New Graham & Doddsville Issue: Kingstown Capital Interview

Columbia Business School has released the Winter 2017 edition of its Graham & Doddsville newsletter.  In it, they feature a great interview with Guy Shanon and Michael Blitzer of Kingstown Capital.

They talk about their investment process and also outline their thesis for their largest position, Adient (ADNT), a spin-off from Johnson Controls (JCI).

The issue also features chats with Rupal Bhansali of Ariel Investments, Simeon Wallis of ValorBridge Partners, Jared Friedberg of Mercator, as well as Charles and Roy Studness of Studness Capital Management.

Lastly, this edition includes student investment pitches on short Foot Locker (FL), long Axalta Coating Systems (AXTA), and short Cardtronics (CATM).

Embedded below is Columbia Business School's latest Graham & Doddsville:



You can download a .pdf copy here.

You can also view past issues of this newsletter, including interviews with Meritage Group and MSD Capital.

Kingstown Capital Trims Aerojet Rocketdyne Stake

Michael Blitzer and Guy Shanon's investment firm Kingstown Capital has filed a 13G with the SEC regarding its position in Aerojet Rocketdyne (AJRD).  Per the filing, Kingstown now owns 4.3% of AJRD with 3 million shares.

This is a decrease compared to the 3.5 million shares they owned at the end of the second quarter.

We've previously highlighted recent portfolio activity from Kingstown here.

Per Yahoo Finance, Aerojet Rocketdyne "designs, develops, manufactures, and sells aerospace and defense products and systems in the United States. The company operates in two segments, Aerospace and Defense, and Real Estate. "

Kingstown Capital Sells Some Ocwen Financial Equity, Buys Senior Notes

Michael Blitzer hedge fund firm Kingstown Capital Management has filed an amended 13D with the SEC regarding its position in Ocwen Financial (OCN).  Per the filing, Kingstown now owns 7.66% of the company with 9.5 million shares.

This is a decrease in their common stock position compared to the 11.35 million shares they owned at the end of the second quarter.  The filing was made due to activity on August 31st. 

It also indicates they purchased 6.625% Senior Notes due 2019.

Per Google Finance, Ocwen Financial is "a financial services holding company. The Company, through its subsidiaries, operates as a mortgage company. The Company's segments include Servicing, Lending, and Corporate Items and Other. The Company's Servicing segment consists of its core residential servicing business. The Company's Lending segment is focused on originating and purchasing conventional and government-insured residential forward and reverse mortgage loans. The Company's Corporate Items and Other segment includes business activities that include providing secured floor plan lending to used car dealerships through its Automotive Capital Services (ACS) venture and providing financing to investors to purchase single-family homes and apartments for lease through its Liberty Rental Finance venture. The Corporate Items and Other segment also includes the diversified fee-based businesses, which provide property valuation, real estate owned (REO) management, title and closing services."

Kingstown Capital Files 13D on Aerojet Rocketdyne

Michael Blitzer's hedge fund firm Kingstown Capital has filed a 13D with the SEC regarding shares of Aerojet Rocketdyne (AJRD).  Per the filing, Kingstown now owns 5.5% of the company with 3.5 million shares.

This is up slightly from the 3.4 million shares they owned at the end of the second quarter.  The 13D filing contains the standard boilerplate that they purchased shares because they thought it was undervalued and they may talk to management from time to time.

We've posted previous portfolio activity from Kingstown here.

Per Google Finance, Aerojet Rocketdyne Holdings, Inc., formerly GenCorp, Inc., "is a manufacturer of aerospace and defense products and systems. The Company develops and manufactures propulsion systems for defense and space applications, and armaments for precision tactical and long-range weapon systems applications. It has two operating segments: Aerospace and Defense, and Real Estate. Its Aerospace and Defense segment includes the operations of its subsidiary Aerojet Rocketdyne, Inc., which is engaged in designing, developing and manufacturing aerospace and defense products and systems for the United States Government, including the United States Department of Defense (DoD), the National Aeronautics and Space Administration (NASA), aerospace and defense prime contractors, as well as portions of the commercial sector. Its real estate segment includes activities of its subsidiary Easton Development Company, LLC related to the re-zoning, entitlement, sale, and leasing of its excess real estate assets."

Kingstown Capital Boosts Ocwen Financial Stake

Michael Blitzer's hedge fund firm Kingstown Capital has filed an amended 13D with the SEC regarding its position in Ocwen Financial (OCN).  Per the filing, Kingstown now owns 9.97% of Ocwen with over 12.5 million shares (though they have an aggregate economic exposure to 14 million shares due to cash-settled total return swaps).

This is up from the 12 million shares they owned at the end of the first quarter. The filing was made due to activity on August 4th.  The return swaps were purchased on August 4th and 5th at prices of $8.0053, $7.6299, and $7.7450.

