AAMC - Altisource Asset Management

[yadayada]

Uh the slides say, results better then expected, that means better then the math I provided here. Also it does take 6-18 months like I said, and in about a year -15 months they converted 1/3... Right on track.

 

At this point your trying to just win the discussion with strawman arguments. Please study the reports before commenting

 

They paid out 1.28 over the past reported quarters. And announced 55 c . So who knows how many cash they generated this quarter

[ItsAValueTrap]

Oh yeah it takes a while to actually foreclose on somebody.  Because there have been more and more consumer protection laws (e.g. due to robosigning / servicers not foreclosing properly), the foreclosure process has been getting longer.

 

Also, the timelines vary from state to state.  Foreclosure is more expensive in some states.

 

It all takes time.

[thepupil]

Uh the slides say, results better then expected, that means better then the math I provided here. Also it does take 6-18 months like I said, and in about a year -15 months they converted 1/3... Right on track.

 

At this point your trying to just win the discussion with strawman arguments. Please study the reports before commenting

 

They paid out 1.28 over the past reported quarters. And announced 55 c . So who knows how many cash they generated this quarter

 

converting 1/3 i in a year to 18 months is "right on track" to working out 100% in 6-18 months..if only 1/3 are done in 12-18 months, wouldn't that imply a longer timeline?...I don't understand.

 

it is unclear to me that the slides saying "better than expected" proves all the math. which math are you referring to? it's been a long day

 

Not really trying to win...I just don't enjoy being called ignorant ("clearly don't understand the business model" "haven't read the 10-K" "straw man" "READ THE FINANCIALS" ) by someone who slavishly just repeats what management has said or refers me to pretty power points promising years of wondrous returns. I will admit to not understanding the all the  nuances of all this. It is an incredibly opaque and uncertain vehicle!

 

this discussions been fun but it's turning into this http://petebrown.blogspot.com/2011/10/someone-is-wrong-on-internet.html and neither of us probably thinks we are guilty but we both are.

 

we've documented our thoughts and can now watch it unfold. I will try to have the discipline to not respond and devote my attention elsewhere.

[ItsAValueTrap]

("clearly don't understand the business model" "haven't read the 10-K" "straw man" "READ THE FINANCIALS" )

 

Some people would call that trollbait ;)

[yadayada]

Uh the slides say, results better then expected, that means better then the math I provided here. Also it does take 6-18 months like I said, and in about a year -15 months they converted 1/3... Right on track.

 

At this point your trying to just win the discussion with strawman arguments. Please study the reports before commenting

 

They paid out 1.28 over the past reported quarters. And announced 55 c . So who knows how many cash they generated this quarter

 

converting 1/3 i in a year to 18 months is "right on track" to working out 100% in 6-18 months..if only 1/3 are done in 12-18 months, wouldn't that imply a longer timeline?...I don't understand.

 

it is unclear to me that the slides saying "better than expected" proves all the math. which math are you referring to? it's been a long day

 

Not really trying to win...I just don't enjoy being called ignorant ("clearly don't understand the business model" "haven't read the 10-K" "straw man" "READ THE FINANCIALS" ) by someone who slavishly just repeats what management has said or refers me to pretty power points promising years of wondrous returns. I will admit to not understanding the all the  nuances of all this. It is an incredibly opaque and uncertain vehicle!

 

this discussions been fun but it's turning into this http://petebrown.blogspot.com/2011/10/someone-is-wrong-on-internet.html and neither of us probably thinks we are guilty but we both are.

 

we've documented our thoughts and can now watch it unfold. I will try to have the discipline to not respond and devote my attention elsewhere.

Smart man, gotta know when to retreat. Maybe you can spend some of that away time on those annual reports?

[jay21]

Can we do our best not to turn this into a tech or SHLD thread? RESI and AAMC are very interesting vehicles and can be difficult to analyze. I don't think anyone is trying to mislead people with their comments in the thread.

 

 

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.

 

Right, you got the basics. But my point is that should not affect value. Using your argument, you would never invest in a liquidation because they will no longer have a recurring CF.

