Notes to Consolidated Financial Statements
March 31, 2016
(Unaudited)
1
.
Organization and basis of presentation
Altisource Residential Corporation is a Maryland REIT focused on acquiring, owning and managing single-family rental properties throughout the United States. On December 21, 2012 we became a stand-alone publicly traded company with an initial capital contribution of
$100 million
.
We conduct substantially all of our activities through our wholly owned subsidiary Altisource Residential, L.P. (“ARLP”) and its subsidiaries. Initially, we acquired our rental properties primarily through the acquisition of sub-performing and non-performing mortgage loan (“NPL”) portfolios; however, commencing in the second quarter of 2015, we refocused our acquisition strategy to opportunistically acquire portfolios of single-family rental properties, both individually and in pools, as an avenue to more quickly achieve scale in our rental portfolio.
We have a long-term service agreement with Altisource Portfolio Solutions S.A. (“ASPS”), a leading provider of real estate and mortgage portfolio management, asset recovery and customer relationship management services. For the mortgage loans in our portfolio, we also have servicing agreements with
three
separate mortgage loan servicers. Our ability to execute our business strategy is reliant, in part, on the performance of these service providers.
We are managed by Altisource Asset Management Corporation (“AAMC” or our “Manager”). We do not have any employees and therefore rely on AAMC for administering our business and performing certain of our corporate governance functions. AAMC also provides portfolio management services in connection with our acquisition and management of residential mortgage loans and real estate owned (“REO”) properties. See Note 8 for a description of this related party relationship.
Basis of presentation and use of estimates
The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). All wholly owned subsidiaries are included and all intercompany accounts and transactions have been eliminated. The preparation of consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ materially from those estimates.
The unaudited interim consolidated financial statements and accompanying unaudited consolidated financial information, in our opinion, contain all adjustments that are of a normal recurring nature and necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods. The interim results are not necessarily indicative of results for a full year. We have omitted certain notes and other information from the interim consolidated financial statements presented in this Quarterly Report on Form 10-Q as permitted by the Securities and Exchange Commission (“SEC”) rules and regulations. These consolidated financial statements should be read in conjunction with our annual consolidated financial statements included within our 2015 Annual Report on Form 10-K, which was filed with the SEC on February 29, 2016.
Certain prior year amounts have been reclassified for consistency with the current period presentation, including acquisition fees and costs within our consolidated statement of operations. These reclassifications had no effect on the reported results of operations.
Our financial statements include the accounts of our wholly owned subsidiaries as well as the variable interest entities (“VIEs”) of which we are the primary beneficiary. We eliminate intercompany accounts and transactions in consolidation.
The determination of the VIE’s primary beneficiary requires an evaluation of the contractual and implied rights and obligations associated with each party’s relationship with or involvement in the entity, an estimate of the entity’s expected losses and expected residual returns and the allocation of such estimates to each party involved in the entity. We reassess our involvement with VIEs on a quarterly basis. Changes in methodologies, assumptions and inputs in the determination of the primary beneficiary could have a material effect on the amounts presented within the consolidated financial statements.
In certain instances, we hold both the power to direct the most significant activities of VIEs as well as an economic interest in the entity, and, as such, we are deemed to be the primary beneficiary or consolidator of the VIE. We have determined that our current and former securitization trusts, ARLP Securitization Trust, Series 2014-1 (“ARLP 2014-1”), ARLP Securitization Trust, Series 2014-2 (“ARLP 2014-2”) and ARLP Securitization Trust, Series 2015-1 (“ARLP 2015-1”), are VIEs of which we are the primary beneficiaries. See Note 6 for more information regarding our current and former securitization trusts.
Repurchases of common stock
During the first quarter of 2016, we determined that the
1,645,075
shares of common stock we repurchased during the third quarter of 2015 should have been classified as a reduction to common stock, for the par amount of the common stock, and to additional paid-in capital and that such repurchased shares should be included as shares unissued within the consolidated financial statements as of and for the year ended December 31, 2015. We previously classified common shares repurchased as treasury stock. The accompanying consolidated balance sheet as of December 31, 2015 and the related balances within our consolidated statement of stockholders' equity for the three months ended March 31, 2016 have been corrected to eliminate treasury stock of
$25.0 million
and reduce common stock and additional paid-in capital by an equivalent amount in the aggregate, resulting in no change in total equity as of December 31, 2015. The previously-reported consolidated statements of income, consolidated statements of comprehensive income or consolidated statements of cash flows were not impacted.
Deferred debt issuance costs
In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-03, Interest – Imputation of Interest (Subtopic 835-30) - Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 requires that debt issuance costs are presented on the balance sheet as a deduction from the carrying amount of the related debt liability instead of being presented as an asset. Debt disclosures include the face amount of the debt liability and the effective interest rate. In August 2015, the FASB issued ASU 2015-15, Interest - Imputation of Interest (Subtopic 835-30) - Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. ASU 2015-15 provides additional guidance to ASU 2015-03, which did not address presentation or subsequent measurement of debt issuance costs related to line of credit arrangements. ASU 2015-15 noted that the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line of credit arrangement, regardless of whether there are any outstanding borrowings on the line of credit arrangement.
Our application of ASU 2015-03 represents a change in accounting principle and has been applied retrospectively, which resulted in i) a reclassification of the deferred debt issuance cost component of our deferred leasing and financing costs to repurchase agreements and other secured borrowings and ii) a reclassification of deferred leasing costs component of our deferred leasing and financing cost to prepaid expenses and other assets in our consolidated balance sheets.
The following table represents the effect of change on the prior periods that will be restated as a result of this adoption ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
As Previously Reported
|
|
Adjustments
|
|
Current Presentation
|
Assets:
|
|
|
|
|
|
|
Deferred leasing and financing costs (1)
|
|
$
|
7,886
|
|
|
$
|
(7,886
|
)
|
|
$
|
—
|
|
Prepaid expenses and other assets (1)
|
|
415
|
|
|
711
|
|
|
1,126
|
|
Liabilities:
|
|
|
|
|
|
|
Repurchase agreements
|
|
767,513
|
|
|
(4,144
|
)
|
|
763,369
|
|
Other secured borrowings
|
|
505,630
|
|
|
(3,031
|
)
|
|
502,599
|
|
____________
|
|
(1)
|
Upon adoption of ASU 2015-03, we reclassified our deferred leasing costs to prepaid expenses and other assets.
|
Recently issued accounting standards
In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718). ASU 2016-09 makes several modifications to Topic 718 related to the accounting for forfeitures, employer tax withholding on share-based compensation and the financial statement presentation of excess tax benefits or deficiencies. ASU 2016-09 also clarifies the statement of cash flows presentation for certain components of share-based awards. This update standard is effective for interim and annual
reporting periods beginning after December 15, 2016, although early adoption is permitted. We are currently evaluating the impact of this ASU on our consolidated financial statements.
