Kelly Residential & Apartment Real Estate ETF
Q1 2014 Earnings Call Transcript

Published: 29 Apr 2014

[Operator:]

Good day, ladies and gentlemen. And welcome to the Altisource Residential Corporation and Altisource Asset Management Corporation Q1 2014 Conference. At this time, all participant lines are in a listen-only mode. Later, we will be conducting a question-and-answer session, and instructions will follow at that time. (Operator Instructions) I would now like to introduce your host for today’s program, Mr. Kenneth Najour, CFO of Altisource Residential Corporation and Altisource Asset Management Corporation. Mr. Najour, you may begin.

[Ken Najour:]

Thank you. Good morning, everyone, and thank you for joining us today. My name is Ken Najour, and I am the Chief Financial Officer of both Altisource Residential Corporation, which we refer to as RESI, and Altisource Asset Management Corporation, which we refer to as AAMC. 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 either www.altisourceresi.com or www.altisourceamc.com under the Shareholder section of the site. 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 could cause 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 RESI’s and AAMC’s filings with the Securities and Exchange Commission, including each company’s 2013 Form 10-K’s and the respective first quarter Form 10-Q that will be 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 each company’s 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 AAMC; and Ashish Pandey, Chief Executive Officer of RESI and AAMC. I would now like to turn the call over to Bill Erbey. Bill?

[Bill Erbey:]

Thank you, Ken. Good morning, everyone, and thank you for joining us today. We decided this quarter to combine the earnings calls for RESI and AAMC. I would like to begin with RESI’s performance. As shown on slide three, during the quarter, RESI has estimated taxable income of $25.8 million and paid a cash dividend of $0.40 per share or $22.8 million. Including the catch-up dividend we distributed in March 2014 with respect to RESI’s 2013 taxable income, RESI distributed an aggregate of $27.4 million to RESI’s stockholders in the quarter, representing an annualized return on equity of 10.7%. It’s important to keep in mind that the 10.7% return on equity is net of the incentive fees payable to AAMC. As you know, RESI pays AAMC a quarterly incentive management fee based on RESI’s level of distributable cash per share. Turning to AAMC’s first quarter performance, AAMC achieved its first quarter of positive net income. For the quarter, AAMC reported net income of $6.8 million or $2.39 per share. AAMC’s results reflect a strong operating performance of RESI and increasing quarterly dividend payable to RESI’s shareholders. In March, AAMC issued 250,000 shares of its new Series A Convertible Preferred Stock for institutional investors for aggregate net proceeds of $248.9 million. The preferred stock is convertible under AAMC’s common stock at conversion price of $1,250 per share. It is not entitle to hold us dividend. Concurrently, AAMC’s Board of Directors also approved a share repurchase program that authorizes AAMC to repurchase up to $300 million in shares of AAMC’s common stock. As of March 31, 2014, we’d acquired approximately 42,240 shares of our common stock. We expect the share repurchase program to be accretive to AAMC’s shareholders and when the program is completed, the number of AAMC’s outstanding shares to decrease even assuming that all of the preferred stock is converted into common stock. As we have discussed with you in the past, RESI’s business model is predicated upon its ability to, one, acquire single-family properties that provide attractive returns and rental markets with good balance between supply and demand, two, manage properties in this rental portfolio effectively and cost significantly below the industry, and three, raise capital at accretive pricing. During the first quarter of 2014, we successfully delivered on all three of these fronts. As shown on slide four, during the first quarter, we completed the acquisition of approximately 4,207 mortgage loans, substantially all of which were non-performing which we refer to as NPLs with $900 million of underlying property value. For these loans, we paid an average of 68% of the underlying property value and deploy an aggregate of $613 million of capital. For the balance of 2014, we believe that there will be a large supply of NPLs available for purchase which should allow us to grow RESI’s portfolio. As far our operating performance, resolutions increased to 185% quarter-over-quarter. At the end of the quarter, 35 properties were rented, 17 properties were listed for rent and renovations were in progress on 48 properties. Ashish will provide more detail on our progress during the quarter. Additionally, in January 2014, RESI completed a $468 million equity offering. RESI’s ability to raise additional equity capital in the future will be more streamlined as it has attained Well Known Seasoned Issuer or WKSI status. We continue to see the securitization market develop. In April 2014, a second securitization of single family rental properties was successfully completed by Colony American Homes. We are excited about these developments as we believe securitization financing will have a material positive impact on the returns from RESI’s business model. We expect to be in a position to tap the securitization market by the first quarter of 2015. Ashish will now provide more detail on RESI’s operations and investment activities during the quarter and then Ken will provide detail on RESI’s and AMC’s financial performance. I’ll now turn the call over to Ashish. Ashish?