 

The assets in RESI have value (sometimes even tremendous value). The NPL pipeline is still robust. Once it dries up, the company could liquidate or find new high RoE businesses.

 

From the little I have seen, the bear point I agree with for AAMC is the valuation and for RESI, the fee structure. However, that does not mean RESI is a bad investment (although it might mean AAMC is?).

[thepupil]

another day and more RESI/AAMC fun  ;D but this is getting somewhere...

 

i disagree that the breakdown of carry on recurring income  vs carry on liquidation profits should not affect the valuation of AAMC and RESI and how we capitalize their earnings

 

For the purposes of AAMC : I would not capitalize the carry from a liquidation fund at a 15X multiple (or a 10X for that matter), I might capitalize management fee income of a diversified asset manager with sticky money at that multiple, but not carry from a liquidation. Carry from a liquidation is not worth a multiple; it is worth the carry from that particular liquidation. slapping a 15X multiple on it implies they can do that again 15 more times just to make our money back ; considering it takes 6-18 months (and I think it may take longer) to work all these out, a 15X multiple implies a very long duration of the opportunity set.

 

to use an absurd example : I just made 20% on my portfolio flipping pork bellies; my portfolio of $100 has earnings of $20, I have a management agreement with myself that pays one savings  account 50% of my profits on my portfolio, this account earned $10.  What multiple of earnings does my account deserve? If it deserves a 10 multiple than this account is valued at $100 (100% of AUM, just like AAMC)  even though it has no assets and I may lose money next year and not any carry flipping my pork bellies

 

So the right earnings multiple for AAMC, in my opinion is some combination of a high multiple of its ongoing steady state recurring net income (which is why I'm trying to get an idea of how long it takes to get there) and a very low multiple on the quick and juicy flipping profits, which even if they last for 5 years, are still deserving of a very low multiple.

 

For the purposes of RESI  : I wouldn't invest in a liquidation fund where 50% of distributions of profits above 4% of tangible equity go to the GP and unrealized profits  on non-marketable illiquid assets can be calculated quarterly by the GP;  the structure is terrible and open to serious abuse in the wrong hands.

[yadayada]

I think if we just assume they get a half decent rate on rentals like the other REITS, and things work out ok, then we can see how much value there would be for AAMC in that case.

 

I think payout looks like this for AAMC 35%-40%-35%-18%-18%-18%-28%-28%-18%

 

And then a bunch of balloon payments if they would sell the homes the rented, and you would get 20-40% yields again for a few years and then it falls of a cliff.

 

And the more of these early value added liquidations they can do, the bigger the % of rental yield they get. Because that would be value accretive for RESI, so RESI pays out a bigger $ per share from the rental revenue. Plus AAMC gets most of the upside.

 

And if rentals are not a success, then AAMC gets almost nothing from that.

 

example:

So let's say they add another 5 billion, for 8 billion$ total. Let's assume it happens in 2 parts and they can do it for a premium to book. so about 70m shares at ~35$ per share.

 

4 billion is rental (like they projected) rest is sold off .

 

so on 130m shares that could look like this Assuming 40% return on selling off houses over 3 years and a 7% net rental yield.

 

And last part of chain is RESI selling off their rental portfolio in about 4 years for 50% profit (inflation, discount and housing market turning up), And im assuming they break even on rentals in last 4 years

 

Profit:

530m$-530m$-530m$-280m$-280m$-200m$-200m$ (housing market recovers) 500m$-500m$-500m$-500m$

 

So on 130m shares that would be

 

4$p share in first 3 years, then 2.15$ per share, and then 1.50$ per share, and finally 3.8$ per share.

 

So AAMC would get 40% in the first 3 years, or about 640m$

39% of 280$ = 110m$ or 220m$ and then 23% of 200m$ is 100m$ total in 2 years.

 

And then of the final sell of they would get 39% again, 800m$

 

Or about 1.75 bn$ total to AAMC.