In February 2016, FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires that lessees recognize assets and liabilities for leases with lease terms greater than twelve months in the statement of financial position and also requires improved disclosures to help users of financial statements better understand the amount, timing and uncertainty of cash flows arising from leases. This update is effective for fiscal years beginning after December 15, 2018, including interim reporting periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact of this ASU on our consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01 (Subtopic 825-10), Financial Instruments - Overall. ASU 2016-01 requires all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee). The amendments also require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. In addition, the amendments eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities and the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet for public business entities. The amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. We do not expect the impact of adopting this standard to have a material impact on our consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09 Revenue from Contracts with Customers. ASU 2014-09 is a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. In August 2015, FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which effectively delayed the adoption date of ASU 2014-09 by one year. ASU 2014-09 is therefore effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted for fiscal years, and interim periods within those years, beginning after December 15, 2016. We are currently evaluating the impact of ASU 2014-09 on our consolidated financial statements.
2. Asset acquisitions and dispositions
Real estate assets
Acquisitions, including those accounted for as business combinations
On March 30, 2016, we completed the acquisition of
590
single-family residential properties in
five
states from an unrelated third party for an aggregate purchase price of approximately
$64.8 million
. We recognized acquisition fees and costs related to this portfolio acquisition of
$0.6 million
. The value of in-place leases was estimated at
$0.7 million
based upon the costs we would have incurred to lease the properties and is being amortized over the weighted-average remaining life of the leases of
7 months
as of the acquisition date.
During the
three months ended March 31, 2016
, we acquired
113
properties under our one-by-one acquisition program. The aggregate purchase price attributable to these acquired properties was
$10.1 million
.
During the
three months ended March 31, 2015
, we did
not
purchase any real estate assets.
Dispositions
During the
three months ended March 31, 2016
and
2015
, we sold
686
and
254
residential properties, respectively, and recorded
$29.4 million
and
$10.6 million
, respectively, of net realized gains on real estate.
Mortgage loan assets
Resolutions and dispositions
During the
three months ended March 31, 2016
and
2015
, we resolved
169
and
150
mortgage loans, respectively, primarily through short sales, refinancing and foreclosure sales. In connection with these resolutions, we recorded
$12.7 million
and
$15.4 million
, respectively, of net realized gains on mortgage loans.
During the
three months ended March 31, 2016
, we sold
1,078
of our mortgage loans held for sale to a third party purchaser. In connection with this sale, we recorded
$34.2 million
of net realized gains on mortgage loans held for sale. During the
three months ended March 31, 2015
, we did not sell any mortgage loans.
Transfers of mortgage loans to real estate owned
During the
three months ended March 31, 2016
and
2015
, we transferred an aggregate of
360
and
724
mortgage loans, respectively, to REO at an aggregate fair value based on BPOs of
$64.9 million
and
$134.8 million
, respectively. Such transfers occur when the foreclosure sale is complete. In connection with these transfers to REO, we recorded
$11.6 million
and
$27.1 million
, respectively, in net unrealized gains on mortgage loans.
Due diligence costs
During the
three months ended March 31, 2016
and
2015
, we recognized
$0.2 million
and
$0.1 million
, respectively, of due diligence costs related to the above-described and other transactions in our consolidated statement of operations as acquisition fees and costs.
3
.
Real estate assets, net
Real estate held for use
As of
March 31, 2016
, we had
5,143
single-family residential properties held for use. Of these properties,
2,720
had been leased,
265
were listed and ready for rent and
546
were in varying stages of renovation and unit turn status. With respect to the remaining
1,612
REO properties, we will make a final determination whether each property meets our rental profile after (a) applicable state redemption periods have expired, (b) the foreclosure sale has been ratified, (c) we have recorded the deed for the property, (d) utilities have been activated and (e) we have secured access for interior inspection. A majority of the REO properties are subject to state regulations that require us to await the expiration of a redemption period before a foreclosure can be finalized. We include these redemption periods in our portfolio pricing, which generally reduces the price we pay for the mortgage loans. Once the redemption period expires, we immediately proceed to record a new deed, take possession of the property, activate utilities, and start the inspection process in order to make our final determination. If an REO property meets our rental profile, we determine the extent of renovations that are needed to generate an optimal rent and maintain consistency of renovation specifications for future branding. If we determine that the REO property will not meet our rental profile, we list the property for sale, in certain instances after renovations are made to optimize the sale proceeds.
As of
December 31, 2015
, we had
4,933
single-family residential properties held for use. Of these properties,
2,118
had been leased,
264
were listed and ready for rent and
350
were in various stages of renovation. With respect to the remaining
2,201
REO properties, we were in the process of determining whether these properties would meet our rental profile.
With respect to residential rental properties classified as held for use, we perform an impairment analysis using estimated cash flows if events or changes in circumstances indicate that the carrying value may be impaired, such as prolonged vacancy, identification of materially adverse legal or environmental factors, changes in expected ownership period or a decline in market value to an amount less than cost. This analysis is performed at the property level. These cash flows are estimated based on a number of assumptions that are subject to economic and market uncertainties, including, among others, demand for rental properties, competition for customers, changes in market rental rates, costs to operate each property and expected ownership periods.
If the carrying amount of a held for use asset exceeds the sum of its undiscounted future operating and residual cash flows, an impairment loss is recorded for the difference between estimated fair value of the asset and the carrying amount. We are not able to recover any such impairments should the estimated fair value subsequently improve. We generally estimate the fair value of assets held for use by using BPOs. In some instances, appraisal information may be available and is used in addition to BPOs.
During the
three months ended March 31, 2016
, we recognized
$3.0 million
of impairment on real estate held for use. During the
three months ended March 31, 2015
, we recognized
no
impairment on our real estate held for use.
Real estate held for sale
As of
March 31, 2016
and
December 31, 2015
, our real estate held for sale included
1,752
and
1,583
REO properties, respectively, having an aggregate carrying value of
$297.1 million
and
$250.6 million
, respectively. Management determined to divest of these properties because they do not meet our residential rental property investment criteria.
We record residential properties held for sale at the lower of the carrying amount or estimated fair value less costs to sell. The impairment loss, if any, is the amount by which the carrying amount exceeds the estimated fair value less costs to sell. In the event that the estimated fair value of impaired properties held for sale subsequently improves, we are able to recover impairments to the extent previously recognized.
During the
three months ended March 31, 2016
and
2015
, we recognized
$11.9 million
and
$4.1 million
, respectively, of impairment on our real estate held for sale.
