2016 reet eport - National Rental Home Council

10-Year: 1.7%DJIA: 17,920BAA: 4.6%

www.GreenStreetAdvisors.com

Single-Family Rental Primer

June 6, 2016

RMZ: 1,155

This is not a Green StreetAdvisors Research Report

National Rental Home Council (NRHC)

Table of ContentsSections

I. Executive Summary 3

II. Single Family Rentals 101 5

III. Demand Drivers 12

IV. Supply Growth 24

30

35

www.greenstreetadvisors.com © 2016, Green Street Advisors, LLCUse of this report is subject to the Terms of Use listed at the end of the report

V. Operating Fundamentals

Common SFR MythsVI.

2


I. Executive Summary


3


Executive Summary Single-Family Rentals 101 •

•

•

Demand Drivers •

•

Supply Considerations •

•

Operating Fundamentals •

•

•

Common Myths •


Tepid Supply Growth

New additions primarily reflect foreclosure conversions. Rental units will also be removed from the supply pool as some rentals convert to owner-occupied properties.

SFR supply is expected to expand by roughly ~1.3 million new units over the next five years, or approximately 1.5% of existing stock annually. Expected new supply levels are well below the long-term trend.

Attractive Revenue and Margin Growth

Historically, SFR rent growth has exceeded apartment rent growth. Going forward, if SFR rent growth keeps pace with apartments, and long-term occupancy levels revert to their historical average, revenue growth in the SFR sector should average roughly 3.0% annually through 2020.Operating margins for institutional owners have expanded from 50% to closer to 65% as operators have built scale and refined their platforms. Even so, opportunities persist to capture additional operational efficiencies, providing for further cash flow upside for existing owners. Views on the necessary amounts of Cap-ex to maintain a competitive real estate asset vary widely. A detailed cost and useful life analysis suggests a Cap-ex reserve of roughly $1,650/unit (15% of NOI).

Due to its infancy, investors are keenly focused on operating margins and portfolio liquidity. While there are still many unknowns centered on these topics, preliminary results suggest concerns may be too pessimistic.

Key Investor Concerns

Household Formations and Declining Homeownership

Household formation and changes in the homeownership rate are two fundamental drivers for rental housing demand. Single-family rentals are likely to capture roughly 37% of the estimated 3.9 million new renter households coming to market over the next five years. This translates into approximately 1.5 million new units of SFR demand between 2016 and 2020.

The Institutionalization of an Emerging Asset Class

The single-family rental ("SFR") market comprises ~13% of all occupied housing and ~37% of the total rental market. The institutionalization of this asset class has created an opportunity to scale a business that has traditionally been dominated by "Mom & Pop" owners who do not benefit from a regional or national platform and/or industry-level expertise.While institutional investors have been active acquirers in recent years, their portfolios still represent just one percent of the total single-family rental market.

4


II. Single-Family Rentals 101


5


Single-Family Rentals 101: A Different Product•

www.greenstreetadvisors.com ©2016, Green Street Advisors Inc.Use of this report is subject to the Terms of Use listed at the end of the report

SFRs vs Apartments: Professionally-managed single-family rentals are different products that cater to a different resident base than apartment complexes. While single-family rentals typically offer residents greater space and privacy at a more attractive rate than a similar quality apartment complex, they typically offer fewer on-site amenities.

Residents get more bedrooms and space at a lower cost per sq. ft.

For Residents

Pros

For Investors Turnover is much lower than apartments. Occupancy is "stickier" in

single-family rentals

Single-family rentals are more likely to be located in high quality school districts

Residents benefit from amenities such as garages which are typically an extra expense in apartments

Landlords have limited or no common area maintenance costs that are required in apartments

Meaningful asset value upside potential from current levels relative to apartments

Cons

Fewer on-site amenities

Limited options in the urban core

More to maintain (i.e., front yards and backyards) relative to apartments

For Residents For Investors

Long-term cap-ex requirements may be higher than apartments

Difficult to achieve operational scale

High up-front rehab costs

VS.

6


Single-Family Rentals 101: Current Landscape●

Source: Census, Green Street Advisors - Advisory & Consulting Group


Townhomes / Condos:3.2M units

Home Sweet Home: There are ~325 million people in the U.S. today living in ~118 million dwellings. There are ~16 million detached single-family rentals, and this segment of the rental market accounts for ~13% of the total U.S. housing stock, and ~37% of all rental housing.

