Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read together with Part I. Item 6. “Selected Financial Data,” Part I. Item. “Business,” and the combined and consolidated financial statements, including the notes thereto, that are included elsewhere in this Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements based upon our current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under Part I. Item 1A. “Risk Factors,” “Forward-Looking Statements,” or in other parts of this report.

Capitalized terms used without definition have the meaning provided elsewhere in this Annual Report on Form 10-K.

Overview

We are a leading owner and operator of single-family homes for lease in the United States. Our portfolio of nearly 50,000 high quality homes is wholly owned and is concentrated in attractive in-fill submarkets of major MSAs. We have selected locations with strong demand drivers, high barriers to entry and high rent-growth potential, primarily in the Western United States and Florida. Through disciplined market and asset selection, we designed our portfolio to capture the operating benefits of local density as well as economies of scale that we believe cannot be readily replicated. Since our founding in 2012, we have built a proven, vertically integrated operating platform that allows us to effectively and efficiently acquire, renovate, lease, maintain and manage our homes.

In April 2012, we began purchasing single-family rental homes, and by December 31, 2012, we owned over 11,000 homes in 12 markets. Our rapid acquisition pace continued, and by December 31, 2013 and 2014, our portfolio included approximately 39,000 and 46,000 homes, respectively, and had expanded to 13 markets across 10 states. Since inception, we have invested approximately $1,300.0 million of additional capital in the form of improvements into our homes that we still own as part of the initial renovation of acquired homes, as well as ongoing general maintenance and upkeep.

As of December 31, 2016, we owned 48,298 single-family rental homes and had an additional 63 homes in escrow that we expected to acquire, subject to customary closing conditions. As of December 31, 2016, we had 36,469 homes in our Same Store portfolio (consisting of homes which had commenced their initial post-renovation lease prior to October 3, 2014). References to our Same Store portfolio (consisting of homes which had commenced their initial post-renovation lease 90 days prior to the first day of the first year of the comparison period) for the years ended December 31, 2016 and 2015 are for these 36,469 homes. References to our Same Store portfolio (consisting of homes which had commenced their initial post-renovation lease 90 days prior to the first day of the first year of the comparison period) for the years ended December 31, 2015 and 2014 are to a Same Store portfolio of 18,762 homes.

We have historically funded the purchase and renovation of our single-family rental homes with a combination of equity capital, warehouse loans from our Sponsor, and borrowings under credit facilities of up to 75% of the acquisition and renovation costs of our single-family homes. In November 2013, we were the first single-family residential rental home owner and operator to securitize a loan on certain of our homes through the creation of a new type of residential real estate asset-backed securitization class that combines characteristics of traditional residential mortgage-backed securities (“RMBS”) and commercial mortgage-backed securities (“CMBS”). Like RMBS, the underlying assets of this new type of residential real estate asset-backed securitization are single-family homes. Like CMBS, the underlying borrower for this new type of residential real estate asset-backed securitization is a business, not an individual homeowner, and the cash flow comes from rental, rather than mortgage, payments. We refer to these securitized loans as our “mortgage loans.” This initial mortgage loan financing totaled $479.1 million, and to date we have executed a total of $5,334.0 million of mortgage loan financings to refinance certain of our credit facility balances.

The historical combined and consolidated financial information discussed below reflects the financial position and results of operations for the IH Holding Entities and is presented on a historical cost basis. Such historical information does not reflect the impact of certain transactions and arrangements that occurred as a result of the Pre-IPO Transactions (as discussed in Part I. Item 1. “Business”) and our IPO which was completed on February 6, 2017, including certain financing transactions and changes to our compensation plans.

Our Portfolio

The following table provides summary information regarding our total and Same Store portfolio (consisting of homes which had commenced their initial post-renovation lease prior to October 3, 2014) as of and for the periods ended December 31, 2016 as noted below.

MarketNumber of homes(1)Average Occupancy(2)Average monthly rent(3)Average monthly rent PSF(3)% of Revenue(4)
Western United States
Southern California4,63094.9%$2,176$1.2812.5%
Northern California2,87996.4%1,7081.086.7%
Seattle3,18494.3%1,8750.998.0%
Phoenix5,64994.7%1,1280.728.3%
Las Vegas94495.2%1,4250.741.7%
Western United States Subtotal17,28695.0%1,6620.9937.2%
Florida
South Florida5,58294.6%2,1451.1214.6%
Tampa4,95294.7%1,5570.809.8%
Orlando3,71995.2%1,4780.777.0%
Jacksonville1,98494.0%1,5440.773.8%
Florida Subtotal16,23794.7%1,7380.9035.2%
Southeast United States
Atlanta7,51794.2%1,3530.6612.7%
Charlotte3,11994.0%1,3600.685.2%
Southeast United States Subtotal10,63694.2%1,3550.6717.9%
Midwest United States
Chicago2,95692.0%2,0101.197.0%
Minneapolis1,18394.2%1,7490.882.7%
Midwest United States Subtotal4,13992.6%1,9341.099.7%
Total/Average48,29894.5%$1,643$0.89100.0%
Same Store Portfolio Total / Average36,46995.9%$1,642$0.8876.3%
(1)As of December 31, 2016.
(2)Represents average occupancy for the year ended December 31, 2016.
(3)Represents average rent, net of rental concessions, for the three months ended December 31, 2016.
(4)Represents the percentage of total revenue generated in each market for the three months ended December 31, 2016.

Factors That Affect Our Results of Operations and Financial Condition

Our results of operations and financial condition are affected by numerous factors, many of which are beyond our control. Key factors that impact our results of operations and financial condition include market fundamentals, property acquisitions and renovations, rental rates and occupancy levels, turnover and days to re-resident homes, property improvements and maintenance, and financing arrangements.

Market Fundamentals: Our results are impacted by housing market fundamentals and supply and demand conditions in our markets, particularly in the Western United States and Florida, which represented 72.4% of our revenues during the three months ended December 31, 2016. In recent periods, our Western United States and Florida markets have experienced favorable demand fundamentals with employment growth and household formation rates that have exceeded the U.S. averages, while exhibiting a greater decline in the rate of new supply deliveries (measured by total housing permits as a percentage of households) from their long-term averages than the United States on the whole. We believe these favorable supply and demand fundamentals have driven strong rental rate growth and home price appreciation for our Western United States and Florida markets in recent periods compared to the U.S. average, and we expect these trends to continue in the near to intermediate term.

Property Acquisitions and Renovations: Future growth in rental revenues and operating income may be impacted by our ability to identify and acquire homes, our pace of property acquisitions, and the time and cost required to renovate and lease a newly acquired home. Our ability to identify and acquire single-family homes that meet our investment criteria is impacted by home prices in targeted acquisition locations, the inventory of homes available for sale through our acquisition channels, and competition for our target assets. The acquisition of homes involves expenditures in addition to payment of the purchase price, including payments for acquisition fees, property inspections, closing costs, title insurance, transfer taxes, recording fees, broker commissions, property taxes and HOA fees (when applicable). Additionally, we typically incur costs to renovate a home to prepare it for rental. Renovation work varies, but may include paint, flooring, carpeting, cabinetry, appliances, plumbing hardware, roof replacement, HVAC replacement, and other items required to prepare the home for rental. The time and cost involved in accessing our homes and preparing them for rental can significantly impact our financial performance. The time to renovate a newly acquired property can vary significantly among homes for several reasons, including the property’s acquisition channel, the condition of the property, and whether the property was vacant when acquired. Due to our size and scale both nationally and locally, we believe we are able to purchase goods and services at favorable prices.

