Notes to Condensed Consolidated Financial Statements
March 31, 2017
(Unaudited)
1
.
Organization and basis of presentation
Altisource Residential Corporation (“we,” “our,” “us,” or the “Company”) is a Maryland real estate investment trust (“REIT”) focused on acquiring, owning and managing single-family rental (“SFR”) properties throughout the United States. We conduct substantially all of our activities through our wholly owned subsidiary, Altisource Residential, L.P. (“ARLP”), and its subsidiaries. On December 21, 2012, we became a stand-alone publicly traded company with an initial capital contribution of
$100 million
.
We employ a diversified SFR property acquisition strategy that includes acquiring portfolios of SFR properties from a variety of market participants and purchasing SFR properties on a mini-bulk or one-by-one basis from the Multiple Listing Service and alternative listing sources. In 2015, we commenced the disposition of certain sub-performing and non-performing mortgage loans (“NPLs”) we had previously acquired in order to create additional liquidity and purchasing power to build our rental portfolio. As of
March 31, 2017
, we had disposed of, or agreed to the sale of, the substantial majority our remaining NPL portfolio.
We are managed by Altisource Asset Management Corporation (“AAMC” or our “Manager”). We do not have any employees; therefore, AAMC provides us with dedicated personnel to administer our business and perform certain of our corporate governance functions. AAMC also provides portfolio management services in connection with our acquisition and management of SFR properties and the ongoing management of our residential mortgage loans and real estate owned (“REO”) properties. See
Note 8
for a description of this related party relationship.
We have property management contracts with
two
separate third-party service providers to provide to us, among other things, leasing and lease management, operations, maintenance, repair, property management and property disposition services in respect of our SFR and REO portfolios. Also, we have servicing agreements with
two
separate mortgage loan servicers for the remaining mortgage loans in our portfolio.
Basis of presentation and use of estimates
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). All wholly owned subsidiaries are included, and all intercompany accounts and transactions have been eliminated.
The unaudited interim condensed consolidated financial statements and accompanying unaudited condensed consolidated financial information, in our opinion, contain all adjustments that are of a normal recurring nature and are necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods. The interim results are not necessarily indicative of results for a full year. We have omitted certain notes and other information from the interim condensed consolidated financial statements presented in this Quarterly Report on Form 10-Q as permitted by the Securities and Exchange Commission (“SEC”) rules and regulations. These condensed consolidated financial statements should be read in conjunction with our annual consolidated financial statements included within our 2016 Annual Report on Form 10-K, which was filed with the SEC on March 1, 2017.
Our financial statements include the accounts of our wholly owned subsidiaries as well as the variable interest entities (“VIEs”) of which we are the primary beneficiary. We eliminate intercompany accounts and transactions upon consolidation.
The determination of the VIE’s primary beneficiary requires an evaluation of the contractual and implied rights and obligations associated with each party’s relationship with or involvement in the entity, an estimate of the entity’s expected losses and expected residual returns and the allocation of such estimates to each party involved in the entity. We reassess our involvement with VIEs on a quarterly basis. Changes in methodologies, assumptions and inputs in the determination of the primary beneficiary could have a material effect on the amounts presented within the condensed consolidated financial statements.
In certain instances, we hold both the power to direct the most significant activities of each VIE as well as an economic interest in the entity, and, as such, we are deemed to be the primary beneficiary or consolidator of the VIE. We have determined that our
securitization trust, ARLP Securitization Trust, Series 2015-1 (“ARLP 2015-1”), is a VIE of which we are the primary beneficiary. See
Note 6
for more information regarding our securitization trust.
Use of estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ materially from those estimates.
Recently issued accounting standards
Adoption of recent accounting standards
In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, in an effort to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This update standard is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. We adopted the provisions of ASU 2017-01 effective January 1, 2017. Although this adoption had no significant effect on our previously reported consolidated financial information, we expect that the majority of future acquisitions of SFR properties will no longer meet the definition of a business under the amended guidance. As a result, for future SFR acquisitions that do not meet the definition of a business, we expect to capitalize certain acquisition costs that would have otherwise been expensed in the period incurred, including the HOME II Transaction described in
Note 2
.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The amendments in ASU 2016-18 require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This update standard is effective for public business entities for fiscal years beginning after December 15, 2017 and interim periods within fiscal years beginning after December 15, 2019. The amendments in ASU 2016-18 should be applied on a retrospective transition basis. Early adoption is permitted, including adoption during an interim period. Effective January 1, 2017, the Company has adopted the provisions of ASU 2016-18. Upon adoption, the Company has retrospectively reclassified
$3.1 million
of cash flows related to changes in restricted cash from investing activities on the cash flow statement to the cash, cash equivalents and restricted cash balances for the quarter ended March 31, 2016 to be consistent with the current presentation. Restricted cash balances include amounts related to tenant deposits, mortgage loan escrows and reserves for debt service established pursuant to our repurchase and loan agreements and other secured borrowings.
In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718). ASU 2016-09 makes several modifications to Topic 718 related to the accounting for forfeitures, employer tax withholding on share-based compensation and the financial statement presentation of excess tax benefits or deficiencies. ASU 2016-09 also clarifies the statement of cash flows presentation for certain components of share-based awards. This update standard is effective for interim and annual reporting periods beginning after December 15, 2016, although early adoption is permitted. Our adoption of this amendment on January 1, 2017 did not have a significant effect on our condensed consolidated financial statements.
Recently issued accounting standards not yet adopted
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. The amendments in ASU 2016-16 eliminate the exception of recognizing, at the time of transfer, current and deferred income taxes for intra-entity asset transfers other than inventory. This update standard is effective for public business entities for fiscal years beginning after December 15, 2017 and interim periods within fiscal years beginning after December 15, 2019. The amendments in ASU 2016-16 should be applied on a modified retrospective transition basis. Early adoption is permitted, including adoption during an interim period. We are currently evaluating the impact of this ASU on our consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The amendments in ASU 2016-15 address eight specific cash flow issues and apply to all entities that are
required to present a statement of cash flows under Topic 230. The amendments in ASU 2016-15 are effective for public business entities for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted, including adoption during an interim period. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments which amends the guidance on measuring credit losses on financial assets held at amortized cost. The amendment is intended to address the issue that the previous “incurred loss” methodology was restrictive for an entity's ability to record credit losses based on not yet meeting the “probable” threshold. The new language will require these assets to be valued at amortized cost presented at the net amount expected to be collected with a valuation provision. This update standard is effective for fiscal years beginning after December 15, 2019. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements.
In February 2016, FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires that lessees recognize assets and liabilities for leases with lease terms greater than twelve months in the statement of financial position and also requires improved disclosures to help users of financial statements better understand the amount, timing and uncertainty of cash flows arising from leases. This update is effective for fiscal years beginning after December 15, 2018, including interim reporting periods within those fiscal years. Early adoption is permitted. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10). ASU 2016-01 requires all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee). The amendments also require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. In addition, the amendments eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities and the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet for public business entities. The amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 is a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. In August 2015, FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which effectively delayed the adoption date of ASU 2014-09 by one year. In 2016, the FASB issued accounting standards updates that amended several aspects of ASU 2014-09. ASU 2014-09, as amended, is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted for fiscal years, and interim periods within those years, beginning after December 15, 2016. We are currently evaluating the impact of ASU 2014-09 on our consolidated financial statements; however, we do not expect the adoption of this standard to have a material impact on our consolidated financial statements as our lease terms are generally one to two years. We anticipate applying this amendment using the modified retrospective method.
