Document
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549


FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR TRANSITION PERIOD FROM __________ TO __________

COMMISSION FILE NUMBER: 001-35657


http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=13046429&doc=12
 
Front Yard Residential Corporation
(Exact name of registrant as specified in its charter)

MARYLAND
46-0633510
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)

c/o Altisource Asset Management Corporation
5100 Tamarind Reef
Christiansted, United States Virgin Islands 00820
(Address of principal executive office)

(340) 692-0525
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer
o
 
Accelerated Filer
x
Non-Accelerated Filer
o
(Do not check if a smaller reporting company)
Smaller Reporting Company
o
 
 
 
Emerging Growth Company
o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common stock, par value $0.01 per share
RESI
New York Stock Exchange

As of August 1, 2019, 53,826,458 shares of our common stock were outstanding.




Front Yard Residential Corporation
June 30, 2019
Table of Contents


i


(table of contents)

References in this report to “we,” “our,” “us” or the “Company” refer to Front Yard Residential Corporation and its consolidated subsidiaries, unless otherwise indicated. References in this report to “AAMC” refer to Altisource Asset Management Corporation and its consolidated subsidiaries, unless otherwise indicated.

Special note on forward-looking statements

Our disclosure and analysis in this Quarterly Report on Form 10-Q contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In some cases, you can identify forward-looking statements by the use of forward-looking terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts” or “potential” or the negative of these words and phrases or similar words or phrases that are predictions of or indicate future events or trends and that do not relate solely to historical matters. You can also identify forward-looking statements by discussions of strategy, plans or intentions.

The forward-looking statements contained in this report reflect our current views about future events and are subject to numerous known and unknown risks, uncertainties, assumptions and changes in circumstances that may cause our actual results to differ significantly from those expressed in any forward-looking statement. Factors that may materially affect such forward-looking statements include, but are not limited to:

our ability to implement our business strategy;
our ability to make distributions to our stockholders;
our ability to acquire single-family rental assets for our portfolio;
the impact of changes to the supply of, value of and the returns on single-family rental assets;
our ability to successfully integrate newly acquired properties into our portfolio of single-family rental properties;
our ability to successfully perform property management services for our single-family rental assets at the standard and/or the cost that we anticipate;
our ability to predict our costs;
our ability to effectively compete with our competitors;
our ability to apply the proceeds from financing activities or asset sales to target single-family rental assets in a timely manner;
our ability to sell non-core assets on favorable terms and on a timely basis or at all;
the failure to identify unforeseen expenses or material liabilities associated with asset acquisitions through the due diligence process prior to such acquisitions;
changes in the market value of our single-family rental properties and real estate owned;
changes in interest rates;
our ability to obtain and access financing arrangements on favorable terms or at all;
our ability to maintain adequate liquidity;
our ability to retain our engagement of AAMC;
the failure of our third party vendors to effectively perform their obligations under their respective agreements with us;
our failure to maintain our qualification as a REIT;
our failure to maintain our exemption from registration under the Investment Company Act;
the results of our strategic alternatives review and risks related thereto;
the impact of adverse real estate, mortgage or housing markets;
the impact of adverse legislative, regulatory or tax changes; and
general economic and market conditions.

While forward-looking statements reflect our good faith beliefs, assumptions and expectations, they are not guarantees of future performance. Such forward-looking statements speak only as of their respective dates, and we assume no obligation to update them to reflect changes in underlying assumptions or factors, new information or otherwise. For a further discussion of these and other factors that could cause our future results to differ materially from any forward-looking statements, please see Part II, Item 1A in this Quarterly Report on Form 10-Q and “Item 1A. Risk factors” in our Annual Report on Form 10-K for the year ended December 31, 2018.


ii


(table of contents)

Part I
 
Item 1. Financial Statements (Unaudited)

Front Yard Residential Corporation
Condensed Consolidated Balance Sheets
(In thousands, except share and per share amounts)


June 30, 2019

December 31, 2018
 
(unaudited)
 
 
Assets:



Real estate held for use:



Land
$
392,769


$
395,532

Rental residential properties
1,665,790


1,667,939

Real estate owned
34,317


40,496

Total real estate held for use
2,092,876


2,103,967

Less: accumulated depreciation
(171,278
)

(137,881
)
Total real estate held for use, net
1,921,598


1,966,086

Real estate assets held for sale
30,826


146,921

Mortgage loans at fair value
4,372


8,072

Cash and cash equivalents
45,563


44,186

Restricted cash
35,827


36,974

Accounts receivable
16,079


11,591

Goodwill
13,376

 
13,376

Prepaid expenses and other assets
34,466


43,045

Total assets
$
2,102,107


$
2,270,251





Liabilities:



Repurchase and loan agreements
$
1,624,200


$
1,722,219

Accounts payable and accrued liabilities
68,671


72,672

Payable to AAMC
3,992


3,968

Total liabilities
1,696,863


1,798,859





Commitments and contingencies (Note 8)







Equity:



Common stock, $0.01 par value, 200,000,000 authorized shares; 53,826,458 shares issued and outstanding as of June 30, 2019 and 53,630,204 shares issued and outstanding as of December 31, 2018
538


536

Additional paid-in capital
1,186,683


1,184,132

Accumulated deficit
(760,468
)

(700,623
)
Accumulated other comprehensive loss
(21,509
)

(12,653
)
Total equity
405,244


471,392

Total liabilities and equity
$
2,102,107


$
2,270,251



See accompanying notes to condensed consolidated financial statements.

1

(table of contents)

Front Yard Residential Corporation
Condensed Consolidated Statements of Operations
(In thousands, except share and per share amounts)
(Unaudited)

 
Three months ended June 30,
 
Six months ended June 30,

2019
 
2018

2019

2018
Revenues:

 





Rental revenues
$
51,553

 
$
40,906


$
104,178


$
80,671

Total revenues
51,553

 
40,906


104,178


80,671

Expenses:

 


 

 
Residential property operating expenses
18,968

 
14,248


37,405


28,103

Property management expenses
3,538

 
2,949

 
7,213

 
5,886

Depreciation and amortization
19,936

 
18,761


42,321


37,951

Acquisition and integration costs
651

 
759


2,862


792

Impairment
1,576

 
2,143


2,596


9,718

Mortgage loan servicing costs
194

 
319


581


674

Interest expense
21,165

 
16,338


42,675


32,401

Share-based compensation
1,811

 
1,094


2,930


680

General and administrative
7,992

 
2,477


13,758


5,150

Management fees to AAMC
3,556

 
3,697


7,131


7,487

Total expenses
79,387

 
62,785


159,472


128,842

Net gain (loss) on real estate and mortgage loans
3,842

 
(306
)
 
12,619

 
(1,940
)
Operating loss
(23,992
)
 
(22,185
)
 
(42,675
)
 
(50,111
)
Casualty (losses) loss reversals, net
(184
)
 
520

 
(577
)
 
520

Insurance recoveries
11

 
115

 
538

 
115

Other (expense) income
(846
)
 
214


(797
)

790

Loss before income taxes
(25,011
)
 
(21,336
)
 
(43,511
)
 
(48,686
)
Income tax expense
6

 


14



Net loss
$
(25,017
)
 
$
(21,336
)

$
(43,525
)

$
(48,686
)

 
 








Loss per share of common stock - basic:
 
 








Loss per basic share
$
(0.47
)
 
$
(0.40
)

$
(0.81
)

$
(0.91
)
Weighted average common stock outstanding - basic
53,714,998

 
53,520,486


53,672,835


53,487,459

Loss per share of common stock - diluted:


 








Loss per diluted share
$
(0.47
)
 
$
(0.40
)

$
(0.81
)

$
(0.91
)
Weighted average common stock outstanding - diluted
53,714,998

 
53,520,486


53,672,835


53,487,459




 








Dividends declared per common share
$
0.15

 
$
0.15


$
0.30


$
0.30



See accompanying notes to condensed consolidated financial statements.

2

(table of contents)

Front Yard Residential Corporation
Condensed Consolidated Statements of Comprehensive Loss
(In thousands)
(Unaudited)

 
Three months ended June 30,
 
Six months ended June 30,
 
2019
 
2018
 
2019
 
2018
Net loss
$
(25,017
)
 
$
(21,336
)
 
$
(43,525
)
 
$
(48,686
)
 
 
 
 
 
 
 
 
Other comprehensive loss:
 
 
 
 
 
 
 
Change in fair value of interest rate caps
(3,482
)
 

 
(11,091
)
 

Losses from interest rate caps reclassified into earnings from accumulated other comprehensive loss
1,248

 

 
2,235

 

Net other comprehensive loss
(2,234
)
 

 
(8,856
)
 

 
 
 
 
 
 
 
 
Comprehensive loss
$
(27,251
)
 
$
(21,336
)
 
$
(52,381
)
 
$
(48,686
)


See accompanying notes to condensed consolidated financial statements.

3

(table of contents)

Front Yard Residential Corporation
Condensed Consolidated Statements of Stockholders' Equity
(In thousands, except share and per share amounts)
(Unaudited)

 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Deficit
 
Accumulated Comprehensive Loss
 
Total Equity
 
Number of Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
53,630,204

 
$
536

 
$
1,184,132

 
$
(700,623
)
 
$
(12,653
)
 
$
471,392

Adoption of ASC 842 (Note 1)

 

 

 
96

 

 
96

Dividends on common stock ($0.15 per share)

 

 

 
(8,158
)
 

 
(8,158
)
Share-based compensation

 

 
1,119

 

 

 
1,119

Change in fair value of cash flow hedging derivatives

 

 

 

 
(6,622
)
 
(6,622
)
Net loss

 

 

 
(18,508
)
 

 
(18,508
)
March 31, 2019
53,630,204

 
536

 
1,185,251

 
(727,193
)
 
(19,275
)
 
439,319

Common shares issued under share-based compensation plans, net of shares withheld for employee taxes
234,389

 
2

 
59

 

 

 
61

Shares withheld for taxes upon vesting of restricted stock
(38,135
)
 

 
(438
)
 

 

 
(438
)
Dividends on common stock ($0.15 per share)

 

 

 
(8,258
)
 

 
(8,258
)
Share-based compensation

 

 
1,811

 

 

 
1,811

Change in fair value of cash flow hedging derivatives

 

 

 

 
(2,234
)
 
(2,234
)
Net loss

 

 

 
(25,017
)
 

 
(25,017
)
June 30, 2019
53,826,458

 
$
538

 
$
1,186,683

 
$
(760,468
)
 
$
(21,509
)
 
$
405,244



See accompanying notes to condensed consolidated financial statements.

