Kelly Residential & Apartment Real Estate ETF
Q4 2015 Earnings Call Transcript

Published: 29 Feb 2016

[Operator:]

Good day, ladies and gentlemen, and welcome to the Altisource Residential Corporation Q4 2015 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]. As a reminder today's conference call is being recorded. I would now like to turn the conference over to Mr. Robin Lowe, Chief Financial Officer. Please go ahead.

[Robin Lowe:]

Thank you, Candace. 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 statement in our earnings release as well as the company's filings with the Securities and Exchange Commission, including our year-end December 31, 2014, Form 10-K, our first, second, and third quarter 2015 Form 10-Qs, and our 2015 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 website using the e-mail alert 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, Rob, and good morning, everyone. When Robin and I spoke last November, we outlined a clear path for where Altisource Residential was headed. We covered four major topics, maintaining a strong annual dividend, continued NPL sales at or near the mark-to-market level, using our liquidity to drive SFR buying, and the experience and depth of expertise of our partners at Altisource Portfolio Solutions and their ability to manage our properties. Today, we will connect the last three months of hard work and results to that same narrative and listed goals. Today, we will cover the following topics

[Robin Lowe:]

Thank you, George. Starting on Page 20 of our slide presentation, you can find details of our financial results. As shown on Page 21, estimated taxable income was $37.8 million or $0.68 per share for the fourth quarter of 2015, and $107.6 million for the full-year 2015 or $1.90 per share. Taxable income was higher than the third quarter, primarily due to net realized gains on the bulk sales of mortgage loans, higher rental revenues, and lower cost mainly due to the recalculation of the first quarter 2015 AAMC management fee as required under the new management agreement resulting in $6.9 million rebate to RESI in the fourth quarter. Turning to Slide 22, on a GAAP basis, we reported a net loss of $46 million for the full-year which included a fourth quarter loss of $66.2 million. Fourth quarter net income was lower than the third quarter primarily due to lower unrealized gain on mortgage loans and higher selling costs and impairment as we contributed over 1,300 REOs for sale during the quarter. Rental income increased by 41% to $5.7 million in the third quarter as we saw the first full quarter of revenues from Invitation Homes that we purchased in the third quarter. Expenses for the fourth quarter were $90.3 million and included $38 million of selling cost and impairment provisions. We recognized selling cost provision of $14.9 million on the 1,329 assets contributed to sale and impairment of $23.1 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 the gain. Any such gain is realized when the property is sold or if it is added to the rental portfolio through high yields on lower renovation CapEx. Overall, we estimate that the market value of our total real estate portfolio exceeded carrying value by approximately $50 million. On Slide 24, 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%. Turning back to Slide 17, on liquidity and funding capacity, we have $117 million of cash on hand at the end of the fourth quarter, and $512 million of funding capacity for a total of $629 million available financing. As shown on Slide 18, at quarter-end, we held a total of 6,516 REOs of which 2,732 were in the rental portfolio, and 1,583 were held for sale. A further 2,201 were under evaluation for rental or sale which is a reduction of 27% of REOs under evaluation compared to the third quarter. 389 REOs are sold in the quarter for proceeds of approximately $49 million. The bottom right chart on Slide 18 shows REO sales timelines from the date of contribution for sale and is based on actual date since inception. Once contributed for sale over 50% of REOs are sold within five months rising to nearly 90% within 10 months. As we continue to contribute REOs for sale, we expect to match or improve on these timelines. I would now like to turn the call back over to George.

[George Ellison:]

Thanks, Rob. So to recap, very solid quarter, lots of activity, loan sales, one-by-one buying, solid dividend, and solid operational numbers finally coming into focus. 2016 appears to be off to a very strong and best start as well. We will continue to sell loans. We will continue to buy back stock. We continue to grow our SFR portfolio carefully and maintain an industry-leading ROE which will lead to a very strong dividend yield once we are stabilized. The story of this year into next is one of navigating this business to one with a stable rate of return. We are shifting the equity with which we have been entrusted to a position that can deliver ongoing long-term competitive returns. Once the transition is complete, we believe this stock represents a diversified income producing play on the U.S. rental market and excellent long-term diversifier to any portfolio. We believe the opportunities inherent RESI stock are inflation protection, portfolio diversification, solid income, growth potential, professionally managed both asset and property and liquidity. You can get into a form of stock obviously. We believe we have the right team, the right strategy, the right plan to execute that strategy, and with the help of investors who are interested in long-term growth, we can succeed. Before we move to the Q&A portion of the call, I'm not sure if all of you saw, but I want to address the announcement made this morning that Bill Wall has been appointed as an Independent Director to the Residential Board of Directors effective March 1 tomorrow. Bill's appointment follows Jim Mullen's decision to step down as a member of the board. We are extremely excited to have someone of Bill's caliber joining our board. He will also serve as a member of the Audit, the Compensation, and the Nomination committee. Bill has extensive experience serving on boards of both public and private companies. He is also a proven business leader with extensive corporate and investment experience. His demonstrated leadership and a substantial board level experience make him an excellent fit for Residential and we are looking forward to benefitting from his insights. Also, and importantly on behalf of the entire board, I want to thank Jim Mullen for his three years of excellent distinguished service. We wish him well in his future endeavors. Additionally, I want to briefly address our situation with the RESI shareholders group. Residential's board and our leadership team value the views of our shareholders and welcome a constructive dialogue with them. We are committed to acting in the best interest of our company and all of our stakeholders. Consistent with Residential's normal practice, our board is currently reviewing the RESI Shareholder Group's proposed candidates. The board will present details regarding its recommended slate of director nominees in the company's proxy statement. With that said, let's keep in mind the purpose of today's call is to discuss our financial results and the details of the plan we further outlined. I would ask that you focus your questions on these topics only and with that we will now open up the line to Q&A. Candace, I will turn it back to you.

