GTIS Partners

\\ Q4 2015 - Single Family Rental Primer

GTIS US Residential Research

This material is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any . Offers to sell or solicitations to invest in a GTIS fund are made only by means of a confidential offering memorandum and in accordance with applicable securities laws. An investment in a GTIS fund is suitable only for qualified investors that fully understand the risks of such an investment. The information contained herein is based on the internal research and opinion of GTIS Partners and has not been reviewed or verified by any third parties. This information is confidential and proprietary and not intended for further distribution. The information presented is as of the date indicated on the materials; GTIS has no duty to update these materials or notify you of any changes. Single-Family Rental Market Primer

Single-family housing is often incorrectly associated with “owning a home.” However, for consumers, the decision to rent vs. own and the choice to live in single-family vs. multifamily housing are often two distinct processes. Both prior to and following the financial crisis, consumers have historically preferred single-family detached housing upon starting a family, spurred by the need for larger space as well as higher quality schools for their children. Following the decision on housing and location preference, the analysis of renting vs. owning is a separate financial decision driven more directly by income, down payment and mortgage availability.

Preceding the most severe housing crisis in US history, single-family rental (“SFR”) housing already comprised a sizeable 31% share of total US rental stock, with approximately 11 million “mom-and-pop” SFR units in 2005. Following the recession, during which many homes passed to institutions through foreclosure or discounted purchases, the number of SFR homes rose to over 15 million today. While SFR has always been a sizeable housing product in the US, three key events unfolded during the crisis which opened up the market for institutional investors:

1. Double-digit gross rental yields available as a result of large peak-to-trough home price drops coupled with strong rent growth

2. Acquisitions available at scale through foreclosures and real-estate owned (“REO”) inventory on banks’ balance sheets

3. Rapid improvements in new technology for both the acquisition/due diligence process and managing homes at scale

Historically, single-family homes priced with an embedded 10-20% ownership premium over their implied rental value, which made the asset class unattractive for institutional ownership and management, especially given the significant upfront startup costs necessary to build out the technical infrastructure for managing thousands of individual homes. Amidst the negative rippling effects of the foreclosure crisis, home prices nationally experienced a severe peak-to-trough national price correction of 33%, with hard-hit regions such as Las Vegas and South Florida experiencing price declines of over 50%. Additionally, foreclosed homes fell into disrepair which reduced prices in the surrounding neighborhoods by an average of 10-20%. The self- feeding negative equity spiral led to over 8.2 million foreclosure starts between 2007 and 2011, with nearly

1 700,000 homes held on banks’ and government-sponsored enterprises’ (“GSE”) balance sheets at the peak of the crisis.

Severely depressed home prices and the concentrated number of distressed housing owners quickly drew interest from well-capitalized institutional investors for SFR. Since its emergence in the institutional investment landscape in 2012, the SFR market has gone through a maturation process. Initially, investors were attracted by historically depressed values, strong yield characteristics (7-9% unleveraged net yields), attractive spreads to comparable income-producing assets such as Class B multifamily (200-300 bps range), and significant levels of foreclosed distressed inventory held by mortgage lenders, which could be acquired at scale with limited competition as households retreated from the market. SFR investors absorbed a sizeable share of the distressed housing inventory and combined with the gradual reentry of traditional homebuyers, the single-family housing sector started to stabilize and generate positive momentum.

After a strong bounce-back from the housing recession, the single-family residential sector today is in a sustained recovery mode characterized by rising demand and a shortage of supply due to years of underproduction. Household formations have fully recovered back to the long-term average level of 1.2 million annually versus a low of 500,000 during the recession, as young adults delayed life events such as marriage, returned to school, doubled up, or moved in with parents. Meanwhile, employment – arguably one of the most important factors in housing demand – continues to expand with the number of jobs exceeding the pre-recession peak by 4.7 million.

With positive economic fundamentals supporting demand, national home prices increased 5.5% year-over- year in Q3 2015 - a growth rate near the 3% to 4.5% annual price appreciation that analysts believe is sustainable given the long-term fundamental strength of the US economy. From the trough, home prices nationally have increased 30% according to the Case-Shiller 20-City Home Price Index although prices still remain 14% below the pre-recession peak, underscoring the magnitude of the housing correction. Going-in unleveraged yields have compressed since the depths of the crisis and the initial institutional investment rationale for the “SFR buy-and-flip trade” is less applicable today. However, market forces have evolved such that the SFR asset class is now driven by substantially greater market visibility, combined with strong demographic tailwinds, capital markets acceptance, and a favorable cash flow profile providing a solid income stream and optionality on the residential market recovery.

