AAMC - Altisource Asset Management

[yadayada]

It looks attractive at current price. It seems that a lot of people misunderstand this company. ANd resi as well.

 

Resi has a low cost advantage by using ocwen and altisource portfolio. And they can buy single family homes for at least a 10% discount because they buy the loans, and not the homes.

 

So this means a small % of loans get refinanced, paid off or the house is sold. ANd usually they buy those loans at a 35-40% discount to home value. So if a home is sold at these premium market prices (or above as is currently happening) you get a 50-60% return within 2-3 years minus renovation costs on your cost basis.

 

And up to 20% of those loans are made performing again. And in that case they get somewhere between 12-14%. Finally if they rent out, they get about 9%.

 

So if you take their mortgages and homes, and subtract the profits they made so far that is about 10-11% return on cost basis. that is 220-230m in revenue. If you have to believe the company this could be much higher.

 

In the presentation they say that 50% is turned into rental, and other 50% is hopefully flipped at 95% of BPO (so far at premium though). So this would be a 30% mark up.

 

So far rates are 12-13%. That would be 252m in revenue. Not hard to see how that can quickly snowball for AAMC as most of that seems to be income. And AAMC gets 20-40% of that?

 

They only have a few billion in assets now, but are underlevered and the market is in the 100's of billions. Number of people renting these homes go up, and looking at other REITs in less attractive places they get 90%+ utilization rates. But with much higher costs.

 

They said they planned to buy a lot of non performing mortgages in 2015-16, and that would mean at 10% returns (but probably higher because of their cost advantage, and ability to buy at lower cost) on possibly 3-6 billion at cost. And it seems AAMC deserves a high multiple. Also Erbey has comitted to buy back 300m$ of AAMC when stock was 50% higher then today.

 

I haven't quite worked out what exactly their income will be. But they will be lower cost, and bought at lower prices then competition. And AAMC will get a royalty. If you think 3 years in Resi has 10 billion$ of homes (ASPS is v scalable) then obviously AAMC is worth probably 3-5x today.

[Picasso]

When I look at RESI a few things stand out.  The stock is awfully close to book value and a drop below that price will hurt any new secondary offerings.  Why issues stock at 90% of book to buy up mortgages at 90% of par?  The growth for AAMC goes out the window.

 

One could say they are going to do better than buying up mortgages at 90% of par but the market today is much, much more competitive.  2008-2011 was a bit of a "one time item" that I would not expect to happen again in the near future where you could buy up real estate or loans tied to real estate at severed discounts. 

 

What is the downside protection on AAMC?  I actually see very little upside and a fair amount of downside if RESI drops further.

[yadayada]

latest was bought at 59% of property value only a few months ago (900m$ I think). They are bought for a 30-40% discount. So not 10%. The market is still very attractive, and there are few competing buyers, because very few have the capabilities RESI has through ocwen and altisource.

 

Quote from VIC write up

As described above, there are three basic things that can happen once RESI acquires an NPL – the borrower can be made current or RESI can take ownership of the property and then either rent or sell the home.  RESI anticipates 10-15% of loans will be made current (though more recent commentary has suggested the high end is more likely – see ASPS Q3 earnings call for example), 50% of homes will be rented, and 35% of homes will be sold.  The economics of each of these outcomes is different and has important implications for the overall value of RESI.

 

Modifications were described above.  RESI assumes that modifications will on average be made at 95% of market value (though experience to date suggests that this assumption may be low).  It is assumed that modifications will take 6-9 months on average.  If we assume purchases at 70% of market (more expensive than experience to date), mods at 95% of market value (appears below experience to date), 9 months of carry cost, and 50% debt to capital (below current advance rates) at 3.5% cost of debt, then RESI generates about 70% return on equity on modifications.  If 10% of the portfolio generates this return, then this generates about 7% return on the entire portfolio, and if RESI hits the high end of its modification target, modifications alone will contribute over 10% return on the entire portfolio.

 

http://www.valueinvestorsclub.com/value2/Idea/ViewIdea/108911

 

What I like is, this model is not dependant on rental. They can either make the loan performing, refinance, flip the house or rent it out.

