The Net Operating Loss is stated to be $489 million. This is not the value of the DTA. This is the value of the accumulated losses. The DTA would be approximately 35% of this amount (give or take). This amounts to a possible value of $171 million.
The company has 8.8 million shares outstanding and a $20 million convertible note. If the full value of the DTA were to be recognized, this would amount to $16.74 per share in book value additions. The preferred stock sits senior to the common. So, the first $23 to $24 million would go to capitalizing this preferred.
Note that the $20 million convertible note will automatically convert above $16.31. In the event of full DTA activation and conversion of the note, the company would have $219 million of equity capital, one quarter of which would be preferred stock.
Why can't the company put itself up for sale? IRS section 382 (g) limits the transfer of ownership during a 3-year period.
Thus, the company must find a way to generate positive earnings from operations that will help it grow organically.
Sentiment: Strong Buy
What value would the DTA ever have to IMH? Won't they be able to use the net operating losses to offset future earnings? They clearly won't make enough from earnings to even put a dent in the $489 NOL. Therefore the DTA - which does eventually expire worthless - is effectively a sunk asset that will never realize any value?
I found something on the web that seems to nail it down.
– Begins on the first day of the
tax year when carryforward begins
– 3-year “rolling” period unless change occurs"
So, I would assume that that losses from prior to 2010 are safe from section 382. Losses from 1/1/2011 forward could be in jeopardy. I guess that depends on whether the carryforward is considered to begin the day the company turns profitable, or year after the loss is recorded.
From IRS rules,
"Also, for purposes of determining the beginning of the acquiring corporation's testing period, such losses are considered to arise either in a taxable year that begins not earlier than the later of the day following the change date or the day of the section 381(a) transaction, or in a taxable year that begins 3 years before the end of the 5 consecutive year period. Pre-change losses of a distributor or transferor corporation that are subject to a limitation under section 382 continue to be subject to the limitation notwithstanding the occurrence of a fold-in event. Any ownership change that occurs in connection with, or subsequent to, the section 381 transaction may result in an additional, lesser limitation with respect to such pre-change losses. This paragraph (a)(1)(iv) applies to any testing date occurring on or after January 29, 1991."
I'll have to read this 5 or 6 times over before I can answer the question.
Interesting. Perhaps the company already has a way to organically grow that is untapped. What about the mortgage servicing rights (MSRs)? How much does the company hold, and how can they capitalize this portfolio?
It seems to me there is a lot money to be made just growing and expanding the MSR portfolio. Take for example Stone Gate Mortgage Corp. (SGM) or Nationstar Mortgage Holdings (NSM). They seem to be going gangbusters in this arena.
Sentiment: Strong Buy
MSRs are $27,857 as of September 30. I think they were adding $5,000 per Q.
These are discounted 10.5%. You'll see the net servicing income line is $2.9 million in the income statement for three Qs. It appears that adding $10 million in MSRs boosts this line by about $1.33 million.
Also, the MSRs gain value when interest rates rise. So, adding $10 million in MSRs could unlock value in the DTA of maybe $9.33 million. ($1.33 million Net Servicing Revenue x 20 years times 35%.)
If these earnings are retained and reinvested, the cycle continues.