 

Return for RESI would be 2800m$+ original price of those homes = 8000m$ -4000m$ in debt so 6800m$ or about 52$ per share. (downside protection here is that if profit is small, AAMC takes a much smaller part. if profit would only be 3000bn$ total, then AAMC would take like 20% on average. And if they only sell small chunks of homes for a profit and rental is break even, almost nothing would go to AAMC , but RESI would still profit a little bit. 

 

And if they can do this several times over, obviously return would be huge for AAMC. But I thinka t some point return RESI would level off. But probably room for RESI shares to get the 60-80$ per share in the next 5 years or so?

 

Also if they add more of these portfolio's with issued shares over book value, AAMC would get a bigger cut of more rental revenue. And if you think that is even somewhat recurring, then AAMC could be worth 7-8bn$. Because every year of rental means eventual selling price is higher, and more income untill the final balloon payouts happen. And because upside is leverage on the selling part, that really adds up over 5-10 years.

 

So I think if you invest in AAMC, you have to believe a few things:

 

1. new portfolio's of mortgages available to buy

2. they at least sell them at a nice profit WITHIN A SHORT TIME FRAME (so not in 10 years or so). If that does not happen, AAMC still does not get much

3. Rental at least generates some cash

4. Capital markets don't dry up (but with a fat dividend I doubt that is really a risk here).

 

I think outcome varies wildly between AAMC being worth 10bn$ and possibly 500m-1bn$. Im not sure about likelyhood. Obviously there is demand for rentals, judging by how well the other REITS do. And RESI has a cost advantage in like 5 different ways.

 

That is my view on this whole thing.

 

bonus upside

Also I assumed on average a 6% yield (AMH gets 5% now), but it could easily be 9%. 9% for like 6 years gets you half your money back on a 8bn$ portfolio (4bn$ rented). That would be 360m$ a yeaar. AAMC gets 35% of that. so 766m$.

 

Now imagine 10 years, and imagine they can load up like 20bn$ total, or 10bn$ rentals (altisource is extremely scalable). that would be almost 3 billion$ for AAMC. Just in rental income alone. So it all depends on how much of these things they can load up, and how they perform with them. So far you have a proven model for everything but the rentals in OCN/ASPS.

 

Also let's assume that RESI shares spike up for some reason and they can sell shares at a large premium to book value. Both RESI and AAMC would do well in that case, but AAMC would do really well.

 

Finally I think that once they get cash flow going, and if there is more to buy, they can scale up signficiantly. OCN and ASPS have been proven to be extremely scalable. ASPS processed like 160k sucessfull REO's . OCN can quickly service large amounts of loans cheaply. And if you have to believe the annual report, ASPS can quickly handle a lot of rentals with their mostly automated platform. So even if there is only one house in a state somewhere, they can still rent it out, unlike other rental REITS. Those need to be concentrated. This is a pretty big advantage.

[yadayada]

What is interesting, current market cap of ASPS is about 2 billion$. But looking at eviction costs, and rental costs, that could be in the hundreds of millions to ASPS. So that could be up to several hundred million $ in income to ASPS. On a 2 billion$ market cap. So a less risky way to bet on AAMC's success could be ASPS.

 

If you think they will rent out a 5 billion$ portfolio of houses, and get a 12% yield, that is 200-300m$ a year to ASPS in revenue (assuming costs of 4-6%. Which is probably high margin for Altirsource.

 

If your extremely bullish, and think they take a large share in the rental market, then this could be hundreds of millions of FCF for ASPS a few years down the line. Which is not priced  in at all in stock of ASPS. income now comes from other things.

[thepupil]

it's not like the Ocwen family is a squeaky clean operation without its share of controversy.

 

But because of the unique skills of OCN and ASPS (by the way the controversy is all bullshit if you look close)

 

http://online.wsj.com/articles/ocwen-backdated-thousands-of-letters-to-distressed-homeowners-ny-state-says-1413909346?mod=yahoo_hs

 

big buying opportunity if this is "all bullshit".

