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Edited Transcript of RESI earnings conference call or presentation 9-Aug-18 12:30pm GMT

Q2 2018 Front Yard Residential Corp Earnings Call

Frederiksted Aug 23, 2018 (Thomson StreetEvents) -- Edited Transcript of Front Yard Residential Corp earnings conference call or presentation Thursday, August 9, 2018 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* George G. Ellison

Front Yard Residential Corporation - CEO & Director

* Robin Neil Lowe

Front Yard Residential Corporation - CFO

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Conference Call Participants

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* Anthony Paolone

JP Morgan Chase & Co, Research Division - Senior Analyst

* Douglas Michael Harter

Crédit Suisse AG, Research Division - Director

* Jade Joseph Rahmani

Keefe, Bruyette, & Woods, Inc., Research Division - Director

* Michael John Grondahl

Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Front Yard Residential Corporation Q2 2018 (Operator Instructions)

I would now like to introduce your host for today's conference, Robin Lowe, Chief Financial Officer. You may begin.

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Robin Neil Lowe, Front Yard Residential Corporation - CFO [2]

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Thank you, Dimitris. Good morning, everyone, and thank you for joining us today. My name is Robin Lowe, and I'm 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 onto our website at www.frontyardresidential.com. These slides provide additional information that investors may find useful.

As indicated on Slide 1, our presentation may contain certain forward-looking statements pursuant to the safe harbor provisions of the Federal Securities Laws. These forward-looking statements may be identified by reference to a future period or by use of forward-looking terminology. They may involve risks and uncertainties that could cause the company's actual results to differ materially from the results discussed in the forward-looking statements.

For an elaboration of the factors that may cause such a difference, please refer to the risk disclosure statement in our earnings release, as well as the company's filings with the Securities and Exchange Commission, including our year-end December 31, 2017, Form 10-K, our first quarter 2018 Form 10-Q and our second quarter 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 alert button. Joining me for today's presentation is George Ellison, Chief Executive Officer of Front Yard Residential. I'll now turn the call over to George.

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George G. Ellison, Front Yard Residential Corporation - CEO & Director [3]

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Thanks, Robin, and good morning, everyone. Today, we're pleased to announce several landmark transactions at Front Yard Residential. First, we've signed and closed an agreement to purchase HavenBrook homes, both their property management platform as well as their portfolio of approximately 3,200 single-family rental homes that they currently manage.

On previous calls, we were open about our intentions to begin the internalization of property management at Front Yard, today that process has begun. The deal we're announcing today will enable us to manage almost half of our entire portfolio, internally within a few months.

In addition to buying HavenBrook and its portfolio, we've also reached an agreement to acquire the resources that manage our 4,000 homes from Altisource Portfolio Solutions, ASPS. We'll be merging these 2 great teams into one, the transition should be complete by year-end. We're excited and optimistic about Front Yard Residential operating its own property management platform, which will maintain the first-class customer experience while achieving some of the best operating metrics in the industry. These extremely important transactions come on the heels of another quarter with strong operating results.

Let's take a look at the second quarter and then spend a little more time on the HavenBrook acquisition. If you please turn to Page 4, 94% of stabilized rentals were leased at quarter-end. Turnover for the stabilized portfolio was 8.7%. Blended rent increases were 4.2% for the second quarter. Rental revenue increased 36% versus the second quarter of last year. Stabilized rental NOI margin remains strong at 64.5%, 65% of funding was fixed, 79% had a maturity of over 3 years. Excuse me. Full company core FFO increased to $0.06 per share and 97% of the properties in the portfolio were rentals and virtually all of the rental portfolio is stabilized.

On Page 5, we show important company data over the last 5 quarters. There continues to be some very good trend lines on the schedule, but I call your attention to the REO data specifically. As of quarter-end, we had only about 100 REO held-for-sale with 88 under review. And as of yesterday, there are approximately 70 REO left in the held-for-sale bucket. The legacy REO issue, just as a loan portfolio, is essentially gone.

I'll now turn the call back to Rob.

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Robin Neil Lowe, Front Yard Residential Corporation - CFO [4]

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Thank you, George. Today, I'll cover our second quarter 2018 portfolio activity, financial results and balance sheet development.

Our total rental portfolio at the end of the second quarter was 11,886 homes, of which 11,729 or 99% was stabilized. We reduced remaining legacy REOs by 41% during the quarter, leaving 190 legacy REOs with the carrying value of $44.5 million. Since the end of the second quarter, we have sold about 33 more legacy REOs with a further reduction of approximately $7 million in carrying value.