Rental Rates and Occupancy Levels: Rental rates and occupancy levels are primary drivers of rental revenues and other property income. Our rental rates and occupancy levels are affected by macroeconomic factors and local and property-level factors, including market conditions, seasonality, resident defaults, and the amount of time it takes to prepare a home for its next resident and re-lease homes when residents vacate. An important driver of rental rate growth is our ability to increase monthly rents from expiring leases, which typically have a term of one to two years.

Turnover and Days to Re-Resident: Other drivers of rental revenues and property operating and maintenance expense include increasing the length of stay of our residents, minimizing resident turnover rates, and reducing the number of days a home is unoccupied between residents. Our operating results also are impacted by the amount of time it takes to market and lease a property. The period of time to market and lease a property can vary greatly and is impacted by local demand, our marketing techniques, the size of our available inventory, and economic conditions and outlook. Increases in turnover rates and the average number of days to re-resident increase property operating and maintenance expenses and reduce rental revenues as the homes are not generating income during this period.

Property Improvements and Maintenance: Property improvements and maintenance impact capital expenditures, property operating and maintenance expense, and rental revenues. We actively manage our homes on a total portfolio basis to determine what capital and maintenance needs may be required, and what opportunities we may have to generate additional revenues or expense savings from such expenditures. Due to our size and scale both nationally and locally, we believe we are able to purchase goods and services at favorable prices.

Financing Arrangements: Financing arrangements directly impact interest expense, credit facilities, mortgage loans, and warehouse loans, as well as our ability to acquire and renovate homes. We have historically utilized credit facilities and warehouse loans to acquire and renovate new homes. In certain instances we have refinanced our credit facilities and warehouse loans utilizing mortgage loans. Our current financing arrangements contain variable interest rate terms, along with certain financial covenants. Interest rates are impacted by the characteristics of our homes, market conditions, and the terms

of the underlying financing arrangements. See “—Quantitative and Qualitative Disclosures about Market Risk” for further discussion regarding interest rate risk. Our future financing arrangements may not have similar terms with respect to amounts, interest rates, financial covenants, and durations.

Recent Events

Initial Public Offering

On February 6, 2017, we completed our IPO in which we sold 88,550,000 shares of common stock at an initial public offering price of $20.00 per share. The shares offered and sold in the offering were registered under the Securities Act pursuant to our Registration Statement on Form S-11, which was declared effective by the SEC on January 31, 2017. The common stock is listed on the NYSE under the symbol "INVH" and began trading publicly on February 1, 2017. The offering generated net proceeds of approximately $1,667.0 million to us after underwriting discounts, expenses and transaction costs. We used a portion of the net proceeds, together with the borrowings under the Term Loan Facility of our New Credit Facility (described below), to repay all of our existing credit facilities and our mortgage loan relating to the IH1 2013-1 securitization and a portion of the mortgage loan relating to the IH1 2014-1 securitization transaction, and to pay fees and expenses related to the offering.

In March 2017, we used the remaining IPO proceeds, together with cash on hand, to voluntarily prepay approximately $260.0 million of additional borrowings outstanding under the mortgage loan relating to the IH1 2014-1 securitization transaction, reducing the outstanding principal balance to approximately $421.0 million.

New Credit Facility

On February 6, 2017, the Operating Partnership entered into a new credit agreement with the lenders party thereto, Bank of America, N.A., as administrative agent and the other parties party thereto. The new credit agreement provides for senior secured credit facilities (together, collectively, the “New Credit Facility”) consisting of (i) a $1,000.0 million revolving credit facility (the “Revolving Facility”), which will mature on February 6, 2021, with a one-year extension option subject to certain conditions and (ii) a $1,500.0 million Term Loan Facility, which will mature on February 6, 2022. See “—Liquidity and Capital Resources.”

Fannie Mae Commitment

On January 12, 2017, we entered into a commitment letter with Wells Fargo Bank, National Association and Fannie Mae pursuant to which they have made, subject to the satisfaction or waiver of certain conditions, a binding commitment to enter into a securitization transaction with us to fund a new ten-year fixed rate mortgage loan in a principal amount of up to $1,000.0 million, collateralized by certain of our homes. See “—Liquidity and Capital Resources.”

Components of Revenues and Expenses

The following is a description of the components of our revenues and expenses:

Revenues

Rental Revenues

Rental revenues, net of any concessions and uncollectible amounts, consist of rents collected under lease agreements related to our single-family rental homes. These include leases that we enter into directly with our residents, which typically have a term of one to two years.

Other Property Income

Other property income is comprised of: (i) resident reimbursements for utilities, HOA fines, and other charge-backs; (ii) rent and non-refundable deposits associated with pets; and (iii) various other fees including application and lease termination fees.

Expenses

Property Operating and Maintenance

Once a property is available for its initial lease, which we refer to as “rent-ready,” we incur ongoing property-related expenses, which consist primarily of property taxes, insurance, HOA fees (when applicable), market-level personnel expenses, utility expenses, repairs and maintenance, leasing costs and marketing. Prior to a property being “rent-ready,” certain of these expenses are capitalized as building and improvements. Once a property is “rent-ready,” expenditures for ordinary maintenance and repairs thereafter are expensed as incurred and we capitalize expenditures that improve or extend the life of a home.

Property Management Expense

Property management expense represents personnel and other costs associated with the oversight and management of our portfolio of homes. All of our homes are managed through our internal property manager.

General and Administrative

General and administrative expense represents personnel costs, professional fees, and other costs associated with our day to day activities. We expect to incur additional legal, accounting and other expenses that we have not incurred as a private company, including costs associated with public company reporting requirements. As a result, general and administrative expense in the historical periods discussed in “—Results of Operations” may not be comparable to general and administrative expense in periods following the IPO.

Noncash Incentive Compensation Expense

Certain current and former employees, as well as certain of our founders, were granted Class B incentive units in certain of the IH Holding Entities or their parent entities. We have recognized noncash incentive compensation expense related to the value of those units in our results of operations as a component of general and administrative expense and property management expense. In connection with the IPO, we modified certain of our incentive awards and issued new awards in order to align our employees’ interests with those of our investors. Such adjustments may impact noncash incentive compensation expense in periods following the IPO.

Depreciation and Amortization

We recognize depreciation and amortization expense associated primarily with our homes and other capital expenditures over their expected useful lives.

Impairment and Other

Impairment and other represents provisions for impairment when the carrying amount of our single-family residential properties is not recoverable and casualty losses, net of any insurance recoveries.

Interest Expense

Interest expense includes interest expense as well as amortization of discounts and deferred financing costs from our financing arrangements and unrealized gains (losses) on non-designated hedging instruments. Interest expense in the historical periods discussed in “—Results of Operations” does not reflect the impact of the following: (i) certain financing transactions that we completed concurrently with the completion of the IPO; (ii) certain hedging instruments that were entered into prior to and subsequent to December 31, 2016; (iii) any additional financing transactions currently contemplated (e.g., the FNMA Loan as defined in “—Liquidity and Capital Resources”); or (iv) the repayment of certain indebtedness with a portion of the net proceeds from the IPO and the New Credit Facility.

Other

Other includes acquisition costs, interest income, and other miscellaneous income and expenses.

Gain (Loss) on Sale of Property

Gain (loss) on sale of property consists of gains and losses resulting from sales of our homes.

