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 1. “Business,” and the 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.

Unless otherwise indicated or the context otherwise requires, information presented throughout this discussion and analysis of our financial condition and results of operations as of and for the year ended December 31, 2017 includes the impact of the Mergers; however, the discussion of operational information for our total and same store portfolio, including average occupancy, average rent and net effective rental rate growth, is provided with respect to the Legacy IH portfolio and does not reflect the results of the Legacy SWH portfolio.

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

Overview

Invitation Homes is a leading owner and operator of single-family homes for lease, offering residents high-quality homes in sought-after neighborhoods across America. With over 82,000 homes for lease in 17 markets across the country as of December 31, 2017, Invitation Homes is meeting changing lifestyle demands by providing residents access to updated homes with features they value, such as close proximity to jobs and access to good schools. Our mission statement, “Together with you, we make a house a home,” reflects our commitment to high-touch service that continuously enhances residents’ living experiences and provides homes where individuals and families can thrive.

We operate in markets with strong demand drivers, high barriers to entry and high rent growth potential, primarily in the Western United States, Florida and the Southeastern United States. Through disciplined market and asset selection, we and, prior to the Mergers, SWH designed our portfolios 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.

We invest in markets that we expect will exhibit lower new supply, stronger job and household formation growth and superior NOI growth relative to the broader United States housing and rental market. Within our 17 markets, we target attractive neighborhoods in in-fill locations with multiple demand drivers, such as proximity to major employment centers, desirable schools and transportation corridors. Our homes average approximately 1,850 square feet with three bedrooms and two bathrooms, appealing to a resident base that we believe is less transitory than the typical multifamily resident. As of December 31, 2017, we have invested approximately $1.2 billion in the upfront renovation of homes in the Legacy IH portfolio, representing approximately $25,000 per home, in order to address capital needs, reduce ongoing maintenance costs and drive resident demand. As a result, our portfolio benefits from high occupancy and low turnover rates, and we are well positioned to drive strong rent growth, attractive margins and predictable cash flows.

Reorganization and Initial Public Offering

On January 31, 2017, we and our Pre-IPO Owners effected the Pre-IPO Transactions that resulted in INVH LP holding, directly or indirectly, all of the assets, liabilities, and results of operations reflected in our consolidated financial statements, including the full portfolio of homes held by the IH Holding Entities. As a result of the Pre-IPO Transactions, INVH LP became a consolidated subsidiary of INVH. A wholly-owned subsidiary of INVH, Invitation Homes OP GP LLC, serves as INVH LP’s sole general partner.

The Pre-IPO Transactions have been accounted for as a reorganization of entities under common control utilizing historical cost basis in our 2017 financial statements. Accordingly, after January 31, 2017, our consolidated financial statements include the accounts of INVH and its wholly-owned subsidiaries. Prior to that date, our consolidated financial statements include the combined accounts of INVH LP and the IH Holding Entities and their wholly-owned subsidiaries.

On February 6, 2017, Invitation Homes Inc. completed an initial public offering of 88,550,000 shares of common stock at a price to the public of $20.00 per share (the “IPO”). An additional 221,826,634 shares of common stock were issued to the Pre-IPO Owners, including stock held by directors, officers, and employees as part of the Pre-IPO Transactions.

Merger with Starwood Waypoint Homes

On November 16, 2017, we completed the Mergers with SWH. We believe that the Mergers provide a number of significant potential strategic benefits and opportunities that will be in the best interests of our stockholders. More specifically, we believe that the Mergers created a diversified and high-quality portfolio of homes in high-growth markets. Potential benefits from economies of scale and the market overlap of INVH’s and SWH’s complementary portfolios may be derived from optimization of operations, reduction of operating costs and other anticipated synergies.

Our Portfolio

The following table provides summary information regarding our total portfolio as of and for the periods ended December 31, 2017 as noted below:

Legacy IH
MarketTotal Portfolio Number of Homes(1)Legacy SWH Number of Homes(1)Number of Homes(1)Average Occupancy(2)Average Monthly Rent(3)Average Monthly Rent PSF(3)% of Revenue(4)
Western United States
Southern California8,3843,7524,63295.5%$2,267$1.3312.7%
Northern California4,6061,7592,84795.8%1,7801.136.7%
Seattle3,271N/A3,27194.7%1,9561.038.3%
Phoenix7,4351,9905,44595.3%1,1790.748.2%
Las Vegas2,7081,74596395.2%1,4630.761.8%
Denver2,1952,195N/AN/AN/AN/AN/A
Western United States Subtotal28,59911,44117,15895.3%1,7361.0237.7%
Florida
South Florida9,3343,7685,56693.4%2,1861.1414.6%
Tampa8,8533,9204,93394.4%1,5940.829.6%
Orlando5,6791,9433,73695.4%1,5270.807.0%
Jacksonville1,945N/A1,94594.6%1,5690.793.8%
Florida Subtotal25,8119,63116,18094.3%1,7780.9235.0%
Southeastern United States
Atlanta12,4285,0757,35394.9%1,3890.6712.6%
Charlotte4,8951,7213,17494.1%1,3860.705.2%
Nashville761761N/AN/AN/AN/AN/A
Southeastern United States Subtotal18,0847,55710,52794.7%1,3880.6817.8%
Texas
Houston2,5972,597N/AN/AN/AN/AN/A
Dallas2,2702,270N/AN/AN/AN/AN/A
Texas Subtotal4,8674,867N/AN/AN/AN/AN/A
Midwest United States
Chicago4,0311,1572,87493.2%2,0231.206.9%
Minneapolis1,178N/A1,17895.0%1,7730.892.6%
Midwest United States Subtotal5,2091,1574,05293.7%1,9501.109.5%
Total/Average82,57034,65347,91794.7%$1,692$0.91100.0%
(1)As of December 31, 2017.
(2)Represents average occupancy of the Legacy IH portfolio for the year ended December 31, 2017.
(3)Represents average monthly rent, net of rental concessions, of the Legacy IH portfolio for the year ended December 31, 2017.
(4)Represents the percentage of total revenue of the Legacy IH portfolio generated in each market for the year ended December 31, 2017.

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. See Part I. Item 1A. “Risk Factors” for more information regarding factors that could materially adversely affect our results of operations and financial condition. Key factors that impact our results of operations and financial condition include market fundamentals, property acquisitions and renovations, rental rates and occupancy levels, turnover rates 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 72.0% of our revenues during the year ended December 31, 2017. In recent periods, our Western United States and Florida markets have experienced favorable demand fundamentals with employment growth and household formation rates and favorable supply fundamentals such as the rate of new supply delivery. We believe these supply and demand fundamentals have driven favorable rental rate growth and home price appreciation for our Western United States and Florida markets in recent periods, and we expect these trends to continue in the near to intermediate term.

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 Rates 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.

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.

