Front Yard Residential Corporation (NYSE:RESI) Q1 2018 Earnings Conference Call May 8, 2018 8:30 AM ET
Robin Lowe - CFO
George Ellison - CEO
Douglas Harter - Credit Suisse
Jade Rahmani - KBW
Mike Grondahl - Northland Securities
Anthony Paolone - JPMorgan
Good day, ladies and gentlemen and welcome to the Front Yard Residential Corporation Q1 2018 Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call maybe recorded.
I would now like to turn the conference over to our host of today's call, Mr. Robin Lowe, Chief Financial Officer. You may begin.
Thank you, Sonia. Good morning, everyone and thank you for joining us today. My name is Robin Lowe and I am the Chief Financial Officer of Front Yard Residential Corporation.
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.frontyardresidential.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 Provisions of the Federal Securities laws. These forward-looking statements maybe identified by reference to a future period or by use of forward-looking terminology that may involve risks and uncertainties that could cause the company's actual results to differ materially from the results discussed in the forward-looking statements.
For an elaboration of the factors that may cause such a difference, please refer to the risk disclosure statement in our earnings release as well as the company's filings with the Securities and Exchange Commission, including our year-end December 31, 2017 Form 10-K, and first quarter 2018 Form 10-Q that we filed today.
If you would like to receive our news releases, SEC filings and other materials via e-mail, please register on the Investors page of our website using the e-mail alerts button.
Joining me for today's presentation is George Ellison, Chief Executive Officer of Front Yard Residential.
I would now like to turn the call over to George.
Thanks, Robin and good morning everyone. We're pleased to report another solid quarter of results of Front Yard Residential. The numbers are strong on almost every front. If you please turn to page four, you can see that 94% of stabilized rentals were leased at quarter end. Turnover for the stabilized portfolio was 6.3%. Blended rent increases were 3.5% in the first quarter.
Rental revenue increased 55% since Q1 of 2017 from 14% since year-end. Stabilized Rental NOI margin remained strong at 65%. Stabilized rental core FFO was $0.16 per share. 78% of funding was over 3.5 years and 65% was fixed. And finally, we're pleased to announced full company core FFO of $0.05 per share.
This is an extremely important milestone that’s been reached. After years of cleaning up the legacy issues, which have been a drag on our earnings, reporting this number now makes sense. This number is the manifestation of all the work that’s gone into removing both the loans and the non-strategic REO from our balance sheet. We committed to turnaround the earnings, and eliminate the legacy assets and expenses. We have delivered and continue to make this number grow. We will focus on this important metric going forward.
We continue to optimize the portfolio with 96% of properties now being rentals and 98% of the rental portfolio stabilized. Full company core FFO of $0.05 per share is a very positive and meaningful accomplishments. Let’s look at the state of the whole business and the future of our company.
On page five, you see some economic tailwinds, which are relevant to our industry and specifically Front Yard, and why we think we can grow full company core FFO going forward. The economy continues to get stronger and inflation expectations are increasing, rates have been steadily rising. Higher interest rates means higher mortgage rates, which will make it more difficult for people to afford a mortgage, which means more families will choose to rent.
We are in the affordable housing space, where this impact will be more pronounced. More renters means rental rates will continue to rise. Higher inflation into our real estate, our home will be worth more. Single-family housing starts are already down and affordable housing starts are even worst. And don’t forget the population of the U.S. continues to grow, creating more households, more renters every year. All of this is positive for Front Yard and leaves us well positioned to meet the growing needs of our renters.
On page six, we show important company data over the last few quarters. I would draw your attention to some key trend lines. Steady strength in NOI, steady growth in stabilized rental core FFO and now a new trend line starts, as we report full company core FFO, with a goal of similar continued growth. The cleanup strategy of eliminating legacy assets that we employed three years ago is now clearly starting to yield the intended results.
I’ll now turn the call back to Rob.
Thank you, George. Today I’ll cover our portfolio activity and financial results and balance sheet development. Our total rentable portfolio at the end of the first quarter, was 11,954 homes of which 11,760 or 98% was stabilized. We reduced remaining legacy REOs by 35% during the quarter, leaving 320 legacy REOs with a carrying value of $17.1 million.
Since the end of the first quarter, we have sold about 50 more legacy REOs with a further reduction of approximately $10 million in carrying value. We continue to refine our rental portfolio by identifying homes for sales in non-core markets. During the quarter we sold 28 previous rental homes and identified a further 142 homes for sale, with a carrying value of approximately $24 million.
We purchased 35 rental homes during the quarter, at an average price of $118,000. Rental revenues increased by 14% to $39.8 million compared with the fourth quarter of 2017. As we saw the full quarter impact of the 1,957 homes purchased from Amherst at the end of November 2017. Stabilized rental NOI margin was 65.2% and stabilized rental core FFO was $0.16 per diluted share.
