Kelly Residential & Apartment Real Estate ETF
Q3 2016 Earnings Call Transcript

Published: 7 Nov 2016

[Operator:]

Good day ladies and gentlemen, and thank you for standing by. Welcome to the Altisource Residential Corporation Q3 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the prepared remarks, we will host a question-and-answer session and instructions will follow at that time. [Operator Instructions] It is now my pleasure to hand the conference over to Mr. Rob Lowe, Chief Financial Officer. Sir.

[Robin Lowe:]

Thank you, Brian. 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. They 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 and second quarter 2016 Form 10-Qs and our third quarter 2016 Form 10-Q 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 Altisource Residential is excited to announce another quarter of successfully executing our business strategies, to grow our company's single family rental portfolio, get first class operating metrics, continue to dispose of legacy assets. As you see on Page 3, we completed the acquisition that we discussed on last quarter's call. We purchased 4,300 homes that are stabilized in the locations we desire and at prices in line with our return targets. This increases our rental portfolio to 8,500 homes. Our purchases this quarter more than doubled the size of our rental portfolio. As you see on the slide, and as we discussed last quarter, we maintain our core FFO assumptions, $0.60 per share at 10,000 homes, $1.70 a share for 20,000 when stabilized. In addition to the announced transaction, our current portfolio metrics continue to improve and stabilize. Stabilized rental NOI margin increased from a normalized 58% to 59%. Stabilized rental core FFO increased to $0.04 per share. On a pro forma basis at we own the acquired homes at the beginning of 2016, we estimate stabilized rental NOI margin at around 61% and stabilized rental core FFO at $0.28 per share for the first nine months of 2016. Rental increases in retention kind of improved as well. As advertised, starting over a year-ago, asset disposition both loans and REOs continued at a rapid pace. We have maintained our dividend at $0.15 per share for the third quarter in a row and as you see we increased stock buybacks from last quarter. In some, an extremely strong quarter. Now let's turn to Page 4, and get into the details of the third quarter. Rental revenue increased 12% from last quarter. Stabilized core FFO increased to $0.04 per share. NAV increased to an estimated $20.65 per share. We repurchased just under 600,000 shares spending $6.25 million bringing us closer to 50% completion of our announced buyback plan. Again, a dividend of $0.15 per share was paid. In our portfolio, we acquired a total of 4,500 homes in the quarter. The total rental portfolio increased 115% to just over 8,500 homes. The NPL portfolio decreased 9% to 3,717 loans. As announced on our last call, we are planning both a re-performing loan sale and a non-performing loan sale in the fourth quarter -- this quarter. These sales will leave our inventory of loans below 1,700 as we start 2017. On the REO front, as predicted, the torrid pace of the summer selling season cooled down in the third quarter, but we still sold over 600 homes. This number of sold homes will most likely drop again during the winter months, but pick back up again in the spring. This quarter sales leave us with about 2,200 non-rented homes, a 16% increase from the second quarter. On the operations front, net operating margin improved again in the third quarter, from a normalized 58% to 59%. 95% of stabilized rentals were leased at quarter end and our lease renewal rate for the quarter was 81% with an average rent increase of 7% on renewals and 10% on re-lease rentals. On the funding front, Rob and his team continue to keep our liquidity at high levels, but have also initiated an aggressive work stream to move the duration of our debt out for longer maturities. As part of the acquisition of the 4,300 homes, we secured almost $500 million in seller financing, for up to a five-year term. Prior to that, our book of assets have been primarily supported by short-term repurchased agreements. Rob and his team are working diligently to reduce the short-term maturity facilities and move us to a much longer maturity debt footprint. If you please turn to Page 5, we present a pro forma view into what our metrics would have looked like after we include the new acquisition. The portfolio closed on September 30, 2016. As I mentioned, our portfolio rental homes increased 115% and now stands at just over 8,500 homes. This purchase is a portfolio of seasoned assets and pulls our stabilized number of homes, up dramatically to around 7,500 homes. This purchase also came with a new property manager, Main Street Renewal. This now means that RESI has diversified property management operations and has two vendors, instead of just one. As mentioned, the financing on the 4,300 homes is a five-year term financing, much preferable to our previous repo arrangements. On the right of Slide 5, you can see the power of these additional assets. Here we show stabilized pro forma, year-to-date rental data, as of Q3, specifically, rental income of $65.6 million, NOI of $40 million, NOI margin of 61% and pro forma core FFO of $15.4 million or $0.28 per share for the nine months ending September 30, 2016. Page 6 shows how the combination of our existing portfolio and our acquisition plays out across United States. As stated on last quarter's earnings call, this acquisition has helped us to rapidly grow inside, as well as gets us into markets that we were targeting to enter and get more scale. We will continue to push our higher-yielding strategy by more affordable homes, which as you see will take us to many more locations than others. Less competition will continue to be positive for our bottom line. Page 7 shows the acquisitions in the quarter with some more granular data. As you see, we dial back our One-by-One program to make room for the large acquisitions. However, we made great penetration into some locations we already operate like Texas, Florida, and Georgia, but we also picked up some great new high yielding markets, Tennessee, Indiana, North Carolina. Page 8 is always one of our most important report card, buying homes right is important, running them efficiently and profitably is just critical. Here you see this quarter's operating metrics. These numbers are good and they do show improvement for sure, but with the acquisition of so many stabilized homes, all of these numbers, and most importantly anticipated NOI margin should get pulled materially higher as we move forward. Finally, if you please turn to Page 9, we show important renewal and retention data. This data looks as good as it ever has. Renewal rate up from 73% to 81%. Retention rate up 64% to 66%, and average rent increase on renewals up 7% and our new leases up 10%. These numbers are extremely strong. They’re being driven by thoughtful property improvements on the first turn of acquired homes, as well as market rent appreciation. We expect these numbers to normalize slightly lower in the future, but for this quarter its simply outstanding. I will now turn the call back to Rob.

