AAMC - Altisource Asset Management

[thepupil]

the 60% was simply using your numbers of 5% and 8% (3/5=60%), if AMH is doing 5% and you think RESI can get to 8% net yield on its rentals, then AAMC is investing at 60% higher returns. I'm just questioning the plausibility and neatness of the growth story and the value of the Ocwen relationship, if it really can lead to billions of below market purchases.

 

until i see it, i won't believe it and I'm unsure if a guy who creates such a structure deserves the credibility; it's not like the Ocwen family is a squeaky clean operation without its share of controversy. no one knows what actual yield they are buying these until they convert them to rentals. it is not a neat and quick process. they say they are buying for X yield but it's all estimates and presentations until we see some realized financial results. 

 

you're right, i don't understand it and i got out. at a certain multiple of AUM and after a 10X move, i didn't think i had to understand it fully; it was more a bet that AAMC wasn't worth a large percentage of blackstone or (insert alternative asset manager here). I moved on. the particular thing that got me out was when RESI went up on the announcement of a giant secondary. the seemingly insane valuation drew me in like a siren song and I'm thankful for not getting too hurt.

 

if you could point to a 3 successful alternative asset managers or general partner entities that started in high splits and charged 50% on a low hurdle and successfully raised billions, maybe i'd be less of a hater. Didn't the MLP's who got to high splits take many years to get there? at least the ones i've looked at did not start out in high splits or start out by declaring a run rate dividend that far exceeded their cash generation. what's the rush with the dividend? got to raise as much money as possible while we still have a premium to book!!!

 

Not sure I understand the comparison to Google. To me the comparison for RESI is to an investment in a private equity fund, hedge fund, or REIT or whatever that purchases homes or mortgages or other forms of real property in exchange for a fee. And for AAMC the comparison is to seeding a hedge fund or purchasing an established alternative asset management franchise or MLP GP. An investment in RESI or AAMC strikes me as highly unfavorable in terms of risk/reward compared to those options.

 

 

[yadayada]

you gotta see it side by side. So look at some guys buying houses on the market and get a 5% yield on them, issuing shares and getting debt.

 

And then look at RESI + AAMC. At same valuation, RESI is the better pick vs other REITS.

 

But because of the unique skills of OCN and ASPS (by the way the controversy is all bullshit if you look close), they can do better then AMH. This is leverage. That is why the comparison to google. They are the only ones right now that can do this. AAMC+ RESI have something to offer in the form of management of AAMC and their expertise and proprietary way of analyzing data + knowledge of OCN and ASPS to get the most value out of this. So why should they give away all the value to RESI? RESI is a commodity structure, there is nothing unique about RESI. It does not even have active management.

 

If you read AAMC 10k then there are many ways where they are cutting costs, and judging by Q2 this year, everything seems to go better then guidance that was given by management. For example 100 properties rented within 30 days on average for a 12% gross yield. Also as I said, ASPS and OCN now have a solid track record of being low cost providers in past decade or so.

[thepupil]

you gotta see it side by side. So look at some guys buying houses on the market and get a 5% yield on them, issuing shares and getting debt.

 

And then look at RESI + AAMC. At same valuation, RESI is the better pick vs other REITS.

 

But because of the unique skills of OCN and ASPS (by the way the controversy is all bullshit if you look close), they can do better then AMH. This is leverage. That is why the comparison to google. They are the only ones right now that can do this. AAMC+ RESI have something to offer in the form of management of AAMC and their expertise and proprietary way of analyzing data + knowledge of OCN and ASPS to get the most value out of this. So why should they give away all the value to RESI? RESI is a commodity structure, there is nothing unique about RESI. It does not even have active management.

 

If you read AAMC 10k then there are many ways where they are cutting costs, and judging by Q2 this year, everything seems to go better then guidance that was given by management. For example 100 properties rented within 30 days on average for a 12% gross yield. Also as I said, ASPS and OCN now have a solid track record of being low cost providers in past decade or so.

 

Wow 100 whole properties on a $2.6B asset base!

