Note 8. Shareholders' equity

Class A common shares

In connection with the Management Internalization in 2013 (see Note 11), we entered into a registration rights agreement with AH LLC providing for registration rights exercisable after December 10, 2015. After June 10, 2015, if we are eligible to file a shelf registration statement, AH LLC will have the right to request that we file and maintain a shelf registration statement to register for resale the Class A common shares and securities convertible into Class A common shares that are held by AH LLC. AH LLC also has a right to "piggy-back" registration rights to include the Class A common shares and securities convertible into Class A common shares that AH LLC owns in other registration statements that we may initiate.

In connection with the Alaska Joint Venture Acquisition in 2013 (see Note 11), we entered into a registration rights agreement with APFC. Pursuant to the terms of such agreement, we filed and will maintain a shelf registration statement with the SEC that registers for resale the Class A common shares acquired by APFC in connection with the Alaska Joint Venture Acquisition. APFC also has a right to "piggy-back" registration in the event we conduct future offerings of Class A common shares for our own behalf.

In November and December 2012, and March 2013, the Company sold 35,360,898 and 46,718,750 Class A common shares in connection with the 2012 Offering and 2013 Offering, respectively. In August 2013, the Company sold an additional 55,422,794 Class A common shares in connection with the IPO and the 2013 Concurrent Private Placements.

In July 2014, the Company issued 8,158,001 Class A common shares, $0.01 par value per share, in connection with the acquisition of Beazer Rental Homes (see Note 11).

In August 2014, the Company issued 17,782,861 Class A common shares, $0.01 par value per share, in an underwritten public offering and concurrent private placement, which raised gross proceeds of $313.3 million before offering costs of $4.9 million.

Our board of trustees declared distributions that totaled $0.20 per share and $0.05 per share on our Class A common shares during the years ended December 31, 2014 and 2013, respectively.

Class B common shares

AH LLC received a total of 635,075 shares of Class B common shares in our Company in connection with its investment in the 2012 Offering and the 2,770 Property Contribution (see Note 10). Each Class B common share generally entitles the holder to 50 votes on all matters that the holders of Class A common shares are entitled to vote. The issuance of Class B common shares to AH LLC allows AH LLC a voting right associated with its investment in the Company no greater than if it had solely received Class A common shares. Additionally, when the voting interest from Class A common shares and Class B common shares are added together, a shareholder is limited to a 30% total voting interest. Each Class B common share has the same economic interest as a Class A common share. Our board of trustees declared distributions that totaled $0.20 per share and $0.05 per share on our Class B common shares during the years ended December 31, 2014 and 2013, respectively.

Participating preferred shares

Participating preferred shares represent non-voting preferred equity interests in our Company and entitle holders to a cumulative annual cash dividend equal to 5.0% of an initial liquidation preference of $25 per share. Any time between September 30, 2017 and September 30, 2020 (the "initial redemption period"), the Company has the option to redeem the preferred shares for cash or Class A common shares, at a redemption price equal to the initial liquidation preference, adjusted by an amount equal to 50% of the cumulative change in value of an index based on the purchase prices of single-family properties located in our top 20 markets (the "HPA adjustment"). During the initial redemption period, the amount payable upon redemption will be subject to a cap, such that the total internal rate of return, when considering the initial liquidation preference, the HPA adjustment and dividends up to, but excluding, the date of redemption, will not exceed 9.0%. If not redeemed by the end of the initial redemption period, the initial liquidation preference of $25 per share will be adjusted by the HPA adjustment as of September 30, 2020, (the "adjusted liquidation preference") and the cumulative annual cash dividend rate will be prospectively increased to 10% of the adjusted liquidation preference. Any time after September 30, 2020, the Company has the option to redeem the preferred shares for cash or Class A common shares, at a redemption price equal to the adjusted liquidation preference. Because the HPA adjustment meets the definition of a derivative under ASC 815, Derivatives and Hedging, and is not clearly and closely related to the economic characteristics and risks of the underlying preferred shares, the fair value of the HPA adjustment has been reflected as a liability in the consolidated balance sheets and is adjusted to fair value each period and included in remeasurement of preferred shares in the consolidated statements of operations (see Note 15).

In October 2013, the Company issued 5,060,000 5.0% Series A participating preferred shares in an underwritten public offering, which raised gross proceeds of $126.5 million before offering costs of $7.3 million.

