per year. |
Our credit facilities are subject to certain terms and conditions that must be satisfied to obtain additional draws. These terms and conditions are specific to each credit facility agreement and include the following range of provisions which are detailed in the respective credit facility agreements: (i) the aggregate loan principal balance may not exceed 55.00%-90.00% of the total cost basis associated with financed properties; (ii) the aggregate loan principal balance may not exceed 55.00%-75.00% of the value associated with financed properties; (iii) the aggregate debt yield may not be less than 5.75%-7.00%; and (iv) the aggregate debt service coverage ratio may not be less than 1.35 to 1.00.
F-22
INVITATION HOMES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands)
All of our credit facilities also require us to maintain compliance with certain affirmative, negative, and financial covenants. Affirmative covenants with which we must comply include our, and certain of our affiliates’, compliance with (i) use of proceeds requirements specified in the credit facility agreement, (ii) licensing, permitting and legal requirements specified in the respective credit facility agreement, (iii) organizational requirements of the jurisdictions in which we, and certain of our affiliates, are organized, (iv) federal and state tax laws, and (v) books and records requirements specified in the credit facility agreement. Negative covenants with which we must comply include our, and certain of our affiliates’, compliance with limitations surrounding (i) the operation of our properties, (ii) the amount of our indebtedness and the nature of our investments, (iii) the execution of transactions with affiliates, and (iv) the nature of our business activities. Financial covenants are specific to each credit facility agreement and include (i) a maximum loan to value ratio of 65.00%-80.00%, (ii) maximum loan to cost ratio of 65.00%-90.00%, (iii) a debt service coverage ratio of not less than 1.10 to 1.00, and (iv) a debt yield of not less than 5.75%-7.00%. Our IH3 2015, IH4 2015, IH5 2014, and IH6 2016 credit facilities have an additional financial covenant related to an adjusted debt service coverage ratio of not less than 0.70 to 1.00 or 1.00 to 1.00. At December 31, 2016, and through the date our financial statements were issued, we believe we were in compliance with all affirmative, negative, and financial covenants related to the aforementioned credit facilities.
Collateral
Collateral for the amounts borrowed include all of the equity value of the respective Borrower Entities and the constituent parts thereof, all of our rights, title and interest in, and to, any lease agreements, and all of our rights title and interest in, and to, any other agreements, documents, and instruments related to the foregoing.
Debt Maturities Schedule
The following table reflects the full repayment of all credit facilities that occurred on February 6, 2017:
| Year | Principal | |||
| 2017 | $ | 2,321,585 | ||
| Total payments | 2,321,585 | |||
| Less deferred financing costs, net | (6,044 | ) | ||
| Total credit facilities, net | $ | 2,315,541 |
Mortgage Loans
As of December 31, 2016, we have completed seven securitization transactions (the “Securitizations” or the “mortgage loans”) collateralized by homes owned by the respective Invitation Homes Borrower Entities. The proceeds from the mortgage loans were used to fund (i) partial repayments of the then-outstanding IH1 and IH2 credit facilities, (ii) initial deposits in the reserve accounts, (iii) closing costs in connection with the mortgage loans, (iv) general costs associated with our operations, and (v) distributions and dividends to IH1 and IH2 equity investors.
F-23
INVITATION HOMES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands)
The following table sets forth a summary of the mortgage loan indebtedness as of December 31, 2016 and 2015:
| Outstanding Principal Balance(3) | ||||||||||||||
| Maturity Date(1) | Rate(2) | Range of Spreads | December 31, 2016(4) | December 31, 2015 | ||||||||||
| IH1 2013-1(5) | December 9, 2017 | 2.45% | 115-365 bps | $ | 462,431 | $ | 469,554 | |||||||
| IH1 2014-1(6) | June 9, 2017 | 2.61% | 100-375 bps | 978,231 | 993,738 | |||||||||
| IH1 2014-2, net(7) | September 9, 2017 | 2.67% | 110-400 bps | 710,664 | 718,610 | |||||||||
| IH1 2014-3, net(8) | December 9, 2017 | 3.08% | 120-500 bps | 766,753 | 766,043 | |||||||||
| IH2 2015-1, net(9) | March 9, 2018 | 3.13% | 145-430 bps | 531,318 | 536,174 | |||||||||
| IH2 2015-2(10) | June 9, 2017 | 2.72% | 135-370 bps | 630,283 | 631,097 | |||||||||
| IH2 2015-3 | August 9, 2017 | 2.94% | 130-475 bps | 1,184,314 | 1,190,695 | |||||||||
| Total Securitizations | 5,263,994 | 5,305,911 | ||||||||||||
| Less deferred financing costs, net | (9,256 | ) | (41,718 | ) | ||||||||||
| Total | $ | 5,254,738 | $ | 5,264,193 |
| (1) | Each mortgage loan’s initial maturity term is two years, individually subject to three, one-year extension options at the borrower’s discretion (provided that there is no event of default under the loan agreement and the borrower obtains a replacement interest rate cap agreement in a form reasonably acceptable to the lender). Our IH1 2014-1, IH1 2014-2, IH1 2014-3, and IH2 2015-1 mortgage loans have exercised the first extension options, and IH1 2013-1 has exercised the second extension option. The maturity dates above are reflective of all extensions that have been exercised. |
| (2) | Interest rates are based on a weighted average spread to LIBOR; as of December 31, 2016, LIBOR was 0.77%. |
| (3) | Outstanding Principal Balance is net of discounts and does not include capitalized deferred financing costs, net. |
| (4) | From January 1, 2017 to March 24, 2017, we made repayments of $16,398 on our mortgage loans related to the disposition of properties. |
| (5) | On February 6, 2017, the outstanding balance of IH1 2013-1 was repaid in full. See Note 14 for subsequent activity related to our mortgage loans. |
| (6) | On February 6, 2017 and March 9, 2017, we made voluntary repayments of $291,500 and $260,000, respectively (see Note 14). |
| (7) | Net of unamortized discount of $0 and $1,325 as of December 31, 2016 and 2015, respectively. |
| (8) | Net of unamortized discount of $0 and $3,279 as of December 31, 2016 and 2015, respectively. |
| (9) | Net of unamortized discount of $55 and $351 as of December 31, 2016 and 2015, respectively. On February 9, 2017, we exercised our first one-year extension option on IH2 2015-1, extending the maturity from March 9, 2017 to March 9, 2018 (see Note 14). |
| (10) | On March 9, 2017, we submitted a notification to request an extension of the maturity of the IH2 2015-2 mortgage loan from June 9, 2017 to June 9, 2018 upon approval (see Note 14). |
Securitization Transactions
IH1 2013-1: In November 2013, we completed our first securitization transaction (“IH1 2013-1”), in which 2013-1 IH Borrower L.P. (“S1 Borrower”), a newly-formed special purpose entity and wholly owned subsidiary of IH1, executed a loan agreement with a third-party lender. The third-party lender made a six component term loan to S1 Borrower in the amount of $479,137. All six components of the loan were sold at par. We are obligated to make monthly payments of interest and principal with the first payment being due upon the closing of the loan, and subsequent payments beginning January 9, 2014 and continuing monthly thereafter. On February 6, 2017, the outstanding balance of IH1 2013-1 was repaid in full.
