Sifting through the opposing rulings on the legality of the subsidies on the federal health insurance exchange.
We were incorporated in Maryland on July 19, 2012. Our primary business is to
acquire, own and manage single-family rental properties throughout the United
States that meet our investment criteria. We currently intend to acquire
single-family rental assets primarily through the acquisition of sub-performing
and non-performing loan portfolios.
Our objective is to provide attractive risk-adjusted returns to our investors
over the long-term, primarily through dividends and secondarily through capital
appreciation. We believe that the events affecting the housing and mortgage
market in recent years create an opportunity to acquire single-family properties
for rental purposes at valuations that meet our investment objectives. We
believe that our ability to effectively acquire properties through the
non-performing loan channel and to efficiently manage a widely dispersed
portfolio of single-family properties will provide us with a competitive
advantage in pursuing our strategy.
We conduct substantially all of our activities through our operating
partnership. The operating partnership was organized on June 7, 2012. We own
100% of the operating partnership's general partner, and as of December 31,
2012, we owned 100% of the outstanding partnership interest in our operating
We are managed by AAMC. We 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 of
non-performing loans, single-family properties and other assets. AAMC was formed
on March 15, 2012 and was spun-off from Altisource concurrently with our
separation from Altisource.
Our business objective is to provide attractive returns to our shareholders
primarily through dividends. We believe we can accomplish this with the
• We expect to acquire single-family rental assets primarily through our
acquisition of non-performing loan portfolios. We believe that the
non-performing loan acquisition channel will give us a cost advantage over
other acquisition channels such as foreclosure auctions and other
real-estate owned, or "REO," acquisitions because:
? we believe we will be able to purchase our single-family
assets at a
lower price because there are fewer participants in the
non-performing loan marketplace leading to a higher discount rate
? we believe we will be able to purchase non-performing loans at a
lower price because the seller does not have to pay the broker
commissions and closing costs of up to 10% of gross proceeds that
typically are incurred when selling REO after foreclosure.
• We expect to generate near-term cash-flow through the modification of our
non-performing loans and subsequently refinance them at or near the value
of the underlying property without waiting for entire loan portfolios to
reach stabilized rental state.
• We expect to operate and manage single-family rental properties at a
predictable and attractive cost structure after converting non-performing
loans to rental properties due to the competitive property management fees
offered to us under our services agreement with Altisource:
? our management of single-family rental properties using
nationwide vendor network is not dependent upon scale. Unlike many
of our competitors, we do not require a critical size of
single-family rental assets in a geographic area to attain operating
? non-performing loan pools typically contain properties that are
geographically dispersed requiring a cost-effective nationwide
property management system. Because of our arrangement with
Altisource, we are positioned to acquire properties throughout the
United States allowing us to bid on large distributed
that geographically constrained competitors cannot.
• We expect to generate a stable cash flow stream through our preferred
investment in a title insurance and reinsurance business that is
positioned to perform the title search and insurance services for our
network of single-family assets.
As further described in "Item 1. Business." we believe that Ocwen's mortgage
servicing experience will enable us to shorten non-performing loan resolution
timelines by (1) converting a portion of the non-performing loan portfolio to
performing status and (2) managing the foreclosure process and timelines with
respect to the remainder of the portfolio. We also expect that our 15-year
master services agreement with Altisource for construction management, leasing
and property management services will allow us to operate single-family rental
assets at a lower cost than our competitors due to Altisource's established real
property management experience and centralized vendor management model. Further,
because of Altisource's widely-distributed established vendor model, we can
acquire assets nationwide. We believe this will enable us to competitively bid
on large sub-performing or non-performing mortgage portfolios with assets
dispersed throughout the United States.
We expect our results of operations to be affected by various factors, many of
which are beyond our control. Generally, we expect that our mortgage loan
portfolio may grow at an uneven pace, as opportunities to acquire distressed
mortgage loans may be irregularly timed and may involve large portfolios of
loans, and the timing and extent of our success in acquiring such loans cannot
Our operating results will depend heavily on sourcing sub-performing and
non-performing loans. As a result of the economic crisis in 2008 that continues
through today, we believe that there is currently a large supply of
sub-performing and non-performing loans available to us for acquisition. A
recent study estimates that the average pre-REO delinquency levels that are in
excess of levels typically experienced in a balanced market, known as shadow
inventory, were approximately 5.1 million units over the past four years. The
available amount of shadow inventory provides for a steady acquisition pipeline
of assets since we plan on targeting just a small percentage of the population.
Our ability to grow our business by acquiring sub-performing and non-performing
loans is dependent on the availability of adequate financing including
additional equity financing, debt financing or both in order to meet our
objectives. As a REIT, we generally will need to distribute at least 90% of our
taxable income each year (subject to certain adjustments) to our shareholders to
qualify as a REIT under the Code. This distribution requirement limits our
ability to retain earnings and thereby replenish or increase capital to support
our activities. Because our decision to issue equity through accessing the
capital markets or debt through entering into credit agreements will depend on
market conditions and other factors beyond our control, we cannot predict or
estimate our future capital structure.