 

Let's say they get to adding 2000 houses a month @ 1000 / month gross rent for simplicity (adding $2MM of gross rent per month, $24MM / year). <---this seems hard right? it's a headache to manage 1 house as a landlord.

 

How many months/years will it take to lease RESI to something that resembles a nice recurring cash flow to the equity to which I can assign a multiple (dividend yield) that is not based on future capital additions or asset sales? If they don't lease em up, they flip them (can't put a multiple on that), and if they work out the mortgages and get them current, you basically own reperforming mortgages with no equity upside in a terrible fee structure when you could just hire a subprime bond manager and not pay someone all your excess upside.

 

I know, I know, the Ocwen advantage will take care of all these issues and justifies the terrible asymmetry of the RESI fee structure.

 

 

[Picasso]

you gotta see it side by side. So look at some guys buying houses on the market and get a 5% yield on them, issuing shares and getting debt.

 

And then look at RESI + AAMC. At same valuation, RESI is the better pick vs other REITS.

 

But because of the unique skills of OCN and ASPS (by the way the controversy is all bullshit if you look close), they can do better then AMH. This is leverage. That is why the comparison to google. They are the only ones right now that can do this. AAMC+ RESI have something to offer in the form of management of AAMC and their expertise and proprietary way of analyzing data + knowledge of OCN and ASPS to get the most value out of this. So why should they give away all the value to RESI? RESI is a commodity structure, there is nothing unique about RESI. It does not even have active management.

 

If you read AAMC 10k then there are many ways where they are cutting costs, and judging by Q2 this year, everything seems to go better then guidance that was given by management. For example 100 properties rented within 30 days on average for a 12% gross yield. Also as I said, ASPS and OCN now have a solid track record of being low cost providers in past decade or so.

 

Wow 100 whole properties on a $2.6B asset base!

 

Let's say they get to adding 2000 houses a month @ 1000 / month gross rent for simplicity (adding $2MM of gross rent per month, $24MM / year). <---this seems hard right? it's a headache to manage 1 house as a landlord.

 

How many months/years will it take to lease RESI to something that resembles a nice recurring cash flow to the equity to which I can assign a multiple (dividend yield) that is not based on future capital additions or asset sales? If they don't lease em up, they flip them (can't put a multiple on that), and if they work out the mortgages and get them current, you basically own reperforming mortgages with no equity upside in a terrible fee structure when you could just hire a subprime bond manager and not pay someone all your excess upside.

 

I know, I know, the Ocwen advantage will take care of all these issues and justifies the terrible asymmetry of the RESI fee structure.

 

+1

 

Investors give so many passes to the way Erbey operates because everyone is looking for the next "Outsider."  The fact is, the current share price of both RESI and AAMC is already taking into account growth way into the future. 

 

Sometimes with these stories you have to step back and think:

 

Does it seem reasonable for AAMC to keep up the pace of the last few years?  In something as competitive as housing? 

 

One can say the relationships and expertise are that good but I just don't buy it.  The opportunity set in 2010-2012 was very unique and likely to not happen again for a very long time.  Scaling up into billions more at current values seems unlikely to produce extraordinary returns.

[yadayada]

ok so the business model of renting SFH is obviously proven with AMH. Those guys are doing 5% yield right now, and they don't have the platform RESI has.

 

It is not comparable at all to buying houses on real estate market. They buy distressed mortgages, not houses. Very different animal. And they buy them in large quantities. Very few players can do this, as opposed to the housing market where every idiot with money can buy a house. That is why they get the discount. No one else has the combination of skills RESI has access to. So few others can actually profit from buying a load of 90+day delinq loans. And the market for these things is still several 100 billion$ a year... The fact that they only recently bought one for 1 bn$ for 41% discount proves this.

 

And at 15$ per share , the fee structure was fair. at 1$ per share AAMC only gets 8 cents. at 2$ per share 29%. Everyone is staring themselves blind on 50%, when they did not even do the math. AAMC just got lucky that they sold a ton of shares at 30$.

