ACCREDITED MTG LN REIT TR AHHAP
February 29, 2012 - 2:15pm EST by
GideonMagnus
2012 2013
Price: 6.00 EPS $0.00 $0.00
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 $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT 0.0x 0.0x

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  • Mortgage REIT
  • Liquidation
  • Preferred stock
  • Liquidating Trust
 

Description

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.

  1. AHHAP is entitled to all of Claim 6H on the “Consolidated Holdco” estate which is estimated between $15.288 - $17.353 million (page 5).
  2. It is also entitled to all of Claim 7C on the “Consolidated Debtors” estate which is estimated between $0 and $0.602 million (page 9).
  3. It also has a $37.5 million Claim 3C on the “Consolidated Debtors” estate, which has an expected recovery of 97.9%-100.0% or $36.7125 - $37.5 million (page 9).

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.

  1. Balance Sheet (page 15):
    1. The only definitive asset value here is Cash of $9.69 million.

    2. “Due from affiliates” was the disputed amount that LEND owed to AHHAP pre-bankruptcy. The $227.30 million amount should thus be ignored as the actual value here is the recovery range discussed above as Asset Group 1.

    3. Fair value of securitizations and Fair value of owned bonds represent the equity residuals and some bonds owned by AHHAP as part of its operations before the sub-prime mortgage collapse eliminated any new business. I ignore the $10.12 million value listed for residuals on the balance sheet as I believe it is some form of book value estimate and it is not clear that this is an accurate value. I do not know which bonds are represented by the $2.05 million line item, however there is good evidence that these bonds are cash flowing quite well and thus I accept this as an estimate of the true value of the bonds. I will return to this evidence shortly.

      Monthly operating reports on these securitizations can be found in two places. The first is https://tss.sfs.db.com/investpublic/ (click on RMBS, then Accredited, then Accredited Mortgage Loan Trust). The second is https://usbtrustgateway.usbank.com/portal/login.do (you need to create a free login, then click Trust Investor Reporting, Search for Deals, and click Accredited Mortgage). The reports from the two websites have different formats, but in both cases the amount of the equity residuals each month are listed on the second page as “Trust”, “Trust Cert”, “Cert”, etc. at the bottom of the distribution lists (equity is always last on the list). Reviewing these on a monthly basis, you can determine how much cash AHHAP is receiving from the equity residuals.

      Most of the securitization trusts are no longer providing any residuals and never will as foreclosure losses have wiped out the equity and some of the subordinated debt. But the 2004 trusts have continued to make sporadic residual payments over the past several years. In 2010, the residuals totaled $3.95 million. In 2011, the total was $4.48 million. In the first two months of 2012, the total is $0.37 million. In terms of our liquidation value estimates, the relevant cash flow is the actual residuals since the 3/31/11 balance sheet date, which come to $3.94 million. The question of how much more these residuals will pay out is challenging. I do not have extensive modeling to answer this question, however I recognize that there are two factors that have allowed these residuals to be paid out despite the relatively horrible fundamentals for subprime borrowers and home prices. The first is ultra- low 1-month LIBOR rates; since many of the securitization bonds in the 2004 trusts are floating-rate, the trusts receive a significant amount of excess interest each month. However, most of this excess interest is eaten up by foreclosure losses. The second factor is the very long lag in realizing losses on foreclosures. The trusts all have large backlogs of unrealized losses which, if marked to market, would substantially reduce or eliminate any over-collateralization in the trusts and thus end any additional residuals. But as long as LIBOR rates stay low (likely for several years) and foreclosure delays continue, there is a good likelihood for additional residuals in the near future. Currently the 2004-1 and 2004-4 trusts are at or very close to sufficient collateratilization levels to produce residuals and have been the primary source of residuals over the past twelve months. There is some hope for improvement in the 2004-3 trust, but it is not in a position to pay residuals in the near term. The residuals in the 2004-2 trust have been in hibernation, but this bear may awaken very soon! All of the bonds in the trust are being paid amazingly low rates tied to one-month LIBOR; in February, the rates averaged just 0.576%. With an enormous excess interest margin, the excess collateralization levels have been consistently and rapidly improving over the past year. If the current trend continues, this trust may start paying residuals again by mid-year.

