AAMC - Altisource Asset Management

[thepupil]

yes and no.

 

It makes me feel better about RESI (on which I own some calls) and the solidity/realness of its book value as they convert those unrealized gains to cash and worse about AAMC and the multiple it deserves. AAMC still looks really expensive.

 

RESI is still out-dividending the shit out of its cash flow (about $30MM this q alone) and does not have access to equity capital so that's a tough dynamic in which to buy, even if the gains are solid. You see how book is declining (because they are dividending out more than NI and haven't raised equity) and taxable NI is also declining.

 

I also can't help but dislike that they are buying from Blackstone now. Tough to see how they are good guys to have on the other side of the table.

 

basically, I think the bull blue sky case for AAMC is almost busted completely and it still should be lower from here, but RESI's p/tbv discount and capital return is compelling as long as their earnings are real and they aren't committing fraud. haven't had a chance to read through the q's yet though so i reserve the right to change my mind.

 

EDITING SO AS NOT TO UNNECESSARILY BUMP: clearly the market is starting to get a little worried about liquidity at RESI and a divvy cut; I'd like to see them cut the divvy and maybe another leg down in the stock, but RESI valuation getting really interesting down here. this is basically a way of buying levered home equity at a big discount.

 

EDITING AGAIN: Also, I wonder if the bulk purchase of rental properties will count towards the fee ratchet. if so then that's bullshit and would be negative for RESI.

[ItsAValueTrap]

I think the buying of SFR homes from Blackstone may be a huge negative.  The press release highlights diversification:

 

we took crucial steps to diversify Residential’s acquisition strategies to grow its single-family rental portfolio

http://www.sec.gov/Archives/edgar/data/1555074/000155507415000033/a991aamc2q2015earnings.htm

 

I'd rather see AAMC try to generate high returns than to diversify.  I don't see how they are going to create a lot of value from buying SFR... perhaps they should have stuck to their old playbook and get their hands dirty with non-performing loans.  *It's unclear to me if their 2 new servicers are any good at dealing with NPLs.  I don't know if there are attractive returns in the NPL market.

 

2- AAMC fees are much lower because RESI's returns were much lower this quarter.  AAMC excl. Newsource generated $0.835M in net income this quarter.

 

3- AAMC's hiring of senior personnel is a negative to me.  If they keep their overhead down they will make more money.

 

The Company also announced that it is adding depth and hiring senior personnel on all fronts, including five recent senior hires in finance, portfolio management and capital markets to strengthen its management and support teams.

http://www.sec.gov/Archives/edgar/data/1555074/000155507415000028/aamc8-kexhibit991apge.htm

 

EDIT:  Or I could be wrong.  On the conference call, they address these points.

[thepupil]

Share repurchase for RESI announced (after the awkward and bumbling exchange on the call yesterday, I'm not surprised)... RESI seems to be flailing a bit. Don't want to cut the dividend, can't raise equity, now announcing a share repo.

 

I wish they'd just cut it and be done with it; with stock at 2/3 book, just harvesting cash and repurchasing is a huge return (but of course they want to grow grow grow for AAMC's benefit).

 

http://finance.yahoo.com/news/altisource-residential-corporation-announces-100-120446126.html

 

 

Fred Small - Compass Point

 

I have a couple, just first can you talk a little bit about your capital allocation priorities going forward just including the sort of the turn away from NPL purchases to single family rental purchases and then the potential for share repurchase and how you evaluate share repurchase in the context of what’s the best return?

George G. Ellison - CEO

 

Sure, let’s sort of take that sequentially. Still bidding on NPLs, lot of flow in the marketplace. HUD as you know had a big auction. That was probably one that fit us the best but I think one of the money center banks is out this week. I think the GSCs were two weeks ago so flow is still very strong. We’re still in the flow of that. It is really, we are looking to see what is accretive to the current book and if it’s going to be loans we are going to compare that to homes which the purchase we just made, we thought was better for the -– to be accretive with the current book as I said. So I wouldn’t prioritize one of those more than the other.

 

I think we compare them every day and as you know if you’ve listened to a lot of calls there is a lot of packages big and small of homes that are out now. There is a lot of liquidity starting into that so, and the third piece -- those I’d say you compare those, we have to compare those all the time, every day. And then we will also as I said we have been looking at homes every day. So now what used to be just one channel there is two, three, and we might develop more.