Financing Arrangements: Financing arrangements directly impact our interest expense, mortgage loans, term loan facility, revolving facility and convertible debt, as well as our ability to acquire and renovate homes. We have historically utilized indebtedness to acquire and renovate new homes. Our current financing arrangements contain financial covenants, and certain financing arrangements contain variable interest rate terms. Interest rates are impacted by market conditions, and the terms of the underlying financing arrangements. See Item 7A. “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 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 $1,692.1 million to us after underwriting discounts, but before transaction costs. We used a portion of the net proceeds, together with the borrowings under the Term Loan Facility of our New Credit Facility (both described below), to repay all of the then 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, 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.

Merger with Starwood Waypoint Homes

On November 16, 2017, we completed the Mergers with SWH. We believe that the Mergers provide a number of significant potential strategic benefits and opportunities that will be in the best interests of our stockholders. More specifically, we believe that the Mergers created a diversified and high-quality portfolio of homes in high-growth markets. Potential benefits from economies of scale and the market overlap of INVH’s and SWH’s complementary portfolios may be derived from optimization of operations, reduction of operating costs and other anticipated synergies.

The assets, including a portfolio of 34,670 single-family rental homes, and liabilities of SWH were recorded at their respective fair values at the Merger Date. The estimated fair value of the consideration transferred was $4,920.5 million, which was based upon (i) the observable public closing share price of $23.01 on November 15, 2017 for the 207,448,958 shares of INVH common stock issued to SWH stockholders in exchange for their SWH common shares, (ii) the equity component of the Convertible Senior Notes, which was valued at $135.5 million, and (iii) the recognition of $11.6 million of precombination service related to the exchange of SWH RSUs for INVH RSUs.

New Credit Facility

On February 6, 2017, INVH LP 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 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 (the “Term Loan Facility”), which will mature on February 6, 2022. See “—Liquidity and Capital Resources.”

Fannie Mae Securitization Transaction

On April 28, 2017, we completed a securitization transaction pursuant to which we entered into a loan agreement, providing for a new, ten-year, fixed-rate mortgage loan comprised of two components with a total principal amount of $1,000.0 million (“IH 2017-1”). IH 2017-1 will mature June 9, 2027, and is secured by first priority mortgages on a portfolio of our homes. See “—Liquidity and Capital Resources.”

We used proceeds from the IH 2017-1 securitization to repay the remaining $420.0 million outstanding under our mortgage loan relating to the IH1 2014-1 securitization transaction, to fund certain reserves and to pay transaction fees and expenses incurred with respect to IH 2017-1. The IH1 2014-1 mortgage loan outstanding balance had been reduced as of April 28, 2017 due to prepayments from IPO proceeds and application of proceeds from sales of homes. On May 9, 2017, we used the remaining proceeds to voluntarily prepay $510.0 million of our mortgage loan relating to the IH1 2014-3

securitization transaction. On June 9, 2017, we made a $100.0 million prepayment on IH 2014-3, reducing the outstanding principal balance thereon to approximately $151.0 million.

IH 2017-2 Securitization

On November 9, 2017, we completed a securitization transaction pursuant to which we entered into a loan agreement with a third party lender, providing for a new mortgage loan comprised of six components with a total principal amount of $865.0 million (“IH 2017-2”). IH 2017-2 will mature in December 2019, has five one-year extension options, and is secured by first priority mortgages on a portfolio of certain of our homes. Each of the six components of IH 2017-2 bears interest at a floating rate equal to LIBOR plus an applicable spread that ranges from 91 to 306 bps, with a weighted average spread to LIBOR of 150 bps. See “—Liquidity and Capital Resources.” We utilized proceeds from IH 2017-2 to repay IH1 2014-2 and IH1 2014-3, to fund certain reserves, and for general corporate purposes.

IH 2018-1 Securitization

On February 8, 2018, we completed a securitization transaction pursuant to which we entered into a loan agreement with a third-party lender, providing for a new mortgage loan comprised of six components with a total principal balance of $916.6 million (“IH 2018-1”). IH 2018-1 has a stated maturity of March 9, 2020, with five one-year extension options, and is secured by first priority mortgages on a portfolio of homes. Each of the six components of IH 2018-1 bears interest at a floating rate equal to LIBOR plus an applicable spread that ranges from 76 to 256 bps, with a weighted average spread to LIBOR of 124 bps. We used proceeds from IH 2018-1 to repay CAH 2014-1 and CAH 2014-2, to fund certain reserves, and for general corporate purposes.

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 homes for lease. 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. Following the IPO, we incurred additional legal, accounting and other expenses that we had not previously incurred as a private company, including costs associated with public company reporting requirements. General and administrative expense also includes IPO and merger and transaction-related expenses that are of a non-recurring nature. 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 from and after the IPO and the Mergers.

Share-Based 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. In connection with the IPO, all of the Class B units were converted into shares of common stock, canceled, or converted into similar units of newly formed subsidiaries of the Pre-IPO Owners. We have recognized incentive compensation expense related to the value of those units in our results of operations. In connection with and subsequent to 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. We also assumed similar awards in connection with the Mergers. All incentive unit and share-based compensation expense is recognized in our statements of operations as components of general and administrative expense and property management expense.

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, unrealized gains (losses) on non-designated hedging instruments and noncash interest expense related to designated hedging instruments acquired in the Mergers.

Other, net

Other, net includes interest income, third-party management fee income, equity in income from an unconsolidated joint venture acquired in the Mergers, other miscellaneous income and expenses, and acquisition costs (in periods prior to January 1, 2017).

Gain (Loss) on Sale of Property, net of tax

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

Results of Operations

Year Ended December 31, 2017 Compared to Year Ended December 31, 2016

The following table sets forth a comparison of the results of operations for the years ended December 31, 2017 and 2016:

Year Ended December 31,
($ in thousands)20172016$ Change% Change
Revenues:
Rental revenues$994,921$877,991$116,93013.3%
Other property income59,53544,59614,93933.5%
Total revenues1,054,456922,587131,86914.3%
Operating expenses:
Property operating and maintenance391,495360,32731,1688.6%
Property management expense43,34430,49312,85142.1%
General and administrative167,73969,10298,637142.7%
Depreciation and amortization309,578267,68141,89715.7%
Impairment and other24,0934,20719,886472.7%
Total operating expenses936,249731,810204,43927.9%
Operating income118,207190,777(72,570)(38.0)%
Other expenses:
Interest expense(256,970)(286,048)(29,078)(10.2)%
Other, net(959)(1,558)(599)(38.4)%
Total other expenses(257,929)(287,606)(29,677)(10.3)%
Loss from continuing operations$(139,722)$(96,829)$42,89344.3%

Portfolio Information

As of December 31, 2017 and 2016, we owned 82,570 and 48,298 single-family rental homes, respectively, generating rental revenue of $994.9 million and $878.0 million, respectively, for the years then ended. As of December 31, 2017, the Legacy IH portfolio accounted for 47,917 of the 82,570 total owned homes and rental revenues of $915.7 million of our total rental revenues of $994.9 million. As of December 31, 2017, our Same Store portfolio was comprised of 42,689 homes from the Legacy IH portfolio.

