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 MARCH 31, 2017

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


https://cdn.kscope.io/6d4095a8f74b0967249eea7d0d3ed688-resi-logoa05a01a05.jpg

Altisource 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
36C Strand Street
Christiansted, United States Virgin Islands 00820
(Address of principal executive office)

(340) 692-1055
(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

As of May 2, 2017, 53,515,458 shares of our common stock were outstanding.



Altisource Residential Corporation
March 31, 2017
Table of Contents


i


(table of contents)

References in this report to “we,” “our,” “us” or the “Company” refer to Altisource 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 assets for our portfolio, including difficulties in identifying single-family rental assets and properties to acquire;
our ability to sell residential mortgage assets on favorable terms;
the impact of changes to the supply of, value of and the returns on single-family rental and mortgage assets;
our ability to complete proposed transactions in accordance with anticipated terms and on a timely basis or at all;
our ability to successfully integrate newly acquired properties into our portfolio of single-family rentals;
our ability to predict our costs;
our ability to effectively compete with our competitors;
our ability to apply the proceeds from financing activities or residential mortgage loan asset sales to target assets in a timely manner;
changes in the market value of our acquired real estate owned and single-family rental properties;
our ability to successfully modify or otherwise resolve sub-performing and non-performing loans;
our ability to convert residential mortgage loans to rental properties and generate attractive returns;
changes in interest rates and in the market value of the collateral underlying our sub-performing and non-performing loan portfolios;
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 Altisource Portfolio Solutions S.A. or Main Street Renewal, LLC to effectively perform their obligations under various agreements with us;
the failure of our mortgage loan servicers to effectively perform their servicing obligations;
our failure to maintain qualification as a REIT;
our failure to maintain our exemption from registration under the Investment Company Act;
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, 2016.

ii


(table of contents)

Part I
 
Item 1. Financial Statements (Unaudited)

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


March 31, 2017

December 31, 2016
 
(Unaudited)
 
 
Assets:



Real estate held for use:



Land
$
244,104


$
220,800

Rental residential properties
1,035,510


926,320

Real estate owned
192,648


289,141

Total real estate held for use
1,472,262


1,436,261

Less: accumulated depreciation
(37,512
)

(27,541
)
Total real estate held for use, net
1,434,750


1,408,720

Real estate assets held for sale
158,239


133,327

Mortgage loans at fair value
70,794


460,444

Mortgage loans held for sale
354,306


108,036

Cash and cash equivalents
61,683


106,276

Restricted cash
39,806


22,947

Accounts receivable, net
31,708


34,931

Prepaid expenses and other assets
9,119


10,166

Total assets
$
2,160,405


$
2,284,847





Liabilities:



Repurchase and loan agreements
$
1,213,614


$
1,220,972

Other secured borrowings
82,355


144,099

Accounts payable and accrued liabilities
54,177


51,442

Related party payables
5,091


5,266

Total liabilities
1,355,237


1,421,779





Commitments and contingencies (Note 7)







Equity:



Common stock, $0.01 par value, 200,000,000 authorized shares; 53,527,755 shares issued and outstanding as of March 31, 2017 and 53,667,631 shares issued and outstanding as of December 31, 2016
535


537

Additional paid-in capital
1,181,877


1,182,245

Accumulated deficit
(377,244
)

(319,714
)
Total equity
805,168


863,068

Total liabilities and equity
$
2,160,405


$
2,284,847



See accompanying notes to condensed consolidated financial statements.
1

(table of contents)

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

Three months ended March 31, 2017

Three months ended March 31, 2016
Revenues:



Rental revenues
$
25,618


$
6,071

Change in unrealized gain on mortgage loans
(51,865
)

(42,452
)
Net realized gain on mortgage loans
7,261


12,732

Net realized gain on mortgage loans held for sale
28,289


34,197

Net realized gain on real estate
19,956


29,401

Interest income
79


112

Total revenues
29,338


40,061

Expenses:



Residential property operating expenses
18,259


18,201

Real estate depreciation and amortization
15,174


3,601

Acquisition fees and costs
167


1,581

Selling costs and impairment
14,220


26,591

Mortgage loan servicing costs
6,245


11,724

Interest expense
15,572


16,416

Share-based compensation
1,914


45

General and administrative
2,322


2,915

Management fees to AAMC
4,815


4,526

Total expenses
78,688


85,600

Loss before income taxes
(49,350
)

(45,539
)
Income tax expense
7


119

Net loss
$
(49,357
)

$
(45,658
)






Loss per share of common stock - basic:





Loss per basic share
$
(0.92
)

$
(0.82
)
Weighted average common stock outstanding - basic
53,646,291


55,380,120

Loss per share of common stock - diluted:





Loss per diluted share
$
(0.92
)

$
(0.82
)
Weighted average common stock outstanding - diluted
53,646,291


55,380,120







Dividends declared per common share
$
0.15


$
0.15



See accompanying notes to condensed consolidated financial statements.
2

(table of contents)

Altisource 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
 
Total Equity
 
Number of Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
53,667,631

 
$
537

 
$
1,182,245

 
$
(319,714
)
 
$
863,068

Issuance of common stock, including stock option exercises
26,703

 

 
48

 

 
48

Repurchases of common stock
(166,579
)
 
(2
)
 
(2,330
)
 

 
(2,332
)
Dividends on common stock ($0.15 per share)

 

 

 
(8,173
)
 
(8,173
)
Share-based compensation

 

 
1,914

 

 
1,914

Net loss

 

 

 
(49,357
)
 
(49,357
)
March 31, 2017
53,527,755

 
535

 
$
1,181,877

 
$
(377,244
)
 
$
805,168



 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Deficit
 
Total Equity
 
Number of Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
55,581,005

 
$
556

 
$
1,202,418

 
$
(50,617
)
 
$
1,152,357

Issuance of common stock, including stock option exercises
7,915

 

 
29

 

 
29

Repurchases of common stock
(893,104
)
 
(9
)
 
(10,009
)
 

 
(10,018
)
Dividends on common stock ($0.15 per share)

 

 

 
(16,479
)
 
(16,479
)
Share-based compensation

 

 
45

 

 
45

Net loss

 

 

 
(45,658
)
 
(45,658
)
March 31, 2016
54,695,816

 
$
547

 
$
1,192,483

 
$
(112,754
)
 
$
1,080,276



See accompanying notes to condensed consolidated financial statements.
3

(table of contents)

Altisource Residential Corporation
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 
Three months ended March 31, 2017

Three months ended March 31, 2016
Operating activities:
 
 
 
Net loss
$
(49,357
)
 
$
(45,658
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Change in unrealized gain on mortgage loans
51,865

 
42,452

Net realized gain on mortgage loans
(7,261
)
 
(12,732
)
Net realized gain on mortgage loans held for sale
(28,289
)
 
(34,197
)
Net realized gain on real estate
(19,956
)
 
(29,401
)
Real estate depreciation and amortization
15,174

 
3,601

Selling costs and impairment
14,220

 
26,591

Accretion of interest on re-performing mortgage loans

 
(37
)
Share-based compensation
1,914

 
45

Amortization of deferred financing costs
2,331

 
5,002

Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
(1,208
)
 
(8,739
)
Related party receivables

 
1,966

Deferred leasing costs
(262
)
 
(84
)
Prepaid expenses and other assets
(641
)
 
(919
)
Accounts payable and accrued liabilities
1,030

 
4,507

Related party payables
(175
)
 
4,676

Net cash used in operating activities
(20,615
)
 
(42,927
)
Investing activities:
 
 
 
Investment in real estate
(28,225
)
 
(74,845
)
Investment in renovations
(13,453
)
 
(7,352
)
Real estate tax advances
(752
)
 
(5,696
)
Mortgage loan resolutions and dispositions
117,690

 
329,363

Mortgage loan payments
3,694

 
5,619

Disposition of real estate
75,888

 
84,276

Acquisition related deposits
(315
)
 

Net cash provided by investing activities
154,527

 
331,365

Financing activities:
 
 
 
Issuance of common stock, including stock option exercises
181

 
49

Payment of tax withholdings on exercise of stock options
(133
)
 
(20
)
Repurchase of common stock
(2,332
)
 
(10,018
)
Dividends on common stock
(8,050
)
 
(13,833
)
Repayments of other secured debt
(61,882
)
 
(341,175
)
Proceeds from repurchase and loan agreements
6,099

 
285,234

Repayments of repurchase and loan agreements
(93,786
)
 
(200,934
)
Payment of deferred financing costs
(1,743
)
 
(3,014
)
Net cash used in financing activities
(161,646
)
 
(283,711
)
Net (decrease) increase in cash, cash equivalents and restricted cash
(27,734
)
 
4,727

Cash, cash equivalents and restricted cash as of beginning of the period
129,223

 
137,268

Cash, cash equivalents and restricted cash as of end of the period
$
101,489

 
$
141,995

 
 
 
 

See accompanying notes to condensed consolidated financial statements.
4

(table of contents)

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

 
Three months ended March 31, 2017
 
Three months ended March 31, 2016
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest
$
13,362

 
$
11,459

Income taxes paid
1

 
180

Seller financing of assets acquired
79,879

 

Transfer of mortgage loans to real estate owned, net
30,553

 
62,542

Transfer of mortgage loans at fair value to mortgage loans held for sale, net
352,677

 
34,029

Changes in accrued capital expenditures
1,582

 
(91
)
Changes in receivables from mortgage loan resolutions and dispositions, payments and real estate tax advances to borrowers, net
4,519

 
(6,959
)
Changes in receivables from real estate owned dispositions
(8,950
)
 
9,777

Dividends declared but not paid
8,463

 
8,204



See accompanying notes to condensed consolidated financial statements.
5

(table of contents)

Altisource Residential Corporation
Notes to Condensed Consolidated Financial Statements
March 31, 2017
(Unaudited)

1. Organization and basis of presentation

Altisource 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, Altisource Residential, L.P. (“ARLP”), and its subsidiaries. On December 21, 2012, we became a stand-alone publicly traded company with an initial capital contribution of $100 million.