[Operator:]

Thank you. [Operator Instructions]. And our first question comes from the line of Jade Rahmani of KBW. Your line is open.

[Jade Rahmani:]

Good morning. Thank you for taking my questions. Do you have an estimate for net asset value? You mentioned the $50 million in excess of carrying value. Is that after transaction costs? The question is whether you think NAV is in line with GAAP book value or higher.

[Robin Lowe:]

Yes, the book value Jade is $20.73 and I think NAV is very close to that.

[Jade Rahmani:]

Okay. I'm curious how you would answer the following criticism. With most single-family rental stocks trading well below net asset value, why not liquidate RESI's end tail portfolio and use all proceeds to buy back shares rather than pivot to SFR right now? It seems like there could be greater upside from that than opting to become a single-family rental REIT at this stage and given the uncertain capital markets environment, there doesn't seem to be a huge impetus for home prices to continue to strongly appreciate. So you would still have the option to do SFR later if the stock responded and you gained increase access to capital.

[George Ellison:]

Well there is a lot of that question. What you're really asking is about the difference between people who don't want or not in favor of long-term supportable growth. And there, the question you're asking is should you just liquidate and take the money out. The, you know Jade the obviously equities have gotten off to a very tough start, REIT sector probably even tougher, and then, and so the question is, another way to see your question is you guys are coming in last in a sector that has lag. So the sector, the industry needs to do a better job of hitting their numbers, all of us do. I say that respectively to our peers. But I think what people don't understand about this story which we try to hit on today is that that comparison to some, if not all of those folks, is not accurate. And so to be pursuing a high-yield strategy, which I think is probably the only pure high-yield strategy in the space, I think is not a risky strategy and we have the capital to get to the home. I think the market will start to understand the story as we continue to tell it and as we continue to hit our numbers which we're starting to see us hit now and I think they will continue to distinguish between the brands and this is a very different brand. And so, to cut and run now when it's really starting to just get it legs under it -- people thought we didn't have the money, we got the money. People said we couldn't sell NPLs, we sell NPLs. People said we couldn’t buy homes, we are buying homes. Then the question and these are all completely legitimate or can you hit the yield. And we're not saying we will get the yield, I think on that one slide the homes we bought in the fourth quarter I think the gross yield rather like 12.7% this isn't something we're saying we can do, this is something we're doing. So we're looking for people who believe in a long-term growth story and it will go through book value and well beyond book value. Not to mention what you say in terms of liquidation, you need to be very careful and thoughtful these are not 10-year notes so that you can sell on a screen. The friction cost and the challenges to liquidation around something this big and complicated is you say well why not just liquidate it, like we're calling up a broker and selling something. It's not that easy and there will be friction cost and it will take time and there will be risk to that as well. This is actually less risk.

[Jade Rahmani:]

Regarding the comments around friction costs, does that suggest that true NAV after transaction cost is below the $20.73 book value?

[George Ellison:]

No, my math was just in terms of remember you have NPLs that's pretty clear. You have rental homes that's clear, and then you have REOs, those are the three assets. All I meant was selling thousands of REO which we're doing one at a time and so we're hitting the numbers that we report the Company is worth. That's true, factual, and happening. I'm just saying someone said let's start doing a block trade of this or that; I'm just saying there could be clear friction cost that come. Would you agree with that?

[Robin Lowe:]

Yes, exactly.

[Jade Rahmani:]

I mean, I think the essential disconnect is your stock is trading at 48% of book value, which means you can buy these assets, the same assets that you are going out and paying market price for at $0.50 on the dollar, which would be highly accretive to shareholders and that's a provable thing whereas the single-family rental strategy with ASPS is more uncertain just given that you haven't been at that business for an extended period of time. So I think that buying back the stock in meaningful amounts would be compelling at this point.

[George Ellison:]

Well, as I said I mean its people -- educated people can disagree. We are buying back stock, you said I'm not sure the word used material or significant. So people could disagree on how much to buyback. We're buying back stock, we will continue to buy back stock, we will buy back as much as we can, but we have to balance liquidity, as you know, and the opportunities to get high yielding homes we believe is in the long-term interest of the stock and that's what we're answering to. People who want a long-term stock that moves through the teens, through the 20s, and hopefully into the 30s and 40s. That's what we are addressing. Those are the people that we're answering. And so it's really a choice, it's a very clear choice. Are you in this for the long-term growth or not? And we are managing to a long-term growth investor whose stock well beyond what you're saying.