5+Unit Apartments:17.9M units

Single-Family Rentals: 15.7M units

Attached Townhomes:8.1M units

Manufactured Housing Rentals:0.9M units

Single-Family Homes:67.4M units

Manufactured Housing:4.5M units

Renters 42.6M units

(36%)

Owners 75.2M units (64%)

118 Million Occupied Housing Units, as of year end 2015

SFR, 37%

Apts, 42%

Other, 21%

Renters

Single-Family,

90%

Manuf. Housing,

6%

Condos, 4%

Owners

15.2%

13.3%

6.8%

0.8%

57.3%

3.8%

2.7%

7


Single-Family Rentals 101: Institutionalization●

Source: Case Shiller, Bloomberg, Company Disclosure/Documents, Green Street Advisors - Advisory & Consulting Group


Evolution of an Industry: In early ’12, Warren Buffett posited the opportunity to invest in single-family rentals: "If I had a way of buying a couple hundred thousand single-family homes and if I had a way of managing them ..., I would load up on them" (Buffett, February 12, 2012). While Buffett could not find a way to monetize his prediction, the NRHC members did capitalize on the opportunity, and now collectively manage over 160,000 single-family rentals. This growth coincided with rapidly rising home prices, resulting in significant embedded gains for the acquired portfolios that have not yet been monetized.

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

75

95

115

135

155

175

195

Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16

Single-Family Rental History Highlights

Number of Homes Owned by NRHC Members (Right Axis)

Case Shiller Home Price Index (Left Axis)

American Residential

Properties (ARPI) IPO

(May '13)

36%

Since BuffettProposal

Home Price Appreciation (as of 3/31/16)

Buffett announces SFR

Investment Opportunity

(Feb. '12)

Blackstone announces

entry (Jun '12)

American Homes 4 Rent (AMH) IPO

(Aug. '13)

Silverbay (SBY) IPO (Dec. '12)

AMH acquires Beazer Rental

Homes (Jul. '14)

Colony/SWAY announce merger

(Sep. '15)

AMH acquires ARPI

(Nov. '15)

Invitation Homes Private ~48,000American Homes 4 Rent AMH ~48,000Colony Starw ood Homes SFR ~31,000Progress Residential Private ~17,000Silver Bay SBY ~9,000Tricon American Homes Private ~7,600Total (as of 1Q16) ~160,600

$9,600$8,000

NRHC Members & Estimated Ownership

$28,475

$5,800$3,000

$875

Company # HomesTotal Investment

($ millions)Ticker

$1,200

Starwood Waypoint Spin-off

(Feb. '14)

8


Single-Family Rentals 101: Home Price Appreciation ●

Source: Case Shiller Home Price Index, Green Street Advisors - Advisory & Consulting Group


More Room to Run: Despite climbing ~36% since Buffett's proposal, average home prices are still roughly 11% below the prior peak level, which compares to average apartment values that are approximately 38% above the prior peak level.

Price Appreciation : Single-Family Homes vs Apartments Appreciation Since Peak

138

89

0

20

40

60

80

100

120

140

160

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16

Apartment Values Case Shiller (Home Price Index)

Apartments are 38% aboveprevious peak values while home prices are still ~11%

below peak values

-11%

38%

55%

HousingAppreciation

Since Prior Peak

Apt. AppreciationSince Prior Peak

ImpliedAppreciation to

MatchApartments

9


Single-Family Rentals 101: Market Share●

Source: Bureau of Labor Statistics, U.S. Census Bureau, and Green Street Advisors - Advisory & Consulting Group


Total Single-Family Rental Stock (millions) SFR Acquisitions by Owner

Total SFR Ownership

A Sliver with Enormous Growth Potential: The single-family rental business has traditionally been, and continues to be, dominated by "Mom & Pop" investors that do not benefit from a regional or national platform and/or industry-level expertise. While the NRHC members were the most active buyers over the past several years, their acquisitions collectively represent less than 5% of new supply and roughly 1% of the entire SFR industry. Consolidation of Mom & Pop owners will remain a key source of external growth for institutional investors.

1.0% 99%

Institutional (NRHC members)Mom & Pop

13.3 13.4 13.3 13.5

12.6 12.6 12.6

12.9

13.5

14.3 14.7

15.2

15.9 16.2

16.4

16.9

10

11

12

13

14

15

16

17

18

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

SFR Acquisitions ('08 - '15)

Mom & Pop

Institutional (NRHC members)

New supply additions

3.2 million

~160k

SFR Inventory New Additions

10


Single-Family Rentals 101: Risks and Opportunities●

1.

2.

3.

4.

5.

6.

7.