We employ a diversified SFR property acquisition strategy that includes acquiring portfolios of SFR properties from a variety of market participants and purchasing SFR properties on a mini-bulk or one-by-one basis from the Multiple Listing Service and alternative listing sources. In 2015, we commenced the disposition of certain sub-performing and non-performing mortgage loans (“NPLs”) we had previously acquired in order to create additional liquidity and purchasing power to build our rental portfolio. As of March 31, 2017, we had disposed of, or agreed to the sale of, the substantial majority our remaining NPL portfolio.

We are managed by Altisource Asset Management Corporation (“AAMC” or our “Manager”). We do not have any employees; therefore, AAMC provides us with dedicated personnel to administer our business and perform certain of our corporate governance functions. AAMC also provides portfolio management services in connection with our acquisition and management of SFR properties and the ongoing management of our residential mortgage loans and real estate owned (“REO”) properties. See Note 8 for a description of this related party relationship.

We have property management contracts with two separate third-party service providers to provide to us, among other things, leasing and lease management, operations, maintenance, repair, property management and property disposition services in respect of our SFR and REO portfolios. Also, we have servicing agreements with two separate mortgage loan servicers for the remaining mortgage loans in our portfolio.

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 the 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 2016 Annual Report on Form 10-K, which was filed with the SEC on March 1, 2017.

Our financial statements include the accounts of our wholly owned subsidiaries as well as the variable interest entities (“VIEs”) of which we are the primary beneficiary. We eliminate intercompany accounts and transactions upon consolidation.

The determination of the VIE’s primary beneficiary requires an evaluation of the contractual and implied rights and obligations associated with each party’s relationship with or involvement in the entity, an estimate of the entity’s expected losses and expected residual returns and the allocation of such estimates to each party involved in the entity. We reassess our involvement with VIEs on a quarterly basis. Changes in methodologies, assumptions and inputs in the determination of the primary beneficiary could have a material effect on the amounts presented within the condensed consolidated financial statements.

In certain instances, we hold both the power to direct the most significant activities of each VIE as well as an economic interest in the entity, and, as such, we are deemed to be the primary beneficiary or consolidator of the VIE. We have determined that our

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(table of contents)

securitization trust, ARLP Securitization Trust, Series 2015-1 (“ARLP 2015-1”), is a VIE of which we are the primary beneficiary. See Note 6 for more information regarding our securitization trust.

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 January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, in an effort to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This update standard is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. We adopted the provisions of ASU 2017-01 effective January 1, 2017. Although this adoption had no significant effect on our previously reported consolidated financial information, we expect that the majority of future acquisitions of SFR properties will no longer meet the definition of a business under the amended guidance. As a result, for future SFR acquisitions that do not meet the definition of a business, we expect to capitalize certain acquisition costs that would have otherwise been expensed in the period incurred, including the HOME II Transaction described in Note 2.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The amendments in ASU 2016-18 require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This update standard is effective for public business entities for fiscal years beginning after December 15, 2017 and interim periods within fiscal years beginning after December 15, 2019. The amendments in ASU 2016-18 should be applied on a retrospective transition basis. Early adoption is permitted, including adoption during an interim period. Effective January 1, 2017, the Company has adopted the provisions of ASU 2016-18. Upon adoption, the Company has retrospectively reclassified $3.1 million of cash flows related to changes in restricted cash from investing activities on the cash flow statement to the cash, cash equivalents and restricted cash balances for the quarter ended March 31, 2016 to be consistent with the current presentation. Restricted cash balances include amounts related to tenant deposits, mortgage loan escrows and reserves for debt service established pursuant to our repurchase and loan agreements and other secured borrowings.

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718). ASU 2016-09 makes several modifications to Topic 718 related to the accounting for forfeitures, employer tax withholding on share-based compensation and the financial statement presentation of excess tax benefits or deficiencies. ASU 2016-09 also clarifies the statement of cash flows presentation for certain components of share-based awards. This update standard is effective for interim and annual reporting periods beginning after December 15, 2016, although early adoption is permitted. Our adoption of this amendment on January 1, 2017 did not have a significant effect on our condensed consolidated financial statements.

Recently issued accounting standards not yet adopted

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. The amendments in ASU 2016-16 eliminate the exception of recognizing, at the time of transfer, current and deferred income taxes for intra-entity asset transfers other than inventory. This update standard is effective for public business entities for fiscal years beginning after December 15, 2017 and interim periods within fiscal years beginning after December 15, 2019. The amendments in ASU 2016-16 should be applied on a modified retrospective transition basis. Early adoption is permitted, including adoption during an interim period. We are currently evaluating the impact of this ASU on our consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The amendments in ASU 2016-15 address eight specific cash flow issues and apply to all entities that are

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(table of contents)

required to present a statement of cash flows under Topic 230. The amendments in ASU 2016-15 are effective for public business entities for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted, including adoption during an interim period. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements.

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 update standard is effective for fiscal years beginning after December 15, 2019. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements.

In February 2016, FASB issued 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. This update is effective for fiscal years beginning after December 15, 2018, including interim reporting periods within those fiscal years. Early adoption is permitted. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10). ASU 2016-01 requires all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee). The amendments also require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. In addition, the amendments eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities and the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet for public business entities. The amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 is a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. In August 2015, FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which effectively delayed the adoption date of ASU 2014-09 by one year. In 2016, the FASB issued accounting standards updates that amended several aspects of ASU 2014-09. ASU 2014-09, as amended, is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted for fiscal years, and interim periods within those years, beginning after December 15, 2016. We are currently evaluating the impact of ASU 2014-09 on our consolidated financial statements; however, we do not expect the adoption of this standard to have a material impact on our consolidated financial statements as our lease terms are generally one to two years. We anticipate applying this amendment using the modified retrospective method.

2. Asset acquisitions and dispositions

Real estate assets

Acquisitions, including those accounted for as business combinations

On March 30, 2017, we entered into an agreement to acquire up to 3,500 SFR properties (the “HOME II Transaction”) from entities (the “Sellers”) sponsored by Amherst Holdings, LLC (“Amherst”) in multiple closings. In the first closing on March 30, 2017, our indirect wholly owned subsidiary, HOME SFR Borrower II, LLC (“HOME Borrower II”), acquired 757 SFR properties for an aggregate purchase price of $106.5 million, which is subject to potential purchase price adjustments as described in Note 7. The purchase price was funded with approximately $79.9 million of proceeds from a seller financing arrangement (the “HOME II loan agreement,” see Note 6) representing 75% of the aggregate purchase price as well as $26.6 million of cash on hand. As of March 31, 2017, we were committed to purchase up to 2,743 additional stabilized rental

8



properties from the Sellers, 1,250 of which are subject to the Sellers' good faith efforts to offer such properties for sale. We capitalized $1.5 million of acquisition fees and costs related to this portfolio acquisition. The value of in-place leases was estimated at $2.4 million based upon the costs we would have incurred to lease the properties and is being amortized over the weighted average remaining life of the leases of approximately seven months as of the acquisition date.

On March 30, 2016, we completed the acquisition of 590 SFR properties located in five states from an unrelated third party for an aggregate purchase price of approximately $64.8 million. We recognized acquisition fees and costs related to this portfolio acquisition of $0.6 million. The value of in-place leases was estimated at $0.7 million based upon the costs we would have incurred to lease the properties and is being amortized over the weighted average remaining life of the leases of approximately seven months as of the acquisition date.

During the three months ended March 31, 2016, we acquired 113 residential properties under our one-by-one acquisition program for an aggregate purchase price of $10.1 million.

Dispositions

During the three months ended March 31, 2017 and 2016, we sold 413 and 686 REO properties, respectively, and recorded $20.0 million and $29.4 million, respectively, of net realized gains on real estate.

Mortgage loan assets

Resolutions

During the three months ended March 31, 2017 and 2016, we resolved 78 and 169 mortgage loans, respectively, primarily through short sales, refinancing and foreclosure sales. In connection with these resolutions, we recorded $7.3 million and $12.7 million, respectively, of net realized gains on mortgage loans.

Dispositions

During the three months ended March 31, 2017 and 2016, we sold 556 and 1,078 of our mortgage loans held for sale to third party purchasers. In connection with these sales, we recorded $28.3 million and $34.2 million, respectively, of net realized gains on mortgage loans held for sale.

In addition, in January 2017, we commenced an auction process to sell an additional portfolio of 2,384 mortgage loans with an aggregate unpaid principal balance (“UPB”) of $574.4 million. On February 15, 2017, following the auction process, we agreed in principle to award the sale to an unrelated third party. Subject to typical confirmatory due diligence and negotiation of a definitive purchase agreement, we expect to consummate this transaction during the second quarter of 2017. As is customary in these transactions, this confirmatory due diligence process may result in certain loans being removed from the sale or a repricing of certain loans; therefore, the final composition and proceeds of this portfolio sale are subject to adjustment depending on the final diligence results and further negotiation by the parties. No assurance can be given that this transaction will be completed on a timely basis or at all.

Following completion of the sale of this additional mortgage loan portfolio, we will have sold the substantial majority of our non-performing and re-performing loans that were not expected to be rental candidates. We may conduct additional sales of non-performing loans that do not meet our rental criteria, although the number of remaining mortgage loans that may be sold will be substantially lower than it has been in prior periods. It is anticipated that the proceeds generated from any such transactions would be utilized, in part, to continue to facilitate our strategy to grow our SFR portfolio through the purchase of additional SFR properties.

Transfers of mortgage loans to real estate owned

During the three months ended March 31, 2017 and 2016, we transferred an aggregate of 195 and 360 mortgage loans, respectively, to REO at an aggregate fair value based on broker price opinions (“BPOs”) of $28.7 million and $64.9 million, respectively. Such transfers occur when the foreclosure sale is complete. In connection with these transfers to REO, we recorded $9.5 million and $11.6 million, respectively, in change in unrealized gain on mortgage loans that resulted from marking the properties to their most current market value.


9


Due diligence costs

During the three months ended March 31, 2017 and 2016, we recognized $0.2 million in each period related to due diligence costs. These due diligence costs are included in our condensed consolidated statement of operations as acquisition fees and costs.

