Kelly Residential & Apartment Real Estate ETF
Q3 2014 Earnings Call Transcript

Published: 4 Nov 2014

[Operator:]

Good day, ladies and gentlemen. And welcome to the Altisource Residential Corporation Q3 2014 Conference Call. At this time, all participants are in a listen-only mode. Later, we will be conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions) As a reminder, this conference is being recorded. I would like to introduce your host for today's conference, Mr. Robin Lowe, Chief Financial Officer. Mr. Lowe, please begin.

[Robin Lowe:]

Thank you. 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 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 one, our presentation may contain certain forward-looking statements pursuant to the Safe Harbor Provision of the Federal Securities Laws. These forward-looking statements maybe identified by reference to a future period or by use of forward-looking terminology. They may involve risks and uncertainties that would 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 today's earnings release, as well as the company’s filings with the Securities and Exchange Commission including our year-end, 31 December, 2013 Form 10-K., our first and second quarter 2014 10-Qs and the third quarter 2014 10-Q we will file today. If you'd 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 two, joining me for today's presentation are Bill Erbey, Chairman of RESI and Ashish Pandey, Chief Executive Officer of RESI. I would now like to turn the call over to Bill Erbey. Bill?

[Bill Erbey:]

Thank you, Robin. Good morning everyone and thank you for joining us today. During the third quarter RESI increased its quarterly dividend for the fourth time in the past 12 months raising it by 22% compared to last quarter. As shown on Slide 3, during the third quarter RESI had estimated tax income of $38.7 million and paid a cash dividend of $0.55 per share distributing $31.4 million to its shareholders. The third quarter 2014 dividend represents an annualized return on book equity of 9.6% after accounting for the incentive fees paid to AAMC. Also at the end of the third quarter excluding modified loans, our portfolio of non-performing mortgage loans which we call NPLs consisted of 11,600 unresolved NPLs with $2.8 billion in market value of underlying properties. Our tax basis on these loans at the end of third quarter was $1.9 billion. We will stick to resolve the substantial portion of these loans over the next six to eight quarters and generate taxable gains. If achieved, these gains will drive dividend distributions to RESI's shareholders. Robin will provide additional color on how RESI realizes tax bookings on our existing portfolio of NPLs. We will continue to focus on the three factors that we believe are essential for the success of our business model. First on the NPL acquisition front, during the third quarter we acquired 1,289 NPLs with $321 million in market value of underlying properties. This includes the final closing of the NPL portfolio which we agree to acquire in the second quarter. We paid 57% of the market value of underlying properties for these NPLs. During the third quarter, another round of HUD auctions was held, 10 pools consisting of approximately 14,000 loans traded an aggregate price of 70.44% of the $2 billion of market value of the underlying properties. Our bid on two of these pools including largest pool in the offering was within 50 basis points of the winning bid. Based on the pricing of these pools, we believe the market pricing for NPLs is again trending toward more rational levels. Second on the operations front, our third quarter resolution of NPLs increased by 31% over the second quarter. Our 2,984 ROEs at the quarter end represented 20% of our overall portfolio of 15,074 NPLs and ROEs. Our rental portfolio was comprised of 306 properties of which 260 properties were leased and 90 properties were been marketed for lease. In addition, 270 of our properties were undergoing renovation at the end of the third quarter. Ashish will provide additional details on operations later. Third, on the capital markets front, we initiated efforts to increase the funding efficiency of NPL portfolio and at the same time migrate to a more stable source of financing. I'm pleased to say that RESI achieved another milestone in this initiative. As shown on Slide 4, we completed the sale of our senior notes from our first NPL securitization transactions. The growth proceeds from the securitization totaled $150 million which represents approximately 73% of the price we paid for the NPLs or 48% of the market value of the underlying properties. The senior notes on the securitization carry a fixed interest rate of approximately 3.5%. We plan to gradually transition from repurchase agreement based NPL financing to securitization based NPL financing. We believe securitization financing would enable us to achieve more stable leverage and offer us greater flexibility in capital planning. If we were to securitize all of our NPLs at the end of the third quarter under similar terms as our first NPLs securitization financing, this could provide us with approximately $150 million of additional cash. Overall, I’m pleased with the way we've developed and executed our strategy since our spin-off nearly two years ago. Ashish will now provide more details on RESI's operations and investment activities during the third quarter. And then Robin will provide details on RESI’s financial performance and review the differences between GAAP and tax accounting to provide more clarity on the timing differences between our GAAP and tax earnings. I'll now turn the call over to Ashish. Ashish?

