Document
 

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

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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
 
resi-logoa05a01a03.jpg
Altisource Residential Corporation
(Exact name of registrant as specified in its charter)
MARYLAND
46-0633510
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)

c/o Altisource Asset Management Corporation
36C Strand Street
Christiansted, United States Virgin Islands 00820
(Address of principal executive office)

(340) 692-1055
(Registrant’s telephone number, including area code)

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer
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 October 28, 2016, 53,869,642 shares of our common stock were outstanding.



Altisource Residential Corporation
September 30, 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 and its consolidated subsidiaries, 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 that are predictions of or indicate future events or trends and that do not relate solely to historical matters. You can also identify forward-looking statements by discussions of strategy, plans or intentions.

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

•
our ability to implement our business strategy;
•
our ability to make distributions to our stockholders;
•
our ability to acquire assets for our portfolio, including difficulties in identifying single-family rental assets and properties to acquire;
•
our ability to sell residential mortgage assets on favorable terms;
•
the impact of changes to the supply of, value of and the returns on single-family rental and mortgage assets;
•
our ability to acquire single-family rental properties or convert residential mortgage loans to rental properties and generate attractive returns;
•
our ability to complete proposed transactions in accordance with anticipated terms and on a timely basis or at all;
•
our ability to successfully integrate newly acquired properties into our portfolio of single-family rentals;
•
our ability to successfully integrate Main Street Renewal LLC as an additional property manager for our single-family rentals;
•
our ability to predict our costs;
•
our ability to effectively compete with our competitors;
•
our ability to apply the proceeds from financing activities or residential mortgage loan asset sales to target assets in a timely manner;
•
changes in the market value of our acquired real estate owned and single-family rental properties;
•
our ability to successfully modify or otherwise resolve sub-performing and non-performing loans;
•
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 Part II, Item 1A in this quarterly report on Form 10-Q and “Item 1A. Risk factors” in our annual report on Form 10-K for the year ended December 31, 2015.

ii

(table of contents)

Part I
 
Item 1. Financial Statements (Unaudited)

Certain information contained herein is presented as of October 28, 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)


September 30, 2016

December 31, 2015
Assets:



Real estate held for use:



Land
$
213,174


$
56,346

Rental residential properties (net of accumulated depreciation of $17,615 and $7,127, respectively)
866,903


224,040

Real estate owned
326,358


455,483

Total real estate held for use, net
1,406,435


735,869

Real estate assets held for sale
169,841


250,557

Mortgage loans at fair value
628,304


960,534

Mortgage loans held for sale
4,038


317,336

Cash and cash equivalents
56,890


116,702

Restricted cash
23,382


20,566

Accounts receivable, net
27,839


45,903

Related party receivables
—


2,180

Prepaid expenses and other assets
14,372


1,126

Total assets
$
2,331,101


$
2,450,773





Liabilities:



Repurchase and loan agreements
$
1,182,677


$
763,369

Other secured borrowings
156,986


502,599

Accounts payable and accrued liabilities
52,114


32,448

Related party payables
4,926


—

Total liabilities
1,396,703


1,298,416





Commitments and contingencies (Note 7)







Equity:



Common stock, $0.01 par value, 200,000,000 authorized shares; 53,869,642 shares issued and outstanding as of September 30, 2016 and 55,581,005 shares issued and outstanding as of December 31, 2015
539


556

Additional paid-in capital
1,184,174


1,202,418

Accumulated deficit
(250,315
)

(50,617
)
Total equity
934,398


1,152,357

Total liabilities and equity
$
2,331,101


$
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 September 30, 2016

Three months ended September 30, 2015

Nine months ended September 30, 2016

Nine months ended September 30, 2015
Revenues:







Rental revenues
$
9,590


$
4,021


$
24,242


$
7,561

Change in unrealized gain on mortgage loans
(41,152
)

27,499


(155,306
)

130,842

Net realized gain on mortgage loans
9,428


12,874


30,340


47,528

Net realized gain on mortgage loans held for sale
19


100


50,166


505

Net realized gain on real estate
26,307


13,914


94,833


36,926

Interest income
209


115


425


595

Total revenues
4,401


58,523


44,700


223,957

Expenses:







Residential property operating expenses
15,011


16,574


51,215


45,890

Real estate depreciation and amortization
5,149


2,050


12,790


4,392

Acquisition fees and costs
5,202


861


8,306


1,738

Selling costs and impairment
11,570


10,705


50,003


34,235

Mortgage loan servicing costs
7,792


13,477


27,960


47,989

Interest expense
10,174


14,436


37,060


39,477

General and administrative
2,500


2,286


9,100


8,509

Management fees
4,658


4,988


14,234


25,039

Total expenses
62,056


65,377


210,668


207,269

Other income (expense)
—


1,518


(750
)

3,518

(Loss) income before income taxes
(57,655
)

(5,336
)

(166,718
)

20,206

Income tax (benefit) expense
(17
)

27


106


53

Net (loss) income
$
(57,638
)

$
(5,363
)

$
(166,824
)

$
20,153












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










(Loss) earnings per basic share
$
(1.06
)

$
(0.09
)

$
(3.05
)

$
0.35

Weighted average common stock outstanding - basic
54,178,129


57,056,625


54,722,828


57,154,734

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










(Loss) earnings per diluted share
$
(1.06
)

$
(0.09
)

$
(3.05
)

$
0.35

Weighted average common stock outstanding - diluted
54,178,129


57,056,625


54,722,828


57,351,014












Dividends declared per common share
$
0.15


$
0.55


$
0.60


$
1.73



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

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

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

 
$
556

 
$
1,202,418

 
$
(50,617
)
 
$
1,152,357

Issuance of common stock, including stock option exercises
18,707

 
—

 
30

 
—

 
30

Repurchases of common stock
(1,730,070
)
 
(17
)
 
(18,767
)
 
—

 
(18,784
)
Dividends on common stock ($0.60 per share)
—

 
—

 
—

 
(32,874
)
 
(32,874
)
Share-based compensation
—

 
—

 
493

 
—

 
493

Net loss
—

 
—

 
—

 
(166,824
)
 
(166,824
)
September 30, 2016
53,869,642

 
$
539

 
$
1,184,174

 
$
(250,315
)
 
$
934,398



 
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
33,034

 
—

 
104

 
—

 
104

Repurchases of common stock
(1,234,393
)
 
(12
)
 
(19,971
)
 
—

 
(19,983
)
Dividends on common stock ($1.73 per share)
—

 
—

 
—

 
(98,302
)
 
(98,302
)
Share-based compensation
—

 
—

 
139

 
—

 
139

Net income
—

 
—

 
—

 
20,153

 
20,153

September 30, 2015
55,990,853

 
$
560

 
$
1,207,363

 
$
21,099

 
$
1,229,022



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

Altisource Residential Corporation
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 
Nine months ended September 30, 2016

Nine months ended September 30, 2015
Operating activities:
 
 
 
Net (loss) income
$
(166,824
)
 
$
20,153

Adjustments to reconcile net (loss) income to net cash used in operating activities:
 
 
 
