−Removed: Risks Related to Our Business
Set forth below are the risks that we believe are material to our shareholders.
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Additional risks of which we are currently unaware or that we currently consider immaterial also may impact our business.
−Removed: If any of the following events or circumstances actually occur, our business, prospects, financial condition, results of operations and ability to satisfy our debt
−Removed: obligations and make distributions to our shareholders could be materially and adversely affected, and you could lose all or part of your investment in our securities.
Some statements in the following risk factors are forward-looking statements.
See the section entitled “Cautionary Note Regarding Forward-Looking Statements.”
−Removed: We are employing a business model with a limited track record, which may make our business difficult to evaluate.
−Removed: Until recently, the single-family rental business consisted primarily of private and individual investors in local markets
−Removed: and was managed individually or by small, local property managers.
−Removed: Our investment strategy involves purchasing, renovating, maintaining and managing a large number of residential properties and leasing them to suitable tenants.
−Removed: Large, well-capitalized investors have only recently entered this business and, as a result, there are not peer companies with an established long-term track record to assist us in predicting whether our investment strategy can be implemented and sustained successfully over time.
−Removed: It will be difficult for you to evaluate our potential future performance without the benefit of established long-term track records from companies implementing a similar business model.
+Added: Risks Related to Our Business
+Added: Our company and our business model are relatively new, which may make our business difficult to evaluate.
+Added: We commenced operations in 2012, and after our initial public offering in 2013, were among the first public companies to pursue our investment strategy of purchasing, renovating, developing, maintaining and managing a large number of residential properties and leasing them to tenants.
+Added: The lack of a long-term company and industry track record covering multiple real estate cycles may make it difficult for you to evaluate our potential future performance.
+Added: In addition, our strategy of developing a significant pipeline of single-family homes for rent is relatively new and unprecedented among public companies which may further complicate
+Added: evaluating our potential future performance.
We may encounter unanticipated problems implementing our investment strategy and operations, which may adversely affect our results of operations and ability to make distributions to our shareholders and cause our share price to decline significantly.
−Removed: We may not be able to successfully operate our business or generate sufficient cash flows to make or sustain distributions on our preferred and common shares.
−Removed: We may not be able to successfully operate our business or implement our operating policies and investment strategy.
−Removed: Furthermore, we may not be able to generate sufficient cash flows to pay our operating expenses, service any debt and make distributions to our shareholders.
−Removed: Our ability to successfully operate our business and implement our operating policies and investment strategy depends on many factors, including:
−Removed: the availability of, and our ability to identify, attractive acquisition and development opportunities consistent with our investment strategy;
−Removed: our ability to effectively manage development, renovation, maintenance, marketing and other operating costs for our properties;
−Removed: our ability to maintain high occupancy rates and target rent levels;
−Removed: our ability to compete with other investors entering the single-family sector;
−Removed: costs that are beyond our control, including weather-related damage, title litigation, litigation with tenants or tenant organizations, legal compliance, real estate taxes, HOA fees and insurance;
−Removed: judicial and regulatory developments affecting landlord-tenant relations that may affect or delay our ability to dispossess or evict occupants or increase rents;
−Removed: judicial and regulatory developments affecting banks’ and other mortgage holders’ ability to foreclose on delinquent borrowers;
−Removed: judicial and regulatory developments related to environmental or climate change matters that could limit or increase the cost of our developments and operations;
−Removed: reversal of population, employment or homeownership trends in target markets;
−Removed: interest rate levels and volatility, such as the accessibility of short-term and long-term financing on desirable terms;
−Removed: economic conditions in our target markets, including changes in employment and household earnings and expenses, as well as the condition of the financial and real estate markets and the economy in general.
−Removed: In addition, we face significant competition in acquiring attractive properties on advantageous terms, and the value of the properties that we acquire may decline substantially after we purchase them.
−Removed: Any one or more of these factors could adversely affect our business, financial condition and results of operations.
−Removed: We may not be able to effectively manage our growth, and any failure to do so may have an adverse effect on our business and operating results.
−Removed: We continue to add to our existing portfolio through our development and acquisition activities.
−Removed: Our future operating results may depend on our ability to effectively manage our growth, which is dependent, in part, upon our ability to:
−Removed: stabilize and manage additional properties and tenant relationships while maintaining a high level of tenant satisfaction and building and enhancing our brand;
−Removed: attract, integrate and retain new management and operations personnel as our organization grows in size and complexity;
−Removed: continue to improve our operational and financial controls and reporting procedures and systems;
−Removed: scale our technology and other infrastructure platforms to adequately service new properties.
−Removed: There can be no assurance that we will be able to achieve these results or that we may otherwise be able to manage our growth effectively, or without incurring significant additional expenses.
−Removed: Any failure to do so may have an adverse effect on our business and operating results.
−Removed: We intend to continue to expand our scale of operations and develop properties and make acquisitions even if the rental and housing markets are not as favorable as they were when we commenced operations, which could adversely impact anticipated yields.
−Removed: Our long-term growth depends, in part, on the availability of acquisition opportunities for land and properties in our target markets at acceptable pricing levels.
−Removed: We believe home prices have stabilized in many areas and expect that in the future, housing prices will continue to stabilize, and therefore future acquisitions may be more costly.
−Removed: The following factors, among others, are making acquisitions more expensive:
−Removed: improvements in the overall economy and job market;
−Removed: a resumption of consumer lending activity and greater availability of consumer credit;
−Removed: improvements in the pricing and terms of mortgage-backed securities;
−Removed: our ability to expand our development operations while controlling increases in the cost of acquiring land and construction costs and delays;
−Removed: the emergence of increased competition for single-family assets from private investors and entities with similar investment objectives to ours;
−Removed: tax or other government incentives that encourage homeownership.
−Removed: We have not adopted and do not expect to adopt a policy of making future acquisitions only if they are accretive to existing yields and distributable cash.
−Removed: We plan to continue acquiring properties as long as we believe such properties offer an attractive total return opportunity.
−Removed: Accordingly, future acquisitions may have lower yield characteristics than recent past and present opportunities and if such future acquisitions are funded through equity issuances, the yield and distributable cash per share will be reduced, and the value of our common and preferred shares may decline.
Our future growth depends, in part, on the availability of additional debt or equity financing.
If we cannot obtain additional financing on terms favorable or acceptable to us, our growth may be limited.
−Removed: Part of our business strategy may involve the use of debt and equity financing to increase potential returns to our shareholders in the future.
+Added: The execution of our growth strategy will involve the use of debt and equity financing, particularly given that as a REIT we are required to distribute a significant portion of our taxable income which reduces our ability to retain earnings to fund growth.
Our inability in the future to obtain additional financing on attractive terms, or at all, could adversely impact our ability to execute our business strategy, which could adversely affect our growth prospects and future shareholder returns.
−Removed: Our access to capital depends, in part, on:
−Removed: general business conditions;
−Removed: financial market conditions;
−Removed: the market’s perception of our business prospects and growth potential;
−Removed: the market prices of our common and preferred shares;
−Removed: our current debt levels;
−Removed: our current and expected earnings, cash flow and distributions.
−Removed: We cannot assure you that we will be able to obtain debt or equity financing on terms favorable or acceptable to us or at all.
−Removed: If we are unable to do so, then we may have to curtail our investment activities, which could limit our growth prospects, and we may be forced to dispose of assets at inopportune times in order to maintain our REIT qualification or satisfy our debt obligations.
−Removed: We continue to seek additional sources of financing for our acquisitions.
−Removed: Our pace of acquisitions may depend on the level of funds available for investment.
−Removed: In addition, if we are unable to obtain debt financing, then we may have to rely more heavily on additional equity issuances, which may be dilutive to our shareholders, or on less efficient forms of debt financing that require a larger portion of our cash flow from operations, thereby reducing funds available for our operations, future business opportunities, cash distributions to our shareholders and other purposes.
Our revenue and expenses are not directly correlated, and because a large percentage of our costs and expenses are fixed, we may not be able to adapt our cost structure to offset declines in our revenue.
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The loss of the services of any of our key management personnel, or our inability to recruit and retain qualified personnel in the future, could have an adverse effect on our business and financial results.
−Removed: In addition, as we expand our operations, we will continue to need to attract and retain additional qualified personnel but may not be able to do so on acceptable terms or at all.
+Added: In addition, we will continue to need to attract and retain additional qualified personnel but may not be able to do so on acceptable terms or at all.
Competition for highly skilled managerial, investment, financial and operational personnel is intense.
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If we are unable to hire and retain qualified personnel as required, our growth and operating results could be adversely affected.
−Removed: Our investments are, and are expected to continue to be, concentrated in our markets and in the single-family properties sector of the real estate industry, which exposes us to seasonal fluctuations in rental demand and downturns in our markets or in the single-family properties sector.
−Removed: Our investments in real estate assets are, and are expected to continue to be, concentrated in our target markets and in the single-family properties sector of the real estate industry.
−Removed: A downturn or slowdown in the rental demand for single-family housing caused by adverse economic, regulatory or environmental conditions, or other events, in our markets may have a greater impact on the value of our properties or our operating results than if we had more fully diversified our investments.
−Removed: We believe that there are seasonal fluctuations in rental demand with demand higher in the spring and summer than in the late fall and winter.
−Removed: Such seasonal fluctuations may impact our operating results.
−Removed: In addition to general, regional, national and international economic conditions, our operating performance will be impacted by the economic conditions in our markets.
−Removed: We acquire, develop, renovate, lease and operate single-family properties in our target markets, which currently include MSAs within 22 states.
−Removed: As of December 31, 2019 , approximately 61% of our properties in operation were concentrated in five states— Texas, North Carolina, Florida, Georgia and Tennessee .
−Removed: We base a substantial part of our business plan on our belief that property values and operating fundamentals for single-family properties in these markets will improve significantly over the next several years.
−Removed: However, each of these markets has experienced substantial economic downturns in recent years and could experience similar or worse economic downturns in the future.
−Removed: We can provide no assurance as to the extent property values and operating fundamentals in these markets will improve, if at all.
−Removed: If the recent economic downturn in these markets returns or if we fail to accurately predict the timing of economic improvement in these markets, the value of our properties could decline and our ability to execute our business plan may be adversely affected, which could adversely affect our financial condition, operating results and ability to make distributions to our shareholders and cause the value of our outstanding securities to decline.
−Removed: We may not be able to effectively control the timing and costs relating to the renovation of properties, which may adversely affect our operating results and our ability to make distributions on our preferred and common shares.
+Added: Our investments are, and are expected to continue to be, concentrated in single-family properties and we have a significant number of properties in certain geographic markets, which exposes us to significant risks if there is economic distress in our largest markets or in the single-family home rental sector.
