Altisource Asset Management AAMC S
January 10, 2013 - 3:53pm EST by
heffer504
2013 2014
Price: 98.00 EPS $0.00 $0.00
Shares Out. (in M): 2 P/E nm nm
Market Cap (in $M): 230 P/FCF nm nm
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 235 TEV/EBIT nm nm
Borrow Cost: NA

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  • Asset Management
  • REIT
  • GP
 

Description

Altisource Asset Management (AAMC) was recently spun out of Altisource Portfolio Solutions (ASPS), along with a new residential REIT called Altisource Residential (RESI).  It is somewhat illiquid and subject to the vagaries of spin-offs in general, and has been very volatile;  however, borrow is available.  To take advantage of the investment rage du jour, RESI will be investing in distressed single family homes, while AAMC will be the external investment manager for the REIT.  AAMC will be paid on a sliding scale based on the amount of cash that RESI actually dividends out—2% of the first $.65, 15% of the next $.12, 25% of the next $.25, and 50% of any dividend over $1.03 (annualized).  In addition, RESI will reimburse AAMC for most of its non-overhead expenses.

 

Currently, RESI has $80MM of cash and will add $100 MM of leverage, so they can purchase $180 MM of homes.  Assuming they get a 10% rental yield after property-level expenses (twice what many investors are quoting), some expenses at both AAMC and ASPS, and a 4% cost of debt, this would leave $8 MM available for a dividend at a 90% dividend rate, which would be around $1 MM of income to AAMC at the stated split.  Clearly, this is not enough upside.

 

However, RESI can raise more capital, making AAMC somewhat akin to the GP of an MLP structure.  The problem is that they need to raise it in small enough chunks that the dividend per share doesn’t fall dramatically due to dilution from the higher share count, otherwise AAMC will never get paid.  Here is a quick model to show how this works, as RESI keeps raising money but temporarily hurts AAMC as it does so (not sure if this will format correctly, apologies in advance):

 

    1q13 2q13 3q13 4q13 1q14 2q14 3q14 4q14 1q15 2q15 3q15 4q15 1q16
debt               100             100             100             100             400             400             400             400             400             400             700             700            700
equity               100             100             100             100             400             400             400             400             400             400             700             700            700
                             
BOP to invest               180             120               60                -               600             480             360             240             120                 -               600             360            120
BOP portfolio                  -                 60             120             180             180             300             420             540             660             780             900          1,140         1,380
invested                 60               60               60               60             120             120             120             120             120             120             240             240            240
  homes bought             500             500             500             500          1,000          1,000          1,000          1,000          1,000          1,000          2,000          2,000         2,000
    ASP   12% 12% 12% 12% 12% 12% 12% 12% 12% 12% 12% 12% 12%
ROI   10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10%
                             
revs                0.8              2.3              3.8              4.5              6.0              9.0            12.0            15.0            18.0            21.0            25.5            31.5           34.5
expenses                1.0              1.3              1.5              1.8              1.8              1.3              1.3              1.3              1.3              1.3              1.3              1.3             1.3
interest                  -                  -                0.5              1.0              1.5              2.3              3.0              3.8              4.0              4.0              4.5              5.5             5.5
    cashflow             (0.3)              1.0              1.8              1.8              2.8              5.5              7.8            10.0            12.8            15.8            19.8            24.8           27.8
                             
dividend                  -                0.9              1.6              1.6              2.5              5.0              7.0              9.0            11.5            14.2            17.8            22.3           25.0
shares                7.8              7.8              7.8              7.8            30.0            30.0            30.0            30.0            30.0            30.0            52.0            52.0           52.0
per share    $            -    $       0.11  $       0.20  $       0.20  $        0.08  $        0.17  $        0.23  $        0.30  $        0.38  $        0.47  $        0.34  $        0.43  $       0.48
                             
amt to AAMC   ($MM)                -                0.8              0.8              0.8                 -                0.8              0.8              0.8              2.0              3.3              2.4              4.6             6.0

                       

 

 

The punchline is, even if RESI raises $600 MM in equity and levers it, AAMC will only receive $25 MM in dividends from them, which, after some corporate expenses and taxes, will be around $20 MM of net income.  So, the stock is trading at 12x these hypothetical earnings that are 3-4 years away, if everything goes right.  It is just as likely, in my opinion, that the economic model for buying single family homes is busted, and RESI cannot raise equity.  In this case, AAMC is basically worthless.

 

Finally, AAMC has said that they will not pay a dividend.  Also, while AAMC only pays 4% taxes due to an offshore structure, they will have to pay repatriation taxes to get that cash to their shareholders.  Most importantly, RESI’s board can buy out AAMC’s management contract for 3x the trailing payment.  While the pressure not to do this would be high, given the interconnected ownership, there would be an issue of fiduciary duty in the interim. 

 

So, AAMC has no earnings and no prospect for them in the next few years.  The $235 MM market cap is absurd, in my opinion.

