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Edited Transcript of RESI earnings conference call or presentation 7-Aug-19 12:30pm GMT

Q2 2019 Front Yard Residential Corp Earnings Call

Frederiksted Aug 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Front Yard Residential Corp earnings conference call or presentation Wednesday, August 7, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alysia Cherry

Front Yard Residential Corporation - Head of IR

* George G. Ellison

Front Yard Residential Corporation - CEO & Director

* Miles Adams

Front Yard Residential Corporation - SVP of Property Operations

* 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

* Michael John Grondahl

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

* Ryan John Tomasello

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

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the Front Yard Residential Corporation Second Quarter 2019 Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Ms. Alysia Cherry, VP of Investor Relations.

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Alysia Cherry, Front Yard Residential Corporation - Head of IR [2]

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Thank you, Ian. Good morning, and thank you for joining us for Front Yard Res Second Quarter 2019 Earnings Conference Call. Joining me on today's call is George Ellison, Chief Executive Officer; Miles Adams, Senior Vice President of Property Operations; and Robin Lowe, Chief Financial Officer. I'd like to guide everyone to the second quarter earnings slide presentation available through the Investors section of our website at www.frontyardresidential.com. These slides were created to accompany our remarks and provide additional information investors may find useful.

I'd also like to inform you that our comments today may contain forward-looking statements relating to the future performance of our business, the company's financial results, capital allocation and other nonhistorical information. These statements may involve risks and uncertainties that could cause the company's actual results to differ materially from those discussed in the forward-looking statements. We describe some of these risks and potential differences in our earnings release as well as the company's filings with the SEC, including the Form 10-Q, we filed today. We may also discuss certain non-GAAP financial measures. You can find additional information on these measures, including a reconciliation to GAAP within our earnings release and earnings presentation located in the Investors section of our website.

I'll now turn the call over to George Ellison, Chief Executive Officer. George?

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

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Thanks, Alysia, and good morning, everyone. Given all the unprecedented changes to our business in the first half of the year, from operational consolidation to material corporate governance changes, including onboarding 3 new directors, we're glad to have successfully gotten to a point where we simplified our business model.

We're highly focused on 3 areas of the business: first, how to drive shareholder value; second, we have now successfully operationalized our business and are busy executing on best practices; and last, we're looking at ways to improve our net asset value by driving towards better operating margins.

To that end, we completed the operational transition of over 12,000 homes from 2 outside property management vendors onto our own platform at a record pace, months ahead of schedule. We quintupled the size of the operation, which was an enormous undertaking. Our main focus was that the families in our homes, our customers, were not inconvenienced in any way. We're pleased to note that this quarter's top line revenue results reflect the quality of that transition, our portfolio and the markets we serve. However, as with any undertaking of this size, we did experience some onetime integration challenges along the way, which are manifesting themselves in our second quarter results.

The rapid pace of operationalizing our business resulted specifically in prolonged turn times, elevated repair and maintenance cost and lowered our collections. To put it bluntly, the aggressiveness of this transition of homes to our platform caused parts of the business to struggle. Although we did not perform to our own high expectations, we learned valuable lessons and have put a plan in place that will help us operate efficiently and effectively, both now and as we continue to grow our portfolio of homes. Transparency on this outcome is key and Miles will go into greater detail in his prepared remarks.

But the most important point to focus on today is the underlying fundamentals of the rental business, and specifically, the single-family rental market are stronger than ever. Every day, reports come out on rental demand, both apartment and SFR hitting new highs. Stories detailing the fact that renting is cheaper and more flexible than buying a home. Survey is showing that over 70% of Americans believe homeownership is out of reach. Private capital continues support to the SFR investments. First-time homebuyers share of the market is dropping. Housing starts are down. Rental demand is up. These tailwinds continued to support strong rent increases in the industry and for Front Yard. That's the best news today and speaks to the business fundamentals being stronger than ever.

