EQUITY AND EARNINGS PER SHARE

Equity and Dividends

On April 26, 2013, Drive Shack announced that its board of directors had formally declared the distribution of shares of common stock of New Residential, a then wholly owned subsidiary of Drive Shack. Following the spin-off, New Residential is an independent, publicly-traded REIT primarily focused on investing in residential mortgage related assets. The spin-off was completed on May 15, 2013 and New Residential began trading on the New York Stock Exchange under the symbol “NRZ.” The spin-off transaction was effected as a taxable pro rata distribution by Drive Shack of all the outstanding shares of common stock of New Residential to the stockholders of record of Drive Shack as of May 6, 2013. The stockholders of Drive Shack as of the record date received one share of New Residential common stock for each share of Drive Shack common stock held.

New Residential’s certificate of incorporation authorizes 2,000,000,000 shares of common stock, par value $0.01 per share, and 100,000,000 shares of preferred stock, par value $0.01 per share. At the time of the completion of the spin-off, there were 126,512,823 outstanding shares of common stock which was based on the number of Drive Shack’s shares of common stock outstanding on May 6, 2013 and a distribution ratio of one share of New Residential common stock for each share of Drive Shack common stock (adjusted for the reverse split described below).

New Residential’s board of directors authorized a one-for-two reverse stock split on August 5, 2014, subject to stockholder approval. In a special meeting on October 15, 2014, New Residential’s stockholders approved the reverse split. On October 17, 2014, New Residential effected the one-for-two reverse stock split of its common stock. As a result of the reverse stock split, every two shares of New Residential’s common stock were converted into one share of common stock, reducing the number of issued and outstanding shares of New Residential’s common stock from approximately 282.8 million to approximately 141.4 million. The impact of this reverse stock split has been retroactively applied to all periods presented.

In April 2014, New Residential issued 13,875,000 shares of its common stock in a public offering at a price to the public of $12.20 per share for net proceeds of approximately $163.8 million. One of New Residential’s executive officers participated in this offering and purchased an additional 500,000 shares at the public offering price for net proceeds of approximately $6.1 million. To compensate the Manager for its successful efforts in raising capital for New Residential, in connection with this offering, New Residential granted options to the Manager relating to 1,437,500 shares of New Residential’s common stock at a price of $12.20, which had a fair value of approximately $1.4 million as of the grant date. The assumptions used in valuing the options were: a 2.87% risk-free rate, a 12.584% dividend yield, 25.66% volatility and a 10-year term.

In April 2015, New Residential issued the New Residential Acquisition Common Stock in connection with the HLSS Acquisition (Note 1).

In addition, in April 2015, New Residential issued 29,213,020 shares of its common stock in a public offering at a price to the public of $15.25 per share for net proceeds of approximately $436.1 million. One of New Residential’s executive officers participated in this offering and purchased 250,000 shares at the public offering price. To compensate the Manager for its successful efforts in raising capital for New Residential, in connection with this offering and the New Residential Acquisition Common Stock issued in the HLSS Acquisition, New Residential granted options to the Manager relating to 5,750,000 shares of New Residential’s common stock at a price of $15.25, which had a fair value of approximately $8.9 million as of the grant date. The assumptions used in valuing the options were: a 2.02% risk-free rate, a 6.71% dividend yield, 24.04% volatility and a 10-year term.

In June 2015, New Residential issued 27.9 million shares of its common stock in a public offering at a price to the public of $15.88 per share for net proceeds of approximately $442.6 million. One of New Residential’s executive officers participated in this offering and purchased 9,100 shares at the public offering price. To compensate the Manager for its successful efforts in raising capital for New Residential, in connection with this offering, New Residential granted options to the Manager relating to 2.8 million shares of New Residential’s common stock at the public offering price, which had a fair value of approximately $3.7 million as of the grant date. The assumptions used in valuing the options were: a 2.61% risk-free rate, a 7.81% dividend yield, 23.73% volatility and a 10-year term. In addition, the Manager and its employees exercised an aggregate of 6.7 million options and were issued an aggregate of 3.6 million shares of New Residential’s common stock in a cashless exercise, which were sold to third parties in a simultaneous secondary offering.

