Mr Cooper Group Inc (COOP)

[JusticeWillWin]

===>>>Highlights from Q4 call and outlook for Q1<<<===

Presentation for the Q4 2021 earnings call:
https://s1.q4cdn.com/275823140/files/doc_financials/2021/q4/4Q'21-Earnings-Presentation_FINAL.pdf

From the PR: Mr. Cooper Delivers $1.4 billion GAAP Net Income and 17% Servicing Portfolio Growth for Full-year 2021
https://www.businesswire.com/news/home/20220211005095/en/Mr.-Cooper-Delivers-1.4-billion-GAAP-Net-Income-and-17-Servicing-Portfolio-Growth-for-Full-year-2021

* Q4 net income of $155 million and $2.01 per diluted share (=ROCE of 19%)
* Book value per share increased to $45.64, tangible book value per share increased to $43.82
* Servicing UPB grew to $710 billion
* Repurchased 1.3 million common shares in Q4 for $56 million (average of $41.22)
* BOD authorized additional $200 million stock repurchase, bringing total authorization to $252 million

From the earnings call transcript:
https://www.fool.com/earnings/call-transcripts/2022/02/11/mr-cooper-group-inc-coop-q4-2021-earnings-call-tra/

Jay Bray -- Chairman and Chief Executive Officer

We expect to generate continued growth in TBV and we believe those shares represent outstanding value. I'm also pleased to report that the board has authorized an additional $200 million, bringing our total authorization to $252 million as of today.

The balance sheet is in the strongest shape of the company's history.

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The company generated very strong cash flow during the quarter with $171 million in steady-state cash flow. And when it comes to cash generation, our balanced business model is very different from peers.

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we're starting the year with $895 million in unrestricted cash and a total of $1.7 billion in liquidity, which is a lot of dry powder.

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Having said that, let's talk about TBV growth where the outlook is stronger. In fact, the outlook for TBV growth is really quite excellent because in addition to operating earnings, there's a strong likelihood that we'll mark up our MSRs for higher rates. And as you know, a successful monetization of Xome would drive substantial benefit for TBV.

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As you know, we've established a strategic target of $1 trillion in UPB, which would be around 5 million customers. We believe this level of scale will constitute a major competitive advantage.

We're actually moving toward that goal faster than we expected, and we're very excited about this momentum.

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And that brings us up to the deal with Sagent Lending, which we announced this morning.

Let's start with the terms. We're conveying the rights to our proprietary servicing platform to Sagent, which is owned by Warburg Pincus and Fiserv, and provides mortgage servicing solutions to banks and other lenders. Sagent, in turn, will integrate our native cloud platform onto a cloud-based core and offer the first ever cloud-native servicing platform to the mortgage industry. In exchange for the rights to our platform, Sagent is providing us with an equity stake in their company and two board seats.

In the first quarter, we expect to record a pre-tax gain of approximately $225 million related to the sale. And we would fully expect this equity position to appreciate significantly as Sagent delivers on its mission of disrupting the status quo. This is a very significant development for the industry and for Mr. Cooper.

Chris Marshall -- Vice Chairman, President, and Chief Financial Officer

And given our outlook for future growth in TBV per share, we believe the return from repurchasing shares will turn out to be extremely high over time. Looking ahead, we fully expect to keep growing TBV per share.

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In fact, if we close the books today, we'd expect to record a positive mark of at least $300 million. Additionally, and as we've previously shared with you, we're actively exploring monetization options for the Auction Exchange, which we think is certainly the most valuable of all the Xome business units. And finally, we'll continue to repurchase stock on an opportunistic basis.

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================ Q&A Session ==================

Kevin Barker -- Piper Sandler -- Analyst

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So could you just clarify, with Sagent, the $225 million gain, is that because you're licensing the servicing? Or is that a gain because you now have an equity stake in the company? Could you clarify that?

Chris Marshall -- Vice Chairman, President, and Chief Financial Officer

That's because of the equity stake in the company.

Kevin Barker -- Piper Sandler -- Analyst

OK. And so what would that value the company at this point with the $225 million?

Chris Marshall -- Vice Chairman, President, and Chief Financial Officer

We're going to have about a 20% stake in the company. So the value is $1 billion -- roughly, $1.250 billion.

Kevin Barker -- Piper Sandler -- Analyst

OK. And so on a pro forma basis, with the roughly over $300 million mark in the MSR and the $225 million gain on -- with the servicing technology, that's an additional, what, about $5 in book value growth? Am I thinking about that correctly for the first quarter without earnings?

Chris Marshall -- Vice Chairman, President, and Chief Financial Officer

Actually, the $300 million, just to be a little bit more accurate. I just want to be a little conservative on that comment, but I'm looking -- I wanted to see what rates were doing this morning. It's nearly $400 million. So think about that $400 million -- hair under $400 million, $225 million plus decent earnings in the first quarter at our tax rate for 75 million shares, it's well north of a $50 tangible book value.