We continue to refine our rental portfolio by identifying homes for sale in noncore markets. During the quarter, we sold 14 previous rental homes and identified a further 221 for sale with a carrying value of $36.4 million. We purchased 19 rental homes during the quarter at an average price of $124,000.

Rental revenues increased by 2.9% to $40.9 million compared to the prior quarter. Stabilized rental NOI margin was 64.5%, and full company core FFO increased to $0.06 per share compared to $0.05 last quarter. At the end of the second quarter, 65% of our funding had fixed or capped rates and 79% had a maturity of over 3 years.

Today, we announced the Berkadia Commercial Mortgage LLC has provided $509 million of financing to us as part of Freddie Mac's affordable single-family rental pilot program. The financing is a 10-year interest-only loan with a fixed rate of 4.65%. As of today, including this loan, 77% of our funding now has fixed or capped rates and 87% has a maturity over 3 years. The weighted average maturity of our debt is now 5.2 years, and 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 15 and 24 of our earnings supplement.

I'll now turn the call back over to George.

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George G. Ellison, Front Yard Residential Corporation - CEO & Director [5]

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Thanks, Rob. Now let's do a deeper dive into the acquisition of HavenBrook and the wind down of the ASPS relationship. In searching for the right acquisition, we wanted to find a company that was focused on affordable housing, just as we are at Front Yard. HavenBrook homes is squarely in the affordable housing sector. The company based in Duluth, Georgia, bought their first home in mid-2013. They built an excellent team that acquired and managed homes, first in Atlanta, followed by Minneapolis, Birmingham, and then several MSAs in Florida. 3,236 in all. These stabilized single-family rental homes are either in markets where we are already strong, and we wanted to grow further, like Georgia and Florida, or in markets that we wanted to get better scale, Minneapolis and Birmingham.

At the time of the purchase, almost 97% of the portfolio was leased. The year-to-date average occupancy was 96%, blended rent increases were just under 4%, annualized turnover 32% and 2018 year-to-date NOI margin was solid at 62%.

With this purchase, Front Yard adds over 3,200 attractive properties to our portfolio, acquires a strong team with a proven track record and puts property management on our own platform. We believe this is the way to serve our customers more directly, closer, better and bring more efficiencies and savings out of the numbers as we grow our company.

As I mentioned, we are closing on our long successful partnership with our friends at ASPS. The ASPS team currently serves about 4,000 families. We need to ensure a smooth transition, as well as build out the HavenBrook team to handle these and many more homes.

To help with this transition, we're happy to announce we've also reached an agreement to move the teammates at ASPS that are currently managing our homes over to our platform as well. In this way, we should minimize any disruption and provide continuity to our families as we make these important changes.

This morning, the same teammates at HavenBrook and ASPS are handling the same families they took care of yesterday. The goal, minimal disruption to our customers. Then over the next 5 months, we'll merge the 2 teams taking the best ideas and practices from both. The HavenBrook acquisition is immediate, while the onboarding of our new teammates from ASPS to Front Yard should be completed by year-end.

I'd like to thank Bill Shepro and the team at ASPS for their excellent performance over the years and their help in this transition.

We're also pleased to announce we were able to secure attractive financing under the Freddie Mac's single-family rental pilot program through Berkadia. We've continually stated our commitment to the affordable housing market and the families who live there. Freddie Mac is obviously also committed to these families. Their support in partnership, along with Berkadia, gives enormous credibility to our status as the leading provider of affordable rental homes.

In conclusion, another solid quarter for Front Yard Residential. Core FFO keeps moving up, occupancy remains strong, rent growth steadily continues and NOI margin targets keep getting reached, all of which will be completed by the integration of our new internal property management platform.

As we said from the beginning of this journey, we need to simplify our story, remove the noise around the numbers, set aggressive growth and operating goals and then deliver, and we have delivered. Results matter. But the big news today is that we continue to take control of our own destiny. The transactions we announced today lay the foundation of the future Front Yard Residential and are exactly in line with what we've been talking about over the last several quarters.

We executed on removing loan servicing away from Ocwen shortly after we arrived and now control property management, the internal property management is now ours. The growth continues, the results keep improving, goals have been set and reached. And now structural changes are firmly in place that position us to become the leading affordable rental housing provider. And more importantly, to be better stewards of the needs of our families.

I'll now turn it back to the operator. We can open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Tony Paolone from JP Morgan.

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Anthony Paolone, JP Morgan Chase & Co, Research Division - Senior Analyst [2]

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First question is just want to make sure the deal is closed and the financing is closed, is all of that done or is anything pending still?

