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Edited Transcript of RESI earnings conference call or presentation 27-Feb-19 1:30pm GMT

Q4 2018 Front Yard Residential Corp Earnings Call

Frederiksted Mar 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Front Yard Residential Corp earnings conference call or presentation Wednesday, February 27, 2019 at 1:30:00pm 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

* 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 Q4 and Full Year 2018 Call. (Operator Instructions) As a reminder, today's conference may be recorded.

I would now like to turn the call over to Alysia Cherry, Head of Investor Relations. Ma'am, you may begin.

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

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Thank you, Sidney. Good morning, and thank you for joining us for Front Yard's Fourth Quarter 2018 Earnings Conference Call. Joining me on today's call is George Ellison, Chief Executive Officer; Robin Lowe, Chief Financial Officer; and Miles Adams, Senior Vice President of Property Operations.

I'd like to guide everyone to the fourth quarter earnings slide presentation available through the Investors section of our website at frontyardresidential.com. These slides were created to accompany the company's 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 allocations 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 2018 form 10-K 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.

It's been another very productive quarter and year at Front Yard Residential. The transition of 12,000 homes from 2 external property managers to our own platform that started in August is almost complete, and the results are starting to show. We targeted the move of some 4,000 homes from ASPS by year-end 2018, but were able to complete this move by mid-November.

Our next goal was to move the 8,000 homes being managed by MSR by year-end 2019. We then were able to move that goal up to midyear and now are predicting the complete transition to be executed by the end of the first quarter. As you can imagine, transferring homes from one platform to another is complex and challenging. The team has done an outstanding job in doing both the hard, detailed work in the background of onboarding 4,155 homes by year-end and just over 10,000 homes as of today while the whole time not having our families be inconvenienced and continuing to receive first-class service.

When we purchased HavenBrook in August, we predicted 2 to 3 quarters of noise in our financial results. However, the results in the third quarter turned out better than expected. Despite being in the middle of such a transformational integration, the fourth quarter results were very solid as well.

Rob also has great news on the funding front with the refinancing we completed in December with very attractive terms as well as positive financial results from the sale of about 450 nonstrategic homes.

Today, we introduce Miles Adams, Senior Vice President of Property Operations. Miles was a member of the senior management team at HavenBrook, and we are both happy and fortunate that we were able to keep him with us after the acquisition. He and his team are doing an incredible job, and today we've asked him to make a few comments on the transition of homes to our platform. Finally, I'll update performance goals from last quarter and then recap 2018 accomplishments.

If you'll please turn to Page 4, we can run through the fourth quarter results. Rental revenue of $54 million. Stabilized rental core NOI margin, 62.5%. Core FFO, $0.05 per share. Blended rent increases, 4.3%. 94% of stabilized rentals released at year-end. And turnover for the stabilized portfolio was 6.6%. 7,300 homes were internally managed at year-end, about 13,000 today. 87% of funding was fixed or capped and had a weighted average maturity of 5.5 years.

As we mentioned on last quarter's call, we had identified about 800 homes as noncore and up for sale. Just this month, we closed the sale of about 450 of these noncore rental homes. Rob will go over the numbers, but let me just say that, while previous sales consisted primarily of legacy REOs, this sale from our rental portfolio is a good indication of the value that's embedded there.

If you'll please turn to Page 5, we show some important company data over the last several quarters. Total home count continues to go up. Legacy assets are almost completely gone. Blended rent increases are staying strong, and turnover remains very low. All good news.

Rob?

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

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Thank you, George.

As we said last quarter, our fourth quarter 2018 numbers continue to be impacted by the integration of our new property manager and the transition of our rental portfolio from external property managers. Having said that, we are seeing solid underlying performance.

GAAP net loss for the quarter, at $34.2 million, was a 29% improvement over the prior quarter and included a number of onetime items. First, acquisition and integration costs of $7.6 million include a onetime $5.25 million transition services fee to MSR, our remaining external property manager, as we transfer nearly 8,000 homes away from them to our internal property manager.

Other acquisition and integration costs of $2.4 million represent expenses incurred to ramp up internal property manager resources while at the same time paying the ongoing property management fees to our external property managers. We expect these costs to further reduce in the first quarter of 2019 and substantially cease by the second quarter of 2019.

Second, fourth quarter 2018 interest expense includes $1.7 million of nonrecurring debt extinguishment costs related to our refinancing of the MSR Loan Agreement during the quarter. I'll talk more about this later, but with this refinancing, we reduced the credit spread by 148.5 basis points of spread, or approximately $7.5 million annually.