 

If you work out the math you will see it is fair, since more value is added. If AAMC wouldn't perform, RESI would get less, but AAMC would get almost nothing (with higher vacancy). So they deserve higher payout, because if they can actually buy a large amount of these things, RESI will profit too, with little risk. And down the line if vacancies go up, AAMC's share in this quickly goes to almost zero %.

 

Finally, 100 homes, they actually got 17% yield on purchase price. But there are some costs converting them. But so far they turned 2k out of 12k homes into REO for a very cheap price if you look up costs. and 100 is a decent sample, unless you assume they cherry picked them. Allthough 17% is not sustainable. But 17% would be at least a 10% net yield on purchase price, which is pretty damn nice.

 

As far as the skills to pull this off, OCN/ASPS have proven to be v good at automating these things and get a huge cost advantage with servicing loans.

 

Personally im waiting another quarter, if they prove to quickly rent out the remaining homes at a decent rate, this is pretty much a slam dunk for AAMC. 

[thepupil]

And at 15$ per share , the fee structure was fair. at 1$ per share AAMC only gets 8 cents. at 2$ per share 29%. Everyone is staring themselves blind on 50%, when they did not even do the math. AAMC just got lucky that they sold a ton of shares at 30$.

 

I look at the hurdles as a percentage of tangible equity of $23/ share and think that the hurdles are low and that the blended rate of take for AAMC is high, particularly for permanent non-redeemable capital and for a manager that has already put up defenses to ever being fired. I'm comparing it to what GP's charge for similar high fee actively managed opportunities (real estate credit and equity funds, private equity, venture capital, hedge funds, etc.) and AAMC's fees are objectively very very very high, like highest in industry high. 

 

If they were fair at $15, that doesn't help the potential future investors in RESI that are required to pony up the dough for AAMC to work.

 

In my view a structure that was fair at $15 but not fair at a 60% higher price isn't that fair; 60% is not that much in illiquid private investments land.  But guess we could argue forever about what's fair and what's not. if you opened a hedge fund, could you look potential new investors in the eye and say "well we've done well for our past investors and are in high splits so I'm going to take 30-50% of the returns from here. Good luck raising money from me or anyone else who believes in the rights of limited partners who put up all the capital and bear all the risk...

 

So what percentage of RESI equity do you require to be paying recurring cash flow (either through performing loans or rented out homes) before you invest?

Given the current financials show $250K of rental revenue and $8MM of mortgage loan payments (under CFI  on the cash flow statement), both of which are immaterial to the market cap, I'm curious as to the answer.

 

[yadayada]

Honestly this is not comparable to a fund manager. Your buying very cheap houses with almost no risk... This is not like giving your money to someone and then having them take a large % of the profits on some risky stocks. Even if they do really badly.

 

If someone said to me, Im really skilled in flipping houses from mortgages, want to invest? Buying them at 35-40% discounts to home value. And they had a proven track record of cheaply turning aroudn mortages, and cheaply evicting people. Maybe you make 5%, maybe 10 %, but there is almost no risk. Because your protected by houses that are bought at bottom rates through mortgages.

 

And this is especially attractive since very few others can do it.

 

As for recurring cash flow, read the financials...

 

Seems very likely they do between 5-9% on the rentals. so between 60-90m$ of recurring income on current portfolio. But my bet is, they will tap the market for much more of these things.  AMK does 5% after everything, and they have an inferior business model. They also have about 90% occupancy. And a 12% gross rental yield on 4 billion$ of assets.

 

 

Fwiw i worked out the fees, up untill 1$ they get about 10%, everything after they get 50%. So for 2$ they get (.50+.10)/2 = 30%.  For 3$ they get 36%. So like 40-45% at most. And they would have to create enourmous value for RESI.

 

That makes this stock a bit less attractive already i guess.

 

It adds up too, so far AAMC took about 32% .

 

They also don't take an asset fee like most funds, and they get very little pay off if shareholder value gets below 1-2$ per share in payout. So there is almost no downside for RESI. And only upside.

 

My guess they deserve a large fee, because if they squeeze a lot of value out of RESI, they basicly squeeze a lot of value out of a low risk asset. Sort of like getting a net net performing again.