[Robin Lowe:]

Thank you, George. Today I will review our third quarter 2016 financial results and discuss our liquidity and NAV. We reported a GAAP net loss of $57.6 million for the third quarter 2016, a 9% improvement over prior quarter on higher revenues and lower expenses. Rental revenues were $9.6 million, an increase of 12% over the last quarter, reflecting a 7% increase in average leased homes in the pre-acquisition portfolio and the impact of rental increases averaging 7% renewals and 10% for re-leases. 4,262 homes we just acquired and that we refer to as the HOME SFR transaction, were purchased on 30 September and there was no significant revenue impact in the third quarter. Expenses were lower by 2% compared to the prior quarter, mainly due to lower property operating expenses, as we continue to divest high-cost non-rental REOs. Lower mortgage loan servicing costs, as we continue to reduce NPLs, offset by higher acquisition costs related to the HOME SFR transaction. Stabilized portfolio NOI margin improved to 59% from a normalized 58% last quarter due to rental increases and further improvement in expense efficiency. On a pro forma basis, if we had owned the HOME SFR portfolio since the beginning of 2016, we estimated the stabilized portfolio NOI margin for the nine months ending 30 September 2016 would have been 61% compared to 58% excluding the HOME SFR portfolio. Core FFO on the stabilized portfolio increased to $0.04 from $0.03 last quarter on higher revenues and lower expenses, as NOI margin continue to improve. On a pro forma basis, if we had owned the HOME SFR portfolio since the beginning of 2016, we estimate that year-to-date 2016 pro forma core FFO for the stabilized portfolio would have been $0.28 compared to $0.10 excluding the HOME SFR portfolio. As shown on Slide 10, at the end of the third quarter, we held a total of 10,731 REOs, of which 8,541 were in the rental portfolio and 839 were held for sale. The remaining 1,351 were under evaluation for rental or sale. The total number of REOs under evaluation were held for sale reduced by 16% compared to the prior quarter. As shown on Slide 11, our loan and REO disposition plan remains on track. 604 REOs were sold in the third quarter, less in the second quarter due to seasonality for proceeds of approximately $82 million and NPLs reduced to 3,717, a 9% reduction compared to the prior quarter. BY the end of 2016, we plan to have agreed our fourth and last major NPL sale, as well as an RPL sale leaving approximately 1,700 loans in 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 regards to liquidity and funding capacity on Slide 12, we had $57 million of available cash at the end of the third quarter 2016 and $650 million of unused funding capacity for a total of $707 million of available financing. During the quarter, we added $489 million of five-year term seller financing related to the HOME SFR transaction. As George mentioned, we’re also working on extending the term of our existing financing to better match asset duration and to potentially take advantage of the current low interest rate environment. On Slide 16, we estimate our NAV to be $20.65 per share as of the end of the third quarter, up from $19.93 at the end of the second quarter mainly due to the HOME SFR acquisition. A full description of the NAV calculation methodology is included on Slide 29. I will now turn the call back over to George.

[George Ellison:]

Thanks, Rob. In conclusion, Altisource Residential had an excellent operating quarter, managing the portfolio it currently owns, but also completely transform the Company by acquiring a portfolio that doubles the size of our rental enterprise. This acquisition is already adding current rental income with the stabilized portfolio, which means the ramp-up friction costs and volatility will be absent, which will make the operating metrics immediately better. It comes with an extremely attractive financing package, with a proven property manager, and allows us to diversify our vendor arrangement. This acquisitions just as the Atlanta acquisition did last summer, should produce excellent returns for years to come. And that's great news for us, but even better news is that we are staying on track and doing exactly what we said we would do by disposing of legacy assets, both loans and REO. The lion share of these will be gone by year-end and totally sometime during 2017. The proceeds from these sales should allow us to continue to purchase more high-yielding rentals, which will drive our growth, improve our operating metrics, increase our earnings and allow us to grow our dividend. Thank you. Brian, I will turn it back to you to open it up for questions, please. Thank you, sir. [Operator Instructions] And our first question comes from the line of Anthony Paolone with JP Morgan. Your questions please.

[Anthony Paolone:]

Thanks and good morning. I guess, first, if I’m looking at Page 11, and you show sort of expectations for winding down the non-core NPLs and so forth. Can you give us any estimate as to the dollars in the door you expect on the remaining sales?

[Robin Lowe:]

Yes, Tony, this is Robin. So, you can see that on our balance sheet that the kind of total of all those assets together carrying value, it's about a $1 billion. So, maybe it's even 50% debt funding on that. So, maybe about half of that is going to be free cash or equity to reinvest.

[Anthony Paolone:]

Okay, but it sounds like are you -- have you been achieving on the non-core both the REOs and the NPLs pretty close to the book?

[Robin Lowe:]

Yes, we’re pretty close to where we mark, obviously there is a little bit of fluctuation quarter-on-quarter. But generally, we’re not very far off the marks.

[Anthony Paolone:]

Okay. Because if I look at your income statement, you had about $41 million and change in unrealized gain. Why was that so high? How do I tie that in?

