Kelly Residential & Apartment Real Estate ETF
Q2 2013 Earnings Call Transcript

Published: 23 Jul 2013

[Operator:]

Good day, ladies and gentlemen, and welcome to the Altisource Residential Corporation Q2 2013 Call. At this time, all lines are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). With us today we have Bill Erbey, Chairman; Ashish Pandey, Chief Executive Officer; and Ken Najour, Chief Financial Officer. I would now like to turn the call over to Ken Najour. You may begin, sir.

[Ken Najour:]

Thank you. Good morning, everyone, and thank you for joining us today. My name is Ken Najour. I am the Chief Financial Officer of Altisource Residential Corporation which we refer to as Residential. 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 Provision 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 risk 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 today’s earnings release as well as the company’s filings with the Securities and Exchange Commission, including our year-end December 31, 2012 Form 10-K, our first quarter 2013 Form 10-Q and the second quarter 2013 Form 10-Q we will file today. If you’d like to receive news releases, SEC filings and other material 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 are Bill Erbey, Chairman of Residential; and Ashish Pandey, Chief Executive Officer of Residential. 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 this morning. It’s a pleasure to share with you Residential’s second quarter results. I’ll start by saying that I’m pleased with all we’ve accomplished in the second quarter and the first six full months of our operation as a public company. We’ve previously told investors that our success will depend on our ability to

[Ashish Pandey:]

Thank you, Bill. Good morning, and thank you again for being on today’s call. I plan to spend a few minutes discussing NPL pools for which our bidding efforts were successful in the second quarter. I’ll also update you on the performance of our existing NPL pools. In the second quarter, we agreed to acquire two NPL pools with a total of 2,698 first lien mortgage loans having $470 million of UPB and $370 million of market value of the underlying properties. We expect these acquisitions to close at the end of the month. For these pools, we agreed to pay $253 million or approximately 68% of the market value of the underlying properties, subject to adjustments pending the final composition of the portfolios. Please note that 8% of REO properties in one of these pools was one of the driving factors in the higher price relative to our prior acquisitions. As shown on slide 7, 99% of the loans in these pools were 90-plus days delinquent, but a substantial number of them in foreclosure as of the related cutoff date. The top two states by market value are Florida and California, which collectively account for 31% of loans by UPB. I will now like to update you on the performance of our NPL portfolio. The performance update mostly relates to the first pool of 460 loans we acquired in February. The other pools were boarded through the second quarter leaving us with little time to work on them. Please turn to slide 8 for our performance highlights. As you can see, as of the end of the quarter, we successfully resolved 104 loans. Of these loans, 14 loans were reinstated i.e. borrower made all delinquent payment. 18 loans were modified and rendered current, 34 loans were resolved via short fill and third-party sales resulting in proceeds of $7.9 million, representing 95% of average BPO values. Four loans were paid in full by the borrowers, 27 loans were foreclosed resulting in residential gaining control of the underlying property as REO. Seven loans were resolved via deeds in lieu of foreclosure resulting in expedited control of the underlying property to residential. In addition at the end of the second quarter, 25 loans were on trial modification plans. For loans liquidated during the second quarter, we made a gain of approximately 30% over the amount we paid for these loans. Overall, we are happy with the progress we made in resolving loans and expect to report resolution of more loans next quarter. Looking forward, we continue to see a robust pipeline of potential opportunities in the market, and we are actively reviewing NPL pools for acquisition when the characteristics of the pools meet our investment criteria. I would now like to turn the call over to Ken. Ken?

[Ken Najour:]

Thank you, Ashish. Today, I’ll provide more detail on our financial performance for the second quarter of 2013 and discuss our liquidity and funding position. As you can see on slide 10, we reported net income of $5.2 million or $0.26 per share for the quarter. Our book value per share at the end of the quarter was $16.50. It’s worth noting that the earnings for the quarter reflects return generated from investing the $100 million of initial capital and not the $310 million raised in the May offering. Total investment gains for the quarter were $8.9 million. This can be divided into three components. First, we realized cash gains of $1.7 million from the resolution of 28 loans. Second, we recognized $1.4 million in unrealized gains driven by a material change in loan status. During the quarter, we converted 33 loans to REO status. Upon conversion of these loans to REO, we marked these properties to the most recent market value, less selling cost in the case of REO’s held for sale in accordance with GAAP. Third, we accreted $5.8 million of discount in expenses which was priced into the acquisition and represent the time value of money and servicing expenses incurred as the property’s proceeds through the foreclosure process. The judgment embedded in this value is the time that it takes to foreclose on a loan in various jurisdictions. During the quarter we raised, we recorded $3.9 million in expenses which include $1.2 million of reimbursable expenses to AAMC and $1.2 million of surge on fees to Auckland. I would now ask you to turn to slide 11, where we have provided additional details in our financing arrangements. We are in advanced stages of negotiations on two new repurchase facilities that will add $300 million of borrowing capacity and have a blended advance rate of approximately 65% and a funding cost of LIBOR plus 300 basis points, which are better than the 50% advance rate and the 4.5% all-in funding cost contemplated in our business plan. We expect these facilities to close during the third quarter. Upon closing of the NPL acquisitions described by Ashish, we expect to use $220 million of cash on hand and $30 million of borrowing capacity. Subsequent to the closing of these acquisitions, we will use the remaining capacity in our existing repurchase facility and new financing facilities for future acquisitions of NPLs. While we did not make any distributions to stockholders in the quarter, we intend to elect and qualify to be taxed of the REIT in 2013. This will require us, among other things, to distribute annually at least 90% of our REIT taxable income to our stockholders. At this time, we would like to open the call up for questions. Operator?

