Kelly Residential & Apartment Real Estate ETF
Q4 2016 Earnings Call Transcript

Published: 1 Mar 2017

[Operator:]

Good day ladies and gentlemen, and welcome to the Altisource Residential Corporation Q4 2016 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 follow at that time. [Operator Instructions] I would now like to introduce host for your today's conference call, Mr. Rob Lowe, Chief Financial Officer. Sir, you may begin.

[Robin Lowe:]

Thank you, Kevin. Good morning everyone, and thank you for joining us today. My name is Robin Lowe and I'm the Chief Financial Officer of Altisource Residential Corporation, which we refer to as RESI. Before we begin, I want to remind you that a slide presentation is available to accompany our remarks. To access the slides, please log on to our Web site at www.altisourceresi.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 Provisions 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 that 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 statements in our earnings release, as well as the company's filings with the Securities and Exchange Commission, including our year-end December 31, 2015, Form 10-K, our first, second and third quarter 2016 Form 10-Q's and our December 31, 2016 Form 10-K that we have filed today. If you would like to receive our news releases, SEC filings, and other materials via e-mail, please register on the shareholders page of our Web site using the e-mail alerts button. Joining me for today's presentation is George Ellison, Chief Executive Officer of RESI. I'd now like to turn the call over to George.

[George Ellison:]

Thanks, Robin, and good morning, everyone. The team at RESI is excited to announce another quarter of successfully executing our business strategies. This story remains the same; grow our Company's single-family rental portfolio, get first-class rental operating metrics, continue to dispose of legacy assets. As you see on Page 3, we are announcing another material acquisition from Amherst that when completed will include upto 3,500 stabilized homes. These stabilized homes will again be in locations we desire and the price is in line with our return targets. When completed, this acquisition will increase our rental portfolio to approximately 12,000 homes. We continue to maintain our core FFO assumptions of $0.60 per share at 10,000 homes and $1.70 when we reach 20,000 stabilized homes. In addition to continuing to grow our portfolio, we are keenly focused on and are currently hitting excellent operating metrics. Stabilized rental NOI margin increased to a normalized 62%, stabilized rental core FFO increased to $0.11 per share. In 2015, we committed to aggressive disposition of non-rental assets, both loans and REO's and this would be completed by the end of 2017. We are currently on target to achieve this goal. We have maintained our dividend $0.15 per share for the fourth quarter in a row and continue stock buybacks in some another very strong quarter. Now let's turn to Page 4 and get into details. Rental revenue increased about 150% from last quarter because of our recent large acquisition. Stabilized rental core FFO increased 140% to $0.11 per share. NAV now is estimated at $19.91 per share. We repurchased 230,000 shares spending $2.8 million which now puts us at $46.5 million spent against our announced buyback plan of $100 million. Again, a dividend of $0.15 per share was declared and paid. For some portfolio detail, the total rental portfolio ended the year at 8,600 homes, a 215% increase year-over-year with 91% of the homes stabilized. Leased homes increased to 7,293, a 244% increase year-over-year. As mentioned in my opening comments, we are very pleased to announce another game changing single-family rental acquisition. We have signed a letter of intent to purchase approximately 900 stabilized homes from Amherst who will close this quarter. This will be immediately followed by purchasing an additional portfolio of homes from the same seller. When combined with the first 900, we expect the total purchase to be somewhere between 3,000 to 3,500 stabilized homes. Just as in last quarter's purchase from the same seller, the homes will be managed by Main Street Renewal. The homes are again in locations we desire with prices in line with our return targets. When completed our rental portfolio, as I mentioned, should be somewhere close to 12,000 homes, an excellent start to the year. On our last call we announced that we would be launching two loan sales. One is already closed in January and the more critical trade was awarded in February. The February trade is the final MPL sale that we discussed last quarter. If you recall, during that discussion we noted there was a possibility of combining all remaining NPL's with the residual loans from other sales, as well as loans that didn't quite fit standard NPL transactions. The possibility of selling all these loans was a hope of ours but not a certainty. I'm happy to announce this morning that with this final portfolio sale of NPL's we were able to include these residual loans. This transaction should close in the second quarter of this year. After this last sale closes, all that remains of the loan portfolio is a cleanup sale of loans scheduled for this summer, a truly excellent outcome. On the REO disposition front, we had a goal of 400 homes to be sold during the slow winter months. We're pleased to report that we've sold close to 500 homes. This pace start picking up now that winter is almost over. Non-rented REO now stands at just over 1,900 homes, approximately a 50% decrease year-over-year. As previously stated just as with other actions promised and delivered upon, these homes should all be sold by the end of this year. On the operations front, stabilized rental portfolio NOI margin was 62% in the fourth quarter, up from 59% last quarter. 93% of stabilize rentals released at quarter-end. Our lease renewal rate for the quarter was 71% with an average rate increase of 5% on renewals and 3% on release rentals. On the funding front, as always, Rob and his continue to keep our liquidity at high levels and as mentioned last quarter, have been working on pushing the duration of our debt out for longer maturities. As we also mentioned last quarter, the 4,300 homes purchased from Amherst last year were financed with a five-year loan. Rob is continuing to work on finding other term funding for our portfolio, and hopefully, we can announce the transaction of this type in the near future. As loans and REO's continue to be liquidated, much of the capital from these sales will get recycled into stabilized high-yielding, single-family rental units. As mentioned before, we feel we have enough capital to eventually purchase somewhere between 15,000 and 20,000 homes. Page 5 shows this next wave of purchasing in the announce transaction with Amherst, the shaded states where we currently have stabilized rental homes and the highlighted states with cities with stars indicate our targeted locations for this next wave of growth. Page 6, as always, we show our report card. As we say every quarter, buying homes right is important but running them efficiently and profitably is just as critical. Here are this quarter's operating metrics. As you can see, we are successfully starting to hit our long-term targets. Most importantly, stabilized NOI margin hit 62% in the fourth quarter and 60% for all of 2016. Targets were set and targets were hit. Finally, if you please turn to Page 7, we show some important renewal retention and term data. Renewal rate is 71%; retention rate, 66%; turnover, 7%; average rent increase on renewals, 5% and on new leases, up 3%. As we clearly pointed out on last quarters call, although these same metrics from the third quarter were outstanding, we predicted they would normalize to lower numbers in the future. This quarter's numbers reflect that normalization but also have clearly been affected by the winter months with multiple holidays. I will now turn the call back to Rob.

