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Deep Breathing; Greater Expectations: Best of Kass

Most important, the company's ability to access the public markets at a higher price-to-book value and in greater dollar raises is the catalyst for this morning's outlook upgrade.

Last week, RESI raised money through a secondary offering that was increased from 10 million to 15 million shares. It was done at a greater premium to tangible book of $18.34 a share than I had previously forecast. Since the deal was done at a higher price, the EPS impact is more accretive).

Given its greater capital base, Altisource Residential has been able (and will be able in the future) to more aggressively purchase and board nonperforming loans and properties. The company has recently or will soon close on $470 million of unpaid principal balance in nonperforming loans with 2,700 properties (1,854 properties in third quarter and the balance in the fourth quarter). And as reported in a recent 8-K, RESI signed an agreement in principle to acquire nearly 3,000 nonperforming loans with $922 million unpaid principal balance. These assets have approximately $800 million of market value for which RESI is paying only about $540 million (or 67% of ultimate value). Upon full closing of the deal, RESI will have $1.7 billion in unpaid principal balance, (roughly $250,000 per property) or about 7,000 loans, representing approximately $1.4 billion in market value ($200,000 per property) and having paid about $950 million for the properties ($135,000 per property).

The bottom line is that I am raising my expectations for earnings available for cash dividends by $0.15 in 2014, to $1.50 a share (or $162.5 million net income), and by $0.25 in 2014,to $1.75 a share (or $215 million net income).

More aggressive and more successful property acquisition results than I am modeling for could raise these profit forecasts further.

My share price target by year-end 2014 is now $28 a share, and RESI remains on my Best Ideas list.

At the time of original publication, Kass was long RESI.

Doug Kass is the president of Seabreeze Partners Management Inc. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.

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