market folly

We've posted up notes from the Value Investing Congress in Las Vegas and next up in the series is Chris Mayer of Agora Financial who pitched long CherryHill Mortgage Corp (CHMI) and Kennedy Wilson Europe.


Chris Mayer's Value Investing Congress Presentation

His presentation: "Investing by the C.O.D.E."

• 17% annualized if you bought all of his capital and crisis names since 2002.
• 13% - 14% annualized off his special situations names.
• Two ideas. C.O.D.E – four points of what he looks for in an investment. C = cheap,   O = owner operators, D = disclosure;  E = excellent financial position (i.e. no troubled balance sheets.)
• Mortgage Servicing Rights (MSRs):  Chris is not recommending a specific servicer like specialty servicers – Ocwen,  Nationstar and Walter.  Likes the excess servicing rights – when interest rates go up, value of excess MSR increases. 


• CherryHill Mortgage Inv. Corp (CHMI) is a mortgage REIT. Partners with Freedom Mortgage Corp (private mortgage originator) – invested $20MM in the business and own 13.5% of the company. Freedom paid the listing fees for the IPO. 
• IPO priced $20, BV $19ish. Freedom was started in 1990.
• CHMI has a 10.5% yield. $21.5 BV, stock trades at $19.
• It was a way for Freedom to have a cheaper cost of capital set-up.
• Cherryhill is purely an investor. Cherryhill does not have to do the bidding, they have a steady flow from freedom – have an agreement with freedom in regards to excess MSR sales – valued by a third party. 
• Chris believes incentives are aligned.
• Picked up two pools of excess MSRs since the IPO.
• What should it be worth? No-pure play comps, best comp may be HLSS. Thinks upside should be in line with HLSS and other competitors – around 1.3x TBV. Low risk with decent upside.


• Second idea – macro idea, very interesting. Investing in non-performing loans in the EU. EU banks have $1 trillion in NPLs and pressure to get rid of them. 
• For example, Lloyds is exiting Ireland. Last year only $90B sold. UK, Spain and  Ireland are the most interesting. Over $180B in NPLs in each country, most likely  higher. 
• Specific recommendation for the investment through Kennedy Wilson Europe – KWE.   Raised $1.7B in February, should benefit from this trend. 
• Acquired a portfolio already. Kennedy Wilson invested over $200MM in the platform (is the manager). NAV is 9.77 pounds, sells for 10.40 pounds, a small premium above NAV for a compelling idea and strong management team.
• Kennedy Wilson background – 1% mgmt. fee and a performance fee. One criteria they look for is growing foreign investment. Ireland is benefiting from Companies such as Google/LinkedIn moving to the Country. Have a lot of people on the ground.
• Although KW rose in price (the asset manager) since he first recommended it in 2012, he still likes it.

• Summary – Cherryhill low risk –low downside decent upside. KWE – should benefit from NPLs in Europe, aligned incentives and trades at a small premium to NAV.


Be sure to check out the rest of the Value Investing Congress presentations.