Our blended rent growth of 4.5% continues to be very strong. As an example, the time from turn complete to move in, in Atlanta hit 20 days. The demand is there. People are willing to pay for our product and unique service offering. And all of these issues I mentioned are even more amplified in the workforce housing sector, which we believe has the longest runway for growth. We know the business works. We know the product makes sense and generates excellent returns. Investors should be as interested and excited about the workforce single-family rental space as ever. There is an affordable housing crisis in our country, and Front Yard Residential is the best way to participate in this enormous investment opportunity.

I'll now turn it over to Miles.

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Miles Adams, Front Yard Residential Corporation - SVP of Property Operations [4]

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Thank you, George, and good morning, everyone. As George mentioned, we completed the internalization of nearly 12,000 homes from 2 separate external property managers during Q4 of 2018 and Q1 of 2019. And this was our first quarter of having direct control over the entire rental portfolio of nearly 15,000 homes. Our operating footprint, which started in South Florida, Atlanta, Birmingham and Minneapolis, now spans the Southeast, Southwest and Midwest. Our management company more than doubled from approximately 80 people to approximately 190 team members as of today. The transition of homes was a very significant undertaking that was accomplished quickly by our dedicated team of professionals. However, an undertaking of this magnitude is often accompanied by challenges.

We faced 3 primary operating challenges, which adversely impacted our Q2 operating results: prolonged turn cycle times due to excess homes in turn, which adversely impacted occupancy levels; elevated repairs and maintenance expense; and collection rates below our expectations. From a market perspective, those issues were particularly pronounced in Texas, as you can see on Slide 15 in the presentation. We had personnel issues in this market on a few key positions, which we have addressed. Clearly, these are not the sort of metrics we're expecting in Texas, and we're confident that we will see a marked improvement going forward.

Let me spend a bit of time to talk about what caused issues across the portfolio in general and the measures we are taking to correct them. For unit turns, we encountered 3 primary issues. First, more than 6.5% of homes were in turn status when they transitioned to us from third-party managers. Second, we experienced turnover of key field-based personnel as mentioned in Texas, but also in the Midwest, which caused temporary delays in completing unit turns. Both of these issues were magnified by seasonally elevated turnover and by the scheduled expiration of 31% of our leases in Q2. Lastly, it took us longer than expected to set up fully functioning leasing operations in all the new markets, which led to subpar leasing terms, particularly in Tennessee and Texas. Each of these matters contribute to an increase in cash-to-cash cycle times, which hurt our occupancy levels during the quarter.

At this point, we have addressed all significant matters. During Q2, we've built a SWAT team consisting of both field staff and property managers that can be deployed at a moment's notice when inevitable events occur that impact staffing levels. These individuals can capably fill staffing gaps and then train permanent replacements to mitigate the impact of employee turnover.

During July, we also undertook a significant one-time effort to accelerate completion of unit turns. We challenged our field teams to award all homes in backlog as of July 16 by the end of the month. We expect the percentage of homes in turn to decrease from 4.5% down to a stabilized 2% to 2.5% of the portfolio by mid-August. The results of this effort will lead to an additional 2% to 2.5% increase in homes available for occupancy. At the end of July, we were halfway through this initiative and on track to meet these targets.

Looking forward, we expect turnover to decline significantly over the remainder of the year as lease expirations steadily decline during Q3 to their lowest point during Q4. This will ease the burden on the field-based teams as they continue to improve cycle times through remainder of the year. Finally, we will be adding skilled turn technicians in a targeted manner. The benefit of this will be felt in both lower costs and greater internal capacity on a go-forward basis.

For repairs and maintenance, when we assembled our initial field-based teams, we were careful not to overstaff. We have analyzed the percentage of work orders performed in-house by our field-based teams to determine the optimal levels of cost containment on a market-by-market basis. Portfolio density levels, local supply of cost-effective third-party vendors and the cost and quality of local labor, all impacted the determination of ideal staffing levels and, in turn, cost per home for maintenance and repairs. Stated simply, our performance of work orders on an in-house basis was not sufficient to meet our goals for repairs and maintenance expense in Q2.

