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ALTISOURCE RESIDENTIAL CORP - 10-Q - Management's discussion and analysis of financial condition and results of operations
[July 22, 2014]

ALTISOURCE RESIDENTIAL CORP - 10-Q - Management's discussion and analysis of financial condition and results of operations


(Edgar Glimpses Via Acquire Media NewsEdge) Overview We are a Maryland REIT focused on acquiring and managing single-family rental properties by acquiring portfolios of sub-performing and non-performing residential mortgage loans throughout the United States. We believe that the events affecting the housing and mortgage market in recent years have created a significant rental demand for single-family properties. These events have also created a large supply of distressed mortgage loans for sale in the market. We therefore believe we have an opportunity to acquire single-family properties through the acquisition of sub-performing and non-performing loan portfolios at attractive valuations. We expect our integrated approach of acquiring sub-performing and non-performing residential mortgage loans and converting them to rental properties will enable us to compete more effectively for attractive investment opportunities.



In 2013, we acquired portfolios consisting of an aggregate of 8,491 residential mortgage loans and 40 REO properties, substantially all of which were non-performing, having an aggregate unpaid principal balance ("UPB") of approximately $2.2 billion and an aggregate market value of underlying properties of $1.8 billion. The aggregate purchase price for these portfolios was $1.2 billion.

During the quarter ended June 30, 2014, we agreed to acquire an aggregate of 4,374 residential mortgage loans, of which 3,269 were non-performing loans and 1,105 were re-performing loans, with an aggregate market value of underlying properties of $1.23 billion. On June 27, 2014, we acquired 1,116 of the non-performing loans and 879 of the re-performing loans with an aggregate market value of underlying properties of $646.4 million for an aggregate purchase price of $379.1 million. On July 10, 2014, we acquired 46 non-performing loans with an aggregate market value of underlying properties of $5.0 million for an aggregate purchase price of $3.7 million. Subject to satisfactory due diligence results and final agreement on terms, we anticipate completing the acquisition of the remainder of these portfolios in the third quarter of 2014. There can be no assurance that we will complete these transactions in whole or in part on a timely basis or at all.


On May 1, 2014, we also completed the acquisition of a portfolio of 664 non-performing mortgage loans and REO properties with an aggregate property value of $126.6 million for an aggregate purchase price of $92.7 million. We had previously agreed to purchase an aggregate of 915 non-performing mortgage loans and REO properties in this portfolio in March 2014. There can be no assurance that we will complete this transaction in whole or in part on a timely basis or at all.

During the six months ended June 30, 2014, our total completed acquisitions consisted of an aggregate of 5,797 residential mortgage loans, substantially all of which were non-performing, 879 re-performing mortgage loans and 190 REO properties having an aggregate UPB of approximately $1.8 billion and an aggregate market value of underlying properties of $1.7 billion. The aggregate purchase price for these acquisitions was $1.1 billion.

During 2013 and the six months ended June 30, 2014, we modified an aggregate of 272 mortgage loans, converted an aggregate of 1,756 mortgage loans into REO properties, disposed of an aggregate of 462 mortgage loans through short sale, refinancing or other liquidation events.

Following the above-referenced transactions, as of June 30, 2014, our portfolio consisted of 12,070 residential mortgage loans, substantially all of which were non-performing, having an aggregate UPB of approximately $3.3 billion and an aggregate market value of underlying properties of $2.9 billion. We also had 1,958 REO properties with an aggregate carrying value of $277.4 million, of which 102 REO properties were rented and 40 were being listed for rent or prepared for rental. We also had 879 re-performing mortgage loans having an aggregate UPB of approximately $207.1 million and an aggregate market value of underlying properties of approximately $271.1 million.

To date, we have acquired our non-performing and re-performing loan portfolios through direct acquisitions from institutions such as banks, HUD and private equity funds.

We are externally managed by AAMC, an asset management company that provides portfolio management and corporate governance services to investment vehicles that own real estate related assets. We conduct substantially all of our operations, and make substantially all of our investments, through our operating partnership and its subsidiaries. One of our subsidiaries is the sole general partner of the operating partnership, and we are the sole limited partner.

17 -------------------------------------------------------------------------------- (table of contents) Observations on Current Market Opportunities We believe there is currently a significant market opportunity to acquire single-family rental properties through the distressed loan channel and expect the supply of non-performing loans, sub-performing loans, properties in foreclosure and REO to remain steady over the next several years as banks and other mortgage lenders seek to dispose of their distressed inventories. We continue to see substantial volumes of distressed residential mortgage loan portfolios offered for sale by banks, HUD and private equity funds, among others. We believe that the distressed loan channel gives us a cost advantage over other acquisition channels such as foreclosure auctions and REO acquisitions, involves less competition and positions us to be selected as the buyer of diverse portfolios of such loans since we are not geographically constrained. Our preferred resolution methodology is to modify the sub-performing and non-performing loans. We believe modification followed by refinancing generates near-term cash flows, provides the highest possible economic outcome for us and is a socially responsible business strategy because it keeps more families in their homes.

Metrics Affecting Our Results Revenues Our revenues primarily consist of the following: i. Net unrealized gains from the conversion of loans to REO. Upon conversion of loans to REO, we mark the properties to the most recent market value (less estimated selling costs in the case of REO properties held for sale). The difference between the carrying value of the asset at the time of conversion and the most recent market value, based on BPOs, is recorded in our statement of operations as net unrealized gain on mortgage loans.