In December 2013 and January 2014, the Company issued 4,400,000 5.0% Series B preferred shares in an underwritten public offering which raised gross proceeds of $110.0 million before offering costs of $6.6 million.

In May 2014, the Company issued 7,600,000 5.5% Series C participating preferred shares in an underwritten public offering and concurrent private placement, raising gross proceeds of $190.0 million before offering costs of $9.7 million.

As of December 31, 2014, the initial liquidation preference, as adjusted by an amount equal to 50% of the cumulative change in value of an index based on the purchase prices of single-family properties located in our top 20 markets, for all of the Company's outstanding 5.0% Series A participating preferred shares, 5.0% Series B participating preferred shares and 5.5% Series C participating preferred shares was $441.7 million.

Our board of trustees declared distributions that totaled $1.25 per share, $1.2875 per share and $0.912847 per share on our 5.0% Series A participating preferred shares, 5.0% Series B participating preferred shares and 5.5% Series C participating preferred shares, respectively, during the year ended December 31, 2014. Distributions declared on our 5.0% Series A participating preferred shares totaled $0.229167 per share for the year ended December 31, 2013.

Class A units

Class A units represent voting equity interests in the Operating Partnership. Holders of Class A units in the Operating Partnership have the right to redeem the units for cash or, at the election of the Company, exchange the units for the Company's Class A common shares on a one-for-one basis. The Company owned 93.6% and 93.1% of the total 225,914,576 and 199,291,586 Class A units outstanding as of December 31, 2014 and 2013, respectively.

Series C convertible units

Series C convertible units represent voting equity interests in the Operating Partnership. Holders of the Series C convertible units are entitled to distributions equal to the actual net cash flow from a portfolio of 2,770 single-family properties contributed to the Company by AH LLC on February 28, 2013 (see Note 9), up to a maximum of 3.9% per unit per annum based on a price per unit of $15.50, but will not be entitled to any distributions of income generated by any other properties or operations of our company or any liquidating distributions. Since the date of issuance of the Series C units, net cash flow from the properties contributed to the Company exceeded 3.9% per annum, providing the payment of the maximum amount of the preferred distribution. Holders of the Series C units have a one-time right to convert all such units into Class A units on a unit for unit basis. If on the date of conversion, the contributed properties had not been initially leased for at least 98% of the scheduled rents (determined on an aggregate basis), then the Series C units with respect to the single-family properties leased for at least 98% of the scheduled rents (determined on an aggregate basis) will convert into Class A units, and the Series C units associated with the remaining single-family properties will convert into a number of Class A units determined by dividing the original aggregate cost of the properties (including the acquisition fees) by $15.50, with proportionate reduction in Class B common shares. If the Series C units have not been converted by the earlier of the third anniversary of the original issue date or the date of commencement of a dissolution or liquidation, then the Series C units will automatically convert into Class A units at the specified conversion ratio defined above. As of December 31, 2014, AH LLC owned all of the 31,085,974 outstanding Series C convertible units. Our board of trustees declared distributions that totaled $0.60452 per share and $0.15113 per share on our Series C convertible units during the years ended December 31, 2014 and 2013, respectively.

Series D convertible units

Series D convertible units represent non-voting equity interests in the Operating Partnership. Holders of the Series D convertible units do not participate in any distributions for 30 months from the date of issuance and do not participate in any liquidating distributions at any point in time. The Series D units are automatically convertible into Class A units on a one-for-one basis only after the later of (1) 30 months after the date of issuance and (2) the earlier of (i) the date on which adjusted funds from operations per Class A common share aggregates $0.80 or more over four consecutive quarters following the closing of the Management Internalization or (ii) the date on which the daily closing price of our Class A common shares on the NYSE averages $18.00 or more for two consecutive quarters following the closing of the Management Internalization. After 30 months, the Series D units will participate in distributions (other than liquidating distributions) at a rate of 70% of the per unit distributions on the Class A units. As of December 31, 2014 and 2013, AH LLC owned all of the 4,375,000 outstanding Series D units (see Note 11).