2 Rental Share of Total Housing Stock

Single-Family Rental 15% "Mom and Pop" Multifamily Rental (2-9 Units) Institutional Multifamily Rental (10+ Units)

15M Units 13% +4M SFR Homes

11%

11M Units 9%

Source: US Census, GTIS Partners

The first wave of renters moving into single-family housing was led by Gen X households that were displaced through foreclosures. Between 2005 and 2014, single-family rental households grew by 35% from 11 million (10% of total housing stock) to 15 million (13% of housing stock), while the homeownership rate for the 35- 44 year-old Gen X cohort fell from a peak of 70% in 2005 to 58% in 2015. On average, these displaced households tend to be older and larger than multifamily rental households according to data from the US Census, as the majority of single-family rental households have three or more members, while single-person households comprise 60% of multifamily (50+ unit) rental housing. In GTIS’s own single-family rental portfolio, the median age of adult residents is 36 years with an average household size of 4.3 people.

As the US economy stabilized, steady job growth allowed the Gen X cohort to slowly repair their credit profiles. However mortgage credit availability is still generally tight according to John Burns Real Estate Consulting (“JBREC”), with just 5% of mortgage loans originated to borrowers with FICO scores below 640 compared to an average of 10% in the early 1990s and 25% in the early 2000s. For many Gen X households, the housing crisis wiped out their largest form of savings (housing equity) and the median net worth of 35-44 year-old households fell below the approximately 30% savings requirement needed to purchase the median home (assuming 20% down payment and additional 10% in ancillary fees and capital reserves). Note that while displaced homeowners technically do qualify as first-time homebuyers under several housing assistance programs, psychological factors are also holding back potential buyers as 46% of consumers still believe that it is difficult to get a mortgage today.

3 As a result, new household formations post-crisis have been predominantly rental. Sustained above-average growth of the US population in their 20s and early 30s has generated demand for multifamily rental housing as evidenced in the chart below. However, the foreclosure crisis from 2008 to 2013 also led to a sizeable number of displaced owner households that appear to have largely migrated into SFR housing – a product that offers nearly identical lifestyle choices with the exception of ownership. Post-crisis, the majority of new households have been in SFR. The foreclosure crisis has since stabilized and started to abate, but legacies of the housing crisis combined with new drivers are likely to support SFR demand for the intermediate future.

Annual Household Formation (000s) Net Worth as a % of Median Home Price

3,000 Owner MF Rental SF Rental 160% <35 Years 35-44 140% 45-54 55+ 2,000 120% 1,000 100% 0 80% 60% -1,000 40% -2,000 20% Savings Constraint -3,000 0%

Source: US Census Bureau, Federal Reserve, National Association of Realtors, GTIS Partners

Coupled with the lingering scars of the recession still holding back the Gen X cohort, older millennials are also entering the age typically associated with marriage and starting a family, lifestyles that are strongly correlated with single-family housing. Over the next decade, the population aged 30 to 39 years in the US is projected to expand by 5.4 million people, or 13% according to the US Census. Millennials are the most educated of any generation, but the societal push towards higher education has also left millennials more indebted than any previous generation. Since 2003, the average student loan balance at age 25 nearly doubled from $10,650 to $20,926 by 2013 according to the Federal Reserve. In the 2003-2004 academic year, 1.6 million college students graduated with debt. By 2012, 2.5 million students graduated with debt. Long-term, research still shows that a college degree is still one of the best investments one can make – the median inflation-adjusted lifetime income of a college graduate is $1.2 million in today’s dollars according to the Brookings Institution, more than double the typical high school graduate – but student debt is likely an investment that restricts short-term savings and spending power.

4 Average Student Loan Balance Median Lifetime Income by Education ($ Millions)

$25,000 $1.4

$1.2 $20,000 $1.0

$15,000 $0.8

$10,000 $0.6 $0.4 $5,000 $0.2

$0 $0.0 Bachelor's - All Associate's High School Majors Degree Only

Source: Federal Reserve, Brookings Institution – The Hamilton Project

With more of their incomes going to servicing debt, millennials have been delaying lifetime milestones such as marriage and homeownership. Notably, unlike other forms of consumer debt such as auto or credit card debt which are typically acquired after establishing a steady source of income, student debt burdens are acquired early in a person’s lifetime and appear to have a significantly larger psychological affect on spending. According to a survey by personal finance company MyBankTracker, millennials would prefer to “get rid of student debt at all costs” by minimizing spending to eliminate the loan as quickly as possible. As an affordable alternative to home ownership, SFR is consistent with their propensity to save and pay down debt in their early burdened years.

