Kelly Residential & Apartment Real Estate ETF
Q2 2015 Earnings Call Transcript

Published: 10 Aug 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to the Altisource Residential Corporation's Second Quarter 2015 Call. At this time all participants are in a listen-only mode. Later we will conduct the question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Robin Lowe, Chief Financial Officer of Altisource Residential Corporation. Sir, please begin.

[Robin N. Lowe:]

Thank you, Shirley. Good morning everyone and thank you for joining us today. My name is Robin Lowe, and I am 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 quarter 2015 Form 10-Q, and our second quarter 2015 Form 10-Q that we will file today. If you would like to receive our news releases, SEC filings and other materials via e-mail, please register on the Shareholders page of our website using the e-mail alerts button. As indicated on slide 2, joining me for today's presentation is George Ellison, Chief Executive Officer of RESI. I would now like to turn the call over to George. George?

[George G. Ellison:]

Thank you, Robin. Good morning everyone and thank you for joining us today. Today I will cover key highlights for the second quarter of 2015, our long-term strategy, and provide an update on our operating performance and then Robin will hit the financial performance later. Could you please turn to slide 3. Estimated taxable income for the second quarter of 2015 increased by 42% to $37.7 million or $0.66 a share from $26.5 million or $0.46 for the same period last year. We also declared and paid $0.55 per share dividend. Next, we’ve agreed the purchase of the 1,325 single family rental homes from Invitation Homes. We expect this transaction to close later this month. This marks our first acquisition of an SFR pools, we expand our acquisition strategies to grow our rental portfolio. We still continue to bid on NPL pools but remain disciplined on pricing and will not bid at prices which render the economics unattractive. We believe at this point in the market cycle, currently rented homes can achieve our shareholder return goals better than purchased NPLs, but now we have the proven flexibility to acquire either in response to market opportunities. Also in the second quarter, we successfully completed our third NPL securitization generating 171 million of gross proceeds, 77.4% of the purchase price we paid for the underlying NPLs. Next, we sold 189 re-performing loans generating about 35 million of gross proceeds and approximately 8.6 million of a taxable gain. We also have made strong progress with our servicing transfer initiative that we have been talking about all year along. During the quarter, we moved 4,342 loans, 1.2 billion of UPB from Auckland to Fay and BSI. With this transfer, virtually all non-securitized NPLs have been transferred away from Auckland as of June 30. Although these transfers have continued to hamper our resolution efforts with a negative impact on our results, we continue to believe this is the right thing to do for our long-term prospects. Next under the new asset management agreement with AAMC, the fees payable to the asset management in the second quarter were 5.2 million, down from 15.5 million second quarter last year. The 5.2 million is made up of a base management fee of 4.8 million and a rental property conversion fee of 400,000. No incentive fee was payable to AAMC this quarter as return on invested capital as defined in the agreement was below the required hurdle rate. Last, as another path in our expansion of our rental home acquisition strategy we initiated a program to acquire rental properties on a one-by-one basis using a proprietary valuation model that we have developed. We expect to commence purchases later this quarter. I’d now like to spend a few minutes discussing our long-term strategy if you please turn to slide 4. Our goal is to build a large single family rental portfolio and maintain a consistent, sustainable dividend. NPL prices have been driven to what we feel are uneconomic levels. As I said earlier, we will continue to bid on NPL pools and acquire them where it makes sense, but we will now also pursue alternate channels to acquire single family rental homes. This may include further bulk acquisitions similar to the pool we agreed to acquire from Invitation Homes or acquiring single family rentals on a flow basis through the one-by-one strategy that I referred to earlier. We will also focus on accelerating sales of non-rental REOs. During the second quarter we upsized our Nomura REO financing facility by an additional 100 million. Our funding lines are becoming increasingly aligned to support the growing proportions of REOs in the portfolio which also allows us to accelerate their disposition. These dispositions increased from 254 in the first quarter to 321 in the second. And we will look forward to this trend continuing in the second half of the year. Now let's move on to operating performance. On 5, we have seen continued growth in our rental portfolio during 2015. At the end of June, 777 properties in our portfolio released. Assuming 60 rental conversions per month during the third quarter and including the 1,325 we purchased, we should close the third quarter somewhere between 2,200 and 2,300 leased properties. On 6 we show the details of the rental portfolio as of the end of June. In addition to the 777 leased an additional 96 were listed for rent, and another 111 under renovation. 7 gives the details of the Invitation Homes purchase. As I stated we agreed to acquire 1,325 single family rental properties all of which are located in the Atlanta Georgia area. Total purchase price $112.6 million, average market value of around $85,000, average size of the homes, 1,574 square feet, average monthly rent 848. Approximately 94% of the properties were occupied and the weighted average lease term remaining just under eight months. If you please turn to 8, here we layout our community outreach initiative that we are launching as we enter the Atlanta market. We aspire to be the best provider of quality affordable housing for working class families and will work closely with communities and neighborhood associations where we own properties. Key tenants of our commitment are listed here but are not limited to us offering family flexible leases. For example we will seek to put 25% of the Atlanta Homes we just purchased into a Rent-to-Own program. Families will be free to move within our network of homes after 12 months of timely payments if they want to change the neighborhood in which they live. All homes in the Atlanta portfolio will be made internet friendly if they are not already. RESI will arrange to provide HUD certified pre-purchase counseling for all customers in our Atlanta Homes and will mandate minority contractors be included in all renovation RFPs. On 9 I will discuss our next initiative, our one-by-one buying program. This is a program we launched in June to acquire rental properties on a one-by-one basis using a proprietary valuation model that we developed which identifies properties for purchase with desirable rental outcomes to highly granular approach which will allow us to make very targeted acquisitions based on our investment criteria. The team has access to every single home for sale in the United States every single day. We expect the first purchases to occur by the end of this quarter and hopefully by the end of this month. I will now turn the call back to Robin. Rob.