2. Asset acquisitions and dispositions
Real estate assets
Acquisitions, including those accounted for as business combinations
On March 30, 2017, we entered into an agreement to acquire up to
3,500
SFR properties (the “HOME II Transaction”) from entities (the “Sellers”) sponsored by Amherst Holdings, LLC (“Amherst”) in multiple closings. In the first closing on March 30, 2017, our indirect wholly owned subsidiary, HOME SFR Borrower II, LLC (“HOME Borrower II”), acquired
757
SFR properties for an aggregate purchase price of
$106.5 million
, which is subject to potential purchase price adjustments as described in
Note 7
. The purchase price was funded with approximately
$79.9 million
of proceeds from a seller financing arrangement (the “HOME II loan agreement,” see
Note 6
) representing
75%
of the aggregate purchase price as well as
$26.6 million
of cash on hand. As of
March 31, 2017
, we were committed to purchase up to
2,743
additional stabilized rental
properties from the Sellers,
1,250
of which are subject to the Sellers' good faith efforts to offer such properties for sale. We capitalized
$1.5 million
of acquisition fees and costs related to this portfolio acquisition. The value of in-place leases was estimated at
$2.4 million
based upon the costs we would have incurred to lease the properties and is being amortized over the weighted average remaining life of the leases of approximately
seven months
as of the acquisition date.
On March 30, 2016, we completed the acquisition of
590
SFR properties located in
five
states from an unrelated third party for an aggregate purchase price of approximately
$64.8 million
. We recognized acquisition fees and costs related to this portfolio acquisition of
$0.6 million
. The value of in-place leases was estimated at
$0.7 million
based upon the costs we would have incurred to lease the properties and is being amortized over the weighted average remaining life of the leases of approximately
seven months
as of the acquisition date.
During the three months ended March 31, 2016, we acquired
113
residential properties under our one-by-one acquisition program for an aggregate purchase price of
$10.1 million
.
Dispositions
During the
three months ended March 31, 2017
and 2016, we sold
413
and
686
REO properties, respectively, and recorded
$20.0 million
and
$29.4 million
, respectively, of net realized gains on real estate.
Mortgage loan assets
Resolutions
During the
three months ended March 31, 2017
and
2016
, we resolved
78
and
169
mortgage loans, respectively, primarily through short sales, refinancing and foreclosure sales. In connection with these resolutions, we recorded
$7.3 million
and
$12.7 million
, respectively, of net realized gains on mortgage loans.
Dispositions
During the
three months ended March 31, 2017
and
2016
, we sold
556
and
1,078
of our mortgage loans held for sale to third party purchasers. In connection with these sales, we recorded
$28.3 million
and
$34.2 million
, respectively, of net realized gains on mortgage loans held for sale.
In addition, in January 2017, we commenced an auction process to sell an additional portfolio of
2,384
mortgage loans with an aggregate unpaid principal balance (“UPB”) of
$574.4 million
. On February 15, 2017, following the auction process, we agreed in principle to award the sale to an unrelated third party. Subject to typical confirmatory due diligence and negotiation of a definitive purchase agreement, we expect to consummate this transaction during the second quarter of 2017. As is customary in these transactions, this confirmatory due diligence process may result in certain loans being removed from the sale or a repricing of certain loans; therefore, the final composition and proceeds of this portfolio sale are subject to adjustment depending on the final diligence results and further negotiation by the parties. No assurance can be given that this transaction will be completed on a timely basis or at all.
Following completion of the sale of this additional mortgage loan portfolio, we will have sold the substantial majority of our non-performing and re-performing loans that were not expected to be rental candidates. We may conduct additional sales of non-performing loans that do not meet our rental criteria, although the number of remaining mortgage loans that may be sold will be substantially lower than it has been in prior periods. It is anticipated that the proceeds generated from any such transactions would be utilized, in part, to continue to facilitate our strategy to grow our SFR portfolio through the purchase of additional SFR properties.
Transfers of mortgage loans to real estate owned
During the
three months ended March 31, 2017
and
2016
, we transferred an aggregate of
195
and
360
mortgage loans, respectively, to REO at an aggregate fair value based on broker price opinions (“BPOs”) of
$28.7 million
and
$64.9 million
, respectively. Such transfers occur when the foreclosure sale is complete. In connection with these transfers to REO, we recorded
$9.5 million
and
$11.6 million
, respectively, in change in unrealized gain on mortgage loans that resulted from marking the properties to their most current market value.
Due diligence costs
During the
three months ended March 31, 2017
and
2016
, we recognized
$0.2 million
in each period related to due diligence costs. These due diligence costs are included in our condensed consolidated statement of operations as acquisition fees and costs.
3
.
Real estate assets, net
Real estate held for use
As of
March 31, 2017
, we had
10,280
single-family residential properties held for use. Of these properties,
8,385
had been leased,
486
were listed and ready for rent and
449
were in varying stages of renovation and unit turn status. With respect to the remaining
960
REO properties, we will make a final determination whether each property meets our rental profile after (a) applicable state redemption periods have expired, (b) the foreclosure sale has been ratified, (c) we have recorded the deed for the property, (d) utilities have been activated and (e) we have secured access for interior inspection. A majority of the REO properties are subject to state regulations that require us to await the expiration of a redemption period before a foreclosure can be finalized. Once the redemption period expires, we immediately proceed to record a new deed, take possession of the property, activate utilities and start the inspection process in order to make our final determination. If an REO property meets our rental profile, we determine the extent of renovations that are needed to generate an optimal rent and maintain consistency of renovation specifications. If we determine that the REO property will not meet our rental profile, we list the property for sale, in certain instances after renovations are made to optimize the sale proceeds.
As of
December 31, 2016
, we had
9,939
single-family residential properties held for use. Of these properties,
7,293
had been leased,
703
were listed and ready for rent and
607
were in various stages of renovation. With respect to the remaining
1,336
REO properties, we were in the process of determining whether these properties would meet our rental profile.
With respect to residential rental properties classified as held for use, we perform an impairment analysis using estimated cash flows if events or changes in circumstances indicate that the carrying value may be impaired, such as prolonged vacancy, identification of materially adverse legal or environmental factors, changes in expected ownership period or a decline in market value to an amount less than the carrying amount. This analysis is performed at the property level. These cash flows are estimated based on a number of assumptions that are subject to economic and market uncertainties, including, among others, demand for rental properties, competition for customers, changes in market rental rates, costs to operate each property and expected ownership periods.
If the carrying amount of a held for use asset exceeds the sum of its undiscounted future operating and residual cash flows, an impairment loss is recorded for the difference between estimated fair value of the asset and the carrying amount. We are not able to recover any such impairments should the estimated fair value subsequently improve. We generally estimate the fair value of assets held for use by using BPOs. In some instances, appraisal information may be available and is used in addition to BPOs.
During the
three months ended March 31, 2017
and
2016
, we recognized
$2.3 million
and
$3.0 million
, respectively, of impairment on real estate held for use, all of which relates to our properties under evaluation for rental strategy.
Real estate held for sale
As of
March 31, 2017
and
December 31, 2016
, our real estate held for sale included
793
and
594
REO properties, respectively, having an aggregate carrying value of
$158.2 million
and
$133.3 million
, respectively. Management determined to divest these properties because they do not meet our residential rental property investment criteria.
We record residential properties held for sale at the lower of the carrying amount or estimated fair value less costs to sell. The impairment loss, if any, is the amount by which the carrying amount exceeds the estimated fair value less costs to sell. In the event that the estimated fair value of impaired properties held for sale subsequently improves, we are able to recover impairments to the extent previously recognized.
During the
three months ended March 31, 2017
and
2016
, we recognized
$2.1 million
and
$11.9 million
, respectively, of impairment on our real estate held for sale.
