Checking In on Fidelity National Financial (FNF)

FNF is something I have held for years and written about a few times. I’m doing a quick update here.

The reasons I’m holding remain the same: 1) intermediate term defensiveness, 2) long term upside, and 3) Stewart acquisition synergies. For the next year or so it’s a value/dividend play: number one player in oligopoly; strong cash flow generation at solid valuation; great balance sheet; 3%+ dividend yield. In the longer term FNF has upside from demographic tailwind (millennial reaching prime home buying age). FNF is also in the process of acquiring the industry’s number three player, Stewart, and will benefit from acquisition synergies.

Quarterly earnings will fluctuate and are not my focus. The main things I look for in earning calls are: 1) Stewart acquisition progress, 2) financial health, and 3) any disruptive threats in the horizon. Here are the latest.

1) STC acquisition. Not much update on this front. The deal is still stuck on NY regulators and it may come down to divestitures.

2) Financials. Balance sheet remains very strong. FNF debt outstanding was $837mm (compared to investment portfolio of more than 4.6bn). Debt to total capital ratio was 14%.

3) Disruptive Threats. One of the biggest trends in real estate is the emergence of iBuyers. The risks for FNF are 1) they have relationships with real estate agents who recommend FNF’s services, but iBuyers seek to place themselves at the center of transaction, resulting in channel disruption for FNF. 2) Also iBuyers will have better bargaining leverage compared to regular home owners since they hold large portfolios.

This exchange from 1Q19 transcript shows that FNF may have not grasped the full significance of iBuyer. It’s hard to tell, maybe management is simply being careful about what they say to maintain relationship with real estate agents. That said, it’s still early innings in the iBuyer game and a group with strong tech track record like FNF will likely get on top of it.

Mike Nolan
“…I think what we see at least today is that the real estate agent is still at the center of the transaction. And so while there's disruption potentially in brokerage, I don't know that that's disrupted the agent yet. Now that could change of course. But we're really focused on real estate agents, because that's who gives us the transactions and that's why we've made investments in real estate technology and lead gen and things like that because that's where we're going to continue to focus.

Jason Deleeuw
Got it. And what about the iBuyers and – I mean, how are you relating to them? It seems like it's going to continue to be a growing segment of the market. Is there a change in how you're doing that? Or you're reaching out to them or you're already working with some of them? How is that working?

Mike Nolan
Really both. We're reaching out and working with some of them. They're a customer just like anyone else.

They have transactional volume that they can control. And we'd like to perform that title and closing works. So, we're calling on them. We're working with them. In some cases they might be working with our agents. So by extension we're working with them. But they're really just another type of customer from our perspective.

Overall, title insurance is a sleep industry and the latest quarter was business as usual. I continue to hold a 4%-5% position, and would hold even in the unlikely scenario that Stewart acquisition does not come through.

NexPoint Residential Trust Passes My Stress Test, Has Room to Improve

NexPoint Residential Trust (NXRT) is a dividend growth play. They own and operate apartment buildings in the south. I view NXRT as having both defensiveness and optionality.

Defensiveness comes from the fact that NexPoint invest in Class B apartments, which are actually more defensive than high end Class A’s because tenants live there not out luxury, but of necessity. Growth optionality comes from their strategy of buying apartments that they can rehabilitate, which then allow them to raise the rent.

The company's geographic exposure is below. In this article I want think through a stress case on NXRT, then some of the more qualitative factors.

Defining the Stress Case

Rental vacancies for the South Region, where NXRT operates, peaked around 13.5% during the great recession of 2007-2009. There are large local variations though. Spot checking MSA level data on some of NXRT’s cities I get the following rental vacancies (using 1Q to 4Q 2009 as proxy):

• Atlanta: 14.6% - 18.4%
• Charlotte: 10.9% -14.6%
• Dallas: 9.9%-14.2%
• Nashville: 5.7%-10.9%
• Orlando: 18.2%-28.1%

How about rental prices? According to Axiometrics, class B rent growth went negative for about 7 quarters from 4Q2008 to 1Q2010. Importantly, rent never declined more than 10% before it rebounded.





So I think a reasonable stress case for NXRT would be 85% occupancy and 10% rent cut from current levels. Since we’re modeling stressful times, I assume they cut down a little on G&A expenses and shut off all capital expenditures, which is not good but understandable.

In this stress scenario NXRT can still get to ~$16mm of funds from operations (FFO) which, along with cash on hand, should let them maintain current dividend of $17.5mm per year. Realistically, if they get to that point I would expect a dividend cut, but the point is even in stress scenarios NXRT will generate enough cash to have options.

The credit and liquidity picture looks fine. They are highly leveraged but no big maturities until 2020+.

Quality of Apartments - Need to Get Better

I googled around Nexpoint's properties for ratings, and ended up settling on www.apartmentratings.com since this is the one site I know of that has all NXRT’s properties. Since people tend to write reviews only when they have negative things to say, the key is to see how NXRT's properties stack up relative to their peers. For example, if an NXRT apartment in Dallas has 20% of reviewers recommending it, while the average apartment in Dallas gets has 60% its reviewers recommending it, then the NXRT property probably have some room to improve.

In the table below I listed out NXRT’s properties. The four columns on the right (highlighted in green) shows 1) number of reviews, 2) percentage of reviewers that recommend that particular apartment, 3) average percentage of “recommends” for apartments in that city, 4) difference between NXRT’s property versus city average.

This is not pretty. Nexpoint’s properties in Texas generally get much worse reviews than city averages. Some of their Florida properties get excellent reviews. In general though, this is a picture of lower quality versus peers.

I understand NXRT’s strategy is buy apartments and rehab them, so arguably it’s the migration of ratings that matters, not ratings at a snapshot in time. Unfortunately, NXRT do not have any rating improvement data. The only related data are improving occupancies and higher rents – which are functions of not just quality, but also overall industry demand.

On the positive side, clearly they have lots of room and options for improvement.

Valuation

For valuation I have always struggled to determining an appropriate amount of “maintenance capital expenditure” to deduct from FFO. This gets a bit hazy as some of the natural decays of the building might be offset by regular maintenance and repair expenses, which are already charged through the income statement. (The IR person I spoke to argues that it’s all accounted for in the income statement, so there’s no need for a separate maintenance capex deduction. But I think that’s a bit aggressive since repairs are expensed, but you still get one-off replacements like roofing/tiles which are not).