[yadayada]

so if they get about a 50% return on flipping the 1.2 billion$ half that will not be rented (returns could be more then 100%, so this seems lowballing it), you get 600m$ in profit over 2 years. Profit will be more if they flip/refi them quicker.

 

Then the other 1.2 billion$ will generate 60-90m$ next year in recurring rental. So that would be 360-390m$ in the first 2 years. And then 60-90m$ after that. And if they would sell a large bulk all at once, you get another big payout.

 

With current 60m shares, that would be 6$ per share in the first 2 years, so 43%.

 

Then after that, RESI would get 75m$ from the rentals (taking the middle here), divided by 60m. AAMC would take 18% off this. Assuming they can pull this for 10 years, that would be 322m$  + 135m$ or about 455m$. And then another large payday if they would sell these homes quickly in a short period. So current downside is probably around 50-60% if they execute and find no more mortgages to buy.

 

But if they would add a similar portfolio next year, then ofcourse it will quickly add up. If they add another 4 billion$ next year then the math is:

 

2billion$ equity at 32$ (likely if the above works out) . This would work out to total of 120m shares.

 

So in 2016, that would be 500m$ from flipping + 322m$ (still from flipping other half of first batch) + 75 rental (possibly 150$) .

 

So that would be about 900m$. ABout 7.55$ per share.  AAMC would get 45% of that. So 400m$. RESI would get 500m$ . If you put a 10x multiple on this freight train for RESI, you would get a per share value of 41$... Not so bad?

 

If it does not continue after that, you will have 120m shares. And rental will give 225m$ (assuming a 7.5% yield on the 3 billion$ of rentals).

 

So that would be 225/120 1.875$ per share.

 

This would amount to 28% fee to AAMC. More then 160m$ to RESI. That would be 20$ per share for RESI at 15x multiple. Also note that if they would sell, it would be a additional pay day for RESI. So liquidation value is also important then.

 

And it would be about 63m$ to AAMC. So if they pull these things off for a few years, they can issue more and more shares at a premium to book, and that means if you think rental is even somewhat recurring, and they can buy no more mortgages after like 3-4 years it will still throw off a 100m$+ to AAMC just from rentals.  and then a large payday (or additional income from selling next to rentals if they run it off).

 

If you disagree with my math please let me know.

 

 

[yadayada]

hmm sorry for spam of posts, but looking at the above, it does look like additional upside goes mostly to AAMC, but that seems fair? RESI takes little risk, and with little added value they don't really pay those 40-50% fees to AAMC. And if this all fails, AAMC risks getting paid nothing.

 

To take this scenario:

Then after that, RESI would get 75m$ from the rentals (taking the middle here), divided by 60m. AAMC would take 18% off this. Assuming they can pull this for 10 years, that would be 322m$  + 135m$ or about 455m$. And then another large payday if they would sell these homes quickly in a short period. So current downside is probably around 50-60% if they execute and find no more mortgages to buy.

 

when they start selling, let's say they sell all these 1.2 bn$ of houses in the last 3 years. Rental income is only 45m$ in year one, 25m$ in year 2 and 0$ in year three.

 

Given the huge discounts, and inflation (and a good housing market if they are selling), a 50% profit seems very reasonable. so that is 600m$ over 3 years.  Or about 3$ per share. Let's just use 30% for AAMC here. That would be another 200m$. And 1600m$ would go to RESI shareholders (this is what I mean by protected downside risk).

 

So then payout for AAMC would be 655m$. So about 60% downside. This does not take any execution risk into account, or any risk they are not selling the properties quick enough.

[Picasso]

hmm sorry for spam of posts, but looking at the above, it does look like additional upside goes mostly to AAMC, but that seems fair? RESI takes little risk, and with little added value they don't really pay those 40-50% fees to AAMC. And if this all fails, AAMC risks getting paid nothing.

 

That is not fair at all.

 

It is like saying "don't worry about me managing your money.  The one actually at risk here is me because if I lose all your money I won't get paid a fee."

 

???

[thepupil]

 

 

As for recurring cash flow, read the financials...