Because we believe that the majority of acquired loans will be converted into
rental property, the key components that will affect our rental and other
revenues over the long-term will be average occupancy and rental rates. We
believe that demand for single-family rental assets will either increase or at
least remain relatively constant in the future. In response to the economic
crisis, the origination of subprime mortgage loans has dramatically declined. In
addition, lenders have increased their credit standards for originating new
loans. Furthermore, a significant number of families cannot obtain a new
mortgage due to impairment of credit history caused by foreclosure on past loans
or the lack of savings to make a down payment. All of the above factors and the
shift in demographics point towards a robust demand for single family rentals in
Our expenses primarily will consist of loan servicing fees, rental property
operating expenses, depreciation and amortization, general and administrative
expenses, expense reimbursement and incentive management fees and interest
expense. From time to time, expenses also may include impairments of assets.
Loan servicing fees are expenses paid to Ocwen to service our acquired loans.
Rental property operating expenses are expenses associated with our ownership
and operation of rental properties and include expenses that are either impacted
by to occupancy levels, such as utilities and turnover costs, and expenses that
do not vary based on occupancy, such as property taxes, insurance and HOA dues.
Depreciation and amortization is a non-cash expense associated with the
ownership of real estate and generally remains relatively consistent each year
at an asset level since we depreciate our properties on a straight-line basis
over a fixed life. The general and administrative expenses consist of those
costs related to the general operation and overall administration of the
business. The expense reimbursement consists primarily of management and
employee salaries and other personnel costs and corporate overhead. The
incentive management fee consists of additional compensation due to AAMC should
we achieve certain levels cash available for distribution. The interest expense
consists of the costs to borrow money.
Other Factors Influencing Our Results
The way a non-performing loan is resolved will impact the amount and timing of
revenue we will receive. The exact nature of resolution will be dependent on a
number of factors that are beyond our control including borrower willingness,
property value, availability of refinancing, interest rates, conditions in the
financial markets, regulatory environment and other factors. In addition, we
expect that our real estate assets would decline in value in a rising interest
rate environment and that our net income could decline in a rising interest rate
environment to the extent such real estate assets are financed with floating
rate debt and there is no accompanying increase in rental yield.
The state of the real estate market and home prices will determine proceeds from
sale of real estate acquired in settlement of loans. While we make extensive
efforts at anticipating real estate price trends and estimate effect of those
trends on the valuations of our portfolios of mortgage loans, future real estate
values are subject to influences beyond our control. Generally, rising home
prices are expected to positively affect our results of real estate acquired in
settlement of loans. Conversely, declining real estate prices are expected to
negatively affect our results of real estate acquired in settlement of loans.
The size of our investment portfolio will also be a key revenue driver.
Generally, as the size of our investment portfolio grows, the amount of revenue
we expect to generate will increase. The larger investment portfolio, however,
will drive increased expenses including servicing fees to Ocwen, property
management fees to Altisource and related fees payable to AAMC. We may also
incur additional interest expense to finance the purchase of our assets.
Completion of Spin-Off
As of the close of business on December 21, 2012, we completed our spin-off from
Altisource. Our shares began "regular way" trading on the New York Stock
Exchange under the ticker symbol "RESI" on December 24, 2012. The spin-off was
treated as a taxable pro rata distribution by Altisource of all of our
outstanding shares of Class B Common Stock to the shareholders of record of
Altisource as of the record date, December 17, 2012. The shareholders of
Altisource received one share of our Class B common stock for every three shares
of Altisource common stock held and cash in lieu of fractional shares.
Results of Operations
The following sets forth discussion of our results of operations from inception
on June 7, 2012, which we refer to as "inception," through December 31, 2012.
We have generated no rental revenues for the period from inception to December
31, 2012. We expect to generate rental revenues in 2013 upon acquisition of
non-performing loans and conversion to single-family rental properties.
Gains on Acquisition of Property
We have generated no gains on acquisition of property for the period from
inception to December 31, 2012. We expect to generate gains from acquisition of
property in 2013 upon acquisition of non-performing loans and conversion to
single-family rental properties.
Gains on Repayment of Non-Performing Loans
We have generated no gains on repayment of non-performing loans for the period
from inception to December 31, 2012. We expect to generate gains on repayment of
non-performing loans in 2013 through short sales or through modification and
refinancing of non-performing loans.
Gains on Disposition of Property
We generated no gains on disposition of property for the period from inception
to December 31, 2012. We expect to generate gains on disposition of property in
2013 through liquidation of the underlying collateral of non-performing loans
after completion of foreclosure.