Results of Operations

Year Ended December 31, 2016 Compared to Year Ended December 31, 2015

The following table sets forth a comparison of the results of operations for the years ended December 31, 2016 and 2015:

Year Ended December 31,
($ in thousands)20162015$ Change% Change
Revenues:
Rental revenues$877,991$800,210$77,7819.7%
Other property income44,59635,8398,75724.4%
Total revenues922,587836,04986,53810.4%
Operating expenses:
Property operating and maintenance360,327347,96212,3653.6%
Property management expense30,49339,459(8,966)(22.7)%
General and administrative69,10279,428(10,326)(13.0)%
Depreciation and amortization267,681250,23917,4427.0%
Impairment and other4,2074,584(377)(8.2)%
Total operating expenses731,810721,67210,1381.4%
Operating income190,777114,37776,40066.8%
Other income (expenses):
Interest expense(286,048)(273,736)12,3124.5%
Other(1,558)(3,121)(1,563)(50.1)%
Total other income (expenses)(287,606)(276,857)10,7493.9%
Loss from continuing operations$(96,829)$(162,480)$65,65140.4%

Rental Revenues

As of December 31, 2016 and 2015, we owned 48,298 and 48,138 single-family rental homes, respectively, generating rental revenue of $878.0 million and $800.2 million, respectively, for the years then ended. Rental revenues increased 9.7% due to an increase in both average occupancy and average monthly rent per occupied home, as well as the increase in number of homes owned. During the years ended December 31, 2016 and 2015 we acquired 1,253 and 3,576 homes, respectively, and sold 1,093 and 1,481 homes, respectively.

Average occupancy for the total portfolio was 94.5% and 93.4% for the years ended December 31, 2016 and 2015, respectively. The increase in average occupancy correlates with the decrease in the number of homes acquired during 2016 compared to 2015 as homes are unoccupied for a longer period of time during initial renovations than during a re-resident period. Average rent per occupied home in actual dollars for the year ended December 31, 2016 was $1,611, compared to $1,515 for the year ended December 31, 2015, a 6.3% increase.

For our Same Store portfolio (consisting of homes which had commenced their initial post-renovation lease prior to October 3, 2014), our average occupancy was 95.9% and 96.1% for the years ended December 31, 2016 and 2015, respectively, and our average rent per occupied home in actual dollars for the year ended December 31, 2016, was $1,613, compared to $1,545 for the year ended December 31, 2015, a 4.4% increase.

To monitor prospective changes in average rent per occupied home, we compare the monthly rent from an expiring lease to the monthly rent from the next lease for the same home, in each case, net of any amortized concessions. Leases are either renewal leases, where our current resident stays for a subsequent lease term, or a new lease, where our previous resident moves out and a new resident signs a lease to occupy the same home. The following information regarding our renewal leases and new leases is with respect to our total portfolio. For the years ended December 31, 2016 and 2015, renewal lease net effective rental rate growth for the total portfolio averaged 5.5% and 5.1%, respectively. For the years ended December 31, 2016 and 2015, new lease net effective rental rate growth for the total portfolio averaged 5.5% and 4.3%, respectively.

For the years ended December 31, 2016 and 2015, the turnover rate for our Same Store portfolio (consisting of homes which had commenced their initial post-renovation lease prior to October 3, 2014) was 35.2% and 34.3%, respectively. For our total portfolio, an average home remained unoccupied for 42 days between residents for each of the years ended December 31, 2016 and 2015.

Other Property Income

For the years ended December 31, 2016 and 2015, other property income was $44.6 million and $35.8 million, respectively, a 24.4% increase. The primary drivers of the increase were utility recoveries and miscellaneous revenues associated with the ongoing implementation of our national lease, which standardized resident fees across the portfolio.

Operating Expenses

Operating expenses were $731.8 million and $721.7 million for the years ended December 31, 2016 and 2015, respectively, a 1.4% increase. Set forth below is a discussion of changes in the individual components of operating expenses.

Property operating and maintenance expense increased to $360.3 million for the year ended December 31, 2016 from $348.0 million for the year ended December 31, 2015 due to the increase in the number of homes owned in 2016 and increases in property taxes for homes owned in both periods, partially offset by reduced market-level personnel expense.

Property management expense and general and administrative expense decreased to $99.6 million for the year ended December 31, 2016 from $118.9 million for the year ended December 31, 2015 due to efficiencies from lower headcount, a decrease in noncash incentive compensation expense of $17.7 million, and a reduction in severance expense of $5.2 million. These reductions were partially offset by $13.0 million of expenses incurred in 2016 in preparation for the IPO. Noncash incentive compensation expense decreased due to an overall reduction in the number of vesting Class B units and in the weighted average fair value per unit of previously issued non-employee Class B units. This decrease was partially offset by an increase in the number of new Class B units issued during the year ended December 31, 2016 as compared to the year ended December 31, 2015.

Depreciation and amortization expense increased due to the increase in the number of homes owned and placed into service.

Interest Expense

Interest expense was $286.0 million and $273.7 million for the years ended December 31, 2016 and 2015, respectively, a 4.5% increase. The increase in interest expense was due to an increase in the average monthly LIBOR rates of 30 basis points from 0.20% to 0.50% during the years ended December 31, 2015 and 2016, respectively, and the recognition of $8.7 million of unrealized losses related to non-designated interest rate hedges, partially offset by a reduction in amortization of deferred financing costs of $18.4 million and a reduction in average debt balances outstanding. As of December 31, 2016, we had $7,570.3 million of debt outstanding, net of deferred financing costs and discounts, compared to $7,726.0 million as of December 31, 2015, a 2.0% decrease. The decrease in debt outstanding was attributable to the payoff of our warehouse loans, as well as $219.0 million of repayments on our credit facilities. Credit facility borrowings totaled $184.7 million and were utilized to fund acquisitions and improvements.

Gain on Sale of Property

Gain on sale of property was $18.6 million and $2.3 million for the years ended December 31, 2016 and 2015, respectively. Of the 1,093 homes sold during the year ended December 31, 2016, 590 were sold in bulk sales for a gain of $9.4 million. Of the 1,481 homes sold during the year ended December 31, 2015, 1,314 homes were sold in bulk sales for a

gain of $1.5 million. The primary driver for the difference in the gain on sale between periods was the composition of homes sold during the respective periods.

Year Ended December 31, 2015 Compared to Year Ended December 31, 2014

The following table sets forth a comparison of the results of operations for the years ended December 31, 2015 and 2014:

Year Ended December 31,
($ in thousands)20152014$ Change% Change
Revenues:
Rental revenues$800,210$631,115$169,09526.8%
Other property income35,83927,6078,23229.8%
Total revenues836,049658,722177,32726.9%
Operating expenses:
Property operating and maintenance347,962320,65827,3048.5%
Property management expense39,45962,506(23,047)(36.9)%
General and administrative79,42888,177(8,749)(9.9)%
Depreciation and amortization250,239215,80834,43116.0%
Impairment and other4,5843,3961,18835.0%
Total operating expenses721,672690,54531,1274.5%
Operating income (loss)114,377(31,823)146,200459.4%
Other income (expenses):
Interest expense(273,736)(235,812)37,92416.1%
Other(3,121)(1,991)1,13056.8%
Total other income (expenses)(276,857)(237,803)39,05416.4%
Loss from continuing operations$(162,480)$(269,626)$107,14639.7%

Rental Revenues

As of December 31, 2015 and 2014, we owned 48,138 and 46,043 single-family rental homes, respectively, generating rental revenue of $800.2 million and $631.1 million, respectively, for the years then ended. Rental revenues increased 26.8% due to an increase in both average occupancy and average monthly rent per occupied home, as well as the increase in number of homes owned. During the year ended December 31, 2015 and 2014 we acquired 3,576 and 7,183 homes, respectively, and sold 1,481 and 100 homes, respectively.