To address this issue, we're adding skilled maintenance technicians to our teams in certain markets to achieve sufficient bandwidth to meet our goals of in-house performance of work orders. At the same time, we are focused on increasing utilization of existing resources around optimization, reduction of time spent on nonmaintenance work orders and additional cross-training of our team to increase their ability to respond to different types of routine work orders.

We recently implemented route optimization technology, which significantly reduces average drive and wait times for our technicians. In our test market of Atlanta, this resulted in a 40% to 50% improvement in the volume of work orders that a technician can complete in a day. We are excited about what this can mean when fully implemented across our platform in the coming months. Route optimization, along with eliminating time spent on nonmaintenance work orders, coupled with additional training of our existing technicians, will lead to improved utilization of our resources and will lower our cost in this area.

On collection rates, the transfer of homes was disruptive to the collection cycle. Reconciliation of the transferred resident accounts was a time-intensive process where we took extreme care to ensure all residents were treated equitably. This reconciliation process delayed or prevented the collection of some delinquent accounts transferred. At this point, the reconciliation has been completed. Work remains in this area, but we anticipate that collection rates will improve over the course of the remainder of the year.

For the second half of the year, our primary focus is to reduce the turn times, which, given the strong demand we're seeing in our markets, will lead to increased occupancy. In parallel, we will increase the share of repair and maintenance work performed internally by improving the efficiency of existing technicians and by adding additional resources where it makes sense. We've discussed the measures we are taking that we believe will yield improved results in these areas of our business. We believe these improvements will begin to be reflected in our operating results in Q4 of this year.

Demand for our homes remained strong as evidenced by a robust blended rental growth rate of 4.5% during Q2 comprised of renewal rent growth of 4.1% and re-lease rent growth of 5.3%. In fact, re-lease and renewal growth rates in Atlanta, by far, our most significant market, continue to remain well above average at 7.8% and 4.6%, respectively.

In summary, we remain very optimistic on the outlook of our company, our portfolio and our team. This quarter, our team faced some inevitable challenges that arise anytime an organization experiences rapid growth. But I am confident we will get through these challenges quickly as a team and that we will ultimately achieve our goals.

I will now turn the call over to Robin.

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Robin Neil Lowe, Front Yard Residential Corporation - CFO [5]

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Thanks, Miles. Good morning, everyone. Today, I'll cover the financial results for the quarter, touch on balance sheet activity and provide an update on acquisitions and dispositions. GAAP net loss for the quarter was $25 million. Rental revenue was up 26% compared to the second quarter of 2018, as we increased the stabilized rental portfolio by 22% to 14,348 homes, and stabilized rental NOI of $30.3 million was up 15%. Occupancy at 94.1% and turnover at 8.7% were virtually flat to the second quarter of 2018.

Stabilized rental core NOI margin was 59.7%, and core FFO per share was $0.05 for the quarter, reflecting the operational challenges that Miles has discussed as well as a year-on-year increase of about 12% in property taxes on a same-home basis. Most significantly, we saw higher-than-expected tax increases in Georgia, Texas, Minnesota and North Carolina. We have an ongoing appeal process in place, but we expect that full year property taxes may be significantly higher than originally forecast. Higher-than-expected taxes are currently estimated to have a $0.01 to $0.02 per share per quarter impacts on our core FFO.

Finally, on the financial results this quarter, G&A costs include approximately $3.8 million one-time legal and professional fees, mainly related to the proxy contest as well as the renegotiation of the asset management agreement and other litigation.

Turning to the balance sheet. 92% of our financing is either fixed rate or capped, up from 65% a year ago, with a weighted average duration of 5.3 years. During the second quarter, we successfully negotiated a 70 basis point reduction in interest rate spread for rental properties on both our Nomura and Crédit Suisse lines from 3% to 2.3% as well as some other improvements to the fee structure.