 

Seems very likely they do between 5-9% on the rentals. so between 60-90m$ of recurring income on current portfolio. But my bet is, they will tap the market for much more of these things.  AMK does 5% after everything, and they have an inferior business model. They also have about 90% occupancy. And a 12% gross rental yield on 4 billion$ of assets.

 

 

People I know who buy foreclosed properties and do real estate workouts on NPL's would not characterize their business as "no risk"; they buy at discounts to fair market value too. I know of no asset manager that has a claim on LP assets and no one that charges those kind of fees. All GP's get nothing if things don't work out. AAMC put up no capital! Why on earth would they get capital if shit hit the fan? But whatever, let's agree to disagree on the fees. Let's focus on the fundamentals of RESI. I happen to think the process of evaluating RESI/AAMC fee arrangement is VERY similar to evaluating a fund manager or PE opportunity, something I happen to know a little bit about.

 

But back to RESI's business:

 

Can you walk me through RESI's financials and show me where the recurring cash flow is? I must be blind (in addition to not doing math, not reading the 10-K, completely misunderstanding the business model and all the other things I'm apparently doing today)

 

https://www.bamsec.com/filing/155503914000027?cik=1555039

 

Let's look at revenue (the first place I would look for cash flow). First 6 months of 2014, I see $190MM, $170MM of which is non-cash (writeup of the portfolio). The rest is realized gains on dispositions (as an aside the buy a massive portfolio sell a little bit for a premium to price paid and get people excited about writeups reminds me a lot of Chesapeake Energy and all the fun that went on there) No recurring cash flow there (yet). $250K of rental revenue, which i've mentioned, is recurring.

 

If it's not on the income statement, maybe it's on the cash flow statement. I see a negative $44MM under cash flow from operating activities, so no cash flow there. The only material addback is a non-cash charge for $26MM payable incentive fee to AAMC.

 

Under investing there are a few positive items, the largest of which is mortgage dispositions +$70MM (selling assets, not recurring).

 

There is a "mortgage loan payments (+$8MM), not sure what % of that is principal what % is interest. Do you know? But let's just say it's all interest so that it is recurring.

 

What additional items in the financial statement that represent recurring cash flow am I missing? Can you point me to a section of the 10-Q that indicates recurring cash flow? I'm really confused.

 

They started the year with $1.2B of assets so it's not like they haven't had anything from which to extract something that looks like recurring cash flow or yield. Am I just completely misinterpreting the statements here?

 

 

[yadayada]

Seriously READ THE FINANCIALS.  This business is not even 1 year old. Most of these things are less then one year on the balance sheet. When they started buying these things they gave guidance that it takes like 6-18 months to flip them/turn into rentals. So far things are going quicker then planned...

 

And no there is almost no risk with single family homes. Very different then owning stocks or some pipeline. If you buy them at 40% discounts in a average housing market, it is very unlikely you will lose money there. You might not make money, but losing money is hard, especially with their skills in turning these things around. That is the reason why apartments pay out such a low yield, they are very low risk.

 

 

And if you look at my numbers, they promise very high return on something like real estate assets. And they get very little if they only deliver an average return. So that looks fair to me.

[thepupil]

How did you derive your estimate of "60-90m$ of recurring income on current portfolio"? Did you extrapolate what has been on the books for a little while to come up with a percentage and then apply it to their new purchases?

 

RESI is new but it isn't brand spanking new, they've owned a small percentage for over a year and 1.2BN of assets for 6 months. Are you saying it takes time to lease up and/or work out thousands of properties? Because we can find common ground there. The current financials (not the promised ones) currently have no evidence of recurring free cash flow.

 

Of their $163MM in mortgage loans they owned at June 2013, what % of those have been leased up or worked out and converted to cash flowing assets?

 

I'm reading the financials, I see no cash flow. I see purchases of giant pools of illiquid assets, unrealized mark ups, and a pledge to pay a dividend that is far higher than their run rate REIT taxable income and far higher than their cash flow.

 

Am I misreading them?