Change in unrealized gain on mortgage loans
155,306

 
(130,842
)
Net realized gain on mortgage loans
(30,340
)
 
(47,528
)
Net realized gain on mortgage loans held for sale
(50,166
)
 
(505
)
Net realized gain on real estate
(94,833
)
 
(36,926
)
Real estate depreciation and amortization
12,790

 
4,392

Selling costs and impairment
50,003

 
34,235

Accretion of interest on re-performing mortgage loans
(107
)
 
(581
)
Share-based compensation
493

 
139

Amortization of deferred financing costs
8,840

 
4,271

Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
6,612

 
(1,746
)
Related party receivables
2,180

 
—

Deferred leasing costs
(69
)
 
(1,287
)
Prepaid expenses and other assets
(4,729
)
 
(22
)
Accounts payable and accrued liabilities
19,031

 
15,584

Related party payables
4,926

 
(22,444
)
Net cash used in operating activities
(86,887
)
 
(163,107
)
Investing activities:
 
 
 
Investment in real estate
(291,688
)
 
(111,423
)
Investment in renovations
(38,334
)
 
(15,936
)
Real estate tax advances
(7,791
)
 
(18,438
)
Mortgage loan resolutions and dispositions
508,712

 
190,146

Mortgage loan payments
16,438

 
19,268

Disposition of real estate
315,973

 
119,368

Investment in derivative financial instrument
(55
)
 
—

Disposition of preferred stock of affiliate
—

 
18,000

Change in restricted cash
(2,816
)
 
(12,229
)
Net cash provided by investing activities
500,439

 
188,756

Financing activities:
 
 
 
Issuance of common stock, including stock option exercises
51

 
204

Payment of tax withholdings on exercise of stock options
(21
)
 
(100
)
Repurchases of common stock
(18,784
)
 
(19,983
)
Dividends on common stock
(30,206
)
 
(67,685
)
Proceeds from the issuance of other secured debt
—

 
221,691

Repayments of other secured debt
(348,565
)
 
(32,298
)
Proceeds from repurchase and loan agreements
392,506

 
285,967

Repayments of repurchase and loan agreements
(460,025
)
 
(386,480
)
Payment of deferred financing costs
(8,320
)
 
(9,250
)
Net cash used in financing activities
(473,364
)
 
(7,934
)
Net (decrease) increase in cash and cash equivalents
(59,812
)
 
17,715

Cash and cash equivalents as of beginning of the period
116,702

 
66,166

Cash and cash equivalents as of end of the period
$
56,890

 
$
83,881

 
 
 
 

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

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

 
Nine months ended September 30, 2016
 
Nine months ended September 30, 2015
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest
$
27,983

 
$
34,879

Income taxes paid
180

 
—

Seller financing of assets acquired
489,259

 
—

Transfer of mortgage loans to real estate owned, net
168,395

 
359,378

Transfer of mortgage loans at fair value to mortgage loans held for sale, net
101,201

 
250,346

Changes in accrued capital expenditures
(1,695
)
 
164

Changes in receivables from mortgage loan resolutions and dispositions, payments and real estate tax advances to borrowers, net
(157
)
 
2,550

Changes in receivables from real estate owned dispositions
(11,295
)
 
1,949

Dividends declared but not paid
8,226

 
30,617



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

Altisource Residential Corporation
Notes to Consolidated Financial Statements
September 30, 2016
(Unaudited)

1. Organization and basis of presentation

Altisource Residential Corporation is a Maryland real estate investment trust (“REIT”) focused on acquiring, owning and managing single-family rental (“SFR”) 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.

We employ a diversified SFR property acquisition strategy that includes acquiring portfolios of SFR properties and purchasing SFR properties on a one-by-one basis from the Multiple Listing Service and alternative listing sources. Initially, 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 NPL pools became more competitive and higher-priced, we introduced the alternative SFR property acquisition strategies described above. In the third quarter of 2015, we commenced the disposition of certain NPLs and, as of September 30, 2016, we had disposed of a substantial portion of our NPL portfolio.

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

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

Basis of presentation and use of estimates

The accompanying unaudited interim 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 are necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods. The interim results are not necessarily indicative of results for a full year. We have omitted certain notes and other information from the interim 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 upon consolidation.


7
(table of contents)

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.

In certain instances, we hold both the power to direct the most significant activities of each VIE as well as an economic interest in the entity, and, as such, we are deemed to be the primary beneficiary or consolidator of the VIE. We have determined that our 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 last six months of 2015 should have been classified within the consolidated financial statements as of and for the year ended December 31, 2015 as a reduction to common stock, for the par amount of the common stock, and to additional paid-in capital, for the amount paid in excess of par, and that such repurchased shares should be included as shares unissued. 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 nine months ended September 30, 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 operations and 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 be 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 and loan agreements and other secured borrowings and ii) a reclassification of deferred leasing costs component of our deferred leasing and financing costs to prepaid expenses and other assets in our consolidated balance sheets.

The following table represents the effect of the reclassification prior period balances 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 and loan 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.


8

(table of contents)

Recently issued accounting standards

In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The amendments in ASU 2016-15 address eight specific cash flow issues and apply to all entities that are required to present a statement of cash flows under Topic 230. The amendments in ASU 2016-15 are effective for public business entities for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted, including adoption during an interim period. We do not expect the impact of adopting this standard to have a material impact on our consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments which amends the guidance on measuring credit losses on financial assets held at amortized cost. The amendment is intended to address the issue that the previous “incurred loss” methodology was restrictive for an entity's ability to record credit losses based on not yet meeting the “probable” threshold. The new language will require these assets to be valued at amortized cost presented at the net amount expected to be collected with a valuation provision. This update standard is effective for fiscal years beginning after December 15, 2019. We do not expect the impact of adopting this standard to have a material impact on our consolidated financial statements.

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

In February 2016, FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires that lessees recognize assets and liabilities for leases with lease terms greater than twelve months in the statement of financial position and also requires improved disclosures to help users of financial statements better understand the amount, timing and uncertainty of cash flows arising from leases. This update is effective for fiscal years beginning after December 15, 2018, including interim reporting periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact of this ASU on our consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10). ASU 2016-01 requires all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee). The amendments also require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. In addition, the amendments eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities and the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet for public business entities. The amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. We do not expect the 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 (Topic 606). ASU 2014-09 is a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. In August 2015, FASB issued ASU 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.


9


2. Asset acquisitions and dispositions

Real estate assets

Acquisitions, including those accounted for as business combinations

On September 30, 2016, we acquired a portfolio of 4,262 single-family residential properties located in 14 states for an aggregate purchase price of $652.3 million in two separate seller-financed transactions. The properties were acquired from two separate investment funds sponsored by Amherst Holdings, LLC (“Amherst”), neither of which is a related party to us. In the first transaction, ARLP acquired 3,868 of the 4,262 properties through our entry into a Membership Interest Purchase and Sale Agreement (the “MIPA”) with MSR I, L.P. (“MSR I”). Pursuant to the MIPA, ARLP acquired from MSR I 100% of the membership interests of HOME SFR Equity Owner, LLC (“HOME Equity”), a newly formed special purpose entity and sole equity owner of HOME SFR Borrower, LLC (“HOME Borrower”), which owned the 3,868 single-family residential properties. Following the consummation of the transaction, HOME Equity and HOME Borrower became indirect, wholly owned subsidiaries of the Company. In the second transaction, ALRP entered into a Purchase and Sale Agreement (the “PSA”) with Firebird SFE I, LLC. Pursuant to the PSA, HOME Borrower, as assignee from ARLP, acquired the remaining 394 of the 4,262 properties. We refer to these acquisitions, collectively, as the “HOME SFR Transaction.”