During the quarter, we acquired 43 homes at a purchase price of $5.5 million on average cost of about $128,000. We sold 160 noncore homes that did not fit our rental criteria. Net sales proceeds were approximately $28 million, with a gain of $3.3 million of the GAAP carrying value. Last quarter, we sold 576 noncore homes for a gain of $7.5 million. We believe that the gains we continue to realize are strong evidence of the value embedded in our portfolio.

Additionally, on Slide 16 and 17, we are providing details of investment cost and home price appreciation by key markets that we believe provides support for a baseline valuation of our portfolio.

I'll now turn the call back to George.

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George G. Ellison, Front Yard Residential Corporation - CEO & Director [6]

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Thanks, Rob. So let's recap. As we sit here today, Front Yard is the largest public full-service workforce housing REIT in the United States with approximately 14,500 homes. Our top line growth of 4.5% and mid-90s occupancy validates our workforce housing investment thesis. And as Miles notes also points a way to furthering shareholder value as we continue to drive towards operational excellence.

As I stated earlier in the call, we've simplified our business model. Miles pointed out the opportunity to reduce turn times and drive higher occupancy levels. And the management team is working hard to realize the value of the platform through higher NOI leading to a better valuation.

I'd like to just take a moment to thank our teammates in the field who are working so diligently to address the operational needs of the business and our customers. We see the challenges you face, but these challenges also represent great opportunity. We thank you and acknowledge your hard work.

Also, I'd like to thank our Board of Directors, old and new, for quickly assembling and working with management as well as legal and financial advisers on the strategic review of our business. The company is working diligently with its advisers to maximize shareholder value, and my team and I look forward to working with them to that conclusion.

I'll now open up the call to Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question is from Douglas Harter from Crédit Suisse.

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Douglas Michael Harter, Crédit Suisse AG, Research Division - Director [2]

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I guess just on -- after kind of going through the operational challenges that you went through this quarter, do you think there's any change to kind of the long-term outlook as to where you can get in terms of operating margins and running the business internally?

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

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No, no, I think the -- as Miles went through, we've put 15,000 homes on top of the platform that had 3. So obviously, when these things get put together, we've seen in the SFR space or even outside of them, you put companies together things have to get straightened out. So for the first 3 months of running this thing, we've finally got to see more numbers than we had in the past, Doug and we could actually do something about it. So as it relates to expectations and targets that we put out there, we put very clear assumptions and markers that we have to hit to hit those numbers in terms of earnings. So we still are highly confident we can get there, might be a -- some of those might get hit by year-end, some of them might not, but we'll either hit them at the end of the year or the first quarter, the second quarter. So to use your phrase, long term, yes, we believe -- we might miss the timing by a touch, but we still believe particularly even more now than ever that we own the business and actually run the business that we'll hit those numbers that we put out there. So we still are highly confident we can get there.

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Douglas Michael Harter, Crédit Suisse AG, Research Division - Director [4]

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Okay. And then given -- kind of given the operational challenges in the hit to occupancy in the quarter, how does that impact kind of your ability to get rent increases kind of as you're kind of carrying more vacancies heading into or through a peak leasing season?

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Miles Adams, Front Yard Residential Corporation - SVP of Property Operations [5]

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Yes. So I would just say on that, that we have to take a market-by-market approach, that market demand and our occupancy levels in each market have to be factored into that consideration. We have to balance our need for an improvement in our occupancy levels with the rent growth that the market will yield. And so we have to be measured on that. But in general, I would expect there to be more of a focus on gaining occupancy than maximizing the last basis point of increase in rent, lease or re-lease. So...

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Operator [6]

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The next question is from Jade Rahmani from KBW.

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Ryan John Tomasello, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [7]

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This is actually Ryan on for Jade. I'm just wondering if you can give us an update on the Board's strategic review process. Do you think that a sale of the company or a combination with a larger portfolio could be a likely outcome? Or are there other strategies that the Board is considering at this time?

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George G. Ellison, Front Yard Residential Corporation - CEO & Director [8]

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Yes, Ryan, as I said in my comments, the strategic review is well underway, and the Board and its advisers are moving as expeditiously as possible. As we mentioned in the last call or in the announcement of that committee being formed, everything is on the table, including those things you mentioned and others. So it is underway. It's moving ahead. We'll report things as we are able to. But all things are on the table.