[Robin Lowe:]

Yes, this is accounting kind of peculiarity the way this thing works. Every time I sell an asset, I re-class all of the gain that I previously recognized in that line to one of the realized gain lines. So while you put minus 41 in that line, I re-class $39 million of that out to net realized gain on mortgage loans in that realized gain on real estate. So if you like the net mark on the portfolio of the quarter, the NPL portfolios, probably like $2 million something like that.

[Anthony Paolone:]

Okay, got it. So the $2 million be roughly the -- would that be sort of the difference between what you achieved and what book was on everything that happened in the quarter?

[Robin Lowe:]

Yes, that $2 million is basically kind of the valuation mark with the quarter.

[Anthony Paolone:]

Okay, got it. And then just to make sure you got this math right on the HOME acquisition, if I just look at your pro forma NOI on the purchase price, it’s like a 6.2 cap rate, is that the right number?

[Robin Lowe:]

Which page you’re looking, Tony?

[Anthony Paolone:]

I think it’s the 40 or is it Page 5, which is $40.2 million and your purchase price was $652 million, is that …?

[Robin Lowe:]

That's right, $652 million.

[Anthony Paolone:]

Or is that annual or three quarters?

[Robin Lowe:]

This is for the first three quarters. These numbers are for the nine months to September.

[Anthony Paolone:]

Okay. So, what actually being higher or just trying to understand like what the …?

[Robin Lowe:]

Yes, you have to annualize this to get to the full-year numbers.

[Anthony Paolone:]

So is it more like an 8 or, 8 and change? It seems kind of high.

[Robin Lowe:]

Yes, I’m not quite sure what the calculations you’re doing there Tony, sorry.

[Anthony Paolone:]

On Page 5, that $40.2 million of NOI, is that for everything or for just the HOME portfolio?

[Robin Lowe:]

This is the combined numbers for both portfolios had we owned the HOME SFR portfolio since the beginning of the year. So it’s the combined numbers for the first nine months of the year.

[Anthony Paolone:]

I see. So do you a cap rate or expected NOI yield on just the $652 million HOME acquisition?

[George Ellison:]

We didn’t disclose that at this point, Anthony.

[Anthony Paolone:]

Okay. And then just last question, if I look at, I guess, it’s Slide 7 …

[Robin Lowe:]

Anthony, I will just say on that one, that expected return is obviously in line with the target returns that we’ve previously given, otherwise you wouldn’t have bought it, right?

[Anthony Paolone:]

Okay. Can you remind me what those have been?

[Robin Lowe:]

We’ve spoken previously about a net yield of 9% to 11% net ROE.

[Anthony Paolone:]

Okay. And on Page 7, just trying to tie together, I know there is big difference between the number of homes in these two buckets, but the One-by-One acquisitions that are $103,000 and then the portfolio 150 house, but the rents are reasonably close to each other. How do you bridge those and think about the type of home you want?

[Robin Lowe:]

So, if I think the gross yields on the existing portfolio and the new -- the HOME SFR portfolio are not that different, maybe kind of looks the lower. Kind of close to here, but that’s more maybe a peculiarity of the OBOs that we purchased this quarter. But generally, again the gross yields that we’re buying to, ultimately we buy to net yield of course, are kind of in line with the model. So, I think this is already consistent.

[Anthony Paolone:]

Okay. These are lot of renovation costs that need to go into the One-by-One's?

[Robin Lowe:]

Yes, you should probably expect maybe $10,000 of -- on average of One-by-One renovation.

[Anthony Paolone:]

Okay. Thank you.

[George Ellison:]

Thanks, Tony.

[Robin Lowe:]

Thanks, Tony.

[Operator:]

Thank you. Our next question comes from the line of Jade Rahmani with KBW. Your questions please.

[Jade Rahmani:]

Good morning. Thanks for taking my question. George, if you could talk about what you’re seeing on the acquisition environment, if you’ve been experiencing an increase in flow from small fund holders looking to sell, and what the typical deal sizes that you might be looking at?

[George Ellison:]

The -- its pretty balanced across the spectrum. The One-by-One market is still strong. Obviously we’re in a lot of different places, so that opens up a lot of volume there. As technology and more people come into the space, you see mini bulks say 50 to 200, maybe not every day, but definitely one or two week. And then the bulk is pretty strong as well. Obviously, there is less of those folks, but it's pretty strong Jade across the whole front.

[Jade Rahmani:]

And just what is the source of say the many bulk deals? Are they through like REO liquidation systems or through investment banks? How are those -- its being sourced?

[George Ellison:]

The -- there is probably a couple of flavors of that. Remember, we're not really competing against the big public guys, that’s really not our space. We're actually much more aligned with the 90% to 95% of what this market is across the country. So we see a lot of roll ups locally and we're going to continue to see that. So I think the -- if we’re in a city and you're rolling up 30, 40, 50,60, 100 homes, people know we’re out there buying and our phone rings a lot. So the team will get direct regional calls. And then as you know the -- some of our larger friends in the space are always pruning or optimizing and sometimes that fits for us and sometimes it doesn’t. So there are a couple of small investment banks are in the space that show you packages, but its -- it comes from a lot of different places.

[Jade Rahmani:]

And how would you characterize the level of conversation for M&A corporate combinations that’s going on?

[George Ellison:]

I’m not sure, I will follow you.