We expect the timeline to convert acquired loans into REO will vary significantly by loan, which could result in fluctuations in our revenue recognition and our operating performance from period to period. The factors that may affect the timelines to foreclose upon a residential mortgage loan include, without limitation, state foreclosure timelines and deferrals associated therewith; unauthorized parties occupying the property; federal, state or local legislative action or initiatives designed to provide homeowners with assistance in avoiding residential mortgage loan foreclosures and continued declines in real estate values and/or sustained high levels of unemployment that increase the number of foreclosures and which place additional pressure and/or delays on the already overburdened judicial and administrative proceedings.

ii. Net unrealized gains from the change in fair value of loans. After our sub-performing and non-performing mortgage loans are acquired, the fair value of each loan is adjusted in each subsequent reporting period as the loan proceeds to a particular resolution (i.e., modification, or conversion to real estate owned). As a loan approaches resolution, the resolution timeline for that loan decreases and costs embedded in the discounted cash flow model for loan servicing, foreclosure costs and property insurance are incurred and removed from future expenses. The shorter resolution timelines and reduced future expenses each increase the fair value of the loan. The increase in the value of the loan is recognized in net unrealized gain on mortgage loans in our consolidated statements of operations The exact nature of resolution will be dependent on a number of factors that are beyond our control, including borrower willingness to pay, property value, availability of refinancing, interest rates, conditions in the financial markets, the regulatory environment and other factors.

iii. Net realized gain on mortgage loans. We record net realized gains, including the reclassification of previously accumulated net unrealized gains, upon the liquidation of a loan which may consist of short sale, third party sale of the underlying property, refinancing or full debt pay-off of the loan. We expect the timeline to liquidate loans will vary significantly by loan, which could result in fluctuations in revenue recognition and operating performance from period to period. Additionally, the proceeds from loan liquidations may vary significantly depending on the resolution methodology. We generally expect to collect proceeds of loan liquidations in cash and, thereafter, have no continuing involvement with the asset.

As a greater number of our REO properties are renovated and deemed suitable for rental, we expect a greater portion of our revenues will be rental revenues. We believe the key variables that will affect our rental revenues over the long term will be average occupancy and rental rates. We anticipate that a majority of our leases of rental properties to tenants will be for a term of two years or less. As these leases permit the residents to leave at the end of the lease term without penalty, we anticipate our rental revenues will be affected by declines in market rents more quickly than if our leases were for longer terms.

Short-term leases may result in high turnover, which involves expenses such as renovation costs and marketing costs, or reduced rental revenues.

18 -------------------------------------------------------------------------------- (table of contents) Although we generally seek to lease the REO properties we acquire on foreclosure, we may determine to sell the properties that do not meet our rental criteria. The real estate market and home prices will determine proceeds from any sale of real estate. In addition, while we seek to track real estate price trends and estimate the effects of those trends on the valuations of our portfolios of residential mortgage loans, future real estate values are subject to influences beyond our control.

Expenses Our expenses primarily consist of loan servicing fees and advances, rental property operating expenses, depreciation and amortization, general and administrative expenses, expense reimbursement, incentive management fees and interest expense. From time to time, expenses also may include impairments of assets. Loan servicing fees and advances are expenses paid to Ocwen to service our acquired loans and for real estate insurance and other corporate advances.

Rental property operating expenses are expenses associated with our ownership and operation of rental properties including expenses such as Altisource's inspection, property preservation and renovation fees, property management fees, turnover costs, 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 in relation to our asset levels since we depreciate our properties on a straight-line basis over a fixed life. Interest expense consists of the costs to borrow money in connection with our debt financing of our portfolios. General and administrative expenses consist of the costs related to the general operation and overall administration of our business, including estimated selling costs of REO held for sale. Expense reimbursement consists primarily of employee salaries of AAMC in direct correlation to the services they provide on our behalf and other personnel costs and corporate overhead. The incentive management fees consist of compensation due to AAMC, based on the amount of cash available for distribution to our stockholders for each period.

Other factors affecting our consolidated results We expect our results of operations to be affected by various factors, many of which are beyond our control, including the following: Acquisitions Our operating results will depend on our ability to source sub-performing and non-performing loans, as well as other residential mortgage loans and REO property assets. We believe that there is currently a large supply of sub-performing and non-performing mortgage loans available to us for acquisition. We believe the available supply provides for a steady acquisition pipeline of assets since we plan on targeting just a small percentage of the population.

Generally, we expect that our residential mortgage loan portfolio may grow at an uneven pace, as opportunities to acquire distressed residential mortgage loans may be irregularly timed and may at times involve large portfolios of loans, and the timing and extent of our success in acquiring such loans cannot be predicted.

Financing Our ability to grow our business is dependent on the availability of adequate financing including additional equity financing, debt financing or both in order to meet our objectives. We intend to leverage our investments with debt, the level of which may vary based upon the particular characteristics of our portfolio and on market conditions. To the extent available at the relevant time, our financing sources may include bank credit facilities, warehouse lines of credit, structured financing arrangements and repurchase agreements, among others. We may also seek to raise additional capital through public or private offerings of debt or equity securities, depending upon market conditions. To qualify as a REIT under the Code, we will need to distribute at least 90% of our taxable income each year to our stockholders. This distribution requirement limits our ability to retain earnings and thereby replenish or increase capital to support our activities.

Our taxable income is triggered primarily by material changes in the economic status of loans, such as a sale of the loan, modification of the loan from a non-performing status to a performing status or conversion of the loan to REO.

We expect to convert our taxable gains on REO dispositions and loan modifications within a short period of time to cash gains, which can be used to fund the distribution requirements from the corresponding taxable gains.

Distribution requirements from our taxable gains on the remaining loans that we expect to convert to rental properties can be funded through a higher advance rate on the increased value when a property becomes rented.

19 -------------------------------------------------------------------------------- (table of contents) Resolution Activities Six months First Second Six months First Second ended June 30, quarter quarter ended June 30, quarter 2013 quarter 2013 2013 2014 2014 2014 Mortgage Loans (1) Beginning balance - 673 - 8,054 11,509 8,054 Acquisitions 684 720 1,404 4,207 1,590 5,797 Dispositions (10 ) (28 ) (38 ) (116 ) (135 ) (251 ) Mortgage loan conversions to REO (1 ) (33 ) (34 ) (637 ) (907 ) (1,544 ) Reversions to mortgage loans (2) - - - 1 13 14 Ending balance 673 1,332 1,332 11,509 12,070 12,070 Modifications - 18 18 81 90 171 Real Estate Owned Beginning balance - 7 - 262 896 262 Acquisitions 6 - 6 - 190 190 Dispositions - - - (2 ) (22 ) (24 ) Mortgage loan conversions to REO 1 33 34 637 907 1,544 Reversions to mortgage loans - - - (1 ) (13 ) (14 ) Ending balance 7 40 40 896 1,958 1,958 Leased - 1 1 35 102 102 Renovations complete - - - 17 40 40 Renovations in process - 5 5 48 140 140 Evaluating strategy/held for sale 7 34 34 796 1,676 1,676 7 40 40 896 1,958 1,958 _____________(1) Excludes mortgage loans held for investment.

(2) Subsequent to the foreclosure sale, we may be notified that the foreclosure sale was invalidated for certain reasons.