IH1 2014-1: In May 2014, we completed our second securitization transaction (“IH1 2014-1”), in which 2014-1 IH Borrower L.P. (“S2 Borrower”), a newly-formed special purpose entity and wholly owned subsidiary of IH1, executed a loan agreement with a third-party lender. The third party lender made a six component term loan to S2 Borrower in the amount of
F-24
INVITATION HOMES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands)
$993,738. All six components of the loan were sold at par. We are obligated to make monthly payments of interest with the first payment being due upon the closing of the loan, and subsequent payments beginning July 9, 2014 and continuing monthly thereafter. On February 6, 2017 and March 9, 2017, we made voluntary repayments of $291,500 and $260,000, respectively (see Note 14).
IH1 2014-2: In August 2014, we completed our third securitization transaction (“IH1 2014-2”), in which 2014-2 IH Borrower L.P. (“S3 Borrower”), a newly-formed special purpose entity and wholly owned subsidiary of IH1, executed a loan agreement with a third-party lender. The third-party lender made a term loan comprised of (1) six floating rate components and (2) one fixed rate component to S3 Borrower in the amount of $719,935. Of the seven loan components, the Class A, B, C, D and G certificates were sold at par; however, the Class E and F certificates were sold at a total discount of $3,970. The unamortized balance of this discount is included in mortgage loans, net on our combined and consolidated balance sheets as of December 31, 2016 and 2015. We are obligated to make monthly payments of interest with the first payment being due upon the closing of the loan, and subsequent payments beginning October 9, 2014 and continuing monthly thereafter.
IH1 2014-3: In November 2014, we completed our fourth securitization transaction (“IH1 2014-3”), in which 2014-3 IH Borrower L.P. (“S4 Borrower”), a newly-formed special purpose entity and wholly owned subsidiary of IH1, executed a loan agreement with a third-party lender. The third-party lender issued a term loan comprised of (1) six floating rate components and (2) one fixed rate component to S4 Borrower in the amount of $769,322. Of the seven components, the Class B and G certificates were sold at par; however, the Class A, C, D, E and F certificates were sold at a total discount of $7,235. The unamortized balance of this discount is included in mortgage loans, net on our combined and consolidated balance sheets as of December 31, 2016 and 2015. We are obligated to make monthly payments of interest with the first payment being due upon the closing of the loan, and subsequent payments beginning December 9, 2014 and continuing monthly thereafter.
IH2 2015-1: In January 2015, we completed our fifth securitization transaction (“IH2 2015-1”), in which 2015-1 IH2 Borrower L.P. (“S5 Borrower”), a newly-formed special purpose entity and wholly owned subsidiary of IH2, executed a loan agreement with a third-party lender. The third-party lender made a seven component term loan to S5 Borrower in the amount of $540,854. Six of the seven components, the Class A, B, C, D, E, and G certificates were sold at par; however, the Class F certificates were sold at a total discount of $622. The unamortized balance of this discount is included in mortgage loans, net on our combined and consolidated balance sheets as of December 31, 2016 and 2015. We are obligated to make monthly payments of interest with the first payment being due upon the closing of the loan, and subsequent payments beginning March 9, 2015 and continuing monthly thereafter.
IH2 2015-2: In April 2015, we completed our sixth securitization transaction (“IH2 2015-2”), in which 2015-2 IH2 Borrower L.P. (“S6 Borrower”), a newly-formed special purpose entity and wholly owned subsidiary of IH2, executed a loan agreement with a third-party lender. The third-party lender made a seven component term loan to S6 Borrower in the amount of $636,686. All of the components of the loan were sold at par. We are obligated to make monthly payments of interest with the first payment being due upon the closing of the loan, and subsequent payments beginning June 9, 2015 and continuing monthly thereafter.
IH2 2015-3: In June 2015, we completed our seventh securitization transaction (“IH2 2015-3”), in which 2015-3 IH2 Borrower L.P. (“S7 Borrower”), a newly-formed special purpose entity and wholly owned subsidiary of IH2, executed a loan agreement with a third-party lender. The third-party lender made a seven component term loan to S7 Borrower in the amount of $1,193,950. All of the components of the loan were sold at par. We are obligated to make monthly payments of interest with the first payment being due upon the closing of the loan, and subsequent payments beginning August 7, 2015 and continuing monthly thereafter.
Concurrent with the execution of each loan agreement, the respective third-party lender sold each loan it originated with us to individual depositor entities (the “Depositor Entities”) who subsequently transferred each loan to Securitization-specific trust entities (the “Trusts”). The Depositor Entities associated with the IH1 2014-2 and IH1 2014-3 securitizations are wholly owned subsidiaries of IH1, the Depositor Entities associated with the IH2 2015-1, IH2 2015-2, and IH2 2015-3 securitizations are wholly owned subsidiaries of IH2, and the Depositor Entities associated with the IH1 2013-1 and IH1 2014-1 securitizations are wholly owned by unaffiliated third parties.
We accounted for the transfer of the individual Securitizations from the Depositor Entities wholly owned by IH1 and IH2 to the respective Trusts as a sale under ASC Topic 860, Transfers and Servicing, with no resulting gain or loss as the Securitizations were both originated by the lender and immediately transferred at the same fair market value.
F-25
INVITATION HOMES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands)
As consideration for the transfer of each loan to the Trusts, the Trusts issued certificate classes which mirror the components of the individual loan agreements (collectively, the “Certificates”) to the Depositor Entities, except that Class R certificates do not have related loan components as they represent residual interests in the Trusts. The Certificates represent the entire beneficial interest in the Trusts. Following receipt of the Certificates, the Depositor Entities sold the Certificates to investors using the proceeds as consideration for the loans sold to the Depositor Entities by the lenders. These transactions had no effect on our combined and consolidated financial statements other than with respect to the Class G certificates purchased by IH1 and IH2.
For IH1 2014-2, IH1 2014-3, IH2 2015-1, IH2 2015-2, and IH2 2015-3, the Trusts made the Class A through Class F certificates available for sale to both domestic and foreign investors. With the introduction of foreign investment, IH1 and IH2, as sponsors of the respective loans, are required to retain a portion of the risk that represents a material net economic interest in each loan. The Class G certificates for IH1 2014-2, IH1 2014-3, IH2 2015-1, IH2 2015-2, and IH2 2015-3 are equal to 5% of the original principal amount of the loans in accordance with the agreements. Per the terms of the Securitization agreements, the Class G certificates are restricted certificates and were made available exclusively to IH1 and IH2, as applicable. The Class G certificates are principal only and bear a stated annual interest rate of 0.0005%. The Class G certificates are classified as held to maturity investments and are recorded in other assets, net in the combined and consolidated balance sheets (see Note 5).
The Trusts are structured as pass through entities that receive principal and interest from the Securitizations and distribute those payments to the holders of the Certificates. The assets held by the Trusts are restricted and can only be used to fulfill the obligations of those entities. The obligations of the Trusts do not have any recourse to the general credit of any entities in these combined and consolidated financial statements. We have evaluated our interests in the Class G certificates of the Trusts and determined that they do not create a more than insignificant variable interest in the Trusts. Additionally, the Class G certificates do not provide us with any ability to direct the activities that could impact the Trusts’ economic performance. Therefore, we do not consolidate the Trusts.