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Loan Servicing Fees
We have incurred no loan servicing fees for the period from inception to
December 31, 2012. We expect to incur loan servicing fees in 2013 upon
acquisition of non-performing loans.
Rental Property Operating Expenses
We have incurred no rental property operating expenses for the period from
inception to December 31, 2012. We expect to incur rental property operating
expenses in 2013 upon acquisition of non-performing loans and conversion to
single-family rental properties.
Real Estate Depreciation and Amortization
We have incurred no real estate depreciation and amortization for the period
from inception to December 31, 2012. We expect to incur real estate depreciation
and amortization 2013 upon acquisition of non-performing loans and conversion to
single-family rental properties.
General and Administrative Expenses
Our general and administrative expenses consist of those costs related to the
general operation and overall administration of our business from inception to
December 31, 2012. We expect our general and administrative expenses to increase
in 2013 as we increase operations.
Our expense reimbursement consists of direct and indirect costs incurred by AAMC
on our behalf since inception and primarily includes compensation costs. We
expect our expense reimbursement to increase in 2013 as we increase operations.
Incentive Management Fee
We have incurred no incentive management fee from inception to December 31,
2012. We expect to incur incentive management fees in 2013 as we generate cash
available for distribution, as contractually defined.
Segment Results of Operations
We currently operate under one reportable segment.
Liquidity and Capital Resources
In conjunction with our separation, we received a capital contribution from
Altisource of $100 million which is unrestricted for our use. We intend to use
the proceeds from this capital contribution to invest in sub-performing and
non-performing loans, renovate acquired real estate, fund our operating costs
and fund our preferred investment in NewSource.
As a REIT, we generally will need to distribute at least 90% of our taxable
income each year (subject to certain adjustments) to our shareholders to qualify
as a REIT under the Code. This distribution requirement limits our ability to
retain earnings and thereby replenish or increase capital to support our
activities. As a result, in the event we decide to grow our business, we will
evaluate a number of potential capital raising alternatives including the
issuance and sale of shares of Class A common stock, the issuance and sale of
debt securities and entering into credit facilities with banks or other lending
institutions. Because our decision to issue equity through accessing the capital
markets or debt through entering into credit agreements will depend on market
conditions and other factors beyond our control, we cannot predict or estimate
our future capital structure.
Our primary cash flows to date have been the capital contribution we received
from Altisource in conjunction with the separation.
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The following table sets forth our capitalization (in thousands, except per
December 31, 2012
Class B Common Stock Outstanding 7,810,708
Per Share Stock Price $ 15.84
Total Capitalization $ 123,722
Recent Financing Activity
On December 21, 2012 we issued 7.8 million shares of Class B common stock in
connection with our separation from Altisource. Altisource contributed to us
total cash of $100 million. The proceeds from the capital contribution were
contributed by us to the operating partnership for 100% of the then outstanding
preferred interest in the operating partnership. We plan to use the contributed
cash for working capital purposes and for the funding of our acquisition and
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements as of December 31, 2012.
The following table sets forth a summary regarding our known contractual
obligations including required interest payments, if any, as of December 31,
2012 (in thousands):
Amounts Due During Years
Ending December 31,
Total 2013 2014 2015 2016 2017 Thereafter
NewSource Subscription $ 18,000 $ 18,000 $ - $ -
$ - $ - $ -
On December 21, 2012, we entered into a subscription agreement to invest $18.0
million in the non-voting preferred stock of NewSource.
Recent Accounting Pronouncements
Critical Accounting Judgments
Accounting standards require information in financial statements about the risks
and uncertainties inherent in significant estimates, and the application of
generally accepted accounting principles involves the exercise of varying
degrees of judgment. Certain amounts included in or affecting our financial
statements and related disclosures must be estimated requiring us to make
certain assumptions with respect to values or conditions that cannot be known
with certainty at the time our Consolidated Financial Statements are prepared.
These estimates and assumptions affect the amounts we report for our assets and
liabilities and our revenues and expenses during the reporting period and our
disclosure of contingent assets and liabilities at the date of our Consolidated
Financial Statements. We routinely evaluate these estimates utilizing historical
experience, consultation with experts and other methods we consider reasonable
in the particular circumstances. Nevertheless, actual results may differ
significantly from our estimates and any effects on our business, financial
position or results of operations resulting from revisions to these estimates
are recorded in the period in which the facts that give rise to the revision
We consider our critical accounting judgments to be those used in the
determination of the reported amount and disclosure related to the following:
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We believe that we will comply with the provisions of the Code applicable to
REITs beginning for the year ended December 31, 2013. Accordingly, we believe
that we will not be subject to federal income beginning the year ended December
31, 2013 on that portion of our REIT taxable income that is distributed to our
shareholders as long as certain asset, income and share ownership tests are met.