[Jade Rahmani:]

Okay. And just two quick ones. On the GAAP loss, the $42 million unrealized loss on mortgage loans, how much of that will be recognized as a cash cost in future quarters? And then the follow-up would be what should investors expect around the dividend for 2016?

[Robin Lowe:]

Yes, most of that GAAP looks as I explained were non-cash items, Jade. So it will be selling cost and impairment cost and that was really driven by the very large number of REOs that we contributed to the TRS this quarter. And George, do you want to talk about the dividend?

[Jade Rahmani:]

But, sorry, in future quarters, when you sell those REOs, will those costs be realized in cash?

[Robin Lowe:]

Yes, some of them will. And then it comes through in the gain or loss on sale right. It ultimately depends on what we actually sell the assets pool.

[Jade Rahmani:]

Okay. And on the dividend?

[George Ellison:]

Yes, the dividend we talked about this in the past, it's -- we're trying to get the volatility out of it. And the way you do that is get to a stabilized amount of rental homes the 20,000 to 30,000 we have the capital to buy. But between here and there you have two or three crosscurrents. You have the legacy business again call it that winding down slowly gets driven by resolutions. So that's still there and coming down, you have rental income as you continue you grow and you're growing pretty rapidly but still you got to get rental income up. So that's rising all through the years as we transition, so that's a positive. And then NPL sales intermittently if those have a gain in them taxable gains that obviously goes to the dividend. So it's still moving around and probably we will have more volatility than we would like but that's what this transition is about. We are reacting to the change in the environment and we're sticking with the story which is that it's an SFR REIT and we're driving towards making it one of the biggest and that's going to take time and the dividend will be volatile. I want to be very, very clear; the dividend will be volatile as we transition. So that's why we put that slide the last time which we can provide again of where the company will -- what it will look like in a stabilized environment.

[Jade Rahmani:]

I thought that the previous expectation was the underlying SFR earnings are going to be building, so not yet continuing, but the retaxable gains expected from NPL sales would trigger dividends?

[George Ellison:]

That's -- forgive me, that's what I would may be I'll make that clear. That's what I'm saying the three drivers are the current business that you follow for years coming down but still putting some money into the dividend, but that's obviously trending down, rentals are trending up, and sort of straight across the middle are taxable gains on NPL sales. That's what I'm saying it's one going down, one going up, and one, I'm not going to count on taxable gains for NPL sales although obviously they have occurred and I think they will continue to occur but that one is obviously question mark but that should be definitely this year that should be a driver.

[Operator:]

Thank you. And our next question comes from Anthony Paolone of JPMorgan. Your line is now open.

[Anthony Paolone:]

Thanks, good morning. When do you think you will be out of the NPL business it seems like between 4Q and 1Q its 40 some odd percent of the book?

[George Ellison:]

Good morning, Tony. The -- we have two more sales that are scheduled for this year. The -- obviously the market all markets have been treacherous at the start of the year driven by equities, commodities, and others. NPLs really don't react that much to it. But I would tell you they got a little bumpy right after we did our sale but again it's a very short duration asset. So all I kind of say is I think those sales we will have I think will be fine but I might not go as fast on them until things cool down a bit. So there are two big sales that happen recently with the GSEs. One was I think an excellent print and the other was a little jumpy, a little choppy. But again as you know every one of these pools is very, very different. A slight change in state concentration can change it. So I think those two will happen this year, probably this quarter and the third quarter, and that would leave us with probably some NPL and RPL sales to clean up as we move into '17. And then I think what will be left over is probably 1,000 loans would you say. And so when you think about the sales they will happen this year may be some clean-ups as we move to the beginning of next year, and underneath will be kick out some different things and things wrapped up in litigation whatever that can't put into a deal and we will keep banging away on those from a resolution standpoint. Long story, short I would say that's most of this year probably halfway through next year they will be gone.

[Anthony Paolone:]

Okay. And the two sales that you mentioned for this year, one of them being the 1,266 that's teed up already?

[George Ellison:]

No, forgive me that the -- there will be three this year. So the one that's done we consider done its closing in two weeks and we're just finishing wrapping up final due diligence. So I was speaking I will do a -- so we did one in the fourth quarter, we did one that will close this quarter, the first quarter. We will probably do another one we'll have to see the pricing in 2Q and may be in terms of the quarter we'll do another one this year which will be sometime in the second half, so a total of three for this year, a total for four in all.

[Anthony Paolone:]

Okay. Got it. Thank you. And then you guys went through a bunch of details on ASPS and their breadth and how you get to leverage off of that, but can you tell us just how RESI shareholders get that scale benefit by way of fees? Does the fee change that you pay to ASPS as your portfolio gets larger or is the scale just a matter of them being good at what they do and so you get good economics? Like how is that -- like do you get -- how does RESI get the benefit of ASPS's scale?