[Operator:]

Thank you. (Operator Instructions). Our first question comes from Mike Grondahl with Piper. Please go ahead with your question.

[Mike Grondahl:]

Yes. Thanks, guys, for taking my questions. The first one is just as it relates to mods and short sales or kind of your loan resolution, how does that compare to kind of what you expected? And kind of what did you learn through that process?

[Bill Erbey:]

Ashish, would you like to cover that?

[Ashish Pandey:]

Sure. So Mike, I think we are meeting our targets that we set for ourselves. In fact, I’m pleased with the proceeds that we received. I highlighted that we received almost 95% of the BPO value on these properties. And I think those resolutions have panned out well for us.

[Mike Grondahl:]

Got you. And then could you provide a little bit more color on the pipeline and sort of the supply you’re seeing in the marketplace?

[Ashish Pandey:]

Sure, Mike. So we are working on active pipeline of more than $800 million at this point of time. Market has been very vibrant in terms of supply. We have seen last two months which were much better than the initial four months of the year. We are seeing a lot more sellers selling in higher volumes than they have in the past. So we remain positive about the supply situation here in the market and expect pricing to remain at the levels where we have been purchasing.

[Mike Grondahl:]

Okay. And I think as stated in the slides that after you put this $220 million of cash to work and $30 million of debt, then you’ll have the credit facility to the tune of about $300 million to draw down on?

[Ashish Pandey:]

Yes, we will have $300 million of credit facility to draw down upon and we will have some amount remaining on our existing facility to the extent of $70 million roughly so that we will have $350 million of purchasing power.

[Mike Grondahl:]

Okay, great. Thanks a lot guys.

[Operator:]

Our next question comes from Dan Oppenheim with Credit Suisse. Please go ahead with your question.

[Dan Oppenheim:]

Great. Thanks very much. I was wondering in terms of the loans that you purchase are under contract right now, you talked about having 8% of those in REO at this point and so higher price there. Is that more desirable for you in thinking about being able to move more quickly in terms of having a portfolio rentals that way, should we look for that in terms of future purchases, how are you thinking about that overall?

[Ashish Pandey:]

Dan, Ashish here. Our preference is to actually buy non-performing loans rather than REOs because we have more optionality when we are buying non-performing loan. If we are able to work with the borrower and get him current, we make a lot more money that way. But it is nature of composition of the pool that trade on an all-or-none basis. So there are 5% to 10% REOs in a particular pool, we are not going to shy away from purchasing those pools. At the same point of time, you should not expect us to be buying pools that are 100% REO.

[Dan Oppenheim:]

Right, sure. And then in terms of the – you’d commented on the loan resolutions from the original pool in February, I think the timing was certainly faster in terms of some of the resolutions than we expected. Are you seeing that in general in terms or just – do you think anything unique to that portfolio or do you think in general some of the resolutions are likely happening a little bit faster than you might have anticipated originally?

[Ashish Pandey:]

We were able to get to the results that we aspire for on these portfolios. In general, I would say that market environment is a little bit better, people are more positive about home prices. And therefore, borrower who are in a marginal equity position. They are probably more willing to work and remain in home, have the upside than try to default strategically, so that’s what I can comment on.

[Dan Oppenheim:]

Okay. And then the last comment – last question is currently looking at portfolios active with $800 million, is that based on unpaid balances there on those portfolios that you’re looking at to or that when you talk about the $800 million?

[Ashish Pandey:]

We are talking about an unpaid principal balance, $800 million of (inaudible).

[Dan Oppenheim:]

Okay. Great. Thank you.

[Ashish Pandey:]

You’re welcome.

[Operator:]

(Operator Instructions). Our next question comes from Tony Paolone with JPMorgan. Please go ahead with your question.

[Tony Paolone:]

Thanks. Good morning. Just following up on the deal flow questions. Can you put some parameters around how much in deals you actually looked at or underwrote to get to the acquisitions that you’ve signed up here?

[Ashish Pandey:]

Tony, Ashish here. You should think about that we probably are winning at a rate of 25%. So that’s what hit on the pools where we actively bid on. We obviously look at a lot more pools but we may put up a bid which we know is not going to be competitive in certain instances, but 25% should be a ratio which you should think about when we are bidding with an intent to win.