As a result of the Mergers, an additional 34,670 homes were added to our portfolio, which generated rental revenues of $79.2 million for the year ended December 31, 2017. In addition to the impact of the Mergers, during the years ended December 31, 2017 and 2016, we acquired 910 and 1,253 homes, respectively, and sold 1,308 and 1,093 homes, respectively.

Rental Revenues

In the Legacy IH total portfolio, rental revenue increased by 4.3% due to an increase in both average occupancy and average monthly rent per occupied home, partially offset by a decrease in number of homes owned.

Average occupancy for the Legacy IH total portfolio was 94.7% and 94.5% for the years ended December 31, 2017 and 2016, respectively. The increase in average occupancy correlates with the decrease in the number of homes acquired during 2017 compared to 2016 as homes are unoccupied for a longer period of time during initial renovations than during a re-

resident period. Average rent per occupied home for the Legacy IH total portfolio in actual dollars for the year ended December 31, 2017 was $1,691, compared to $1,611 for the year ended December 31, 2016, a 5.0% increase.

For our Same Store portfolio, our average occupancy was 95.7% and 96.1% for the years ended December 31, 2017 and 2016, respectively, and our average rent per occupied home in actual dollars for the year ended December 31, 2017, was $1,694, compared to $1,626 for the year ended December 31, 2016, a 4.2% 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 new leases, 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 the Legacy IH total portfolio. For the years ended December 31, 2017 and 2016, renewal lease net effective rental rate growth for the Legacy IH total portfolio averaged 5.1% and 5.5%, respectively. For the years ended December 31, 2017 and 2016, new lease net effective rental rate growth for the Legacy IH total portfolio averaged 3.6% and 5.5%, respectively.

For the years ended December 31, 2017 and 2016, the turnover rate for the Legacy IH Same Store portfolio was 34.6% and 34.9%, respectively. For the Legacy IH total portfolio, an average home remained unoccupied for 47 and 42 days between residents for each of the years ended December 31, 2017 and 2016, respectively.

Other Property Income

For the years ended December 31, 2017 and 2016, other property income was $59.5 million and $44.6 million, respectively, with the Legacy IH portfolio comprising $54.1 million of other property income for the year ended December 31, 2017, an increase of 21.3%. The primary drivers of the increase were pet rent and late fee income attributable to the implementation of our national lease for all leases written beginning in February 2016 and the automation and consistent application of these fees beginning in March 2017. Other property income of $5.4 million was attributable to the homes acquired in the Mergers.

Operating Expenses

Operating expenses were $936.2 million and $731.8 million for the years ended December 31, 2017 and 2016, respectively. Set forth below is a discussion of changes in the individual components of operating expenses.

Property operating and maintenance expense increased to $391.5 million for the year ended December 31, 2017 from $360.3 million for the year ended December 31, 2016 due to the increase in the number of homes owned in 2017. The Legacy IH portfolio comprised $360.5 million of the property operating and maintenance expenses for the year ended December 31, 2017, which is relatively unchanged from 2016. Legacy IH portfolio expenses were relatively flat as increases in property taxes for homes owned in both periods were offset by reduced market-level personnel expense. Property operating and maintenance expenses of $31.0 million is attributable to homes acquired in the Mergers.

Property management expense and general and administrative expense increased to $211.1 million for the year ended December 31, 2017 from $99.6 million for the year ended December 31, 2016 primarily due to an increase in share-based compensation expense of $71.0 million and merger and transaction-related expenses of $29.8 million incurred during the year ended December 31, 2017.

Depreciation and amortization expense increased due to higher average cost basis per home at December 31, 2017 compared to December 31, 2016 and the addition of 34,670 homes acquired in the Mergers.

Impairment and other expenses increased to $24.1 million for the year ended December 31, 2017 from $4.2 million for the year ended December 31, 2016 primarily due to losses and damages related to Hurricane Irma.

Interest Expense

Interest expense was $257.0 million and $286.0 million for the years ended December 31, 2017 and 2016, respectively, with interest expense related to indebtedness incurred prior to the Mergers comprising $239.7 million, a decrease of 16.2% from the year ended December 31, 2016. The decrease in interest expense was due to a reduction in average debt balances outstanding during 2017. This was partially offset by an increase in our weighted average cost of debt due to an increase in

the average monthly LIBOR rates of 63 basis points from 0.51% to 1.14% during the years ended December 31, 2016 and 2017, respectively. The decrease in average debt balances outstanding during the year ended December 31, 2017 was primarily attributable to net reductions in debt from the use of a portion of our net IPO proceeds, together with the borrowings under the Term Loan Facility, to repay all of our then existing credit facilities and certain of our mortgage loans. As of December 31, 2017, we had $9,651.7 million of debt outstanding, net of deferred financing costs and discounts, compared to $7,570.3 million as of December 31, 2016.

Gain on Sale of Property, Net of Tax

Gain on sale of property was $33.9 million and $18.6 million for the years ended December 31, 2017 and 2016, respectively, an increase of 82.3%. Of the 1,308 homes sold during the year ended December 31, 2017, 454 were sold in bulk sales for a gain of $9.5 million. Of the 1,093 homes sold during the year ended December 31, 2016, 590 homes were sold in bulk sales for a gain of $9.4 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, 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 issued by the IH Holding Entities 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 by the IH Holding Entities 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.

Liquidity and Capital Resources

Our liquidity and capital resources as of December 31, 2017 and 2016 included unrestricted cash and cash equivalents of $179.9 million and $198.1 million, respectively, a 9.2% decrease due primarily to net repayments of certain of our indebtedness, which is discussed in further detail in “—Cash Flows.” Additionally, $965.0 million of the Revolving Credit Facility remained undrawn as of December 31, 2017.

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 intend 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 believe our rental income net of operating expenses will generally provide cash flow sufficient to fund our operations 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 which has an undrawn balance of $965.0 million as of December 31, 2017.

As a REIT, we are required to distribute to our stockholders at least 90% of our 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.

The following describes the key terms of our current indebtedness.

Mortgage Loans

Our securitization transactions (the “Securitizations” or the “mortgage loans”) are collateralized by certain homes owned by the respective Borrower Entities. We utilize the proceeds from our securitizations to fund (i) repayments of then-outstanding indebtedness, including credit facilities and prior securitization transactions, (ii) initial deposits into Securitization reserve accounts, (iii) closing costs in connection with the mortgage loans, (iv) general costs associated with our operations, and (v) distributions and dividends. In addition to the Securitization transactions we initiated, we assumed certain mortgage loans from SWH in connection with the Mergers.