As we near the end of legacy asset disposition, we plan to move from reporting stabilized rental portfolio metrics to full company metric. This quarter we are reporting for the first time full company core FFO of $0.05 per diluted share. As we complete legacy asset disposal and continue to recycle available equity into rental homes, we anticipate a significant increase in this number overtime.
We estimate that with approximately $50 million embedded equity and legacy assets for sale, and $115 million of unrestricted cash, we have the ability to purchase a further 3,000 to 4,000 homes depending on pricing leverage.
During the quarter, we took steps to further strengthen our balance sheet, by extending debt term and hedging against potential increase in interest rates. At the end of the first quarter 65% of our funding had fixed or capped rates, and 78% had a maturity of over three and half years. We continue to work on strengthening our funding profile.
Reconciliations from GAAP net loss to reported FFO, core FFO and NOI numbers are provided on slides 13, 22 and 23 of our earnings supplement. Effective January 1, 2018, we adopted the new U.S. GAAP revenue recognition standard and we now classified gains and losses from mortgage loans and real estate sales as a component of other income. The new standard had no other material impacts on our financial statements.
I'll now turn the call back over George.
Thanks, Rob. Front Yard Residential the full company is now making $0.05 per share of core FFO. As we continue to reduce even the small number of remaining legacy assets and as our efficiencies and operations continue to evolve and improve, so will core FFO. Economic indicators are healthy and getting stronger. More families are renting especially in the affordable housing sector, the demand for affordable housing is enormous and Front Yard Residential will be there to meet this demand. The company is turning the corner and the future looks very bright.
I'll now turn the call back to the operator and open it up for questions.
Certainly. [Operator Instructions]. And our first quarter comes from Doug Harter of Credit Suisse. Your line is open.
Thanks. I was hoping if you talk about how you see your pipeline and what your expectations are for the timeframe to deploy that excess capital that you mentioned, Robin?
Good morning, Doug. The pipeline is as we've talked about in the past, somewhat episodic. There is still some significant pools out there of 1,000 to say 3,000 or 4,000. We've developed some smaller flow programs with three folks we've talked about in the past. But we're really looking at some larger pools that we think are available in terms -- and that would use up the remaining equity that Rob talked about the 3,000 to 4,000. We'll see if we're able to get those.
In terms of timing, I'd be -- I think we said this on the last call. I would hope that before the end of the year we would be able to use the rest of the equity. And so for modeling purposes, I would sort of smooth it out between now and year-end. But our hope is that we get it this year, but again we have to be disciplined about price, yield where they are et cetera.
And I guess, can you just talk about the price and yield and how that's changed over the past several month's quarters?
It hasn't changed that much. We’re still shooting for a 6% yield all in upfront before we start applying leverage. So, I mean, if we vary from that it's by very, very high-5s and then sometimes obviously you can get a little bit above 6%. So I wouldn't say our target for that has changed dramatically over the last few quarters if at all.
Alright, thank you.
And our next question comes from Jade Rahmani of KBW. Your line is open.
Thanks for taking the questions. Are there any prospects for meaningful M&A in the sector?
As oppose to Doug's question about the acquisition pipeline?
Yes, just I guess platforms where there could be scale benefits and just I guess levels of dialogue that you would -- how you would characterize that in the market?
We’ve put out on the last earnings call the 4Q, 2017 some of our goals and we mentioned that we would always consider looking at internalization of property management. So as we've said and as Rob's numbers indicate both of our property managers are doing an incredibly great job both MSR and ASPS and a lot of folks didn't think that was possible. So we're very pleased that those two partnerships have worked out so well. But that doesn't mean that we won’t look at. As we continue to grow, I steel believe pulling property management internal at some point might be able to say this even a little bit more.
So, I'm please -- we're pleased with where it is now, but we're always looking for ways to save money and that might be a way to do it. And yes, there is platforms out there, but obviously I can't comment on we are close to one another.
So, just following up on that, you could look to acquire a company that provides property management and merge with them then they would do your in-house property management?
Again, this is all hypothetical. So, the report you guys put out a couple of weeks ago, which was excellent listed pretty much everybody who's anybody in the space and that sort of -- that's a list we all know and look at obviously the first couple on your list were the very large players IAH and AMH progress I think was third. So, I -- if it were to happen, you probably be acquiring homes and the platform, I don't think that you’d go out there just a platform.
So, it would probably be some combination of one of the people on your list if you look where we were then the following 10 names, that's a shopping list. So you would look at that and say hey you can pick up 1,000 or 5,000 homes and pickup a property manager that have some great technology and then you think about internalizing it.