8.Source: Green Street Advisors - Advisory & Consulting Group


Evaluating Risk and Reward: The macro-economic drivers of single-family rental demand are similar to those experienced by apartment owners. Both will benefit from: household formations, declining homeownership rates, and an escalating propensity to rent. Yet, only single-family rental owners will be able to capitalize on the expanding preference, particularly among families, to live in a detached home. Moreover, while home prices have surged over the past few years, they remain 11% below the levels experienced during the ’06 peak. Apartment values, by contrast, are already more than 35% above the prior peak. This divergence in pricing suggests home values may have more appreciation potential than apartments.

Single Family Rental Risk Map: 2016 to 2020E Risks and OpportunitiesOpportunities

The long-term cap-ex requirements for institutional single-family rentals remain untested.

Historically, SFR rent growth has outpaced apartments. More recently, SFR rents have lagged. The future trend remains uncertain.

Home prices have not recovered as much as apartment values, suggesting there may be additional upside.

The homeownership rate has fallen considerably since '06, serving as a tailwind for SFR demand. A continuation of this trend bodes well for the long-term prospects of the industry.

While margins of NRHC members have increased from 50% to 65% in only a few years, long-term stabilized margins remain unproven.

A sharp increase in the homeownership rate, however unlikely, would result in less rental demand.

Risks

Demographic dynamics are increasing the likelihood for the largest age cohort to rent.

Single-family rentals are well positioned for a increase in the preference for more bedrooms as the swell of younger cohorts age and start families.

Hig

h

Lik

elih

ood

L

ow

Impact Positive Negative

Major Risk Major Opportunity

1

7

3 5

8

2

Secular shift away from homeownership

Homeownership rates increase meaningfully

Capture millennial household formation

Operating costs unmanageable

SFR rent growth may exceed or lag apartments Home prices

continue to rise Uncertain long-term cap-ex

requirements

6

4

Increased need for additional bedrooms

11


III. Demand Drivers


12


Demand Drivers●



A Solid Base: Household formations are the fundamental driver of housing demand. A household's choice between a single-family home or apartment, and whether to buy vs. rent, is generally predicated on lifestyle needs and financial situation. An estimated 6.6 million total households are expected to be created over the next 5 years. Rentals are expected to capture over half of these households, a share well above the long-term average. Of these, approximately 1.5 million renter households will occupy single-family rentals.

2016 - 2020E Housing Demand Forecast

Household Growth SFR Demand Growth

'16 - '20E SFR Demand Forecast(cumulative, in millions)

Population Growth

Job / Income Growth Demographics

Net Household Formations ('16-'20E cumulative)

Renters

Homeowners

Apartment & Other Rentals

Single-Family Rentals

Demographic trends dictate the

proportion of owners and renters, which is constantly changing

~9.2% increase in occupied single-family rentals by '20

15.7

17.2

+1.5

OccupiedSFR ('15)

New SFRRenters(by '20E)

OccupiedSFR ('20E)

+1.5 million

+6.6 million

118

124

+6.6

Households('15)

NewHouseholds

(by '20E)

Households('20E)

+3.9 million +2.7 million

+2.5 million

13


Demand Drivers: Employment●



Slow and Steady Recovery: Job growth is an important driver of rental demand. In '15, the trend of better-than-expected job growth seen since 2010 continued. Healthy, but decelerating, job growth is expected over the remainder of the decade. Despite this deceleration, the economy is expected to add roughly 156,000 jobs per month over the next five years, well above the 115,000 necessary to drive down unemployment.

Nonfarm Employment Monthly Job Growth Forecast(in thousands)

115

156

BreakevenEmployment

16E - '20E(Monthly Avg.)

Une

mpl

oym

ent D

ecre

asin

g U

nem

ploy

men

t Inc

reas

ing

Mon

thly

job

addi

tions

impa

ct o

n un

empl

oym

ent r

ate

-800

-600

-400

-200

0

200

400

600

40

60

80

100

120

140

160

'80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20

Thou

sand

s

Total Employment (Shaded Area, Left Axis in Millions)

Monthly Job Growth Pace (Right Axis in '000s)

4.0 years

6.5 years to get back to

pre-recession levels

2.7 years

2.3 years

Green Street's forecast calls for a new household to be formed for roughly every 1.5 jobs created

14


Demand Drivers: Household Formations●



More Jobs, More Households: With the economy adding jobs and pushing down unemployment, an estimated 6.6 million households are expected to be created by 2020. The 1.3 million average annual pace is slightly faster-than-average, but similar to that experienced in other post-recessionary environments.

Annual Household Formations (Thousands) Household Formations

+6.6 Million Total New Household

From '16-'20

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

'69 '71 '73 '75 '77 '79 '81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13 '15 '17 '19

1,200 1,240 1,320

Long TermAvg.