 

So if it stays hard to buy they can rent at attractive yields. If the market turns up, then house prices go up and returns only shoot up, and they can more easily sell more houses for a profit. And it does look that the economy delevered in the past 5 years regarding mortgages, so some up turn could be happening. That would be really good for both RESI and AAMC

 

His write up basicly implies a 15% return on equity. Not sure what it will be though.

[Picasso]

The issue on AAMC is the downside protection.  Weak capital markets for RESI is a big issue for AAMC.

 

There are many players in the NPL market, if there a source somewhere that says how the discounts are 30% more than typical methods of obtaining these properties? 

 

The thing that worries me about AAMC is the sort of conflicts you have.  Erbey is incentivized to use RESI as a printing machine to increase the value of AAMC indefinitely.  I remember looking at this stock at $120 and thinking how crazy the rally was only to see it go up another 10 fold.

 

Too bad options don't trade on this. 

[yadayada]

you can read the 10k, it is all in there. Presentations and latest conf call is useful as well.

 

Also AAMC only gets the 50% share if portfolio's bought by RESI grow equity (annual div above 1$ per share). If they destroy value then dividend per share will go down and AAMC's take will also go down.

 

So basicly if market is several 100 billion and you think there is at least another 5-6 billion$ of juicy portfolio's out there, then RESI can basicly issue shares and grow equity value. AAMC will get 50% of the take.

[yadayada]

http://www.sec.gov/Archives/edgar/data/1562401/000119312514116022/d644538d10k.htm

 

Another good example. And these guys are not even lower cost, and they are buying straight in the market. They are not buying mortgages with 30-40% discounts . Returns here are around 10-11% gross rental yields if they are 100% rented out. And probably about 4% net? Seems to be about 6% ROE for them.

 

If these guys can pull it off. Honestly think a ROE at 8-9% is on the low end for RESI. They are buying at a lower cost to rent out, and they have lower costs renting it out. And half the houses are bought and flipped or turned into performing loans which could yield more then 10% on cost.

 

If you can get a profit of more then 40-50% on selling a house within 1-2 years, then return on equity should be north of 10% if in a base case.

 

Also for all the shorts and things people shout about this company, almost no one seemed to have bothered to read the 10k it seems.

[ItsAValueTrap]

  I remember looking at this stock at $120 and thinking how crazy the rally was only to see it go up another 10 fold.

 

When I did my writeup on ASPS, I thought that AAMC was better than ASPS but that the valuation had gotten a little out of hand.  AAMC was trading in the $300s.

 

Now AAMC is trading in the $600s.  And here's the crazy thing... I do think that the valuation is reasonable.  In that timeframe, RESI managed to raise a huge amount of capital.

 

AAMC is like an asset management company that is really, really good at what it does.  They might be able to deliver 7-20% returns with medium risk.  That's a compelling value proposition.  By structuring RESI as a dividend-paying company, it trades at a premium because yield-chasing investors are willing to overpay for yield.

RESI is somewhat captive though I believe they can vote to have AAMC removed as their asset manager.

 

 

[yadayada]

There is absolutely zero incentive to do that. People complain about the 50%, but other companies would not be able to do 50% a year on RESI. And they don't get much if they don't perform.

 

Also there is a termination fee of 3 times the average annual income of the last 24 months. So if they don't perform, this is not much, but if they do perform, there is absolutely zero incentive to break up with AAMC.

 

What I am wondering is this, Erbey is smart and bought back almost 300m$ in stock at almost 1k$ per share. And I don't think he destroys value, he is not going to destroy capital and hurt his own return given his large stake in AAMC.

 

Now it is at 600$ per share.

 

The thing is, if they raise 2-4 billion $ a year, and make those loans performing and sell like 1/3, then recurring income is in the hundred's of millions in year 2-3. And they have additional income by flipping these houses for 50-100% more then they bought the mortgages within 1-2 years.

 

So in a somewhat optimistic scenario of the VIC case, you could see 6-800million$ of income in 1-2 years. That would be 2-400m$ in income for AAMC. And this is  scalable, and ramps up really quickly with zero cost to AAMC.

 

If you think they will really start loading up, then it could be even more.

 

And once the housing market picks up again and they have more vacancies, they can sell these homes for nice profits again.