Average occupancy for the total portfolio was 93.4% and 85.9% for the years ended December 31, 2015 and 2014, respectively. The increase in average occupancy correlates with the decrease in the number of homes acquired during 2015 compared to 2014 as homes are unoccupied for a longer period of time during initial renovations than during a re-resident period. Average rent per occupied home in actual dollars for the year ended December 31, 2015 was $1,515, compared to $1,424 for the year ended December 31, 2014, a 6.4% increase.

For our Same Store portfolio (consisting of homes which had commenced their initial post-renovation lease prior to October 3, 2013), our average occupancy was 96.2% and 95.6% for the years ended December 31, 2015 and 2014, respectively, and our average rent per occupied home in actual dollars for the year ended December 31, 2015, was $1,502, compared to $1,451 for the year ended December 31, 2014, a 3.5% increase.

For the years ended December 31, 2015 and 2014, renewal lease net effective rental rate growth for the total portfolio averaged 5.1% and 4.7%, respectively. For the years ended December 31, 2015 and 2014, new lease net effective rental rate growth for the total portfolio averaged 4.3% and 3.6%, respectively.

For the years ended December 31, 2015 and 2014, the turnover rate for our Same Store portfolio (consisting of homes which had commenced their initial post-renovation lease prior to October 3, 2013) was 34.4% and 32.8%, respectively. For our total portfolio, the number of days an average home remained unoccupied between residents was 42 and 47 days for the years ended December 31, 2015 and 2014, respectively.

Other Property Income

For the years ended December 31, 2015 and 2014, other property income was $35.8 million and $27.6 million, respectively, a 29.8% increase. The primary drivers for the increase were utility recoveries and miscellaneous revenues.

Operating Expenses

Operating expenses were $721.7 million and $690.5 million for the years ended December 31, 2015 and 2014, respectively, a 4.5% increase. The net increase in operating expenses was driven by the following:

Property operating and maintenance expense increased to $348.0 million for the year ended December 31, 2015 from $320.7 million for the year ended December 31, 2014 due to the increase in the number of homes owned in 2015 and increases in property taxes for homes owned in both periods, partially offset by reduced market-level personnel expense.

Property management expense and general and administrative expense decreased to $118.9 million for the year ended December 31, 2015 from $150.7 million for the year ended December 31, 2014 due to efficiencies from lower headcount and a reduction in severance expense of $8.0 million. These reductions were partially offset by an increase in noncash incentive compensation expense of $3.6 million due to the issuance of additional Class B units, which was partially offset by an overall decrease in the weighted average fair value per unit of Class B units previously issued to non-employees.

Depreciation and amortization expense increased due to the increase in the number of homes owned during the year ended December 31, 2015.

Interest Expense

Interest expense was $273.7 million and $235.8 million for the years ended December 31, 2015 and 2014, respectively, a 16.1% increase. The increase in interest expense was due to the increase in debt outstanding during the two years. As of December 31, 2015, we had $7,726.0 million of debt outstanding, net of deferred financing costs, compared to $6,564.6 million as of December 31, 2014, a 17.7% increase. The increase in debt outstanding was attributable to increased leverage from mortgage loans of $2,370.9 million, which were used to repay $1,955.0 million of our credit facilities. Additional credit facility borrowings totaled $901.6 million and were utilized to fund acquisitions and improvements.

Liquidity and Capital Resources

Our liquidity and capital resources as of December 31, 2016 and 2015 included unrestricted cash and cash equivalents of $198.1 million and $274.8 million, respectively, a 27.9% decrease due primarily to repayments of certain of our indebtedness which is discussed in further detail in “—Cash Flows.”

Liquidity is a measure of our ability to meet potential cash requirements, maintain our assets, fund our operations, make distributions and dividend payments to our equity investors and meet other general requirements of our business. Our liquidity, to a certain extent, is subject to general economic, financial, competitive and other factors beyond our control. Our near-term liquidity requirements consist primarily of: (i) renovating newly-acquired homes; (ii) funding HOA fees (as applicable), real estate taxes, insurance premiums and the ongoing maintenance for our homes; (iii) interest expense; and (iv) payment of dividends to our equity investors. Our long-term liquidity requirements consist primarily of funds necessary to pay for the acquisition of and non-recurring capital expenditures for our homes and principal payments on our indebtedness.

We will seek to satisfy our long-term liquidity needs through cash provided by operations, long-term secured and unsecured borrowings, the issuance of debt and equity securities, and property dispositions. We have financed our operations and acquisitions to date through cash provided by operations, capital contributions from our equity investors, and financing arrangements. We believe our rental income net of operating expenses will generally provide cash flow sufficient to fund our operations and distributions and dividend payments on a near-term basis. Our real estate assets are illiquid in nature. A timely

liquidation of assets may not be a viable source of short-term liquidity should a cash flow shortfall arise, and we may need to source liquidity from other financing alternatives, such as the Revolving Facility in the amount of $1,000.0 million that we entered into on February 6, 2017.

As a REIT, Invitation Homes Inc. will be required to distribute to its stockholders at least 90% of its taxable income, excluding net capital gain, on an annual basis. Therefore, as a general matter, it is unlikely that we will be able to retain substantial cash balances that could be used to meet our liquidity needs from our annual taxable income. Instead, we will need to meet these needs from external sources of capital and amounts, if any, by which our cash flow generated from operations exceeds taxable income.

We have historically utilized credit facilities, mortgage loans and warehouse loans from our Sponsor to fund acquisitions and renovation improvements. As of December 31, 2016, we have repaid all outstanding borrowings under the warehouse loans and do not expect to obtain warehouse loans from our Sponsor in the future. Subsequent to December 31, 2016, we repaid all obligations outstanding under the existing credit facilities and the IH1 2013-1 mortgage loan, and made repayments totaling $551.5 million on the IH1 2014-1 mortgage loan. As further described and defined below, we entered into a New Credit Facility on February 6, 2017 which includes a $1,000.0 million revolving line of credit component that is currently undrawn and a fully drawn $1,500.0 million term loan component.

The following describes the key terms and conditions of our current credit facilities, mortgage loans and warehouse loans.

Credit Facilities

Our credit facilities were comprised of the following as of December 31, 2016 and 2015:

($ in thousands)Outstanding Principal Balance(3)
Credit FacilityOrigination DateMaturity Date(1)Interest Rate(2)December 31, 2016December 31, 2015
IH1 2015(4)April 3, 2015October 3, 20174.02%$85,492$161,105
IH2 2015(5)September 29, 2015March 29, 20173.52%43,859116,109
IH3 2013(6)December 19, 2013June 30, 20173.77%932,583958,622
IH4 2014(7)May 5, 2014May 5, 20173.77%529,866556,987
IH5 2014(8)December 5, 2014June 5, 20173.94%564,348563,125
IH6 2016(9)April 13, 2016April 13, 20183.28%165,437—
Total2,321,5852,355,948
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 credit facilities were repaid in full in connection with the completion of our IPO and the initial funding of the New Credit Facility.
(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.

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.

Mortgage Loans

As of December 31, 2016, we have completed seven securitization transactions, which we refer to as the “Securitizations” or the “mortgage loans,” collateralized by homes owned by certain subsidiaries of the IH Holding 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.