In addition, as of June 30, 2014, 291 of our mortgage loans were on trial modification plans, compared to 105 mortgage loans on trial modification plans as of March 31, 2014.

Portfolio size 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. A growing investment portfolio, however, will drive increased expenses including possibly higher servicing fees to Ocwen, property management fees to Altisource and fees payable to AAMC. We may also incur additional interest expense if we incur debt to finance the purchase of our assets.

Existing Portfolio During 2013, we acquired portfolios of residential mortgage loans, substantially all of which were non-performing, consisting of 8,491 mortgage loans and 40 REO properties with approximately $2.2 billion of UPB and approximately $1.8 billion in aggregate market value of underlying properties.

20 -------------------------------------------------------------------------------- (table of contents) On January 2, 2014, we acquired a portfolio of residential mortgage loans, substantially all of which were non-performing, consisting of 650 loans with approximately $121 million of UPB and approximately $94 million in aggregate market value of underlying properties.

On January 28, 2014, we acquired a portfolio of residential mortgage loans, substantially all of which were non-performing, consisting of 66 loans with approximately $7 million of UPB and approximately $7 million in aggregate market value of underlying properties.

On January 31, 2014, we acquired a portfolio of residential mortgage loans, substantially all of which were non-performing, consisting of 3,421 loans with approximately $988 million of UPB and approximately $792 million in aggregate market value of underlying properties.

On February 28, 2014, we acquired a portfolio of residential mortgage loans, substantially all of which were non-performing, consisting of 70 loans with approximately $8 million of UPB and approximately $8 million in aggregate market value of underlying properties.

On May 1, 2014, we acquired a portfolio of residential mortgage loans, substantially all of which were non-performing, consisting of 474 mortgage loans and 190 REO properties with approximately $153 million of UPB and approximately $127 million in aggregate market value of underlying properties.

On June 27, 2014, we acquired a portfolio of residential mortgage loans, substantially all of which were non-performing, consisting of 1,116 mortgage loans with approximately $328 million of UPB and approximately $375 million in aggregate market value of underlying properties.

Throughout this quarterly report, all unpaid principal balance and market value amounts for the portfolios we have acquired are provided as of the applicable "cut-off" date for each transaction unless otherwise indicated. We refer to the assets underlying our completed acquisitions of nonperforming loans through June 30, 2014 as our "Existing Portfolio." As defined in this quarterly report, our "Existing Portfolio" does not include the 879 re-performing mortgage loans with approximately $207.5 million of UPB and approximately $271.1 million in aggregate market value of underlying properties that we purchased on June 27, 2014. Such 879 re-performing loans are considered "Mortgage loans held for investment".

Our sub-performing and non-performing mortgage loans become REO properties when we have obtained legal title to the property upon completion of the foreclosure.

Additionally, some of the portfolios we purchase may, from time to time, contain a small number of residential mortgage loans that have already been converted to REO. As of June 30, 2014, we had 1,958 REO properties.

As of June 30, 2014, 102 of our 1,958 REO properties had been rented and were occupied by tenants, 40 were being listed for rent, 140 were in varying stages of renovation and 192 were being held for sale. With respect to the remaining 1,484 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 which require us to await the expiration of a redemption period before a foreclosure can be finalized. We include these redemption periods in our portfolio pricing which generally reduces the price we pay for the mortgage loans. Once the redemption period expires, we immediately proceed to record the new deed, take possession of the property, activate utilities, and start the inspection process in order to make our final determination. As of June 30, 2013, we had 40 REO properties held for use and were in the process of determining whether these properties would meet our rental profile.

Additionally, there were eight REO properties held for sale. If a REO property meets our rental profile we determine the extent of renovations that are needed to generate an optimal rent and maintain consistency of renovation specifications for future branding. If we determine that the REO property will not meet our rental profile, we list the property for sale, in some instances after renovations are made to optimize the sale proceeds.

21 -------------------------------------------------------------------------------- (table of contents) The following table sets forth a summary of our REO properties as of June 30, 2014 ($ in thousands): Weighted Number of Carrying value average State / District properties (1) age (2) Alabama 14 2,004 21 Arizona 45 7,044 19 Arkansas 14 1,828 28 California 137 35,764 41 Colorado 15 2,699 28 Connecticut 10 2,099 45 Delaware 8 1,348 23 District of Columbia 1 240 103 Florida 362 52,303 23 Georgia 54 6,227 22 Hawaii 1 67 24 Idaho 2 216 35 Illinois 247 35,716 41 Indiana 104 11,029 35 Iowa 4 294 58 Kansas 22 1,776 46 Kentucky 23 2,642 35 Louisiana 14 1,525 28 Maine 8 1,224 120 Maryland 32 5,828 35 Massachusetts 15 2,788 98 Michigan 68 8,176 42 Minnesota 35 5,467 39 Mississippi 2 162 22 Missouri 24 2,410 40 Nebraska 4 527 47 Nevada 14 2,486 18 New Hampshire 4 525 44 New Jersey 18 2,266 83 New Mexico 24 2,799 24 New York 17 2,856 73 North Carolina 160 18,778 19 Ohio 83 9,369 45 Oklahoma 15 1,697 26 Oregon 2 458 25 Pennsylvania 40 5,224 47 Rhode Island 30 3,666 67 South Carolina 41 4,161 21 South Dakota 1 130 97 Tennessee 32 4,204 26 Texas 48 5,690 23 Utah 19 3,298 35 Vermont 3 562 140 Virginia 12 2,411 25 Washington 9 1,407 45 West Virginia 2 382 42 Wisconsin 119 13,605 48 Total 1,958 $ 277,377 35 _____________(1) The carrying value of an asset is based on historical cost which generally consists of the market value at the time of foreclosure sale plus renovation costs, net of any accumulated depreciation.

(2) Weighted average age is based on the age weighted by carrying value for each state.

22 -------------------------------------------------------------------------------- (table of contents) The remainder of our Existing Portfolio consists of a diversified pool of sub-performing and non-performing residential mortgage loans with the underlying properties located across the United States. The aggregate purchase price of our Existing Portfolio for acquisitions completed through June 30, 2014 was 68% of the aggregate market value, as determined by the most recent BPO provided by the applicable seller for each property in the respective portfolio as of its cut-off date. We cannot assure you that the BPOs accurately reflected the actual market value of the related property at the purported time or accurately reflect such market value today.