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Ryan John Tomasello, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [9]

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Okay. And then just switching over to cash flow, do you have an estimate of where AFFO was in the quarter, inclusive of leasing commissions and recurring CapEx? And Robin, maybe you can say where recurring CapEx is trending today on a per-home basis and how that compares versus a year ago.

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

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Sure, Ryan. Thanks. We haven't given a number for AFFO yet. So we're not sort of giving that number right now. On the CapEx side, I'll turn over to Miles.

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Miles Adams, Front Yard Residential Corporation - SVP of Property Operations [11]

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Yes. So on recurring CapEx, the previous numbers we've provided on that were $2,700 gross and $2,400 net on an annual basis. Right now, obviously, with the challenges we described, that's increased a bit temporarily. We're about $2,850 gross and about $2,550 net right now is what we're seeing, so a little bit of an increase over our previous statements on that. However, we think there's certainly opportunity to improve from there and get back to the numbers that we were talking about and perhaps even improve over that. So we just have to -- I'll just have to go back to the remarks that I made. We have to get to that improvement and utilization of our existing resources, and in a targeted manner, we're going to have to add some additional resources to be able to do more work in-house, so that's going to lower our gross cost to maintain.

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Ryan John Tomasello, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [12]

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And just to clarify, the $2,550 net, that's inclusive of all direct property costs, including R&M, in turn, right? So do you have the CapEx component of that?

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Miles Adams, Front Yard Residential Corporation - SVP of Property Operations [13]

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Correct. Yes, that includes all of those items.

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Ryan John Tomasello, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [14]

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And specifically, CapEx as a component of that, where that is on a per-home basis versus your targets?

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Robin Neil Lowe, Front Yard Residential Corporation - CFO [15]

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It's about $1,250, Ryan.

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Ryan John Tomasello, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [16]

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Got it. And then, I guess, in trying to boil down the operational issues, and I'm sorry if I missed it in the prepared remarks, but do you have a specific dollar impact of where that was in the quarter or what core FFO perhaps would have been? And then notwithstanding these challenges, kind of following up on Doug's question, are you still comfortable with the prior core AFFO ranges that you're providing -- that you've been providing? I believe in the past, you've cited $0.52 to $0.64 of AFFO.

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George G. Ellison, Front Yard Residential Corporation - CEO & Director [17]

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Yes, as I said to Doug's question, yes. If you go back to those projections, we had very specific targets and assumptions that went into those numbers. So that's really where we're focused. So if you look at that page, I think we've put in a couple last few quarters, things like the assumption on NOI, the assumption on occupancy, the assumption on number of homes. So I think we had 16,000 homes, for example, on that sheet, Ryan. So right now, we're 14,500. Back of the envelope, Rob could tell you exactly 500 homes is probably $0.01 a share a quarter, so I'm $0.03 away from that. So it's things like that.

So the bottom line is we still believe in those numbers. We still support those projections. What we have to focus on is the operational pieces, and Miles went through that in great detail. We -- in the first quarter that we ran this thing, we see what's not working, and we've already moved to fix it. And so we'll fix it. And so the operational numbers on that page will get hit. The occupancy will get hit. Home buying, you have to be disciplined. We'll get to 16,000 when we get the right prices on the right number of homes. So we're continuing to bid all the time. So bottom line is, yes. When we actually hit it? It depends on when we hit those markers. Some of them -- I think we can hit by the end of the year. Some will slip into the first or second quarter of next year.

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Operator [18]

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The next question is from Mike Grondahl from Northland Securities.

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Michael John Grondahl, Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst [19]

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So the changes you're making on the operations side, do you -- I'm trying to just understand when do you feel like those will be largely in place? Is that at the end of 3Q? Or is it going to even take a little bit longer?