3. Real estate assets, net

Real estate held for use

As of March 31, 2017, we had 10,280 single-family residential properties held for use. Of these properties, 8,385 had been leased, 486 were listed and ready for rent and 449 were in varying stages of renovation and unit turn status. With respect to the remaining 960 REO properties, we will make a final determination whether each property meets our rental profile after (a) applicable state redemption periods have expired, (b) the foreclosure sale has been ratified, (c) we have recorded the deed for the property, (d) utilities have been activated and (e) we have secured access for interior inspection. A majority of the REO properties are subject to state regulations that require us to await the expiration of a redemption period before a foreclosure can be finalized. Once the redemption period expires, we immediately proceed to record a new deed, take possession of the property, activate utilities and start the inspection process in order to make our final determination. If an REO property meets our rental profile, we determine the extent of renovations that are needed to generate an optimal rent and maintain consistency of renovation specifications. If we determine that the REO property will not meet our rental profile, we list the property for sale, in certain instances after renovations are made to optimize the sale proceeds.

As of December 31, 2016, we had 9,939 single-family residential properties held for use. Of these properties, 7,293 had been leased, 703 were listed and ready for rent and 607 were in various stages of renovation. With respect to the remaining 1,336 REO properties, we were in the process of determining whether these properties would meet our rental profile.

With respect to residential rental properties classified as held for use, we perform an impairment analysis using estimated cash flows if events or changes in circumstances indicate that the carrying value may be impaired, such as prolonged vacancy, identification of materially adverse legal or environmental factors, changes in expected ownership period or a decline in market value to an amount less than the carrying amount. This analysis is performed at the property level. These cash flows are estimated based on a number of assumptions that are subject to economic and market uncertainties, including, among others, demand for rental properties, competition for customers, changes in market rental rates, costs to operate each property and expected ownership periods.

If the carrying amount of a held for use asset exceeds the sum of its undiscounted future operating and residual cash flows, an impairment loss is recorded for the difference between estimated fair value of the asset and the carrying amount. We are not able to recover any such impairments should the estimated fair value subsequently improve. We generally estimate the fair value of assets held for use by using BPOs. In some instances, appraisal information may be available and is used in addition to BPOs.

During the three months ended March 31, 2017 and 2016, we recognized $2.3 million and $3.0 million, respectively, of impairment on real estate held for use, all of which relates to our properties under evaluation for rental strategy.

Real estate held for sale

As of March 31, 2017 and December 31, 2016, our real estate held for sale included 793 and 594 REO properties, respectively, having an aggregate carrying value of $158.2 million and $133.3 million, respectively. Management determined to divest these properties because they do not meet our residential rental property investment criteria.

We record residential properties held for sale at the lower of the carrying amount or estimated fair value less costs to sell. The impairment loss, if any, is the amount by which the carrying amount exceeds the estimated fair value less costs to sell. In the event that the estimated fair value of impaired properties held for sale subsequently improves, we are able to recover impairments to the extent previously recognized.

During the three months ended March 31, 2017 and 2016, we recognized $2.1 million and $11.9 million, respectively, of impairment on our real estate held for sale.


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4. Mortgage loans

The following table sets forth our mortgage loans at fair value, the related unpaid principal balance and market value of underlying properties by delinquency status as of March 31, 2017 and December 31, 2016 ($ in thousands):
 
 
Number of Loans
 
Carrying Value
 
Unpaid Principal Balance
 
Market Value of Underlying Properties
March 31, 2017
 
 
 
 
 
 
 
 
Current
 
194

 
$
28,484

 
$
39,681

 
$
47,520

30
 
22

 
3,674

 
4,999

 
7,921

60
 
15

 
1,535

 
2,316

 
2,805

90
 
110

 
17,736

 
30,897

 
31,760

Foreclosure
 
101

 
19,365

 
28,717

 
30,545

Mortgage loans at fair value
 
442

 
$
70,794

 
$
106,610

 
$
120,551

 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
 
Current
 
211

 
$
33,992

 
$
45,568

 
$
58,842

30
 
66

 
7,898

 
11,836

 
13,576

60
 
34

 
4,444

 
6,364

 
7,536

90
 
400

 
48,338

 
82,705

 
91,772

Foreclosure
 
2,180

 
365,772

 
551,243

 
574,546

Mortgage loans at fair value
 
2,891

 
$
460,444

 
$
697,716

 
$
746,272


The following table sets forth our mortgage loans held for sale, the related unpaid principal balance and market value of underlying properties by delinquency status as of March 31, 2017 and December 31, 2016 ($ in thousands):
 
 
Number of Loans
 
Carrying Value
 
Unpaid Principal Balance
 
Market Value of Underlying Properties
March 31, 2017
 
 
 
 
 
 
 
 
Current
 
97

 
$
16,114

 
$
22,795

 
$
26,701

30
 
21

 
3,101

 
4,721

 
5,452

60
 
15

 
2,178

 
3,352

 
4,410

90
 
480

 
87,103

 
123,996

 
141,689

Foreclosure
 
1,590

 
245,810

 
384,011

 
394,284

Mortgage loans held for sale
 
2,203

 
$
354,306

 
$
538,875

 
$
572,536

 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
 
Current
 
519

 
$
100,558

 
$
114,757

 
$
140,471

30
 
10

 
1,082

 
1,911

 
2,329

60
 
4

 
286

 
623

 
663

90
 
17

 
1,622

 
2,291

 
3,430

Foreclosure
 
33

 
4,488

 
6,023

 
6,675

Mortgage loans held for sale
 
583

 
$
108,036

 
$
125,605

 
$
153,568


As of March 31, 2017, our mortgage loans held for sale include certain mortgage loans identified for sale by management and our remaining re-performing residential mortgage loans that we initially acquired in June 2014. We determined to dispose of these mortgage loans because we do not expect them to be rental candidates.


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Re-performing residential mortgage loans

For the three months ended March 31, 2017 and 2016, we recognized no provision for loan loss and no adjustments to the amount of the accretable yield for our re-performing residential mortgage loans. For the three months ended March 31, 2017, we accreted no interest income with respect to our re-performing loans. For the three months ended March 31, 2016, we accreted $37 thousand into interest income with respect to our re-performing loans. At March 31, 2017 and December 31, 2016, our re-performing loans had a UPB of $5.0 million and $5.7 million, respectively, and a carrying value of $3.5 million and $3.7 million, respectively. We included these loans in mortgage loans held for sale.

The following table presents changes in the balance of the accretable yield for the periods indicated:
Accretable Yield
Three months ended March 31, 2017

Three months ended March 31, 2016
Balance at the beginning of the period
$
1,757

 
$
2,146

Payments and other reductions, net
(182
)
 

Accretion

 
(37
)
Balance at the end of the period
$
1,575

 
$
2,109



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5. Fair value of financial instruments

The following table sets forth the fair value of financial assets and liabilities by level within the fair value hierarchy as of March 31, 2017 and December 31, 2016 ($ in thousands):
 
 
 
Level 1
 
Level 2
 
Level 3
 
Carrying Value
 
Quoted Prices in Active Markets
 
 Observable Inputs Other Than Level 1 Prices
 
 Unobservable Inputs
March 31, 2017
 
 
 
 
 
 
 
Recurring basis (assets)
 
 
 
 
 
 
 
Mortgage loans at fair value
$
70,794

 
$

 
$

 
$
70,794

Interest rate cap derivative (1)
66

 

 
66

 

Nonrecurring basis (assets)
 
 
 
 
 
 
 
Real estate assets held for sale
158,239

 

 

 
158,239

Not recognized on condensed consolidated balance sheets at fair value (assets)
 
 
 
 
 
 
 
Mortgage loans held for sale
354,306

 

 

 
354,306

Not recognized on condensed consolidated balance sheets at fair value (liabilities)
 
 
 
 
 
 
 
Repurchase and loan agreements
1,213,614

 

 
1,219,164

 

Other secured borrowings
82,355

 

 
83,089

 

 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
Recurring basis (assets)
 
 
 
 
 
 
 
Mortgage loans at fair value
$
460,444

 
$

 
$

 
$
460,444

Interest rate cap derivative (1)
66

 

 
66

 

Nonrecurring basis (assets)
 
 
 
 
 
 
 
Real estate assets held for sale
133,327

 

 

 
133,327

Not recognized on condensed consolidated balance sheets at fair value (assets)
 
 
 
 
 
 
 
Mortgage loans held for sale
108,036

 

 

 
108,036

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


 


 


Repurchase and loan agreements
1,220,972

 

 
1,226,972

 

Other secured borrowings
144,099

 

 
144,971

 

_____________
(1)
We include the fair value of our interest rate cap derivative within prepaid expenses and other assets in our condensed consolidated balance sheets.

We have not transferred any assets from one level to another level during the three months ended March 31, 2017 or during the year ended December 31, 2016.

The carrying values of our cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities and related party payables are equal to or approximate fair value. The fair values of mortgage loans at fair value and NPLs held for sale are estimated using our asset manager's proprietary discounted cash flow pricing model. The fair value of re-performing mortgage loans held for sale is estimated using the present value of the future estimated principal and interest payments of the loan, with the discount rate used in the present value calculation representing the estimated effective yield of the loan. The fair value of our interest rate cap derivative is estimated using a discounted cash flow analysis based on the contractual terms of the derivative. The fair value of the repurchase and loan agreements is estimated using the income approach based on credit spreads available to us currently in the market for similar floating rate debt. The fair value of other secured borrowings is estimated using observable market data.


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The following table sets forth the changes in our level 3 assets that are measured at fair value on a recurring basis ($ in thousands):
 
Three months ended March 31, 2017
 
Three months ended March 31, 2016
Mortgage loans at fair value
 
 
 
Beginning balance
$
460,444

 
$
960,534

Change in unrealized gain on mortgage loans
6,774

 
26,256

Net realized gain on mortgage loans
7,261

 
12,732

Transfers of mortgage loans at fair value to mortgage loans held for sale, net
(352,677
)
 
34,029

Mortgage loan resolutions and payments
(22,866
)
 
(49,931
)
Real estate tax advances to borrowers
2,327

 
3,442

Transfer of mortgage loans to real estate owned, net
(30,469
)
 
(62,519
)
Ending balance
$
70,794

 
$
924,543

 
 
 
 
Change in unrealized gain on mortgage loans at fair value held at the end of the period
$
1,025

 
$
20,642


The significant unobservable inputs used in the fair value measurement of our mortgage loans at fair value 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 our mortgage loans at fair value as of the dates indicated:
Input
 
March 31, 2017
 
December 31, 2016
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
 
-3.1% to 11.2%
 
-11.2% to 15.1%
Loan resolution probabilities — modification
 
0% to 5.9%
 
0% to 5.9%
Loan resolution probabilities — rental
 
0%
 
0%
Loan resolution probabilities — liquidation
 
32.6% to 100%
 
31.8% to 100%
Loan resolution probabilities — paid in full
 
0% to 66.4%
 
0% to 66.2%
Loan resolution timelines (in years)
 
0.1 to 5.7
 
0.1 to 5.8
Value of underlying properties
 
$10,500 to $2,450,000
 
$3,500 to $4,600,000


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6. Borrowings

Repurchase and loan agreements

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. As of March 31, 2017, the average annualized interest rate on borrowings under our repurchase and loan agreements was 4.23%, excluding amortization of deferred debt issuance costs.