[Ashish Pandey:]

Thank you, Bill. Let me begin by saying that we are very pleased with our NPL resolution performance in the first quarter. As shown on Slide 5, during the quarter we successfully resolved 822 loans with $191 million in unpaid principal balance representing 185% increase over the 288 loans that we resolved in the fourth quarter of 2013. This compares to a 73% increase in the average portfolio of balance for the same period. In fact, the number of loans resolved in the first quarter of 2014 is greater than the aggregate number of loans resolved by RESI in all of 2013. Slide 6 provides details of loan resolution. 637 loans were converted to REO either through foreclosure or deed in lieu. The increased pace of REO conversions is a stepping stone in our goal of becoming a leading player in the single family rental business. As Bill mentioned earlier, we are targeting a principal mark of 1,000 rented properties required for securitization financing by the first quarter of 2015. 58 loans were resolved via short sales and third-party sales resulting in proceeds of approximately $19.3 million which represents 95% of the updated BPO value at the time of resolution or 102% of the average BPO value provided by the filler at the time of acquisition. 81 loans were modified and rendered current. RESI’s average current deal on these loans based on the purchase price is 9.5%. 12 loans were refinanced at 97% of the updated BPO value at the time of resolution or 107% of the BPO value at the time of acquisition, generating approximately $2.8 million in net proceeds. 19 loans were reinstated i.e. the borrower made all delinquent payments and15 loans were repaid in full by the respective borrowers, generating approximately $5.8 million in net proceeds. On the loans liquidated during the quarter, RESI realized a gain of 40% over the purchase price that it paid for these loans. In addition, 28 loans were subject to loss mitigation activities initiated by the seller at the time of acquisition and were subsequently resolved via short sales or third-party sales. On these loans, we realized proceeds of approximately $7 million representing 85% of average BPO value at the time of acquisition. Our total gains over purchase price for these 28 loans were 17%. Now I want to spend a few minutes discussing the performance of loans that we modified in the first half of 2013. Of the 18 modifications, we completed in the first and second quarter of 2013, our recidivism rate of 6% is well below industry average. We expect to sell re-performing loans after establishing nine months of performance history. We have reached that status on loans that we modified in the first and second quarter of 2013 and expect to sell these loans shortly. In addition, we’ll begin sharing our resolution analysis by acquisition vintage at the end of next quarter. The very first analysis will cover loans purchased in the first and second quarter of 2013. RESI’s rental portfolio is growing in line with our expectations. As shown on Slide 7, at the end of the first quarter, 35 properties owned by us were leased. Average gross rent per property were 12.7% of the property value at the time of acquisition. On average, these 35 properties were leased within 27 days of being placed on market. 17 additional properties were renovated and listed for rent. For the 52 properties, the renovation was completed, our average renovation expense per property was $13,660 and renovations were in progress on 48 additional properties. We’re encouraged by the early trends in our rental portfolio and we expect to have 100 rental properties by the end of second quarter and 1,000 rental properties by the end of 2014. While resolution activity was the highlight of this quarter, we continue to remain focused on growing our NPL portfolio. Please turn to Slide 8 for an update on the first quarter NPL acquisition activity. In March 2014, RESI agreed to acquire a pool of 915 assets consisting of 668 mortgage loans with $131 million in market value and 247 REOs with $49 million in property value from a large money center commercial bank. The purchase price was $132 million. Assuming the purchase price of 83% of property value for the REOs, the purchase price for the non-performing loans was 69% of the market value of underlying properties. The transaction is expected to close in the month of April. In February 2014, we also completed the second closing of the previously announced HUD transaction consisting of 70 loans with $8 million in UPB and $8.2 million in market value of underlying properties. In aggregate, we purchased a total of 4,207 loans with $1.1 billion in UPB and $900 million in market value of underlying properties in the first quarter of 2014. To date, we have agreed or -- we have acquired or agreed to acquire loans with an aggregate underlying property value of approximately $2.9 billion. Using our 17% acquisition discount estimate, we believe we added approximately $7.60 of value per share that is not currently reflected in our book value. We are witnessing much higher NPL sales activity in April than any month in the first quarter. We also have HUD auctions scheduled for June 4th and June 20th, where we expect to HUD to auction approximately $5 billion of UPB under its national sale and NSO program. We expect to be able to close-up on multiple transactions in the second quarter. In addition, we are in active discussions on two large pools from two different sellers on an exclusive basis. If successful, we expect these acquisitions to take place in the third quarter. As show on Slide 9, when I see the estimated taxable income for the quarter was $25.8 million versus the taxable income of $11.3 million in the fourth quarter of 2013, representing a 128% sequential increase. Strong taxable earnings for the quarter reflect our substantial progress in resolving non-performing loans. During the quarter, we disposed off 116 loans and two REOs and realized an average gain of $78,000. On these 118 resolutions, our aggregate proceeds were approximately $35.4 million. During the quarter, we converted 637 loans to REO and completed 81 loan modifications with an average gain of $55,000. On the 637 conversions to REO, the increase in funding capacity available to us was $22.2 million due to the change in the borrowing base from NPL purchase price to market value of the property. I will now turn the call over to Ken. Ken?