4

(table of contents)

Front Yard Residential Corporation
Condensed Consolidated Statements of Stockholders' Equity (continued)
(In thousands, except share and per share amounts)
(Unaudited)

 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Deficit
 
Accumulated Comprehensive Loss
 
Total Equity
 
Number of Shares
 
Amount
 
 
 
 
December 31, 2017
53,447,950

 
$
534

 
$
1,181,327

 
$
(537,259
)
 
$

 
$
644,602

Common shares issued under share-based compensation plans, net of shares withheld for employee taxes
44,187

 
1

 
106

 

 

 
107

Dividends on common stock ($0.15 per share)

 

 

 
(8,071
)
 

 
(8,071
)
Share-based compensation

 

 
(414
)
 

 

 
(414
)
Net loss

 

 

 
(27,350
)
 

 
(27,350
)
March 31, 2018
53,492,137

 
535

 
1,181,019

 
(572,680
)
 

 
608,874

Common shares issued under share-based compensation plans, net of shares withheld for employee taxes
92,502

 
1

 

 

 

 
1

Shares withheld for taxes upon vesting of restricted stock
(22,836
)
 

 
(240
)
 

 

 
(240
)
Dividends on common stock ($0.15 per share)

 

 

 
(8,142
)
 

 
(8,142
)
Share-based compensation

 

 
1,094

 

 

 
1,094

Net loss

 

 

 
(21,336
)
 

 
(21,336
)
June 30, 2018
53,561,803

 
$
536

 
$
1,181,873

 
$
(602,158
)
 
$

 
$
580,251



See accompanying notes to condensed consolidated financial statements.

5

(table of contents)

Front Yard Residential Corporation
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 
Six months ended June 30,
 
2019

2018
Operating activities:
 
 
 
Net loss
$
(43,525
)
 
$
(48,686
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Net (gain) loss on real estate and mortgage loans
(12,619
)
 
1,940

Depreciation and amortization
42,321

 
37,951

Impairment
2,596

 
9,718

Share-based compensation
2,930

 
680

Amortization of deferred financing costs
2,528

 
2,554

Casualty losses (loss reversals), net
577

 
(520
)
Insurance recoveries
(538
)
 
(115
)
Change in fair value of interest rate cap derivatives in profit or loss
2,235

 

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
2,630

 
(1,216
)
Deferred leasing costs
(1,418
)
 
(1,276
)
Prepaid expenses and other assets
(30
)
 
(1,447
)
Accounts payable and accrued liabilities
(6,557
)
 
3,812

Payable to AAMC
24

 
101

Net cash (used in) provided by operating activities
(8,846
)
 
3,496

Investing activities:
 
 
 
Investment in real estate
(7,374
)
 
(6,701
)
Investment in renovations
(13,707
)
 
(16,520
)
Payment of real estate tax advances
(29
)
 
(154
)
Proceeds from mortgage loan resolutions and dispositions
1,690

 
4,643

Receipt of mortgage loan payments
138

 
173

Proceeds from dispositions of real estate
144,432

 
62,118

Proceeds from casualty insurance
1,550

 

Net cash provided by investing activities
126,700

 
43,559

Financing activities:
 
 
 
Proceeds from exercise of stock options
137

 
108

Payment of tax withholdings on share-based compensation plan awards
(76
)
 

Shares withheld for taxes upon vesting of restricted stock
(438
)
 
(240
)
Dividends on common stock
(16,237
)
 
(16,102
)
Proceeds from repurchase and loan agreements
32,068

 

Repayments of repurchase and loan agreements
(131,983
)
 
(30,430
)
Investment in interest rate cap derivative

 
(936
)
Financing-related deposits

 
(11,259
)
Principal repayments of finance leases
(463
)
 

Payment of financing costs
(632
)
 
(945
)
Net cash used in financing activities
(117,624
)
 
(59,804
)
Net change in cash, cash equivalents and restricted cash
230

 
(12,749
)
Cash, cash equivalents and restricted cash as of beginning of the period
81,160

 
161,488

Cash, cash equivalents and restricted cash as of end of the period
$
81,390

 
$
148,739

 
 
 
 
 
 
 
 

See accompanying notes to condensed consolidated financial statements.

6

(table of contents)

Front Yard Residential Corporation
Condensed Consolidated Statements of Cash Flows (continued)
(In thousands)
(Unaudited)

 
Six months ended June 30,
 
2019
 
2018
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for:
 
 
 
Interest
$
38,911

 
$
29,970

Income taxes

 
58

 
 
 
 
Non-cash investing and financing transactions:
 
 
 
Transfer of mortgage loans to real estate owned, net
$
3,740

 
$
64

Changes in accrued capital expenditures
(2,064
)
 
183

Changes in receivables from mortgage loan resolutions and dispositions, payments and real estate tax advances to borrowers, net
(68
)
 
628

Changes in receivables from real estate owned dispositions
8,767

 
(1,954
)
Change in other comprehensive loss from cash flow hedges
(8,856
)
 

Right-of-use lease assets recognized - operating leases
1,485

 

Right-of-use lease assets recognized - finance leases
1,103

 

Operating lease liabilities incurred
1,437

 

Finance lease liabilities incurred
1,109

 

Dividends declared but not paid
8,376

 
8,383



See accompanying notes to condensed consolidated financial statements.

7

(table of contents)

Front Yard Residential Corporation
Notes to Condensed Consolidated Financial Statements
June 30, 2019
(Unaudited)

1. Organization and Basis of Presentation

Front Yard Residential Corporation (“we,” “our,” “us,” or the “Company”) is a Maryland real estate investment trust (“REIT”) focused on acquiring, owning and managing single-family rental (“SFR”) properties throughout the United States. We conduct substantially all of our activities through our wholly owned subsidiary, Front Yard Residential, L.P., and its subsidiaries.

On August 8, 2018, we acquired a property management firm (our “internal property manager”) and commenced the internalization of our property management function. During the first quarter of 2019, we completed the transition of property management for our SFR properties that were previously externally managed to our internal property management platform. We anticipate that all SFR properties acquired in the future will also be managed internally.

As of June 30, 2019, we had a core rental portfolio of 14,421 homes. In addition, we had 291 rental homes that are identified for future sale, and we had a small portfolio of mortgage loans and non-rental real estate owned (“REO”) properties remaining from our previous mortgage loan portfolio acquisitions. We have engaged third-party service providers to service these remaining mortgage loans and to manage non-rental real estate owned (“REO”) and certain other properties. We are currently preparing these non-core assets for future disposition in order to create additional liquidity and purchasing power to continue building our core rental portfolio.

We are managed by Altisource Asset Management Corporation (“AAMC” or our “Manager”). AAMC provides us with dedicated personnel to administer certain aspects of our business and perform certain of our corporate governance functions. AAMC also provides oversight of our acquisition and management of SFR properties and the ongoing management of our remaining residential mortgage loans and REO properties. See Note 9 for a description of this related-party relationship.

Basis of presentation and use of estimates

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). All wholly owned subsidiaries are included, and all intercompany accounts and transactions have been eliminated.

The unaudited interim condensed consolidated financial statements and accompanying unaudited condensed consolidated financial information, in our opinion, contain all adjustments that are of a normal recurring nature and are necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods. The interim results are not necessarily indicative of results for a full year. We have omitted certain notes and other information from the interim condensed consolidated financial statements presented in this Quarterly Report on Form 10-Q as permitted by Securities and Exchange Commission (“SEC”) rules and regulations. These condensed consolidated financial statements should be read in conjunction with our annual consolidated financial statements included within our 2018 Annual Report on Form 10-K, which was filed with the SEC on February 27, 2019.

Use of estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ materially from those estimates.

Recently issued accounting standards

Adoption of recent accounting standards

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842). ASU 2016-02 requires that lessees recognize assets and liabilities for leases with lease terms greater than twelve months in the statement of financial position and also requires improved disclosures to help users of financial statements better understand the amount, timing and uncertainty of cash flows arising from leases. Accounting by

8

(table of contents)

lessors is substantially unchanged from prior practice as lessors will continue to recognize lease revenue on a straight-line basis. The FASB has also issued multiple ASUs amending certain aspects of Topic 842. ASU 2016-02, as amended, also provides for certain practical expedients related to the identification and classification of leases that commenced before the effective date, initial direct costs for leases that commenced before the effective date and the ability to use hindsight in evaluating lessee options to extend or terminate a lease or to purchase the underlying asset. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim reporting periods within those fiscal years. We have applied the amendments in ASU 2016-02 on a modified retrospective transition basis as of January 1, 2019, the effective date of the standard. We elected the “package of practical expedients,” which permits us not to reassess our prior conclusions about lease identification, lease classification and initial direct costs under the new standard. We did not elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter not being applicable to us. The new standard also provides practical expedients for an entity's ongoing accounting. We elected the short-term lease exemption for all leases for which we are lessee that qualify; as a result, we will not recognize right-of-use assets or lease liabilities for qualifying leases. We also elected the practical expedient to not separate lease and non-lease components. Effective January 1, 2019, we recognized aggregate right-of-use lease assets as a component of prepaid expenses and other assets and lease liabilities as a component of accounts payable and accrued expenses, resulting in a nominal aggregate transition adjustment to retained earnings. For more information on our leasing activity, see Note 7.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 simplifies the accounting for goodwill impairment by removing step two of the goodwill impairment test, which had involved determining the fair value of individual assets and liabilities of a reporting unit to measure goodwill. Instead, goodwill impairment will be determined as the excess of a reporting unit’s carrying value over its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for annual reporting periods beginning after December 15, 2019 and early adoption is permitted. We adopted ASU 2017-04 effective June 30, 2019. Though it changed our goodwill impairment testing process, the adoption of ASU 2017-04 did not have a material impact on our consolidated financial statements.