I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

no real catalysts, so i will discuss the risks here:
 
1) erbey is a smart guy, and probably has an incentive to grow AAMC versus maximize RESI yield
2) illiquid, and possibly manipulated
3) if the single family rental concept proves viable over the long term (I believe that given the property-level costs that are typically absorbed by the home owner, this is unlikely to be true), then the GP-like structure has leverage and will get a large multiple
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    Description

    Altisource Asset Management (AAMC) was recently spun out of Altisource Portfolio Solutions (ASPS), along with a new residential REIT called Altisource Residential (RESI).  It is somewhat illiquid and subject to the vagaries of spin-offs in general, and has been very volatile;  however, borrow is available.  To take advantage of the investment rage du jour, RESI will be investing in distressed single family homes, while AAMC will be the external investment manager for the REIT.  AAMC will be paid on a sliding scale based on the amount of cash that RESI actually dividends out—2% of the first $.65, 15% of the next $.12, 25% of the next $.25, and 50% of any dividend over $1.03 (annualized).  In addition, RESI will reimburse AAMC for most of its non-overhead expenses.

     

    Currently, RESI has $80MM of cash and will add $100 MM of leverage, so they can purchase $180 MM of homes.  Assuming they get a 10% rental yield after property-level expenses (twice what many investors are quoting), some expenses at both AAMC and ASPS, and a 4% cost of debt, this would leave $8 MM available for a dividend at a 90% dividend rate, which would be around $1 MM of income to AAMC at the stated split.  Clearly, this is not enough upside.

     

    However, RESI can raise more capital, making AAMC somewhat akin to the GP of an MLP structure.  The problem is that they need to raise it in small enough chunks that the dividend per share doesn’t fall dramatically due to dilution from the higher share count, otherwise AAMC will never get paid.  Here is a quick model to show how this works, as RESI keeps raising money but temporarily hurts AAMC as it does so (not sure if this will format correctly, apologies in advance):

     

        1q13 2q13 3q13 4q13 1q14 2q14 3q14 4q14 1q15 2q15 3q15 4q15 1q16
    debt               100             100             100             100             400             400             400             400             400             400             700             700            700
    equity               100             100             100             100             400             400             400             400             400             400             700             700            700
                                 
    BOP to invest               180             120               60                -               600             480             360             240             120                 -               600             360            120
    BOP portfolio                  -                 60             120             180             180             300             420             540             660             780             900          1,140         1,380
    invested                 60               60               60               60             120             120             120             120             120             120             240             240            240
      homes bought             500             500             500             500          1,000          1,000          1,000          1,000          1,000          1,000          2,000          2,000         2,000
        ASP   12% 12% 12% 12% 12% 12% 12% 12% 12% 12% 12% 12% 12%
    ROI   10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10%
                                 
    revs                0.8              2.3              3.8              4.5              6.0              9.0            12.0            15.0            18.0            21.0            25.5            31.5           34.5
    expenses                1.0              1.3              1.5              1.8              1.8              1.3              1.3              1.3              1.3              1.3              1.3              1.3             1.3
    interest                  -                  -                0.5              1.0              1.5              2.3              3.0              3.8              4.0              4.0              4.5              5.5             5.5
        cashflow             (0.3)              1.0              1.8              1.8              2.8              5.5              7.8            10.0            12.8            15.8            19.8            24.8           27.8
                                 
    dividend                  -                0.9              1.6              1.6              2.5              5.0              7.0              9.0            11.5            14.2            17.8            22.3           25.0
    shares                7.8              7.8              7.8              7.8            30.0            30.0            30.0            30.0            30.0            30.0            52.0            52.0           52.0
    per share    $            -    $       0.11  $       0.20  $       0.20  $        0.08  $        0.17  $        0.23  $        0.30  $        0.38  $        0.47  $        0.34  $        0.43  $       0.48
                                 
    amt to AAMC   ($MM)                -                0.8              0.8              0.8                 -                0.8              0.8              0.8              2.0              3.3              2.4              4.6             6.0

                           

     

     

    The punchline is, even if RESI raises $600 MM in equity and levers it, AAMC will only receive $25 MM in dividends from them, which, after some corporate expenses and taxes, will be around $20 MM of net income.  So, the stock is trading at 12x these hypothetical earnings that are 3-4 years away, if everything goes right.  It is just as likely, in my opinion, that the economic model for buying single family homes is busted, and RESI cannot raise equity.  In this case, AAMC is basically worthless.

     

    Finally, AAMC has said that they will not pay a dividend.  Also, while AAMC only pays 4% taxes due to an offshore structure, they will have to pay repatriation taxes to get that cash to their shareholders.  Most importantly, RESI’s board can buy out AAMC’s management contract for 3x the trailing payment.  While the pressure not to do this would be high, given the interconnected ownership, there would be an issue of fiduciary duty in the interim. 

     

    So, AAMC has no earnings and no prospect for them in the next few years.  The $235 MM market cap is absurd, in my opinion.

    I do not hold a position of employment, directorship, or consultancy with the issuer.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    no real catalysts, so i will discuss the risks here:
     
    1) erbey is a smart guy, and probably has an incentive to grow AAMC versus maximize RESI yield
    2) illiquid, and possibly manipulated
    3) if the single family rental concept proves viable over the long term (I believe that given the property-level costs that are typically absorbed by the home owner, this is unlikely to be true), then the GP-like structure has leverage and will get a large multiple

    Messages


    SubjectUncool to mention mainstream
    Entry01/11/2013 08:34 AM
    Memberangus309
    Doug Kass has AAMC as his stock of the year for 2013 (ASPS was his back in the $ teens several years back, so he knows the company) with a conservative value of $150...And goes on to say that might prove to be way too conservative. I realize a few out there will scoff at mentioning a somewhat mainstream voice; I happen to think Kass is a smart son of a gun. I have no skin in the game. Just an FYI.