The following table sets forth a summary of our mortgage loan indebtedness as of December 31, 2017 and 2016:

Outstanding Principal Balance(3)
($ in thousands)Maturity DateMaturity Date if Fully Extended(1)Interest Rate(2)Range of SpreadsDecember 31, 2017December 31, 2016
IH1 2013-1N/AN/A—%125-375 bps$—$462,431
IH1 2014-1N/AN/A—%107-382 bps—978,231
IH1 2014-2, netN/AN/A—%117-407 bps—710,664
IH1 2014-3, netN/AN/A—%126-506 bps—766,753
IH2 2015-1, net(4)(5)March 9, 2019March 9, 20203.99%152-437 bps528,795531,318
IH2 2015-2(4)June 9, 2018June 9, 20203.57%142-377 bps627,259630,283
IH2 2015-3(4)August 9, 2018August 7, 20203.80%136-481 bps1,165,8861,184,314
IH1 2017-1(6)June 9, 2027N/A4.23%N/A996,453—
IH1 2017-2(4)December 9, 2019December 9, 20243.06%91-306 bps863,413—
CAH 2014-1(4)(7)May 9, 2018May 9, 20193.28%125-290 bps473,384—
CAH 2014-2(4)(7)July 9, 2018July 9, 20193.32%105-345 bps385,401—
CAH 2015-1(4)July 9, 2018July 9, 20203.45%128-373 bps656,551—
CSH 2016-1(4)July 9, 2018July 9, 20213.87%158-508 bps531,517—
CSH 2016-2(4)December 9, 2018December 9, 20213.41%133-423 bps609,815—
SWH 2017-1(4)October 9, 2019January 9, 20233.11%102-347 bps769,754—
Total Securitizations7,608,2285,263,994
Less deferred financing costs, net(28,075)(9,256)
Total$7,580,153$5,254,738
(1)Represents the maturity date if we exercise each of the remaining one-year extension options available, which are subject to certain conditions being met.
(2)Except for IH 2017-1, interest rates are based on a weighted average spread over LIBOR, plus applicable servicing fees; as of December 31, 2017, LIBOR was 1.56%. Our IH 2017-1 mortgage loan bears interest at a fixed rate of 4.23% per annum, equal to the market determined pass-through rate payable on the certificates including applicable servicing fees.
(3)Outstanding principal balance is net of discounts and does not include deferred financing costs, net.
(4)The initial maturity term of each of these mortgage loans is two to three years, individually subject to two to five, one‑year extension options at the borrower’s discretion (provided that there is no continuing 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 IH2 2015-2, IH2 2015-3, CAH 2014-1 and CAH 2015-1 mortgage loans have exercised the first extension option; and IH2 2015-1, and CAH 2014-2 have exercised the second extension option. The maturity dates above are reflective of all extensions that have been exercised.
(5)Net of unamortized discount of $0.0 million and $0.1 million as of December 31, 2017 and 2016, respectively.
(6)Net of unamortized discount of $3.3 million as of December 31, 2017.
(7)On February 8, 2018, the outstanding balances of CAH 2014-1 and CAH 2014-2 were repaid in full with proceeds from IH 2018-1, a new securitization transaction.

Securitization Transactions

For each Securitization transaction, the Borrower Entity executed a loan agreement with a third‑party lender. Except for IH 2017-1, each mortgage loan consists of five to seven components. The components are floating rate except with respect to certain components we were required to retain in connection with risk retention rules. The two to three year initial terms are individually subject to two to five, one-year extension options at the Borrower Entity’s discretion. Such extensions are available provided there is no continuing event of default under the respective loan agreement and the Borrower Entity obtains a replacement interest rate cap agreement in a form reasonably acceptable the lender. IH 2017-1 is a 10-year, fixed rate mortgage loan comprised of two components. Certificates issued by the trust in connection with Component A of IH 2017-1 benefit from the Federal National Mortgage Association’s guaranty of timely payment of principal and interest.

Certain components were sold at a discount, and $3.3 million and $0.1 million of unamortized discount are included in mortgage loans, net in our consolidated balance sheets as of December 31, 2017 and 2016, respectively.

Each mortgage loan is secured by a pledge of the equity in the assets of the respective Borrower Entities, as well as first-priority mortgages on the underlying properties and a grant of security interests in all of the related personal property. As of December 31, 2017 and 2016, a total of 47,616 and 30,900 homes (unaudited), respectively, were pledged pursuant to the mortgage loans. We are obligated to make monthly payments of interest for each mortgage loan, and IH 2013-1 and CAH 2014-1 also required monthly payments of principal.

Transactions with Trusts

Concurrent with the execution of each loan agreement, the respective third-party lender sold each loan it originated to individual depositor entities (the “Depositor Entities”) who subsequently transferred each loan to Securitization-specific trust entities (the “Trusts”). The Depositor Entities are wholly-owned subsidiaries, except for the IH 2013-1 and IH 2014-1 Depositor Entities which were 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 consolidated financial statements other than with respect to Certificates we retained in connection with a Securitization or purchased at a later date.

The Trusts are structured as pass-through entities that receive interest, and in the case of IH1 2013-1 and CAH 2014-1 principal payments, from the Securitizations and distribute those payments to the holders of the Certificates. The assets held by the Trusts are restricted and can only be used to fulfill the obligations of those entities. The obligations of the Trusts do not have any recourse to the general credit of any entities in these consolidated financial statements. We have evaluated our interests in certain certificates of the Trusts held by us (discussed below) and determined that they do not create a more than insignificant variable interest in the Trusts. Additionally, the retained certificates do not provide us with any ability to direct the activities that could impact the Trusts’ economic performance. Therefore, we do not consolidate the Trusts.

Retained Certificates

Beginning in April 2014, the Trusts made Certificates available for sale to both domestic and foreign investors. With the introduction of foreign investment, sponsors of the mortgage loans are required to retain a portion of the risk that represents a material net economic interest in each loan. These requirements were further refined in December 2016 pursuant to Regulation RR (the “Risk Retention Rules”) under the Securities Exchange Act of 1934 as amended (the “Exchange Act”). As such, loan sponsors are now required to retain a portion of the credit risk that represents not less than 5% of the aggregate fair value of the loan as of the closing date.

To fulfill these requirements, Class G certificates for IH1 2014-2, IH1 2014-3, IH2 2015-1, IH2 2015-2, IH2 2015-3, CAH 2015-1, CSH 2016-1, and CSH 2016-2 are equal to 5% of the original principal amount of the loans. Per the terms of the mortgage loan agreements, the Class G certificates are restricted certificates that were made available exclusively to the sponsor, as applicable. We retained these Class G certificates at the time of the related Securitizations, and they are principal

only, bearing a stated interest rate of 0.0005%. Additionally, in certain instances, we have elected to purchase certain Class F certificates, which bear a stated annual interest rate of LIBOR plus a spread ranging from 4.80% to 5.08%.

For IH 2017-1, the Class B certificates are restricted certificates that were made available exclusively to INVH LP in order to comply with the Risk Retention Rules. The Class B certificates bear a stated annual interest rate of 4.23%, including applicable servicing fees.

For IH 2017-2 and SWH 2017-1, we retained a portion of each certificate class to meet the Risk Retention Rules. These retained certificates accrue interest at a floating rate of LIBOR plus a spread ranging from 0.91% to 3.47%.