 

Im still not sure about the yield though. it looks like they do 10-15% yield on the property value.  That is a 14-20% yield on the acquisition price because property value is a premium to what they pay for the mortgage.  That seems a bit high to me.

 

edit:

http://files.shareholder.com/downloads/AMDA-1HZPVK/3556948907x0x662358/be50dcb6-e01a-4bb6-8176-829a0e447b25/AAMC_1Q-2013_Earnings_Presentation_FINAL_5-9-13_.pdf

 

They mention a 9% net rental yield here (adjusted from previous year). yea seems to be on acquisiton value. But that would still mean FFO of 108m$ that is recurring for RESI. So about 50m$ to AAMC. Seems like net yield on entire acquistiion costs is more like 15% though. THat would be like 180m$ a year and growing for AAMC if they keep buying at least 1-2 billion$ a year in loans.

 

Imagine though, in year 4 if they have like 5 billion $ of rentals, that is 200m$ alone for AAMC. Now they start selling them because the housing market is turning up again, they are marked up probably 30-60% (since already bought at discount and tracking inflation). That is 1.8b$ in income for RESI (the mark up at 45%) or another 900m$ to AAMC probably spread over several years while rental income dries up.

 

 

[Picasso]

The problem is, it is hard to assume they can keep picking up 70 cent dollars.  You're puffing through smaller and smaller cigar butts as the market improves.  I think people are trying to model this business as a recurring cash flow but I beg to differ.

 

If the capital markets dry up for RESI (meaning they have to issue stock below book value) AAMC has tremendous downside because a lot of the current valuation is supported by continued growth in RESI. 

 

In my mind, you have to model AAMC as receiving "X" amounts of cash flow as RESI continues to scale up.  But you should not be able to assign a multiple to that cash flow because once the party stops the fees to AAMC will fall significantly.

 

So what we need to do is build up a model of how much in fees go to AAMC over the next 10 years if RESI continues to scale and put close to a $0 terminal value at the end.  We're paying $1.5 billion for AAMC today, for this to be a value investment we want to see $4-5 billion of fees coming in the next 10 years. 

[yadayada]

no they have recurring revenue in rentals. Let's say they issue shares at an average of 30$ a share in the next 24 months. another 80m shares on top of 60m. They do 50/50 debt equity, and have about 300m left in debt. So that is 2.4 b$ in equity and 2.7b$ in debt.

 

So another 5.1b$ in homes can be bought on top of current 2.2b$.

 

They obviously have one time income on flipping and refinancing these loans, but the returns are also larger (15-30% on acquisition unlevered). They plan to keep half and rent those out.

 

So that would be about 3.6b$ in rentals. That alone would yield probably 8% to be safe, or 288m$ or 2$ a share. So probably 35-45% to AAMC, or 100-130m$. So that is your downside here. But then capital markets would basicly have to dry up within months from now and stay dried up for years. And then they also don't have access to other forms of financing like MBS.

 

And the nice thing is, if demand for rentals goes down, and for owning homes goes up, it generates another billion$ on that 3.6b$ a few years from now.

 

And the other 3.5b$ was flipped/refinanced/performing for a 20% return, so that would mean another 300m$ for AAMC. So just from selling for a profit and getting non performing loans working again, they get 1.2b$ , and probably recurring revenue is worth another 5-700m$ at least.

 

So you would have to be pretty pessimistic on capital markets in the next 2-3 years.

[yadayada]

As for the market, they recently picked up a 59 cent for a billion$. The market still looks distressed, and they are in a unique position that they can extract more value out of these things. The market is several 100 billion, so pretty likely they will make at least a few more good deals in the next few years.

 

Given they will buy another billion$ probably without issuing many shares, that would mean 1.5 billion$ in properties yielding about 9% That is 135 million$ a year, or well over the 1$ per share treshold.

 

The other 1.5 billion$ will give AAMC probably another 20% return, or 100-150m$. So in a worst case scenario with dried up markets, it is still trading at like 20x earnings right now.

 

If they are rented out for 5 years and then start to run off that is 5x 60m$ +130m$ is about 430m$ then they sell the remaining houses for about a 50% profit, THat is another 300m$ (assuming rentals fall of a cliff in 5 years).