We recognized acquisition fees and costs related to the HOME SFR Transaction of $3.9 million. The value of in-place leases was estimated at $9.8 million based upon the costs we would have incurred to lease the properties and is being amortized over the weighted average remaining life of the leases of approximately seven months as of date of the HOME SFR Transaction.

We recognized $163 thousand in revenues and $59 thousand in earnings related to the HOME SFR Transaction in our consolidated statements of operations for the three and nine months ended September 30, 2016.

The preliminary allocation of the purchase price is based upon the estimated fair values of the assets acquired and is subject to change during the measurement period. The purchase price allocation is preliminary as we are in the process of finalizing the valuation. The following table sets forth the preliminary allocation of the estimated fair value of the assets acquired as well as the source of funds related to the HOME SFR Transaction ($ in thousands):

Estimated fair value of assets acquired:
 
 
 
 
Land
 
 
 
$
123,857

Rental residential properties
 
 
 
499,785

Real estate owned
 
 
 
18,895

Prepaid expenses and other assets (1)
 
 
 
9,809

   Total preliminary allocation of purchase price
 
 
 
$
652,346

 
 
 
 
 
Source of funds:
 
 
 
 
Cash on hand
 
 
 
$
163,087

Debt financing (Note 6)
 
 
 
489,259

   Total purchase price
 
 
 
$
652,346

________
(1)
Represent estimated lease-in-place intangible asset.

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

On August 18, 2015, we completed our acquisition of 1,314 single-family rental properties located in the Atlanta, Georgia market from an unrelated third party for an aggregate purchase price of approximately $111.4 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 $1.6 million based upon the costs we would have incurred to lease the properties and was amortized over the weighted average remaining life of the leases of seven months as of the acquisition date.

10


During the three and nine months ended September 30, 2016, we acquired 238 and 642 residential properties, respectively, under our one-by-one acquisition program for an aggregate purchase price of $24.6 million and $64.7 million, respectively.

During the three and nine months ended September 30, 2015, we acquired 10 residential properties under our one-by-one acquisition program for an aggregate purchase price of $1.1 million.

Supplemental pro forma financial information (unaudited)

The following supplemental pro forma financial information summarizes our results of operations as if the HOME SFR Transaction occurred on January 1, 2015 as follows ($ in thousands, except per share amounts):

 
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
Unaudited pro forma revenues
$
18,711

 
$
70,905

 
$
86,021

 
$
257,908

Unaudited pro forma net loss
$
(59,717
)
 
$
(10,611
)
 
$
(173,562
)
 
$
(2,317
)
Loss per basic common share
$
(1.10
)
 
$
(0.19
)
 
$
(3.17
)
 
$
(0.04
)
Weighted average common stock outstanding - diluted
54,178,129

 
57,056,625

 
54,722,828

 
57,154,734

Loss per diluted common share
$
(1.10
)
 
$
(0.19
)
 
$
(3.17
)
 
$
(0.04
)
Weighted average common stock outstanding - diluted
54,178,129

 
57,056,625

 
54,722,828

 
57,154,734


The following table presents the adjustments included for each period ($ in thousands):

 
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
Revenues from consolidated statement of operations
$
4,401

 
$
58,523

 
$
44,700

 
$
223,957

Add: historical revenues of acquired properties not reflected in consolidated statement of operations
14,310

 
12,382

 
41,321

 
33,951

Unaudited pro forma revenues
$
18,711

 
$
70,905

 
$
86,021

 
$
257,908

 
 
 
 
 
 
 
 
Net (loss) income from consolidated statement of operations
$
(57,638
)
 
$
(5,363
)
 
$
(166,824
)
 
$
20,153

Plus: historical net income of acquired properties not reflected in consolidated statement of operations
8,416

 
7,597

 
25,566

 
20,157

Less: pro forma depreciation and amortization
(5,157
)
 
(6,558
)
 
(15,472
)
 
(25,281
)
Less: pro forma interest expense
(4,737
)
 
(4,737
)
 
(14,212
)
 
(14,212
)
Less: pro forma management fees
(601
)
 
(1,550
)
 
(2,620
)
 
(3,134
)
Unaudited pro forma net loss
$
(59,717
)
 
$
(10,611
)
 
$
(173,562
)
 
$
(2,317
)

The supplement pro forma financial information for all periods presented was adjusted to reflect real estate depreciation and amortization on the acquired properties and related intangible assets, interest expense on the related financing facility and incremental management fees that would have been incurred under the asset management agreement. The supplemental pro forma financial information is for informational purposes only and is not necessarily indicative of the actual results of operations that would have been achieved if the acquisition had taken place on January 1, 2015, nor does it purport to represent or be indicative of the results of operations for future periods.


11

Dispositions

During the three and nine months ended September 30, 2016, we sold 604 and 2,200 residential properties, respectively, and recorded $26.3 million and $94.8 million, respectively, of net realized gains on real estate.

During the three and nine months ended September 30, 2015, we sold 357 and 932 residential properties, respectively, and recorded $13.9 million and $36.9 million, respectively, of net realized gains on real estate.

Mortgage loan assets

Resolutions

During the three and nine months ended September 30, 2016, we resolved 109 and 400 mortgage loans, respectively, primarily through short sales, refinancing and foreclosure sales. In connection with these resolutions, we recorded $9.4 million and $30.3 million, respectively, of net realized gains on mortgage loans.

During the three and nine months ended September 30, 2015, we resolved 145 and 565 mortgage loans, respectively, primarily through short sales, refinancing and foreclosure sales. In addition, we sold 137 loans that had transitioned to re-performing status from prior non-performing loan acquisitions to a third party purchaser during June 2015. In connection with these resolutions and disposals, we recorded $12.9 million and $47.5 million, respectively, of net realized gains on mortgage loans.

Dispositions

During the nine months ended September 30, 2016, we sold 1,974 of our mortgage loans held for sale to third party purchasers. In connection with these sales, we recorded $50.2 million of net realized gains on mortgage loans held for sale.

During June 2015, we sold 52 loans from the re-performing mortgage loans purchased in June 2014 to a third party purchaser. In connection with this sale, we recognized $0.3 million of net realized gains on mortgage loans held for sale.

Transfers of mortgage loans to real estate owned

During the three and nine months ended September 30, 2016, we transferred an aggregate of 246 and 914 mortgage loans, respectively, to REO at an aggregate fair value based on BPOs of $49.5 million and $173.8 million, respectively. Such transfers occur when the foreclosure sale is complete. In connection with these transfers to REO, we recorded $10.7 million and $34.8 million, respectively, in change in unrealized gain on mortgage loans that resulted from marking the properties to their most current market value.