[Robin Lowe:]

Yes, Tony, I will take that one if I may. So I think there are two aspects to ASPS in that sense. One is we get the scale benefit from day one, okay because they already have that scale built in. So to some extent for us it is like plug-and-play. Now I'm not going to tell you its matter of we have one property in a MSA or 1,000. There obviously is some benefit to us and to ASPS on that. But to some extent anyway it is plug-and-play. We get the advantage of ASPS scale and economies of scale from day one and that's reflected in our pricing. The second thing and George touched on this in his prepared comments was because of the ASPS's geographical ability we can go well beyond the 12 MSAs where our competitors typically go. We can go and search those high-yields in places where our competitors cannot. So we get a benefit from ASPS both on the growth rental yield side and also on the operating cost side.

[George Ellison:]

And Tony, I'm not a -- I don't pretend to be an expert on other folks mistakes but from what I've read pieces you put out, and others have put out, I think one of the struggles that people have had which was why we keep trying to distinguish ourself and will, is in building something like that. So people have struggled as they've tried to build the ASPS equivalent. This thing has dropped in the RESI shareholder lapse. This thing to Rob's point we start day one and our shareholders, RESI shareholders don't have to suffer through people some of these calls I've listened to people announcing they've hired people in certain sections of the company, so we're moving there. This is already built, 100% built. This is -- I'm not sure how many employees they have. It's over 10,000 people. These are call centers handling thousands and thousands of calls a day. The 1,300 Atlanta purchase. Literally we moved that's a perfect example of ASPS. How RESI shareholders benefiting we got 1,300 homes flipped into these guys you can check with us to see how it went, you can check with Invitation Homes. Those guys are absolute first class guys in the industry. They will tell you it went perfectly. And you can check we will give you homeowners or renters, 1,300 homes dropped in their laps literally nothing went wrong. I think there were some deposit checks, they got to sent to IH, and they send them to us, like people had a delay of getting their deposit check back of like 10 people, on 1300 homes. These guys -- Shepro has one of the best property management businesses in the entire space and he's bigger than just does. So it's how they benefit, massive, massive advantage to have those guys already built ready to go and I think we're just going to get better.

[Anthony Paolone:]

Okay, thanks. And last question, the REOs, you moved a bunch to held for sale. So there's still -- is the 2,200 I think still being evaluated? Like when does that come to some sort of conclusion on whether they are keepers or not?

[Robin Lowe:]

That's right. That's going to happen over the next couple of quarters or so. There are some in-built delays and these things from when we take title to ask you when we can even get access to the property, there are redemption period, there are other legal or other issues. So it takes one gets access to these properties once though we get title. Once we are there, we may a pretty quick evaluation and decide what we want to do. So that will be an ongoing process, Tony.

[Anthony Paolone:]

I mean, what's been the experience thus far in terms of the percentage of REOs that you've evaluated that either made it into your and then held for sale pool versus rental pool like what's?

[Robin Lowe:]

I would say history today, may be a third, something like that of the stuff under evaluation goes to rental roughly. But that's not necessarily the case going forward; we look at each property on its merit and figure out whether we can achieve the yield that we're targeting.

[Anthony Paolone:]

Okay. And does that pool of REOs require much capital either to get it sold or to tee it up as a rental?

[Robin Lowe:]

We fund that the same as we do our other properties. So it is 55% or 60% funded. What we've achieved this year is to fund with the REOs in our TRS where we have to contribute REOs to sale, which means we can accelerate the sale process which is why you've seen us contribute over 1,300 properties to the TRS this quarter for sale and we will continue to accelerate that process obviously it's in our interest to recycle that capital as quickly as possible.

[Anthony Paolone:]

Okay. So can the number of homes sold tick up? I think you've been running like 300, 400 or something a quarter?

[George Ellison:]

Yes. We're trying to shoot for -- we want to double this, Tony, but I think we did 389 last quarter. We are already over that for the end of Feb. I haven't seen the numbers this morning. Sales always close heavily in the last week of the month. So I think we're already over there. So we will hit 600 as the goal, I think we will get over that too. So they are picking up materially from kind of the 320, 330, 390, bang 600 and more. So that's what I would anticipate.

[Operator:]

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

[Brock Vandervliet:]

Well thanks for taking my question. So I guess there are kind of two issues. One is the cost of the transition from NPL to rental and the second is just the operating metrics on the rental business, which is still kind of embryonic. I guess, Robin, you talked through this a bit with Jade, but if you could go back to the $15 million in selling costs, the $23 million in impairment costs and what does that represent? What's driving that and what -- I guess any sort of expectation for remainder of the year in terms of what you want to sell? Is it going to be generating marks like that to ditch out of the rest of the NPLs?