Post Recession Avg.

'16E-'20E

Average Annual Household Formations

(000s)

Measuring and forecasting household formations is challenging, especially over the short-term. Green Street's forecast contemplates the strong historical correlation between household formation and job growth and a continued reduction of household size. This approach allowed for an accurate forecast in '15.

1969-2015 Avg. = 1.2 MM

15


Demand Drivers: Household Formations (cont.)●



From Owners to Renters: Historically, roughly 34% of new households chose to rent rather than buy. However, the housing boom pushed purchases to record levels and the home ownership rate to a level that proved to be unsustainable. The subsequent housing meltdown caused the home ownership rate to plummet and allowed apartment owners and SFR landlords to capture a disproportionate number of new households. While the homeownership rate is expected to rise from current levels, apartment and SFR landlords should be able to capture a majority of new household formations over the next several years.

Household Formations by Type Household Formation Forecast

60%

61%

62%

63%

64%

65%

66%

67%

68%

69%

70%

(1.0)

(0.5)

-

0.5

1.0

1.5

2.0

2.5

3.0

'70 '75 '80 '85 '90 '95 '00 '05 '10 '15 '20

Hom

eow

ners

hip

Rat

e

New

Ow

ners

/Ren

ters

New Owners (Left Axis, Millions)New Renters (Left Axis, Millions)Homeownership Rate (Right Axis)

"Owner Nation" "Renter Nation" Owners Return

533

787

Annual OwnerFormations

Annual RenterFormations

Average Annual '16E - '20E Forecast

(000's)

16


Demand Drivers: Demographics●



Demographic Shifts Favor Renters: Distinct age cohorts make different choices about their housing. As a result, demographic shifts can have profound impacts on housing demand. The prime renter demographic – those under 35 years old – is expected to grow faster than the broader population over the next decade, representing a tailwind for rental demand. Furthermore, the proportion of nearly every cohort opting to rent is likewise putting upward pressure on rental demand, further bolstering the single-family rental market.

20 21 21 21

22 22 22 21 20 21

22 22

19

16

11

8

6 6

0

5

10

15

20

25

<5 5-9 10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80-84 >85

Mill

ions

of P

eopl

e

The Generations by Age Cohort Based on Census Projections

Gen Y (Millennials) Gen X Gen Z Eisenhower Gen

2015

Long

Ter

m

Avg.

Propensity to Rent

65% 20%

2015

Long

Ter

m

Avg.

Propensity to Rent

65% 20%

2015

Long

Ter

m

Avg.

Propensity to Rent

65% 20%

2015

Long

Ter

m

Avg.

Propensity to Rent

30% 20%

Baby Boomers

Not Yet In Rental Market

17


Demand Drivers: Demographics (cont.)●



Life Events Drive Decision Making: The homeownership rate has fallen substantially since '06 as the propensity to rent has increased for every age group. The even-higher propensity to rent among younger cohorts is reflective of a trend for delaying major life events. This shift to delaying marriage, having children, and buying a home is unlikely to change quickly. This provides a stable foundation for the single-family rental industry to build upon.

Cumulative Change in the Propensity to Rent Delaying Major Life Events

-500

-300

-100

100

300

500

700

1995

1995

1996

1996

1997

1997

1998

1998

1999

1999

2000

2000

2001

2001

2002

2002

2003

2003

2004

2004

2005

2005

2006

2006

2007

2007

2008

2008

2009

2009

2010

2010

2011

2011

2012

2012

2013

2013

2014

2014

2015

Bas

is P

oint

s

Average (all ages) Under 35 35-44

45-54 55-64 65 and over

During the housing boom, 25-34 year olds made an unprecedented rush into homeownership, but they were then hardest hit in the subsequent downturn. This generation, which has aged into today's 35-44 year olds, shows no signs of a desire to return to homeownership.

65%

21%

41%

30%

25% 33

26

28

15%

0%

2%

4%

6%

8%

10%

12%

14%

1985 1989 1993 1997 2001 2005 2009 201318

20

22

24

26

28

30

32

34

Age of First-Time Homebuyer (Right Axis)

Mother's Age at First Birth (Right Axis)

Median Age of First Marriage (Right Axis)

Percent of 25-34 Year Olds Living with Parents(Left Axis)

Propensity to Rent (current)

18


Demand Drivers: Demographics (cont.)●

Source: Company Disclosure/Documents, Green Street Advisors - Advisory & Consulting Group


Too Much Debt: The delay in major life events likely stems in part from the increasingly heavy debt burden encumbering younger generations. While credit card debt has largely remained flat since ’04, student debt has surged nearly five-fold to $1.2 trillion (or roughly $19,000 per person aged 20-34) during this time period. Not surprisingly, a 30 year old burdened with student loan debt is more likely to delay major life events and is considerably more likely to rent, driving up demand for single-family rentals. This burden amplifies the challenge of amassing equity for a down payment.