4. Mortgage loans
The following table sets forth our mortgage loans at fair value, the related unpaid principal balance and market value of underlying properties by delinquency status as of
March 31, 2017
and
December 31, 2016
($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Loans
|
|
Carrying Value
|
|
Unpaid Principal Balance
|
|
Market Value of Underlying Properties
|
March 31, 2017
|
|
|
|
|
|
|
|
|
Current
|
|
194
|
|
|
$
|
28,484
|
|
|
$
|
39,681
|
|
|
$
|
47,520
|
|
30
|
|
22
|
|
|
3,674
|
|
|
4,999
|
|
|
7,921
|
|
60
|
|
15
|
|
|
1,535
|
|
|
2,316
|
|
|
2,805
|
|
90
|
|
110
|
|
|
17,736
|
|
|
30,897
|
|
|
31,760
|
|
Foreclosure
|
|
101
|
|
|
19,365
|
|
|
28,717
|
|
|
30,545
|
|
Mortgage loans at fair value
|
|
442
|
|
|
$
|
70,794
|
|
|
$
|
106,610
|
|
|
$
|
120,551
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Current
|
|
211
|
|
|
$
|
33,992
|
|
|
$
|
45,568
|
|
|
$
|
58,842
|
|
30
|
|
66
|
|
|
7,898
|
|
|
11,836
|
|
|
13,576
|
|
60
|
|
34
|
|
|
4,444
|
|
|
6,364
|
|
|
7,536
|
|
90
|
|
400
|
|
|
48,338
|
|
|
82,705
|
|
|
91,772
|
|
Foreclosure
|
|
2,180
|
|
|
365,772
|
|
|
551,243
|
|
|
574,546
|
|
Mortgage loans at fair value
|
|
2,891
|
|
|
$
|
460,444
|
|
|
$
|
697,716
|
|
|
$
|
746,272
|
|
The following table sets forth our mortgage loans held for sale, the related unpaid principal balance and market value of underlying properties by delinquency status as of
March 31, 2017
and
December 31, 2016
($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Loans
|
|
Carrying Value
|
|
Unpaid Principal Balance
|
|
Market Value of Underlying Properties
|
March 31, 2017
|
|
|
|
|
|
|
|
|
Current
|
|
97
|
|
|
$
|
16,114
|
|
|
$
|
22,795
|
|
|
$
|
26,701
|
|
30
|
|
21
|
|
|
3,101
|
|
|
4,721
|
|
|
5,452
|
|
60
|
|
15
|
|
|
2,178
|
|
|
3,352
|
|
|
4,410
|
|
90
|
|
480
|
|
|
87,103
|
|
|
123,996
|
|
|
141,689
|
|
Foreclosure
|
|
1,590
|
|
|
245,810
|
|
|
384,011
|
|
|
394,284
|
|
Mortgage loans held for sale
|
|
2,203
|
|
|
$
|
354,306
|
|
|
$
|
538,875
|
|
|
$
|
572,536
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Current
|
|
519
|
|
|
$
|
100,558
|
|
|
$
|
114,757
|
|
|
$
|
140,471
|
|
30
|
|
10
|
|
|
1,082
|
|
|
1,911
|
|
|
2,329
|
|
60
|
|
4
|
|
|
286
|
|
|
623
|
|
|
663
|
|
90
|
|
17
|
|
|
1,622
|
|
|
2,291
|
|
|
3,430
|
|
Foreclosure
|
|
33
|
|
|
4,488
|
|
|
6,023
|
|
|
6,675
|
|
Mortgage loans held for sale
|
|
583
|
|
|
$
|
108,036
|
|
|
$
|
125,605
|
|
|
$
|
153,568
|
|
As of
March 31, 2017
, our mortgage loans held for sale include certain mortgage loans identified for sale by management and our remaining re-performing residential mortgage loans that we initially acquired in June 2014. We determined to dispose of these mortgage loans because we do not expect them to be rental candidates.
Re-performing residential mortgage loans
For the
three months ended March 31, 2017
and
2016
, we recognized no provision for loan loss and no adjustments to the amount of the accretable yield for our re-performing residential mortgage loans. For the
three months ended March 31, 2017
, we accreted
no
interest income with respect to our re-performing loans. For the
three months ended March 31, 2016
, we accreted
$37 thousand
into interest income with respect to our re-performing loans. At
March 31, 2017
and
December 31, 2016
, our re-performing loans had a UPB of
$5.0 million
and
$5.7 million
, respectively, and a carrying value of
$3.5 million
and
$3.7 million
, respectively. We included these loans in mortgage loans held for sale.
The following table presents changes in the balance of the accretable yield for the periods indicated:
|
|
|
|
|
|
|
|
|
Accretable Yield
|
Three months ended March 31, 2017
|
|
Three months ended March 31, 2016
|
Balance at the beginning of the period
|
$
|
1,757
|
|
|
$
|
2,146
|
|
Payments and other reductions, net
|
(182
|
)
|
|
—
|
|
Accretion
|
—
|
|
|
(37
|
)
|
Balance at the end of the period
|
$
|
1,575
|
|
|
$
|
2,109
|
|
5.
Fair value of financial instruments
The following table sets forth the fair value of financial assets and liabilities by level within the fair value hierarchy as of
March 31, 2017
and
December 31, 2016
($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Carrying Value
|
|
Quoted Prices in Active Markets
|
|
Observable Inputs Other Than Level 1 Prices
|
|
Unobservable Inputs
|
March 31, 2017
|
|
|
|
|
|
|
|
Recurring basis (assets)
|
|
|
|
|
|
|
|
Mortgage loans at fair value
|
$
|
70,794
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
70,794
|
|
Interest rate cap derivative (1)
|
66
|
|
|
—
|
|
|
66
|
|
|
—
|
|
Nonrecurring basis (assets)
|
|
|
|
|
|
|
|
Real estate assets held for sale
|
158,239
|
|
|
—
|
|
|
—
|
|
|
158,239
|
|
Not recognized on condensed consolidated balance sheets at fair value (assets)
|
|
|
|
|
|
|
|
Mortgage loans held for sale
|
354,306
|
|
|
—
|
|
|
—
|
|
|
354,306
|
|
Not recognized on condensed consolidated balance sheets at fair value (liabilities)
|
|
|
|
|
|
|
|
Repurchase and loan agreements
|
1,213,614
|
|
|
—
|
|
|
1,219,164
|
|
|
—
|
|
Other secured borrowings
|
82,355
|
|
|
—
|
|
|
83,089
|
|
|
—
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
Recurring basis (assets)
|
|
|
|
|
|
|
|
Mortgage loans at fair value
|
$
|
460,444
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
460,444
|
|
Interest rate cap derivative (1)
|
66
|
|
|
—
|
|
|
66
|
|
|
—
|
|
Nonrecurring basis (assets)
|
|
|
|
|
|
|
|
Real estate assets held for sale
|
133,327
|
|
|
—
|
|
|
—
|
|
|
133,327
|
|
Not recognized on condensed consolidated balance sheets at fair value (assets)
|
|
|
|
|
|
|
|
Mortgage loans held for sale
|
108,036
|
|
|
—
|
|
|
—
|
|
|
108,036
|
|
Not recognized on condensed consolidated balance sheets at fair value (liabilities)
|
|
|
|
|
|
|
|
|
|
|
Repurchase and loan agreements
|
1,220,972
|
|
|
—
|
|
|
1,226,972
|
|
|
—
|
|
Other secured borrowings
|
144,099
|
|
|
—
|
|
|
144,971
|
|
|
—
|
|
_____________
|
|
(1)
|
We include the fair value of our interest rate cap derivative within prepaid expenses and other assets in our condensed consolidated balance sheets.
|
We have not transferred any assets from one level to another level during the
three months ended March 31, 2017
or during the year ended
December 31, 2016
.