[Robin N. Lowe:]

Thank you, George. I will now provide more details on estimated taxable income and GAAP financials for the second quarter of 2015. On slide 10 we show that estimated taxable income was $37.7 million in the second quarter of 2015, an increase of 74% over the first quarter of 2015 and 42% over the second quarter of 2014. Revenues were $76.2 million, 11% higher than the prior quarter, mainly driven by an $8.6 million gain on the sale of 189 re-performing loans. Expenses were 18% lower than the prior quarter mainly due to the lower AMCCs under the new asset management agreement. On slide 11, we show the GAAP income statement. We reported net income of $13.1 million or $0.23 per diluted share for the second quarter. Our book value per share at the end of the second quarter was $22.46. Total revenue and net gain on investments for the quarter was $76.5 million, 14% lower than the prior quarter, primarily due to lower unrealized gains on mortgage loans which was negatively impacted by servicing transfers. Total expenses for the second quarter of 2015 was $63.4 million, down 19% from the prior quarter. Residential property operating expenses of $16.9 million were up $4.4 million over the prior quarter primarily due to the growth in the number of properties and some onetime expenses during the quarter. Real estate selling costs and impairment charges decreased to $8.8 million from $14.7 million in the prior quarter. The second quarter selling cost provision decreased to $3.1 million from $10.6 million in the first quarter of 2015 mainly due to the lower number of properties contributed for sales. The impairment recognition amount increased from $4.1 million in the first quarter to $5.7 million in the second quarter. As explained on our prior calls, GAAP requires us to recognize impairment for properties where the market value is less than the initial carrying value. However, we cannot recognize a gain where the market value is above the initial carrying value. Any such gain is recognized when the property is sold or if it is added to the rental portfolio through high yields on lower renovation CAPEX. Mortgage loans servicing costs decreased by 11% to 16.2 million when compared to 18.3 million in the first quarter. The main components of this line item are insurance expenses, corporate bounces [ph] made on behalf of the delinquent borrower and foreclosure cost which are not straight-line in nature and do not therefore directly correlate to the number of loans on a quarterly basis. Related party general and administrative expenses were $5.2 million in the second quarter compared to $16.1 million in the first quarter mainly due to the reduction of fees paid to AAMC under the new asset management agreement. During the quarter we paid $4.8 million of base fee and $400,000 of conversion fee to AAMC. We paid no incentive fee to AAMC during the second quarter as the required return hurdle rate was not achieved. General and administrative expenses were $1.6 million in the second quarter compared to $4.4 million in the first quarter mainly due to the reversal of a $1.5 million litigation reserve taken in the first quarter of 2015. In the appendix we show details of NPL resolutions that’s occurred during the second quarter. At this time we would like to open up the call for questions. So I’ll pass it back to Shirley [ph].

[Operator:]

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

[George G. Ellison:]

Jade?