Student Debt Outstanding Debt Per Capita (ages 20-34)

0%

2%

4%

6%

8%

10%

12%

14%

0

200

400

600

800

1,000

1,200

1,400

'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15

Credit Card Debt ($ Billions, Left Axis)

Student Loan Debt ($ Billions, Left Axis)

% of Student Loan Balances 90+ Days Delinquen (Right Axis)

The number of student loan borrowers has nearly doubled over the past 10 years to 42 million. Student loan debt surpassed credit

card debt in 2010. $5,756

$19,124 $11,928

$10,798

2004 2015

Student Loan Debt Credit Card Debt

$17,684

$29,922

Total

Total

19


Demand Drivers: Space Needs●

SF Avg. Rent Rent/SF SF Avg. Rent Rent/SF2,045 $1,242 $0.61 1,031 $1,054 $1.021,988 $1,442 $0.73 965 $987 $1.021,930 $1,372 $0.71 939 $883 $0.941,570 $1,120 $0.71 886 $926 $1.041,949 $1,452 $0.74 938 $1,069 $1.141,897 $1,326 $0.70 952 $984 $1.03

Average Rent/SF Discount to Multifamily -32%

Source: Company Disclosure/Documents, Axiometrics, Green Street Advisors - Advisory & Consulting Group


The Pending Demand for Space: As families age and have children, they require more space and bedrooms. Following this trend, Millennials will soon require the space that can only be offered by single-family rental homes, due to the limited number of 3+ bedroom units offered by apartment complexes.

MarketSingle-Family Rentals Apartments

More Space, For Less

Average

Phoenix

Bedroom Requirements by Age Cohort Single-Family Rentals Apartments

Tampa

CharlotteLas Vegas

Atlanta

3%

97%

Gen Z 62 Million

Millennials 87 Million

Gen X 62 Million

Baby Boomers 79 Million

Eisenhower Gen

31 Million

1

2

3

4

0 20 40 60 80

Aver

age

Bed

room

s Pe

r Hou

seho

ld*

Current Midpoint Age for Each Generation

Gen Z Millennials Gen X Baby Boomers Eisenhower Gen

SFR

Ren

ters

(>

2 Be

ds)

3%

46% 42%

9%

Studio

1 Bedroom

2 Bedrooms

3+ Bedrooms

*Green Street Estimate

Apt.

Rent

ers

(≤2

Beds

)

Moving on Up: As the families of renters expand, they upgrade from apartments to SFRs, but rarely downgrade to apartments from SFRs.

20


Demand Drivers: Housing Alternatives●

Source: U.S. Census, Company Disclosure/Documents, Green Street Advisors - Advisory & Consulting Group


Rolling 12 Month Average Construction vs Historical Average(Ratio of trailing 12-month to historical average) 1 Unit vs 5+ Unit Construction

Housing Shortage: Apartment development is now well above prior peak levels. New home construction, by contrast, remains limited. The dearth of new homes is likely to limit the options of renters whose space demands have exceeded traditional apartment offerings. Single-family rentals are well positioned to capture this growing group of renters that may be unable to find their space demands met elsewhere.

73%

152%

0%

50%

100%

150%

200%

250%

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Single Family Apartments

73%

152% 750

387

0

100

200

300

400

500

600

700

800

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1 Unit 5+ Unit

Relative to Historical Avg.Avg. Trailing 12-Month Pace

Abov

e hi

stor

ical

av

g.

Belo

w h

isto

rical

av

g.

21


Demand Drivers: Renter Formations●



Getting Their Fair Share: In '15, renter household growth was the highest in a generation. Over the past five years, all of the growth in households has been from renters. Initially, renter growth was due to a shift of foreclosed households into single-family rentals. More recently, growth has been driven by demographic trends that favor renting.

Renter Households and Capture Rate Renter Household Formations+3.9 Million

New Renters

From '16-'20

-15%

97%

-50%

0%

50%

100%

150%

200%

0

5

10

15

20

25

30

35

40

45

50

'72 '74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20

Renter Households (Millions, Left Axis)

% of New Households Electing to Rent (3-yr avg., RightAxis)

Renter capture rates above 100% (or below 0%) are unsustainable.