The retained certificates total $378.5 million and $209.3 million as of December 31, 2017 and 2016, respectively, are classified as held to maturity investments, and are recorded in other assets, net in the consolidated balance sheets.

Loan Covenants

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, 2017, and through the date our consolidated 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 or two year anniversary of the closing dates of each of the mortgage loans except for IH 2017-1. For IH 2017-1, prepayments on or before December 2026 will require a yield maintenance premium. For the years ended December 31, 2017, 2016, and 2015, we made voluntary and mandatory prepayments of $2,951.0 million, $42.1 million, and $13.2 million, respectively, under the terms of the loan agreements.

Term Loan Facility and Revolving Facility

On February 6, 2017, we entered into the New Credit Facility, which was amended on December 18, 2017 to include entities and homes acquired in the Mergers. The New Credit Facility provides $2,500.0 million of borrowing capacity and consists of the $1,000.0 million Revolving Facility, which will mature on February 6, 2021, with a one-year extension option, and the $1,500.0 million Term Loan Facility, which will mature on February 6, 2022. The Revolving Facility 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 provides us with the option to enter into additional incremental credit facilities (including an uncommitted incremental facility that provides us 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. Proceeds from the Term Loan Facility were used to repay existing indebtedness and for general corporate purposes. Proceeds from the Revolving Facility were used for general corporate purposes.

The following table sets forth a summary of the outstanding principal amounts under such loans as of December 31, 2017:

($ in thousands)Maturity DateInterest Rate(1)December 31, 2017
Term loan facilityFebruary 6, 20223.26%$1,500,000
Deferred financing costs, net(12,027)
Term Loan Facility, net$1,487,973
Revolving FacilityFebruary 6, 20213.31%$35,000
(1)Interest rates for the Term Loan Facility and the Revolving Facility are based on LIBOR plus an applicable margin of 1.70% and 1.75%, respectively; as of December 31, 2017, LIBOR was 1.56%.

Interest Rate and Fees

Borrowings under the New Credit Facility bear interest, at our 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”), we may elect to convert to a credit rating based pricing grid.

In addition to paying interest on outstanding principal under the New Credit Facility, we are 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 0.35% or 0.20% 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 we 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 and Amortization

No principal reductions are required under the New Credit Facility. We are 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 will be permitted under the Term Loan Facility.

Loan Covenants

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, our ability and that of the Subsidiary Guarantors (as defined below) and their respective subsidiaries to (i) engage in certain mergers, consolidations or liquidations, (ii) sell, lease or transfer all or substantially all of their respective assets, (iii) engage in certain transactions with affiliates, (iv) make changes to the our fiscal year, (v) make changes in the nature of our business and our subsidiaries, and (vi) incur additional indebtedness that is secured on a pari passu basis with the New Credit Facility.

The New Credit Facility also requires us, on a consolidated basis with our 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. At December 31, 2017, and through the date our consolidated financial statements were issued, we believe we were in compliance with all affirmative and negative covenants.

Guarantees and Security

The obligations under the New Credit Facility are guaranteed on a joint and several basis by each of our direct and indirect domestic wholly-owned subsidiaries that own, directly or indirectly, unencumbered assets (the “Subsidiary Guarantors”), subject to certain exceptions. The guarantee provided by any Subsidiary Guarantor will be 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, INVH may be required to provide a guarantee of the New Credit Facility under certain circumstances, including if INVH does not maintain its 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 us and each of the Subsidiary Guarantors. The security interests 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.

Convertible Senior Notes

In connection with the Mergers, we assumed SWH’s convertible senior notes. In July 2014, SWH issued $230.0 million in aggregate principal amount of 3.00% convertible senior notes due 2019 (the “2019 Convertible Notes”). Interest on the 2019 Convertible Notes is payable semiannually in arrears on January 1st and July 1st of each year. The 2019 Convertible Notes will mature on July 1, 2019.

In January 2017, SWH issued $345.0 million in aggregate principal amount of 3.50% convertible senior notes due 2022 (the “2022 Convertible Notes” and together with the 2019 Convertible Notes, the “Convertible Senior Notes”). Interest on the 2022 Convertible Notes is payable semiannually in arrears on January 15th and July 15th of each year. The 2022 Convertible Notes will mature on January 15, 2022.

The following table summarizes the terms of the Convertible Senior Notes outstanding as of December 31, 2017:

($ in thousands)Coupon RateEffective Rate(1)Conversion Rate(2)Maturity DateAmortization PeriodPrincipal Amount
2019 Convertible Notes3.00%4.92%53.09697/1/20191.50 years$230,000
2022 Convertible Notes3.50%5.12%43.76941/15/20224.04 years345,000
Total575,000
Net unamortized fair value adjustment(26,464)
Total$548,536
(1)Effective rate includes the effect of the adjustment to the fair value of the debt as of the Merger Date, the value of which reduced the initial liability recorded to $223.2 million and $324.3 million for each of the 2019 Convertible Notes and 2022 Convertible Notes, respectively.
(2)We generally have the option to settle any conversions in cash, common stock or a combination thereof. The conversion rate represents the number of shares of common stock issuable per $1,000 principal amount (actual $) of Convertible Senior Notes converted at December 31, 2017, as adjusted in accordance with the applicable indentures as a result of cash dividend payments and the effects of the Mergers. The Convertible Senior Notes did not meet the criteria for conversion as of December 31, 2017, except as noted below in connection with the completion of the Mergers.

Terms of Conversion

As of December 31, 2017, the conversion rate applicable to the 2019 Convertible Notes was 53.0969 common shares per $1,000 principal amount (actual $) of the 2019 Convertible Notes (equivalent to a conversion price of approximately $18.83 per common share – actual $). The conversion rate for the 2019 Convertible Notes is subject to adjustment in some events, but will not be adjusted for any accrued and unpaid interest. In addition, following certain events that occur prior to the maturity date, we will increase the conversion rate for a holder who elects to convert its 2019 Convertible Notes in connection with such an event in certain circumstances. At any time prior to January 1, 2019, holders may convert the 2019 Convertible Notes at their option only under specific circumstances as defined in the indenture agreement, dated as of July 7, 2014, between us and our trustee, Wilmington Trust, National Association (“the Convertible Notes Trustee”). As a result of the completion of the Mergers, the 2019 Convertible Notes were convertible for a 35 trading day period, which expired January 8, 2018. On or after January 1, 2019 and until maturity, holders may convert all or any portion of the 2019 Convertible Notes at any time. Upon conversion, we will pay or deliver, as the case may be, cash, common stock, or a combination of cash and common stock, at our election.