[Robin Lowe:]

Thank you, George. Today we are reporting a GAAP loss of $61.2 million for the fourth quarter 2016, $228 million for the full year. Fourth quarter revenues were $12.1 million, an increase of $7.7 million over the last quarter driven by 154% increase in rental revenue as we saw the first full quarter benefit of revenues from home as above portfolio. Change in net unrealized gain on mortgage loans of minus $40.6 million for the quarter includes a re-cost on the sales of MTL's and REO's $34 million, leaving a net reduction of $6.6 million and evaluation of our mortgage loan portfolio compared to the carrying value at the end of the third quarter. This evaluation reflects bids received on two sales of a total 2,940 mortgage loans at about 97% of third quarter 2016 carrying value. We closed one of the two sales in January, 556 loans and expect to close the other 2,384 loans in the second quarter of 2017. In addition to the NPL sales we result 75 mortgage loans in the quarter and sold 468 non-rental REO's for net proceeds of approximately $69 million. Full year 2016 revenues were $56.8 million including rental revenues of $48.6 million, an increase of 267% over 2015. We sold a result 2,450 NPL's and sold 2,668 non-rental REO's during the year, up from 1,551 NPL's and 1,321 non-rental REOs in 2015. Fourth quarter expenses were $11.2 million higher than the prior quarter lifting the operating costs, depreciation and interest expense associated with the HOME SFR portfolio. The increase in property operating expenses was offset a reduction due to the sale of 468 non-rental REO's in the quarter which is significantly more expensive than rental properties to hold. The percentage of rental properties to total properties improved from 42% at the end of 2015 to 82% at the end of 2016. Full year 2016 expenses were 4.6% lower than 2015 mainly driven by lower selling costs and impairment and lower mortgage loan servicing cost as we sold legacy assets offset by higher depreciation and amortization and property operating expenses due to the growth of the rental portfolio during 2016. Stabilized portfolio NOI margin improved to 62% from 59% last quarter reflecting continued improvement in operating efficiency. Core FFO on the stabilized portfolio increased to $0.11 from $0.04 last quarter reflecting a full quarter impact of the HOME SFR portfolio as well as the NOI margin improvement. As shown on Slide 8, at the end of the year we held a total of 10,533 properties [ph] of which 8,603 were in the rental portfolio and 594 were held for sale. The remaining 1,336 were under evaluation per rental or sale. The total number of REOs under evaluation or held for sales reduce by 12% compared to the prior quarter. As shown on Slide 9, our loan and REO disposition plan remains on-track. 468 REOs were sold in the fourth quarter, less than the third quarter due to seasonality and NPLs reduced to 2,891, a 22% reduction compared to the prior quarter. After the completion of the second loan sale of further 2,384 NPLs we expect to close in the second quarter of 2017, we anticipate that there will be approximately 550 loans remaining on our books that we plan to divest during 2017. Likewise, we plan to have sold virtually all non-rental REOs by the end of 2017. With regard to liquidity and funding capacity on Slide 10, we had $106.3 million of available cash at the end of 2016 and $112.3 million of unused funding capacity for a total of $219 million of available financing. We continue to focus on adding longer-term financing and are in active discussions with potential long-term lenders. The purchase of upto 3,500 homes from Amherst will be seller financed with potential term for approximately five years of broadly similar terms to the Amherst transaction we closed in September, 2016 but with expected lower interest spread. On Slide 14 we estimate our NAV to be $19.91 per share at the end of 2016. A full description of the NAV calculation methodology is included on Slide 26. I'll now turn the call back over to George.