I ended up using an extremely rough proxy. Maintenance capex from fellow apartment REITS UDR and Post Properties are stated at $1150-1250 per unit. For NXRT that works out to ~16mm of maintenance capex. The company currently has about $34mm of FFO (which mirrors cash flow from operations excluding working capital); deducting $16mm maintenance capex would leave $18mm of free cash flow, which is almost 100% used toward paying dividends.

Since free cash flow mirrors dividend payments, this also means FCF yield = dividend yield = ~6.2% at the current price of $13.2 per share.

I would give this idea a B. It has enough defensiveness and growth optionality, but the apartment reviews are something to monitor. That NXRT is externally managed is another ding. I have a small amount of NXRT in my IRA account.

Summerset Group's Business Model - Potential Short

I have been digging around New Zealand the past week or so. I have not found any stocks I would act on right away, but I did find a few interesting business models that could make for good trades later. Summerset is one and I’ll focus on that here. Fonterra is another. I also went ahead and shorted the New Zealand Dollar (short NZD/USD), but that is for another post.

Summerset Group (SNZ.ASX)

This is a short candidate but not now. Summerset is a developer and operator of retirement villages and aged care facilities in New Zealand. Looking past the healthcare angle however, Summerset essentially borrows money from old people to speculate in properties. This I will explain in the paragraphs to follow. I will also explain why this could be a good short and when to short it.

The Business Model

Summerset’s business model produces 3 cash flows. First, you (the retirees/customers) pay around $300-500k NZD upfront, for the right to live in the villa/townhouse/apartment units. Second, you pay a weekly contribution toward village operations (for things like water, staff, activities…etc). Third, when you decide to leave (or die), you or your estate get 75-80% of your initial money back (Summerset keeps 20-25% of initial amount as “Deferred Management Fee”). It’s important that the customer don’t actually get ownership, and Summerset gets the capital gain from any price appreciation when units are resold.

Follow the cash flows above, Summerset basically borrows money from retirees, pay a negative interest rate (the weekly contributions), and pay back 75-80% of principal at the end. What do they do with that borrowing? They build/develop more properties.

The accounting reflects these economics. The large amounts that customers pay upfront are in fact booked as “Residents’ Loans”, a liability on Summerset’s balance sheet. The footnotes then attribute the asset “Investment Property” as the sum of residents’ loans and Summerset’s equity. On the income statement, main revenue sources are the weekly fees, the amortized deferred management fees, as well as any valuation gains in investment properties.

Main Sources of Profit

Of the various revenue sources, property value gains are the main source of profit. Without that Summerset would barely breakeven or be cash flow negative. A quick look at the financial statements will make this clear.

First, in the income statement if you back out the “Fair value movement of investment property”, pretax income would be close to $0. Second (as shown below), management’s non-GAAP “underlying profits” shows that profit came solely from “realized gain on resales” and “realized development margin”. This should make clear that Summerset is essentially a profit developer and heavily dependent on property value.

I also wonder what fair value really means. In Summerset’s business model, a sale of “License to Occupy” is not a true sale of property, but rather a retiree lending money to the company. Are those transaction prices really reflective of property value? The annual report does have this to say – but that doesn’t tell me much: “The fair value of the Group’s investment property is determined on a semi-annual basis, based on market values, being the estimated amount for which a property could be exchanged on the date of the valuation between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion”. 

Let’s move on to the cash flows statement, which shows similar results. Without the borrowing from resident’s loans, cash flow from operations would actually be negative. 

Leverage and Liquidity

I have nothing against property development or land speculation. When times are good this is a fine business model. Even the liquidity risk from resident departure /loan redemption is mitigated, as Summerset contractually do not have to repay the “resident’s loan” until they receive money from a new buyer.

But it’s also obvious that Summerset would be in trouble when there’s a big property down turn. The company is leveraged 3x in terms of asset to equities. There is very little cash on hand, and the bulk of its assets are in illiquid assets such as land, buildings, equipment…etc. An economic downturn could lead to higher retiree departure and loan redemptions (to free up cash for other uses like supporting their unemployed children). Competitors could have their own liquidity issue leading to a downward spiral of asset value impairments. If resale values are lower than residents’ loans, and new sales are low (most likely in a property downturn) then the company could have trouble redeeming residents loans. At the minimum we’ll see some ugly margins if not liquidity issues and lawsuits.

What to Do?

So yes, Summerset is basically a highly leveraged builder that borrows money from grandmothers. Its profits are completely dependent on property value gains. Meanwhile news media is full of reports about NZ being in a property bubble, with one of the most expensive housing markets in the world. The stock is trading at more than 2x P/B.

All these make SNZ a short, but not yet: 1) I actually think the property market has more room to run, as much of the price gains are due to supply constraints in Auckland. 2) This is further supported by NZ’s central bank easy monetary policy. 3) Summerset’s sales were strong in 1Q15 and its stock is showing bullish technicals.

If not now, then when? I am waiting for signs of credit deceleration from the banks before acting on this. Before retirees pay Summerset hundreds of thousands for a “License to Occupy”, they have to sell their existing homes to someone else, so Summerset needs a solid housing and credit environment.

What I can see happening is the NZ property market continue to run for a while as the central bank keep lowering rates to depreciate the NZ Dollar and keep its exports competitive (think Fonterra and its farmers). The low rates encourage building and could lead to oversupply of retirement homes. Eventually monetary policy will stabilize and loan growth at the banks will slow. Slower credit and oversupply of buildings would then have a depressive impact on property values, crushing Summerset’s margins and stock price.

Interestingly, bank stocks (it’s the same big 4 that dominate both Australia and NZ) have shown weaknesses in the last month while Summerset and its peers have stayed strong. The two cannot diverge forever.

Adding to American Capital Agency (AGNC)

Summary

• At 84% of book value, AGNC is trading near its historically low.
• Upside is collect 14% dividend and perhaps more with a pull to par. 
• Downside is controlled. There are many risks, but they are mostly uncorrelated. The biggest threat in the near term is book value decline due to rising rates and mortgage spreads. 
• Comparing the current environment to 2Q13 (the worst quarter in AGNC history), book value hits should be limited. 
• I added to my positions this past week.

Situation

American Capital Agency Corp (AGNC) is a mortgage REIT. It earns a spread by buying mortgage backed securities (MBS) with low cost funding, and then magnifying that spread with leverage. In the past few years this allowed AGNC to pay a consistently high dividend yield.