[Ashish Pandey:]

Thank you, Bill. Our continued focus on NPL resolution efforts have resulted in a 31% increase in resolutions in the third quarter 2014 when compared to the second quarter of 2014. As shown on Slide 5, during the quarter we resolved 1,510 loans with $358 million in unpaid principal balance or UPB. Slide 6 provides details of loan resolutions. NPL conversions to REO constituted approximately 74% of all the NPL resolutions in the quarter. 1,113 loans were converted to REO in the third quarter either through foreclosure or deed in lieu. With this, the total number of REOs at the end of the third quarter increased to 2,984 properties representing 20% of our overall portfolio at the end of the quarter. 119 loans were resolved via short sales and third party sales at 98% of the BPO at the time of acquisition and 95% of the updated BPO value at the time of resolution, generating net proceeds of approximately $44 million. 179 loans were modified and rendered current. 64 loans were reinstated or i.e. the borrower made all delinquent payments. RESI's average unlevered current yield on the modified and reinstated loans based on the purchase price is 12.9%. 11 loans were refinanced by the borrower at 137% of the BPO value at the time of acquisition and 106% of the most recent BPO value available at the time of resolution generating approximately $1.3 million in net proceeds. And 24 loans were repaid in full by the respective borrowers, generating approximately $8.9 million in net proceeds. Of the loans liquidated during the quarter, RESI realized an aggregate gain of 37% over the purchase price paid for these loans. At the end of the third quarter, 197 loans were on trial modification plan. We liquidated 78 REO's in the quarter for total proceeds of $10.8 million. In addition, we identified 324 REO’s as held for sale at the end of the quarter. The 1,510 loan resolutions which we achieved in the third quarter represents 12% of our quarterly average loan count of 12,400. If we were to sustain a run rate of 1,500 loan resolutions per quarter, this would result in a substantial majority of our current NPL portfolio being resolved within the [next eight] (ph) quarter's. Our trend of completed resolutions has maintained an upward trajectory since our inception and we continue to remain focused in quickly and efficiently resolving non-performing loans. As shown on Slide 7, at the end of the third quarter, 216 properties in our portfolio were leased more than double of our leased properties at the end of the second quarter. On properties leased by us, average gross rent per property was 12.6% of the property value at the time of acquisition. 90 additional properties were listed for rent. For the properties that we had renovated through the end of third quarter, our average renovation expense per property was approximately $19,000, and renovations were in progress on 270 additional properties. 33% of our tenants have signed up for a lease period of 24 months either at the time of lease initiation or lease renewal. We have had four leases up for renewal since inception, and each of these leases have been renewed. We're extremely encouraged by these initial trends which is maintained or increased should have a substantial impact on our overall rental economics. Please turn to Slide 8 for an update on our third quarter NPL acquisition activity. In June 2014, RESI agreed to acquire a pool in a privately negotiated transaction. We completed the final closing of this transaction in July 2014. In this closing, we acquired 1,243 non-performing loans with $316 million in market value of underlying properties, and $260 million in UPB. We did not acquire any additional RPLs during the third quarter. We also purchased a small pool of 46 loans with $5 million in market value of underlying properties and $7 million in UPB. In addition, during the quarter we also agreed to purchase 246 non-performing loans with $30 million in market value of underlying properties and $32 million in UPB. The purchase price we agreed to pay was 70% of the market value of the underlying properties. This transaction is expected to close in the fourth quarter. In October, we sold 934 re-performing loans. The sale included 770 loans from the RPL pool we purchased in the second quarter and 164 loans from prior NPL acquisitions that have transitioned to re-performing status, and had a clean pay history of at least six months. On the sale of loans from the recent RPL pool, our gain on purchase price was approximately 2%, and on the sale of loans that had reached re-performing status, our gain on purchase price was approximately 28%. As we have mentioned in previous earning calls, we expect a sizeable supply of NPL pools for the foreseeable future, that should allow us to grow RESI’s portfolio. Large bank continue to offer pools of NPLs. At the end of the second quarter of 2014, large banks held $125 billion of NPLs on their books. Approximately, 560,000 FHA loans with $71 billion in UPB were non-performing at the end of July 2014. And we expect HUD to sell additional pool of these NPLs in the coming months. Freddie Mac sold its first pool of NPLs during the third quarter, and we expect that Fannie Mae will conduct its inaugural NPL sale in the fourth quarter. Some analysts estimate potential supply of NPLs from U.S. commercial banks, the FHA, and the government agencies to exceed $300 billion. Our current outlook on potential NPL supply is even more positive than it was at the beginning of 2014. We are encouraged by the recent pricing trends in the NPL marketplace. We believe that NPL securitization financing will enable us to generate $150 million of additional cash available for investment. As shown on Slide 9, assumed purchase price of 70% of the BPO for the NPLs and leverage of 75% on the purchase price, this $150 million of cash could enable us to purchase NPLs with up to $850 million in market value of underlying properties. If achieved, the additional projected purchase of $850 million would represent a 25% increase over our assets at the end of the third quarter. We believe that our dividend distribution should not substantially change as our business model shifts from one that is generating most of its income from resolving NPLs to invest predominantly generates it returns from a single family rental portfolio. As been mentioned earlier, our third quarter dividend payout represents an annualized dividend yield of 9.6%. And our returns at this time are primarily being driven by NPL resolutions. In order to estimate returns from a rental property, we start with an assumed unlevered net rental yield of 7.5% on property value which is consistent with our prior-disclosures. We assume debt of 75% on our rental portfolio, and a cost of funding of 3.5% for a five year term, which is inline with securitization financing currently available for single family rental property. If these assumptions are achieved, ROE from a rental property would be expected to approximate 20%. Further assuming that AAMC's incentive fee is 40% of the gross ROE, RESI shareholder returned on this single family rental portfolio would be expected to be approximately 12%, which is higher than our third quarter annualized dividend yield. On Slide 10, we demonstrate the potential effect of home price appreciation on our rental portfolio returns in future periods. Assuming annual home price appreciation of 2% over a five year period, and a similar magnitude of growth in net rental income, ROE could grow from approximately 20% to 31% over five years, or a compounded annual growth rate of approximately 10%. This could potentially be achieved by monetizing HPA through re-averaging the property. As we can see in the example, $25 was needed at the beginning of year one to finance a $100 property using leverage of 3