 

Do you think the regulators did not look closely enough? Even if it is all bullshit, might this slow down the parabolic growth of RESI/AAMC just a little bit? Will the reflexivity feedback loop of accretive equity issuance reverse? Will RESI face hurdles buying NPL's? Or perhaps increased compliance costs or increased time in working out NPL's?  Might it not be a good idea to pay 100% of AUM (4X the multiple of the highest peer multiple i can find and 10X that of others) for an asset manager facing an increasing amount of scrutiny and regulatory hair?

 

is the thepupil being an annoying dick with all his questions?

[yadayada]

It is easy to throw around some general statements and conclude your right, but if you look close, you see it is all bullshit:

 

http://cdn1.valuewalk.com/wp-content/uploads/2014/03/tRW7I9h-1024x374.png

 

So they received these complaints over thousands of loans? That is 1.6% of their deliquent portfolio and 0.03% of their normal portfolio. If this was a structural problem you would see complaint rates of 10-20%. But it is only at 2.5%.

 

Basicly if you look really closely to any financial institution handling bad loans, you can always find some faults, especially on this scale. But if you look at statistics OCN/ASPS do far better the all the banks.

 

 

 

[Picasso]

The cognitive dissonance in the AAMC/RESI bulls is incredible.  Wish I had shorted the stock even though it is probably not too late.

[thepupil]

I've mostly asked questions rather than thrown out statements. I am trying to get you to question management and their promises as well; you don't appear to do so and seem very confident everything is going to work out well. RESI is an easy 5 year double and AAMC is a 3-5X in 3 years, right? RESI has no downside, right?.  In my view those are the statements being thrown out that require more backing and quantitative rigor and testing of the assumptions as well as require more empirical evidence to support with a high degree of confidence. I'm trying to get you to question your assumptions. Perhaps Mr. Lawsky will do a better job of that than I can.

 

(yada yada: Return for RESI would be 2800m$+ original price of those homes = 8000m$ -4000m$ in debt so 6800m$ or about 52$ per share.)

(yadayada: 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.)

 

Perhaps you did go into this with the same questions that I have, you looked at the body of evidence and came to a different conclusion. That's what makes a market! The same set of facts can lead to wildly different conclusions and that's why investing is fun. 

 

And to be clear I got lucky here and nothing really matters because i didn't make any money on this. This one day move and accusations proves nothing. But it may make potential participants in RESI secondaries question whether they want to pay a premium to book to pay a blended 20-50% of upside.

 

The statements I have made are that RESI has a terrible fee structure that creates weird incentives, that the dividend relative to cash flow that we know about seems aggressive, that it seems very optimistic to give them credit for a few multiples of the capital base in offerings over the next few years, and that 100% of current AUM bakes in a ton of growth. And that most of RESI's revenue to date is unrealized appreciation which is determined by AAMC. I think the facts support these statements.

 

[yadayada]

I've mostly asked questions rather than thrown out statements. I am trying to get you to question management and their promises as well; you don't appear to do so and seem very confident everything is going to work out well. RESI is an easy 5 year double and AAMC is a 3-5X in 3 years, right? RESI has no downside, right?.  In my view those are the statements being thrown out that require more backing and quantitative rigor and testing of the assumptions as well as require more empirical evidence to support with a high degree of confidence. I'm trying to get you to question your assumptions. Perhaps Mr. Lawsky will do a better job of that than I can.

 

(yada yada: Return for RESI would be 2800m$+ original price of those homes = 8000m$ -4000m$ in debt so 6800m$ or about 52$ per share.)

(yadayada: 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.)

 

Perhaps you did go into this with the same questions that I have, you looked at the body of evidence and came to a different conclusion. That's what makes a market! The same set of facts can lead to wildly different conclusions and that's why investing is fun. 

 

And to be clear I got lucky here and nothing really matters because i didn't make any money on this. This one day move and accusations proves nothing. But it may make potential participants in RESI secondaries question whether they want to pay a premium to book to pay a blended 20-50% of upside.