AGNC’s stock price has declined steadily the past 2 months, with price to book now at 84%, among the lowest in its history. My base case outlook is a 12% dividend in the next year, while a P/B recovery (less likely) would add 16% for a total return of 28%. But what is the downside, and the likelihood of that downside?

Many Risks, But Uncorrelated

AGNC is cheap for a reason. Many reasons actually. Among its many risks, the main three are: 1) book value hit due to rising rates and mortgage spreads, 2) flatter yield curve leading to spread compression and threaten the mREIT business model, 3) dividend sustainability with dollar rolls. The last point about dollar rolls is really a unique subset of spread compression. It is relatively obscure and deserves a separate discussion, but for now I want to focus on the first two risks.

The worst case would be a bear flattener, which is a combination of 1) and 2) - rising rates and compression spreads. Rising rates would hurt asset prices and decrease book value in the near term, while compressed spreads hurt P/B multiples by lowering future income. Theoretically, these can happen at the same time. For mortgage REITs though, these are conflicting risks that are unlikely to happen at the same point in time:

o Unlike other financial institutions that constantly have money coming and risk investing with lower spreads, a mortgage REIT’s exposure to spread compression mostly comes from mortgages prepayments, where investors have to re-investment into a lower spread environment. However, if rate/ mortgage basis are shocking upward, prepayments would likely to be muted.

o For AGNC, the most relevant rates are repo funding cost and MBS yields, where repo funding costs are unlikely to spike upward short of a banking crisis. High prepayments (both voluntary and involuntary) are unlikely in that scenario, given the current state of housing markets.

Since these risks are unlikely to happen at the same time, I will focus on the risk of rising rates and spreads hurting book value. This is the more immediate risk, and is also the one that hurt AGNC more historically.

Quantifying the Downside

Historically, AGNC’s worst performance came during 2Q13, when the stock dropped 31% in the quarter. About 2/3 of that price drop was simply due to market multiples. Price to book ratio flipped from a premium of 110% to a discount of <90%, which magnified a 12% decline in book value.




The ~12% in book value (both on a total and per share basis) was due to a confluence of multiple factors:

o A violent 63bps up move in 10yr UST, while mortgage yields were up more than rates.

o A collapse in specified pool pay-ups. AGNC owned prepayment protected MBS such as low loan balance and HARP loans. Normally, these trades a premium (“pay-ups”) to more generic MBS, but as rates go up and people are less worried about prepays, those premiums shrank dramatically.

Here’s an old 2Q13 presentation slide explaining the collapse in pay-ups. Note that the 30year, 4% coupon pay-up dropped from 3.28 in 1Q13, to 0.91 in 2Q13. A decline of 237bps!




As of now, many these factors are simply not present. Comparing the present situation to end of 1Q13 (the start of 2Q13 meltdown), AGNC already trades at ~15% discount to book value as opposed to a 10% premium. Yes, it’s very possible that rates may shock upward, but probably not as violently as in 2Q13 when talks of Fed “tapering” dominated news headlines. Finally, as the below table from Markit shows, specified pool pay-ups are nowhere near where they were in 1Q13, which could be greater than 3 points. As of January 2015, the higher pay ups are for 30 year low loan balance (LLB) pools with >4% coupon, and those are under 3% of AGNC’s portfolio.

Therefore I believe AGNC’s downside is limited - any book value deterioration from rate increases should be less than the 12% drop as seen in 2Q13, and thus well within the current 84% P/B buffer. I do not think P/B will drop much further because that would have to come from spread compression, which as I explained previously, is incompatible with a “rate up” scenario.

Finally, if all else fails management always have the option to do buybacks, as they have done before.

Week Ending 1/16/2015: Wrapping up on Ocwen, Moving on to Other Names (SERV)

I closed out of a short position on OCN first thing this morning. It was a small but material position that protected my portfolio from the tough markets the past 2 weeks. I closed out of the short because OCN is basically trading around liquidation value, as if the company is in bankruptcy already. So why not turn around and go long? 1) the valuation range I came up with is wide, and 2) I think more bad news are likely on the way. Even if Ocwen muddles through, there’s not much upside in terms of business growth. More on each of these as follows:

1. Liquidation value. I did a liquidation scenario assuming OCN hits bankruptcy, and came up with a $4.5 – $13 per share. This is the floor value assuming no further legal issues. The valuation is very sensitive to how you value the MSRs, as well as how much you haircut the advances (Some people would say advances should be valued at par, but I disagree. This is a 0% interest receivable that requires financing cost –i.e. negative carry. There’s an operating cost to collect those advances, and it takes time to get them all back. So I think a smallish haircut is certainly warranted in a bankruptcy scenario. Note that a 5% haircut =~$1.3 per share)

2. More bad news likely and no growth outlook. (Warning, I’ll get a little philosophical here). In my mind there’s 2 basic ways to profit off discrepancies between fundamental vs market prices. First is the traditional value investing concept: there’s an intrinsic value that’s not reflected in market value. If the intrinsic value is much higher, buy the stock and ignore market fluctuations. If the stock drops 30% on no fundamental changes, I’ll buy more. Call this “reversion to the mean”, classic value investing, or the Warrant Buffett/Seth Klarman way.

The second way is George Soros’ “reflexivity” feedback loop. In this model, market prices actually change the “fundamentals”. How does that happen? Soros has his examples but one way is this: when stock prices go down and negative media attention, regulators are emboldened to, even pressured to take legal actions. Rating agencies / bankers / analysts all toughen up on the company. Customers may stop doing business with you. Working capital terms deteriorate. Basically everyone’s trying to cover their own ass. This leads to more lawsuits, less future business, working capital deterioration, liquidity/capital stress -> even lower market prices, and the cycle repeats. Call this “trending market”, or “Reflexive feedback loop”

Successful investing requires one to recognize which of the 2 situations we’re in. When I first wrote about Ocwen almost a year ago here, I was working under a Buffett/Klarman framework, insisted on a long term, “normalized” view and ignored the price actions. Somewhere down the line, I (slowly and belatedly) realized that Ocwen became a Soros “reflexive spiral” situation, where declining prices actually does influence the fundamentals. Recognizing that has been very helpful the past 2 months. More concretely, Ocwen is not likely to get through its regulatory troubles before July this year, thus giving more time for bad news to pop up. Even if it survives through this whole thing, fundamental upside is shot because 1) who dares to give new businesses to Ocwen? 2) what consumer wants Ocwen as a lender? (I say “fundamental upside” because speculation can certainly get this stock much higher)

Taking a Break from Mortgage Servicing

I plan to take a mental break from mortgage servicing the next 2 months. At this point, my only position in that subsector is PennyMac (PFSI), which 1) unlike its peers, PFSI already has an origination segment that more than offsets servicing runoffs. 2) can benefit from FHA lowering its premium, 3) has good upside participation if the regulatory overhang in the sector improves, 4) downside protection in the sense that PFSI has potential to take over MSRs if Ocwen gets fired (note that HLSS already does business with PennyMac). 5) Ocwen will likely vacate the Ginnie Mae space and PFSI is a strong player there.