At March 31, 2017, we were party to one repurchase agreement and three loan agreements. Below is a description of each agreement outstanding during the three months ended March 31, 2017:

Repurchase Agreement

Credit Suisse (“CS”) is the lender on the repurchase agreement entered into on March 22, 2013, (the “CS repurchase agreement”) with an initial aggregate maximum borrowing capacity of $100.0 million. During 2014, 2015 and 2016, the CS repurchase agreement was amended on several occasions, ultimately increasing the aggregate maximum borrowing capacity to $600.0 million as of December 31, 2016 with a maturity date of November 17, 2017. Pursuant to the amended and restated repurchase agreement with CS dated November 18, 2016, the aggregate maximum borrowing capacity of the CS repurchase agreement decreased incrementally on each of January 31, 2017 and February 28, 2017 and will further decrease on each of June 30, 2017 and September 30, 2017 to an aggregate of $350.0 million as of September 30, 2017. At March 31, 2017, the CS repurchase agreement had an aggregate maximum borrowing capacity of $525.0 million.

Loan Agreements

Nomura Corporate Funding Americas, LLC (“Nomura”) is the lender under a loan agreement dated April 10, 2015 (the “Nomura loan agreement”) with an initial aggregate maximum funding capacity of $100.0 million. The Nomura loan agreement was amended during 2015 and 2016, ultimately increasing the maximum funding capacity to $250.0 million on December 31, 2016. On April 6, 2017, we entered into an amended and restated loan and security agreement with Nomura that retained our aggregate borrowing capacity of $250.0 million, removed the exit fee requirement upon early repayment and extended the maturity date to April 5, 2018. The uncommitted maximum borrowing amount increased to $100.0 million, which is available subject to our meeting certain eligibility requirements.

In connection with the seller financing related to our acquisition of 4,262 SFR properties on September 30, 2016 (the “HOME SFR Transaction”), we entered into a loan agreement (the “MSR loan agreement”) between HOME SFR Borrower, LLC (“HOME Borrower”), our indirect wholly owned subsidiary, the sellers and MSR Lender LLC, as agent. Pursuant to the MSR loan agreement, HOME Borrower borrowed approximately $489.3 million from the lenders (the “MSR Loan”). Effective October 14, 2016, the MSR loan agreement was assigned to MSR Lender, LLC (“MSR Lender”) and, in connection with MSR Lender’s securitization of the MSR Loan, we and MSR Lender amended and restated the MSR loan agreement to match the terms of the bonds in MSR Lender's securitization of the MSR Loan. The aggregate amount of the MSR Loan and the aggregate interest rate of the MSR Loan remained unchanged from the original loan agreement. The MSR Loan is a floating rate loan, composed of eight floating rate components, interest on each of which is computed monthly based on one-month LIBOR plus a fixed component spread. The initial maturity date of the MSR Loan is November 9, 2018. HOME Borrower has the option to extend the MSR Loan beyond the initial maturity date for three successive one-year terms to an ultimate maturity date of November 9, 2021, provided, among other things, that there is no event of default under the MSR loan agreement on each maturity date. The MSR Loan is secured by the membership interests of HOME Borrower and the properties and other assets of HOME Borrower.

In connection with the seller financing related to the first closing under the HOME II Transaction on March 30, 2017, HOME Borrower II entered into the HOME II loan agreement with entities sponsored by Amherst, pursuant to which we borrowed approximately $79.9 million in connection with the first acquisition of properties (the “HOME II Loan”). The HOME II loan agreement is a floating rate loan, composed of eight floating rate components, interest on each of which is computed monthly based on one-month LIBOR plus a fixed component spread. The entire principal amount is currently allocable to one component at a fixed-rate spread over one-month LIBOR, which is anticipated to be the

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weighted average fixed rate spread for the duration of the HOME II loan agreement. The initial maturity date of the HOME II loan agreement is October 9, 2019. 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 is secured by the membership interests of HOME Borrower II and the properties and other assets of HOME Borrower II.

Following all of the amendments described above, the maximum aggregate funding available to us under these repurchase and loan agreements as of March 31, 2017 was $1.3 billion, subject to certain sublimits, eligibility requirements and conditions precedent to each funding. As of March 31, 2017, an aggregate of $1.2 billion was outstanding under our repurchase and loan agreements. The CS repurchase agreement and the Nomura loan agreement are fully guaranteed by us.

The following table sets forth data with respect to our repurchase and loan agreements as of March 31, 2017 and December 31, 2016 ($ in thousands):
 
Maximum Borrowing Capacity
 
Book Value of Collateral
 
Amount Outstanding
 
Amount of Available Funding
March 31, 2017
 
 
 
 
 
 
 
CS repurchase agreement due November 17, 2017
$
525,000

 
$
774,701

 
$
505,530

 
$
19,470

Nomura loan agreement due April 6, 2017
250,000

 
232,583

 
144,496

 
105,504

MSR loan agreement due November 9, 2018
489,259

 
635,448

 
489,259

 

HOME II loan agreement due October 9, 2019
79,879

 
105,610

 
79,879

 

Less: deferred debt issuance costs

 

 
(5,550
)
 

 
$
1,344,138

 
$
1,748,342

 
$
1,213,614

 
$
124,974

 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
CS repurchase agreement due November 17, 2017
$
600,000

 
$
902,339

 
$
582,659

 
$
17,341

Nomura loan agreement due April 6, 2017
250,000

 
238,142

 
155,054

 
94,946

MSR loan agreement due November 9, 2018
489,259

 
638,799

 
489,259

 

Less: deferred debt issuance costs

 

 
(6,000
)
 

 
$
1,339,259

 
$
1,779,280

 
$
1,220,972

 
$
112,287


Our business model relies to a significant degree on both our short-term financing and longer duration asset backed financing arrangements, including the HOME II loan agreement that closed in March 2017 and the new term loan arrangement that closed in April 2017 (as described in Note 14), 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 non-rental REO properties and certain NPLs in the ordinary course, 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 our ongoing relationships with lenders.

Terms and covenants related to the CS repurchase agreement

Under the terms of the CS repurchase agreement, as collateral for the funds drawn thereunder, subject to certain conditions, our operating partnership and/or an intervening limited liability company subsidiary 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. In the event the lender determines the value of the collateral has decreased, the lender has the right to initiate a margin call and require us, or the applicable trust subsidiary, to post additional collateral or to repay a portion of the outstanding borrowings. The price paid by the lender for each mortgage or REO asset we finance under the repurchase agreements 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 based on the lender’s cost of funds plus a spread calculated based on the type of applicable assets collateralizing the funding, as well as certain other customary fees, administrative costs and

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expenses to maintain and administer the CS repurchase agreement. We do not collateralize any of our repurchase facilities with cash.

Pursuant to the CS repurchase agreement, we are entitled to collateralize a portion of the facility with securities. As of March 31, 2017, approximately $21.3 million of the amount outstanding under the CS repurchase agreement was collateralized by $34.0 million of the Class A-2 Notes issued and retained by us in connection with the securitization completed in July 2015 by ARLP 2015-1.

The CS repurchase agreement requires us to maintain various financial and other covenants, including maintaining a minimum adjusted tangible net worth, a maximum ratio of indebtedness to adjusted tangible net worth and a minimum fixed charge coverage ratio. In addition, the CS repurchase agreement contains customary events of default.

Terms and covenants related to the Nomura loan agreement

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. Under the terms of the Nomura loan agreement, we are required to pay interest based on the one-month LIBOR plus a spread and certain other customary fees, administrative costs and expenses in connection with Nomura's structuring, management and ongoing administration of the facility.

The Nomura loan agreement requires us to maintain various financial and other covenants, including a minimum adjusted tangible net worth, a maximum ratio of indebtedness to adjusted tangible net worth and specified levels of unrestricted cash. In addition, 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.

Terms and covenants related to the MSR loan agreement and HOME II loan agreement

Under the terms of the MSR loan agreement and the HOME II loan agreement, each of the MSR Loan and the HOME II Loan are non-recourse to us and are secured by a lien on the membership interests of HOME Borrower and Home Borrower II 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. The loan agreements require that each entity comply with various affirmative and negative covenants that are customary for loans of this type, including limitations on the indebtedness each entity can incur, limitations on sales and dispositions of the properties collateralizing the respective loan agreements, minimum net asset requirements and various restrictions on the use of cash generated by the operations of such properties while the respective loan agreements are outstanding. 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 or HOME Borrower II in connection with the secured collateral.

Even though the MSR loan agreement and HOME II loan agreement 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 the MSR Loan, the HOME II Loan 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.

We are currently in compliance with the covenants and other requirements with respect to the repurchase and loan agreements. We monitor our lending partners’ ability to perform under the repurchase and loan agreements 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.