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Robin Neil Lowe, Front Yard Residential Corporation - CFO [3]

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It's done, Tony. It's all closed, closed yesterday.

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Anthony Paolone, JP Morgan Chase & Co, Research Division - Senior Analyst [4]

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Okay. And then, you've talked about bringing ASPS folks over to effectively the HavenBrook platform, is there -- you just changed your name to Front Yard, what will happen like with sort of the brand and what are you going to do in terms of like outward facing to the residents, is there an integration there or another change to happen?

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George G. Ellison, Front Yard Residential Corporation - CEO & Director [5]

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I'll start and then you can. Yes, so the -- Front Yard acquired HavenBrook, so it will be Front Yard, so the brand is Front Yard. The folks who come over from ASPS will become part of Front Yard. You might want to talk about sort of the future. Now, we are touching consumers directly. And so there will be a whole build out of that branding but...

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Robin Neil Lowe, Front Yard Residential Corporation - CFO [6]

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Yes. Day 1, Tony, as you know, in these kind of situations nothing changes. So HavenBrook has their own website and you know that's their interaction with their tenants. But over time, as we integrate level change and all that, the final name and the branding for everything will be Front Yard Residential.

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Anthony Paolone, JP Morgan Chase & Co, Research Division - Senior Analyst [7]

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Okay. And are these the first employees of RESI and so these -- -- everyone will be an employee of RESI and not like AAMC?

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Robin Neil Lowe, Front Yard Residential Corporation - CFO [8]

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That's right. This is the first time we're putting people into Front Yard.

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Anthony Paolone, JP Morgan Chase & Co, Research Division - Senior Analyst [9]

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Okay. Can you talk about what G&A and OpEx and any integration costs, what all that might look like going forward?

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Robin Neil Lowe, Front Yard Residential Corporation - CFO [10]

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Yes. There's definitely going to be some integration cost. There will be some noise in the next numbers in the near term. So you should expect that. The challenge for us, the imperative for us is to move the homes onto the HavenBrook platform as quickly as possible, so that we can achieve scale and cover the fixed costs to G&A, but there will be some noise in the near term, Tony.

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Anthony Paolone, JP Morgan Chase & Co, Research Division - Senior Analyst [11]

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Do you have a number like, if I look at sort of the last couple of quarters, your total overhead between fees and other costs like running about $7 million or so a quarter like, just give us a sense to where that goes?

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Robin Neil Lowe, Front Yard Residential Corporation - CFO [12]

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Yes. We haven't -- we are not giving out that number today. Over time, we'll sort of become clear on that. For us some pro forma financial and that kind of stuff, but today we are not giving out those numbers.

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Anthony Paolone, JP Morgan Chase & Co, Research Division - Senior Analyst [13]

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Okay. Maybe just last question, can you just talk to the economics, like either the yield or just total NOI that will come over from HavenBrook relative to, I guess, like the all-in purchase price of property management, the termination fee and the actual purchase price of the properties?

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Robin Neil Lowe, Front Yard Residential Corporation - CFO [14]

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Yes. We think, we got a very attractive yield on this one, Tony. I think the nominal cap rate is probably over 6%. The majority of that $485 million transaction price is allocated to assets. And I think if you look at the final purchase price compared to where BPOs are today, we're probably 90% of BPOs or something like that, so I think we got a pretty good deal here.

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Anthony Paolone, JP Morgan Chase & Co, Research Division - Senior Analyst [15]

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Okay. But that 6% is on what you are allocating to the real estate?

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Robin Neil Lowe, Front Yard Residential Corporation - CFO [16]

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That's right. So I'm not going to give you an exact number, but I will say that the majority of that purchase price, the big majority is allocated to assets.

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Operator [17]

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And our next question comes from Doug Harter with Crédit Suisse.

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Douglas Michael Harter, Crédit Suisse AG, Research Division - Director [18]

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Just a sort of feed off of the last questions. I guess, just how should we think about kind of in the early days at this size, the relative cost to Front Yard managing yourself on this platform versus kind of the current costs that you have with ASPS and kind of margin expectations?

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Robin Neil Lowe, Front Yard Residential Corporation - CFO [19]

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Yes. Look, I think over time, Doug, the intention and the belief obviously is that we can be more efficient by bringing this thing internal. As I just said to Tony's question, in the short term, there's going to be some synergies that we're going to need to realize, there's going to be some duplication of costs and other things that we're going to drive out. But in the longer term, there are 2 aims to this integration internalization. One, is to be more efficient and we definitely believe there are efficiencies here as we move forward. But two is to create an internal scalable platform, right, which gives us the platform to grow, without sort of paying unit cost to an external vendor. So we'll get the benefit through all that scale as we continue to grow.