 

Edit:

 

Also this market is heavily regulated because regulators wouldn't want vultures buying these mortgages up and kicking everyone out of their homes. So RESI has the low cost servicer to (OCN) to get the most value for everyone.

 

And then also lowest cost of fixing them up and renting them on the  market.

 

Plus AAMC provides expertise which mortgages to buy, and which loans to keep going, which homes to sell, and which homes to rent out.

 

So several low cost advantages in a market where demand is restrained by regulation.

[jay21]

The problem is, it is hard to assume they can keep picking up 70 cent dollars.  You're puffing through smaller and smaller cigar butts as the market improves.  I think people are trying to model this business as a recurring cash flow but I beg to differ.

 

If the capital markets dry up for RESI (meaning they have to issue stock below book value) AAMC has tremendous downside because a lot of the current valuation is supported by continued growth in RESI. 

 

In my mind, you have to model AAMC as receiving "X" amounts of cash flow as RESI continues to scale up.  But you should not be able to assign a multiple to that cash flow because once the party stops the fees to AAMC will fall significantly.

 

So what we need to do is build up a model of how much in fees go to AAMC over the next 10 years if RESI continues to scale and put close to a $0 terminal value at the end.  We're paying $1.5 billion for AAMC today, for this to be a value investment we want to see $4-5 billion of fees coming in the next 10 years.

 

Can't they do something like start an mREIT when nonagencies return?

[Picasso]

The problem is, it is hard to assume they can keep picking up 70 cent dollars.  You're puffing through smaller and smaller cigar butts as the market improves.  I think people are trying to model this business as a recurring cash flow but I beg to differ.

 

If the capital markets dry up for RESI (meaning they have to issue stock below book value) AAMC has tremendous downside because a lot of the current valuation is supported by continued growth in RESI. 

 

In my mind, you have to model AAMC as receiving "X" amounts of cash flow as RESI continues to scale up.  But you should not be able to assign a multiple to that cash flow because once the party stops the fees to AAMC will fall significantly.

 

So what we need to do is build up a model of how much in fees go to AAMC over the next 10 years if RESI continues to scale and put close to a $0 terminal value at the end.  We're paying $1.5 billion for AAMC today, for this to be a value investment we want to see $4-5 billion of fees coming in the next 10 years.

 

Can't they do something like start an mREIT when nonagencies return?

 

I suppose they could.  I think we should spend more time analyzing RESI before we come to any conclusions on AAMC. 

 

The best comparison I can make on AAMC/RESI is KMI/KMP.  It was nice being able to participate as the general partner as long as KMP could keep making deals.  Will RESI have constant access to capital markets and how does their current asset base compare to the current share price of AAMC?  Something in my head says these massive returns on NPL purchases are unsustainable. 

 

Projecting out and saying the stock is cheap because of the potential can get you into trouble with these types of stocks.  Nothing wrong with that, but it does not really imply a margin of safety.

 

I can think of a few other similar situations to AAMC such as NSAM and PFSI.  Has anyone examined how those compare to AAMC?

 

I am curious why the mREIT's have not done a spin of the asset managers? 

 

Speaking of PFSI, I spoke with a founding executive about their opportunity set (maybe 9 months ago) and he had said it was dying down tremendously.  If I am not mistaken they were buying directly from Countrywide which was their competitive advantage. 

[thepupil]

I've shorted AAMC twice (basically broke even having lost and gained about 20% both times). I have no position now. the illiquidity and strange movements in stock price scare me too much. the float is controlled by a small number of well capitalized smart people whom I don't wish to be against.

 

I think AAMC is an absurd entity.  I have to give Bill Erbey credit for his skills as a financial alchemist; to create a GP/LP structure where the GP trades for more than the LP and the LP trades at a premium to NAV  despite an incredibly parasitic and shareholder unfriendly fee structure takes a special kind of promotional skill.

 

The single family rental business is completely unproven, does not benefit from scale like other commercial property, and is rife with competition from mom + pops and big private equity guys who have raised money with the mandate to buy these big portfolios of homes/mortgages. It is a massive mischaracterization to say these properties are "yielding" much of anything that resembles a fully leased up performing real estate portfolio.  Thus far, rental revenue at RESI for the first 6 months of 2014 was a meager $250K.