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Other secured borrowings

On June 29, 2015, we completed a securitization transaction in which ARLP 2015-1 issued $205.0 million in ARLP 2015-1 Class A Notes with a weighted coupon of approximately 4.01% and $60.0 million in ARLP 2015-1 Class M Notes. ARLP 2015-1 is a Delaware statutory trust that is wholly owned by our operating partnership with a federally chartered bank as its trustee. We retained $34.0 million of the ARLP 2015-1 Class A Notes and all of the ARLP 2015-1 Class M Notes. No interest will be paid on any ARLP 2015-1 Class M Notes while any ARLP 2015-1 Class A Notes remain outstanding. The ARLP 2015-1 Class A Notes and ARLP 2015-1 Class M Notes are non-recourse to us and are secured solely by the NPLs and REO properties of ARLP 2015-1 but not by any of our other assets. The assets of ARLP 2015-1 are the only source of repayment and interest on the ARLP 2015-1 Class A Notes and the ARLP 2015-1 Class M Notes, thereby making the cash proceeds received by ARLP 2015-1 of loan payments, loan liquidations, loan sales and sales of converted REO properties the sole sources of the payment of interest and principal by ARLP 2015-1 to the bond holders. The ARLP 2015-1 Class A Notes and the ARLP 2015-1 Class M Notes mature on May 25, 2055 and May 25, 2044, respectively, and we do not guarantee any of the obligations of ARLP 2015-1 under the terms of the indenture governing the notes or otherwise. As of March 31, 2017, the book value of the underlying securitized assets held by ARLP 2015-1 was $174.5 million.

The following table sets forth data with respect to these notes as of March 31, 2017 and December 31, 2016 ($ in thousands):

 
Interest Rate
 
Amount Outstanding
March 31, 2017
 
 
 
ARLP Securitization Trust, Series 2015-1
 
 
 
ARLP 2015-1 Class A Notes due May 25, 2055 (1)
4.01
%
 
$
117,089

ARLP 2015-1 Class M Notes due May 25, 2044
%
 
60,000

Intercompany eliminations
 
 
 
Elimination of ARLP 2015-1 Class A Notes due to ARNS, Inc.
 
 
(34,000
)
Elimination of ARLP 2015-1 Class M Notes due to ARLP
 
 
(60,000
)
Less: deferred debt issuance costs
 
 
(734
)
 
 
 
$
82,355

 
 
 
 
December 31, 2016
 
 
 
ARLP Securitization Trust, Series 2015-1
 
 
 
ARLP 2015-1 Class A Notes due May 25, 2055 (1)
4.01
%
 
178,971

ARLP 2015-1 Class M Notes due May 25, 2044
%
 
60,000

Intercompany eliminations
 
 
 
Elimination of ARLP 2015-1 Class A Notes due to ARNS, Inc.
 
 
(34,000
)
Elimination of ARLP 2015-1 Class M Notes due to ARLP
 
 
(60,000
)
Less: deferred debt issuance costs
 
 
(872
)
 
 
 
$
144,099

_____________
(1)
The expected redemption date for the Class A Notes ranges from June 25, 2018 to June 25, 2019.


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7. Commitments and contingencies

Litigation, claims and assessments

From time to time, we may be involved in various claims and legal actions arising in the ordinary course of business. Set forth below is a summary of legal proceedings to which we are a party as of March 31, 2017:

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 plaintiffs 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 Unites 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. Plaintiff’s opposition to defendants’ motion for reconsideration is anticipated to be due on May 8, 2017. In addition, the defendants filed their answer and affirmative defenses by April 21, 2017.

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.

Amendment and Waiver Agreement with Altisource Solutions

In connection with the HOME SFR Transaction and to enable Main Street Renewal, LLC (“MSR”) to be property manager for the acquired properties, we and Altisource Solutions S.à r.l. (“Altisource Solutions”), a wholly owned subsidiary of Altisource Portfolio Solutions S.A. (“ASPS”), entered into an Amendment and Waiver Agreement (the “Amendment and Waiver Agreement”) to amend the Master Services Agreement (the “MSA”) between Altisource Solutions and us, dated December 21, 2012, under which Altisource Solutions was the exclusive provider of leasing and property management services to us. Pursuant to the Amendment and Waiver Agreement, we obtained a waiver of the exclusivity requirements under the MSA for the acquired properties. Additionally, the Amendment and Waiver Agreement permits us to utilize the property management services of MSR in connection with up to approximately 3,000 additional properties if we acquire such additional properties from an investment fund or other entity affiliated with Amherst in one or more transactions prior to an agreed-upon date. The Amendment and Waiver Agreement also amended the MSA to require us or any surviving entity to pay a $60 million liquidation fee to Altisource Solutions if (i) we sell, liquidate or dispose of 50% or more of our SFR portfolio managed by Altisource Solutions over a rolling eighteen (18) month period without using the proceeds of such sales, liquidations or disposals to purchase additional SFR assets or if (ii) the surviving entity in a change of control does not assume the MSA with

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Altisource Solutions as property manager. The liquidation fee will not be required to be paid if we or any surviving entity terminate the MSA as a result of a material breach of the MSA by Altisource Solutions, for Altisource Solutions’ failure to meet certain specified performance standards or for certain other customary reasons.

Commitments and contingencies related to the HOME II Transaction

In connection with the HOME II Transaction, as of March 31, 2017, we had committed to purchase up to 2,743 additional stabilized rental properties from the Amherst sponsored entities in additional closings that are expected to occur during 2017. Because the properties to be acquired had not yet been fully finalized prior to the date of this report, we are unable to predict the total aggregate purchase price of the future closings under the HOME II Transaction.

Pursuant to the purchase and sale agreement underlying the HOME II Transaction (the “PSA”), the ultimate purchase price of the properties acquired or to be acquired is subject to potential adjustment based on a predetermined formula, which is dependent upon the valuation of the acquired properties at a future date. Because such future valuation of the properties is unknown, we are unable to predict the ultimate adjustments, if any, that will be made to the initial aggregate purchase price at this time.

8. Related-party transactions

Asset management agreement with AAMC

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

Base Management Fee. AAMC is entitled to a quarterly Base Management Fee equal to 1.5% of the product of (i) our average invested capital (as defined in the AMA) for the quarter multiplied by (ii) 0.25, while we have fewer than 2,500 single-family rental properties actually rented (“Rental Properties”). The Base Management Fee percentage increases to 1.75% of invested capital while we have between 2,500 and 4,499 Rental Properties and increases to 2.0% of invested capital while we have 4,500 or more Rental Properties;

Incentive Management Fee. AAMC is 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) exceeds an annual hurdle return rate of between 7.0% and 8.25% (depending on the 10-year treasury rate). The Incentive Management Fee increases to 22.5% while we have between 2,500 and 4,499 Rental Properties and increases to 25% while we have 4,500 or more Rental Properties; and
 
Conversion Fee. AAMC is entitled to a quarterly conversion fee equal to 1.5% of the market value of the single-family homes leased by us for the first time during the applicable quarter.
 
We have the flexibility to pay up to 25% of the Incentive Management Fee to AAMC in shares of our common stock.

Under the AMA, we reimburse 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 AMA requires 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 is entitled to terminate the 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 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 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 March 31, 2017
 
Three months ended March 31, 2016
Base management fees (1)
$
4,211

 
$
4,124

Conversion fees (1)
604

 
402

Expense reimbursements (2)
196

 

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

No Incentive Management Fee under the AMA was payable to AAMC during the three months ended March 31, 2017 because our return on invested capital (as defined in the AMA) was below the required hurdle rate. Under the AMA, to the extent we have an aggregate shortfall in our return rate over the previous seven quarters, that aggregate return rate shortfall gets added to the normal quarterly 1.75% return hurdle for the next quarter before AAMC is entitled to an Incentive Management Fee. As of March 31, 2017, the aggregate return shortfall from the prior seven quarters under the AMA was approximately 55.60% of invested capital. In future quarters, return on invested capital must exceed the required hurdle for the current quarter plus any carried-forward cumulative additional hurdle shortfall from the prior seven quarters before any Incentive Management Fee will be payable to AAMC.

9. Share-based payments

2016 Equity Incentive Plan

Beginning in July 2016, our non-management directors each received annual grants of restricted stock units issued under the Altisource Residential Corporation 2016 Equity Incentive Plan (the “2016 Equity Incentive Plan”). These restricted stock units are eligible for settlement in the number of shares of our common stock having a fair market value of $60 thousand 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 applicable 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 actually paid to our stockholders.

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 condensed consolidated statements of operations because they are not related to our incentive compensation. As of March 31, 2017, options to purchase an aggregate of 141,087 shares of our common stock were remaining under the Conversion Option Plan and Special Conversion Option Plan.

Share-based payment activity

We made no grants of share-based awards during the three months ended March 31, 2017. During the three months ended March 31, 2016, our restricted stock activity included the grant to a director of 1,232 shares with a weighted average grant date fair value of $9.30 per share and the forfeiture by a director of 625 shares with a weighted average grant date fair value of $18.25 per share.


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We recorded $1.9 million and $45 thousand of compensation expense related to our share-based compensation programs for the three months ended March 31, 2017 and 2016, respectively. As of March 31, 2017, we had $4.6 million of unrecognized share-based compensation cost remaining with an average remaining estimated term of 1.3 years. As of March 31, 2016, we had a nominal amount of unrecognized share-based compensation cost remaining with respect to the director grants.

10. 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 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.

On September 29, 2016, we entered into an interest rate cap to manage the economic risk of increases in the floating rate portion of the MSR loan agreement. The interest rate cap has a strike rate on the one-month LIBOR of 2.938%, a notional amount of $489.3 million and a termination date of November 15, 2018. At March 31, 2017, the interest rate cap had a fair value of $66 thousand. We did not designate the interest rate cap as an accounting hedge; therefore, changes in the fair value of the interest rate cap are recorded as a component of interest expense in our condensed consolidated statement of operations. For the three months ended March 31, 2017, we recognized no changes in the fair value of the interest rate cap.

11. 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 may be precluded from qualifying as a REIT for the subsequent four taxable years following the year in which we lost our REIT qualification.

During 2016, we paid cash distributions of $38.3 million to our stockholders, which consisted of $24.5 million related to the 2016 taxable year, including $16.3 million of capital gain distributions and $8.2 million of return of capital distributions, and $13.8 million related to the 2015 taxable year. After these distributions, the aggregate minimum distribution to stockholders required to maintain our REIT status had been met for 2016.

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 March 31, 2017, the TRS operated at a cumulative taxable loss, which resulted in our recording a deferred tax asset with a corresponding valuation allowance.

We recorded state income tax expense on our condensed consolidated operations for the three months ended March 31, 2017 and 2016. As a REIT, we may also be subject to federal taxes if we engage in certain types of transactions.