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George G. Ellison, Front Yard Residential Corporation - CEO & Director [20]

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I'll let Miles handle them in more detail, but as we said, Mike, this is the first time that we actually could get under the hood and see more things. So when you have an outside vendor running your business, and both of those guys did a great job, you're really just overseeing what they did. Now we can see the numbers and actually make the changes. And so that's what we're working on right now and putting in place. So as we saw the numbers, April, May, June, we started reacting. And we've already put things in place, as Miles said, in June and July. So some of the numbers I think we're starting to see are turning. But I think it's going to take most of the third quarter to get everything in place that we want. And I think we'll have this thing straightened out by year-end.

I'd be disappointed if a year from now we have these kind of numbers, but I'm not surprised, and no one should be, that putting these 2 companies together and quintupling the size of it puts some stress on the system. That's okay. But let's look at what didn't work and let's fix it and get the numbers back to where they should be. So I would say, third quarter still, we'll be tweaking some things and changing some things and add some more people. And then I think by the end of the year, it should be -- most of these numbers should be straightened out. Do you agree with that?

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Miles Adams, Front Yard Residential Corporation - SVP of Property Operations [21]

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Yes, I would agree. I would take it by the components that I've discussed. And I refer back to the remarks that I made on turns. The first thing that we have to do, as I mentioned, is just reduce the number of homes that are in turn and make them available for leasing. And so we've made great strides on that at the end of July. We're continuing to work on that at the beginning of August, and we're looking for big months in August and September on the leasing front. And that will lead to improvement in occupancy, but the revenue trails signing the leases. And so it takes a little bit of time for that to be reflected in the numbers. And then as we mentioned on turn costs and repairs and maintenance expense, it really is about optimizing our staff, implementing technology and then adding additional technicians in a targeted manner. And all of that takes a little bit of time, as George mentioned. So I think that's more of a -- that's going to trail the improvement in occupancy that we're pushing for. And so that's where I would guide you to, to answer your questions.

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Michael John Grondahl, Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst [22]

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Got it. Okay. And then maybe just your confidence that you are making progress in Texas. Those are 2 decent-sized markets for you, and the core NOI margin is pretty low there. I mean how do we think about recovery in Texas?

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Miles Adams, Front Yard Residential Corporation - SVP of Property Operations [23]

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So when I said we've recently made changes there, I mean, it's very recent. So I would be a little patient there. I'm going to be, but I'm confident that we've made improvements there in our leadership, and it will result in improvement in those numbers, but we do need to be a little patient there.

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Operator [24]

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The next question is from Anthony Paolone from JPMorgan.

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Anthony Paolone, JP Morgan Chase & Co, Research Division - Senior Analyst [25]

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With some of the challenges on the op side, is any of this a function of just being subscale in any markets? Or is it just not related to having critical mass?

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Miles Adams, Front Yard Residential Corporation - SVP of Property Operations [26]

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I wouldn't say that. I mean I think it's more a function of entering a significant amount of territory where we weren't operating prior to the merger or acquisition, and then as I mentioned, just the increase in size of our employee base going from 80 to 190. Not every single person that we onboarded has operated at tip-top level. And we've had to make changes as we've gone.

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

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Yes. I mean you're talking about MSR running thousands of homes starting in the first part of the year, and we're enormously happy with the speed that we transitioned stuff over. And as I mentioned, customer service was paramount. And I think we did that very well. The IT part worked well, but all of a sudden, 8,000 homes that were being run by another company were being run by us. And so as Miles said, we had to double the size of the staff and, all of a sudden, a couple of thousand homes in Texas that were being run by the guys out of Austin are now being run by us. So that's new offices, new people, new leadership. So 3 or 4 of the major regions were being run by us pretty quickly.