4. Mortgage loans
The following table sets forth our mortgage loans at fair value, the related unpaid principal balance and market value of underlying properties by delinquency status as of
March 31, 2016
and
December 31, 2015
($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Loans
|
|
Carrying Value
|
|
Unpaid Principal Balance
|
|
Market Value of Underlying Properties
|
March 31, 2016
|
|
|
|
|
|
|
|
|
Current
|
|
803
|
|
|
$
|
133,463
|
|
|
$
|
176,174
|
|
|
$
|
196,136
|
|
30
|
|
69
|
|
|
12,383
|
|
|
17,563
|
|
|
20,658
|
|
60
|
|
34
|
|
|
5,165
|
|
|
6,974
|
|
|
7,947
|
|
90
|
|
728
|
|
|
96,004
|
|
|
151,728
|
|
|
144,887
|
|
Foreclosure
|
|
3,763
|
|
|
677,528
|
|
|
923,883
|
|
|
906,636
|
|
Mortgage loans at fair value
|
|
5,397
|
|
|
$
|
924,543
|
|
|
$
|
1,276,322
|
|
|
$
|
1,276,264
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Current
|
|
730
|
|
|
$
|
124,595
|
|
|
$
|
165,645
|
|
|
$
|
177,348
|
|
30
|
|
80
|
|
|
12,003
|
|
|
18,142
|
|
|
21,858
|
|
60
|
|
38
|
|
|
5,688
|
|
|
8,088
|
|
|
8,766
|
|
90
|
|
984
|
|
|
130,784
|
|
|
216,717
|
|
|
196,963
|
|
Foreclosure
|
|
3,907
|
|
|
687,464
|
|
|
946,962
|
|
|
917,671
|
|
Mortgage loans at fair value
|
|
5,739
|
|
|
$
|
960,534
|
|
|
$
|
1,355,554
|
|
|
$
|
1,322,606
|
|
The following table sets forth the carrying value of our mortgage loans held for sale, the related unpaid principal balance and market value of underlying properties by delinquency status as of
March 31, 2016
and
December 31, 2015
($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Loans
|
|
Carrying Value
|
|
Unpaid Principal Balance
|
|
Market Value of Underlying Properties
|
March 31, 2016
|
|
|
|
|
|
|
|
|
Current
|
|
16
|
|
|
$
|
2,111
|
|
|
$
|
3,115
|
|
|
$
|
4,106
|
|
30
|
|
2
|
|
|
142
|
|
|
422
|
|
|
375
|
|
60
|
|
2
|
|
|
159
|
|
|
310
|
|
|
255
|
|
90
|
|
2
|
|
|
188
|
|
|
222
|
|
|
341
|
|
Foreclosure
|
|
10
|
|
|
1,445
|
|
|
1,989
|
|
|
2,090
|
|
Mortgage loans held for sale
|
|
32
|
|
|
$
|
4,045
|
|
|
$
|
6,058
|
|
|
$
|
7,167
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Current
|
|
58
|
|
|
$
|
10,864
|
|
|
$
|
13,466
|
|
|
$
|
17,776
|
|
30
|
|
26
|
|
|
7,616
|
|
|
10,013
|
|
|
12,200
|
|
60
|
|
6
|
|
|
668
|
|
|
775
|
|
|
1,063
|
|
90
|
|
328
|
|
|
73,164
|
|
|
101,121
|
|
|
103,395
|
|
Foreclosure
|
|
879
|
|
|
225,024
|
|
|
314,991
|
|
|
330,573
|
|
Mortgage loans held for sale
|
|
1,297
|
|
|
$
|
317,336
|
|
|
$
|
440,366
|
|
|
$
|
465,007
|
|
As of
March 31, 2016
, our mortgage loans held for sale include our remaining re-performing residential mortgage loans that we initially acquired in June 2014. We initially determined to dispose of these mortgage loans in order to take advantage of attractive market pricing and because we do not expect them to be rental candidates.
Re-performing residential mortgage loans
For the
three months ended March 31, 2016
and
2015
, we recognized no provision for loan loss and no adjustments to the amount of the accretable yield. For the
three months ended March 31, 2016
and
2015
, we accreted
$37 thousand
and
$232 thousand
into interest income with respect to our re-performing loans. For both
March 31, 2016
and
December 31, 2015
, these re-performing loans had a UPB of
$6.0 million
and a carrying value of
$4.0 million
and were included in mortgage loans held for sale.
The following table presents changes in the balance of the accretable yield for the periods indicated:
|
|
|
|
|
|
|
|
|
|
Accretable Yield
|
|
Three months ended March 31, 2016
|
|
Three months ended March 31, 2015
|
Balance at the beginning of the period
|
|
$
|
2,146
|
|
|
$
|
7,640
|
|
Payments and other reductions, net
|
|
—
|
|
|
(201
|
)
|
Accretion
|
|
(37
|
)
|
|
(232
|
)
|
Balance at the end of the period
|
|
$
|
2,109
|
|
|
$
|
7,207
|
|
5.
Fair value of financial instruments
The following table sets forth the fair value of financial assets and liabilities by level within the fair value hierarchy as of
March 31, 2016
and
December 31, 2015
($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
Quoted Prices in Active Markets
|
|
Observable Inputs Other Than Level 1 Prices
|
|
Unobservable Inputs
|
March 31, 2016
|
|
|
|
|
|
|
Recurring basis (assets)
|
|
|
|
|
|
|
Mortgage loans at fair value
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
924,543
|
|
Nonrecurring basis (assets)
|
|
|
|
|
|
|
Real estate assets held for sale
|
|
—
|
|
|
—
|
|
|
297,074
|
|
Not recognized on consolidated balance sheets at fair value (assets)
|
|
|
|
|
|
|
Mortgage loans held for sale
|
|
—
|
|
|
—
|
|
|
4,045
|
|
Not recognized on consolidated balance sheets at fair value (liabilities)
|
|
|
|
|
|
|
Repurchase agreements at fair value
|
|
—
|
|
|
851,813
|
|
|
—
|
|
Other secured borrowings
|
|
—
|
|
|
165,339
|
|
|
—
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
Recurring basis (assets)
|
|
|
|
|
|
|
Mortgage loans at fair value
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
960,534
|
|
Nonrecurring basis (assets)
|
|
|
|
|
|
|
Real estate assets held for sale
|
|
—
|
|
|
—
|
|
|
250,557
|
|
Not recognized on consolidated balance sheets at fair value (assets)
|
|
|
|
|
|
|
Mortgage loans held for sale
|
|
—
|
|
|
—
|
|
|
317,336
|
|
Not recognized on consolidated balance sheets at fair value (liabilities)
|
|
|
|
|
|
|
Repurchase agreements at fair value
|
|
—
|
|
|
767,513
|
|
|
—
|
|
Other secured borrowings
|
|
—
|
|
|
502,268
|
|
|
—
|
|
We have not transferred any assets from one level to another level during the
three months ended March 31, 2016
or during the year ended
December 31, 2015
.
The carrying values of our cash and cash equivalents, restricted cash, related party receivables, accounts payable and accrued liabilities and related party payables are equal to or approximate fair value. The fair values of mortgage loans at fair value and NPLs held for sale are estimated using our asset manager's proprietary pricing model. The fair value of re-performing mortgage loans held for sale is estimated using the present value of the future estimated principal and interest payments of the loan, with the discount rate used in the present value calculation representing the estimated effective yield of the loan. The fair value of the repurchase agreements is estimated using the income approach based on credit spreads available to us currently in the market for similar floating rate debt. The fair value of other secured borrowings is estimated using observable market data.