      Ultimately, as the loan portfolios shrink and foreclosure losses accumulate, the residuals will end. My assumption is that the residuals will have $0 additional payments on the low end and $4 million on the high end for all of 2012 and nothing after that ($4 million is essentially one more year like the last two for 2004-1 and 2004-3, but gives no credit to the possibility that 2004-2 will come alive); accounting for the first two months of 2012, that leaves a high estimate of $3.63 million for the remainder of the year. I think there’s a fair chance that even my high estimate is too conservative. YOUR ABILITY TO ESTIMATE THE RESIDUAL VALUES WILL GIVE YOU A SIGNIFICANT EDGE IN VALUING THIS SECURITY!

      Now, about those bonds. In reviewing the Cash Flow Statement on page 17 of Docket #2675 vs. the amount of residuals paid to AHHAP over matching time periods, I find that there are significant cash flows above and beyond the residuals. Since there are no other assets, these cash flows must come from the bonds and only relatively well-protected bonds would have such high paydowns from the securitization trusts. This is why I am willing to accept the balance sheet’s fair value estimate for these bonds.

    4. The Accrued preferred dividends liability should be ignored. This was a liability from the common stock's perspective, but for the preferred it would just represent an asset and liability to itself.

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.

Catalyst

When will you get your money? The LEND estate needs to make at least one distribution to creditors each year. I anticipate, but can’t guarantee, that the LEND estate’s AHL Canada assets will be liquidated before the end of 2012 and thus all or nearly all of AHHAP’s remaining bankruptcy recovery will be achieved within the year. AHHAP has not shared its intent with the residuals and bonds it owns, but presumably they will be sold at some time in the near future and once the LEND bankruptcy is finalized and litigation issues are resolved, the company should be dissolved within a few years. But while the shares may continue to trade for several more years at a very low price, I expect the bulk of the value (LEND recovery + 2012 residuals and bond cash flows) to be distributed to AHHAP shareholders in early 2013. So the weighted-average time horizon of the investment is slightly over one year, leading to a fair or excellent IRR over the holding period.
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    Description

    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.

    1. AHHAP is entitled to all of Claim 6H on the “Consolidated Holdco” estate which is estimated between $15.288 - $17.353 million (page 5).
    2. It is also entitled to all of Claim 7C on the “Consolidated Debtors” estate which is estimated between $0 and $0.602 million (page 9).
    3. It also has a $37.5 million Claim 3C on the “Consolidated Debtors” estate, which has an expected recovery of 97.9%-100.0% or $36.7125 - $37.5 million (page 9).

    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.

    1. Balance Sheet (page 15):
      1. The only definitive asset value here is Cash of $9.69 million.

      2. “Due from affiliates” was the disputed amount that LEND owed to AHHAP pre-bankruptcy. The $227.30 million amount should thus be ignored as the actual value here is the recovery range discussed above as Asset Group 1.

      3. Fair value of securitizations and Fair value of owned bonds represent the equity residuals and some bonds owned by AHHAP as part of its operations before the sub-prime mortgage collapse eliminated any new business. I ignore the $10.12 million value listed for residuals on the balance sheet as I believe it is some form of book value estimate and it is not clear that this is an accurate value. I do not know which bonds are represented by the $2.05 million line item, however there is good evidence that these bonds are cash flowing quite well and thus I accept this as an estimate of the true value of the bonds. I will return to this evidence shortly.

        Monthly operating reports on these securitizations can be found in two places. The first is https://tss.sfs.db.com/investpublic/ (click on RMBS, then Accredited, then Accredited Mortgage Loan Trust). The second is https://usbtrustgateway.usbank.com/portal/login.do (you need to create a free login, then click Trust Investor Reporting, Search for Deals, and click Accredited Mortgage). The reports from the two websites have different formats, but in both cases the amount of the equity residuals each month are listed on the second page as “Trust”, “Trust Cert”, “Cert”, etc. at the bottom of the distribution lists (equity is always last on the list). Reviewing these on a monthly basis, you can determine how much cash AHHAP is receiving from the equity residuals.