 

Out of $190MM in revenue at RESI, $170MM is from unrealized gains on the mortgage portfolio. How do you assign a multiple to unrealized capital appreciation ? And if you do, how do you pay more than the entire LP interest for that? You are starting off way behind and need everything to work out in order for the investment to provide a satisfactory risk adjusted return.

 

RESI has committed to a dividend that far exceeds its cash income and thus far dividends have come from stock offerings and borrowings, which is effectively a high level legal ponzi scheme. Now, of course, RESI can grow into this dividend if they are successful in leasing up some portion for rentals, flipping properties etc. But all that takes time and it is very aggressive to raise the dividend first and then try to earn your way into the dividend, in my opinion.

 

AAMC is a single strategy asset manager that charges its sole client egregiously high fees. Yet it trades for a multiple of current AUM. Sure AUM can grow, but would you ever pay 100% of AUM for a seeding stake in a promising hedge fund? Of course not. If someone came to you that charged 2% and 20% on $100MM and was selling his management company you wouldn't give him $100MM. You can buy already built out alternative asset managers with multi-decade relationships and strong franchises for much lower % of AUM (BX, OAK, BAM, APO, OZM, etc.)

 

For AAMC to work out, RESI has to raise billions and billions and everything has to work perfectly. You are counting on market participants paying a premium to NAV for the privilege of paying the GP 50% of profits above a low fixed hurdle. I'm not shorting AAMC and I'm not saying that they won't raise more money. But paying 100% of AUM for a single strategy asset manager that has yet to show it provides real value to its clients beyond accretive equity issuance and portfolio markups seems like a tough way to make money, no?

[thepupil]

 

"What I am wondering is this, Erbey is smart and bought back almost 300m$ in stock at almost 1k$ per share. And I don't think he destroys value, he is not going to destroy capital and hurt his own return given his large stake in AAMC."

 

http://ir.altisourceamc.com/releasedetail.cfm?ReleaseID=833175

 

Have you looked into the exact nature of this "share repurchase"?  To me it looked like an injection of cash by a hedge fund that had already made a ton of money on this thing (was playing with house money) in order to repurchase shares and tighten up the float and scare shorts out of the stock. But I'd love to hear a less skeptical/paranoid explanation from someone who is not as negatively biased and from someone that does not think RESI should charge AAMC with grand larceny  : ) 

[ItsAValueTrap]

What AAMC does:

 

They buy portfolios of delinquent/NPL loans.  They've figured out that lenders are really, really bad at dealing with these loans.  Part of it is because the servicing agreements for securitizations prevent the servicer from doing a lot of things and incentivizes them to do certain things that aren't good for the investors.

 

First, they'll try to refinance or restructure the loan.

 

If that fails, then the home is going into foreclosure.  They will try to pay the homeowner money to give up title to the house.  This saves RESI a lot of money if the homeowner agrees because the formal foreclosure process is really expensive.

 

After the home turns into REO, AAMC will spend money on repairing / "renovating" the home.  Most mortgage servicers try to spend as little money as possible and just want to sell the home as fast as possible, which isn't how you maximize value.  AAMC will properly repair the home and put it on the market.  Then they try to sell the home or to rent it out.

 

Eventually... a long time from now... RESI will accumulate a huge rental inventory.  But what RESI really wants to do is to flip NPL loans all day long because that's where the most value is created.  RESI won't create that much value as a company that owns single-family residential housing.

 

AAMC is a single strategy asset manager that charges its sole client egregiously high fees. Yet it trades for a multiple of current AUM. Sure AUM can grow, but would you ever pay 100% of AUM for a seeding stake in a promising hedge fund? Of course not. If someone came to you that charged 2% and 20% on $100MM and was selling his management company you wouldn't give him $100MM. You can buy already built out alternative asset managers with multi-decade relationships and strong franchises for much lower % of AUM (BX, OAK, BAM, APO, OZM, etc.)

As crazy as this is... you have to skate where the puck is going.

 

RESI will lever up.  This will increase its dividends.  All of the extra money distributed will be at a 50/50 split because AAMC is now in the high splits.  So AAMC has a huge amount of leverage there.  Right now they're at 2:1 leverage and IMO they will likely bump that up to 3:1.