 

So really just trying to optimize what the best is. As for the share repurchase, you and I and Rob have chatted about that since last year. That is something that we look at. We are really trying to build this thing and make it strong and sustainable and make it as large and as profitable as we can. And so share repurchase although mathematically sometimes you and I have debated whether it is the right thing to do, I think we are a little more focused on using the capital to go after a lot of new things that are out there that have very, very good yield to them. And so for right or for wrong, when we are looking at things and there is more packages out there that we think are strong for our company, reducing the size of it seems somewhat across purposes. But that said we look at it all the time and we won't rule it out. And Rob, would you add anything to that.

Robin N. Lowe - CFO

 

I agree to that completely.

George G. Ellison - CEO

 

Is that fair Fred.

Fred Small - Compass Point

 

Well, I think that if you think about the long-term growth potential for the company, getting the stock back to book value, would be the fastest way to do that and I think that the fastest way to achieve that is probably by repurchasing shares and showing that you are committed to shareholder value and aligned incentives. And I think it would remove sort of the overhang from AAMC and possible sort of misalignment of incentives with just continued growth if you are really focused on the highest return opportunity for capital allocation but I will get off --?

George G. Ellison - CEO

 

So, that’s completely, completely fair. And you know we have spent a lot of time with all of you. We are very, very seriously committed to shareholder value and increasing it. I just -- we are not ruling anything out but I think we are sort of building this and getting it out of the distress situation as you know sequentially. And so some of the first feedback was can you guys buy, do you have liquidity to buy, will you buy, can you compete and buy, and so we have. And we will buy more. And so, again as we are very conservative, we wanted to -- you can only move as fast as you can. So, what we wanted to do was show that the acquisition question which was hanging over the stock is gone. And it will be gone, and we will continue to grow this thing.

 

That said this point you bring up is obviously very, very critical. We want to see how our shareholders view accelerating our growth to a rental -- to a large rental REIT. And as we talked about and as we will talk about more on the one on ones, the push that makes sure that, that dividend stays there and grows is paramount. I think that rentals and growing rentals quickly at the right yield will make sure that dividends stays in place. And that should make the stock react. But we will have to see what people think today or over the next few weeks.

[ItsAValueTrap]

Do you think they'll actually repurchase shares?  The press release suggests to me that they aren't committing to it.

 

To me, if they're going to do it, they would say something bullish about the stock.  This is to satisfy the lawyers and to cover your ass against lawsuits down the road if shareholders complain that they were ripped off because insiders knew that the company was undervalued.  So if you're going to buyback shares, many companies nowadays will explain why they think the shares are undervalued or attractive.

[thepupil]

No I don't think they'll use the authorization AND pay the divvy. The divvy is $31MM / quarter ($120MM / year) or just under 10% of equity. If you layer on significant share repurchase, that's just too much capital return for an externally managed fund to ever do (because capital return decreases your fees) AND they aren't generating that kind of cash.

 

This whole dynamic where they create taxable income without generating the commensurate cash seems to be biting them in the ass. First 6 months they generated $59MM of estimated REIT taxable income, despite only $25MM of GAAP net income and like $65MM of revenue outside of the unrealized gain. I still don't fully understand how/why unrealized gains generate tax in this instance. Assistance from someone  more knowledgeable and less lazy than I would be appreciated here.

 

At these stock prices and current state of things, I think RESI should just convert to a C-Corp and cut the dividend to zero and focus solely on share repo or NAV growth in order to force Re-Rating. Trying to maintain this 15% yield bullshit seems like wishful thinking at best. They generate large losses at their taxable REIT subsidiaries and I think the tax leakage would be small and worth it while they right the ship. Also the new agreement doesn't incentivize AAMC to jack up the divvy as high as possible. With the old agreement, i understood why they were so giddy to generate taxable income (give them reason to funnel dat paper to old Billy boy).

 

This thang is 50% upside to book and 100% upside to management's possibly rose colored assessment of NAV. In my opinion, the stock isn't going to magically re-rate if everyone thinks the dividend is a sucker's yield and the divvy is the problem, not the solution.

