10-Q
 

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, 2016

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
 
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
x
 
Accelerated Filer
o
Non-Accelerated Filer
o
(Do not check if a smaller reporting company)
Smaller Reporting Company
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 April 29, 2016, 54,696,077 shares of our common stock were outstanding.



Altisource Residential Corporation
March 31, 2016
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, unless otherwise indicated. References in this report to “ASPS” refer to Altisource Portfolio Solutions S.A. 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, which we refer to as the “Securities Act,” and Section 21E of the Securities Exchange Act of 1934, as amended, which we refer to as 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 which are predictions of or indicate future events or trends and which 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 residential mortgage or single-family rental assets;
•
our ability to successfully modify or otherwise resolve sub-performing and non-performing loans;
•
our ability to convert residential mortgage loans to rental properties or acquire single-family rental properties and generate attractive returns;
•
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;
•
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 ASPS to effectively perform its 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 "Item 1A. Risk factors” in our annual report on Form 10-K for the year ended December 31, 2015.


ii

(table of contents)

Part I
 
Item 1. Financial Statements (Unaudited)

Certain information contained herein is presented as of April 29, 2016, which we have concluded is the latest practicable date for financial information prior to the filing of this quarterly report.


1

(table of contents)

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

 
March 31, 2016
 
December 31, 2015
Assets:
 
 
 
Real estate held for use:
 
 
 
Land
$
75,080

 
$
56,346

Rental residential properties (net of accumulated depreciation of $9,948 and $7,127, respectively)
300,059

 
224,040

Real estate owned
329,223

 
455,483

Total real estate held for use, net
704,362

 
735,869

Real estate assets held for sale
297,074

 
250,557

Mortgage loans at fair value
924,543

 
960,534

Mortgage loans held for sale
4,045

 
317,336

Cash and cash equivalents
124,560

 
116,702

Restricted cash
17,435

 
20,566

Accounts receivable, net
61,038

 
45,903

Related party receivables
214

 
2,180

Prepaid expenses and other assets
1,949

 
1,126

Total assets
$
2,135,220

 
$
2,450,773

 
 
 
 
Liabilities:
 
 
 
Repurchase agreements
$
846,984

 
$
763,369

Other secured borrowings
164,097

 
502,599

Accounts payable and accrued liabilities
39,187

 
32,448

Related party payables
4,676

 
—

Total Liabilities
1,054,944

 
1,298,416

 
 
 
 
Commitments and contingencies (Note 7)

 

 
 
 
 
Equity:
 
 
 
Common stock, $.01 par value, 200,000,000 authorized shares; 54,695,816 shares issued and outstanding as of March 31, 2016 and 55,581,005 shares issued and outstanding as of December 31, 2015
547

 
556

Additional paid-in capital
1,192,483

 
1,202,418

Accumulated deficit
(112,754
)
 
(50,617
)
Total equity
1,080,276

 
1,152,357

Total liabilities and equity
$
2,135,220

 
$
2,450,773



See accompanying notes to consolidated financial statements.
2
(table of contents)

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

Three months ended March 31, 2016
 
Three months ended March 31, 2015
Revenues:
 
 
 
Rental revenues
$
6,071

 
$
1,400

Net unrealized (loss) gain on mortgage loans
(42,452
)
 
61,134

Net realized gain on mortgage loans
12,732

 
15,382

Net realized gain on mortgage loans held for sale
34,197

 
151

Net realized gain on real estate
29,401

 
10,608

Interest income
112

 
240

Total revenues
40,061

 
88,915

Expenses:
 
 
 
Residential property operating expenses
18,201

 
12,459

Real estate depreciation and amortization
3,601

 
998

Acquisition fees and costs
1,581

 
364

Selling costs and impairment
26,591

 
14,691

Mortgage loan servicing costs
11,724

 
18,266

Interest expense
16,416

 
11,643

General and administrative
2,960

 
4,417

Related party general and administrative
4,526

 
15,650

Total expenses
85,600

 
78,488

Other income
—

 
2,000

(Loss) income before income taxes
(45,539
)
 
12,427

Income tax expense
119

 
3

Net (loss) income
$
(45,658
)
 
$
12,424

 
 
 
 
(Loss) earnings per share of common stock - basic:
 
 
 
(Loss) earnings per basic share
$
(0.82
)
 
$
0.22

Weighted average common stock outstanding - basic
55,380,120

 
57,200,889

(Loss) earnings per share of common stock - diluted:
 
 
 
(Loss) earnings per diluted share
$
(0.82
)
 
$
0.22

Weighted average common stock outstanding - diluted
55,380,120

 
57,406,619

 
 
 
 
Dividends declared per common share
$
0.15

 
$
0.63



See accompanying notes to consolidated financial statements.
3
(table of contents)

Altisource Residential Corporation
Consolidated Statements of Stockholders' Equity
(In thousands, except share amounts)
(Unaudited)

 
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



 
Common Stock
 
Additional Paid-in Capital
 
Retained Earnings
 
Total Equity
 
Number of Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
57,192,212

 
$
572

 
$
1,227,091

 
$
99,248

 
$
1,326,911

Issuance of common stock, including stock option exercises
10,999

 
—

 
27

 
—

 
27

Dividends on common stock ($0.63 per share)
—

 
—

 
—

 
(36,038
)
 
(36,038
)
Share-based compensation
—

 
—

 
57

 
—

 
57

Net income
—

 
—

 
—

 
12,424

 
12,424

March 31, 2015
57,203,211

 
$
572

 
$
1,227,175

 
$
75,634

 
$
1,303,381



See accompanying notes to consolidated financial statements.
4
(table of contents)

Altisource Residential Corporation
Consolidated Statements of Cash Flows
(In thousands) (Unaudited)
 
Three months ended March 31, 2016
 
Three months ended March 31, 2015
Operating activities:
 
 
 
Net (loss) income
$
(45,658
)
 
$
12,424

Adjustments to reconcile net income to net cash used in operating activities:

 

Net unrealized loss (gain) on mortgage loans
42,452

 
(61,134
)
Net realized gain on mortgage loans
(12,732
)
 
(15,382
)
Net realized gain on sale of mortgage loans held for sale
(34,197
)
 
(151
)
Net realized gain on sale of real estate
(29,401
)
 
(10,608
)
Real estate depreciation and amortization
3,601

 
998

Selling costs and impairment
26,591

 
14,691

Accretion of interest on re-performing mortgage loans
(37
)
 
(232
)
Share-based compensation
45

 
57

Amortization of deferred financing costs
5,002

 
532

Changes in operating assets and liabilities:

 


Accounts receivable, net
(8,739
)
 
996

Related party receivables
1,966

 
(4,535
)
Deferred leasing costs
(84
)
 
—

Prepaid expenses and other assets
(919
)
 
(299
)
Accounts payable and accrued liabilities
4,507

 
1,024

Related party payables
4,676

 
19,150

Net cash used in operating activities
(42,927
)
 
(42,469
)
Investing activities:
 
 
 
Investment in real estate
(74,845
)
 
—

Investment in renovations
(7,352
)
 
(5,534
)
Real estate tax advances
(5,696
)
 
(6,556
)
Mortgage loan resolutions and dispositions
329,363

 
56,337

Mortgage loan payments
5,619

 
5,816

Disposition of real estate
84,276

 
32,139

Change in restricted cash
3,131

 
(1,484
)
Net cash provided by investing activities
334,496

 
80,718

Financing activities:
 
 
 
Issuance of common stock, including stock option exercises
49

 
74

Payment of tax withholdings on exercise of stock options
(20
)
 
(47
)
Repurchases of common stock
(10,018
)
 
—

Dividends on common stock
(13,833
)
 