[George Ellison:]

Thanks, Rob. In conclusion, RESI had another quarter of executing the plan we set forth in 2015. At that time, we stated that our transition to a straight toward single-family rental storey would take about three years. We have just started that third year and are right on-track or maybe even a bit ahead of schedule. So let's recap. In 2015 we stated our three major objectives, one, grow the number of high-yielding single-family rental homes. We had 300 to 400 homes in our portfolio coming into 2015. That number is now on-track to soon hit 12,000 and we have enough capital to hit between 15,000 and 20,000 homes. Two, hit first-class operating metrics when we first reported stabilized NOI margin, it was in the mid-50% range. We put forward our own goal to hit between 60% and 65%. We just hit 62% in the fourth quarter, another goal reached. And three, disposed of all non-rental legacy assets both REOs and loans, probably the most exciting news today is that the non-performing loan portfolio sale has been awarded a very good price and it includes most of our remaining residual loans. When that deal closed, we will essentially be free of any legacy loans discussion and associated issues. The cleanup sale that remains this summer will be a mere rounding error [ph]. And just as promised, the REO story is about to end as well. As these legacy issues fade, our story continues to transition into one of simplicity, transparency, growth; buying high-yielding assets to pay a strong dividend to our owners. We established goals in 2015 and now almost all of them have been hit. Now we can start to look to the future. We must continue to grow and be vigilant about hitting best-in-class operating metrics. These two issues will be the next chapter in RESI story, growth and operational excellence. And if we continue to successfully do these two things, we will drive our expansion into dozens of markets around the country, grow our portfolio and in turn, grow our dividend. We look forward to discussing our results and our aspirations with all of you. Kevin, I'll now turn it back to you to open up for questions.

[Operator:]

[Operator Instructions] Our first question comes from Doug Harter with Credit Suisse.

[Douglas Harter:]

Thanks. I was hoping you could talk about the net impact to liquidity of the loan sale and the home portfolio purchase?

[Robin Lowe:]

Yes, thanks, Doug. So we were two sales; obviously the NPL sale that we closed in January and then we got the second quarter larger sale. And I think between those two it should generate somewhere between $150 million to $200 million of net financing, net cash. I think tied up in our balance sheet is the whole and the legacy assets. We probably have somewhere north of $300 million. If you add that sort of cash that we have on-hand, you know, I said earlier, we had $106 million of cash on-hand; so we are somewhere -- I guess over $400 million of free cash if you'd like that we can recycle into our business. So you know, you can make various assumptions about home prices and leverage and all that but that equals somewhere between say 8,000 to 10,000 homes that we can buy from where we are today.

[Douglas Harter:]

Got it. And in addition to the cash that's freed up on the run-off of the REO portfolio?

[Robin Lowe:]

Yes, I'm including that when I say legacy assets.

[Douglas Harter:]

Okay. So that's included in the 300?

[Robin Lowe:]

That's right but as I said, we've got another hundred or so cash on-hand in our balance sheet already. So we're looking at 400+ cash free to recycle into homes.

[Douglas Harter:]

Got it. And then looking at the rent -- the occupancy rate on the stabilized portfolio, you know, I guess how should we think that trends over the course of 2017? What's your expectations?

[Robin Lowe:]

Yes, it's 93%, its slightly on the lower side but obviously the seasonality involved there; I think you know, so you're seeing that across the board right now this time of year. You know, we would expect occupancy to sort of go up I think we should be targeting at least mid-90s, 95, possibly slightly higher but around that level.

[Douglas Harter:]

Great, thank you.

[Operator:]

Our next question comes from Jade Rahmani with KBW.

[Jade Rahmani:]

Thanks very much and congratulations on moving the company forward to where becoming a pure play single-family rental REIT [ph]. Just on the additional Amherst purchases, I guess pro forma for the close representative of the portfolio were Main Street Renewal manage?

[Robin Lowe:]

Well, if you add the other 3,000 homes that say or so, you know, they are going to be something like 7,000 to 7,500 homes in total. So as we stand today, you know, the other half of the portfolio -- the legacy portfolio is just over 4,000. But obviously once those homes are bought and any other homes that we buy will go into the ASPS portfolio. So that's really, you know -- it will kind of evolve overtime Jade.

[Jade Rahmani:]

And are there any additional waivers or contingencies or other fees you need to provide to Altisource to close the transaction?

[Robin Lowe:]

No, nothing else.

[Jade Rahmani:]

And what did you anticipate as the timing for the close today?

[George Ellison:]

Jade, it's George. As we said, the 900 will close this quarter and then the remainder that takes it up to the 3,000 or 3,500 probably will be a flow program that will be closing stages. So we're not exactly sure those guys buy homes every week, every month; so things they bought in January won't be stabilized till March or April. So it will flow for several months out until till we get to that amount. We can't say exactly when we'll close it but it will probably close maybe this closing and maybe two more stages but we will have to see how fast they get them.

[Jade Rahmani:]

So these are homes that they are acquiring and stabilizing rather than already operating?