[Ken Najour:]

Thank you, Ashish. Today, I will provide more detail on AAMC and RESI’s GAAP and taxable financial performance for the first quarter of 2014 and discuss RESI’s liquidity and funding position. Beginning with RESI, you can see on Slide 10 that we reported net income of $41.9 million or $0.77 per share for the first quarter of 2014 versus a net loss of $984,000, or $0.13 per share for the first quarter of 2013. RESI’s net income also increased 94% from the fourth quarter of 2014. RESI’s book value per share at the end of the quarter was $22.21 per share. Turning to AAMC, you can see on Slide 11 that AAMC reported net income of $6.8 million, or $2.39 for the quarter versus a loss of $840,000 or $0.36 a share in the first quarter of 2013. On Slide 11 also shows the revenues of AAMC as a standalone entity, which consists of management incentive fees of $10.9 million and expense reimbursement of $1.8 million. We also show operating expense of $5.2 million, which represents the cost of operating AAMC on a standalone basis and includes $3.3 million of non-cash stock compensation expense. Additionally, AAMC’s balance sheet under GAAP includes the equity of RESI, which is then reflected in AAMC’s book value per share. This reporting does not reflect the true economics to AAMC shareholders. On Slide 12, we show the standalone balance sheet of RESI, NewSource and AAMC. Please turn to Slide 13 for an update on our financing activity. In the month of April, we increase the funding available on one of our existing repurchase facilities by $100 million. We currently have capacity to purchase up to $725 million of additional UPB, assuming one-to-one leverage on the existing unencumbered NPLs and future purchases. Assuming three-to-one leverage on existing unencumbered collateral and future purchases, we can purchase up to $2.2 billion of UPB. Even then, our overall leverage would still be conservative one and a half to one. Our under levered balance sheet provides us with adequate flexibility to fund future purchases. At this time, we would like to open the call up for questions. Operator?

[Operator:]

Thank you. (Operator Instructions) And our first question comes from the line of Mike Grondahl from Piper Jaffray. Your line is open.

[Mike Grondahl:]

Yeah. Thank you, guys. I'm just trying to understand the supply a little bit deeper and it sounded like you talked about going forward, there is kind of three buckets that are in play right now. There is this very large HUD portfolio that's like $5 billion a UPB that’s coming June 4th and June 20th. And then there was the money center banks that were bringing some volume or stepped-up volume to the market in April. Could you comment the size of that volume and then, or I think you mentioned, if you could repeat the two separate large pools that you're negotiating with the [Celeron] (ph) and those would be 3Q transactions. Approximately, how large are those pools?

[Ashish Pandey:]

Mike, Ashish here. Pace activity picked up significantly in April from large money center commercial banks. We are seeing much more volume than what we have seen in any month during the first quarter. We expect that trend to continue, I think large money center commercial banks were expecting HUD to sell loans in March as we did and probably were holding back supply, so that’s encouraging. On the second question regarding exclusive transactions, we will not comment on the exact price which we are talking about, but these are significant opportunities.

[Mike Grondahl:]

Would significant be over one to thousand NPLs?

[Ashish Pandey:]

Yes. This would be something which would be transaction in billions of UPB. It’s not going to be hundred of millions.

[Mike Grondahl:]

Okay. Okay. And secondly, could -- Ken, could you just verify the liquidity you have today and maybe instead of how much UPB you can purchase, what sort of a range at the values you’ve been purchasing on, just in terms of number of NPLs?

[Ken Najour:]

So, Mike, if we assume then that we have purchasing to buy the $725 million UPB, now that’s sort of one-to-one leverage, so that would mean the purchase price would be in the $360 range, halfway UPB that would bind it around $0.50, the dollar, our purchase price would be around $360. And if we use an outreach, now it’s purchase price 150,000 per property and that’s given it’s around 2000 or 2400 loans.