[Robin Lowe:]

Thank you, Ashish. Today I will provide more details on our financial performance for the third quarter of 2014, review our taxable income and provide additional color on the mechanics of GAAP and tax accounting in the context of our business. As you can see on Slide 12, we reported net income of $37.7 million or $0.66 per share for the third quarter. Our book value per share at the end of the quarter was $23.3. Unrealized gains on mortgage loans was sequentially lower as in the second quarter we revised our portfolio leverage assumption from 55% to 65% resulting an higher unrealized gains in the second quarter due to a lower discount rates but lower appreciation in a subsequent quarters. If we were to normalize for this change, our GAAP earnings would have been sequentially higher this quarter. Total revenue and net gain on investment for the quarter was $109.1 million. During the quarter we recorded $71.4 million of expenses which include the following five items. Firstly, $23.3 million of general and administrative expenses including incentive fees of $19.5 million, and $1.6 million of reimbursable expenses to AAMC. Secondly, $21.2 million of servicing costs which included approximately $3.8 million of contractual servicing fees payable to Ocwen and $17.4 million of insurance, and foreclosure expenses. Third, $11.7 million of interest expense. Fourth, $9.2 million of property operating expenses. And fifth, $5.5 million of real estate selling costs and impairments. As shown on Slide 13, RESI's estimated taxable income for the quarter was $38.7 million compared to an estimated taxable income of $5 million in the third quarter of 2013 and $26.5 million in the second quarter of 2014. As I will discuss later, our taxable earnings reflect our substantial progress in resolving non-performing loans by one of the following methods. By the converted to performing loan, or liquidating for cash or converting to REO, where we earn title. During the quarter, we completed 179 loan modifications with an average gain of $100,000. We disposed over 165 loans and on these resolutions our aggregate proceeds were approximately $55.6 million or an average gain of $85,000 per loans. And we converted 1,113 loans to REO with an average gain of $45,000 per loan. As Bill mentioned earlier, I will now spend a few minutes taking you through a few simple illustrative examples that should provide additional clarity on GAAP tax accounting with regard to resolution of NPLs. On Slide 14, we provide assumptions for hypothetical NPL purchase. In this example, we assume we're acquiring a loan that ultimately will not meet our investment criteria for rental property and will therefore be liquidated. The NPL has a UP balance of $133,000, a property value of $100 and therefore a loan to value or LTV ratio of 133%. Our assumed purchase price is 70% of the underlying property value and we assume 60% debt and 40% equity from the loan purchase. The foreclosure timeline is assumed to be 18 months and our cost of funding is assumed to be 4%. Other key assumptions are mortgage servicing fee of $0.67 per year or $0.01 in total. Annual property taxes of approximately 1.5% the property value, property insurance of approximately 0.5% of the property value. Foreclosure cost of $4 a year and selling cost are estimated at the higher end of 10% at the property value. Despite timing differences between GAAP and tax accounting, we will show in the following slides, that the amounts of recognized gains and expenses are materially the same resulting the same amounts of net income over the life of a non-performing loan. Slide 15 illustrates our gains and expenses are recognized for GAAP purposes over a 6.25 time frame. Mortgage servicing expenses are factored into our loan sale value model, which is a discounted cash flow model. As mortgage servicing expenses are incurred, they are expensed in the income statement and removed expense from the fair value model. The results, is an expense item with a corresponding unrealized gain. Second, as the loan progresses through the foreclosure process, it increases in value as it gets closure to foreclosure. In this example, we estimate the gain from this time value of money being approximately equal to our weighted average cost of capital with 60% debt of the assumed 4% cost of funding and 40% equity with an expected return on equity of 15%. For the purpose on simplicity we have prepared this example with expenses that are recognized equally over the foreclosure period. In reality, actual results may be a bit lumpier as for example property taxes in our insurance, that's a due you pay by either annually or semi annually. Slide 16 illustrates the timing of gains and expenses from a tax perspective. The key difference is compared to the GAAP perspective our first gains, are only recognized of the time alone is converted to ROE, yet certain expenses are recognized or incurred such as mortgage servicing fees and interest expense. Second, some items that are expensed to GAAP are capitalized for tax purposes such as insurance and foreclosure cost. These capitalized expenses, increase to tax basis of the loan as the loan approaches resolution. Slide 17 compares the timing of incumbent expenses for both GAAP and tax. As you will observe, tax income lacks GAAP income for ROE conversions but the final results is materially the same under both GAAP and tax accounting which is also important to know that dividend distributions are based on taxable income. Hence, there is an expected delay from the time RESI has net income for GAAP purposes and when our distribution will be made shareholders. At this time, we would like to open up the call for questions. Operator?

[Operator:]

Thank you. (Operator Instructions) Our first question comes from the line of Mike Grondahl with Piper Jaffray. Your line is open. Please go ahead.

[Mike Grondahl:]

Thank you, guys. First one, the renovation costs seem to be creeping up a little bit to 19,000 per unit. Can you talk about what’s driving those and are those still sort of inline with your expectation?