It is important to point out the distinction that young adults have only been delaying marriage and children, not rejecting the lifestyle altogether. Notably, 70% of millennials plan to get married and 70% of respondents still want to have children at some point in their lifetime. It appears that a generational shift in preferences has only delayed the peak single-family housing demand into the 30s rather than eliminated the housing preference entirely.

One question when it comes to millennials still remains unresolved however. Thus far into their young adult lives, millennials have been a generation of renters not just in housing but across multiple product types. research found that millennials have been reluctant to buy items such as cars, music, and luxury goods. Whereas previous generations bought CDs, DVDs, and SUVs, millennials have turned to services such as Spotify, Netflix, and Zipcar. Products that are successful with teens and young adults

5 provide access to services without the burdens of ownership, sparking the creation of a “sharing economy.” Of the college-aged students surveyed by Goldman Sachs, only 15% believed that owning a car is important and 10% believed it was important to own luxury goods. Compared to the general indifference towards owning products in general, the fact that 40% of respondents believed owning a house is extremely important remains relatively high, but surveys so far suggest that rental demand will likely remain elevated for the intermediate future.

Led initially by the rotation of Gen X households from single-family for-sale to rental housing, SFR vacancy rates nationally fell from 10% pre-crisis to under 7% in 2015. Increased rental demand quickly absorbed the vacant rental stock during the crisis. Notably, SFR demand continued to remain strong as the economy stabilized and job growth started to accelerate as the SFR vacancy rate continued to fall below 7% currently. Combined with sustained Gen X demand, millennials have contributed to the recent growth of the SFR market and improving conditions for young adults will likely further drive household formation and SFR demand.

Unlike the multifamily rental market where units are built specifically for rent, single-family housing tends to be interchangeable between rental and for-sale. The share of single-family housing built specifically for rent increased slightly post-crisis, but still remains miniscule at just 28,000 homes started in the past year, or 4% of total single-family starts. As a result, overall single-family housing starts can be used as a proxy for SFR supply. Single-family housing construction is currently in the midst of a recovery, with 589,000 permits issued year-to-date through October, which is 8.6% higher year-over-year and 64% above the 2011 trough. However, single-family construction activity still remains well below historical levels and would need to increase an additional 27% just to reach the 1960 to 2000 average.

SFR Rent and Vacancy

Avg. Monthly Rent (Left) $1,200 12% SFR Vacancy Rate (Right) 2,000 10% WWII and $1,100 1,600 Great Depression 8% $1,000 1,200 6% $900 800 4%

$800 2% 400

$700 0% 0

Source: US Census, GTIS Partners

6 Tightness in the SFR market has pressured rents higher nationally and rent growth remained positive even during the crisis. Since 2012, average monthly SFR rent increased at an average of 2.8% annually to just under $1,100 nationally. In key GTIS target markets such as Atlanta and Nashville, rents have grown at a much higher 3.8% and 6.4% annually since 2012 according to Zillow. While yields have compressed since institutional investors entered the market in 2012, SFR gross yields still remain in the 11-13% range versus 7- 9% for comparative multifamily transactions. After factoring in management and operating expenses, net unlevered yields for SFR range between 6-7% versus 4-6% for multifamily.

Compared to multifamily, property management of SFR is costlier due to the spread-out nature of the asset, and single-family properties generally pay higher taxes in many jurisdictions. However, the limited institutional operating history of SFR provides substantial opportunities for margin improvement and efficiency gains. Since inception, the GTIS SFR platform has been able to compress expenses such as property management fees (8.5% of rental income in 2013 versus below 6% currently) while leasing performance has so far shown higher renewal rates and lower turnover costs in the SFR sector compared to original underwriting. As the portfolio increases in scale, savings from larger bulk purchases and contracting services will likely drive margin expansion.

