Altisource Residential (NYSE:RESI) was created through a spin-off from Altisource Portfolio Solutions (NASDAQ:ASPS) in late 2012. Originally seeded with $100 million, the company has raised additional equity capital via three secondary stock offerings since inception. Cumulative capital raising thus far has totaled $1.267 billion.
The original business model of RESI was to purchase non-performing mortgage loans (NPLs) and convert a portion of the underlying homes into single-family rental properties as certain mortgage holders defaulted. By buying NPLs at a fraction of the market value of the underlying home, RESI did not necessarily have a desire to foreclose. If the borrower was able to regain current status on their mortgage, RESI would happily be repaid in full (and at a solid profit). However, if the borrower did go on to default, RESI either converts the home into a rental property, or if it does not seem to fit well with that model, can sell the home on the open market.
Today, RESI's shares appear to trade significantly below the fair market value of their net assets. This could be due to multiple factors, such as the relative illiquid nature of NPL portfolios, the company's recent decision to buy rental homes outright from other sellers in addition to sourcing them through its own pipeline, as well as the fact that there are other larger players in the space that are publicly traded and are garnering more investors support.
While RESI's portfolio of assets is a bit complex (rental homes, foreclosed homes under evaluation for suitability as rentals, foreclosed homes that will be sold, and NPLs), the company has stated a clear path to monetize the asset base, create a simpler balance sheet, and transition into predominantly a landlord owning single-family rental properties across the country. While it may not be the biggest, or the one with the most experience, the rental home business does possess both strong demographic and financial characteristics.
At the recent price of $9.30 per share and approximately 55.4 million diluted shares outstanding, Wall Street is currently valuing the equity of RESI at roughly $515 million. Below is a summary of both the asset and liability sides of the company's balance sheet as of 3/31/16:
- Cash $124 million
- Owned Land $75 million
- Rental Properties $300 million
- Owned Real Estate $626 million
- Mortgage Loans: $928 million
- Total Cash/Real Estate Related Assets: $2,053 million
- Repurchase Agreements: $847 million
- Secured Debt: $164 million
- Total Real Estate Related Liabilities: $1,011 million
If we deduct the debt from the gross book value of the assets, we arrive at a net book value of real estate-related assets of $1,042 million, or $18.81 per share. So why does the stock trade at $9.30, or half of book value?
Aside from lack of investor interest, the only logical conclusion one can draw is that investors do not believe the values of the assets listed on the balance sheet. RESI's management has publicly stated that it is confident in those values and is currently engaged in a process to sell the NPL portfolio at those very prices to prove that its balance sheet is "marked" appropriately.
You can see from the values above that if RESI is able to sell its mortgage loans for at least 91% of its stated value, the proceeds would completely repay all borrowings under the repurchase agreements, leaving RESI with cash, land, owned real estate valued at $1.125 billion, against just $164 million of secured debt. And for that, investors are currently paying $515 million.
So, if the mortgages are priced more or less accurately on the balance sheet, are there other ways the stock could actually be correctly priced today? Well, maybe the value of the single -family homes that RESI owns is inflated. Although actual houses are far easier to value than delinquent mortgages, there appears to be plenty of folks who do not believe their value.
And this is where RESI's management can prove the naysayers wrong. RESI is either going to turn an owned home into a rental property (which will prove value by generating rent), or it will decide it is not a good candidate for rental and instead elect to sell it. Either way, it should become quite clear to investors how accurate the stated asset values shown on the balance sheet are during this process. Given the level of discount the stock is currently offering investors, the patience required to see how the process unfolds certainly could be well worth it. In the first quarter of 2016 alone, RESI sold over 1,000 mortgage loans for 99% of their stated book value.
From a risk versus reward perspective, it is difficult to find investment opportunities in the public markets that stack up quite as favorable as RESI. For investors to suffer a permanent loss of capital at current prices, there would seemingly have to be some downright idiotic capital allocation decisions yet to come.
Disclosure: I am/we are long RESI AND ASPS.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.