 

In terms of AAMC, if RESI isn't making its hurdle ROE, and they are only earning management fees (0.015*1250=$18MM) and corporate overhead is rising and legal costs are increasing (see the 10-Q), I could see them earning nothing and earning less than nothing if you normalize the cost of the preferred stock (let's say 6% / year = $15MM). I think AAMC is still quite expensive and unless things improve at RESI in terms of ROE or they get new clients/products it could be a zero. Still seems like a terrible risk / reward as a long (particularly relative to RESI, AAMC can't suceed without RESI re-rating and growing and RESI has plenty of upside if that happens)

 

Fun Fact: RESI's REO portfolio on Maine consists of 13 properties with a weighted average age of 124 years. must be like a 300 year old house in there skewing the average lol. the 1 in DC is 105 years old. the whole portfolio's weighted average age is 36 years, a little scary. my fear with RESI has always been they make great returns on 20% of the assets and the other 80% are terrible and difficult to harvest. What's a 40 yr old foreclosed on house look like and how rentable is that without substantial repairs?  (apparently the median home age in the US is 35 yrs... so maybe not bad)

 

 

[thepupil]

every time i point out AAMC still looks overvalued...it falls...and i have failed to short it every single time...i suck

 

at some point it will make sense for RESI to put in a lowball bid for AAMC (or better yet RESI should buy AAMC's preferred from Luxor (at a discount since it pays no coup) and then RESI would really have AAMC by the balls and effectively would be paying itself since AAMC owes $250MM to the pref.

 

So Luxor owns 400,000 shares of AAMC (16% of the company) which has a market value of $20MM. Their preferred is a $250MM investment, so they own 10X the value in the AAMC preferred than the common, so their interests are to keep the preferred's value, the best way to do this would be to negotiate a deal with RESI where RESI gives cash or shares for the preferred and effectively gets back its upside that it pays to AAMC.

[thepupil]

$24...(-96% over 11 months of thread)

 

I think it may be time to buy a little AAMC as an option on the nuisance value. At the current market cap, RESI could buy 51% of for $25MM to take control get rid of all fees paid to AAMC and effectively become an internally managed REIT, which would better align interest and possibly lead to a lower cost of capital. they still need to deal with luxor's pref somehow (which would not be happy if RESI neuters AAMC's earnings power further).

 

If they took out the preferred at par and bid for AAMC at current price, it would cost them $300MM to internalize, which is too much. Probably best for RESI to start buying AAMC and hold Luxor's feet to the fire to try to buy the pref at a discount.

 

Either way, I think AAMC starts to be an interesting speculation down here at a $50MM market cap. On a pure fundamental/earnings power valuation, it's probably worthless or at least a way OTM option, but the value of controlling AAMC to determine RESI/AAMC fee structure  (which is very hard to quantify) may be more than the market price.

[Picasso]

I can't imagine how the Luxor preferred is worth anywhere close to par value.  I've been trying to think through the potential outcome here and just can't get comfortable with the price even at $25.  Maybe I'd get interested around $0.50.

 

Sort of comical to read back through this thread.

[ItsAValueTrap]

RESI/AAMC earnings out.

http://www.sec.gov/Archives/edgar/data/1555039/000155503915000059/a991resi3q2015earnings.htm

 

1- Slightly negative GAAP earnings for the quarter.

2- Repurchased $20.0 million of outstanding common stock under Board-approved repurchase plan.

 

Over time I think earnings will be far less lumpy.  The Atlanta rental home acquisition should have a cap rate of at least 6% by my guestimation.  They bought the homes at around $54/sqft.

 

[ItsAValueTrap]

Anybody looking at RESI lately?  The current share price strikes me as crazy.

 

They own real estate in various forms.  Lots of NPLs.  The market for NPLs is good- people are paying high prices for them (which is why AAMC doesn't want RESI to buy NPLs at low yields).  RESI can sell off its assets to buy back more shares and make some really easy money (though that might be somewhat bad for AAMC, although it helps AAMC hit its hurdles).

[thepupil]

Been looking at it, own in small size; bought calls when I thought AaMC would get booted, that didn't work, then bought outright @ $10ish, was planning on opening a thread.

 

I'm worried a little bit about liquidity and their dependence of repo facilities that mature this year. I think that is one of the reasons the stock has sold off  even more so than other hairy real stocks. I've laid out the structure of what they own with all the various retained tranches of the securitization  and stuff. Not home this weekend but will provide that later.