As of March 31, 2017 and 2016, 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 the three months ended March 31, 2017 and 2016. Our subsidiaries and we remain subject to tax examination for the period from inception to December 31, 2016. RESI and its subsidiaries file income tax returns in the U.S. and various state, local and foreign jurisdictions. On February 16, 2017, the IRS opened an examination of the 2014 tax year of the TRS. On April 28, 2017, we received verbal confirmation from the IRS that the examination of the TRS’ 2014 tax year will be closed without any changes.


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12. Earnings per share

The following table sets forth the components of diluted (loss) earnings per share (in thousands, except share and per share amounts):
 
Three months ended March 31, 2017
 
Three months ended March 31, 2016
Numerator
 
 
 
Net loss
$
(49,357
)
 
$
(45,658
)
 
 
 
 
Denominator
 
 
 
Weighted average common stock outstanding – basic
53,646,291

 
55,380,120

Weighted average common stock outstanding – diluted
53,646,291

 
55,380,120

 
 
 
 
Loss per basic common share
$
(0.92
)
 
$
(0.82
)
Loss per diluted common share
$
(0.92
)
 
$
(0.82
)

We excluded the items presented below from the calculation of diluted earnings per share as they were antidilutive for the periods indicated:
 
Three months ended March 31, 2017
 
Three months ended March 31, 2016
Denominator (in weighted-average shares)
 
 
 
Stock options
160,478

 
159,015

Restricted stock
95,511

 
5,276


Effective April 1, 2015, we have the flexibility to pay up to 25% of the Incentive Management Fee to AAMC in shares of our common stock. Should we choose to do so, our earnings available to common stockholders would be diluted to the extent of such issuance. Because AAMC did not earn any Incentive Management Fees, no dilutive effect was recognized for the three months ended March 31, 2017 or 2016.

13. Segment information

Our primary business is the acquisition and ownership of single-family rental assets. Our primary sourcing strategy is to acquire these assets by purchasing single-family rental properties, either on an individual basis or in pools, or by the acquisition and resolution of NPLs. As a result, we operate in a single segment focused on the acquisition and ownership of rental residential properties.

14. Subsequent events

On April 6, 2017, RESI TL1 Borrower, LLC (“TL1 Borrower”), our indirect 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 (collectively, the “Lenders”).

Pursuant to the Term Loan Agreement, TL1 Borrower borrowed $100.0 million to finance the ownership and operation of single-family rental properties (the “Term Loan”). The Term Loan Agreement has a maturity date of April 6, 2022 and a fixed interest rate of 5.00%. Approximately $73.6 million of the proceeds were used to pay down other existing borrowings.

The Term Loan Agreement requires that the TL1 Borrower comply with various affirmative and negative covenants that are customary for loans of this type including, without limitation, reporting requirements to the agent; maintenance of minimum levels of liquidity, indebtedness and tangible net worth; limitations on sales and dispositions of the properties collateralizing the Term Loan Agreement and various restrictions on the use of cash generated by the operations of the properties while the Term

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Loan is outstanding. The Term Loan Agreement also includes customary events of default, the occurrence of which would allow the Lenders to accelerate payment of all amounts outstanding thereunder. The Term Loan 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, 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.

Management has evaluated the impact of all events subsequent to March 31, 2017 and through the issuance of these interim condensed consolidated financial statements. Except as described above, we have determined that there were no additional subsequent events requiring adjustment or disclosure in the financial statements.


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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Our Company

We are 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, Altisource Residential, L.P. (“ARLP”), and its subsidiaries. We conduct an SFR business with a diversified SFR property acquisition strategy and an efficient property management structure in order to pursue our objective of becoming one of the top single-family equity REITs serving working class American families and their communities.

Our strategy is to build long-term shareholder value through the creation of a large portfolio of SFR homes that are targeted to operate at a best-in-class yield. The Company believes there is a compelling opportunity in the single-family rental market and that it has implemented the right strategic plan to capitalize on the sustained growth in single-family rental demand. The Company targets the moderately-priced single-family home market that, in the Company's view, offers optimal yield opportunities.

In order to achieve this goal, we have focused on (i) identifying and acquiring high-yielding SFR properties in pools or on a targeted, individual basis; (ii) working with our property managers to implement a cost-effective and scalable property management structure; (iii) selling certain mortgage loans and non-rental REO properties that do not meet our targeted rental criteria, which generates cash that we may reinvest in acquiring additional SFR properties; (iv) resolving the remaining mortgage loans in our portfolio, including the conversion of a portion of the underlying properties to rental units and (v) extending the duration of our financing arrangements to better match the long-term nature of our rental portfolio.

We are managed by Altisource Asset Management Corporation (“AAMC” or our “Manager”), which we rely on to provide us with dedicated personnel to administer our business and perform certain of our corporate governance functions. AAMC also provides portfolio management services in connection with our acquisition and management of SFR properties and the ongoing management of our real estate owned (“REO”) properties and residential mortgage loans.

We have also entered into property management service agreements with two separate third-party property managers, Altisource Portfolio Solutions S.A. (“ASPS”) and Main Street Renewal, LLC (“MSR”, together with ASPS, our “Property Managers”), to provide, among other things, leasing and lease management, operations, maintenance, repair and property management services in respect of our SFR portfolios. We believe that our relationships with our Property Managers and our access to their respective nationwide renovation and property management vendor and internal networks enables us to competitively acquire and operate large portfolios of SFR properties or individual SFR properties on a targeted basis.

Management Overview

During the first quarter of 2017, we made substantial progress on our strategic objectives. On March 30, 2017, we entered into an agreement to acquire up to 3,500 SFR properties (the “HOME II Transaction”) from entities (the “Sellers”) sponsored by Amherst Holdings, LLC (“Amherst”) in multiple closings. In the first closing on March 30, 2017, our indirect wholly owned subsidiary, HOME SFR Borrower II, LLC (“HOME Borrower II”), acquired 757 SFR properties for an aggregate purchase price of $106.5 million. We also committed to purchase up to 2,743 additional stabilized rental properties from the Sellers, 1,250 of which are subject to the Sellers' good faith efforts to offer such properties for sale.

The purchase price was funded with approximately $79.9 million of proceeds from a seller financing arrangement (the “HOME II loan agreement,”) representing 75% of the aggregate purchase price (the “HOME II Loan”), which, along with the Term Loan (as defined below), advanced our objective of obtaining longer term financing arrangements for our assets. The HOME II Loan is a floating rate loan, on which interest is computed monthly based on one-month LIBOR plus a fixed component spread of 2.75%, which is anticipated to be the weighted average fixed rate spread for the duration of the HOME II loan agreement. The initial maturity date of the HOME II Loan is October 9, 2019, and we have the option to extend the HOME II Loan for three successive one-year periods, 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 is secured by the membership interests of HOME Borrower II and the properties and other assets of HOME Borrower II.

In connection with the HOME II Transaction, we again retained MSR, the current property manager for the portfolio, to provide property management services for the acquired rental homes (the “HOME II Portfolio”), including leasing and lease management, operations, maintenance, repair, property management and property disposition services. We believe that our property management agreements with MSR and ASPS are, and will continue to be, key drivers of efficiency and cost

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management in our model and will provide us with scalable, established, geographically dispersed property management infrastructures to support our growing portfolio of SFR properties.

During the first quarter of 2017, we also continued our efforts to recycle capital through the sale of certain mortgage loans and non-rental REO properties. We successfully completed the sale of 556 mortgage loans during the three months ended March 31, 2017, and in January 2017, we commenced an auction process to sell an additional portfolio of 2,384 mortgage loans with an aggregate unpaid principal balance (“UPB”) of $574.4 million. On February 15, 2017, following the auction process, we agreed in principle to award the sale to an unrelated third party. Subject to typical confirmatory due diligence and final negotiation of the definitive purchase agreement, we expect to consummate this transaction during the second quarter of 2017. Following completion of the sale of this additional mortgage loan portfolio, we will have sold the substantial majority of our non-performing and re-performing loans that were not expected to be rental candidates. In addition, we have continued to make significant progress on the sale of our non-rental REO properties with an additional 413 of such properties sold during the first quarter of 2017. These mortgage loan and non-rental REO property sales have allowed, and will continue to allow, us to recycle capital to purchase pools of stabilized rental homes at attractive yields, to repurchase common stock or to utilize the proceeds for such other purposes as we may determine.

We have continued our efforts to optimize our financing structure. In addition to securing the HOME II Loan in March 2017, on April 6, 2017, we also entered into a fixed rate, five year credit and security agreement with an aggregate principal balance of $100.0 million (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 (the “Term Loan”). The majority of the proceeds of the Term Loan were used to reduce our balances on certain of our other short-term repurchase and loan agreements. We believe that the Term Loan, together with the HOME II Loan, better matches the long term nature of our assets than the shorter term repurchase and loan agreements historically used to finance our portfolios while providing us with protection against rising interest rates.

Additionally, on April 6, 2017, we amended and restated our loan and security agreement with Nomura Corporate Funding Americas, LLC (“Nomura”) to, among other things, extend the termination date of the facility by one year to April 5, 2018.

We believe the foregoing developments are critical to our strategy of building long-term stockholder value through the creation of a large portfolio of SFR homes that we target operating at a best-in-class yield.

Portfolio Overview

Real Estate Assets

As of March 31, 2017, we had 10,280 single-family residential properties held for use. Of these properties, 8,385 had been leased, 486 were listed and ready for rent and 449 were in varying stages of renovation and unit turn status. With respect to the remaining 960 REO properties, we will make a final determination whether each property meets our rental profile after (a) applicable state redemption periods have expired, (b) the foreclosure sale has been ratified, (c) we have recorded the deed for the property, (d) utilities have been activated and (e) we have secured access for interior inspection. A majority of the REO properties are subject to state regulations that require us to await the expiration of a redemption period before a foreclosure can be finalized. Once the redemption period expires, we immediately proceed to record a new deed, take possession of the property, activate utilities and start the inspection process in order to make our final determination. If an REO property meets our rental profile, we determine the extent of renovations that are needed to generate an optimal rent and maintain consistency of renovation specifications. If we determine that the REO property will not meet our rental profile, we list the property for sale, in certain instances after renovations are made to optimize the sale proceeds.