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Douglas Michael Harter, Crédit Suisse AG, Research Division - Director [20]

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Okay. And now that you've kind of tackled this -- the portfolio management, I guess, what are your thoughts on AAMC and that relationship?

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George G. Ellison, Front Yard Residential Corporation - CEO & Director [21]

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Well, this is -- this one's got us pretty busy right now, Doug. So we've always said, we always look at that relationship, we always try to see if we can think of ways to improve the contract between the 2, we talk to both boards about that. So I think the real message today is, as we've talked about over and over the structure that we inherited when we got here has no -- we will consider making any change we have to make to improve the company's performance and the stock price. This is a pretty big move, that I don't think people thought would happen or would happen this soon. So that's a big deal. We'll deal with AAMC in due time. And it's a complicated story, but we'll keep looking at that.

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Operator [22]

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And our next question comes from Jade Rahmani with KBW.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [23]

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The -- can you give the number of direct employees RESI will now have, including HavenBrook and the migration of the ASPS employees?

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Robin Neil Lowe, Front Yard Residential Corporation - CFO [24]

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HavenBrook is roughly 85 people. So those are immediate employees now of RESI. The actual number that we're taking from ASPS is we're kind of working through that now, but we think it's probably going to be somewhere between 50 and 100 something like that. Is that fair George?

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George G. Ellison, Front Yard Residential Corporation - CEO & Director [25]

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Yes. But some will go to RESI and some will go to AMC, so we're still working through that. But as Rob said earlier, Jade, RESI will now have employees and so most of the property function, management folks will be in RESI, but there will be some of both teams that might migrate to AMC, but we're -- as I said on my comments, right now it's everybody who's handling families on each side, keep doing what you're doing, so that our customers don't feel a disruption and we have any issues there in customer service. And behind the curtain, we'll be working out who goes where.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [26]

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Was the acquisition competitively bid? Or was this privately negotiated?

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George G. Ellison, Front Yard Residential Corporation - CEO & Director [27]

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It was.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [28]

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Okay. And just to confirm, there is no equity issuance involved in either the acquisition or the payment to ASPS?

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Robin Neil Lowe, Front Yard Residential Corporation - CFO [29]

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None at all.

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George G. Ellison, Front Yard Residential Corporation - CEO & Director [30]

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None.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [31]

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And the liquidation fee to ASPS, I thought was $60 million contractually. Can you give any color on the $18 million figure?

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George G. Ellison, Front Yard Residential Corporation - CEO & Director [32]

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The $60 million is a little different. The $60 million was a change of control payment that ASPS would receive in a change of control of RESI. So if RESI were to be purchased and there was a change of control and that new owner did not hire ASPS, who still has about 10 years left on that original contract. That $60 million was to be their payment, if they weren't chosen. That's what we negotiated when we got the first waiver on the first Amherst transaction back in '16, that's not really what this was. So that, that really wasn't the starting point. So the $18 million, which is $15 million now and $3 million over time, that was really for a myriad of people, resources, separation, that was -- so we are very pleased with that figure.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [33]

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And if the -- if there is a change in control in the future, does the $60 million payment still stand?

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George G. Ellison, Front Yard Residential Corporation - CEO & Director [34]

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No. Gone.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [35]

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Okay. And then go ahead. Sorry.

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George G. Ellison, Front Yard Residential Corporation - CEO & Director [36]

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It's gone. I said it's gone.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [37]

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Okay. And what are the implications with respect to Mainstreet Renewal? Are they going to continue to manage think about half the portfolio prior to this deal?

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George G. Ellison, Front Yard Residential Corporation - CEO & Director [38]

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Well, it's sort of the same answer that I gave Doug, on the last question, which is, this is a huge, this is a big deal, we're appropriately anxious, we want to make sure we do this right. It's -- we're pulling property management inside of ourselves. And so we have to be supremely focused on customer service. And as Rob said, and then we'll start figuring out people and numbers and whatever. So this is a big deal. We're putting 2 teams together and we're actually in Duluth today doing the call, so we're starting to integrate at 10:00 on our first call with the teams after this. So that's really the focus. MSR, we'll deal with down the road. Right now, the focus of today and the headline today is property management is internal, HavenBrook is the centerpiece of that, and then we will expand those teams with people from ASPS because the HavenBrook folks can handle more than their 3,000, but they're going to have 8,000 by the end of year. So that's really what the focus is. We'll deal with MSR down the road.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [39]

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Okay. So that means, I think about 7,000 properties are managed by Mainstreet Renewal?