Recently issued accounting standards not yet adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments, which amends the guidance on measuring credit losses on financial assets held at amortized cost. The amendment is intended to address the issue that the previous “incurred loss” methodology was restrictive for an entity's ability to record credit losses based on not yet meeting the “probable” threshold. The new language will require these assets to be valued at amortized cost presented at the net amount expected to be collected with a valuation provision. This ASU is effective for fiscal years beginning after December 15, 2019. The amendments in ASU 2016-13 should be applied on a modified retrospective transition basis. We expect to adopt this standard on January 1, 2020. While we are still evaluating the overall impact of this ASU, we do not expect the adoption of this standard to have a material impact on our consolidated financial statements because the standard, as amended, excludes receivables arising from operating leases, which represent the majority of our receivables.

2. Asset Acquisitions and Dispositions

Real estate assets

Real estate acquisitions

During the three months ended June 30, 2019 and 2018, we acquired 43 and 19 SFR properties, respectively, for an aggregate purchase price of $5.5 million and $2.4 million, respectively.

During the six months ended June 30, 2019 and 2018, we acquired 57 and 54 SFR properties, respectively, for an aggregate purchase price of $7.4 million and $6.7 million, respectively.

Real estate dispositions

During the three months ended June 30, 2019 and 2018, we sold 160 and 137 properties, respectively. Net proceeds of these sales were $27.9 million and $25.0 million, respectively.

During the six months ended June 30, 2019 and 2018, we sold 736 and 330 properties, respectively. Net proceeds of these sales were $153.2 million and $60.2 million.

9




Mortgage loans

Mortgage loan dispositions and resolutions

During the three months ended June 30, 2019 and 2018, we resolved 5 and 9 mortgage loans, respectively, primarily through short sales, refinancing and foreclosure sales. Net proceeds of these resolutions were $0.6 million and $0.7 million, respectively.

During the six months ended June 30, 2019 and 2018, we resolved 13 and 21 mortgage loans, respectively, primarily through short sales, refinancing and foreclosure sales. Net proceeds of these resolutions were $1.6 million and $1.8 million, respectively.

The following table presents the components of net gain (loss) on real estate and mortgage loans during the three and six months ended June 30, 2019 and 2018 ($ in thousands):
 
Three months ended June 30,
 
Six months ended June 30,
 
2019
 
2018
 
2019
 
2018
Conversion of mortgage loans to REO, net
$
137

 
$
147

 
$
752

 
$
284

Change in fair value of mortgage loans, net
176

 
43

 
292

 
106

Net realized gain on mortgage loans
204

 
212

 
727

 
99

Net realized gain (loss) on sales of real estate
3,325

 
(708
)
 
10,848

 
(2,429
)
Net gain (loss) on real estate and mortgage loans
$
3,842

 
$
(306
)
 
$
12,619

 
$
(1,940
)

3. Real Estate Assets, Net

The following table presents the number of real estate assets held by the Company by status as of the dates indicated:
June 30, 2019
Held for Use
 
Held for Sale
 
Total Portfolio
Rental Properties:
 
 
 
 
 
Leased
13,498

 

 
13,498

Listed and ready for rent
360

 

 
360

Unit turn
498

 

 
498

Renovation
65

 

 
65

Total rental properties
14,421

 
 
 
 
Previous rentals identified for sale
148

 
143

 
291

Legacy REO
33

 
27

 
60

 
14,602

 
170

 
14,772

December 31, 2018
 
 
 
 
 
Rental Properties:
 
 
 
 
 
Leased
13,546

 
423

 
13,969

Listed and ready for rent
434

 
8

 
442

Unit turn
428

 
18

 
446

Renovation
136

 
2

 
138

Total rental properties
14,544

 
 
 
 
Previous rentals identified for sale
158

 
188

 
346

Legacy REO
56

 
48

 
104

 
14,758

 
687

 
15,445


For properties held for sale or identified for future sale, management has determined to divest these properties because they do not meet our residential rental property investment criteria.

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Impairment on real estate

During the three months ended June 30, 2019 and 2018, we recognized $1.6 million and $2.1 million, respectively, of impairment on our real estate assets held for sale.

During the six months ended June 30, 2019 and 2018, we recognized $2.6 million and $9.7 million, respectively, of impairment on our real estate held for sale.

4. Mortgage Loans

The following table sets forth information related to our mortgage loans at fair value, the related unpaid principal balance and market value of underlying properties by delinquency status as of June 30, 2019 and December 31, 2018 ($ in thousands):

 
 
Number of Loans
 
Fair Value and Carrying Value
 
Unpaid Principal Balance
 
Market Value of Underlying Properties (1)
June 30, 2019
 
 
 
 
 
 
 
 
Current
 
19

 
$
2,083

 
$
2,750

 
$
4,419

30 days past due
 
1

 
56

 
135

 
90

90 days past due
 
13

 
393

 
5,374

 
4,923

Foreclosure
 
24

 
1,840

 
6,184

 
8,329

Mortgage loans at fair value
 
57

 
$
4,372

 
$
14,443

 
$
17,761

 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
 
Current
 
20

 
$
1,827

 
$
2,701

 
$
4,353

60 days past due
 
1

 
115

 
148

 
180

90 days past due
 
17

 
649

 
6,019

 
5,418

Foreclosure
 
36

 
5,481

 
12,376

 
16,097

Mortgage loans at fair value
 
74

 
$
8,072

 
$
21,244

 
$
26,048

________
(1)
The market values of the underlying properties are estimated based on BPOs.


11

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5. Fair Value of Financial Instruments

The following table sets forth the carrying value and fair value of our financial assets and liabilities by level within the fair value hierarchy as of June 30, 2019 and December 31, 2018 ($ in thousands):
 
 
 
Level 1
 
Level 2
 
Level 3
 
Carrying Value
 
Quoted Prices in Active Markets
 
 Observable Inputs Other Than Level 1 Prices
 
 Unobservable Inputs
June 30, 2019
 
 
 
 
 
 
 
Recurring basis (assets)
 
 
 
 
 
 
 
Mortgage loans at fair value
$
4,372

 
$

 
$

 
$
4,372

Interest rate cap derivatives (1)
3,276

 

 
3,276

 

Not recognized on condensed consolidated balance sheets at fair value (liabilities)
 
 
 
 
 
 
 
Repurchase and loan agreements
1,624,200

 

 
1,634,870

 

 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
Recurring basis (assets)
 
 
 
 
 
 
 
Mortgage loans at fair value
$
8,072

 
$

 
$

 
$
8,072

Interest rate cap derivatives (1)
14,367

 

 
14,367

 

Not recognized on consolidated balance sheets at fair value (liabilities)


 


 


 


Repurchase and loan agreements
1,722,219

 

 
1,734,152

 

_____________
(1)
Included within prepaid expenses and other assets in the condensed consolidated balance sheets.

We have not transferred any assets from one level to another level during the six months ended June 30, 2019 or during the year ended December 31, 2018.

The fair values of our mortgage loans are estimated based on (i) market information, to the extent available and as adjusted for factors specific to individual mortgage loans, or (ii) as determined by AAMC's proprietary discounted cash flow model. The fair value of our interest rate cap derivatives are estimated using a discounted cash flow analysis based on the contractual terms of the derivatives.

The following table sets forth the changes in our mortgage loans during the three and six months ended June 30, 2019 and 2018 ($ in thousands):
 
Three months ended June 30,
 
Six months ended June 30,
 
2019
 
2018
 
2019
 
2018
Mortgage loans at fair value, beginning balance
$
4,848

 
$
10,274

 
$
8,072

 
$
11,477

Net gain on mortgage loans
531

 
473

 
1,771

 
358

Mortgage loan dispositions, resolutions and payments
(660
)
 
(783
)
 
(1,760
)
 
(2,006
)
Real estate tax advances to borrowers
17

 
15

 
29

 
96

Selling costs on loans held for sale

 

 

 
(83
)
Transfer of mortgage loans to real estate owned, net
(364
)
 
(201
)
 
(3,740
)
 
(64
)
Mortgage loans at fair value, ending balance
$
4,372

 
$
9,778

 
$
4,372

 
$
9,778

 
 
 
 
 
 
 
 
Change in unrealized gain (loss) on mortgage loans at fair value held at the end of the period (1)
$
187

 
$
(159
)
 
$
189

 
$
(80
)
_____________
(1)
Included in net gain (loss) on real estate and mortgage loans in the interim condensed consolidated statements of operations.

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The significant unobservable inputs used in the fair value measurement of certain of the remaining mortgage loans are discount rates, forecasts of future home prices, alternate loan resolution probabilities, resolution timelines and the value of underlying properties. Significant changes in any of these inputs in isolation could result in a significant change to the fair value measurement. A decline in the discount rate in isolation would increase the fair value. A decrease in the housing pricing index in isolation would decrease the fair value. Individual loan characteristics such as location and value of underlying collateral affect the loan resolution probabilities and timelines. An increase in the loan resolution timeline in isolation would decrease the fair value. A decrease in the value of underlying properties in isolation would decrease the fair value.

