|Shares Out. (in M):||2||P/E||0||0|
|Market Cap (in $M):||22||P/FCF||0||0|
|Net Debt (in $M):||0||EBIT||0||0|
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Altisource Asset Management (AAMC) is a company with a complicated history. It was one of the greatest spin off performers of all time and, as part of the Erbey complex, it is one of the great crashes. This is one of those names a lot of people recognize and have strong feelings about, given the boom and bust. There was a short pitch here on VIC from a few years ago, it was spot on in the end. Still, we feel like this is a company members will have strong emotions about. AAMC was very complicated at the time, today it still has some hair on it but it is a fairly straight forward asset management business. We think some of the hair could come off and it has some interesting convexity to it at today's prices.
What is AAMC today?
AAMC is the external advisor to Front Yard Residential (RESI) a single family housing REIT. They recently re-negotiated the external asset management agreement (AMA) to have minimum revenues of $14.2m or so. There are escalators in the AMA for growing RESI to $2.2b of gross assets and reaching an AFFO target of $0.15/sh, at that point it stairsteps to $5.25m/q. The contract also features a termination payment of 3x an average of the last 3 TTM fees. RESI is in the process of a strategic review that may end in nothing or a sale. Presumably under a sale the contract would be terminated and AAMC would be owed more than $50m. This wouldn’t be so bad in my view, depending what happens with pref issue I highlight later and the timing of it. We're not sure it will or won’t get sold, but at this point a deal wouldn't close before the pref issue comes to a head.
AAMC also 1.624m shares of RESI stock worth about $19m and $22m of cash and securities. This is about $41m against a current share count of about 1.6m and market cap of $22m.
What complicates AAMC?
The biggest thing, when looking at the balance sheet, is a large pref sitting on it. The backstory on it is AAMC at the height of its run issued a $250m face value convertible preferred. Three entities own the $250m pref: Luxor ($150m), Putnam (~$82m), Wellington Hedge Funds (~$18m).
It is our understanding that this security was created by the pref holders themselves (presumably the biggest, Luxor), who were also big holders of AAMC stock at the time, so AAMC could execute a buyback and create something of a corner in the stock. This is only something we'd heard, but makes sense. AAMC did use a lot of the proceeds to retire shares from Luxor.
So what about this pref?
Here is a link to the pref agreement: http://ir.altisourceamc.com/node/6501/html
The pref has no coupon, a conversion strike price of $1,250/sh, and based on our understanding very few practical protections for owners. Holders can request an early redemption every 5 years after the initial tender within 30 days of 3/15/2020. The tender is made from “funds legally available thereof” and they need to meet all tenders or none of them. Funds legally available are determined on the “business judgment rule”. AAMC can say we need this money to run our operations, which we believe they will. This is defensible b/c AAMC is currently in cash burn, which can change, and we will touch on that more when we get to the cost structure.
If AAMC cannot meet the full redemption with “funds legally available” for the amount tendered, then no prefs will be tendered, and pref holders can keep coming back every 5 years until the end date which is 2044. Based on my read (and a number of other folks that look at these kinds of things) of the pref agreement, if it cannot be met at that point, it is an event of default but one with as far as I can tell no practical consequences other than the preferred's continued existence. It is essentially perpetual, zombie security worth the conversion value. Luxor filed a form 4 in September of 2018 where it said as much, marking the maturity as “perpetual”, and the transaction for purposes of what I think was moving shares to a GP was marked at 4.5c on the dollar. This is at a time when the conversion value of the pref about 5c on the dollar. (https://www.sec.gov/Archives/edgar/data/1316580/000156761918002556/xslF345X03/doc1.xml) I think the Luxor form 4 was an accidental filing at the time because it was amended a few days later to say they no longer have reporting obligations, but the filing is still out there. Luxor moved most (perhaps all, it is hard to tell), into a side vehicle where there are no management fee or performance fees being charged.