General Terms
The general terms that apply to all of the mortgage loans require us to maintain compliance with certain affirmative and negative covenants. Affirmative covenants with which we must comply include our, and certain of our affiliates’, compliance with (i) licensing, permitting and legal requirements specified in the loan agreement, (ii) organizational requirements of the jurisdictions in which we, and certain of our affiliates, are organized, (iii) federal and state tax laws, and (iv) books and records requirements specified in the respective loan agreements. Negative covenants with which we must comply include our, and certain of our affiliates’, compliance with limitations surrounding (i) the amount of our indebtedness and the nature of our investments, (ii) the execution of transactions with affiliates, (iii) the Manager, and (iv) the nature of our business activities. At December 31, 2016, and through the date our financial statements were issued, we believe we were in compliance with all affirmative and negative covenants.
Prepayments
For the mortgage loans, prepayments of amounts owed are generally not permitted by us under the terms of the respective loan agreements unless such prepayments are made pursuant to the voluntary election and mandatory provisions specified in such agreements. The specified mandatory provisions become effective to the extent that a property becomes characterized as a disqualified property, a property is sold, and/or upon the occurrence of a condemnation or casualty event associated with a property. To the extent either a voluntary election is made, or a mandatory prepayment condition exists, in addition to paying all interest and principal, we must also pay certain breakage costs as determined by the loan servicer and a spread maintenance premium if prepayment occurs before the month following the one year anniversary of the closing dates of the mortgage loans. For the years ended December 31, 2016 and 2015, mandatory prepayments of $42,099 and $13,173, respectively, were made under the terms of the loan agreements. No prepayments were made for the year ended December 31, 2014.
F-26
INVITATION HOMES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands)
Collateral
Collateral for the mortgage loans includes first priority mortgages on certain of our properties and a grant of a security interest in all of our personal property. The following table lists the gross carrying values of the single-family residential properties pledged as collateral for the loans as of December 31, 2016 and 2015:
| Number of Homes(1) | December 31, 2016 | December 31, 2015 | |||||||||
| IH1 2013-1 | 3,185 | $ | 533,005 | $ | 535,079 | ||||||
| IH1 2014-1 | 6,326 | 1,124,069 | 1,140,370 | ||||||||
| IH1 2014-2 | 3,669 | 785,459 | 795,784 | ||||||||
| IH1 2014-3 | 3,997 | 850,056 | 852,067 | ||||||||
| IH2 2015-1 | 3,021 | 594,155 | 595,494 | ||||||||
| IH2 2015-2 | 3,520 | 744,070 | 740,547 | ||||||||
| IH2 2015-3 | 7,182 | 1,382,683 | 1,377,551 | ||||||||
| Total | 30,900 | $ | 6,013,497 | $ | 6,036,892 |
| (1) | The loans are secured by first priority mortgages on portfolios of single-family residential properties owned by S1 Borrower, S2 Borrower, S3 Borrower, S4 Borrower, S5 Borrower, S6 Borrower, and S7 Borrower. The numbers of homes noted above are as of December 31, 2016. As of December 31, 2015, a total of 31,224 homes were secured by the above-mentioned mortgage loans. |
Debt Maturities Schedule
Future maturities of these mortgage loans as of December 31, 2016 are set forth in the table below:
| Year | Principal(1) | |||
| 2017 | $ | 4,732,676 | ||
| 2018 | 531,373 | |||
| Total payments | 5,264,049 | |||
| Less discounts | (55 | ) | ||
| Less deferred financing costs, net | (9,256 | ) | ||
| Total mortgage loans, net | $ | 5,254,738 |
| (1) | Each mortgage loan is subject to three one-year extension options at the borrower's discretion, of which the IH1 2014-1, IH1 2014-2 and IH1 2014-3 mortgage loans have exercised the first extension options, and IH1 2013-1 has exercised the second extension option. |
Warehouse Loans
The Invitation Homes Partnerships entered into unsecured warehouse loan agreements with BREP VII and Affiliates. Interest accrued at rates based on a spread to LIBOR, and any unpaid interest amounts were compounded into the remaining unpaid principal balance on a monthly basis. All of the warehouse loans were repaid in full during the year ended December 31, 2016.
F-27
INVITATION HOMES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands)
The following table sets forth a summary of the outstanding principal amounts under such loans as of December 31, 2016 and 2015:
| Origination Date | Maturity Date | December 31, 2016 | December 31, 2015 | |||||||||
| IH3 warehouse loan(1) | March 26, 2014 | December 31, 2017 | $ | — | $ | 38,137 | ||||||
| IH4 warehouse loan(1) | May 7, 2014 | May 6, 2015 | — | 4,740 | ||||||||
| IH5 warehouse loan(2) | April 27, 2015 | April 26, 2016 | — | 71,146 | ||||||||
| Total warehouse loans | $ | — | $ | 114,023 |
| (1) | This loan bore interest at LIBOR + 275 basis points. The loan was repaid in full during the year ended December 31, 2016. |
| (2) | This loan bore interest at LIBOR + 250 basis points. The loan was repaid in full during the year ended December 31, 2016. |
Note 7—Derivative Instruments
From time to time, we enter into derivative instruments to manage the economic risk of changes in interest rates. We do not enter into derivative transactions for speculative or trading purposes. Non-designated hedges are derivatives that do not meet the criteria for hedge accounting or for which we did not elect to designate as accounting hedges. As of December 31, 2016, all of our derivative instruments are non-designated hedges. As such, changes in the fair value of our non-designated derivatives are recorded in interest expense in the accompanying combined and consolidated statements of operations.
Concurrent with entering into the mortgage loan agreements, we entered into and now maintain interest rate cap agreements with terms and notional amounts equivalent to the terms and amounts of the loans made by the third-party lenders and strike prices equal to approximately 3.46% for IH1 2013-1, 3.82% for IH1 2014-1, 3.09% for IH1 2014-2, 2.59% for IH1 2014-3, 2.07% for IH2 2015-1, 2.71% for IH2 2015-2, and 2.52% for IH2 2015-3 (collectively, the “Strike Prices”). To the extent that the maturity date of one or more of the loans is extended through an exercise of one or more of the extension options, replacement or extension interest rate cap agreements must be executed with terms similar to those associated with the initial interest rate cap agreements and strike prices equal to the greater of the Strike Prices and the interest rate at which the debt service coverage ratio (as defined) is not less than 1.2 to 1.0. The interest rate cap agreements, including all of our rights to payments owed by the counterparty and all other rights, have been pledged as additional collateral for the loans. As of December 31, 2016 and 2015, interest rate caps had a carrying value of $0 and $101, respectively.
On December 21, 2016, the Operating Partnership entered into forward interest rate swap agreements with two financial institutions for an aggregate notional amount of $1,500,000 to hedge the risk arising from changes in one-month LIBOR. The interest rate swaps began February 28, 2017, mature January 31, 2022, and will effectively convert one-month LIBOR interest payments to a fixed rate of 1.97%. Certain of the Invitation Homes Partnerships and certain Borrower Entities have guaranteed the Operating Partnership’s obligations under the interest rate swaps. For the year ended December 31, 2016, unrealized losses of $8,683, are included in interest expense in the combined and consolidated statements of operations for our non-designated interest rate swap instruments. There were no interest rate swaps outstanding for the years ended December 31, 2015 and 2014. As a result of the Pre-IPO Transactions described in Note 1, we have designated these swaps for hedge accounting purposes; and the effective portion thereof will be recorded in other comprehensive income as of January 31, 2017.