The following table sets forth the changes in our level 3 assets that are measured at fair value on a recurring basis ($ in thousands):
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2016
|
|
Three months ended March 31, 2015
|
Mortgage loans at fair value
|
|
|
|
|
|
Beginning balance
|
$
|
960,534
|
|
|
$
|
1,959,044
|
|
Net unrealized gain on mortgage loans at fair value
|
26,256
|
|
|
61,134
|
|
Net realized gain on mortgage loans at fair value
|
12,732
|
|
|
15,382
|
|
Transfers of mortgage loans held for sale to mortgage loans at fair value
|
34,029
|
|
|
—
|
|
Mortgage loans at fair value resolutions and payments
|
(49,931
|
)
|
|
(65,168
|
)
|
Real estate tax advances to borrowers
|
3,442
|
|
|
7,127
|
|
Reclassification of realized gains on real estate sold from unrealized gains
|
—
|
|
|
10,802
|
|
Transfer of mortgage loans at fair value to real estate owned, net
|
(62,519
|
)
|
|
(134,826
|
)
|
Ending balance at March 31
|
$
|
924,543
|
|
|
$
|
1,853,495
|
|
|
|
|
|
Net unrealized gain on mortgage loans at fair value held at the end of the period
|
$
|
20,642
|
|
|
$
|
51,068
|
|
The significant unobservable inputs used in the fair value measurement of our mortgage loans are discount rates, forecasts of future home prices, alternate loan resolution probabilities, resolution timelines and the value of underlying properties. Significant changes in any of these inputs in isolation could result in a significant change to the fair value measurement. A decline in the discount rate in isolation would increase the fair value. A decrease in the housing pricing index in isolation would decrease the fair value. Individual loan characteristics such as location and value of underlying collateral affect the loan resolution probabilities and timelines. An increase in the loan resolution timeline in isolation would decrease the fair value. A decrease in the value of underlying properties in isolation would decrease the fair value.
The following table sets forth quantitative information about the significant unobservable inputs used to measure the fair value of our mortgage loans as of:
|
|
|
|
|
|
Input
|
|
March 31, 2016
|
|
December 31, 2015
|
Equity discount rate
|
|
15.0%
|
|
15.0%
|
Debt to asset ratio
|
|
65.0%
|
|
65.0%
|
Cost of funds
|
|
3.5% over 1 month LIBOR
|
|
3.5% over 1 month LIBOR
|
Annual change in home pricing index
|
|
0.0% to 10.3%
|
|
0.0% to 10.2%
|
Loan resolution probabilities — modification
|
|
0% to 44.7%
|
|
0% to 44.7%
|
Loan resolution probabilities — rental
|
|
0% to 100.0%
|
|
0% to 100.0%
|
Loan resolution probabilities — liquidation
|
|
0% to 100.0%
|
|
0% to 100.0%
|
Loan resolution timelines (in years)
|
|
0.1 - 5.2
|
|
0.1 - 5.6
|
Value of underlying properties
|
|
$300 - $4,500,000
|
|
$3,000 - $4,500,000
|
6. Borrowings
Repurchase and loan agreements
Our operating partnership and certain of its Delaware statutory trust subsidiaries, as applicable, have entered into master repurchase agreements and a loan agreement with major financial institutions. The purpose of these repurchase and loan agreements is to finance the acquisition and ownership of REO properties and mortgage loans in our portfolio. We have effective control of the assets associated with these agreements and therefore have concluded these are financing arrangements. As of
March 31, 2016
, the weighted average annualized interest rate on borrowings under our repurchase and loan agreements was
3.52%
, excluding amortization of deferred financing costs.
We have entered into
three
separate repurchase agreements and a loan agreement to finance the acquisition and ownership of residential mortgage loans and REO properties. Below is a description of each agreement:
|
|
•
|
Credit Suisse (“CS”) is the lender on the repurchase agreement entered into on March 22, 2013, (the “CS repurchase agreement”) with an initial aggregate maximum borrowing capacity of
$100.0 million
. During 2014 and 2015, the CS repurchase agreement was amended on several occasions, ultimately increasing the aggregate maximum borrowing capacity to
$275.0 million
on December 31, 2014 with a maturity date of April 18, 2016. On March 31, 2016, we entered into an amended and restated repurchase agreement with CS that increased our aggregate borrowing capacity to
$350.0 million
, extended the maturity date to March 30, 2017 and removed the REO sublimit under the facility so that 100% of the financed assets can be REO properties.
|
|
|
•
|
Deutsche Bank (“DB”) is the lender on the repurchase agreement dated September 12, 2013 (the “DB repurchase agreement”). During March 2016, upon expiration of the DB repurchase agreement in accordance with its terms, we repaid the remaining balance of the DB repurchase agreement and transferred the collateral to our other existing facilities.
|
|
|
•
|
Wells Fargo (“Wells”) is the lender under the repurchase agreement dated September 23, 2013 (the “Wells repurchase agreement”) with an initial aggregate maximum borrowing capacity of
$200.0 million
. Throughout 2013, 2014 and 2015, the Wells repurchase agreement was amended on several occasions, ultimately increasing the aggregate maximum borrowing capacity to
$750.0 million
with a maturity date of September 27, 2017.
|
|
|
•
|
Nomura Corporate Funding Americas, LLC (“Nomura”) is the lender under a loan agreement dated April 10, 2015 (the “Nomura loan agreement”) with an initial aggregate maximum funding capacity of
$100.0 million
. The Nomura loan agreement was amended during 2015, ultimately increasing the maximum funding capacity to
$200.0 million
on December 31, 2015 with a maturity date of April 8, 2016. On April 7, 2016, we entered into an amended and restated loan and security agreement with Nomura that increased our aggregate borrowing capacity to
$250.0 million
and extended the termination date to April 16, 2017. See Note 13 for a more complete description of the amended and restated Nomura loan agreement.
|
Following all of the amendments described above, the maximum aggregate funding available to us under these repurchase and loan agreements as of
March 31, 2016
was
$1.3 billion
, subject to certain sublimits, eligibility requirements and conditions precedent to each funding. As of
March 31, 2016
, an aggregate of
$851.8 million
was outstanding under our repurchase and loan agreements. All obligations under each of these repurchase and loan agreements are fully guaranteed by us.
The following table sets forth data with respect to our repurchase and loan agreements as of
March 31, 2016
and
December 31, 2015
($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Borrowing Capacity
|
|
Book Value of Collateral
|
|
Amount Outstanding
|
|
Amount of Available Funding
|
March 31, 2016
|
|
|
|
|
|
|
|
CS repurchase agreement due March 30, 2017
|
$
|
350,000
|
|
|
$
|
308,236
|
|
|
$
|
176,127
|
|
|
$
|
173,873
|
|
Wells repurchase agreement due September 27, 2017
|
750,000
|
|
|
889,546
|
|
|
487,408
|
|
|
262,592
|
|
Nomura loan agreement due April 8, 2016 (1)
|
200,000
|
|
|
273,138
|
|
|
188,278
|
|
|
11,722
|
|
Less: deferred debt issuance costs
|
—
|
|
|
—
|
|
|
(4,829
|
)
|
|
—
|
|
|
$
|
1,300,000
|
|
|
$
|
1,470,920
|
|
|
$
|
846,984
|
|
|
$
|
448,187
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
CS repurchase agreement due April 18, 2016
|
$
|
275,000
|
|
|
$
|
335,184
|
|
|
$
|
194,346
|
|
|
$
|
80,654
|
|
Wells repurchase agreement due September 27, 2017
|
750,000
|
|
|
708,275
|
|
|
371,130
|
|
|
378,870
|
|
DB repurchase agreement due March 11, 2016
|
54,944
|
|
|
130,863
|
|
|
54,944
|
|
|
—
|
|
Nomura loan agreement due April 8, 2016
|
200,000
|
|
|
204,578
|
|
|
147,093
|
|
|
52,907
|
|
Less: deferred debt issuance costs
|
—
|
|
|
—
|
|
|
(4,144
|
)
|
|
—
|
|
|
$
|
1,279,944
|
|
|
$
|
1,378,900
|
|
|
$
|
763,369
|
|
|
$
|
512,431
|
|
_____________
|
|
(1)
|
On April 7, 2016, the maturity date of the Nomura loan agreement was extended to April 16, 2017 and the available funding under the facility was increased to
$250.0 million
(see Note 13).