[Operator:]

If your phone is muted please unmute.

[George G. Ellison:]

Okay, can we move to the second.

[Operator:]

Our next question comes from the line of Fred Small from Compass Point. Your line is open.

[Fred Small:]

Hey, good morning. Thanks for taking my question.

[George G. Ellison:]

Hi, Fred.

[Fred Small:]

I have a couple, just first can you talk a little bit about your capital allocation priorities going forward just including the sort of the turn away from NPL purchases to single family rental purchases and then the potential for share repurchase and how you evaluate share repurchase in the context of what’s the best return?

[George G. Ellison:]

Sure, let’s sort of take that sequentially. Still bidding on NPLs, lot of flow in the marketplace. HUD as you know had a big auction. That was probably one that fit us the best but I think one of the money center banks is out this week. I think the GSCs were two weeks ago so flow is still very strong. We’re still in the flow of that. It is really, we are looking to see what is accretive to the current book and if it’s going to be loans we are going to compare that to homes which the purchase we just made, we thought was better for the -– to be accretive with the current book as I said. So I wouldn’t prioritize one of those more than the other. I think we compare them every day and as you know if you’ve listened to a lot of calls there is a lot of packages big and small of homes that are out now. There is a lot of liquidity starting into that so, and the third piece -- those I’d say you compare those, we have to compare those all the time, every day. And then we will also as I said we have been looking at homes every day. So now what used to be just one channel there is two, three, and we might develop more. So really just trying to optimize what the best is. As for the share repurchase, you and I and Rob have chatted about that since last year. That is something that we look at. We are really trying to build this thing and make it strong and sustainable and make it as large and as profitable as we can. And so share repurchase although mathematically sometimes you and I have debated whether it is the right thing to do, I think we are a little more focused on using the capital to go after a lot of new things that are out there that have very, very good yield to them. And so for right or for wrong, when we are looking at things and there is more packages out there that we think are strong for our company, reducing the size of it seems somewhat across purposes. But that said we look at it all the time and we won't rule it out. And Rob, would you add anything to that.

[Robin N. Lowe:]

I agree to that completely.

[George G. Ellison:]

Is that fair Fred.

[Fred Small:]

Well, I think that if you think about the long-term growth potential for the company, getting the stock back to book value, would be the fastest way to do that and I think that the fastest way to achieve that is probably by repurchasing shares and showing that you are committed to shareholder value and aligned incentives. And I think it would remove sort of the overhang from AAMC and possible sort of misalignment of incentives with just continued growth if you are really focused on the highest return opportunity for capital allocation but I will get off --?

[George G. Ellison:]

So, that’s completely, completely fair. And you know we have spent a lot of time with all of you. We are very, very seriously committed to shareholder value and increasing it. I just -- we are not ruling anything out but I think we are sort of building this and getting it out of the distress situation as you know sequentially. And so some of the first feedback was can you guys buy, do you have liquidity to buy, will you buy, can you compete and buy, and so we have. And we will buy more. And so, again as we are very conservative, we wanted to -- you can only move as fast as you can. So, what we wanted to do was show that the acquisition question which was hanging over the stock is gone. And it will be gone, and we will continue to grow this thing. That said this point you bring up is obviously very, very critical. We want to see how our shareholders view accelerating our growth to a rental -- to a large rental REIT. And as we talked about and as we will talk about more on the one on ones, the push that makes sure that, that dividend stays there and grows is paramount. I think that rentals and growing rentals quickly at the right yield will make sure that dividends stays in place. And that should make the stock react. But we will have to see what people think today or over the next few weeks.

[Fred Small:]

Got it, thanks. And then just on the -- in terms of the capital for the purchase, I think there is about $70 million of cash on that balance sheet at the end of the second quarter, is the capital for the entire purchase going to be funded internally?

[George G. Ellison:]

No, well there is equity and debt. Nomura, the lines that Rob built allows this and so we work with Nomura and another party for small mezzanine piece. We had the capital to do all the equity but it was, you know the struggle people are having trying to get some yield. We have got many, many calls when we were bidding too. With the help of that Nomura would have done the whole thing. So, debt and equity we put up the equity and that is sort of the sum of it.

[Fred Small:]

Okay, you said that there will be a small mezz piece from the third party capital coming in, what was the cost of that?