        Most of the securitization trusts are no longer providing any residuals and never will as foreclosure losses have wiped out the equity and some of the subordinated debt. But the 2004 trusts have continued to make sporadic residual payments over the past several years. In 2010, the residuals totaled $3.95 million. In 2011, the total was $4.48 million. In the first two months of 2012, the total is $0.37 million. In terms of our liquidation value estimates, the relevant cash flow is the actual residuals since the 3/31/11 balance sheet date, which come to $3.94 million. The question of how much more these residuals will pay out is challenging. I do not have extensive modeling to answer this question, however I recognize that there are two factors that have allowed these residuals to be paid out despite the relatively horrible fundamentals for subprime borrowers and home prices. The first is ultra- low 1-month LIBOR rates; since many of the securitization bonds in the 2004 trusts are floating-rate, the trusts receive a significant amount of excess interest each month. However, most of this excess interest is eaten up by foreclosure losses. The second factor is the very long lag in realizing losses on foreclosures. The trusts all have large backlogs of unrealized losses which, if marked to market, would substantially reduce or eliminate any over-collateralization in the trusts and thus end any additional residuals. But as long as LIBOR rates stay low (likely for several years) and foreclosure delays continue, there is a good likelihood for additional residuals in the near future. Currently the 2004-1 and 2004-4 trusts are at or very close to sufficient collateratilization levels to produce residuals and have been the primary source of residuals over the past twelve months. There is some hope for improvement in the 2004-3 trust, but it is not in a position to pay residuals in the near term. The residuals in the 2004-2 trust have been in hibernation, but this bear may awaken very soon! All of the bonds in the trust are being paid amazingly low rates tied to one-month LIBOR; in February, the rates averaged just 0.576%. With an enormous excess interest margin, the excess collateralization levels have been consistently and rapidly improving over the past year. If the current trend continues, this trust may start paying residuals again by mid-year.

        Ultimately, as the loan portfolios shrink and foreclosure losses accumulate, the residuals will end. My assumption is that the residuals will have $0 additional payments on the low end and $4 million on the high end for all of 2012 and nothing after that ($4 million is essentially one more year like the last two for 2004-1 and 2004-3, but gives no credit to the possibility that 2004-2 will come alive); accounting for the first two months of 2012, that leaves a high estimate of $3.63 million for the remainder of the year. I think there’s a fair chance that even my high estimate is too conservative. YOUR ABILITY TO ESTIMATE THE RESIDUAL VALUES WILL GIVE YOU A SIGNIFICANT EDGE IN VALUING THIS SECURITY!

        Now, about those bonds. In reviewing the Cash Flow Statement on page 17 of Docket #2675 vs. the amount of residuals paid to AHHAP over matching time periods, I find that there are significant cash flows above and beyond the residuals. Since there are no other assets, these cash flows must come from the bonds and only relatively well-protected bonds would have such high paydowns from the securitization trusts. This is why I am willing to accept the balance sheet’s fair value estimate for these bonds.

      4. The Accrued preferred dividends liability should be ignored. This was a liability from the common stock's perspective, but for the preferred it would just represent an asset and liability to itself.

    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.

    Catalyst

    When will you get your money? The LEND estate needs to make at least one distribution to creditors each year. I anticipate, but can’t guarantee, that the LEND estate’s AHL Canada assets will be liquidated before the end of 2012 and thus all or nearly all of AHHAP’s remaining bankruptcy recovery will be achieved within the year. AHHAP has not shared its intent with the residuals and bonds it owns, but presumably they will be sold at some time in the near future and once the LEND bankruptcy is finalized and litigation issues are resolved, the company should be dissolved within a few years. But while the shares may continue to trade for several more years at a very low price, I expect the bulk of the value (LEND recovery + 2012 residuals and bond cash flows) to be distributed to AHHAP shareholders in early 2013. So the weighted-average time horizon of the investment is slightly over one year, leading to a fair or excellent IRR over the holding period.

    Messages


    SubjectThanks for the write up
    Entry02/29/2012 02:53 PM
    Memberwinchester
    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.

    SubjectRE: Thanks for the write up
    Entry02/29/2012 04:27 PM
    MemberGideonMagnus
    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.

    SubjectRE: RE: Thanks for the write up
    Entry03/01/2012 06:46 AM
    Memberwinchester
    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.
     
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