As of June 30, 2014 the aggregate carrying value of our Existing Portfolio was $2.02 billion. The carrying value of an asset is based on our fair value model.

The significant unobservable inputs used in the fair value measurement of our mortgage loans are discount rates, forecasts of future home prices, alternate resolution probabilities and timelines. Significant changes in any of these inputs in isolation could result in a significant change to the fair value measurement. For a more complete description of the fair value measurements and the factors that may significantly affect the carrying value of our assets, please see Note 4 to our consolidated financial statements.

The table below provides a summary of the sub-performing and non-performing residential mortgage loans in our Existing Portfolio based on the respective UPB and respective market values of underlying properties as of June 30, 2014 ($ in thousands): Market value of Weighted underlying average market Location Loan count UPB properties (1) LTV (2) Alabama 62 $ 10,145 $ 8,616 170.5 % Alaska 4 868 1,293 72.3 % Arizona 227 61,596 52,021 131.7 % Arkansas 68 6,242 5,568 128.8 % California 1783 810,870 783,742 116.3 % Colorado 72 19,064 18,546 110.7 % Connecticut 134 37,384 34,382 136.6 % Delaware 57 10,948 9,449 130.5 % Dist. of Columbia 51 14,787 15,679 108.6 % Florida 2278 550,521 417,929 151.7 % Georgia 346 63,558 50,336 144.4 % Hawaii 53 27,908 28,385 106.6 % Idaho 38 8,325 7,615 131.7 % Illinois 459 112,917 84,246 180.5 % Indiana 306 37,727 34,632 121.5 % Iowa 19 1,863 1,817 114.1 % Kansas 21 2,729 2,594 117.0 % Kentucky 80 9,797 8,639 124.7 % Louisiana 31 5,033 5,396 106.3 % Maine 32 6,334 5,817 126.8 % Maryland 627 172,722 137,227 148.0 % Massachusetts 282 77,669 72,249 125.3 % Michigan 106 17,539 14,685 186.0 % Minnesota 74 16,118 13,716 128.9 % Mississippi 34 4,063 3,667 130.9 % Missouri 114 13,223 10,221 167.9 % Montana 7 1,470 1,386 112.4 % Nebraska 8 1,515 1,155 141.4 % Nevada 241 70,800 51,698 154.4 % New Hampshire 22 5,201 5,120 114.5 % 23 -------------------------------------------------------------------------------- (table of contents) New Jersey 1029 317,598 240,655 159.4 % New Mexico 111 17,133 16,293 112.9 % New York 678 234,353 232,524 118.1 % North Carolina 313 46,645 41,058 127.0 % North Dakota 1 123 138 89.5 % Ohio 145 21,576 17,695 155.8 % Oklahoma 35 4,539 4,576 107.7 % Oregon 112 31,789 29,040 117.2 % Pennsylvania 399 71,209 59,377 137.9 % Puerto Rico 2 220 252 117.6 % Rhode Island 74 17,069 9,146 219.3 % South Carolina 237 44,289 37,094 130.8 % South Dakota 5 721 613 127.3 % Tennessee 105 16,397 15,612 124.0 % Texas 373 50,088 57,748 95.2 % Utah 111 24,040 23,419 108.6 % Vermont 8 1,334 1,274 108.5 % Virginia 140 48,469 45,532 117.9 % Washington 450 129,488 120,494 118.8 % West Virginia 8 1,276 945 138.3 % Wisconsin 97 14,654 10,341 179.6 % Wyoming 1 $ 354 $ 275 128.8 %Total mortgage loans 12,070 $ 3,272,300 $ 2,851,927 135.1 % _____________ (1) Market value is based on the most recent BPO provided to us by the applicable seller for each property in the respective portfolio as of its cut-off date or an updated BPO received since the acquisition was completed. Although we performed diligence on a representative sample of the properties to confirm the accuracy of the BPOs provided to us by the sellers, we cannot assure you that the BPOs set forth in this table accurately reflected the actual market value of the related property at the purported time or accurately reflect such market value today.

(2) Weighted average loan to value (LTV) is based on the loan to value weighted by unpaid principal balance for each state.

Results of operations Three and six months ended June 30, 2014 versus three and six months ended June 30, 2013 Rental revenues Rental revenues increased to $181,000 and $250,000 for the three and six months ended June 30, 2014, respectively. The number of leased properties increased to 102 leased properties at June 30, 2014 from 35 at March 31, 2014. We had no rental revenues for the three and six months ended June 30, 2013. We expect to generate increasing rental revenues for the remainder of 2014 upon renovating, listing and renting additional residential rental properties. Our rental revenues will be dependent primarily on occupancy levels and rental rates for our residential rental properties. Because our lease terms generally are expected to be one to two years, our occupancy levels and rental rates will be highly dependent on localized residential rental markets.

Net unrealized gain on mortgage loans Our net unrealized gains on mortgage loans increased to $105.0 million for the three months ended June 30, 2014 from $7.2 million for the three months ended June 30, 2013. Additionally, our net unrealized gains on mortgage loans increased to $170.2 million for the six months ended June 30, 2014 from $8.3 million for the six months ended June 30, 2013. These increases were primarily related to an increase in the number of loans for which unrealized gains were achieved. The net unrealized gains for the three and six months ended June 30, 2014 and 2013 can be broken down into the following components: 24 -------------------------------------------------------------------------------- (table of contents) • First, we recognized unrealized gains driven by a material change in loan status of $28.5 million and $52.1 million for the three and six months ended June 30, 2014, respectively, compared to $1.4 million and $1.6 million for the three and six months ended June 30, 2013, respectively.

During the three and six months ended June 30, 2014, we converted 907 and 1,544 mortgage loans to REO status, respectively. During the three and six months ended June 30, 2013, we converted 33 and 34 mortgage loans to REO status, respectively. Upon conversion of these mortgage loans to REO, we marked these properties to the most recent market value, less estimated selling costs in the case of REO properties held for sale; and • Second, we recognized $76.5 million and $118.1 million in unrealized gains for the three and six months ended June 30, 2014, respectively, from the net increase in the fair value of loans during the period. During the three and six months ended June 30, 2013, we recognized $5.8 million and $6.7 million, respectively, in unrealized gains from the net increase in the fair value of loans during the period. Adjustments to the fair value of loans after acquisition represent a change in the expected time required to complete the foreclosure process, among other factors. The reduction in time required to complete the foreclosure is driven by the completion of activities in the foreclosure process after we acquired the loans. This reduction in timeline results in reduced carrying costs and reduced future expenses for the loans, each of which increase the fair value of the loans. The increase in the value of the loans is recognized in net unrealized gain on mortgage loans in our consolidated statements of operations.