[Tony Paolone:]

Okay. And then I think Bill had mentioned kind of getting some of these deals done despite some volatility in the market. I was just curious as to what specifically there was a volatility of just pricing or just the amount of deals that were in the market, just kind of understand what that was.

[Bill Erbey:]

It was pricing for – certainly the end of June was leading up to and through the end of June it was a little disruptive within the market. I think the pricing now is somewhat to our advantage because there is less attractive ABS execution on the part of some of the other players. So that’s been -we’ve benefited from that since we do not leverage as high – not as high leverage as they do. The one thing, and I wouldn’t take a whole lot of way from how many deals we’ve won or lost. There’s a very interesting dynamic, when we become [Wuxi] (ph) eligible which would be when there’s $1 billion of float and when there is – where you’ve been actually issued your first K. You actually can do equity raises virtually overnight. So one of the things that Ashish and his team has to balance is the amount of the old flow versus the amount of equity they have before they can get to a window period. We’re hopeful by the early part of next year that significant limitation will be eliminated. We’ve seen that – we worked our way through that with HOSS. You’ll see that occurring here where it gives the management team far greater flexibility when they can go to market based on the level of the deal for that they see.

[Tony Paolone:]

So the intentions sounds are that you will need to have an active shelf at all times as well as perhaps like an aftermarket or something along those lines?

[Bill Erbey:]

Well, not after market but you can just go when you’re Wuxi eligible, you can issue overnight.

[Tony Paolone:]

Right.

[Bill Erbey:]

I mean you can give it immediately – you’re immediately effective. It significantly improves your execution capability because you can match your capital much more easily to the amount of demands that there are in the market so when Ashish was saying we were being laid on some bids, it really related to – in some cases not as much to the amount of the quality of the product, but basically being extremely conservative because if we want it, we would have probably made other capital decisions that would’ve been slightly less efficient. So I wouldn’t take a whole lot of way in this early period from that from what our win rate happens to be.

[Tony Paolone:]

Okay. Understood. And last question, just given the ramp-up of the organization over the course of this year, do you think you actually have taxable net income in 2013 that you’ll have to distribute?

[Ken Najour:]

This is Ken speaking. That was in more line of guidance and we haven’t been in a position where we want to give guidance at this point.

[Tony Paolone:]

Okay. But thus far, if I just look at to your result then I guess, it would suggest that there’s really no dividend requirement thus far into the year. Is that a fair assumption?

[Ken Najour:]

That’s a fair assumption.

[Tony Paolone:]

Okay. Thank you.

[Operator:]

(Operator Instructions). Our next question comes from Jim Fowler of Harvest Capital. Please go ahead with your question.

[Jim Fowler:]

Good morning, and thank you for taking the questions. I’m looking at page 3 where you noted you agreed to acquire $470 million of the UPB. I also noted that – I’m not sure when it was posted, but there was a report on the FHA website dated 6/26 that you were awarded a $379-million pool from a HUD auction. I’m wondering, is the HUD auction that I referenced, is that part of the $470 million? Or would that HUD auction be an addition to what you have on page 3?

[Ashish Pandey:]

Jim, this is Ashish. That number is included in the number, which you see on page 3, $470 million.

[Jim Fowler:]

Okay, great. Thank you. And then just a little bit on the HUD auction, I mean, how frequently do you expect or do you think HUD will auction loans?

[Ashish Pandey:]

If you were to take their past cycle, there are typically options once every quarter. What we are seeing on the hot side is that the size of auction has been increasing almost every quarter, so it’s going to be a good source of supply we expect next auction to happen sometime at the end of this quarter.

[Jim Fowler:]

Bill, might I ask you a question that might cross company lines here, but let me give it a shot. And the first part will be an assumption. I assume when the – when your organization is buying service saying there’s various approval that might be needed by FHFA, the GSCs, et cetera. I’m wondering if that’s the case with non-performing loans or if these purchases you just bid whatever you think the value as you ordered them and there’s not as much focus per se if there is, if I’m right on that assumption, in terms of any capacity issues or whether Auckland has recently bought a large pool. But I mean does anybody care about that when you’re buying the non-performing loans or is it a straight economic analysis and bidding process?

[Bill Erbey:]

Trade economic analysis and bidding process, you still have to be approved as a bidder. But these pools compared to a top four servicer are not – do not really move the needle in terms of the capacity issue at all.

[Jim Fowler:]

Yes. I assume that. I just wondered if there was any concern relative to anything you might have been doing otherwise and people’s concern. Anyway, enough said. Thank you very much.

[Bill Erbey:]

There’s no concern across the board with – we need to obviously deal with issues. But as you see, various companies have been able to continue to get approvals.

[Jim Fowler:]

Yes, great. Thank you very much. Congratulations on the quarter. Thanks.

[Bill Erbey:]

Thank you.

[Operator:]

I would like to turn it back over to the company for closing comments at this time.

[Bill Erbey:]

Thank you very much for joining in the call. We appreciate your support. Have a great day.

[Operator:]

Thank you very much. Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the conference. You may now disconnect. Good day.