[thepupil]

btw, the $2.20 per share dividend on 57MM shares outstanding equates to $125MM / year in dividends to RESI. So by your estimate of "$60-$90MM on the current portfolio" RESI is paying out between 200% and 140% of its recurring income.....

 

Do you agree that is somewhat aggressive? Why such a high percentage? Oh right, AAMC gets a a lot of that and Bill Erbey owns AAMC and this whole structure is designed to funnel cash to him whether this entire thing ends up working or not.

 

Edit: And if the dividend is not all recurring cash flow and income and some portion of that is return of capital rather than return on capital, isn't AAMC taking some of RESI's liquidation proceeds? Am I completely off my rocker for thinking that?

[yadayada]

yeah pretty sure your misreading them. They had 30m in realized gains. But since they need scale it is going to take to probably next year untill you see cash flow. Also they had unrealized gain, which means that loan is in the process of being refinanced (because it is made non relinquent again). Or it is about to be turned into a rental.

 

Im not sure where you get the 2.2$ from. 60-90m$ is rental assuming a 5-7.5% rental yield.

 

So that would be 1-1.5$ per share. AAMC would take 18% here. That seems reasonable.

 

BTW those unrealized mark ups, are either loans made current, or houses that are now on the books of RESI. They would have to then be fixed up and offered for rental.

 

So far the 100 rentals were rented within 30 days... So expect a huge inflow of cash within the next 12 months.

 

There are roughly 3 scenario's for RESI shareholders

1. Things don't work out, loans are sold, or homes are sold at a discount to market value and you get your money back.

2. Works out sort of ok, get a few large dividends in the first 2-3 years and then a bit of rental dividends (AAMC takes a normal fee here)

3. Things are a home run (AAMC takes 40%+, 25-30% on rental revenue, but dividend to RESI shareholders would be higher for rental too in this case).

 

So seems to me that RESI shareholders are not getting screwed here. They can invest in a safe asset, and potentially outperform with that safe asset and get a good risk adjusted return they wouldn't be able to get somewhere else.

 

If they would buy a pool of loans at 30-40% discount to asset value, that means cost of turning them into REO must be higher, and they would have to sell all those houses at a pretty large discount for RESI shareholders to lose money.

 

 

[thepupil]

I am getting $2.20 per share in pledged RESI dividend because RESI declared a 55 cent dividend for its most recent divvy. I am annualizing that to get $2.20 per share. This practice is not uncommon in evaluating the common stock of a dividend payer to assess dividend sustainability since people say "X stock is yielding X%" based on the last quarter's dividend annualized over the current stock price. Right?

 

http://seekingalpha.com/news/1969315-altisource-residential-declares-0_55-dividend

 

So by saying it is "going to take to probably next year until you see cash flow", are you not acknowledging that my interpretation of "no current recurring cash flow" is correct? But you still assert I'm misreading the financials. How am I misreading them?

 

"BTW those unrealized mark ups, are either loans made current, or houses that are now on the books of RESI. They would have to then be fixed up and offered for rental." I agree with this. It takes time and until they're rented out or sold, we don't know what the financials will look like. That really is all I'm saying. It bothers me that you seem so certain, when to me this thing has enormous amounts of uncertainty.

 

100 rentals in 30 days is not material and represents a very low percentage of the asset base. At $200K / unit that only $20MM / month , $240MM / year of assets. It would take 11 years to lease that portfolio up if that is the run rate; who will pay all those dividends in the meantime? At 1000 a month (10X what they are bragging about) it still takes you a year and change.

 

[yadayada]

At this point i might as well paraphrase their entire 10k and all the quarterly calls. All the answers to your questions are in there.

[Picasso]

Yadayada, you're projecting out from small pieces of data from the financials and conference calls.  100 properties are a lot different than the tens of thousands needed to justify the stock price.  thepupil is asking rhetorical questions because there is no data today to support your thesis.  Maybe they scale up like you think they will, but that doesn't usually make for a good investment.  While we're at it let's buy up Amazon and Facebook so that a decade of growth can catch up to what we are paying today.

