Description

Altisource Asset Management (AAMC) was recently spun out of Altisource Portfolio Solutions (ASPS), along with a new residential REIT called Altisource Residential (RESI).  It is somewhat illiquid and subject to the vagaries of spin-offs in general, and has been very volatile;  however, borrow is available.  To take advantage of the investment rage du jour, RESI will be investing in distressed single family homes, while AAMC will be the external investment manager for the REIT.  AAMC will be paid on a sliding scale based on the amount of cash that RESI actually dividends out—2% of the first $.65, 15% of the next $.12, 25% of the next $.25, and 50% of any dividend over $1.03 (annualized).  In addition, RESI will reimburse AAMC for most of its non-overhead expenses.

Currently, RESI has $80MM of cash and will add $100 MM of leverage, so they can purchase $180 MM of homes.  Assuming they get a 10% rental yield after property-level expenses (twice what many investors are quoting), some expenses at both AAMC and ASPS, and a 4% cost of debt, this would leave $8 MM available for a dividend at a 90% dividend rate, which would be around $1 MM of income to AAMC at the stated split.  Clearly, this is not enough upside.

However, RESI can raise more capital, making AAMC somewhat akin to the GP of an MLP structure.  The problem is that they need to raise it in small enough chunks that the dividend per share doesn’t fall dramatically due to dilution from the higher share count, otherwise AAMC will never get paid.  Here is a quick model to show how this works, as RESI keeps raising money but temporarily hurts AAMC as it does so (not sure if this will format correctly, apologies in advance):

The punchline is, even if RESI raises $600 MM in equity and levers it, AAMC will only receive $25 MM in dividends from them, which, after some corporate expenses and taxes, will be around $20 MM of net income.  So, the stock is trading at 12x these hypothetical earnings that are 3-4 years away, if everything goes right.  It is just as likely, in my opinion, that the economic model for buying single family homes is busted, and RESI cannot raise equity.  In this case, AAMC is basically worthless.

Finally, AAMC has said that they will not pay a dividend.  Also, while AAMC only pays 4% taxes due to an offshore structure, they will have to pay repatriation taxes to get that cash to their shareholders.  Most importantly, RESI’s board can buy out AAMC’s management contract for 3x the trailing payment.  While the pressure not to do this would be high, given the interconnected ownership, there would be an issue of fiduciary duty in the interim. 

So, AAMC has no earnings and no prospect for them in the next few years.  The $235 MM market cap is absurd, in my opinion.

Catalyst