Series E convertible units

Series E convertible units represent non-voting equity interests in the Operating Partnership. Series E convertible units do not participate in any distributions and automatically convert into Series D units, or if the Series D units have previously converted into Class A units, into Class A units, on February 29, 2016, subject to an earn-out provision based on the level of pro forma annualized EBITDA contribution, as defined, of the Advisor and the Property Manager. Based on the terms of the earn-out provision, if pro forma annualized EBITDA contribution, as defined, equals or exceeds $28 million during the six-month period ending December 31, 2015 (the "measurement period"), the Series E units will convert into Series D units (or if the Series D units have previously converted into Class A units, into Class A units) on a one-for-one basis at February 29, 2016. If, during the measurement period, the pro forma annualized EBITDA contribution, as defined, is less than $28 million, the Series E units will convert into a number of Series D units (or if the Series D units have previously converted into Class A units, into Class A units) determined by (1) dividing (A) Pro Forma Annualized EBITDA Contribution during the Measurement Period less $14 million by (B) $14 million and (2) multiplying that result by 4,375,000. Series E units which are not converted at the end of the measurement period, if any, will be cancelled.

Because the Series E units may potentially be settled by issuing a variable number of Series D units or Class A units, the Series E units have been recorded at fair value and reflected as a liability in accordance with ASC 480, Distinguishing Liabilities and Equity, in the consolidated balance sheets and are adjusted to fair value each period (see Note 15). As of December 31, 2014 and 2013, AH LLC owned all of the 4,375,000 outstanding Series E units (see Note 11).

3.5% convertible perpetual preferred units

In connection with the Company's acquisition of a Class B ownership interest in RJ American Homes 4 Rent Investments, LLC ("RJ LLC") on December 31, 2012 (see Note 11), the Company issued 653,492 3.5% convertible perpetual preferred units ("Preferred Units") to AH LLC. The Preferred Units represented non-voting equity interest in the Operating Partnership and entitled the holder to a preferred annual distribution equal to $0.525 per unit, when authorized and declared by the general partner of the Operating Partnership (i.e., the Company). Distributions accrued on a cumulative basis from the date of issuance and were payable quarterly.

In connection with AH LLC's contribution of its remaining ownership interest in RJ LLC to the Company on June 14, 2013, all of the outstanding 653,492 Preferred Units held by AH LLC were converted into Class A units (see Note 11).

Noncontrolling interest

Noncontrolling interest as reflected in the Company's consolidated balance sheets primarily consists of the interest held by AH LLC in units in the Company's Operating Partnership. As of December 31, 2014 and 2013, AH LLC owned 14,440,670 and 13,787,292, or approximately 6.4% and 6.9%, respectively, of the total 225,914,576 and 199,291,586 Class A units in the Operating Partnership, respectively. Additionally, AH LLC owned all 31,085,974 Series C convertible units and all 4,375,000 Series D convertible units in the Operating Partnership as of December 31, 2014 and 2013. Also included in noncontrolling interest are outside ownership interests in certain consolidated subsidiaries of the Company.

Noncontrolling interest as reflected in the Company's consolidated statements of operations for the years ended December 31, 2014 and 2013, primarily consisted of $18.6 million and $14.9 million, respectively, of preferred income allocated to Series C convertible units, zero and $0.2 million, respectively, of preferred income allocated to Preferred Units (prior to the date of conversion), $3.4 million and $1.8 million, respectively, of net loss allocated to Class A units, and $0.3 million and $0.1 million, respectively, of net loss allocated to noncontrolling interests in certain of the Company's consolidated subsidiaries. There was no noncontrolling interest for the year ended December 31, 2012.

Subscription agreement

In 2012, we entered into a subscription agreement with AH LLC under which AH LLC had the option to purchase 3,333,334 Class A common shares through November 21, 2015, for an aggregate purchase price of $50,000,000 ($15.00 per share), the price per share of our Class A common shares in the 2012 Offering.

In 2013, the Company entered into an agreement with AH LLC to fully settle the subscription agreement based on a price of $17.25 per share, a price determined based on the most recent trade in the Company's shares at the time of settlement. Such settlement resulted in the issuance of 434,783 Class A common shares to AH LLC.

2012 Equity Incentive Plan

In 2012, we adopted the 2012 Equity Incentive Plan (the "Plan") to provide persons with an incentive to contribute to the success of the Company and to operate and manage our business in a manner that will provide for the Company's long-term growth and profitability. The Plan provides for the issuance of up to 1,500,000 Class A common shares through the grant of a variety of awards including stock options, stock appreciation rights, restricted stock, unrestricted shares, dividend equivalent rights and performance-based awards. The Plan terminates in November 2022, unless it is earlier terminated by the board of trustees. In April 2013, our shareholders approved an amendment to the Plan allowing for an increase in the maximum number of Class A common shares available for issuance from 1,500,000 to 6,000,000.