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George G. Ellison, Front Yard Residential Corporation - CEO & Director [40]

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There is about 8,000 with Mainstreet, there's 3,000 today and 4,000 ASPS. So the first Phase 1 will be to put together over the next 5 months, we want to do this, as I said by year-end. The 4,000 from ASPS, combined with the 3,200 from HavenBrook that's Phase 1. And then we will deal with the 8,000 at MSR down the road.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [41]

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Did HavenBrook have an active acquisition and renovation platform that was ongoing, were they still active buying homes?

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George G. Ellison, Front Yard Residential Corporation - CEO & Director [42]

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As I mentioned, when they started they did, but in the last probably a year or 2, it's really been a tightening up of the ship, acquisition stopped, and they -- as you saw from the numbers, they really said let's focus on -- Pat Whelan and his team did a tremendous job of really tightening this thing up. We have pretty good numbers, we're blessed to be putting up some good metrics. These guys' numbers integrate very, very well with ours. We have occupancy, theirs is higher. We have great NOI, theirs are little bit lower. You compare on side by side, their rent increases around the same as ours. It's an excellent, excellent platform. And so we've looked at -- as we mentioned, we've looked at, I don't know 4 or 5 different platforms and this one fit, the numbers are great, we like the people, those are good numbers in markets we wanted. So it was a really good. They are in the affordable housing space just like us, it was a -- it's a perfect fit.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [43]

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When you look at, when you consider the financing that you guys put in place, what do you think the achievable return on capital, return on equity is over -- and over what time frame just thinking about the underwriting of this transaction and the outlook for earnings? Because I do want to mention that I think according to the AAMC management agreement, RESI needs to generate a 7% return on invested capital for the next 2 years starting April 1, otherwise a performance event of default will be triggered. So what do you think the next 2 years achievable return on capital will be?

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Robin Neil Lowe, Front Yard Residential Corporation - CFO [44]

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Yes. We're quite confident we can achieve those numbers, Jade. I don't see any issue there.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [45]

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So that would be I think about $1.56 or so per share, is that what you expect to achieve?

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Robin Neil Lowe, Front Yard Residential Corporation - CFO [46]

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Yes. I'm not going to get into exact numbers today, Jade. But as I say, we don't see any issues with meeting the requirements in the AMA as it stands.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [47]

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Okay. That's good to know. Just wanted to ask about the historical CapEx, since I think HavenBrook's portfolio is more seasoned. Did you look at that and historical turnover costs, maybe could you give any sense of those numbers?

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Robin Neil Lowe, Front Yard Residential Corporation - CFO [48]

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Yes. Look, Jade, I think they probably spent a little bit more on CapEx than we have historically, which is good for us because that means their houses are in better shape. I don't have exact numbers to give you right now. But you know that our sort of CapEx is in that $850 million, $900 million range on a maintenance CapEx basis. I think these guys have put slightly more money into their properties going -- and the average investment in each of the properties in terms of renovation something like $26,000 a home, which is quite a lot when you think about it. So these homes are well maintained and well kept for, and so obviously that stands us in good status as we go forward.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [49]

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Okay. And anything on the turn cost?

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Robin Neil Lowe, Front Yard Residential Corporation - CFO [50]

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Yes. I don't have a specific number to give you right now, Jade, sorry about that.

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Operator [51]

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(Operator Instructions) And our next question comes from Mike Grondahl with Northland Securities.

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Michael John Grondahl, Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst [52]

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Congratulations guys on both events, pretty nice to see. The integration with HavenBrook, do we sort of think about that occurring over the next 5 to 6 months? By year-end, you should be kind of woven together?

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Robin Neil Lowe, Front Yard Residential Corporation - CFO [53]

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Well, certainly, Mike, on the ASPS piece, as George said, that our agreement with ASPS is to move all those 4,000 properties over. So by the end of the year, all of that should be integrated on onboard. And then we'll see how the rest of it does going forward.

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George G. Ellison, Front Yard Residential Corporation - CEO & Director [54]

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HavenBrook is sort of the skeleton to the property management business, we'll obviously have to make that bigger and sort of attach the ASPS folks who are needed. So as I said, the HavenBrook team can handle a lot more than they're handling right now. So they're excited, Mike, because as I said on the last question, they haven't been buying for a while, so they're very excited to get a lot more homes to manage, we had a town hall with everybody last night. So it's great news for them, we think, we hope and -- but, bringing ASPS over virtually doubling, more than doubling, the size of HavenBrook that might be -- that's a lot. So that's why we want more folks, more boots on the ground. And so we'll be able to, I think, move all the homes over by year-end, but the transition will probably keep going for a little bit after that as well.