GTIS SFR Gross-to-Net Yield Spread Typical Multifamily Gross-to-Net Spread

Adj Gross Income 12.3% EGI 8.0%

Other Other 0.1% Vacancy & Bad Vacancy & bad 81%0.6% 0.5% Debt Debt Advertising Advertising0.0% 0.1%

G&A 0.2%G&A 0.6%

Utilities Margin 0.1%Utilities 0.1% improvement Lease Commission Lease Commission0.3% 0.1% opportunity Prop. Mgmt 0.6%Prop. Mgmt 0.2%

Maint. & Reserves Maint.1.1% & Reserves 0.2%

Insurance 0.5% Insurance 0.2%

HOA 0.1% HOA 0.0%

Property Taxes 2.0% Property Taxes 0.9%

NOI 6.7% NOI 5.0%

0% 2% 4% 6% 8% 10% 12% 0.0% 2.0% 4.0% 6.0% 8.0%

7 An important aspect of the single-family housing market is that while lenders are still reluctant to expand the mortgage credit box outside of pristine credit for individual homebuyers, credit markets are starting to accept SFR as an institutional asset class. Market acceptance has dramatically reduced the cost of portfolio financing while is opening up to mid-sized SFR investors. Since Q3 2013, the SFR industry average net unlevered yield compressed slightly from 6.5% to 6.2%, but the cost of portfolio financing fell from 3m LIBOR + 475 bps to 3m LIBOR + 300, resulting in a rental spread of approximately 310 bps currently versus 154 bps two years ago. With financing available up to 70% LTV at L+275 to L+300, cash-on-cash yields for SFR range between 9-11% without including price appreciation, highly attractive in the current low- yielding environment.

SFR Industry Average Rental Yield vs. Cost of Financing (%)

7.0%

6.0% Industry-Average 5.0% Net Rental Yield

4.0% Portfolio Loan L + 475 bps L + 300 bps 3.0%

2.0% Securitization L + 204 bps 1.0% L + 176 bps

0.0% Q3 2013 Q1 2014 Q3 2014 Q1 2015

Source: Bloomberg, JMP Securities

For larger investors, SFR offer an even cheaper source of capital. Since 2013, 26 SFR securitizations have been completed backed by loans on approximately 100,000 homes and $13.1 billion of proceeds. Securitizations have been typically five year terms (3 + 2 extensions), although five fixed-rate securitizations have been issued to date, with LTVs ranging from 65% to 79% for all securitizations. More importantly, three multi-borrower securitizations have been issued in 2015 with fully extended loan terms ranging from five to ten years. Wider use of multi-borrower pools would significantly increase liquidity in the SFR market for mid-tier investors given that large investors control less than 10% of the total SFR market and the top ten investors own less than 2% of the entire market.

GTIS assessment of the SFR market finds that given the global low-yielding environment, it is difficult to find a sector like SFR that is not only the largest existing rental asset class, but also fastest growing real estate

8 sector with strong double-digit current yields that is rapidly gaining acceptance by institutional investors and debt markets. Despite years of industry growth, sophisticated institutional investors still comprise a small sliver in market share, suggesting significant opportunities and growth large players who have already invested in the substantial upfront startup costs.

9 SINGLE-FAMILY RENTAL STRATEGY

It is not often that a $27.7 trillion market hides under the radar of institutional investors, but US residential real estate, and particularly single-family rental, has remained largely ignored and under-allocated by global investors until recently. Relative to the housing market, the $16.5 trillion US commercial real estate asset class and the $20 trillion US equities market both pale in size. On a global scale, the US housing market is only 30% smaller than the aggregate equity market capitalization of the entire world according to Bank of America. In short, the US housing market is most likely the world’s largest asset class.

Unlike equities, fixed income, and commercial real estate however, the single-family housing market has traditionally been a labor intensive business with inefficient operations. As mentioned previously, single- family homes have historically been priced at a 10-20% premium to their implied rental value, and potential large-scale investors balked at the significant operational infrastructure investment that would have been necessary to build out a business to manage thousands of homes. Until recently, an institutional method of directly investing in the housing market did not exist.

So what has changed in the past ten years? Historically depressed prices during the housing recession coupled steady rent growth and declining vacancies in the single-family rental “(SFR”) market led to a highly attractive mid-teens gross rental yield with significant upside from the recovery in asset prices. The crisis provided a brief opportunity to justify the high startup costs in the business, a window that has now closed for new entrants barring a takeover of an existing management platform. As an early entrant in the sector, the GTIS-643 SFR platform grew to become one of the top 15 largest institutional investors with over 3,400 homes owned and managed with operating metrics on par or better than its peers.