(4,576
)
Proceeds from the issuance of other secured debt
—

 
50,690

Repayments of secured notes
(341,175
)
 
(9,256
)
Proceeds from repurchase agreement
285,234

 
33,877

Repayments of repurchase agreement
(200,934
)
 
(119,590
)
Payment of deferred financing costs
(3,014
)
 
(2,341
)
Net cash provided used in financing activities
(283,711
)
 
(51,169
)
Net increase (decrease) in cash and cash equivalents
7,858

 
(12,920
)
Cash and cash equivalents as of beginning of the period
116,702

 
66,166

Cash and cash equivalents as of end of the period
$
124,560

 
$
53,246

 
 
 
 

See accompanying notes to consolidated financial statements.
5
(table of contents)

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

 
Three months ended March 31, 2016
 
Three months ended March 31, 2015
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest
$
11,459

 
$
10,429

Income taxes paid
180

 
—

Transfer of mortgage loans to real estate owned, net
62,542

 
134,826

Transfer of mortgage loans held for sale to mortgage loans at fair value
34,029

 
—

Changes in accrued capital expenditures
(91
)
 
(1,430
)
Changes in receivables from mortgage loan resolutions and dispositions, payments and real estate tax advances to borrowers, net
(6,959
)
 
2,848

Changes in receivables from real estate owned dispositions
9,777

 
630

Dividends declared but not paid
8,204

 
31,462



See accompanying notes to consolidated financial statements.
6
(table of contents)

Altisource Residential Corporation
Notes to Consolidated Financial Statements
March 31, 2016
(Unaudited)

1. Organization and basis of presentation

Altisource Residential Corporation is a Maryland REIT focused on acquiring, owning and managing single-family rental properties throughout the United States. On December 21, 2012 we became a stand-alone publicly traded company with an initial capital contribution of $100 million.

We conduct substantially all of our activities through our wholly owned subsidiary Altisource Residential, L.P. (“ARLP”) and its subsidiaries. Initially, we acquired our rental properties primarily through the acquisition of sub-performing and non-performing mortgage loan (“NPL”) portfolios; however, commencing in the second quarter of 2015, we refocused our acquisition strategy to opportunistically acquire portfolios of single-family rental properties, both individually and in pools, as an avenue to more quickly achieve scale in our rental portfolio.

We have a long-term service agreement with Altisource Portfolio Solutions S.A. (“ASPS”), a leading provider of real estate and mortgage portfolio management, asset recovery and customer relationship management services. For the mortgage loans in our portfolio, we also have servicing agreements with three separate mortgage loan servicers. Our ability to execute our business strategy is reliant, in part, on the performance of these service providers.

We are managed by Altisource Asset Management Corporation (“AAMC” or our “Manager”). We do not have any employees and therefore rely on AAMC for administering our business and performing certain of our corporate governance functions. AAMC also provides portfolio management services in connection with our acquisition and management of residential mortgage loans and real estate owned (“REO”) properties. See Note 8 for a description of this related party relationship.

Basis of presentation and use of estimates

The accompanying unaudited interim 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 preparation of 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ materially from those estimates.

The unaudited interim consolidated financial statements and accompanying unaudited consolidated financial information, in our opinion, contain all adjustments that are of a normal recurring nature and 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 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 consolidated financial statements should be read in conjunction with our annual consolidated financial statements included within our 2015 Annual Report on Form 10-K, which was filed with the SEC on February 29, 2016.

Certain prior year amounts have been reclassified for consistency with the current period presentation, including acquisition fees and costs within our consolidated statement of operations. These reclassifications had no effect on the reported results of operations.

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 in 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 consolidated financial statements.


7
(table of contents)

In certain instances, we hold both the power to direct the most significant activities of VIEs 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 current and former securitization trusts, ARLP Securitization Trust, Series 2014-1 (“ARLP 2014-1”), ARLP Securitization Trust, Series 2014-2 (“ARLP 2014-2”) and ARLP Securitization Trust, Series 2015-1 (“ARLP 2015-1”), are VIEs of which we are the primary beneficiaries. See Note 6 for more information regarding our current and former securitization trusts.

Repurchases of common stock

During the first quarter of 2016, we determined that the 1,645,075 shares of common stock we repurchased during the third quarter of 2015 should have been classified as a reduction to common stock, for the par amount of the common stock, and to additional paid-in capital and that such repurchased shares should be included as shares unissued within the consolidated financial statements as of and for the year ended December 31, 2015. We previously classified common shares repurchased as treasury stock. The accompanying consolidated balance sheet as of December 31, 2015 and the related balances within our consolidated statement of stockholders' equity for the three months ended March 31, 2016 have been corrected to eliminate treasury stock of $25.0 million and reduce common stock and additional paid-in capital by an equivalent amount in the aggregate, resulting in no change in total equity as of December 31, 2015. The previously-reported consolidated statements of income, consolidated statements of comprehensive income or consolidated statements of cash flows were not impacted.

Deferred debt issuance costs

In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-03, Interest – Imputation of Interest (Subtopic 835-30) - Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 requires that debt issuance costs are presented on the balance sheet as a deduction from the carrying amount of the related debt liability instead of being presented as an asset. Debt disclosures include the face amount of the debt liability and the effective interest rate. In August 2015, the FASB issued ASU 2015-15, Interest - Imputation of Interest (Subtopic 835-30) - Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. ASU 2015-15 provides additional guidance to ASU 2015-03, which did not address presentation or subsequent measurement of debt issuance costs related to line of credit arrangements. ASU 2015-15 noted that the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line of credit arrangement, regardless of whether there are any outstanding borrowings on the line of credit arrangement.

Our application of ASU 2015-03 represents a change in accounting principle and has been applied retrospectively, which resulted in i) a reclassification of the deferred debt issuance cost component of our deferred leasing and financing costs to repurchase agreements and other secured borrowings and ii) a reclassification of deferred leasing costs component of our deferred leasing and financing cost to prepaid expenses and other assets in our consolidated balance sheets.

The following table represents the effect of change on the prior periods that will be restated as a result of this adoption ($ in thousands):
 
 
December 31, 2015
 
 
As Previously Reported
 
Adjustments
 
Current Presentation
Assets:
 
 
 
 
 
 
Deferred leasing and financing costs (1)
 
$
7,886

 
$
(7,886
)
 
$
—

Prepaid expenses and other assets (1)
 
415

 
711

 
1,126

Liabilities:
 
 
 
 
 
 
Repurchase agreements
 
767,513

 
(4,144
)
 
763,369

Other secured borrowings
 
505,630

 
(3,031
)
 
502,599

____________
(1)
Upon adoption of ASU 2015-03, we reclassified our deferred leasing costs to prepaid expenses and other assets.

Recently issued accounting standards

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

8

(table of contents)

reporting periods beginning after December 15, 2016, although early adoption is permitted. We are currently evaluating the impact of this ASU 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 are currently evaluating the impact of this ASU on our consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01 (Subtopic 825-10), Financial Instruments - Overall. 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 impact of adopting 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. 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 No. 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. ASU 2014-09 is therefore 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.

2. Asset acquisitions and dispositions

Real estate assets

Acquisitions, including those accounted for as business combinations

On March 30, 2016, we completed the acquisition of 590 single-family residential properties 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 7 months as of the acquisition date.

During the three months ended March 31, 2016, we acquired 113 properties under our one-by-one acquisition program. The aggregate purchase price attributable to these acquired properties was $10.1 million.

During the three months ended March 31, 2015, we did not purchase any real estate assets.

Dispositions

During the three months ended March 31, 2016 and 2015, we sold 686 and 254 residential properties, respectively, and recorded $29.4 million and $10.6 million, respectively, of net realized gains on real estate.


