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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AAMC revisited – A royalty on yield chasing

(AAMC has a market cap of $490M and the shares are fairly illiquid.)

AAMC (original writeup) is the asset manager of RESI.  Asset managers can be extremely attractive investments because they have the potential to grow earnings dramatically.  The underlying business model revolves around buying up non-performing loans (NPLs) and resolving them (e.g. loan mods, selling REO properties, and converting NPLs into rental units).  Over time, RESI will accumulate rental housing units.

I think of AAMC as a play on investors chasing yield in the current low-interest rate environment and doing silly things such as overpaying for dividend yield.

The Altisource thesis revisited

Originally, my thesis for Altisource was that regulation wouldn’t be so bad because they would create long-term barriers to entry.  I was wrong.  I did not forsee:

1. The NY DFS blocking Ocwen from buying MSRs.
2. Bill Erbey being forced out of all of his companies.
3. The California DBO threatening to suspend Ocwen’s mortgage license.

AAMC: A wonderful asset management company

AAMC is the asset manager that controls the operations of RESI.  Asset management is a business with potentially wonderful economics because the returns on capital can be absurdly high.

Suppose that AAMC generates returns on equity of 16%.  After taking its fees, the owners of the ‘closed-end fund’ (RESI shareholders) would receive a 10% dividend yield on their REIT.  In the current environment of low interest rates and yield hungry investors, it is likely that such a REIT will trade at a premium to book value.  AAMC can then sell shares in secondary offerings to further grow their assets under management.  High management fees combined with a rapidly growing AUM base can translate into very high returns for AAMC shareholders.  The economics are somewhat similar to midstream GPs such as Kinder Morgan.

*Disclosure:  No position.

The market cap is around $1.49B.  The shares are quite illiquid.

What Ocwen and Altisource do

Erbey’s empire of publicly traded companies (OCN, ASPS, HLSS, AAMC, RESI) is a little confusing.  Here’s my understanding of what his companies do.

Altisource (ASPS) – Part 1 – A spinoff / growth situation

A discussion of spinoffs and a shallow first pass at valuing Altisource.