ARLINGTON ASSET INVESTMENT AI
October 22, 2009 - 7:50am EST by
heffer504
2009 2010
Price: 14.05 EPS nm $2.00
Shares Out. (in M): 8 P/E nm 7.0x
Market Cap (in $M): 111 P/FCF nm 7.0x
Net Debt (in $M): 0 EBIT 0 18
TEV ($): 111 TEV/EBIT nm nm

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Description

 

Arlington Asset is the old FBR mortgage REIT that has been cleaned up.  The story lies in an understated clean book value, as well as a few other sources of potential value.  I believe the stock is worth at least $18, with potential upside from this value.  First, the book value:

        fbcm pf pf mbs
    2q09 q 8/10 update mk to mkt debt repo mk to mkt
agency mbs              120.0                120.0                120.0             120.0             120.0
non-agency mbs                30.0                  49.3                  49.3                49.3                60.0
   note: face value                   115.8               115.8             115.8             115.8
other assets                12.0                  12.0                  12.0                12.0                12.0
cash                36.8                    9.4                    9.4                  4.4                  5.7
fbcm share value                71.3                  69.1                  77.6                77.6                77.6
  note: shares owned                15.1                 14.7                 14.7               14.7               14.7
  note: price - 12%    $         4.70  $             4.70  $             5.28  $           5.28  $           5.28
  total assets              270.1                259.8                268.3             263.3             275.4
             
repos                94.7                  94.7                  94.7                94.7                94.7
a/p etc                31.4                  31.4                  31.4                31.4                31.4
lt debt                51.8                  26.8                  26.8                  1.8                  1.8
  total liabilities              177.9                152.9                152.9             127.9             127.9
             
calculated equity                92.2                106.9                115.4             135.4             147.5
shares                   8.0                    8.0                    8.0                  8.0                  8.0
per share    $        11.60  $           13.45  $           14.52  $         17.03  $         18.55

 

This is the adjustment from stated book as of 6/30 through my estimate of current economic book value.  The adjustments are as follows (right to left):

1) Bought non-agency MBS and retired $25m of trust preferred debt for $5m, as reported in 8/10 press release

 

2) Mark to market 14.7 million share holding of FBCM from $4.70 price as of 6/30 to current price, less 7% fees and 5% offering discount

 

3) Repurchase remaining $25m of trust preferred debt at .20, as per management guidance, and similar to repurchase done in August

 

4) Mark non-agency MBS to market, assuming a 20% increase in price in the last 2-4 months.  These are all "busted" AAA tranches, likely of alt-a paper, so per my checks this seems like a reasonable assumption of appreciation.

 

This, I believe that the current book value is around $19.  In addition, I believe you are getting the following potential sources of upside:

 

1) Other assets are mostly private equity holdings and have been marked down to extremely conservative valuations.

 

2) FBCM stock could trade up from its recently-depressed price before the offering occurs as they tell their story on the roadshow.  FBR has been the lead underwriter in a few FDIC-assisted bank recapitalization transactions (most recently for a $1.2 billion blind pool), and I believe the number of these transactions will increase dramatically in the next 12 months due to the increasing pace of bank failures and the compelling economics offered to investors.

 

3) There are roughly $1 billion of gross net operating and capital loss carry-forwards that are not carried at any value on the balance sheet.  With 8 million shares outstanding, this works out to over $40 (net, undiscounted) per share in NOL value.  As a result, though, there is a poison pill in place to prevent any section 382 limitation issues.

 

What is the most likely outcome here?  The management will sell the FBCM stock and be left with book value of around $150 million.  Then assume they are able to lever up modestly and create a 12% pre-tax ROE (seems like the average over a cycle for mortgage REITs), of which 85% is paid out.  This should allow a dividend of roughly $1.75 a share, which at an 8% yield would give you a $20-22 stock.

Catalyst

FBCM shares sold

quarter reported and new book value discussed

capital invested into interest-bearing assets

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