But that's -- as we said on the last call, that's things we think about and we'll see if we are able to do something like that. But so far not yet.
And just in terms of markets that you currently are targeting for growth, where do you see the most attractive prospects?
We're -- it's probably I think it takes 2016 or 2017 where we leave things. And where we spend a lot of time in the deck you see 2016 and 2017, we do some pretty significant breakdown. So, we're probably about full on Atlanta, although the numbers still continue to be pretty strong. Memphis is great, Houston is a little bit slower coming out of the storm, but we're very positive on Houston.
OKC is a name, we've talked with you about on both last calls. We're very positive on OKC, the NOI has been great, but the rents, the pushing rents has been a little bit more difficult, although it's starting turn. So, that top 10 list if you see on 2017 would probably be our -- that's where we do most of our -- have most of our focus.
But again back to your other question, if you’re buying someone or you buying a pool, they're going to have cities that they’re in, but as we get bigger, we'll probably focus on buying pools where they have cities we want. And then we're going to have to do just as other folks have done, probably start buying and selling off sub-pieces of it that don't feet, either by region or by size, or by yield. So, I'd say 2017 would be a good answer to your question.
Although St. Louis, we've talked about before continues to be a focus, and we're spending a lot of time looking at Chicago, but as you know Chicago is incredibly difficult and some people try to stay away from there. So, we're looking at Chicago very hard because of the population. But Chicago can be tricky. So we’ll have to see whether we go there, but we're studying it pretty hard.
And just lastly, is there any comment on the AMC or update on the AMC commentary you provided last quarter?
We talked about it and said that we were always open to all ideas and all suggestions and we reserve the right with our boards to obviously decide on that. You asked a very specific question, I have a very specific recommendation. So, we will always look at the two companies, whether there is an internalization as you mentioned on the last call or a partial internalization or the thing we've talk about both boards are pretty active and we talk to them about it every single quarter.
And so as I said last time, there are no sacred [ph] cows around things we won’t do, I think we’ve proven that we’ve changed things pretty dramatically here. And if we decide the boards decide that’s the right thing than we would start that process. So it’s always on the table, we openly talk about whether it’s the internalization or partial internalization, but there’s no plan to do it right now.
Thanks very much for taking the questions.
[Operator Instructions] Our next question comes from Mike Grondahl of Northland Securities. Your line is open.
Hey, George and Robin. Quick question as it relates to slide 17, that far right column stabilized rental NOI margin, how do you think about the markets that are below say 65% kind of what the average is?
So let’s look at -- Houston is the first one going down the list is at 53% I just mentioned that. We’re still very positive on Houston and as you know they post storm I think everyone has been a little disappointed that how quickly they’ve come back. But we are completely committed to Houston and so we’ll just have to be a little bit more patient. If you can think about the long-term fundamentals of Houston unfortunately they lost a lot of homes and that’s a positive for all housing fundamentals in Houston. So we’re very aware of a 50s kind of a number and how that doesn’t work, but we’re very, very positive on that.
Indianapolis is probably one that we’ve struggled with the most, you see that there’s the next one it’s just under 60% and MSR has a big presence there and has been working very hard to turn that around. And Randall, Alicia, Renee sit on top of those guys pretty tightly. And so that’s one we’re watching like and I’ll be honest with you it’s been a little problematic.
The next one, Tampa Randall Mason was just there and I think the fundamentals there are still fine as well. So you’ll see some dips anything into the 60s obviously catches our eye and into the 50s is unacceptable. And then you sit back and look at the fundamentals, you have to take into consideration of the seasonables [ph] of what’s going on, Indianapolis is probably the furthest North where we have a large presence and as you know most people tried stay in the warmer locations.
And in winter isn’t just difficult because of the damage to the physical building, but it’s also things really as you know you live in that part of the world, everything slows down in terms of people moving and changing homes obviously school -- we tend to have more children in our homes than multifamily. And so we’re very, very cyclical around the kids and their calendars and their school and their issues.
And then you add in cold weather to that and that’s why people struggle with going North, but I think we can get there. We just have to work a little harder. We’re not ready to give up [indiscernible], as I said we’re not ready to cross off Chicago yet there’s too many people there. So the way we think about it is, it is 50s we’re not pleased, we’ll dig on to -- we get into the hug and figure out why in the Houston case I'm not concerned, in Tampa I'm fine with it, Indi is on our radar and we have to figure out how to fix Indi.
Got it. The 142 identified for sale and the 28 rentals you sold in 1Q, were those sprinkled over a bunch of geographies or were they concentrated in one or two geographies?