 

With the higher leverage, the dividend yield will go up.  Because so many people are chasing yield right now, the stock price *might* go up due to the higher dividends.  Then RESI will be able to do "accretive" issuances of equity.  AKA sell stock at high prices.  This will help the splits even more... book value per share will go up, which makes it easier for AAMC to get high payouts on its fees.  Um... virtuous cycle.  (Yeah yeah it resembles a Ponzi scheme.)

 

AAMC has the potential for a huge amount of growth.

[thepupil]

yep, I've read the pitches and presentations too. It all sounds great and there are scenarios where I can see them pulling it off to the point where maybe just maybe AAMC can justify its current valuation (it was more absurd at $1000, of course).

 

But, I have no vision and cannot skate to where the puck is going in this case. I am old fashioned and cannot imagine paying someone an expense pass through plus 50% of profits above a low hurdle and in my view the genius behind such a structure is not to be trusted.

 

I wouldn't pay those fees to  someone with the best track record in the world, much less an unproven business model (show me a large scale single family REIT that produces a recurring 8% cash yield? Correct me if I'm wrong, but haven't the other SFR REITS been disappointments? I've heard of some private funds doing well but that game quickly got crowded, right?).

 

I know I  know, Bill Erbey's a genius and because he has Ocwen, he can buy better properties, he buys NPL's not houses and has a license to print money. But so far, there's no hard evidence that the money printing presses have been turned on at RESI.

 

So it is really hard for me to imagine RESI raising billions upon billions and more and more investors in RESI just bending over for AAMC and Bill's benefit again and again. And since AAMC's market cap can only be justified by lots of raises at RESI, I can't help but be bearish of AAMC.

 

No matter how bright the prospects of the NPL operation, I think it's imprudent that RESI committed to a $125MM annualized dividend when thus far it has produced $20MM in realized earnings and has no real recurring cash flow. Does it say anything about the real business prospects of the NPL operation that the best way to make money off this opportunity is to charge 50% of profits and attempt to fool the capital markets by paying out today's dividends with tommorow's earnings? And then have those same capital markets assign a giant option value on the right to charge the high fees. And for good measure, maybe throw in a strange (some might call it manipulative) issuance of convertible preferred to a favored hedge fund to try to squeeze out shorts who were too smart for their own good.

 

 

When you seed a hedge fund you get an LP interests + some portion of the carry and a giant option on future growth (if the strategy is scalable). As long as the manager doesn't blow up, if the fund doesn't gain traction you get your money back, you have some asset backing. When you buy AAMC, you have no asset backing, negative common equity. The downside is a goose egg; if the model doesn't work AAMC owns nothing of value. And we don't know if the model works yet.

 

When you buy an established asset management company, you get a diversified revenue stream on which you can put some form of multiple and diversification provides you with a little more protection.

 

Anyways,  that was a little long and disorganized, but I  just want everyone to look at this thing very skeptically. I think AAMC is an expensive call option on the "huge potential growth" and if someone does decide to buy it,  I would hope he/she sizes it like an option w/ 100% downside.

 

ValueTrap, as a reader of most of your posts, I always appreciate your skepticism of junior mining management's who are promotional, make giant promises, and constantly raise money. It's funny to me that you like Bill Erbey. I think he's a genius, but that he just may be an evil one.

 

[ItsAValueTrap]

No matter how bright the prospects of the NPL operation, I think it's imprudent that RESI committed to a $125MM annualized dividend when thus far it has produced $20MM in realized earnings and has no real recurring cash flow.

 

It's a REIT.  They have to dividend out 90% of their taxable income.

 

ValueTrap, as a reader of most of your posts, I always appreciate your skepticism of junior mining management's who are promotional, make giant promises, and constantly raise money. It's funny to me that you like Bill Erbey. I think he's a genius, but that he just may be an evil one.

Erbey doesn't strike me as very promotional.  He's not a bullshitter.  Perhaps he could do a better job of explaining the businesses because I get the feeling that most people don't understand them.  He doesn't give investors the "spark notes"/"Coles notes" version of the investor presentation.  The presentations just assume that the audience understands the mortgage servicing industry.