9


Mortgage loan assets

Resolutions and dispositions

During the three months ended March 31, 2016 and 2015, we resolved 169 and 150 mortgage loans, respectively, primarily through short sales, refinancing and foreclosure sales. In connection with these resolutions, we recorded $12.7 million and $15.4 million, respectively, of net realized gains on mortgage loans.

During the three months ended March 31, 2016, we sold 1,078 of our mortgage loans held for sale to a third party purchaser. In connection with this sale, we recorded $34.2 million of net realized gains on mortgage loans held for sale. During the three months ended March 31, 2015, we did not sell any mortgage loans.

Transfers of mortgage loans to real estate owned

During the three months ended March 31, 2016 and 2015, we transferred an aggregate of 360 and 724 mortgage loans, respectively, to REO at an aggregate fair value based on BPOs of $64.9 million and $134.8 million, respectively. Such transfers occur when the foreclosure sale is complete. In connection with these transfers to REO, we recorded $11.6 million and $27.1 million, respectively, in net unrealized gains on mortgage loans.

Due diligence costs

During the three months ended March 31, 2016 and 2015, we recognized $0.2 million and $0.1 million, respectively, of due diligence costs related to the above-described and other transactions in our consolidated statement of operations as acquisition fees and costs.

3. Real estate assets, net

Real estate held for use

As of March 31, 2016, we had 5,143 single-family residential properties held for use. Of these properties, 2,720 had been leased, 265 were listed and ready for rent and 546 were in varying stages of renovation and unit turn status. With respect to the remaining 1,612 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. We include these redemption periods in our portfolio pricing, which generally reduces the price we pay for the mortgage loans. 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 for future branding. 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, 2015, we had 4,933 single-family residential properties held for use. Of these properties, 2,118 had been leased, 264 were listed and ready for rent and 350 were in various stages of renovation. With respect to the remaining 2,201 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 cost. 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.

10
(table of contents)


During the three months ended March 31, 2016, we recognized $3.0 million of impairment on real estate held for use. During the three months ended March 31, 2015, we recognized no impairment on our real estate held for use.

Real estate held for sale

As of March 31, 2016 and December 31, 2015, our real estate held for sale included 1,752 and 1,583 REO properties, respectively, having an aggregate carrying value of $297.1 million and $250.6 million, respectively. Management determined to divest of 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, 2016 and 2015, we recognized $11.9 million and $4.1 million, respectively, of impairment on our real estate held for sale.

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, 2016 and December 31, 2015 ($ in thousands):
 
 
Number of Loans
 
Carrying Value
 
Unpaid Principal Balance
 
Market Value of Underlying Properties
March 31, 2016
 
 
 
 
 
 
 
 
Current
 
803

 
$
133,463

 
$
176,174

 
$
196,136

30
 
69

 
12,383

 
17,563

 
20,658

60
 
34

 
5,165

 
6,974

 
7,947

90
 
728

 
96,004

 
151,728

 
144,887

Foreclosure
 
3,763

 
677,528

 
923,883

 
906,636

Mortgage loans at fair value
 
5,397

 
$
924,543

 
$
1,276,322

 
$
1,276,264


 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
 
Current
 
730

 
$
124,595

 
$
165,645

 
$
177,348

30
 
80

 
12,003

 
18,142

 
21,858

60
 
38

 
5,688

 
8,088

 
8,766

90
 
984

 
130,784

 
216,717

 
196,963

Foreclosure
 
3,907

 
687,464

 
946,962

 
917,671

Mortgage loans at fair value
 
5,739

 
$
960,534

 
$
1,355,554

 
$
1,322,606



11
(table of contents)

The following table sets forth the carrying value of our mortgage loans held for sale, the related unpaid principal balance and market value of underlying properties by delinquency status as of March 31, 2016 and December 31, 2015 ($ in thousands):
 
 
Number of Loans
 
Carrying Value
 
Unpaid Principal Balance
 
Market Value of Underlying Properties
March 31, 2016
 
 
 
 
 
 
 
 
Current
 
16

 
$
2,111

 
$
3,115

 
$
4,106

30
 
2

 
142

 
422

 
375

60
 
2

 
159

 
310

 
255

90
 
2

 
188

 
222

 
341

Foreclosure
 
10

 
1,445

 
1,989

 
2,090

Mortgage loans held for sale
 
32

 
$
4,045

 
$
6,058

 
$
7,167

 
 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
 
Current
 
58

 
$
10,864

 
$
13,466

 
$
17,776

30
 
26

 
7,616

 
10,013

 
12,200

60
 
6

 
668

 
775

 
1,063

90
 
328

 
73,164

 
101,121

 
103,395

Foreclosure
 
879

 
225,024

 
314,991

 
330,573

Mortgage loans held for sale
 
1,297

 
$
317,336

 
$
440,366

 
$
465,007


As of March 31, 2016, our mortgage loans held for sale include our remaining re-performing residential mortgage loans that we initially acquired in June 2014. We initially determined to dispose of these mortgage loans in order to take advantage of attractive market pricing and because we do not expect them to be rental candidates.

Re-performing residential mortgage loans

For the three months ended March 31, 2016 and 2015, we recognized no provision for loan loss and no adjustments to the amount of the accretable yield. For the three months ended March 31, 2016 and 2015, we accreted $37 thousand and $232 thousand into interest income with respect to our re-performing loans. For both March 31, 2016 and December 31, 2015, these re-performing loans had a UPB of $6.0 million and a carrying value of $4.0 million and were included 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, 2016
 
Three months ended March 31, 2015
Balance at the beginning of the period
 
$
2,146

 
$
7,640

Payments and other reductions, net
 
—

 
(201
)
Accretion
 
(37
)
 
(232
)
Balance at the end of the period
 
$
2,109

 
$
7,207



12

(table of contents)

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, 2016 and December 31, 2015 ($ in thousands):
 
 
Level 1
 
Level 2
 
Level 3
 
 
Quoted Prices in Active Markets
 
 Observable Inputs Other Than Level 1 Prices
 
 Unobservable Inputs
March 31, 2016
 
 
 
 
 
 
Recurring basis (assets)
 
 
 
 
 
 
Mortgage loans at fair value
 
$
—

 
$
—

 
$
924,543

Nonrecurring basis (assets)
 
 
 
 
 
 
Real estate assets held for sale
 
—

 
—

 
297,074

Not recognized on consolidated balance sheets at fair value (assets)
 
 
 
 
 
 
Mortgage loans held for sale
 
—

 
—

 
4,045

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

 
851,813

 
—

Other secured borrowings
 
—

 
165,339

 
—

 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
Recurring basis (assets)
 
 
 
 
 
 
Mortgage loans at fair value
 
$
—

 
$
—

 
$
960,534

Nonrecurring basis (assets)
 
 
 
 
 
 
Real estate assets held for sale
 
—

 
—

 
250,557

Not recognized on consolidated balance sheets at fair value (assets)
 
 
 
 
 
 
Mortgage loans held for sale
 
—

 
—

 
317,336

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

 
767,513

 
—

Other secured borrowings
 
—

 
502,268

 
—


We have not transferred any assets from one level to another level during the three months ended March 31, 2016 or during the year ended December 31, 2015.

The carrying values of our cash and cash equivalents, restricted cash, related party receivables, 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 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 the repurchase 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.