+Added: Our investments are, and are expected to continue to be, concentrated in single-family properties.
+Added: In addition, our strategy is to concentrate our properties in select geographic markets that we believe favor future growth in rents and valuations.
+Added: For example, 60.5% of our properties are located in Atlanta, GA, Dallas-Fort Worth, TX, Charlotte, NC, Phoenix, AZ, Houston, TX, Nashville, TN, Indianapolis, IN, Tampa, FL, Jacksonville, FL and Raleigh, NC.
+Added: A downturn or slowdown in the rental demand for single-family housing generally, or in our target markets specifically, caused by adverse economic, regulatory or environmental conditions, or other events, would have a greater impact on our operating results than if we had more diversified investments.
+Added: We may not be able to effectively control the timing and costs relating to the renovation of properties, which may adversely affect our operating results and our ability to make distributions.
Nearly all of our properties acquired through traditional channels require some level of renovation immediately upon their acquisition or in the future following expiration of a lease or otherwise.
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We also may acquire properties that we expect to be in good condition only to discover unforeseen defects and problems that require extensive renovation and capital expenditures.
−Removed: To the extent properties are leased to existing tenants, renovations may be postponed until the tenant vacates the premises, and we will pay the costs of renovating.
+Added: To the extent properties are leased to existing tenants, renovations may be
+Added: postponed until the tenant vacates the premises, and we will pay the costs of renovating.
In addition, from time to time, in order to reposition properties in the rental market, we will be required to make ongoing capital improvements and replacements and perform significant renovations and repairs that tenant deposits and insurance may not cover.
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As a result, the purchase price of potential acquisition properties may be significantly elevated, or we may be unable to acquire properties on desirable terms or at all.
−Removed: We face significant competition in the leasing market for quality tenants, which may limit our ability to rent our single-family homes on favorable terms or at all.
+Added: We face competition in the leasing market for quality tenants, which may limit our ability to rent our single-family homes on favorable terms or at all.
We depend on rental income for substantially all of our revenues, and to succeed we must attract and retain qualified tenants.
We face competition for tenants from other lessors of single-family properties, apartment buildings and condominium units, and the continuing development of single-family properties, apartment buildings and condominium units in many of our markets increases the supply of housing and exacerbates competition for tenants.
−Removed: Competing properties may be newer, better located and more attractive to tenants.
−Removed: Potential competitors may have lower rates of occupancy than we do or may have superior access to capital and other resources than we do, which may result in competitive properties offered at lower rental rates than we might offer.
−Removed: Many of these competitors may successfully attract tenants with better incentives and amenities, which could adversely affect our ability to obtain quality tenants and lease our single-family properties on favorable terms or at all.
−Removed: Additionally, some competing housing options may qualify for government subsidies that may make such options more affordable and therefore more attractive than our properties.
−Removed: In addition, increases in unemployment levels and other adverse changes in economic conditions in our markets may adversely affect the creditworthiness of potential residents, which may decrease the overall number of qualified residents for our properties within such markets.
−Removed: We could also be adversely affected by accelerating development of competing properties or high vacancy rates of homes in our markets, which could result in an excess supply of homes and reduce occupancy and rental rates.
−Removed: Improving economic conditions, along with the availability of low residential mortgage interest rates and government sponsored programs to promote home ownership, have made home ownership more affordable and more accessible for potential renters who have strong credit.
−Removed: These factors may encourage potential renters to purchase residences rather than lease them, thereby causing a decline in the number and quality of potential tenants available to us.
−Removed: As of December 31, 2019 , we owned 52,552 single-family properties, including 1,187 properties classified as held for sale, and 48,767 , or 94.9% , of our total properties (excluding properties held for sale) were occupied.
−Removed: No assurance can be given that we will be able to attract and retain qualified tenants.
−Removed: Our operating results and ability to make distributions to the Company’s shareholders and the Operating Partnership’s OP unitholders, including AH4R, would be adversely affected if we are not able to lease our properties on favorable terms or at all.
−Removed: Our evaluation of properties involves a number of assumptions that may prove inaccurate, which could result in us paying too much for properties we acquire or overvaluing our properties or our properties failing to perform as we expect.
+Added: Competing properties may be newer, better located and more attractive to tenants, or may be offered at more attractive rents.
+Added: Additionally, some competing housing options, like home ownerships, may qualify for government subsidies or other incentives that may make such options more affordable and therefore more attractive than renting our properties.
+Added: These competitive factors will impact our occupancy and the rents we can charge.
+Added: Our evaluation of acquisition properties involves a number of assumptions that may prove inaccurate, which could result in us paying too much for properties we acquire or our properties failing to perform as we expect.
In determining whether a particular property meets our investment criteria, we make a number of assumptions, including assumptions related to estimated time of possession and estimated renovation costs and time frames, annual operating costs, market rental rates and potential rent amounts, time from purchase to leasing and tenant default rates.
These assumptions may prove inaccurate.
−Removed: As a result, we may pay too much for properties we acquire or overvalue our properties, or our properties may fail to perform as anticipated.
−Removed: Adjustments to the assumptions we make in evaluating potential purchases may result in fewer properties qualifying under our investment criteria, including assumptions related to our ability to lease properties we have purchased.
−Removed: Reductions in the supply of properties that meet our investment criteria may adversely affect our ability to implement our investment strategy and operating results.
−Removed: Furthermore, the properties that we acquire vary materially in terms of time to possession, renovation, quality and type of construction, location and hazards.
−Removed: Our success depends on our ability to acquire properties that can be quickly possessed, renovated, repaired, upgraded and rented with minimal expense and maintained in rentable condition.
−Removed: Our ability to identify and acquire such properties is fundamental to our success.
−Removed: In addition, the recent market and regulatory environments relating to single-family residential properties have been changing rapidly, making future trends difficult to forecast.
−Removed: For example, an increasing number of homeowners now wait for an eviction notice or eviction proceedings to commence before vacating foreclosed premises, which significantly increases the time period between the acquisition and leasing of a property.
−Removed: Such changes affect the accuracy of our assumptions and, in turn, may adversely affect our operating results.
+Added: As a result, we may pay too much for properties we acquire or our properties may fail to perform as anticipated.
Bulk portfolio acquisitions may subject us to the risk of acquiring properties that do not fit our target investment criteria and may be costly or time consuming to divest, which may adversely affect our operating results.
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We may also experience delays in integrating the information systems and property and tenant information of the acquired properties which could adversely affect operating results.
−Removed: Our expanded development activities expose us to additional operational and real estate risks, which may adversely affect our financial condition and operating results.
−Removed: We are expanding our development activities, including the acquisition of land and construction of homes.
−Removed: We are constructing single-family homes as well as rental communities.
−Removed: Since 2017, we have added a total of 1,054 “built-for-rental” homes to our portfolio through our AMH Development Program.
−Removed: We have limited experience building homes and in constructing and renting rental communities.
+Added: Our significant development activities expose us to additional operational and real estate risks, which may adversely affect our financial condition and operating results.
+Added: We have a significant development program that involves the acquisition of land and construction of homes.
+Added: We have a limited track record of building homes for rent.
Rental home construction can involve substantial up-front costs to acquire land and to build a rental home or rental community before a home is available for rent and generates income.
−Removed: In addition to the up-front costs, building rental homes and rental communities involve potentially significant new risks to our business, such as delays or cost increases due to changes in or failure to meet regulatory requirements, including permitting and zoning regulations, failure of lease rentals on newly-constructed properties to achieve anticipated investment returns, inclement weather, adverse site selection, unforeseen site conditions or shortages
−Removed: of suitable land, construction materials and labor and other risks described below.
+Added: In addition to the up-front costs, building rental homes and rental communities involve potentially significant new risks to our business, such as delays or cost increases due to changes in or failure to meet regulatory requirements, including permitting and zoning regulations, failure of lease rentals on newly-constructed properties to achieve anticipated investment returns, inclement weather, adverse site selection, unforeseen site conditions or shortages of suitable land, construction materials and labor and other risks described below.
We may be unable to achieve our objective of building new rental homes and rental communities that generate acceptable returns and, as a result, our growth and results of operations may be adversely impacted.
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Should suitable lots or land become less available, the number of homes we could build and lease could be reduced, and the cost of land could increase, perhaps substantially, which could adversely impact our growth and results of operations.
−Removed: We rely on subcontractors to construct our homes and on building supply companies to supply components for the construction of our homes.
−Removed: The failure of our subcontractors to properly construct our homes or defects in the components we obtain from building supply companies could have an adverse effect on us.
−Removed: We engage subcontractors to perform the actual construction of our homes and purchase components used in the construction of our homes from building supply companies.
−Removed: Despite our quality control efforts, we may discover that our subcontractors were engaging in improper construction practices or that the components purchased from building supply companies are not performing as specified.
−Removed: The occurrence of such events could require us to repair the homes in accordance with our standards and as required by law.
−Removed: The cost of satisfying our legal obligations in these instances may be significant, and we may be unable to recover the cost of repair from subcontractors, suppliers and insurers.
−Removed: If we experience shortages or increased costs of labor and supplies or other circumstances beyond our control, there could be delays or increased costs in constructing new rental homes, which could adversely affect our growth and operating results.
−Removed: Our ability to build new rental homes may be adversely affected by circumstances beyond our control, including work stoppages, labor disputes, and shortages of qualified trades people, such as carpenters, roofers, masons, electricians, and plumbers;
+Added: If we experience disruptions, shortages or increased costs of labor and supplies or other circumstances beyond our control, there could be delays or increased costs in constructing new rental homes, which could adversely affect our growth and operating results.
+Added: Our ability to build new rental homes may be adversely affected by circumstances beyond our control, including:
+Added: work stoppages, labor disputes, and shortages of qualified trades people, such as carpenters, roofers, masons, electricians, and plumbers;
changes in laws relating to union organizing activity;
−Removed: lack of availability of adequate utility or infrastructure and services, our need to rely on local subcontractors who may not be adequately capitalized or insured;
+Added: lack of availability of adequate utility or infrastructure and services;
+Added: our need to rely on local subcontractors who may not be adequately capitalized or insured or may not, despite our quality control efforts, engage in proper construction practices or comply with applicable regulations;
+Added: inadequacies in components purchased from building supply companies;
and shortages delays in availability, or fluctuations in prices of building materials.
Any of these circumstances could give rise to delays in the start or completion of, or could increase the cost of, constructing new rental homes.
−Removed: Adverse weather conditions, natural disasters, and other conditions could disrupt construction of new rental homes, which could harm our growth and results of operations.