[George Ellison:]

It's sort of a continuum. So these 900, the 4,200 we bought that we closed on September 30, 2016, they had. So these 900, think of those just like that trade. They have them but they are buying -- they buy every week and so we're looking at things that they bought at the end of last year that we'll probably do in the second quarter closing. So it takes them a couple of months to stabilize. So some of them they already own and they are stabilizing, some they just bought and so they have to refer them and get them rented and some they probably haven't bought yet. But that's how I think about it.

[Jade Rahmani:]

And what are the target cap rates that you're looking at?

[George Ellison:]

Nothing has changed from what we have said in the past. So we look at three numbers in addition to the one that you bring up. So we prefer because there is noise the way people reported but we try to view the net rental yield inclusive of everything. We've always said we shoot for that 6% level and then with leverage, we shoot for an 11% to 13% ROE and then once we're stabilized and have the number of homes that we've targeted, that we've mentioned, we are shooting for a dividend yield for owners of RESI stock to be in the high 8's to mid-9's. And so we use that -- those three metrics everyday whether we're buying five houses or 5,000, we use those same -- we use other ones but those are the three main metrics that the team shows us and we go to the investment committee with to buy every single day.

[Jade Rahmani:]

And in terms of the relationship with Main Street Renewal, is there any possibility of a broader strategic involvement accommodation of some kind?

[George Ellison:]

We're always open to listening to all ideas and we have a lot of great people that talk to us about things but there is nothing currently contemplated of that nature.

[Jade Rahmani:]

And looking across your portfolio, we've seen a lot of the single-family rental companies look to coal [ph] assets. You do have a lot of markets with under 100 homes, for example?

[George Ellison:]

Right.

[Jade Rahmani:]

I was wondering if it's too early in the stage of evolution to consider markets such as say Arkansas or Connecticut where you may want to exit or sell assets, redeploy that capital. How do you look at that in terms of portfolio management?

[George Ellison:]

You are spot-on. Obviously we had a few other things as I just detailed that we were focused on; so calling the usual word homes that are currently providing yield but might not fit the broader picture is exactly -- that's exactly the way we think about it. So I would anticipate us; we've already done the analysis, we've been working on it for several months -- again, I never liked selling things that are making us money but this thing, it is time to start optimizing the portfolio. So we are stack ranking every single home we own and we probably use 20 or 30 different variables and we stack rank best to worse and so we will be looking to call in certain places; I can't really say where or how many yet, but we are -- the question is spot-on, we are doing that analysis right now and I think we'll probably do a pilot to sell some homes, see how that goes probably later this quarter that we're in and then to blossom right into the key selling season.

[Jade Rahmani:]

Just on the current M&A environment, we saw sizable transaction announced earlier in the week. Are you seeing an increase in M&A discussions amongst the various players or would you say that debated somewhat as some of the mergers of a larger kind have already been consummated?

[George Ellison:]

I wouldn't say there is obviously -- those are important trade, I think it's important trade for the industry; this is IH's IPOs, incredibly important and added continuing credibility to the SFR space. So that transaction I think is great and continues to show how serious the spaces and how it's not going away, it's actually growing, there are 17 million families that rent these homes and growing, and they look a lot like us.; they look probably more like us, those 17 million and some of our competitors. So I wouldn't say the activities heated up, the number of players is still quite small but I think everybody has pretty much found their niche; everyone knows that that transaction of the folks that are selling or merging, that folks have been working on that for some transaction around that company for some time. So I don't think that's -- I don't think the fact that it's traded is indicative of some larger M&A situation.

[Jade Rahmani:]

Just in terms of rental operations, I was wondering if you could provide per property annual R&M cost to turn may be the cost of each turn rather than annuals since you're running at around below 30%. And then just annual recurring maintenance CapEx, what you're seeing on those kind of three drivers?

[Robin Lowe:]

Yes, annual CapEx, right now Jade we're running at about 1,200, annual R&M slightly less than that about 1,100 and the turn cost on average we've seen so far is kind of in the 300 range.

[Jade Rahmani:]

So the turn cost, the 300 is an annual number? So that would be around 900 property?

[Robin Lowe:]

Yes, the 300 is the annual number.

[Jade Rahmani:]

So the cost of the actual term --

[Robin Lowe:]

It's three-year term.

[Jade Rahmani:]

Okay.

[Robin Lowe:]

Yes, you're right. I see what you're saying, yes.

[Jade Rahmani:]

And lastly, since I was always asked this and followed you guys about it, the corporate structure with both AMC and ASPS; has the board given any consideration to potentially changing that or looking at internalization of any kind?

[George Ellison:]

No. The answer remains the same. There is nothing being contemplated to change the structure.

[Jade Rahmani:]

Great. Well, thanks for taking the questions.

[George Ellison:]

Thanks, Jade.

[Operator:]

Our next question comes from Mike Grondahl with Northland Securities.