13
(table of contents)

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, 2016
 
Three months ended March 31, 2015
Mortgage loans at fair value


 


Beginning balance
$
960,534

 
$
1,959,044

Net unrealized gain on mortgage loans at fair value
26,256

 
61,134

Net realized gain on mortgage loans at fair value
12,732

 
15,382

Transfers of mortgage loans held for sale to mortgage loans at fair value
34,029

 
—

Mortgage loans at fair value resolutions and payments
(49,931
)
 
(65,168
)
Real estate tax advances to borrowers
3,442

 
7,127

Reclassification of realized gains on real estate sold from unrealized gains
—

 
10,802

Transfer of mortgage loans at fair value to real estate owned, net
(62,519
)
 
(134,826
)
Ending balance at March 31
$
924,543

 
$
1,853,495

 
 
 
 
Net unrealized gain on mortgage loans at fair value held at the end of the period
$
20,642

 
$
51,068


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

The following table sets forth quantitative information about the significant unobservable inputs used to measure the fair value of our mortgage loans as of:
Input
 
March 31, 2016
 
December 31, 2015
Equity discount rate
 
15.0%
 
15.0%
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
 
0.0% to 10.3%
 
0.0% to 10.2%
Loan resolution probabilities — modification
 
0% to 44.7%
 
0% to 44.7%
Loan resolution probabilities — rental
 
0% to 100.0%
 
0% to 100.0%
Loan resolution probabilities — liquidation
 
0% to 100.0%
 
0% to 100.0%
Loan resolution timelines (in years)
 
0.1 - 5.2
 
0.1 - 5.6
Value of underlying properties
 
$300 - $4,500,000
 
$3,000 - $4,500,000


14
(table of contents)

6. Borrowings

Repurchase and loan agreements

Our operating partnership and certain of its Delaware statutory trust subsidiaries, as applicable, have entered into master repurchase agreements and a loan agreement with major financial institutions. The purpose of these repurchase and loan agreements is to finance the acquisition and ownership of REO properties and 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, 2016, the weighted average annualized interest rate on borrowings under our repurchase and loan agreements was 3.52%, excluding amortization of deferred financing costs.

We have entered into three separate repurchase agreements and a loan agreement to finance the acquisition and ownership of residential mortgage loans and REO properties. Below is a description of each 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 and 2015, the CS repurchase agreement was amended on several occasions, ultimately increasing the aggregate maximum borrowing capacity to $275.0 million on December 31, 2014 with a maturity date of April 18, 2016. On March 31, 2016, we entered into an amended and restated repurchase agreement with CS that increased our aggregate borrowing capacity to $350.0 million, extended the maturity date to March 30, 2017 and removed the REO sublimit under the facility so that 100% of the financed assets can be REO properties.
    
•
Deutsche Bank (“DB”) is the lender on the repurchase agreement dated September 12, 2013 (the “DB repurchase agreement”). During March 2016, upon expiration of the DB repurchase agreement in accordance with its terms, we repaid the remaining balance of the DB repurchase agreement and transferred the collateral to our other existing facilities.

•
Wells Fargo (“Wells”) is the lender under the repurchase agreement dated September 23, 2013 (the “Wells repurchase agreement”) with an initial aggregate maximum borrowing capacity of $200.0 million. Throughout 2013, 2014 and 2015, the Wells repurchase agreement was amended on several occasions, ultimately increasing the aggregate maximum borrowing capacity to $750.0 million with a maturity date of September 27, 2017.

•
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, ultimately increasing the maximum funding capacity to $200.0 million on December 31, 2015 with a maturity date of April 8, 2016. On April 7, 2016, we entered into an amended and restated loan and security agreement with Nomura that increased our aggregate borrowing capacity to $250.0 million and extended the termination date to April 16, 2017. See Note 13 for a more complete description of the amended and restated Nomura loan agreement.

Following all of the amendments described above, the maximum aggregate funding available to us under these repurchase and loan agreements as of March 31, 2016 was $1.3 billion, subject to certain sublimits, eligibility requirements and conditions precedent to each funding. As of March 31, 2016, an aggregate of $851.8 million was outstanding under our repurchase and loan agreements. All obligations under each of these repurchase and loan agreements are fully guaranteed by us.


15
(table of contents)

The following table sets forth data with respect to our repurchase and loan agreements as of March 31, 2016 and December 31, 2015 ($ in thousands):
 
Maximum Borrowing Capacity
 
Book Value of Collateral
 
Amount Outstanding
 
Amount of Available Funding
March 31, 2016
 
 
 
 
 
 
 
CS repurchase agreement due March 30, 2017
$
350,000

 
$
308,236

 
$
176,127

 
$
173,873

Wells repurchase agreement due September 27, 2017
750,000

 
889,546

 
487,408

 
262,592

Nomura loan agreement due April 8, 2016 (1)
200,000

 
273,138

 
188,278

 
11,722

Less: deferred debt issuance costs
—

 
—

 
(4,829
)
 
—

 
$
1,300,000

 
$
1,470,920

 
$
846,984

 
$
448,187

 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
CS repurchase agreement due April 18, 2016
$
275,000

 
$
335,184

 
$
194,346

 
$
80,654

Wells repurchase agreement due September 27, 2017
750,000

 
708,275

 
371,130

 
378,870

DB repurchase agreement due March 11, 2016
54,944

 
130,863

 
54,944

 
—

Nomura loan agreement due April 8, 2016
200,000

 
204,578

 
147,093

 
52,907

Less: deferred debt issuance costs
—

 
—

 
(4,144
)
 
—

 
$
1,279,944

 
$
1,378,900

 
$
763,369

 
$
512,431

_____________
(1)
On April 7, 2016, the maturity date of the Nomura loan agreement was extended to April 16, 2017 and the available funding under the facility was increased to $250.0 million (see Note 13).

Under the terms of two of our repurchase agreements, 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 applicable lender equity interests in the Delaware statutory trust subsidiary that owns the applicable underlying mortgage assets on our behalf, or the trust will directly sell such underlying mortgage or REO 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 repurchase agreements, our applicable subsidiary is required to pay the lender interest based on LIBOR or at 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 expenses to maintain and administer the repurchase agreements. 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, 2016, approximately $21.0 million of the amounts 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.

Each of the repurchase agreements require 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 specified levels of unrestricted cash. In addition, both of the repurchase agreements contain customary events of default.

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 REO properties. The advances paid under the Nomura loan agreement with respect to the REO properties from time to time will be based on a percentage of the market value of the applicable REO 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

16
(table of contents)

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 REO properties then subject thereto.

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

Other secured debt

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 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, 2016, the book value of the underlying securitized assets held by ARLP 2015-1 was $282.2 million.

On November 25, 2014, we completed a securitization transaction in which ARLP 2014-2 issued $270.8 million in ARLP 2014-2 Class A Notes with a weighted yield of approximately 3.85% and $234.0 million in ARLP 2014-2 Class M Notes. We repaid the notes issued under the ARLP 2014-2 in March 2016.

On September 25, 2014, we completed a securitization transaction in which ARLP 2014-1 issued $150.0 million in ARLP 2014-1 Class A Notes with a weighted yield of approximately 3.47% and $32.0 million in ARLP 2014-1 Class M Notes with a weighted yield of 4.25%. We repaid the notes issued under the ARLP 2014-1 securitization in March 2016.