[Jade Rahmani:]

Just the public players combining or some of the larger players combining and you’re now close to 10,000 homes targeting that by year-end. How would you categorize sort of the level of conversation for combinations?

[George Ellison:]

I mean, I think the stepping back, I think the space is clearly consolidating. So, we -- its a small market, so everybody is pretty familiar with each other, so I wouldn’t characterize it as hot or cool, it's just -- there is a few players left publicly and there is conversations that go on and, but I wouldn’t characterize it as particularly active or not.

[Jade Rahmani:]

Okay. Just switching to the relationship with AAMC. Have there been any discussion at the Board level on a potential internalization transaction? What are your thoughts on that?

[George Ellison:]

No. No. This is obviously an interesting topic in the -- our SFR space, it's obviously a larger topic across the greater REIT space. At this time, we're focused on executing the things we're talking about here, getting the Company to grow, hitting the right metrics, selling what we said we’re going to sell. We are focused on doing what we said we're going to do. AAMC internalization is not a -- we are open to everything we're pragmatic people. It's just to be perfectly honest, it's just not high on our list of priorities right now. The three that we talk about here today, we are working our tails off to hit these numbers and deliver. And so that’s just not -- I’m just being honest with you, that’s not real high on our list.

[Jade Rahmani:]

Okay. And lastly, can you just give some color on the decision to retain Main Street Renewal for property management and maybe how the arrangement with them compares with ASPS, because it seems like the target that you provided for -- in the same-store normalized results suggest lower property management figures as a percentage of revenues than perhaps the deal with ASPS implies.

[George Ellison:]

Wow, there is a lot in there. ASPS is killing it. They’re doing excellent job and as we start to look at stabilize of how they’re doing, we were recently reviewing this before the call, they’re doing a tremendous job. Remember the --or in case we didn't clarify, the property management of MSR was a function of the loan that was made to us being securitized almost simultaneously with the close on September 30. So the folks who gave us the financing were well on their way to doing securitizations. They made us a loan, they turned around to securitized that. The servicer, if you can call it that in the space of property management, and that was baked and blessed by credit folks that they dealt with, rating agencies etcetera. So the good news was we are able to purchase a large block in places that we want, deals that we like. The twist was that to get the seller financing we had to use their property manager. So that’s as I said, that’s good and bad. ASPS is our vendor of choice and always will be, but this was a unique transaction which might grow as we said and an MSR is also an excellent group. And we're getting to know those folks and they do a very, very great job. So as it gets to the last part of your question about comparing them, we don’t really have enough data yet to sort of compare pricing or things you might have seen. I think we can get better with you in another quarter or two, as we really start to see MSR unfold and as ASPS continues to mature with us, I think the real issue around some of the numbers, Rob put out, you have to remember we bought a -- this is a portfolio that’s 1 to 5 years old, very, very seasoned portfolio. And that's naturally even if it was ASPS in our portfolio three or four or five years from now. Those numbers as you know get better once the noise and the volatility that I mentioned are out. So I think some of the improvements that Rob put forward in terms of pro forma, the real issue I think are both very similar in terms of cost. The real issue is one stabilize and the other is not.

[Jade Rahmani:]

And just finally, the trends in rent growth were very strong, stronger than peers' reported results. Were any of the leased portfolios that you acquired under market in terms of lease to say a prior operator that underpriced rents just in order to fill the homes, what drove the strength in rent growth?

[George Ellison:]

Yes, I mean, I think this is a very interest topic. I mean, one quarter does not a two-year three-year trend make, but it is interesting and I think some of the resources have been put out recently, you are seeing stronger growth, which is the case we’ve been making from the beginning. You’re seeing strong rent growth in the lower end of the market and I know you’ve seen this research in August that came out talking about larger homes and the rent growth there is actually factually slowing down. Again, I can't draw a vector from one strong month, but in the lower rent space, rent growth is you have to be thoughtful about it, but it is possible, and the numbers prove it. I don't think particularly this quarter there was a whole -- there wasn’t anything we were digesting, the last summer's portfolio is pretty much all -- that’s into the numbers now. So I think that's just blocking and tackling and getting rent right is critical and -- but I think there is something forming here, which is a business case that we have been making again and again not to criticize the guys buying higher end homes, but pushing rents in lower end, smaller price homes, you’re talking about very small movements in rent can be quite large in terms of percentages, because you're just in the lower end space. It's incredibly powerful.

[Jade Rahmani:]

Thanks very much for taking my questions.

[George Ellison:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Mike Grondahl with Northland Securities. Your questions please.

[Mike Grondahl:]

Hi. Yes, thanks George and Robin. The first question, I just maybe want to get a tad more specific, but George, how would you characterize the pipeline today for acquisitions? I mean, does it remain robust, is it softening, where do you see it today? And then maybe secondly, kind of your outlook for the One-by-One strategy.

[George Ellison:]

Yes, I think I answer it this way, in the short-term and I think we listen to all our fellow public SFR companies calls, I think SFR goes after us, but listening to the other ones who were at excellent calls, pretty much said the same thing. I think in the short-term 6 to 9 to maybe 18 months, most of the large transactions will come and be executed and be finished. And so that's important and we have as you know, we mentioned the sales we're getting ready to reload and we're looking at opportunities as we speak, because these things take some time to complete, but interesting things always happen around year-end etcetera. So we will have the capital and we are ready to go. But I think the big ones will play out over the next, as I said, 6 to 18 months. The real growth after that is an interesting question and that's why One-by-One, which we continue to refine with ASPS, that’s your long-term growth and so -- and getting the bugs out of that, making sure that’s strong and smooth and efficient, that's what's going to replace the bulks down the road. Mini bulk as I said. I don’t think the mini bulk will be that attractive to some of the guys with higher end homes. But for us, as I said, I can -- the rollups of mom-and-pop into residential, I think will go on forever. That's exactly where mom-and-pop is in higher-yielding space, that’s 95% of this market and that's right where we are. Those are our competitors. So I think we will be rolling up those folks for the foreseeable future.