The following table sets forth a summary of the mortgage loan indebtedness as of December 31, 2016 and 2015:

Outstanding Principal Balance(4)
($ in thousands)Maturity Date(1)Maturity Date if Fully Extended(2)Rate(3)Range of SpreadsDecember 31, 2016(5)December 31, 2015
IH1 2013-1(6)December 9, 2017December 9, 20182.45%115-365 bps$462,431$469,554
IH1 2014-1(7)June 9, 2017June 9, 20192.61%100-375 bps978,231993,738
IH1 2014-2, net(8)September 9, 2017September 9, 20192.67%110-400 bps710,664718,610
IH1 2014-3, net(9)December 9, 2017December 9, 20193.08%120-500 bps766,753766,043
IH2 2015-1, net(10)March 9, 2018March 9, 20203.13%145-430 bps531,318536,174
IH2 2015-2(11)June 9, 2017June 9, 20202.72%135-370 bps630,283631,097
IH2 2015-3August 9, 2017August 7, 20202.94%130-475 bps1,184,3141,190,695
Total Securitizations5,263,9945,305,911
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)Represents the maturity date if we exercise each of the remaining one-year extension options available, which are subject to certain conditions being met.
(3)Interest rates are based on a weighted average spread to LIBOR; as of December 31, 2016, LIBOR was 0.77%.
(4)Outstanding Principal Balance is net of discounts and does not include capitalized deferred financing costs, net.
(5)From January 1, 2017 to March 24, 2017, we made repayments of $16.4 million on our mortgage loans related to the disposition of properties.
(6)On February 6, 2017, the outstanding balance of IH1 2013-1 was repaid in full.
(7)On February 6, 2017 and March 9, 2017, we made voluntary repayments of $291,500 and $260,000, respectively.
(8)Net of unamortized discount of $0 and $1.3 million as of December 31, 2016 and 2015, respectively.
(9)Net of unamortized discount of $0 and $3.3 million as of December 31, 2016 and 2015, respectively.
(10)Net of unamortized discount of $0.1 million and $0.4 million 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.
(11)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.

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 $479.1 million. 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

$993.7 million. 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 $291.5 million and $260.0 million, respectively.

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 $719.9 million. 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 $4.0 million. 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 $769.3 million. 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 $7.2 million. 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 $540.9 million. 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 $0.6 million. 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 $636.7 million. 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 $1,194.0 million. 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.

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.

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 $42.1 million and $13.2 million, respectively, were made under the terms of the loan agreements.

Other Information

We used the net proceeds from our IPO, together with borrowings under the Term Loan Facility, to repay the IH1 2013-1 mortgage loan and $551.5 million of the IH1 2014-1 mortgage loan. In addition, we intend to enter into the FNMA Loan (as defined in “—Fannie Mae Securitization Transaction”) and use the net proceeds to repay all remaining amounts under the IH1 2014-1 mortgage loan and approximately $529.0 million of the IH1 2014-2 mortgage loan.

Warehouse Loans

From time to time certain of the IH Holding Entities entered into unsecured warehouse loan agreements with our Sponsor. 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 and we do not expect to obtain warehouse loans from our Sponsor in the future.

The following table sets forth a summary of the outstanding principal amounts under such loans as of December 31, 2016 and 2015:

($ in thousands)Origination DateMaturity DateDecember 31, 2016December 31, 2015
IH3 warehouse loan(1)March 26, 2014December 31, 2017$—$38,137
IH4 warehouse loan(1)May 7, 2014May 6, 2015—4,740
IH5 warehouse loan(2)April 27, 2015April 26, 2016—71,146
Total warehouse loans$—$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.

New Credit Facility

On February 6, 2017, concurrently with the completion of the IPO, our Operating Partnership entered into the New Credit Facility with Bank of America, N.A., as administrative agent, and a syndicate of banks, financial institutions and institutional lenders from time to time party thereto.

The New Credit Facility provides $2,500.0 million of borrowing capacity and consists of:

•a new $1,000.0 million Revolving Facility, which will mature four years from the closing date of the New Credit Facility (the “Closing Date”), with a one-year extension option subject to certain conditions; and
•a new $1,500.0 million Term Loan Facility, which will mature five years from the Closing Date.

Our Operating Partnership, which is referred to in this section as the “Borrower,” is the borrower under the New Credit Facility. The Revolving Facility component also includes borrowing capacity available for letters of credit and for short-term borrowings referred to as swing line borrowings, in each case subject to certain sublimits. The New Credit Facility also provides the Borrower with the option to enter into additional incremental credit facilities (including an uncommitted incremental facility that provides the Borrower with the option to increase the size of the Revolving Facility and/or the Term Loan Facility by an aggregate amount of up to $1,500.0 million), subject to certain limitations.

Interest Rate and Fees. Borrowings under the New Credit Facility bear interest, at the Borrower’s option, at a rate equal to a margin over either (a) a LIBOR rate determined by reference to the Bloomberg LIBOR rate (or comparable or successor rate) for the interest period relevant to such borrowing or (b) a base rate determined by reference to the highest of (1) the administrative agent’s prime lending rate, (2) the federal funds effective rate plus 0.50%, and (3) the LIBOR rate that would be payable on such day for a LIBOR rate loan with a one-month interest period plus 1.00%. The margin is based on a total leverage based grid. The margin for the Revolving Facility ranges from 0.75% to 1.30%, in the case of base rate loans, and 1.75% to 2.30%, in the case of LIBOR rate loans. The margin for the Term Loan Facility ranges from 0.70% to 1.30%, in the case of base rate loans, and 1.70% to 2.30%, in the case of LIBOR rate loans. In addition, the New Credit Facility provides that, upon receiving an investment grade rating on its non-credit enhanced, senior unsecured long term debt of BBB- or better from Standard & Poor’s Rating Services, a division of The McGraw-Hill Companies, Inc., or Baa3 or better from Moody’s Investors Service, Inc. (an “Investment Grade Rating Event”), the Borrower may elect to convert to a credit rating based pricing grid.

In addition to paying interest on outstanding principal under the New Credit Facility, the Borrower is required to pay a facility fee to the lenders under the Revolving Facility in respect of the unused commitments thereunder. The facility fee rate is based on the daily-unused amount of the Revolving Facility and is either 0.350% or 0.200% per annum based on the unused facility amount. Upon converting to a credit rating pricing based grid, the unused facility fee will no longer apply and the Borrower will be required to pay a facility fee ranging from 0.125% to 0.300%. We are also required to pay customary letter of credit fees.

Prepayments. No prepayment is required under the New Credit Facility. The Borrower is permitted to voluntarily repay amounts outstanding under the Term Loan Facility at any time without premium or penalty, subject to certain minimum amounts and the payment of customary “breakage” costs with respect to LIBOR loans. Once repaid, no further borrowings are permitted under the Term Loan Facility.

Amortization. The New Credit Facility has no amortization payments.

Guarantees and Security. The obligations under the New Credit Facility are guaranteed on a joint and several basis by each direct and indirect domestic wholly owned subsidiary of the Borrower that owns, directly or indirectly, unencumbered assets (the “Subsidiary Guarantors”), subject to certain exceptions. The guarantee to be provided by any Subsidiary Guarantor is automatically released upon the occurrence of certain events, including if it no longer has a direct or indirect interest in an unencumbered asset or as a result of certain non-recourse refinancing transactions pursuant to which such Subsidiary Guarantor becomes contractually prohibited from providing its guaranty of the New Credit Facility. In addition, we may be required to provide a guarantee of the New Credit Facility under certain circumstances, including if we do not maintain our qualification as a REIT.

The New Credit Facility is collateralized by first priority or equivalent security interests in all the capital stock of, or other equity interests in any Subsidiary Guarantor, held by the Borrower and each of the Subsidiary Guarantors. The security interests to be granted under the New Credit Facility will be automatically released upon the occurrence of certain events, including upon an Investment Grade Rating Event or if the total net leverage ratio is less than or equal to 8.00:1.00 for four consecutive fiscal quarters.