[Mike Grondahl:]

Okay. And then I guess what I want to clarify too is, did you say you could purchase, that was the lower end of the bracket and the higher end of the range was three times that amount if you took the leverage up. Did I hear that correct?

[Ken Najour:]

That’s correct. It should be like 7,500 loans at the high end of the range, Mike.

[Mike Grondahl:]

And that’s, I mean, I guess what we are saying is that’s without raising any new equity, that’s just taking your leverage up to sort of overall 1.5 to 1?

[Ken Najour:]

That’s correct. That’s just trying to avail securitization financing on what we will purchase. If we were to use NPL securitization financing, you can fiscally get that 3 to 1 leverage which will still keep portfolio leverage just at 1.5 to 1.

[Mike Grondahl:]

Got you. Thank you. I will jump back in the queue. Thanks guys.

[Operator:]

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

[Jade Rahmani:]

Thank you very much. Last quarter I think you gave some disclosure on cash flow generation, would you be able to provide the same updated cash flow from operations number at the amount of mortgage on dispositions as well as working capital to get to net cash flow generations?

[Ken Najour:]

Jade, it would be dead actually if you go through the Q that we intend to file later today, you will be able to back up to that number. We generated 39 million out of dispositions and then there was another 22 million of additional funding, but you should be able to back up that number from the Q that we will be filing later today.

[Jade Rahmani:]

Okay. With respect to the slide on expected rental portfolio, the 1000 properties by year end, does this refer to total properties available for rent by year end or total rented properties?

[Ken Najour:]

Total leased properties, properties which we are leased.

[Jade Rahmani:]

Okay. Do you have a rough estimate how many REOs you would expect to have by year end?

[Ken Najour:]

I do not have that number at top of my mind.

[Jade Rahmani:]

Okay. And just with respect to capital and leverage, is the company’s overall target leverage ratio still one times and do you expect to announce additional borrowing capacity to achieve that leverage target before considering other forms of capital?

[Ken Najour:]

Yes. And we would be announcing additional financing facility as we inch up to that leverage.

[Jade Rahmani:]

Okay. And with respect to an NPL securitization, just to clarify that would be in the form of a liquidating trust, so there wouldn’t be REOs held for use that would come out of such a structure?

[Ken Najour:]

No, you can transfer REOs at the market value. So there won’t be any -- it won’t be that REOs need to be liquidated. There are variations of liquidating trust structure be it in buyback REOs from the trust that does appraisal at the time of resolution.

[Jade Rahmani:]

Okay. Are you actively looking into securitization options on any NPLs that you have acquired?

[Ken Najour:]

To me, it’s one of the options. We have enough of collateral if we want to do securitization. We can always use collateral to actually have on hand. So we always look at the options. We will take a call as we are closer to some of the acquisition opportunity.

[Jade Rahmani:]

Okay. Thanks for taking the questions. I will get back in the queue.

[Operator:]

Thank you. Our next question comes from the line of Dan Oppenheimer from Credit Suisse. Your line is open.

[Dan Oppenheimer:]

Thank you, guys. I was wondering if you can just talk a little bit more in terms of talking about the 1000 lease there at the end of the year. I guess the quarter we saw sort of increased activity in terms of the resolutions. I wonder if you can talk about geographically sort of how you are expecting in terms of the timing, in terms resolution to renovation to leasing, is there anything clearly depending on the market that can take some time whether it’s to get to the renovation state, are you confident where everything being consistent with prior expectations for that and should we expect to see higher level of resolutions also in the second quarter?

[Ken Najour:]

Dan, we converted 800 just of properties, we have 800 plus properties in REOs at the end of this quarter and we think that this number will continue to grow which provide such visibility into how many properties we will be able to dig into rental portfolio. I do not think that we have concentration in certain geography, and therefore we will not get into a situation where we have a lot of properties coming into one single market at the same point of time, and therefore we will have difficulty to rent. We thought that’s the benefit of our diversify portfolio. We have been able to lease properties on an average within 27 days and haven’t compromised on the rent that you have from these properties.

[Operator:]

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

[Fred Small:]

Hi. Good morning. Just on the rental pipeline. Can you give -- is the 1000 properties that you’re talking about now is that, are you just changing it to sort of rental count versus the $200 million that you talked about on the last call?

[Ashish Pandey:]

You can approximate that, yes, if you were to approximate that but $200 million was the amount which we thought where we can get the first securitization deal done.

[Fred Small:]

Okay.

[Ashish Pandey:]

It was in a different context but both of the number should be similar. If we have 1000 properties, we should have roughly $200 million there.