[George G. Ellison:]

The, well let's say it is accretive to the deal. Can we say that -- I am not sure we should really get into that piece because it is relatively interesting structure, so rather not say exactly what that yield was. It was high single-digit, it wasn’t -- it was accretive to this. We didn’t -- we could have done with all equities, it was a great offer from guys we know. It is a one year note and they will gone, no strains, no nothing. No warrants, no nothing. It will lead us to a SFR securitization which as you know probably has to be what 3,500 to 4,000 which hopeful we’ll hit later this year, early next year and so we should be easily pay that guy off as we go into that. We can pay him off now but it’s a one year note without recall.

[Fred Small:]

Okay, got it and then just two more; one on the re-taxable comparison, just the format change for how you are reporting that now Rob, were there any big change, is there anything that sort of changed in how you are reporting it versus what you are reporting in Q1 from an economic standpoint?

[Robin N. Lowe:]

No Fred, there is no change in any economics whatsoever. It’s just a new format that we felt might sort of be a clear disclosure going forward.

[Fred Small:]

Okay, so you think you’ll think with this format going forward for at least a few quarters?

[Robin N. Lowe:]

That will be the plan if everybody finds it more usable.

[Fred Small:]

Okay, got it and then the last two just you said you sold 321 in non-rental pool REO in the second quarter, can you say how much cash you got from that.

[Robin N. Lowe:]

It was about $39 million.

[Fred Small:]

Okay and then on the average renovation expense, it was up a little, just picked up a little bit but has it sort of stabilized here at 21,000 to 22,000 per unit or do you expect that to go back down?

[Robin N. Lowe:]

I think it has stabilized. It’s a little higher than we’d like it to be this quarter. I think in last quarter we had some high value properties where we felt it was worth spending a little bit more. So 21.6 I think is certainly a stabilized number and longer term we’d like to push that down a little bit.

[Fred Small:]

Okay, great, thanks a lot for your time.

[George G. Ellison:]

Thanks Fred.

[Operator:]

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

[George G. Ellison:]

Hi Jade. Jade?

[Operator:]

If your phone is muted, please unmute.

[George G. Ellison:]

Keep trying Shirley.

[Operator:]

Our next question comes from the line of Tony Paolone of J.P. Morgan. Your line is open.

[Anthony Paolone:]

Thanks, good morning. Hi, George can you maybe put some numbers around unlevered expected IRRs on a market NPL deal today versus what you think you’ll get out of something like this Blackstone purchase or what you are shooting for on the one-by-one transactions?

[George G. Ellison:]

What the -- are you talking the gross yield or what Tony -–

[Anthony Paolone:]

Just net, like what do you think, like where returns for NPLs -- like how you are making that trade off?

[George G. Ellison:]

I think the, when you start talking yields everybody puts so many different assumptions into it. So I am going to try to be as simple about it as I can be but again people could nitpick what I say and sort of question what the yields are. When we were selling at our former employer, again different people have different models. We felt based on our model as the seller I am talking backwards at the last stop when we were the one of biggest NPL sellers in the country, again the buyers would argue with this, so I just want to be sensitive to that because they have different models. They might have different HBA assumptions and so I am in no way, shape, or form want to be critical of anybody who bought them because they are good friends of ours, good clients of the bank. So I want to be very, very thoughtful about that answer. I am just telling you from our perspective, from our math we felt that those yields of NPLs straight up were getting into the low single-digits. And again, people might say that is completely bunk and we have got them at 9%. I am just saying for you as a seller it was a strong market. It was good to be a seller. We crossed the table and come here, it is still us. As we mentioned in AAMC call, most of the team joined us here in St. Croix, same model, same math, same people, same valuations. I think the markets are strong as it has been. I am just on NPLs right now. We have been on the HUD pools and couple of people who are very, very bright people, who we respect a hell lot beat us sometimes very closely and sometimes by quite a bit. Our bid was a quite a bit behind. So I kind of think of NPL sort of down there, the lower single-digits. One-by-one, I mean on the growth yields not the flip metrics on you but you can do the math on the IH trade. I think we and IH would agree, you multiply rent times 12 months times number of homes divided by purchase price that again I want to be clear, I am switching metrics on your touch, that takes you up on the 12. And obviously you got to adjust for occupancy. It is very accretive, very good. How people run those and that's the whole, you and I have talked about the health of the rental model which is still very young. I think I was listening to the American Home call and those folks got the same question. I think we all view it, it is a business of pennies and you got to run it hard. I think everybody aspires, I say that purposefully to get this stuff running, stabilized into the sixes. But again, different people would disagree and it depends on what your CAPEX is and what mine is, what your turnover is and what mine is. Forgive me if I am going long winded but it is a complicated question. And then when you move finally into single family, excuse me, single home one-by-one that’s, I think everybody in the industry does that to some degree. Tony it is a very, it is hard, it is granular, it takes longer but you can actually get pretty good size up and you can -- there is a lot of homes in major MSAs that have higher yields than the last obviously than the first and higher than the bulk. So it is a -- the single buy is still very, very strong return. And then we have the advantage that we can go to a lot of places people don’t go. We have a much more dispersed model so we don’t have to play in just the big markets. So, I am trying to get to your question. That is sort of how I think about it. NPLs pretty low in the single-digit neighborhood, stabilized rental stuff. I think we all, I am not saying we are all there, but I think we all, I mean whatever the eight or nine of us aspire to be in the sixes. It is great, you are killing it if you get to 7 and then single family buy, excuse me single home buy one-by-one I think can be -- you get it at an even more attractive entry point, so hopefully stabilizing it, driving towards that magic seven is a goal that we all aspire to.