Through our acquisitions, the number of sub-performing and non-performing loans in our Existing Portfolio has grown from 8,054 loans at December 31, 2013 to 12,070 loans at June 30, 2014. The fair value of mortgage loans is based on a number of factors which are difficult to predict and may be subject to adverse changes in value depending on the financial condition of borrowers, as well as geographic, economic, market and other conditions. Therefore, we may experience unrealized losses on our mortgage loans in the future.

Net realized gain on mortgage loans Net realized gains on mortgage loans increased to $10.8 million for the three months ended June 30, 2014 from $1.7 million for the three months ended June 30, 2013. We disposed of 135 mortgage loans in the three months ended June 30, 2014 and 28 mortgage loans in the three months ended June 30, 2013, primarily from short sales and foreclosure sales.

Net realized gains on mortgage loans increased to $20.1 million for the six months ended June 30, 2014 from $2.1 million for the six months ended June 30, 2013. We disposed of 251 mortgage loans in the six months ended June 30, 2014 and 38 mortgage loans in the six months ended June 30, 2013, primarily from short sales and foreclosure sales.

Residential property operating expenses We incurred $3.3 million and $4.3 million of residential property operating expenses for the three and six months ended June 30, 2014, respectively, compared to $84,000 for both the three and six months ended June 30, 2013. We expect to incur increasing residential property operating expenses in the remainder of 2014 upon converting our mortgage loans to, and owning, residential properties. Our residential property operating expenses will be dependent primarily on residential property taxes and insurance, property management fees and repair and maintenance expenditures.

Real estate depreciation and amortization We incurred $103,000 and $151,000 of real estate depreciation and amortization for the three and six months ended June 30, 2014, respectively, compared to $0 in real estate depreciation and amortization for the three and six months ended June 30, 2013. We expect to incur increasing real estate depreciation and amortization in 2014 upon converting our mortgage loans to, and owning, residential rental properties. Real estate depreciation and amortization are non-cash expenditures which generally are not expected to be indicative of the market value or condition of our residential rental properties.

Mortgage loan servicing costs We incurred $16.9 million of mortgage loan servicing costs, primarily for servicing fees, foreclosure fees and advances of residential property insurance and HOA dues, for the three months ended June 30, 2014 compared to $1.2 million for the three months ended June 30, 2013. For the six months ended June 30, 2014, we incurred $28.4 million of mortgage loan servicing costs compared to $1.6 million for the six months ended June 30, 2013. We incur mortgage loan servicing and foreclosure costs as Ocwen or other interim servicers service our loans and pay for advances relating to property insurance and HOA dues that are made to protect our investment in mortgage loans. Our loan servicing costs could be higher than expected in a given period if the number of non-performing mortgage loans exceeds expected levels.

25 -------------------------------------------------------------------------------- (table of contents) Interest expense We incurred $6.9 million and $12.7 million of interest expense (including amortization of deferred financing costs) due to borrowings under our repurchase agreement for the three and six months ended June 30, 2014, respectively, compared to $0.7 million for both the three and six months ended June 30, 2013.

The interest rate on our financing under our repurchase agreements is subject to change, based on changes in the relevant index. Market interest rates are currently at historically low levels, and any increase in market interest rates will cause our contractual interest expense to increase. We also expect our interest expense to increase as our debt increases to fund and/or leverage our ownership of existing and additional portfolios.

General and administrative expenses General and administrative expenses increased to $5.7 million for the three months ended June 30, 2014 from $0.7 million for the three months ended June 30, 2013, primarily due to an increase in professional fees and acquisition costs related to our equity offering in January 2014 and purchases of mortgage loan portfolios and an increase in estimated selling costs of REO held for sale.

These activities also resulted in an increase in general and administrative expenses for the six months ended June 30, 2014 to $7.1 million from $1.7 million for the six months ended June 30, 2013.

Related party general and administrative We incurred $17.5 million and $30.1 million of related party general and administrative expenses for the three and six month ended June 30, 2014, respectively, compared to $1.2 million and $2.2 million for the three and six months ended June 30, 2013, respectively. The increase in 2014 included $13.7 million and $24.6 million in management incentive fees for the three and six months ended June 30, 2014, respectively, which were due to AAMC under the asset management agreement. We did not have any cash available for distribution for the three and six months ended June 30, 2013, which resulted in AAMC earning no incentive fees for these periods. The remaining increase in related party general and administrative expenses related to increased expense reimbursements to AAMC for salaries and benefits attributable to AAMC's hiring of additional personnel to provide services on behalf of our business.

Liquidity and capital resources As of June 30, 2014, we had cash and cash equivalents of $130.8 million compared to $116.0 million as of December 31, 2013. Our liquidity reflects our ability to meet our current obligations (including our operating expenses and, when applicable, retirement of, and margin calls relating to, our financing arrangements), purchase additional portfolios of sub-performing and non-performing residential mortgage loans when our manager identifies them and make distributions to our stockholders. We are required to distribute at least 90% of our taxable income each year to our stockholders to qualify as a REIT under the Internal Revenue Code. This distribution requirement limits our ability to retain earnings and thereby replenish or increase capital to support our activities.

We were initially funded with $100.0 million from Altisource in connection with our separation on December 21, 2012. Since our separation, our primary sources of liquidity have been proceeds from equity offerings, borrowings under our repurchase agreements, interest we receive from our portfolio of assets, cash generated from loan liquidations and our cash generated from operating results.

Based on our current borrowing capacity and leverage ratio, we believe that these sources of liquidity will be sufficient to enable us to meet anticipated short-term (one year) liquidity requirements, including funding our current investment opportunities, paying expenses on our existing loan portfolio, funding distributions to our stockholders, paying fees to AAMC under the asset management agreement and general corporate expenses.

To date, we have used the proceeds of our equity offerings and the available funding under our repurchase agreements to finance the acquisition of residential mortgage loans and REO properties. These equity offerings and repurchase facilities are described below.