[Mike Grondahl:]

Maybe as a follow-up to that, George, the One-by-One strategy, what sort of -- what are the goalposts for 2017 that we can think about with that or is it too dependent on if your capital is going to the bulk side?

[George Ellison:]

You know you answered the question. Yes, the second part of that is the answer. We had very aggressive goals this year, thousands and for '16, and we never anticipated the flow of the ability to buy some of these large packages. So you balance both of them, again we're trying to grow that dividend, we're trying to be prudent about buying back stock, we're trying to grow, so you’ve to balance all these things. I think as it relates to One-by-One versus mini versus bulk, it's just going to be about yield. If you’re going to find a -- I think getting through a critical size is very, very important, but not at the cost of yield. So if we’re able to find another large package at a good yield, growing I think is getting to that 15,000, 20,000 number is critical. But if we can't get the yield, we won't chase it, and then mini and One-by-One will have to fill in. So it's a -- we look at all of them and you try to balance it, but at the end of the day, you got to hit that yield.

[Mike Grondahl:]

Got it. And then one more and maybe this is for Robin. Slide 18, the pro forma NOI. If I do the math there, the HOME SFR portfolio had about 63% and you guys on a stabilized basis was like 58.5%. What would you ascribe to the delta there? Why was HOME 4.5 points higher?

[Robin Lowe:]

I think the primary reason, Mike, is just that the HOME SFR portfolio is obviously a very highly stabilized portfolio, it’s a much more seasoned portfolio. And so maybe stuff like repairs and maintenance and so on, it's probably a little lesser. And that just got a lot more efficient in running that as the portfolio has become very seasoned. So, you can see that starting to happen with the existing portfolio. You’ve seen that kind of NOI percentage, NOI margin sort of go up 56%, 57%, 58% and we just recorded 59% right, so we’re getting there, but obviously the HOME SFR portfolio is a lot more seasoned.

[Mike Grondahl:]

Okay, got it. Thank you.

[Robin Lowe:]

Thank you.

[George Ellison:]

Thanks, Mike.

[Operator:]

Thank you. Our next question comes from the line of Brock Vandervliet with Nomura Securities. Your questions please.

[Brock Vandervliet:]

Hey, thanks for taking my question. So, I guess, to state the obvious, the transition here in the sale of the loans and the REO properties causes a significant amount of uncertainty. And it looks on Slide 11 like you’ve got a very large trade in the works on the loan side for the fourth quarter. Can you share anything with us in terms of specifics there? Are you comfortable with where you're marked? Do you think marks on that are going to be comparable to what we have already seen? Any color there would be great.

[George Ellison:]

Sure. As I mentioned, we will be doing a re-performing loan sale and a non-performing loan sale. And it's time to actually -- I think you saw one of our competitors did a cleanup trade of their remaining bits and pieces, sort of the residuals from all the other sales. So that's something worth thinking about, I want to publicly say as well, cautious about NPLS. We got roughed up a little bit in the second quarter, but the market is a lot stronger, that was coming off of a pretty rough start to the year. So I feel very good about the mark. NPLS are always as you know, Brock, up a few, down a few, but net-net I think I feel good about that one. And RPLs we feel very good about that one, just because it’s a pretty hot market. Then we will do one small RPL next year, but we’re also considering, we’re talking to a few folks about one trade to clean it all up. But again, it's a rock pile of tougher and tougher things and we’re going to be very thoughtful about the price. But as you can appreciate, as you started to question getting rid of these legacy issues is paramount. And if we can find the right level to sell them all, this quarter or first quarter next year, we will entertain that as well.

[Brock Vandervliet:]

Okay, great. And moving over to the other side of that slide, is there -- the REO portfolio has been on a much more mild glide path of divestiture. Is there anything you’re considering to accelerate that or is there some structural difference there that accounts for the slower divestiture?

[George Ellison:]

At my previous employer, we struggled with this issue as well. The NPL market is very developed. It's -- I mean in quotes, but there is as you know 6, 8, 10, 12, 14 guys and folks that they’re involved in that market and it's very, very transparent. Selling homes in both REO is a much tougher sledding as I found out having been very involved in the space for the last lot of years. So you actually selling homes One-by-One is really unfortunately the best X. Selling a big package of REO is it does not get good execution in my opinion. Also you have to break them into regional packages and that doesn’t accomplish what we want to do for our shareholders, who want to get out it. So, it's really seasonal. ASPS did a tremendous job selling homes this year. It gets quiet in the winter as I said, but it will pick back up. So One-by-One unfortunately is the best execution and -- but based on how well we sold homes in '16 and I sit on top of that personally, because it’s a high priority. I’m confident, we will be able to get them out of here by the end of '17, but a bulk purchase to clean them up unfortunately it doesn't work that way in REOs like it does in NPLS.

[Brock Vandervliet:]

Got it. Got it. That makes sense. And lastly around this whole repositioning theme, you’ve got 1,350 homes or so under valuation, that number continues to come down. Where should we look for that to go either by year-end or intermediate term?