As of December 31, 2017, the conversion rate applicable to the 2022 Convertible Notes was 43.7694 common shares per $1,000 principal amount (actual $) of the 2022 Convertible Notes (equivalent to a conversion price of approximately $22.85 per common share – actual $). The conversion rate for the 2022 Convertible Notes is subject to adjustment in some events, but will not be adjusted for any accrued and unpaid interest. In addition, following certain events that occur prior to the maturity date, we will increase the conversion rate for a holder who elects to convert its 2022 Convertible Notes in connection with such an event in certain circumstances. At any time prior to July 15, 2021, holders may convert the 2022 Convertible Notes at their option only under specific circumstances as defined in the indenture agreement, dated as of January 10, 2017, between us and the Convertible Notes Trustee. As a result of the completion of the Mergers, the 2022 Convertible Notes were convertible for a 35 trading day period, which expired January 8, 2018. On or after July 15, 2021 and until maturity, holders may convert all or any portion of the 2022 Convertible Notes at any time. Upon conversion, we will pay or deliver, as the case may be, cash, common stock, or a combination of cash and common stock, at our election.

General Terms

We may not redeem the Convertible Senior Notes prior to their maturity dates except to the extent necessary to preserve our status as a REIT for United States federal income tax purposes, as further described in the indentures. If we undergo a fundamental change as defined in the indentures, holders may require us to repurchase for cash all or any portion of their Convertible Senior Notes at a fundamental change repurchase price equal to 100% of the principal amount of the Convertible Senior Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

The indentures contain customary terms and covenants and events of default. If an event of default occurs and is continuing, the Convertible Notes Trustee, by notice to us, or the holders of at least 25% in aggregate principal amount of the outstanding Convertible Senior Notes, by notice to us and the Convertible Notes Trustee, may, and the Convertible Notes Trustee at the request of such holders shall, declare 100% of the principal of and accrued and unpaid interest on all the Convertible Senior Notes to be due and payable. In the case of an event of default arising out of certain events of bankruptcy, insolvency or reorganization in respect to us (as set forth in the indentures), 100% of the principal of and accrued and unpaid interest on the Convertible Senior Notes will automatically become due and payable.

Certain Hedging Arrangements

From time to time, we enter into derivative instruments to manage the economic risk of changes in interest rates. We do not enter into derivative transactions for speculative or trading purposes. Designated hedges are derivatives that meet the criteria for hedge accounting and for which we have elected to designate them as hedges. Non-designated hedges are derivatives that do not meet the criteria for hedge accounting or which we did not elect to designate as accounting hedges.

Designated Hedges

We have entered into various interest rate swap agreements, which are used to hedge the variable cash flows associated with variable-rate interest payments. Certain of the Invitation Homes Partnerships and certain Borrower Entities guaranteed the obligations under each of the interest rate swaps from the date the swaps were entered into through the date of the IPO.

Each of these swaps was accounted for as a non-designated hedge until January 31, 2017, when the criteria for hedge accounting were met as a result of the Pre-IPO Transactions described in Part I. Item 1. “Business—Pre-IPO Transactions and Mergers.” At that time, we designated these swaps for hedge accounting purposes. Subsequent to that date, changes in the fair value of these swaps are recorded in other comprehensive income and are subsequently reclassified into earnings in the period in which the hedged forecasted transactions affect earnings.

In addition, in connection with the Mergers, we acquired various interest rate swap instruments, which we designated for hedge accounting purposes. We recorded these interest rate swaps at their aggregate estimated fair value of $21.1 million. Over the terms of each swap, an amount equal to the Merger Date fair value will be amortized and recorded as an increase in interest expense and accumulated other comprehensive income.

The table below summarizes our interest rate swap instruments as of December 31, 2017 ($ in thousands):

Agreement DateForward Effective DateMaturity DateStrike RateIndexNotional Amount
February 23, 2016March 15, 2017March 15, 20180.85%One-month LIBOR$800,000
February 23, 2016March 15, 2017March 15, 20180.80%One-month LIBOR800,000
February 23, 2016March 15, 2018March 15, 20191.10%One-month LIBOR800,000
February 23, 2016March 15, 2018March 15, 20191.06%One-month LIBOR800,000
June 3, 2016July 15, 2017July 15, 20180.93%One-month LIBOR450,000
June 3, 2016July 15, 2018July 15, 20191.12%One-month LIBOR450,000
June 3, 2016July 15, 2019July 15, 20201.30%One-month LIBOR450,000
June 3, 2016July 15, 2020July 15, 20211.47%One-month LIBOR450,000
December 21, 2016February 28, 2017January 31, 20221.97%One-month LIBOR750,000
December 21, 2016February 28, 2017January 31, 20221.97%One-month LIBOR750,000
January 10, 2017January 15, 2017January 15, 20181.04%One-month LIBOR550,000
January 10, 2017January 15, 2018January 15, 20191.58%One-month LIBOR550,000
January 10, 2017January 15, 2019January 15, 20201.93%One-month LIBOR550,000
January 10, 2017January 15, 2020January 15, 20212.13%One-month LIBOR550,000
January 10, 2017January 15, 2021July 15, 20212.23%One-month LIBOR550,000
January 12, 2017February 28, 2017August 7, 20201.59%One-month LIBOR1,100,000
January 13, 2017February 28, 2017June 9, 20201.63%One-month LIBOR595,000
January 20, 2017February 28, 2017March 9, 20201.60%One-month LIBOR325,000
March 29, 2017March 15, 2019March 15, 20222.21%One-month LIBOR800,000

During the year ended December 31, 2017, such derivatives were used to hedge the variable cash flows associated with existing variable-rate interest payments. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on our variable-rate debt. During the next 12 months, we estimate that $5.3 million will be reclassified to earnings as a decrease in interest expense.

There were no interest rate swap agreements designated as hedges outstanding during the year ended December 31, 2016.

Non-Designated Hedges

Concurrent with entering into certain of the mortgage loan agreements and in connection with the Mergers, we entered into or acquired and 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 ranging from approximately 2.63% to 4.43% (collectively, the “Strike Prices”). To the extent that the maturity date of one or more of the mortgage 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.

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 United States federal income tax purposes) may result in taxable cancellation of indebtedness income to us, which amounts may be material, and in related adverse tax consequences to us.

Cash Flows

Year Ended December 31, 2017 Compared to Year Ended December 31, 2016

The following table summarizes our cash flows for the year ended December 31, 2017 and 2016:

Year Ended December 31,
($ in thousands)20172016$ Change% Change
Net cash provided by operating activities$259,789$250,126$9,6633.9%
Net cash provided by (used in) investing activities53,282(255,037)308,319120.9%
Net cash used in financing activities(331,312)(71,788)(259,524)(361.5)%
Change in cash and cash equivalents$(18,241)$(76,699)$58,45876.2%

Operating Activities

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. Net cash provided by operating activities was $259.8 million and $250.1 million for the years ended December 31, 2017 and 2016, respectively, an increase of 3.9%. Cash provided by operating activities included cash from operations of $292.0 million and $256.4 million, and $(32.2) million and $(6.3) million from other changes in operating assets and liabilities, for the years ended December 31, 2017 and 2016, respectively. The increase in cash from operations was primarily attributable to an increase of $100.7 million in net operating income, partially offset by $25.1 million of incremental IPO and merger and transaction-related expenses compared to 2016 and $21.5 million of hurricane related damages recorded in 2017.