−Removed: Adverse weather conditions and natural disasters, such as hurricanes, tornadoes, earthquakes, floods, droughts, and fires, can have serious effects on our ability to build homes for rent.
−Removed: We also may be affected by unforeseen engineering, environmental, or geological conditions or problems, including conditions or problems which arise on lands of third parties in the vicinity of our rental homes, but nevertheless negatively impact our properties.
−Removed: Any of these adverse events or circumstances could cause delays in or prevent the completion of, or increase the cost of, developing one or more of our rental homes or residential communities and, as a result, could harm our growth and results of operations.
We are subject to risks from natural disasters and severe weather.
−Removed: Natural disasters and severe weather such as earthquakes, tornadoes, hurricanes or floods may result in significant damage to our properties.
+Added: Natural disasters and severe weather such as earthquakes, tornadoes, hurricanes or floods may result in significant damage to our properties and significant delays to our development projects.
The extent of our casualty losses and loss in rental income in connection with such events depends on the severity of the event and the total amount of exposure in the affected area.
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When we have geographic concentration of exposures, a single catastrophe (such as an earthquake) or destructive weather event (such as a hurricane) affecting a region may have a significant negative effect on our financial condition and results of operations.
−Removed: If occupancy levels and rental rates in our target markets do not increase sufficiently to keep pace with rising costs of operations, our net income and distributable cash will decline.
−Removed: The success of our business model depends, in part, on conditions in the single-family rental market in our target markets.
−Removed: Our asset acquisitions are premised on assumptions about occupancy levels and rental rates, and if those assumptions prove to be inaccurate, our cash flows and profitability will be reduced.
−Removed: A continuation of the recent strengthening of the U.S.
−Removed: economy and job growth, coupled with government programs designed to keep homeowners in their homes and/or other factors may contribute to an increase in homeownership rather than renting.
−Removed: In addition, we expect that as investors like us increasingly seek to capitalize on opportunities to purchase housing assets and convert them to productive uses, the supply of single-family rental properties will increase and the competition for tenants may intensify.
−Removed: A softening of the rental market in our target areas would reduce our rental income and profitability.
We depend on our tenants for substantially all of our revenues.
−Removed: Poor tenant selection and defaults and nonrenewals by our tenants may adversely affect our reputation, financial performance and ability to make distributions on our preferred and common shares.
+Added: Poor tenant selection and defaults and nonrenewals by our tenants may adversely affect our reputation, financial performance and ability to make distributions.
We depend on rental income from tenants for substantially all of our revenues.
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Increases in unemployment levels and other adverse changes in the economic conditions in our markets could result in substantial tenant defaults.
−Removed: In the event of a tenant default or bankruptcy, we may experience delays in enforcing our rights as landlord at that property and will incur costs in protecting our investment and re-leasing the property.
−Removed: Short-term leases of residential property may expose us to the risk that we may have to re-lease our properties frequently, which we may be unable to do on attractive terms, on a timely basis or at all, which may adversely affect our operating results and our ability to make distributions on our preferred and common shares.
+Added: In the event of a tenant
+Added: default or bankruptcy, we may experience delays in enforcing our rights as landlord at that property and will incur costs in protecting our investment and re-leasing the property.
+Added: In addition, we rely on information supplied by prospective residents in making tenant selections, which may in some cases be false.
+Added: Our short-term leases require us to re-lease our properties frequently, which we may be unable to do on attractive terms, on a timely basis or at all.
Substantially all of our new leases have a duration of one year.
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If our tenants do not renew their leases or the rental rates for our properties decrease, our operating results and ability to make distributions to our shareholders could be adversely affected.
−Removed: We are self-insured against many potential losses, and uninsured or underinsured losses relating to properties may adversely affect our financial condition, operating results, cash flows and ability to make distributions on our preferred and common shares.
+Added: We are self-insured against many potential losses, and uninsured or underinsured losses relating to properties may adversely affect our financial condition, operating results, cash flows and ability to make distributions.
We attempt to ensure that our properties are adequately insured to cover casualty losses.
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Under those circumstances, the insurance proceeds we receive might be inadequate to restore our economic position on the damaged or destroyed property.
−Removed: Any such losses could adversely affect our financial condition, operating results, cash flows and ability to make distributions on our preferred and
−Removed: common shares.
+Added: Any such losses could adversely affect our financial condition, operating results, cash flows and ability to make distributions.
In addition, we may have no source of funding to repair or reconstruct the damaged property, and we cannot assure you that any such sources of funding will be available to us for such purposes in the future.
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We may not discover such restrictions during the acquisition process, and such restrictions may adversely affect our ability to utilize such properties as we intend.
+Added: Municipalities, counties, or HOAs could also enact new covenants, ordinances, moratoria, or other regulations restricting or prohibiting leasing, which could adversely affect our ability to acquire, develop, or utilize properties.
We are highly dependent on information systems and systems failures and delays could significantly disrupt our business, which may, in turn, adversely affect our financial condition and operating results.
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A significant number of our properties are part of HOAs, which are private entities that regulate the activities of, and levy assessments on properties in, a residential subdivision.
−Removed: HOAs in which we own properties may have or enact onerous or arbitrary rules that restrict our ability to renovate, market or lease our properties or require us to renovate or maintain such properties at standards or costs that are in excess of our planned operating budgets.
+Added: HOAs in which we own properties may have or enact onerous or arbitrary rules
+Added: that restrict our ability to renovate, market or lease our properties or require us to renovate or maintain such properties at standards or costs that are in excess of our planned operating budgets.
Such rules may include requirements for landscaping, limitations on signage promoting a property for lease or sale, or the use of specific construction materials in renovations.
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We are involved in a range of legal actions in the ordinary course of business.
−Removed: These actions may include, among others, eviction proceedings and other landlord-tenant disputes, challenges to title and ownership rights (including actions brought by prior owners alleging wrongful foreclosure by their lender or servicer), disputes arising over potential violations of HOA rules and regulations and issues with local housing officials arising from the condition or maintenance of the property and outside vendor disputes.
+Added: These actions may include, among others, eviction proceedings and other landlord-tenant disputes, challenges to title and ownership rights (including actions brought by prior owners alleging wrongful foreclosure by their lender or servicer), disputes arising over potential violations of HOA rules and regulations and issues with local housing officials arising from the condition or maintenance of the property, outside vendor disputes and employee disputes.
These actions can be time consuming and expensive and may adversely affect our reputation.
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Government investigations or legal proceedings brought by governmental authorities may result in significant costs and expenses and reputational harm and may divert resources from our operations and therefore could have a material adverse effect on our business, financial condition, operating results or cash flows.
−Removed: From time to time, we may be subject to government investigations or legal proceedings brought by governmental authorities.
+Added: From time to time, we are subject to government investigations or legal proceedings brought by governmental authorities.
Government investigations and any related legal proceedings may result in significant costs and expenses, including legal fees, and divert management attention and company resources from our operations and execution of our business strategy.
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Any governmental legal proceeding, whether or not resolved adversely, could also negatively impact our reputation.
−Removed: Therefore, government investigations or legal proceedings could have a material adverse effect on our business, financial condition, operating results or cash flows.
−Removed: If we fail to maintain an effective system of integrated internal controls, we may not be able to accurately report our financial results.
−Removed: In connection with operating as a public company, we are required to provide reliable financial statements and reports to our shareholders.
−Removed: To monitor the accuracy and reliability of our financial reporting, we have established an internal audit function that oversees our internal controls.
−Removed: In addition, we have developed policies and procedures with respect to company-wide business processes and cycles in order to implement effective internal control over financial reporting.
−Removed: While we have undertaken substantial work to comply with Section 404 of the Sarbanes-Oxley Act of 2002, we cannot be certain that we will continue to be successful in maintaining effective internal control over our financial reporting and may determine in the future that our existing internal controls need improvement.
−Removed: If we fail to comply with proper overall controls, we could be materially harmed or we could fail to meet our reporting obligations.
−Removed: In addition, the existence of a material weakness or significant deficiency in our internal controls could result in errors in our financial statements that could require a restatement, cause us to fail to meet our reporting obligations, result in increased costs to remediate any deficiencies, attract regulatory scrutiny or lawsuits and cause investors to lose confidence in our reported financial information, leading to a substantial decline in the market price of our preferred and common shares.
−Removed: Future debt service obligations could adversely affect the Company’s operating results, may require us to sell properties and could adversely affect the Company’s ability to make distributions on our preferred and common shares and the Operating Partnership’s ability to make distributions on its OP units.
−Removed: Our financing strategy contemplates the use of secured and unsecured debt to finance long-term growth.
−Removed: Our outstanding borrowings contain certain debt covenants that limit the outstanding principal we may incur on our consolidated indebtedness.
−Removed: While we intend to comply with all debt covenants, our governing documents contain no limitations on the amount of debt that we may incur, and the Company’s board of trustees may change our financing strategy at any time without shareholder approval.
−Removed: As a result, we may be able to incur substantial additional debt in the future.
−Removed: Incurring debt could subject us to many risks, including the risks that:
−Removed: our cash flows from operations will be insufficient to make required payments of principal and interest;
−Removed: our debt may increase our vulnerability to adverse economic and industry conditions;
−Removed: we may be required to dedicate a substantial portion of our cash flows from operations to payments on our debt, thereby reducing cash available for distribution to shareholders and unitholders, funds available for operations and capital expenditures, future business opportunities or other purposes;
−Removed: we violate restrictive covenants in the documents that govern our indebtedness, which would entitle our lenders to accelerate our debt obligations;
−Removed: refinancing of the debt may not be available on favorable terms or at all;
−Removed: the use of leverage could adversely affect our ability to make distributions to shareholders and unitholders and the market price of our preferred and common shares.
−Removed: If we incur debt in the future and do not have sufficient funds to repay our debt at maturity, it may be necessary to refinance the debt through additional debt or equity financings.
−Removed: If, at the time of any refinancing, prevailing interest rates or other factors result in higher interest rates on refinancings, increases in interest expense could adversely affect our operating results and cash flows and, consequently, cash available for distribution to shareholders and unitholders.
−Removed: If we are unable to refinance our debt on acceptable terms, we may be forced to dispose of substantial numbers of properties on disadvantageous terms, potentially resulting in losses.
−Removed: To the extent we cannot meet any future debt service obligations, we will risk losing some or all of our properties that may be pledged to secure our obligations to foreclosure.
−Removed: Any unsecured debt agreements we enter into may contain specific cross-default provisions with respect to specified other indebtedness, giving the unsecured lenders the right to declare a default if we are in default under other loans in some circumstances.
