Kelly Residential & Apartment Real Estate ETF
Q1 2016 Earnings Call Transcript

Published: 9 May 2016

[Operator:]

Good day, ladies and gentlemen, and welcome to the Altisource Residential Corporation First Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] I would now like to turn the conference over to our host for today, Robin Lowe, Chief Financial Officer of Altisource Residential Corporation. You may begin.

[Robin Lowe:]

Thank you, Sonia. 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 website 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, and our first 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 website using the e-mail alerts button. Joining me for today's presentation is George Ellison, Chief Executive Officer of RESI. I would now like to turn the call over to George.

[George Ellison:]

Thanks, Rob, and good morning, everyone. Altisource Residential is off to a strong start this year. The results are in line with our expectations. We continued to successfully execute on our strategy of selling NPLs and REOs at good prices, balancing stock buybacks with buying attractive outfits, and hitting our marks on operating metrics. We also continue to get support and a vote of confidence from the lending community with two new renewals that gives us a strong balance sheet and liquidity position. If you please turn to page three, you can see our first quarter highlights. Taxable earnings of approximately $17 million or $0.30 per share, a dividend of $0.15 per share has been paid out. Rental revenue increased 7% from last quarter. We repurchased about 900,000 shares, spending $10 million during the quarter and have now completed 35% of our $100 million buyback. We will continue buybacks in a measured fashion and work to strike the right balance between this activity, our liquidity position, and the opportunity to buy high yielding rental homes. We successfully closed the portfolio purchased of about 600 rental homes for a total of about 700 homes in the quarter at an average gross yield of 11.3%. We successfully closed another bulk sale of about 1100 loans at approximately 99% of our balance sheet carrying value. We are currently anticipating another sale this quarter based on continuing opportunistic market conditions. We closed the quarter at about 3500 rental homes and a little over 5000 loans. On the operations front, net operating margin remains on track at 56% as the team continues to push on this important metric. Our lease renewal rate for the quarter was 77%, with an average rent increase of 6% on renewals. 95% of stabilized rentals released at quarter end. REO sales, which started picking up in the fourth quarter continued to improve moving from 389 homes sold to 686, an improvement of 76%. On funding, Rob will cover the two new facility renewals, which I mentioned earlier allowing us to maintain a strong liquidity footprint. If you turn to page four, here we reaffirm our four key themes that we have outlined since last summer. The NPL market remains strong as evidenced by our first quarter sale right on top of our mark. And depending on market conditions, we will execute another sale this quarter. We continue to see good opportunities to grow our portfolio at attractive yields in bulk purchases, mini bulk acquisitions, and one-by-one buying. We continue to achieve attractive operating metrics and are pushing ourselves to get our NOI higher. And finally, we continue to stress our high yield strategy that distinguishes us from those we are frequently compared to. This higher yielding strategy should allow us to hit best-in-class operating cash flow. On page 5, you see the details of our first quarter NPL sale. Again, as with the first sale in the fourth quarter of 2015, our second sale was right on top of our market. And depending on market conditions, we are considering a sale on the second quarter and expect an additional sale later this year. On page 6, you can see our acquisition update. Between our single family rental portfolio of purchase and a one-by-one program, we purchased about 700 homes during the first quarter with a gross rental yield just over 11%. The SFR portfolio purchased was across five states with an average home value of $110,000 dollars. These homes came online at the end of March and thus will show results already in the second quarter. Page 7 is a repeat of our acquisition strategy slide from last quarter, but it bears [ph] repeating. We want to be clear, distinguishing our company and our brand from others in the SFR space, the difference is that we start with a much higher gross rental yield. We target moderately priced homes that provide this yield, our partners at Altisource portfolio solutions allow us to go into any MSA where we can achieve our required high yield. As we stated last quarter on this slide, after all costs are taken into account, our net yield target is 6% to 7% and this leads to a leveraged ROE on the asset of 11% to 13%. And finally, we are stabilized and reach full capacity somewhere between 20,000 and 25,000 homes; we expect to reach a dividend yield of 9% to 11%. If you please turn to page 8, as I said last quarter, this year is all about executing our strategy. Buying homes at attractive yields is only half the story, hitting operating targets is the other half. Here you see on this page we continue to execute well. We are happy with an NOI of 56% and are far from satisfied. Efforts to drive down costs in each of the categories listed here taxes, insurance; HOA, Turn cost and others are all being dissected and reviewed. The goal is to drive this NOI above 60%. Finally, please turn to slide 9. As our portfolio of growth, we continue to get more visibility into important industry metrics. A year ago we did not have the scale to see these metrics. But with each quarter, we are getting better and more granular depth. On this page, we share some common metrics that others cite in our disclosures and that we can now share from our portfolio. Renewal rate of 77%, retention rate of 67%, both good numbers. Average increase in rent 6%, also very strong, but we prefer to remain cautious and conservative in our projections. The rental housing market is robust right now, so we remain optimistic about these metrics for the foreseeable future. Rob?