[Anthony Paolone:]

Got it. So, and appreciate all that color, with the Blackstone transaction, will it also be run by ASPS or will there be a different property management structure, how will that work?

[George G. Ellison:]

Well all ASPS, those guys are great. We -- let me just say that the IH guys were -- we think the world of those guys and the Blackstone folks, David and John were just really, really I can't say enough of our first class act those guys are. So, they made it very, very easy for us. And ASPS air dropped in people immediately, we started doing due diligence. We had ten teams on the ground. We have had people on the ground the entire time. We have people coming in again to close it out later this month so, I have been very, very pleased. You know I am new so, I am still learning the ASPS folks Bill Shepro is absolutely excellent and incredibly responsive with his team. Joe Davila and others. So yes, we will be using them and we are anxious to move on to other places.

[Anthony Paolone:]

Okay, and then on the one-by-one program, are there any general criteria that you could share like either price point or rent level suite. We have -- some of your peers in the single family rental space either target under $20,000 homes or $165,000 homes, or rents above $1000, any general parameters like that you guys have set out?

[George G. Ellison:]

We are still tweaking it right now. We have 240 homes that we were looking at over the last two weeks to bid on. We have not bid on them yet. So we are being -- we are all structured products guys so we probably over think things sometimes. But, so we are trying to be very, very thoughtful. Obviously you start with yield but -- I don’t know yet. Well in the third quarter when we speak, which will be probably beginning of November, I will be able to give you what the team has purchased and the strat. So right now obviously we all start with yield. I wouldn’t say generically the boys are probably, do as I said, our sweet spot is starting to feel like to me it is kind of 150 and down. I think that is why IH thing worked so well. Dallas and John are moving, John borrowing and moving up and obviously they are doing a great job. So it was kind of a symbiotic trade. We want the 150 and down, that is sort of where we want to play. And we think there is lot of opportunity there and that’s sort of our -- that’s kind of our DNA. So I’ll give you these tips -– like when we first start buying them we can start putting out sort of what we are looking for. So yield for us is probably lower end in terms of the range as you gave probably more 150 and down. But we can get into bathrooms, bedrooms, and things like that as we start to buy.

[Anthony Paolone:]

Okay and last question from me. In our deck you mentioned I think 13% gross rental yields on the stuff that you’ve gotten done to date and that’s based on the value at the time of the acquisition, I just want to clarify the definition is that based on the price of those NPLs that you originally paid or I am just to trying to understand what the denominator is on that.

[George G. Ellison:]

That’s an acquisition based -- the purchase price and cost to convert.

[Anthony Paolone:]

I am sorry so basically what you paid for the paper plus the cost to convert?

[George G. Ellison:]

Correct.

[Anthony Paolone:]

Okay, got it, thank you.

[George G. Ellison:]

Thanks Tony.

[Operator:]

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

[Jade Rahmani:]

Thank you, can you hear me.

[George G. Ellison:]

Jade we finally got you.

[Jade Rahmani:]

Sorry, I don’t know what the phone issue was.

[George G. Ellison:]

It wasn’t us Jade, that was not us doing that.