−Removed: Defaults under our debt agreements could materially and adversely affect our financial condition and results of operations.
Our revolving credit facility, unsecured senior notes and securitizations contain financial and operating covenants that could restrict our business and investment activities.
−Removed: Failure to satisfy these covenants could result in a default under our revolving credit facility and unsecured senior notes that could accelerate the maturity of our debt obligations or, with respect to our securitizations, also require that all cash flow generated from operations service only the indebtedness and the possible foreclosure of the properties securing the indebtedness, which would have a material adverse effect on our business, liquidity, results of operations and financial condition and our ability to make distributions on our preferred and common shares and the Operating Partnership’s ability to make distributions on its OP units.
Our revolving credit facility, unsecured senior notes and securitizations contain financial and operating covenants, such as debt ratios, minimum liquidity, unencumbered asset value, minimum debt service coverage ratio, and other limitations that may restrict our ability to make distributions or other payments to the Company’s shareholders and the Operating Partnership’s ability to make distributions on its OP units and may restrict our investment activities.
−Removed: Among others, our revolving credit facility requires that we maintain financial covenants relating to the following matters:
−Removed: (i) total indebtedness to total asset value to not exceed 0.60 to 1.00 at any time, (ii) EBITDA for the period of four consecutive fiscal quarters most recently ended to fixed charges for such period to be no less than 1.75 to 1.00 as of the last day of such period, (iii) secured indebtedness to total asset value to not exceed 0.40 to 1.00 at any time, (iv) unsecured indebtedness to unencumbered asset value to not exceed 0.60 to 1.00 at any time and (v) unencumbered net operating income (“NOI”) for the period of four consecutive fiscal quarters most recently ended to unsecured interest expense for such period, to be no less than 1.75 to 1.00 as of the last day of such period.
−Removed: Among others, our unsecured senior notes require that we maintain financial covenants relating to the following matters:
−Removed: (i) total indebtedness to total asset value to not exceed 0.60 to 1.00 at any time, (ii) secured indebtedness to total asset value to not exceed 0.40 to 1.00 at any time, (iii) unencumbered asset value to unsecured indebtedness to be no less than 1.50 at any time and (iv) consolidated income available for debt service to interest expense for the period of four consecutive fiscal quarters most recently ended to be no less than 1.50 to 1.00 as of the last day of such period.
Our securitizations require, among other things, that a cash management account controlled by the lender collect all rents and cash generated by the properties securing the portfolio.
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If we violate covenants in our revolving credit facility, unsecured senior notes, securitizations or future agreements, we could be required to repay all or a portion of our indebtedness before maturity at a time when we might be unable to arrange financing for such repayment on attractive terms or at all.
−Removed: Our revolving credit facility permits us to incur significant indebtedness, which could require that we generate significant cash flow to satisfy the payment and other obligations under our revolving credit facility.
−Removed: We may incur significant indebtedness in connection with draws under our revolving credit facility.
−Removed: This indebtedness may exceed our cash on hand and/or our cash flows from operating activities.
−Removed: Our ability to meet the payment and other obligations under
−Removed: our revolving credit facility depends on our ability to generate sufficient cash flow in the future.
−Removed: Our ability to generate cash flow, to some extent, is subject to general economic, financial, competitive, legislative and regulatory factors, as well as other factors that are beyond our control.
−Removed: It is possible that our business will not generate cash flow from operations, or that future borrowings will not be available to us, in amounts sufficient to enable us to meet our payment obligations under our revolving credit facility.
−Removed: If we are not able to generate sufficient cash flow to service our revolving credit facility and other debt obligations, as well as satisfy the REIT distribution requirement, we may need to refinance or restructure our debt, reduce or delay capital investments, or seek to raise additional capital.
−Removed: If we are unable to implement one or more of these alternatives, we may not be able to meet our payment obligations under our revolving credit facility, which could materially and adversely affect our liquidity.
−Removed: We have and may in the future continue to utilize non-recourse long-term asset-backed securitizations, and such structures may expose us to risks not prevalent in unsecured debt financings, which could result in losses to us.
−Removed: We have and may continue in the future to utilize non-recourse long-term asset-backed securitizations of pools of homes which we own, if and when they become available and to the extent consistent with the maintenance of our REIT qualification, in order to generate cash for funding new investments.
−Removed: As of December 31, 2019 , the principal amount of such indebtedness was $2.0 billion .
−Removed: These securitizations involve conveying a pool of homes from the Company’s portfolio to a special purpose vehicle that obtains a loan from a third-party lender represented by a promissory note.
−Removed: The promissory note is immediately transferred by the third-party lender to a subsidiary of the Company and then to a Real Estate Mortgage Investment Conduit (“REMIC”) trust in exchange for classes of single-family rental pass-through certificates representing all the beneficial ownership interests in the loan and the trust.
−Removed: Upon receipt of the certificates, the subsidiary of the Company sells the certificates to investors.
−Removed: The securitization of our pools of homes in our portfolio investments can magnify our exposure to losses on those investments because any equity interest we retain in the issuing entity would be subordinate to the certificates issued to investors and we would, therefore, absorb all of the losses sustained with respect to a securitized pool of assets before the investors experience any losses.
−Removed: In addition, accounting rules for securitizations are complex and involve significant judgment and assumptions.
−Removed: These complexities and possible changes in accounting rules, interpretations or our assumptions could undermine our ability to prepare timely and accurate financial statements.
−Removed: Moreover, we cannot be assured that we will be able to access the securitization market or be able to do so at favorable rates.
−Removed: The inability to consummate securitizations of our portfolio to finance our investments on a long-term basis could require us to seek other forms of potentially less attractive financing or to liquidate assets at an inopportune time or price, which could adversely affect our performance and our ability to grow our business.
Adverse changes in our credit ratings could negatively affect our financing ability.
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In the event that our current credit ratings are downgraded or removed, we would most likely incur higher borrowing costs and experience greater difficulty in obtaining additional financing, which in turn could have a material adverse impact on our financial condition, results of operations, cash flows and liquidity.
−Removed: We may be adversely affected by changes in LIBOR reporting practices or the method in which LIBOR is determined.
−Removed: As of December 31, 2019 , we had no debt outstanding that was indexed to the London Interbank Offered Rate (“LIBOR”).
−Removed: On July 27, 2017, the Financial Conduct Authority (the “FCA”) announced its intention to phase out LIBOR by the end of 2021.
−Removed: It is not possible to predict the further effect of the FCA’s announcement, any changes in the methods by which LIBOR is determined, or any other reforms to LIBOR that may be enacted in the United Kingdom, the European Union or elsewhere.
−Removed: Such developments may cause LIBOR to perform differently than in the past, or cease to exist.
−Removed: In addition, any other legal or regulatory changes made by the FCA, ICE Benchmark Administration Limited, the European Money Markets Institute (formerly Euribor-EBF), the European Commission or any other successor governance or oversight body, or future changes adopted by such body, in the method by which LIBOR is determined or the transition from LIBOR to a successor benchmark may result in, among other things, a sudden or prolonged increase or decrease in LIBOR, a delay in the publication of LIBOR, and changes in the rules or methodologies in LIBOR, which may discourage market participants from continuing to administer or to participate in LIBOR’s determination, and, in certain situations, could result in LIBOR no longer being determined and published.
−Removed: If a published U.S.
−Removed: dollar LIBOR is unavailable after 2021, the interest rates on our debt which is indexed to LIBOR will be determined using various alternative methods, any of which may result in interest obligations which are more than or do not otherwise correlate over time with the payments that would have been made on such debt if U.S.
−Removed: dollar LIBOR was available in its current form.
−Removed: Further, the same costs and risks that may lead to the unavailability of U.S.
−Removed: dollar LIBOR may make one or more of the alternative methods impossible or impracticable to determine.
−Removed: Any of these proposals or consequences could have a material adverse effect on our financing costs, and as a result, our financial condition, operating results and cash flows.
+Added: We are subject to risks from the global pandemic associated with COVID-19 and we may in the future be subject to risks from other public health crises.
+Added: Our business is subject to risks from the COVID-19 pandemic that is currently impacting our tenants, employees and suppliers.
+Added: The COVID-19 pandemic has spread rapidly, adversely affecting public health, economic activity and employment.
+Added: The risks to our business from the COVID-19 pandemic include:
+Added: • The COVID-19 pandemic and the measures taken to combat it have resulted in a significant increase in unemployment .
+Added: Our operating results depend significantly on the ability of our current and prospective tenants to pay their rent.
+Added: To the extent our current tenants or prospective tenants experience unemployment, deteriorating financial conditions, and declines in household income, they may be unwilling or unable to pay rent in full on a timely basis or renew or enter into new leases for our homes, and our revenues and operating results could be negatively affected.
+Added: We have received a number of tenant inquiries regarding rent relief and we continue to work closely with delinquent residents on a case-by-case basis to find the resolution that is best for the resident and the Company.
+Added: Although minimal to date, workout options have included and may in the future include deferred payment plans which we began offering in June, or, where appropriate, early lease termination.
+Added: The longer the COVID-19 pandemic continues, the greater the adverse impact may be on our tenants’ ability to make timely rental payments, on prospective residents to afford our homes, and ultimately on our occupancy.
+Added: • State, local, federal and industry-initiated efforts in response to the COVID-19 pandemic may continue to adversely affect our business.
+Added: Certain government actions have, and future government actions may, restrict our ability to collect rent or enforce remedies for failure to pay rent.
+Added: In addition, government restrictions on movement have and may in the future limit the ability of prospective tenants to visit our properties or new tenants to move into our properties.
+Added: These government efforts to respond to the COVID-19 pandemic may continue to increase possible credit losses and may adversely affect our occupancy levels.
+Added: • Our acquisition and development activities have been slowed.
+Added: Our growth may be adversely impacted as our ability to acquire and construct homes has been negatively affected by COVID-19.
+Added: Due to market uncertainties regarding future asset values at the beginning of the COVID-19 pandemic, we temporarily suspended acquisitions through traditional channels and our National Builder Program but have since resumed acquisitions through these channels.
+Added: We have continued new home construction, which most states permit as an essential business activity;
+Added: however, some states where we are constructing new homes, such as Washington, temporarily prohibited residential construction during the early stages of the COVID-19
+Added: pandemic and may institute future prohibitions.
+Added: We have also experienced certain other COVID-19 related construction delays, including government office slowdowns.
+Added: In addition, adverse impacts on the supply of construction materials and labor may delay or halt our construction activity.
+Added: • Our employees face COVID-19 health risks.
+Added: If a significant number of our employees, or if key personnel, are unable to work as a result of COVID-19, this would adversely impact our business and operating results.
