Description
Arlington Asset is the old FBR mortgage REIT that has been cleaned up. The story lies in an understated clean book value, as well as a few other sources of potential value. I believe the stock is worth at least $18, with potential upside from this value. First, the book value:
| |
|
|
|
fbcm |
pf |
pf mbs |
| |
|
2q09 q |
8/10 update |
mk to mkt |
debt repo |
mk to mkt |
| agency mbs |
|
120.0 |
120.0 |
120.0 |
120.0 |
120.0 |
| non-agency mbs |
|
30.0 |
49.3 |
49.3 |
49.3 |
60.0 |
| note: face value |
|
|
115.8 |
115.8 |
115.8 |
115.8 |
| other assets |
|
12.0 |
12.0 |
12.0 |
12.0 |
12.0 |
| cash |
|
36.8 |
9.4 |
9.4 |
4.4 |
5.7 |
| fbcm share value |
|
71.3 |
69.1 |
77.6 |
77.6 |
77.6 |
| note: shares owned |
|
15.1 |
14.7 |
14.7 |
14.7 |
14.7 |
| note: price - 12% |
|
$ 4.70 |
$ 4.70 |
$ 5.28 |
$ 5.28 |
$ 5.28 |
| total assets |
|
270.1 |
259.8 |
268.3 |
263.3 |
275.4 |
| |
|
|
|
|
|
|
| repos |
|
94.7 |
94.7 |
94.7 |
94.7 |
94.7 |
| a/p etc |
|
31.4 |
31.4 |
31.4 |
31.4 |
31.4 |
| lt debt |
|
51.8 |
26.8 |
26.8 |
1.8 |
1.8 |
| total liabilities |
|
177.9 |
152.9 |
152.9 |
127.9 |
127.9 |
| |
|
|
|
|
|
|
| calculated equity |
|
92.2 |
106.9 |
115.4 |
135.4 |
147.5 |
| shares |
|
8.0 |
8.0 |
8.0 |
8.0 |
8.0 |
| per share |
|
$ 11.60 |
$ 13.45 |
$ 14.52 |
$ 17.03 |
$ 18.55 |
This is the adjustment from stated book as of 6/30 through my estimate of current economic book value. The adjustments are as follows (right to left):
1) Bought non-agency MBS and retired $25m of trust preferred debt for $5m, as reported in 8/10 press release
2) Mark to market 14.7 million share holding of FBCM from $4.70 price as of 6/30 to current price, less 7% fees and 5% offering discount
3) Repurchase remaining $25m of trust preferred debt at .20, as per management guidance, and similar to repurchase done in August
4) Mark non-agency MBS to market, assuming a 20% increase in price in the last 2-4 months. These are all "busted" AAA tranches, likely of alt-a paper, so per my checks this seems like a reasonable assumption of appreciation.
This, I believe that the current book value is around $19. In addition, I believe you are getting the following potential sources of upside:
1) Other assets are mostly private equity holdings and have been marked down to extremely conservative valuations.
2) FBCM stock could trade up from its recently-depressed price before the offering occurs as they tell their story on the roadshow. FBR has been the lead underwriter in a few FDIC-assisted bank recapitalization transactions (most recently for a $1.2 billion blind pool), and I believe the number of these transactions will increase dramatically in the next 12 months due to the increasing pace of bank failures and the compelling economics offered to investors.
3) There are roughly $1 billion of gross net operating and capital loss carry-forwards that are not carried at any value on the balance sheet. With 8 million shares outstanding, this works out to over $40 (net, undiscounted) per share in NOL value. As a result, though, there is a poison pill in place to prevent any section 382 limitation issues.
What is the most likely outcome here? The management will sell the FBCM stock and be left with book value of around $150 million. Then assume they are able to lever up modestly and create a 12% pre-tax ROE (seems like the average over a cycle for mortgage REITs), of which 85% is paid out. This should allow a dividend of roughly $1.75 a share, which at an 8% yield would give you a $20-22 stock.
Catalyst
FBCM shares sold
quarter reported and new book value discussed
capital invested into interest-bearing assets