|
Under the terms of
two
of our repurchase agreements, as collateral for the funds drawn thereunder, subject to certain conditions, our operating partnership and/or an intervening limited liability company subsidiary will sell to the applicable lender equity interests in the Delaware statutory trust subsidiary that owns the applicable underlying mortgage assets on our behalf, or the trust will directly sell such underlying mortgage or REO assets. In the event the lender determines the value of the collateral has decreased, the lender has the right to initiate a margin call and require us, or the applicable trust subsidiary, to post additional collateral or to repay a portion of the outstanding borrowings. The price paid by the lender for each mortgage or REO asset we finance under the repurchase agreements is based on a percentage of the market value of the mortgage or REO asset and, in the case of mortgage assets, may depend on its delinquency status. With respect to funds drawn under the repurchase agreements, our applicable subsidiary is required to pay the lender interest based on LIBOR or at the lender’s cost of funds plus a spread calculated based on the type of applicable assets collateralizing the funding, as well as certain other customary fees, administrative costs and expenses to maintain and administer the repurchase agreements. We do not collateralize any of our repurchase facilities with cash.
Pursuant to the CS repurchase agreement, we are entitled to collateralize a portion of the facility with securities. As of
March 31, 2016
, approximately
$21.0 million
of the amounts outstanding under the CS repurchase agreement was collateralized by
$34.0 million
of the Class A-2 Notes issued and retained by us in connection with the securitization completed in July 2015 by ARLP 2015-1.
Each of the repurchase agreements require us to maintain various financial and other covenants, including maintaining a minimum adjusted tangible net worth, a maximum ratio of indebtedness to adjusted tangible net worth and specified levels of unrestricted cash. In addition, both of the repurchase agreements contain customary events of default.
Under the terms of the Nomura loan agreement, subject to certain conditions, Nomura may advance funds to us from time to time, with such advances collateralized by REO properties. The advances paid under the Nomura loan agreement with respect to the REO properties from time to time will be based on a percentage of the market value of the applicable REO properties. Under the terms of the Nomura loan agreement, we are required to pay interest based on the one-month LIBOR plus a spread and certain other customary fees, administrative costs and expenses in connection with Nomura's structuring, management and ongoing administration of the facility.
The Nomura loan agreement requires us to maintain various financial and other covenants, including a minimum adjusted tangible net worth, a maximum ratio of indebtedness to adjusted tangible net worth and specified levels of unrestricted cash. In
addition, the Nomura loan agreement contains events of default (subject to certain materiality thresholds and grace periods), including payment defaults, breaches of covenants and/or certain representations and warranties, cross-defaults, certain material adverse changes, bankruptcy or insolvency proceedings and other events of default customary for this type of transaction. The remedies for such events of default are also customary for this type of transaction and include the acceleration of the principal amount outstanding under the Nomura loan agreement and the liquidation by Nomura of the REO properties then subject thereto.
We are currently in compliance with the covenants and other requirements with respect to the repurchase and loan agreements. We monitor our banking partners’ ability to perform under the repurchase and loan agreements and have concluded there is currently no reason to doubt that they will continue to perform under the repurchase and loan agreements as contractually obligated.
Other secured debt
On June 29, 2015, we completed a securitization transaction in which ARLP 2015-1 issued
$205.0 million
in ARLP 2015-1 Class A Notes with a weighted coupon of approximately
4.01%
and
$60.0 million
in ARLP 2015-1 Class M Notes. ARLP 2015-1 is a Delaware statutory trust that is wholly-owned by our operating partnership with a federally-chartered bank as its trustee. We retained
$34.0 million
of the ARLP 2015-1 Class A Notes and all of the ARLP 2015-1 Class M Notes. No interest will be paid on any ARLP 2015-1 Class M Notes while any ARLP 2015-1 Class A Notes remain outstanding. The ARLP 2015-1 Class A Notes and ARLP 2015-1 Class M Notes are non-recourse to us and are secured solely by the NPLs and REO properties of ARLP 2015-1 but not by any of our other assets. The assets of ARLP 2015-1 are the only source of repayment and interest on the ARLP 2015-1 Class A Notes and the ARLP 2015-1 Class M Notes, thereby making the cash proceeds received by ARLP 2015-1 of loan payments, loan liquidations, loan sales and sales of converted REO properties the sole sources of the payment of interest and principal by ARLP 2015-1 to the bond holders. The ARLP 2015-1 Class A Notes and the ARLP 2015-1 Class M Notes mature on May 25, 2055, and we do not guarantee any of the obligations of ARLP 2015-1 under the terms of the indenture governing the notes or otherwise. As of
March 31, 2016
, the book value of the underlying securitized assets held by ARLP 2015-1 was
$282.2 million
.
On November 25, 2014, we completed a securitization transaction in which ARLP 2014-2 issued
$270.8 million
in ARLP 2014-2 Class A Notes with a weighted yield of approximately
3.85%
and
$234.0 million
in ARLP 2014-2 Class M Notes. We repaid the notes issued under the ARLP 2014-2 in March 2016.
On September 25, 2014, we completed a securitization transaction in which ARLP 2014-1 issued
$150.0 million
in ARLP 2014-1 Class A Notes with a weighted yield of approximately
3.47%
and
$32.0 million
in ARLP 2014-1 Class M Notes with a weighted yield of
4.25%
. We repaid the notes issued under the ARLP 2014-1 securitization in March 2016.
Following the repayment of the notes issued under the ARLP 2014-1 and 2014-2 securitizations, at March 31, 2016, only the ARLP 2015-1 securitization remained in effect. The following table sets forth data with respect to these notes as of
March 31, 2016
and
December 31, 2015
($ in thousands):
|
|
|
|
|
|
|
|
|
Interest Rate
|
|
Amount outstanding
|
March 31, 2016
|
|
|
|
ARLP Securitization Trust, Series 2015-1
|
|
|
|
ARLP 2015-1 Class A Notes due May 25, 2055 (1)
|
4.01
|
%
|
|
$
|
199,339
|
|
ARLP 2015-1 Class M Notes due May 25, 2044
|
—
|
%
|
|
60,000
|
|
Intercompany eliminations
|
|
|
|
Elimination of ARLP 2015-1 Class A Notes due to ARNS, Inc.