+Added: In addition, during the COVID-19 outbreak, substantially all of our employees are working remotely and depend on Internet and third-party communications vendors that may be unreliable, experience shut-downs or be subject to new cybersecurity risks, adversely impacting operations.
+Added: • COVID-19 may impact our ability to maintain our properties .
+Added: Some tenants may be reluctant to request routine maintenance during the COVID-19 pandemic.
+Added: Deferring routine repairs and maintenance may impact the value and desirability of our rental homes.
+Added: It may also increase the expense and difficulty of completing these repairs in the future and may delay other needed repairs when the COVID-19 pandemic no longer constrains business activity.
+Added: We believe that the degree to which COVID-19 continues to adversely impact our business, operating results, cash flows, ability to make distributions, ability to service our debt and/or financial condition will be driven primarily by the duration, spread and severity of the pandemic, including resurgences, impact of government regulations, and the speed and effectiveness of vaccine distribution, all of which are uncertain and difficult to predict.
+Added: As a result, we are not able at this time to estimate the effect of these factors on our business, but the adverse impact on our business, results of operations, financial condition and cash flows could be material.
+Added: Future public health crises could have similar impacts.
Risks Related to the Real Estate Industry
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There are significant expenditures associated with an investment in real estate (such as debt service, real estate taxes, insurance and maintenance costs) that generally do not decline when circumstances reduce the income from the property.
−Removed: Income from and the value of the properties we acquire may be adversely affected by the following factors:
−Removed: downturns in international, national, regional and local economic conditions (particularly increases in unemployment);
−Removed: the attractiveness of the properties we acquire to potential tenants and competition from other properties;
−Removed: increases in the supply of, or decreases in the demand for, similar or competing properties in our target markets;
−Removed: increases in the cost of land for development activities and construction costs;
−Removed: unemployment, bankruptcies, financial difficulties or lease defaults by our tenants;
−Removed: declines in the value of residential real estate;
−Removed: changes in interest rates, availability and terms of debt financing;
−Removed: increases in property-level maintenance and operating costs and expenses and our ability to control rents;
−Removed: changes in, or increased costs of compliance with, governmental laws, rules, regulations and fiscal policies, including changes in tax, real estate, environmental and zoning laws, and our potential liability thereunder and the rules and regulations of government or private parties, including HOAs, to discourage or deter the purchase or rental of single-family properties by entities owned or controlled by institutional investors;
−Removed: shortages or rising prices of building materials and construction services, including independent contractor or outside supplier capacity constraints, and the impact of governmental tariffs, duties and/or trade restrictions imposed or increased on building materials and manufacturing defects resulting in recalls of materials;
−Removed: our ability to provide adequate management and maintenance;
−Removed: changes in the cost or availability of insurance, including coverage for mold or asbestos;
−Removed: costs resulting from the clean-up of and liability to third parties for damages resulting from environmental problems, such as mold;
−Removed: tenant turnover and the inability to lease or re-lease homes on a timely basis, attractive terms or at all;
−Removed: costs and time period required to convert acquisitions to rental homes and to prepare homes for re-leasing;
−Removed: the short-term nature of most residential leases and the costs and potential delays in re-leasing;
−Removed: the failure of tenants to pay rent when due or otherwise perform their lease obligations;
−Removed: unanticipated repairs, capital expenditures or other costs;
−Removed: the illiquidity of real estate investments generally;
−Removed: the geographic mix of our properties;
−Removed: residents’ perceptions of the safety, convenience and attractiveness of our properties and the neighborhoods where they are acquired;
−Removed: the ongoing need for capital improvements, particularly in older properties;
−Removed: the ability or unwillingness of residents to pay rent increases;
−Removed: civil unrest, acts of God, including earthquakes, floods and other natural disasters, which may result in uninsured losses, acts of war or terrorism, and outbreaks of pandemic or contagious diseases;
−Removed: rent control or rent stabilization or other housing laws, which could prevent us from raising rents.
−Removed: For these and other reasons, we cannot assure you that we will be profitable or that we will realize growth in the value of our real estate properties.
+Added: Income from and the value of our properties may be adversely affected by numerous factors, including general economic conditions (particularly increases in unemployment), property supply and demand fundamentals and rent control or rent stabilization or other housing laws, which could prevent us from raising rents.
Environmentally hazardous conditions may adversely affect our financial condition, cash flows and operating results.
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A property owner who violates environmental laws may be subject to sanctions which may be enforced by governmental agencies or, in certain circumstances, private parties.
−Removed: In connection with the acquisition and ownership of our properties, we may be exposed to such costs.
+Added: In connection with the acquisition, development and ownership of our properties, we may be exposed to such costs.
The cost of defending against environmental claims, of compliance with environmental regulatory requirements or of remediating any contaminated property could materially adversely affect our business, financial condition, results of operations and, consequently, amounts available for distribution to shareholders and unitholders.
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We may be subject to environmental laws or regulations relating to our properties, such as those concerning lead-based paint, mold, asbestos, proximity to power lines or other issues.
−Removed: We cannot assure you that future laws, ordinances or regulations will not impose any material environmental liability, or that the current environmental condition of our properties will not be affected by the operations of residents, existing conditions of the land, operations in the vicinity of the properties or the activities of unrelated third parties.
+Added: We cannot assure you that future laws, ordinances or regulations will not impose any material environmental liability, or that the current environmental condition of our
+Added: properties will not be affected by the operations of residents, existing conditions of the land, operations in the vicinity of the properties or the activities of unrelated third parties.
In addition, we may be required to comply with various local, state and federal fire, health, life-safety and similar regulations.
Failure to comply with applicable laws and regulations could result in fines and/or damages, suspension of personnel, civil liability and/or other sanctions.
−Removed: Tenant relief laws, including laws regulating evictions, rent control laws and other regulations that limit our ability to increase rental rates may negatively impact our rental income and profitability.
+Added: Tenant relief laws, including laws restricting evictions, rent control laws and other regulations that limit our ability to increase rental rates may negatively impact our rental income and profitability.
As landlord of numerous properties, we are involved regularly in evicting tenants who are not paying their rent or are otherwise in material violation of the terms of their lease.
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Furthermore, rent control laws or other regulations that may limit our ability to increase rental rates may affect our rental income.
−Removed: Especially in times of recession and economic slowdown, rent control initiatives can acquire significant political support.
−Removed: rent controls unexpectedly became applicable to certain of our properties, our revenue from and the value of such properties could be adversely affected.
+Added: If rent controls unexpectedly became applicable to certain of our properties, our revenue from and the value of such properties could be adversely affected.
+Added: Since the onset of the COVID-19 pandemic, there have been increases in restrictions and other regulations on evictions and rent increases and we believe these increases will continue given the ongoing effects of the pandemic, economic challenges nationally and in many of our markets and increasing political support for these types of regulations.
Class action, tenant rights and consumer demands, litigation and adverse media publicity could directly limit and constrain our operations and may result in significant litigation expenses.
−Removed: Numerous tenants’ rights and consumers’ rights organizations exist throughout the country and operate in our target markets, and as we grow in scale, we may attract attention from some of these organizations and become a target of legal demands, litigation and adverse media publicity.
−Removed: Many of such consumer organizations have become more active and better funded in connection with mortgage foreclosure-related issues, and with the large settlements identified below in the risk factor entitled “Mortgage loan modification programs and future legislative action may adversely affect the number of available properties that meet our investment criteria” and the increased market for single-family rentals arising from displaced homeownership, some of these organizations may shift their litigation, lobbying, media efforts, fundraising and grass roots organizing activities to focus on landlord-tenant issues.
+Added: Certain organizations, including tenant rights and housing advocacy organizations have been critical of our business model.
+Added: We have been and may in the future be a target of legal demands, litigation and adverse media publicity driven by these organizations.
While we intend to conduct our business lawfully and in compliance with applicable landlord-tenant and consumer laws, such organizations might work in conjunction with trial and pro bono lawyers in one state or multiple states to attempt to bring claims against us on a class action basis for damages or injunctive relief and to seek to publicize our activities in a negative light.
−Removed: We cannot anticipate what form such legal actions might take, or what remedies they may seek.
+Added: We cannot anticipate what form such actions might take, or what remedies they may seek.
Additionally, these organizations may lobby local county and municipal attorneys or state attorneys general to pursue enforcement or litigation against us, may lobby state and local legislatures to pass new laws and regulations to constrain our business operations or may generate unfavorable publicity for our business.
If they are successful in any such endeavors, they could directly limit and constrain our operations, adversely impact our business and may impose on us significant litigation expenses, including settlements to avoid continued litigation or judgments for damages or injunctions.
−Removed: Acquiring properties during periods when the single-family home sector is experiencing substantial inflows of capital and intense competition may result in inflated purchase prices and increase the likelihood that our properties will not appreciate in value and may, instead, decrease in value.
−Removed: The allocation of substantial amounts of capital for investment in the single-family home sector and significant competition for income producing real estate may inflate the purchase prices for such assets.
−Removed: To the extent we purchased, or in the future purchase, real estate in such an environment, it is possible that the value of our properties may not appreciate and may, instead, decrease in value, perhaps significantly, below the amount we paid for such properties.
−Removed: In addition to macroeconomic and local economic factors, technical factors, such as a decrease in the amount of capital allocated to the single-family home sector and the number of investors participating in the sector, could cause the value of our properties to decline.
Climate change and related regulatory actions may adversely affect our business.
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In addition, changes in federal, state and local legislation and regulation based on concerns about climate change could result in delays and increased costs to complete our developments and increased capital expenditures on our existing properties (for example, to improve their energy efficiency and/or resistance to inclement weather) without a corresponding increase in revenue, and, as a result, adversely impact our financial results and operations.
−Removed: We may have difficulty selling our real estate investments, and our ability to distribute all or a portion of the net proceeds from such sale to shareholders and unitholders may be limited.
−Removed: Real estate investments are relatively illiquid and, as a result, we may have a limited ability to sell our properties.
−Removed: When we sell any of our properties, we may recognize a loss on such sale.
−Removed: We may elect not to distribute any proceeds from the sale of properties to shareholders and unitholders.
−Removed: Instead, we may use such proceeds for other purposes, including:
−Removed: purchasing additional properties;
−Removed: repaying debt or buying back shares;
−Removed: buying out interests of any co-venturers or other partners in any joint venture in which we are a party;
−Removed: creating working capital reserves;
−Removed: making repairs, maintenance or other capital improvements or expenditures to our remaining properties.
+Added: It would be difficult for us to quickly generate cash from sales of our properties.
+Added: Real estate investments, particularly large portfolios of properties, are relatively illiquid.