[Robin Lowe:]

Go ahead, Ashish.

[Ashish Pandey:]

We had three properties where we incurred high renovation expense, but it makes sense for us to make those renovations as growth yield after accounting for high renovation cost, it still made lot of sense. So that's what is actually driving that number, it's more roughly now, quarterly variation than any trend per say.

[Mike Grondahl:]

Okay. Okay. And then I think you mentioned if I heard you right, on the hard deal, you missed a large portfolio by 50 basis points pricing if you will. If you would have won that, did you have the liquidity to close it?

[Robin Lowe:]

Is by less than 50 bps Mike.

[Mike Grondahl:]

Okay, by less than 50 bps. I am more curious about your liquidity, it seems like liquidity has been tight. Did you have the liquidity to close that deal if you want it?

[Ashish Pandey:]

I think Mike, to the extent we signed that use of proceed is compelling. We will be able to create liquidity either to convertible or a write offering. We have indications from some of our core shareholders that they will be very interested in participating in such an offering. What is important for us is that we will buy portfolio at the right price which is attractive to us.

[Mike Grondahl:]

Okay. So, in essence the softer NPL purchases in 3Q, would you say that was sort of reflection of – you didn’t find the deal that was priced good enough for you or low enough for you. Is that correct?

[Ashish Pandey:]

I think we went into quarter with lot of chatter around the pricing which came from the hard deal and as we saw the quarter panning out, we saw yields spreading at pretty attractive level. So, we feel comfortable where pricing is today and we are going to be meaningful participant.

[Mike Grondahl:]

Okay. And then maybe just lastly -

[Robin Lowe:]

Mike, if you remember back at the end of the second quarter, she said, there was always concerned around pricing. While we saw sequentially throughout the quarter pricing is coming back to where we thought it should have been there what was been historically. And so we just didn't - we weren't prepared to offer bid for properties during that period of time. I think the last HUD bid is really pretty indicative that pricing has almost resumed its historical pattern.

[Mike Grondahl:]

Got you. And thus you guys will be more active going forward taking away from this.

[Robin Lowe:]

Correct.

[Mike Grondahl:]

Did you give an updated NAV for the portfolio at September 30th Ashish?

[Ashish Pandey:]

Robin, I've been including that in the queue, if not we will be able to give that number later in the day Mike.

[Robin Lowe:]

Sorry, we didn't give that one, we can do that.

[Ashish Pandey:]

Since we did not purchase a lot during the quarter, market hasn't substantially changed target from where it was last time.

[Mike Grondahl:]

Okay. Thanks guys. I can get back in the queue.

[Operator:]

Thank you. And our next question comes from the line of Jade Rahmani with KBW. Your line is open. Please go ahead.

[Jade Rahmani:]

Good morning. Thanks for taking the question. As a result of volatility in the market, would you say competitions for NPLs is modestly less than last quarter? Have you seen any small fund players exist the market?

[Ashish Pandey:]

I think competition is definitely less, Jade. There is one large player which is not active in the marketplace which was pretty active in our last year and the first quarter of this year. So, competition has - I think has less than what we have seen historically.

[Jade Rahmani:]

Thanks.

[Robin Lowe:]

It was illustrative in the HUD bid, if this information we have available from the market is that many players got more product than they have thought they would get. In other words they were surprised of how much they had won at those price points, which I think is a good thing that they got overfilled during that last bid.

[Jade Rahmani:]

Thanks. Regarding taxable income, do you expect that to remain stable or increase and additional is it possible to quantify how much of taxable REIT income included any return of capital?

[Ashish Pandey:]

Go ahead, Robin.

[Robin Lowe:]

So to answer your first question, obviously that depends on how quickly we convert the ROE properties. So overtime as I showed earlier, taxable income will follow GAAP income but obviously there is some delinquent process. So that's really as much of our timing issue than anything else. Ashish if you want to add anything to that.

[Ashish Pandey:]

No, that's perfect.

[Jade Rahmani:]

And regarding the current dividend, do you view that as sustainable and does it include any return of capital?

[Ashish Pandey:]

It does not include any return of capital. Our EPS has always been higher than the dividend distribution. So there is no return of capital involved year-to-date.

[Jade Rahmani:]

I'll take your earlier comments in the script regarding the difference between the REO income, the rental income and the NPL income to be a timing issue but you view the dividend as sustainable?

[Ashish Pandey:]

That's correct. They have been accrued and they have been gained fully - these loans have gone up in value. So they will be realized ultimately.

[Jade Rahmani:]

Okay. Just turning to the lease property account, I think last quarter you expected about a 1,000 lease properties by year end. Can you articulate an updated expectation and if the account is lower than previously, can you discuss the drivers including whether the foreclosure timeline is different in any way from what you previously expected?

[Ashish Pandey:]

No, it has nothing - foreclosure timelines have changed. We are working diligently towards the goal and we'll like to get as close to goal as possible. There were 270 renovations that were in progress as of quarter end and it will be logical to assume that these properties would move into rental portfolio by year end. So we definitely have visibility on 575 properties. In addition, the properties where we start renovation in October and early part of November should also move into our rental portfolio by end of the year.