17
(table of contents)

Following the repayment of the notes issued under the ARLP 2014-1 and 2014-2 securitizations, at March 31, 2016, only the ARLP 2015-1 securitization remained in effect. The following table sets forth data with respect to these notes as of March 31, 2016 and December 31, 2015 ($ in thousands):
 
Interest Rate
 
Amount outstanding
March 31, 2016
 
 
 
ARLP Securitization Trust, Series 2015-1
 
 
 
ARLP 2015-1 Class A Notes due May 25, 2055 (1)
4.01
%
 
$
199,339

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
 
 
(1,242
)
 
 
 
$
164,097

December 31, 2015:
 
 
 
ARLP Securitization Trust, Series 2014-1
 
 
 
ARLP 2014-1 Class A Notes (2)
3.47
%
 
$
136,404

ARLP 2014-1 Class M Notes (2)
4.25
%
 
32,000

ARLP Securitization Trust, Series 2014-2
 
 
 
ARLP 2014-2 Class A Notes (2)
3.63
%
 
244,935

ARLP 2014-2 Class M Notes (2)
—
%
 
234,010

ARLP Securitization Trust, Series 2015-1
 
 
 
ARLP 2015-1 Class A Notes due May 25, 2055 (1)
4.01
%
 
203,429

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

Intercompany eliminations
 
 
 
Elimination of ARLP 2014-1 Class M Notes due to ARNS, Inc.
 
 
(32,000
)
Elimination of ARLP 2014-2 Class A Notes due to ARNS, Inc.
 
 
(45,138
)
Elimination of ARLP 2014-2 Class M Notes due to ARLP
 
 
(234,010
)
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
 
 
(3,031
)
 
 
 
$
502,599

_____________
(1)
The expected redemption date for the Class A Notes ranges from June 25, 2018 to June 25, 2019.
(2)
Terminated during March 2016

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, 2016 or which settled during 2016:

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, Mr. 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 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

18
(table of contents)

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. Our motion to dismiss the amended complaint was due on March 22, 2016.

On March 22, 2016, defendants filed a motion to dismiss all claims in the action. The plaintiffs are required to file a response to the defendants’ motion to dismiss on or before May 20, 2016, and the defendants are required to file any reply briefs to the plaintiffs’ response on or before July 1, 2016.

We believe the complaint is without merit and intend to vigorously defend the action. 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.

Sokolowski v. Erbey, et al.
On December 24, 2014, a shareholder derivative action was filed in the United States District Court for the Southern District of Florida by a purported shareholder of Ocwen. The action named the directors of Ocwen as defendants and alleged, among other things, various breaches of fiduciary duties by the directors of Ocwen.

On February 11, 2015, plaintiff filed an amended complaint naming the directors of Ocwen as defendants and also naming the Company, AAMC, Altisource and Home Loan Servicing Solutions, Ltd. as alleged aiders and abettors of the purported breaches of fiduciary duties. The amended complaint alleges that the directors of Ocwen breached their fiduciary duties by, among other things, allegedly failing to exercise oversight over Ocwen’s compliance with applicable laws, rules and regulations; failing to exercise oversight responsibilities with respect to the accounting and financial reporting processes of Ocwen; failing to prevent conflicts of interest and allegedly improper related party transactions; failing to adhere to Ocwen’s code of conduct and corporate governance guidelines; selling personal holdings of Ocwen stock on the basis of material adverse inside information; and disseminating allegedly false and misleading statements regarding Ocwen’s compliance with regulatory obligations and allegedly self-dealing transactions with related companies. Plaintiff claims that as a result of the alleged breaches of fiduciary duties, Ocwen has suffered damages, including settlements with regulatory agencies in excess of $2 billion, injury to its reputation and corporate goodwill and exposure to governmental investigations and securities and consumer class action lawsuits. In addition to the derivative claims, the plaintiff also alleges an individual claim that Ocwen’s 2014 proxy statement allegedly contained untrue statements of material fact and failed to disclose material information in violation of federal securities laws. The plaintiff seeks, among other things, an order requiring the defendants to repay to Ocwen unspecified amounts by which Ocwen has been damaged or will be damaged, an award of an unspecified amount of exemplary damages, changes to Ocwen's corporate governance and an award of attorneys’ and other fees and expenses.

On April 13, 2015, nominal defendant Ocwen and defendants Mr. Erbey and Mr. Faris filed a motion to stay the action.

On July 16, 2015, we filed a motion to dismiss all claims against us in the action, based upon, among other arguments, lack of personal jurisdiction and failure to state a claim. Co-defendant AAMC filed a similar motion to dismiss the complaint as to all claims asserted against it.

On December 8, 2015, the court granted AAMC’s and our motions to dismiss for lack of personal jurisdiction with leave to amend the jurisdiction allegations no later than January 4, 2016.

On December 15, 2015, Hutt v. Erbey, et al., Case No. 15-cv-81709-WPD, was transferred to the Southern District of Florida from the Northern District of Georgia. That same day, a third related derivative action, Lowinger v. Erbey, et al., Case No. 15-cv-62628-WPD, was also filed in the Southern District of Florida. The court then requested that the parties file a response stating their positions as to whether the actions should be consolidated. On December 29, 2015, we filed a response stating that we took no position on the issue of consolidation, so long as our defenses were fully reserved should plaintiff Sokolowski seek

19
(table of contents)

to file an amended complaint. Neither plaintiff Sokolowski nor plaintiff Hutt opposed consolidation in their responses. On December 30, 2015, the court issued an order that, among other things, extended the deadline for plaintiff Sokolowski to file its amended complaint to cure the jurisdictional defects as to AAMC and us until January 13, 2016. On January 8, 2016, the court issued an order consolidating the three related actions.

On February 2, 2016, Plaintiffs Sokolowski and Lowinger filed competing motions for appointment of lead counsel in the consolidated action. These motions were fully briefed on February 5, 2016. Subsequently, on February 17, 2016, the court issued an order appointing Sokolowski’s counsel as lead counsel with Lowinger’s and Hutt’s counsel serving on the executive committee of the plaintiffs. It also ordered that a consolidated complaint in the matter shall be filed no later than March 8, 2016.

On March 8, 2016, the plaintiffs filed a consolidated certified shareholder derivative complaint (the “Consolidated Complaint”) in the action. On March 11, the Special Litigation Committee of Ocwen sought additional time beyond the March 31, 2016 originally anticipated completion date to analyze the Consolidated Complaint. On March 22, 2016, the parties filed a joint consent motion for entry of an order amending the briefing schedule regarding the Consolidated Complaint. On March 23, 2016, the court entered a scheduling order requiring defendants to file their motions to dismiss on or before May 13, 2016, plaintiffs to file a response to any such motion on or before June 17, 2016 and defendants to file any reply briefs on or before July 15, 2016.

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

Moncavage v. Faris, et al.
In March, 2015, a shareholder derivative action was filed in the Circuit Court for the Fifteenth Judicial Circuit in and for Palm Beach County, Florida by a purported shareholder of Ocwen under the caption Moncavage v. Ronald Faris, et al., Case No. 2015-CA-03244 (MB-AD). The action named certain officers and directors of Ocwen as defendants and alleged, among other things, various breaches of fiduciary duties by these individual defendants. The action also named Altisource, Home Loan Servicing Solutions, Ltd. and us as alleged aiders and abettors of the purported breaches of fiduciary duties. The allegations of wrongdoing contained in the Moncavage action are similar to the allegations in the Sokolowski action updated above. On July 13, 2015, the plaintiff and we jointly filed a stipulation of an extension of time to respond to the pending motions to stay the action that had been filed by Ocwen and the individual defendants. On November 9, 2015, the court granted Ocwen’s motion to stay the action in its entirety for a period of 180 days.

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

Management does not believe that we have incurred an estimable, probable or material loss by reason of any of the above actions.

8. Related-party transactions

New Asset Management Agreement with AAMC

On March 31, 2015, we entered into a new Asset Management Agreement (the “New AMA”) with AAMC. The New AMA, which became effective on April 1, 2015, provides for a new management fee structure, which replaces the incentive fee structure under the original asset management agreement (the “Original AMA”) 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 equity capital 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 equity capital while we have between 2,500 and 4,499 Rental Properties and increases to 2.0% of invested equity 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 equity 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

20
(table of contents)

 
•
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 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 New AMA, AAMC will 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 equity capital of at least 7.0%. Under the New AMA, we will not be required to reimburse AAMC for the allocable compensation and routine overhead expenses of its employees and staff, all of which will now be covered by the base management fee described above.