+Added: If we had a sudden need for significant cash, it would be difficult for us to fund such need quickly through a sale of our properties.
Our ability to sell our properties may also be limited by our need to avoid the 100% prohibited transactions tax that is imposed on gain recognized by a REIT from the sale of property characterized as dealer property.
−Removed: In order to ensure that we avoid such characterization, we may be required to hold our properties for a minimum period of time and comply with certain other requirements in the Code or dispose of our properties through a TRS.
+Added: In order to ensure that we avoid such characterization, we may be required to hold
+Added: our properties for a minimum period of time and comply with certain other requirements in the Code or dispose of our properties through a TRS.
Risks Related to Our Ownership, Organization and Structure
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Provisions of Maryland law may limit the ability of a third-party to acquire control of us by requiring the Company’s board of trustees or shareholders to approve proposals to acquire our company or effect a change in control.
−Removed: Certain provisions of the Maryland General Corporation Law (the “MGCL”) applicable to Maryland real estate investment
−Removed: trusts may have the effect of inhibiting a third-party from making a proposal to acquire us or of impeding a change in control under circumstances that otherwise could provide our shareholders with the opportunity to realize a premium over the then-prevailing market price of their shares, including:
−Removed: “business combination” provisions that, subject to limitations, prohibit certain business combinations between us and an “interested shareholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our outstanding voting shares or an affiliate or associate of ours who, at any time within the two-year period immediately prior to the date in question, was the beneficial owner of 10% or more of the voting power of our then outstanding shares) or an affiliate of any interested shareholder for five years after the most recent date on which the shareholder becomes an interested shareholder, and thereafter imposes two super-majority shareholder voting requirements on these combinations, unless, among other conditions, our common shareholders receive a minimum price, as defined in the MGCL, for their shares and the consideration is received in cash or in the same form as previously paid by the interested shareholder for its shares;
+Added: Certain provisions of the Maryland General Corporation Law (the “MGCL”) applicable to Maryland real estate investment trusts may have the effect of inhibiting a third-party from making a proposal to acquire us or of impeding a change in control under circumstances that otherwise could provide our shareholders with the opportunity to realize a premium over the then-prevailing market price of their shares, including:
+Added: • “business combination” provisions that, subject to limitations, prohibit certain business combinations between us and an “interested shareholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our
+Added: outstanding voting shares or an affiliate or associate of ours who, at any time within the two-year period immediately prior to the date in question, was the beneficial owner of 10% or more of the voting power of our then outstanding shares) or an affiliate of any interested shareholder for five years after the most recent date on which the shareholder becomes an interested shareholder, and thereafter imposes two super-majority shareholder voting requirements on these combinations, unless, among other conditions, our common shareholders receive a minimum price, as defined in the MGCL, for their shares and the consideration is received in cash or in the same form as previously paid by the interested shareholder for its shares;
• “control share” provisions that provide that our “control shares” (defined as voting shares that, when aggregated with all other shares controlled by the shareholder, entitle the shareholder to exercise one of three increasing ranges of voting power in electing trustees) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of issued and outstanding “control shares”) have no voting rights except to the extent approved by our shareholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding shares owned by the acquirer, by our officers or by our employees who are also trustees of our company.
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In addition, pursuant to a provision in the Company’s bylaws, we have opted out of the control share provisions of the MGCL.
−Removed: However, the Company’s board of trustees may by resolution elect to opt in to the business combination provisions of the MGCL and we may, by amending the Company’s bylaws, opt in to the control share provisions of the MGCL in the future.
+Added: However, the Company’s board of trustees may by resolution elect to opt into the business combination provisions of the MGCL and we may, by amending the Company’s bylaws, opt into the control share provisions of the MGCL in the future.
In addition, the “unsolicited takeover” provisions of Title 3, Subtitle 8 of the MGCL permit the board of trustees of a Maryland REIT, without shareholder approval and regardless of what is currently provided in its declaration of trust or bylaws, to implement certain takeover defenses, including adopting a classified board or increasing the vote required to remove a trustee.
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Therefore, any revocation or modification of this opt-out would require an amendment to the Company’s declaration of trust that is first recommended by the Company’s board of trustees and then approved by a majority of all the votes entitled to be cast generally in the election of trustees.
−Removed: The Company’s rights and the rights of the Company’s shareholders to take action against the Company’s trustees and officers are limited, which could limit your recourse in the event of actions not in your best interests.
−Removed: Under Maryland law, generally, a trustee will not be liable if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in our best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances.
−Removed: In addition, the Company’s declaration of trust limits the liability of our trustees and officers to us and our shareholders for money damages, except for liability resulting from:
−Removed: actual receipt of an improper benefit or profit in money, property or services;
−Removed: active and deliberate dishonesty by the trustee or officer that was established by a final judgment as being material to the cause of action adjudicated.
−Removed: The Company’s declaration of trust authorizes us to indemnify our trustees and officers for actions taken by them in those capacities to the maximum extent permitted by Maryland law.
−Removed: The Company’s bylaws require us to indemnify each trustee and officer, to the maximum extent permitted by Maryland law, in the defense of any proceeding to which he or she is made, or threatened to be made, a party by reason of his or her service to us.
−Removed: In addition, we may be obligated to advance the defense costs incurred by our trustees and officers.
−Removed: As a result, we and the Company’s shareholders may have more limited rights against the Company’s trustees
−Removed: and officers than might otherwise exist absent the current provisions in the Company’s declaration of trust and bylaws or that might exist with other companies.
Risks Related to Qualification and Operation as a REIT
−Removed: Qualifying as a REIT involves highly technical and complex provisions of the Code.
−Removed: Qualification as a REIT involves the application of highly technical and complex Code provisions for which only limited judicial and administrative authorities exist.
−Removed: Even a technical or inadvertent violation could jeopardize our REIT qualification.
−Removed: Our qualification as a REIT depends upon our satisfaction of certain asset, income, organizational, distribution, shareholder ownership and other requirements on a continuing basis.
−Removed: New legislation, court decisions or administrative guidance, in each case possibly with retroactive effect, may make it more difficult or impossible for us to qualify as a REIT.
−Removed: Certain rules applicable to REITs are particularly difficult to interpret or to apply in the case of REITs investing in real estate mortgage loans that are acquired at a discount, subject to work-outs or modifications, or reasonably expected to be in default at the time of acquisition.
−Removed: In addition, our ability to satisfy the requirements to qualify as a REIT depends in part on the actions of third parties over which we have no control or only limited influence, including in cases where we own an equity interest in an entity that is classified as a partnership for U.S.
−Removed: federal income tax purposes.
Failure to qualify as a REIT, or failure to remain qualified as a REIT, would cause us to be taxed as a regular corporation, which would substantially reduce funds available for distribution to our shareholders.
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As a result, we cannot assure you that we qualify or that we will remain qualified as a REIT.
+Added: Qualification as a REIT involves the application of highly technical and complex Code provisions for which only limited judicial and administrative authorities exist.
+Added: Even a technical or inadvertent violation could jeopardize our REIT qualification.
+Added: Our qualification as a REIT depends upon our satisfaction of certain asset, income, organizational, distribution, shareholder ownership and other requirements on a continuing basis.
+Added: New legislation, court decisions or administrative guidance, in each case possibly with retroactive effect, may make it more difficult or impossible for us to qualify as a REIT.
If we fail to qualify as a REIT in any taxable year, and we do not qualify for certain statutory relief provisions, we will face serious tax consequences that will substantially reduce the funds available for distributions to our shareholders because:
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As a result of all these factors, our failure to qualify as a REIT could impair our ability to expand our business and raise capital, and it could adversely affect the value of our preferred and common shares.
−Removed: Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities.
−Removed: The REIT provisions of the Code may limit our ability to hedge our assets and operations.
−Removed: Under these provisions, any income that we generate from transactions intended to hedge our interest rate risk will be excluded from gross income for purposes of the REIT 75% and 95% gross income tests if the instrument hedges interest rate risk on liabilities used to carry or acquire real estate assets or manages the risk of certain currency fluctuations, and such instrument is properly identified under applicable Treasury Regulations.
−Removed: Income from hedging transactions that do not meet these requirements will generally constitute non-qualifying income for purposes of both the REIT 75% and 95% gross income tests.
−Removed: As a result of these rules, we may have to limit our use of hedging techniques that might otherwise be advantageous or implement those hedges through a TRS.
−Removed: This could increase the cost of our hedging activities because our TRS would be subject to tax on gains or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear.
−Removed: In addition, losses in our TRS will generally not provide any tax benefit, except for being carried back or forward against past or future taxable income in the TRS, provided, however, losses in our TRS arising in taxable years beginning after December 31, 2017, may only be carried forward and may only be deducted against 80% of future taxable income in the TRS.
−Removed: Complying with the REIT requirements may cause us to forgo and/or liquidate otherwise attractive investments.
−Removed: To qualify as a REIT, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts that we distribute to our shareholders and the ownership of our shares.
−Removed: To meet these tests, we may be required to take or forgo taking actions that we would otherwise consider advantageous.
−Removed: For instance, in order to
−Removed: satisfy the gross income or asset tests applicable to REITs under the Code, we may be required to forgo investments that we otherwise would make.
−Removed: Furthermore, we may be required to liquidate from our portfolio otherwise attractive investments.
−Removed: In addition, we may be required to make distributions to our shareholders at disadvantageous times or when we do not have funds readily available for distribution.
−Removed: These actions could reduce our income and amounts available for distribution to our shareholders.
−Removed: Thus, compliance with the REIT requirements may hinder our investment performance.
Even if we qualify as a REIT, we may face other tax liabilities that reduce our cash flow.
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Any of these taxes would decrease cash available for distribution to our shareholders.
−Removed: In addition, in order to meet the REIT qualification requirements, or to avert the imposition of a 100% tax that applies to certain gains derived by a REIT from dealer property or inventory, we hold some of our assets through a TRS or other subsidiary corporations that are subject to corporate-level income tax at regular corporate rates.
−Removed: Our TRS may have tax liability with respect to “phantom income” if it is treated as a “dealer” for U.S.
−Removed: federal income tax purposes which would require the TRS to mark to market its assets at the end of each taxable year.
−Removed: In addition, our TRS is subject to U.S.
+Added: In addition, in order to meet the REIT qualification requirements, or to avert the imposition of a 100% tax that applies to certain gains derived by a REIT from dealer property or inventory, we hold some of our assets through a TRS or other subsidiary corporations that are subject to U.S.
federal, state and local corporate taxes.
Any of these taxes would decrease cash available for distribution to our shareholders.