Third, G&A expense included about $1.5 million of nonordinary course legal, professional and other expenses that we expect to reduce going forward. Finally, fourth quarter turn costs were around $600,000 higher than average as we accelerated efforts to maximize the number of properties available for rent as we start the leasing season. Results so far are very encouraging, with stabilized occupancy for mid-February at 95%.

During the continued integration and transition impact, core NOI margin for the quarter held up at 62.5%, essentially flat to last quarter. And core FFO increased by 16% to $0.054 from $0.046 last quarter. So how will we get from the core FFO numbers we're reporting today to the targets for the end of 2019 that we're showing on Slide 7? I'll briefly go through the key items.

As discussed earlier, there are some expense items included in our fourth quarter numbers that we expect to substantially go away. We should see an approximate $0.03 per quarter reduction in the costs of maintaining legacy assets as we continue to divest them. And interest savings from the refinancing, not already included in the fourth quarter, should be around $0.02 per quarter. Further, we expect to drive at least $0.1 per quarter of efficiency in ordinary course G&A costs in 2019 as we continue to integrate the HavenBrook and Front Yard infrastructures.

At the operating level, a 3% to 4% annualized rent increase in 2019 would equate to $0.03 to $0.04 additional core FFO per quarter, and a 1% to 2% increase in occupancy would be $0.01 to $0.02. We're targeting $0.04 to $0.05 per quarter of operating efficiencies that will drive NOI back to 65% to 66%. And finally, every 500 new homes that we acquire should contribute around $0.01 of core FFO per quarter. In total, we expect all of these items to drive an increasing core FFO in the range of $0.17 to $0.20 per quarter by the end of 2019 over the $0.05 that we're reporting today for the fourth quarter of 2018.

We've also made further progress on strengthening our balance sheet. In the fourth quarter, we refinanced the $489 million MSR Loan Agreement with Morgan Stanley. We've refinanced the same collateral at a 70% advance rate for loan proceeds of $505 million compared to the MSR loan of $489 million at a 75% advance rate. Further, the credit spread was reduced from 328.5 basis points under the MSR loan to 180 basis points under the new loan, a saving of nearly 150 basis points, or approximately $7.5 million annually. We purchased a LIBOR cap on the new loan at a strike of 2.5%, meaning that the maximum rate on this loan is capped at 4.3%.

Additionally during the quarter, we capped the LIBOR rate on the home SFR2 and home SRF3 loan agreements for the duration of the loans at 2.3%, meaning that the maximum rate on these loans will be 4.4%. Should credit spreads narrow, we have an option to refinance these loans after November 2019. Approximately 87% of our debt is now fixed or capped, with a weighted average maturity of 5 1/2 years.

The fact that we were able to achieve higher loan proceeds at a lower advance rate on the Morgan Stanley loan evidences an approximate 10% increase in the value of the homes, or about 5% annualized. We were also able to realize about a 14% increase, or approximately 5% annualized, in the collateral value for the existing homes on our books that were included in the Freddie Mac loan that we closed in the third quarter. We believe that, along with the independent valuation by Duff & Phelps in June 2018, this is strong evidence supports the valuation of our portfolio at or around the NAV that Slides 19 and 20 in the earnings deck imply.

Finally, earlier this month, we sold 444 non-core homes that did not fit our rental criteria. 402 were homes that we recently purchased as part of the HavenBrook acquisition. Sale proceeds were approximately $102.9 million, giving a $4.8 million gain of a GAAP carrying value. We applied the entire cash proceeds to paying down debt on our Credit Suisse warehouse line, resulting in a reduction of overall leverage by about 1.5%.

I'll now turn the call over to Miles.

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

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Thank you, Robin, and good morning, everyone.

I would like to start by recognizing our operations team. It was an extremely busy quarter, filled with growth and new challenges. I'm very proud of the results our team has achieved and of all the new team members that we've assembled. The team's steadfast dedication to our residents and our great company is truly inspiring and has laid a solid foundation for our future success. I thank you all for each contribution you've made towards achieving our company's goals.

We began the quarter with three primary operating objectives: first, to successfully transition all of the ASPS homes onto our management company platform with minimal disruption to our residents; second, to expand our footprint and assemble a team capable of operating 15,000 properties at best-in-class metrics. Lastly, we challenged ourselves to avoid any decline in the company's key operating metrics during this transition period and, where possible, to improve them.