I might also get into NationStar (NSM) at some point (I got stopped out of my position on Walter Investment (WAC), put that money into NSM and then got stopped out of that one too). At some point, someone is going to justify a high price for NSM, probably with a flawed valuation method (using EBITDA multiples for servicing and P/E multiples for originations). If the market falls for that I want to be along for the ride..

Onto Other Things (ServiceMaster)

One of the ideas I’m looking at is ServiceMaster (SERV). The company’s largest segment is Terminix (pest & termite business), which is a direct competitor to Orkin, owned by Rollins (ROL). Rollins trades at 30x forward PE and 18x LTM EBITDA. ServiceMaster is much cheaper at 20x forward P/E and 12.3x EBITDA.

ServiceMaster can achieve a higher valuation (10-30% upside) with the following transaction. They can sell their home warranty business, and use the proceeds to pay down debt. This would deleverage the company, and leave the Terminix segment to be compared directly to Rollins, which of course trades much higher.

I know people will say Rollins is overvalued, but I actually think it’s reasonable because: 1) it historically has traded at a rich multiple, 2) 10-15 years of consecutive revenue / earnings growth, 3) large untapped growth potential through further consolidation, 4) stable industry demand. As for the how much American Home Shields (the home warranty business) will fetch, I think 10-15x P/E is reasonable. (First American Financial is a title insurer that owns a home warranty business, and they trade at 15x P/E)

Of course, I can’t tell management what to because I don’t have control. But the biggest owner of SERV is private equity firm Clayton, Dubilier & Rice (“CDR”), and they definitely have control. I think the CDR guys has to be thinking about the transaction I highlighted here. I’m looking for an entry point here.

HLSS and evolution of tail risks

HLSS stock got killed this week. To me, this is an example of when the market re-prices former “tail risks” as not so “tails”. The market starts out seeing certain risks as a <1% probability event, then re-evaluates that to be a 5% probability event, and then a 20% probability event. How did this happen?? I’m writing this to clarify and record my thoughts. Also, this could be of help to someone looking at HLSS.

Although it’s clear that HLSS’ problems are tied to Ocwen (OCN), how OCN’s issues transmit to HLSS can get pretty esoteric and not well understood –even now. This is not a simple matter of Ocwen no longer adding any more MSRs and thus curtailing HLSS’s growth potential. (In fact, anyone investing in HLSS should have valued it based on a runoff scenario in the first place).

I’ll go over a few risks here. A year from now we may look back and say these concerns are absurd. But what I want to emphasize here is how they changed over time.

Evolution of Risks

1. Risk of forced servicing transfers away from Ocwen. Ocwen’s weak servicer ratings triggered Event of Default (EOD) in certain nonagency MBS, which makes them eligible for servicing transfers. Ying Shen at Deutsche Bank gave an example recently:

“For investors of MSAC 2005-HE3, the Master Servicer, Wells Fargo, sent an EOD notice to all bondholders seeking to vote by the January 5, 2015, deadline as to whether Ocwen shall be terminated as a servicer.”

Just a few months ago, the default reaction is “Impossible! MBS investors won’t terminate Ocwen given lack of alternatives!” But now, firing Ocwen is no longer some unimaginable tail risk, but rather an actual item on the table, being voted on. The probabilities are still low, but not that low. If Ocwen’s troubles keep dragging on (perhaps due to even more lawsuits which Dr. Shen contemplated), then MBS investors will really have to start thinking about plan B. If and when that plan B develops, Ocwen will be in real trouble. How that plays out for HLSS will be left to the lawyers. Keep in mind HLSS never actually owned the legal title to Ocwen serviced MSRs, but is technically more like a secured lender.

2. Cash flows to equity from advance securitizations get shut off (very esoteric). Dr. Shen also commented on HLSS’s servicing advance (SA) deals:

 “We expect extension of distress timelines due to the delay in the foreclosure process…likely result in a slowdown of advance recoveries…Significant reduction of recovery speeds beyond certain thresholds will likely trigger an early amortization event, which will likely result immediately in paydown of the SA notes”.

For equity holders, the implication is cash flows getting funneled to pay down debt instead of going to equity. This would hurt dividend coverage (which are still strong but have deteriorated) and reduce present value of cash flows by pushing them back. I bet not many people thought of this one back in January 2014!

3. Ocwen and HLSS re-negotiate their contracts to the disadvantage of HLSS. This was my main concern back around August. I think the risk actually decreased with the exile of Bill Erbey, because OCN affiliates are now more likely to deal in a true arms-length manner.

My Own Experience in This Name

My investments in HLSS mirrored how these risks evolved. I first bought HLSS in late 2012. It was a major position after a lot research. But honestly, I never even thought of three risks discussed above! Even if I did, I would have considered them extremely low probability to the point of paranoia. It wasn’t until August 2014 that I started worrying about #3 (threat of recontracting) and reduced my positions. October 2014 is when the market really started talking about #1 and #2, and I further cut my position to a minimal amount. By mid-December I exited the remaining stake and actually thought about going short, but the high dividends held me back. Overall HLSS was a slight loss for me.

In each of these gap downs, I was tempted to say “these are super low probabilities, the market is over-reacting, and I should be a contrarian and double down” but decided not to. The reasons are twofold: 1) given my belated recognition of these risks, I wonder if there's even more risks that I have not thought of?  I’m just not close enough to the non-agency MBS market to sense its latest developments. 2) what’s the upside? Why wouldn’t people just move to AGNC which yields a solid 12% without these issues? I think the latter argument will be repeated throughout 2015.