The following table sets forth quantitative information about the significant unobservable inputs used to measure the fair value of certain of our mortgage loans:
Input
 
June 30, 2019
 
December 31, 2018
Equity discount rate
 
17.0%
 
17.0%
Debt to asset ratio
 
65.0%
 
65.0%
Cost of funds
 
3.5% over 1 month LIBOR
 
3.5% over 1 month LIBOR
Annual change in home pricing index
 
-2.56% to 8.26%
 
-0.55% to 16.79%
Loan resolution probabilities — modification
 
0% to 5.9%
 
0% to 5.9%
Loan resolution probabilities — liquidation
 
37.3% to 100%
 
38.8% to 100%
Loan resolution probabilities — paid in full
 
0% to 62.7%
 
0% to 61.2%
Loan resolution timelines (in years)
 
0.1 to 6.1
 
0.1 to 6.1
Value of underlying properties
 
$53,000 to $1,567,000
 
$50,000 to $2,500,000

6. Borrowings

Our operating partnership and certain of its Delaware statutory trust and/or limited liability company subsidiaries, as applicable, have entered into master repurchase agreements and loan agreements to finance the acquisition and ownership of the SFR properties, other REO properties and the remaining mortgage loans in our portfolio. We have effective control of the assets associated with these agreements and therefore have concluded these are financing arrangements.

We pay interest on all of our borrowings as well as certain other customary fees, administrative costs and expenses each month. As of June 30, 2019, the average annualized interest rate on borrowings under our repurchase and loan agreements was 4.42%, excluding amortization of deferred debt issuance costs and loan discounts.


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The following table sets forth data with respect to our repurchase and loan agreements as of June 30, 2019 and December 31, 2018 ($ in thousands):
 
Maturity Date
 
 
Interest Rate
 
 
Amount Outstanding
 
Maximum Borrowing Capacity
 
Amount of Available Funding
 
Book Value of Collateral
June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
CS Repurchase Agreement
11/15/2019
 
 
1-month LIBOR + 2.30%
 
 
$
88,160

 
$
250,000

 
$
161,840

 
$
90,723

Nomura Loan Agreement
4/3/2020
 
 
1-month LIBOR + 2.30%
 
 
36,294

 
250,000

 
213,706

 
41,867

HOME II Loan Agreement
11/9/2019
(1)
 
1-month LIBOR + 2.10%
(2)
 
83,270

 
83,270

 

 
99,185

HOME III Loan Agreement
11/9/2019
(1)
 
1-month LIBOR + 2.10%
(2)
 
89,150

 
89,150

 

 
110,134

HOME IV Loan Agreement (A)
12/9/2022
 
 
4.00%
 
 
114,201

 
114,201

 

 
143,787

HOME IV Loan Agreement (B)
12/9/2022
 
 
4.00%
 
 
114,590

 
114,590

 

 
144,585

Term Loan Agreement
4/6/2022
 
 
5.00%
 
 
99,782

 
99,782

 

 
112,211

FYR SFR Loan Agreement
9/1/2028
 
 
4.65%
 
 
508,700

 
508,700

 

 
577,710

MS Loan Agreement
12/7/2023
 
 
1-month LIBOR + 1.80%
(3)
 
504,986

 
504,986

 

 
601,199

 
 
 
 
 
 
 
1,639,133

 
$
2,014,679

 
$
375,546

 
$
1,921,401

Less: unamortized loan discounts
 
 
 
 
 
 
(4,263
)
 
 
 
 
 
 
Less: deferred debt issuance costs
 
 
 
 
 
 
(10,670
)
 
 
 
 
 
 
 
 
 
 
 
 
 
$
1,624,200

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
CS Repurchase Agreement
11/15/2019
 
 
1-month LIBOR + 3.00%
 
 
$
193,654

 
$
250,000

 
$
56,346

 
$
224,934

Nomura Loan Agreement
4/5/2020
 
 
1-month LIBOR + 3.00%
 
 
30,497

 
250,000

 
219,503

 
48,388

HOME II Loan Agreement
11/9/2019
 
 
1-month LIBOR + 2.10%
 
 
83,270

 
83,270

 

 
100,461

HOME III Loan Agreement
11/9/2019
 
 
1-month LIBOR + 2.10%
 
 
89,150

 
89,150

 

 
111,542

HOME IV Loan Agreement (A)
12/9/2022
 
 
4.00%
 
 
114,201

 
114,201

 

 
145,461

HOME IV Loan Agreement (B)
12/9/2022
 
 
4.00%
 
 
114,590

 
114,590

 

 
146,479

Term Loan Agreement
4/6/2022
 
 
5.00%
 
 
100,000

 
100,000

 

 
114,401

FYR SFR Loan Agreement
9/1/2028
 
 
4.65%
 
 
508,700

 
508,700

 

 
585,563

MS Loan Agreement
12/7/2023
 
 
1-month LIBOR + 1.80%
 
 
504,986

 
504,986

 

 
609,619

 
 
 
 
 
 
 
1,739,048

 
$
2,014,897

 
$
275,849

 
$
2,086,848

Less: unamortized loan discounts
 
 
 
 
 
 
(4,896
)
 
 
 
 
 
 
Less: deferred debt issuance costs
 
 
 
 
 
 
(11,933
)
 
 
 
 
 
 
 
 
 
 
 
 
 
$
1,722,219

 
 
 
 
 
 
_____________
(1)
Represents initial maturity date. We have the option to extend the maturity date for up to three successive one-year extensions.
(2)
The interest rate is capped at 4.40% under an interest rate cap derivative. See Note 11.
(3)
The interest rate is capped at 4.30% under an interest rate cap derivative. See Note 11.


14

(table of contents)

Additional details regarding the above repurchase and loan agreements are as follows:

CS Repurchase Agreement

Credit Suisse AG (“CS”) is the lender on the repurchase agreement entered into on March 22, 2013, (the “CS Repurchase Agreement”), which has been amended on several occasions. Under the terms of the CS Repurchase Agreement, as collateral for the funds drawn thereunder, subject to certain conditions, our operating partnership and/or one or more of our limited liability company subsidiaries will sell to the lender equity interests in the Delaware statutory trust subsidiary that owns the applicable underlying mortgage or REO assets on our behalf, or the trust will directly sell such underlying mortgage assets. We may be required to repay a portion of the amounts outstanding under the CS Repurchase Agreement should the loan-to-value ratio of the funded collateral decline. The price paid by the lender for each mortgage or REO asset we finance under the CS Repurchase Agreement is based on a percentage of the market value of the mortgage or REO asset and, in the case of mortgage assets, may depend on its delinquency status. With respect to funds drawn under the CS Repurchase Agreement, our applicable subsidiary is required to pay the lender interest monthly and certain other customary fees, administrative costs and expenses to maintain and administer the CS Repurchase Agreement. We do not collateralize any of our repurchase facilities with cash. The CS Repurchase Agreement contains customary events of default and is fully guaranteed by us.

Nomura Loan Agreement

Nomura Corporate Funding Americas, LLC (“Nomura”) is the lender under a loan agreement dated April 10, 2015 (the “Nomura Loan Agreement”), which has been amended on several occasions. As of June 30, 2019, the maximum funding capacity of the Nomura Loan Agreement was $250.0 million, all of which is uncommitted but available to us subject to our meeting certain eligibility requirements.

Under the terms of the Nomura Loan Agreement, subject to certain conditions, Nomura may advance funds to us from time to time, with such advances collateralized by SFR properties and other REO properties. The advances paid under the Nomura Loan Agreement with respect to the applicable properties from time to time will be based on a percentage of the market value of the properties. We may be required to repay a portion of the amounts outstanding under the Nomura Loan Agreement should the loan-to-value ratio of the funded collateral decline.

The Nomura Loan Agreement contains events of default (subject to certain materiality thresholds and grace periods), including payment defaults, breaches of covenants and/or certain representations and warranties, cross-defaults, certain material adverse changes, bankruptcy or insolvency proceedings and other events of default customary for this type of transaction. The remedies for such events of default are also customary for this type of transaction and include the acceleration of the principal amount outstanding under the Nomura Loan Agreement and the liquidation by Nomura of the SFR and REO properties then subject thereto. The Nomura Loan Agreement is fully guaranteed by us.

Seller Financing Arrangements

We have entered into the following facilities, each of which were initially seller financing arrangements:

In connection with the seller financing related to the an acquisition of SFR properties on March 30, 2017, our wholly owned subsidiary, HOME SFR Borrower II, LLC (“HOME Borrower II”), entered into the HOME II Loan Agreement with entities sponsored by Amherst Holdings, LLC (“Amherst”). On November 13, 2017, HOME Borrower II entered into an amended and restated loan agreement, which was acquired by Metropolitan Life Insurance Company (“MetLife”). HOME Borrower II has the option to extend the HOME II Loan Agreement beyond the initial maturity date for three successive one-year extensions, provided, among other things, that there is no event of default under the HOME II Loan Agreement on each maturity date. The HOME II Loan Agreement is cross-defaulted and cross-collateralized with the HOME III Loan Agreement.

In connection with the seller financing related to an acquisition of SFR properties on June 29, 2017, our wholly owned subsidiary, HOME SFR Borrower III, LLC (“HOME Borrower III”), entered into the HOME III Loan Agreement with entities sponsored by Amherst. On November 13, 2017, HOME Borrower III entered into an amended and restated loan agreement, which was acquired by MetLife. HOME Borrower III has the option to extend the HOME III Loan Agreement beyond the initial maturity date for three successive one-year extensions, provided, among other things, that there is no event of default under the HOME III Loan Agreement on each maturity date. The HOME III Loan Agreement is also cross-defaulted and cross-collateralized with the HOME II Loan Agreement.


15

(table of contents)

In connection with the seller financing related to an acquisition of SFR properties on November 29, 2017, our wholly owned subsidiary, HOME SFR Borrower IV, LLC (“HOME Borrower IV”), entered into two separate loan agreements with entities sponsored by Amherst (collectively, the “HOME IV Loan Agreements”). The HOME IV Loan Agreements were acquired by MetLife on November 29, 2017.
    
