Friday, January 21, 2011

ACAS Raises Monthly AGNC-based Revenues

ACAS' ability to grow revenue has been evidenced a bit more with its pricing of more AGNC shares earlier this week. AGNC shares were priced at $28, which is a premium to its NAV (which is closer to $23). This drove down AGNC's price from above $29, at least momentarily. You can track it here to see how it plays out over the longer term, but earlier issuances in the lower $20s didn't hold prices down or dilute value: they were at or above NAV and were neutral to accretive.

What's this mean for ACAS? In the immediate term, it means that its client AGNC is set to increase its assets by a net of $625,000,000. Since AGNC pays ACAS 1.25% of its assets as an annual management fee, and pays in monthly installments, this means that ACAS' monthly income is set to increase by over $650,000 (almost $2m/q), and its annual revenue is heading up by $7.8m. Not bad, considering the revenue is likely obtained on the same investment analysis infrastructure, and involves primarily ramping up deal sizes in an existing stream of transactions in a marketplace for government-backed securities that is so liquid that AGNC is able to use derivatives to hedge risk, and use repurchase agreements to finance purchases. Considering that ACAS' 3Q2010 pre-tax NOI was $59m, little projects to increase revenues $2m a quarter without committing any additional capital are pretty nifty. At 341m shares outstanding at the end of Q32010, the ACAS income boost from this issuance amounts to over half a penny a share per quarter in earnings. (The total AGNC management fee is more, and AGNC also pays ACAS dividends on, if I recall, 2.5m shares; the 5.7¢ per share is the impact of just this newest-priced issuance.)

In the long term, this suggests that ACAS' business as an asset manager isn't dead. As the marketplace begins to value asset management better, ACAS' ability to create cash by growing asset pools it doesn't own and which don't create any capital risk to ACAS (other than its risk as an owner of a couple million dividend-paying shares) should make for more ACAS shareholder value. The major placement of ACAS' "funds under management" box on the Q32010 investor fact sheet suggests that ACAS' management is really trying to draw attention to this, too. AGNC may be a nice source of dividends, and covers several salaries at ACAS, but perhaps its true value is to advertise to the world what ACAS can do as an asset manager.

In theory, the AGNC deal signals something else: when ACAS' management is able to show stable dividends, its performance supports a NAV premium. That is, after the liquidity panic and once the markets had begun normalizing, ACAS has been able to issue AGNC shares at and above NAV and AGNC shares have traded at and above NAV. The ability to issue half a billion bucks' worth of shares – and to do so over $4 above NAV – isn't some mystical property of AGNC but is a result of the management team provided by ACAS. Give ACAS a year to be stuck with taxable net income (*sob*) and its BDC obligation to issue dividends of 90% or more of that income will place ACAS back on the radar of dividend stocks (though it'll take a little while for people to view the income stream as stable; cutting the dividend burned people who just earlier the year of the cut had heard management say it never planned issuing a dividend it would have to lower).

So, what dividend will ACAS pay? Hard to say. The NAV of ACAS by that time will likely be different, though how different is still speculative. The number of $0-valued assets that turn out to be valuable will not be infinite. And the recovery (however it happens to materialize) will impact portfolio company revenues, which all turn up on ACAS' consolidated balance sheet. It's still speculative, but consider that ECAS' listed value (the FAS-157-compliant value) on ACAS' SEC filings is about 5/8 of its NAV, and as the market conditions for ACAS' NAV discount evaporation occur so too will conditions affecting the "fair value" and thus NAV discount of ECAS. That's hundreds of millions in assets right there, subjected to a double NAV discount (once in ECAS, then once in ACAS). What return is likely? What value will be "fair" in a year and a half? There's a lot to consider in terms of upside, and the existing NAV discount offers some insurance – particularly in light of the current trend toward increasing NAV. Despite that ACAS has had a wild ride up from its trading price nadir of $0.59 per share, its current price north of $8 leaves it over a dollar is NAV discount.

ACAS' report for the 2010 calendar year will be interesting reading, as it will embrace results from an enormously changing set of circumstances: ACAS entered 2010 in default of all its debt (due not from missed interest payments but to net asset covenant breach) and paying (timely, mind you) default-rate interest on a ten-figure debt, while paying its attorneys and its lenders' attorneys to haggle over ACAS' debt restructuring while maintaining a credible threat of bankruptcy to ensure that negotiations went its way (at a cost of tens of millions of dollars) ... and it exited 2010 with a nine-figure debt that was not in default and which had been lowered in interest rate to the most favorable rate available under its refinanced debt agreements due to prepayments (while ditching its crazy bankruptcy-related and debt-renegotiation-related legal overhead). Looking at the difference between the entry and the exit of 2010 should be quite an eye-opener. The first quarter of 2011 will be the first chance to see a whole quarter of what are presumably "normal" results for the refinanced ACAS.

As long as NAV and NOI continue to trend in the right direction, ACAS' future is headed toward mandatory dividends and toward the re-attraction of those who invest for dividends. Increasing the demand for the shares is a significant part of shucking ACAS' NAV discount, so the dividend issuance, while a drain on cash, is actually a boon to share price. (It's also the price of ACAS' nearly-tax-exempt status.)

My take on ACAS hasn't changed much, just ACAS' position in its turnaround. My lack of posting isn't from lack of interest in ACAS, but from extreme busy-ness in my "real work" that now involves lots of time at a client's site solving problems that don't leave me with the time I once had to think about ACAS as a break from work. I expect continued improvement with ACAS, and I also expect continued improvement in my free time as I transition from my "old work" to the new tasks I'm currently undertaking for my new (4Q2010) client.

Which client may be in a position to offer me a regular job, which could be interesting. Buying health insurance as a self-employed person is an adventure not for the faint of heart.


Anonymous said...

Glad to see you are back posting. One question. Didn't ACAS sell all of its AGNC?

dubhe said...

Glad to see you back postings.

I've been coming back and were disappointed for the past 3 months. (due to lack of postings). :o)

Thank you for your sharing!

Jaded Consumer said...

At the time of the IPO, ACAS bought 5m shares at $20 in a private issuance straight to ACAS. ACAS sold half to Deutche Bank, and continued to hold 2.5m shares. In that post, I mentioned that rather than selling AGNC shares, ACAS could have AGNC issue more equity to boost ACAS' management fees on AGNC's assets, which looks like a plan now well underway. Above-NAV issuance also boosts the value of ACAS' remaining AGNC shares. The fact that ACAS has "skin in the game" and holds tens of millions of dollars' worth of AGNC is surely part of ACAS' pitch when it seeks trust from prospective buyers of more AGNC shares: ACAS isn't just riding the money for free, it shares the buyers' outcome.

A look at ACAS' latest 10-Q shows ACAS holding 2,500,100 shares with a fair value of $66.4m, which means that in addition to picking up $1.40/share per quarter in dividends, ACAS has enjoyed capital appreciation from its $50m basis.

anthony said...

Hey review of the ACAS quarter that was a blowout? Either you sold your stock or are uber busy. Looking forward to your excellent commentary now that the 10k is out.

Jaded Consumer said...

Crazy busy, but liking what I see -- will post when I have time to do something that might actually inform those who wouldn't read the filings themselves ...

... thanks for looking, and like more famous figures have said, "I Shall Return" :-)