Certain Covenants and Events of Default. The New Credit Facility contains certain customary affirmative and negative covenants and events of default. Such covenants will, among other things, restrict, subject to certain exceptions, the ability of the Borrower, the Subsidiary Guarantors and their respective subsidiaries to:

•engage in certain mergers, consolidations or liquidations;
•sell, lease or transfer all or substantially all of their respective assets;
•engage in certain transactions with affiliates;
•make changes to the Borrower’s fiscal year;
•make changes in the nature of the business of the Borrower and its subsidiaries; and
•incur additional indebtedness that is secured on a pari passu basis with the New Credit Facility.

The New Credit Facility also requires the Borrower, on a consolidated basis with its subsidiaries, to maintain a (i) maximum total leverage ratio, (ii) maximum secured leverage ratio, (iii) maximum unencumbered leverage ratio, (iv) minimum fixed charge coverage ratio, (v) minimum unencumbered fixed charge coverage ratio and (vi) minimum tangible net worth.

If an event of default occurs, the lenders under the New Credit Facility are entitled to take various actions, including the acceleration of amounts due under the New Credit Facility and all actions permitted to be taken by a secured creditor.

Certain Hedging Arrangements

On December 21, 2016, the Operating Partnership entered into forward interest rate swap agreements with two financial institutions for an aggregate notional amount of $1,500.0 million 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 IH Holding Entities and/or their subsidiaries have guaranteed the Operating Partnership’s obligations under the interest rate swaps.

On January 12, 2017, the Operating Partnership entered into a forward interest rate swap agreement for a notional amount of $1,100.0 million 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 $595.0 million 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 $325.0 million 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 Part I. Item. 1, “Business.” 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.

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. We may enter into additional swap or other hedging arrangements from time to time in the future.

Fannie Mae Securitization Transaction

Pursuant to a commitment letter dated January 12, 2017, Wells Fargo Bank, National Association (“Wells Fargo”) and Fannie Mae have made, subject to the satisfaction or waiver of certain conditions, a binding commitment to enter into a securitization transaction with us whereby an entity to be designated by Wells Fargo (the “FNMA Loan Originator”) will fund to a special purpose entity and wholly owned subsidiary of IH1 (the “FNMA Loan Borrower”) a new ten-year fixed rate mortgage loan in a principal amount of up to $1,000.0 million (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 (the “Guaranteed Certificates”) that carry Fannie Mae’s guaranty of timely payment of principal and interest 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”). The FNMA Loan would 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 and include certain customary affirmative and negative covenants and events of default. The FNMA Loan would generally be non-recourse to the FNMA Loan Borrower, subject to certain customary carve-outs in respect of which the Operating Partnership or IH1 will provide a guarantee or indemnity. In order to satisfy applicable rules imposing credit risk retention requirements, we would purchase and retain the Subordinate Non-Guaranteed Certificates which will be equal to 5% (or such other percentage necessary to ensure that such risk retention requirements are met) of the initial certificate balance of the mortgage-backed certificates that represent the beneficial interests in the FNMA Loan.

We intend to enter into the FNMA Loan during the second quarter of 2017 and use the net proceeds to repay all remaining amounts outstanding under our mortgage loan relating to the IH1 2014-1 securitization and approximately $529.0 million of our mortgage loan relating to the IH1 2014-2 securitization. The commitment letter and the obligations of Fannie Mae and the FNMA Loan Lender to consummate the transaction are subject to certain conditions, including the satisfaction of all risk retention requirements in a manner acceptable to all parties to the transaction; clearance by the FNMA Loan Borrower, IH1, the Operating Partnership and all other principals of the transaction under all prohibited person searches and all other compliance checks; confirmation that the final loan amount complies with certain loan-to-value and debt service coverage ratios pursuant to underwriting standards approved by Fannie Mae methodology; the taking of such additional action by the FNMA Borrower, IH1 and the Operating Partnership as is required by Fannie Mae or Wells Fargo; provided that

such additional actions shall be consistent with the terms contemplated by the commitment letter; the provision of such other information as Fannie Mae or Wells Fargo may require; confirmation from Fannie Mae and/or Wells Fargo as to the acceptability of the homes that will collateralize the FNMA Loan; and the origination of the FNMA Loan on documents in form and substance acceptable to Wells Fargo and Fannie Mae. In addition, the commitment letter is terminable if any material adverse changes shall occur at any time prior to the closing of the FNMA Loan with respect to the credit of the applicable loan parties. There can be no assurances that we will be able to complete this transaction on the terms described above or at all.

Purchase of Outstanding Debt Securities or Loans

As market conditions warrant, we and our equity investors, including our Sponsor, its affiliates, and members of our management, may from time to time seek to purchase our outstanding debt, including borrowings under our credit facilities and mortgage loans or debt securities that we may issue in the future, in privately negotiated or open market transactions, by tender offer or otherwise. Subject to any applicable limitations contained in the agreements governing our indebtedness, any purchases made by us may be funded by the use of cash on our balance sheet or the incurrence of new secured or unsecured debt, including borrowings under our credit facilities and mortgage loans. The amounts involved in any such purchase transactions, individually or in the aggregate, may be material. Any such purchases may be with respect to a substantial amount of a particular class or series of debt, with the attendant reduction in the trading liquidity of such class or series. In addition, any such purchases made at prices below the “adjusted issue price” (as defined for U.S. federal income tax purposes) may result in taxable cancelation of indebtedness income to us, which amounts may be material, and in related adverse tax consequences to us.

Cash Flows

Year Ended December 31, 2016 Compared to Year Ended December 31, 2015

The following table summarizes our cash flows for the year ended December 31, 2016 and the year ended December 31, 2015:

Year Ended December 31,
($ in thousands)20162015$ Change% Change
Net cash provided by operating activities$250,126$197,474$52,65226.7%
Net cash used in investing activities(255,037)(859,833)604,79670.3%
Net cash (used in) provided by financing activities(71,788)651,581(723,369)(111.0)%
Change in cash and cash equivalents$(76,699)$(10,778)$(65,921)(611.6)%

Operating Activities

Net cash provided by operating activities was $250.1 million and $197.5 million for the years ended December 31, 2016 and 2015, respectively, an increase of 26.7%. The increase was primarily driven by our net loss decreasing from $(160.2) million for the year ended December 31, 2015 to $(78.2) million for the year ended December 31, 2016, partially offset by a $37.4 million decrease in noncash expenses. Our cash flows provided by operating activities depend on numerous factors, including the occupancy level of our homes, the rental rates achieved on our leases, the collection of rent from our residents, and the amount of our operating and other expenses.

Investing Activities

Net cash used in investing activities primarily consists of the acquisition costs of homes, capital improvements, changes in restricted cash, and proceeds from property sales. Net cash used in investing activities was $255.0 million and $859.8 million for the years ended December 31, 2016 and 2015, respectively, a decrease in use of cash of 70.3%. The decrease in use of funds was primarily due to (i) a decrease in homes acquired during 2016, from 3,576 homes during the year ended December 31, 2015 to 1,253 homes during the year ended December 31, 2016 and by (ii) a decrease in purchases

of investments in debt securities from $118.6 million during the year ended December 31, 2015 to $16.0 million during the year ended December 31, 2016.

Financing Activities

Net cash used in financing activities was $71.8 million at December 31, 2016 and net cash provided by financing activities was $651.6 million at December 31, 2015, a 111.0% decrease. Equity investors contributed $138.0 million and $246.8 million of capital for the years ended December 31, 2016 and 2015, respectively, a 44.1% decrease. Equity investors received $682.5 million of distributions and dividends for the year ended December 31, 2015. We received $184.7 million and $3,417.1 million of debt proceeds for the years ended December 31, 2016 and 2015, respectively. For the year ended December 31, 2016, we repaid $381.1 million of debt, compared to $2,278.1 million for the year ended December 31, 2015. The equity and debt proceeds received were primarily utilized for the purchase and renovation of acquired single-family rental homes, and to repay then-outstanding IH1 and IH2 credit facilities. Remaining proceeds from the 2015 mortgage loan financings were the primary source of the distributions and dividends paid during the year ended December 31, 2015.