Under the terms of the HOME II Loan Agreement, the HOME III Loan Agreement and the HOME IV Loan Agreements, each of the facilities are non-recourse to us and are secured by a lien on the membership interests of HOME Borrower II, HOME Borrower III, HOME Borrower IV and the acquired properties and other assets of each entity, respectively. The assets of each entity are the primary source of repayment and interest on their respective loan agreements, thereby making the cash proceeds of rent payments and any sales of the acquired properties the primary sources of the payment of interest and principal by each entity to the respective lenders.

Each loan agreement also includes customary events of default, the occurrence of which would allow the respective lenders to accelerate payment of all amounts outstanding thereunder. We have limited indemnification obligations for wrongful acts taken by HOME Borrower II, HOME Borrower III or HOME Borrower IV under their respective loan agreements in connection with the secured collateral. Even though the HOME II Loan Agreement, the HOME III Loan Agreement and the HOME IV Loan Agreements are non-recourse to us and all of our subsidiaries other than the entities party to the respective loan agreements, we have agreed to limited bad act indemnification obligations to the respective lenders for the payment of (i) certain losses arising out of certain bad or wrongful acts of our subsidiaries that are party to the respective loan agreements and (ii) the principal amount of each of the facilities and all other obligations thereunder in the event we cause certain voluntary bankruptcy events of the respective subsidiaries party to the loan agreements. Any of such liabilities could have a material adverse effect on our results of operations and/or our financial condition.

Term Loan Agreement

On April 6, 2017, RESI TL1 Borrower, LLC (“TL1 Borrower”), our wholly owned subsidiary, entered into a credit and security agreement (the “Term Loan Agreement”) with American Money Management Corporation, as agent, on behalf of Great American Life Insurance Company and Great American Insurance Company as initial lenders, and each other lender added from time to time as a party to the Term Loan Agreement. We may be required to make prepayments of a portion of the amounts outstanding under the Term Loan Agreement under certain circumstances, including certain levels of declines in collateral value.

The Term Loan Agreement includes customary events of default, the occurrence of which would allow the lenders to accelerate payment of all amounts outstanding thereunder. The Term Loan Agreement is non-recourse to us and is secured by a lien on the membership interests of TL1 Borrower and the properties and other assets of TL1 Borrower. The assets of TL1 Borrower are the primary source of repayment and interest on the Term Loan Agreement, thereby making the cash proceeds received by TL1 Borrower from rent payments and any sales of the underlying properties the primary sources of the payment of interest and principal by TL1 Borrower to the lenders. We have limited indemnification obligations for wrongful acts taken by TL1 Borrower and RESI TL1 Pledgor, LLC, the sole member of TL1 Borrower, in connection with the secured collateral for the Term Loan Agreement.

FYR SFR Loan Agreement

On August 8, 2018, FYR SFR Borrower, LLC (“FYR SFR Borrower”), our wholly owned subsidiary, entered into loan agreement (the “FYR SFR Loan Agreement”) with Berkadia Commercial Mortgage LLC, as lender (“Berkadia”) secured by 2,798 properties acquired on August 8, 2018 (the “RHA Acquired Properties”) as well as 2,015 other properties already owned by us and previously financed on our existing warehouse facilities with other lenders (together, the “FYR SFR Collateral Properties”). The FYR SFR Loan Agreement was originated as part of the Federal Home Loan Mortgage Corporation’s (“Freddie Mac”) single-family rental pilot program and has been purchased from Berkadia by Freddie Mac. The FYR SFR Loan Agreement contains customary events of default and is secured by the equity interests of FYR SFR Borrower and mortgages on the collateral properties. In connection with the FYR SFR Loan Agreement, we maintained $7.6 million and $2.9 million in escrow for future payments of property taxes and repairs and maintenance as of June 30, 2019 and December 31, 2018, respectively.

MS Loan Agreement

On December 7, 2018, our wholly owned subsidiary, HOME SFR Borrower, LLC (“HOME Borrower”), entered into a loan agreement (the “MS Loan Agreement”) with Morgan Stanley Bank, N.A. (“Morgan Stanley”) and such other persons that may

16

(table of contents)

from time to time become a party to the MS Loan as lenders. The MS Loan Agreement can be prepaid without penalty at any time after December 7, 2021. The MS Loan Agreement contains customary events of default and is secured by the equity interests in HOME Borrower and mortgages on its 4,262 SFR properties. In connection with the MS Loan Agreement, we maintained $9.2 million and $8.2 million in escrow for future payments of property taxes, insurance, HOA dues and repairs and maintenance as of June 30, 2019 and December 31, 2018, respectively.

Compliance with covenants

Our repurchase and loan agreements require us and certain of our subsidiaries to maintain various financial and other covenants customary to these types of indebtedness. The covenants of each facility may include, without limitation, the following:

reporting requirements to the agent or lender,
minimum adjusted tangible net worth requirements,
minimum net asset requirements,
limitations on the indebtedness,
minimum levels of liquidity, including specified levels of unrestricted cash,
limitations on sales and dispositions of properties collateralizing certain of the loan agreements,
various restrictions on the use of cash generated by the operations of properties, and
a minimum fixed charge coverage ratio.

We are currently in compliance with the covenants and other requirements with respect to the repurchase and loan agreements.

Counterparty risk

We monitor our lending partners’ ability to perform under the repurchase and loan agreements, including the obligation of lenders under repurchase agreements to resell the same assets back to us at the end of the term of the transaction, and have concluded there is currently no reason to doubt that they will continue to perform under the repurchase and loan agreements as contractually obligated.

Reliance on financing arrangements

Our business model relies to a significant degree on both short-term financing and longer duration asset-backed financing arrangements, and we generally do not carry sufficient liquid funds to retire any of our short-term obligations upon their maturity. Prior to or upon such short-term maturities, management generally expects to (1) refinance the remaining outstanding short-term facilities, obtain additional financing or replace the short-term facilities with longer-term facilities and (2) continue to liquidate certain non-core real estate and mortgage loan assets, which will generate cash to reduce the related financing. We are in continuous dialogue with our lenders, and we are currently not aware of any circumstances that would adversely affect our ability to complete such refinancings. We believe we will be successful in our efforts to refinance or obtain additional financing based on our recent success in renewing our outstanding facilities and obtaining additional financing with new counterparties and our ongoing relationships with lenders.

7. Leases

Front Yard as Lessor

Our primary business is to lease single-family homes to families throughout the United States. Our leases to tenants generally have a term of one year with potential extensions, including month-to-month leases after the initial term. These leases are classified as operating leases.


17

(table of contents)

Future contractual rents for the 13,498 properties that were leased as of June 30, 2019 are as follows ($ in thousands):
2019 (1)
$
71,865

2020
35,069

2021
1,343

2022
60

2023

Thereafter

 
$
108,337

_____________
(1)
Excludes the six months ended June 30, 2019.

Front Yard as Lessee

We lease office space and automobiles throughout the United States to support our property management function. We include lease right-of-use assets as a component of prepaid assets and other expenses, and we include lease liabilities as a component of accounts payable and accrued liabilities.

Operating Leases

Our office leases, which are operating leases, are generally for terms of one to five years and generally include renewal options, which we include in determining our lease right-of-use assets and lease liabilities to the extent that a renewal option is reasonably certain of being exercised. We do not record lease right-of-use assets or lease liabilities for leases with an initial maturity of one year or less. Along with rents, we are generally required to pay common area maintenance, taxes and insurance, each of which vary from period to period and are therefore expensed as incurred. As of June 30, 2019, we applied a weighted average discount rate of 4.68% to our office leases. We determine the discount rate for each lease to be either the discount rate stated in the lease agreement or the rate that we would be charged to finance real estate assets. Our weighted average remaining lease term was 2.3 years.

During the three and six months ended June 30, 2019, our operating leases resulted in rent expense of $0.1 million and $0.3 million, respectively, related to long-term leases and a nominal amount related to short-term leases as well as a nominal amount of common area maintenance expense, which is allocated amongst property management expenses and general and administrative expenses. At June 30, 2019, we had operating lease right-of-use assets of $1.2 million.

The following table presents a maturity analysis of our operating leases as of June 30, 2019 ($ in thousands):
 
Operating Lease Liabilities
2019 (1)
$
293

2020
601

2021
239

2022
121

2023

Thereafter

Total lease payments
1,254

Less: interest
66

Lease liabilities
$
1,188

_____________
(1)
Excludes the six months ended June 30, 2019.


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(table of contents)

Finance Leases

Our vehicle leases, which are finance leases, are each for an initial term of 36 months with the option to renew on a month-to-month basis. In determining our lease right-of-use assets and lease liabilities, we include such future month-to-month extensions based on our historical average period of use for our vehicles. We have elected to combine the lease and non-lease components, which relate primarily to maintenance services. At June 30, 2019, the weighted average discount rate applied to our vehicle leases was 7.6% based on the rates implied in the individual lease agreements and our weighted average remaining lease term was 3.8 years.

During the three and six months ended June 30, 2019, our finance leases resulted in $0.2 million and $0.3 million, respectively, of amortization of our lease right-of-use assets, which we include as a component of residential property operating expense, property management expenses, general and administrative expenses, and a nominal amount of interest expense from our lease liabilities. At June 30, 2019, we had finance lease right-of-use assets of $3.3 million.