 

I do think that there is value creation going on.  Outsourcing call center work to India... makes sense.  Paying homeowners to give up the deed to their house instead of foreclosure... makes sense.  He's managed to create a lot of efficiencies.

 

And I do think that RESI shareholders will do ok.  Obviously I would never own RESI.

 

---

I was skeptical of AAMC at first and thought it was a short.  But then they raised over a billion in capital.  So their AUM went up something like 10 times (not an exact number).  A 10X increase in AUM is a game changer... especially when they did the secondary offerings above book.

[ItsAValueTrap]

And this stock is fascinating to me because of the way some shorts were destroyed by it.

 

It seemed so obviously overvalued... until RESI raised over a billion dollars of capital.  And yes, I was one of the naysayers.

[thepupil]

The dividend exceeds their taxable income substantially, unless RESI has to distribute dividends on unrealized gains in its portfolio, which I didn't see anywhere. Is this the case?

 

Bill erbey's words don't strike me as a bullshitter; his actions strike me as someone who is incredibly shrewd and greedy. This could be good greed (like Malone type of greed where he makes shareholders who figure him out rich) or not so much. Any guy who can come up with this is to be respected.

 

Yep, it is a fascinating stock. I'm incredibly glad I discovered this stock after its 10x move up. I'd have the same objections at $100 as I did at $1000, and probably would have gotten destroyed

[yadayada]

RESI is basicly a holding company, i don't think it is predatory. After all to actually get that 40-50% share on a sustainable basis they need to add some serious long term value.

 

To get at least a 40% share, Resi needs to be able to pay out at least 2$ per share in dividend for a stustained period. And sustaining this is hard if the rental income is not recurring on a long term basis.

 

So let's say they buy 10 billion$ more of these things, 5 billion of equity. If they don't increase dividend over a few years time, and only issue shares at 30$ on average, then that is about 166m new shares. Or about 220m shares.

 

This would be over 12 billion$ in loans. They gave guidance for 50% recurring (so is not flipped in a 6month-3 year period).

 

They said they could do 9% on these things on a cost basis. Let's assume 7% (AMH does 5% I think). This is 420 million$. Let's say after 5 years they flipped the rest and buying pool dried up. Now that is about 400m$ in payable income. On 220m shares. that is probably 36-38% to AAMC. With a 5% recurring yield, that is only 300m$. So now they probably get less then 30%. And if that starts falling off a cliff, AAMC gets almost nothing, while RESI gets the majority.

 

And if you think these things are not long term and they will start selling these homes after 4-8 years, then they will be having a dilluted share count after 8 years with less recurring revenue. So AAMC's income will fall off a cliff after that.

 

I honestly think there is not much unfairness going on here. You have RESI which is low risk but also low return. And AAMC which is higher risk but higher return.

 

If AAMC does not perform well, RESI will still do ok (because they pay out less to AAMC).

 

So this is basicly structured as a play on single family rentals as either an option or a low risk reit structure. You know what your in for. I don't think RESI shareholders are getting screwed. And they are forced to pay dividend because of the REIT structure.

 

Sure AAMC gets a lot of money if this works out, but they have to make sure it is sustainable and that they don't do share issue's that add little long term value. If they do, Resi perform better and AAMC will fall of a cliff. So you get more reward, but also more risk.

 

 

Now when you say unproven, AMH clearly proved that there is demand, and they have a less efficient structure. They do almost 5% after being fully rented out and they also prove there is a scale advantage (look at some smaller reits). They get a 5% yield, and RESI is buying these things on a lower cost level, and will operate them on lower cost level (read AAMC's 10k about this). And ASPS and OCN have already proven to be low cost servicers, and a low cost platform for fixing these homes up (ASPS with 162k homes fixed up on a lower cost basis).

 

So demand is proven, and execution is proven here. And so far things are going better then expected.

 

The only reason they have little rental income isb ecause they need to fix these houses up first and assess wether they can get the loans performing or not. So there is a lag between income and cash flow at first. But the homes they put up for rent, were rented after less then 30 days on average.

