Trex: marketing hype and unproven technology

This blog post is in reference to John Hempton’s post on Trex; the post points out that Trex’s operating margins are suspiciously high.  I haven’t uncovered enough about Trex that would suggest to me that there is some form of egregious accounting fraud occurring.  However, I can see how Trex’s margins can appear to be so high. This industry does not sell a commodity.  Rather, the industry sells marketing hype and unproven technology.

Trex was one of the companies that pioneered the use of wood-plastic composites as decking material over 2 decades ago.  Unfortunately, the composite materials did not live up to their fanfare and marketing hype (e.g. zero maintenance, lasts longer than wood, etc.).  There have been issues with composite deck materials from virtually all manufacturers that have led to recalls, expensive warranty claims, and class action lawsuits.  Some manufacturers have gone bankrupt and were not able to pay out all warranty claims, leaving homeowners holding the bag.

The current practice is for manufacturers to exclude known problems from their written warranties.  These written warranties do not obligate them to stand behind their marketing hype.

(*Disclosure:  No position.)

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AAMC update Aug 2015

I previously described AAMC as a “royalty on yield chasing“.  AAMC’s economics can potentially be extremely attractive because asset managers can generate extremely high returns on capital.  Currently, the stock is trading at very depressed levels.  Two explanations for the share price:

  1. Luxor capital and other major shareholders may be liquidating.  Luxor suffered a lot of losses on the Bill Erbey family of stocks.
  2. AAMC generated close to no fees in the past quarter.  Either you think that management screwed up or that there is a temporary hiccup in revenue recognition.  Rental revenue, selling the home/mortgage, and marking the asset to BPO value all generate GAAP profits.  There is a time period after a BPO (broker price opinion) and before a home is rented out (or sold) where the home will not generate any GAAP profits, which can result in less fees for AAMC.

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The restructured HLSS/NRZ deal is good for OCN and ASPS

On April 6, 2015 HLSS and NRZ announced that they have restructured the Feb 22 merger agreement between the two companies (press release).  The new deal:

  1. Reduces the value received by HLSS shareholders.
  2. In the near term, HLSS has agreed not to transfer subservicing away from Ocwen.  Ocwen has given up a little bit of value to reduce some of its unusual risks.

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Unusual risks at Ocwen

Unfortunately for me, the drama never seems to end at the Erbey complex (OCN/ASPS/HLSS/RESI/AAMC).  Ocwen’s regulatory problems has been cascading into other problems.  I suppose the lesson here is that some companies sit on very unusual risks.  When it rains it pours.

I believe Ocwen’s financing deal with HLSS exposes it to a very unusual risk.  Ocwen had (more or less) sold excess servicing rights on its MSRs to HLSS.  If Ocwen loses its MSRs, then it has to compensate HLSS for HLSS’ loss.  The payment will be for the purchase price of the excess servicing rights adjusted for run-off at rates pre-determined in the contract between Ocwen and HLSS (8-K filing).

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OCN, ASPS, NSM, and inflated fees

I made a mistake.  I did not figure out the game that Ocwen and Altisource are playing.  Ocwen seems to receive fees from Altisource that could be (mis)construed as kickbacks under its “Data Access and Services Agreement”.  These fees could be seen as a quid pro quo (“you scratch my back I’ll scratch yours”) for the big profits that Altisource formerly earned for lender placed insurance “brokerage”.

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Why I’m not shorting Canadian real estate

  • Comparing Canadian real estate to the US, Canadian underwriting is tighter.  Compared to the peak of the US subprime bubble, Canadian underwriting is far more conservative.
  • Comparing real estate to oil&gas and mining, there is far less fraud in real estate.
  • Based on price per square foot… the most overpriced market is China, then Australia, then Canada, and then the US.

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