A Rant about Tree.com/LendingTree (TREE)

I'll keep this short because the story is simple. There is a great write up on Seeking Alpha by New Capital: The Beauty of Shorting Tree.com. I will just highlight a few observations here.

• This website asks you a bunch of questions then sell your contact information to strangers.
• The company has been in business for 18 years and still can't make any money.
• Management makes absurd claims that their brand is more recognizable than Citibank.

I tried Tree.com/LendingTree for this research and now I'm flooded with calls from strangers. I've given away my phone number, and there's still no rate quotes - just brokers calling me. Who in the world wants this??

And yes they had the galls to ask for your social security number - again before showing any rate quotes. Who in their right mind does this??

TREE trades at 42x PE, 3x sales. Revenue is growing at a modest ~10% pace, but that is fueled by marketing and advertising spends. There are no operating leverage in this business, so no amount of sales will translate to EBITDA or earnings growth. The company has proven this in its history.

I've looked at other "lead-gen" companies. Most of them trade at sky-high prices but few are as bad as TREE. TrueCar is as least innovative and disruptive, if somewhat easy to copy. Zillow/Trulia both have name recognition and together could be considered a monopoly. Bankrate.com is easy to use and actually have contents. TREE is none of these.

The only sensible thing to do is short the fuck out of this. Unfortunately it's a bull market out there so you have to pick your spots. Check out the LendingTree website, do your research, and short on signs of weakness.

Appendix:

Here's TREE asking for your social security number:







Here they try to sell me a real estate agent – despite having indicated that I’m not interested in one earlier:




And of course, LendingTree is more famous than Citibank:

Musing on Ocwen’s Liquidity Situation

Background

Last Friday (12/12/2014) Ocwen (OCN) announced the purchase of $253mm Ginnie Mae early buyout (EBO) loans. On the surface this looks like good news as it appears that OCN is back on their feet doing business again.

Reading between the lines, I see this as a confession that they lack liquidity.

1) The company was obligated to buy those loans. Barclays’ MBS analysts noted that Ginnie Mae requires servicers to maintain delinquency levels below a 5% threshold, and delinquencies on OCN serviced pools have ran above that threshold for months.

2) In November the scuttlebutt was that Ocwen tried to sell those Ginnie Mae loans but were unsuccessful.

3) Last Friday OCN finally bought what they had to buy all along. But they turned around and sold it to an “unaffiliated third party”. Since Ocwen was already the servicer on these loans, this is not adding to their mortgage servicing rights portfolio.

So here’s the more complete narrative. OCN faced obligations to put up cash for loans. They were delinquent in doing so and tried unsuccessfully to offload that obligation. When they finally bought the loans, they had to bring in a 3rd party to finance it.

Is OCN having cash issues?

Latest Liquidity Situation Uncertain From Filings

At 9/30/2014, Ocwen had almost $300mm of cash on balance sheet but planned to use that for upcoming debt obligations and share repurchases.

Ocwen has to “advance” payments on behalf of delinquent borrowers and raise the money for that through securitization of advance receivables. The advance securitization notes each have their own “amortization date”, which is when OCN has to start paying down those notes and new advances are no longer financed. October 2014 was when the majority of these notes were supposed to start amortizing. In the latest 10Q, Ocwen said they subsequently paid off some of these notes, pushed back the amortization dates of some notes, and issued new notes. The disclosures are vague in terms of dollar sources and uses, so I’m unable judge their current liquidity situation regarding the advance receivables notes. Given the show of weakness on these Ginnie Mae EBO loans, I have to wonder.

Implications

The conventional view is that Ocwen services such a large portion of the subprime market that they’re “too big to fail”. But “too big to fail” does not mean shareholders won’t be wiped out, so investors can’t ignore the tail risk. Still, Ginnie Mae loans are a small subset of OCN’s overall servicing portfolio, so how might this sink Ocwen?

Liquidity issues, like runs on banks, are a bit of circular logic. Confidence (or lack thereof) feeds on itself. It doesn't help that Ocwen may have a large legal settlement coming anytime and capital requirements for servicers are still being discussed. Should Ocwen somehow lose Ginnie Mae’s business or show further signs of liquidity/capital strains, rating agencies may feel intense pressure to downgrade them further (rating agency analysts are people and they have to protect their career risk!) Further rating downgrades could effectively make banks pull their credit facilities - lower advanced rates, higher interest cost, covenant triggers...etc. At that point the issue is no longer confined to advance receivable facilities, but spills over to MSR financing, warehouse lending, corporate debt issues, capital requirements. In short - everything. In fact banks are probably already worried about OCN. No credit access = even less liquidity -> securities price spiral downward -> less confidence -> even less cash access.

Ocwen can try to ease its cash outflows by stop advancing earlier, and quicken the pace of modifications/principal reductions. Keep in mind though, investors have already threated to sue Ocwen due to opaque servicing practices. Any further changes in operations could lead to revolt in the MBS investor base.

In theory, servicing advances and EBO loans are high quality assets with virtually no credit risk, so there should be plenty of hedge funds, insurers…etc willing to provide funding and take these assets off Ocwen’s hands. On the other hand, the corporate high yield market is currently in shambles and liquidity is also scarce there. If I were a hedge fund and OCN desperately seeks my help, I wouldn’t do so without extracting my pound of flesh (perhaps some sort of convertible preferred?)

What If Liquidity Deteriorates

3 Scenarios: 

· Most likely. OCN gets its liquidity at higher funding cost or equity dilution. Ocwen and PennyMac (PFSI) appears to have some sort of alliance going on.

· Possible. Without funding, OCN couldn’t originate loans or acquire MSR. It goes into runoff mode.

· Low probability. Liquidity and confidence evaporates suddenly. Government or a consortium of investors take over OCN on emergency basis and stock goes to 0.


OCN is near the cusp of a tipping point in confidence. It’s possible that capital market goes into raging bull mode, liquidity splashes everywhere, in which case all these issues go away and stock goes back to the 50’s. For now I’m still on the sidelines, viewing Ocwen with a negative bias. If a trend emerges, I’m ready to act either way.

Risk Control and my Mortgage and Housing Portfolio

I mentioned my mortgage/housing portfolio a few months ago and here’s what it looks like now:

• Title insurance: FNF/FAF/STC
• Asset pools: AGNC/MTGE/ HLSS
• Origination and servicing: PFSI/WAC. A short put position in OCN that is fully hedged 
• Builders: UCP
• A tiny position in Freddie Preferred.