The carrying values of our cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities and related party payables are equal to or approximate fair value. The fair values of mortgage loans at fair value and NPLs held for sale are estimated using our asset manager's proprietary discounted cash flow pricing model. The fair value of re-performing mortgage loans held for sale is estimated using the present value of the future estimated principal and interest payments of the loan, with the discount rate used in the present value calculation representing the estimated effective yield of the loan. The fair value of our interest rate cap derivative is estimated using a discounted cash flow analysis based on the contractual terms of the derivative. The fair value of the repurchase and loan agreements is estimated using the income approach based on credit spreads available to us currently in the market for similar floating rate debt. The fair value of other secured borrowings is estimated using observable market data.
The following table sets forth the changes in our level 3 assets that are measured at fair value on a recurring basis ($ in thousands):
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2017
|
|
Three months ended March 31, 2016
|
Mortgage loans at fair value
|
|
|
|
Beginning balance
|
$
|
460,444
|
|
|
$
|
960,534
|
|
Change in unrealized gain on mortgage loans
|
6,774
|
|
|
26,256
|
|
Net realized gain on mortgage loans
|
7,261
|
|
|
12,732
|
|
Transfers of mortgage loans at fair value to mortgage loans held for sale, net
|
(352,677
|
)
|
|
34,029
|
|
Mortgage loan resolutions and payments
|
(22,866
|
)
|
|
(49,931
|
)
|
Real estate tax advances to borrowers
|
2,327
|
|
|
3,442
|
|
Transfer of mortgage loans to real estate owned, net
|
(30,469
|
)
|
|
(62,519
|
)
|
Ending balance
|
$
|
70,794
|
|
|
$
|
924,543
|
|
|
|
|
|
Change in unrealized gain on mortgage loans at fair value held at the end of the period
|
$
|
1,025
|
|
|
$
|
20,642
|
|
The significant unobservable inputs used in the fair value measurement of our mortgage loans at fair value are discount rates, forecasts of future home prices, alternate loan resolution probabilities, resolution timelines and the value of underlying properties. Significant changes in any of these inputs in isolation could result in a significant change to the fair value measurement. A decline in the discount rate in isolation would increase the fair value. A decrease in the housing pricing index in isolation would decrease the fair value. Individual loan characteristics such as location and value of underlying collateral affect the loan resolution probabilities and timelines. An increase in the loan resolution timeline in isolation would decrease the fair value. A decrease in the value of underlying properties in isolation would decrease the fair value.
The following table sets forth quantitative information about the significant unobservable inputs used to measure the fair value of our mortgage loans at fair value as of the dates indicated:
|
|
|
|
|
|
Input
|
|
March 31, 2017
|
|
December 31, 2016
|
Equity discount rate
|
|
17.0%
|
|
17.0%
|
Debt to asset ratio
|
|
65.0%
|
|
65.0%
|
Cost of funds
|
|
3.5% over 1 month LIBOR
|
|
3.5% over 1 month LIBOR
|
Annual change in home pricing index
|
|
-3.1% to 11.2%
|
|
-11.2% to 15.1%
|
Loan resolution probabilities — modification
|
|
0% to 5.9%
|
|
0% to 5.9%
|
Loan resolution probabilities — rental
|
|
0%
|
|
0%
|
Loan resolution probabilities — liquidation
|
|
32.6% to 100%
|
|
31.8% to 100%
|
Loan resolution probabilities — paid in full
|
|
0% to 66.4%
|
|
0% to 66.2%
|
Loan resolution timelines (in years)
|
|
0.1 to 5.7
|
|
0.1 to 5.8
|
Value of underlying properties
|
|
$10,500 to $2,450,000
|
|
$3,500 to $4,600,000
|
6. Borrowings
Repurchase and loan agreements
Our operating partnership and certain of its Delaware statutory trust and/or limited liability company subsidiaries, as applicable, have entered into master repurchase agreements and loan agreements to finance the acquisition and ownership of the SFR properties, other REO properties and the remaining mortgage loans in our portfolio. We have effective control of the assets associated with these agreements and therefore have concluded these are financing arrangements. As of
March 31, 2017
, the average annualized interest rate on borrowings under our repurchase and loan agreements was
4.23%
, excluding amortization of deferred debt issuance costs.
At
March 31, 2017
, we were party to
one
repurchase agreement and
three
loan agreements. Below is a description of each agreement outstanding during the
three months ended March 31, 2017
:
Repurchase Agreement
|
|
•
|
Credit Suisse (“CS”) is the lender on the repurchase agreement entered into on March 22, 2013, (the “CS repurchase agreement”) with an initial aggregate maximum borrowing capacity of
$100.0 million
. During 2014, 2015 and 2016, the CS repurchase agreement was amended on several occasions, ultimately increasing the aggregate maximum borrowing capacity to
$600.0 million
as of December 31, 2016 with a maturity date of November 17, 2017. Pursuant to the amended and restated repurchase agreement with CS dated November 18, 2016, the aggregate maximum borrowing capacity of the CS repurchase agreement decreased incrementally on each of January 31, 2017 and February 28, 2017 and will further decrease on each of June 30, 2017 and September 30, 2017 to an aggregate of
$350.0 million
as of September 30, 2017. At
March 31, 2017
, the CS repurchase agreement had an aggregate maximum borrowing capacity of
$525.0 million
.
|
Loan Agreements
|
|
•
|
Nomura Corporate Funding Americas, LLC (“Nomura”) is the lender under a loan agreement dated April 10, 2015 (the “Nomura loan agreement”) with an initial aggregate maximum funding capacity of
$100.0 million
. The Nomura loan agreement was amended during 2015 and 2016, ultimately increasing the maximum funding capacity to
$250.0 million
on December 31, 2016. On April 6, 2017, we entered into an amended and restated loan and security agreement with Nomura that retained our aggregate borrowing capacity of
$250.0 million
, removed the exit fee requirement upon early repayment and extended the maturity date to April 5, 2018. The uncommitted maximum borrowing amount increased to
$100.0 million
, which is available subject to our meeting certain eligibility requirements.
|
|
|
•
|
In connection with the seller financing related to our acquisition of
4,262
SFR properties on September 30, 2016 (the “HOME SFR Transaction”), we entered into a loan agreement (the “MSR loan agreement”) between HOME SFR Borrower, LLC (“HOME Borrower”), our indirect wholly owned subsidiary, the sellers and MSR Lender LLC, as agent. Pursuant to the MSR loan agreement, HOME Borrower borrowed approximately
$489.3 million
from the lenders (the “MSR Loan”). Effective October 14, 2016, the MSR loan agreement was assigned to MSR Lender, LLC (“MSR Lender”) and, in connection with MSR Lender’s securitization of the MSR Loan, we and MSR Lender amended and restated the MSR loan agreement to match the terms of the bonds in MSR Lender's securitization of the MSR Loan. The aggregate amount of the MSR Loan and the aggregate interest rate of the MSR Loan remained unchanged from the original loan agreement. The MSR Loan is a floating rate loan, composed of eight floating rate components, interest on each of which is computed monthly based on one-month LIBOR plus a fixed component spread. The initial maturity date of the MSR Loan is November 9, 2018. HOME Borrower has the option to extend the MSR Loan beyond the initial maturity date for
three
successive
one
-year terms to an ultimate maturity date of November 9, 2021, provided, among other things, that there is no event of default under the MSR loan agreement on each maturity date. The MSR Loan is secured by the membership interests of HOME Borrower and the properties and other assets of HOME Borrower.
|
|
|
•
|
In connection with the seller financing related to the first closing under the HOME II Transaction on March 30, 2017, HOME Borrower II entered into the HOME II loan agreement with entities sponsored by Amherst, pursuant to which we borrowed approximately
$79.9 million
in connection with the first acquisition of properties (the “HOME II Loan”). The HOME II loan agreement is a floating rate loan, composed of eight floating rate components, interest on each of which is computed monthly based on one-month LIBOR plus a fixed component spread. The entire principal amount is currently allocable to one component at a fixed-rate spread over one-month LIBOR, which is anticipated to be the
|
weighted average fixed rate spread for the duration of the HOME II loan agreement. The initial maturity date of the HOME II loan agreement is October 9, 2019. HOME Borrower II has the option to extend the HOME II loan agreement beyond the initial maturity date for
three
successive
one
-year extensions, provided, among other things, that there is no event of default under the HOME II loan agreement on each maturity date. The HOME II Loan is secured by the membership interests of HOME Borrower II and the properties and other assets of HOME Borrower II.