During the three and nine months ended September 30, 2015, we transferred an aggregate of 507 and 1,918 mortgage loans, respectively, to REO at an aggregate fair value based on BPOs of $90.7 million and $359.4 million, respectively. Such transfers occur when the foreclosure sale is complete. In connection with these transfers to REO, we recorded $17.0 million and $68.4 million, respectively, in change in unrealized gain on mortgage loans that resulted from marking the properties to their most current market value.

Due diligence costs

During the three and nine months ended September 30, 2016, we recognized $1.3 million and $1.9 million, respectively, of due diligence costs, and we recognized a nominal amount and $0.4 million, respectively, of due diligence costs during the three and nine months ended September 30, 2015. These due diligence costs are included in our consolidated statement of operations as acquisition fees and costs.


12
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3. Real estate assets, net

Real estate held for use

As of September 30, 2016, we had 9,892 single-family residential properties held for use. Of these properties, 7,079 had been leased, 587 were listed and ready for rent and 875 were in varying stages of renovation and unit turn status. With respect to the remaining 1,351 REO properties, we will make a final determination whether each property meets our rental profile after (a) applicable state redemption periods have expired, (b) the foreclosure sale has been ratified, (c) we have recorded the deed for the property, (d) utilities have been activated and (e) we have secured access for interior inspection. A majority of the REO properties are subject to state regulations that require us to await the expiration of a redemption period before a foreclosure can be finalized. Once the redemption period expires, we immediately proceed to record a new deed, take possession of the property, activate utilities and start the inspection process in order to make our final determination. If an REO property meets our rental profile, we determine the extent of renovations that are needed to generate an optimal rent and maintain consistency of renovation specifications. If we determine that the REO property will not meet our rental profile, we list the property for sale, in certain instances after renovations are made to optimize the sale proceeds.

As of December 31, 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 the carrying amount. This analysis is performed at the property level. These cash flows are estimated based on a number of assumptions that are subject to economic and market uncertainties, including, among others, demand for rental properties, competition for customers, changes in market rental rates, costs to operate each property and expected ownership periods. If the carrying amount of a held for use asset exceeds the sum of its undiscounted future operating and residual cash flows, an impairment loss is recorded for the difference between estimated fair value of the asset and the carrying amount. We are not able to recover any such impairments should the estimated fair value subsequently improve. We generally estimate the fair value of assets held for use by using BPOs. In some instances, appraisal information may be available and is used in addition to BPOs.

During the three and nine months ended September 30, 2016, we recognized $1.2 million and $6.2 million, respectively, of impairment on real estate held for use. During the nine months ended September 30, 2015, we recognized no impairment on our real estate held for use.

Real estate held for sale

As of September 30, 2016 and December 31, 2015, our real estate held for sale included 839 and 1,583 REO properties, respectively, having an aggregate carrying value of $169.8 million and $250.6 million, respectively. Management determined to divest these properties because they do not meet our residential rental property investment criteria.

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

During the three and nine months ended September 30, 2016, we recognized $7.2 million and $23.0 million, respectively, of impairment on our real estate held for sale.

During the three and nine months ended September 30, 2015, we recognized $3.6 million and $13.4 million, respectively, of impairment on our real estate held for sale.


13
(table of contents)

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 September 30, 2016 and December 31, 2015 ($ in thousands):
 
 
Number of Loans
 
Carrying Value
 
Unpaid Principal Balance
 
Market Value of Underlying Properties
September 30, 2016
 
 
 
 
 
 
 
 
Current
 
761

 
$
125,038

 
$
161,706

 
$
193,704

30
 
75

 
11,444

 
17,213

 
18,371

60
 
42

 
5,844

 
8,362

 
9,809

90
 
407

 
54,049

 
83,064

 
91,907

Foreclosure
 
2,432

 
431,929

 
608,258

 
620,472

Mortgage loans at fair value
 
3,717

 
$
628,304

 
$
878,603

 
$
934,263

 
 
 
 
 
 
 
 
 
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


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 September 30, 2016 and December 31, 2015 ($ in thousands):
 
 
Number of Loans
 
Carrying Value
 
Unpaid Principal Balance
 
Market Value of Underlying Properties
September 30, 2016
 
 
 
 
 
 
 
 
Current
 
13

 
$
1,357

 
$
1,985

 
$
2,600

30
 
7

 
713

 
1,508

 
1,642

90
 
1

 
485

 
489

 
990

Foreclosure
 
10

 
1,483

 
1,998

 
2,212

Mortgage loans held for sale
 
31

 
$
4,038

 
$
5,980

 
$
7,444

 
 
 
 
 
 
 
 
 
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 September 30, 2016, our mortgage loans held for sale include our remaining re-performing residential mortgage loans that we initially acquired in June 2014. We 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.


14

(table of contents)

Re-performing residential mortgage loans

For the three and nine months ended September 30, 2016 and 2015, we recognized no provision for loan loss and no adjustments to the amount of the accretable yield for our re-performing residential mortgage loans. For the three and nine months ended September 30, 2016, we accreted $35 thousand and $107 thousand, respectively, into interest income with respect to our re-performing loans. For the three and nine months ended September 30, 2015, we accreted $112 thousand and $581 thousand into interest income with respect to our re-performing loans. At September 30, 2016 and December 31, 2015, these re-performing loans had a UPB of $6.0 million and a carrying value of $4.0 million at each date. We included these loans in mortgage loans held for sale.

The following table presents changes in the balance of the accretable yield for the periods indicated:
Accretable Yield
Nine months ended September 30, 2016

Nine months ended September 30, 2015
Balance at the beginning of the period
$
2,146

 
$
7,640

Payments and other reductions, net
—

 
(3,285
)
Accretion
(107
)
 
(581
)
Balance at the end of the period
$
2,039

 
$
3,774



15

(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 September 30, 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
September 30, 2016
 
 
 
 
 
 
Recurring basis (assets)
 
 
 
 
 
 
Mortgage loans at fair value
 
$
—

 
$
—

 
$
628,304

Interest rate cap derivative (1)
 
—

 
55

 
—

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

 
—

 
169,841

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

 
—

 
4,038

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

 
1,189,253

 
—

Other secured borrowings
 
—

 
157,950

 
—

 
 
 
 
 
 
 
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 and loan agreements
 
—

 
767,513

 
—

Other secured borrowings
 
—

 
502,268

 
—

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

We have not transferred any assets from one level to another level during the three or nine months ended September 30, 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 discounted cash flow pricing model. The fair value of re-performing mortgage loans held for sale is estimated using the present value of the future estimated principal and interest payments of the loan, with the discount rate used in the present value calculation representing the estimated effective yield of the loan. The fair value of our interest rate cap derivative is estimated using a discounted cash flow analysis based on the contractual terms of the derivative. The fair value of the repurchase and loan agreements is estimated using the income approach based on credit spreads available to us currently in the market for similar floating rate debt. The fair value of other secured borrowings is estimated using observable market data.