[Robin Lowe:]

Sure. Good morning, Brock. Those costs are REO-related, not NPL-related. Right, so when we decide we got to sell something we take a selling cost provision for GAAP purposes right. So it's a non-cash provision as Jade was saying earlier. And so the actual impact of that is decided at the time when we finally make a gain or loss on the sale of that particular asset. So that's just part of the normal asset disposal for instance. The same reason we're required when we contribute assets for sale to make an assessment of whether we believe there is an impairment compared to market value. As I said on my prepared remarks, we -- GAAP requires us to recognize the downside but not the upside. So I can't give mark down my asset, like I can't mark them back up, or I can't even mark back up to the initial carrying value. So what I was trying to say there was overall we actually believe that our portfolio is worth somewhat more than our GAAP carrying value. But the way the GAAP process works means I have to take the downside when I'm evaluating for impairment.

[Brock Vandervliet:]

So do you think you'll get some of that back when -- at the end of the process?

[Robin Lowe:]

Yes, absolutely. I said, overall, I think that -- we believe our overall portfolio, which includes my rental assets worth something in the region of $50 million more than I'm carrying it at. But even if you look at the TRS level where I'm selling the assets even there the market value is significantly above the carrying value on an overall basis.

[Brock Vandervliet:]

Okay. I will make another run at that offline.

[Robin Lowe:]

Sure.

[Brock Vandervliet:]

I guess the other thing in terms of the operating metrics on the rental business, it looked like the in-place rentals were flat at roughly 2,100 units, but the operating expense -- the property operating expense -- was up pretty significantly. Is that a lag effect from the Atlanta acquisition or some other factor there?

[Robin Lowe:]

Yes, that's fair. I mean, overall our property numbers did go up. We were at 2,732 versus 2,516. It obviously we still on the rental side a full quarter's worth of IH revenue this quarter as I mentioned earlier and with that comes a full quarter expenses as well.

[Brock Vandervliet:]

Okay. But the in-place number of rental homes was just 2118?

[Robin Lowe:]

Yes, actually leased to us 2118 listed was 264 and then we add another three in renovation or turn.

[Operator:]

Thank you. And our next question comes from Mike Grondahl of Northland Securities. Your line is now open.

[Mike Grondahl:]

Hey, thanks for taking my questions. Could you talk a little bit about the economics on the 627 rentals that you bought?

[George Ellison:]

Yes, it's probably I’d say in general and then I'll get specific, on that. To me the numbers that you -- that you try to get, are a 11 to 13 gross yield. The Atlanta one was I think 12, may be 11 after vacancy. We haven't close the thing the yet. I think this one the 600 will be right around there in terms of gross. Then you want to look at net. The one-by-one Mike you can so specifically hit those numbers. I mean you can literally, literally get into the house and know exactly what you're in for we do -- we buy for a like renovation so that pool I think was 12.7. So I would say in general I mean other people might disagree in the industry, your growth should be, 11, 12, 13 great one. Your net bulk seems to be a little bit senior. So I would say bulk purchases you buy 5.5 to 6 and you try to drive on into the 6s. And I think it's in the slide somewhere there, we've been able to push rents up probably around 5% on those that have turn. So bulk to get the size you probably buy that in the high 5s individually one-by-one you can get those in the 6s. I think the guys have machines out up to like 6.3 and let check with the team. And then, as I said, on the page then you take 6 to 7, would leverage up to, 11, 12 and then after everything you try to like when -- so these are the things we use when we buy both bulk and individually. The literally the numbers we put into the machine when we're buying today. And we put dividend yields into those model. And so right now we're buying so I think it's like 9.3 or 9.4 dividend yield on book. So, that’s sort of how we think about the growth, the net, the levered ROE, and then dividend yield to RESI shareholders.

[Mike Grondahl:]

Okay. The NPL sale that's going to happen in the March quarter, do you expect a taxable gain from that?

[Robin Lowe:]

Yes, there will be a taxable gain. Obviously, the number is not --

[George Ellison:]

The one we just did the January one. The one we're closing in two weeks?

[Mike Grondahl:]

The one that will close in March.

[Robin Lowe:]

Yes, there will be a taxable gain. Obviously, the numbers are not finalized yet, Mike, but there will be a gain.

[Mike Grondahl:]

Can you give a range at all?

[Robin Lowe:]

Not really because the numbers are not closed yet.

[Mike Grondahl:]

Okay. And then, how are you guys thinking about -- obviously that NPL sale and potential future sales are going to generate kind of a lot of cash, a lot of liquidity. What does your pipeline look for putting that capital back to work? How robust is that pipeline, if at all?

[George Ellison:]

Its -- I will you Mike it is that's what I said in my comments. It is we will not see, you were following this space for a while, the consolidation phase is well upon us. And there are as you know companies that have traded, companies that have merged, those kick off homes. One company still I think is available but beyond that there are funds that have to liquidate by their natural durations, some funds want to liquidate, so there are blocks of attractive -- if you can get the right yield, attractive size that are right in our real house. So there are -- there's still stuff around 8,000 or 9,000, there's probably half a dozen things between 3,000 to 5,000 and then there is some smaller guys that are pruning like the 600 that we just picked up. So we are choreographing the NPL sales right into purchases. And so the NPL sales will happen and the money will be spent pretty quickly assuming we can get these close yields that we want.