Year Ended December 31, 2015 Compared to Year Ended December 31, 2014

The following table summarizes our cash flows for the year ended December 31, 2015 and the year ended December 31, 2014:

Year Ended December 31,
($ in thousands)20152014$ Change% Change
Net cash provided by operating activities$197,474$48,451$149,023307.6%
Net cash used in investing activities(859,833)(1,899,697)1,039,86454.7%
Net cash provided by financing activities651,5811,705,277(1,053,696)(61.8)%
Change in cash and cash equivalents$(10,778)$(145,969)$135,19192.6%

Operating Activities

For the years ended December 31, 2015 and 2014, net cash provided by operating activities was $197.5 million and $48.5 million, respectively, a 307.6% increase. The increase was primarily driven by our net loss decreasing from $(269.9) million for the year ended December 31, 2014 to $(160.2) million for the year ended December 31, 2015. Our cash flows provided by operating activities depend on numerous factors, including the occupancy level of our homes, the rental rates achieved on our leases, the collection of rent from our residents, and the amount of our operating and other expenses.

Investing Activities

For the years ended December 31, 2015 and 2014, net cash used in investing activities was $859.8 million and $1,899.7 million, respectively, a decrease of 54.7%. The decrease in use of funds was primarily due to (i) a decrease in homes acquired during 2015, from 7,183 homes during the year ended December 31, 2014 to 3,576 homes during the year ended December 31, 2015 and partially offset by (ii) an increase in homes sold during 2015, from 100 homes sold during the year ended December 31, 2014 to 1,481 homes sold during the year ended December 31, 2015. The pace of our acquisitions slowed during the year ended December 31, 2015, because fewer homes met our selection criteria.

Financing Activities

For the years ended December 31, 2015 and 2014, net cash provided by financing activities was $651.6 million and $1,705.3 million, respectively, a 61.8% decrease. Equity investors contributed $246.8 million and $557.4 million of capital for the years ended December 31, 2015 and 2014, respectively, a 55.7% decrease. Equity investors received $682.5 million and $787.5 million of distributions and dividends for the years ended December 31, 2015 and 2014, respectively, a 13.3% decrease. We received $3,417.1 million and $4,105.5 million of debt proceeds for the years ended December 31, 2015 and 2014, respectively, a decrease of 16.8%. For the year ended December 31, 2015, we repaid $2,278.1 million of debt, compared to $2,093.8 million for the year ended December 31, 2014, an 8.8% increase. The equity and debt proceeds received were primarily utilized for the purchase and renovation of acquired single-family rental homes, and to repay then-

outstanding IH1 and IH2 credit facilities. Remaining proceeds from the 2015 and 2014 mortgage loan financings were the primary source of the distributions and dividends paid during the years ended December 31, 2015 and 2014.

Off-Balance Sheet Arrangements

We have no obligations, assets, or liabilities that would be considered off-balance sheet arrangements.

Contractual Obligations

Our contractual obligations as of December 31, 2016, consisted of the following:

($ in thousands)Total20172018-20192020-2021Thereafter
Credit facilities(1)$2,365,292$2,198,324$166,968$—$—
Mortgage loans(1)5,368,4814,834,065534,416——
Interest rate swap(2)88,40814,98435,96335,9631,498
Purchase commitments(3)14,25814,258———
Operating lease obligations7,2341,8752,6322,488239
Capital lease obligations49928914763—
Total$7,844,172$7,063,795$740,126$38,514$1,737
(1)Includes estimated interest payments on the respective debt based on amounts outstanding as of December 31, 2016 at rates in effect as of such date. On February 6, 2017, the outstanding balances for all six credit facilities were repaid in full. Additionally, we repaid the entire balance of the IH1 2013-1 mortgage loan as well as $551.5 million on the IH1 2014-1 mortgage loan subsequent to December 31, 2016.
(2)Net obligation calculated using rates in effect as of December 31, 2016.
(3)Commitments to acquire 63 single-family rental homes.

Critical Accounting Policies and Estimates

Our discussion and analysis of our historical financial condition and results of operations is based upon our combined and consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and in conjunction with the rules and regulations of the SEC. The preparation of combined and consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the combined and consolidated financial statements and accompanying notes. Actual results could ultimately differ from those estimates. For a discussion of recently-issued and adopted accounting standards, see “Notes to Combined and Consolidated Financial Statements, Note 2—Significant Accounting Policies.”

As an emerging growth company, we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. We have irrevocably elected not to take advantage of the extension of time to comply with new or revised financial accounting standards available under Section 102(b) of the JOBS Act.

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, HOA fees (when applicable), 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 our 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.

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 (when applicable), 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.

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.

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.

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.

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 the IH2 Promote Partnerships (as defined in “Part III. Item 11. “Executive Compensation”), 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. 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.

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.

Non-GAAP Measures

EBITDA and Adjusted EBITDA

EBITDA and Adjusted EBITDA are supplemental, non-GAAP measures often utilized to evaluate the performance of real estate companies. We define EBITDA as net income or loss (computed in accordance with GAAP) before the following items: interest expense; income tax expense; and depreciation and amortization. Adjusted EBITDA is defined as EBITDA before the following items: noncash incentive compensation expense; offering related expenses, impairment and other; acquisition costs; gain (loss) on sale of property; and interest income and other miscellaneous income and expenses. EBITDA and Adjusted EBITDA are used as supplemental financial performance measures by management and by external users of our financial statements, such as investors and commercial banks. Set forth below is additional detail on how management uses EBITDA and Adjusted EBITDA as measures of performance.

Our management uses EBITDA and Adjusted EBITDA in a number of ways to assess our combined and consolidated financial and operating performance, and we believe these measures are helpful to management and external users in

identifying trends in our performance. EBITDA and Adjusted EBITDA help management identify controllable expenses and make decisions designed to help us meet our current financial goals and optimize our financial performance, while neutralizing the impact of capital structure on results. Accordingly, we believe these metrics measure our financial performance based on operational factors that management can impact in the short-term, namely our cost structure and expenses.

We believe that the presentation of EBITDA and Adjusted EBITDA provides information useful to investors in assessing our financial condition and results of operations. The GAAP measure most directly comparable to EBITDA and Adjusted EBITDA is net income or loss. EBITDA and Adjusted EBITDA are not used as measures of our liquidity and should not be considered alternatives to net income or loss or any other measure of financial performance presented in accordance with GAAP. Our EBITDA and Adjusted EBITDA may not be comparable to the EBITDA and Adjusted EBITDA of other companies due to the fact that not all companies use the same definitions of EBITDA and Adjusted EBITDA. Accordingly, there can be no assurance that our basis for computing these non-GAAP measures is comparable with that of other companies.

The following table presents a reconciliation of net loss to EBITDA and Adjusted EBITDA as determined in accordance with GAAP on a historical basis for each of the periods indicated:

Year Ended December 31,
($ in thousands)201620152014
Net loss$(78,239)$(160,208)$(269,861)
Interest expense286,048273,736235,812
Depreciation and amortization267,681250,239215,808
EBITDA475,490363,767181,759
Noncash incentive compensation expense(1)10,21027,92424,335
Offering related expenses12,979——
Impairment and other4,2074,5843,396
Acquisition costs502751,384
(Gain) loss on sale of property(18,590)(2,272)235
Other(2)1,5082,846607
Adjusted EBITDA$485,854$397,124$211,716
(1)For the years ended December 31, 2016, 2015, and 2014, $10,014, $23,758, and $19,318 was recorded in general and administrative expense, respectively, and $196, $4,166, and $5,017 was recorded in property management expense, respectively.
(2)Includes interest income and other miscellaneous income and expenses.