580

889

787

HousingBubble Years

('03 - '08)

Post 2008 '16 - '20Forecast

Average Annual Renter Household Formations

(000s)

Absolute Owner Households Declining

Absolute Renter Households Declining

22


Demand Drivers: Single-Family Rental Demand●



Looking to the Past: The percentage of renters electing to live in a single-family home has averaged ~35% over the last fifteen years, dipping to 33% during the housing boom. With an estimated 3.9 million new renters up for grabs through 2020, the single-family rental market is set to attract 1.5 million, or roughly 37% of the total pool.

Renter Households and SFR Capture Rate Household Formations('16 - '20)

1.5 million new Single-Family rentals

by 2020

37% 37% 36%

35%

33% 33% 33%

34% 35%

35% 36%

36% 37% 37% 37% 37% 37% 37% 37%

20%

22%

24%

26%

28%

30%

32%

34%

36%

38%

40%

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20

Renter Households Occupied SFRs SFR Capture Rate (3-yr avg., Right Axis)

1,320

787

290

Total HHs Renter HHs SFR HHs

Average Annual Household Formations

(000s)

23


IV. Supply Growth


24


Supply: Sources For New Inventory●

Source: Company Disclosure/Documents, NRHC, Green Street Advisors - Advisory & Consulting Group


Multiple Sources of Growth: Traditional real estate relies primarily upon open-market acquisitions to fuel external growth engines. SFR investors, by contrast, have a number different acquisition channels that can be accessed at different points in the cycle. This menu of alternatives provides additional flexibility when primary channels become competitive.

NRHC Sources of New Inventory NRHC Portfolio Sources

2012 2013 2014 2015 2016

Auction Bulk Portfolio MLS REO/Short Sale

52%

4% 9%

35%

As of Dec. 2012

Auction Bulk PortfolioMLS REO/Short Sale

30%

10% 33%

27%

As of March 2016

Total Homes ~160k

NRHC

25


Supply: New Units of Supply●



Tepid Growth: All told, single-family rental supply is expected to expand by roughly 1.3 million new units over the next 5 years, or approximately 1.5% of the existing stock annually. The limited expansion of inventory relative to demand increases offers ample opportunity for the professionally managed single-family rental platforms to improve occupancy and acquire market share without the risk of new supply moving forward.

5-Year Supply Growth Forecast (millions) Change in Supply vs Demand('16 - '20, millions)

16.9

18.2

17.2

2.0

+0.15

-0.9

15.0

15.5

16.0

16.5

17.0

17.5

18.0

18.5

19.0

19.5

Existing(pg. 10)

ForeclosureConversions

(pg. 27)

NewConstruction

(pg. 28)

Rent-to-OwnConversion

(pg. 29)

2020 Supply Est. 2020 DemandEst.

(pg. 13)

1.3

1.5

∆ Supply ∆ Demand

26


Supply: Foreclosures●

Source: U.S. Census, Federal Reserve, Company disclosures, Green Street Advisors - Advisory & Consulting Group


The Primary Source of Recent New Inventory: Investors acquire the majority of foreclosures put up for sale by lenders since such purchases often require a more sophisticated acquirer than the typical home buyer. As a result, the number of homes with mortgages that are seriously delinquent (60+ days) is a leading indicator for new additions to the single-family rental space. On average, 50-60% of the households that are foreclosed upon end up in the single-family rental pool. Based on the current pool of seriously delinquent homes, roughly 2 million units are expected by be added to the single-family rental pool by 2020.

Shadow Inventory and Subsequent Supply (millions) Net Annual Supply Additions

1.2

2.4 3.0

2.6 2.3 2.2 2.0 1.7

1.2

2.1

2.3

2.4 2.5

2.0 1.8 1.6 0.6

0.6

0.6 0.6

0.5

0.4

0.4

0.4

0

1

2

3

4

5

6

7

2008 2009 2010 2011 2012 2013 2014 2015

REO Foreclosure 60+ Days Due

55%

410

0

50

100

150

200

250

300

350

400

450

500

25%

30%

35%

40%

45%

50%

55%

60%

65%

70%

Forecast('16E - '20E)

% of Shadow SupplyAnnual Additions (000s)

2.9

5.1

5.9 5.7

5.2

4.5 4.1

3.7

15%

25% 60%

Where Do Foreclosure Households Go? Family Apts. SFRs

27


Supply: New Construction●



Development, a Costlier Source of Supply: In all sectors of real estate, new construction is synonymous with new supply growth. However, build-to-rent single-family development is virtually non-existent as the cost of construction typically exceeds the cost of acquiring an existing home from other sources. With essentially no new supply expected to be delivered over the next 5 years, new construction is considerably less important to the single-family rental industry than for apartments.