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Michael John Grondahl, Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst [55]

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Got it. And from a very high level, by internalizing, George, 2, 3 years from now, how will we see in the numbers that this was the right decision? How will we track that? And I mean, is it a couple of points to margin, what will the external signs that we'll see that it worked?

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George G. Ellison, Front Yard Residential Corporation - CEO & Director [56]

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Well, I'll give you the high level and Rob can probably give you the more accurate financial part of your question. As I said in my speech, we all worked together and put that speech together. So that's all of us speaking. We really believe -- that I think we've been looking for this for some time, as we said. So if we just bought assets today, that will be fine. But when you start getting to the size, I think you can do 2 things. I think you can, and the team convinced me of this, that you can get expenses down, particularly as you start moving to 15,000, 20,000, 25,000, 30,000 homes, you can actually wring significant expenses out of the business, if you control it yourself. And so that's great for shareholders. That goes right to the bottom line. But I also believe and I said this in my comments, I really believe that we don't want somebody between us and the customers. And I say that with no disrespect to our property managers. We want to -- we want our own spin on our own customers, we want to touch them, we want to hear from them, we want to talk to them, so customer contact in this day and age and that whole dynamic is incredibly powerful. And so it was okay, the way it was originally structured, but I personally, and my management team are much more comfortable that when we want to say something to our customers and we want to do something about the people in the communities where we manage homes, we want to call those shots that, that we want to voice our views and our passion through that. So that's -- so I think it's a -- it's part customer, I mean, obviously, good customer service leads to financial results. But I think we can do better customer service when we control it. I really believe that. And I think happier customers means they stay longer and they continue to use your product and you get more customers. So that's a good thing.

But also I think, once you start and we talk to the team about it last night folks who've been managing homes in Atlanta, can push people around with the 1,000 homes. Well, now they're going to have close to 4,000 and that can have an enormous benefit. I think we'll be one of the biggest property managers in Atlanta of all the companies. And it gives you enormous pricing power. So the team really has been pressing on me to look at the numbers of internalization of property management. They convinced me of it. Rob and his team, they're right. And so if it was today, great. But we're going to do this to 20,000 and 25,000. I don't know, Rob, if you want to give more specific numbers.

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Robin Neil Lowe, Front Yard Residential Corporation - CFO [57]

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Yes, I thought I'd just say two things. I think there are two kind of pointers to this, Mike. One is even at -- with 15,000 homes at George's point, I think there are operating efficiencies we can realize by internalizing. And you know a lot of people have asked us before, why don't you internalize, it stands to reason that this thing is internal, you're not paying a third-party vendor their margin. So it is by definition just internalizing that should improve our operating performance. And then secondly, I think it's a going forward thing. As I said earlier, the fact when we have an internal property management platform now gives us the ability to scale up without increasing our costs in correlation. And so that we're going to be sort of more efficient as we go forward financially and we'll see benefits that way.

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Michael John Grondahl, Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst [58]

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Got it. And with the $18 million you're paying to Altisource, are you getting any revenues associated with that or cash flow? How do we think about that?

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Robin Neil Lowe, Front Yard Residential Corporation - CFO [59]

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In some sense, we will because some of that -- for example, I'd just give you one example. Some of the other income that gets charged to tenants, we would share that with the property manager externally. And so now we'll be getting all of that internal. So that's just one example. But so that, that's really sort of the revenue side of it as I see.

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Michael John Grondahl, Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst [60]

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Got it. And the cash flow from that other income, is that what you're saying? I mean are those...

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Robin Neil Lowe, Front Yard Residential Corporation - CFO [61]

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That's right.

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Michael John Grondahl, Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst [62]

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That revenue and cash flow pretty small numbers, I mean, you're basically paying them and grabbing some people and resources.

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Robin Neil Lowe, Front Yard Residential Corporation - CFO [63]

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Yes. So if you think about how an agreement with an external vendor would work, they might keep some of the extra charges to tenants, other income, perhaps some late payments or stuff like that on the one side. They might want you do renovation work, they might charge you a markup on what the vendor cost is. And so those cash flows now come to us, right. We know this is savings. It's a real cash flow for the tenant side. And it's a saving on the expense side. So yes, in terms of that fee, yes, we are in some sense buying resources, as we said earlier, from ASPS. So we are taking part of that property platform, including their most talented people and combining that with the HavenBrook platform.