Net Operating Income

NOI is a non-GAAP measure often used to evaluate the performance of real estate companies. We define NOI for an identified population of homes as rental revenues and other property income less property operating and maintenance expense (which consists primarily of property taxes, insurance, HOA fees (when applicable), market-level personnel expenses, repairs and maintenance, leasing costs and marketing). NOI excludes: interest expense; depreciation and amortization; general and administrative expense; property management expense; impairment and other; acquisition costs; (gain) loss on sale of property; and interest income and other miscellaneous income and expenses.

We consider NOI to be a meaningful supplemental financial measure of our performance when considered with the financial statements determined in accordance with GAAP. We believe NOI is helpful to investors in understanding the core performance of our real estate operations. The GAAP measure most directly comparable to NOI is net income or loss. NOI is not used as a measure of liquidity and should not be considered as an alternative to net income or loss or any other measure

of financial performance presented in accordance with GAAP. Our NOI may not be comparable to the NOI of other companies due to the fact that not all companies use the same definition of NOI. Accordingly, there can be no assurance that our basis for computing this non-GAAP measure is comparable with that of other companies.

We believe that Same Store NOI is also a meaningful supplemental measure of our operating performance for the same reasons as NOI and is further helpful to investors as it provides a more consistent measurement of our performance across reporting periods by reflecting NOI for homes in our Same Store portfolio.

The following table presents a reconciliation of net loss to NOI for our total portfolio and NOI for our Same Store portfolio as determined in accordance with GAAP on a historical basis for each of the periods indicated:

Year Ended December 31,
($ in thousands)201620152014
Net loss$(78,239)$(160,208)$(269,861)
Interest expense286,048273,736235,812
Depreciation and amortization267,681250,239215,808
General and administrative(1)69,10279,42888,177
Property management expense(2)30,49339,45962,506
Impairment and other4,2074,5843,396
Acquisition costs502751,384
(Gain) loss on sale of property(18,590)(2,272)235
Other(3)1,5082,846607
NOI (total portfolio)562,260488,087338,064
Non-Same Store NOI(125,132)(83,515)(157,127)
NOI (Same Store portfolio)(4)$437,128$404,572$180,937
(1)Includes $10,014, $23,758, and $19,318 of noncash incentive compensation expense for the years ended December 31, 2016, 2015, and 2014, respectively.
(2)Includes $196, $4,166, and $5,017 of noncash incentive compensation expense for the years ended December 31, 2016, 2015, and 2014, respectively.
(3)Includes interest income and other miscellaneous income and expenses.
(4)Same Store (consisting of homes which had commenced their initial post-renovation lease prior to October 3rd of the year prior to the first year of the comparison period) homes are 36,469 for the years ended December 31, 2016 and 2015 and 18,762 for the year ended December 31, 2014.

Funds from Operations, Core Funds from Operations, and Adjusted Funds from Operations

FFO, Core FFO, and Adjusted FFO are supplemental, non-GAAP measures often utilized to evaluate the performance of real estate companies. FFO is defined by the National Association of Real Estate Investment Trusts (“NAREIT”) as net income or loss (computed in accordance with GAAP) excluding gains or losses from sales of previously depreciated real estate assets, plus depreciation, amortization and impairment of real estate assets, and adjustments for unconsolidated partnerships and joint ventures.

We believe that FFO is a meaningful supplemental measure of the operating performance of our business because historical cost accounting for real estate assets in accordance with GAAP assumes that the value of real estate assets diminishes predictably over time, as reflected through depreciation and amortization. Because real estate values have historically risen or fallen with market conditions, management considers FFO an appropriate supplemental performance measure as it excludes historical cost depreciation and amortization, impairment on depreciated real estate investments, as well as gains or losses related to sales of previously depreciated homes, from GAAP net income or loss. By excluding depreciation and amortization and gains or losses on sales of real estate, management uses FFO to measure returns on its

investments in homes. However, FFO excludes depreciation and amortization and captures neither the changes in the value of the homes that result from use or market conditions nor the level of capital expenditures to maintain the operating performance of the homes, all of which have real economic effect and could materially affect our results from operations, the utility of FFO as a measure of our performance is limited.

Management also believes that FFO, combined with the required GAAP presentations, is useful to investors in providing more meaningful comparisons of the operating performance of a company’s real estate between periods or as compared to other companies. The GAAP measure most directly comparable to FFO is net income or loss. FFO is not used as a measure of our liquidity and should not be considered an alternative to net income or loss or any other measure of financial performance presented in accordance with GAAP. Our FFO may not be comparable to the FFO of other companies due to the fact that not all companies use the same definition of FFO. Accordingly, there can be no assurance that our basis for computing this non-GAAP measures is comparable with that of other companies.

We believe that Core FFO and Adjusted FFO are also meaningful supplemental measures of our operating performance for the same reasons as FFO and are further helpful to investors as they provides a more consistent measurement of our performance across reporting periods by removing the impact of certain items that are not comparable from period to period. We define Core FFO as FFO adjusted for noncash interest expense related to amortization of deferred financing costs and discounts related to our financing arrangements, noncash interest expense for derivatives, noncash incentive compensation expense, offering related expenses, severance expenses, casualty losses, net, and acquisition costs, as applicable. We define Adjusted FFO as Core FFO less recurring capital expenditures that are necessary to help preserve the value of and maintain functionality of our homes. The GAAP measure most directly comparable to Core FFO and Adjusted FFO is net income or loss. Core FFO and Adjusted FFO are not used as measures of our liquidity and should not be considered alternatives to net income or loss or any other measure of financial performance presented in accordance with GAAP. Our Core FFO and Adjusted FFO may not be comparable to the Core FFO and Adjusted FFO of other companies due to the fact that not all companies use the same definition of Core FFO and Adjusted FFO. Accordingly, there can be no assurance that our basis for computing this non-GAAP measures is comparable with that of other companies.

The following table presents a reconciliation of net loss to FFO, Core FFO, and Adjusted FFO as determined in accordance with GAAP on a historical basis for each of the periods indicated:

Year Ended December 31,
($ in thousands)201620152014
Net loss$(78,239)$(160,208)$(269,861)
Add (deduct) adjustments from net loss to derive FFO:
Depreciation and amortization on real estate assets263,093245,666212,434
Impairment on depreciated real estate investments2,2821,448423
(Gain) loss on sale of previously depreciated investments in real estate(18,590)(2,272)235
FFO168,54684,634(56,769)
Noncash interest expense related to amortization of deferred financing costs, mortgage loan discounts and noncash interest expense from derivatives59,40269,84964,566
Noncash incentive compensation expense(1)10,21027,92424,335
Offering related expenses12,979——
Severance expense2,3637,54715,558
Casualty losses, net1,9253,1362,973
Acquisition costs502751,384
Core FFO255,475193,36552,047
Recurring capital expenditures(47,877)(49,773)(56,952)
Adjusted FFO$207,598$143,592$(4,905)
(1)For the years ended December 31, 2016, 2015, and 2014, $10,014, $23,758, and $19,318 was recorded in general and administrative expense, respectively, and $196, $4,166, and $5,017 was recorded in property management expense, respectively.

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