New Single-Family Rental Construction (thousands) Ann. Rate of New SFR Const.

Just 150k units of new SFR properties are

expected to be delivered by '20.

0.0%

0.1%

0.2%

0.3%

0.4%

0

10

20

30

40

50

60

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20

Single-Family Built-for-Rent (Thousands of Units, Left Axis)

As % of Existing SFR Inventory (Right Axis)

30.1 30.4

30.0

0.2% 0.2% 0.2%

1.3%

0.9%

1.6%

-0.4%

0.1%

0.6%

1.1%

1.6%

2.1%

25.0

26.0

27.0

28.0

29.0

30.0

31.0

32.0

33.0

34.0

35.0

Historical Avg. Past 5 Years 5 Year Forecast

Annual Rate (000s)

As % of Existing SFR Supply

Apt. Supply Additionsas % of Existing Stock

28


Supply: Homeownership Effects●



The Return of the Home Buyer: The aggregate supply of SFRs is expected to tick up as foreclosed homes are acquired by investors and some new construction is delivered. However, a smaller, but sizable number of homes will exit the single-family rental market. A portion of these homes will leave as a result of obsolescence, but the vast majority will transition as landlords sell homes to owner-occupants. On average, ~1% of existing SFRs are expected to be converted to owner-occupied homes annually over the next five years.

Homeownership Rate and Total SFR Inventory Rent-to-own Conversions

A total of 890k rental units are expected to

be converted into owner-occupied units

from '16 - '20E.

63% 63% 62% 63% 63%

58%

60%

62%

64%

66%

68%

70%

0

200

400

600

800

1,000

1,200

1,400

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Conversions (SFR -> Owner Occupied) New InventoryConversions (Owner Occupied -> SFR) Homeownership Rate (Right Axis)

266

100

178

Hist. Avg.Conversions

Past 5-Years 5-YearForecast

Average Annual Conversions

(000s)

Renters switch to owning

Renters Come Back

29


V. Operating Fundamentals


30


Operating Fundamentals: Occupancy●



Ticking Up: During the recession, occupancy for single-family rentals declined as a wave of new supply entered the market through unprecedented levels of foreclosures and distress. More recently, however, occupancy has increased substantially and is expected to climb further as fewer SFR units are added to the market. Should SFR occupancy return to its historical average (~94%), the gains will cause revenues of SFR owners to increase faster than rent growth alone. Conversely, apartment owners are currently enjoying higher-than-average occupancy (96% vs. 95%), raising questions as to whether current apartment occupancies are sustainable. This could put downward pressure on apartment occupancy over the near-term, serving to slow the growth pace of apartment revenues.

Historical Occupancy 5-Year Occupancy Forecast

5 Year Forecast

94%

95%

85%

87%

89%

91%

93%

95%

97%

99%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

SFR Inventory

SFR Occupancy

Apartment Occupancy

94.2%

93%

94%

94.5%

95%

95%

Long Term Avg. Current 2016E -2020E

SFR Apartments

SFR occupancy to revert to 94%

by 2020

31


Operating Fundamentals: Rent Growth●



Lower Rents, Similar Growth: Apartment owners have historically been able to garner higher rents than comparable-quality single-family rentals on a per-sq. ft. basis. However, over the long-term, rent growth between the sectors should (and has) trended closely together due to similar demographic demand drivers. Going forward, should this relationship continue, SFR rent growth should mirror that of the apartment sector.

Rent Growth (Indexed 2015=100) 5-Year Annual Rent Forecast

5 Year Forecast

100

115

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

0

20

40

60

80

100

120

140

1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

% Change in SFR Rent SFR Rent Growth Apartment Rent Growth

3.8%

2.8% 2.7%2.7%

4.0%

2.7%

'93 - '15 '10 - '15 '16E-'20E

SFR Apartments

Apartment vs SFR Rent(based on historical relationship)

32


Operating Fundamentals: Revenue Growth●

* Based on historical rent growth relationships, and a reversion of SFR occupancy to its historical average.Source: U.S. Census, Company Disclosure/Documents, Green Street Advisors - Advisory & Consulting Group


Similar Rent Growth + Occupancy Gains = Better Revenue Growth: Assuming single-family rent keeps pace with apartments and a reversion to historical average occupancy (~94% for SFRs vs ~95% for apartments), revenue growth in the single family rental sector would outpace the apartment sector by ~30 bps annually over the next five years. Moreover, with only a fraction of the single family rental industry in the hands of professionally managed national platforms, large operators may further outperform their Mom & Pop peers as they capture additional economies of scale.