    Subjectanother point to make here
    Entry01/15/2013 11:55 AM
    Memberheffer504
    if AAMC and RESI were not separate, the combined entity would be valued at 5x book before commencing operations
     

    SubjectRE: RE: another point to make here
    Entry01/16/2013 10:27 AM
    Memberheffer504

    First off, I would say that a REIT that trades at 5x book is absurd on its face.  But, let’s dig in a little here.

     

    An investor needs to accept one basic premise before investing in this company (let’s just talk about RESI + AAMC for now as a combined entity)—that the cost advantage conferred upon it is sustainable and unique.  The company will be buying pools of NPLs in competitive auctions, with no advantages from its ASPS relationship.  The cost advantage, as discussed in today’s 8-K, is around 150 bps.  This makes several assumptions that seem quite outlandish to me, such as .7% vacancy (each home is vacant for 2 days a year), .1% bad debt (on homes that were repossessed since the previous owners couldn’t service the mortgage), and property maintenance charges that are “similar to multifamily”.  So, let’s say they have a 100 bps cost advantage.

     

    Their main competitor is one that will buy bundles of NPLs, try to refinance or restructure them, and then sell the homes once they take possession.  Let’s say these competitors are hedge funds that are bidding in order to realize a 15% return.  According to the RESI presentation, if you buy a portfolio of NPLs at .60, 10% of the loans will refinance and give you .95, and 90% will take .16 of investment to get to salable condition, at which point they can be sold for par (less real estate commissions).  So, your return on an unlevered basis is 10% x .30 + 90% x (1.00 - .6 - .16 - .03) / .6, or 37%.  If you lever this 1:1 then your returns (from selling the property, not renting it out) become around 60%.  I would like to go buy NPLs at that price, and so would the trillions of dollars out there that is earning .5%.  So, let’s just chalk those projections up as being too optimistic also.  Remember, they have no competitive advantage in buying NPLs.

     

    So let’s say, instead, that buying the NPL gives them 150bps of price advantage (vs the 250bps they quote, so the “competitive” return is still 35-40%), and add the 100bps of cost advantage.  That is 250bps better than the other REITs out there, which are raising money at book value, promising 3% current returns, and a call option on home price appreciation.  What would you pay for the same REIT that promised 5.5% current returns and the same call option?  Well, I guess if you thought that 10% was your required return here, which implies 7% home price appreciation, you would pay 1.25x book for this company vs the peers (12.5% return instead of 10%).  So now the question is, would you pay it all in advance?  Because with $400MM of premium to book now, that .25x premium implies a future book value of $1.6B. 

     

    Now, let’s look at the pieces separately.  RESI, with the profit split set-up, effectively gets to earn a 9% return before it gives up half of future profits ($1.03 per share dividend before the 50/50 split hits, $11.50 of book).  In addition, it is likely that the management team will encourage RESI to raise as much capital as possible as long as it is at or above book value.  As such, it is unlikely that investors will pay much above book for RESI.  So, if RESI cannot raise capital more cheaply than at book value, then its returns will be necessarily be constrained to the numbers above.  If we assume that RESI will, though, trade at 1.1x book due to its Erbey affiliation, then the remainder of the valuation benefit would accrue to AAMC.  So, AAMC would trade at .15x RESI’s book value.  This methodology would imply $2.2B of book value at RESI (at the stock price when I wrote the previous comment).  Also remember that these calculations assume a 0% discount rate…

     

    So, yes, you can justify the price I guess, if you are willing to wait long enough.  My thesis is that the business model of owning single family homes will fall into disrepute before that happens (it is cheaper to own vs rent, and owners can always pay more than investors due to higher leverage and zero cost ascribed to their "management" activities), and that aggressive capital will compete away NPL returns before RESI can benefit.

     

    But I welcome comments to the contrary.

     

    Thanks, Heffer

     


    Subjectkass from twitter
    Entry01/17/2013 11:12 AM
    Memberheffer504
    Douglas Kass@DougKass

                      Today I added to my bond short, took in QQQ short ($66.50), added to IWM short ($87.70), took off some AAMC (above $127). 

     
     
     
     

    SubjectRE: RE: kass from twitter
    Entry02/08/2013 08:31 AM
    Memberheffer504
    they are consolidating RESI's financials... AAMC was capitalized with $5 million, and RESI was capitalized with $100 million.  the offset is the "non-controlling interest" liability.
     
    best, heffer

    Subjectlong pond capital
    Entry02/14/2013 08:29 AM
    Memberheffer504
    evidently, a small hedge fund has bought 5% of the float (136k shares) of this thinly-traded stock.  that would explain the movement/manipulation upwards...

    SubjectRE: No dilution incentive fee
    Entry02/20/2013 03:05 PM
    Memberheffer504
    i'm not sure what you mean.  the incentive payment is based on a dividend per share, with a graduated split up to 50%.  if you are saying that in fact the incentive would always be 50% as long as the dividend per original share were over the $1.03 threshold, even if they issue unlimited shares at resi and the dividend per share hovers around .01, i disagree with that.  i am not sure under what circumstances resi would make a dividend a return of capital, since this would hinder their growth, but i assume this clause is in there to protect aamc if they do, since aamc does not get any incentive payment on a return of capital...
     
    great catch though.  let me know if you disagree with my take...