And so we have new people in their new office in Charlotte is doing a great job. Tennessee is doing a great job. Texas has struggled but, as Miles said, we'll see some new leadership there pretty soon. It will be public. So it's just -- we've doubled the size of the DOs, the directors and the offices, and those people got to get up to speed. Some hit the ground running, some struggled a bit but, as I said, that shouldn't surprise anybody when we went from 3,000 to 15,000. Getting on property management was the move. And so we are -- it's a year ago today. We're celebrating the first anniversary. We're still enormously excited about the purchase. It was the right thing to do. You know to control the expenses. We had to pull it internal. And so there's some bumps in the road, but we're very, very pleased with how it's gone.

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Anthony Paolone, JP Morgan Chase & Co, Research Division - Senior Analyst [28]

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Okay. So you're not seeing any of these costs hit -- particularly if I look at this like having 40-some-odd hundred homes in Atlanta, like those numbers aren't -- the effect on that portfolio is not similar to, say, like Nashville at 1/10 that size, like, this is kind of just a people thing across the board.

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George G. Ellison, Front Yard Residential Corporation - CEO & Director [29]

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Yes. Well, it's a people thing, which caused operational issues. Rob did mention some other things. I think some of our competitors mentioned the tax thing was a little surprising. We have newer stuff, newer homes, newer purchases, so appraisals are fresher. And so I think we've got nicked a little on taxes. Insurance is coming off the storms. So maybe a touch there. You'll see as we go through the year. But I'd say, all in all, it was just kind of getting our legs underneath us operationally is the issue.

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Anthony Paolone, JP Morgan Chase & Co, Research Division - Senior Analyst [30]

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Okay. And incremental costs that come with buttoning this down, is that all going to be in OpEx? Or will we see any of that in overhead?

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Robin Neil Lowe, Front Yard Residential Corporation - CFO [31]

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Yes. I think it's mostly in that repairs and maintenance expense line item. That's essentially where you'll find most of it.

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Anthony Paolone, JP Morgan Chase & Co, Research Division - Senior Analyst [32]

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Okay. And then just one question about the -- some of the stats in the portfolio. You reported pretty consistent blended leasing spreads in the mid-4s. But if I look at just the average rent in the quarter and compare to the same quarter a year ago, it's up like 2.5%. Is that a mix matter or am I missing something?

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Miles Adams, Front Yard Residential Corporation - SVP of Property Operations [33]

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I think it's -- there's a bit more inventory in Atlanta, which was driving -- the growth there was pretty impressive, as I mentioned, and having more homes in that market relative to this time a year ago, I think, drove some improvement in that blended increase. Pretty impressive numbers there in Atlanta.

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Alysia Cherry, Front Yard Residential Corporation - Head of IR [34]

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Yes. Tony, this is Alysia. We also had a separate mix of homes. We do present things on a stabilized portfolio basis. So it's not same store when you're looking at the average rent per home. So what you have in there is just the average rent per leased home. And so that mix has changed quarter ago year, right, as we're looking at those numbers. The best number to use is that quoted. We found lease improvement that really shows you the true underlying increases on a same-home basis.

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Anthony Paolone, JP Morgan Chase & Co, Research Division - Senior Analyst [35]

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Okay. Got it. And then just back to your guidance, the 16,000 homes, I get the margins and occupancy and things like that, given the option stuff. But in terms of getting to the 16,000 homes, do you think that gets pushed out as you kind of focus on operations? Or do you think that's something that the deal team's still kind of pushing ahead with?

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

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We're kind of almost completely disconnected, except to the extent that the acquisition guys will go to Miles and see where he would prefer to fill in. So we'll see pools. There was a 3,200 pool in, I don't know, probably 9 different markets. So we'll target places where these expenses won't go up by adding a couple of hundred homes here, in Atlanta or Minneapolis or Florida. And so to that extent, they'll get involved. But the acquisition guys really are shooting for a target yield. And so if they can't find something in that yield, we stay very disciplined about it. And if they can, you'll see us buying some more stuff over the next few weeks and months here. I'm confident there's a lot of stuff still out there. So -- but Miles' role in that is I want more homes in this region, in that region so we can just keep filling out where he's already pretty big.

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Anthony Paolone, JP Morgan Chase & Co, Research Division - Senior Analyst [37]

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Okay. So are you still seeing stuff you like that's hitting your yields out there?

