9th annual Spring value investing congress

April 3, 2014 Las Vegas, NV Investing by the C.O.D.E

Chris Mayer, Agora Financial

www.ValueInvestingCongress.com

Investing by the C.O.D.E.

Chris Mayer Editor & Founder, Capital & Crisis, Mayers Special Situations coffeecan@agorafinancial.com

#1 Mortgage Servicing Rights (MSRs)

The big picture: Banks are getting out of the mortgage

servicing business Specialty servicers taking the slack (Ocwen, Walter, etc.) Im not recommending a servicer

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First, How MSRs Work

Servicer earns a fee based on the unpaid principal

balance (UPB)
Basic servicing fee Excess servicing fee

Contractual flows with interesting properties

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Cherry Hill Mortgage Inv Corp. (CHMI)

Unique mortgage REIT that co-invests in MSRs with

partner Freedom Mortgage Corp.

Freedom started in 1990 by Stanley Middleman; $13 billion in originations in 2012: $10 billion in first half of 2013 Paid most of CHMIs listing fees (went public in October) Stock is $19 7.5 mil shares outstanding Quarterly dividend is 50 cents for 10.5% yield Book is $21.50 (up 8.6% since IPO)

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After IPO
Agency MBS (65% of assets); Excess MSRs (25% of

assets), but majority of equity (68%) in Excess MSRs. Bought 2 pools of Excess MSRs

Excess MSRs also helps protect book value against

interest rate increases. (Hence, that 8.6% gain)

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Cherry Hill
Comps?
HLSS (not a REIT, focuses on subprime) co-invests with Ocwen, trades ~1.3x book NRZ co-invests in excess MSRs with Nationstar (but lots of other assets too), trades for ~1.3 times book

Upside for Cherry Hill

Stock is $19, book value is $21.5, plus you get that 11% yield.

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Comparisons

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Second idea

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#2 Investing in NPLs in the EU

EU banks sit on $1 trillion + in NPLs

Pressure to get rid of them:

Basel III Retrenchment Improved liquidity

The pace will quicken

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Best places to be

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Investing in NPLs in the EU

The big 3:
UK Spain Ireland $226 billion $230 billion $186 billion

Large discounts

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Kennedy Wilson Europe (KWE)

February IPO raised $1.7 billion
Kennedy Wilson, invested $200 million, is the manager

Seed portfolio:

NAV per share is 9.77 pounds (shares go for 1,050)

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The Kennedy Wilson Complex

Kennedy Wilson is the manager Basic criteria:
KW can immediately boost the return on the property (such as in the Alliance) Good prospects for rental growth and price appreciation Where the property should benefit from on-going foreign investment in Europe

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A word about KW

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Outperformance since IPO

KW total return of 135% since listing in November 2009

Tells only part of the story

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McMorrow The O in CODE

From the 2011 annual report:

2009 book value per share $4.36: 2013 was $9.91

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Summary
#1 Cherry Hill (CHMI) #2 Kennedy Wilson Europe (KWE)
Also Kennedy Wilson (KW)

Review of Last Years Picks

First Citizens (FCNCA) up 27% since Atlas Financial (AFH) up 86% since

Contact e-mail: coffeecan@agorafinancial.com My letters:

Capital & Crisis +17.6% annualized return since inception in January 2004 Mayers Special Situations +13.1% annualized since inception in July, 2006
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