Combined, these are more than 20% of my portfolio. My housing exposure is actually more if I count Wells Fargo, Citibank…etc.

Since that last post, I have traded in and out of STC with incredible luck, and it looks like my patience in title insurers are now paying off. I’m not so lucky in OCN however. This one killed my returns this year. Analysts are bound to make wrong fundamental calls at some point, but you have to control your losses with sound portfolio management and this is where I failed. 

Getting Scalped by Gamma

Among the many lessons I learned (and paid for), a more interesting one is the negative convexity of shorting options. I got into OCN with short put positions thinking I can subsequently adjusted my net exposure up and down by going long/short stocks. That turns out to be naïve. A simplified example using fake numbers go like this.

Time 1

Stock trade at $34.
My long position: sold 100 shares of puts strike $35, this is now in the money so I’m net long.
My short position: short 100 shares of stocks.
Net exposure:  zero; I’m hedged right?  right?

Time 2

Stock spikes to $37.
My long position: now 0. That 100 shares of $35 puts is now out-of-the-money
My short position:  still short 100 shares of stocks.
Net exposure:  all the sudden I’m net short, when stock is making a run upward! I close my short stocks to bring net exposure down to 0.

Time 3 

Stock goes back down to $33.
My long position: Those sold puts struck at $35 went In-The-Money again.
My short exposure:  0. I closed my shorts in time 2
Net exposure: long 100 shares, but stock is plummeting.

So basically, that short put positions goes in and out of the money at the worst times. What I thought was a fully hedged position could turn into a net short exposure when stock is making a run upward; and vice versa, it turns to net long when stock is tanking.

People talk about “gamma scalping” by going long call option and shorting stock. With my set up I was short gamma and got scalped instead. 

Controlling Risk with Technical Analysis

FNF, and to some extent FAF, are core positions I plan to hold through the cycles. The rest however are not what most people would consider “quality” companies and my positions in them fluctuate greatly. When the fundamentals are shaky and information dissemination is sparse, I learned to use technicals to control my risk. That means buying things near some technical support level (ideally around 52 week or all-time lows), and cut my losses when they drop below that support level. Since that doesn’t always work (some of these stocks are known for taking a big gap downward), I further control risk by diversify my sector bets into multiple names, and look for cheap valuation (low P/Es or P/B multiples) 

Blending of Risk across Sub-sectors

Some of these sub-sectors offset each other with respect to specific risk factors. 

For example, my positions in title insurers could be hurt if mortgage transactions get lower. A partial hedge to that is a position in AGNC. This agency mortgage REIT benefits in that scenario because lower MBS issuance would drive its asset valuation higher. On the other hand, the mREITs have duration risks and could be hurt when rates go higher. The mortgage servicers provide some offset here with their MSR holdings. And so on. 

This is not an exact science because it’s hard to quantify the effect of various risk factors. Nevertheless, it’s good to think through what you’re trying to bet on and the risk you’re exposed to. For now, this portfolio is a bet on household formation, higher mortgage volumes, regulatory environment stabilizing, and various company specific factors such as operating efficiency, low valuation…etc.

Finally, I just started positions in PFSI and WAC this week. Those are for a separate post.

UCP Lot Valuation

Summary: 

• I was skeptical of the long thesis on UCP because analysts tout strong inventory valuations but glosses over the fact that it takes time to realize value - i.e. they do not apply a present value.
• It turns out that the approach of valuing lots by ascribing value as % of home prices is flawed but surprisingly robust. This is because the 2 missing factors are offsetting: 1) Applying a discount rate would decrease value, but 2) this method also understates cash flows and correcting for that increases value. 
• Valuation is $18/share.  UCP trades around $12 per share at the time of writing.

UCP and Its California Inventory

UCP, Inc. (UCP) is a land developer turned home builder that historically focused on California. Its operating subsidiary, UCP, LLC is 57.5% owned by PICO. As of 6/30/2014, UCP owns 4,639 lots and LTM net new order was only ~300 units. UCP has enough inventories to last years, so valuing the company requires valuing the lots.

When people hear that UCP owns lots in California, they think of San Francisco, Silicon Valley economy…etc. and assume high prices. However, UCP mostly operates in inland locations like Fresno and Madera where it could take 3 hours to reach the coast. According to Zillow, median home prices for Fresno and Madera are less than $200k. Other areas where UCP has strong presence are Monterey County in CA (prices in the $400-450k neighborhood) and Thurston County in Washington (low $200k’s range). These are not exactly your premium million dollar homes in San Francisco. UCP acquired Citizens Homes earlier this year, which allows them to expand into the Southeast.

The Long Thesis

This is an asset play. Much of UCP’s land inventories were bought during 2008-2009, when lots are cheap. These are now worth much more than what market value would suggest. With enough inventories to last several years, UCP also has some nice options:  a) monetize the lots by building homes themselves, b) sell lots to other builders, or c) sell itself to another company. Being acquired is a possibility due to the small market cap and their local footprints.

Valuation

The bullish write ups I have seen tend to value the inventory without a discount rate, then net out the liabilities to result in a massive net asset value. There was a PICO articlepublished 9/8/2014 on SA included detailed valuation of lots by locations. The methodology separates inventory into developed and undeveloped lots. For developed lots - assigns a reasonable home price for the area (say $450k for Monterey Bay area), and assume lots are worth certain percentage of home value (50% here). For undeveloped lots, just assign value per lot based on location, using UCP’s historical revenue per lots sold for context.

I duplicated the exercise below and got a very similar ~$350mm of value for the lots (164mm for developed lots and 183mm for undeveloped). Netting out liabilities and minority interest this would value UCP at ~18 per share.

It's tempting to stop here without applying a discount, and point out as upsides the optioned lots (which are not included here) and UCP’s potential as M&A target.

There are 2 things missing here. The first is obvious - it will take years for UCP to monetize this inventory and thus time value discounting is not only necessary but makes a big difference. Clearly, it takes time for local housing demand to emerge, and for UCP to build and sell those houses. The second missing piece is what amounts should we be discounting?  Just spreading the $350mm of total value and discount back would be a mistake, because the total cash flows UCP will get is actually more than that.

The second point requires some explanation so bear with me. What exactly do we mean when we say a lot is worth x dollars?  An excellent article here makes it clear that the value of a land lot is what another builder is willing to pay for the lot, and still be able to generate some profit. The profit part is key. For example, if other builders are willing to pay UCP $100k to buy some inventory, incur another $80k of construction cost, and sell the house for $200k, their profit is then $20k. The lot to ASP ratio would be 50%. How much cash flows will UCP get for this lot? 