[Robin Lowe:]

Yes, we continue to sort of reduce that number, Brock, as obviously as the number of NPLs reduce as well, the flow through to that bucket, if you like, we will go down as well. So, we continue to -- we expect to continuing declining trend in that number.

[Brock Vandervliet:]

Okay. Fair enough. Thank you.

[Robin Lowe:]

Thank you.

[George Ellison:]

Thanks, Brock.

[Operator:]

Thank you. Our next question comes from the line of Fred Small with Compass Point. Your questions please.

[Fred Small:]

Hey, good morning. Thanks. Robin, I think you said the average rentals were up 7% quarter-over-quarter in the third quarter. What were the actual number of average rentals?

[Robin Lowe:]

Actual number of average rentals in the third quarter, give me a second. Total leased in the third quarter was 3,143. I’m talking about the pre-acquisition number here versus 3,010 in the second quarter.

[Fred Small:]

Okay. So they were like 100 -- that’s 133 homes from the -- that converted from the REO portfolio to rentals?

[Robin Lowe:]

Well, it may not be that simple. There are several kind of dynamics going on there, but that was just the absolute -- that was the least number, right. Other things can flow in and out the rental portfolio.

[Fred Small:]

Right. Understood. Okay. And just on the increase in the real estate fair value adjustment, what drove the majority of that quarter-over-quarter, I guess, it went from $88 million to $195 million?

[Robin Lowe:]

So which number is that, Fred?

[Fred Small:]

In the NAV, the real estate fair value adjustment?

[Robin Lowe:]

Okay. That's basically the addition of the HOME SFR portfolio, which we acquired on the last day of the quarter. So you know when we’re doing our forward -- 12 month forward NOI estimates, so we’re now into that. As I said in my prepared remarks, that’s the main reason for the driver of the increased NAV.

[Fred Small:]

So that -- the real estate fair value adjustment is based on the NOI in your NAV [multiple speakers]?

[Robin Lowe:]

It’s a forward looking. Yes, it’s a forward looking 12 months NOI.

[Fred Small:]

Okay, got it. And then on the timeline for -- on the timeline for the current plan, when do you expect to reach 20,000 homes?

[George Ellison:]

Again, it depends on -- so first, obviously we have to sell loans, but we feel pretty -- as I mentioned earlier, we feel pretty confident about that. Whether we can get a cleanup trade done or not, obviously we'd swing that. Financing seems pretty available. Got to get to the right yield, buying the right packages I mentioned, so the goal is to get there by the end of '17. But as I said, we will have the capital, so that's nailed down I think the financing is there, so I feel pretty good about that. But it really depends on what you see. If we can't find a big package, maybe that slips. If you can find a couple of big packages, we could hit it by a midway through the year. I would caution that as we talked about earlier, this purchase, Fred, was around 150,000 homes, so we might start focusing more just on pure FFO invested dollars to buy this had we bought as we did last summer, $85,000 homes, the number -- you can spend $600 million on $85,000 home or a 150,000, obviously the number is almost half at that high print. So, it's really to find the yield dollars invested kicks off a certain amount of yield. So, we’re still shooting for 20, but if we buy a little higher at homes, maybe that’s 16, maybe it's 18. If we find a package that’s more like last summer, maybe it's closer to 20 or over 20. So, I might focus a little bit more on the overall cash flow that’s coming out of the thing. The FFO and things like that, NOI and operating metrics, the pure number I might downgrade as one of the key issues, but short answer end of next year.

[Fred Small:]

Okay, end of next year. And if you change it from 20, you would still expect -- based on what you just said you would still expect $1.70, nothing has changed in terms of your return targets?

[George Ellison:]

Right, exactly. Exactly. When its stabilized, which is critical, I know you know and we said that, but yes that’s exactly what I meant. The dollars invested will still produce those numbers that we mentioned on Page 1, once we’re stabilized. That’s still exactly true, although the actual number of homes might be different.

[Fred Small:]

Okay. I guess by when if -- as a RESI shareholder and an AAMC stakeholder, by when would you be disappointed if you haven't hit 20K or $1.70?

[George Ellison:]

When would I be disappointed. 10,000 homes probably -- lets focus on the first part of the bullet point, 10,000 homes stabilized if we have about 7,500 now. So let's focus on that first marker before we get to the terminal marker. You got to believe the 10,000 homes will be stabilized sometime during next year, because we’ve 7,500 right now. So that's sort of your first marker. Then we’ve to buy and then are we buying stabilized or not, I’m just making sure we're communicating crisply with each other, so let’s say you’re able to buy 20,000 or whatever the dollars are all spend by the end of next year, then that probably takes another 3 to 6 months to stabilize. and that obviously will roll into the next year, so I will be disappointed if we have to get there at the right yield, I want to get there by the end of next year and I think that would stabilize within 3 to 6 months after that.

[Fred Small:]

So by the middle of 2018 you’re not at $1.70 core FFO and/or 20,000 homes, you would be disappointed?

[George Ellison:]

That’s actually -- no, that’s actually the target. What I’m saying is the target is to get them all by the end of the next year, and then stabilization depending on whether we buy stabilized or not, I’m assuming it’s a mix of both. You could see the stabilization feeding that number as you go into '18. Let's say by the end of '18, if we missed and that hadn't happened and we had 20,000 or whatever the number turns out to be and they’re not stabilized, I would be disappointed. My target is to hit that between beginning of '18 and the middle of '18. That’s what the stated goal, because of stabilization. But them by the end of next year, stabilize them, 3 to 6 months after that that's the target. After that I would be disappointed.