As George mentioned, as of December 31, 2018, we had transitioned all of the approximately 4,000 homes from ASPS onto our internal platform ahead of schedule and had a total of 7,300 homes under management. Since then, we have transferred approximately 6,000 homes from MSR and are currently managing approximately 12,900 homes. We expect to be substantially complete with the remaining property transitions onto our internal platform by the end of Q1 2019, well ahead of schedule.

This transition has resulted in the expansion of our platform to the Carolinas, Tennessee, Texas and parts of the Midwest. We've opened offices in Indianapolis, Charlotte, Houston, Dallas, Tampa and Memphis. When we began the transition process, our management company was comprised of approximately 80 people. This team has been expanded to include approximately 175 team members as of today. We strongly believe in finding the best local resources to manage our homes and service our residents. We are confident our growing team will continue to deliver superior customer service to our residents as well as best-in-class operating results. We are truly excited about the team we've built, and we are well positioned for the upcoming peak leasing season.

Even with the challenges of transitioning homes to our management and building our platform, we remain very focused on maintaining and improving our overall occupancy during Q4 and beyond. In addition to maintaining strong service levels for our existing residents, turning and leasing homes was a primary focus of our team during the transition. In fact, we completed approximately 350 unit turns from the various dates of transition to December 31, 2018 for the homes under transition, which is approximately 66% above what we would consider a normal turnover rate for this subset of homes.

As a result of accelerating turns to boost leasing velocity, our portfolio's stabilized lease percentage of 94.2% was an improvement of 30 basis points from September 30, 2018. This metric was further improved to 95% as of mid-February. Given the challenges of the transition and onboarding the new team, and allowing for Q4 seasonality, we are very pleased with achieving this increase in occupancy. We believe improvement in the occupancy metric demonstrates that our team members have hit the ground running and are poised to achieve the targets that have been outlined for 2019.

In addition to the improving occupancy, we achieved stabilized rental growth of 4.3%, comprised of renewal rent growth of 4.1% and re-lease rent growth of 4 1/2%. The Q4 renewal rate of 71% represents an improvement of 500 basis points over the 66% rate of Q3 2018. The Q4 turnover rate of 6.6% represents a 60 basis point improvement over Q3's turnover rate of 7.2%.

In summary, it was a very solid quarter with many significant accomplishments. We are on track to complete the buildout of our property management platform. We will complete the transition away from external property managers by the end of Q1 2019, ahead of schedule, and our occupancy is on the rise. We are very pleased with the operations team we've assembled, our portfolio and the markets in which we own homes. We look forward to challenging ourselves with our goals for 2019 and continuing to position our company to take advantage of future opportunities.

I will now turn the call back over to George.

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

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Thanks, Miles, and great work.

As you see on Page 7, we're reiterating our 2019 run rate projections. First, let me restate some assumptions that went into these numbers: home count of 16,000 homes; rental increases of 3% to 4%; occupancy, 95% to 96%. So here you see on an annualized basis, we're still projecting between $240 million and $250 million in revenue, a 66% NOI margin, which results in $158 million to $165 million in net operating income. After interest expense and G&A, we're still projecting between $47 million and $54 million in annualized core funds from operations, or $0.22 to $0.25 per share, per quarter. Annualized AFFO of between $27 million and $34 million, resulting in $0.13 to $0.16 per share, per quarter to be reached in the fourth quarter of this year.

As we have stated before, you can appreciate there are many variables that go into these targets. However, our track record of repeatedly reaching our stated goals, and the fact that the internalization of property management will be completed to get ahead of schedule, should give confidence that we will do so again.

Let's recap 2018 on Page 8. Most importantly, we internalized property management with the acquisition of HavenBrook Homes. And coincident with this acquisition, we began winding down our relationships with both of our outside property management vendors. ASPS was done at year-end, and Main Street Renewal will be done by the end of the first quarter.

As we said earlier, we are increasing our property management platform from 3,000 to 15,000 homes. This is tough, meticulous work that must be done quickly but carefully and requires close attention by all of us. The legacy noncore assets, both loans and REO, are effectively gone. 448 noncore homes were sold in 2018, reducing drag on our P&L and freeing up capital. And add to this almost 450 homes which we sold just this month, above our mark.

On the financing liquidity front, we secured a $500 million, 10-year loan from Freddie Mac in August as well as refinanced another $500 million with a 5-year loan from Morgan Stanley. We also lowered the effective rate we pay on our line with Credit Suisse and restructured our line with NOMURA. As we stated earlier, these transactions resulted in average debt maturity being pushed out to over 5 years, with 87% of our debt fixed or capped.