[Jade Rahmani:]

Okay. And just finally the mortgage loan servicing costs, I think increased sequentially and I believe on a per loan basis, can you discuss whatsoever that?

[Robin Lowe:]

Mike I will take that one, this is Robin. There are couples of elements in the mortgage loan servicing cost, one is we have this solid unit servicing cost with Ocwen which tends to stay stable and is volume driven. But there are lot of other costs in there, there has been on property insurance, there were foreclosure fees insurance advances to name a few, and they tend to be more lumpier and historic as I eluded to in the prepared remarks earlier. So really I wouldn’t read too much into that trend. It's really just some lumpiness in the numbers.

[Jade Rahmani:]

Great, thanks. Thanks for taking the questions.

[Operator:]

Thank you. And our next question comes from the line of Stephen Laws with Deutsche Bank. Your line is open. Please go ahead.

[Stephen Laws:]

Hi, good morning thanks for taking my questions. I guess first with regards to the units that are leased up. Can you maybe talk about your progress and an update on timing of when you think about your first rental securitization? I know you did rental securitization previously but securitization of rental cash flows?

[Ashish Pandey:]

It will be the first half of 2015, Stephen.

[Stephen Laws:]

Still think it’s a 2015 event there as far as getting the scale you need on the rail side?

[Ashish Pandey:]

Yeah. We’ll start engaging with rating agencies somewhere around November. It’s a three to four month process. They need to get comfortable with processes and procedures in place and then ultimately do a final due diligence on the portfolio. So we’ll start engaging in that process later this month or in early December.

[Stephen Laws:]

Great. The different circuits, I know what AAMC you guys have stock repurchase in place effective. Maybe talk about your thought process around stock repurchases at RESI, what would go into that decision and maybe update us on your thinking there?

[Robin Lowe:]

Do you want me to do that Ashish - we have no plans at this time to repurchase shares RESI. I think there were attractive opportunities now the pricing has returned to more normal levels and we can continue to build shareholder value by expanding the portfolio.

[Stephen Laws:]

Okay, great. And then I guess given the news going on of Ocwen and the backdating. Can you talk about any overlap and timing that might have taken place with the backdating issue and the revenue portfolio, were there any loans or this may be an issue – I know in the prepared remarks you commented that you don’t expect an impact but maybe looking for a little more color on why you don't expect an impact are there other no loan that we’re – went into REO or RESIs that were backdated, the timing completely different. Can you maybe give us a little more color on why you're confident there's not an impact at REO or RESI?

[Ashish Pandey:]

Sure. There are four loans out of the 6,100 loans that were referenced in the letter to Ocwin which are earned by RESI today. None of these loans have been converted to REO. The misdating of letter happened prior to the time when RESI acquired these loans and three of the loans have been brought current, one of the loan is in delinquent status. That's why I say that, we don’t expect an impact.

[Stephen Laws:]

That’s great color. Thank you for that. And thank you for taking my questions.

[Ashish Pandey:]

You’re welcome.

[Operator:]

Thank you. And our next question comes from the line of Anthony Paolone with JP Morgan. Your line is open. Please go ahead.

[Anthony Paolone:]

Thanks. Good morning. Can you talk whether or not there's any sensitivity in the market by NPL sellers as to who the buyers servicing partners are? Does that have any client names?

[Ashish Pandey:]

Sorry. We haven’t seen any impact either for us or for anybody else. I think to the extent you have got a servicer who is approved servicer, there is no difference.

[Anthony Paolone:]

Okay. And then, maybe on the liquidity side, can you maybe walk us a little bit down the path here that how much do you think firepower do you to cap the NPL securitization market, you get sort of resolution as expected and thus pay dividend you expected, but how much can you really go out and acquire before you start to have to think about it in [indiscernible] offering and something of that nature?

[Ashish Pandey:]

At this time we believe that our ability to increase leverage wise securitization will give us buying power to the extent of $850 million roughly. And this is as of today's excess snapshot in time. As we resolve more loans and sell more REO's, that number is going to increase. Obviously if we end up buying something which is very, very substantial at that point of time, we'll need to explore other options. But our first line of tax would be enough to get securitizations completed.

[Anthony Paolone:]

And what this flow look like at the moment to get $850 million out the door, is that – you're seeing activity a quarter two, or do you think that's three quarters, any sense there?

[Ashish Pandey:]

This should be all over by end of first quarter of 2015.

[Anthony Paolone:]

Okay. In the quarter, rental expenses – if I call bounced up a bit, is there anything in there such as the cost of putting that operation together? What's going to drive that?

[Robin Lowen:]

It's probably volume driven, but again there are some lumpy items in that, the stuff like taxes, insurance, property maintenance et cetera, which are again lumpy in nature. So again the same sort of answers to mortgage and servicing costs. I wouldn't read too much into that trend, obviously volume is driving part of that difference, but there are just some lumpiness in the numbers.

[Anthony Paolone:]

Okay. And then, remind me on the balance sheet, just difference in the REO assets and the rental properties?

[Robin Lowen:]

The rental properties, the properties that are actually rented – so, there are 216 of those. The REO assets and everything else, we've converted to REO. So there will be other properties that - either evaluating for sale, and then if we decide to sell them and they drop it to the real estate assets help certainly.