[Mike Grondahl:]

Okay. And then may be just lastly quick for Robin. Do you expect positive GAAP net income in 2016? I think people are just sort of wrestling with the impairments and some of the marks as you move -- decide to sell assets. So can you comment on GAAP net income?

[Robin Lowe:]

Yes, Mike obviously I can't give any forward guidance to that. Well we're sort of contributing these REOs for sales, we get these selling cost provisions and we get this impairment recognition. Going forward, as I say, our assets, our market value of our assets is overall well above impairment. So I don't really see that as an issue, it's a non-cash item and selling cost ultimately come out in the wash when you actually sell the assets right, so.

[Mike Grondahl:]

Got it. So may be directionally, in 1Q, we will see more progress there or the other side of that. Is that one way to look at it when you complete this next sale?

[Robin Lowe:]

Yes, look I mean I think trend wise what you're going to see once we kind of deal with that backlog that we had with the REOs under evaluation that we’re sort of recycling now. Obviously that's going to drive down the selling cost provision. On the other hand over time, as we grow our SFR portfolio like every other REIT in the space, you’re going to see depreciation go up which will contribute to GAAP net income also right.

[Operator:]

Thank you. And our next question comes from Fred Small of Compass Point. Your line is now open.

[Fred Small:]

Sorry, so going back to just maybe the friction costs you talked about on selling pieces of the portfolio now and you talked about sort of friction costs if you were to sell bigger chunks of the entire portfolio, may be including single-family rental assets as opposed to continuing to aggregate. When you talk about that, are you making a distinction between the NPL selling costs and the single-family rental selling costs there?

[George Ellison:]

You say when I mentioned friction?

[Fred Small:]

Yes.

[George Ellison:]

Yes, as I said the company has three basic types of assets NPLs which I think when people talk about again I'm paraphrasing someone else's thoughts, so forgive me. I think people confuse NPLs which believe it or not, trade in a very liquid format. The market is not tremendously deep but that's been going on for since the crisis in big size, and the process is well worked and so those are in "liquid". You can put a package out, GSEs, banks, whoever get bids and in eight weeks close it to a group of very reputable buyers and services. So that is liquid as it were. And then after that we're trying to sell, as Tony was just focusing on homes. And so when you say you have thousands of homes for sale we said, Tony was just asking how many did you sell this quarter. What I'm trying to say is the process of selling thousands of homes will take you a year to two years. It's not like picking up a phone and selling a block. And then there's the risk or the journey around that. And then, lastly you have this ever growing portfolio of rentals. And you see, as I said, those trade I wouldn't call that liquids but those trade in blocks and some companies have tried to sell they can't. Guys like us are buying. We're going to be very, very tough on yield and so sell struggle to sell. So all I meant is when people push the rhetoric that they say let's just liquidate its enormously more complicated and time consuming and it can't be, as I said, you can't -- this is not selling GT10Go -- GT10 Government go. So my point is it will take time and there will be risk.

[Fred Small:]

Got it. Thanks. And if you didn't buy another asset, how long do you think it would take where you were at a state where you had just cash and rental homes at some sort of target occupancy?

[George Ellison:]

You mean how long is that the question? How long until the NPLs go away? Or NPLs [indiscernible].

[Fred Small:]

You've rented, I think, out of your own portfolio -- so not stuff that you purchased. I think it's like 20 homes in the back half of the year, which is my next question, but how long would it take until you just had cash? So including the other single-family rental sales also that you are not going to rent?

[Robin Lowe:]

Are you talking about when we get to a stabilized kind of end state with our current equity, Fred, like when we hit 25,000 homes or whatever is that what you're asking?

[Fred Small:]

No. I'm saying if you didn't buy anything else.

[George Ellison:]

If we didn't buy anything else, we kept --

[Fred Small:]

How long would it take until you had cash and some stabilized amount of homes?

[George Ellison:]

Okay. So I think that question is what I was saying. I think, what you were asking is if I didn't buy another home, how long would it take to sell everything else and have cash in those home; is that correct?

[Fred Small:]

Yes, leased. So you are at like 90% plus leased on what's going to move to rental?

[George Ellison:]

Okay. So keep what we have and sell everything else which is what we're doing. So, as I said NPLs would probably duration of that, it's probably a year-and-a-half. Through this year we will do the next two sales in addition to the one closing in two weeks. Homes as I said will detail on that again is probably year and half could go longer. And so that would be the main two assets, I think you described. Loans we went through this in our previous employer, you sell loans that you can and then you develop a sort of a residual pile of things that keep getting kicked out of other deals as I mentioned earlier or they have severe litigation or other problems and those are one that take time to really work out and really intense servicing. And I think as I said that pile of thousand will be with us probably well into the next year till the end of next year.

[Fred Small:]

All right. And just on slide 26, am I reading that upper right-hand chart correctly, you leased 13 homes in the fourth quarter?