Following all of the amendments described above, the maximum aggregate funding available to us under these repurchase and loan agreements as of
March 31, 2017
was
$1.3 billion
, subject to certain sublimits, eligibility requirements and conditions precedent to each funding. As of
March 31, 2017
, an aggregate of
$1.2 billion
was outstanding under our repurchase and loan agreements. The CS repurchase agreement and the Nomura loan agreement are fully guaranteed by us.
The following table sets forth data with respect to our repurchase and loan agreements as of
March 31, 2017
and
December 31, 2016
($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Borrowing Capacity
|
|
Book Value of Collateral
|
|
Amount Outstanding
|
|
Amount of Available Funding
|
March 31, 2017
|
|
|
|
|
|
|
|
CS repurchase agreement due November 17, 2017
|
$
|
525,000
|
|
|
$
|
774,701
|
|
|
$
|
505,530
|
|
|
$
|
19,470
|
|
Nomura loan agreement due April 6, 2017
|
250,000
|
|
|
232,583
|
|
|
144,496
|
|
|
105,504
|
|
MSR loan agreement due November 9, 2018
|
489,259
|
|
|
635,448
|
|
|
489,259
|
|
|
—
|
|
HOME II loan agreement due October 9, 2019
|
79,879
|
|
|
105,610
|
|
|
79,879
|
|
|
—
|
|
Less: deferred debt issuance costs
|
—
|
|
|
—
|
|
|
(5,550
|
)
|
|
—
|
|
|
$
|
1,344,138
|
|
|
$
|
1,748,342
|
|
|
$
|
1,213,614
|
|
|
$
|
124,974
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
CS repurchase agreement due November 17, 2017
|
$
|
600,000
|
|
|
$
|
902,339
|
|
|
$
|
582,659
|
|
|
$
|
17,341
|
|
Nomura loan agreement due April 6, 2017
|
250,000
|
|
|
238,142
|
|
|
155,054
|
|
|
94,946
|
|
MSR loan agreement due November 9, 2018
|
489,259
|
|
|
638,799
|
|
|
489,259
|
|
|
—
|
|
Less: deferred debt issuance costs
|
—
|
|
|
—
|
|
|
(6,000
|
)
|
|
—
|
|
|
$
|
1,339,259
|
|
|
$
|
1,779,280
|
|
|
$
|
1,220,972
|
|
|
$
|
112,287
|
|
Our business model relies to a significant degree on both our short-term financing and longer duration asset backed financing arrangements, including the HOME II loan agreement that closed in March 2017 and the new term loan arrangement that closed in April 2017 (as described in
Note 14
), and we generally do not carry sufficient liquid funds to retire any of our short-term obligations upon their maturity. Prior to or upon such short-term maturities, management generally expects to (1) refinance the remaining outstanding short-term facilities, obtain additional financing or replace the short-term facilities with longer term facilities and (2) continue to liquidate non-rental REO properties and certain NPLs in the ordinary course, which will generate cash to reduce the related financing. We are in continuous dialogue with our lenders, and we are currently not aware of any circumstances that would adversely affect our ability to complete such refinancings. We believe we will be successful in our efforts to refinance or obtain additional financing based on our recent success in renewing our outstanding facilities and our ongoing relationships with lenders.
Terms and covenants related to the CS repurchase agreement
Under the terms of the CS repurchase agreement, as collateral for the funds drawn thereunder, subject to certain conditions, our operating partnership and/or an intervening limited liability company subsidiary will sell to the lender equity interests in the Delaware statutory trust subsidiary that owns the applicable underlying mortgage or REO assets on our behalf, or the trust will directly sell such underlying mortgage assets. In the event the lender determines the value of the collateral has decreased, the lender has the right to initiate a margin call and require us, or the applicable trust subsidiary, to post additional collateral or to repay a portion of the outstanding borrowings. The price paid by the lender for each mortgage or REO asset we finance under the repurchase agreements is based on a percentage of the market value of the mortgage or REO asset and, in the case of mortgage assets, may depend on its delinquency status. With respect to funds drawn under the CS repurchase agreement, our applicable subsidiary is required to pay the lender interest based on the lender’s cost of funds plus a spread calculated based on the type of applicable assets collateralizing the funding, as well as certain other customary fees, administrative costs and
expenses to maintain and administer the CS repurchase agreement. We do not collateralize any of our repurchase facilities with cash.
Pursuant to the CS repurchase agreement, we are entitled to collateralize a portion of the facility with securities. As of
March 31, 2017
, approximately
$21.3 million
of the amount outstanding under the CS repurchase agreement was collateralized by
$34.0 million
of the Class A-2 Notes issued and retained by us in connection with the securitization completed in July 2015 by ARLP 2015-1.
The CS repurchase agreement requires us to maintain various financial and other covenants, including maintaining a minimum adjusted tangible net worth, a maximum ratio of indebtedness to adjusted tangible net worth and a minimum fixed charge coverage ratio. In addition, the CS repurchase agreement contains customary events of default.
Terms and covenants related to the Nomura loan agreement
Under the terms of the Nomura loan agreement, subject to certain conditions, Nomura may advance funds to us from time to time, with such advances collateralized by SFR properties and other REO properties. The advances paid under the Nomura loan agreement with respect to the applicable properties from time to time will be based on a percentage of the market value of the properties. Under the terms of the Nomura loan agreement, we are required to pay interest based on the one-month LIBOR plus a spread and certain other customary fees, administrative costs and expenses in connection with Nomura's structuring, management and ongoing administration of the facility.
The Nomura loan agreement requires us to maintain various financial and other covenants, including a minimum adjusted tangible net worth, a maximum ratio of indebtedness to adjusted tangible net worth and specified levels of unrestricted cash. In addition, the Nomura loan agreement contains events of default (subject to certain materiality thresholds and grace periods), including payment defaults, breaches of covenants and/or certain representations and warranties, cross-defaults, certain material adverse changes, bankruptcy or insolvency proceedings and other events of default customary for this type of transaction. The remedies for such events of default are also customary for this type of transaction and include the acceleration of the principal amount outstanding under the Nomura loan agreement and the liquidation by Nomura of the SFR and REO properties then subject thereto.
Terms and covenants related to the MSR loan agreement and HOME II loan agreement
Under the terms of the MSR loan agreement and the HOME II loan agreement, each of the MSR Loan and the HOME II Loan are non-recourse to us and are secured by a lien on the membership interests of HOME Borrower and Home Borrower II and the acquired properties and other assets of each entity, respectively. The assets of each entity are the primary source of repayment and interest on their respective loan agreements, thereby making the cash proceeds of rent payments and any sales of the acquired properties the primary sources of the payment of interest and principal by each entity to the respective lenders. The loan agreements require that each entity comply with various affirmative and negative covenants that are customary for loans of this type, including limitations on the indebtedness each entity can incur, limitations on sales and dispositions of the properties collateralizing the respective loan agreements, minimum net asset requirements and various restrictions on the use of cash generated by the operations of such properties while the respective loan agreements are outstanding. Each loan agreement also includes customary events of default, the occurrence of which would allow the respective lenders to accelerate payment of all amounts outstanding thereunder. We have limited indemnification obligations for wrongful acts taken by HOME Borrower or HOME Borrower II in connection with the secured collateral.