16
(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 September 30, 2016
 
Three months ended September 30, 2015
 
Nine months ended September 30, 2016
 
Nine months ended September 30, 2015
Mortgage loans at fair value
 
 
 
 
 
 
 
Beginning balance
$
707,445

 
$
1,716,489

 
$
960,534

 
$
1,959,044

Change in unrealized gain on mortgage loans
(8,086
)
 
43,525

 
20,542

 
170,845

Net realized gain on mortgage loans
9,428

 
12,874

 
30,340

 
47,528

Transfers of mortgage loans at fair value to mortgage loans held for sale, net
1,914

 
(250,346
)
 
(101,201
)
 
(250,346
)
Mortgage loan resolutions and payments
(34,967
)
 
(57,882
)
 
(119,794
)
 
(205,120
)
Real estate tax advances to borrowers
1,161

 
6,611

 
6,255

 
18,002

Transfer of mortgage loans to real estate owned, net
(48,591
)
 
(90,696
)
 
(168,372
)
 
(359,378
)
Ending balance
$
628,304

 
$
1,380,575

 
$
628,304

 
$
1,380,575

 
 
 
 
 
 
 
 
Change in unrealized gain on mortgage loans at fair value held at the end of the period
$
(15,027
)
 
$
13,022

 
$
(5,309
)
 
$
93,874


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 the dates indicated:
Input
 
September 30, 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
 
-15.2% to 16.9%
 
0.0% to 10.2%
Loan resolution probabilities — modification
 
0% to 11.4%
 
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 - 5.5
 
0.1 - 5.6
Value of underlying properties
 
$3,000 - $4,250,000
 
$3,000 - $4,500,000


17
(table of contents)

6. Borrowings

Repurchase and loan agreements

Our operating partnership and certain of its Delaware statutory trust and/or limited liability company subsidiaries, as applicable, have entered into master repurchase agreements and loan agreements to finance the acquisition and ownership of single-family rental properties, other 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 September 30, 2016, the weighted average annualized interest rate on borrowings under our repurchase and loan agreements was 3.72%, excluding amortization of deferred debt issuance costs.

We had entered into three separate repurchase agreements and two loan agreements to finance the acquisition and ownership of single-family rental properties, other REO properties and mortgage loans. In March 2016, our repurchase agreement with Deutsche Bank (“DB”) expired pursuant to its terms and is no longer outstanding. Therefore, at September 30, 2016, we were party to two repurchase agreements and two loan agreements. Below is a description of each agreement outstanding during the nine months ended September 30, 2016:

Repurchase Agreements

•
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, 2015 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.
    
•
DB was 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.

Loan Agreements

•
Nomura Corporate Funding Americas, LLC (“Nomura”) is the lender under a loan agreement dated April 10, 2015 (the “Nomura loan agreement”) with an initial aggregate maximum funding capacity of $100.0 million. The Nomura loan agreement was amended during 2015, 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.

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

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agreement on each maturity date. The MSR Loan is secured by the membership interests of HOME Borrower and the properties and other assets of HOME Borrower.

Following all of the amendments described above, the maximum aggregate funding available to us under these repurchase and loan agreements as of September 30, 2016 was $1.8 billion, subject to certain sublimits, eligibility requirements and conditions precedent to each funding. As of September 30, 2016, an aggregate of $1.2 billion was outstanding under our repurchase and loan agreements. Each of the CS repurchase agreement, the Wells repurchase and the Nomura loan agreement are fully guaranteed by us.

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

 
$
337,268

 
$
211,382

 
$
138,618

Wells repurchase agreement due September 27, 2017
750,000

 
621,699

 
334,726

 
415,274

Nomura loan agreement due April 16, 2017
250,000

 
230,765

 
153,886

 
96,114

Original MSR loan agreement due November 15, 2018
489,259

 
642,537

 
489,259

 
—

Less: deferred debt issuance costs
—

 
—

 
(6,576
)
 
—

 
$
1,839,259

 
$
1,832,269

 
$
1,182,677

 
$
650,006

 
 
 
 
 
 
 
 
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


Terms and covenants related to our repurchase agreements

Under the terms of our two remaining 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 September 30, 2016, approximately $21.0 million of the amount outstanding under the CS repurchase agreement was collateralized by $34.0 million of the Class A-2 Notes issued and retained by us in connection with the securitization completed in July 2015 by ARLP 2015-1.

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.


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Terms and covenants related to the Nomura loan agreement

Under the terms of the Nomura loan agreement, subject to certain conditions, Nomura may advance funds to us from time to time, with such advances collateralized by single-family rental properties and other REO properties. The advances paid under the Nomura loan agreement with respect to the applicable properties from time to time will be based on a percentage of the market value of the properties. Under the terms of the Nomura loan agreement, we are required to pay interest based on the one-month LIBOR plus a spread and certain other customary fees, administrative costs and expenses in connection with Nomura's structuring, management and ongoing administration of the facility.

The Nomura loan agreement requires us to maintain various financial and other covenants, including a minimum adjusted tangible net worth, a maximum ratio of indebtedness to adjusted tangible net worth and specified levels of unrestricted cash. In addition, the Nomura loan agreement contains events of default (subject to certain materiality thresholds and grace periods), including payment defaults, breaches of covenants and/or certain representations and warranties, cross-defaults, certain material adverse changes, bankruptcy or insolvency proceedings and other events of default customary for this type of transaction. The remedies for such events of default are also customary for this type of transaction and include the acceleration of the principal amount outstanding under the Nomura loan agreement and the liquidation by Nomura of the REO properties then subject thereto.

Terms and covenants related to the A&R MSR loan agreement

Under the terms of the A&R MSR loan agreement, the MSR Loan is a floating rate loan, composed of eight floating rate components, interest on each of which is computed monthly based on one-month LIBOR plus a fixed component spread. The MSR Loan is non-recourse to us and is secured by a lien on the membership interests of HOME Borrower and the acquired properties and other assets of HOME Borrower. The assets of HOME Borrower are the primary source of repayment and interest on the MSR Loan, thereby making the cash proceeds received by HOME Borrower of rent payments and any sales of the acquired properties the primary sources of the payment of interest and principal by HOME Borrower to MSR Lender. The A&R MSR loan agreement requires that HOME Borrower comply with various affirmative and negative covenants that are customary for loans of this type, including limitations on indebtedness HOME Borrower can incur, limitations on sales and dispositions of the MSR Properties and various restrictions on the use of cash generated by the operations of the MSR Properties while the MSR Loan is outstanding. We have limited indemnification obligations for wrongful acts taken by HOME Equity and HOME Borrower in connection with the secured collateral.

Even though the MSR Loan is non-recourse to us and all of our subsidiaries other than HOME Equity and HOME Borrower, we have agreed to limited bad act indemnification obligations to the MSR Lender for the payment of (i) certain losses arising out of certain bad or wrongful acts of HOME Equity and HOME Borrower with respect to the MSR Loan and (ii) the principal amount of the MSR Loan and all other obligations under the A&R MSR loan agreement in the event we cause certain voluntary bankruptcy events of HOME Equity or HOME Borrower. Any of such liabilities could have a material adverse effect on our results of operations and/or financial condition.