The following table presents a maturity analysis of our finance leases as of June 30, 2019 ($ in thousands):
 
Finance Lease Liabilities
2019 (1)
$
437

2020
714

2021
605

2022
143

2023
58

Thereafter

Total lease payments
1,957

Less: interest
179

Lease liabilities
$
1,778

_____________
(1)
Excludes the six months ended June 30, 2019.


19

(table of contents)

8. Commitments and Contingencies

Litigation, claims and assessments

Information regarding reportable legal proceedings is contained in the “Commitments and Contingencies” note in the financial statements provided in our Annual Report on Form 10-K for the year ended December 31, 2018. We establish reserves for specific legal proceedings when we determine that the likelihood of an unfavorable outcome is probable and the amount of loss can be reasonably estimated. We do not currently have any reserves for our legal proceedings. The following updates and restates the description of the previously reported Martin v Altisource Residential Corporation et al. matter:

Martin v. Altisource Residential Corporation et al.
On March 27, 2015, a putative shareholder class action complaint was filed in the United States District Court of the Virgin Islands by a purported shareholder of the Company under the caption Martin v. Altisource Residential Corporation, et al., 15-cv-00024. The action names as Defendants the Company, our former Chairman, William C. Erbey, and certain officers and a former officer of the Company and alleges that the Defendants violated federal securities laws by, among other things, making materially false statements and/or failing to disclose material information to the Company's shareholders regarding the Company's relationship and transactions with AAMC, Ocwen Financial Corporation (“Ocwen”) and Home Loan Servicing Solutions, Ltd. These alleged misstatements and omissions include allegations that the Defendants failed to adequately disclose the Company's reliance on Ocwen and the risks relating to its relationship with Ocwen, including that Ocwen was not properly servicing and selling loans, that Ocwen was under investigation by regulators for violating state and federal laws regarding servicing of loans and Ocwen’s lack of proper internal controls. The complaint also contains allegations that certain of the Company's disclosure documents were false and misleading because they failed to disclose fully the entire details of a certain asset management agreement between the Company and AAMC that allegedly benefited AAMC to the detriment of the Company's shareholders. The action seeks, among other things, an award of monetary damages to the putative class in an unspecified amount and an award of attorney’s and other fees and expenses.

In May 2015, two of our purported shareholders filed competing motions with the court to be appointed Lead Plaintiff and for selection of lead counsel in the action. Subsequently, opposition and reply briefs were filed by the purported shareholders with respect to these motions. On October 7, 2015, the court entered an order granting the motion of Lei Shi to be Lead Plaintiff and denying the other motion to be Lead Plaintiff.

On January 23, 2016, the Lead Plaintiff filed an amended complaint.

On March 22, 2016, Defendants filed a motion to dismiss all claims in the action. The Plaintiff filed opposition papers on May 20, 2016, and the Defendants filed a reply brief in support of the motion to dismiss the amended complaint on July 11, 2016.

On November 14, 2016, the Martin case was reassigned to Judge Anne E. Thompson of the United States District Court of New Jersey. In a hearing on December 19, 2016, the parties made oral arguments on the motion to dismiss, and on March 16, 2017 the Court issued an order that the motion to dismiss had been denied. On April 17, 2017, the Defendants filed a motion for reconsideration of the Court’s decision to deny the motion to dismiss. On April 21, 2017, the Defendants filed their answer and affirmative defenses. Plaintiff filed an opposition to Defendants’ motion for reconsideration on May 8, 2017. On May 30, 2017, the Court issued an order that the motion for reconsideration had been denied. Shortly thereafter, discovery commenced.

On October 10, 2018, the Lead Plaintiff filed a second amended complaint, which added a second Lead Plaintiff to the case. The allegations and causes of action asserted by the Plaintiffs were virtually identical to the prior complaint, except that they added what the Plaintiffs claimed was additional detail in support of their allegations.

On December 7, 2018, the Defendants moved to dismiss the second amended complaint in its entirety. Plaintiffs filed their opposition to the motion on December 31, 2018, and Defendants filed their reply brief on January 24, 2019. On February 21, 2019, Judge Thompson issued an order that granted Defendants’ motion and dismissed the second amended complaint in its entirety.

On February 26, 2019, the Court granted Plaintiffs’ request for leave to file a Third Amended Complaint within 14 days. On March 12, 2019, Plaintiffs filed their Third Amended Complaint, and on April 12, 2019, Defendants moved to dismiss the Third Amended and Restated Complaint in its entirety. Plaintiffs filed their opposition to the motion to dismiss on May 13, 2019, and Defendants filed their reply in support of the motion on May 31, 2019. On June 12, 2019, Judge Thompson issued an Order granting in part and denying in part Defendants’ motion to dismiss the Third Amended Complaint. Specifically, Judge

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Thompson granted Defendants’ motion to dismiss any alleged misrepresentation made after each Plaintiff’s final purchase of securities. Judge Thompson denied Defendants’ motion to dismiss on the remaining grounds.

On June 26, 2019, Defendants filed a motion to certify interlocutory appeal to the Third Circuit of Judge Thompson’s Order granting in part and denying in part Defendants’ motion to dismiss the Third Amended Complaint. Plaintiffs filed their opposition to the motion on July 10, 2019 and Defendants’ reply in support of the motion was filed on July 24, 2019.

Separately, on July 5, 2019, Judge Thompson accepted the case schedule proposed by the parties. Discovery is ongoing. The deadline for the completion of fact discovery is November 8, 2019, the deadline for the completion of expert discovery is January 30, 2020, and the deadline to submit dispositive motions is February 27, 2020.

We believe this complaint is without merit. At this time, we are not able to predict the ultimate outcome of this matter, nor can we estimate the range of possible loss, if any.

Potential purchase price adjustments of certain acquired properties

Certain of the properties we acquired on November 29, 2017 are subject to potential purchase price adjustments in accordance with the related purchase and sale agreement, which may result in an upward or downward adjustment of up to 10% of the purchase price related to the affected properties. The purchase price adjustment will be determined based on the rental rates achieved for the properties within 24 months after the closing date. We currently do not expect to recognize a material purchase price adjustment related to these properties.

9. Related-Party Transactions

Terms of the Amended AMA

Front Yard and AAMC entered into an amended and restated asset management agreement (the “Amended AMA”) on May 7, 2019 (the “Effective Date”). The Amended AMA amends and restates, in its entirety, the asset management agreement previously entered into on March 31, 2015, as amended on April 7, 2015. The Amended AMA has an initial term of five years and will renew automatically each year thereafter for an additional one-year term, subject in each case to the termination provisions further described below.

Management Fees

The Amended AMA provides for the following management fee structure, which is subject to certain performance thresholds and an Aggregate Fee Cap (as described below):

Base Management Fee. Front Yard will pay a quarterly base management fee (the “Base Management Fee”) to AAMC as follows:

Initially, commencing on the Effective Date and until the Reset Date (as defined below), the quarterly Base Management Fee will be (i) $3,584,000 (the “Minimum Base Fee”) plus (ii) an additional amount (the “Additional Base Fee”), if any, of 50% of the amount by which Front Yard's per share Adjusted AFFO (as defined in the Amended AMA) for the quarter exceeds $0.15 per share (provided that the Base Management Fee for any calendar quarter prior to the Reset Date cannot be less than the Minimum Base Fee or greater than $5,250,000). Beginning in 2021, the Base Management Fee may be reduced, but not below the Minimum Base Fee, in the fourth quarter of each year by the amount that Front Yard's AFFO (as defined below) on a per share basis is less than an aggregate of $0.60 for the applicable calendar year (the “AFFO Adjustment Amount”); and

Thereafter, commencing in the first quarter after which the quarterly Base Management Fee first reaches $5,250,000 (the “Reset Date”), the Base Management Fee will be 25% of the sum of (i) the applicable Annual Base Fee Floor plus (ii) the amount calculated by multiplying the applicable Manager Base Fee Percentage by the amount, if any, that Front Yard's Gross Real Estate Assets (as defined below) exceeds the applicable Gross Real Estate Assets Floor (in each case of the foregoing clauses (i) and (ii), as set forth in the table below), minus (iii) solely in the case of the fourth quarter of a calendar year, the AFFO Adjustment Amount (if any); provided, that the Base Management Fee for any calendar quarter shall not be less than the Minimum Base Fee.


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Gross Real Estate Assets (1)
 
Annual Base Fee Floor
 
Manager Base Fee Percentage
 
Gross Real Estate Assets Floor
Up to $2,750,000,000
 
$21,000,000
 
0.325%
 
$2,250,000,000
$2,750,000,000 – $3,250,000,000
 
$22,625,000
 
0.275%
 
$2,750,000,000
$3,250,000,000 – $4,000,000,000
 
$24,000,000
 
0.250%
 
$3,250,000,000
$4,000,000,000 – $5,000,000,000
 
$25,875,000
 
0.175%
 
$4,000,000,000
$5,000,000,000 – $6,000,000,000
 
$27,625,000
 
0.125%
 
$5,000,000,000
$6,000,000,000 – $7,000,000,000
 
$28,875,000
 
0.100%
 
$6,000,000,000
Thereafter
 
$29,875,000
 
0.050%
 
$7,000,000,000
_______________
(1)
Gross Real Estate Assets is generally defined as the aggregate book value of all residential real estate assets owned by Front Yard and its subsidiaries before reserves for depreciation, impairment or other non-cash reserves as computed in accordance with GAAP.

In determining the Base Management Fee, “AFFO” is generally calculated as GAAP net income (or loss) adjusted for (i) gains or losses from debt restructuring and sales of property; (ii) depreciation, amortization and impairment on residential real estate assets; (iii) unconsolidated partnerships and joint ventures; (iv) acquisition and related expenses, equity based compensation expenses and other non-recurring or non-cash items; (v) recurring capital expenditures on all real estate assets and (vi) the cost of leasing commissions.

For any partial quarter during the term of the Amended AMA, the Base Management Fee is subject to proration based on the number of calendar days under the Amended AMA in such period.

Incentive Fee. AAMC may earn an annual Incentive Fee to the extent that Front Yard's AFFO exceeds certain performance thresholds. The annual Incentive Fee, if any, shall be an amount equal to 20% of the amount by which Front Yard's AFFO for the calendar year (after the deduction of Base Management Fees but prior to the deduction of Incentive Fees) exceeds 5% of Gross Shareholder Equity (as defined below).