In 2014, the Company granted stock options for 1,270,000 Class A common shares and 92,000 restricted stock units to certain employees of the Company. In 2013, the Company granted stock options for 550,000 Class A common shares to certain employees of the Company. In 2012, the Company granted stock options for 50,000 Class A common shares to members of our board of trustees of the Company. Also in 2012, the Company granted stock options for 650,000 Class A common shares to certain employees of AH LLC and its subsidiaries. Because these options were granted to nonemployees of the Company, noncash share-based compensation expense was initially recorded based on the estimated fair value of the options at grant date and was re-measured at the end of each period. As a result of the Management Internalization on June 10, 2013, certain former employees of AH LLC became employees of the Company and, accordingly, stock options for 485,000 Class A common shares were reclassified as grants to employees and re-measured as of the date of the Management Internalization.

All of the options and restricted stock units granted during the years ended December 31, 2014, 2013 and 2012, vest over four years and expire 10 years from the date of grant. Noncash share-based compensation expense related to these options is based on the estimated fair value on the date of grant and is recognized in expense over the service period. Such expense is adjusted to consider estimated forfeitures. Estimated forfeitures are adjusted to reflect actual forfeitures at the end of the vesting period.

The following table summarizes stock option activity under the Plan for the years ended December 31, 2014, 2013 and 2012:

		Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life (in years)		Aggregate Intrinsic Value (1) (in thousands)
Options outstanding at December 31, 2011			—		$	—		—	$	—
Granted			700,000			15.00
Exercised			—			—
Forfeited			—			—

Options outstanding at December 31, 2012			700,000		$	15.00		9.9	$	—	(2)

Granted			550,000			16.03
Exercised			—			—
Forfeited			(60,000	)		15.00

Options outstanding at December 31, 2013			1,190,000		$	15.48		9.3	$	862

Granted			1,270,000			16.74
Exercised			(28,750	)		15.00				74
Forfeited			(266,250	)		15.88

Options outstanding at December 31, 2014			2,165,000		$	16.17		8.8	$	1,890


Options exercisable at December 31, 2014			375,000		$	15.31		8.2	$	645


(1)	Intrinsic value for activities other than exercises is defined as the difference between the grant price and the market value on the last trading day of 2014 of $17.03 for those stock options where the market value is greater than the exercise price. For exercises, intrinsic value is defined as the difference between the grant price and the market value on the date of exercise.
(2)	Prior to August 1, 2013, there was no public trading market for our Class A common shares.

The following table summarizes the Black-Scholes Option Pricing Model inputs used for valuation of the stock options for Class A common shares issued during the years ended December 31, 2014, 2013 and 2012:

	2014			2013			2012
Weighted-average fair value	$	5.06		$	4.75		$	4.52
Expected term (years)		7.0			7.0			7.0
Dividend yield		3.0	%		3.0	%		3.0	%
Volatility		38.5	%		38.0	%		38.0	%
Risk-free interest rate		2.2	%		2.0	%		2.5	%

The following table summarizes the activity that relates to the Company's restricted stock units under the Plan for the years ended December 31, 2014, 2013 and 2012:

	2014			2013		2012
Restricted stock units at beginning of period		—			—		—
Units awarded		92,000			—		—
Units released		—			—		—
Units forfeited		(7,000	)		—		—

Restricted stock units at end of the period		85,000			—		—

Total non-cash share-based compensation expense related to stock options and restricted stock units was $2.6 million, $0.8 million and $0.1 million for the years ended December 31, 2014, 2013 and 2012, respectively. Also included in noncash share-based compensation expense for the year ended December 31, 2013, was $0.3 million associated with 19,500 Class A common shares issued to our trustees during 2013.

As of December 31, 2014, there was a total unrecognized compensation cost of $7.1 million for unvested stock options and $1.1 million for unvested restricted stock and restricted stock units, which does not include estimated forfeitures. The unrecognized compensation cost for unvested stock options and restricted stock and restricted stock units is expected to be recognized over a weighted-average period of 2.8 and 3.1 years, respectively.