|
|
|
(34,000
|
)
|
Elimination of ARLP 2015-1 Class M Notes due to ARLP
|
|
|
(60,000
|
)
|
Less: deferred debt issuance costs
|
|
|
(1,242
|
)
|
|
|
|
$
|
164,097
|
|
December 31, 2015:
|
|
|
|
ARLP Securitization Trust, Series 2014-1
|
|
|
|
ARLP 2014-1 Class A Notes (2)
|
3.47
|
%
|
|
$
|
136,404
|
|
ARLP 2014-1 Class M Notes (2)
|
4.25
|
%
|
|
32,000
|
|
ARLP Securitization Trust, Series 2014-2
|
|
|
|
ARLP 2014-2 Class A Notes (2)
|
3.63
|
%
|
|
244,935
|
|
ARLP 2014-2 Class M Notes (2)
|
—
|
%
|
|
234,010
|
|
ARLP Securitization Trust, Series 2015-1
|
|
|
|
ARLP 2015-1 Class A Notes due May 25, 2055 (1)
|
4.01
|
%
|
|
203,429
|
|
ARLP 2015-1 Class M Notes due May 25, 2044
|
—
|
%
|
|
60,000
|
|
Intercompany eliminations
|
|
|
|
Elimination of ARLP 2014-1 Class M Notes due to ARNS, Inc.
|
|
|
(32,000
|
)
|
Elimination of ARLP 2014-2 Class A Notes due to ARNS, Inc.
|
|
|
(45,138
|
)
|
Elimination of ARLP 2014-2 Class M Notes due to ARLP
|
|
|
(234,010
|
)
|
Elimination of ARLP 2015-1 Class A Notes due to ARNS, Inc.
|
|
|
(34,000
|
)
|
Elimination of ARLP 2015-1 Class M Notes due to ARLP
|
|
|
(60,000
|
)
|
Less: deferred debt issuance costs
|
|
|
(3,031
|
)
|
|
|
|
$
|
502,599
|
|
_____________
|
|
(1)
|
The expected redemption date for the Class A Notes ranges from June 25, 2018 to June 25, 2019.
|
|
|
(2)
|
Terminated during March 2016
|
7. Commitments and contingencies
Litigation, claims and assessments
From time to time, we may be involved in various claims and legal actions arising in the ordinary course of business. Set forth below is a summary of legal proceedings to which we are a party as of March 31, 2016 or which settled during 2016:
Martin v. Altisource Residential Corporation et al.
On March 27, 2015, a putative shareholder class action complaint was filed in the United States District Court of the Virgin Islands by a purported shareholder of the Company under the caption
Martin
v.
Altisource Residential Corporation, et al.
, 15-cv-00024. The action names as defendants the Company, Mr. Erbey and certain officers and a former officer of the Company and alleges that the defendants violated federal securities laws by, among other things, making materially false statements and/or failing to disclose material information to the Company's shareholders regarding the Company's relationship and transactions with AAMC, Ocwen and Home Loan Servicing Solutions, Ltd. These alleged misstatements and omissions include allegations that the defendants failed to adequately disclose the Company's reliance on Ocwen and the risks relating to its relationship with
Ocwen, including that Ocwen was not properly servicing and selling loans, that Ocwen was under investigation by regulators for violating state and federal laws regarding servicing of loans and Ocwen’s lack of proper internal controls. The complaint also contains allegations that certain of the Company's disclosure documents were false and misleading because they failed to disclose fully the entire details of a certain asset management agreement between the Company and AAMC that allegedly benefited AAMC to the detriment of the Company's shareholders. The action seeks, among other things, an award of monetary damages to the putative class in an unspecified amount and an award of attorney’s and other fees and expenses.
In May 2015,
two
of our purported shareholders filed competing motions with the court to be appointed lead plaintiff and for selection of lead counsel in the action. Subsequently, opposition and reply briefs were filed by the purported shareholders with respect to these motions. On October 7, 2015, the court entered an order granting the motion of Lei Shi to be lead plaintiff and denying the other motion to be lead plaintiff.
On January 23, 2016, the lead plaintiff filed an amended complaint. Our motion to dismiss the amended complaint was due on March 22, 2016.
On March 22, 2016, defendants filed a motion to dismiss all claims in the action. The plaintiffs are required to file a response to the defendants’ motion to dismiss on or before May 20, 2016, and the defendants are required to file any reply briefs to the plaintiffs’ response on or before July 1, 2016.
We believe the complaint is without merit and intend to vigorously defend the action. At this time, we are not able to predict the ultimate outcome of this matter, nor can we estimate the range of possible loss, if any.
Sokolowski v. Erbey, et al.
On December 24, 2014, a shareholder derivative action was filed in the United States District Court for the Southern District of Florida by a purported shareholder of Ocwen. The action named the directors of Ocwen as defendants and alleged, among other things, various breaches of fiduciary duties by the directors of Ocwen.
On February 11, 2015, plaintiff filed an amended complaint naming the directors of Ocwen as defendants and also naming the Company, AAMC, Altisource and Home Loan Servicing Solutions, Ltd. as alleged aiders and abettors of the purported breaches of fiduciary duties. The amended complaint alleges that the directors of Ocwen breached their fiduciary duties by, among other things, allegedly failing to exercise oversight over Ocwen’s compliance with applicable laws, rules and regulations; failing to exercise oversight responsibilities with respect to the accounting and financial reporting processes of Ocwen; failing to prevent conflicts of interest and allegedly improper related party transactions; failing to adhere to Ocwen’s code of conduct and corporate governance guidelines; selling personal holdings of Ocwen stock on the basis of material adverse inside information; and disseminating allegedly false and misleading statements regarding Ocwen’s compliance with regulatory obligations and allegedly self-dealing transactions with related companies. Plaintiff claims that as a result of the alleged breaches of fiduciary duties, Ocwen has suffered damages, including settlements with regulatory agencies in excess of
$2 billion
, injury to its reputation and corporate goodwill and exposure to governmental investigations and securities and consumer class action lawsuits. In addition to the derivative claims, the plaintiff also alleges an individual claim that Ocwen’s 2014 proxy statement allegedly contained untrue statements of material fact and failed to disclose material information in violation of federal securities laws. The plaintiff seeks, among other things, an order requiring the defendants to repay to Ocwen unspecified amounts by which Ocwen has been damaged or will be damaged, an award of an unspecified amount of exemplary damages, changes to Ocwen's corporate governance and an award of attorneys’ and other fees and expenses.
On April 13, 2015, nominal defendant Ocwen and defendants Mr. Erbey and Mr. Faris filed a motion to stay the action.
On July 16, 2015, we filed a motion to dismiss all claims against us in the action, based upon, among other arguments, lack of personal jurisdiction and failure to state a claim. Co-defendant AAMC filed a similar motion to dismiss the complaint as to all claims asserted against it.
On December 8, 2015, the court granted AAMC’s and our motions to dismiss for lack of personal jurisdiction with leave to amend the jurisdiction allegations no later than January 4, 2016.
On December 15, 2015,
Hutt v. Erbey, et al.
, Case No. 15-cv-81709-WPD, was transferred to the Southern District of Florida from the Northern District of Georgia. That same day, a third related derivative action,
Lowinger v. Erbey, et al.
, Case No. 15-cv-62628-WPD, was also filed in the Southern District of Florida. The court then requested that the parties file a response stating their positions as to whether the actions should be consolidated. On December 29, 2015, we filed a response stating that we took no position on the issue of consolidation, so long as our defenses were fully reserved should plaintiff Sokolowski seek
to file an amended complaint. Neither plaintiff Sokolowski nor plaintiff Hutt opposed consolidation in their responses. On December 30, 2015, the court issued an order that, among other things, extended the deadline for plaintiff Sokolowski to file its amended complaint to cure the jurisdictional defects as to AAMC and us until January 13, 2016. On January 8, 2016, the court issued an order consolidating the
three
related actions.