 

The statements I have made are that RESI has a terrible fee structure that creates weird incentives, that the dividend relative to cash flow that we know about seems aggressive, that it seems very optimistic to give them credit for a few multiples of the capital base in offerings over the next few years, and that 100% of current AUM bakes in a ton of growth. And that most of RESI's revenue to date is unrealized appreciation which is determined by AAMC. I think the facts support these statements.

http://lmgtfy.com/?q=reading+comprehension+for+dummies

 

Before you look at bodies of evidence, try to click the link I provided.

[ItsAValueTrap]

Unfortunately RESI will not generate more fees/revenues/profits for ASPS and OCN.  You can see that in RESI's 10-K under related party transactions.

 

A mortgage servicing right will throw off a lot more servicing fees than buying a mortgage outright.

[ItsAValueTrap]

The Benjamin Lawsky thing:

 

In my opinion, he's gone on a fishing expedition looking for wrongdoing.  So far, he hasn't found much.  However, he's been a total dick and has issued a lot of press releases to hurt Ocwen / Erbey / Altisource.  Ultimately he may be able to extort money out of Ocwen.  It would make sense for Ocwen to settle (like they did with the CFPB for chump change) because Lawsky gets to use other people's money for his fishing expedition.

 

It's highly unlikely that he will target RESI/AAMC.  They account for a very small number of homeowners so it's hardly worth going after them.  Plus the consumer protection issues wouldo happen with Ocwen and its servicing practices, which he's already looking at.

[yadayada]

Regarding the investment in cleanup calls relating to MBS, some of these whole loans are left over. Do you plan to sell them to potentially Altisource Residential? Or would you expect it to be bid out to several parties?

 

William Charles Erbey – Executive Chairman and Chairman of Executive Committee

We would have to bid those out. We just can’t assign them to one company. But I think you’ll see a large — it will create a meaningful amount of product that will be coming to market as a result of that.

 

Kevin Barker – Compass Point Research & Trading, LLC, Research Division

Can RESI participate in these auctions? Or is that off limits?

 

William Charles Erbey – Executive Chairman and Chairman of Executive Committee

That would be something you’d have to ask RESI.

 

 

This is interesting.. AAMC now at 550. So price has come down as well.

 

Given that RESI's Q2 callw as before that, I think we will get some interesting information next Q call. By the end of the year we will also see how well they do with the rentals. If you get a several thousand sample size on that it will be interesting to see what is happening.

[thepupil]

Price has gone from very very very optimistic to just very very optimistic.

 

AAMC's minor drop does not change the fact that it is valued at multiples of peers, which bakes in a lot of AUM growth.

 

For example:

 

http://www.valueinvestorsclub.com/value2/Idea/ViewIdea/120305

 

Apollo trades for $23.2 and has about 400MM shares according to the VIC writeup, so $9.2B market cap. They seem to owns some assets too but let's just ignore that. About half of Apollo's AUM is carry eligible so it gets those juicy incentive fees on about $80B

 

AAMC trades for $1.3B.

 

            Market cap        AUM        Strategies

AAMC :    $1.3B            $1.3B            1

APO  :    $9.2B        $158.0B          Many

 

Would you rather own all of AAMC and receive the incentive fee on $1.3B  or 14% of Apollo and receive the carry on $11B of carry eligible assets + management fee on the management fee only stuff?

 

I would choose $11B of diversified strategies today versus $1.3B + more tomorrow in a single strategy. But if RESI becomes $10B vehicle as you think is possible, the math gets different since RESI earns higher fees (that whole egregious 50% above 4% of tangible book thing ).

 

I know nothing about Apollo, just using this to exemplify the optimistic pricing of an asset manager trading at ~95% of AUM. RESI really has to grow grow grow for AAMC to be worth anything close to its current market cap (particularly on a present value basis).

 

Agree with you this quarter is crucial for RESI / AAMC because if RESI has a bad q and the price drops it will get well into discount to tangible book value  territory which destroys the prospect of accretive issuance and makes it a lot harder to grow AUM. I would not bet on that happening since earnings in any q can be divined when most of revenue is mark to market unrealized gains on a small portion of illiquid assets.