 

Really it's just a question of whether or not the assets are worth what they say they are and the company not having to engage in any kind of forced fire sale because of the illiquid nature of the assets and the recourse nature of the liabilities. Despite the apparent cheapness,(0.4x book and creating these houses at really low values), I do think there's a good bit of risk here but the compensation for the risk is certainly quite high.

 

I feel more comfortable that they've slashed the dividend and that AAMC is a zero. Makes it easier for this to get sold (which you may have seen the 13D pushing for that)

 

AAMC is worthless in my opinion and the market's. Luxor's preferred and position in RESI makes them incentivized to protect their interest there. Just an OTM option at this point

[jay21]

How does RESI compare to other yield plays: mREITs, REITs, and the fortress vehicles? Nothing special about it in this landscape. Unless they are the closest to kicking out their sponsor, then it probably has a better catalyst.

 

Im interested to see what happens to OCN and ASPS. It looks like they survived and started returning capital. OCN even mentioned growth.

[thepupil]

http://seekingalpha.com/news/3119456-altisource-residential-activists-speak

 

 

An owner of more than 4% of Altisource Residential (RESI -1.2%), the RESI Shareholders Group notes the current stock price just above $9 is only about 40% of book value.

 

The factors, says the group: 1) The shift in strategy from being a buyer of distressed mortgages to the outright purchase of single-family rentals; 2) Conflicts of interest from the external management structure and the master services agreement with ASPS; 3) A conflicted board with ongoing ties to former Chairman Bill Erbey despite his forced resignation.

 

It's "economic insanity," says the group to use company capital to buy homes at par, which - given the current stock price - immediately trade at less than 50% of the purchase price.

 

It serves only to generate fees for RESI's external manager AAMC and external services provider ASPS. The group notes Bill Erbey owns just 3.6% of RESI, but 30.9% of ASPS and 29.4% of AAMC.

[thepupil]

completely agree w/ below. looks like the stock is getting a little love as the absolute cheapness / prospects for change are outweighing the lack of confidence in management.

 

 

 

 

 

Dear George,

 

It is unfortunate that you have chosen to refuse our invitations to discuss your strategy for RESI.  As a former Wall Street executive, we would have expected that you would be able to engage in a standard commercial conversation, articulate your strategy and not hide behind layers of lawyers.  While our goal for the maximization of RESI shareholder value is very clear and transparent, you have been unable to present a compelling and credible strategic vision to shareholders. Instead you have chosen to remain silent while RESI’s share price languishes near all-time lows.  In anticipation of the Fourth Quarter earnings call currently scheduled for February 29, 2016, we thought we would share some thoughts on RESI and your “strategy.”

 

During the Third Quarter earnings call, you described your intent to liquidate all non-performing loans (NPLs) and reperforming loans (RPLs), emphasizing your belief that they were marked properly on your balance sheet (despite significant investor concern regarding your non-cash mark-to-market accounting which provided significant incentive fees to your conflicted external manager). You also commented that the duration to resolve the loans would be in the “12 to 18 month” timeframe or “sooner.”

 

Based on these statements and given the more conservative nature of your accounting for the real estate owned, an investor would believe that you are confident in your stated tangible book value which approximates to $22 per share, or an almost 135% premium to RESI’s recent share prices.

 

Given your stated intent to liquidate two-thirds of your balance sheet, investors deserve to understand why they should take the risk of RESI management reinvesting their capital in your new strategy.

 

We believe that any new strategy should be evaluated against the baseline option of a simple liquidation at book value or other strategies to produce a premium to book value. You must be aware that publicly traded single-family rental REITs trade at significant discounts to their estimated net asset values despite the fact that the two largest competitors enjoy the benefits of significant scale not available to you and do not have the stigma of external management.

 

We have been very clear in our belief that the low valuation of RESI shares is attributable to the shift in strategy from being a buyer of distressed mortgage loans to the outright purchase of single-family homes and the conflicts of interest that arise from the external management structure.

 

 

 

 

 

Since RESI shares trade at approximately 40% of book value, every single-family rental purchase is immediately value destructive. Does RESI management really believe that the capital markets would provide you and your conflicted external management and services providers with capital to deplete in this manner if you were not already holding $1.2 billion of investors’ capital that was raised for a very different strategy?

 

It is time for you to be honest with yourself and shareholders about the value that could be restored by not reinvesting shareholders’ capital in your current value destroying strategy.

 

Sincerely,

 

 

RESI Shareholders Group

[thepupil]

the fight for the meth lab mortgages is heating up!