As a REIT, we generally will not be subject to federal income tax to the extent
we distribute our REIT taxable income to our shareholders. If we fail to qualify
as a REIT in any taxable year, we will be subject to federal income tax on our
REIT taxable income at regular corporate income tax rates and generally will not
be permitted to qualify for treatment as a REIT for federal income tax purposes
for the four taxable years following the year during which qualification is lost
unless the IRS grants us relief under certain statutory provisions. Such an
event could materially adversely affect our net income and net cash available
for distribution to shareholders.
Our taxable REIT subsidiaries, if any, will be subject to federal and state
income taxes. Income taxes are provided for using the asset and liability
method. Deferred tax assets and liabilities will be recognized for the future
tax consequences attributable to differences between the Consolidated Financial
Statements carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities will be measured using
enacted rates expected to apply to taxable income in the years in which
management expects those temporary differences to be recovered or settled. The
effect on deferred taxes of a change in tax rates will be recognized in income
in the period in which the change occurs. Subject to our judgment, a valuation
allowance will be established if realization of deferred tax assets is not more
likely than not. We will recognize tax benefits only if it is more likely than
not that the tax position will be sustained upon examination by the appropriate
taxing authority. A tax position that meets this standard will be recognized as
the largest amount that exceeds 50 percent likelihood of being realized upon
Non-GAAP Measures - FFO and NOI
We believe that funds from operations, which we refer to as "FFO," and FFO per
share are important indicators of the performance of any equity REIT. Because
FFO and FFO per share calculations exclude such factors as depreciation,
amortization and impairment of real estate assets and gains or losses from sales
of operating real estate assets which can vary among owners of identical assets
in similar conditions based on historical cost accounting and useful life
estimates, they facilitate comparisons of operating performance between periods
and between other REITs. We believe that historical cost accounting for real
estate assets in accordance with GAAP implicitly assumes that the value of real
estate assets diminishes predictably over time. Since real estate values have
historically risen or fallen with market conditions, many industry investors and
analysts have considered the presentation of operating results for real estate
companies that use historical cost accounting to be insufficient on a standalone
basis. As a result, we believe that the use of FFO and FFO per share, together
with the required GAAP presentations, provide a more complete understanding of
our performance relative to our competitors and a more informed and appropriate
basis on which to make decisions involving operating, financing and investing
FFO and FFO per share are non-GAAP financial measures and, therefore, do not
represent net income or net income per share as defined by GAAP. Net income and
net income per share as defined by GAAP are the most relevant measures in
determining our operating performance because FFO and FFO per share include
adjustments that investors may deem subjective, such as adding back expenses
such as depreciation, amortization and impairment. Furthermore, FFO per share
does not depict the amount that accrues directly to the stockholders' benefit.
Accordingly, FFO and FFO per share should never be considered as alternatives to
net income or net income per share as indicators of our operating performance.
Our presentation of FFO is consistent with FFO as defined by the National
Association of Real Estate Investment Trusts, which we refer to as the "NAREIT,"
which is calculated as follows:
• net income/(loss) computed in accordance with GAAP;
• less dividends to holders of Preferred Stock and less excess of Preferred
Stock redemption cost over carrying value;
• less net income attributable to noncontrolling interests in consolidated
• plus depreciation and amortization of depreciable operating properties;
• less gains or plus losses from sales of depreciable operating properties,
plus impairments on depreciable operating properties and excluding items
that are classified as extraordinary items under GAAP;
• plus or minus adjustments for unconsolidated partnerships and joint
ventures (to reflect FFO on the same basis) and
• plus or minus adjustments for depreciation and amortization and
gains/(losses) on sales of depreciable operating properties, plus
impairments on depreciable operating properties and noncontrolling
interests in consolidated affiliates related to discontinued operations.
In calculating FFO, we add back net income attributable to noncontrolling
interests in the operating partnership, if any which we believe is consistent
with standard industry practice for REITs that operate through an UPREIT
For the period from inception to December 31, 2012, there were no adjustments
for FFO and FFO per share to net loss and net loss per share, respectively.
In addition, we believe that net operating income from continuing operations,
which we refer to as "NOI," and same property NOI are useful supplemental
measures of our property operating performance because such metrics provide a
performance measure of the revenues and expenses directly involved in owning
real estate assets and provides a perspective not immediately apparent from net
income or FFO. We define NOI as rental revenues from continuing operations less
rental property expenses from continuing operations. We define cash NOI as NOI
less straight line rent and lease termination fees. We define our same property
population as those properties owned for the entirety of the comparative
reporting periods. Other REITs may use different methodologies to calculate NOI
and same property NOI than we do.
For the period from inception to December 31, 2012, our NOI and same property
NOI were not meaningful.
To the extent we provide, FFO, FFO per share and NOI in any future reports, we
will provide a reconciliation of these non-GAAP financial measures to GAAP net