Altisource Asset Management Corporation
Q2 2015 Earnings Call Transcript

Published: 10 Aug 2015

[Operator:]

Good day, ladies and gentlemen and welcome to the Altisource Asset Management Corporation Second Quarter Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] I would now like to turn the conference over to Mr. Robin Lowe, Chief Financial Officer of Altisource Asset Management. Sir, please go ahead.

[Robin Lowe:]

Thank you, Genesia. Good morning, everyone and thank you for joining us today. My name is Robin Lowe and I'm the Chief Financial Officer of Altisource Asset Management Corporation which we refer to as AAMC. Before we begin, I want to remind you that a slide presentation is available to accompany our remarks. To access the slide, please log on to our website at www.altisourceamc.com. These slides provide additional information investors may find useful. As indicated on Slide 1, our presentation may contain certain forward-looking statements pursuant to the Safe Harbor provision of the federal securities laws. These forward-looking statements may be identified by reference to a future period or by use of forward-looking terminology and may involve risks and uncertainties that could cause the Company's actual results to differ materially from the results discussed in the forward-looking statements. For an elaboration of the factors that may cause such a difference, please refer to the risk disclosure statement in earnings release as well as the Company's filings with the Securities and Exchange Commission including our 2014 Form 10-K, our first quarter 2015 Form 10-K and our second quarter 2015 Form 10-Q that we will file today. If you would like to receive our news releases, SEC filings and other materials via email, please register on the shareholders page of our website using the E-Mail Alerts button. As indicated on Slide 2, joining me for today's presentation is George Ellison, Chairman and Chief Executive Officer of AAMC. I would now like to turn the call over to George. George?

[George Ellison:]

Thanks Robin. Good morning, everyone and thank you for joining us today. I would like to begin with some key highlights. You please turn to Slide 3. Resi's estimated taxable income for the second quarter of 2015 increased by 42% compared to the second quarter of '14 and declared and paid $0.55 per share dividend. We negotiated Resi's agreement to purchase up to 1,325 single family rental homes from Invitation Homes and we expect this transaction to close latte this month. This marks Resi's first acquisition of an SFR pool as we expand our acquisition strategies to grow Resi's rental portfolio. Resi continues to bid on NPL pools but remains disciplined on pricing and will not bid prices which render the economics unattractive. We believe at this point in the market cycle, rental homes offer better returns than purchased NPLs, but we now have proven flexibility to acquire either asset class in response to market opportunities. Also in the second quarter, we advised Resi on its successfully completed third NPL securitization generating a $171 million in gross proceeds, 77.4% of the purchase price Resi paid for the underlying NPLs. We transferred 4,342 loans this quarter, $1.2 billion of UPB from Auckland to BSI. With this transfer, virtually all of the non-securitized NPLs have been transferred away from Auckland at the end of June. Although these transfers have continued to hamper resolution efforts with a negative impact on Resi's results, we continue to believe this is the right thing to do for Resi's long term prospects. We also advised Resi on the sale of 189 re-performing loans generating about $35 million in gross proceeds and approximately $8.6 million of a taxable gain. As another path in the expansion of Resi's rental home acquisition strategy, we initiated a program to acquire rental properties on a one by one basis using a proprietary valuation model that we've developed. We expect to commence purchases by the end of this quarter. Finally under the new asset management agreement with Resi, the fees payable to AMC in the second quarter were $5.2 million. You please turn to Slide 4. Under the new asset management agreement with Resi, AMC earned approximately $4.8 million of base management fee and $400,000 of conversion fee during the second quarter for a total of $5.2 million. AMC did not earn any incentive fee since AFFO as defined re-asset management agreement, which is a GAAP based metric did not exceed the required return of 7% on invested capital. Although estimated taxable income of $37.7 million represented about 12% return. As the income from rental properties grows, AFFO will become a more consistent, regular annuity stream of achieving the return hurdles as illustrated in the chart. The chart at the bottom of Page 4 is very important. It shows the net income generated by adding more rents. The hurdle amount for the incentive fee to kick in was currently around $22 million. At present we're running at about $13 million to $14 million of AFFO. As you can see on the chart at approximately 5,000 to 6,000 homes, this hurdle will be surpassed and the incentive fee will be activated. As rentals move up, AFFO moves up and the incentive fee increases. I'll turn it back to Robin now.