 

 

RESI Shareholders Group Sends Letter to Altisource Residential Chairman

PR Newswire

 

NEW YORK, March 4, 2016

 

NEW YORK, March 4, 2016 /PRNewswire/ - RESI Shareholders Group owning over 4.5% of the outstanding shares of Altisource Residential Corporation ("RESI" or the "Company") (NYSE: RESI) announced today that it has released an open letter to David Reiner, Chairman of the Board of Directors of the Company (the "Board").

 

Full text of the letter follows:

 

March 4, 2016

 

"RESI: Destroy Shareholder Value & Insert ASPS Advertisement Here"

 

Source: Fred Small's March 1, 2016 report from Compass Point Research & Trading, LLC

 

Dear Mr. Reiner,

 

It is clear that RESI's Board and management's attempt to justify your current value-destroying strategy during the earnings call on Monday was a resounding failure. In the face of shareholder opposition, sell-side analyst criticism and negative market reaction, management has redoubled its commitment to pursuing a failed and discredited strategy of acquiring single-family rentals ("SFR").

 

On the call, Jade Rahmani, a research analyst at Keefe, Bruyette & Woods, encapsulated shareholder concerns with this strategy when he said:

 

"I think the essential disconnect is your stock is trading at 48% of book value, which means you can buy these assets, the same assets that you are going out and paying market price for at $0.50 on the dollar, which would be highly accretive to shareholders and that's a provable thing whereas the single-family rental strategy with ASPS is more uncertain just given that you haven't been at that business for an extended period of time. So I think that buying back the stock in meaningful amounts would be compelling at this point."

 

RESI CEO, George Ellison has displayed a frightening inability to explain why his strategy will work.  Clearly, investors and analysts are unable to understand how purchasing homes could be a better opportunity than buying back RESI shares at less than 50% of tangible book value or liquidating RESI completely. CEO Ellison effectively threatened shareholders by citing friction costs and timing in the event of a liquidation, although he is already undertaking a full liquidation of the legacy assets anyway. Pushed further, however, about the true NAV given these purported friction costs, he reiterated that the stated book value of $20.73 does indeed represent fair value, almost double the current share price.

 

Shareholder confidence in this management has been further eroded by CEO Ellison's irrational commitment to Altisource Portfolio Solutions S.A. ("ASPS"). Since the call, ASPS is now trading down 35% on recent news. RESI's Board must recognize the futility and harm of propping up the Erbey complex of formerly related entities and must focus strictly on their fiduciary duty to RESI shareholders alone.

 

Since the date of CEO Ellison's appointment, RESI's share price has declined by approximately 40%. It is clear to us this represents an unequivocal vote of no-confidence in the Company's current strategy and its management. Shareholders will have a chance to express their views when they decide on the makeup of the post-Erbey Board at the next Annual Meeting, which we expect will be held in May.

 

We urge you to take your role as our Chairman seriously and restore value by ceasing the drain of shareholder capital in management's current value destroying strategy.

 

Mr. Reiner, you are a fiduciary to RESI shareholders, not Mr. Ellison, AAMC, ASPS or any other conflicted group. We demand you act in the best interest of all shareholders and pursue the best risk adjusted outcome for RESI by halting the SFR strategy.

 

Sincerely,

 

RESI Shareholders Group

 

CERTAIN INFORMATION CONCERNING THE PARTICIPANTS

 

BLR Partners LP, together with the other participants named herein (collectively, "RESI Shareholders Group"), intends to file a preliminary proxy statement and an accompanying proxy card with the Securities and Exchange Commission ("SEC") to be used to solicit votes for the election of its slate of three highly-qualified director nominees at the 2016 annual meeting of stockholders of Altisource Residential Corporation, a Maryland corporation (the "Company").

 

RESI SHAREHOLDERS GROUP STRONGLY ADVISES ALL SHAREHOLDERS OF THE COMPANY TO READ THE PROXY STATEMENT AND OTHER PROXY MATERIALS AS THEY BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION. SUCH PROXY MATERIALS WILL BE AVAILABLE AT NO CHARGE ON THE SEC'S WEB SITE AT HTTP://WWW.SEC.GOV. IN ADDITION, THE PARTICIPANTS IN THIS PROXY SOLICITATION WILL PROVIDE COPIES OF THE PROXY STATEMENT WITHOUT CHARGE, WHEN AVAILABLE, UPON REQUEST. REQUESTS FOR COPIES SHOULD BE DIRECTED TO THE PARTICIPANTS' PROXY SOLICITOR.