Investing Activities

Net cash provided by (used in) investing activities primarily consists of the acquisition costs of homes, capital improvements, changes in restricted cash, proceeds from property sales, and the impact of cash acquired in the Mergers. Net cash provided by (used in) investing activities was $53.3 million and $(255.0) million for the years ended December 31, 2017 and 2016, respectively, leading to an increase in cash provided by investing activities of $308.3 million between the years. The increase was primarily due to the release of restricted cash in connection with the repayment of our credit facilities and the IH1 2013-1, IH1 2014-1, IH1 2014-2, and IH1 2014-3 mortgage loans during the year ended December 31, 2017, resulting in an increase of $104.1 million; the cash we acquired as a result of the Mergers of $85.0 million; and repayment proceeds received from our retained debt securities of $79.3 million. Additionally, there was a decrease in the number of homes acquired, from 1,253 homes during the year ended December 31, 2016 to 910 homes during the year ended

December 31, 2017, which resulted in $57.4 million less in acquisition, renovation, and capital expenditure spend. The increase in number of homes sold during 2017 of 1,308 compared to 1,093 homes during the year ended December 31, 2016 resulted in an increase in the amount of proceeds from sale of residential properties of $62.9 million. The changes above were partially offset by an increase in investments in debt securities of $(79.1) million resulting from the application of risk retention rules to our IH 2017-1 and IH 2017-2 mortgage loans.

Financing Activities

Net cash used in financing activities was $(331.3) million and $(71.8) million for the years ended December 31, 2017 and 2016, respectively, or a decrease in cash of $(259.5) million. For the year ended December 31, 2017, we received $1,692.1 million in proceeds, net of underwriting discounts, from our IPO, while during the year ended December 31, 2016, equity investors contributed $138.0 million of capital.

During the year ended December 31, 2017, proceeds from our IPO, Term Loan Facility, Revolving Facility, and the IH 2017-1 and IH 2017-2 mortgage loans of $5,188.5 million, along with proceeds from home sales and operating cash flows, were used to repay $2,321.6 million of then-outstanding credit facilities and $2,951.0 million of mortgage loans, including full repayment of the IH1 2013-1, IH1 2014-1, and IH1 2014-3 mortgage loans, to fund $54.6 million of deferred financing costs associated with the Term Loan Facility and the IH 2017-1 and IH 2017-2 mortgage loans, and for dividend payments which totaled $69.0 million. During the year ended December 31, 2016, proceeds from our equity investors and credit facilities of $322.7 million, along with proceeds from operating cash flows, were used to repay $381.1 million of debt.

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.

Off-Balance Sheet Arrangements

We have no material off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.

Contractual Obligations

Our contractual obligations as of December 31, 2017, consisted of the following:

($ in thousands)Total20182019-20202021-2022Thereafter
Mortgage loans, net(1)$8,783,721$273,103$4,280,814$1,357,028$2,872,776
Term Loan Facility, net(1)1,700,55748,90097,8001,553,857—
Revolving Facility(1)(2)49,0684,5369,07235,460—
Convertible Senior Notes(3)643,13818,975261,050363,113—
Interest rate swaps(4)39,932—24,49015,442—
Purchase commitments(5)75,36875,368———
Operating lease obligations23,3905,9439,1605,9682,319
Capital lease obligations25897161——
Total$11,315,432$426,922$4,682,547$3,330,868$2,875,095
(1)Includes estimated interest payments on the respective debt based on amounts outstanding as of December 31, 2017 at rates in effect as of such date.
(2)Includes the related unused commitment fee.
(3)Obligations are calculated using coupon rates of the Convertible Senior Notes.
(4)Net obligations calculated using LIBOR as of December 31, 2017, or 1.56%.
(5)Commitments to acquire 303 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 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 consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions about the effect of matters that are inherently uncertain and that affect the amounts reported in the 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 Part IV. Item 15. “Exhibits and Financial Statement Schedules,” Note 2.

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. Upon adoption of ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”), our purchases of homes are treated as asset acquisitions and are recorded at their purchase price, which is allocated between land, building and improvements, and in-place lease intangibles (when a tenant is in place at the acquisition date) based upon their relative fair values at the date of acquisition. The purchase price for purposes of this allocation is inclusive of acquisition costs which typically include legal fees, bidding service and title fees, payments made to cure tax, utility, homeowners’ association (“HOA”), and other mechanic’s and miscellaneous liens, as well as other closing costs. Properties acquired in the Mergers were recorded at fair value. The fair values of acquired in-place lease intangibles, if any, 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 consolidated balance sheets. Prior to our adoption of ASU 2017-01 effective January 1, 2017, acquisition costs for transactions accounted for as business combinations were expensed in the period in which they were incurred and were reflected in other expenses in the consolidated statements of operations.

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.

Depreciation

Costs capitalized in connection with single-family residential property acquisitions, stabilization activities, and on an ongoing basis are depreciated over their estimated useful lives on a straight line basis. The depreciation period commences upon the cessation of stabilization related activities or upon the completion of improvements made on an ongoing basis. For those costs capitalized in connection with residential property acquisitions and stabilization activities and those capitalized on an ongoing basis, the weighted average useful lives range from 7 years to 28.5 years.

Provisions for Impairment

We continuously evaluate, by property, whether there are any events or changes in circumstances indicating that the carrying amount of our single-family residential properties may not be recoverable. Examples of such events and changes in circumstances that we consider include significant and persistent declines in an individual property’s net operating income, regional changes in home price appreciation as measured by certain independently developed indices, change in expected use of the property, significant adverse legal factors, substantive damage to the individual property as a result of natural disasters and other risks inherent in our business not covered by insurance proceeds, or a current expectation that a property will be disposed of prior to the end of its estimated useful life.

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 consider local broker price opinions (“BPOs”) and automated valuation model (“AVM”) data, each of which are important components of our process with no one information source being necessarily determinative. In order to validate the BPOs and AVM data 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 and any adjustments to comparable transactions made in reaching the value opinions.

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.

Derivatives

We enter into interest rate swap and interest rate cap agreements (collectively, “Hedging Derivatives”) for interest rate risk management purposes. We do not enter into Hedging Derivatives for trading or other speculative purposes, and all of our Hedging Derivatives are carried at fair value in our consolidated balance sheets. Designated hedges are derivatives that meet the criteria for hedge accounting and that we have elected to designate as hedges. Non-designated hedges are derivatives that do not meet the criteria for hedge accounting or that we have not elected to designate as hedges.

Pursuant to the terms of certain of our mortgage loans, we are required to maintain interest rate caps. We have elected not to designate these interest cap agreements for hedge accounting (collectively, the “Non-Designated Hedges”). We enter into interest rate swap agreements to hedge the risk arising from changes in our interest payments on variable-rate debt due to changes in the one-month LIBOR. In connection with the Pre-IPO Transactions and the Mergers we have elected to account for our interest rate swap agreements as effective cash flow hedges (collectively, the “Designated Hedges”). We assess the effectiveness of these interest rate swap cash flow hedging relationships on an ongoing basis. The effect of these interest rate cap agreements and interest rate swap agreements is to reduce the variability of interest payments due to changes in LIBOR.