Equity Offerings We have completed three public equity offerings with aggregate net proceeds of approximately $1.1 billion. On May 1, 2013, we completed a public offering of 17,250,000 shares of common stock at $18.75 per share and received net proceeds of approximately $309.5 million. On October 1, 2013, we completed our second public offering of 17,187,000 shares of common stock at $21.00 per share and received net proceeds of $349.4 million. On January 22, 2014, we completed our third public offering of 14,200,000 shares of common stock at $34.00 per share and received net proceeds of approximately $467.6 million.

26 -------------------------------------------------------------------------------- (table of contents) Repurchase Facilities On March 22, 2013, September 12, 2013 and September 23, 2013, we entered into three separate repurchase agreements to finance the acquisition and ownership of residential mortgage loans and REO properties. The maximum aggregate funding available under each of these repurchase agreements was increased at least one time subsequent to entering in to the agreements.

For the repurchase agreement entered into on March 22, 2013, we amended it on April 21, 2014 to initially increase the aggregate maximum borrowing capacity from $100.0 million to $200.0 million. The maturity date of the repurchase agreement was also extended to April 20, 2015 subject to an additional one-year extension with the approval of the lender. On June 11, 2014, we further amended this repurchase agreement to increase the aggregate maximum borrowing capacity from $200.0 million to $375.0 million, subject to certain sublimits, for the period from June 11, 2014 through October 11, 2014. The aggregate borrowing capacity under the repurchase agreement will revert to $200.0 million after October 11, 2014.

The repurchase agreement dated September 12, 2013, as amended on December 18, 2013, has an aggregate funding capacity of $250.0 million and matures on March 11, 2016. This agreement includes a provision that, beginning in the nineteenth month, we will not be able to finance mortgage loans in excess of amounts outstanding under the facility at the end of the eighteenth month.

For the repurchase agreement dated September 23, 2013, we amended it on December 23, 2013 to initially increase the aggregate maximum borrowing capacity from $200.0 million to $400.0 million. On June 25, 2014, we further amended this repurchase agreement to increase the aggregate maximum borrowing capacity from $400.0 million to $1.0 billion, subject to certain sublimits. The maturity date of the repurchase agreement is March 23, 2015. All obligations under the repurchase agreements are fully guaranteed by us. We have the option to extend this agreement for an additional year with no additional funding.

Following the above amendments to our repurchase agreements, the maximum aggregate funding available to us under these repurchase agreements as of June 30, 2014 was $1.7 billion, subject to certain sublimits, eligibility requirements and conditions precedent to each funding. As of June 30, 2014, an aggregate of $1.3 billion was outstanding under our repurchase agreements, and as of July 18, 2014, an aggregate of $1.3 billion was outstanding under our repurchase agreements. All obligations under the repurchase agreements are fully guaranteed by us.

Under the terms of each repurchase agreement, as collateral for the funds we draw thereunder, subject to certain conditions, the operating partnership will sell to the applicable lender equity interests in the Delaware statutory trust subsidiary that owns the applicable underlying mortgage assets on our behalf, or the trust will sell directly such underlying mortgage assets. In the event the lender determines the value of the collateral has decreased, it has the right to initiate a margin call and require us to post additional collateral or to repay a portion of the outstanding borrowings. The price paid by the lender for each underlying mortgage asset we finance under the applicable repurchase agreement is subject to agreement between the lender and us and is based on a percentage of the market value of the underlying mortgage asset and depends on its delinquency status. Our cost of borrowing under the repurchase agreements generally corresponds to LIBOR, or the lender interest at the lender's cost of funds plus a margin. We are also required to pay certain other customary fees, administrative costs and expenses to maintain and administer the repurchase agreements.

The repurchase agreements require us to maintain various financial and other covenants, including maintaining a minimum adjusted tangible net worth, a maximum ratio of indebtedness to adjusted tangible net worth and specified levels of unrestricted cash. In addition, the repurchase agreements contain customary events of default.

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

We expect our existing business strategy will require additional debt and/or equity financing. Our manager continues to explore a variety of financing sources to support our growth, including, but not limited to, debt financing through bank warehouse lines of credit, additional and/or amended repurchase agreements, term financing, securitization transactions and additional debt or equity offerings. However, there can be no assurance as to how much additional financing capacity such efforts will produce, what form the financing will take or that such efforts will be successful. If we are unable to renew, replace or expand our 27 -------------------------------------------------------------------------------- (table of contents) sources of financing, our business, financial condition, liquidity and results of operations may be materially and adversely affected.

The following table sets forth data with respect to our repurchase agreements as of and for the three months ended June 30, 2014, June 30, 2013 and December 31, 2013 ($ in thousands): Three months Three months ended ended June 30, Three months ended June 30, 2014 2013 December 31, 2013 Balance at end of period $ 1,271,483 $ 472 $ 602,382 Maximum month-end balance outstanding during the period 1,271,483 79,512 602,382 Weighted average quarterly balance 810,833 41,749 364,665 The repurchase agreements provide for the lenders to finance our portfolio at advance rates (or purchase prices) ranging from 40% to 75% of the "asset value" of the mortgage loans and REO properties. Under the repurchase agreements, the "asset value" generally is an amount that is based on the market value of the mortgage loan or REO property. We believe these are typical market terms which are designed to provide protection for the lender to collateralize its advances to us in the event the collateral declines in value. Under each of the repurchase agreements, if the carrying value of the collateral declines beyond certain limits, we would have to either (a) provide additional collateral or (b) repurchase certain assets under the agreement to maintain the applicable advance rate.

The increase in amounts outstanding under our repurchase agreements from December 31, 2013 to June 30, 2014 relate primarily to funds we drew down under a repurchase facility in January 2014, April 2014 and June 2014 to complete our acquisitions of portfolios of mortgage loans and REO properties. Our overall advance rate under the repurchase agreements declined slightly from 59.9% at December 31, 2013 to 58.9% at June 30, 2014, although the aggregate dollar amount of funding increased. We do not collateralize any of our repurchase facilities with cash.