 

The participants in the solicitation are BLR Partners LP ("BLR Partners"), BLRPart, LP ("BLRPart GP"), BLRGP Inc. ("BLRGP"), Fondren Management, LP ("Fondren Management"), FMLP Inc. ("FMLP"), The Radoff Family Foundation ("Radoff Foundation"), Bradley L. Radoff, OP Select Fund, L.P. ("OP Select"), Oliver Press Investors, LLC ("Oliver Press Investors"), Oliver Press Partners, LLC ("Oliver Press Partners"), Augustus K. Oliver II, Clifford Press, Andrew L. Platt and Joshua E. Schechter.

 

As of the date hereof, BLR Partners beneficially owned directly 1,961,400 shares of Common Stock, including 20,000 shares of Common Stock underlying certain call options exercisable within 60 days of the date hereof. BLRPart GP, as the general partner of BLR Partners, may be deemed to beneficially own the 1,961,400 shares beneficially owned by BLR Partners. BLRGP, as the general partner of BLRPart GP, may be deemed to beneficially own the 1,961,400 shares beneficially owned by BLR Partners. Fondren Management, as the investment manager of BLR Partners, may be deemed to beneficially own the 1,961,400 shares beneficially owned by BLR Partners. FMLP, as the general partner of Fondren Management, may be deemed to beneficially own the 1,961,400 shares beneficially owned by BLR Partners. As of the date hereof, Radoff Foundation owned directly 25,000 shares of Common Stock. As of the date hereof, Mr. Radoff owned directly 580,000 shares of Common Stock and, as the sole shareholder and sole director of each of BLRGP and FMLP and a director of Radoff Foundation, may be deemed to beneficially own the 1,961,400 shares beneficially owned by BLR Partners and the 25,000 shares owned by the Radoff Foundation. As of the date hereof, OP Select owned directly 21,000 shares of Common Stock. Oliver Press Investors, as the general partner of OP Select, may be deemed to beneficially own the 21,000 shares owned by OP Select. Oliver Press Partners, as the investment manager of OP Select, may be deemed to beneficially own the 21,000 shares owned by OP Select. Each of Messrs. Oliver and Press, as a managing member of Oliver Press Investors and Oliver Press Partners, may be deemed to beneficially own the 21,000 shares owned by OP Select. As of the date hereof, Mr. Schechter beneficially owned 25,000 shares of Common Stock. As of the date hereof, Mr. Platt does not beneficially own any shares of Common Stock.

 

SOURCE RESI Shareholders Group

 

[thepupil]

http://seekingalpha.com/article/3983990-altisource-residential-trading-less-50-percent-net-asset-value

 

a quick article by Chad / Peridot Capital on RESI.

[jrallen81]

Does anyone follow this closely? The price action is just crazy so I was curious.

[thepupil]

I can speak a little to the recent volatility.

 

RESI announced a transaction that greatly increases their number of single family rentals

https://www.bamsec.com/filing/119312516728741?cik=1555039

 

This increases AAMC's fee to the maximum, see slide 4, management fee goes to 2%, incentive goes to 25% (after meeting a 7% preferred return)

http://files.shareholder.com/downloads/AMDA-1HZPVK/3066972410x0x818964/9921944D-3BBF-4D5A-AD9D-A9E55AAB24AC/AAMC-4Q-14_Earnings_PPT_April_1_2015_FINAL_.pdf

 

the increase in fee schedule (and supposed viability of RESI as it transitions to mare cash flowing assets), makes it somewhat more likely that AAMC may just may have common equity value. AAMC is burdened by a 0% $250mm par value preferred stock which ranks senior to the equity and comes due in the next few years (I think 2020 or 2021). If AAMC can somehow turn RESI around and increase the size of RESI and start making money again, then maybe some solution can be had that takes care of that obligation and makes the common worth >0.

 

You can see what AAMC's balance sheet looks like when you remove RESI stuff that was consolidated in their amended 10-Q.

https://www.bamsec.com/filing/155507416000075?cik=1555074

 

 

Luxor, a hedge fund, owns 100% of the zero coupon preferred, 12% of AAMC, and 7.5% of RESI. Deciphering their interests and negotiating leverage is key to figuring out if AAMC has any value.