[Jade Rahmani:]

It was my phone, we are having technical issues here. Just wanted to see if you could give the number of NPLs remaining to be resolved?

[Robin N. Lowe:]

AT the end of the second quarter the number left Jade was 9,134.

[Jade Rahmani:]

And what do you think the duration is of those resolutions?

[George G. Ellison:]

Obviously it is kind of binary. You get to pick a hurdle in different states and different foreclosure issues. So you model that but obviously it could change and things stop and you have to start all over which deters the movement alone. I think about it sort of as a year and a half duration left to wind that down. There could be a tail but when we are modeling and thinking about it that’s the current static pool. I think fields like to me it’s a year and a half kind of a thing. We buy more obviously then it starts to lengthen.

[Jade Rahmani:]

And just in terms of the taxable income statement provided in your slide, the net unrealized, it feels like the rental revenues clearly that’s going to grow with the Invitation Homes acquisitions. The net unrealized gain on mortgage loans which is basically slightly down from last quarter and slightly up from a year ago, that number seems most at risk of decline. So, how do you view I guess the earnings and dividend stability and over what kind of period and how dramatically should we anticipate that line items decline?

[George G. Ellison:]

That’s a great question. It really cuts through the core of a lot of issues around this company and what we are trying to resolve, fix, and then grow. So, I don’t think the -- that line which is a very critical line in GAAP we purposefully made a decision for a lot of reasons which we still standby. And although I know it’s tough medicine, tough medicine for us and it’s a tough message for shareholders to slowdown the journey of a loan to the pipeline which releases that gain and by moving it we just moved another block. But again -- Jade you and I have talked about this, we just got here, we are trying to fix this as fast as we can, one step at a time the right way. We believe it is the right thing to do. But it hurts that line. So, we can’t -- I can't duck that. It is what it is. That said as BSI and Fay move in and both Gagan and Ed are doing a great job. We are very, very happy with both of them. We gave them different portfolios so they have different challenges but they are both doing tremendous job. I would think that, that line and I will turn it back to Rob when I am done, he is closer to it than I am but I think as those guys kick in and start really getting under the hood and they are both starting to move I think you will see the speed at least start to pick up a little bit which should make that line stop. I mean it is kind of flat with the RPL sale obviously helped it. But I think those guys will be able to keep that line where it is. And then moving to last part, the transition to rentals which is why we have accelerated it, with the capital that we have with the company you can as we just did, you can buy a lot of homes either one-by-one or in bulk. And that number move very quickly. And that number as it -- there is enough -- we believe there is enough equity in the company to make sure at least for the foreseeable future, obviously we can't give guidance, but I mean we feel the equity in the company will allow us to buy NPLs, buy homes one-by-one or buy bulk and keep hammering away at that dividend to make sure we hid it. So, I think we transitioned to homes particularly because I think the yield is better than the NPLs. I think the faster you do that, as long as you are disciplined and you are making sure you are getting the right return I think that will address the issue that people have. Obviously we have to prove that. We have to prove that we will sustain that dividend. But I believe that looking at more measures, more outlets than just buying NPLs particularly where pricing is, is the right thing to do. Would you add anything to that Rob.

[Robin N. Lowe:]

I agree with what you said George. Jade, I think you were asking about the test line that underlies guidance which is obviously mainly driven by REO conversion in months [ph]. So…

[George G. Ellison:]

I mean that is our GAAP question.

[Robin N. Lowe:]

Fine, I think on the GAAP side we are obviously seeing a slow down for exactly the reasons that George has outlined. In subset the GAAP where it was it kind of accretes gradually over time where as the tax is all -- you recognize the income all at the end when you actually convert the things to REO. That is in some sense why I think you have seen that differential between the GAAP and the tax numbers right now is that we have accreted earnings on a GAAP basis and now we are catching up on a tax basis. So, you may see that phenomenon continue for another quarter or two. So, I am not overly pessimistic about the tax line right now. But obviously it remains to be seen and we can't give any kind of forward guidance.

[Jade Rahmani:]

So with just in REIT taxable income, slide 10, net unrealized gain on mortgage loans do you think that is reasonable to project something similar to what it ran in the second quarter of 47 million?

[Robin N. Lowe:]

As I say, I can't give specific guidance but as I will say, what you are seeing in that line is kind of a catch up on the tax side. So, provided the services can at least equal the number of conversions going forward, that line should hold up.