Our rental portfolio grew 21% from just under 12,000 to 14,544 homes, reinforcing Front Yard Residential's position as the leader in the affordable, single-family rental housing segment. Revenue increased 48% from $124 million to $183 million year-over-year. We targeted $0.15 per share of stabilized rental core FFO, a mid-60s NOI margin. We committed to grow whole-company FFO and reach critical scale in home count, all targets we hit or exceeded. On the bottom of Page 8, we restate our goals for 2019.

All in all, it was a transformational year at Front Yard Residential, with solid results and a long list of accomplishments. But the real story is the groundwork that was laid, the foundation that sets us up for a strong 2019. And it's already starting to be evident in the numbers. Keeping an eye on the right acquisitions while being prudent with our leverage, pruning noncore assets, being opportunistic in unlocking value from our balance sheet, maintaining strong operating metrics and covering our dividend are the focus for this year. Now, as the transition of homes to our platform is almost complete, the financial results are starting to show up in the first quarter and will continue to improve as well as become more and more predictable. We have continued to state our goals publicly and then achieve them. 2019 will be no different.

I'll turn it back to you, Sidney.

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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 Douglas Harter with Credit Suisse.

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

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Just I know you kind of walked through the numbers quickly, Robin, but just kind of wanted to, again, get an expectation of kind of when the size and the timing of the synergies kind of as you are able to -- as the internalization of property management is completed, when we should start to see the margin benefits from that.

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

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Yes. Thanks, Doug. So some of it's going to come sooner rather than later, obviously. So as I said in my remarks and as I said last quarter, one of the things we've been, obviously, dealing with is ramping up our internal property manager to take all the homes away from our external property managers, at the same time still paying all those fees to the external property managers. So as we said, we're still going through that this quarter, first quarter with MSR. We've got about 2,000 homes left to go. We're nearly there. We've made great progress. But you're still going to see a lot of noise in the first quarter, although less, obviously, than the fourth quarter. So I expect things to improve in the first quarter and then get significantly better in the second quarter. And then some of this stuff you see will just come as -- during the course of the year as Miles and his team and us continue to drive out expenses and realize the efficiencies that are embedded in our new structure.

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

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Great. And then on your slide for run rate, run rate FFO and AFFO, I guess, can you just talk -- the interest expense line item is the same despite the substantial savings that you got in the December refinancing. I guess, did the 3Q number kind of already contemplate that level of refinancing? Or if you could just help on that, Robin.

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

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Yes. We're trying to be quite conservative in these numbers, Doug. So we've got 4.75% there as the annualized assumed rate. Today, as you'll see in our 10-K, our weighted average interest rate at the end of the year was 4.53%, so there could be some opportunity there. Some of our loans are still LIBOR-based, and so that could go against us, although it's not a big amount after the debt pay down from the sale in February. So I'm being slightly conservative there, is the answer.

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Operator [6]

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And our following question comes from Anthony Paolone with JPMorgan.

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

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First question, on the hundred and some-odd million dollars of dispositions that you just did, what was the NOI on that group of assets that we have to think about pulling out and then replace?

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

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The NOI was quite low. Most of those homes were the homes in South Florida that we acquired from HavenBrook, and I know we said last quarter we put those on the [CS] line, Tony, with a view to selling them. So both the NOI and the yield were kind of lower on that. And Tony, I think it was you that asked me last quarter, did we expect to sort of be able to sell those and recycle them into something more accretive? And the answer is, yes. So we sold stuff that's lower yield, and we're going to reinvest that in high-yield assets.

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

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Okay. But I mean, is it something like 3%, 4%? Like, what's the order of magnitude, do you think?

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

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I don't have that number in front of me, but I think ballpark, you're probably in the right region there, yes.

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

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And then in terms of what's remaining when I look at your held for sale, it seemed like about $50 million, $60 million left. Do you plan on adding to that over the course of the year as you talked about refining the footprint a bit? Or what's the order of magnitude of what could be behind the $100 million over the balance of '19?

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

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Yes. Definitely we plan to keep going on that. We think it's a discipline that we should be sort of doing constantly in terms of reviewing and refining our portfolio. So the ones that we've sort of identified already are kind of the more obvious ones in these sort of outlying areas where we really don't want to be and we're never going to build critical mass. So obviously, they're first on the list. But then as we go forward, we're going to continue to review and refine.

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

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Okay. And then, on the portfolio, what is -- is there much of a spread between the leased rate and the occupied rate as we think about just the actual economics in any given quarter? Because I think some of your peers report both, and there's sometimes a gap. I just want to understand what the number is.

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

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So I'm not -- so what -- I'm sorry. I'm not sure I understand the question.