[Robin Lowe:]

Thank you, George. Starting on Page 12 of our slide presentation, you can find details of our financial results. As shown on Page 13, estimated taxable income was $16.9 million or $0.30 per share for the first quarter of 2016. Revenues were $10.7 million lower than the first quarter of 2015, primarily due to lower unrealized gains on the smaller number of REO conversions and modifications offset by higher realized gains on the sale of mortgage loans. Expenses in the first quarter of 2016 were lower than the first quarter of 2015, mainly due to lower fees paid to AMC under the new asset management agreement, partly offset by higher property operating expenses and depreciation on a larger number of properties. Estimated taxable income was $20.9 million lower than the fourth quarter of 2015, mainly due to lower revenues on a smaller number of REO conversions and modifications, lower realized gains and loan sales and higher expenses due to the $6.9 million management fee reimbursements from AMC in the fourth quarter. Turning to slide 14 on a GAAP basis, we reported a net loss of $45.7 million in the first quarter, which included $29.2 million of non-cash items related to the depreciation of payment and selling cost provisions. Compared to the fourth quarter of 2015, revenues were $15.9 or 66% higher mainly due to an increase in the mortgage loan portfolio of value due to accretion in REO conversions. The net unrealized gain of mortgage loan lines shows us the loss because as loans and real estate assets are sold, gains that have been previously accreted as unrealized gain on mortgage loans are reclassed out of unrealized gains on mortgage loans to net realized gains on mortgage loans or real estate as appropriate. Excluding these REIT class, net unrealized gain on mortgage loans would have been positive $36 million in the first quarter of 2016. Expenses for the quarter were $85.6 million and included $26.6 million of selling cost and impairment provisions and $3.6 million of depreciation and amortization. We recognized a selling cost provision of $11.7 million on the 755 assets contributed for sale to a taxable REIT subsidiary during the first quarter and impairment of $14.9 million. GAAP required us to recognize impairment where carrying value exceeds estimate fair value. Where estimated fair value exceeds initial carrying value GAAP does not allow the recognition of such a gain. Any gain is recognized when the property is sold or if it is added to the rental portfolio through higher NAV. At March 31, 2016 we estimate that the market value of our real estate assets exceeded carrying value by approximately $68 million. On slide 16, we showed the split of operating income amongst stabilized rentals, non-stabilized rentals, and other REOs and loans. We estimate that our stabilized rental portfolio is currently producing a net operating margin of approximately 56%. As we develop the stabilized rental portfolio we are targeting and believe we can achieve a net operating margin of 60% to 65%. On slide 17, we show FFO and core FFO for the stabilized rental portfolio, clearly this is still small and new portfolio and we expect FFO to improve significantly both with scale in terms of covering fixed costs and seasoning as performance improves. As we grow the SFR portfolio, FFO, NOI and NAV will become key metrics to track. As at the end of the first quarter 2016, we estimate NAV to be approximately $21 per share. Turning back to slide 10 and liquidity of funding capacity, we had $125 million of cash on hand at the end of the quarter and $448 million of funding capacity for a total of $573 million available financing. As shown on slide 11 at quarter end, we held a total of 6,895 REOs of which 3,531 were in the rental portfolio and 1,752 were held for sale. The further 1,612 were under evaluations for rental sale which is a reduction of 27% of REOs under evaluation compared to the prior quarter. 686 REOs were sold in the quarter, a 76% increase in sales over the prior quarter for proceeds of approximately $94 million. The 27% reduction in REOs under evaluation and the 76% in REO sales are clearly both very positive metrics in terms of our capital recycling. The bottom right chart on slide 11 shows REO sales timeline from the date of contribution for sale and is based on actual data since interception. Once contributed for sale, over 50% of REOs are sold within five months right until 90% within 11 months. As we continue to contribute REOs for sale, we would expect to match or improve on these timelines. I will now turn the call back over to George.