[Jade Rahmani:]

And then if you converted to 100% rental, how many rental properties do you think you need to support the dividend?

[George G. Ellison:]

Well, probably it is a little early to answer that. But we are, we look at that and model that, it is dependent on a lot of things Jade. It is depending on -- if you recycle capital and we see opportunities to use our capital in different ways whether that's money coming in from REOs that we said is accelerating and will continue to accelerate, whether it is people are calling up trying to buy NPLs because that market is so hot. So we are selling homes, or selling NPLs. As I said we are still buyer of NPLs, I am just a little unhappy with the offerings. So, I think if we were to recycle capital, you start to change the composition. Forgive me for talking going back to the other answer but as that GAAP number is being released overtime if you were to sell that alone, there is good and bad implications. And so you have to immediately move it into a home that gives you the right yield. If you think about it on a sell this loan versus buy this house. It’s something where there is a live moving parts. We believe and we have to as we transition to some of these other methodologies make sure we do it the right way and get the right yield. Again, we can’t give guidance’s where that will be but there is plenty of equity in this company. Plenty to drive towards more houses and make sure we sustain that dividend. Where that is and how many homes that is I don’t know, that’s a tough one to pin down. What I would tell you is it’s the right thing to do and we are going the right direction. If you can get that yield, this company is going to transition into a big rental thing and then I think we’ll be able to see the answer to your question over the next quarter or two. But I am very optimistic that what we are doing is accretive and that we are going to get there.

[Jade Rahmani:]

Okay just on the add back that Fred asked about to re-taxable income, how much of that TRS loss is the actual cash, the 9 million?

[Robin N. Lowe:]

[Technical Difficulty] Jade when we recognize taxable income you know it on that reconversion which is the BPO price and the reason that’s basically lot develop in the TRS is because we have sales cost associated with that and that’s really what drives that number.

[Jade Rahmani:]

Okay, so it’s a cash cost?

[George G. Ellison:]

Kind of comes through in the net proceeds I guess if you are going to think about it.

[Jade Rahmani:]

And then just finally on the NPL market, can you give a sense to where pricing is as a percent of BPO and if you think pricing on an asset level basis is the main issue or if you think other competitors are using much more aggressive leverage strategies to make their target returns?

[George G. Ellison:]

As I said before it’s a small community we work in. So I want to be crystal clear I am not being critical of anybodies purchase price, great for the sellers but the guys like the HUD auction we lost to good friends of ours who are very bright guys. They have a different business model, they target different stuff so I can’t comment on why people pay what they pay. Back to the first part of that question, its really pool specific. So people talk generically which I think is the spear of your question and say when Mr. [indiscernible] started this, it was NPL prices were in the high 50s low 60s. When we left our last employer, I’d say it was probably between 70 and 75. But again it’s very, very pool specific. The composition and what’s going on with the loans in the pool can make prices in the 80s. We missed the pool back trying to think who that was, I think it may was be of April just to get the characteristics along to the pool. We bid like 80.5 in this. So I don’t think you can just throw out like hey where they are trading but people talking casually, I think they probably say 72 to 75, that would be just the kind of wing in it. But again for those who do it every day you have to say show me the pool.

[Jade Rahmani:]

Okay, thanks very much for taking my questions.

[George G. Ellison:]

Thanks Jade. Thanks for keep calling in.

[Jade Rahmani:]

No problem.

[Operator:]

Thank you and our next question come from the line of Fred Small of Compass Point. Your line is open.

[Fred Small:]

Hey, just a quick follow up on the ASPS property manager, can you sort of walk through the economics a little bit of what we are paying them now. There were sort of some per asset fees that they’ve disclosed historically I think 12.75 as sort of an ongoing management fee and 16.25 as a conversion to REO. But can you talk about what else is going into that from sort of a direct ASPS fee because the numbers don’t sort of foot if I look at their disclosure versus yours?