Neither party is entitled to terminate the New 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 New AMA and failure to cure such breach, (b) us for certain other reasons such as our failure to achieve a return on invested equity capital of at least 7.0% for two consecutive fiscal years after the third anniversary of the New AMA, and (c) us in connection with certain change of control events.

Related party transaction summary

Our consolidated statements of operations include the following significant related party transactions for the periods indicated ($ in thousands):
 
Amount
 
Counter-
party
 
Location within Consolidated Statements of Operations
Three months ended March 31, 2016
 
 
 
 
 
Conversion fee
$
402

 
AAMC
 
Related party general and administrative expenses
Base management fee
4,124

 
AAMC
 
Related party general and administrative expenses
 
 
 
 
 
 
Three months ended March 31, 2015
 
 
 
 
 
Expense reimbursements
$
750

 
AAMC
 
Related party general and administrative expenses
Management incentive fee (1)
14,900

 
AAMC
 
Related party general and administrative expenses
Interest expense (2)
160

 
NewSource
 
Interest expense
Professional fee sharing for negotiation of AMA
2,000

 
AAMC
 
Other income
______________
(1)
Pursuant to the terms of the New AMA, the fourth quarter of 2015 management incentive fees were recalculated, and it was determined that $6.9 million was reimbursable by AAMC to us.
(2)
On October 17, 2013, we invested $18.0 million in the non-voting preferred stock of NewSource Reinsurance Company Ltd. (“NewSource”), an insurance and reinsurance company focused on real estate related insurance products in Bermuda and a wholly owned subsidiary of AAMC. On September 14, 2015, NewSource completed the repurchase of all of our shares of non-voting preferred stock for aggregate proceeds of $18.0 million, which was the aggregate par value of the shares being repurchased.

No Incentive Management Fee under the New AMA was payable to AAMC during the first quarter of 2016 because our return on invested equity capital (as defined in the New AMA) for the four quarters covered by the new AMA was below the required hurdle rate. Under the New 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, 2016, the aggregate return shortfall from the prior four quarters under the New AMA was approximately 17.56% of invested equity capital. Therefore, we must achieve a 19.31% return on invested equity capital in the second quarter of 2016 before any Incentive Management Fee will be payable to AAMC for the first quarter of 2016. In future quarters, return on invested equity 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.


21
(table of contents)

9. Share-based payments

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

Our directors each receive annual grants of restricted stock equal to $45 thousand based on the market value of our common stock at the time of the annual stockholders meeting. This restricted stock vests and is issued after a one-year service period, subject to each director attending at least 75% of the Board and committee meetings. No dividends are paid on the shares until the award is issued. During the three months ended March 31, 2016, our restricted stock activity included the grant of 1,236 shares to and the forfeiture of 625 shares by our directors. During the three months ended March 31, 2015, no shares of restricted stock were granted to or forfeited by our directors.

We recorded $45 thousand of compensation expense related to these grants for the three months ended March 31, 2016, and we recorded $57 thousand of compensation expense for the three months ended March 31, 2015. During the three months ended March 31, 2016 and 2015, we had a nominal amount of unrecognized share-based compensation cost remaining with respect to the director grants.

10. 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.

Based on our estimated 2015 taxable income of $107.6 million, which consisted entirely of net capital gains, the aggregate minimum distribution to stockholders required to maintain our REIT status has been met for 2015. Dividends declared per share of common stock aggregated $1.83 for the year ended December 31, 2015, or $103.9 million. These distributions included a cash dividend paid on March 30, 2015 of $0.08 per share of common stock, or $4.6 million, which was intended to satisfy the requirement that a REIT must distribute at least 90% of its annual REIT taxable income to its stockholders and was treated as a 2014 distribution for REIT qualification purposes. The remaining taxable income with respect to 2015 was distributed through a dividend of $0.15 per share declared on February 28, 2016 and paid on March 17, 2016.

Our 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, 2016, 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 consolidated operations for the three months ended March 31, 2016. As a REIT, we may also be subject to federal taxes if we engage in certain types of transactions.

As of March 31, 2016 and 2015, we did not accrue interest or penalties associated with any unrecognized tax benefits during the three months ended March 31, 2016 and 2015. 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, 2016 and 2015. Our subsidiaries and we remain subject to tax examination for the period from inception to December 31, 2015.


22
(table of contents)

11. 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, 2016
 
Three months ended March 31, 2015
Numerator
 
 
 
 
Net (loss) income
 
$
(45,658
)
 
$
12,424

 
 
 
 
 
Denominator
 
 
 
 
Weighted average common stock outstanding – basic
 
55,380,120

 
57,200,889

Stock options using the treasury method
 
—

 
200,712

Restricted stock
 
—

 
5,018

Weighted average common stock outstanding – diluted
 
55,380,120

 
57,406,619

 
 
 
 
 
(Loss) earnings per basic share
 
$
(0.82
)
 
$
0.22

(Loss) earnings per diluted share
 
$
(0.82
)
 
$
0.22


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, 2016
 
Three months ended March 31, 2015
Denominator (in weighted-average shares)
 
 
 
 
Stock options
 
159,015

 
—

Restricted stock
 
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, 2016.

12. 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.


23

(table of contents)

13. Subsequent Events

Management has evaluated the impact of all events subsequent to March 31, 2016 and through the issuance of these consolidated interim financial statements. Other than disclosed below, we have determined that there were no subsequent events requiring adjustment or disclosure in the financial statements.

Amendment and Extension of Loan and Security Agreement with Nomura

On April 7, 2016, acting through our subsidiaries, we amended and extended the terms of our loan and security agreement with Nomura through the entry into an Amended and Restated Loan and Security Agreement (the “Amended and Restated Loan Agreement”).

Under the Amended and Restated Loan Agreement, we extended the termination date of the facility for an additional year and increased the facility size from $200.0 million to $250.0 million. Prior to the entry into the Amended and Restated Loan Agreement, an aggregate of approximately $188.3 million was outstanding under the original Nomura loan facility.

Our subsidiaries’ obligations under the Amended and Restated Loan Agreement continue to be fully guaranteed by us pursuant to the original Guaranty (the “Guaranty”) made by us in favor of Nomura with respect to the original Nomura loan agreement.

Other than as described above, the amended loan facility remains substantially the same as the original Nomura loan facility.


24

(table of contents)

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

Our Company

We are a Maryland REIT focused on acquiring, owning and managing single-family rental 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 run a single-family rental (“SFR”) business, and we employ a diversified SFR property acquisition strategy in order to achieve that objective. In 2015, we expanded our acquisition strategy to opportunistically acquire portfolios of single-family rental properties in order to more quickly achieve scale in our rental portfolio. We also purchase single-family residential properties on a one-by-one basis, sourcing listed properties from the Multiple Listing Service and alternative listing sources. Prior to the second quarter of 2015, our preferred acquisition strategy involved acquiring portfolios of sub-performing and non-performing mortgage loans (“NPLs”). However, as market conditions evolved and the acquisition of sub-performing mortgage loans and non-performing mortgage loan pools became more competitive and higher-priced, we introduced the alternative single-family rental acquisition strategies described above. We continue to take steps to capitalize on what we believe is a tremendous opportunity to acquire high-yielding single-family homes at attractive prices to generate a steady stream of rental income. In addition, we believe the current pricing of NPLs has created an excellent opportunity to sell NPLs at attractive prices.