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

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Yes. I mean it's a two-edged sword. Rob mentioned it in terms of valuations. We keep selling things as we clean up these sort of areas that are leftovers from the loan distribution being in cities and places we didn't want. And I don't want to overstate it or I can't predict the future, but this is a second and third quarter in a row where we sold 100, 150. One quarter, it was, I think, 450. And everything, Tony, is up in price.

So that's the good news. And that speaks to -- we say it on every call, it speaks to the valuation of what these 14,000, 15,000 homes are worth. It's pretty clear that the demand for this product, as we mentioned, is red hot. And I think all of us in the public space are reporting higher and higher rents. I think the IH guys are a little bit more West Coast. You know how hot that is. We're not really there, but I think all 3 of us are pretty pleased with the rent increases. The demand for the product is incredibly high. So it's -- I think things are in very good shape in that regard, and we'll see how it plays out.

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Anthony Paolone, JP Morgan Chase & Co, Research Division - Senior Analyst [39]

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Got it. Last question on the strategic alternatives process, do you think we'll hear something on that front by the end of this year?

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

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I can't really say when that will be. As I said, we're moving on it expeditiously, I think, was word I used. So we're moving ahead on it, Tony. And as soon as we have something to report there, we'll go publicly. But I can't put a time line on when and what the Board will do.

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Operator [41]

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And we have a follow-up question from Jade Rahmani.

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Ryan John Tomasello, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [42]

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It's Ryan, again. Just with the recent changes in the Board, can you say how engagement with the new members is going so far?

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George G. Ellison, Front Yard Residential Corporation - CEO & Director [43]

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Yes, it's been perfectly fine. We had our first Board meeting and, obviously, with a strategic review, pretty regular call. So it's been incredibly constructive and positive. And we're -- I think we as a management team are very pleased with the dynamic and I think they are as well like we all are.

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Ryan John Tomasello, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [44]

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Great. And you continue to optimize the portfolio as you look across your markets today in the existing in-place portfolio, what percentage of homes would you deem as core? And for those that aren't, do those relate to specific characteristics like market? Or is it more so asset quality and overall characteristics as it relates to rents -- in-place rents in those assets?

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Robin Neil Lowe, Front Yard Residential Corporation - CFO [45]

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Yes, we have a slide in the supplemental information, Ryan, Slide 9, where we kind of show the stabilized core portfolio, if you like. And then we've got some unstabilized stuff, which we're stabilizing. And then we've got some stuff which is available for sale. So some previous rentals identified for sale is 291 of those right now. Those are kind of for the reasons you gave. They're noncore markets. There are other reasons why they don't fit our rental portfolio criteria. And then lastly, we still have a few legacy REOs and 60 of those that we're showing that we're going to sell as well. So about 351 right now.

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Ryan John Tomasello, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [46]

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Yes. I mean it seems that, that 351 number has kind of remained around that level despite you continuing to sell assets. So I guess that was the impetus for the question because it seems like you're continuing to just incrementally identify new assets that you don't deem as core. So just was wondering if we should expect the stabilized portfolio to continue to trend down absent new bulk acquisitions.

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Robin Neil Lowe, Front Yard Residential Corporation - CFO [47]

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Yes. I don't think that there's always going to be stuff around the edges, that we're always going to be refining and optimizing the portfolio. You always expect to see something as it was going to be running at this level, maybe not. I'm not sure we expect to see this stabilized portfolio to decrease much more than this. So that's really not going to happen.

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George G. Ellison, Front Yard Residential Corporation - CEO & Director [48]

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I agree.

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Operator [49]

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And I'm showing no further questions at this time. I would like to turn the conference back over to the company for closing remarks.

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George G. Ellison, Front Yard Residential Corporation - CEO & Director [50]

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Thank you, everyone, for dialing in, and we'll be speaking to most of you throughout the day. And thank you, everyone, for your interest. Have a good day.

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Operator [51]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and have a wonderful day. You may all disconnect.