We are currently in compliance with the covenants and other requirements with respect to the repurchase and loan agreements. We monitor our lending partners’ ability to perform under the repurchase and loan agreements and have concluded there is currently no reason to doubt that they will continue to perform under the repurchase and loan agreements as contractually obligated.

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 May 25, 2044, respectively, and we do not guarantee any of the obligations of ARLP

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2015-1 under the terms of the indenture governing the notes or otherwise. As of September 30, 2016, the book value of the underlying securitized assets held by ARLP 2015-1 was $267.0 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 ARLP 2014-2 and terminated the securitization 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 ARLP 2014-1 and terminated the securitization in March 2016.

Following the repayment of the notes issued under the ARLP 2014-1 and 2014-2 securitizations during the first quarter of 2016, only the ARLP 2015-1 securitization remained in effect. The following table sets forth data with respect to these notes as of September 30, 2016 and December 31, 2015 ($ in thousands):
 
Interest Rate
 
Amount Outstanding
September 30, 2016
 
 
 
ARLP Securitization Trust, Series 2015-1
 
 
 
ARLP 2015-1 Class A Notes due May 25, 2055 (1)
4.01
%
 
$
191,950

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
 
 
(964
)
 
 
 
$
156,986

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)
Repaid during March 2016.


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7. Commitments and contingencies

Litigation, claims and assessments

From time to time, we may be involved in various claims and legal actions arising in the ordinary course of business. Set forth below is a summary of legal proceedings to which we are a party 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 Ocwen, including that Ocwen was not properly servicing and selling loans, that Ocwen was under investigation by regulators for violating state and federal laws regarding servicing of loans and Ocwen’s lack of proper internal controls. The complaint also contains allegations that certain of the Company's disclosure documents were false and misleading because they failed to disclose fully the entire details of a certain asset management agreement between the Company and AAMC that allegedly benefited AAMC to the detriment of the Company's shareholders. The action seeks, among other things, an award of monetary damages to the putative class in an unspecified amount and an award of attorney’s and other fees and expenses.

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

On January 23, 2016, the lead plaintiff filed an amended complaint.

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

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.

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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 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.

On May 13, 2016, we filed a motion to dismiss the Sokolowski action as to us. Subsequently, plaintiffs sought and received an extension to file their opposition to the defendants' motions to dismiss to August 19, 2016, and a further extension to September 29, 2016.

On September 13, 2016, plaintiffs, Ocwen, Mr. Erbey, Mr. Faris, and Mr. Britti requested that the court transfer the case to Magistrate Judge Snow in order to assist with settlement negotiations. The court granted the request, and counsel for plaintiffs and Ocwen appeared before Magistrate Judge Snow on October 13, 2016 for a settlement conference. At the conference, plaintiffs and Ocwen reached an agreement in principle to resolve certain claims, which Ocwen has publicly disclosed it believes will be covered in full by its applicable insurance coverage. Based on our understanding of the settlement terms, we believe the settlement agreement will include our release from any and all liability in the matter. Plaintiffs filed a Settlement Term Sheet under seal on October 18, 2016. The Stipulation of Settlement is due on or before November 18, 2016. A Final Approval Hearing will be held on January 18, 2017.

We believe the complaint against us is without merit. At this time, until the settlement agreement is finalized and approved, 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.


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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.

Amendment and Waiver Agreement with Altisource Solutions

In connection with the HOME SFR Transaction and to enable Main Street Renewal LLC (“MSR”) to be property manager for the acquired properties, we and Altisource Solutions S.à r.l. (“Altisource Solutions”), a wholly owned subsidiary of Altisource Portfolio Solutions S.A. (“ASPS”), entered into an Amendment and Waiver Agreement (the “Amendment and Waiver Agreement”) to amend the Master Services Agreement (the “MSA”) between Altisource Solutions and us, dated December 21, 2012, under which Altisource Solutions is the exclusive provider of leasing and property management services to the us. Pursuant to the Amendment and Waiver Agreement, we obtained a waiver of the exclusivity requirements under the MSA for the acquired properties. Additionally, the Amendment and Waiver Agreement permits us to utilize the property management services of MSR in connection with up to approximately 3,000 additional properties if we acquire such additional properties from an investment fund or other entity affiliated with Amherst in one or more transactions prior to June 30, 2017. The Amendment and Waiver Agreement also amended the MSA to require us or any surviving entity to pay a $60 million liquidation fee to Altisource Solutions if (i) we sell, liquidate or dispose of 50% or more of our SFR portfolio managed by Altisource Solutions over a rolling eighteen (18) month period without using the proceeds of such sales, liquidations or disposals to purchase additional SFR assets or if (ii) the surviving entity in a change of control does not assume the MSA with Altisource Solutions as property manager. The liquidation fee will not be required to be paid if we or any surviving entity terminate the MSA as a result of a material breach of the MSA by Altisource Solutions, for Altisource Solutions’ failure to meet certain specified performance standards or for certain other customary reasons.

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

•
Incentive Management Fee. AAMC is entitled to a quarterly Incentive Management Fee equal to 20% of the amount by which our return on invested capital (based on AFFO defined as our net income attributable to holders of common stock calculated in accordance with GAAP plus real estate depreciation expense minus recurring capital expenditures on all of our real estate assets owned) exceeds an annual hurdle return rate of between 7.0% and 8.25% (depending on the 10-year treasury rate). The Incentive Management Fee increases to 22.5% while we have between 2,500 and 4,499 Rental Properties and increases to 25% while we have 4,500 or more Rental Properties; and
 
•
Conversion Fee. AAMC is entitled to a quarterly conversion fee equal to 1.5% of the market value of the single-family homes leased by us for the first time during the 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 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, which will now be covered by the Base Management Fee described above. Only the compensation and benefits of the general counsel dedicated to us and certain other out-of-pocket expenses incurred by AAMC on our behalf will be reimbursed.


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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 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.

Summary of related-party transactions

The following table presents our significant transactions with AAMC, which is a related party, for the periods indicated ($ in thousands):

 
Three months ended September 30, 2016
 
Three months ended September 30, 2015
 
Nine months ended September 30, 2016
 
Nine months ended September 30, 2015
Base management fees (1)
$
4,208

 
$
4,659

 
$
12,838

 
$
9,411

Conversion fees (1)
450

 
329

 
1,396

 
728

Management incentive fees (1) (2)
—

 
—

 
—

 
14,900

Expense reimbursements (3)
196

 
—

 
553

 
750

Dividend income (4)
—

 
1,518

 
—

 
1,518

Interest expense (5)
—

 
242

 
—

 
563

Professional fee sharing for negotiation of New AMA
—

 
—

 
—

 
2,000

______________
(1)
Included in management fees in the consolidated statements of operations.
(2)
Pursuant to the terms of the New AMA, the management incentive fees for the first quarter of 2015 were recalculated during the fourth quarter of 2015, and it was determined that $6.9 million was reimbursable by AAMC to us.
(3)
Included in general and administrative expenses in the consolidated statements of operations.
(4)
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 plus the payment of all accrued and unpaid cumulative dividends on such shares of preferred stock in the amount of $1.5 million.
(5)
Interest expense related to ARLP 2014-1 Class M Notes issued to NewSource. These Class M Notes were repurchased on September 14, 2015.