·         If UCP sells the lots to another, then you should discount just the $100k proceed from the lot sale. 

·         UCP however, plans to build the homes itself. In this case UCP gets $120k of incremental cash flows ($200k selling price – $80k construction cost). The other way to think about it is they get $100k of working capital back, plus $20k profit.

This is why the $350mm value above understates cash flows - because it implicitly assumes UCP will sell these lots to another builder, and thus fails to include the profits UCP will get upon a home sale.

I get to roughly $18/share. It turns out that applying a discount rate is offset by this extra cash flow - even with some very conservative assumptions about sales pace.

Value destroying growth is always a risk

Growth ambitions are dangerous in homebuilding. At the peak of cycles, financing becomes widely available so builders gorge themselves with expensive inventories. During a crisis when they should be buying cheap, they can’t because of financing constraints. In short, builders always risk buying at the worst times.

By virtue of having land that can last years, UCP can theoretically avoid this type of behavior. In my opinion, the best case for UCP would be to stop trying to expand, and focus on monetizing its existing lot inventory as quickly as possible. Of course, management teams never want to liquidate themselves and UCP has in fact been acquiring.This makes them more like other builders, but with subpar scale and diversification. Business expansion also makes UCP a less likely M&A target (which I wouldn’t count on as the basis for an investment anyways). These factors perhaps call for a higher discount rate than peers, but still result in a strong valuation.

Random thoughts on CarMax, Oracle, and Housing Vacancies

·         CarMax (KMX)

o   Funny that every analyst wanted to ask about subprime on the earning call. I get that KMX is arguably a finance company. But guys, falling subprime mix is a GOOD thing!! So what if revenue slows a little bit, to the extent that customer base is more sustainable, that’s good news.

o   KMX does look expensive even with today’s drop off. From lenders perspective though, it is good to hear that subprime players are tightening standards.

·         Oracle (ORCL)

o   This Barron’s articlesaid that Oracle is threatened by Hadoop. Ironic considering that Oracle oversees Java – the language that Hadoop is written in. I have also heard that Oracle is hurt by freely available database options. Well, ORCL also owns MySQL, one of the most popular free databases. If Hadoop and free databases are really the downfall of ORCL, this needs to be a business school study on making your stuff open-source and freely available.

o   Hadoop does not replace a database. The Hadoop wiki says as much. Hadoop is great for unstructured data (for example if you’re mining terabytes of tweets) while traditional relational databases are good for structured data (in the row/column format). Hadoop is just a way to split up your job to various computing and data resources, each of those could be different form of data storage, including a database. In fact, Hadoop and database can be complementary - there’s just so much information in databases that someone mining data will have to link up Hadoop with relational databases.

·         Follow up on last week’s postabout housing stock – how to find true vacancy numbers?

o   I can’t stress enough that the reported “homeowner vacancy” and “rental vacancy” numbers are just fake. There are substantial “other vacancies” that are not included in those numbers – easily 30% or even 50% of total vacancies depending on location. Here’s a helpful reportthat US Census put out on “Other” vacancies last year.

o   How to find the true vacancy number then!?  Those numbers are available in the American Community Survey. Unfortunately the US Census does not make this easy. To be useful you’re really looking for local statistics. FactFinders allows you to get this by entering the MSA’s one by one. But if you want to figure out say vacancies for say, all the exposures of some home builder, then this will take a LONG time.

o   Ideally you want historical time series for each local level so you get a sense of “normal”. You can try to download the ACS summary files, but those only go back to 2005 on the Census website. 

o   One way to do this is with Public Use Microdata Samples (PUMS). The U. of Minnesota has a great site that let you select the variables and the vintage years you want. Load that into a database (it's easily in gigs of data) then process it however you want. The results will not match the ACS summary data exactly because these are samples of the original survey. But at least you get a sense of the vacancy mixes going further back than 2005.

A Mental Model on Housing Stock and Flow

I often hear people say something like this: “household formation should be 1.5mm per year and new construction are running 1mm per year, therefore we’re facing a housing shortfall”. 

The obvious flaw with this statement is that it ignores existing inventories and focuses completely on trends and “flow”. Put another way, it assumes inventory is already in balance. The logical questions are then:  how about the existing inventory?  How do you know we didn’t overbuilt so much during the last cycle that there are still still excess home supply? 

Intuitively, I’d lay out household formation and housing starts (“flow”) against total number of households and housing units (“stock”) like this:

Assessing whether we’re overbuilding is then a 3 step process: 1) estimate the number of households, 2) estimate number of housing units that can be occupied, 3) compare the two numbers; if there’s a housing unit shortfall then that’s the number of units we need to build. 

In the example above, I started with 2013 number of households. An estimate 750k of household formation for 2014E gets me to 2014E households of ~115mm.

Next step is take the housing unit numbers and figure out how many of those are actually available to live in? This is where subjective judgment comes in. The economy is not perfectly efficient, so at any given time, there’s a healthy amount of vacant units in transition (it takes some time going from a rental listing to actually renting out the unit, a unit could be sold but the buyer has not moved in yet…etc.) These are units that are not available, so I’ll take those out. I also remove a normalized amount of second homes and “held for market – other” units from the stock. For 2013, I estimated ~12.2% of housing units are “normalized vacants”, and removed a corresponding 16mm unit from stock. This resulted in an estimated 116.6mm housing units that are actually available to be occupied.

Finally, compare 2014E households of 115.4mm vs 116.6 of available units at year end 2013 and it’s clear that we still have excess inventory. I expect this excess inventory to decrease only slightly at the end of 2014 because household formation barely exceeds net unit adds. 

Alternatively, I have also seen analyst keeping track of the stock of vacancies, and map out the difference between demand (household formations), and supply (housing starts, demolitions…etc.) as a burn rate against excess vacancy. This is slightly more elegant but should get you similar results. Either way, the point is you have to take into account existing stock (whether in terms of available units as I did above, or as inventory of excess vacancies), rather than just compare housing starts against household formation.

* As a note, the headline reported homeowner and rental vacancies can be misleading as they both understate total vacancy. The way these numbers are reported: if census can’t categorize if a vacant unit is for rent or own, that unit will be left out of the data. i.e these numbers exclude units that are held off market or seasonal vacant. For this reason I focus on total vacancy for a big picture (construction activities). Then only drill down to homeowner vs rental vacancy when I evaluate rent vs own type of decisions.