[Mike Grondahl:]

Hey, George and Rob and congratulations on the additional 3,500 LOI. Question for you, you know, the 4,200 was great, the 3,500 is more progress; what does it look like -- you kind of mentioned growth and execution post the 3,500, any ideas kind of on the pacing that you guys hope for or expect, kind of I guess as we look at the second half of the year in terms of acquiring rentals?

[George Ellison:]

Sure, and good morning, Mike. We started working on that transaction very quickly after the last one closed on September 30. So that was -- that's an important trade. I would say the -- you can never say exactly how the year will play out, we have the liquidity to react to anything. You continue to see as Jade mentioned, some of the other competitors optimize their portfolios and just as when we bought the 1,300 homes from IH two years ago, I think you will continue to see some of that. And so there is homes that are in other folks platforms that can be sizable, 500's and maybe even a 1,000 or more. So I think that's one source. We've tapped the brakes a little on OBO as we publicly said because these other transactions have frankly been larger than we had anticipated but OBO is still cycling in the background. So we can bring that forward and back and represent an enormous amount of growth. We've just been -- as I said, we had it on idle for a while. So I think there are still some funds out there that we've mentioned that have sizable thousands of homes and those can come out at any time. So I think it will be a combination of small purchases as there has always been. Then you will see pools of 200s and 300s. You could see a 1,000 and more from a competitor, you could see a 1,000 or more coming from funds, several have 3,000 or more as I mentioned. So I think it will be as it always is, I think will be several fronts. The good news is that Rob has us -- particularly with this last sale, we have a very strong liquidity position and now he is turning up the funding which is awesome. So we have the capital. I think the homes are out there, we just have to get them at the right price.

[Mike Grondahl:]

With the capital that Rob's generated or this approximate $400 million to recycle, do you anticipate that you will be able to do that efficiently?

[George Ellison:]

What do you mean, efficiently?

[Mike Grondahl:]

Well, you know, we just won't see a big balance of cash sitting on the balance sheet, that you'd be able to put it to work. As Rob brings the capital back in, you'll be able to put it to work in rentals or something else?

[George Ellison:]

Yes. The only time I think we really ran on cash up was when we were -- Rob was preparing for the first Amherst trade, so that was an anomaly. So yes, it will be -- I think it will be pretty balanced on coming in and going right back up.

[Mike Grondahl:]

Got you. And what range of rentals at year-end 2017 be to start thinking about?

[George Ellison:]

Wow, it's -- I think there is a possibility we could spend the liquidity that we've mentioned in the plans that we have detailed so that we could get to $15,000 to $17,000, $18,000. I think it obviously depends on the price you pay, the number could come down, actually the units could come down. But I think could we hit 16,500 by the end of the year; yes. It won't be stabilized -- you know, all the numbers that we've put forth in terms of dividends and FFO, remember, those are stabilized just to be completely crisp. But -- yes, I think there is a possibly we get to 16,500 if you're modeling it, maybe you dial that back a bit just to be conservative but something big could come along and it could jump up pretty dramatically. So it's very hard to say this early in the year, we can talk about it off-line as to how to model it but I think there is a chance we could spend the money to get the 15 or 16 this year, I think it's -- I'd say that's 50-50, maybe even 70-30 chance.

[Mike Grondahl:]

Got you. And then your second comment about sort of execution and optimization, what's the one or two priorities you're still sort of working on that to drive that and make that a success?

[George Ellison:]

I think the legacy business which were still -- as we mentioned on this call winding down, that portfolio is in a different position. If the MSR stabilized homes very mature portfolio and so that's much more of just keeping it on expenses, watching turns, watching listening etcetera. I remember, we're still sort of bringing homes through the pipeline, probably legacy loan into REO into refurbished, into rent. So there is still a construction repair piece that will go away just as all these others should go away. So Randall Mason and I and others focus an enormous amount on harvesting all the great homes that came through that business. But it is still -- I would think of the ASPS driven portfolio as maybe a year behind the Amherst portfolio. So we spent a ton of time on that. And then obviously, the other question you asked, growth is really [indiscernible] growth, and I spend a lot of time trying to figure out new sources and new pipes to feed into the portfolio. So that's how I would answer that.

[Mike Grondahl:]

Okay. Thanks a lot, guys.

[Operator:]

Our next question comes from Amit Sharma with JP Morgan.

[Amit Sharma:]

Good morning, guys. So as we saw the tri-con [ph] merger that the new company plans to become an aggregator of these middle-market single-family rentals that are about $1,200 to $1,300 a month. You're at a similar price point; would you describe that as being your strategy as well or are you unbiased in terms of the price point as long as they have a good yield?