F-28
INVITATION HOMES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands)
The table below summarizes our interest rate swap instruments as of December 31, 2016:
| Counterparty | Notional Amount | Forward Effective Date | Maturity Date | Strike Rate | Index | ||||||||
| Wells Fargo Bank, N.A. | $ | 750,000 | February 28, 2017 | January 31, 2022 | 1.97 | % | One-month LIBOR | ||||||
| Bank of America, N.A. | 750,000 | February 28, 2017 | January 31, 2022 | 1.97 | % | One-month LIBOR |
See Note 11 for the details of fair value for the swaps as of December 31, 2016 and 2015. Subsequent to December 31, 2016, we entered into additional interest rate swap agreements as more fully described in Note 14.
Note 8—Equity
As described in Note 1, IH1, IH3, IH4, IH5, and IH6 are partnerships. These entities each have limited partners and a general partner (the “Class A Partners”), along with a board of directors designated in the respective limited partnership agreements.
IH2 is a Delaware corporation and has issued 1,000 shares of common stock and 113 shares of Series A Preferred Stock. IH2 has a board of directors elected by the common stockholders.
The same board of directors is responsible for directing the significant activities of the Invitation Homes Partnerships and the Operating Partnership on a combined basis.
The IH2 Series A Preferred Stock ranks, in respect of rights to the payment of dividends and the distribution of assets in the event of any liquidation or dissolution, senior to the IH2 common stock. Holders of such IH2 Series A Preferred Stock shares are entitled to receive, when and if declared by our board of directors, cumulative cash dividends at the rate of 12.0% per annum of the total of a liquidation preference plus all accumulated and unpaid dividends thereon as defined in the IH2 organizational documents. During the year ended December 31, 2014, IH2 issued 113 shares of Series A Preferred Stock for $1,130. During the years ended December 31, 2016, 2015, and 2014, IH2 made dividend payments of $136, $136, and $127 respectively, to the holders thereof. As of December 31, 2016 and 2015, there are no dividend amounts declared and outstanding related to the 12.0% per annum dividend requirements of the Series A Preferred Stock. Holders of the Series A Preferred Stock have no voting rights, and shares of such series are not convertible or exchangeable into common stock or other series of preferred stock that may from time to time be designated by our board of directors. They may, however, be redeemed at our sole discretion, in whole or in part, subject to certain provisions within the IH2 organizational documents. On January 31, 2017, in connection with the Pre-IPO Transactions, the Series A Preferred Stock was redeemed for $1,153, inclusive of the redemption premium and accrued and unpaid dividends to that date.
As further described in Note 10, we have granted certain individuals incentive compensation units in IH1, IH2, IH3, IH4, IH5, and IH6, which currently consists of Class B units that are accounted for as a substantive class of equity due to the terms of the agreements and rights of the holders.
Profits and losses, and cash distributions are allocated in accordance with the terms of the respective entity’s organizational documents.
During the years ended December 31, 2016, 2015, and 2014, we made distributions, including common stock dividends, of $0, $682,470, and $776,448, respectively. We also made distributions to certain Class B unitholders in the form of non-recourse cash advances totaling $11,023 during the year ended December 31, 2014. Any amounts distributed to the holders of the Class B units in the event of a liquidating event will be reduced by amounts previously paid to such Class B unitholders as advance distributions.
We executed notes receivables with certain Class B unitholders (the “Class B Notes”) and funded $0, $1,500, and $18,728 during the years ended December 31, 2016, 2015, and 2014, respectively, pursuant to those note agreements. The Class B Notes are secured by certain of the Class B units of the makers of the Class B Notes and are otherwise non-recourse to the makers. The Class B Notes mature the earlier of a liquidation event or defined dates in 2024 and bear interest of 1.57% to 1.97% per annum. As such, the Class B Notes have been recorded as a component of combined equity in our combined and consolidated balance sheets as of December 31, 2016 and 2015. Additionally, the non-recourse nature of the Class B Notes resulted in modifications to the Class B management subscription incentive unit agreements, which resulted in
F-29
INVITATION HOMES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands)
additional incentive unit expense being recorded for the years ended December 31, 2016, 2015, and 2014, with respect to the Class B Notes (see Note 10). Class B Note repayments of $1,527 were received during the year ended December 31, 2016. No such repayments were made for the years ended December 31, 2015 and 2014.
Note 9—Related Party Transactions
On October 1, 2012, the Manager entered into a services agreement with CAS Residential, LLC, a related party affiliated with certain of our equity investors, who provided property accounting services to the Manager pursuant to a services agreement. This agreement provided for fees based upon a full reimbursement of actual expenses incurred, as well as an additional 10.0% of compensation costs less any severance payments. The agreement was terminated effective October 31, 2014. For the year ended December 31, 2014, we incurred $4,049 of service fees pursuant to the terms of the services agreement which is included in property management expense in the combined and consolidated statements of operations.
Through December 31, 2014, certain related parties provided us with consulting services for which we recorded payables. We also made offsetting income tax payments related to distributions on behalf of these related parties. On December 31, 2015, net payables to related parties were $1,959 and are included in accounts payable and accrued expenses in our combined and consolidated balance sheet. All amounts were repaid during the year ended December 31, 2016.
Note 10—Incentive Compensation Units
IH1, IH2, IH3, IH4, and IH5 have incentive compensation unit programs for the purpose of retaining certain key employees of the Manager. Under these programs, certain individuals were granted incentive compensation units, which originally consisted of two classes of interests for IH1, IH2, and IH3 (Class B Units and Class C Units, collectively the “Units”). The Units are profits interests for United States federal income tax purposes, and certain Units were issued in exchange for nominal contributions. Due to the terms of the agreements with each Class B and Class C Unit holder and each parties’ respective rights thereunder, we account for the Class B and Class C Units as a substantive class of equity.
On May 30, 2014, pursuant to amended and restated limited partnership agreements for IH1, IH2, and IH3 and upon the execution of certain exchange and separation agreements, the Class C Units were converted to Class B Units. Pursuant to an amended and restated partnership agreement dated February 25, 2016, IH5 was authorized to issue Class B Units and 9,996 were issued during the year ended December 31, 2016. IH1, IH2, IH3, IH4, and IH5 are each authorized to issue 10,000 Class B Units.
The Units generally vest pro rata on an annual basis over a three to five year period pursuant to provisions of the individual incentive unit agreements. For IH1, because the Units were granted to employees of the Manager, which is a wholly-owned subsidiary of IH1, noncash incentive compensation expense is calculated based on the grant date fair value of the Units and is recognized in expense over the service period. Additional compensation expense is recognized if modifications to existing incentive unit agreements result in an increase in the post-modification fair value of the Class B Units that exceeds their pre-modification fair value. For IH2, IH3, IH4, and IH5, the Units were granted to non-employees of the issuing entities. As such, noncash incentive compensation expense is initially recorded based on the estimated fair value of the Units at grant date and recognized in expense over the service period. Fair value is subsequently re-measured for the unvested units at the end of each reporting period.
Certain of the Units are performance-based units that only vest upon the occurrence of a liquidity event. Compensation cost for performance based units is recognized when it is probable that the performance condition will be achieved. No compensation expense has been recognized for performance-based units in 2016, 2015, and 2014 as the liquidity event was not considered probable of occurring.