    SubjectRE: No dilution incentive fee
    Entry02/21/2013 08:38 AM
    Memberheffer504
    i believe the thresholds only reset for a stock split or a return of capital, not based on share issuance.  the fee is explicitly tied to the dividend per share, which is implicitly linked to a reasonable return on equity for RESI shareholders...

    Subjectalso
    Entry02/21/2013 09:58 AM
    Memberheffer504
    if the RESI board allowed a large return of capital purely for the sake if increasing AAMC's profit split, they would (rightfully) be subject to massive litigation...

    Subjectso
    Entry02/22/2013 10:31 AM
    Memberheffer504
    they were the high bidder (by a lot, from what i understand) for $250m of face, and then somehow bought from ocwen in a "sweetheart" deal that ocwen's shareholders and clients will just allow to happen over and over?  i can put $150MM to work very quickly too, let's see what the returns are...

    Subjectalso to be clear
    Entry02/22/2013 10:34 AM
    Memberheffer504
    buying NPLs is not the same thing as getting assets on the balance sheet.  now begins the workout process.  the model i put forth was not for how quickly they could purchase paper, but how quickly they could turn it into income-producing rental properties...

    SubjectRE: RE: RE: No dilution incentive fee
    Entry02/22/2013 02:16 PM
    Memberheffer504
    of course cash from capital transactions applies to cash raised through an equity issuance.  however, this does not mean that the thresholds reset unless the cash is paid out as a return of capital.  i do not think your conclusion is valid, despite your statement that it "seems clear".

    SubjectRE: RE: RE: RE: RE: No dilution incentive fee
    Entry02/25/2013 10:07 AM
    Memberheffer504
    uh... it clearly says the payment of any dividend of cash from CAPITAL TRANSACTIONS, not any dividend

    SubjectRE: No dilution incentive fee
    Entry02/25/2013 11:52 AM
    Memberjoe661
    Azia, you list all the right steps, but then you come to the wrong conclusion.  Your #2 says AAMC's thresholds adjust if RESI pays a dividend out of cash from a Capital Transaction.  Your #3 says that raising capital qualifies as a Capital Transaction.  Both of those statements are correct.
     
    Your conclusion is that AAMC's thresholds adjust if RESI raises more capital, but that seems to be contrary to what you posted just before that.  AAMC's thresholds adjust if RESI pays a dividend out of cash from a Capital Transaction (what you list as #2).  Simply raising cash from a Capital Transaction is not enough, they have to pay that cash out as a dividend.
     
    Heffer, do you think there is any chance that part of the valuation is because some people think AAMC holds $105mm in cash (as listed on the balance sheet), rather than the $5mm cash that they actually hold?  When I first looked at this I got really excited about the RSU vesting agreements, spent a lot of time reading through the Agreement, and I penciled in $105mm in cash based on what was in the balance sheet.  I didn't realize my mistake until I read through it again.

    SubjectWhat if RESI can sell stock at a premium to book?
    Entry02/25/2013 12:21 PM
    Memberjoe661
    Heffer, have you done any type of sensitivity analysis as to what AAMC's potential earnings would do as RESI sells stock as a function of RESI's asset spread and the price that RESI is able to sell shares at?  There are three variables there so it isn't that straightforward, but I think a big risk to an AAMC short is that RESI is able to sell additional stock at its current price (about $17).  If RESI can sell stock at a decent premium to book then from my model it seems that AAMC's earnings will increase pretty significantly (after accounting for RESI's increased share count), even if RESI is only able to get a low single digit spread on the assets.  

    SubjectRE: RESI can sell stock at a premium to book?
    Entry03/04/2013 10:41 AM
    Memberheffer504
    joe,
     
    i assumed they would sell stock at a decent premium to book, but obviously the higher they can sell, the more aamc is worth... haven't constructed a sensitivity though.
     
    at the end of the day, the question becomes whether a mortgage reit should trade at 5x book (as a combined entity).  all the single family competitors trade ~1.1x book. 
     
    best,
     
    heffer
     

    SubjectRE: RE: RE:
    Entry04/24/2013 09:38 AM
    Memberheffer504
    i was at the lunch yesterday, and it was clear that erbey is focused on aamc, not resi.  he discussed how great the returns were when you can issue stock at 1.5x book, to which i asked whether those returns were great for the investors buying stock at 1.5x.  he dodged that question...
     
    he also admitted that a financial buyer that was just looking to refi and liquidate assets after foreclosure should be able to pay a higher price, yet they were definitely outbidding all of them currently.  huh?  well, he said, we can cure the assets more cheaply.  except, they are using OCN and ASPS to cure the assets, at a price that is equivalent to other clients, and all the competitive bidders on these NPLs can use OCN and ASPS also.  so, the only reason he can pay so much for these NPLs (i heard 20% over market in this first set of acquisitions) is that the book multiple is so crazy. 
     
    but let's look at the resi investor buying at $18.  this investor will get a 14% ROE (if all goes great, with decent HPA) on a book value of around $14.25, so $1.25 of dividend ($2 less $.60 to AAMC x 90% payout ratio).  but, the dividend will take 18 months to ramp up. 
     
    i guess my point is, we will see how this offering goes, and then we will see if he can raise equity at a premium again.  as you mention, soros played this on the way up, but we will see how these returns look as they actually have to lease up a few thousand properties spread among a thousand cities with a brand new team of leasing brokers.  i am keeping the short on. 