[yadayada]

To add, somewhere in the next 10-20 years, RESI recurring rental income will fall because housing market turns up. In that case what they pay out in dividend per share will also fall (because of their dilluted share count), and in that case AAMC's share will drastically fall while RESI will keep paying out dividends for some time after that, and gets to keep most of them, because payout ratio to AAMC will go from 40% to 2%. So payable income per share for RESI will fall because recurring rental income is falling while they are liquidating their portfolio. But actual payout to resi shareholders will not fall.

 

 

So I would say in early and middle stage AAMC will make more then RESI if it works out, but as it starts to level off AAMC will become risky and RESI will surpass AAMC in income. And at any time there is more risk for AAMC as they don't have the assets to back it up, so possible payout if things go right should be higher for AAMC then for RESI. Also getting that 9% yield would be pretty impressive, so AAMC should deserve a high payout for that.

 

There is also time risk. A sizable part of outperformance will come from selling these homes quickly and turning the distressed loans around and have them refinanced. If AAMC does not do this quickly, payout per share each year is lower, and they get less. Or if recurring rental revenue falls off, they have to sell thse homes. If they don't do that fast the income is spread out, and they get a much lower cut from RESI.

 

Another time risk is that recurring revenue is not sustainable. In this case return goes down for RESI, but dividend payout does not go down as they simply give AAMC a lot less.

 

Someone should put this all in excel, I think you will see that the structure is pretty fair, and RESI shareholders are not really getting screwed here.

[yadayada]

Put it in a paint doc to visualize it. Too lazy to actually work out all the numbers in excel. But it should look something like this. Top is a best case scenario, and bottom could be worst case.

 

I think key is to figure out here how much is recurring, and how big of a return they can get (and in what time frame) on the other 50% of the portfolio they flip. That return also allows them to issue new more valuable shares again.

 

I don't full understand payout yet, fair amount of financial engineering going on here. Red line is what they can pay out.

[thepupil]

we appear to agree on the issues and drivers of RESI/AAMC, but disagree on the interpretation thereof.

 

I think a fixed per share hurdle that has been surpassed in the first year or two of operations is a very unfair and low hurdle; If RESI does continue to build value per share the hurdle will become a lower % of equity; it's like a high watermark that never moves up.

 

I think 50% of profits no matter how high a hurdle is unreasonable and unethical. The best venture capital firms don't even charge that! When I say "unproven" I mean to say that the bull case is "they will" "they can buy these at 60% higher yields than market" "they project". When someone tells me they can buy billions of assets that are traditionally not great investments (SFR goes up by inflation and only works with lots of leverage; i know they are really an NPK workout operation but still) at way below where other big sophisticated players are doing so and then asks to charge me "expenses + 50% above a low hurdle" and then starts paying out cash before earnings are realized,  I bristle in fear, rather than see an interesting opportunity.

 

Anyways, don't think I have additional value to add here (if i have added any). In a few years we can look back on this and you can point to my post as an example of the type of thinking that allowed you to buy AAMC on the cheap.

[yadayada]

If AAMC leaves, RESI cannot get managers elswhere to get nearly the same return.

 

So if you take an average asset manager, then RESI would get maybe 4-5%. Or might not be able to do this. So why should resi then get the excess returns? AAMC is saying, we can get you really high returns on top of that 4-5%. RESI gets to keep a little bit of that, and AAMC gets the most.

 

And if AAMC does not pull it off, and $ per share goes down when long term rentals goes down, they get very little of the excess. They are not protected by assets like RESI

 

Also, they don't buy at 60% higher yields then the market. Im not sure why you shorted this thing if you clearly don't understand their business model. They get a 12% rental yield vs 10% for competitors. So competitors get 10%, and 5% after costs. But RESI would get 12% and then 9% after costs. On a small scale they have proven already to turn these properties into rentals at lower cost. Also lower servicing costs have already been proven with OCN. Same with getting people to leave their homes and renovating them cheaply if necessairy by ASPS.

 

Finally I think you don't understand that over a period of 20 years, RESI is not worse off here. As AAMC's revenue will fall of a cliff, so RESI willg et most of the tail.

 

AAMC is basicly saying to RESI, I can get you a 1.5x return vs x return other players are getting here. The real return will be much higher then 1.5x, but where else are you going to go but us? So you gotta take 1.5x or just settle with x and we go elsewhere.

 

You could say the same thing for google, how it is unfair that they have such large profit margins.