[George Ellison:]

Thanks, Rob. In conclusion, let me repeat, this was a successful quarter in terms of hitting our targets on multiple fronts. Another successful NPL sales right at this mark, strong home sales more than ever sold in the quarter before. A $0.15 dividend that should remain at this level well into next year as we reached a fully stabilized portfolio and then see that dividends start to rise. Continued stock buybacks, another good portfolio purchased at high yield, and we continue to hit good NOI levels with the help of ASPS showing we know how to operate successfully. And we're maintaining and growing strong liquidity, all-in-all, a very solid quarter. The business is growing and we're hitting our operating target. Moving forward, the rest of the year looks very strong as well. Liquidity for NPLs at homes looks good. Acquisition opportunities continue to be readily available. Again, we commit to take disciplined about our specified yield bogey [ph] while buying. Our partners at ASPS continue to be leading property management provider. Also, if we continue to see rental demand growth in our country and we think we will, Altisource residential stands alone as the only institutional manager of high yielding, single-family rental homes to take advantage of this changing dynamic in our country. We believe we will provide optimal returns and dividends for shareholders who are focused on long term sustainable growth and performance. Before we move to the Q&A, I'd like to remind everyone, the purpose of today's call is to discuss our financial results and the progress that we're successfully executing in the Company's current strategy. I ask that you focus your questions please on just these topics. Any questions related to our situation with RESI shareholders group we refer you to our definitive proxy statement that we filed on April 27th and the letter we send to shareholders on May 6th for additional information. The board and the management team of Residential are committed to capitalizing on the sustain growth in single-family rental demand to generate long term stockholder value. We will continue to take steps to achieve this objective. With that, we'll now open up the lines for Q&A. Sonia?

[Operator:]

[Operator Instructions] And our first question comes from Jade Rahmani from KBW. Your line is now open.

[Jade Rahmani:]

Thanks. Can you characterize where acquisitions are most attractive on the single-family rental side if it includes individual portfolios from the likes of say Invitation Homes other large institutional owners bulk purchases from funds or one-off purchases, sort of how -- in terms of your pipeline, how those three stack up and may be give a range of yields by seller type?

[George Ellison:]

It kind of starts the other way around. We have a bogey as I just discussed. So, when we bid, whether its one-by-one, mini bulk, or bulk, it's really -- there's a lot available, it depends on what is the yield. So, there are different yields, I guess, but we really are looking through a lens where we're trying to hit the metrics that I discussed, six to seven on net, 11 to 13 on leveraged ROE, that's really what we -- if it doesn't hit those numbers, then we decline.

[Jade Rahmani:]

And when you underwrite portfolio acquisitions of leased properties, are you making additional improvement CapEx assumptions, and also what are your assumptions for recurring CapEx?

[Robin Lowe:]

Yes, Jay, this is Robin. So, yes, let me but -- of course we will make some assumptions about renovation required, obviously we do lot of due-diligence when we buy [indiscernible], so we don't going to sign every property, so we will make some assumptions. And we don't get access to all the properties. So as and when we do, we'll assess whether any renovation is required. On an ongoing CapEx basis, we've modeled and so far we think an annual CapEx number around $1200 to $1300.