 

[ItsAValueTrap]

I think of AAMC as an out of the money call option on RESI.  AAMC will be a good asset manager if RESI trades above NAV and is able to sell shares, growing AAMC's assets under management.

 

AAMC going up while RESI going down slightly doesn't make that much sense to me.

 

*It's possible that AAMC does something brilliant outside of RESI.  It depends on how highly you think of the CEO.

 

This increases AAMC's fee to the maximum

That seemed inevitable?  (To me at least)

[thepupil]

One potentially fascinating thing about AAMC is that the preferred does not appear to have any means of restricting share repurchases by AAMC (at least I didn't find anything in the docs linked below), and in fact AAMC has been buying back its shares.

 

AAMC has a common market cap of $65mm, cash of $40mm and $15mm of RESI stock, so AAMC has $55mm of liquid assets (84% of its common's market cap) and no liabilities due until March 15,2020.

 

The "responsible" thing to do would probably be to hold onto that cash and build up liquidity to be able to re-fi/restructure the prefs in 2020 should Luxor decide to redeem, but I think it would make sense to just go all-in and reduce the share count as aggressively as possible to make AAMC an even more levered option (maybe by tendering for say 58% of shares at $50 / share). Additionally, Luxor is in total control of the value of the common in 2020, so they could buy more AAMC common and then not redeem the pref (which would allow AAMC to use available cash to retire shares).

 

It's a fascinating situation with a zero coupon preferred with no real rights other than liquidation in 3.5 years.

 

ValueTrap, do you have a view how it will play out?

 

https://www.sec.gov/Archives/edgar/data/1555074/000155507414000008/ex31seriesapreferred.htm

https://www.sec.gov/Archives/edgar/data/1555074/000155507414000008/form8-kseriesapreferred.htm

https://www.sec.gov/Archives/edgar/data/1555074/000155507414000008/ex991seriesapreferred.htm

[thepupil]

That seemed inevitable?  (To me at least)

 

It wasn't inevitable if RESI collapsed or continues to have NAV deterioration; what if they had to use up their liquidity on a repo line that got cut, rather than buying more SFR? Also I didn't realize they could increase their fee schedule through inorganic acquisition of SFR. I should have assumed given AAMC's past that it would be unfair/ridiculous like that, rewarding AAMC at RESI's expense for doing something that requires no skill (buying assets from PE).

 

RESI was at 40% of book at one point, pricing in some pretty terrible scenarios. I'm still not convinced RESI is viable, and I own the stock simply because I think it has positive EV and the risk/reward is positively skewed, but it still is hot steamy pile of shit run by conflicted people.

 

I mean this most recent deal is with 75% leverage, all of which is floating rate and LIBOR is doing nothing but going up lately, and they are going to have to pay for extenral property management, so it's not really clear to me if they did this deal to make money, or jsut to provide some hope that AAMC has value (by ratchting up the fee schedule). they spent $163mm of cash for the equity check on that; their stock is at 56% of book and has a $560mm market cap. If their assets are at all real and the value is not completely fabricated, value per RESI share would obviously have best been built by taking in stock. But who cares about that, more important to try to get the OTM option that is AAMC closer to the money.

 

 

[ItsAValueTrap]

in fact AAMC has been buying back its shares.

They bought back shares from Luxor... the people who own the preferred.

 

2- The current NAV discount on RESI is not good for AAMC.  But a lot can happen in 3.5 years?  They could theoretically do something brilliant outside of RESI... do asset management for other asset classes.

 

3-

I mean this most recent deal is with 75% leverage

Well... an individual in the US can buy a house with 96.5% leverage.  It used to be 100%+ leverage.

 

That being said, they do have an incentive to run on the riskier side with leverage... because some people buy stocks based on dividend yield.

 

ValueTrap, do you have a view how it will play out?

Shrug, out of the money call option?

 

- OTM call options usually go to 0

- Any number of crazy things can happen that would push the option into the money.

 

And also it depends on your faith in the CEO.  His resume is stacked.  And there was some minor controversy over what he did in Las Vegas (apparently what happens in Vegas doesn't stay in Vegas).

 

Good things he did:

- Cleverly bought shares from Luxor at a minor discount to mkt value.

