WMIH-NSM CREDIT SUISSE OPINION
Management Meetings Highlight Improving Fundamentals and Deal Rationale
We recently had the opportunity to meet with Nationstar CEO Jay Bray and CFO Amar Patel. The meetings focused on the cash flow benefits of the pending transaction with WMIH as well as the improving operating fundamentals of the business following 4Q earnings. Highlights from the meetings are below:
¦ Estimates: We are raising our 2018 and 2019 core EPS estimates to $2.40 (from $2.35) and $2.75 (from $2.45) following 4Q earnings. Corporate expense savings (including corporate debt expense) and moderately improving Xome earnings are the biggest source of upside compared to our prior estimates. Our estimates remain for standalone NSM; pro forma for the transaction with WMIH core pre-tax net income would be $7-8 million higher (lower cash taxes offset by higher interest expense). Also the share count would be 12% lower resulting in 2019 cash EPS in the $3+ range.
¦ Transaction: One of the key strategic rationales for the deal with WMIH is the ability to utilize the $1.2 billion DTA. As the value of the DTA is increased by pulling the utilization forward, management will look towards M&A to increase the earnings power. NSM expects to see continued consolidation in the mortgage banking sector, and that the company will be well positioned to take advantage of that consolidation.
Share price performance
¦ Servicing: Profitability on the servicing portfolio is expected to improve to 6.0+ bps in 2018 from 5.4 bps (adjusted for one-time deboarding fee) in the 4th quarter. Lower repayments and premium amortization account for about two-thirds of the improvement, with lower costs driving the remaining pickup. Management was optimistic about the potential for additional cost savings over time as it looks to further
automate parts of the business; we expect more detail on this potential around the middle of the year. Management expects 5% servicing balance growth with the majority of the additions coming from origination and flow partners. The bulk transfer pipeline is currently less robust and getting more competitive (in certain pockets), and therefore NSM is not factoring in significant large bulk activity. This market remains lumpy and could produce opportunities later in the year.
¦ Origination: The origination opportunity for NSM has transitioned away from a rate driven refi focus which has resulted in lower profitability; this is captured in the guidance ($140 million pre-tax vs. $163 million in 2017). Management expects the first quarter to be the weakest given seasonality and some cost saves. The bigger portfolio opportunities in the near term are cash-out and debt consolidation, with purchase
recapture a smaller opportunity. NSM will also continue to be active in the correspondent channel as a way to add servicing balances at an attractive price.
¦ Xome: During the 4th quarter NSM demonstrated increased sustainability to Xome’s profitability, especially within the exchange segment. 3rd party property inflows increased 19% in the quarter offsetting the decline in NSM inventory; management expects this trend to continue. Later this year the GSEs are expected to allocate more
home sales, which could accelerate the growth of 3rd party volumes and Xome’s profitability. Additionally NSM is relaunching it’s field services product April 1 which should add $20 million to EBITDA annually.
¦ Reiterate Outperform: We think NSM offers an attractive risk/reward at current levels following the announced acquisition. The current environment with higher rates remains favorable for NSM to generate attractive servicing profitability. While leverage will be higher for NSM, the improved cash flow from the DTA benefit should allow
NSM/WMIH to navigate higher leverage.
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