[George G. Ellison:]

Fred, forgive me, I am not sure, I’ll have to check to with the ASPS guys. Forgive me, a rookie issue. I am not sure how much of their fee and the composition of how Mr. Shepro and ASPS fees workout. Let me do a deeper dive when you and I talk this afternoon, let me find out what is public and what is not. We are not sure here in this room. We think some of it is public and some of it is not. So let me get a better accounting of what ASPS, what their fee structure is. And we’ll say this because I do see it all, I think our fee structure and we’re because of the single family rental securitizations you are starting to get a lot of information in those deals and we are tracking that very closely. As I said on the back of the question with Tony, it’s not a complicated income statement. Your rent coming in and the expenses to come up and everybody is working very hard. It’s like 7 or 8 line items. And we all live and die by HOA fees and property taxes and obviously CAPEX and things like that. So everybody is watching those really closely and everybody has different numbers for them. Management fee, we think the service we get is great and we think that their price is lower than what we are starting to see with other folks in the industry. And obviously he with the highest yield will thrive. So -- but let me find out how much of that is public and of all this will share with you but I just want to be careful about what will be the ASPS guys fee charge. Is that fair Rob.

[Robin N. Lowe:]

No its correct.

[George G. Ellison:]

Is that okay Fred?

[Fred Small:]

Yes, sure. I guess the easy follow up is just will you look to diversify providers of property managing the services at all so that we don’t fall into the same trap we were in with Auckland servicing where we didn’t have other providers and then we had this sort of scramble to find them?

[George G. Ellison:]

That there is a lot of things I worry about, that’s on the list. So well here is what I think about it. Shepro and the guys are excellent and getting better if that’s possible. So when we were pushing to do more and more they want us to grow. Their numbers get better as we grow and I think assuming we can get this count up to where our management team wants it to be, I think it is going to be extremely positive for ASPS as we grow. Would we diversify, I don’t know. Though Shepro and I talk every day, he is incredibly focused on our business. There are the areas where maybe they are less strong, yes. But at the end of the day we are a public company and I answer to my shareholders. We have talked already and Bill knows this, two competitors of his. I met with a group about three weeks ago in New York to discuss this very topic. So we are on it and we will be good stewards of our shareholders money and we will not get ourselves into a position that happened with the servicing side of the business. We will make sure that their champion challenge ventures going on. We are going to keep talking to people to compete with Bill and I am saying that in a friendly, healthy way. He would expect that of me and he runs his public company. So we are on this issue. We’ve only been here for six months but your comment is not lost on me.

[Fred Small:]

Thanks.

[George G. Ellison:]

Thanks Fred.

[Operator:]

Thank you and our next question comes from the line of Stephen Malls [ph] from Deutsche Bank. Your line is open.

[Unidentified Analyst:]

Hi, good morning. Good morning George. Most of my questions have been addressed but wanted to maybe now that you are looking down to the one for one strategy, can you talk a little bit about geographically MSA, we have heard that you don’t like here imagine comment earlier that kind of sweet spot of under 150 that maybe pushes you off the toast, but can you talk about maybe areas you are looking to grow the portfolio?

[George G. Ellison:]

Steve, again I think the team just joined that is building their model. And again we are getting a lot of help from ASPS on that as well. I think it is just a little early. We have a pilot that we are rolling out as I mentioned, we picked a few hundred homes and we are bidding in about eight different zip codes where we know we have strong presence with ASPS. So, we are starting to get a lot of good data. As our home, rental home start to grow we can start to see where we have stronger teams than weaker teams. Stay tuned, that will probably drive where we are going next. So, we are starting where we know and we have a lot of experience where ASPS is very, very strong and which is a lot of places. So, I think as I said on one of the other questions, let's get that thing going. Please God I can tell you whether that, as I said in November HD [ph] we bought 200 homes or 800 homes or 173 homes. And then we can say here is what we bought, here is what it looks like, and then you guys will be able to see and model and think through sort of where we fit in the pack of buying. And we just don’t have the data yet. And we haven’t bought anything yet so I just don’t want to give a talk about things we have not done yet, is that fair.

[Unidentified Analyst:]

It is certainly fair George, I had to get it out. I want to thank you for the color on a lot of topics discussed earlier in the Q&A, explained a lot of my questions, so appreciate your comments.

[George G. Ellison:]

Alright Steve, we have not met. I would love to sit down with you. So if we can get on your schedule I would appreciate it very much.

[Unidentified Analyst:]

Look forward to doing that soon George.

[George G. Ellison:]

Thank you.

[Operator:]

Thank you. And at this time I am showing no further questions in queue. I would like to turn the call back over to management for closing remarks.

[Robin N. Lowe:]

Thank you very much everyone for joining the call today. We appreciate your interest and have a great day. Thank you.

[Operator:]

Ladies and gentlemen thank you for your participation in today's conference. This concludes the program. You may all disconnect.