Just as three key drivers emerged during the crisis that led to the creation of the institutional SFR asset class, new drivers are leading the current growth opportunity for the SFR market going forward:

1. Availability of Financing – the credit market acceptance of SFR as an institutional asset class has already contributed to cheaper sources of capital since the market’s inception. Going forward, the recent success of multi-borrower securitizations opens the low-cost securitization credit window to mid-tier SFR operators at favorable borrowing terms of five to ten years

10 2. Improving Operating Efficiencies – institutional SFR operators now have four years of proprietary operational data, translating into more precise, tighter underwriting and greater forecasting accuracy on costs and expenses

3. High Fragmentation / Consolidation Opportunities – Larger operators have experienced greater market acceptance, leading to an advantage for both financing availability and operational efficiency.

Analyst coverage and publicly available data on the sector is still limited relative to other asset classes, but industry players now have four years of proprietary operational data which allows for greater precision and transparency for underwriting. From GTIS’s own experience in the sector, underwritten projections conservatively assumes higher vacancy and bad debt charges for SFR relative to multifamily rental, but empirical results have so far suggested the opposite. SFR underwriting standards have been conservative due to limited institutional operating history, but it is important to note that single-family housing is by far the most popular form of shelter in the US with 89.2 million total single-family units, of which 22.6 million are rental. SFR was already a sizeable share of the US housing stock pre-crisis with an established “mom-and- pop” operational track record, and the 70% renewal rate in GTIS’s SFR portfolio versus 40-50% for a typical multifamily rental suggest that consumers are highly comfortable with institutional-quality SFR product.

Additionally, business processes have improved since inception and the asset class has established a longer track record, generating margin improvement from reduced expenses such as property management, maintenance and reserves, and insurance. With large infrastructure spending already completed, the industry will likely continue to benefit from improved operational processes going forward.

One common question from potential investors on the SFR asset class is “how do you manage thousands of homes in disparate locations?” Critics were skeptical that the management process could be scalable but GTIS’s experience has thus far suggested that a careful, measured acquisition approach can keep operating expenses in check, and several management processes do benefit from economies of scale even if the individual sites are scattered. Technology has been an integral part of the operating process and the GTIS- 643 platform has developed a highly sophisticated targeting and acquisition process that has acquired 3,400 homes across seven markets, with the ability to move to new geographies as the supply pipeline is exhausted. GTIS rotated out of Las Vegas in 2013 when supply tightened and into Chicago and Nashville in 2014 and 2015 respectively. Despite yield compression in various markets, GTIS has still been able to acquire at 5-10% discounts to direct non-distressed comparables thanks to its sourcing and acquisitions process.

11 At the local market level, the SFR business requires considerable coordination of suppliers and local contractors to renovate existing homes, as well as relationships with local market experts and brokers. Investors with a larger presence in local markets are able to negotiate bulk services at favorable costs. Note that while multifamily management does provide certain efficiencies, SFR management also provides a different set of advantages such as on-demand, contracted services that can be cheaper than maintaining full time staff at a multifamily building. Much like multifamily, the SFR business model includes teams of skilled professionals based in local target markets providing real-time review of leasing and property performance. At the entity level, larger investors have been able to tap into the lower-cost securitization market as well as negotiate more favorable portfolio financing terms.

Given the benefits of scale mentioned above, the SFR market has started to emerge as an industry of “haves and have-nots.” The elevated startup costs necessary to enter the sector has largely limited the industry to the existing investors, and despite the considerable growth of institutional investment in recent years, the market as a whole still remains extremely fragmented. The top ten SFR portfolios combine for only roughly 160,000 homes, or less than 2% of the entire SFR universe, providing massive consolidation opportunities. In recent quarters, large institutional investors that have focused primarily on acquisition growth have slowed down purchases in order to concentrate on leasing and stabilizing their portfolios.