[George Ellison:]

They have that pyramid towards the end of that one presentation that I thought was excellent and we actually were -- Randall and I were looking at it last night, I think that's a fair way to think about it. If you have that there, you know -- I think they are probably a little bit above where we are but the second half of your question is right. At the end of the day, the first thing we do is yield and it really comes down to yield but because we are so focused on yield to drive the dividend, it mathematically pushes you out of -- as you know, Amit, it pushes you out of certain places. Because our yield is higher than others, and we want to pay that high dividend, it pushes you out of California because of the house price in California vis-à-vis Chattanooga, is so dramatically different and the rents as you know are a little more balanced. So you can get the same house in Atlanta or Memphis or Houston for half the price or less then you can get in California or Seattle or any of those states. And so it is really yield driven which sort of answers the first part of your question, that drives you to that $125,000 price point. Remember the homes we ought from IH were at an average price of $85,000, that's obviously a little low. So I would say $75,000 to maybe $150,000, the last Amherst transaction was $153,000 average; this one I think will be $125,000 to $131,000; we're still playing around it as it sorts out. So I would agree that we're in a similar price point, maybe a touch below that new combination.

[Amit Sharma:]

Alright, got you. And then I'm wondering if you can give a high level offshore which is the sources of used fund in '17. It looks like the NPL proceeds are about $700 million and that if you sell the planned -- remaining of the REO's, let's say it takes you to $1 billion; and I'm sure there is a debt paydown associated with that; so are you planning -- would you help to deploy just a net amount of that into acquisitions, or just keep it leverage neutral?

[Robin Lowe:]

Yes, I mean that's roughly right. So as I said to Doug's question earlier on this call, you know, I think the net cash that we -- it will generate free cash to reinvest will be kind of in the region of $400 million. And so that's what we'll be reinvesting -- probably a slightly higher leverage than the legacy assets; you know, the Amherst deal, you know, the first one as you know we got 75% some leverage. So there is probably a little bit of leverage advantage there as we reinvest that capital.

[Amit Sharma:]

Okay. And I asked like next year as we transition to a more conventional looking REIT, so getting out of the NPL business, do you have a view on leverage in terms of net debt to EBITDA?

[George Ellison:]

Well, I mean we're -- I'm not sure that next year, it's sort of happening right now this year, obviously it will be completed as we move into next year because I said NPL is a pretty much -- this next trade will be 500 loans or less. So that's a loan thing in our mind is just about done. So when that's all done and the REO are sold and the homes are purchased, Rob's been running it between 50% and 60% of the company. Obviously as he said, Amherst pulled it up this next trade, we're not ready to talk yet about the details but as Rob said earlier, it will be similar. So I think the company will probably run between 60% and 70%, particularly I think it will run a little bit higher while we're in such a rapid growth phase and then we'll probably as we mature, dial it back down, that's how we think about it.

[Amit Sharma:]

Okay. And just last question on this, on the NPL sale, could you disclose what type of buyer it is and then if there is any substantial risks to it not closing?

[George Ellison:]

There are -- you know, when you open up a file room for MPL having done this for a while; 20 to 25 people actually sign up and sign NDAs to go into the room, and I've seen that number go up and down around that number, but a meal [ph], the same 5 to 10 folks, maybe 12 at the outside, it's a very small group with enormous amount of capital; as you know, there are a lot of really big players in that space. So it just sort of rotates as to who just bought something, who is digesting something, who hasn't brought in a while, who just raised money. So it's one of the very reliable, excellent, well-funded known names in the NPL space; and -- so you can never say never but I'm -- we're not concerned at all that it will close. It will take a little bit longer because as I mentioned, and we talked about this on the last call, the important part of that trade, the pure NPL piece of this grade. The most important part of it as I said, I'm not sure what to call them, we have jargon for what to call these sort of tag ends; some people refer to them as cats and dogs or the rock pile. It's that which remains from the kick-outs and other just heavy litigation, all sorts of documentation, it's really a hodgepodge of things. I think the Starwood guys do trade similar to this when they merged with Colony -- if you remember, they did a cleanup trade, that's exactly what this was. So Neil Patel was able to get -- we were hoping to get the cats and dogs into the larger trade and we did. And so until what remains when that one closes is becoming deminimus [ph]. So that's really the great news about that trade.

[Amit Sharma:]

All right, thank you.

[Operator:]

Our next question comes from Fred Small with Compass Point.

[Fred Small:]

Good morning, thanks for taking the question. Just starting off on the NPL sales, I guess two questions; how much additional unrealized loss do you expect to run-through the P&L when you sell the bulk of what you've signed up for; I guess the 42?

[Robin Lowe:]

Yes, Fred. You know, the way they got accounting work from that that -- you know, once you've got a bid, really you have to map that portfolio to that bid plus what you think you're likely to get for it basically. So we marked that portfolio to our bid at the end the fourth quarter, so the numbers are already embedded in the balance sheet evaluation, okay. And actually as I said in my prepared remarks earlier, the net overall reduction in NPL evaluation this quarter was only -- it was less than $7 million, so it was not a big number.

[Fred Small:]

Okay, that's fine. And so that's all -- maybe I missed just the beginning when you were talking about that but there is only $7 million in that. What was the total number of the unrealized?

[Robin Lowe:]

What I'm saying is the change in unrealized gain on mortgage loans which is minus 40.6, we sell stuff; so the net valuation change in the mortgage portfolio between the third and the fourth quarter was $7 million, and that includes the mass we've taken based on the bids based for these NPL we're selling.