No Incentive Management Fee under the New AMA was payable to AAMC during the three and nine months ended September 30, 2016 because our return on invested capital (as defined in the New AMA) for the six 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 September 30, 2016, the aggregate return shortfall from the prior six quarters under the New AMA was approximately 36.66% of invested capital. Therefore, we must achieve a 38.41% return on invested capital in the fourth quarter of 2016 before any Incentive Management Fee will be payable to AAMC. In future quarters, return on invested capital must exceed the required hurdle for the current quarter plus any carried-forward cumulative additional hurdle shortfall from the prior seven quarters before any Incentive Management Fee will be payable to AAMC.

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9. Share-based payments

The Altisource Residential Corporation 2016 Equity Incentive Plan (the “2016 Equity Incentive Plan”) was approved at the Annual Meeting of Stockholders on June 1, 2016.

Beginning in July 2016, our non-management directors each will receive annual grants of restricted stock units issued under the 2016 Equity Incentive Plan. These restricted stock units are eligible for settlement in the number of shares of our common stock having a fair market value of $60 thousand on the date of grant. The restricted stock units are expected to vest on the earlier of the first anniversary of the date of grant or the next annual meeting of stockholders, with distribution mandatorily deferred for an additional 2 years thereafter until the third anniversary of grant (subject to earlier distribution or forfeiture upon the applicable director’s separation from the Board of Directors). The awards will be issued together with dividend equivalent rights. In respect of dividends paid to our stockholders prior to the vesting date, dividend equivalent rights are expected to accumulate and be paid in a lump sum in cash following the vesting date, contingent on the vesting of the underlying award. During any period thereafter when the award is vested but remains subject to settlement, dividend equivalent rights are expected to be paid in cash on the same timeline as underlying dividends are actually paid to our stockholders.

The first annual grant of restricted stock units was made to our non-management directors on July 11, 2016 with respect to the 2016 to 2017 service year in an aggregate number of 26,520 shares of restricted stock with a weighted average grant date fair value of $9.05 per share.

On August 9, 2016, an aggregate of 247,008 shares of restricted stock and 695,187 stock options were granted to certain employees of AAMC pursuant to the 2016 Equity Incentive Plan. The restricted stock and stock options had a weighted average grant date fair value of $10.04 per share and $1.91 per share, respectively. The restricted stock will vest in equal annual installments on each of the first three anniversaries of the grant date, subject to acceleration or forfeiture. The stock options will vest in three equal annual installments on the later of the anniversary of the option award and the date of the satisfaction of certain performance criteria, in each case, on the first, second and third anniversaries of the option award, subject to acceleration or forfeiture. The performance criteria is satisfied on the date on which the sum of (a) the average price per share for the consecutive 20-trading-day period ending on such date plus (b) the amount of all reinvested dividends, calculated on a per-share basis from the date of grant through such date, shall equal or exceed 125% of the price per share on the date of grant (the “Performance Goal”); provided however that the Performance Goal must be attained no later than the fourth anniversary of the grant date. In the event that the Performance Goal is not attained prior to the fourth anniversary of the grant date, the stock options shall expire.

In addition to the above-described grants under the 2016 Equity Incentive Plan, during the nine months ended September 30, 2016 and pursuant to the 2013 Director Equity Plan, an aggregate of 1,232 shares of restricted stock were granted to a director who joined the Board on March 1, 2016 with a weighted average grant date fair value of $9.30 per share, and a former director forfeited 625 shares of restricted stock with a weighted average grant date fair value of $18.25 per share due to his departure from the Board on March 1, 2016. During the nine months ended September 30, 2015, our directors were granted 9,924 shares of restricted stock with a weighted average grant date fair value of $18.25 per share.

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. As of September 30, 2016, options to purchase an aggregate of 194,078 shares of our common stock were remaining under the Conversion Option Plan and Special Conversion Option Plan.

We recorded $419 thousand and $493 thousand of compensation expense related to our share-based compensation programs for the three and nine months ended September 30, 2016, respectively. As of September 30, 2016 and 2015, we had $3.8 million and $0.1 million, respectively, of unrecognized share-based compensation cost remaining with an average remaining estimated term of 1.8 years and 0.7 years, respectively.


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10. Derivatives

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

On September 29, 2016, we entered into an interest rate cap to manage the economic risk of increases in the floating rate portion of the Original MSR loan agreement. The interest rate cap has a strike rate on the one-month LIBOR of 2.938%, a notional amount of $489.3 million and a termination date of November 15, 2018. At September 30, 2016, the interest rate cap had a fair value of $55 thousand. We did not designate the interest rate cap as an accounting hedge; therefore, changes in the fair value of the interest rate cap are recorded in other income or expense in our consolidated statement of operations. For the three and nine months ended September 30, 2016, we recognized no changes in the fair value of the interest rate cap.

11. Income taxes

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

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 September 30, 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 and nine months ended September 30, 2016 and 2015. As a REIT, we may also be subject to federal taxes if we engage in certain types of transactions.

As of September 30, 2016 and 2015, we did not accrue interest or penalties associated with any unrecognized tax benefits. We recorded nominal state and local tax expense along with nominal penalties and interest on income and property for the three and nine months ended September 30, 2016 and 2015. Our subsidiaries and we remain subject to tax examination for the period from inception to December 31, 2015.


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12. Earnings per share

The following table sets forth the components of diluted (loss) earnings per share (in thousands, except share and per share amounts):
 
Three months ended September 30, 2016
 
Three months ended September 30, 2015
 
Nine months ended September 30, 2016
 
Nine months ended September 30, 2015
Numerator
 
 
 
 
 
 
 
Net (loss) income
$
(57,638
)
 
$
(5,363
)
 
$
(166,824
)
 
$
20,153

 
 
 
 
 
 
 
 
Denominator
 
 
 
 
 
 
 
Weighted average common stock outstanding – basic
54,178,129

 
57,056,625

 
54,722,828

 
57,154,734

Stock options using the treasury method
—

 
—

 
—

 
192,870

Restricted stock
—

 
—

 
—

 
3,410

Weighted average common stock outstanding – diluted
54,178,129

 
57,056,625

 
54,722,828

 
57,351,014

 
 
 
 
 
 
 
 
(Loss) earnings per basic common share
$
(1.06
)
 
$
(0.09
)
 
$
(3.05
)
 
$
0.35

(Loss) earnings per diluted common share
$
(1.06
)
 
$
(0.09
)
 
$
(3.05
)
 
$
0.35


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 September 30, 2016
 
Three months ended September 30, 2015
 
Nine months ended September 30, 2016
 
Nine months ended September 30, 2015
Denominator (in weighted-average shares)
 
 
 
 
 
 
 
Stock options
151,755

 
215,773

 
154,828

 
—

Restricted stock
35,671

 
9,924

 
15,545

 
—


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 nine months ended September 30, 2016.