−Removed: Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends, which could adversely affect the value of our shares if they are perceived as less attractive investments.
−Removed: The maximum rate applicable to “qualified dividend income” paid by regular “C” corporations to U.S.
−Removed: shareholders that are individuals, trusts and estates generally is 20%.
−Removed: Dividends payable by REITs to those U.S.
−Removed: shareholders, however, generally are not eligible for the current reduced rate, except to the extent that certain holding requirements have been met and a REIT’s dividends are attributable to dividends received by a REIT from taxable corporations (such as a TRS), to income that was subject to tax at the REIT/corporate level, or to dividends properly designated by the REIT as “capital gains dividends.” Effective for the taxable year ended December 31, 2018 through the taxable year ending December 31, 2025, those U.S.
−Removed: shareholders may deduct 20% of their dividends from REITs (excluding qualified dividend income and capital gains dividends).
−Removed: For those U.S.
−Removed: shareholders in the top marginal tax bracket of 37%, the deduction for REIT dividends yields an effective income tax rate of 29.6% on qualified REIT dividends, which is higher than the 20% tax rate on qualified dividend income paid by “C” corporations.
−Removed: Although the reduced rates applicable to dividend income from regular “C” corporations do not adversely affect the taxation of REITs or dividends payable by REITs, it could cause investors who are non-corporate taxpayers to perceive investments in REITs to be relatively less attractive than investments in the shares of regular “C” corporations that pay dividends, which could adversely affect the value of our preferred and common shares.
+Added: Complying with the REIT requirements may cause us to forgo and/or liquidate otherwise attractive investments.
+Added: To qualify as a REIT, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts that we distribute to our shareholders and the ownership of our shares.
+Added: To meet these tests, we may be required to take or forgo taking actions that we would otherwise consider advantageous.
+Added: For instance, in order to satisfy the gross income or asset tests applicable to REITs under the Code, we may be required to forgo investments that we otherwise would make.
+Added: Furthermore, we may be required to liquidate from our portfolio otherwise attractive investments.
+Added: In addition, we may be required to make distributions to our shareholders at disadvantageous times or when we do not have funds readily available for distribution.
+Added: These actions could reduce our income and amounts available for distribution to our shareholders.
+Added: Thus, compliance with the REIT requirements may hinder our investment performance.
The prohibited transactions tax may limit our ability to engage in sale transactions.
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In general, “prohibited transactions” are sales or other dispositions of property other than foreclosure property, held primarily for sale to customers in the ordinary course of business.
−Removed: We may be subject to the prohibited transactions tax equal to 100% of net gain upon a disposition of real property or debt instruments that we hold.
+Added: We may be subject to the prohibited transactions tax equal to 100% of net gain upon a disposition of real property that we hold.
Although a safe harbor is available, for which certain sales of property by a REIT are not subject to the 100% prohibited transaction tax, we cannot assure you that we can comply with the safe harbor or that we will avoid owning property that may be characterized as held primarily for sale to customers in the ordinary course of business.
−Removed: Consequently, we may choose not to engage in certain sales of our properties or debt instruments or we may conduct such sales through our TRS, which would be subject to U.S.
+Added: Consequently, we may choose not to engage in certain sales of our properties or we may conduct such sales through our TRS, which would be subject to U.S.
federal and state income taxation.
In addition, we may have to sell numerous properties to a single or a few purchasers, which could cause us to be less profitable than would be the case if we sold properties on a property-by-property basis.
−Removed: For example, if we decide to acquire properties or debt instruments opportunistically to renovate in anticipation of immediate resale, we will need to conduct that activity through our TRS to avoid the 100% prohibited transactions tax.
+Added: For example, if we decide to acquire properties opportunistically to renovate in anticipation of immediate resale, we will need to conduct that activity through our TRS to avoid the 100% prohibited transactions tax.
The 100% tax described above may limit our ability to enter into transactions that would otherwise be beneficial to us.
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In addition, in order to avoid the prohibited transactions tax, we may be required to limit the structures we utilize for our securitization transactions, even though the sales or structures might otherwise be beneficial to us.
−Removed: If the Operating Partnership fails to qualify as a partnership for U.S.
−Removed: federal income tax purposes, we could fail to qualify as a REIT and suffer other adverse consequences.
−Removed: As a partnership, the Operating Partnership is not subject to U.S.
−Removed: federal income tax on its income.
−Removed: Instead, each of the partners is allocated its share of the Operating Partnership’s income.
−Removed: No assurance can be provided, however, that the IRS will not challenge the Operating Partnership’s status as a partnership for U.S.
−Removed: federal income tax purposes, or that a court would not sustain such a challenge.
−Removed: If the IRS was successful in treating the Operating Partnership as an association or publicly traded partnership taxable as a corporation for U.S.
−Removed: federal income tax purposes, we would fail to meet the gross income tests and certain of the asset tests applicable to REITs and, accordingly, would cease to qualify as a REIT.
−Removed: Also, the failure of the Operating Partnership to qualify as a partnership would cause it to become subject to U.S.
−Removed: federal, state and local taxes on its income at regular corporate rates, which would reduce significantly the amount of its cash available for distribution to its partners, including AH4R.
−Removed: The ability of the Company’s board of trustees to revoke the Company’s REIT qualification without shareholder approval may cause adverse consequences to our shareholders.
−Removed: The Company’s declaration of trust provides that the Company’s board of trustees may revoke or otherwise terminate the Company’s REIT election, without shareholder approval, if it determines that it is no longer in our best interest to continue to qualify as a REIT.
−Removed: If we cease to qualify as a REIT, we would become subject to U.S.
−Removed: federal income tax on our net taxable income and would no longer be required to distribute most of our taxable income to our shareholders, which may have adverse consequences on our total return to our shareholders.
+Added: Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities.
+Added: The REIT provisions of the Code may limit our ability to hedge our assets and operations.
+Added: Under these provisions, any income that we generate from transactions intended to hedge our interest rate risk will be excluded from gross income for purposes of the REIT 75% and 95% gross income tests if the instrument hedges interest rate risk on liabilities used to carry or acquire real estate assets or manages the risk of certain currency fluctuations, and such instrument is properly identified under applicable Treasury Regulations.
+Added: Income from hedging transactions that do not meet these requirements will generally constitute non-qualifying income for purposes of both the REIT 75% and 95% gross income tests.
+Added: As a result of these rules, we may have to limit our use of hedging techniques that might otherwise be advantageous or implement those hedges through a TRS.
+Added: This could increase the cost of our hedging activities because our TRS would be subject to tax on gains or expose us to greater risks associated with changes in interest
+Added: rates than we would otherwise want to bear.
+Added: In addition, losses in our TRS will generally not provide any tax benefit, except for being carried back or forward against past or future taxable income in the TRS, provided, however, losses in our TRS arising in taxable years beginning after December 31, 2020, may only be carried forward and may only be deducted against 80% of future taxable income in the TRS.
Our ownership of our TRS is subject to limitations and our transactions with our TRS will cause us to be subject to a 100% penalty tax on certain income or deductions if those transactions are not conducted on arm’s-length terms.
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In addition, for taxable years beginning after December 31, 2017, taxpayers, including TRS, are subject to a limitation on their ability to deduct net business interest generally equal to 30% of adjusted taxable income, subject to certain exceptions.
−Removed: This provision may limit the ability of our TRS to deduct interest, which could increase their taxable income.
+Added: However, the Coronavirus Aid, Relief, and Economic Security Act enacted in March 2020 generally increased the 30% limitation to a 50% limitation for any taxable year beginning in 2019 and 2020 for corporate taxpayers.
+Added: This provision may limit the ability of our TRS to deduct interest, which could increase its taxable income.
The Code also imposes a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s-length basis.
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You may be restricted from acquiring or transferring certain amounts of our shares.
−Removed: The share ownership restrictions of the Code for REITs, the 8.0% common share ownership limit that applies to all shareholders, other than the Hughes family, which is subject to the “excepted holder limit” (as defined in the declaration of trust), and “designated investment entities” (as defined in the declaration of trust), which are subject to a 9.9% common share ownership limit, and the 9.9% preferred share ownership limit, all as provided in the Company’s declaration of trust may inhibit market activity in our equity shares and restrict our business combination opportunities.
In order to qualify as a REIT, for each taxable year beginning with our taxable year ended December 31, 2013, five or fewer individuals, as defined in the Code, may not own, beneficially or constructively, more than 50% in value of our issued and outstanding equity shares at any time during the last half of a taxable year.
6 unchanged sentences
These restrictions on ownership and transfer will not apply, however, if the Company’s board of trustees determines that it is no longer in our best interest to continue to qualify as a REIT.
−Removed: We may be subject to adverse legislative or regulatory tax changes that could reduce the market price of our outstanding common or preferred shares.
−Removed: The IRS, the United States Treasury Department and Congress frequently review U.S.
−Removed: federal income tax legislation, regulations and other guidance.
−Removed: We cannot predict whether, when or to what extent new U.S.
−Removed: federal tax laws, regulations, interpretations or rulings will be adopted.
−Removed: Any legislative action may prospectively or retroactively modify our tax treatment and, therefore, may adversely affect our taxation or our Company’s shareholders.
−Removed: We urge you to consult with your tax advisor with respect to the status of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in our stock.
−Removed: Although REITs generally receive certain tax advantages compared to entities taxed as “C” corporations, it is possible that future legislation would result in a REIT having fewer tax advantages, and it could become more advantageous for a company that invests in real estate to elect to be treated for U.S.
−Removed: federal income tax purposes as a “C” corporation.
−Removed: We may be required to report taxable income for certain investments in excess of the economic income that we ultimately realize from them.
−Removed: We and our TRS may invest in mortgages, including non-performing loans, for less than their face amount.
−Removed: The amount of such discount is generally treated as “market discount” for U.S.
−Removed: federal income tax purposes.
−Removed: Accrued market discount is reported as income when, and to the extent that, any payment of principal of the debt instrument is made, unless we elect to include accrued market discount in income as it accrues.
−Removed: Principal payments on certain loans are made monthly, and consequently accrued market discount may have to be included in income each month as if the debt instrument were assured of ultimately being collected in full.
−Removed: If we collect less on the debt instrument than our purchase price plus the market discount we had previously reported as income, then we may not be able to benefit from any offsetting loss deductions.
−Removed: In the event that any debt instruments acquired by us are delinquent as to mandatory principal and interest payments, or in the event payments with respect to a particular debt instrument are not made when due, we may nonetheless be required to continue to recognize the unpaid interest as taxable income as it accrues, despite doubt as to its ultimate collectability.