No, if you’ll recall we -- because of the legacy platform that bought loans from large financial institutions the geography of what we bought would mirror what whichever bank, whatever their geography was with their loans. And so you’d end up with very similar geography to the population of the country. So you’d end up with a lot of California, a lot of Atlanta, a lot of the big cities, but you’d also end up with three homes in Boise and 10 homes in Providence, and one home in Harrisburg.
And so it’s really good just an optimization of getting out of locations where we don’t have enough homes to be significant not to confuse it with places like St. Louis where we have a small number, but that’s intended to grow. So it’s pretty diverse across the country, but Michael what we are trying to do is clean up, we’re not going to have homes in Rhode Island, we’re not going to have homes in Idaho, if we have homes in Seattle, we’re going to get rid of it doesn’t hit the yield.
So it’s really yield and the ability to grow critical mass, which can drive expenses much, much lower. So you need the size and you need the yield, and so we still have 30 to 40 places will be, but it won’t be some of these far out locations that narrow the loan purchases.
Got it. Then Robin, any rough update on kind of your back of the envelop NAV?
Yes, so as you know Mike, people have different ways of calculating it and that apply different discount rates. But we’re solidly in the 18 to 19 range per share.
Got it, okay. Thanks, guys.
And our last question comes from Anthony Paolone of JPMorgan. Your line is now open.
Thanks, good morning. So I guess following up on the portfolio kind of recycling question, do you think we see more properties as we move ahead move out of rentals and into being identified for sale even though the REO portfolio keeps winding down. Like do you think that we’re going to see like kind of 400, 500 units just pretty consistently or do you think there is a finite number of homes want to get rid of that are non-core?
I think there is probably a finite number Tony, we’re always going to be sort of pruning, but as George said, this is kind of an initial thing because of the way we acquired a number of these initial homes through foreclosure sales. So we need to get out of these states where we don’t intent to be for critical mass reasons or yield reason.
So we are showing in addition to the 28 homes that we sold in the first quarter another 142 there that we have already identified for sale, there could be another couple of hundred. But once we have dealt with that, there’s probably not going to be much more, although but it always continue to refine.
And so the other point that George made earlier, if we do acquire big pool from somebody maybe some of those may not fit and maybe we would sell those, but those are the only scenarios I can see.
Got it. And do those -- now that your strengths like some rentals that are non-core, what do those sales, yields look like in comparison to the yields at which you buy? Or get down to…
Pretty good, generally we have seen positive HPI as it normally varies. So we’re getting pretty good yield from these sales.
Okay. And then anything on the balance sheet as you guys move ahead are now have largely completed the cleanup in terms of either moving away from repurchase agreements and some of these other types of debt to maybe just more I don’t know term loans or securitizations like how do you think about just the balance sheet any opportunities there?
Yes, we are definitely looking to continue to term out our funding duration. So we are looking at existing debt and as things come up for refi how we deal with that. But definitely the plan is to continue to term out debt and new acquisitions obviously we’ll be looking for longer term debt as well.
And then secondly, as I said in my prepared remarks we are also looking to hedge our long-term interest rate exposure, against potential rate increases. So as I said 65% is already fixed or cap rate now, which is a big increase over last quarter, but we think there is more to do there. So we’ll be looking at improving that as well, as we go forward.
Okay. And then last question, on the idea of internalizing property management perhaps at some point in the future, like is there a piece of the operations that you just feel like you would benefit in those from gaining control, whether it’s R&M or just the leasing process or is there a key to that that you just feel like you’d rather control?
The R&M is clearly high on that list, but it's a as I said, both of those guys are doing a great job. We just believe that at some time you need to have your own folks who answer directly to your management team to get the absolute best price I'm not saying those guys don't. But I just believe if as we get bigger we'd like to have, I'd like to have more control over the R&M process. But you bring up other issues. Setting rent is only one key revenue to this business Tony, as you know.
There are some ancillary things you can charge, but it's really rent until the science of controlling rent is really extremely technical requires a lot of IT and having other people do it for you even watching them I believe, I mean, most of my team would agree. And we would just like to have more control over it. And you have to as I said on the last call answer to what we believe is an important ratio because the external management, the G&A of the whole thing whether it's external or internal divided by assets have to line up with other people and other REITs.
And so you have to squeeze every last penny out of this thing and we could be wrong, but I believe that if we pulled it internal and you align incentives properly I think you can squeeze a lot of money on R&M, I think you can set rents more, you can optimize rents better and I think we’d just rather have control over.
Got it, thank you.
And I'm showing no further questions at this time. I would now like to turn the call back over to management for closing remarks.
Thank you everyone for joining the call. And have a great day. Thank you.
Ladies and gentlemen, that concludes today's conference. Thank you for your participation and have a wonderful day.