[Robin Lowe:]

Thank you, George. On Slide 5 we show our financial results. As we've stated in previous earnings releases, on the GAAP we're required to consolidate Resi into our financial statements as if we were the parent in a typical parent subsidiary relationship. But in reality, we do not have a claim on either 100% of the income or assets of Resi. Also because we own 100% of the votes in common stock on NewSource and there are no substantive kick out rights granted to other equity owners. We consolidate NewSource in our consolidated financial statements. In order to provide clarity to our shareholders we have included certain non-GAAP disclosures on Slides 6 and 7 that provide standalone financials for AAMC. We believe this non-GAAP presentation provides a meaningful comparison between our reported results and how we internally manage our business. This non-GAAP information should be viewed in addition to and not as an alternative for our reported results under GAAP. On a consolidated basis we reported net income of $743,000 or $0.27 per diluted share for the second quarter of 2015 down from $6.9 million or $2.50 per diluted share in the first quarter of 2015. AMC standalone income before taxes was $835,000 in the second quarter. Revenues for the second quarter was $5.4 million down from $15.9 million in the first quarter. The decrease was mainly driven by revised terms of the new asset management agreement as discussed earlier. Total expenses for the second quarter were $4.4 million down from $8.7 million in the first quarter. The reduction was primarily driven by the decrease in legal expense including the reversal of a litigation reserve established in the first quarter. Additionally AMC’s balance sheet under GAAP includes the equity of residential, which is then reflected in AMC’s book value per share. This reporting does not reflect the true economics to AAMC shareholders and so on Slide 6, we show the standalone balance sheet of residential, NewSource and AMC. I’d now like to turn the call back over to George. George?

[George Ellison:]

Thanks Rob. Here’s the bottom line, earlier this year we got the asset management agreement in place. Today you can see the initial not permanent results and how they affect AMC. This agreement is different than the previous one and that the fee structure is heavily correlated to GAAP earnings, which are down for reasons we’ve discussed, that's the bad news. The good news is that as we lift earnings through rental income growth, we quickly move towards and we’ll hit the incentive target. This is best for Resi and obviously good for AAMC. As we showed earlier the initial starting point of the second quarter is tough medicine. But we believe was the right thing to do. The good news is that increased rental drive real earnings, whether it's GAAP or tax, which drives the fee. We believe this is the best thing for the long-term stability of both companies. On Page 7, I am referencing a similar slide that we showed earlier in the year where we started discussing new concepts in AAMC. On the first bullet the hiring of our team of professionals that we added this year is complete, fully in place. Some of them are added to Resi work streams, others to the new one by one home buying initiative and still others to the new drivers in AAMC. Second, we continue to believe that single family home loan origination as well as multiple home lessor loans are areas where more capital is needed and we intend to participate. And last, insurance concepts that will reinvigorate our dormant NewSource Sub are being actively explored. We’re meeting with counterparties involved in everything from life and annuities to title and other housing based insurance ideas in an effort to grow insurance-based asset management. The bottom line is that we now have the team in place to build large multiple asset class asset management business, but getting Resi right simply came first. We’ll build this the right way. It’s going to be one step at a time. At this time, I’d like to turn it back to the operator Genesia.

[Operator:]

Thank you. [Operator Instructions] And our first question comes from the line of Mike Grondahl from Piper Jaffray. Your line is open.

[Mike Grondahl:]

Yes. Thank you.

[George Ellison:]

Hey Mike.

[Mike Grondahl:]

Hey. I missed the Resi call due to a conflict so some of these questions relates to just the overall…

[George Ellison:]

No [we all the stuff] [ph], but that's fine, feel free to do Resi stuff obviously.

[Mike Grondahl:]

The Nomura facility that you had that I think was a $100 million and that helped drive some ROE sales so far. What’s the timing there?

[Robin Lowe:]

Yes Mike so to buy and everything else to finances ROE’s and buy the amount of existing lines that will help us a lot in terms of accelerating the ROE disposition. I can’t tell you that in the second quarter you had a huge impact with kind of still setting up from legal and certain things, but going forward this should have a significant impact on the velocity about dispositions.

[Mike Grondahl:]

Okay. And then can u speak to how much liquidity was generated by the third NPL securitization and what’s kind of the overall liquidity today?

[Robin Lowe:]

Yes, so the proceeds from the third securitization were $171 million. Obviously, we had to pay down some financing on that. On our balance sheet today we show cash of about $70 million.

[Mike Grondahl:]

And then where would you peg overall liquidity Robin?

[Robin Lowe:]

In what sense Mike? You can see on our balance sheet right now we have as I say $70 million of cash. If you look at our borrowings and our repo lines, we have an aggregate limit as things stand today of about just over a billion dollars and a maximum and our borrowings at the end of the second quarter by $810 million.

[Mike Grondahl:]

Okay. And the strategy to grow the new -- the one-by-one effort may be I'll call it, how do you -- how are you proceeding there? How do we expect that to ramp up?