F-30
INVITATION HOMES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands)
The following tables summarize awards and activity of the Units for the years ended December 31, 2016, 2015, and 2014:
| Class B Units | |||||||||||||||||||||
| Employee | Non-employee | Total Class B Units | |||||||||||||||||||
| Number of Units | Weighted Average Fair Value | Number of Units | Weighted Average Fair Value | Number of Units | Weighted Average Fair Value | ||||||||||||||||
| Units outstanding January 1, 2014 | 8,855 | $ | 4.1 | 15,678 | $ | 14.5 | 24,533 | $ | 10.7 | ||||||||||||
| Conversion of Class C Units | 378 | 0.7 | — | — | 378 | 0.7 | |||||||||||||||
| Granted | 1,904 | 7.4 | 10,119 | 2.7 | 12,023 | 3.5 | |||||||||||||||
| Forfeited | (1,420 | ) | (4.1 | ) | (274 | ) | (12.5 | ) | (1,694 | ) | (5.5 | ) | |||||||||
| Units outstanding December 31, 2014 | 9,717 | 4.6 | 25,523 | 4.5 | 35,240 | 4.5 | |||||||||||||||
| Granted | 300 | 10.1 | 4,321 | 1.4 | 4,621 | 1.9 | |||||||||||||||
| Forfeited | (85 | ) | (9.4 | ) | (179 | ) | (2.1 | ) | (264 | ) | (4.4 | ) | |||||||||
| Units outstanding December 31, 2015 | 9,932 | 4.6 | 29,665 | 3.5 | 39,597 | 3.8 | |||||||||||||||
| Granted | 90 | 13.1 | 10,442 | 0.7 | 10,532 | 0.8 | |||||||||||||||
| Forfeited/Canceled | (107 | ) | (4.4 | ) | (469 | ) | (0.5 | ) | (576 | ) | (1.2 | ) | |||||||||
| Units outstanding December 31, 2016(1) | 9,915 | $ | 4.2 | 39,638 | $ | 2.5 | 49,553 | $ | 2.9 |
| (1) | Included in units outstanding are 6,879 performance-based units at December 31, 2016. |
| Class C Units | |||||||||||||||||||||
| Employee | Non-employee | Total Class B Units | |||||||||||||||||||
| Number of Units | Weighted Average Fair Value | Number of Units | Weighted Average Fair Value | Number of Units | Weighted Average Fair Value | ||||||||||||||||
| Units outstanding January 1, 2014 | 7,100 | $ | 2.8 | 14,250 | $ | 3.7 | 21,350 | $ | 3.4 | ||||||||||||
| Conversion of Class C Units | (7,100 | ) | (2.8 | ) | (14,250 | ) | (3.7 | ) | (21,350 | ) | (3.4 | ) | |||||||||
| Units outstanding December 31, 2014 | — | $ | — | — | $ | — | — | $ | — |
As of December 31, 2016 and 2015, 37,214 and 26,234, respectively, of Class B Units were fully vested. The estimated fair value of the 10,980 Units that vested during the year ended December 31, 2016 was $21,460. No Units are exercisable as the Units are only entitled to distributions after certain return thresholds are achieved.
F-31
INVITATION HOMES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands)
The fair value of the Units was estimated as of December 31, 2016 and 2015 using an income approach based on discounted cash flows and a market approach based on comparable companies and transactions. Significant inputs and assumptions utilized in applying these valuation approaches include discount rates, terminal capitalization rates, market rent growth rates, expense growth rates and revenue and EBITDA multiples of companies who we deemed to be comparable to us. These fair value estimates were then utilized in an Invitation Homes entity specific Monte-Carlo option pricing model for purposes of deriving a per unit fair value. The following table summarizes the significant inputs utilized in this model:
| December 31, 2016 | December 31, 2015 | |||
| Expected volatility(1) | 30%-42% | 27%-34% | ||
| Risk-free rate | 0.34% | 1.31% | ||
| Expected holding period (years) | 0.3 | 3.0 |
| (1) | Expected volatility is estimated based on the leverage adjusted historical volatility of certain of our peer companies over a historical term commensurate with the remaining expected holding period. |
During the years ended December 31, 2016, 2015, and 2014, we recognized $10,210, $27,924, and $24,335, respectively, of noncash incentive compensation expense, of which $10,014, $23,758, and $19,318, respectively, was recorded in general and administrative expense, and $196, $4,166, and $5,017, respectively, was recorded in property management expense. During the year ended December 31, 2016, we purchased at fair value and subsequently canceled certain Class B units from a unitholder totaling $1,527 which is reflected as compensation expense in general and administrative expense. At December 31, 2016, there was $1,608 of unrecognized incentive unit compensation expense related to unvested units (excluding performance-based units), which is expected to be recognized over a weighted average period of between one and two years depending on the respective partnership.
Note 11—Fair Value Measurements
The carrying amounts of restricted cash, certain components of other assets, accounts payable and accrued expenses, resident security deposits, and other liabilities approximate fair value due to the short maturity of these amounts. Our interest rate swap agreements are the only financial instruments recorded at fair value on a recurring basis within our combined and consolidated financial statements as more fully described in Note 7.
F-32
INVITATION HOMES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands)
The following table displays the carrying values and fair values of financial instruments as of December 31, 2016 and 2015:
| December 31, 2016 | December 31, 2015 | |||||||||||||||||
| Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||||
| Assets carried at historical cost on the combined and consolidated balance sheets | ||||||||||||||||||
| Investments in debt securities | Level 2 | $ | 209,337 | $ | 209,390 | $ | 193,045 | $ | 193,045 | |||||||||
| Interest rate caps | Level 2 | — | 29 | 101 | 101 | |||||||||||||
| Liabilities carried at historical cost on the combined and consolidated balance sheets | ||||||||||||||||||
| Credit facilities(1) | Level 3 | $ | 2,321,585 | $ | 2,329,551 | $ | 2,355,948 | $ | 2,324,249 | |||||||||
| Mortgage loans(2) | Level 2 | 5,263,994 | 5,265,180 | 5,305,911 | 5,194,530 | |||||||||||||
| Warehouse loans | Level 3 | — | — | 114,023 | 114,023 | |||||||||||||
| Interest rate swaps | Level 2 | 8,683 | 8,683 | — | — |
| (1) | The carrying values of the credit facilities exclude $6,044 and $8,207 of deferred financing costs as of December 31, 2016 and 2015, respectively. |
| (2) | The carrying values of the mortgage loans are shown net of discount and exclude $9,256 and $41,718 of deferred financing costs as of December 31, 2016 and 2015, respectively. |
The fair values of our investments in debt securities and of our mortgage loans, which are classified as Level 2 in the fair value hierarchy, are estimated based on market bid prices of comparable instruments at the end of the period. The fair values of our interest rate caps and swaps, which are classified as Level 2 in the fair value hierarchy, are estimated using market values of instruments with similar attributes and maturities.
The fair values of our credit facilities and warehouse loans, which are classified as Level 3 in the fair value hierarchy, are estimated using a discounted cash flow methodology based on market interest rate data and other market factors available at the end of the period.