On February 2, 2016, Plaintiffs Sokolowski and Lowinger filed competing motions for appointment of lead counsel in the consolidated action. These motions were fully briefed on February 5, 2016. Subsequently, on February 17, 2016, the court issued an order appointing Sokolowski’s counsel as lead counsel with Lowinger’s and Hutt’s counsel serving on the executive committee of the plaintiffs. It also ordered that a consolidated complaint in the matter shall be filed no later than March 8, 2016.
On March 8, 2016, the plaintiffs filed a consolidated certified shareholder derivative complaint (the “Consolidated Complaint”) in the action. On March 11, the Special Litigation Committee of Ocwen sought additional time beyond the March 31, 2016 originally anticipated completion date to analyze the Consolidated Complaint. On March 22, 2016, the parties filed a joint consent motion for entry of an order amending the briefing schedule regarding the Consolidated Complaint. On March 23, 2016, the court entered a scheduling order requiring defendants to file their motions to dismiss on or before May 13, 2016, plaintiffs to file a response to any such motion on or before June 17, 2016 and defendants to file any reply briefs on or before July 15, 2016.
We believe the complaint against us is without merit. At this time, we are not able to predict the ultimate outcome of this matter, nor can we estimate the range of possible loss, if any.
Moncavage v. Faris, et al.
In March, 2015, a shareholder derivative action was filed in the Circuit Court for the Fifteenth Judicial Circuit in and for Palm Beach County, Florida by a purported shareholder of Ocwen under the caption
Moncavage
v.
Ronald Faris, et al.
, Case No. 2015-CA-03244 (MB-AD). The action named certain officers and directors of Ocwen as defendants and alleged, among other things, various breaches of fiduciary duties by these individual defendants. The action also named Altisource, Home Loan Servicing Solutions, Ltd. and us as alleged aiders and abettors of the purported breaches of fiduciary duties. The allegations of wrongdoing contained in the
Moncavage
action are similar to the allegations in the
Sokolowski
action updated above. On July 13, 2015, the plaintiff and we jointly filed a stipulation of an extension of time to respond to the pending motions to stay the action that had been filed by Ocwen and the individual defendants. On November 9, 2015, the court granted Ocwen’s motion to stay the action in its entirety for a period of
180 days
.
We believe the claims against us in the matter are without merit. At this time, we are not able to predict the ultimate outcome of this matter, nor can we estimate the range of possible loss, if any.
Management does not believe that we have incurred an estimable, probable or material loss by reason of any of the above actions.
8. Related-party transactions
New Asset Management Agreement with AAMC
On March 31, 2015, we entered into a new Asset Management Agreement (the “New AMA”) with AAMC. The New AMA, which became effective on April 1, 2015, provides for a new management fee structure, which replaces the incentive fee structure under the original asset management agreement (the “Original AMA”) as follows:
|
|
•
|
Base Management Fee
. AAMC is entitled to a quarterly Base Management Fee equal to
1.5%
of the product of (i) our average invested equity capital for the quarter
multiplied by
(ii)
0.25
, while we have fewer than
2,500
single family rental properties actually rented (“Rental Properties”). The Base Management Fee percentage increases to
1.75%
of invested equity capital while we have between
2,500
and
4,499
Rental Properties and increases to
2.0%
of invested equity capital while we have
4,500
or more Rental Properties;
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|
|
•
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Incentive Management Fee
. AAMC is entitled to a quarterly Incentive Management Fee equal to
20%
of the amount by which our return on invested equity capital (based on AFFO defined as our net income attributable to holders of common stock calculated in accordance with GAAP
plus
real estate depreciation expense
minus
recurring capital expenditures on all of our real estate assets owned) exceeds an annual hurdle return rate of between
7.0%
and
8.25%
(depending on the
10
-year treasury rate). The incentive management fee increases to
22.5%
while we have between
2,500
and
4,499
Rental Properties and increases to
25%
while we have
4,500
or more Rental Properties; and
|
|
|
•
|
Conversion Fee
. AAMC is entitled to a quarterly conversion fee equal to
1.5%
of the market value of the single-family homes leased by us for the first time during the quarter.
|
We have the flexibility to pay up to
25%
of the incentive management fee to AAMC in shares of our common stock.
Under the New AMA, AAMC will continue to serve as our exclusive asset manager for an initial term of
15
years from April 1, 2015, with
two
potential
five
-year extensions, subject to our achieving an average annual return on invested equity capital of at least
7.0%
. Under the New AMA, we will not be required to reimburse AAMC for the allocable compensation and routine overhead expenses of its employees and staff, all of which will now be covered by the base management fee described above.
Neither party is entitled to terminate the New AMA prior to the end of the initial term, or each renewal term, other than termination by (a) us and/or AAMC “for cause” for certain events such as a material breach of the New AMA and failure to cure such breach, (b) us for certain other reasons such as our failure to achieve a return on invested equity capital of at least
7.0%
for two consecutive fiscal years after the third anniversary of the New AMA, and (c) us in connection with certain change of control events.
Related party transaction summary
Our consolidated statements of operations include the following significant related party transactions for the periods indicated ($ in thousands):
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|
|
|
|
|
|
|
|
|
Amount
|
|
Counter-
party
|
|
Location within Consolidated Statements of Operations
|
Three months ended March 31, 2016
|
|
|
|
|
|
Conversion fee
|
$
|
402
|
|
|
AAMC
|
|
Related party general and administrative expenses
|
Base management fee
|
4,124
|
|
|
AAMC
|
|
Related party general and administrative expenses
|
|
|
|
|
|
|
Three months ended March 31, 2015
|
|
|
|
|
|
Expense reimbursements
|
$
|
750
|
|
|
AAMC
|
|
Related party general and administrative expenses
|
Management incentive fee (1)
|
14,900
|
|
|
AAMC
|
|
Related party general and administrative expenses
|
Interest expense (2)
|
160
|
|
|
NewSource
|
|
Interest expense
|
Professional fee sharing for negotiation of AMA
|
2,000
|
|
|
AAMC
|
|
Other income
|
______________
|
|
(1)
|
Pursuant to the terms of the New AMA, the fourth quarter of 2015 management incentive fees were recalculated, and it was determined that
$6.9 million
was reimbursable by AAMC to us.
|
|
|
(2)
|
On October 17, 2013, we invested
$18.0 million
in the non-voting preferred stock of NewSource Reinsurance Company Ltd. (“NewSource”), an insurance and reinsurance company focused on real estate related insurance products in Bermuda and a wholly owned subsidiary of AAMC. On September 14, 2015, NewSource completed the repurchase of all of our shares of non-voting preferred stock for aggregate proceeds of
$18.0 million
, which was the aggregate par value of the shares being repurchased.