 

Not successful so far:

- RESI NAV discount

- activists at RESI (offset by ASPS buying RESI shares... ASPS having a vested interest in being the servicer for all of RESI, though they did the waiver for the latest deal)

[thepupil]

no dog in this fight having briefly owned RESI when it traded at very low multiples of book...

 

just updating here since it looks like RESI is being sold

 

RESI equity offerings

 

$18.75 in 4/2013

$21 in 9/2013

$34 in 1/2014

 

participants in the RESI offerings lost between 10-50%. Bill Erbey value creation for the win.

 

AAMC went from $30 to $1200 to $14.

 

 

Front Yard Residential Enters Definitive Agreement to be Acquired by Amherst Residential for $12.50 Per Share in Cash

Transaction Valued at Approximately $2.3 Billion

AUSTIN, Texas and CHRISTIANSTED, U.S. Virgin Islands, Feb. 18, 2020 (GLOBE NEWSWIRE) -- Amherst Residential, LLC (“Amherst Residential”), a privately-owned, vertically-integrated real estate firm, and Front Yard Residential Corporation (“Front Yard” or the “Company”) (NYSE: RESI), two industry leading providers of high-quality and affordable rental homes, announced today that the companies have entered into a definitive merger agreement, whereby Amherst Residential will acquire Front Yard in a transaction valued at approximately $2.3 billion, including debt to be assumed or refinanced.

Under the terms of the agreement, Front Yard shareholders will receive $12.50 in cash per share. The per share purchase price represents a premium of approximately 14.2% over the per share closing price of Front Yard’s common stock on May 20, 2019, the day prior to the public announcement of Front Yard’s decision to initiate a formal process to explore strategic alternatives.

“This transaction meaningfully advances our effort to improve the experience of residents and investors in single-family rental properties,” said Sean Dobson, Chief Executive Officer and Chairman of the Board, Amherst Holdings, LLC. “With our expanded scale, additional team members in local markets and the collective experience of both teams, we believe this combination provides a powerful platform that is well positioned to serve the broad constituency focused on affordable, safe, attractive housing.”

“We are excited to join forces with Amherst in a transaction that we believe is in the best interests of our shareholders, employees and residents,” said George Ellison, Front Yard’s Chief Executive Officer. “The transaction will deliver the certainty of immediate cash to our shareholders at a premium, and I am confident our platform and residents will benefit from being part of a larger, vertically-integrated organization. We look forward to completing this transaction and ensuring a seamless transition.”

“This strategic acquisition grows our ability to optimize the ownership and utilization of U.S. single-family real estate. By combining with Front Yard, our increased scale will allow us to further enhance the services we provide to both individual consumers as well as our investment partners,” said Drew Flahive, President of Amherst Residential. “We know the Front Yard team well and are pleased to welcome them as we continue to execute our differentiated single-family real estate strategies.”

“After a thorough strategic review process, we have decided to enter into this agreement with Amherst, which we believe maximizes value for our shareholders,” said Rochelle R. Dobbs, Front Yard’s Chairwoman of the Board of Directors. “Amherst is a leader in the industry and a natural, strategic fit with Front Yard.”

Amherst Residential is a subsidiary of Amherst Holdings, a data-driven real estate investment firm with strategies across the residential and commercial real estate capital markets. The firm delivers a full suite of products and services to both individual and institutional owners of single-family real estate. This transaction will expand Amherst Residential’s nationwide SFR portfolio to more than 36,000 homes. At closing, Amherst Residential affiliates and subsidiaries will acquire Front Yard’s operating platform and assets, including approximately 15,000 SFR homes, currently managed by Front Yard’s operator, HavenBrook Homes. Beginning at closing, HavenBrook Homes’ operations will be integrated with Main Street Renewal LLC, Amherst Residential’s in-house operating company and the collective organization will retain the Main Street Renewal brand.

Approvals and Timing

The transaction is expected to close in the second quarter of 2020, subject to the approval of the holders of a majority of Front Yard’s outstanding shares and the satisfaction of customary closing conditions.

The Front Yard Board of Directors has unanimously approved the merger agreement and intends to recommend that Front Yard shareholders vote in favor of it at a Special Meeting of Stockholders, to be scheduled as soon as practicable. As part of the transaction, shareholders representing approximately 18% of Front Yard’s voting stock have agreed to vote in favor of the transaction.