In August 2016, New Residential issued 20.0 million shares of its common stock in a public offering at a price to the public of $14.20 per share for net proceeds of approximately $278.8 million. To compensate the Manager for its successful efforts in raising capital for New Residential, in connection with this offering, New Residential granted options to the Manager relating to 2.0 million shares of New Residential’s common stock at the public offering price, which had a fair value of approximately $2.3 million as of the grant date. The assumptions used in valuing the options were: a 1.45% risk-free rate, a 11.80% dividend yield, 27.57% volatility and a 10-year term.

In May 2014, an employee of the Manager exercised 107,500 options with a weighted average exercise price of $5.61 and received 107,500 shares of common stock of New Residential. In August 2014, employees of the Manager and one of New Residential’s directors exercised an aggregate of 498,500 options with a weighted average exercise price of $5.62 and received 276,037 shares of common stock of New Residential. In December 2014, a former employee of the Manager exercised 42,566 options with a weighted average exercise price of $7.19 and received 42,566 shares of common stock of New Residential. In July 2015, a former employee of the Manager exercised 37,500 options with a weighted average exercise price of $7.19 and received 20,227 shares of common stock of New Residential. In August 2016, employees of the Manager exercised an aggregate of 1,100,497 options with a weighted average exercise price of $10.59 per share and received 280,111 shares of common stock of New Residential.

Common dividends have been declared as follows:



		Per Share
Declaration Date	Payment Date	Quarterly Dividend		Special Dividend		Total Dividend		Total Amounts Distributed (millions)
March 19, 2014	April 2014	$	0.35	$	—	$	0.35	$	44.3
June 17, 2014	July 2014	0.35		0.15		0.50		70.6
September 18, 2014	October 2014	0.35		—		0.35		49.5
December 18, 2014	January 2015	0.38		—		0.38		53.7
March 16, 2015	April 2015	0.38		—		0.38		53.7
May 14, 2015	July 2015	0.45		—		0.45		89.5
September 18, 2015	October 2015	0.46		—		0.46		106.0
December 10, 2015	January 2016	0.46		—		0.46		106.0
March 22, 2016	April 2016	0.46		—		0.46		106.0
June 27, 2016	July 2016	0.46		—		0.46		106.0
September 23, 2016	October 2016	0.46		—		0.46		115.4
December 16, 2016	January 2017	0.46		—		0.46		115.4

Approximately 2.4 million shares of New Residential’s common stock were held by Fortress, through its affiliates, and its principals at December 31, 2016.

Option Plan

New Residential has a Nonqualified Stock Option and Incentive Award Plan, as amended (the “Plan”) which provides for the grant of equity-based awards, including restricted stock, options, stock appreciation rights, performance awards, tandem awards and other equity-based and non-equity based awards, in each case to the Manager, and to the directors, officers, employees, service providers, consultants and advisor of the Manager who perform services for New Residential, and to New Residential’s directors, officers, service providers, consultants and advisors. New Residential initially reserved 15,000,000 shares of its common stock for issuance under the Plan; on the first day of each fiscal year beginning during the 10-year term of the Plan in and after calendar year 2014, that number will be increased by a number of shares of New Residential’s common stock equal to 10% of the number of shares of common stock newly issued by New Residential during the immediately preceding fiscal year (and, in the case of fiscal year 2013, after the effective date of the Plan). No adjustment was made on January 1, 2014. Increases of 2,000,000, 8,543,539 and 1,437,500 were made on January 1, 2017, 2016 and 2015, respectively. New Residential’s board of directors may also determine to issue options to the Manager that are not subject to the Plan, provided that the number of shares underlying any options granted to the Manager in connection with capital raising efforts would not exceed 10% of the shares sold in such offering and would be subject to NYSE rules. Upon exercise, all options will be settled in an amount of cash equal to the excess of the fair market value of a share of common stock on the date of exercise over the exercise price per share unless advance approval is made to settle options in shares of common stock.