 

It appears to me that this is outside your circle of competence.  The real estate investors I speak to who competing with AAMC/RESI (Blackstone, Starwood, Colony, Penny Mac) are scaling back because it isn't what it was 2 years ago.  Some of the more seasoned asset managers are waiting for the competition to blow up before getting back in.

[ItsAValueTrap]

You have to figure out what the cash flows will be in the future.  A simple way of doing that is to try to figure out:

1- What the ROE will be for RESI before management incentive fees.

2- How much will assets under management grow.

 

#1 and #2 are interconnected.  But if Erbey can deliver very high returns on equity, then it is likely that AUM will grow.  We know that Erbey has a track record from Ocwen and Altisource.  We know that Ocwen/Altisource is very good at servicing delinquent loans.  What RESI does is fairly similar.  RESI will also own delinquent loans as well as paying Ocwen to service them.  Because RESI owns the loans, it does not suffer from stupid servicing agreements that incentivize the servicer to sell REOs as quickly as possible with as little repair work as possible.

 

What RESI is doing is very difficult and there is a lot of room for value creation.  A royalty on Bill Erbey's brilliance might turn out to be incredibly profitable.

[yadayada]

Yadayada, you're projecting out from small pieces of data from the financials and conference calls.  100 properties are a lot different than the tens of thousands needed to justify the stock price.  thepupil is asking rhetorical questions because there is no data today to support your thesis.  Maybe they scale up like you think they will, but that doesn't usually make for a good investment.  While we're at it let's buy up Amazon and Facebook so that a decade of growth can catch up to what we are paying today.

 

It appears to me that this is outside your circle of competence.  The real estate investors I speak to who competing with AAMC/RESI (Blackstone, Starwood, Colony, Penny Mac) are scaling back because it isn't what it was 2 years ago.  Some of the more seasoned asset managers are waiting for the competition to blow up before getting back in.

http://en.m.wikipedia.org/wiki/Bayesian_probability

 

If I bought 100 properties and rented them out that quick, I'd conclude there is probably demand. Especially if I look at similar reits and see 90% is rented out rather quickly. Also the ones you listed all have a different and inferior business model.

 

Just becaus you don't have a rock solid sample size does not mean you can assign a probability on it. Also the whole point here is that future growth is not priced in for the most part. Look at my math.

[jay21]

 

Edit: And if the dividend is not all recurring cash flow and income and some portion of that is return of capital rather than return on capital, isn't AAMC taking some of RESI's liquidation proceeds? Am I completely off my rocker for thinking that?

 

Yes you are.  They are only distributing their taxable income which would not be a return of their capital. See the appendix to their quarter presentations.

 

I haven't studied RESI in depth, but I think your point about it not having recurring CF does not seem to be a good bear point. What they are doing now has better return characteristics (imo) than agency REITs, but you would say agency REITs have recurring CF? If the NPL opportunity dries up, I imagine RESI starts to make non-prime whole loans and/or buys non-prime RMBS when they return.

[thepupil]

 

http://files.shareholder.com/downloads/AMDA-1HYVK0/3557916522x0x769915/cfc14da5-038f-4004-bdff-43f3ec44471a/RESI-2Q-14_Earnings_Presentation_FINAL_APPPROVED_-_7-22-14_.pdf

 

At the request of yadayada, i've consulted the above presentation. Slide 10. In order to add a little bit of quantitative stuff to my questions about just how quickly are these assets being converted to something that can support RESI's divvy.

 

1400 loans purchased in Q1 and q2 in 2013. It has been at 1-1.5 years from when these were bought. q1 r q2 2013 --> June 30 2014 

 

63% are still NPL's

14% were converted to REO (which of course is just the first step to becoming a repaired, renovated, tenanted property)

The remaining 22% was "liquidated via early resolution strategies at attractive returns". Included in that 22% are 11% which are now current and have a "current yield of 13% on purchase price"

 

So if we count the 11% that are current and all 14% that were converted to REO as income producing assets the tally comes to...

 

63% NPL, 25% income producing assets, 22% attractive return  liquidations at year one. So at the end of 1 year only 25% of assets are supporting a dividend, but 100% of the tangible equity is paying out a dividend. 