SFR Market Share (000s Units) 200 16,000

160 12,000

120 Top 10 Owners 8,000 80 Rest of Market 4,000 40

0 0 Blackstone Blackstone & Top 10 SFR Market Public REITS Owners

Source: Moody’s/Real Capital Analytics, GTIS Partners

Meanwhile, several smaller investors facing difficulties accessing capital opted to realize their gains and bulk- sell their portfolios to institutional owners. In early 2015, publicly-traded Silver Bay acquired a portfolio of 2,500 SFR homes from The American Home in a $263 million deal at a cap rate of 5.0%. Later in 2015, BLT Homes sold a portfolio of 1,400 homes to Canadian investor Tricon American Homes at a cap rate of 4.8%

12 and liquidated its remaining portfolio in a $402 million deal to Cerberus Capital Management. Within local markets, there are numerous smaller operators with portfolios containing several hundred homes currently looking to monetize.

GTIS believes the current market environment provides an opportunity to grow strategically through portfolio or entity-level acquisitions both at the local and national level as the SFR industry starts to consolidate. Additionally, public market uncertainty and volatility surrounding interest rates have driven REIT valuations lower with the 2015 year-to-date performance of the MSCI US REIT Index trailing the S&P 500 index by 400 bps through the end of November and public SFR REITs trading 10-20% below implied NAV. The extremely fragmented SFR market and increasing benefits to scale are likely to support continued consolidation opportunities in the SFR sector similar to the multifamily industry in the 1990s before the asset class became a real estate portfolio staple today.

GTIS believes SFR is highly attractive asset class on a standalone basis. It is difficult in the current low- yielding environment to find an asset class like SFR that is already a large existing product and also quickly growing, with attractive double-digit current yields and significant consolidation opportunities. Evaluated within the context of a diversified portfolio, SFR provides additional attractive benefits as a hedged bet on both the US residential recovery and the overall US economy. SFR’s favorable income stream and cash flow profile provide high optionality on exit and is one of the most compelling characteristics of the SFR strategy within a portfolio context. In a slow economy, fewer households are able to purchase a new home or service payment obligations on existing homes, leading to greater rental demand that typically drives revenue growth through moderate increases in leasing and occupancy rates. Conversely, a strong economy is typically indicative of robust job and income growth supporting elevated housing demand, and driving significant upside price potential.

During the housing recession, a hypothetical institutional SFR investor would have earned double-digit yields to wait out the downturn. Similar to multifamily rental, SFR is a defensive strategy that remains resilient in a slow economy and low rate environment. The slow economy translated into more rental households and higher occupancy rates for both SFR and multifamily rentals following the onset of the crisis, and rental real estate was one of the few asset classes that could drive positive NOI growth in an otherwise slow economy. With economic fundamentals much more solid in the current environment, steady growth will likely lead to price appreciation upside. In the interim, SFR operators are able to continue refinancing the portfolio to reduce the equity basis at increasingly more favorable rates as debt markets continue to open up for SFR. In

13 short, SFR is a compelling “hedged bet” on the residential recovery with favorable projected returns across all facets of the market cycle.

SFR Strategy Execution

While some competitive platforms have been successful taking a “bulk buying” approach, the GTIS-643 platform focuses on a “sharpshooter” approach in select target markets. Acquisitions to-date have typically been sourced from real-estate owned (“REO”) properties on banks’ balance sheets, distressed short sales and foreclosure auctions, as well as multiple listing services (“MLS”) in which real estate brokers list available properties for purchase. However, since GTIS initially entered the market, consolidation opportunities have emerged and GTIS-643 platform will be selective about strategy portfolio or entity-level acquisitions.

The existing SFR portfolio comprises seven markets: Atlanta, Chicago, Dallas, Houston, Las Vegas, Nashville, and South Florida. Within existing markets, GTIS target markets for future acquisitions include Chicago, Atlanta, Dallas, and Nashville. The four existing target markets represent opportunities in different phases of the cycle – early stage recovery, transition from recovery to growth, and sustained long-term growth due to a strong economy.

Foreclosure Inventory (% of Total Mortgages)

7%

6%

5% 2011 4% 2015 3%

2% Historical Avg. 1%

0% Chicago Atlanta Dallas Nashville National

Source: CoreLogic

As one of the hardest hit markets in the crisis, Chicago has only recently transitioned into stabilized growth coming out of the downturn. Foreclosure processes in the US vary by state and located in Illinois, the foreclosure process in Chicago goes through a judicial court system intended to protect the rights of

14 delinquent borrowers. However, judicial reviews extend the average foreclosure timeline by 180 days, leading to a significant backlog of distressed housing inventory waiting to be cleared from the foreclosure pipeline. Approximately 1.7% of all mortgaged homes in Chicago are under foreclosure according to CoreLogic, a significant improve from 6.3% at the peak but still above the 1.2% national average and a contributing factor of why the national distressed inventory of 2 million homes still remains double the normalized level. Given the relatively large pipeline, GTIS believes the still to-be-cleared distressed inventory will provide favorable acquisition discounts in the near-term and positive price momentum in the long-term due to the clearing of distress.