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Michael John Grondahl, Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst [64]

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Got it. And then lastly, just we keep seeing industry data, home prices are rising, things are -- there is a big tailwind, you guys have been obviously at the lower end of the market. Those houses seem to be going up faster than higher priced homes. Last quarter, you kind of talked about an $18 to $19 NAV. How are you thinking about that number now and the benefit you have on this $1.5 billion, now larger with HavenBrook portfolio, those unrealized gains sort of where are they?

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Robin Neil Lowe, Front Yard Residential Corporation - CFO [65]

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Yes. I will talk about post-transaction NAV at a later date, but I can tell you that I'm absolutely convinced that our current NAV pre-transaction is still in that sort of $18 to $19 range. And I'd just tell you we've had that independently validated by a very, very reputable global firm of analysts. So this is not just me telling you that, this is validated.

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Michael John Grondahl, Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst [66]

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Got it. And then, I guess, last one, after HavenBrook, it's closed. You are absorbing 3,200 homes. When you're ready to keep looking and growing, I mean, are you doing that today or do you feel like you got to digest this and then you move forward in a few months?

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George G. Ellison, Front Yard Residential Corporation - CEO & Director [67]

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Well, HavenBrook is closed. Just to be perfectly accurate, that's done. So we're starting on the transition in 15 minutes with the HavenBrook regional folks. We are working on the financing piece of this with Freddie, and Berkadia is extremely important. I think it's the biggest loan they've made in the space. They've done a half dozen or so others. So we hope it's a big deal from them. That partnership is -- we hope that, that partnership continues with both Berkadia and Freddie. So that's an important piece to this. So we're already having conversations with what can we do next. This is all, Freddie has a lot of really interesting things they want to do in this space and we're committed to that too. So we're hoping that, that friendship, that partnership continues. So we're working on that [Erjan Gorhan] working on that, I think tomorrow we'll start that next -- what do we next with those folks. So that's already begun.

And we're already looking to buy, Rob, I don't know how much more capital we have for homes, but I think you said somewhere around 500, we're already out looking for homes. So we'll probably talk to the normal sources where we find that, so the work continues. The teams put in a ton of work, I want to thank all of them for this. The folks of HavenBrook, our guys, everybody who worked on it here, obviously, Freddie and Berkadia, so -- but it's back to work. As soon as this call is over, get the transition done, get back to buying homes, make sure we do this right. And hopefully, keep working with the GSE, so we can stay in their favor. We're incredibly flattered to be associated with those guys. Dave Leopold and his team, Brickman, excellent folks, we're hoping that they will still work with us. So that's -- so there's lot to watch this space. We could buy more homes. And then hopefully, we'll have some more creative financing to go down, the transition, and hopefully, the financials will follow.

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Operator [68]

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And we have a follow-up question from Tony Paolone.

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Anthony Paolone, JP Morgan Chase & Co, Research Division - Senior Analyst [69]

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Just a couple additional ones. With regards to the financing, are there any restrictions placed on you with regards to pushing rents given the affordability component?

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Robin Neil Lowe, Front Yard Residential Corporation - CFO [70]

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None at all, Tony.

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Anthony Paolone, JP Morgan Chase & Co, Research Division - Senior Analyst [71]

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Okay. And do you -- that stack at least as of June 30, anything else that you see as opportunities to either do more of the Freddie Mac-type deals and take out debt or where do you see that, that stack going over the next few quarters are looking like?

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George G. Ellison, Front Yard Residential Corporation - CEO & Director [72]

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Well, as I just said, to be on the other side of a trade with Berkadia and Freddie, it's a big deal. It's -- we've talked about it with the people, the GSEs coming into the space, I think it's a -- we all know there is an affordable housing crisis. Freddie and Fannie are working their tails off to do something about it. Now both of them have done really significant material trades. So that, that started a conversation and we hope it leads to some more creative stuff. But there's nothing I can comment on or nothing we have to report, but Don Layton is serious about this, David Brickman is serious about it, Leopold is serious about it, and we're serious about it. So when we met, it was -- we're on the same frequency as those guys. So we're incredibly flattered to be borrowing money from those folks. We'll see where it can go next, hopefully, it's a long-term partnership.

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Anthony Paolone, JP Morgan Chase & Co, Research Division - Senior Analyst [73]

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Got it. And you mentioned getting back to buying homes again and just continuing to push forward. Can you just remind us kind of where you feel comfortable taking leverage to and whether you're looking at it from a net debt-to-EBITDA or loan to value? Or how are you thinking about just where you want to take leverage level over time?