In each calendar year, the Incentive Fee will be limited to the extent that any portion of the Incentive Fee for such calendar year (after taking into account any AFFO Adjustment Amount and the payment of the Incentive Fee) would cause the AFFO per share for such calendar year to be less than $0.60 (the “Incentive Fee Adjustment”). For any partial calendar year under the Amended AMA, the Incentive Fee amount (and Incentive Fee Adjustment, if any) for that partial calendar year is subject to proration based on the number of calendar days of the year that the Amended AMA is in effect.

Gross Shareholder Equity for purposes of the Amended AMA is generally defined as the arithmetic average of all shareholder equity as computed in accordance with GAAP and adding back all accumulated depreciation and changes due to non-cash valuations (including those recorded as a component of accumulated other comprehensive income) and other non-cash adjustments, in each case, as of the first day of such calendar year, the first day of each of the second, third and fourth calendar quarters of such calendar year and the first day of the succeeding calendar year.

Front Yard has the flexibility to pay up to 25% of the annual Incentive Fee to AAMC in shares of its common stock, subject to certain conditions specified in the Amended AMA.

Aggregate Fee Cap

The aggregate amount of the Base Management Fees and Incentive Fees payable to AAMC in any calendar year cannot exceed the “Aggregate Fee Cap,” which is generally defined as follows:

For any calendar year in which average Gross Real Estate Assets is less than $2,250,000,000, the aggregate fees payable to AAMC shall not exceed $21,000,000; or


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For any calendar year in which average Gross Real Estate Assets exceeds $2,250,000,000, the aggregate fees payable to AAMC shall not exceed the sum of (i) the applicable Aggregate Fee Floor plus (ii) the amount calculated by multiplying the applicable Aggregate Fee Percentage by the amount, if any, by which average Gross Real Estate Assets exceed the applicable Gross Real Estate Assets Floor, in each case as set forth in the table below.

Gross Real Estate Assets
 
Aggregate Fee Floor
 
Aggregate Fee Percentage
 
Gross Real Estate Assets Floor
$2,250,000,000 – $2,750,000,000
 
$21,000,000
 
0.650%
 
$2,250,000,000
$2,750,000,000 – $3,250,000,000
 
$24,250,000
 
0.600%
 
$2,750,000,000
$3,250,000,000 – $4,000,000,000
 
$27,250,000
 
0.500%
 
$3,250,000,000
$4,000,000,000 – $5,000,000,000
 
$31,000,000
 
0.450%
 
$4,000,000,000
$5,000,000,000 – $6,000,000,000
 
$35,500,000
 
0.250%
 
$5,000,000,000
$6,000,000,000 – $7,000,000,000
 
$38,000,000
 
0.125%
 
$6,000,000,000
Thereafter
 
$39,250,000
 
0.100%
 
$7,000,000,000

Expenses and Expense Budget

AAMC is responsible for all of its own costs and expenses other than the expenses related to compensation of Front Yard’s dedicated general counsel. Front Yard and its subsidiaries pay their own costs and expenses, and, to the extent such Front Yard expenses are initially paid by AAMC, Front Yard is required to reimburse AAMC for such reasonable costs and expenses.

Termination Provisions

The Amended AMA may be terminated without cause (i) by Front Yard for any reason, or no reason, or (ii) by Front Yard or AAMC in connection with the expiration of the initial term or any renewal term, in either case with 180 days' prior written notice. If the Amended AMA is terminated by Front Yard without cause or in connection with the expiration of the initial term or any renewal term, Front Yard shall pay a termination fee (the “Termination Fee”) to AAMC in an amount generally equal to three times the arithmetical mean of the aggregate fees actually paid or payable with respect to each of the three immediately preceding completed calendar years (including any such prior years that may have occurred prior to the Effective Date). Upon any such termination by Front Yard, Front Yard shall have the right, at its option, to license certain intellectual property and technology assets from AAMC.

If the Termination Fee becomes payable (except in connection with a termination by AAMC for cause, which would require the payment of the entire Termination Fee in cash), at least 50% of the Termination Fee must be paid in cash on the termination date and the remainder of the Termination Fee may be paid, at Front Yard’s option, either in cash or, subject to certain conditions specified in the Amended AMA, in Front Yard common stock in up to 3 equal quarterly installments (without interest) on each of the six-, nine- and twelve-month anniversaries of the termination date until the Termination Fee has been paid in full.

Front Yard may also terminate the Amended AMA, without the payment of a Termination Fee, upon a change of control of AAMC as described in the Amended AMA and “for cause” upon the occurrence of certain events including, without limitation, a final judgment that AAMC or any of its agents, assignees or controlled affiliates has committed a felony or materially violated securities laws; AAMC’s bankruptcy; the liquidation or dissolution of AAMC; a court determination that AAMC has committed fraud or embezzled funds from Front Yard; a failure of Front Yard to qualify as a REIT as a result of any action or inaction of AAMC; an uncured material breach of a material provision of the Amended AMA; or receipt of certain qualified opinions from AAMC or Front Yard's independent public accounting firm that (i) with respect to such opinions relating to AAMC, are reasonably expected to materially adversely affect either AAMC’s ability to perform under the Amended AMA or Front Yard, or (ii) with respect to such opinions relating to Front Yard, such opinions are a result of AAMC's actions or inaction; in each case, subject to the exceptions and conditions set forth in the Amended AMA. AAMC may terminate the Amended AMA upon an uncured default by Front Yard under the Amended AMA and receive the Termination Fee. A termination “for cause” may be

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effected by Front Yard with 30 days' written notice or by AAMC with 60 days' written notice. Upon any termination by Front Yard “for cause,” Front Yard shall have the right, at its option, to license certain intellectual property and technology assets from AAMC.

Transition Following Termination

Following any termination of the Amended AMA, AAMC is required to cooperate in executing an orderly transition to a new manager or otherwise in accordance with Front Yard’s direction including by providing transition services as requested by Front Yard for up to one (1) year after termination or such longer period as may be mutually agreed (including by assisting Front Yard with the recruiting, hiring and/or training of new replacement employees) at cost (but not more than the Base Management Fee at the time of termination).

If the Amended AMA with AAMC were terminated, our financial position and future prospects for revenues and growth could be materially adversely affected.

Terms of the Former AMA with AAMC

On March 31, 2015, we entered into an asset management agreement (the “Former AMA”) with AAMC. The Former AMA, which became effective on April 1, 2015, provided for a management fee structure as follows:

Base Management Fee. AAMC was entitled to a quarterly base management fee equal to 1.5% of the product of (i) our average invested capital (as defined in the Former AMA) for the quarter multiplied by (ii) 0.25, while we had fewer than 2,500 SFR properties actually rented (“Rental Properties”). The base management fee percentage increased to 1.75% of invested capital while we had between 2,500 and 4,499 Rental Properties and increased to 2.0% of invested capital while we had 4,500 or more Rental Properties;

Incentive Management Fee. AAMC was entitled to a quarterly incentive management fee equal to 20% of the amount by which our return on invested capital (based on AFFO defined as our net income attributable to holders of common stock calculated in accordance with GAAP plus real estate depreciation expense minus recurring capital expenditures on all of our real estate assets owned) exceeded an annual hurdle return rate of between 7.0% and 8.25% (or 1.75% and 2.06% per quarter), depending on the 10-year treasury rate. To the extent that we had an aggregate shortfall in the return rate over the previous seven quarters, that aggregate return rate shortfall was added to the normal quarterly return hurdle for the next quarter before AAMC was entitled to an incentive management fee. The incentive management fee increased to 22.5% while we had between 2,500 and 4,499 Rental Properties and increased to 25% while we had 4,500 or more Rental Properties. No incentive management fee under the Former AMA has been payable to AAMC because our return on invested capital (as defined in the Former AMA) did not exceed the cumulative required hurdle rate; and

Conversion Fee. AAMC was entitled to a quarterly conversion fee equal to 1.5% of the market value of the SFR homes leased by us for the first time during the applicable quarter.
 
Because we had more than 4,500 Rental Properties, AAMC was entitled to receive a base management fee of 2.0% of our invested capital and a potential incentive management fee percentage of 25% of the amount by which we exceeded our then-required return on invested capital threshold.

Under the Former AMA, we reimbursed AAMC for the compensation and benefits of the General Counsel dedicated to us and certain other out-of-pocket expenses incurred by AAMC on our behalf.

The Former AMA required that AAMC continue to serve as our exclusive asset manager for an initial term of 15 years from April 1, 2015, with two potential five-year extensions, subject to our achieving an average annual return on invested capital of at least 7.0%. Neither party was entitled to terminate the Former AMA prior to the end of the initial term, or each renewal term, other than termination by (a) us and/or AAMC “for cause” for certain events such as a material breach of the Former AMA and failure to cure such breach, (b) us for certain other reasons such as our failure to achieve a return on invested capital of at least 7.0% for two consecutive fiscal years after the third anniversary of the Former AMA and (c) us in connection with certain change of control events.


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Summary of related-party transactions

The following table presents our significant transactions with AAMC, which is a related party, for the periods indicated ($ in thousands):
 
Three months ended June 30,
 
Six months ended June 30,
 
2019
 
2018
 
2019
 
2018
Base management fees (1)
$
3,556

 
$
3,644

 
$
7,102

 
$
7,371

Conversion fees (1)

 
53

 
29

 
116

Expense reimbursements (2)
342

 
219

 
670

 
481

______________
(1)
Included in management fees to AAMC in the condensed consolidated statements of operations.
(2)
Included in general and administrative expenses in the condensed consolidated statements of operations.

10. Share-Based Payments

Equity Incentive Plan

Our non-management directors each received annual grants of restricted stock units. These restricted stock units are eligible for settlement in the number of shares of our common stock having a fair market value of $75,000 on the date of grant. Subject to accelerated vesting in limited circumstances, the restricted stock units vest on the earlier of the first anniversary of the date of grant or the next annual meeting of stockholders, with distribution mandatorily deferred for an additional two years thereafter until the third anniversary of grant (subject to earlier distribution or forfeiture upon the respective director’s separation from the Board of Directors). The awards were issued together with dividend equivalent rights. In respect of dividends paid to our stockholders prior to the vesting date, dividend equivalent rights accumulate and are expected to be paid in a lump sum in cash following the vesting date, contingent on the vesting of the underlying award. During any period thereafter when the award is vested but remains subject to settlement, dividend equivalent rights are expected to be paid in cash on the same timeline as underlying dividends are paid to our stockholders.