Even though the MSR loan agreement and HOME II loan agreement are non-recourse to us and all of our subsidiaries other than the entities party to the respective loan agreements, we have agreed to limited bad act indemnification obligations to the respective lenders for the payment of (i) certain losses arising out of certain bad or wrongful acts of our subsidiaries that are party to the respective loan agreements and (ii) the principal amount of the MSR Loan, the HOME II Loan and all other obligations thereunder in the event we cause certain voluntary bankruptcy events of the respective subsidiaries party to the loan agreements. Any of such liabilities could have a material adverse effect on our results of operations and/or our financial condition.
We are currently in compliance with the covenants and other requirements with respect to the repurchase and loan agreements. We monitor our lending partners’ ability to perform under the repurchase and loan agreements and have concluded there is currently no reason to doubt that they will continue to perform under the repurchase and loan agreements as contractually obligated.
Other secured borrowings
On June 29, 2015, we completed a securitization transaction in which ARLP 2015-1 issued
$205.0 million
in ARLP 2015-1 Class A Notes with a weighted coupon of approximately
4.01%
and
$60.0 million
in ARLP 2015-1 Class M Notes. ARLP 2015-1 is a Delaware statutory trust that is wholly owned by our operating partnership with a federally chartered bank as its trustee. We retained
$34.0 million
of the ARLP 2015-1 Class A Notes and all of the ARLP 2015-1 Class M Notes. No interest will be paid on any ARLP 2015-1 Class M Notes while any ARLP 2015-1 Class A Notes remain outstanding. The ARLP 2015-1 Class A Notes and ARLP 2015-1 Class M Notes are non-recourse to us and are secured solely by the NPLs and REO properties of ARLP 2015-1 but not by any of our other assets. The assets of ARLP 2015-1 are the only source of repayment and interest on the ARLP 2015-1 Class A Notes and the ARLP 2015-1 Class M Notes, thereby making the cash proceeds received by ARLP 2015-1 of loan payments, loan liquidations, loan sales and sales of converted REO properties the sole sources of the payment of interest and principal by ARLP 2015-1 to the bond holders. The ARLP 2015-1 Class A Notes and the ARLP 2015-1 Class M Notes mature on May 25, 2055 and May 25, 2044, respectively, and we do not guarantee any of the obligations of ARLP 2015-1 under the terms of the indenture governing the notes or otherwise. As of
March 31, 2017
, the book value of the underlying securitized assets held by ARLP 2015-1 was
$174.5 million
.
The following table sets forth data with respect to these notes as of
March 31, 2017
and
December 31, 2016
($ in thousands):
|
|
|
|
|
|
|
|
|
Interest Rate
|
|
Amount Outstanding
|
March 31, 2017
|
|
|
|
ARLP Securitization Trust, Series 2015-1
|
|
|
|
ARLP 2015-1 Class A Notes due May 25, 2055 (1)
|
4.01
|
%
|
|
$
|
117,089
|
|
ARLP 2015-1 Class M Notes due May 25, 2044
|
—
|
%
|
|
60,000
|
|
Intercompany eliminations
|
|
|
|
Elimination of ARLP 2015-1 Class A Notes due to ARNS, Inc.
|
|
|
(34,000
|
)
|
Elimination of ARLP 2015-1 Class M Notes due to ARLP
|
|
|
(60,000
|
)
|
Less: deferred debt issuance costs
|
|
|
(734
|
)
|
|
|
|
$
|
82,355
|
|
|
|
|
|
December 31, 2016
|
|
|
|
ARLP Securitization Trust, Series 2015-1
|
|
|
|
ARLP 2015-1 Class A Notes due May 25, 2055 (1)
|
4.01
|
%
|
|
178,971
|
|
ARLP 2015-1 Class M Notes due May 25, 2044
|
—
|
%
|
|
60,000
|
|
Intercompany eliminations
|
|
|
|
Elimination of ARLP 2015-1 Class A Notes due to ARNS, Inc.
|
|
|
(34,000
|
)
|
Elimination of ARLP 2015-1 Class M Notes due to ARLP
|
|
|
(60,000
|
)
|
Less: deferred debt issuance costs
|
|
|
(872
|
)
|
|
|
|
$
|
144,099
|
|
_____________
|
|
(1)
|
The expected redemption date for the Class A Notes ranges from June 25, 2018 to June 25, 2019.
|
7. Commitments and contingencies
Litigation, claims and assessments
From time to time, we may be involved in various claims and legal actions arising in the ordinary course of business. Set forth below is a summary of legal proceedings to which we are a party as of
March 31, 2017
:
Martin v. Altisource Residential Corporation et al.
On March 27, 2015, a putative shareholder class action complaint was filed in the United States District Court of the Virgin Islands by a purported shareholder of the Company under the caption
Martin
v.
Altisource Residential Corporation, et al.
, 15-cv-00024. The action names as defendants the Company, our former Chairman, William C. Erbey, and certain officers and a former officer of the Company and alleges that the defendants violated federal securities laws by, among other things, making materially false statements and/or failing to disclose material information to the Company's shareholders regarding the Company's relationship and transactions with AAMC, Ocwen Financial Corporation (“Ocwen”) and Home Loan Servicing Solutions, Ltd. These alleged misstatements and omissions include allegations that the defendants failed to adequately disclose the Company's reliance on Ocwen and the risks relating to its relationship with Ocwen, including that Ocwen was not properly servicing and selling loans, that Ocwen was under investigation by regulators for violating state and federal laws regarding servicing of loans and Ocwen’s lack of proper internal controls. The complaint also contains allegations that certain of the Company's disclosure documents were false and misleading because they failed to disclose fully the entire details of a certain asset management agreement between the Company and AAMC that allegedly benefited AAMC to the detriment of the Company's shareholders. The action seeks, among other things, an award of monetary damages to the putative class in an unspecified amount and an award of attorney’s and other fees and expenses.
In May 2015,
two
of our purported shareholders filed competing motions with the court to be appointed lead plaintiff and for selection of lead counsel in the action. Subsequently, opposition and reply briefs were filed by the purported shareholders with respect to these motions. On October 7, 2015, the court entered an order granting the motion of Lei Shi to be lead plaintiff and denying the other motion to be lead plaintiff.
On January 23, 2016, the lead plaintiff filed an amended complaint.
On March 22, 2016, defendants filed a motion to dismiss all claims in the action. The plaintiffs filed opposition papers on May 20, 2016, and the defendants filed a reply brief in support of the motion to dismiss the amended complaint on July 11, 2016.
On November 14, 2016, the Martin case was reassigned to Judge Anne E. Thompson of the Unites States District Court of New Jersey. In a hearing on December 19, 2016, the parties made oral arguments on the motion to dismiss, and on March 16, 2017 the Court issued an order that the motion to dismiss had been denied. On April 17, 2017, the defendants filed a motion for reconsideration of the Court’s decision to deny the motion to dismiss. Plaintiff’s opposition to defendants’ motion for reconsideration is anticipated to be due on May 8, 2017. In addition, the defendants filed their answer and affirmative defenses by April 21, 2017.
At this time, we are not able to predict the ultimate outcome of this matter, nor can we estimate the range of possible loss, if any.