    SubjectDid you listen to ASPS call?
    Entry04/25/2013 12:21 PM
    Memberangus309
    Strong IMO.

    SubjectRE: Update?
    Entry04/25/2013 08:01 PM
    Memberheffer504
    it obviously accelerates it somewhat vs my original timeframe (and guidance from management about doing smaller raises), and it depends where they raise the capital.  but today's move seemed like an illiquid short squeeze more than anything else.  it is possible that getting the stock to $206 triggers the 50% incentive payment (~2.5% of shares outstanding) so there was the incentive to get it there by buying a few thousand shares.  but i have nothing else to add.
     
     

    SubjectRE: Update?
    Entry04/25/2013 08:12 PM
    Memberjoe661
    I agree the AAMC valuation might seem way too high, but this has been the big risk to shorting AAMC.  "Income stocks" seem to have just about unlimited capacity to sell stock these days, just look at all the MLPs that are glorified Ponzi schemes but that have unlimited demand for their follow-on offerings.  
     
    RESI is an "income stock" and more, it's producing its income in a hot asset class.  After this offering, I figure that if RESI instantly levers up 4:1 and earns a 5% spread (which seems very very optimistic) then AAMC earns about $15/sh.  I don't think AAMC will actually earn $15 based on the current capital base at RESI, but I also don't think RESI is done raising capital at very favorable pricing.
     
    And don't forget, if RESI pays out dividends using the capital it raises from these offerings (like the Ponzi-esque MLPs) then my reading is that that would trigger the clause that lowers the per share dividend thresholds in AAMC's incentive comp structure.

    SubjectRE: RE: Update?
    Entry04/26/2013 07:52 AM
    Memberheffer504
    resi is not producing any income and won't for a year.  it has yet to show that its model works.  and it is levering 1:1 not 4:1. 

    SubjectRE: RE: Update?
    Entry04/26/2013 11:54 AM
    Memberstraw1023
    joe,
     
    I think you are correct. There are terrible mis-pricings going on in income-producing securities due to ZIRP. I have been involved in a parallel discussion on the GPT (fka GKK) thread. 
     
    The thing that I think is going to be interesting here is that I think the rental cash flow is already low and going to plummet. The number of funds being created/expanded to buy single-family homes is out of control. There has more than one per week this year. I am not sure it is large enough to affect the overall housing purchase market although I have read some interesting analysis to this effect. But I do think the suburban single-family rental market is going to crater.
     
    Owning a standalone home is a psychological triumph. American homeownership. Rah. A man and his piece of Earth. But the psychology of renting is quite different, and I do not think the demand is going to keep up with the supply. I think the people leaving single-family homes are going to move to apartments or relatives.
     
    There has already been some evidence to this effect as the ability of these buy-to-rents vacancy on recently purchased homes. After being cleaned up and fixed up, they are taking longer to rent than expected. Turnover, once rented, seems favorably low, but the initial rental has proven much more difficult than expected.

    So, this means that in order to pay meaningful dividends, they are going to need to pay existing shareholders with the capital raised from new shareholders, as you point out. At some point, there is going to be a lot of money to be made on the short side of this trade, but probably early at this point.

    Subjectalso
    Entry04/26/2013 04:01 PM
    Memberheffer504
    many of the bids today were literally 1 share.  i know, because i hit them.  some were pulled before i could execute.
     
    yes, 1 share.  not 100, not 1000.  1 share.
     
    read into that what you will.
     
    execs definitely got their incentive shares today though...

    SubjectColony homes IPO
    Entry06/06/2013 11:26 AM
    Memberjoe661
    Colony Capital delayed the IPO for their single-family homes REIT.  Market conditions.  Can't say from this one data point that the crazy demand for income stocks has turned the corner, but maybe it's a sign that we won't see RESI selling a ton of new shares at 150% of book.  IMO there are non-fundamental reasons not to be short a stock like this (illiquid and manipulated). But fundamentally, the big risk has been RESI doing the kinds of follow-on offerings that they did last month.  To the extent that risk has now abated, there is probably less reason that longs can delude themselves with dreams of how much AAMC will earn.  If RESI cannot do any more offerings that are accretive to AAMC then I think the results at these companies are going to be very disappointing once the dust settles.

    Subject1.4b mkt cap
    Entry09/24/2013 03:49 PM
    Memberheffer504
    and the model is still totally unproven and has not generated a dime of cash flow
     
    they are clearly moving much more quickly than they said they would and then I initially modeled to be fair
     
    but they are also paying a lot more than others for the same properties (15% or so) so it is not difficult to see how they are putting all this capital to work
     
    this would be comical if it weren't so financially disastrous...  sorry everyone
     
     

    SubjectRE: 1.4b mkt cap
    Entry10/02/2013 03:22 PM
    Memberjoe661
    Well, we are now up to $2bn for the combined company, not counting the recently announced secondary for RESI.  
     
    RESI's first offering was a big positive for AAMC.  It was done at such a big premium to book that AAMC should still be better off with the additional RESI shares outstanding as long as RESI can invest it at a reasonable return.  
     