[Jade Rahmani:]

The Invitation Homes portfolios that you bought, did you underwrite improvement CapEx on any of those properties?

[Robin Lowe:]

Yes. We model through similar numbers that I gave you.

[Jade Rahmani:]

Beyond the $1200 to $1300 per property, did you underwrite any upfront one-time improvement CapEx?

[Robin Lowe:]

No. You know, something like 95%, 96% of these properties are leased, so we've no reason to assume that major CapEx is going to be required in any of those properties.

[Jade Rahmani:]

Thanks for taking my questions.

[Robin Lowe:]

Thank you.

[George Ellison:]

Thanks, Jade.

[Operator:]

Thank you. And our next question from Emil Schuler from JPMorgan. Your line is now open.

[Emil Schuler:]

Hi. Good morning. It looks like 90% of your SFRs are in that ten markets. For your future purchases, are you planning to stay within a kind of more concentrated set of markets or are you comfortable extending beyond that?

[George Ellison:]

We look at it sort of in phase, Emil. We probably have 47% I think cities that we’ve stacked rank, which we'll be happy to share. We're currently in I think not like you saying nine or 10, we'll probably expand to 15 by year-end. But we have the entire country targeted, and as I said, we probably have a wish list of 47 that we'll grow into over the next year or two.

[Unidentified Analyst:]

Okay. And then the second question, I'm kind of curious who have been the buyers of some of your NPLs and are they doing anything significantly different than what you were in terms of servicing and turning with SFRs?

[George Ellison:]

Obviously, we probably don't want to say the exact names, but it's similar to the group of folks that we sold to when we were at our last employer, and they are doing something very very different in terms of business model than taking NPL to ramp, which wasn't your question. You asked do they do something different servicing. I think most of them, again I can't speak for them, most of them I would say are really trying to make a refi play to home owners currently in there, but again I can't totally speak to their business models.

[Unidentified Analyst:]

Understood. Thank you.

[George Ellison:]

Thanks. [Indiscernible]

[Operator:]

Thank you. And our next question comes from Brock Vandervliet from Nomura Securities. Your line is now open.

[Brock Vandervliet:]

Thank you. Good morning. Wanted to just talk about the pace of your dispositions from 389 to 686 I believe this quarter. Is this kind of the peak quarter for that or are we looking at several quarters around that same level?

[Robin Lowe:]

Yes. So I think there are two things. First of all, I think Brock, this is not the peak. We expect even better result based on the run rate so far in the second quarter. Obviously, there's certain amount of seasonality to this thing as we get into spring and summer, sales are likely to peak. But also, as you know, we are kind of putting this financing in place at the end of last year which has really enabled us to accelerate the velocity of disposition. So it's both of those things.

[Brock Vandervliet:]

Okay. And I guess as a follow-up, rental revenues going from 5672 to 6000, or $6 million, where do you think that trends over the next couple of quarters or year end?

[Robin Lowe:]

Obviously, that's contingent on the number of homes that we acquired to state the obvious. The IH portfolio that we acquired was really in the last day of the first quarter, so that was like 590 homes where we didn't really recognize any revenue in the first quarter, but we will in the second quarter. And then, obviously future revenue growth, we stated before that we're targeting, you know we would be disappointed if we didn't get to 8,000 to 10,000 homes by the end of this year, and so the yields that we're targeting and therefore we can derive the revenue from that.

[Brock Vandervliet:]

Okay. So the biggest factor was that large portfolio came in at the very end of the quarter?

[Robin Lowe:]

That's right. You didn't really see the revenue impacts for the benefit of that in the first quarter.

[Brock Vandervliet:]

Okay. All right. Thank you.

[George Ellison:]

Thanks Brock.

[Operator:]

Thank you. [Operator Instructions] And our next question comes from Fred Small from Compass Point. Your line is now open.