Our assets measured at fair value on a nonrecurring basis are those assets for which we have recorded impairments. See Note 2 for information regarding significant considerations used to estimate the fair value of our investments in single-family residential properties. The assets for which we have recorded impairments, measured at fair value on a nonrecurring basis, are summarized below:
| Year Ended December 31, | ||||||||||||
| Investments in single-family residential properties, net held for use (Level 3) | 2016 | 2015 | 2014 | |||||||||
| Pre-impairment amount | $ | 3,066 | $ | 2,230 | $ | 467 | ||||||
| Total impairments | (955 | ) | (1,448 | ) | (423 | ) | ||||||
| Fair value | $ | 2,111 | $ | 782 | $ | 44 |
F-33
INVITATION HOMES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands)
| Year Ended December 31, | ||||||||||||
| Investments in single-family residential properties, net held for sale (Level 3) | 2016 | 2015 | 2014 | |||||||||
| Pre-impairment amount | $ | 6,938 | $ | — | $ | — | ||||||
| Total impairments | (1,327 | ) | — | — | ||||||||
| Fair value | $ | 5,611 | $ | — | $ | — |
For additional information related to our single-family residential properties during the years ended December 31, 2016 and 2015, refer to Note 3.
Note 12—Commitments and Contingencies
Leasing Commitments
From time to time, the Manager enters into lease agreements with third parties for purposes of obtaining office and other administrative space. During the years ended December 31, 2016, 2015, and 2014, we incurred rent and other related occupancy expenses of $4,883, $4,510, and $5,334 respectively. Annual base rental commitments associated with these leases, excluding operating expense reimbursements, month-to-month lease payments and other related fees and expenses during the remaining lease terms are as follows:
| Year | Payments | |||
| 2017 | $ | 1,875 | ||
| 2018 | 1,316 | |||
| 2019 | 1,316 | |||
| 2020 | 1,316 | |||
| 2021 | 1,172 | |||
| Thereafter | 239 | |||
| Total | $ | 7,234 |
Insurance Policies
Pursuant to the terms of our credit facility agreements and mortgage loan agreements (see Note 6), laws and regulations of the jurisdictions in which our properties are located, and general business practices, we are required to procure insurance on our properties. For the years ended December 31, 2016, 2015, and 2014, no material uninsured losses have been incurred with respect to the properties.
Supplemental Bonus Plan
In October 2016, we established a supplemental bonus plan for certain key executives and employees (the “Supplemental Bonus Plan”). The payment of a bonus under the Supplemental Bonus Plan is triggered upon an initial public offering or exit event. The board of directors has the ability to determine whether the bonus will be paid in stock or cash. As an IPO was not considered probable of occurring, no amounts have been recorded in our combined and consolidated financial statements as of and for the year ended December 31, 2016 (see Note 14 for information about settlement of the Supplemental Bonus Plan).
Legal Matters
We are subject to various legal proceedings and claims that arise in the ordinary course of our business. We accrue a liability when we believe that it is both probable that a liability has been incurred and that we can reasonably estimate the amount of the loss. We do not believe that the final outcome of these proceedings or matters will have a material adverse effect on our combined and consolidated financial statements.
F-34
INVITATION HOMES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands)
Note 13—Summarized Quarterly Financial Data (Unaudited)
The following table presents summarized condensed combined and consolidated quarterly financial data for each of the eight quarters in the two year period ended December 31, 2016.
| Quarter | |||||||||||
| 2016 | First | Second | Third | Fourth | |||||||
| Total revenues | $224,502 | $230,496 | $233,038 | $234,551 | |||||||
| Net loss | (9,975 | ) | (19,666 | ) | (21,949 | ) | (26,649 | ) | |||
| Net loss attributable to Invitation Homes shareholders | (9,975 | ) | (19,666 | ) | (21,949 | ) | (26,649 | ) | |||
| Net loss per share, basic and diluted | N/A | N/A | N/A | N/A | |||||||
| Shares used in calculation - basic and diluted | N/A | N/A | N/A | N/A |
| Quarter | |||||||||||
| 2015 | First | Second | Third | Fourth | |||||||
| Total revenues | $197,907 | $208,125 | $213,332 | $216,685 | |||||||
| Net loss | (44,920 | ) | (45,411 | ) | (31,335 | ) | (38,542 | ) | |||
| Net loss attributable to Invitation Homes shareholders | (44,920 | ) | (45,411 | ) | (31,335 | ) | (38,542 | ) | |||
| Net loss per share, basic and diluted | N/A | N/A | N/A | N/A | |||||||
| Shares used in calculation - basic and diluted | N/A | N/A | N/A | N/A |
Note 14—Subsequent Events
In connection with the preparation of the accompanying combined and consolidated financial statements, we have evaluated events and transactions occurring after December 31, 2016, for potential recognition or disclosure.
Issuance of Class B Incentive Units and Grant of Bonus Awards
Pursuant to an amended and restated partnership agreement, in January 2017, IH6 issued certain individuals a total of 9,650 Class B Units with similar terms and vesting conditions to the Class B Units described in Note 10. In addition to the Class B Units, these individuals were also granted bonus awards (the “IH6 Bonus Awards”) equal to $0.5 multiplied by the total number of IH6 Units received, entitling the recipients to receive bonus payments in connection with an IPO or exit event. As a result of the IPO of Invitation Homes Inc., these bonus awards were paid in common stock as more fully described below. Furthermore, an additional 188 Units in total were issued from IH1, IH2, and IH3.
Class B Note Cancelation
On January 5, 2017, we canceled $7,723, including accrued interest, of the Class B Notes, resulting in a Class B distribution.
Initial Public Offering
On February 6, 2017, Invitation Homes Inc. completed an IPO of 88,550,000 shares of common stock at a price to the public of $20.00 per share, generating net proceeds from the sale of its shares of approximately $1,667,000, after deducting underwriting discounts and offering expenses (the “Net IPO Proceeds”). An additional 225,116,760 shares of common stock were issued to the Pre-IPO Owners, including shares held by directors, officers, and employees pursuant to the Pre-IPO Transactions described in Note 1.