[Fred Small:]

Okay. Got it. And in terms of the number of overall properties you need. Do you need more than a 1000 properties leased before you can look at a securitization or, I mean, what sort of the relative number, I’m assuming that you don’t want to initially go to market with the first 1000 things you get rented but maybe that wrong?

[Ashish Pandey:]

No. We’ll go with the first 1000 things which we have rented. We are not going to look. We think that every property that we are renting, we are renting it on merits and it generates attractive yield.

[Fred Small:]

Okay.

[Ashish Pandey:]

Now keep in mind that we will end up generating more cash flows but if you see expect to generate more cash flow into the securitization structure than anybody else. So we are very confident on our ability to execute securitization.

[Fred Small:]

Okay. Got it. And then you talked a little bit at the beginning about -- at the beginning of the comment, your comments, Ashish, about the performance of modified loans and selling some those -- selling some of those loans in the first half? Can you maybe just say what the number of loans was there again? And talk a little bit about that market, who the buyers are, where you’d be selling those?

[Ashish Pandey:]

Sure. So, these are 18 loans which we modified in the first and second quarter of last year and 17 of them has performed for a period of more than nine months. We expect some more of those loans to come in this quarter. We will be selling it typically to our slow buyer at this point of time and slow buyer ends up selling those loans to small regional bank. There is a good demand for those loans for the small regional bank, also some of the slow buyers just aggregate and try to get to our reperforming loan securitization. So those are the two aspects.

[Fred Small:]

Okay. And that markets really, how active is that market in terms of just what sort of -- can you give us sense of how active that market is on a quarterly basis?

[Ashish Pandey:]

Sure. It’s very vibrant. You can do $3 billion, $4 billion without moving the needle in terms of pricing there. It’s a very vibrant than active market.

[Fred Small:]

Got it. And what sort of the current bid for the type of reperforming loans that you’d be selling?

[Ashish Pandey:]

Should be somewhere around 95% to 96% after IPO.

[Fred Small:]

Okay. Great. Thanks a lot.

[Operator:]

Thank you. And I have a follow-up from Mike Grondahl from Piper Jaffray. Your line is open.

[Mike Grondahl:]

Yeah. Ashish, is there anything as, half of these NPLs are moving through towards rental. What’s maybe the biggest challenge you’ve noticed over the last year now? And do you see any other big challenges at this point?

[Ashish Pandey:]

Mike, there has been nothing which is a big challenge, but obviously, this is an operational business. We have something going everyday on, every loan. I think that the model that the way we thought model will work, is working. We are pleased with the performance on the foreclosure conversion side and results in this quarter validate that performance. We think that we should be able to reach 2000 properties by end of the year. We feel confident about that.

[Mike Grondahl:]

Okay, great. And next quarter we look forward to see in some of that vintage analysis too, that will be helpful?

[Ashish Pandey:]

We’ll be sharing that.

[Operator:]

Thank you. Our next question comes from the line of (indiscernible) from Deutsche Bank. Your line is open.

[Unidentified Analyst:]

Hey, good morning, guys. Most of my questions have been answered. Actually just a few quick ones. The first one is, I know you disclosed that you acquired 247 REOs or you plan to acquire them. Is that related to an NLP pool or is that you guys going out there and put a significantly different channel? And if so, out of those properties, how many do you expect to retain for rental and how many would you expect to maybe sell?

[Ashish Pandey:]

This was part of an NPL trade, where NPL and REOs were trading together, so it was a single trade.

[Unidentified Analyst:]

All right. It makes sense. And my second question is, could you maybe just walk through the incentive fee calculation for us on the 10.8 million, just maybe talking about the numbers involved and how are you calculating it through the waterfall? Thanks.

[Ashish Pandey:]

Ken, you want to do that or will you like me to do that?

[Ken Najour:]

Yeah. Sure Ashish. So about the way that we calculate the management incentive fees, we do estimate REIT taxable income before any incentive fees paid to AAMC. If you sort of use the numbers that are probably available today, we would be the 10.9 million of incentive fee, plus approximately about $23 millions of distributed earnings of the $0.40 to get us to around $33 million or $34 million. And that’s what we pushed into waterfall to give you distribution amount to shareholder and then the incentive fee to AAMC.

[Unidentified Analyst:]

All right. Great. Thank you very much.

[Operator:]

Thank you. This now concludes the question-and-answer period. I would now like to turn the call over to the speakers for closing remarks.

[Ken Najour:]

Thank you very much for joining us today and have a great day. Good bye.

[Operator:]

Ladies and gentlemen, thank you for participating in today’s session. This now concludes the program and you may all disconnect. Everyone have a great day.