What if

Flaky management changes the business strategy

September 1, 2016

Written by

Noam Ganel is the voice behind Pen & Paper, a value-oriented stock research publication. He also serves as  Vice President in Capital Markets at Silvergate Bankand holds the Chartered Financial Analyst (CFA) credential.

When Altisource Residential (NYSE:RESI) raised $100 million in an initial public offering three years ago, its business model was the acquisition of single-family rental homes by purchasing sub-performing and non-performing loans. It was a lucrative idea but things did not work out as planned. The company is now selling its non-performing loans portfolio and purchasing pools of residential homes at unattractive prices.   

It was ten months ago that Altisource started to sell its non-performing loan portfolio. The company sold a portion of its loan portfolio, of which 80% of the loans were over 60 days delinquent. Loans were non-performing because they were either delinquent in payments or in the process of foreclosure. As of the first quarter of this year, its non-performing loans portfolio declined to 5,397 loans  from 10,089 loans the prior year. 

Now management is eyeing pools of residential homes. Compared to 854 residential properties the company owned in the first quarter of 2015, Altisource owned 3,531 homes as of the first quarter of this year. The largest transaction was a 1,314 single-family residential pool acquisition. Over 90 percent of the homes were occupied at the time of the purchase. The residential pool was purchased for a total of $112 million, an average of $112,000 per home. Not cheap. 

The company’s risk profile changed alongside its business model. Renovating and maintaining residential properties requires a different capital structure than servicing troubled loans. Investment companies like Blackstone Group are buying thousands of houses, notes Nathaniel Popper of The New York Times. And home prices are unattractive as a result.

What if the Altisource redeployed all cash received from the sale of non-performing loans and acquired residential homes instead? expected earnings are unlikely to be impressive. Since the company is targeting home purchases at a net asset yield of 6% to 7%, expected earnings will be $83 million. On an equity balance of $1.1 billion, that would equate to a meager 7 percent yield before transaction costs. Yet due to the company's steep decline in market value, returning capital and dissolving the mortgage REIT would not be a better alternative.