 

Several thousand rentals would help the thesis. Isn't their goal a meager 1000 by end of 2014?

 

yadayada, since you think RESI is solid / low risk, have you considered selling puts on it?

 

the June 2015 $17.50's can be sold for $2.10, which is a 12% gross return over 8 months ~18% annualized to commit to buying RESI at 76% of its current tangible book value. just something to consider if you believe in Erbey.

[ItsAValueTrap]

Rising home prices might ensure that RESI hits it out of the ballpark in the next few quarters.  Since they bought their NPLs, case-schiller home prices have gone up a bunch.

 

More and more regulations have lengthened the foreclosure process.  This increases the value that Ocwen can generate for RESI because Ocwen has gotten good at doing certain things to decrease foreclosure timelines and to avoid foreclosures.

 

I know nothing about Apollo, just using this to exemplify the optimistic pricing of an asset manager trading at ~95% of AUM. RESI really has to grow grow grow for AAMC to be worth anything close to its current market cap (particularly on a present value basis).

In the past, RESI really did grow AUM by more than 10 times.

 

If their next few quarters are great due to rising home prices, then it may be possible that they raise a lot of capital again.

[thepupil]

Yes, AAMC AUM did grow dramatically but  $100MM-->$1B  is a little different than $1B --> $10B.

 

 

[yadayada]

They will have about 3 bn now. If they hit it out of the park with current assets you almost get your money back. Double aum, and aamc is worth 3x. Double again and aamc is a homerun. You don't need 30bn of loans to make $ on aamc. 6-12 bn and you make good$. That said I'm on sidelines

[thepupil]

Rising home prices might ensure that RESI hits it out of the ballpark in the next few quarters.  Since they bought their NPLs, case-schiller home prices have gone up a bunch.

 

End of '13 assets were $1.4B, 6/30 assets $2.6B. So haven't a large portion been purchased this year? Are you saying that the marks in terms of fair value are stale and are higher now? Or that the older assets are in great shape because of recent HPA? Everything I read says HPA is slowing, still nice but slowing (http://www.businessinsider.com/sp-case-shiller-home-price-index-sept-30-2014-9). So I'm a bit confused by what you mean.

[ItsAValueTrap]

End of '13 assets were $1.4B, 6/30 assets $2.6B. So haven't a large portion been purchased this year? Are you saying that the marks in terms of fair value are stale and are higher now? Or that the older assets are in great shape because of recent HPA? Everything I read says HPA is slowing, still nice but slowing (http://www.businessinsider.com/sp-case-shiller-home-price-index-sept-30-2014-9). So I'm a bit confused by what you mean.

 

I'm saying the older assets are in good shape.

[thepupil]

Great headline numbers to support those bullish of RESI/AAMC.

 

The breakdown is getting a little better, from 99% capital appreciation (writeups and realized gains) to 96%, but not a lot of recurring income yet.

 

Revenue Breakdown for                    Q3                Q2

Unrealized Gains                              81%              90.5%

Realized Gain on mtg loans              13%                9.3%

Realized gain on RE                            3%

Interest                                              2%

Realized gain on re-prf mtg              0.2%

Rental                                              0.3%              De Minimis

 

$31MM dividend declared. How much cash produced?

 

Revenue - unrealized gains = $20.4MM  Total expenses =$70MM

 

The bulk of the expenses appear to be of the cash sort.

 

So where'd the dividend that got paid to RESI and AAMC come from?

 

RESI shareholders.

 

I think this Q is another "investing inkblot". Plenty of fodder for bulls "look at all those unrealized gains, they're making a killing on these workouts" and bears "um where's the cash flow? 50% if mark to market gains on an illiquid portfolio getting paid to the GP quarterly is not okay; did i just pay myself?"

[jay21]

I might pick up some RESI if it breaks book. Actually if it breaks book, I could envision a pretty big sell off due to the break in the "accretion model".