Hedge Fund Manager Bets $123 Million on Walter, Loses

It’s a maxim that even novice investors can parrot with confidence: “Diversify your portfolio.”  But players in the high-powered world of hedge fund investing sometimes go long on a single stock with perceived growth potential — a strategy that led to a very bad week for one hedge fund manager who thought Walter Investment Management Corporation (NYSE: WAC) was worthy of betting the farm.

As RMD reported last week, Walter’s stock plummeted after an earnings call revealed massive quarterly and annual losses, as well as a pair of Department of Housing and Urban Development subpoenas into the Tampa, Fla.-based company’s reverse mortgage operations.

On March 13, the day before the announcement, Walter’s stock closed at $2.70 per share; the next day, WAC tumbled to $1.65, starting a downward spiral that concluded with a close of $1.10 per share on Friday. Standard & Poor’s downgraded Walter’s credit rating from B to CCC on Friday, and Seeking Alpha reported that an analysis by Compass Point, a financial and research firm, puts Walter’s odds of entering some kind of bankruptcy protection at 50-50. As the Tampa Bay Business Journal pointed out, both “B” and “CCC” ratings qualify as Walter’s stock as junk.

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Walter’s stock was as high as $7.35 per share as recently as early December, and hit a five-year peak of $47.29 back in March 2013.

This tumble made waves throughout the reverse mortgage community, but hedge fund trader Vadim Perelman might have been the individual most affected: According to Forbes, Walter has been the only U.S. stock in Perelman’s Baker Street Capital Management portfolio since the end of 2015.

Perelman invested nearly $90 million in Walter in early 2014, according to Forbes, even as the mortgage servicer’s stock slid from $35 to about $28. Baker Street’s exposure to Walter then continued to increase as its stock continued its inexorable decline, with Perelman remaining a tireless cheerleader for the company’s prospects. At the end of 2015, Baker Street had $123 million in Walter stock.

Forbes cites a Baker Street presentation from July 2015 called “The WACkiest Disconnect Between Price and Value,” in which Perelman claimed that the stock was wildly undervalued: At a time when WAC was hovering in the teens, Perelman assigned a fair value of $54.

“Over the next 24 months, we believe WAC can grow its servicing business by 40% without using any of its own balance sheet capital,” Forbes reports the presentation as saying. This growth, of course, did not materialize.

Perelman isn’t alone in the beating that Baker Street took on Walter; Birch Run Capital Advisors, a New York City-based hedge fund, held nearly 7.5 million WAC shares as of this past New Year’s Eve, making Walter its second-largest stock by volume and representing almost 12% of its entire portfolio. Birch Run’s manager, Daniel Beltzman, served as chairman of Walter’s board of directors from February 2016 to June 2016, and continues to sit on its board. He also personally owned more than 35,000 shares of WAC stock as of June 2016.

Interestingly, this isn’t Perelman’s first all-in bet on a stock with shaky growth prospects. Back in 2013, stock in steadily declining Sears Holdings accounted for 87% of Baker Street’s U.S. portfolio, with Perelman arguing that the embattled retail chain’s extensive real estate holdings were worth far more than its market cap.

“But by June 2015, Perelman had significantly reduced Baker Street’s exposure to Sears Holdings and his U.S. stock portfolio started to diminish,” Forbes wrote.

Written by Alex Spanko

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  • Rather than piling on Walter any further, let us see the effects of these losses on the industry and the flow of new investment money into our industry.

    The lack of experience in HECMs and the overconfidence and ultra optimism of Walter’s executive management led to its own devastation. Yet will new investment look at Walter management or the industry as the cause of the investor’s losses? Will substantial new money flow into the industry or into the hands of owners of our lenders for their reverse mortgage operations? Probably not the way it would have before the reported losses of Walter this year.

    If this was the only investor to lose so dramatically perhaps there would be room to complain but it is not. Because RMF failed to take its company public despite its application to do so, one has to wonder why. If that had occurred perhaps some of the bad news from Walter might have been muted; however, what is happening at RMF that it is not going public?

    Recently an originator who works for a long-time FHA approved lender and participant in the industry complained about someone pointing out that his employer only had two endorsements in the last five months per a HUD report. In responding, the originator stated that the industry is what we make it, a rather illuminating statement.

    We are in decline even though our basic industry condition is stagnation. Many want to ignore the present (especially sales management) and only look to the future. We started this decline that way when Jeff Lewis rose up at a NRMLA convention in late 2010 and declared: “’We did 80,000 last year,’ Lewis told a general session audience. ‘This is a great product,’ he went on, ‘and I think we’ll do over 100,000 next year.’” Unfortunately the industry has never had a year in which it had endorsements totaling a five figure number that starts with an eight (close it though) and, yes, since 2009 we have not had one year where we have endorsements totals over 100,000; over optimism has solved little in this industry after 2009. See

    http://reversemortgagedaily.com/2010/11/08/optimistic-reverse-mortgage-outlook-but-challenges-remain/

    Realism sometimes is hard to take but as our fellow originator stated: “The industry is what WE make it” (capitalization added).

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