    The recent offering is not so clearly positive.  Not as big a premium to book, and the closer to book that RESI sells stock the more they need to earn on the assets in order to overcome the additional share count.  I'd try to model this kind of thing, but I gave up trying to make sense of AAMC's valuation a few hundred $ ago.

    SubjectRE: RE: 1.4b mkt cap
    Entry10/03/2013 08:03 AM
    Memberheffer504
    more than that, there are 3mm shares out including all the incentive shares, so 1.8b just for aamc...
     

    SubjectRE: RE: RE: 1.4b mkt cap
    Entry10/03/2013 09:38 AM
    MemberSiren81
    This is crazy - if someone can tell me how a short here would lose I'd love to hear it. my model gets an negitive IRR even under very aggreessive assumptions

    SubjectRE: RE: RE: RE: 1.4b mkt cap
    Entry10/03/2013 02:11 PM
    Memberjoe661
    How can a short lose here?
     
    From a fundamental standpoint, there is RESI capital-raising through equity issuance.  This has always been the biggest to shorting AAMC IMO.  The risk is a little less now that RESI is trading closer to book value, but if RESI is able to sell stock at 150% of book then that is most likely good for AAMC. I haven't modeled out the where the dividing line is in terms of whether RESI stock issuance is good or bad for AAMC.  At 150% of book it's probably good under most scenarios.  At book then it might be bad.  But it depends on the premium to book and then the ROA that RESI gets on the new capital (and how quickly they can put it to work).
     
    From a technical/other standpoint: not sure it may be hard to keep the short open and be expensive to do so.  The stock is obviously prone to huge spikes on little news and little volume.  
     
    AAMC is almost up in the range of TSLA or DDD et al in terms of "this is so expensive, how can I lose if I short it?" But obviously we've seen that it is possible to lose.  Given the relative ease in moving the stock by a large %, maybe we will see some shenanigans going into the end of the year.

    SubjectRE: RE: RE: RE: RE: 1.4b mkt cap
    Entry10/03/2013 02:16 PM
    Membermm202
    I'm surprised given the run from $15 to $600+ that we've seen no insider selling.  Any theories as to why not?  There was a little buying and option exercise in the $200s to $300s, but no activity since.

    SubjectRE: RE: RE: RE: RE: RE: 1.4b mkt cap
    Entry10/03/2013 09:02 PM
    Memberheffer504
    after they report this q will be the first chance they have had to sell their stock when not in a blackout window and not on the pink sheets. 

    SubjectRE: Short piece on SA
    Entry12/05/2013 11:24 AM
    Memberhawkeye901
    Saw AAMC is going parabolic... is this thing really a ~$2.4 bn market cap??  Curious if anyone has an idea what the bull case is at this price?  Stock is up ten-fold this year!!

    SubjectRE: RE: Short piece on SA
    Entry12/05/2013 11:33 AM
    Membercuyler1903
    Pretty sure the bull case is that there are 30,776 shares sold short, the stock trades a couple thou shares/day if you're lucky (traded 200 yesterday and 0 some days), and the spread is $849 bid x $949 offer.
     
    Cuyler

    SubjectRE: RE: RE: Short piece on SA
    Entry12/05/2013 11:43 AM
    Memberhawkeye901
    Is there a fundamental bull case?  The actual dollar float looks large to me at first glance ($1.5bn?) so it is surprising that there are so many shareholders sitting on huge gains that wouldn't hit the bid.

    SubjectRE: RE: RE: RE: Short piece on SA
    Entry12/05/2013 12:00 PM
    Membercuyler1903
    Surely there's no fundamental long case, but there's a 134 page slide presentation that appears to spend 1 slide on AAMC (p. 15) in my quick perusal.  The line "create other vehicles under AAMC" might get some people excited?  http://files.shareholder.com/downloads/ABEA-6F4AAO/2785882752x0x710817/0cc74f74-fd55-4682-acee-81745ab889f9/Binder1_OCWEN.pdf
     
    Guessing there are a few involved here on the long side playing for the mother of all squeezes, which may not have even yet occurred as S.I. hasn't fallen that much.  Takes a very strong hand to stay short a stock that runs from 19 to 900.
     
    Cuyler

    SubjectRE: RE: RE: RE: Short piece on SA
    Entry12/05/2013 12:39 PM
    MemberSiren81

    Hawkeye –  I spoke with a couple folks  long name.  As far as I can tell, the ‘bull case’ is based on: 1) Erby is smart and if anyone can figure out this business he can, 2) There will be a large supply of NPLs to buy, 3) RESI can raise a lot of capital at high stock prices.  While I think all these points are mostly true, but it doesn’t matter…

    There are only a few assumptions that really matter in modeling AAMC; 1) Gross/net rental yields, 2) Yield growth overtime, 3) the amount and timing of NPL purchases, 4)the mix of modifications / sales vs. rentals & the economics of modifications / sales.  All these assumptions can be reasonably estimated within some range and I don’t think there is much disagreement between bulls and bears as to what these numbers are.  Take the most bullish assumptions you want and plug them into a model and I get a highly negative IRR from AAMC equity.  


    SubjectWhy Short-selling is so difficult . . .
    Entry12/05/2013 01:16 PM
    Memberstraw1023
    In terms of size and valuation, AAMC has entered the Hall of Fame of single-stock madness. It is not yet in the special room dedicated to Volkswagen circa 2008, but it is in the adjacent room and moving closer.