[Anthony Paolone:]

What portion – there's big difference to this side, what portion of the REO's are likely to become rentals? And wanted to just make sure I clarify – I understand where you mentioned, the rental properties are purely like occupied, it's not stuff that you guys rent-ready if you will, those are just occupied assets.

[Robin Lowen:]

Yeah. So the rental properties we want to actually rent, is 216 of those. In the real estate owned line we've got 2,444 properties which includes 90 which are lifted, 70 - sorry 270 which is renovation in progress, and 2,084 which are under evaluation.

[Anthony Paolone:]

Okay. And then interest income - you guys spoke that out on the GAAP income statement this quarter. Was that - what was that previously - is that kind of innovative way of - your income statement presentation going forward?

[Robin Lowen:]

That's mainly from the re-performing loans that we had on books in the second quarter – in the third quarter, and that we subsequently mostly sold. So, nearly all of that numbers is via the interest we got on the re-performing loans.

[Anthony Paolone:]

Okay. And then, last question is that, just under 50 bps in terms of where you missed on a couple of the - yields that traded, was that – can clarify on a under a narrower basis or on percentage of UPB, what was the 50 bps?

[Ashish Pandey:]

Percentage of sale price, which is generally expressed as P&L. Sale price as a percentage of market value, so it’s 50 basis points within where things traded the price.

[Anthony Paolone:]

Okay. Got it. Thank you.

[Operator:]

Thank you. And our next question comes from the line of Fred Small with Compass Point. Your line is open. Please go ahead.

[Fred Small:]

Hey, good morning. Question on the reconciliation of re-taxable income, what was the pre-incentive fee income number?

[Robin Lowen:]

For the third quarter?

[Fred Small:]

Yes.

[Robin Lowen:]

The incentive fee in the third quarter was 19.5.

[Fred Small:]

Right. So, if I want to look at the number that you've run through the waterfall in order to come up with the incentive fee, what's that number?

[Robin Lowen:]

I don't have the number.

[Ashish Pandey:]

It should be $51 million, Fred. Roughly $0.90 per share, that’s what you need to run through.

[Fred Small:]

$51 million, okay. So, if I just add back the - if I take your - okay, so that's the straight add back to the taxable income?

[Ashish Pandey:]

It should be straight add back to the dividend that we distributed at $0.55. Right, it should be straight add back to that, not to taxable income.

[Fred Small:]

Okay. Got it. So, I guess the - so there are - are there other offsets in that expense line besides the - in the expenses aside from the incentive fee that aren't broken out?

[Robin Lowen:]

You mean the taxable income?

[Fred Small:]

Yeah.

[Robin Lowen:]

There is – there are number of different items that go through the expenses and the revenues together from GAAP taxable income. There's no one single item.

[Fred Small:]

Right, understood. I am just asking about the incentive fee. So, we're at 38, - I mean call it, 39, 40, if we add back 19, if this is just on the estimated income before income taxes, the taxable number. So, call it 40, if we add back 19.5, we’re at 60, but the number that you've run through - the number that you've run through is 51.

[Ashish Pandey:]

Fred, what you have to consider is the amount of dividend that we distributed during the quarter, it's not actually taxable income that you should be running through. So, $0.55 was the dividend distributed during the quarter, add to that $19 million, and that's the amount that you should run through the waterfall. It’s based on distribution, it’s not based on the taxable income.

[Fred Small:]

Okay. Last quarter the numbers were pretty close. I know that they've moved around a bunch, but - I thought that that was one of the reasons that we were breaking out taxable income so explicitly, is that not? Is that not correct?

[Ashish Pandey:]

That has always been based on the cash distributed to RESI shareholder. We think that AAMC only gets paid when RESI shareholder gets the cash in hand. So, to the extent RESI is not distributing cash, AAMC is not getting cash.

[Fred Small:]

Okay.

[Robin Lowen:]

We recently showed taxable income Fred, that's where our most REITs get evaluated on a measure close to that. And it’s basically is more reflective of actual cash that's generated than GAAP. But the distribution - the incentive fee is based on cash distributed to the RESI shareholders, and there is a difference between distributions and taxable income.

[Fred Small:]

Okay. So, I don't want to go too long on it, but how do you come up with the 19.5?

[Ashish Pandey:]

We can lock offline, but let's suppose that, I know that just growth of - I know this is my dividend distribution for the quarter. Let's say I am going to distribute a dividend of $0.55 for the quarter, right. So, that gives me $31 million of payout through the RESI shareholder. To get to the $31 million payout to RESI shareholder, what's the number that I need to run through at the top of the waterfall? Other way of thinking about it is – you have dividend income, add to that whatever incentive fee you are seeing on the P&L and you can do it either way. And we can put our disclosure, we'll be happy to put that up.

[Fred Small:]

I understand the mechanics there, I’m just trying to understand why the difference looks wider than it was in previous quarters? Then, second, what happened to the other loans that we were expecting to acquire during the quarter?

[Ashish Pandey:]

We did acquire those. So, we did acquire the NPL portfolio that we were expected to acquire during the quarter.

[Fred Small:]

So you didn’t acquire the re-performing loans? Maybe I missed that.

[Ashish Pandey:]

No. We did not acquire any re-performing loans.

[Fred Small:]

Okay. So, at the - and I am just going to the previous disclosure, I think there were 2,300 – almost 2,400 loans that were announced at Q2 that were expected to be acquired in Q3, and then we did a little under 1,300. So the balance was just - you decided not to acquire?