Management Overview

During the first quarter of 2016, we continued to pursue our objective of becoming one of the top single-family REITs serving working class American families and their communities with a view to providing robust returns on equity and long-term growth for our investors. Among others, important steps to achieve our objective include:

•
We have had continued success executing upon our diversified single-family acquisition strategy and capitalizing on the compelling market opportunity to acquire high-yielding single-family homes at attractive prices. During the first quarter of 2016, we increased the size of our rental portfolio from 2,732 properties at December 31, 2015 to 3,531 properties at March 31, 2016, representing an increase of 29%. This increase is primarily attributable to our bulk acquisition of 590 single-family rentals from an unrelated third party. We have developed and employed internal proprietary models, which we believe give us an advantage in identifying and purchasing rental properties with optimal rental return metrics in areas that have attractive occupancy levels and rental margins. Our initial areas of focus have begun to generate attractive rental yields.
    
•
We continued efforts to sell certain NPLs to take advantage of attractive market pricing during the first quarter of 2016, successfully completing the sale of 1,078 NPLs at a transaction price within 1% of the carrying value of the loans. This evidences that, not only has the market for NPLs remained strong through 2015 year-end, but also that our recorded valuation of these loans is accurate. We have also accelerated the sale of our non-rental REO properties. We expect that NPL sales and non-rental REO property sales at opportune times will 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.

•
Our partnership with Altisource Portfolio Solutions S.A. (“ASPS”) remains a key driver of efficiency and cost management in our model, and provides the Company with a scalable, established, nationwide property management infrastructure to support our acquisition of large numbers of single-family rental properties. Importantly, our external property management structure allows the Company to achieve scale in our single-family rental portfolio without incurring the substantial costs of developing our own nationwide property management infrastructure. As of March 31, 2016, ASPS managed more than 39,000 vacant pre-foreclosure and REO assets in all 50 states, and these types of properties are far more intensive to manage than tenant-occupied rentals. ASPS has the capacity to conduct more than 249,000 inspections and 131,000 repair and maintenance orders on a monthly basis and has more than 9,900 centrally managed vendors operating nationwide. ASPS also leverages sophisticated systems and strong vendor oversight to mitigate risks for its clients, stringent enough to satisfy the requirements of two top-10 bank clients and one of the largest non-bank mortgage servicers in the United States. At least one analyst firm has ranked ASPS as the number six brokerage company in the United States, operating in 50 states and managing over 32,000 transactions annually.

•
Our lenders continue to support our SFR strategy. In March 2016, we increased the size of our repurchase facility with Credit Suisse First Boston Mortgage Capital, LLC (“CS”) from $275.0 million to $350.0 million and in April 2016, we increased the size of our loan facility with Nomura Corporate Funding Americas, LLC (“Nomura”) from $200 million to $250 million. Both facilities were extended for an additional year to March 2017 and April 2017, respectively.

25

(table of contents)

These amendments were in addition to the amendment and restatement of our repurchase facility with Wells Fargo Bank, National Association (“Wells”) in September 2015, which not only maintained the size of the Wells Fargo facility at $750.0 million but also increased the percentage of real estate owned (“REO”) properties that can be financed under the facility to 40% of the facility, or $300.0 million.

•
As a reflection of our confidence in our long-term strategy and belief that our stock represents an attractive investment opportunity at current levels, we repurchased $10.0 million of our common stock during the first quarter. These repurchases were in addition to the $25.0 million we purchased in 2015, bringing total stock repurchases to $35.0 million. We will work to continue to strike the right balance between opportunities to acquire high-yielding rental homes, our liquidity position and additional repurchases of stock.

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

Portfolio Overview

Real Estate Assets

As of March 31, 2016, we owned 6,895 REO properties with an aggregate carrying value of $1.0 billion, of which 5,143 were held for use and 1,752 were held for sale. Of the 5,143 REO properties held for use, 2,720 properties had been leased, 265 were listed and ready for rent and 546 were in varying stages of renovation and unit turn status. With respect to the remaining 1,612 REO properties held for use, 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.

As of December 31, 2015, we owned 6,516 REO properties with an aggregate carrying value of $986.4 million, of which 4,933 were held for use and 1,583 were held for sale. Of the 4,933 REO properties held for use, 2,118 properties had been leased, 264 were listed and ready for rent and 350 were in varying stages of renovation and unit turn status. With respect to the remaining 2,201 REO properties held for use, 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.

The following table sets forth a summary of our total real estate portfolio as of March 31, 2016 ($ in thousands):
State / District
 
Number of Properties
 
Carrying Value (1)
 
Weighted Average Age in Years (2)
Alabama
 
39

 
$
4,781

 
25.8

Alaska
 
1

 
144

 
33.0

Arizona
 
86

 
17,786

 
22.0

Arkansas
 
27

 
2,262

 
35.9

California
 
517

 
163,561

 
37.1

Colorado
 
31

 
7,587

 
30.3

Connecticut
 
51

 
9,948

 
54.8

Delaware
 
22

 
3,191

 
41.0

Dist. of Columbia
 
1

 
218

 
106.0

Florida
 
1,007

 
155,061

 
28.0

Georgia
 
2,048

 
189,321

 
36.5

Hawaii
 
4

 
720

 
34.9

Idaho
 
15

 
2,404

 
32.9

Illinois
 
411

 
63,953

 
44.6

Indiana
 
178

 
20,129

 
30.8

Iowa
 
14

 
1,285

 
50.0

Kansas
 
20

 
1,704

 
53.9


26

(table of contents)

Kentucky
 
55

 
5,587

 
37.3

Louisiana
 
22

 
2,120

 
36.7

Maine
 
6

 
606

 
158.9

Maryland
 
342

 
65,202

 
37.9

Massachusetts
 
60

 
11,447

 
78.4

Michigan
 
77

 
9,719

 
41.7

Minnesota
 
43

 
7,006

 
45.0

Mississippi
 
12

 
950

 
31.7

Missouri
 
47

 
5,067

 
43.4

Montana
 
2

 
664

 
29.5

Nebraska
 
3

 
414

 
50.4

Nevada
 
34

 
5,742

 
19.9

New Hampshire
 
11

 
1,422

 
68.9

New Jersey
 
107

 
17,042

 
62.6

New Mexico
 
38

 
5,164

 
22.7

New York
 
69

 
13,019

 
67.0

North Carolina
 
398

 
44,713

 
24.8

Ohio
 
99

 
11,474

 
38.0

Oklahoma
 
18

 
1,922

 
35.3

Oregon
 
18

 
3,311

 
40.9

Pennsylvania
 
224

 
28,572

 
55.6

Rhode Island
 
57

 
7,171

 
85.8

South Carolina
 
128

 
15,949

 
23.6

South Dakota
 
3

 
341

 
46.8

Tennessee
 
68

 
9,031

 
25.5

Texas
 
204

 
29,531

 
28.5

Utah
 
47

 
7,771

 
33.9

Vermont
 
5

 
764

 
104.6

Virginia
 
83

 
23,603

 
28.2

Washington
 
60

 
12,889

 
37.9

West Virginia
 
3

 
528

 
12.6

Wisconsin
 
80

 
8,640

 
50.9

Total
 
6,895

 
$
1,001,436

 
36.9

_____________
(1)
The carrying value of an asset is based on historical cost, which generally consists of the market value at the time of acquisition 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)
Weighted average age is based on the age of each property weighted by its proportion of the total carrying value for its respective state.