13. Segment information

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

14. Subsequent events

Management has evaluated the impact of all events subsequent to September 30, 2016 and through the issuance of these consolidated interim financial statements. We have determined that there were no subsequent events requiring adjustment or disclosure in the financial statements.

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

Our Company

We are a Maryland real estate investment trust (“REIT”) focused on acquiring, owning and managing single-family rental (“SFR”) properties throughout the United States. We conduct substantially all of our activities through our wholly owned subsidiary, Altisource Residential, L.P. (“ARLP”), and its subsidiaries. We conduct an SFR business, and we employ a diversified SFR property acquisition strategy in order 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. In 2015, we expanded our acquisition strategy to opportunistically acquire portfolios of SFR properties in order to more quickly achieve scale in our rental portfolio. We also purchase SFR properties on a one-by-one basis, sourcing listed properties from the Multiple Listing Service and alternative listing sources. As a result of this expansion of our acquisition strategy, we have increased the size of our rental portfolio from 2,732 as of December 31, 2015 to 8,541 as of September 30, 2016.

Initially, 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 NPL pools became more competitive and higher-priced, we introduced the alternative SFR property acquisition strategies described above, and we began opportunistically selling portfolios of NPLs.

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

Management Overview

During 2016, we have focused on the direct acquisition of SFR properties as we transition to a 100% SFR REIT, and we continue to successfully execute that strategy. On September 30, 2016, we completed a transformative acquisition of 4,262 high-yielding SFR properties (the “HOME SFR Transaction”) for an aggregate purchase price of $652.3 million in two separate seller financed transactions. The properties were acquired from investment funds sponsored by Amherst Holdings, LLC (“Amherst”). The HOME SFR Transaction brings our total rental portfolio to 8,541 properties at September 30, 2016 and enhances our presence in new and existing strategic target markets, including Florida, Texas, Georgia, Tennessee, North Carolina and South Carolina. The HOME SFR Transaction is a significant step towards completing our transition to a 100% SFR REIT.

In connection with the HOME SFR Transaction, our subsidiary that owns the properties, HOME SFR Borrower, LLC (“HOME Borrower”), borrowed approximately $489.3 million, representing 75% of the aggregate purchase price. This loan was made pursuant to a loan agreement with an ultimate maturity date of up to November 30, 2021 and a floating interest rate of one-month LIBOR plus a fixed spread. We believe that the terms of the loan were attractive in comparison to the financing terms otherwise available to us and will satisfy our financing requirements for the 4,262 SFR properties acquired for the foreseeable future. For additional information on this loan and the related loan agreement, please see “Liquidity and Capital Resources.”

In connection with the seller financing, we retained the current property manager for the portfolio, Main Street Renewal LLC (“MSR”), to provide property management services including, leasing and lease management, operations, maintenance, repair, property management and property disposition services to us with respect to the properties acquired in the HOME SFR Transaction. This new property management agreement expands our property manager structure from the sole agreement already in place with Altisource Solutions S.à r.l. (“Altisource Solutions”), a wholly owned subsidiary of Altisource Portfolio Solutions S.A. (“ASPS”). We believe that the property management agreements with MSR and Altisource Solutions are, and will be, key drivers of efficiency and cost management in our model and provide us with scalable, established, geographically dispersed property management infrastructures to support our portfolios of SFR properties. Importantly, our external property management structure allows us to achieve scale in our SFR portfolio without incurring the substantial costs of developing our own nationwide property management infrastructure.


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In addition to the HOME SFR Transaction, during the third quarter of 2016, we continued our efforts to sell certain mortgage loans to take advantage of attractive market pricing. We have successfully completed the sale of 1,974 NPLs for the nine months ended September 30, 2016, and we expect to agree the sale of two additional portfolios of mortgage loans in the fourth quarter of 2016 and to close these anticipated sales in the first quarter of 2017. In addition, we have continued to make significant progress on the sale of non-rental REO properties with 604 properties sold during the third quarter to bring the total REO properties sold in 2016 to 2,200. We expect that mortgage loan and non-rental REO property sales 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.

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

Portfolio Overview

Real Estate Assets

As of September 30, 2016, we owned 10,731 REO properties with an aggregate carrying value of $1.6 billion, of which 9,892 were held for use and 839 were held for sale. Of the 9,892 REO properties held for use, 7,079 properties had been leased, 587 were listed and ready for rent and 875 were in varying stages of renovation and unit turn status. With respect to the remaining 1,351 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, we were in the process of determining whether these properties would meet our rental profile.

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The following table sets forth a summary of our total real estate portfolio as of September 30, 2016 ($ in thousands):
State / District
 
Number of Properties
 
Carrying
Value (1) (2)
 
Weighted Average Age in Years (3)
Alabama
 
45

 
$
6,481

 
20.1

Arizona
 
58

 
15,436

 
22.5

Arkansas
 
31

 
2,938

 
32.2

California
 
304

 
105,240

 
39.3

Colorado
 
26

 
6,049

 
32.4

Connecticut
 
52

 
9,497

 
56.7

Delaware
 
21

 
3,900

 
36.3

Dist. of Columbia
 
1

 
650

 
111.0

Florida
 
1,299

 
194,865

 
28.3

Georgia
 
2,811

 
297,512

 
32.9

Hawaii
 
3

 
622

 
37.0

Idaho
 
8

 
1,175

 
33.8

Illinois
 
327

 
57,412

 
48.0

Indiana
 
519

 
70,203

 
21.0

Iowa
 
7

 
563

 
53.8

Kansas
 
21

 
2,776

 
40.3

Kentucky
 
41

 
5,617

 
28.6

Louisiana
 
12

 
1,474

 
35.7

Maine
 
4

 
517

 
34.3

Maryland
 
336

 
66,895

 
36.1

Massachusetts
 
67

 
15,343

 
77.6

Michigan
 
53

 
7,887

 
41.6

Minnesota
 
107

 
17,621

 
65.7

Mississippi
 
89

 
13,904

 
17.0

Missouri
 
94

 
14,084

 
24.2

Montana
 
1

 
121

 
25.0

Nebraska
 
2

 
249

 
73.5

Nevada
 
27

 
4,603

 
21.8

New Hampshire
 
4

 
566

 
99.3

New Jersey
 
150

 
23,600

 
64.1

New Mexico
 
51

 
6,052

 
27.3

New York
 
70

 
13,153

 
69.1

North Carolina
 
582

 
73,557

 
21.0

Ohio
 
60

 
7,750

 
34.5

Oklahoma
 
187

 
30,736

 
25.0

Oregon
 
28

 
6,314

 
38.2

Pennsylvania
 
139

 
18,838

 
60.0

Rhode Island
 
55

 
7,040

 
78.5

South Carolina
 
103

 
13,088

 
23.2

South Dakota
 
1

 
95

 
36.0

Tennessee
 
988

 
152,464

 
19.7

Texas
 
1,722

 
253,499

 
26.0

Utah
 
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