F-35
INVITATION HOMES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands)
As a result of the Pre-IPO Transactions described in Note 1 and the Invitation Homes Inc. IPO, several events occurred that will impact our combined and consolidated financial statements during 2017:
| • | Equity: On January 31, 2017, Invitation Home Inc. issued 313,666,760 shares of common stock, including underlying restricted stock units that were granted to directors, officers, and employees, and we redeemed the IH2 Series A Preferred Stock for $1,153, inclusive of the redemption premium and accrued and unpaid dividends to that date. As part of the Pre-IPO Transactions, IH1 assigned $11,963, including accrued interest, of Class B Notes Receivable and $136 of Class A subscriptions receivable to a wholly owned subsidiary of the Pre-IPO Owners that was formed in connection with the reorganization described in Note 1. |
| • | Debt: On February 6, 2017, we drew $1,500,000 on the term loan component (the “Term Loan Proceeds”) of the New Credit Facility, as defined below. Concurrently with the receipt of the Term Loan Proceeds, we used those funds together with the Net IPO Proceeds and $78,977 of releases from restricted cash reserves to repay the following outstanding indebtedness: (i) the entire balance on our existing credit facilities ($2,321,585 as of December 31, 2016); (ii) the entire balance on the IH1 2013-1 mortgage loan ($462,431 as of December 31, 2016); and (iii) $291,500 of the balance on the IH1 2014-1 mortgage loan. On March 9, 2017, we made an additional $260,000 repayment on the IH1 2014-1 mortgage loan from these same sources of cash. |
| • | Incentive Units and Other Stock Compensation: In connection with the Invitation Homes Inc. IPO, common stock or restricted stock units were issued with respect to certain holders of the Class B Units, the Supplemental Bonus Plan, and the IH6 Bonus Awards, as well as to certain directors. In all cases, the number of shares or restricted stock units received was determined in a manner intended to replicate the respective economic value associated with the corresponding dollar value of the award based on a valuation derived from the per share price of common stock sold to the public in the Invitation Homes Inc. IPO. |
| • | Class B Units: The Pre-IPO Transactions resulted in accelerated vesting of 6,482 Class B Units, including 5,358 performance-based Class B Units, held by certain unitholders. In connection with the IPO, all of the Units held by current employees of the Manager (except for 3,878 fully vested Units awarded to a certain unitholder) were either converted into shares of Invitation Homes Inc. common stock or canceled based on whether or not the per share price of common stock sold to the public in the IPO created value in the specific profits interests. As such, a total of 3,060 Units were converted into shares of common stock with an initial value of $1,251, and 15,339 Units were canceled. For the Units converted into Invitation Homes Inc. common stock, vesting and other terms of the shares delivered in the conversion have the same vesting and other terms applicable to the corresponding Units converted. |
Additionally, the obligations under the remaining 40,992 fully vested Units, including those of the unitholders who are not current employees of the Manager and the one employee unitholder noted above that did not convert, were converted into similar units of newly formed subsidiaries of the Pre-IPO Owners.
| • | Supplemental Bonus Plan: Pursuant to the Supplemental Bonus plan, the awards became payable and the payment amount became determinable upon the completion of the IPO. The $59,580 of awards were settled in time-vesting restricted stock units that will generally vest in three equal annual installments, commencing on the completion of the Invitation Homes Inc. IPO and then on the first and second anniversaries thereafter. |
| • | IH6 Bonus Awards: Upon completion of the Invitation Homes Inc. IPO, the IH6 Bonus Awards became payable to the recipients, and $4,825 of awards were settled in restricted stock units that were fully vested upon issuance. |
| • | Director Awards: Invitation Homes Inc. issued $1,398 of restricted stock units to directors that are not our employees or employees of BREP VII. These awards will fully vest on the date scheduled for Invitation Homes Inc.’s 2018 annual stockholders meeting, subject to the director’s continued service on the board of directors through such date. |
F-36
INVITATION HOMES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands)
New Credit Facility
On February 6, 2017, the Operating Partnership entered into a loan agreement with a syndicate of banks, financial institutions and institutional lenders for a new credit facility (the “New Credit Facility”).
The New Credit Facility provides $2,500,000 of borrowing capacity and consists of:
| • | A $1,000,000 revolving credit facility, which will mature four years from the closing date of the New Credit Facility (the “Closing Date”), with a one-year extension option; and |
| • | A $1,500,000 term loan facility, which will mature five years from the Closing Date. |
Proceeds from the New Credit Facility were used to repay existing indebtedness and for general corporate purposes. The New Credit Facility bears interest at our election of either a base rate or LIBOR plus an applicable margin. The New Credit Facility is guaranteed and secured by certain of the Invitation Homes Partnerships and certain Borrower Entities.
FNMA Loan
On January 12, 2017, one of the Borrower Entities entered into a binding commitment for a securitization transaction to fund a new ten-year fixed rate mortgage loan in a principal amount of up to $1,000,000 (the “FNMA Loan”), collateralized by certain of our homes. The commitment letter contemplates that the FNMA Loan will be funded through the issuance and sale of (i) mortgage backed certificates that carry Fannie Mae’s guaranty of timely payment of principal and interest (the “Guaranteed Certificates”) and (ii) certain mortgage backed certificates that will represent a beneficial interest in the most subordinate component of the FNMA Loan (the “Subordinate Non-Guaranteed Certificates”). In connection with the FNMA Loan, we will purchase and retain the Subordinate Non-Guaranteed Certificates at par. The proceeds from the FNMA Loan will be used to repay existing indebtedness. The FNMA Loan will bear interest at a fixed rate per annum equal to the market determined pass-through rate payable on the Guaranteed Certificates plus applicable Fannie Mae guaranty and servicing fees. The FNMA Loan would generally be non-recourse, subject to certain customary carve-outs in respect of which the Operating Partnership or IH1 will provide a guarantee or indemnity.
Interest Rate Swaps
On January 12, 2017, the Operating Partnership entered into a forward interest rate swap agreement for a notional amount of $1,100,000 to hedge the interest rate risk related to changes in one-month LIBOR. The interest rate swap began February 28, 2017, matures August 7, 2020, and will effectively convert our variable base rate of one-month LIBOR interest payments to a fixed rate of 1.59%. Certain of the Invitation Homes Partnerships and certain Borrower Entities have guaranteed the Operating Partnership’s obligations under the interest rate swap.
On January 13, 2017, the Operating Partnership entered into a forward interest rate swap agreement for a notional amount of $595,000 to hedge the interest rate risk related to changes in one-month LIBOR. The interest rate swap began February 28, 2017, matures June 9, 2020, and will effectively convert our variable base rate of one-month LIBOR interest payments to a fixed rate of 1.63%. Certain of the Invitation Homes Partnerships and certain Borrower Entities have guaranteed the Operating Partnership’s obligations under the interest rate swap.
On January 20, 2017, the Operating Partnership entered into a forward interest rate swap agreement for a notional amount of $325,000 to hedge the interest rate risk related to changes in one-month LIBOR. The interest rate swap began February 28, 2017, matures March 9, 2020, and will effectively convert our variable base rate of one-month LIBOR interest payments to a fixed rate of 1.60%. Certain of the Invitation Homes Partnerships and certain Borrower Entities have guaranteed the Operating Partnership’s obligations under the interest rate swap.
These interest rate swap agreements were accounted for as non-designated hedges until January 31, 2017 when they began qualifying for hedge accounting as a result of the Pre-IPO Transactions described in Note 1. At that time, we designated these swaps for hedge accounting purposes; and the effective portion thereof will be recorded in other comprehensive income as of January 31, 2017.
F-37
INVITATION HOMES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands)
Residential Property Dispositions
On February 10, 2017, we executed a bulk sale disposition of 235 homes with a net carrying amount of $21,999 as of December 31, 2016, for an aggregate net sales price of $29,861. A portion of the proceeds were used to make various repayments on our mortgage loans totaling $7,734. At December 31, 2016, these properties were classified as held for sale in other assets, net on our combined and consolidated balance sheet.
In addition to this bulk sale disposition, between January 1, 2017 and March 24, 2017, we disposed of an additional 239 properties with a net carrying amount of $33,836 as of December 31, 2016, for an aggregate net sales price of $41,120. A portion of the proceeds were used to make various repayments on our mortgage loans totaling $8,664. At December 31, 2016, 127 of these properties were classified as held for sale and presented in other assets, net and 112 were classified as investments in single-family residential properties on our combined and consolidated balance sheet.
On March 29, 2017, we executed a purchase and sale agreement for the disposition of 220 homes with a net carrying amount of $19,279 as of December 31, 2016, for an aggregate sales price of $21,868, subject to customary terms and conditions.