In our view, the pref is essentially an equity security and worth the conversion value, which is .8 shares of AAMC, or 200k shares of dilution. About $1.7m dollars vs $250m sitting on the balance sheet. We think if you ran this standoff out far enough, the 200k shares might be all holders would get. However, there is value in cleaning up the pref from an optics perspective so the equity can work. The company is in talks with pref holders as we speak, as disclosed in their recent 10q. If we were sitting in pref holder seats, we’d want a few things: the tax loss event perhaps, which may be the most valuable asset for holders of this pref, to get the best revised deal we can which may be a better conversion price (so more shares) and maybe some cash, but in the end their best bet is to get aligned in their position as an equity holder so the stock can work (resolving the pref in a reasonable way, even with twice the dilution, should make the stock go up in and of itself) and they make money with a marketable security. AAMC has been a repurchaser of shares and does have a program in place but it has been suspended through the early redemption date, they could restart that and provide liquidity alongside a conversion. How this gets worked out is a bit of a question mark, but we don’t think pref holders have a particularly strong hand. In the event there’s no deal before the first deadline, the pref holder rights will then have been tested, and we think it'll be a clearer that this is a zombie.
AAMC’s Cost Structure
The costs are just too darn high, running at about $21.5m/yr. As it stands now, as we'll get to in pref negotiations, it's not in AAMC’s interest to look healthy and profitable. It isn’t unreasonable to think the costs could come down quite a bit and the revenues step up around the same time, after the first redemption window closes. Where it can go do, I’m not sure. Having spoken with their largest shareholder, he is a man known for his frugality so this issue really seemed to bother him. It wouldn’t surprise me costs came down sooner rather than later. The minimum fees of $14.2m or so may be something of a tell as to the actual cost structure of advising a single family housing REIT on what blocks of houses to buy and sell.
Now that we alluded to Erbey, he is the largest shareholder. At this point he’s not legally in control, but we could see him getting more involved after the pref is dealt with and/or the deadline comes and goes. He filed an amended 13d recently to go over 50% and made a few open market purchases earlier this year (for the first time as far as we can tell). He bought 57k shares in and around $37 in march, and another 8k shares around $14/15 in June. FWIW, if he felt the pref was a real issue, I doubt he'd be buying $2m+ in the open market. He is currently hovering around the 50% mark, I can't tell if he's crossed it technically, but accounting for pref dilution he has not.
Related to Erbey, he presently is suing Blackrock and PIMCO in St. Croix, VI (A US District court). He is doing so on behalf of himself and AAMC as a third party. He is seeking damages in the billions, any proceeds would be split with AAMC. The lawsuit reads conspiracy theory-ish to me and would probably get tossed from a NY or Delaware court, but my understanding is that St Croix is a bit of a kangaroo court. Currently the issue sitting on Judge Molloy’s docket is the one of venue, BLK and PIMCO have moved to have this relocated. Venue here is an important issue, because if it stays in the USVI it is a jury trial pitting a local vs some slick mainland money managers, that said it has all the authority of a US court. USVI courts are not easy to get information on, they don’t file electronically as far as we can tell, but once the venue issue is determined, there may be quite a bit of settlement value. We don’t know if that happens or how much settlement value is there so we're not counting anything.
AAMC is an entity with a complicated past and a confusing security in its cap structure, a lot of what this is actually worth in the end depends on the pref getting worked out and the early redemption date coming and going, that should come to a head around March. However, given the current quotation of about $13.60 vs the cash/stock/AMA, there’s a lot of interesting convexity to it. We're not sure if RESI will or will not be sold, but assuming not and they can get to the asset level to stairstep to $5.25m/q, it wouldn’t be unreasonable to think AAMC can get their run rate costs down considerably and this thing start generate real EPS so they can buy in more of the float. As an example, a cost structure of in the mid teens (which we do not think is unreasonable) on a $21m run rate after a stair step would be $4-6m, they are not a meaningful taxpayer being in the USVI, so that would be over $2.5-4/sh. Alternatively, if they just termed the AMA contract then AAMC would be a cash box with about $90m in it, an interesting legal option, and no meaningful operations.
The conv pref has real teeth
A bad deal is done to resolve the pref
They don’t cut costs at AAMC or can't grow RESI
Erbey does something to the detriment of other holders
Deal with Pref
Cost structure alignment
St Croix venue issue
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