Prior to the spin-off, Drive Shack had issued options to the Manager in connection with capital raising activities. In connection with the spin-off, the 10.7 million options that were held by the Manager, or by the directors, officers or employees of the Manager, were converted into an adjusted Drive Shack option and a new New Residential option. The exercise price of each adjusted Drive Shack option and New Residential option was set to collectively maintain the intrinsic value of the Drive Shack option immediately prior to the spin-off and to maintain the ratio of the exercise price of the adjusted Drive Shack option and the New Residential option, respectively, to the fair market value of the underlying shares as of the spin-off date, in each case based on the five day average closing price subsequent to the spin-off date.

Upon joining the board, non-employee directors were, in accordance with the Plan, granted options relating to an aggregate of 6,000 shares of common stock. The fair value of such options was not material at the date of grant.

New Residential’s outstanding options were summarized as follows:



	December 31, 2016			December 31, 2015
	Issued Prior to 2011	Issued in 2011 - 2016	Total	Issued Prior to 2011	Issued in 2011 - 2015	Total
Held by the Manager	330,090	10,874,152	11,204,242	345,720	10,582,860	10,928,580
Issued to the Manager and subsequently transferred to certain of the Manager’s employees	18,910	1,967,458	1,986,368	88,280	1,359,247	1,447,527
Issued to the independent directors	—	6,000	6,000	—	4,000	4,000
Total	349,000	12,847,610	13,196,610	434,000	11,946,107	12,380,107

The following table summarizes New Residential’s outstanding options as of December 31, 2016. The last sales price on the New York Stock Exchange for New Residential’s common stock in the year ended December 31, 2016 was $15.72 per share.



Recipient	Date of Grant/ Exercise^(A)	Number of Unexercised Options	Options Exercisable as of December 31, 2016	Weighted Average Exercise Price^(B)		Intrinsic Value of Exercisable Options as of December 31, 2016 (millions)
Directors	Various	6,000	6,000	$	13.99	$	—
Manager^(C)	2007	349,000	349,000	31.27		—
Manager^(C)	2012	25,000	25,000	7.19		0.2
Manager^(C)	2013	835,571	835,571	11.48		3.5
Manager^(C)	2014	1,437,500	1,437,500	12.20		5.1
Manager^(C)	2015	8,543,539	5,509,457	15.44		1.5
Manager^(C)	2016	2,000,000	266,667	14.20		0.4
Outstanding		13,196,610	8,429,195


(A)	Options expire on the tenth anniversary from date of grant.


(B)	The exercise prices are subject to adjustment in connection with return of capital dividends.


(C)	The Manager assigned certain of its options to Fortress’s employees as follows:



Date of Grant	Range of Exercise Prices	Total Unexercised Inception to Date
2007	$29.92 to $33.80	18,910
2014	$12.20	258,750
2015	$15.25 to $15.88	1,708,708
2016	$14.20	—
Total		1,986,368

The following table summarizes activity in New Residential’s outstanding options:



	Amount		Weighted Average Exercise Price
December 31, 2014 outstanding options	10,737,093
Options granted	8,543,539		$	15.46
Options exercised^(A)	(6,734,525	)	$	7.81
Options expired unexercised	(166,000	)
December 31, 2015 outstanding options	12,380,107
Options granted	2,002,000		$	14.20
Options exercised^(A)	(1,100,497	)	$	10.59
Options expired unexercised	(85,000	)
December 31, 2016 outstanding options	13,196,610		See table above


(A)	The 1.1 million and 6.7 million options that were exercised in 2016 and 2015 had an intrinsic value of approximately $4.0 million and $59.4 million, respectively, at the date of exercise.

Income and Earnings Per Share

New Residential is required to present both basic and diluted earnings per share (“EPS”). Basic EPS is calculated by dividing net income by the weighted average number of shares of common stock outstanding. Diluted EPS is computed by dividing net income by the weighted average number of shares of common stock outstanding plus the additional dilutive effect, if any, of common stock equivalents during each period. New Residential’s common stock equivalents are its outstanding options. During the years ended December 31, 2016, 2015 and 2014, based on the treasury stock method, New Residential had 364,107, 2,167,796 and 3,092,844 dilutive common stock equivalents, respectively.

Noncontrolling Interests

Noncontrolling interests is comprised of the interests held by third parties in consolidated entities that hold New Residential’s investment in Servicer Advances (Note 6) and Consumer Loans (Note 9), as well as HLSS (Note 1) for the period of April 6, 2015 through October 23, 2015.