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No
Incentive Management Fee under the New AMA was payable to AAMC during the first quarter of 2016 because our return on invested equity capital (as defined in the New AMA) for the
four
quarters covered by the new AMA was below the required hurdle rate. Under the New AMA, to the extent we have an aggregate shortfall in our return rate over the previous
seven
quarters, that aggregate return rate shortfall gets added to the normal quarterly
1.75%
return hurdle for the next quarter before AAMC is entitled to an Incentive Management Fee. As of
March 31, 2016
, the aggregate return shortfall from the prior
four
quarters under the New AMA was approximately
17.56%
of invested equity capital. Therefore, we must achieve a
19.31%
return on invested equity capital in the second quarter of 2016 before any Incentive Management Fee will be payable to AAMC for the first quarter of 2016. In future quarters, return on invested equity capital must exceed the required hurdle for the current quarter plus any carried-forward cumulative additional hurdle shortfall from the prior
seven
quarters before any Incentive Management Fee will be payable to AAMC.
9. Share-based payments
On December 21, 2012, as part of our separation transaction from ASPS, we issued stock options under the 2012 Conversion Option Plan and 2012 Special Conversion Option Plan to holders of ASPS stock options to purchase shares of our common stock in a ratio of one share of our common stock to every three shares of ASPS common stock. The options were granted as part of our separation to employees of ASPS and/or Ocwen solely to give effect to the exchange ratio in the separation, and we do not include share-based compensation expense related to these options in our consolidated statements of operations because they are not related to our incentive compensation.
Our directors each receive annual grants of restricted stock equal to
$45 thousand
based on the market value of our common stock at the time of the annual stockholders meeting. This restricted stock vests and is issued after a
one
-year service period, subject to each director attending at least
75%
of the Board and committee meetings. No dividends are paid on the shares until the award is issued. During the three months ended March 31, 2016, our restricted stock activity included the grant of
1,236
shares to and the forfeiture of
625
shares by our directors. During the three months ended March 31, 2015, no shares of restricted stock were granted to or forfeited by our directors.
We recorded
$45 thousand
of compensation expense related to these grants for the
three months ended March 31, 2016
, and we recorded
$57 thousand
of compensation expense for the
three months ended March 31, 2015
. During the
three months ended March 31, 2016
and
2015
, we had a nominal amount of unrecognized share-based compensation cost remaining with respect to the director grants.
10. Income taxes
As a REIT, we must meet certain organizational and operational requirements including the requirement to distribute at least
90%
of our annual REIT taxable income excluding capital gains to our stockholders. As a REIT, we generally will not be subject to federal income tax to the extent we distribute our REIT taxable income to our stockholders and provided we satisfy the REIT requirements including certain asset, income, distribution and stock ownership tests. If we fail to qualify as a REIT, and do not qualify for certain statutory relief provisions, we will be subject to U.S. federal, state and local income taxes and may be precluded from qualifying as a REIT for the subsequent four taxable years following the year in which we lost our REIT qualification.
Based on our estimated 2015 taxable income of
$107.6 million
, which consisted entirely of net capital gains, the aggregate minimum distribution to stockholders required to maintain our REIT status has been met for
2015
. Dividends declared per share of common stock aggregated
$1.83
for the year ended
December 31, 2015
, or
$103.9 million
. These distributions included a cash dividend paid on March 30, 2015 of
$0.08
per share of common stock, or
$4.6 million
, which was intended to satisfy the requirement that a REIT must distribute at least
90%
of its annual REIT taxable income to its stockholders and was treated as a 2014 distribution for REIT qualification purposes. The remaining taxable income with respect to 2015 was distributed through a dividend of
$0.15
per share declared on February 28, 2016 and paid on March 17, 2016.
Our consolidated financial statements include the operations of our taxable REIT subsidiary (“TRS”), which is subject to federal, state and local income taxes on its taxable income. From inception through
March 31, 2016
, the TRS operated at a cumulative taxable loss, which resulted in our recording a deferred tax asset with a corresponding valuation allowance.
We recorded state income tax expense on our consolidated operations for the
three months ended March 31, 2016
. As a REIT, we may also be subject to federal taxes if we engage in certain types of transactions.
As of
March 31, 2016
and
2015
, we did not accrue interest or penalties associated with any unrecognized tax benefits during the
three months ended March 31, 2016
and
2015
. We recorded nominal state and local tax expense along with nominal penalties and interest on income and property for the
three months ended March 31, 2016
and
2015
. Our subsidiaries and we remain subject to tax examination for the period from inception to
December 31, 2015
.
11. Earnings per share
The following table sets forth the components of diluted (loss) earnings per share (in thousands, except share and per share amounts):
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|
|
|
|
|
|
|
|
Three months ended March 31, 2016
|
|
Three months ended March 31, 2015
|
Numerator
|
|
|
|
|
Net (loss) income
|
|
$
|
(45,658
|
)
|
|
$
|
12,424
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
Weighted average common stock outstanding – basic
|
|
55,380,120
|
|
|
57,200,889
|
|
Stock options using the treasury method
|
|
—
|
|
|
200,712
|
|
Restricted stock
|
|
—
|
|
|
5,018
|
|
Weighted average common stock outstanding – diluted
|
|
55,380,120
|
|
|
57,406,619
|
|
|
|
|
|
|
(Loss) earnings per basic share
|
|
$
|
(0.82
|
)
|
|
$
|
0.22
|
|
(Loss) earnings per diluted share
|
|
$
|
(0.82
|
)
|
|
$
|
0.22
|
|
We excluded the items presented below from the calculation of diluted earnings per share as they were antidilutive for the periods indicated:
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2016
|
|
Three months ended March 31, 2015
|
Denominator (in weighted-average shares)
|
|
|
|
|
Stock options
|
|
159,015
|
|
|
—
|
|
Restricted stock
|
|
5,276
|
|
|
—
|
|
Effective April 1, 2015, we have the flexibility to pay up to
25%
of the Incentive Management Fee to AAMC in shares of our common stock. Should we choose to do so, our earnings available to common stockholders would be diluted to the extent of such issuance. Because AAMC did not earn any Incentive Management Fees, no dilutive effect was recognized for the three months ended March 31, 2016.
12. Segment information
Our primary business is the acquisition and ownership of single-family rental assets. Our primary sourcing strategy is to acquire these assets by purchasing single-family rental properties, either on an individual basis or in pools, or by the acquisition and resolution of NPLs. As a result, we operate in a single segment focused on the acquisition and ownership of rental residential properties.
13. Subsequent Events
Management has evaluated the impact of all events subsequent to March 31, 2016 and through the issuance of these consolidated interim financial statements. Other than disclosed below, we have determined that there were no subsequent events requiring adjustment or disclosure in the financial statements.
Amendment and Extension of Loan and Security Agreement with Nomura
On April 7, 2016, acting through our subsidiaries, we amended and extended the terms of our loan and security agreement with Nomura through the entry into an Amended and Restated Loan and Security Agreement (the “Amended and Restated Loan Agreement”).
Under the Amended and Restated Loan Agreement, we extended the termination date of the facility for an additional year and increased the facility size from $200.0 million to $250.0 million. Prior to the entry into the Amended and Restated Loan Agreement, an aggregate of approximately $188.3 million was outstanding under the original Nomura loan facility.
Our subsidiaries’ obligations under the Amended and Restated Loan Agreement continue to be fully guaranteed by us pursuant to the original Guaranty (the “Guaranty”) made by us in favor of Nomura with respect to the original Nomura loan agreement.
Other than as described above, the amended loan facility remains substantially the same as the original Nomura loan facility.