Extensions of Existing Mortgage Loans
On February 9, 2017, we exercised our first extension option on the IH2 2015-1 mortgage loan, extending the maturity date from March 9, 2017 to March 9, 2018.
On March 9, 2017, we submitted a notification to request an extension of the maturity of the IH2 2015-2 mortgage loan from June 9, 2017 to June 9, 2018 upon approval.
F-38
INVITATION HOMES
Schedule III Real Estate and Accumulated Depreciation
As of December 31, 2016
(dollar amounts in thousands)
| Initial cost to company | Cost capitalized subsequent to acquisition | Gross amount at which carried at close of period | ||||||||||||||||||||||||||||||||||||||||||||||
| Market | Number of Properties(1) | Number of Encumbered Properties(2) | Encumbrances(2) | Land | Depreciable Properties | Land | Depreciable Properties | Land | Depreciable Properties | Total(3) | Accumulated Depreciation | Date of construction | Date acquired | Depreciable Period | ||||||||||||||||||||||||||||||||||
| Atlanta | 7,504 | 7,392 | $ | 847,416 | $ | 170,885 | $ | 771,912 | $ | — | $ | 188,217 | $ | 170,885 | $ | 960,129 | $ | 1,131,014 | $ | (104,586 | ) | 1920-2016 | 2012-2016 | 7-28.5 years | ||||||||||||||||||||||||
| Charlotte | 3,097 | 3,017 | 369,187 | 117,348 | 299,086 | — | 67,795 | 117,348 | 366,881 | 484,229 | (37,702 | ) | 1900-2015 | 2012-2016 | 7-28.5 years | |||||||||||||||||||||||||||||||||
| Chicago | 2,944 | 2,930 | 531,049 | 181,811 | 351,188 | — | 148,370 | 181,811 | 499,558 | 681,369 | (54,573 | ) | 1849-2012 | 2012-2016 | 7-28.5 years | |||||||||||||||||||||||||||||||||
| Jacksonville | 1,977 | 1,975 | 293,895 | 91,450 | 231,241 | — | 45,529 | 91,450 | 276,770 | 368,220 | (30,780 | ) | 1932-2014 | 2012-2016 | 7-28.5 years | |||||||||||||||||||||||||||||||||
| Las Vegas | 944 | 931 | 147,144 | 44,621 | 114,044 | — | 18,805 | 44,621 | 132,849 | 177,470 | (15,978 | ) | 1961-2013 | 2012-2016 | 7-28.5 years | |||||||||||||||||||||||||||||||||
| Minneapolis | 1,183 | 1,176 | 204,485 | 72,224 | 148,374 | — | 49,522 | 72,224 | 197,896 | 270,120 | (21,679 | ) | 1886-2015 | 2013-2015 | 7-28.5 years | |||||||||||||||||||||||||||||||||
| Northern California | 2,867 | 2,846 | 527,140 | 182,668 | 374,606 | — | 79,125 | 182,668 | 453,731 | 636,399 | (55,301 | ) | 1900-2012 | 2012-2016 | 7-28.5 years | |||||||||||||||||||||||||||||||||
| Orlando | 3,706 | 3,645 | 493,841 | 137,078 | 398,254 | — | 92,281 | 137,078 | 490,535 | 627,613 | (55,741 | ) | 1947-2015 | 2012-2016 | 7-28.5 years | |||||||||||||||||||||||||||||||||
| Phoenix | 5,408 | 5,219 | 592,373 | 175,228 | 462,365 | — | 106,883 | 175,228 | 569,248 | 744,476 | (74,566 | ) | 1925-2015 | 2012-2016 | 7-28.5 years | |||||||||||||||||||||||||||||||||
| Seattle | 3,175 | 3,072 | 567,205 | 253,888 | 413,514 | — | 116,459 | 253,888 | 529,973 | 783,861 | (48,619 | ) | 1890-2015 | 2012-2016 | 7-28.5 years | |||||||||||||||||||||||||||||||||
| South Florida | 5,575 | 5,505 | 1,137,196 | 531,644 | 895,237 | — | 158,083 | 531,644 | 1,053,320 | 1,584,964 | (107,204 | ) | 1922-2014 | 2012-2016 | 7-28.5 years | |||||||||||||||||||||||||||||||||
| Southern California | 4,597 | 4,492 | 1,145,440 | 547,132 | 701,584 | — | 174,933 | 547,132 | 876,517 | 1,423,649 | (103,935 | ) | 1890-2013 | 2012-2016 | 7-28.5 years | |||||||||||||||||||||||||||||||||
| Tampa | 4,930 | 4,903 | 700,150 | 197,411 | 568,621 | — | 115,429 | 197,411 | 684,050 | 881,461 | (81,666 | ) | 1945-2015 | 2012-2016 | 7-28.5 years | |||||||||||||||||||||||||||||||||
| Total | 47,907 | 47,103 | $ | 7,556,521 | $ | 2,703,388 | $ | 5,730,026 | $ | — | $ | 1,361,431 | $ | 2,703,388 | $ | 7,091,457 | $ | 9,794,845 | $ | (792,330 | ) |
| (1) | Number of properties represents 48,298 total properties owned less 391 properties classified in other assets, net on the combined and consolidated balance sheets. |
| (2) | Encumbrances include the number of properties pledged under the credit facility and the number of properties secured by first priority mortgages under the mortgage loans, as well as the aggregate value of outstanding debt attributable to such properties. Excluded from this is the original issue discount, deferred financing costs, 345 held for sale properties with an encumbered balance of $26,824, and 23 sold properties with an outstanding balance of $2,289, which was repaid subsequent to December 31, 2016. |
| (3) | The gross aggregate cost of total real estate for federal income tax purposes was approximately $9,796,006 (unaudited) as of December 31, 2016. |
F-39
INVITATION HOMES
Schedule III Real Estate and Accumulated Depreciation
(dollar amounts in thousands)
| Year Ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| Residential Real Estate | ||||||||||||
| Balance at beginning of period | $ | 9,596,399 | $ | 8,796,708 | $ | 7,049,927 | ||||||
| Additions during the period | ||||||||||||
| Acquisitions | 284,202 | 790,467 | 1,404,686 | |||||||||
| Improvements, etc. | 53,182 | 103,765 | 301,589 | |||||||||
| Other | 47,877 | 49,261 | 54,779 | |||||||||
| Deductions during the period | ||||||||||||
| Dispositions and other | (136,956 | ) | (143,802 | ) | (14,273 | ) | ||||||
| Reclassifications | ||||||||||||
| Properties held for sale | (49,859 | ) | — | — | ||||||||
| Balance at close of period | $ | 9,794,845 | $ | 9,596,399 | $ | 8,796,708 | ||||||
| Accumulated Depreciation | ||||||||||||
| Balance at beginning of period | $ | (543,698 | ) | $ | (308,155 | ) | $ | (101,227 | ) | |||
| Depreciation expense | (263,093 | ) | (245,065 | ) | (207,289 | ) | ||||||
| Dispositions and other | 9,664 | 9,522 | 361 | |||||||||
| Reclassifications | ||||||||||||
| Properties held for sale | 4,797 | — | — | |||||||||
| Balance at close of period | $ | (792,330 | ) | $ | (543,698 | ) | $ | (308,155 | ) |
F-40
Previous: Item 15. Exhibits and Financial Statement Schedules.