Cash flows We report and analyze our cash flows based on operating activities, investing activities and financing activities. The following table sets forth the changes in our cash flows ($ in thousands): Six months ended June Six months ended June 30, 2014 30, 2013 Change Net cash used in operating activities $ (44,544 ) (4,605 ) $ (39,939 ) Net cash used in investing activities (1,022,725 ) (181,545 ) (841,180 ) Net cash provided by financing activities 1,082,039 309,460 772,579 Total cash flows $ 14,770 $ 123,310 $ (108,540 ) The change in net cash used in operating activities for the six months ended June 30, 2014 and 2013 consisted primarily of gains on our mortgage loans offset by related party mortgage servicing costs including net advances of taxes and insurance on delinquent loans, interest expense, professional fees, acquisition costs and expense reimbursements to our manager for salaries and benefits.

The change in net cash used in investing activities for the six months ended June 30, 2014 consisted primarily of investments in non-performing and re-performing loan portfolios, partly offset by proceeds from the disposition of loans. The change in net cash used in investing activities for the six months ended June 30, 2013 consisted primarily of investments in non-performing loan portfolios. During periods in which we purchase a significant number of mortgage loans and conduct substantial renovations of residential real estate, our cash used in investing activities is generally expected to exceed cash provided by investing activities.

The change in net cash provided by financing activities for the six months ended June 30, 2014 consisted primarily of the net proceeds from the issuance of common stock, payment of dividends and net borrowings under repurchase agreements. The change in net cash provided by financing activities for the six months ended June 30, 2013 consisted primarily of the net proceeds from the issuance of common stock and net borrowings under repurchase agreements. Net cash related to financing activities will generally consist of the incurrence by us of debt, repayment of debt previously incurred by us, payment of dividends and issuance of common stock.

28 -------------------------------------------------------------------------------- (table of contents) Off-balance sheet arrangements We have no off-balance sheet arrangements as of June 30, 2014.

Recent accounting pronouncements In January 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-04, Troubled Debt Restructurings by Creditors. It provides that a repossession or foreclosure has occurred, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendment requires disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in mortgage loans collateralized by residential real estate property that are in the process of foreclosure. The amended guidance may be applied using either a prospective transition method or a modified retrospective transition method and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014, with early adoption permitted. We do not expect this amendment to have a significant effect on our financial position or results of operations since our accounting policies and disclosures are currently consistent with the requirements set forth in the amendment.

In May 2014, the FASB issued ASU 2014-09 Revenue from Contracts with Customers.

ASU 2014-09 is a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. ASU 2014-09 may be applied using either a full retrospective or a modified retrospective approach and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption is not permitted. We are currently evaluating the impact of this amendment on our financial position and results of operations.

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. 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 become known.

We consider our critical accounting judgments to be those used in the determination of the reported amounts and disclosure related to the following: Income taxes We believe that we have complied and will continue to comply with the provisions of the federal income tax code applicable to REITs beginning for the year ended December 31, 2013 and have elected REIT status with the filing of our 2013 income tax return. Accordingly, we believe that we will not be subject to federal income tax beginning in the year ended December 31, 2013 on the portion of our REIT taxable income that is distributed to our stockholders as long as certain asset, income and share ownership tests are met. If after electing to be taxed as a REIT, we subsequently fail to qualify as a REIT in any taxable year, we 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.

Our TRSs 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 are recognized for the future tax consequences attributable to differences between the carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are 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 is recognized in income in the period in which the change occurs. Subject to our judgment, we reduce a deferred tax asset by a valuation allowance if it is "more likely than not" 29 -------------------------------------------------------------------------------- (table of contents) that some or all of the deferred tax asset will not be realized. Tax laws are complex and subject to different interpretations by the taxpayer and respective governmental taxing authorities. Significant judgment is required in evaluating tax positions, and we recognize tax benefits only if it is more likely than not that a tax position will be sustained upon examination by the appropriate taxing authority.

Mortgage loans Upon the acquisition of sub-performing and non-performing mortgage loans, we record the assets at fair value which is the purchase price we paid for the loans on the acquisition date. The sub-performing and non-performing mortgage loans are subsequently accounted for at fair value under the fair value option election with unrealized gains and losses recorded in current period earnings.

We have concluded that accounting for these sub-performing and non-performing mortgage loans at fair value timely reflect the results of our investment performance.

We determine the purchase price for our sub-performing and non-performing mortgage loans at the time of acquisition by using a discounted cash flow valuation model and considering alternate loan resolution probabilities including modification, liquidation or conversion to rental property. Observable inputs to the model include current interest rates, loan amounts, status of payments and property types. Unobservable inputs to the model include discount rates, forecast of future home prices, alternate loan resolution probabilities, resolution timelines and the value of underlying properties.

After our sub-performing and non-performing mortgage loans are acquired, the fair value of each loan is adjusted in each subsequent reporting period as the loan proceeds to a particular resolution (i.e., modification, or conversion to real estate owned). As a loan approaches resolution, the resolution timeline for that loan decreases and costs embedded in the discounted cash flow model for loan servicing, foreclosure costs and property insurance are incurred and removed from future expenses. The shorter resolution timelines and reduced future expenses each increase the fair value of the loan. The increase in the value of the loan is recognized in net unrealized gain on mortgage loans in our consolidated statements of operations.

We also recognize unrealized gains and losses in the fair value of the sub-performing and non-performing loans in each reporting period when our mortgage loans are transferred to real estate owned. The transfer to real estate owned occurs when we have obtained legal title to the property upon completion of the foreclosure. The fair value of these assets at the time of transfer to real estate owned is estimated using BPOs. BPOs are subject to judgments of a particular broker formed by visiting a property, assessing general home values in an area, reviewing comparable listings and reviewing comparable completed sales. These judgments may vary among brokers and may fluctuate over time based on housing market activities and the influx of additional comparable listings and sales. Our results could be materially and adversely affected if the judgments used by a broker prove to be incorrect or inaccurate.

AAMC's capital markets group determines the fair value of sub-performing and non-performing mortgage loans monthly and has developed procedures and controls governing the valuation process relating to these assets. The capital markets group reports to our Investment Committee, a committee of our Chief Executive Officer and our Chairman that oversees and approves the valuations. The capital markets group also monitors the valuation model for performance against actual results which is reported to the Investment Committee and used to continuously improve the model.

Loans held for investment Loans held for investment consist of re-performing residential mortgage loans acquired from others. We do not originate loans. Each acquired loan is evaluated at acquisition to determine if the loan is impaired.