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Miles Adams, Front Yard Residential Corporation - SVP of Property Operations [15]

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Yes. So the -- I think -- this is Miles. So the question is whether there is a gap between the leased percentage or the occupied percentage. And generally what we see on a stabilized portfolio that that's running right around 100 basis points.

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Anthony Paolone, JP Morgan Chase & Co, Research Division - Senior Analyst [16]

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Okay.

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Robin Neil Lowe, Front Yard Residential Corporation - CFO [17]

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Does that answer the question, Tony? Sorry, I didn't understand.

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Anthony Paolone, JP Morgan Chase & Co, Research Division - Senior Analyst [18]

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Yes. No, that's exactly right. I just want to -- and then I'm just trying to bridge with your Page 7. So if your leased rate was about 94%, that suggests your occupied was about 93% then, and your goal is 95% to 96% occupied. I just want to make sure I'm getting sort of the bridge right.

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

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Yes. That's an occupied number. So as I said, we're already sort of improved 80 basis points since year-end. We were at 94.2% at year-end, so we're already at 95%, and it's only February. So I think we feel pretty optimistic right now about getting to at least 95% if not higher by year-end.

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Anthony Paolone, JP Morgan Chase & Co, Research Division - Senior Analyst [20]

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Right. And again, though, I just want to make sure. That's comparable to an occupancy rate at the -- in the fourth quarter that was closer to 93%, so that's 250 bps in pick up.

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Robin Neil Lowe, Front Yard Residential Corporation - CFO [21]

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No. That's the 94%.

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Anthony Paolone, JP Morgan Chase & Co, Research Division - Senior Analyst [22]

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Right. The 94.2% versus 93.9%. So yes, there was a 30 basis pickup from Q3 2018?

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Robin Neil Lowe, Front Yard Residential Corporation - CFO [23]

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You're talking about the difference between the occupancy and the leased again. So I'm saying it's the occupancy. It's the occupied number.

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Anthony Paolone, JP Morgan Chase & Co, Research Division - Senior Analyst [24]

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Right. Okay. And then can you give a sense as to, if we think about the bridge and the goal for year-end 2019, where you see leverage at that point either on net debt to EBITDA or debt to assets, however you want to think about it.

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Robin Neil Lowe, Front Yard Residential Corporation - CFO [25]

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Yes. I think book leverage is going to be sort of low 70s, 71, 72, something like that. With this debt pay down, we reduced it to 70. It may tick up a little bit as we -- if we find the right assets. So low 70s. The book -- sorry. The debt to fair value, if you like, NAV, is actually probably around 60 right now, so that's kind of where I expect to be, there or slightly higher, by year-end.

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Operator [26]

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And our following question comes from Jade Rahmani with KBW.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [27]

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Of the 440 homes that sold, were those all in Florida? I think I saw that Amherst Residential, a Main Street Renewal affiliate, acquired about 212 of those homes.

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George G. Ellison, Front Yard Residential Corporation - CEO & Director [28]

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Yes. I think that was picked up by the counties where the sales happened, so I think Broward and maybe Dade, but that was only -- so that's the story that hit on that real estate piece in Florida was it just picked up on the counties where those closed. I think 400 were Florida, and so the other 50 were spread around other places. So the bulk of it was higher-priced homes in South Florida, 400-ish of the 450.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [29]

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What was the cap rate on the sale?

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

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The way I look at it, the way we look at it when we're buying and selling, is sort of a very objective metric, gross yield. So rent divided by -- rent times 12 divided by price of a house. That's how usually buyers and sellers speak to one another, so that number ranges, when you're buying and selling, from probably -- you sell in the 9s and you buy high 11s to low 12s. So the reason why I speak in that definition, Jade, is because that cuts out how you run them differently than I run them, buyers and sellers and NOI. Somebody buying them might think that they can run them at a higher NOI. So if you want to assume an NOI, a cash NOI, of, say, in the 50s, that would imply times gross yield something in the high 4s is where we sold them, to answer your question directly.

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

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Okay. What's the identifiable pool of noncore homes?

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

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You mean that we're still speaking of selling?

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

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Yes.

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

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Yes. I mean, it's a lot of things. So that list right there was a yield issue. The yields were low, and as we were chatting with Tony, the NOIs were low. But there's also, as you know, still a legacy issue of a small number of homes in places that were born out of the NPL purchasing algorithm. So we'll always be cleaning up places that previously were bought because loan distribution was pretty flat across the country. So there's still a handful of places where we've got to get out of 2s and 4s and 6s and 10s. So it'll be a constant, as Rob said, culling of things that go up in price, and maybe you can sell a home for $250,000 and buy 2 $125,000s, so that'll be part of it. Strategic places that are too small that we don't want to grow. What else would drive selling?