[Fred Small:]

Hey, thanks a lot. Just a quick clarification, I thought the NPL buyer from your previous employer was primarily RESI, because RESI bought a lot of loans from the previous employer, is that correct?

[George Ellison:]

No. RESI was clearly a participant as you know I think in the 2013, beginning of 2014 and then they went quiet, but you know the guys that are out there, easily one or two guys who are much larger buyers obviously rather keep that confidential, but RESI wasn't any material number more than the other three or four guys and one guy stands out much, much larger than that.

[Fred Small:]

Okay, cool. Then on the breakdown of the impairment and the selling costs, can you give that again what was the breakdown between impairment and just rate selling costs?

[Robin Lowe:]

Sure, Fred. So the impairment number was $14.9 million, and selling costs were $11.7 million.

[Fred Small:]

Okay. And so the $11.7 million is spread across how many homes, because it's not the homes, it's not the 686, right. It’s the home that you actually move into TRS?

[George Ellison:]

That's right. It’s the homes that we contributed during the quarter which was 755.

[Fred Small:]

Okay. And then on the other 14.9, how many homes does that spread across?

[Robin Lowe:]

Well, it's an impairment on all of the assets we hold in our balance sheet, so, its all of the REOs, both was the ones that are in the TRS than the ones that we hold through evaluation and rental.

[Fred Small:]

So that 14.9 is related to, I forget, is that changes quarter-over-quarter, but its like, I don't know its 625 million of REO and real estate held for sale?

[Robin Lowe:]

Its not relates to any change, every single quarter we would evaluate all of our assets, so all 6,895 assets we would evaluate.

[Fred Small:]

Okay. So, my question I guess is how much more of a rate down should we expect on REO and real estate held for sale that 625 million as it’s result over the next year or two?

[Robin Lowe:]

Well, so as I said Fred, I think it's really -- this is a really important point, that I want everyone to understand is the GAAP only makes this recognize downside. We're not allowed on the GAAPs to recognize upside on impairment, okay. So I recognize $14.9 million of impairment on my asset this quarter, but as I said in my prepared remarks we estimate that the market value of those assets is an excessive carrying value by $68 million dollars, okay. So this is a peculiarity of GAAP which kind of depresses my asset value, artificially I would argue.

[Fred Small:]

Okay. I mean, that's fine, if the market value, if we're selling it the market value exceeds the carrying value than that will be recognized in cash and we'll get it that way, but I'm just wondering how much more of a GAAP write down, I should expect as we move assets to the taxable REIT sub and as we move through the sales process over the next year or two?

[Robin Lowe:]

Obviously, that's completely impossible to predict, Fred. As I say every quarter depending on the new market value information that we receive, based on the new REOs that we convert – sorry, it's from NPL. We make that evaluation on a quarterly basis. It's not a number that I can predict.

[Fred Small:]

Do you think the real estate values are going down or you're just no – you just use the true-up when it moves from bucket-to-bucket or when you move to the TRS? You're not saying that real estate values are going down where you have your houses?

[Robin Lowe:]

No. So, I think you know that when I convert my NPLs to REOs I do that at the latest market value available, in another words the latest BPOs. What I'm saying is that, when I -- when I compare for impairment, when I assess for impairment some market values would turn out to be lower than my carrying value, and some will turn out to higher than my carrying value, right. The lower ones I have to mark down, the high ones I cannot recognize. So I do end up with highest sales, higher benefit on sale, high gain on sales as you just said, all that will ultimately contribute to our higher NAV on my portfolio, that's the two ways I'll get the benefit, right.

[Fred Small:]

Okay. That 68 million is that on the real estate owned and the real estate held for sales or it’s a real estate…?

[Robin Lowe:]

It’s a whole portfolio.

[Fred Small:]

Whole portfolio. Okay. Thanks.

[George Ellison:]

Thanks, Fred.

[Operator:]

Thank you. And this does conclude our question and answer session. I would now like to turn the call back over to Altisource Residential Corporation for any further remarks.

[George Ellison:]

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

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.