In Atlanta, the foreclosure process is substantially quicker and despite a local economy contraction of 6.1% peak-to-trough, Atlanta was one of the fastest to bounce back to pre-recession job growth rates. Although Atlanta’s recovery has been impressive, the severity of the housing market contraction still leaves approximately 11% of borrowers underwater on their mortgage (i.e. owing more than their home is worth), while another 10% owe between 80% to 100% of their home’s value. As Atlanta continues to work through the legacies of the crisis, a greater share of homeowners will recover equity in their homes, likely driving greater housing market activity.

GTIS views Dallas and Nashville as examples of a steady-state SFR market driven mostly by growth rather than distress emanating from the crisis. Both Dallas and Nasvhille are strong growth markets experiencing significant job and population increases, especially within the millennial demographic. While asset prices are slightly higher relative to rents in both markets, strong demand across all housing sectors have generated above-average NOI growth post-crisis. As of October 2015, average monthly rents increased 8.8% year- over-year in Nashville and 5.2% in Dallas according to Zillow. Outside of existing target markets, the GTIS- 643 platform is evaluating potential expansion markets with favorable growth drivers in metros such as Tampa, Indianapolis, and Charlotte.

Atlanta Nashville

Median Monthly Rent (Left) Median Monthly Rent (Left)

Vacancy Rate (Right) Vacancy Rate (Right) 1,200 14% 1,500 10% 12% 1,400 8% 1,160 10%

8% 1,300 6% 1,120 6% 1,200 4% 1,080 4% 2% 1,100 2% 1,040 0% 1,000 0%

15 Dallas Chicago

Median Monthly Rent (Left) Median Monthly Rent (Left) Vacancy Rate (Right) Vacancy Rate (Right) 1,500 12% 1,900 10%

10% 8% 1,400 1,800 8% 6% 1,300 6% 1,700 4% 4% 1,200 1,600 2% 2% 1,100 0% 1,500 0%

Source: Zillow, US Census, GTIS Partners

GTIS believes the platform will continue to benefit from the know-how, processes, and economies of scale as it grows (stabilized occupancy rate of 96% for homes owned 120+ days and 6.8% net unlevered yield as of Q3 2015). GTIS operates the SFR platform in conjunction with 643 Capital Management, a highly experienced real estate investment firm with best-in-class technical infrastructure and systems. Through the partnership with 643 Capital Management and the sophisticated systems in place, the GTIS-643 SFR platform implements a detailed market selection process using quantitative and qualitative criteria to establish relative rankings.

GTIS-643 has also benefitted from the advanced technical systems to reduce the average lease-up time to 60 days for the existing SFR portfolio versus the 120 days industry average. Operational efficiency gains have translated into realized leasing rates slightly above underwritten and a portfolio cap rate above original underwriting. Relative to its peers, the GTIS-643 platform compares favorable on multiple operating metrics, including occupancy, operating margin, implied cap rates, and G&A expenses. Across the entire SFR platform including non-stabilized properties, the GTIS portfolio is 92% leased compared to 82-88% for publicly-traded SFR REITs. GTIS’s focused acquisition approach and technical infrastructure has kept G&A expenses below most of its public competitors, enhancing operating margins. In addition, the GTIS-643 platform competitive advantage includes institutional controls, continual monitoring, and high-quality reporting standards for its investors.

16 GTIS projects the SFR strategy to remain highly attractive for the intermediate future. However, one of the most compelling characteristics of the SFR strategy is the optionality provided by NOI growth during downturns historically and asset price appreciation during strong markets. Should the housing market continue its growth trajectory and make disposition of the portfolio attractive, five potential strategies can be employed to maximize value of the assets:

1. Sell Homes to Individual Homebuyers • Homes can always be sold piecemeal and relatively small market share of institutional investors limits the risk of bulk sales moving the market • In a strong market, homeowners traditionally pay a 10-20% ownership premium over implied rental values

2. Sell to Small Investors and Operators • Sell in pieces to smaller local investors looking to buy cash flowing assets, especially as specialty lenders provide leverage • Can be sold without vacating tenants or performing capital improvements