[Ashish Pandey:]

The balance should have been RPLs in some sense. Our [Q2] (ph) on the overall portfolio was 90%.

[Fred Small:]

Okay, got it. And then, just how large - on the balance sheet, how large are our convertible offering would you potentially look at doing? And how should we think about the sizing and what are the leverage targets?

[Ashish Pandey:]

Fred, I am not - we’re not saying that we are going to do a convertible offering. Our first line of creating liquidity will be securitizations. Now to the extent we find a pool of loans which we think is attractive – they will use either converts or rights offering or some other form. We think that if a pool purchase makes sense, it's in best interest of RESI shareholders to have that pool on the balance sheet.

[Fred Small:]

Okay. And the timing around the securitizations, I think you said that all the NPL securitizations if you did everything could be done by the end of the first quarter 2015?

[Ashish Pandey:]

Yeah. Most of it should be done by end of first quarter of 2015.

[Bill Erbey:]

Our NPLs we did do prior to that. Well you’re talking about REO rental by the end of the first quarter, right Ashish?

[Ashish Pandey:]

REO rental, I had mentioned first half of 2015, Bill.

[Bill Erbey:]

Right. Okay.

[Fred Small:]

That used to - I think the target there used to be Q1 of next year. So, I understand first-up, how many securitizations would sort of fall in the - during the whole portfolio? Are you looking at something securitization as the same size as the September one, or would these be larger?

[Ashish Pandey:]

No. But next securitization should be little bit larger than the September one, and that’s expected in this quarter. And then we’re probably going to do three more securitizations in the first quarter of 2015, that's what our intent is at this point of time.

[Fred Small:]

And that's feasible you can get [3.75] (ph) without a problem?

[Ashish Pandey:]

Yeah. There are three different issuers effectively, so you can get 3.75 in starting the quarter.

[Fred Small:]

Okay. Got it.

[Ashish Pandey:]

First quarter is pretty active with new location of capital. So, first quarter is an interesting period.

[Fred Small:]

Got it. And if - assuming that you execute all those NPL securitizations, does that impact the expected timing around potential as of our deal?

[Ashish Pandey:]

No. It does not. Both of them are in some sense separate.

[Fred Small:]

Okay. Got it. Thanks a lot. I’ll jump back in the queue.

[Operator:]

Thank you. And our next question comes from the line of Scott Bommer with SAB Capital. Your line is open. Please go ahead.

[Scott Bommer- SAB Capital Advisors LLC:]

Hey, good morning. Could you comment again - I think you addressed it, but on the sustainability of the dividend, I think - I've seen a few research notes this morning with GAAP earnings down, sort of questioning sustainability and just if you could just comment on the interplay between your taxable income which I think $0.67 for the - $0.66 or $0.67 for the quarter versus the GAAP income coming down. I know you gave some reasons for some change in assumptions, but how do those two play into the sustainability of the dividend? Thanks.

[Ashish Pandey:]

Scott, Ashish here. As I mentioned in my prepared remarks, we think that dividend is very sustainable at this point of time. We think that from our rental portfolio, we should be in a position to generate 12% net shareholder return for RESI shareholder, and we are nowhere close to that on our current book value right now in terms of our dividend yield. So, we don't see a reason to start thinking about sustainability of dividend. I think, what has happened on the GAAP earnings is we - there was a reduction in discount rate in the last quarter, it was disclosed and that created a one time catch-up on an overall portfolio in terms of unrealized gain. But if you were to normalize for that in fact GAAP earnings, sequentially are higher quarter-over-quarter.

[Bill Erbey:]

What happened is that, we became more capital efficient in the second quarter. And as a result the discount rate for GAAP, not for tax but for GAAP changed and caused the one time catch-up with regard to that. So, if you were to normalize for that which we're going to do in the queue, you’ll see the GAAP earnings sequentially were up. And GAAP earnings are substantially ahead of taxable income which is what generates dividends. And as Robin indicated, you will see over time you would expect to see, the taxable income will catch-up to GAAP income. So, there was no - from a fundamental perspective there was no decline in GAAP earnings at all. It was simply the revaluation if you will over cost of capital which elevated second quarter GAAP earnings. And as a result third quarter appeared lower but sequentially on the same basis it would have been higher. So, when you look at - to project that GAAP number into dividend sustainability, is somewhat of an [indiscernible] because our tax earnings are so far behind our GAAP earnings and you would expect those to come together over time.

[Scott Bommer:]

Got you. So, ex the catch-up, GAAPs are lot higher, the catch-up is one time, you'd expect GAAP earnings to continue to be higher and taxable to drift up over time, and dividend to drift up obviously as taxable drifts up?

[Bill Erbey:]

Right. And I think the good thing about the quarter Scott, in fact the taxable earnings continue to go up at a very healthy pace, and as something else changes, you would expect taxable earnings to continue to show to - to continually be trying to catch-up with GAAP earning.

[Scott Bommer:]

Fantastic. Thanks very much.

[Operator:]

Thank you. And I am showing a follow up from Mike Grondahl with Piper Jaffray. Your line is open. Please go ahead.