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Robin Neil Lowe, Front Yard Residential Corporation - CFO [35]

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Yes. So if you look on Slide 12 of our earnings deck, Jade, we show 901 homes that are identified for sale, including the legacy REOs and including the 444 that we just sold. So that's the currently identified pool, but as George is saying, as we go forward, there's going to be more.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [36]

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Okay. Can you give an update on AAMC and, I guess more to the point, RESI's plan to optimize G&A? I think annualized G&A is running at $31.5 million, including RESI's G&A, the AAMC management fee and stock compensation costs. So what's the annual target, just looking at the numbers? Relative to assets, it's about 1.4% and relative to equity and market cap, it's about 5% to 5 1/2%. I think that a triple net lease REIT -- for example, NNN is the ticker -- they've got about $35 million of annual G&A, and the market cap's in the billions, so I think they've got an $8.5 billion market cap. So I think optimizing G&A should be one of the top priorities for management.

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George G. Ellison, Front Yard Residential Corporation - CEO & Director [37]

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I'll start that, and then, Rob, you can take it. The third quarter call beginning in November, we stated that the December cycle of board meetings would move -- the AMA discussion between the two companies would be high on the agenda of those two board meetings, and they were. So that conversation and that negotiation has begun. Obviously, we can't talk about that, but also it's between two independent boards, and so to the extent we'll be asked for data or analysis, we'll be part of that. But the real discussion is between the two boards. So all I'll say on that is, it has begun, and just like everything else, we've, I think, stated that we will work on -- we have, so it has begun. So that's all we'll say on that. As it relates to more specifics, obviously we agree with that comment we stated in the past that, as we grow, we have to drive our total, real G&A to levels that are comparable to people in the space and other people that you may mention. So Rob, why don't you take the rest of that please?

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Robin Neil Lowe, Front Yard Residential Corporation - CFO [38]

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Yes. I'd say a couple of things. First of all, as I said in my prepared remarks, there's something like $1.5 million of nonordinary course legal and professional and other costs that we expect to go away during the course of the year. We also expect to be able to realize some further efficiencies, maybe another $0.5 million or something like that. The other thing I would say, Jade, when you start comparing us to other REITs or whatever, is you've got to look at our scale, right, compared to everyone else, right? And so our G&A load, as a percentage of total gross rental assets, I don't think is very much different than our peers were when they were our size, and so this just speaks to the whole issue that we need scale. Scale is important to us, right? Because, yes, our G&A, while I think it's not particularly outsized compared to where our gross rental assets, where our size is today, clearly as we grow, that G&A won't grow with us, and so we'll get -- when we get to sort of 50,000 homes, for example, our G&A load will be comparison -- sorry, comparable with our peers. But scale is very important, clearly.

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George G. Ellison, Front Yard Residential Corporation - CEO & Director [39]

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So I would -- and I'd just wrap it up with, this issue that you're on. We've talked about this in the past on these calls. So we agree with you, that is that that making sure the G&A divided by real estate assets or any other way you want to look at it has to be controlled and has to be driven down. But to Rob's point, that will happen as we grow, and I can guarantee you that whatever comes out of that, assuming that a new contract is constructed, this very issue that you're on will be addressed, and we'll -- if we're able to get something done, if the 2 companies are, we'll be crystal clear about how that number's going to work and how it's going to go down over time. We're completely aware of that.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [40]

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Okay. Just looking at your 2019 targets, the 95% to 96% occupancy, is that in -- is that net of bad debt expense? Where's bad debt expense flow through in your assumptions?

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Robin Neil Lowe, Front Yard Residential Corporation - CFO [41]

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Yes. It's in that, Jade.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [42]

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So bad debt expense is, what, 1 1/2%?

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Robin Neil Lowe, Front Yard Residential Corporation - CFO [43]

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It's about 1%.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [44]

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Okay. So you would be expecting, at the midpoint, 96 1/2% of occupancy and 1% bad debt expense.

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

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Yes. Ballpark, right, Jade. As I said, look, our occupancy already in mid-February is 95%, so I think these targets are very achievable.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [46]

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Do you have an estimate of what you would expect FFO to total for the year? I think that the core FFO and AFFO numbers you gave are quarterly, and that's the target by year-end, so there'll be a buildup to that. Do you just have a range of those 2 items for full year FFO and AFFO?