3. Bulk Sell to Large Investors • Sell the entire portfolio to a large aggregator looking to continue to invest in the space (public or private) • Large investors paying premiums for leased, fully rehabbed portfolios

4. Acquire / Reverse Merge into Public REIT • Sell to a public REIT in combination of cash and shares • Potential to take operational control of combined entity and actively manage the REIT to improve stock performance • Notable recent transactions include privately-held Colony American Homes reverse merger with publicly-traded Starwood Waypoint

5. • Scale the platform and sell portfolio through an IPO offering (10,000+ homes likely required for a successful offering)

17 • Public markets tend to be more volatile and IPO market windows are relatively narrow. Acceptance of the asset class still limited among public investors, but potentially highest upside of any exit strategy

In many ways, the SFR market draws parallels with the multifamily market in the 1990s. Both markets had established track records with small, local operators, but rapidly accelerated with the introduction of large- scale institutional capital and quality controls. With the multifamily industry, following a period of scarce capital, the newly established corporate and tax structure of equity REITs catalyzed a boom in the commercial real estate industry. In 1999, the earliest year breakdown provided by NAREIT, apartment REITs combined for total market capitalization of $23.1 billion. By 2015, multifamily REITs grew to $105.4 billion. The initial proliferation of equity REITs led to significant consolidation in the sector by the early 2000s as the total number of publicly-traded REITs fell from 226 in 1994 to 189 by 2002, while the aggregate market cap increased 285% over the same period from $44.3 billion to $170.3 billion according to NAREIT.

The institutional SFR market appears to be following a similar evolution. The total market capitalization of publicly-listed SFR REITs and major private investors (Blackstone’s Invitation Homes platform and others) combine for a total market capitalization of roughly $15 billion – about the size of multifamily REITs in the late 1990s. The sector is growing at a faster pace than multifamily, and consolidation of sub-scale platforms has been initiated. Four bulk portfolio transactions closed in 2015 totaling nearly 9,000 SFR homes and $1 billion in deal value. More recently, two giant mergers between top 10 operators were announced – privately held Colony American agreed to contribute its 19,000 home portfolio to Starwood Waypoint in exchange for 59% of the combined 31,500 home business and American Homes 4 Rent agreed to effectively acquire American Residential Properties at a transaction value of $1.5 billion ($600 million equity and assumption and repayment of the remaining debt).

18 Recent SFR Portfolio Transactions

American American American Tricon Cerberus Starwood Homes 4 Homes 4 Silver Bay Homes 4 Capital Capital Waypoint Rent Rent Rent Colony American Ellington The American Target Beazer Homes BLT Homes BLT Homes American Residential Housing Home (Reverse) Properties

Date Jul-14 Jan-15 Jan-15 Apr-15 Aug-15 Est. Q1 ‘16 Est. H1 '16

No. of Homes 1,350 900 2,460 1,385 4,200 19,000 8,938

Deal Value ($M) 263 126 263 150 402 1,480 1,500 Avg. Value / Home 195,000 140,000 105,000 108,303 95,700 77,895 167,823

Gross Yield 8.50% 10.00% 10.00% - - - -

Net Yield 5.50% 6.00% 5.00% 4.80% - - - Markets AZ, CA, FL, AZ, CO, GA, GA, NC, FL NC, SC, TX FL, IL, IN, AZ, CA, GA, TX, AZ, GA, NV NC, TN, TX MS, TN TX TN, FL

During the 1990s era of real estate consolidation no fewer than 104 publicly-traded REIT mergers occurred between 1997 and 2002 comprising $131 billion of market value, and the current SFR market fragmentation appears ripe to follow the multifamily and office real estate industry path.

Similarly, the SFR sector still faces a relative shortage of capital, but is quickly gaining acceptance from debt market institutional investors. The initial reception for early SFR public offerings had been lukewarm as most investors, including several operators themselves, viewed the opportunity as a “buy-and-flip” trade. However, as the market moves further away from the crisis environment and visibility improves, GTIS believes the SFR strategy will be evaluated as a sustainable business due to its attractive cash flow profile, especially within the context of a diversified portfolio, and the embedded optionality of the asset class. With several years of operational track record and consistently improving metrics, the industry is now starting to attain comparable standing with multifamily rental real estate, with strong expected growth ahead, and in GTIS view represents one of the best risk-adjusted investment opportunities in the current environment.

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