[Fred Small:]

Okay, got it. And then how much -- I think you said maybe how many you expected to have left after these two sales, just a number, was it 5,500 or something like that, or sorry, 550?

[Robin Lowe:]

That's right, 550. You know, there may be some kick outs from the other trade -- from one of those trades but sort of net-net, 550 so relatively insignificant amount as George said will be substantially out of NPLs.

[Fred Small:]

And any -- I mean I guess there is 568 now -- $568 million on the Q4 balance sheet in terms of held for sale and fair value mortgage loans; how much do you expect to be remaining after these sales?

[Robin Lowe:]

I think the carrying value will be the range of [indiscernible] to $5 million.

[Fred Small:]

Great, thanks. And then on the REO, sort of the same question; you know, from where we are now on the balance sheet to sort of realize on the sale; how much loss do you think there will be? Now I know there are net gains that run through the P&L but just -- how much --

[Robin Lowe:]

The REO that we have to sell, still to sell?

[Fred Small:]

Yes.

[Robin Lowe:]

You know, obviously you've got the sales cost, the frictions cost. When we calculate NAV, when I calculate that number, I think the 10% hack cut for all the REOs in my balance sheet, so we try to be conservative.

[Fred Small:]

Alright. So 10% is probably the right number there to assume?

[Robin Lowe:]

Yes, I guess for modeling purposes that's a good number, that's the number I used for NAV but we try to be conservative.

[Fred Small:]

Okay, awesome. Thanks. On the targeted dividend yield, I guess what's the basis for that because you said -- maybe I just don't understand what you're sort of going for but you said you're targeting an 8% to 9% dividend yield when the rest of the space is trading low single digits. Why -- what sort of the basis for the -- is that off of NAV or why would you just not target a lower yield, if it's just a function of stock price?

[Robin Lowe:]

That's a great question. Obviously dividend policy is something we will have to think very carefully about based on kind of opportunities available to us, but what we're saying is really that's going to be the cash available for distribution whether at the end of the day we decide we're better-off -- it's better for the shareholders, we reinvest some of that, that's another matter I guess, but that should be the catch that we modeled to be available for distribution.

[George Ellison:]

I mean to sort of getting to your point Fred, it's also -- sort of your question to be answered, we have said from the beginning that we wanted to go into the high-yielding space and that we think the rental market of this $16 million to $17 million folks that Green Street writes about looked much more -- so they say it's 95% mom-and-pop and that institutional hands have only touched 2% or 3%. I think that's true. The rest of the population, that other 95% is mom-and-pop to save the research analysts. That looks more like us, they do high-yielding homes and that's what we do. And so we're going to continue to buy from those people and roll those people off and play in the high-yield space and so that's actually what we're trying to offer to people is that we will be giving you a much higher dividend yield. That's the point of why we're in high-yield if I'm understanding your question?

[Fred Small:]

Yes, maybe it's the question of knowing [ph]. I mean when you're talking about a dividend yield -- a dividend yield is a function of your dividend and the stock price; so I'm assuming you want the stock price to be higher which would imply a lower dividend yield? And so I'm just trying to understand what the base for the 8% to 9% target is.

[George Ellison:]

Yes. I'm not saying we're going to hit that high percent yield because the stock price is trading at discount. We talk about that, we're talking about moving through book and beyond and pay, 8% to 9%. We are not assuming this current -- obviously the discount was worse and I think we've got into to the 40s of discount and now we're into the 60s, approaching 70s; so the discount is slowly going away. I'm assuming when we use those numbers, we spent the money, we had the 15,000 to 20,000 homes, they are stabilized and the stock price is somewhere around NAV.

[Fred Small:]

Okay. So NAV is sort of the rough numbers you're assuming for your 8% to 9% target?

[Robin Lowe:]

I think I understand what you're asking now Fred is. It's really an REO number, right.

[Fred Small:]

Okay, got it. And then last one I think or it just slipped my head, on the -- there was a dividend yield, now that's -- I'll get back in the queue if I remember. Thanks.

[Operator:]

Our next question comes from Brock Vandervliet with Nomura Securities.

[Brock Vandervliet:]

Thanks. Just taking another crack at the NAV change; so that was down 3.5% sequentially. I understand the Delta of $7 million, but what else was occurring there to drive that lower?

[Robin Lowe:]

Yes, so obviously we reported GAAP net loss in the quarter as well, Fred. So it's a question of the operating results; -- sorry, Brock. It's operating results plus the dividend that we pay out plus the mark on the portfolio.

[Brock Vandervliet:]

Okay. And to clarify the -- since you've received the bid, you can already mark that portfolio; so that was marked at the end of Q4 so there is not another mark coming there for that sale?

[Robin Lowe:]

Yes. What we do is, we try to be as conservative so we get the bid and then we look sort of our history of our NPL sales. And then we figure out how much that price might fade? And so the mark that we've taken is the safest price, you know, what we expect to come out at the end. So we don't expect any substantial further mark on the portfolio.