[Robin Lowe:]

So that's the difference between the 2105 and the 2118. Yes, on a net basis, there are obviously a lot of ins and outs overall and we grew the portfolio as I say, from 2516 to 2736.

[George Ellison:]

Yes, what we're starting to see is we grew pretty quickly there with the purchase from IH and now you're starting to see the normal rhythm of people coming and going. And so we didn't do any bulk purchases and so we're continuing to create homes through the legacy business. One-by-One obviously in the first quarter was only 150 and all of those are in the portfolio yet. So yes relatively flat in terms of growth obviously this quarter one-by-one will keep blossoming and we bought 230.

[Fred Small:]

Sorry. The third quarter was pretty flat too when I back out Invitation Homes. I think it was somewhere around 10 or 20, I can't remember the exact number. So it just seems like the actual rentals coming out of the converted NPL pipeline is really low.

[George Ellison:]

Yes, when you and I first started talking I think it used to run, but it was just the NPL business and resolutions were driving it. I'm going from memory but I think I'm pretty close, it was something like 60 to 80 a month and it grew through '14 and into the first half of '15. Once you stop buying NPLs that whole engine stops. Early resolutions are no longer early and things that you thought you can resolve on the first year are now gone. And so you're now managing a static pool. And you're getting I think the when original NPL business was sold, as a concept people said things like it's a two-year average. So now, for a two-year average I need to have something that is six months and something that are you know 3.5 years. I think so now you're into that slower stuff. So the old business, the legacy business, which you're trying to subtract out -- we can get to those numbers and that number went from 60, 60, 60 I think it peaked may be -- I think it might peak with 370s or 380 and then it started coming right back down and I think in the third quarter it was like 50, 50, 50, and then the people leaving start getting added in. And now you're getting a robust group of people leaving and people joining and then they sort of watch. And so I think the legacy business will not provide any substantial home growth. The home growth will come out of bulk purchases and one-by-one.

[Fred Small:]

Then you are saying that the -- you have 6,500 REO, I think I'm looking at slide 18 right, 6,500 REO and that the 2,200 that you are evaluating for sale is going to produce like 100 rentals?

[George Ellison:]

No, I thought you answered this earlier --

[Fred Small:]

Just like evaluating for?

[George Ellison:]

How many rentals will come out of the remaining NPL four I think that's the question and the answer is.

[Robin Lowe:]

It's historically about a third.

[George Ellison:]

Right, yes, so I think that number is not going to be 150, I'm talking not subtracting people leaving. I'm saying what will that portfolio harvest. I think it's probably 400, 500, 600, 700, if its 22 you know, let's say its 600, 650. 700 it would be what's going on typically.

[Fred Small:]

Okay. Got it. It just seems like it's coming down. It seems like it's really positioned to a very low number, but I will follow-up with you on it. And then, did you say how much -- I may have missed it -- how much you are paying for the 627 homes?

[George Ellison:]

Haven't closed it yet, you mean dollars or yield?

[Fred Small:]

Dollars?

[George Ellison:]

Dollars, wow I don't know yield. Do you have that, Rob?

[Robin Lowe:]

Dollars, announced it or not.

[George Ellison:]

Give us one second. It was 630 homes I'm guessing how many dollar a home.

[Robin Lowe:]

$68 million.

[George Ellison:]

$68 million.

[Fred Small:]

Okay. Got it.

[George Ellison:]

I want to make sure I check that, but what I'm seeing here is $68 million. Do you get that Fred?

[Operator:]

Thank you. And our next question comes from Jade Rahmani of KBW. Your line is now open.

[Jade Rahmani:]

Thanks for taking the follow-up. Just on the NOI margin, what drives the variance between the current 56% margin and the 60% to 65% expectation that you laid out since ASPS is already at scale, I believe?

[Robin Lowe:]

Well, I think there are number of different things that we can do here Jade. We've got a number particular targets in terms of programs on taxes and insurance in particular whereby we've got like teams who are just focused on bringing these cost down. We've got specialist who can go back and for example challenge tax assessments on the tax side. We are actively negotiating an insurance down we've had a lot of success on that recently which is some dramatic reductions. Repairs and maintenance is another area where I think we can sign up a lot. I think there's a lot of stuff we can do there to really reduce that cost. And this other category here as well, that to me that's like some non-core stuff in there that I think we can largely eliminate. So I think there is easily from 56 this four or five percentage points here that we can achieve.

[George Ellison:]

Yes, and I want to be clear because of the way you asked your question, Jade, when I said scale, they have a scale, ASPS have a scale. That doesn't mean that when we for example, we bought the 1,300 homes so it starts producing a certain yield. They took a deeper dive into certain parts of the portfolio that they thought were sub optimized and pushed a group of rents up that the previous owner either didn't do or missed or whatever I'm not being critical with anyone. So when you give them something it kind of hits at a decent style of starting point. But they're constantly -- so they have a way to manage property taxes to Rob's point. Now they're looking at ways particularly states vary and we're taking them so obviously three or four states now and they will come to us and say, hey, here is a new way that we can push back on municipalities and more accurately garner the right tax expense. So that's what I'm saying it's -- this is where they are just starting, this is where they are at 2,000 homes, imagine where they're going to be at 50,000.