Amendment and Waiver Agreement with Altisource Solutions
In connection with the HOME SFR Transaction and to enable Main Street Renewal, LLC (“MSR”) to be property manager for the acquired properties, we and Altisource Solutions S.à r.l. (“Altisource Solutions”), a wholly owned subsidiary of Altisource Portfolio Solutions S.A. (“ASPS”), entered into an Amendment and Waiver Agreement (the “Amendment and Waiver Agreement”) to amend the Master Services Agreement (the “MSA”) between Altisource Solutions and us, dated December 21, 2012, under which Altisource Solutions was the exclusive provider of leasing and property management services to us. Pursuant to the Amendment and Waiver Agreement, we obtained a waiver of the exclusivity requirements under the MSA for the acquired properties. Additionally, the Amendment and Waiver Agreement permits us to utilize the property management services of MSR in connection with up to approximately
3,000
additional properties if we acquire such additional properties from an investment fund or other entity affiliated with Amherst in one or more transactions prior to an agreed-upon date. The Amendment and Waiver Agreement also amended the MSA to require us or any surviving entity to pay a
$60 million
liquidation fee to Altisource Solutions if (i) we sell, liquidate or dispose of
50%
or more of our SFR portfolio managed by Altisource Solutions over a rolling eighteen (
18
) month period without using the proceeds of such sales, liquidations or disposals to purchase additional SFR assets or if (ii) the surviving entity in a change of control does not assume the MSA with
Altisource Solutions as property manager. The liquidation fee will not be required to be paid if we or any surviving entity terminate the MSA as a result of a material breach of the MSA by Altisource Solutions, for Altisource Solutions’ failure to meet certain specified performance standards or for certain other customary reasons.
Commitments and contingencies related to the HOME II Transaction
In connection with the HOME II Transaction, as of
March 31, 2017
, we had committed to purchase up to
2,743
additional stabilized rental properties from the Amherst sponsored entities in additional closings that are expected to occur during 2017. Because the properties to be acquired had not yet been fully finalized prior to the date of this report, we are unable to predict the total aggregate purchase price of the future closings under the HOME II Transaction.
Pursuant to the purchase and sale agreement underlying the HOME II Transaction (the “PSA”), the ultimate purchase price of the properties acquired or to be acquired is subject to potential adjustment based on a predetermined formula, which is dependent upon the valuation of the acquired properties at a future date. Because such future valuation of the properties is unknown, we are unable to predict the ultimate adjustments, if any, that will be made to the initial aggregate purchase price at this time.
8. Related-party transactions
Asset management agreement with AAMC
On March 31, 2015, we entered into our current asset management agreement (the “AMA”) with AAMC. The AMA, which became effective on April 1, 2015, provides for a management fee structure as follows:
|
|
•
|
Base Management Fee
. AAMC is entitled to a quarterly Base Management Fee equal to
1.5%
of the product of (i) our average invested capital (as defined in the AMA) for the quarter
multiplied by
(ii)
0.25
, while we have fewer than
2,500
single-family rental properties actually rented (“Rental Properties”). The Base Management Fee percentage increases to
1.75%
of invested capital while we have between
2,500
and
4,499
Rental Properties and increases to
2.0%
of invested capital while we have
4,500
or more Rental Properties;
|
|
|
•
|
Incentive Management Fee
. AAMC is entitled to a quarterly Incentive Management Fee equal to
20%
of the amount by which our return on invested capital (based on AFFO defined as our net income attributable to holders of common stock calculated in accordance with GAAP
plus
real estate depreciation expense
minus
recurring capital expenditures on all of our real estate assets owned) exceeds an annual hurdle return rate of between
7.0%
and
8.25%
(depending on the
10
-year treasury rate). The Incentive Management Fee increases to
22.5%
while we have between
2,500
and
4,499
Rental Properties and increases to
25%
while we have
4,500
or more Rental Properties; and
|
|
|
•
|
Conversion Fee
. AAMC is entitled to a quarterly conversion fee equal to
1.5%
of the market value of the single-family homes leased by us for the first time during the applicable quarter.
|
We have the flexibility to pay up to
25%
of the Incentive Management Fee to AAMC in shares of our common stock.
Under the AMA, we reimburse AAMC for the compensation and benefits of the General Counsel dedicated to us and certain other out-of-pocket expenses incurred by AAMC on our behalf.
The AMA requires that AAMC continue to serve as our exclusive asset manager for an initial term of
15
years from April 1, 2015, with
two
potential
five
-year extensions, subject to our achieving an average annual return on invested capital of at least
7.0%
. Neither party is entitled to terminate the AMA prior to the end of the initial term, or each renewal term, other than termination by (a) us and/or AAMC “for cause” for certain events such as a material breach of the AMA and failure to cure such breach, (b) us for certain other reasons such as our failure to achieve a return on invested capital of at least
7.0%
for
two
consecutive fiscal years after the third anniversary of the AMA and (c) us in connection with certain change of control events.
Summary of related-party transactions
The following table presents our significant transactions with AAMC, which is a related party, for the periods indicated ($ in thousands):
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2017
|
|
Three months ended March 31, 2016
|
Base management fees (1)
|
$
|
4,211
|
|
|
$
|
4,124
|
|
Conversion fees (1)
|
604
|
|
|
402
|
|
Expense reimbursements (2)
|
196
|
|
|
—
|
|
______________
|
|
(1)
|
Included in management fees in the condensed consolidated statements of operations.
|
|
|
(2)
|
Included in general and administrative expenses in the condensed consolidated statements of operations.
|
No
Incentive Management Fee under the AMA was payable to AAMC during the
three months ended March 31, 2017
because our return on invested capital (as defined in the AMA) was below the required hurdle rate. Under the AMA, to the extent we have an aggregate shortfall in our return rate over the previous
seven
quarters, that aggregate return rate shortfall gets added to the normal quarterly
1.75%
return hurdle for the next quarter before AAMC is entitled to an Incentive Management Fee. As of
March 31, 2017
, the aggregate return shortfall from the prior seven quarters under the AMA was approximately
55.60%
of invested capital. In future quarters, return on invested capital must exceed the required hurdle for the current quarter plus any carried-forward cumulative additional hurdle shortfall from the prior
seven
quarters before any Incentive Management Fee will be payable to AAMC.
9. Share-based payments
2016 Equity Incentive Plan
Beginning in July 2016, our non-management directors each received annual grants of restricted stock units issued under the Altisource Residential Corporation 2016 Equity Incentive Plan (the “2016 Equity Incentive Plan”). These restricted stock units are eligible for settlement in the number of shares of our common stock having a fair market value of
$60 thousand
on the date of grant. Subject to accelerated vesting in limited circumstances, the restricted stock units vest on the earlier of the first anniversary of the date of grant or the next annual meeting of stockholders, with distribution mandatorily deferred for an additional
two
years thereafter until the
third
anniversary of grant (subject to earlier distribution or forfeiture upon the applicable director’s separation from the Board of Directors). The awards were issued together with dividend equivalent rights. In respect of dividends paid to our stockholders prior to the vesting date, dividend equivalent rights accumulate and are expected to be paid in a lump sum in cash following the vesting date, contingent on the vesting of the underlying award. During any period thereafter when the award is vested but remains subject to settlement, dividend equivalent rights are expected to be paid in cash on the same timeline as underlying dividends are actually paid to our stockholders.
2012 Conversion Option Plan and 2012 Special Conversion Option Plan
On December 21, 2012, as part of our separation transaction from ASPS, we issued stock options under the 2012 Conversion Option Plan and 2012 Special Conversion Option Plan to holders of ASPS stock options to purchase shares of our common stock in a ratio of one share of our common stock to every three shares of ASPS common stock. The options were granted as part of our separation to employees of ASPS and/or Ocwen solely to give effect to the exchange ratio in the separation, and we do not include share-based compensation expense related to these options in our condensed consolidated statements of operations because they are not related to our incentive compensation. As of
March 31, 2017
, options to purchase an aggregate of
141,087
shares of our common stock were remaining under the Conversion Option Plan and Special Conversion Option Plan.
