Altisource Residential (RESI): Benefiting from house rental trend

By Michael Cintolo, Chief Analyst, Cabot Market Letter and Cabot Top Ten Trader
From Cabot Wealth Advisory 7/17/14 Sign up for Cabot Wealth Advisory—it’s free!

I’m a growth investor at heart, so the next idea really gets me excited, and part of the reason is that I’m not talking about a broad industry group. In my experience, some of the best stock picks tend to come from entirely new industries—think satellite radio, robotic surgery, single-serve coffee brewers and even the iPad, which was an entirely new type of computer.

The trend I’m talking about isn’t necessarily changing the way we work and live, but I do believe it, for better or worse, it’s the way of the future.

I’m talking about the trend toward renting houses instead of buying. And these aren’t vacation rentals or houses around a college campus (I still remember my $210 per month rent junior and senior year!), but nice, newer houses smack dab in the middle of solid communities.

Whereas 15 years ago, all the talk was about the growing share of Americans owning their own homes, two stock market crashes and the real estate debacle have kicked off what looks like a new trend—adults and families renting for years and years while they build up enough savings to plop down on a house of their own.

One of the company leading the space is Altisource Residential (RESI), a cousin stock to our old friend Ocwen Financial.

Basically, the firm actually goes out and buys tranches of mortgage debt that’s usually delinquent in some sense. The company generally tries to get borrowers current on their loans, but if that fails (and it often does), these firms are happy to take the houses! Then they renovate them and rent them out. It’s literally like being a landlord, but with a national focus and deep pockets.

These are not slummy places we’re generally talking about—yes, there will always be demand for lower-quality homes, but the “new” demand, the trend that’s taking hold, is the married couple with one child that doesn’t have the money or credit score to buy a $350,000 house. So, instead, they rent, paying $1,500 per month for a few years while they sock their savings away. (I also wonder if more travel and job insecurity is leading to more rentals, but I digress.)

Altisource Residential is small but growing quickly—at the end of the first quarter the firm had just 100 homes in their rental portfolio (including those rented, listed for rent or under renovation), but expects that to jump to 1,000 by year-end.

Altisource is focused on the financing side of the equation; successfully resolving many of the loans it buys via short sales, modifications or reinstatements. This approach has led to rapid growth, and the firm has been paying a rising dividend for a few quarters (totaling 45 cents per share last quarter, for a potential forward yield of 6.8% or so, though that figure could fluctuate).

I’m not actively recommending the stocks for a couple of reasons. RESI is thinly traded, has gotten knocked upside the head when it failed in an auction to acquire any much-sought-after loans.

But this isn’t about what’s going to happen over the next week or month; I think a mega-trend toward renting is underway, and could boost this or other stocks that emerge in the industry in the years ahead. If nothing else, put the idea on a sticky note and see if RESI develops strength in the quarters ahead.

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Company Details

Altisource Residential Corporation (RESI)
402 Strand Street
Frederiksted, VI 00840
Index Membership: N/A
Sector: Financial
Industry: REIT – Residential
Full Time Employees: N/A