Thursday, August 27, 2015

Shaambles at AAMC

We have from time to time covered the mortgage servicing industry, paying particular attention to Ocwen (ticker: OCN) and its affiliates.[1]  While the past 20 months have been rocky for shareholders of Ocwen and its affiliates, for Altisource Asset Management Corporation (ticker: AAMC) it has been catastrophic.[2]

What is going on at AAMC?

Since reporting 2Q15 earnings before the open on August 10th, shares of AAMC have plunged 75%!  By comparison, the Russell 2000 has fallen 6% over the same timeframe.  So … what is going on with AAMC that has investors panicked?    

AAMC is “an asset management company that provides portfolio management and corporate governance services to investment vehicles that own real estate related assets.”[3]  By our reading, AAMC’s only significant client is another Ocwen affiliate, Altisource Residential Corporation (ticker: RESI).  RESI and AAMC are, uh, closely affiliated – they have the same management team (CEO; CFO; CAO; GC). 

Essentially all of AAMC’s revenue is dependent on the asset management fees it collects from RESI.  Those fees are determined by an Asset Management Agreement, which until recently, had been quite favorable to AAMC – at the expense of RESI shareholders.  (It probably won’t surprise you to learn that back in the day former Ocwen, RESI, and AAMC chairman William Erbey had a much larger dollar stake in AAMC than RESI.) 

But in February, RESI shareholder Capstone Equities complained about the one-sidedness of the arrangement, and demanded that the RESI board “terminate the Asset Management Agreement, dated as of December 21, 2012, (the “AMA”), for cause without paying a termination fee….” (emphasis in original) [4]

On March 31, 2015, RESI and AAMC revised their agreement[5], apparently (and oddly) to the relief of AAMC investors, who drove shares of AAMC up 40% over the following week.  Perhaps they were relieved that AAMC was able to retain its sole client.  But the new agreement apportions more of the pie to RESI and is much less favorable to AAMC. 

But the full extent of the damage to AAMC earnings may not have been readily apparent to shareholders until they were able to digest a quarter’s worth of post-agreement earnings, which they got August 10.  See table below for daily price action, which shows the slide beginning on the 10th of August.  

[1] You may recall that Ocwen has garnered the attention of regulators such as the CFPB, New York Department of Financial Services, and the California Department of Business Oversight, as well as investors such as BlueMountain Capital.
[2] AAMC is one of four companies to have spun off from Ocwen (technically AAMC spun off from ASPS, which itself spun off from Ocwen).

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