Share-based payment activity
We made
no
grants of share-based awards during the
three months ended March 31, 2017
. During the
three months ended March 31, 2016
, our restricted stock activity included the grant to a director of
1,232
shares with a weighted average grant date fair value of
$9.30
per share and the forfeiture by a director of
625
shares with a weighted average grant date fair value of
$18.25
per share.
We recorded
$1.9 million
and
$45 thousand
of compensation expense related to our share-based compensation programs for the
three months ended March 31, 2017
and
2016
, respectively. As of
March 31, 2017
, we had
$4.6 million
of unrecognized share-based compensation cost remaining with an average remaining estimated term of
1.3 years
. As of
March 31, 2016
, we had a nominal amount of unrecognized share-based compensation cost remaining with respect to the director grants.
10. Derivatives
We may enter into derivative contracts from time to time in order to mitigate the risk associated with our variable rate debt. We do not enter into derivatives for investment purposes. Derivatives are carried at fair value within prepaid expenses and other assets in our condensed consolidated balance sheet. Upon execution, we may or may not designate such derivatives as accounting hedges.
On September 29, 2016, we entered into an interest rate cap to manage the economic risk of increases in the floating rate portion of the MSR loan agreement. The interest rate cap has a strike rate on the one-month LIBOR of
2.938%
, a notional amount of
$489.3 million
and a termination date of November 15, 2018. At
March 31, 2017
, the interest rate cap had a fair value of
$66 thousand
. We did not designate the interest rate cap as an accounting hedge; therefore, changes in the fair value of the interest rate cap are recorded as a component of interest expense in our condensed consolidated statement of operations. For the
three months ended March 31, 2017
, we recognized
no
changes in the fair value of the interest rate cap.
11. Income taxes
As a REIT, we must meet certain organizational and operational requirements, including the requirement to distribute at least
90%
of our annual REIT taxable income excluding capital gains to our stockholders. As a REIT, we generally will not be subject to federal income tax to the extent we distribute our REIT taxable income to our stockholders and provided we satisfy the REIT requirements, including certain asset, income, distribution and stock ownership tests. If we fail to qualify as a REIT, and do not qualify for certain statutory relief provisions, we will be subject to U.S. federal, state and local income taxes and may be precluded from qualifying as a REIT for the subsequent four taxable years following the year in which we lost our REIT qualification.
During
2016
, we paid cash distributions of
$38.3 million
to our stockholders, which consisted of
$24.5 million
related to the 2016 taxable year, including
$16.3 million
of capital gain distributions and
$8.2 million
of return of capital distributions, and
$13.8 million
related to the 2015 taxable year. After these distributions, the aggregate minimum distribution to stockholders required to maintain our REIT status had been met for 2016.
Our condensed consolidated financial statements include the operations of our taxable REIT subsidiary (“TRS”), which is subject to federal, state and local income taxes on its taxable income. From inception through
March 31, 2017
, the TRS operated at a cumulative taxable loss, which resulted in our recording a deferred tax asset with a corresponding valuation allowance.
We recorded state income tax expense on our condensed consolidated operations for the
three months ended March 31, 2017
and
2016
. As a REIT, we may also be subject to federal taxes if we engage in certain types of transactions.
As of
March 31, 2017
and
2016
, we did not accrue interest or penalties associated with any unrecognized tax benefits. We recorded nominal state and local tax expense along with nominal penalties and interest on income and property for the
three months ended March 31, 2017
and
2016
. Our subsidiaries and we remain subject to tax examination for the period from inception to
December 31, 2016
. RESI and its subsidiaries file income tax returns in the U.S. and various state, local and foreign jurisdictions. On February 16, 2017, the IRS opened an examination of the 2014 tax year of the TRS. On April 28, 2017, we received verbal confirmation from the IRS that the examination of the TRS’ 2014 tax year will be closed without any changes.
12. Earnings per share
The following table sets forth the components of diluted (loss) earnings per share (in thousands, except share and per share amounts):
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2017
|
|
Three months ended March 31, 2016
|
Numerator
|
|
|
|
Net loss
|
$
|
(49,357
|
)
|
|
$
|
(45,658
|
)
|
|
|
|
|
Denominator
|
|
|
|
Weighted average common stock outstanding – basic
|
53,646,291
|
|
|
55,380,120
|
|
Weighted average common stock outstanding – diluted
|
53,646,291
|
|
|
55,380,120
|
|
|
|
|
|
Loss per basic common share
|
$
|
(0.92
|
)
|
|
$
|
(0.82
|
)
|
Loss per diluted common share
|
$
|
(0.92
|
)
|
|
$
|
(0.82
|
)
|
We excluded the items presented below from the calculation of diluted earnings per share as they were antidilutive for the periods indicated:
|
|
|
|
|
|
|
|
Three months ended March 31, 2017
|
|
Three months ended March 31, 2016
|
Denominator (in weighted-average shares)
|
|
|
|
Stock options
|
160,478
|
|
|
159,015
|
|
Restricted stock
|
95,511
|
|
|
5,276
|
|
Effective April 1, 2015, we have the flexibility to pay up to
25%
of the Incentive Management Fee to AAMC in shares of our common stock. Should we choose to do so, our earnings available to common stockholders would be diluted to the extent of such issuance. Because AAMC did not earn any Incentive Management Fees, no dilutive effect was recognized for the
three months ended March 31, 2017
or
2016
.
13. Segment information
Our primary business is the acquisition and ownership of single-family rental assets. Our primary sourcing strategy is to acquire these assets by purchasing single-family rental properties, either on an individual basis or in pools, or by the acquisition and resolution of NPLs. As a result, we operate in a single segment focused on the acquisition and ownership of rental residential properties.
14. Subsequent events
On April 6, 2017, RESI TL1 Borrower, LLC (“TL1 Borrower”), our indirect wholly owned subsidiary, entered into a credit and security agreement (the “Term Loan Agreement”) with American Money Management Corporation, as agent, on behalf of Great American Life Insurance Company and Great American Insurance Company as initial lenders, and each other lender added from time to time as a party to the Term Loan Agreement (collectively, the “Lenders”).
Pursuant to the Term Loan Agreement, TL1 Borrower borrowed
$100.0 million
to finance the ownership and operation of single-family rental properties (the “Term Loan”). The Term Loan Agreement has a maturity date of April 6, 2022 and a fixed interest rate of
5.00%
. Approximately
$73.6 million
of the proceeds were used to pay down other existing borrowings.
The Term Loan Agreement requires that the TL1 Borrower comply with various affirmative and negative covenants that are customary for loans of this type including, without limitation, reporting requirements to the agent; maintenance of minimum levels of liquidity, indebtedness and tangible net worth; limitations on sales and dispositions of the properties collateralizing the Term Loan Agreement and various restrictions on the use of cash generated by the operations of the properties while the Term
Loan is outstanding. The Term Loan Agreement also includes customary events of default, the occurrence of which would allow the Lenders to accelerate payment of all amounts outstanding thereunder. The Term Loan is non-recourse to us and is secured by a lien on the membership interests of TL1 Borrower and the properties and other assets of TL1 Borrower. The assets of TL1 Borrower are the primary source of repayment and interest on the Term Loan, thereby making the cash proceeds received by TL1 Borrower from rent payments and any sales of the underlying properties the primary sources of the payment of interest and principal by TL1 Borrower to the Lenders. We have limited indemnification obligations for wrongful acts taken by TL1 Borrower and RESI TL1 Pledgor, LLC, the sole member of TL1 Borrower, in connection with the secured collateral for the Term Loan.
Management has evaluated the impact of all events subsequent to
March 31, 2017
and through the issuance of these interim condensed consolidated financial statements. Except as described above, we have determined that there were no additional subsequent events requiring adjustment or disclosure in the financial statements.