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Kevin Barker -- Piper Sandler -- Analyst

OK. So your book value is north of $50 on a pro forma basis, give or take, and then you have a 23% tangible net worth ratio, which is 8% above your 15% target. If I do the calculation that would imply you have about $1 billion of excess capital. Why not just take out a chunk of your shares today given that you are trading at a significant discount to tangible book value on a pro forma basis?

Chris Marshall -- Vice Chairman, President, and Chief Financial Officer

Well, if someone called and offered us a big chunk of shares at attractive prices, we'd do just that. You should expect us to be actively repurchasing our shares. We think they're very cheap. And you heard Jay say the board just authorized us to buy another $200 million worth.

If the shares remain this cheap, at this kind of discount, I'm sure the board would ask us to buy back more. So we see it exactly the same way you do. And by the way, I'd just mention, we talked a lot about growth in MSR. Our capital and liquidity is No. 1 priority is growing the book. I just mentioned the $21 billion pool that we came to agreement on. While we were sitting here, we just got confirmation of another nearly $50 billion pool that we actually currently subservice. We just got notification that we came to agreement on that.

So we are growing very rapidly at attractive prices exactly the way we said we would. We expect this to happen. And we've accumulated that capital to be able to continue to grow the business as long as we see investments at attractive prices.

By the way, we haven't talked with you before about purchase recapture, but this is also an area of strategic focus for us since it's another lever to drive higher customer retention. In this regard, we recently entered into a partnership with Realogy, which is the nation's largest realtor network, to provide our customers with access to Realogy agents to assist them with the purchase transaction. We'll provide you with an update on how this is working out later in the year.

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Now if you'll turn to Slide 15, let's talk about the Auction Exchange. As you know, we're very excited to see this platform finally start to ramp back up and generate revenues now that state and federal foreclosure moratoriums are ending. As Jay said, we continue to actively explore monetization options with the caveat that this is a very valuable business. So we're in no rush.

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Also, there's a backlog from the last two years, which still needs to be worked through. And this forecast assumes that the economic outlook remains rosy. If we see any real deterioration in the credit cycle, foreclosure activity could be much, much higher and Xome's revenue would be potentially through the roof. All right.

Chris Marshall -- Vice Chairman, President, and Chief Financial Officer

And Sagent, as part of this transaction is going to replace that with a cloud-native core and have the first end-to-end cloud-native platform. Now you may -- that may mean a lot to the financial analysts on the call. But I know your peers in technology will recognize that as a complete game changer.

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And as long as there are attractive opportunities to do that that's what we're going to do. Now if we get to a point where pricing changes and -- or the stock continues to trade at a discount to book, then we'll be more aggressive there. But at this point, I think our focus is on growth, profitable growth.

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But when we talk about the discount in stock, it's not the discount to tangible book value necessarily, which as we just said, at current levels, would be north of $50, maybe almost $52. That doesn't include the value of the Auction Exchange.

And as you heard in my comments, the return to full profitability may be a little bit slower than we said, but that is an absolutely great business, a very valuable business and we recognize that. And I think investors are starting to recognize that. So when you think of our tangible book value, you've got to think of it as tangible book value plus X for Xome. I'll let you figure out what you think that business is worth, but it's worth a lot.

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It's approximate. And in this guidance, it's kind of hard to think out exactly how it's going to unfold. So the $50 million that we talked about was really -- and I think we made it clear it was all back-end loaded. We expected revenues to really start to kick up in the third quarter.

It may take the fourth quarter, but the $200,000 is just normal run rate prior to the pandemic. It's definitely going to be higher than that because there haven't been anything. Nothing has been foreclosed on -- or virtually nothing other than vacant properties. So it's definitely going to be a big surge.

That's our guess right now. We're in that range. And we'll know more as the year progresses, and we'll certainly talk about Xome a lot more. We're not necessarily going to wait to monetize Xome when it hits that surge.

It's just when we see normality return and that's when we think we'll get full value for the business.

Chris Marshall -- Vice Chairman, President, and Chief Financial Officer

Hey, look, Black Knight is a great company. Anthony and Joe are first-class executives, and we have the utmost respect for them. But every mortgage company wants a cloud-based solution. Every bank that services the Xome portfolio.

Headline in American Banker the other day was all banks are marching to the cloud for obvious reasons. I mean, it provides so many efficiencies to you. Having the first truly native cloud-based platform is a game changer. So I don't want to say anything about our good friends at Black Knight.

But for Sagent, Sagent is creating something brand-new that everyone's wanted, and I would expect it's going to be a major disruption.