[Fred Small:]

Okay, got it. And then, do you expect any need for a special dividend in 2016 based on where you’re on taxable through this part of the year, and the sale in the fourth quarter?

[Robin Lowe:]

No, we don’t, Fred.

[Fred Small:]

Got it. Thanks for taking my questions.

[Robin Lowe:]

Thank you.

[George Ellison:]

Thanks, Fred.

[Operator:]

Thank you. Our next question comes from the line of Stephen Laws with Deutsche Bank. Your questions please.

[Stephen Laws:]

Hi. Good morning. Thanks for taking my questions. I want to follow-up a little bit on the 10,000 and 20,000 stabilized home guidance. I think on Page 5 with the pro forma, you’re at $0.28 on 7,500 homes roughly. Can you talk about either expenses in that pro forma number of $0.28 or maybe the other side, what would you expect out of incremental margins on the next 2,500 homes that kind of gets you from the pro forma core FFO of $0.28 to the $0.60 guidance on 10,000 stabilized units?

[Robin Lowe:]

Yes, Stephen, so as I was saying to Mike little earlier, it's really about seasoning the portfolio. So half of that portfolio right now at the existing portfolio, if you like, as Mike pointed out its operating at just under 59 NOI right now. So we think of a time, we can prove that we can bring up the whole NOI a rule to low to mid 60s, and so that’s going to be key as well as continuing some rental rate increase, we still we had a very strong quarter this quarter, so that’s going to be so strong going forward as George says, but we’re expecting something there.

[Stephen Laws:]

Great. And then sorry if I missed this on the slide, but do you’ve some type of table laid out that shows what month you’ve renewal exposure in or is it pretty much spread out equally across the year? Can you talk about seasonality in the rent maturity timeline?

[Robin Lowe:]

Yes, we haven't sort of laid that out, but I think you will find it on kind of -- its somewhat seasonal as everybody else is that you kind of get more stuff in the spring summer kind of time when people move. But we haven't actually laid that out anywhere, but it's pretty much sort of a bell curve towards kind of the summer time when you see the higher turnover rate there.

[Stephen Laws:]

Great. And then finally, I know you spent a good bit of time earlier on the call discussing ASPS and MSR, but can you talk about how future home acquisitions, either One-by-One or bulk, are going to be allocated and who is going to be managing those future homes you’ve between those two?

[George Ellison:]

Sure. We put this out when we issued the details of the acquisition. We have a waiver on these 4,300 homes to use MSR. That waiver extends to approximately 3,000 more homes. It doesn't mean we will need it or use it, but ASPS gave us the opportunity to do one more transaction. Again that doesn’t mean we will, but everything else stays with ASPS. So the homes we buy this month, One-by-One for example, we will go right onto their platform. So I’d think of sort of the 7,500, kind of the number potentially with MSR and then that’s it. And the rest as we grow will be with ASPS.

[Stephen Laws:]

Sorry, that’s helpful. And lastly, George, as you look out, I mean, not necessarily next year, but three or five years, is 20,000 stabilized homes the size you want? Is there better scale and you think it's a better business at 30,000 or at 50,000? I mean as you can see consolidation and more opportunity and I think in your prepared remarks it sounds like you think this is a big opportunity for the rental housing on the low-end that’s not going away. What is the right size for this Company or the portfolio over the long-term?

[George Ellison:]

That’s a great question, Steve. The -- I think bigger is better. We're going to go to a lot more places than a lot of people are going to go. And so, our aspirations are much larger than 20,000. You know the numbers as well as we do, you’re talking about 17 million families I think is what Green Street pegged it at, something like that, 17 million families are renting homes. And as I said earlier, 95% or more are not institutionally managed. So what’s the depth of institutional reach going to be in that very, very large number of families? Right now it's 1% to 2%. And the number of people growing into the space according to some of the research is 250,000 to 500,000 families a year starting to rent homes. That overwhelms the total amount that the institutional folks have touched. So, as an investor, what’s the runway is how people should think about it in the space. What’s the runway to invest and how much will institutional penetrate? Is it 5, or 10, I guess, we could at multifamily as a comparison, but that doesn’t necessarily mean it will be, but it could be 20% or 25% of 17 million gets touched and managed by institutional. Institutional brains, institutional money, call centers, eviction teams, repair and maintenance teams to enormously beneficial to have that kind of size. The technology, if you listen to folks in the space, its overwhelming. So to think that -- no offense to mom-and-pop, but to think that a person with seven homes can compete with folks who have call centers all over the world and institutional money and enormous technology budgets, I think the experience for the homeowner which we’re all focused on can be much, much better in institutional hands depending on the location. So I think the space has enormous runway and I think our brand is the not even the lion share. Its over 90% of how this is done, and that's who we’re competing against. So I think it could be -- it depends on obviously we’re working to get stock price up, so that we can issue, I think it is without limit. I think it can -- in five years, I think folks in this space when it consolidates are going to have some of the larger end homes guys have 50,000 already. So I don't think hundreds of thousands is out of the question for any one of us. And I think the brand that we're in is 90% to 95% of those 17 million families. So we're going after them to give them a great experience in our homes, a safe, secure, responsive landlord with a yard and a garage and all the things that go with it. And so, I think this space can be very, very large for all of us, but particularly where we're focused, I think is the sweet spot.