[George Ellison:]

Well, we just finished modelling it. The boys picked up 240 homes, eight different zip codes. We’re working closer with ASPS. They have obviously tremendous data feeds. So we're working with them to pick the homes. I think we probably started live bidding in the next few days, weeks or a month. So I think what we would like to do is get that pilot going, so where are we, middle of -- almost middle of August. So we won’t talk again Mike till what five weeks into the second quarter starting at the beginning of November. So I think then we’ll be able -- on the last call we got a lot of questions, excuse me, I think Deutsche one other gentleman were asking for sort of specifics of the template? What are you buying? Where are you buying? I think we will be -- we’re just rolling it out, we’ll be to better answer that when we speak to you at the end of the third quarter and then we’ll have -- then we can see how much it is and we can start drawing vectors to how big it could be. As you know, some guys are -- this could be incredibly sizeable and you’re picking one-by-one. So you're picking yields you want and you can actually -- you're actually getting into the home and there are several checks to make sure you’re buying what you want and more importantly getting what you want. So if it feels a little small ball, but it can be gigantic. As you know competitors of ours buy 1000 in a quarter. So our aspirations were to be big, but we got to make sure we get the yield right and I think when we talk to you next, we’ll be able to say hey, we bought 87 homes or 253 and here’s what they look like and then you can start to see yield and the type of home we want.

[Mike Grondahl:]

Got it. Congratulations on the Atlanta portfolio. Are you currently bidding on other portfolios or do you expect to be bidding on any?

[George Ellison:]

There are a lot of pools big and small that we’re seeing and we’ve probably seen half a dozen in the last while we were working on closing the deal with the folks at IAH so -- from other people I am saying. So yes, I completely anticipate us bidding on more packages.

[Mike Grondahl:]

Okay. And then over taxable income for the quarter is the best way to get that the $37.7 million minus to $8.6 million gain, is there any other onetime thing positive or negative?

[Robin Lowe:]

Yes, that's the main one Mike. As I said in the AFC script, I think it's probably the main one this quarter. We had couple of other small things, but that's the material one.

[Mike Grondahl:]

Okay. And just two more questions, the Resi slide talked about accelerate non-rental REO dispositions, can you just kind of highlight what do you mean by that?

[George Ellison:]

Yes, it was a question you asked earlier. The Nomura facility should start to bear more fruit as we move into the fall. So we saw an increase in REOs, but to Rob's answer to your first question I think was that you'll start to see the REO sales. We're anticipating them going up from here. So that's all we meant is that as that facility kicks in and then sort of starts to bear fruit, the REO should go up. REO sale should go up.

[Mike Grondahl:]

Got it, those are related. Okay. And then one more thing, I get asked this question a fair bit, with your capital allocation thoughts, how do you guys sort of reconcile stock buybacks with the stock so far below book versus buying new portfolios or NPLs?

[George Ellison:]

Yes, we got -- Fred asked the same question on the last call. So I'll try to be consistent with that response. We look at it, it's definitely in our -- on our mind and we are very strongly committed to driving the stock up. We believe that the -- using the capital that we have to, we bid on a lot of NPLs in the last quarter. The prices seem to keep going up and making the yield more challenging. So what we're trying to say to people is that if we just sat here and waited for NPL prices to recover from a I should say decline, recover from a buyer standpoint, not from a seller standpoint, that that wouldn't be the right thing to do. But if you're able to grow and expand and buy assets with the right yield then we think both bulk and definitely one by one I think most people in the industry would agree, that one by one buy could have very significant yield to it. So I would in the hierarchy of need, I would put expanding, growing and using the capital that we've been fortunate enough to have to drive real initiatives and grow the rental income, which drives all the metrics we just talked about up that helps us sustain the dividend even as high as it is, I think that's what we're supposed to be doing. That said, we were looking at that issue. It's on our radar and -- but again I feel the growth in expanding and using the capital to make this thing bigger and generate more returns for our shareholders that way I would put that ahead of shrinking the size of the company.

[Mike Grondahl:]

Got it and then just maybe lastly for Robin, any update on NAV for the portfolio? Is that still around $30 or where is that shaking out Robin?

[Robin Lowe:]

Yes, I think it's a little less than that Mike, probably the $27, $28 range. To some extent, it does kind of head on higher calculate the conversion cost most of that embedded value is in the NPL portfolio, but it's around the $28 number.

[Mike Grondahl:]

Okay. Great. Hey thanks for helping me with those questions, since I missed that earlier call. Take care guys.

[Robin Lowe:]

Thanks Mike.

[George Ellison:]

Thanks Mike.

[Operator:]

Thank you. And I am showing no further questions in the queue. I would now like to turn the call back over to Management for any closing remarks.

[George Ellison:]

Thank you very much for joining in the call today and wish you a great day, thank you.

[Operator:]

That concludes today's question-and-answer session. Thank you for participating in today's conference. You may all disconnect. Everyone have a great day.