−Removed: While we would in general ultimately have an offsetting loss deduction available to us when such interest was determined to be uncollectable, the utility of that deduction could depend on our having taxable income in that later year or thereafter.
−Removed: Finally, we or our TRS may recognize taxable “phantom income” as a result of modifications, pursuant to agreements with borrowers, of debt instruments that we acquire if the amendments to the outstanding debt are “significant modifications” under the applicable U.S.
−Removed: Treasury Regulations.
−Removed: In addition, our TRS may be treated as a “dealer” for U.S.
−Removed: federal income tax purposes, in which case our TRS would be required to mark to market its assets at the end of each taxable year and recognize taxable gain or loss on those assets even though there has been no actual sale of those assets.
+Added: The share ownership restrictions of the Code for REITs and the ownership and transfer restrictions in our declaration of trust may inhibit market activity in our equity shares and restrict our business combination opportunities.
To satisfy the REIT distribution requirements, we may be forced to take certain actions to raise funds if we have insufficient cash flow which could materially and adversely affect us and the trading price of our common or preferred shares.
−Removed: To qualify as a REIT, we generally must distribute to our stockholders at least 90% of our REIT taxable income each year, computed without regard to the dividends paid deduction and our net capital gains, and we will be subject to corporate income tax on our undistributed taxable income to the extent that we distribute less than 100% of our REIT taxable income each year, computed without regard to the dividends paid deduction.
+Added: To qualify as a REIT, we generally must distribute to our stockholders at least 90% of our REIT taxable income each year, computed without regard to the dividends paid deduction and any net capital gains, and we will be subject to corporate income tax on our undistributed taxable income to the extent that we distribute less than 100% of our REIT taxable income each year, computed without regard to the dividends paid deduction.
In addition, we will be subject to a 4% nondeductible excise tax on the amount, if any, by which distributions paid by us in any calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income and 100% of our undistributed income from prior years.
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Our access to third-party sources of capital depends on a number of factors, including the market’s perception of our growth potential, our current debt levels, the market price of our common or preferred shares, and our current and potential future earnings.
−Removed: We cannot assure you that we will have access to such capital on favorable terms at the desired times, or at all, which may cause us to curtail our investment activities and/or to dispose of assets at inopportune times, and could materially and adversely affect us and the trading price of our common or preferred shares.
−Removed: The “fast-pay stock” rules could apply if we issue preferred shares in a reopening.
+Added: We cannot assure you that we will have access to such capital on favorable terms at the desired times, or at all, which may
+Added: cause us to curtail our investment activities and/or to dispose of assets at inopportune times, and could materially and adversely affect us and the trading price of our common or preferred shares.
+Added: We may be subject to adverse legislative or regulatory tax changes that could reduce the market price of our outstanding common or preferred shares.
+Added: The IRS, the United States Treasury Department and Congress frequently review U.S.
+Added: federal income tax legislation, regulations and other guidance.
+Added: We cannot predict whether, when or to what extent new U.S.
+Added: federal tax laws, regulations, interpretations or rulings will be adopted.
+Added: Any legislative action may prospectively or retroactively modify our tax treatment and, therefore, may adversely affect our taxation or our Company’s shareholders.
+Added: We urge you to consult with your tax advisor with respect to the status of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in our stock.
+Added: Although REITs generally receive certain tax advantages compared to entities taxed as “C” corporations, it is possible that future legislation would result in a REIT having fewer tax advantages, and it could become more advantageous for a company that invests in real estate to elect to be treated for U.S.
+Added: federal income tax purposes as a “C” corporation.
+Added: The “fast-pay stock” rules could apply if we issue preferred shares in a reopening, which could subject our shareholders to adverse U.S.
+Added: federal income tax consequences.
We have, and may continue to have, series of preferred shares outstanding with respect to which we have the ability to issue additional preferred shares of that series without shareholder approval (referred to as a “reopening” of the preferred shares).
−Removed: For example, we have the ability to reopen our Series D cumulative redeemable perpetual preferred shares of beneficial interest, our Series E cumulative redeemable perpetual preferred shares of beneficial interest, our Series F cumulative redeemable perpetual preferred shares of beneficial interest, our Series G cumulative redeemable perpetual preferred shares of beneficial interest, and our Series H cumulative redeemable perpetual preferred shares of beneficial interest.
We may issue additional series of preferred shares in the future with the reopening feature.
−Removed: If we issue preferred shares in a reopening at a price that exceeds the redemption price of such preferred shares by more than a de minimis amount, then those shares could be considered to be “fast-pay stock” under the applicable U.S.
−Removed: Treasury Regulations.
−Removed: Whether those regulations would apply would depend upon all of the facts and circumstances.
−Removed: If (i) the redemption (and conversion) price for the preferred shares issued in a reopening is less than the issue price for such shares and (ii) the Company expects that during the entire period that such shares are redeemable (or subject to conversion) the redemption (or conversion) price will be less than the issue price, it may be difficult to determine whether the fast-pay stock rules would apply.
−Removed: If the fast-pay stock rules were determined to apply to the issuance of preferred shares in a reopening, then the consequences could include:
−Removed: The holders of our common shares and other preferred shares (including preferred shares not subject to the fast-pay stock rules) being treated as collectively having acquired from us financial instruments (which may be treated as debt or equity for U.S.
−Removed: federal income tax purposes, depending on the facts) with the same terms as the additional shares of preferred shares being issued, with the result that they will be taxed on payments made on those shares as and when made, even though they will not receive those payments.
−Removed: The holders of the additional shares of preferred shares issued instead having acquired, for U.S.
−Removed: federal income tax purposes, financial instruments (as described above) issued directly to them by the holders of our common shares and other preferred shares in exchange for the price paid for those shares, rather than our shares, with the holders of our common shares and other preferred shares making payments to them with respect to those financial instruments as and when the payments with respect to the additional preferred shares are made.
−Removed: There is virtually no guidance as to the consequences to the purchasers of the preferred shares in a reopening of payments deemed to be coming to them from the holders of our common shares and other preferred shares with respect to the deemed financial instruments that they purchased from such holders, instead of the payments being considered made by us to them with respect to our preferred shares.
+Added: If we issue preferred shares in a reopening at a price that exceeds the redemption price of such preferred shares by more than a de minimis amount, those shares could be considered to be “fast-pay stock” under Treasury Regulations promulgated under Section 7701(l) of the Code (the “Fast-Pay Stock Regulations”).
+Added: Under the Fast-Pay Stock Regulations, if stock of a REIT is structured so that dividends paid with respect to the stock are economically (in whole or in part) a return of the stockholder’s investment (rather than a return on the stockholder’s investment), the stock is characterized as “fast-pay stock,” resulting in the adverse tax consequences described below.
+Added: Under the Fast-Pay Stock Regulations, unless clearly demonstrated otherwise, our preferred shares are presumed to be fast-pay stock if they are issued for an amount that exceeds (by more than a de minimis amount, as determined under certain other Treasury Regulations) the amount at which the shareholder can be compelled to dispose of the shares (“Fast-Pay Stock”).
+Added: Apart from the Fast-Pay Stock Regulations, no meaningful guidance exists regarding the determination of whether a dividend economically constitutes a return of investment for these purposes or how a taxpayer could clearly demonstrate otherwise.
+Added: If any of our preferred shares are determined to be Fast-Pay Stock, the U.S.
+Added: federal income tax treatment of the holders of such Fast-Pay Stock (the “FP Shareholders”) and our other shareholders (the “NFP Shareholders”) would be as described below:
+Added: • The FP Shareholders would be treated as having purchased financing instruments from the NFP Shareholders.
+Added: Such financing instruments would be deemed to have the same terms as the Fast-Pay Stock.
+Added: • Payments made by us on the Fast-Pay Stock would be deemed to be made by us to the NFP Shareholders, and the NFP Shareholders would be deemed to pay equal amounts to the FP Shareholders under the deemed financing instruments.
+Added: • Any Fast-Pay Stock would not be fungible for U.S.
+Added: federal income tax purposes with other preferred shares.
+Added: • If an NFP Shareholder sells our shares, in addition to any consideration actually paid and received for such shares, (i) the buyer would be deemed to pay, and such NFP Shareholder would be deemed to receive, the amount necessary to terminate the NFP Shareholder’s position in the deemed financing instruments at fair market value, and (ii) the buyer would be deemed to issue a financing instrument to the appropriate FP Shareholders in exchange for the amount necessary to terminate the NFP Shareholder’s position in the deemed financing instruments.
+Added: For any transactions that are not sales, but that affect any of our shares that are not Fast-Pay Stock, the parties to the transaction must make appropriate adjustments to properly take into account the Fast-Pay Stock arrangement.
+Added: While the character of the deemed payments and deemed financing instruments (for example, stock or debt) described above are determined under general U.S.
+Added: federal income tax principles and depend on all the facts and circumstances, there is a lack of meaningful guidance regarding the consequences to us, the FP Shareholders and NFP Shareholders of the payments deemed made and received.
+Added: For example, dividends received by the FP Shareholders generally could be treated as (i) additional dividend income to the NFP Shareholders and (ii) ordinary income, in whole or in part, to the FP Shareholders.
+Added: In addition, the extent to which NFP
+Added: Shareholders could deduct payments deemed made on the financing instruments and the withholding taxes and information reporting requirements that could apply are uncertain.
+Added: Transactions involving fast-pay stock arrangements are treated as “listed transactions” for U.S.
+Added: federal income tax purposes.
+Added: Thus, if any preferred shares issued by us are treated as Fast-Pay Stock, we and our shareholders would be required to report our and their participation in the transaction on IRS Form 8886 on an annual basis with our and their U.S.
+Added: federal income tax returns and also would be required to mail a copy of that form to the IRS Office of Tax Shelter Analysis.
+Added: Failure to comply with those disclosure requirements could result in the assessment by the IRS of interest, additions to tax and onerous penalties.
+Added: In addition, an accuracy-related penalty applies under the Code to any reportable transaction understatement attributable to a listed transaction if a significant purpose of the transaction is the avoidance or evasion of U.S.
+Added: federal income tax.
+Added: Finally, treatment as a listed transaction would mean that certain of our “material advisors” (as defined under applicable Treasury Regulations) also would be required to file a disclosure statement with the IRS.
+Added: We and certain of our advisors could decide to file disclosure statements with the IRS on a protective basis to avoid the risk of penalties, even if it is uncertain that our preferred shares are in fact Fast-Pay Stock or that such advisor is a “material advisor.”
+Added: Prospective shareholders should consult their own tax advisors as to the application of these rules to their individual circumstances.
UNRESOLVED STAFF COMMENTS
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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.