The fair value of Hedging Derivatives that are in an asset position are included in other assets, net and those in a liability position are included in other liabilities in our consolidated balance sheets. For Non-Designated Hedges, the related changes in fair value are reflected within interest expense in the consolidated statements of operations. For Designated Hedges, the changes in fair value are reported as a component of other comprehensive income (loss) in our consolidated balance sheets and reclassified into earnings as interest expense in our consolidated statements of operations when the hedged transactions affect earnings.

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 consolidated statements of operations.

Share-Based Compensation Expense

Prior to the IPO, we recognized share-based compensation expense for incentive compensation units granted by the Invitation Homes Partnerships (the “Class B Units”). In connection with and subsequent to the IPO, we issued RSUs that

settle in shares of common stock and restricted shares of our common stock (“RSAs”) for which share-based compensation expense is recognized.

We recognized share-based compensation expense for the Class B Units based on the estimated fair value of the Class B Units and vesting conditions of the related incentive unit agreements. Since the Class B Units granted by IH1 were granted to employees of the Manager, a wholly-owned subsidiary of IH1, the related share-based compensation expense was based on the grant-date fair value of the units and recognized in expense over the service period. Because units in IH2, IH3, IH4, IH5, and IH6 were granted to non-employees of those respective partnerships, fair value was remeasured for non-vested units at the end of each reporting period. The fair value of the Class B Units was determined based on a valuation model that took into account discounted cash flows and a market approach based on comparable companies and transactions.

We recognize share-based compensation expense for the RSUs and RSAs based on their grant-date fair value, net of expected forfeitures, over the service period from the grant date to vest date for each tranche or when any applicable performance or market conditions are met in accordance with the related RSU and RSA agreements. The grant-date fair value of RSUs and RSAs is generally based on the closing price of our common stock on the grant date except for market based RSU grant‑date fair values, which are based on Monte-Carlo option pricing models.

Additional compensation expense is recognized if modifications to existing incentive compensation unit, RSU, or RSA agreements result in an increase in the post-modification fair value of the units that exceeds their pre-modification fair value. Share-based compensation expense is presented as components of general and administrative expense and property management expense in our 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 (loss) computed in accordance with accounting principles generally accepted in the United States (“GAAP”) before the following items: interest expense; income tax expense; and depreciation and amortization. Adjusted EBITDA is defined as EBITDA before the following items: share-based compensation expense; IPO related expenses; merger and transaction-related expenses; severance; impairment and other; acquisition costs; gain (loss) on sale of property, net of tax; 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 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)201720162015
Net loss available to common shareholders$(105,952)$(78,239)$(160,208)
Net loss available to participating securities615——
Non-controlling interests(489)——
Interest expense256,970286,048273,736
Depreciation and amortization309,578267,681250,239
EBITDA460,722475,490363,767
Share-based compensation expense(1)81,20310,21027,924
IPO related expenses8,28712,979—
Merger and transaction-related expenses29,802——
Severance12,048——
Impairment and other(2)24,0934,2074,584
Acquisition costs—50275
Gain on sale of property, net of tax(33,896)(18,590)(2,272)
Other, net(3)9591,5082,846
Adjusted EBITDA$583,218$485,854$397,124
(1)For the years ended December 31, 2017, 2016, and 2015, $70,906, $10,014, and $23,758 was recorded in general and administrative expense, respectively, and $10,297, $196, and $4,166 was recorded in property management expense, respectively.
(2)Includes accrual of $21,500 for losses/damages related to Hurricane Irma for the year ended December 31, 2017.
(3)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, net of tax; 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)201720162015
Net loss available to common shareholders$(105,952)$(78,239)$(160,208)
Net loss available to participating securities615——
Non-controlling interests(489)——
Interest expense256,970286,048273,736
Depreciation and amortization309,578267,681250,239
General and administrative(1)167,73969,10279,428
Property management expense(2)43,34430,49339,459
Impairment and other(3)24,0934,2074,584
Acquisition costs—50275
Gain on sale of property, net of tax(33,896)(18,590)(2,272)
Other, net(4)9591,5082,846
NOI (total portfolio)662,961562,260488,087
Non-Same Store NOI(112,366)(49,735)(83,515)
NOI (Same Store portfolio)(5)$550,595$512,525$404,572
(1)Includes $70,906, $10,014, and $23,758 of share-based compensation expense for the years ended December 31, 2017, 2016, and 2015, respectively.
(2)Includes $10,297, $196, and $4,166 of share-based compensation expense for the years ended December 31, 2017, 2016, and 2015, respectively.
(3)Includes accrual of $21,500 for losses/damages related to Hurricane Irma for the year ended December 31, 2017.
(4)Includes interest income and other miscellaneous income and expenses.
(5)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 42,689 for the years ended December 31, 2017 and 2016 and 36,469 for the year ended December 31, 2015.

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, gains

or losses related to sales of previously depreciated homes, as well non-controlling interests, 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, loan discounts, noncash interest expense for derivatives, share-based compensation expense, IPO related expenses, merger and transaction-related expenses, severance expense, 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, except per share data)201720162015
Net loss available to common shareholders$(105,952)$(78,239)$(160,208)
Add (deduct) adjustments from net income to derive FFO:
Net loss available to participating securities615——
Non-controlling interests(489)——
Depreciation and amortization on real estate assets305,851263,093245,666
Impairment on depreciated real estate investments2,2312,2821,448
Net gain on sale of previously depreciated investments in real estate(33,896)(18,590)(2,272)
FFO168,360168,54684,634
Noncash interest expense related to amortization of deferred financing costs, loan discounts and noncash interest expense from derivatives29,50659,40269,849
Share-based compensation expense(1)81,20310,21027,924
IPO related expenses8,28712,979—
Merger and transaction-related expenses29,802——
Severance expense12,0482,3637,547
Casualty losses, net(2)21,8621,9253,136
Acquisition costs—50275
Core FFO351,068255,475193,365
Recurring capital expenditures(54,423)(47,877)(49,773)
Adjusted FFO$296,645$207,598$143,592
Weighted average common shares outstanding — diluted(3)338,933,198
FFO per common share – diluted$0.50
Core FFO per common share – diluted$1.04
AFFO per common share – diluted$0.88
(1)For the years ended December 31, 2017, 2016, and 2015, $70,906, $10,014, and $23,758 was recorded in general and administrative expense, respectively, and $10,297, $196, and $4,166 was recorded in property management expense, respectively.
(2)Includes accrual of $21,500 for losses/damages related to Hurricane Irma for the year ended December 31, 2017.
(3)Weighted average common shares outstanding – diluted was calculated using the two-class method and represents common share equivalents that are dilutive for FFO, Core FFO, and AFFO.

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