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Robin Neil Lowe, Front Yard Residential Corporation - CFO [74]

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Yes, look, we've always said, Tony, that sort of 70% is our kind of water line if you like. And so I think this transaction takes us close to that, but it doesn't go over it. So roughly speaking that's where we want to be. And then as we go forward over time, I would expect us to sort of delever slowly over time. So that's where we are today. I don't think that's really changed.

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George G. Ellison, Front Yard Residential Corporation - CEO & Director [75]

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Yes. And we've talked about this a lot on these calls. This first book if you will was all about getting the size that we wanted. This now starts the second story, which is now we're pulling property management internal and that opens up a whole new opportunity. So in an aggressive growth stage, we're comfortable pushing the leverage to the level that we're at. We understand that different owners have different views about that. We have our own views about that with a backgrounds that we have and what 60% to 70% LTV means, but it means different things to different people, as you all know. You're right in the middle of the REIT space more than just about anybody. So that crowd would obviously push for much lower leverage and we respect that and we appreciate that. We also have massive owners, who are not REIT funds, and they want growth and they want earnings. And so they're more comfortable with higher leverage. So it's a fine line. We answer to our owners, but some of them are less concerned about this issue, as you know, and some are much more dogmatic about it. I'd ask you to look at our holders list and see that probably the top 10 holders are not folks who are concerned about leverage. So we're very cognizant of it. We will continue to watch it. And it's a balancing act of watching that leverage and not letting it get too high. We understand some folks don't like it, but we'll be balanced about it, and it will probably run higher now and then, as Rob said, we'll bring it down over time.

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Anthony Paolone, JP Morgan Chase & Co, Research Division - Senior Analyst [76]

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Got it. And then just with regards to like your restructure, will there be like a COO or a President or somebody that's just becomes sort of the operational day-to-day face, how will that work?

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George G. Ellison, Front Yard Residential Corporation - CEO & Director [77]

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Yes, yes, there's going to be a Senior Vice President of Property Operations and we're still doing a lot of socializing and it's a whole new group of key people, so we're not ready to announce names, org charts, people, but yes there's going to be point person who will run the property management business and he'll obviously coordinate with Rob and his team, with [Erjan] and his team. And so that person will sit in the middle of what [Erjan Gorhan] does every day, he pretty much oversees most of our strategy and all things. And so his partner will be this person. And on the other side of that person will be Rob and his team. So it's an incredibly important role. We've chosen the person and we are in the loop talking to lot of people about lot of things, but that will be evident very shortly.

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Anthony Paolone, JP Morgan Chase & Co, Research Division - Senior Analyst [78]

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Okay. And just last question. Do you intend to undertake any review of the properties coming in such that we should expect a move up in the dispositions or just kind of revisiting everything now they just have a bigger portfolio and just have a little bit more to cull through?

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George G. Ellison, Front Yard Residential Corporation - CEO & Director [79]

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Yes. Yes. I think the -- I think it's important to -- particularly around that NAV question, I think it's important for people to see what our homes are worth. And we know what they are worth. And we know they're worth what Rob says they are worth. So we have to, I think a disposition strategy that might be programmatic, we haven't hatched that yet, but we're all talking about it, maybe an annual disposition program of several hundred homes to prove our mark and to prove that our real estate is worth what we think it is. I think that's a good discipline to get into. We'll see if I can convince my teammates to do that. So if you do get that in place, then that, that dovetails very, very well with the business folks. There are things that we have bought, that are low yielding, higher priced homes. They probably have, I would hope, some good money in them. That doesn't fit our profile, it's not affordable housing, it doesn't hit our yield bogey. So as we go through this acquisition and our existing portfolio, I think you'll see some more homes come out. Also, as you know, as we publicly stated, we're still in some desperate far ranging locations from the legacy business and those have to go out. I think Rob has mentioned 140 or so that Randall Mason is working on. So yes, I think dispositions, I think there's going to be a disciplined approach to dispositions. Again, we don't have that fully structured yet, because everybody has their own opinion about that, but I'm saying that to the team why don't we try to initiate this and I have a feeling we'll probably start that immediately.

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Operator [80]

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Ladies and gentlemen, this concludes our Q&A portion of today's call. I would now like to turn the call back over to the company for closing remarks.

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Robin Neil Lowe, Front Yard Residential Corporation - CFO [81]

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Thank you very much for joining the call today. And have a great day. Thanks a lot.

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George G. Ellison, Front Yard Residential Corporation - CEO & Director [82]

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Thanks, everyone.

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Operator [83]

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