As of December 31, 2016, we had 9,939 single-family residential properties held for use. Of these properties, 7,293 had been leased, 703 were listed and ready for rent and 607 were in various stages of renovation. With respect to the remaining 1,336 REO properties, we were in the process of determining whether these properties would meet our rental profile.


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The following table presents the number of real estate assets by status as of the dates indicated:

 
 
March 31, 2017
 
December 31, 2016
Rental:
 
 
 
 
Leased
 
8,385

 
7,293

Listed and ready for rent
 
486

 
703

Renovation or unit turn
 
449

 
607

Total rental
 
9,320

 
8,603

Evaluating for rental strategy
 
960

 
1,336

Total real estate held for use
 
10,280

 
9,939

Held for sale
 
793

 
594

Total real estate
 
11,073

 
10,533



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The following table sets forth a summary of our total real estate portfolio as of March 31, 2017 ($ in thousands):
State / District
 
Number of Properties
 
Carrying
Value (1) (2)
 
Weighted Average Age in Years (3)
Alabama
 
77

 
$
11,138

 
21.6

Arizona
 
39

 
9,545

 
24.8

Arkansas
 
21

 
1,883

 
32.8

California
 
207

 
73,995

 
39.6

Colorado
 
22

 
4,748

 
32.1

Connecticut
 
46

 
8,728

 
55.8

Delaware
 
22

 
3,415

 
38.9

District of Columbia
 
6

 
1,261

 
91.5

Florida
 
1,349

 
203,016

 
27.8

Georgia
 
2,896

 
313,981

 
30.3

Hawaii
 
2

 
379

 
42.9

Idaho
 
7

 
920

 
37.6

Illinois
 
286

 
48,253

 
47.6

Indiana
 
580

 
75,011

 
20.6

Iowa
 
2

 
161

 
63.9

Kansas
 
19

 
2,683

 
38.6

Kentucky
 
53

 
6,779

 
28.4

Louisiana
 
17

 
2,202

 
30.5

Maine
 
5

 
683

 
54.4

Maryland
 
302

 
58,026

 
36.4

Massachusetts
 
76

 
16,924

 
77.8

Michigan
 
35

 
5,839

 
37.2

Minnesota
 
101

 
17,821

 
65.6

Mississippi
 
153

 
21,711

 
17.7

Missouri
 
93

 
13,754

 
24.4

Nevada
 
19

 
2,698

 
25.5

New Hampshire
 
1

 
230

 
123.0

New Jersey
 
202

 
30,744

 
60.5

New Mexico
 
43

 
5,362

 
22.7

New York
 
68

 
13,181

 
65.1

North Carolina
 
638

 
86,684

 
19.3

Ohio
 
47

 
6,400

 
35.5

Oklahoma
 
244

 
35,480

 
26.0

Oregon
 
21

 
4,887

 
33.5

Pennsylvania
 
109

 
14,848

 
61.3

Rhode Island
 
43

 
5,768

 
83.6

South Carolina
 
89

 
11,378

 
21.9

South Dakota
 
1

 
95

 
35.0

Tennessee
 
1,141

 
165,569

 
20.3

Texas
 
1,792

 
266,033

 
26.1

Utah
 
25

 
4,581

 
37.8

Vermont
 
5

 
597

 
126.9

Virginia
 
49

 
14,021

 
28.3


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Washington
 
86

 
17,428

 
44.4

West Virginia
 
2

 
278

 
13.1

Wisconsin
 
32

 
3,871

 
48.2

Total
 
11,073

 
1,592,989

 
30.6

_____________
(1)
The carrying value of an asset held for use is based on historical cost plus renovation costs, net of any accumulated depreciation and impairment. Assets held for sale are carried at the lower of the carrying amount or estimated fair value less costs to sell.
(2)
The carrying value of properties acquired in the HOME II Transaction are included based upon the initial purchase price, which is subject to certain purchase price adjustment provisions as set forth in the purchase and sale agreement.
(3)
Weighted average age is based on the age of each property weighted by its proportion of the total carrying value for its respective state.

Real Estate Acquisitions

On March 30, 2017, we entered into an agreement to acquire up to 3,500 SFR properties from the Sellers. The acquisition is expected to be achieved in multiple closings during 2017. In the first closing that occurred on March 30, 2017, we acquired 757 SFR properties for an aggregate purchase price of $106.5 million, which is subject to potential purchase price adjustments after the final closing in the HOME II Transaction. The purchase price was funded with approximately $79.9 million of proceeds from the HOME II loan agreement representing 75% of the aggregate purchase price as well as $26.6 million of cash on hand. As of March 31, 2017, we were committed to purchase up to 2,743 additional stabilized rental properties from the Amherst sponsored entities in additional closings during 2017.

On March 30, 2016, we completed the acquisition of 590 SFR properties located in five states from an unrelated third party for an aggregate purchase price of approximately $64.8 million.

During the three months ended March 31, 2016, we acquired 113 residential properties, respectively, under our one-by-one acquisition program for an aggregate purchase price of $10.1 million.

Real Estate Dispositions

During the three months ended March 31, 2017 and 2016, we sold 413 and 686 residential properties, respectively, and recorded $20.0 million and $29.4 million, respectively, of net realized gains on real estate.


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The following table summarizes changes in our real estate assets for the periods indicated:
 
Three months ended March 31, 2017
 
Three months ended March 31, 2016
Real Estate Assets
 
 
 
Beginning
10,533

 
6,516

Acquisitions
757

 
703

Dispositions
(413
)
 
(686
)
Mortgage loan conversions to REO, net (1)
195

 
360

Other additions
1

 
2

Ending
11,073

 
6,895

_____________
(1)
Subsequent to the foreclosure sale, we may be notified that the foreclosure sale was invalidated for certain reasons.

Mortgage Loan Assets

As of March 31, 2017, our portfolio of mortgage loans at fair value consisted of 442 remaining loans, substantially all of which were non-performing, having an aggregate UPB of approximately $106.6 million and an aggregate market value of underlying properties of $120.6 million. We also owned 2,203 mortgage loans held for sale having an aggregate UPB of approximately $538.9 million and an aggregate market value of underlying properties of approximately $572.5 million as of March 31, 2017. During the first quarter of 2017, we transferred $352.7 million of mortgage loans at fair value to mortgage loans held for sale upon the agreement in principle to sell such loans to a third party in the NPL sale that we expect to close in the second quarter of 2017.

As of December 31, 2016, our portfolio of mortgage loans at fair value consisted of 2,891 loans, substantially all of which were non-performing, having an aggregate UPB of approximately $697.7 million and an aggregate market value of underlying properties of $746.3 million. We also owned 583 mortgage loans held for sale having an aggregate UPB of approximately $125.6 million and an aggregate market value of underlying properties of approximately $153.6 million as of December 31, 2016.


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The table below provides a summary of our mortgage loans at fair value as of March 31, 2017 ($ in thousands):
Location
 
Loan Count
 
Carrying Value
 
UPB
 
Market Value of Underlying Properties (1)
Arizona
 
4

 
$
696

 
$
815

 
$
893

Arkansas
 
1

 
64

 
139

 
105

California
 
47

 
18,621

 
21,185

 
28,566

Colorado
 
1

 
128

 
135

 
171

Connecticut
 
5

 
1,356

 
2,146

 
1,940

Delaware
 
2

 
285

 
428

 
370

District of Columbia
 
3

 
220

 
716

 
390

Florida
 
71

 
10,747

 
15,709

 
19,083

Georgia
 
16

 
1,897

 
2,841

 
2,940

Hawaii
 
2

 
251

 
452

 
580

Illinois
 
16

 
2,247

 
3,177

 
3,407

Indiana
 
15

 
1,132

 
1,873

 
1,949

Kentucky
 
2

 
222

 
300

 
350

Louisiana
 
1

 
70

 
140

 
115

Maryland
 
25

 
3,601

 
6,021

 
5,831

Massachusetts
 
13

 
2,051

 
3,320

 
4,152

Minnesota
 
2

 
318

 
332

 
408

Mississippi
 
1

 
126

 
227

 
182

Missouri
 
5

 
188

 
346

 
344

Nevada
 
27

 

 
6,524

 
5,319

New Jersey
 
39

 
5,800

 
11,919

 
9,439

New Mexico
 
6

 
427

 
658

 
776

New York
 
26

 
6,085

 
9,470

 
10,548

North Carolina
 
7

 
945

 
1,120

 
1,321

Ohio
 
4

 
245

 
425

 
476

Oklahoma
 
2

 
115

 
170

 
190

Oregon
 
3

 
395

 
615

 
635

Pennsylvania
 
15

 
1,743

 
2,241

 
2,594

Rhode Island
 
7

 
550

 
1,291

 
1,068

South Carolina
 
7

 
620

 
986

 
997

Tennessee
 
7

 
1,769

 
1,860

 
2,875

Texas
 
34

 
2,978

 
3,310

 
5,160

Utah
 
2

 
685

 
724

 
1,024

Vermont
 
1

 
200

 
166

 
285

Virginia
 
3

 
276

 
520

 
448

Washington
 
15

 
3,436

 
3,742

 
5,085

Wisconsin
 
5

 
305

 
567

 
535

Total mortgage loans at fair value
 
442

 
$
70,794

 
$
106,610

 
$
120,551

_____________
(1)
Market value is based on the most recent broker price opinion (“BPO”) for each property.

Mortgage Loan Resolutions and Dispositions

During the three months ended March 31, 2017 and 2016, we resolved 78 and 169 mortgage loans, respectively, primarily through short sales, refinancing and foreclosure sales. In connection with these resolutions, we recorded $7.3 million and $12.7 million, respectively, of net realized gains on mortgage loans.


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During the three months ended March 31, 2017 and 2016, we sold 556 and 1,078 of our mortgage loans held for sale to third party purchasers. In connection with these sales, we recorded $28.3 million and $34.2 million, respectively, of net realized gains on mortgage loans held for sale.

The following table summarizes changes in our mortgage loans at fair value for the periods indicated:
 
Three months ended March 31, 2017
 
Three months ended March 31, 2016
Mortgage Loans at Fair Value (1)
 
 
 
Beginning
2,891

 
5,739

Resolutions
(78
)
 
(169
)
Transferred to held for sale, net
(2,176
)
 
187

Mortgage loan conversions to REO, net (2)
(195
)
 
(360
)
Ending
442

 
5,397

_____________
(1)
Excludes mortgage loans held for sale.
(2)
Subsequent to the foreclosure sale, we may be notified that the foreclosure sale was invalidated for certain reasons.