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

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Yes. We haven't given that guidance at this point, Jade. We can see how we can be helpful to you on that, but --

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [48]

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Okay. Do you expect to cover the dividend by year-end?

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Robin Neil Lowe, Front Yard Residential Corporation - CFO [49]

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We expect to achieve that run rate --

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [50]

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Through cash flow?

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Robin Neil Lowe, Front Yard Residential Corporation - CFO [51]

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Yes. So that's the AFFO target that we're showing. That's the $0.13 to $0.16 annualized by year-end. That's what we're saying.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [52]

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Okay. And then there's some cost to own that I would hope to get some clarity on. The 350 units that turned, what was the amount of expenditure, the turn cost, on average for those -- for each unit? How much are you spending per turn?

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Miles Adams, Front Yard Residential Corporation - SVP of Property Operations [53]

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Yes. So this is Miles. Total gross costs to maintain are running in that $2,300 to $2,400 to $2,700 range on a gross basis. On a net basis -- I'm sorry. On a gross basis, about $2,700. On a net basis, $2,300 to $2,400. And the split we're seeing between OpEx and CapEx, inclusive of turns, is about $1,600 on the OpEx side and about $1,000 to $1,100 on the CapEx side.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [54]

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What do you think explains -- that's several hundred dollars lower than Invitation Homes. What do you think explains the difference? Is it -- there could be a couple factors. One is the low turnover ratio in the portfolio is maybe delaying the recognition of certain CapEx items. Two, as the portfolio is less seasoned, there's less expenditure. That's something I've seen coming this industry for 5 years. The longer you own homes, the more there's expense recognition. And then third could be something to do with the way G&A is allocated, inclusive of property expense. So what would you say explains the difference between those numbers that are several hundred dollars below Invitation Homes?

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George G. Ellison, Front Yard Residential Corporation - CEO & Director [55]

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Yes. So you -- the first thing that you referenced was the turnover rate. Certainly, our turnover rate of 27 1/2 is lower, and that does help considerably. The second thing we would point to is that our home size, on an overall basis, on average, is smaller, or much smaller than Invitation's, and so that helps considerably with the cost to maintain. So I think those two factors are the key factors in driving that difference.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [56]

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Okay. And then just -- sorry, leasing commissions and marketing expense, where's that flowing through on the income statement? Are those items expensed fully or are you capitalizing those?

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George G. Ellison, Front Yard Residential Corporation - CEO & Director [57]

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Yes. Those costs are capitalized. We're paying those commissions, when we incur them, to third parties, and so they would be capitalized.

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Robin Neil Lowe, Front Yard Residential Corporation - CFO [58]

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[Because a lot of that's] in-house now. That's -- we're bringing a lot of that in-house.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [59]

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What was the last comment, Robin? I didn't catch that.

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Robin Neil Lowe, Front Yard Residential Corporation - CFO [60]

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I'm just saying that we have more in-house as we go forward. Now all that was external before, but as we bring up (inaudible) to internal property management, some of that activity will be in-house.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [61]

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And so that'll be expensed when it's in-house?

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Robin Neil Lowe, Front Yard Residential Corporation - CFO [62]

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It's all expensed, but it's -- yes. It's expensed. Yes.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [63]

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Okay. And then, I guess, Slides 19 and 20, do you have an update of the NAV estimate? What are you trying to imply with those slides?

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Robin Neil Lowe, Front Yard Residential Corporation - CFO [64]

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17 1/2 --

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [65]

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Does that confirm the -- sorry. Say that again?

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Robin Neil Lowe, Front Yard Residential Corporation - CFO [66]

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17.50. That's a pure indexed carrying value basis, right? So that's the cost that's purchased plus any CapEx and then indexed by the indices that we've shown on the slide. Right. If you apply a kind of a classic [forward] NAV discounted, you've got to come up with a higher number than that, obviously, dependent on the cap rate that you use. But this, to me, is the baseline.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [67]

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Is that what lenders to decide advance rates?

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Robin Neil Lowe, Front Yard Residential Corporation - CFO [68]

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Lenders tend to use [PTOs], but if you use PTOs , you come up with quite a similar number to what we're showing on these 2 slides.

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Operator [69]

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And our following 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 [70]

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Just on Slide 7, as it relates to 16,000 homes that kind of drive some of those numbers, you guys are maybe 1,500 or 1,000 below that. What's sort of your outlook for getting to that 16,000 homes?