Revenue Growth (Indexed 2015=100) 5 Year Annual Forecast5 year forecast based

on historical relationship*

114

100

116

40

50

60

70

80

90

100

110

120

130

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Est. Apartment Revenue Growth Implied SFR Revenue Growth3.1%

3.0%

1.9%

2.7%

'00 - '15 '16E-'20E

SFR Apartments

More Upside to Come? • Institutional investors have yet to capitalize on

ancillary income opportunities (e.g., pet rent, renter's insurance, lawn maintenance, etc.)

• Rent growth has historically outpaced apartments. Our forecast assumes similar growth vs apartments moving forward.

• Institutional owners may be able to achieve occupancy higher than what mom & pop investors have been able to realize historically, aided by stickier tenants.

33


Operating Fundamentals: Estimated Cap-ex Requirements●

(1) Includes 10% developer profit

Source: Company Disclosure/Documents, National Association of Home Builders, Green Street Advisors - Advisory & Consulting Groupwww.greenstreetadvisors.com © 2016, Green Street Advisors, LLC

Use of this report is subject to the Terms of Use listed at the end of the report

Purchase Price1

$30,795

$98,582

$5,483

$4,768

$5,722

$4,649

Land

Building

HVAC

Electrical

Exterior

Leasing Costs/Commissions

$165,000 100

30

7

Expensed

Green Street's Annual Cap-Ex as % of NOI

$1,652

$0

$2,191

$366

100+

45

15

Est. Cost Useful Life

Ann. Cap-ex Reserve

Illustrative Single-Family Cap-ex Build-up

Capital Expenditures, a Drag on Returns: Capital expenditures (Cap-ex) refers to the long-term costs of maintaining a competitive real estate asset. Views on the necessary amounts of Cap-ex vary widely, and a common concern for the single-family rental sector is that the long-term cap-ex requirements will weigh on returns. One approach for estimating Cap-ex is to estimate the cost and useful life for the various components of the building. This yields an estimated cap-ex reserve of approximately $1,650/unit (~15% of NOI), putting single-family rentals in the middle of the pack relative to other real estate sectors.

$159

$817

$31015

Appliances

Component

28.4%

21.8%

15.0%

14.7%

14.6%

11.0%

9.2%

9.0%

8.7%

8.0% 5.9%

5.0%

Based on an estimated cap-ex reserve of

$1,650/unit. A reserve of this amount is

necessary to maintain the competitiveness of

the portfolio.

Included in Green Street's

Cap-ex Estimate: ~$1,650/unit

Excluded

34


VII. Common SFR Myths


35


Myth 1: Impossible to Operate●



About Average, But Growing: For real estate, a simple but effective way to compare the efficiency of operating assets is by reviewing the property level cash flow margins. The most operationally intensive sectors (e.g. hotels) will typically have the lowest margins, while those that require less day-to-day oversight (e.g., net lease) will have higher margins. Single-family rentals currently boast margins that are comparable to the average for other sectors (~65%). However, with the sector still in its infancy, operating margins have been expanded significantly (up from ~50% just 3 years ago) and should have potential to continue to expand.

NOI Margins (all sectors) Expense Breakdown

71% 71% 70% 70% 69% 65% 65% 64%

60% 60% 60%

45%

Property Taxes, 34%

Payroll, 25%

Insurance, 5%

Utilities, 15%

R&M, 14%

Other, 8%

Apartments

Property Taxes, 42%

Property Mgmt.,

17%

R & M, 13%

Insurance, 6%

HOA, 6% Other,

9%

Single-Family Rentals

36


Myth 2: Too Big to Sell●



U.S. Existing Home Sales and Months of New Supply Atlanta Case Study

A Drop in the Bucket: With over 160,000 total homes, the NHRC members own a seemingly large pool of homes. However, a liquidation scenario does not move the needle for market pricing at the national level. Even in Atlanta, the market with the highest concentration of NRHC-owned homes, a liquidation scenario would only add ~3 months to existing supply.

84,000

22,000

0

2

4

6

8

10

12

14

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

'99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15

Mill

ions

Existing Home Sales (Left Axis)

Months of New Supply (Right Axis)

Months of Supply Including Institutional SFRs

4.7 5.1

Months of Supply Months of Supplywith NRHC Inventory

2015 ATL Home Sales

Total NRHC Homes in

ATL

At current home sales pace in ATL, the 22,000 homes

only adds ~3 months of supply

3.2

Increase in Months of Supply

37

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