High Growth Likely For These Real Estate Stocks
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On December 21, 2012, Luxembourg-based property management company Altisource Portfolio Solutions (NASDAQ: ASPS) completed the spin-off of two of its former subsidiaries: Altisource Residential (NYSE: RESI) and Altisource Asset Management Corporation (AAMC). The deal unlocks a tremendous amount of value in ASPS's former subsidiaries and has already provided solid returns for investors who have continued to hold AAMC stock. In the coming months, this complex yet low-key spin-off may yet produce even greater returns for savvy investors.
The terms of this deal were rather complex. According to the agreement, all Altisource Portfolio Solutions shareholders of record on December 17, 2012 received one share of Altisource Residential for every three shares of Altisource Portfolio that they owned. In addition, Altisource Portfolio shareholders of record were to receive one share of Altisource Asset Management for every 10 shares of ASPS that they owned. The Altisource Asset Management shares were not assigned to a particular stock exchange and currently trade on the over-the-counter markets.
Since the finalization of the deal, the two spun-off stocks have behaved very differently. Altisource Residential Class B shares began trading at $18 per share on December 21 and have since fallen slightly. As of the close of trading on January 16, Altisource Residential shares were worth $16.63. This represents a one-month negative return of approximately 7.6 percent.
By contrast, Altisource Asset Management has outperformed the broader market. Since beginning life as a publicly-traded entity at $80 per share on December 21, the company's stock has risen by nearly 31 percent in the span of a month. As of the close of trading on January 16, AAMC stock was worth $104.70 per share. During the month of January, the stock has traded as high as $120 per share. Investors who sold the stock at this short-term high realized a gain of 50 percent in just over three weeks.
Unfortunately, the premiums from the three-way spin-off may be reduced by the transaction's classification as a taxable distribution. Altisource Portfolio Solutions shareholders of record on December 17 will be required to pay taxes on the new shares that they receive. These levies will be assessed in relation to the initial trading prices of the two new equities.
Fortunately, there may be considerable upside to AAMC's current stock price. If the promise of further gains in the coming months and years was not enough to encourage AAMC shareholders to maintain their positions, this penalty might make them think twice about dumping their shares anytime soon. Altisource Residential is a different story. Although it has the potential to begin returning capital to shareholders through a revenue-sharing partnership with private title insurance issuer NewSource, no announcement to this effect has yet been made. Industry observers are estimating that any eventual Altisource Residential dividend could amount to 7 percent or more. If this does not come to pass within the next two or three quarters, investors might be wise to ease up on their RESI holdings and increase their stakes in AAMC.
The Businesses Behind the Spin-Off
Founded in 1999, Altisource Portfolio Solutions is an all-purpose real estate services company that provides property management services, title insurance and buyer services to a variety of institutional and retail customers in North America. The company also operates an asset recovery operation and is known as a major buyer of distressed and sub-prime mortgages. Altisource Portfolio Solutions is growing quickly, especially when compared to competitors like Lender Processing Services (NYSE: LPS). LPS has seen growth flatten in the last year while ASPS has seen a revenue gain of 31%. Both firms are becoming more profitable though with income growth for LPS nearing 45% and for ASPS around 57%. Under the terms of the spin-off, the company owns a majority stake in NewSource and continues to receive regular revenues from AAMC and RESI.
Altisource Residential is structured as a holding company that purchases sub-prime residential asset portfolios and either manages them as rent-producing properties or disposes of them on the foreclosure market. Although there is significant demand for such services in the wake of the collapse of the U.S. housing market, such a business model is inherently risky. However, Altisource Residential's business model enjoys a modicum of stability due to the company's relationship with NewSource. Under the current terms of their partnership, Altisource Residential is entitled to receive 12 percent of NewSource's net income. Again, it appears possible that Altisource Residential will forward at least some of these earnings to its Class B shareholders.
Altisource Asset Management is widely considered to be the most dynamic of the three Altisource companies. Its principal interest is to manage the non-disposable properties that Altisource Residential purchases. In turn, it receives rent and other payments. In this manner, it is somewhat insulated from the tricky sub-prime and non-performing mortgage markets and offers the least risk of the three Altisource properties.
Although the implications of the complex Altisource spin-off have yet to be realized in full, the deal may produce solid value for intrepid shareholders. Over the next two quarters, ASPS shareholders who received AAMC and RESI shares must carefully watch the price action in each stock. If things go as many observers expect, AAMC may turn out to offer the best medium-term value of the three.
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