[Jade Rahmani:]

And then just back on the dividend, I feel like I wasn't really understanding your comments. Are you saying that at least for the next quarter there will be a dividend because the NPL sales will trigger positive REIT taxable EPS, but after that you are not sure? Or is something similar to the fourth quarter, either $0.10 level or $0.25 including the special, just a reasonable expectation?

[George Ellison:]

Okay. The question my guess was do you think there will be a taxable gain on sale that we awarded in the first two weeks and the answer to that was yes, so that's to clarify that. The other question was what will it be composed of. And it will be composed of on a go-forward basis obviously I can't give you guidance, I really can't give you guidance because as I said earlier I mean we really crystal clear, think about the dividend and what's going to drive it. The legacy businesses produces amount of money that goes into the dividend but if the loan count goes down that number will be trending down, but it's a non-zero number. So that's sort of one thing, but it -- to picture that like a line going from left down to right. Rentals that's a line going from lower left to upper right that is rising, that's obviously affected by how many homes we buy and how quickly we stabilize it. That's a rising line. And then there is a flat line across the middle of this conceptual chart I'm drawing the dividend being produced by NPL sales and that I cannot predict. Mike was asking will there be taxable gain on this one, and the answer is yes, how much, we don’t know. So all I'm saying when you think and when you model and when you write about it, it's composed of those three things. One is going away, one is constantly rising, and one is episodic as we sell them. But that middle one will go away and so you -- then you should start modeling NPLs coming down and rental is going up because we're challenging, because you don't how much will get to. So we should probably talk when we're on a deeper dive out to the whole group about what targets would be. So that I'm trying to be as clear as I can be. It's those three composite pieces.

[Jade Rahmani:]

But for 2016, I would expect that the rental portfolio, given its current size and just reasonable projections, probably doesn't contribute positively to REIT taxable income and then the legacy business probably contributes positively, but that number is quickly moderating and then the swing factor is the NPL sales. So just for 2016, I guess I was trying to understand if there should be positive dividends like on a quarterly basis?

[George Ellison:]

I think there will be positive and that's all I'm going to say because I just don't know we can model out the first two as you just said and as you will, the middle one is the swing factor and that's what and as I said this on the last call as well. There is a dividend driver that is real but I'm not pushing that narrative. The narrative we're pushing is the long-term growth narrative. I know you know that, I'm just saying that sort of what we're focused on getting the right number of homes and right yield to hit the stabilized number in between it will be volatile and I can't see '17, but '16 I think it will be positive, but I think it will be primarily driven the swing factor will be the NPL sales, is what I'm trying to be transparent about.

[Operator:]

Thank you. And our next question comes from Anthony Paolone of JPMorgan. Your line is now open.

[Anthony Paolone:]

Thanks. Just a couple follow-ups. On the income statement, the related party G&A net of reimbursements was, I guess, netted out to be a couple million bucks of income. Can you just break that out? It just naturally seemed to go the other direction this quarter.

[Robin Lowe:]

Well, it included $6.9 million of rebate from AMC and the rest is the normal fee that we pay AMC that goes in. That's what the net number is $2.1 million.

[Anthony Paolone:]

Okay, so it was basically asset reimbursement, so it would have been $4 million?

[Robin Lowe:]

Right.

[Anthony Paolone:]

And then you had mentioned -- it sounds like there's some evaluation of the Board going on. When -- not having looked at the documents and so forth that govern these sorts of things, when does that have to come out to make it for the annual shareholder meeting or what should we be looking for there?

[George Ellison:]

Probably I don’t think that date has been solidified yet, we'll let you know when it is, probably in March, second half of March, beginning of April.

[Anthony Paolone:]

Okay. And then last question. Just as you sell down these NPLs, how do you think of just your financing in terms of over the next say six months, 12 months, 18 months of the single-family rental business because it seems like you would naturally move away from repos and so forth? How do you think of your financing sources lining up?

[Robin Lowe:]

Yes, Tony we've done a lot of work already as you know with our lenders to reflect the transformation of our balance sheet from NPLs to REOs. I have to tell you I have a massive amount of pool from our lenders, really massive. So it's really great and when we're looking at doing these trades we literally have a choice of lenders, which is really a class position to be in. So, I have to say totally great support from our lenders. We are highly liquid it's really just not an issue.

[Anthony Paolone:]

Okay. So is that like term loans or secured lines or how do you think about financing the rentals?

[Robin Lowe:]

We've been discussing repo lines, other asset bar structures and ultimately we will be moving towards asset prior securitization but that may not be for next year, we figure out how that goes.

[Operator:]

Thank you. And I'm showing no further questions at this time. I would like to turn the conference back over to the company for closing remarks.

[Robin Lowe:]

Thank you everyone for joining us today. We appreciate your time and have a great day. Thank you.

[George Ellison:]

Thanks everyone.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Have a great day, everyone.