Staying Patient on Title Insurers

2014 has been a tough year for title insurance stocks (as it has been for many mortgage stocks in general) as the group lagged the broader market. However, I believe that title insurers remain the best way to get exposure to housing recovery.

A 30 second thesis on the industry

·         Good industry structure and pricing power. The top 4 players have over 80% of market share. Customers are essentially captive because banks require title insurance for mortgage transactions.

·         Volumes are near historical troughs. Even without any boosts from household formation or homeownership rates, insurance premiums can go up from housing churn and more relaxed lending standards.

·         Expense restructuring. Title insurers had to control expenses through the latest cycles, as well as meet demands from activist investors. Operations are more efficient post-crisis and margins are poised to increase with any volume uptick due to high fixed cost.

Industry Characteristics

·         Product.  Title insurance is generally required by lenders whenever one purchases or refinances a property. Premiums are some percentage of loan amount or property value, with purchases generating higher premiums than refinances. The mortgage industry does not expect much growth in refinance volumes going forward, meaning purchase mortgage volumes will be the biggest driver in the coming years.

·         Players. Top players are Fidelity National Financial (FNF), First American Financial (FAF), Stewart Information Services (STC), and Old Republic (ORI). These 4 traditionally have 80-90% of the market.

·         Pricing. Pricing is regulated by the states and there is very little price competition. As opposed to true pricing power where firms can get away with price hikes, I would say the industry enjoys stable pricing that is very much fixed across the market. The firms also has upside from home price appreciation (remember premiums are a percentage of loan/property amount).

·         Value add. Title insurers are closer to labor intensive service companies than true “insurance” risk pools. “Insurance” in the typical sense of the word is about protecting against future losses yet to incur. However, title insurer actually guard against historical events that ALREADY occurred. As such title insurers can actually minimize losses by just doing a better job upfront (more thorough title search for example).

o   This puts sell side coverage in a weird position. Does the housing analyst cover this?  Or does the insurance analyst cover this? How about the business services analyst?

·         Cost structure. Personnel cost (semi-fixed) are the largest component of expenses, rather than the more unpredictable losses. The combination of fixed cost and relative low margins means earnings can have maximum leverage to volumes gains.

Upside 1:  Macro Narrative

Both total home sales and purchase mortgage volumes are near historical troughs. The current housing environment is marked by 1) low household formation and 2) a shift away from home ownership toward rentals. The mainstream narrative says young people are staying home due to student debt; and when they do move out (thus forming households), they rent instead of own. While that argument has merit, my personal view is household formation will eventually have to pick up, while home ownership rates will have to plateau as rental vacancies decline to more normal levels.

But keep in mind, household formation and home ownership rates are not the only driver of mortgage volume!  In fact, mortgage volume should be more related to total existing home sales (which is a multiple of new home sales).  This means that housing churn and mortgage access can actually be more important than household formation and home ownership rates.

o   Churn measures housing turnover (shown in chart 1 as total home sales as % of year end number of households). Since the late 1960’s this number has trended up with economic growth, dropped during the great recession and now trending up again. Intuitively, as the economy gets better, people will buy and sell houses and move around more, even if the total number of households remains constant.

o   Average mortgage sizes (shown in chart 2 as purchase mortgage volume divided by total home sales) are still at depressed levels even though home prices have recovered. This means either a) lower percentage of buyers taking out mortgages, or b) people take out smaller mortgages (lower LTV loans). Lenders are already in the process of expanding access, so that will help mortgage volume and by extension title insurance volumes.

Title insurers will likely see their premium revenues increase if either, or both, churn and mortgage sizes increase. This is better than say, homebuilders that are depend on new constructions, which goes back to household formation and home ownership rates.

Chart 1:  home sales activity can increase without the benefit of household formation

Chart 2:  mortgage size has room to grow when lending standards normalize

Upside 2: Expenses and operating leverage

The expense picture will be different from each firm and I encourage investors to dig deeper on their own. Just reading through the transcripts though, expense control is clearly a focus for the industry. This is particularly true after the great recession then the refinance boom-bust in 2012- 2013. First American, for example, has condensed its 103 claim centers, 30 accounting centers and 30 data centers in 2006 to 4, 2, and 2 respectively today (source: conference transcript). These are structural costs that are not expected to come back when purchase volumes come back. As a result, FAF now sees a 10% pre-tax margin as the new floor, as opposed to the ceiling it was during pre-crisis days.

Expense initiatives are hardly limited to FAF. FNF and STC have both attracted activist investors in the past couple years and management teams are on tight leashes regarding expenses.

It’s not just the level of expenses improving either. Expense will be easier to manage going forward because purchase volumes are more predictable than refinances. Refinance volumes are very sensitive to rates so companies had to quickly ramp up and ramp down their staff. The transmission goes something like this:  rate volatility -> refinance volume boom/bust -> difficulty in staffing  -> inefficiencies  -> earning volatility. Going forward though, a primarily purchase driven market should be more predictable and thus costs will be easier to manage.

A better blend of risk vs housing related subsectors

Why title insurers versus other housing/macro plays? The table and discussion below will outline how I mentally think of the various housing sub-sectors.

·         Competitive risk. Housing subsectors like home builders, loan origination, mREITs are typically fragmented and competitive. Title insurers and non-bank servicers are the only subsectors with highly concentrated players.

·         Regulatory risk. Non-bank servicers are currently fighting through a host of regulatory issues. Title insurers could have some risk here also, as the uninitiated tend to think of it as a sham product. However as one does more research they realize the protection is necessary.

·         Consumer credit risk. Credit losses are currently minimal but are bound to increase as lenders fight for market share by expanding credit boxes. If you don’t like the idea of normalizing losses (or already have enough in your portfolio) you can screen out origination, mortgage insurers, as well as some of the nonagency mREITS.

At this stage of the cycle, competitive and regulatory risks are my primary concerns. By process of elimination this leaves title insurance as the least risky way to get housing exposure.

Recap

I will leave off at this point. You have an industry with concentrated market power, volumes at a trough but normalizing, and expense running at efficient levels. Note that I have not discussed valuation. However, if you have a positive view on housing in the long term, this should be the best sub-sector to look into, given the better risk blends compared to other housing plays.