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George G. Ellison, Front Yard Residential Corporation - CEO & Director [71]

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There's -- I'll start. Good morning, Mike. We have probably enough capital to go after that amount, 500 to 1,500 maybe if they were smaller, a little bit [larger in] size. Rob used the proceeds of that sale to pay down some debt, so that's the best opportunity at this point. But there's probably at least 2 nice pools out there that we've been looking at for a couple of weeks, and so obviously, the sooner we can buy those, if they fit and we can get the right price, it makes these numbers better. That's why we gave you a range. So I think, if we're able to get something done, it should be in the second quarter. And by that I mean, we would -- we already have some pricing out there, but you know these things take a few weeks to negotiate and then the team will have to do diligence. And so I think if we're able to get something done quickly here in the next few weeks, we could hopefully get something done by the end of the second quarter. And obviously, as I said, the sooner we buy things in the year, the better the 13 to 16 will look. If I take too long buying, then we'll be at the lower end of that range. So that's sort of why we gave ranges.

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Michael John Grondahl, Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst [72]

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Sure. Sure. Okay. And hey, just the internalization is obviously well ahead of schedule. Do you feel like the synergies and the value for doing that -- how do you feel about that now that you're 90% done with it? Do you feel still -- still feel really good about it?

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George G. Ellison, Front Yard Residential Corporation - CEO & Director [73]

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I'd say a couple of things. At just a business level, internalizing creates a completely different dynamic, so where you're waiting for data, you're waiting for results from outside vendors, who both did a great job, but there's -- it's not yours, and you really can't control it, and you wait for the results to come to you. So just at a sort of a blocking and tackling level, having HavenBrook inside just is phenomenally better. And as we said when we purchased them, it also allows us to directly touch the consumer, which is the -- he who keeps that consumer the happiest is going to win this game. And so dealing through a person who's touching the consumer, I can't get to them. We can't get to them. So just at a macro level. Then on top of that, if you look, and we went over the numbers, HavenBrook had a tremendous platform with some of the best numbers in the business, but they were being held back for the last couple years because they were trying to -- the company was going to be sold, and so they weren't allowed to grow. So this team has been just chomping at the bit to get going. They were enormously excited when we showed up that day in Duluth because they saw it going from 3,000 to 15,000, and obviously, Miles has grown the team. So he and [Joe DiVidia], who's here with us as well, have been just crushing it, and the team's enormously excited about it. As we've said, we thought this wasn't going to get done until the end of '19. We've obviously -- just like these numbers imply, the sooner we can get the transition done, the better these numbers get on Page 7. So Miles and his team have responded to that. So how do I feel about it? I feel -- we're just getting started, and we're incredibly -- I'm incredibly pleased with the job he and his team have done. And now we start the creative business of getting better and better and using technology to get better. So it's -- I don't want to get out in front of ourselves, but it's -- we're incredibly pleased with it. We were very happy when we met them, and we're excited to get together. And it's turned out very well, early days, very early days, but this thing could've gone poorly, and that would've been a bad thing. It's going tremendously well, and we're very, very pleased.

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Michael John Grondahl, Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst [74]

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Got it. Got it. And then lastly, George, how do you know that you're getting enough rent? You've consistently had 4% rent increases, give or take a little bit. How do you know you're asking for enough? What insight do you have there?

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Miles Adams, Front Yard Residential Corporation - SVP of Property Operations [75]

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So this is Miles. I'll take this. So in our process, we start before the home is available for rent with marketing the home, and we're pretty aggressive on an individual-home basis with trying to get as much as the market will bear. And we've been very successful with achieving what I would say are pretty impressive growth rates, particularly in Q4. If you look at the slide in the deck there that has a breakdown for our markets, 7 1/2% in re-lease growth in Atlanta during Q4 is indicative of a very, very strong demand in our key market. And then if you look at Charlotte, we're in double digits at 13.4%. So the market tells us whether we have the home priced right or not. If it leases before the home is available, then -- and we've been pretty aggressive, then it's a validation. If it does not, then we have to adjust our pricing, once it's available, to meet the market's -- what the market is saying it's worth. And we don't let homes age because we want them to be occupied. A vacant home always has a negative margin, so we're very, very cognizant of days on market and driving the greatest blend between growing rents and maintaining occupancy levels and improving them as we've demonstrated.

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Operator [76]

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Thank you. And I'm not showing any further questions. At this time, I would now like to turn the call back to the company for closing remarks.

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Alysia Cherry, Front Yard Residential Corporation - Head of IR [77]

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Thank you, Sidney. That will be all.

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George G. Ellison, Front Yard Residential Corporation - CEO & Director [78]

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Thanks, everyone.

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Robin Neil Lowe, Front Yard Residential Corporation - CFO [79]

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Thank you very much.

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Operator [80]

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