[Stephen Laws:]

Great. I appreciate that larger picture overview there. And one last question, politically whether with the national elections here tomorrow or state elections where you guys have a large concentration of your portfolios to kind of your key target markets. Is there anything going on politically that gives you pause or concern, whether it would be changes in taxes or something that might disrupt your current expense run rate on your portfolio that you guys are watching tomorrow that we need to be watching as well?

[George Ellison:]

I don’t -- obviously, we watch all the expenses, all of us do pretty closely. Politically though -- so I’m saying insurance or HOA or repairs and things, those are non or apolitical. Political nationally, I don’t think so. I don't worry. But obviously we are touching consumers and so all of us are very involved, everybody in the industry is very involved with our communities and all of us are very, very sensitive to community activism and making sure that we're doing our share as members of the communities that we live in and own homes. So I think everybody, I say that as an industry. There's a group forming right now and this is one of the agenda items making sure that we're handling consumers the right way is incredibly important to us and all of this come from those backgrounds. Taxes, you do worry about that. I mean, there is nothing you can do about it, but taxes are obviously when communities are struggling. You can see sometimes they will try to dissipate their pain by raising different sorts of taxes. So that’s something we keep an eye on, everybody in the industry does. So I think about it and you deal with it, but it's -- that would be the only thing I think I really associated with politics.

[Operator:]

Thank you. We have follow-up questions from the line of Anthony Paolone with JPMorgan. Your questions please.

[Anthony Paolone:]

Thanks. On Page 7, there is six, seven markets where you’ve less than a 100 homes. How do you think about those? Does that kind of low number matter, because of the business model just being where your vendors are you don't have to focus much on scale?

[George Ellison:]

Yes, the -- as you know, we have undertaken and are almost done with the transition we started last summer. So the dispersion that you see on that page or on the map does have places that there are results, Tony, of buying loan packages that were geographically distributed across all 50 states release or at least the lower 48. So the yields fit and so 16 homes in Colorado fit. Over time though what you’re seeing is we're going to go to all those places. We've sort of turn the sequencing around to grow out Georgia, Florida, Texas, now North Carolina, Indiana, Illinois and so on, Tennessee, we were anxious to get to. So we will get to all the places that you see in most of those states. Could there be optimizing and pruning of three homes in Oregon? Sure, sure. I worry that the West Coast, as you know all the industry players talk about, the yield is tougher to get there, although some folks are seeing to be hitting something attractive in Seattle. So I’d say it’s a little bit of both. We will continue to grow out, but it will be much more sequential to get the right amount in every city, maybe that’s 500, in a third tier city, maybe that’s 1,500 in a second tier and in Atlanta maybe that's three to five or 5,000. That's how we'll do it. That's how we will grow it. And could we prune, 10 homes in Providence, someday? Sure, sure. But right now we’re growing. We are in growth mode, although I will probably be spending some time personally on optimizing next year with some of the members of the team, so maybe you will see this change a little bit, but for not a lot.

[Anthony Paolone:]

Okay. And then on the sales side as you unload some of the REOs and so forth, do you have an arrangement with ASPS where they have to provide it through Hubzu or can you go to like Roofstock or sell them through any channel you would like? How does that work?

[George Ellison:]

We use Hubzu almost exclusively. But just as you saw with this transaction, we enjoy a very strong relationship with Shepro and his team at ASPS, we will run some programs for higher end homes and might not use Hubzu when it's something that should be on Sotheby for example. There might be -- the Roofstock guys are very good friends of everybody in the industry and do a tremendous job. So we’ve actually looked at going the other way buying some things they’ve sourced. So I'd say Hubzu is probably the -- it will always be the main vehicle that we used to get out. But around the edges where things might not fit them exactly. ASPS and team are pretty cooperative if we need to do something else.

[Anthony Paolone:]

Okay. Thank you.

[George Ellison:]

Thank you.

[Operator:]

Thank you. We have follow-up questions from the line of Mike Grondahl with Northland Securities. Your questions please.

[Mike Grondahl:]

Yes, guys. I know you’re not having an AAMC call, so I just thought I'd ask here. The net income there was a $1 million loss or $0.67 loss. What’s kind of the developments there or anything percolating up at AAMC?

[George Ellison:]

Well, the -- as I’ve said, I think this is my seventh call I’ve said this from when we started. The best thing for AAMC is a robust RESI. And you know we are doing everything we can. I think most people would agree. We stated pretty clearly what we said we're going to do and we're doing exactly what we said we were going to do. And I think we are even a little ahead. So the stock is at a very, very attractive price. As we execute and push that up, that will be the biggest feeder of income into AAMC when RESI gets back to book and can issue again. So that’s the number one way. There are other things that we’ve looked at as we mentioned in the past. We continue to look at. I think if we're able to execute on some of those ideas, which I’m -- in an all-day meeting next week for another idea we’re considering. So we will launch other ideas in AAMC. But obviously it's November, those will probably be 2017 announcements.

[Mike Grondahl:]

Okay.

[Operator:]

Thank you. Ladies and gentlemen, this concludes our question-and-answer session for today. I would now like to hand the call back over to the Company for closing comments and remarks.

[Robin Lowe:]

Thank you everybody for joining the call and have a great day. Thank you.

[George Ellison:]

Thanks, everyone.

[Operator:]

Ladies and gentlemen, thank you for your participation on today’s conference. This does conclude the program. You may all disconnect. Everybody have a wonderful day.