Metrics Affecting Our Results

Revenues

Our revenues primarily consist of the following:

i.
Rental revenues. Minimum contractual rents from leases are recognized on a straight-line basis over the terms of the leases in residential rental revenues. Therefore, actual amounts billed in accordance with the lease during any given period may be higher or lower than the amount of rental revenue recognized for the period. As we acquire more SFR properties and as we renovate and deem suitable for rent a greater number of our REO properties, we expect a greater portion of our revenues will be rental revenues. We believe the key variables that will affect our rental revenues over the long term will be average occupancy levels and rental rates.

ii.
Net realized gain (loss) on mortgage loans. We record net realized gains or losses, including the reclassification of previously accumulated net unrealized gains, upon the liquidation of a loan, which may consist of short sale, third party sale of the underlying property, refinancing or full debt pay-off of the loan. We expect the timeline to liquidate loans will vary significantly by loan, which could result in fluctuations in revenue recognition and operating performance from period to period. Additionally, the proceeds from loan liquidations may vary significantly depending on the resolution methodology. We generally expect to collect proceeds of loan liquidations in cash and, thereafter, have no continuing involvement with the asset.

iii.
Change in unrealized gains from the conversion of loans to REO. Upon conversion of loans to REO, we mark the properties to the most recent market value. The difference between the carrying value of the asset at the time of conversion and the most recent market value, based on BPOs, is recorded in our statement of operations as change in unrealized gain on mortgage loans. We expect the timeline to convert acquired loans into REO will vary significantly by loan, which could result in fluctuations in our revenue recognition and our operating performance from period to period. The factors that may affect the timelines to foreclose upon a residential mortgage loan include, without limitation, state foreclosure timelines and deferrals associated therewith; unauthorized parties occupying the property; inadequacy of documents necessary to foreclose; bankruptcy proceedings initiated by borrowers; federal, state or local legislative action or initiatives designed to provide homeowners with assistance in avoiding residential mortgage loan foreclosures; continued declines in real estate values and/or sustained high levels of unemployment that increase the number of foreclosures and which place additional pressure and/or delays on the judicial and administrative proceedings.

iv.
Change in unrealized gains from the change in fair value of loans. The fair value of each of our mortgage loans is adjusted in each reporting period as the loan proceeds to a particular resolution (i.e., modification, liquidation or conversion to real estate owned). As a loan approaches resolution, the resolution timeline for that loan decreases, and costs embedded in the discounted cash flow model for loan servicing, foreclosure costs and property insurance are incurred and removed from future expenses. The shorter resolution timelines and reduced future expenses each

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increase the fair value of the loan. The increase in the value of the loan is recognized in change in unrealized gain on mortgage loans in our condensed consolidated statements of operations. The exact nature of resolution will be dependent on a number of factors that are beyond our control, including borrower willingness to pay, property value, availability of refinancing, interest rates, conditions in the financial markets, the regulatory environment and other factors.

v.
Net realized gain on real estate. REO properties that do not meet our investment criteria are sold out of our taxable REIT subsidiary. The realized gain or loss recognized in the financial statements reflects the net amount of realized and unrealized gains on sold REOs from the time of acquisition to sale completion.

As we acquire more SFR properties and as we renovate and deem suitable for rent a greater number of our REO properties, we expect that a greater portion of our revenues will be rental revenues. We believe the key variables that will affect our rental revenues over the long term will be the number of acquired properties, average occupancy levels and rental rates. We anticipate that a majority of our leases of single-family rental properties to tenants will be for a term of one to two years. As these leases permit the residents to leave at the end of the lease term without penalty, we anticipate our rental revenues will be affected by declines in market rents more quickly than if our leases were for longer terms. Short-term leases may result in high turnover, which involves expenses such as additional renovation costs and leasing expenses or reduced rental revenues. Our occupancy rate is defined as leases in force in which the tenant is in place and occupying the property and leases in force in which the tenant is expected to move in shortly as a percentage of our SFR properties that are leased or available for lease. Our occupancy rate at March 31, 2017 was 94.5%. Our rental properties had an average annual rental rate of $14,368 per home for the 8,385 properties that were leased at March 31, 2017.

Although we seek to convert the majority of the REO properties we acquire to rental properties, we also sell the properties that do not meet our rental investment criteria to generate additional cash for reinvestment in other acquisitions. The real estate market and home prices will determine proceeds from any sale of real estate. In addition, while we seek to track real estate price trends and estimate the effects of those trends on the valuations of our portfolios of residential mortgage loans, future real estate values are subject to influences beyond our control.


Our investment strategy is to develop a portfolio of single-family rental properties in the United States that provides attractive risk-adjusted returns on invested capital. In determining which REO properties we retain for our rental portfolio, we consider various objective and subjective factors, including but not limited to gross and net rental yields, property values, renovation costs, location in relation to our coverage area, property type, HOA covenants, potential future appreciation and neighborhood amenities.

Expenses

Our expenses primarily consist of residential property operating expenses, depreciation and amortization, acquisition fees and costs, selling costs and impairment, mortgage loan servicing costs, interest expense, general and administrative expenses, certain expense reimbursements to our Manager as well as management fees to our Manager under the AMA. Residential property operating expenses are expenses associated with our ownership and operation of residential properties, including expenses such as property management fees, expenses towards repairs, utility expenses on vacant properties, turnover costs, property taxes, insurance and HOA dues. Depreciation and amortization is a non-cash expense associated with the ownership of real estate and generally remains relatively consistent each year in relation to our asset levels since we depreciate our properties on a straight-line basis over a fixed life. Acquisition fees and costs include due diligence fees, property inspection fees, real estate commissions and other fees and costs involved in our efforts to acquire assets. Selling costs and impairment represents our estimated and actual costs incurred to sell a property or mortgage loan and an amount that represents the carrying amount over the estimated fair value less costs to sell. Mortgage loan servicing costs are primarily for servicing fees, foreclosure fees and advances of residential property insurance. Interest expense consists of the costs to borrow money in connection with our debt financing of our portfolios. General and administrative expenses consist of the costs related to the general operation and overall administration of our business. Expense reimbursements include the compensation and benefits of the General Counsel dedicated to us and certain out-of-pocket expenses incurred by AAMC on our behalf. Management fees paid to AAMC consist of a base management fee of 2% of our invested capital (as defined in the AMA), a conversion fee for assets that are converted to single-family rentals during each quarter and an incentive management fee calculated as 25% of our return on invested capital that exceeds a minimum threshold for each period.


33


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Other Factors Affecting Our Consolidated Results

We expect our results of operations will be affected by various factors, many of which are beyond our control, including the following:

Acquisitions

Our operating results will depend on our ability to identify and execute upon SFR properties and other single-family residential assets. We believe that there is currently a large potential supply of SFR and REO properties available to us for acquisition. Generally, we expect that our SFR portfolio may grow at an uneven pace, as opportunities to acquire SFR and REO properties may be irregularly timed and may at times involve large or small portfolios. The timing and extent of our success in acquiring such assets cannot be predicted.

Financing

Our ability to grow our business is dependent on the availability of adequate financing, including additional equity financing, debt financing or both, in order to meet our objectives. We intend to leverage our investments with debt, the level of which may vary based upon the particular characteristics of our portfolio and on market conditions. To the extent available at the relevant time, our financing sources may include term loan facilities, warehouse lines of credit, securitization financing, structured financing arrangements, seller financing loan arrangements, repurchase agreements and bank credit facilities, among others. We may also seek to raise additional capital through public or private offerings of debt or equity securities, depending upon market conditions. To qualify as a REIT under the Internal Revenue Code, we will need to distribute at least 90% of our taxable income each year to our stockholders. This distribution requirement limits our ability to retain earnings and thereby replenish or increase capital to support our activities.

Loan Resolution Activities

The management and/or sale of our remaining portfolio of residential mortgage loans is an important focus of our business. The sale of our mortgage loans from time to time has allowed us to recycle our capital to grow our rental portfolio. For the mortgage loans remaining in our portfolio, we seek to employ various loan resolution methodologies, including loan modification, collateral resolution and collateral disposition. To help us achieve our business objective, we continue to focus on (1) converting a portion of our remaining sub-performing and non-performing loans to performing status and (2) managing the foreclosure process and timelines with respect to the remainder of those loans. Due to the continually evolving market dynamics and pricing of distressed mortgage loans, we continually evaluate the different alternatives with respect to our remaining loan portfolio, including potential sales and continued resolution of such loans.

Disposition of Loans

During 2015, we commenced efforts to sell certain non-performing loan portfolios to take advantage of attractive market pricing and evolving market conditions. Sales of non-performing loans that do not meet our rental property criteria have been a growth catalyst for our company, allowing us to recycle capital that we expect to continue to use to purchase rental properties that meet our return profile.

Resolution of Loans

In our operations to date, certain of our residential mortgage loans have been liquidated as a result of a short sale, third party sale of the underlying property, refinancing or full debt pay-off of the loan. Upon liquidation of a loan, we have recorded net realized gains, including the reclassification of previously accumulated net unrealized gains on those mortgage loans. We expect the timeline to liquidate loans will vary significantly by loan, which has resulted and could continue to result in fluctuations in revenue recognition and operating performance from period to period. Additionally, the proceeds from loan sales and liquidations may vary significantly depending on the resolution methodology used by us for each loan.


34


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We anticipate that REO properties that meet our investment criteria will be converted into SFR properties, which we believe will generate long-term returns for our stockholders. If an REO property does not meet our rental investment criteria, we expect to liquidate the property and generate cash for reinvestment in other acquisitions, repurchases of common stock, dividend distributions or such other purposes as we may determine.

Portfolio Size

The size of our investment portfolio will also impact operating results. Generally, as the size of our investment portfolio grows, the amount of revenue we expect to generate will increase. A growing investment portfolio, however, will drive increased expenses, including possibly higher servicing fees, property management fees and, potentially, depending on our performance, fees payable to AAMC. We may also incur additional interest expense if we incur additional debt to finance the purchase of our assets.

Results of Operations