|Shares Out. (in M):||4||P/E||0.0x||0.0x|
|Market Cap (in $M):||25||P/FCF||0.0x||0.0x|
|Net Debt (in $M):||0||EBIT||0||0|
Accredited Mortgage Loan REIT Trust 9.75% Series A Perpetual Cumulative Preferred Shares (symbol AHHAP) is an asset liquidation play. It has not paid regular dividends in several years, but has begun making distributions to shareholders as it receives cash from several sources. It is not a listed company and therefore files no financial reports. However, there are several publicly available sources of information that shine a light on the value of this preferred stock. Note that there is no longer any common stock for this company, as it was extinguished in the LEND bankruptcy discussed below. Any value in the company here on out accrues to the preferred holders.
There are two sources of value to AHHAP: 1) it is a creditor in the bankruptcy of parent company Accredited Home Lenders Holding Co (former symbol LEND) and 2) it owns bonds and equity residuals in a number of mortgage securitizations. Subtracting from these assets are some expenses (mostly professional fees) and potential litigation losses. We will look at each piece separately and then add them all up to estimate final liquidation value. Note that I start with known reported values on the balance sheet as of 3/31/11, account for known and estimated cash flows since then, estimate future cash flows, and finally subtract distributions to AHHAP shareholders already made after 3/31/11 to reach a final estimate of liquidation value as of 2/29/12.
Asset Group 1: LEND bankruptcy creditor
LEND’s bankruptcy plan is in effect and the assets are being liquidated to pay off creditors. Several distributions to creditors have already occurred. I anticipate, but cannot guarantee, that most or all of the assets will be liquidated by the end of 2012 and distributed to creditors in December 2012. I will refer to several key dockets in the LEND bankruptcy, which can be found here: http://www.kccllc.net/Docket/SearchResults.asp
Docket #2550 (4/4/2011)- Liquidation Analysis, which summarizes anticipated recoveries of LEND’s creditors: AHHAP has three claims in the LEND bankruptcy.
In sum, the range of total expected payout from the LEND bankruptcy estates are $52.005 - $55.455 million. The risk of the assets is very low as most of the estate’s assets had already been converted to cash or were in the form of expected tax refunds at the time of the Liquidation Analysis. The only assets at risk were the AHL Canada mortgage bonds and equity residuals in the Consolidated HoldCo estate. Based on cash totals in the Quarterly Operating Report for Q4 2011 (Docket #3048), these assets do not appear to have been converted to cash in 2011. Given the strong demand for risk assets in general and Maiden Lane assets specifically in recent months, it is reasonable to assume that the value of AHL Canada’s mortgage securities have not deteriorated and presumably the bankruptcy trustee can sell these assets for a fair or even rich price in the current market.
The only other potential for value reduction is for professional/trustee fees after the plan’s effective date. These should be relatively small in relation to the estates’ assets and thus should not make a material impact. As an offset, note that the Amended Federal Tax Refund asset of Debtors (page 9) was listed at $39.773 million but actually turned out to be $41.27 million according the footnote at the bottom of page 6 of Docket #3019. According to the payment waterfall, I expect this additional refund amount will mean that Claim 3C will actually receive the high estimate of 100% ($37.5 million) and that Claim 7C will receive something more than $0; it is difficult to get a better estimate than that as some claim amounts have changed since the Liquidation Analysis was generated. To be conservative, I consider the additional estate expenses to be a wash with the additional tax refund.
Bottom line: Estimated recovery from LEND bankruptcy is $52.005 - $55.455 million
Asset Group 2: REIT balance sheet and operations
Docket #2675 – Financial Statements: AHHAP’s financials as of 3/31/11 are listed here and I will cover the relevant points.
So the pieces here are $3.94 million in known residuals since 3/31/11, $0 - $3.63 million in additional residuals in 2012 and none beyond that, and $2.05 billion in estimated bond value (this is not adjusted from 3/31/11). Adding the $9.69 of Cash as of 3/31/11 gives us an estimated operations asset value of $15.68 - $19.31 million.
Value Reduction 1: Potential Litigation Losses
AHHAP is one of many defendants in a lawsuit by Cambridge Place Investment Management, Inc. regarding approx. $5.5 million of bonds. I have limited knowledge of the details of the case or how likely it is that AHHAP will suffer damages. AHHAP believes that any damages will be covered by insurance, but to be conservative I will assume that AHHAP will lose $1 million through assessment/settlement.
Value Reduction 2: Professional Fees
AHHAP has no employees and one Trustee. Based on the Cash Flow Statement, monthly expenses were $40,000-$50,000 per month. Much of this is from legal fees for the LEND bankruptcy and Cambridge Place lawsuit. There should no longer be any material fees from the LEND bankruptcy, so I estimate these fees to continue at $25,000 per month for two more years, totaling $600,000.
SUM OF THE PARTS
Totaling the four categories above, I estimate a range of $65.715 - $73.165 million. However, AHHAP has already made two distributions totaling $38.89 million, so the estimated value of the remainder is $27.195 - $34.275 million. With 4.094 million shares outstanding, liquidation value as of today is between $6.64 - $8.37. Thus, at a recent price of $6.00/share, the upside ranges from 11% to 40%. As noted, I have tried to be conservative in all areas of value. The residuals could well result in upside well beyond the top of my estimates, but I don’t have the analytical tools to make that call.
|Subject||Thanks for the write up|
|Entry||02/29/2012 02:53 PM|
Nice analysis. I have been in this for years including some prior to the AHL bankruptcy and suspension of the preferred dividend. It has been incredibly profitable for purchases prior to the REIT settlement with AHL and even quite nice after as some amibiguity has been removed. If by some remote chance you are not following the detailed discussion on the yahoo message board you should. The concensus estimate for the residual values is less optimistic than yours. Today's topic is who is buying at $6+. Now I know. Of course liquidity is quite limited.
|Subject||RE: Thanks for the write up|
|Entry||02/29/2012 04:27 PM|
Thanks for the response. I think this is a really nice low-risk security with potential for a lot of upside. Any opinions on what the residuals are worth are appreciated. If those paid out $4 million for two more years instead of my high value assumption of one year, that would be another $1 per share right there. So I can imagine some really good value there, but I'm just not sure it's reality.
|Subject||RE: RE: Thanks for the write up|
|Entry||03/01/2012 06:46 AM|
I have no specific opinion on the residual values. I acquired a substaintial position based on the politics of the AHL bankruptcy with the Dupont Pension Plan being a very large shareholder in AHHAP. I was pretty confident a favorable settlement to the preferred shareholders would be negotitated. I agree with your position that there is almost no downside risk and signficant upside surprise potential. You also have the NOL's which could be useful on the top of the liquidation of assets. At this point given the 1 year timeline, very low liquidity and the risk reward profile, I am going to ride it out to the end.