During the six months ended June 30, 2018, we granted an aggregate of 35,984 restricted stock units, respectively, with a weighted average grant date fair value of $10.64 per share. In addition, upon the departure of one of the members of our Board of Directors on March 26, 2018, 3,495 of previously issued restricted stock units vested and 701 restricted stock units were forfeited, in each case with a grant date fair value of $14.30.

We have also made grants of restricted stock units and stock options to certain employees of AAMC with service-based or market-based vesting criteria. Our service-based awards vest in equal annual installments on each of the first three anniversaries of the grant date, subject to acceleration or forfeiture. Our market-based awards vest in three equal annual installments on the first, second and third anniversary of the later of (i) the date of the award and (ii) the date of the satisfaction of certain performance criteria, subject to acceleration or forfeiture. The performance criteria is satisfied on the date on which the sum of (a) the average price per share for the consecutive 20-trading-day period ending on such date plus (b) the amount of all reinvested dividends, calculated on a per-share basis from the date of grant through such date, shall equal or exceed 125% of the price per share on the date of grant (the “Performance Goal”); provided however that the Performance Goal must be attained no later than the fourth anniversary of the grant date. In the event that the Performance Goal is not attained prior to the fourth anniversary of the grant date, the market-based awards shall expire.

On March 29, 2019, we granted an aggregate of 419,657 service-based restricted stock units and 280,320 market-based restricted stock units to certain of our employees and employees of AAMC with a weighted average grant date fair value of $9.27 per share and $7.39 per share, respectively.

We recorded $1.8 million and $2.9 million of share-based compensation expense for the three and six months ended June 30, 2019, respectively, and we recorded $1.1 million and $0.7 million for the three and six months ended June 30, 2018, respectively. As of June 30, 2019 and December 31, 2018, we had $7.1 million and $4.1 million, respectively, of unrecognized share-based compensation cost remaining with respect to awards granted under the Equity Incentive Plan to be recognized over a weighted average remaining estimated term of 1.2 years and 1.0 year, respectively.

Prior to the second quarter of 2018, our share-based compensation awarded to employees of AAMC fluctuated with changes in the market value of our common stock, among other factors. In the second quarter of 2018, the Financial Accounting Standards

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Board issued Accounting Standards Update 2018-07: Compensation - Stock Compensation (Topic 718), which we adopted effective April 1, 2018. This adoption resulted in (i) the fair value of share-based compensation awards granted to management of AAMC prior to April 1, 2018 being fixed at the transition date fair value and (ii) the fair value of awards granted subsequent to April 1, 2018 to be measured at the grant date fair value, thus eliminating periodic fluctuations of share-based compensation expense that previously arose from changes in our common stock price.

2012 Conversion Option Plan and 2012 Special Conversion Option Plan

On December 21, 2012, as part of our separation transaction from ASPS, we issued stock options under the 2012 Conversion Option Plan and 2012 Special Conversion Option Plan to holders of ASPS stock options to purchase shares of our common stock in a ratio of one share of our common stock to every three shares of ASPS common stock. The options were granted as part of our separation to employees of ASPS and/or Ocwen solely to give effect to the exchange ratio in the separation, and we do not include share-based compensation expense related to these options in our consolidated statements of operations because they are not related to our incentive compensation. As of June 30, 2019, options to purchase an aggregate of 16,834 shares of our common stock were remaining under the Conversion Option Plan and Special Conversion Option Plan.

11. Derivatives

We may enter into derivative contracts from time to time in order to mitigate the risk associated with our variable rate debt. We do not enter into derivatives for investment or trading purposes. Derivatives are carried at fair value within prepaid expenses and other assets in our condensed consolidated balance sheet. Upon execution, we may or may not designate such derivatives as accounting hedges.

Designated Hedges

We have entered into various interest rate cap agreements to mitigate potential increases in interest payments on our floating rate debt. The interest rate caps we currently hold have been designated as and are being accounted for as cash flow hedges with changes in fair value recorded in other comprehensive income or loss each reporting period. Amounts reported in accumulated other comprehensive income or loss related to derivatives will be reclassified to interest expense as interest payments are made on our variable rate debt. During the next 12 months, we estimate that $5.4 million will be reclassified to interest expense.

No gain or loss was recognized related to hedge ineffectiveness or to amounts excluded from effectiveness testing on our cash flow hedges during the three and six months ended June 30, 2019. Prior to the fourth quarter of 2018, none of our derivatives were designated as hedges.

The table below summarizes our interest rate cap instruments as of June 30, 2019 ($ in thousands):
Effective Date
 
Termination Date
 
Strike Rate
 
Benchmark Rate
 
Notional Amount
November 2, 2018
 
May 9, 2024
 
2.50%
 
One-month LIBOR
 
$
505,000

October 16, 2018
 
October 15, 2022
 
2.30%
 
One-month LIBOR
 
83,270

October 16, 2018
 
October 15, 2022
 
2.30%
 
One-month LIBOR
 
89,149


Non-Designated Hedges

On September 29, 2016, we entered into an interest rate cap to manage the economic risk of increases in the floating rate portion of a previous loan agreement. The interest rate cap had a strike rate on one-month LIBOR of 2.938%, a notional amount of $489.3 million and a termination date of November 15, 2018. On March 16, 2018, we paid a premium of $0.9 million to amend the strike rate to 1.80%. During the three and six months ended June 30, 2018, we recognized $0.2 million of interest expense related to changes in the fair value of this interest rate cap.


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Tabular Disclosure of Fair Values of Derivative Instruments on the Condensed Consolidated Balance Sheets ($ in thousands)
 
 
Asset Derivatives
 
 
Balance Sheet Location
 
Fair Value as of
 
 
 
June 30, 2019
 
December 31, 2018
Derivatives designated as hedging instruments:
 
 
 
 
 
 
Interest rate caps
 
Other assets
 
$
3,276

 
$
14,367

Total
 
 
 
$
3,276

 
$
14,367


Tabular Disclosure of the Effect of Derivative Instruments on the Condensed Consolidated Statements of Operations ($ in thousands)
 
 
Amount of Gain (Loss) Recognized in OCI on Derivative (effective portion)
 
Location of Gain (Loss) Reclassified from Accumulated OCI into Net Loss
 
Amount of Gain (Loss) Reclassified from Accumulated OCI into Net Loss (effective portion)
 
Total Amount of Interest Expense Presented in the Condensed Consolidated Statements of Operations
 
 
Three Months ended June 30,
 
 
Three Months ended June 30,
 
Three Months ended June 30,
 
 
2019
 
2018
 
 
2019
 
2018
 
2019
 
2018
Derivatives in cash flow hedging relationships
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate caps
 
$
(3,482
)
 
$

 
Interest expense
 
$
(1,248
)
 
$

 
$
21,165

 
$
16,338


 
 
Amount of Gain (Loss) Recognized in OCI on Derivative (effective portion)
 
Location of Gain (Loss) Reclassified from Accumulated OCI into Net Loss
 
Amount of Gain (Loss) Reclassified from Accumulated OCI into Net Loss (effective portion)
 
Total Amount of Interest Expense Presented in the Condensed Consolidated Statements of Operations
 
 
Six Months ended June 30,
 
 
Six Months ended June 30,
 
Six Months ended June 30,
 
 
2019
 
2018
 
 
2019
 
2018
 
2019
 
2018
Derivatives in cash flow hedging relationships
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate caps
 
$
(11,091
)
 
$

 
Interest expense
 
$
(2,235
)
 
$

 
$
42,675

 
$
32,401


 
 
Location of Gain (Loss) Recognized on Derivative in Net Loss
 
Amount of Gain (Loss) on Derivative Recognized in Net Loss
 
 
 
Three Months ended June 30,
 
 
 
2019
 
2018
Derivatives not designated as hedging instruments
 
 
 
 
 
 
Interest rate caps
 
Interest expense
 
$

 
$
(23
)

 
 
Location of Gain (Loss) Recognized on Derivative in Net Loss
 
Amount of Gain (Loss) on Derivative Recognized in Net Loss
 
 
 
Six Months ended June 30,
 
 
 
2019
 
2018
Derivatives not designated as hedging instruments
 
 
 
 
 
 
Interest rate caps
 
Interest expense
 
$

 
$
(191
)

12. Income Taxes

As a REIT, we must meet certain organizational and operational requirements, including the requirement to distribute at least 90% of our annual REIT taxable income (excluding capital gains) to our stockholders. As a REIT, we generally will not be subject to federal income tax to the extent we distribute our REIT taxable income to our stockholders and provided we satisfy the REIT requirements, including certain asset, income, distribution and stock ownership tests. If we fail to qualify as a REIT, and do not qualify for certain statutory relief provisions, we will be subject to U.S. federal, state and local income taxes and

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may be precluded from qualifying as a REIT for the subsequent four taxable years following the year in which our REIT qualification was lost. As a REIT, we may also be subject to federal taxes if we engage in certain types of transactions.

Our condensed consolidated financial statements include the operations of our taxable REIT subsidiary (“TRS”), which is subject to federal, state and local income taxes on its taxable income. From inception through June 30, 2019, the TRS has operated at a cumulative taxable loss, which resulted in our recording a deferred tax asset with a corresponding valuation allowance.

As of June 30, 2019 and 2018, we did not accrue interest or penalties associated with any unrecognized tax benefits. We recorded nominal state and local tax expense along with nominal penalties and interest on income and property for each of the three and six months ended June 30, 2019 and 2018.

13. Earnings Per Share

The following table sets forth the components of diluted loss per share (in thousands, except share and per share amounts):
 
Three months ended June 30,