    SubjectRE: Why Short-selling is so difficult . . .
    Entry12/05/2013 01:36 PM
    Memberhawkeye901
    The actual short interest % does not appear that large and there are real institutions long the stock that must be sitting on huge gains so it surprises me that this would be happening in this stock... 
     
    Are the longs all playing for another 10%-20% trading gains from momentum even knowing that at some point this will likely be down 50+%??

    SubjectMarket cap vs RESI
    Entry12/05/2013 10:21 PM
    MemberWeighingMachine
    short piece on SA today got me interested in this name. Am new to story. Interesting thread.  how is it possible that the market cap of AAMC is greater than RESI?  Seems they should be at parity (at best for aamc)? Are there any other businesses in AAMC? Does this make most sense as a standalone short or a pair trade with RESI?

    SubjectRE: Market cap vs RESI
    Entry12/06/2013 02:32 AM
    Memberstraw1023
    In theory, AAMC can certainly be worth more than RESI because of secondaries. If AAMC controls an infinite money machine as market believes, they will keep raising money via RESI secondaries and eventually RESI will have mkt cap much greater than current AAMC mkt cap.
     
     

    SubjectOk, either I’m a monkey or this stock is Bananas
    Entry01/31/2014 09:49 AM
    MemberSiren81

    Ok, I realize shorts have lost all credibility in this name, but just hear me out for a sec… I built a fairly robust model for this thing, and here are the assumptions I used:

     

    Gross rental yield: 9.0%

    Vacancy rate: 12.0%

    Expenses (ex vacancy): 4.6%

    Total NPLs purchased: $10B

    Annual rent growth: 4.0%

    Price of RESI equity raise (% of book): 150%

    Cost of debt: 4.25%

    Leverage: 50.0%

    Terminate multiple: 15.5x

    % of loans that become REO : 85%

    % of loans that become Rentals: 55%

    % modifications / other: 15%

    % gains on modifications: 25%

    % gains on REO Sales: 20%

     

    This yields a -12% IRR for AAMC. To get an 8% IRR the stock would have to be $225/share.

    Now we can argue about the assumptions I used, but they are at least reasonable. It seems like all the assumptions that matter here can be estimated with some degree of accuracy. Not sure what I’m missing, but this thing just looks redic expensive.


    SubjectAAMC trades at 66x Credit Suisse 2016E Estimates
    Entry03/12/2014 11:01 AM
    MemberSiren81

    Credit Suisse estimates that in 2016 RESI will pay AAMC $36.6mm in incentive fees. Assuming a 4% tax rate and 500k in non-reimbursable expenses this equals $12/share in EPS for AAMC… Of course its actually worse than this b/c over 70% of the expected 2016E revenue is from 1x gains which will not be available once banks are done selling loans…


    SubjectRE: AAMC trades at 66x Credit Suisse 2016E
    Entry03/13/2014 11:48 AM
    Memberspike945
    FYI -CSFB does not incorporate capital raises into their model. 



    SubjectRE: RE: AAMC trades at 66x Credit Suisse 2016E
    Entry03/17/2014 12:29 PM
    Memberspike945
    anyone have thoughts on the convertible deal that was just done?
     
    thanks

    SubjectRE: RE: RE: AAMC trades at 66x Credit Suisse 2016E
    Entry03/17/2014 01:43 PM
    MemberSiren81
    Dont think it changes much

    SubjectHUD
    Entry06/23/2014 11:48 AM
    Memberscott265
    I'd be interested for the bulls take on this as well.  Just gleaning from what Piper showed in their chart, this sale is by far one of the biggest and now sets a new mark for pricing that does not appear to give even close to the returns that RESI had pitched.  Seems like now Erbey is stuck either finding a new cheap security, hoping this is anamoly in pricing or accepting a stock trading at a discount to book as the new market reality sets in.  Not sure what he does.  He is smart so hard to see him overpaying but also hard to see him accepting a crash down of RESI and AAMC.  I imagine soon we'll hear about some new instrument that he thinks is cheap.  
     
    Seems like a great time to short either RESI or AAMC.  Returns can't be what they were and market may soon correct RESI to a discount to book which ends the AAMC game. 
     
    I'll be truly interested to see what financial instrument Erbey finds to pitch for his next RESI secondary fundraising meeting. 
     

    SubjectRE: HUD
    Entry06/23/2014 01:15 PM
    Memberstraw1023
    rskfrarb,
     
    perhaps you meant toungue-in-cheek, but that is not an apt comparison as the 3.25% bonds funding the purchase of the loans has an equity tranche on top of it. 3.25% is not the proper cost of capital for RESI equity.
     
    however, i do think your comment highlights a good point: the ability of RESI/AAMC to source cheap homes via distressed mortgages going forward is limited; however, it probably does mean that the loans purchased previously (and currently held by RESI) were purchased on the cheap.
     
    The bear case for RESI went something like this: they are not really buying anything cheap, but if I am wrong and they are buying something cheap, they will not be able to continue buying it cheap.
     
    Clearly, this hurts AAMC more than RESI because it calls into question AAMC's ability to grow its AUM to support its lofty valuation.

    SubjectRE: RE: HUD
    Entry06/24/2014 10:02 AM
    MemberSiren81
    So I get why AAMC would trade down on the HUD results. At those prices there is very little (if anything) left for AAMC after they pay RESI...
     