 

RESI has committed to  pay out 2.20 / 22.94 (9.5%) of its tangible equity. Do you see the mismatch here? Dividends today, recurring earnings tomorrow, and not tomorrow as in next quarter, tomorrow as in some unspecified period of time that could be multiple years before all these things are worked out, leased up, or sold. 

 

The recurring earnings have to go up very quickly ton to resemble sustainability. These assets have been in the magical Ocwen AAMC RESI money printing, loan working out machine for 12-18 months, but the majority are still NPLs...You point to 100 houses rented out...wooop tee doo, I can point to 900 loans (out of 1400) not  yet worked out in a year to a year and a half. Which is more significant? I didn't take stats, was a history major and won't bother reading your statistics wiki, so I can't tell you.

 

 

Maybe build a model that attempt to  figure this all out and  how quickly this all works?

 

ValueTrap, I don't think it is so simple as figuring out an ROE. ROE is net income / book. Net income doesn't equal sustainable cash flow when (thus far) 90% of revenue is unrealized appreciation. Even if it was realized appreciation, which presumably it will become, capital gains cannot be thought of as a source of dividend income unless they can be steadily repeated in perpetuity.

[thepupil]

 

Edit: And if the dividend is not all recurring cash flow and income and some portion of that is return of capital rather than return on capital, isn't AAMC taking some of RESI's liquidation proceeds? Am I completely off my rocker for thinking that?

 

Yes you are.  They are only distributing their taxable income which would not be a return of their capital. See the appendix to their quarter presentations.

 

I haven't studied RESI in depth, but I think your point about it not having recurring CF does not seem to be a good bear point. What they are doing now has better return characteristics (imo) than agency REITs, but you would say agency REITs have recurring CF? If the NPL opportunity dries up, I imagine RESI starts to make non-prime whole loans and/or buys non-prime RMBS when they return.

 

good, i'm glad i misinterpreted that because that would be truly nutty! thank you for answering my question and telling me where to ge the answer. But mREITs actually do pay their divvies from the carry, simplified math of 2% spread levered 5X  = 10% yield to equity. all their assets yield cash; of course book value growth goes up and down from duration and market value moves of the MBS but you wouldn't call that yield, right? I've owned mREIT preferrereds in the  past but don't follow them closely enough to know if market conditions have changed to the point where what I'm saying is not true.

 

if the NPL opportunity dries up and they move into those  more plain vanilla assets, RESI will offer shareholders an absolute worst in class fee structure for an easily replicable product.

[ItsAValueTrap]

These assets have been in the magical Ocwen AAMC RESI money printing, loan working out machine for 12-18 months

You forgot ASPS  ;)

 

(Um... the potential of conflicts of interests in the Erbey empire are going to get out of hand one day.)

 

ValueTrap, I don't think it is so simple as figuring out an ROE. ROE is net income / book. Net income doesn't equal sustainable cash flow when (thus far) 90% of revenue is unrealized appreciation. Even if it was realized appreciation, which presumably it will become, capital gains cannot be thought of as a source of dividend income unless they can be steadily repeated in perpetuity.

They'd be able to buy more NPLs and flip them.

 

There will always be NPLs because some homeowners will not be able to pay.  In general, these loans are the most difficult to service.  So there should always be parties looking to get rid of their NPL loans because they aren't good at servicing them.  And there are also parties that just want to get rid of REO and simply aren't interested in renting those properties out (e.g. the various agencies sponsored by the US government).

 

an easily replicable product.

Dealing with NPLs is one of the hardest parts of mortgage servicing.  It's the most difficult to replicate.

 

Sometimes ex-homeowners trash the house and steal all the appliances before leaving.  Sometimes thieves steal all the copper wiring in a house.  Sometimes a person who is evicted will come back and stay there even after they've been kicked out.  Some people run grow ops and cause a lot of damage to the house.

 

I think this is an area where talented management can create value.

[thepupil]

easily repblicable product referred to "if NPL dries up and they move into plain vanilla bonds"...I agree this stuff is hard and takes time.