27

(table of contents)

The following table presents the status of our real estate held for use as of the dates indicated:
 
 
March 31, 2016
 
December 31, 2015
Leased
 
2,720

 
2,118

Listed and ready for rent
 
265

 
264

Renovation or unit turn
 
546

 
350

Other (1)
 
1,612

 
2,201

 
 
5,143

 
4,933

_____________
(1)
Includes properties with a status of evaluating strategy.

Real Estate Acquisitions

On March 30, 2016, we completed our acquisition of 590 single-family residential properties 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 7 months as of the acquisition date.

During the three months ended March 31, 2016, we acquired 113 properties under our one-by-one acquisition program. The aggregate purchase price attributable to these acquired properties was $10.1 million.

During the three months ended March 31, 2015, we did not purchase any real estate assets.

Real Estate Dispositions

During the three months ended March 31, 2016 and 2015, we sold 686 and 254 residential properties, respectively, and recorded $29.4 million and $10.6 million of net realized gains on real estate.

The following table summarizes changes in our real estate assets for the periods indicated:
 
 
Three months ended March 31, 2016
 
Three months ended March 31, 2015
Real Estate Assets
 
 
 
 
Beginning
 
6,516

 
3,960

Acquisitions
 
703

 
—

Dispositions
 
(686
)
 
(254
)
Mortgage loan conversions to REO, net (1) (2)
 
360

 
724

Other additions
 
2

 
—

Ending
 
6,895

 
4,430

_____________
(1)
Subsequent to the foreclosure sale, we may be notified that the foreclosure sale was invalidated for certain reasons.
(2)
During the three months ended March 31, 2016, conversions to REO included 36 properties that were previously in our mortgage loans held for sale.

Mortgage Loan Assets

As of March 31, 2016, our portfolio of mortgage loans at fair value consisted of 5,397 loans, substantially all of which were non-performing, having an aggregate UPB of approximately $1.3 billion and an aggregate market value of underlying properties of $1.3 billion. We also owned 32 mortgage loans held for sale having an aggregate UPB of approximately $6.1 million and an aggregate market value of underlying properties of approximately $7.2 million as of March 31, 2016.

As of December 31, 2015, our portfolio of mortgage loans at fair value consisted of 5,739 loans, substantially all of which were non-performing, having an aggregate UPB of approximately $1.4 billion and an aggregate market value of underlying

28

(table of contents)

properties of $1.3 billion. We also owned 1,297 mortgage loans held for sale having an aggregate UPB of approximately $440.4 million and an aggregate market value of underlying properties of approximately $465.0 million as of December 31, 2015.

The table below provides a summary of our mortgage loans at fair value as of March 31, 2016 ($ in thousands):
Location
 
Loan Count
 
Carrying Value
 
UPB
 
Market Value of Underlying Properties (1)
Alabama
 
24

 
$
2,375

 
$
3,541

 
$
3,037

Arizona
 
32

 
7,085

 
9,042

 
9,568

Arkansas
 
35

 
2,166

 
3,193

 
3,068

California
 
363

 
146,751

 
163,876

 
201,242

Colorado
 
20

 
3,530

 
3,635

 
4,810

Connecticut
 
76

 
14,818

 
21,223

 
20,943

Delaware
 
34

 
4,512

 
6,125

 
6,012

Dist. of Columbia
 
42

 
4,417

 
8,789

 
10,048

Florida
 
1,154

 
166,376

 
251,334

 
230,974

Georgia
 
138

 
15,315

 
20,306

 
20,211

Hawaii
 
21

 
8,501

 
10,297

 
11,533

Idaho
 
4

 
409

 
504

 
530

Illinois
 
176

 
26,632

 
39,908

 
34,733

Indiana
 
134

 
13,150

 
17,255

 
17,456

Iowa
 
8

 
474

 
622

 
762

Kansas
 
7

 
445

 
555

 
821

Kentucky
 
29

 
2,120

 
3,543

 
3,057

Louisiana
 
15

 
1,597

 
2,049

 
2,285

Maine
 
23

 
2,414

 
3,735

 
3,569

Maryland
 
288

 
50,095

 
72,831

 
67,313

Massachusetts
 
173

 
32,292

 
44,172

 
48,334

Michigan
 
25

 
2,797

 
3,566

 
4,100

Minnesota
 
21

 
3,765

 
4,467

 
5,195

Mississippi
 
13

 
1,388

 
1,881

 
1,874

Missouri
 
36

 
2,082

 
3,139

 
3,131

Montana
 
1

 
190

 
255

 
280

Nebraska
 
4

 
321

 
461

 
431

Nevada
 
89

 
16,998

 
27,547

 
22,322

New Hampshire
 
5

 
964

 
1,225

 
1,315

New Jersey
 
727

 
112,966

 
193,817

 
155,109

New Mexico
 
98

 
9,396

 
12,438

 
12,873

New York
 
501

 
116,737

 
154,598

 
166,689

North Carolina
 
87

 
8,691

 
11,001

 
11,823

North Dakota
 
1

 
99

 
123

 
144

Ohio
 
47

 
4,283

 
6,408

 
6,045

Oklahoma
 
14

 
1,945

 
2,449

 
2,442

Oregon
 
58

 
12,820

 
16,138

 
16,379

Pennsylvania
 
124

 
12,877

 
18,788

 
18,259

Puerto Rico
 
1

 
82

 
189

 
190

Rhode Island
 
27

 
3,084

 
5,597

 
4,303

South Carolina
 
103

 
10,856

 
14,098

 
14,539

Tennessee
 
36

 
4,524

 
5,611

 
6,106

Texas
 
228

 
26,520

 
26,078

 
37,116


29

(table of contents)

Utah
 
21

 
4,343

 
4,723

 
5,609

Vermont
 
5

 
575

 
822

 
856

Virginia
 
28

 
6,138

 
8,048

 
8,332

Washington
 
268

 
52,018

 
62,091

 
66,807

West Virginia
 
2

 
203

 
325

 
255

Wisconsin
 
31

 
2,407

 
3,904

 
3,436

Total mortgage loans at fair value
 
5,397

 
$
924,543

 
$
1,276,322

 
$
1,276,266

_____________
(1)
Market value is based on the most recent BPO provided to us by the applicable seller for each property in the respective portfolio as of its cut-off date or an updated BPO received since the acquisition was completed.

Mortgage Loan Resolutions and Dispositions

During the three months ended March 31, 2016 and 2015, we resolved 169 and 150 mortgage loans, respectively, primarily through short sales, refinancing and foreclosure sales. In connection with these resolutions, we recorded $12.7 million and $10.6 million, respectively, of net realized gains on mortgage loans.

During the three months ended March 31, 2016, we sold 1,078 of our mortgage loans held for sale to a third party purchaser. In connection with this sale, we recorded $34.2 million of net realized gains on mortgage loans held for sale. During the three months ended March 31, 2015, we did not sell any mortgage loans.

From inception through March 31, 2016, we converted an aggregate of 6,675 mortgage loans at fair value and 58 mortgage loans held for sale into REO properties and resolved an aggregate of 1,814 mortgage loans at fair value and 49 mortgage loans held for sale through short sale, refinancing or other liquidation events.

As market conditions in the NPL industry have continued to develop and pricing of NPL portfolios have increased, we have been reviewing our portfolio of NPLs that we expect will not be rented by us to consider offering portions of our portfolio for sale to eligible purchasers. We believe that such potential sales will enable us to recycle our assets to provide us with more liquidity and buying power. As such, we view our portfolio of NPLs as a potential growth engine for our business to purchase single-family assets, which we believe provides us with an advantage, particularly at times when it is challenging to access equity markets.

The following table summarizes changes in our mortgage loans at fair value for the periods indicated:
 
 
Three months ended March 31, 2016
 
Three months ended March 31, 2015
Mortgage Loans at Fair Value (1)