[Mike Grondahl:]

Yeah, guys. Could you just give us a roll forward for the MPLs and the REO quantities, just starting with the balance last quarter, the acquisitions, dispositions, conversion to REO, reversions to loans and ending balance, just kind of what comes out in the queue later?

[Robin Lowe:]

Yeah, I can do that. Mike, so on the mortgage loans, the MPLs and by the way the underlying market value [prophesies] (ph) to address your earlier question, is about $2.9 billion. So, we started the quarter on the mortgage loans with $12,070. We had 1,289 acquisitions, we had 165 dispositions, we had 1,113 conversions to REO, we had nine reversions to mortgage loans, so we ended up at balance of $12,090.

[Mike Grondahl:]

You have the same forward for the REOs?

[Robin Lowe:]

Yeah. So, the beginning balance for REOs was 1,958. We had dispositions of 78, then we had those conversions to REO which is 1,113. And the reversions to mortgage loans was just minus nine, which get us to $2,984 at the end of the quarter.

[Mike Grondahl:]

Can you repeat the ending balance?

[Robin Lowe:]

$2,984.

[Mike Grondahl:]

Okay. Thank you. And then, just lastly – do you also have the taxable gain that you generated on modifications during the quarter, and the taxable gain on conversions during the quarter?

[Robin Lowe:]

I'm not sure I have those numbers at hand, Mike.

[Mike Grondahl:]

Okay. I can follow up with you later.

[Robin Lowe:]

All right.

[Operator:]

Thank you. And I am showing another follow up from Jade Rahmani with KBW. Your line is open. Please go ahead.

[Jade Rahmani:]

Hi, thanks for taking the follow up. You mentioned during a single family rental securitization in the first half, and I think the average size in terms of property count is around 3,500 for the 10 deals that have been done so far. I think the smallest one was about 2,900 so. Are those numbers fair to assume for lease property count by the middle of 2015?

[Ashish Pandey:]

Jade, I don’t want to give guidance at this point of time. But obviously, we're not going to do a securitization on a portfolio where it does not make economic sense. There is a fixed cost of securitization as you understand, so we liken up. If people are doing securitizations at around 2,500 properties there is a reason for that because it only makes economic sense then.

[Jade Rahmani:]

Okay. And follow up as just - I think you mentioned 7.5% net yield unlevered, is what you expect on the rental side. Can you just remind us the gross rental yields that you believe you're achieving so far on the cost basis including initial CapEx. And what the NOI margins are that you believe that you can generate after accounting for - your contractual fees to Altisource?

[Ashish Pandey:]

What we had was 12.6% on the acquisition BPO that has been our gross yield till now. And the 7.5% was based on our prior disclosures which we have made, and that's roughly 62% NOI margin. It starts with 12% gross yield assumptions and comes to 7.5% net, 4.5% of expenses.

[Jade Rahmani:]

Okay. The 12.6% that's on BPO value, and I think your fully loaded purchase price including foreclosure cost and upfront CapEx should be below, is it still below or projected to be below BPO value?

[Ashish Pandey:]

Yes. It should be.

[Jade Rahmani:]

Okay. So, your gross yield on cost basis is probably around 13% to 14% I would think?

[Ashish Pandey:]

I don't have number right in front of me, Jade. But we can follow up on this.

[Jade Rahmani:]

Okay. Thanks a lot.

[Operator:]

Thank you. And I am showing a follow up from Fred Small with Compass Point. Your line is open. Please go ahead.

[Fred Small:]

Hey, thanks for taking the follow up. Just two quick ones, on GAAP versus taxable income. What's the biggest source of the difference? Or, I guess another way of asking it would be, what resolution outcome closes this GAAP the most quickly?

[Bill Erbey:]

We recognize taxable income on REO conversion and also on modifications.

[Fred Small:]

Some are then REO conversions biggest source of differences.

[Bill Erbey:]

Yeah. Those are taxable events, if you see what I mean. So, that's when we recognize taxable income.

[Fred Small:]

Right, got it. So, I mean if you were to say if outcome won't happens, it’s going to take two years for the GAAP between GAAP and taxable to close, whereas if outcome two happens, it's only going to take a year. What would - what changes, is it just timelines? Or is it just overall timelines for completions? Or what would cause that GAAP to close much more quickly aside from just call it overall foreclosure timing?

[Bill Erbey:]

Technically, we had a lot of early marks than timeline will close more quickly, but assuming [peninsula] (ph) an 18 months timeline to REO conversion. REO conversions by far the single biggest taxable event where we recognize most of the income. So, I don’t see any particular event happening that would significantly shorten that timeline.

[Fred Small:]

Okay. Got it.

[Robin Lowe:]

Fred, Ashish's presentation, he gave you some insight into that but the rate at which we’re actually resolving and saying that be the next six to eight quarter, so that's -

[Fred Small:]

Okay. And then, over the next six months, you talked about the potential cash that you would have to invest from additional securitizations. Over the next six months, how much cash would you expect to get back from via foreclosure sales?

[Ashish Pandey:]

Fred, we're not going to disclose that at this point of time. It will almost amount to guidance on disposition and REO sales.

[Fred Small:]

Okay.

[Operator:]

Thank you. And I am showing no further questions at this time. And I would like to turn the conference back to management for any closing remarks.

[Bill Erbey:]

Thank you very much for attending today. Have a great day.

[Operator:]

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