[Brock Vandervliet:]

Okay. And so that's down to kind of tag ends after this transaction you've already marked it for the transaction; so I know you're not giving specific guidance on GAAP, giving specific guidance on GAAP earnings but it would seem like GAAP earnings which have been very negative, should change pretty materially here as this noise abates?

[Robin Lowe:]

I think that's exactly what we would expect. Obviously, the goal Brock, is to get rid of all the noise around the NPL and the realized gains and the realized losses so there really won't be rental number; sorry, the only revenue number left is the rental numbers and so yes, I would agree.

[Brock Vandervliet:]

Okay. And separately on the dividend, just looking at it from a different angle, you are now at $0.11. FFO per share shy of the dividend -- how do you look at the dividend payout in terms of you -- presumably later this year you're going to be well above their dividend rate and rental earnings?

[Robin Lowe:]

Yes, that's right. So as you said, we're already at $0.11 here, so we're getting very close to that $0.15 per quarter. You know, as we go through the year and increase the portfolio, you know, it's very possible the FFO number is going to go above 15 and so that gives us passive flexibly on dividend. Obviously, I can't give you an exact course or exact timing, but clearly that is direction we are going in.

[Brock Vandervliet:]

Okay. And lastly, whether it's ASPS or Amherst, that category of renovation in turn, that's growing with the acquisition of course, how are you feeling about both those firms terms in operational capacity to -- through that category get these homes rented as soon as possible?

[George Ellison:]

Well, as I said, the Amherst trade was initiated probably four plus years ago, that doesn't mean all of its back hold but it's a very -- I would think of that as -- we brought a very reasonable portfolio. So the metrics as I mentioned -- it's a very mature portfolio, so when you look at your P&L, you look at your evictions, you look at people that haven't -- you look at terms, you look at probably three or four different subtractions from your revenues. And so when you look at Amherst portfolio it's very quiet because it's sort of a natural flow, your question was you know, who has the capacity to keep fixing up homes. That's really what's going on over in ASPS and we think there's plenty of capacity. And speaking of capacity, I think obviously we've always said ASPS can go to a lot of places. Brock, we probably have 40 to 45 cities stacked out on our wish list and I think both of them can handle that. Remember that after this transaction with MSR or with Amherst, that's the end of what MSR will manage for us, ASPS will do the rest. So we grow to 50,000 homes but the lion share of with that will be with ASPS and we're very confident that they can handle that.

[Brock Vandervliet:]

Great, thank you.

[Operator:]

Our next question comes from Jade Rahmani with KBW.

[Unidentified Analyst:]

Good morning, this is actually Ryan on for Jade. Thanks for taking the follow-up. Is there something you can provide a bit of color on the assumptions in your NAV estimate. Robin, you mentioned the 10% pair cut to the REOs but can you give us some color on your cap rate and NOI margin assumptions that you're using for the SFR portfolio?

[Robin Lowe:]

Sure, Ryan. The biggest change obviously is the evaluation of the portfolio, it's a 12-month discounted cash flow NIO, 12-month forward NOI and we just count that as nominal cap rate of 525.

[Unidentified Analyst:]

And is there a specific reason you're using that 525 based on public comps or just review of the markets hearing?

[Robin Lowe:]

Yes, it is both of those things, its comps and also we feels it's most appropriate.

[Unidentified Analyst:]

And are there any other specific assumptions that are going into the NAV aside from the REO haircuts and the cap rate assumptions for the SFR portfolio that we should?

[Robin Lowe:]

No, those are the big things. I think I wanted to make sure everyone understood we are taking a 10% haircut of the REOs. I think that's most important point to make.

[Unidentified Analyst:]

Great, thanks for taking the follow-up.

[Operator:]

Our last question comes from Fred Small with Compass Point.

[Fred Small:]

Hey, sorry, I remembered what was. On the equity base and thinking about the purchase, the purchase potential, and you are running through before, I don't know, it sounded like you were saying there is $300 million or $400 million of capital you were going to get back to redeploy, and that puts you at -- I think George maybe you said, if you really going to -- you could get to 18,000 by the end of the year, does that assume deploying all that capital? Or you know, when I look back at from the old slides, the low end of the amount of homes you thought you could purchase on the current capital base was sort of you know, mid-20,000. Is that still the case?

[Robin Lowe:]

You know, the major thing that has changed in those slides, Fred it's the value per home. So we assume that I think at that time 110 and the average carrying value is closer to 140; so in terms of the number of units that actually reduces the number somewhat which is why we're saying now 16,000, 17,000 or 18,000 depending on the number of units that we buy.

[Fred Small:]

Okay, so below 20 on the current capital base?

[Robin Lowe:]

That's right.

[George Ellison:]

But we still end up between 15,000 and 20,000.

[Fred Small:]

Okay, great. Thanks a lot.

[Operator:]

Ladies and gentlemen, that concludes the Q&A portion of today's call. I'd turn the conference back over to the Company for closing remarks.

[Robin Lowe:]

Thank you very much everyone for joining the call today. Have a great day. Thank you.

[Operator:]

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.