Acquired distressed re-performing residential mortgage loans that have evidence of deteriorated credit quality at the time of acquisition are accounted for in accordance with the provisions of ASC Topic 310-30, Receivables - Loans and Debt Securities Acquired with Deteriorated Credit Quality. Under ASC 310-30, acquired loans may be aggregated and accounted for as a pool of loans if the loans being aggregated have common risk characteristics. A pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows. Under ASC Topic 310-30, we estimate cash flows expected to be collected, adjusted for expected prepayments and defaults. At each balance sheet date, we evaluate the pool of loans to determine whether the present value derived using the effective interest rate has decreased and, if so, recognize a provision for loan loss. For any significant increases in cash flows expected to be collected, we adjust the amount of accretable yield recognized on a prospective basis over the pool's remaining life.

Real estate impairment 30 -------------------------------------------------------------------------------- (table of contents) With respect to residential rental properties classified as held for use, we perform an impairment analysis using estimated cash flows if events or changes in circumstances indicate that the carrying value may be impaired, such as prolonged vacancy, identification of materially adverse legal or environmental factors, changes in expected ownership period or a decline in market value to an amount less than cost. This analysis is performed at the property level. These cash flows are estimated based on a number of assumptions that are subject to economic and market uncertainties including, among others, demand for rental properties, competition for customers, changes in market rental rates, costs to operate each property and expected ownership periods.

If the carrying amount of a held for use asset exceeds the sum of its undiscounted future operating and residual cash flows, an impairment loss is recorded for the difference between estimated fair value of the asset and the carrying amount. We 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.

Residential properties, net Upon the acquisition of real estate, generally through completion of foreclosure, we record the residential property at fair value as of the acquisition date as a component of real estate owned based on information obtained from a BPO, a full appraisal or the price given in a current contract of sale of the property. After a short evaluation period, we perform property renovations to maximize the value of the property for our rental strategy. Such expenditures are part of our initial investment in a property and, therefore, are classified as investing activities in our consolidated statement of cash flows. Subsequently, the residential property, including any renovations that improve or extend the life of the asset, are accounted for at cost. The cost basis is depreciated using the straight-line method over an estimated useful life of three to 27.5 years based on the nature of the components. Interest and other carrying costs incurred during the renovation period are capitalized until the property is ready for its intended use. Expenditures for ordinary maintenance and repairs are charged to expense as incurred.

Expenditures directly related to successful leasing efforts such as lease commissions are included in deferred leasing and financing costs, net and are stated at amortized cost. Such expenditures are part of our operations and, therefore, are classified as operating activities in our consolidated statement of cash flows. Capitalized leasing costs are amortized on a straight-line basis over the lease term of the respective leases which generally are from one to two years.

Residential properties are classified either as held for use or held for sale.

Residential properties are classified as real estate and related assets held for sale when sale of the assets has been formally approved and is expected to occur in the next twelve months. We record residential properties held for sale at the lower of the carrying amount or estimated fair value. Fair value of assets held for sale is equal to the estimated or contracted sales price with a potential buyer less costs to sell. The impairment loss is the amount by which the carrying amount exceeds the estimated fair value.

Rental revenues Minimum contractual rents from leases are recognized on a straight-line basis over the terms of the leases in rental revenues. Therefore, actual amounts billed in accordance with the lease during any given period may be higher or lower than the amount of rental revenue recognized for the period. Straight-line rental revenue commences when the customer takes control of the leased premises.

Deferred rents receivable, net represents the amount by which straight-line rental revenue exceeds rents currently billed in accordance with lease agreements. Contingent rental revenue is accrued when the contingency is removed. Termination fee income is recognized when the customer has vacated the rental property, the amount of the fee is determinable and collectability is reasonably assured.

Rents receivable, net and deferred rents receivable, net are reduced by an allowance for amounts that become uncollectible. We regularly evaluate the adequacy of our allowance for doubtful accounts. The evaluation takes into consideration the aging of accounts receivable, our analysis of customer personal profile and review of past due account balances. Rents receivable, net and deferred rents receivable, net are written-off when we have deemed that the amounts are uncollectible.

Non-GAAP measures - Estimated REIT taxable income Estimated REIT taxable income is a measure that we use in connection with monitoring our compliance with certain REIT requirements. Estimated REIT taxable income should not be considered as an alternative to net income or net income per share as indicators of our operating performance.

31 -------------------------------------------------------------------------------- (table of contents) The following table is a reconciliation of U.S. GAAP net income to estimated REIT taxable income (unaudited, $ in thousands): U.S. GAAP Adjustments Tax Three months ended June 30, Three months ended June Three months ended 2014 30, 2014 June 30, 2014 Rental revenues and net gain on investments: Rental revenues $ 181 $ - $ 181 Net unrealized gain on mortgage loans 105,042 (58,655 ) 46,387 Net realized gain on mortgage loans 10,819 (2,283 ) 8,536 Interest income, advance recoveries and other - 1,855 1,855 Total revenues 116,042 (59,083 ) 56,959 Expenses: Residential property operating expenses 3,253 - 3,253 Real estate depreciation and amortization 103 (7 ) 96 Mortgage loan servicing costs 16,925 (14,581 ) 2,344 Interest expense 6,945 - 6,945 General and administrative 5,687 (2,774 ) 2,913 Related party general and administrative 17,467 (841 ) 16,626 Total expenses 50,380 (18,203 ) 32,177 Other income 1,698 - 1,698 Income before income taxes $ 67,360 $ (40,880 ) $ 26,480 Six months ended Six months ended June Six months ended June 30, 2014 30, 2014 June 30, 2014 Rental revenues and net gain on investments: Rental revenues $ 250 $ - $ 250 Net unrealized gain on mortgage loans 170,172 (84,194 ) 85,978 Net realized gain on mortgage loans 20,140 (3,405 ) 16,735 Interest income, advance recoveries and other - 2,854 2,854 Total revenues 190,562 (84,745 ) 105,817 Expenses: Residential property operating expenses 4,303 - 4,303 Real estate depreciation and amortization 151 (39 ) 112 Mortgage loan servicing costs 28,362 (23,203 ) 5,159 Interest expense 12,653 - 12,653 General and administrative 7,079 (3,202 ) 3,877 Related party general and administrative 30,099 (867 ) 29,232 Total expenses 82,647 (27,311 ) 55,336 Other income 1,806 - 1,806 Income before income taxes $ 109,721 $ (57,434 ) $ 52,287

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