The 13D contains the standard activist boilerplate that they may meet with management etc.  Kingstown was the largest reported institutional shareholder of OCN shares as of the end of Q1.

Shares of OCN were hit pretty much all throughout 2014 as regulator Benjamin Lawsky came down hard on the company, forcing its Chairman Bill Erbey to resign, among other changes.  OCN fell from $55 to $15 in 2014 and has continued to fall in 2015 down to current levels of $8.11.  Kingstown initiated their position in the first quarter of this year and has just recently bought more.

As we've highlighted earlier this year, Kingstown was also involved in shares of Home Loan Servicing Solutions (HLSS), another one of the companies that was in Bill Erbey's previous empire.

Per Google Finance, Ocwen Financial is "a financial services holding company. The Company through its subsidiaries is engaged in the servicing and origination of mortgage loans. The Company operates in three segments such as, servicing, lending, and corporate items and other. The Company develops programs, such as Shared Appreciation Modification (SAM) which incorporates principal reductions and lower payments for borrowers while providing a net present value positive loss mitigation outcome for investors, including the ability to recoup losses if property values increase over time."

Kingstown Capital Files 13D on Home Loan Servicing Solutions

Michael Blitzer's hedge fund Kingstown Capital has filed a 13D with the SEC regarding shares of Home Loan Servicing Solutions (HLSS).  Per the filing, Kingstown now owns 5.1% of the company with 3.6 million shares.

This is a newly disclosed position for the firm and their 13D indicates that they oppose the announced transaction between the company and New Residential Investment Corp (NRZ).

They write that they "do not believe a transaction at GAAP book value adequately compensates the Issuer's shareholders for the value of its assets, which have historically traded between 1.2x - 1.3x book value according to the Issuer’s September 2014 Investor Presentation.  The Reporting Persons further note the overly conservative nature of the assumptions underlying the Issuer’s book value, including (i) an assumed weighted average prepayment rate of 18% versus the actual 10.3% for the nine months ending September 30, 2014, (ii) an assumed weighted average delinquency rate of 25% versus actual non-performing residential assets of 18.5% of UPB as of September 30, 2014, (iii) an assumed weighted average discount rate of 19% versus a 10% discount rate used by NRZ to value its own MSR assets, and (iv) the exclusion of any value from deferred servicing fees, which were $470M at year-end 2013.      

Kingstown went on to write:

"The Reporting Persons believe that adjusting these assumptions to reflect recently observed rates and the discounted value of deferred servicing fees, among other factors, could add more than $7 per share of additional value above the stated book value.  Notwithstanding a higher offer from NRZ or others, the Reporting Persons believe the most value-enhancing strategies for the Issuer are continuing its servicing relationship with Ocwen Financial Corporation, completing refinancing initiatives recently highlighted by management and executing the Issuer’s growth initiatives as its financing and operations normalize in due course.  The Reporting Persons plan to communicate with the Issuer’s shareholders, management and Board of Directors (the “Board”) as well as other third parties to oppose the current transaction and may present other proposals that offer the Issuer’s shareholders more value. "

Per their 13D, Kingstown was buying HLSS shares throughout January and February at prices ranging from $12.xx to $18.xx.

It's also worth noting that Kingstown holds a large position in Bill Erbey's company Ocwen Financial (OCN) as well (9.5% of the company according to a February 13D filing.) 

They originally started an OCN position in the third quarter of 2014 and were buying on the way down as the company came under siege from the New York Department of Financial Services and regulator Benjamin Lawsky.  This investigation ended with OCN paying a hefty fine and Erbey leaving the company.  Kingstown's 13F filing that details their 2014 year-end portfolio indicated they sold entirely out of their OCN stake.  Then, in a new 13D filing in February, it shows that they started buying OCN again after shares had dropped 50%.

This is worth highlighting due to the fact that both HLSS and OCN have Bill Erbey in common; both are part of the halo of companies he assembled in the mortgage servicing space as HLSS was spun-off from Ocwen a few years ago.  As such, Kingstown's previous work on OCN likely came into play on their HLSS position given the close ties between the companies.

Per Google Finance, HLSS is "a development-stage company. The Company was formed to acquire mortgage servicing assets consisting of mortgage servicing rights, rights to fees and other income from servicing mortgage loans, and associated servicing advances. The Company operates its business as a single reportable segment. HLSS primary source of income is interest income on the Notes receivable – Rights to MSRs. HLSS do not originate mortgage loans, and as a result are not subject to the risk of loss related to the origination of mortgage loans. The Company engaged Ocwen, a residential mortgage loan servicer, to service the mortgage loans underlying HLSS Mortgage Servicing Assets .The Company has not and do not intend to develop its own mortgage servicing platform but instead will rely on high quality third-party residential mortgage loan servicers."