    Not sure why RESI would trade down though. If anything the HUD sale was a validation that the assets you own are valueable.

    SubjectRE: RE: RE: HUD
    Entry06/24/2014 10:16 AM
    Memberstraw1023
    Siren,
     
    I pointed out the mixed case for RESI. But remember that RESI above $30 built on case that would re-invest cash flows at below-mkt prices as well. I do not think you can get to RESI of $30 simply based on fair value of existing assets--even with higher prices revealed by HUD auction. Further, even if you can at present, remember that AAMC has an incentive to keep issuing secondaries of RESI even if it is now purchasing distressed loans at fair value.
     
     

    SubjectRE: RE: RE: RE: HUD
    Entry06/24/2014 11:32 AM
    MemberSiren81
    How can RESI reinvest cash flow? Arent they a reit that must pay everything out?

    SubjectRE: RE: RE: RE: RE: HUD
    Entry06/24/2014 12:17 PM
    Memberstraw1023
    They are a REIT, not a private equity fund where capital is invested exactly once. They need to pay out earnings but not the cash from when distressed loan is paid off or underlying assets is sold.

    SubjectJPM RESI Initation
    Entry09/08/2014 11:16 AM
    MemberSiren81

    JPM initiated on RESI today.  They show AAMC receiving about $600mm in fees through 2019 at which point it tapers down to about $20mm yr.  Cap that $20mm at 8% and its worth $250mm. So basically by buying AAMC you’re paying $2.1b to receive $950mm of value over 5yrs.


    SubjectAAMC/Resi Agreement post Erbey
    Entry12/22/2014 10:56 AM
    Memberscott265

    Would love any other thoughts on how others think Erbey's departure affects AAMC.

     

    My thoughts (in order of importance)

    1.  You now have an independent board effectively running RESI. Erbey has minimal holdings so we can assume they will act in RESI shareholders (either voluntarily or with some activist help) best interest.  With that in mind, here is the termination clause for RESI to ditch AAMC. 

    Termination

    Residential may not terminate the asset management agreement without cause during the first 24 months of its term. Following such 24-month period, Residential may terminate the asset management agreement without cause upon the determination of at least two-thirds of its independent directors that (i) there has been unsatisfactory performance by us that is materially detrimental to Residential, or (ii) the compensation payable to us under the asset management agreement is unreasonable, unless we agree to compensation that at least two-thirds of Residential’s independent directors determine is reasonable.

    We may terminate the asset management agreement without cause by providing written notice to us no later than 180 days prior to December 21 of any year during the initial term or a renewal term, and the asset management agreement will terminate effective on the December 21 next following the delivery of such notice.

    Residential will be required to pay us a termination fee in the event that the asset management agreement is terminated as a result of (i) a termination by Residential without cause, (ii) a termination by us as a result of Residential becoming regulated as an “investment company” under the Investment Company Act, or (iii) a termination by us if Residential defaults in the performance of any material term of the asset management agreement (subject to a notice and cure period).

    The termination fee will be equal to three times the average annual incentive management fee earned by us during the prior 24-month period immediately preceding the date of termination, calculated as of the end of the most recently completed fiscal quarter prior to the date of termination.

     

    Ironically, today marks the two year anniversary of the agreement.  So if my read is correct, RESI can call up AAMC and cancel the agreement as of today.  We can debate what determines cause (Erbey's issues alone could be cause) but it seems like we would just be debating how the final payment gets negotiated.  So somewhere between 0 and $200mm fee they would owe.  It seems to me like RESI can easily question paying the current carry for AAMC's role of engaging in occasional auction purchases of NPLs.  RESI is probably not even engaging in many going forward as they may not be raising capital nor aggressively buying for some time. 

     

    2.  Seems like AAMC's ability to find "another product" story falls flat.  Erbey, the genius, is gone so now it just seems like anybody trying to raise money with high fees in something where they don't have experience.  

     

     


    SubjectMore thoughts
    Entry12/22/2014 11:07 AM
    Memberscott265

    1.  What multiple of earnings is appropriate for a one client asset manager that seems to be stalled in raising more fee generating capital (RESI not raising more $)?  I could make a case for a wide range from 5x p/e to maybe 12x.  

    2.  What is an appropriate level of carry for AAMC if this was a market deal? I really don't have any thoughts beyond the current deal seems egregious and they seem to provide little intellectual value beyond what was Erbey's alleged expertise.

    3.  Will Erbey be a seller of his stock? He has always been a stated non-seller but now he is not affiliated with the company.  I know the guy is a work-a-holic (and scheme-a-holic) so will he want money to start his new venture?  

    On a side note, is anybody in the anti-Erbey crew close to actually buying some of these names now that he's gone?

     


    SubjectNew servicer
    Entry01/29/2015 02:19 PM
    Memberscott265

    RESI hired a new servicer.  They seem to be distancing or protecting themselves from OCN. I think this is first step in renegotiating or eliminating their AAMC contract.  The market does not seem worried about this today but I think this is clearly the first step.  

     

    Anyone have any thoughts?  As resi CFO is also aamc CFO hard to really get straight answer. Any resi shareholders out there with thoughts? 


    SubjectNice call
    Entry11/17/2015 04:52 PM
    Membergrizzlybear

    .

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