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Analyst: Jonathon Clements Email: [email protected]
Nationstar Mortgage (NSM) | LONG | Price Target: $78.00 18
months Investment Thesis . Nationstar is non-bank mortgage servicer
that was taken public by Fortress Investment Group in 2012. While
the company experienced rapid growth coming out of the crisis
capitalizing on Basel III and HARP origination fees, shares have
sold off over the past 6 months on fears of increasing regulation
and decreasing profitability. Trading 43% below its 52 week high
and 9.33x FY2014 P/E, I believe $32.92 offers a great entry point
for considerable upside. Catalysts . Solutionstar Spin-off.
Solutionstar is a rapidly growing division within Nationstar
providing fee-based mortgage-related services to financial
institutions spanning the life cycle of a mortgage loan. NSMs
management previously discussed the spin-off, but decided to delay
in order to pursue TTM acquisitions. Once the division can show
accurate, annualized financials I believe it will be spun-off.
Applying three comparables average FY2014 P/E multiple of 15.47x to
an EPS of ~$1.22, values Solutionstar at $18.89 a share. Therefore,
investors can acquire Nationstars servicing and origination
businesses for $14.03 per share at 6.43x FY2014 earnings.
Growth in Reverse Mortgages (RM). RMs offer one of the most
compelling and underpenetrated markets in the world. Since 2011,
Nationstar has accumulated a $28.9 billion RM servicing portfolio
(32% of the market). While the true market size is difficult at
best to define, as of 2009 only 1% of the eligible borrowers had
been tapped while a peer mortgage servicer has estimated the market
at $1.9 trillion, compared to $90 billion outstanding.
Increasing MSR Values. As interest rates rise, slower refinances
and fewer defaults will improve the overall quality and value of
Nationstars current mortgage servicing rights portfolio. Unlike
almost every other investment that loses money when rates rise,
MSRs increase in value.
Neutral consensus on Wall Street. 11 sell side analysts that
follow NSM: 2 OW, 7 N and 2 UW. The consensus 12 month PT is
$34.00, citing regulatory scrutiny over non-bank servicers,
declining origination activity, and UPB pipeline and profitability
concerns. However, none of the 11 reports mention the concentrated
short position in the float or the underlying future economics of
reverse mortgages. Future upgrades will support upward price
movement.
Increasing Profitability. Since 2007, servicing right premiums
have compressed from 4-6x to 1-2x their yearly return. Nationstar
has laid out a plan to further increase pretax servicing
profitability from 7 to 11bps FY2014 on its UPB (1bp = 4% EPS
growth).
Short Squeeze. Factoring four long shareholders (3/31/14) into
NSMs float reveals a 64% S.I.
Risks . Regulatory scrutiny. Due to being a fairly new and
developing industry, there will most likely be some form of further
oversight to come. Regulation could harness scalability and
profitability.
Ownership Concentration. Fortress owns 74% of the common stock,
therefore controls all matters requiring a stockholder vote. The
latest 10Q cited, the interest of [Fortress] may not always
coincide with our interest or other stockholders.
Nationstar does not capture market share. Regardless of the
massive potential for the RM servicing market, there is the
possibility that Nationstar is not able to secure a material market
share in the servicing business. Timeline . Mar 2012 Sept 2013 IPO
at $14 in (3/2012) Quadruped servicing UPB Originated large
refinancing (HARP) fees Hit high of $57.95 (9/2013)
Oct 2013 Present Shares lost 43% of their value Fears of
increased regulation on
non-bank mortgage servicing Declining refinancing revenues
Next 18 Months Short squeeze / upward pressure Solutionstar
spin-off Market will price in increasing
profitability and RM opportunity
Solutionstar Nationstar FY2015 Value FY2015 Rev $400 FY2015 Rev
xSolutionstar $1,791 Solutionstar $25.50 Pretax Income $180 Pretax
Income $477 Nationstar $52.53 Net Income $111 Net Income $294 PRICE
TARGET $78.13
FY 2015 EPS $1.22 FY 2015 EPS $3.24 Valuation Range Multiple
Price Current Peer Multiple 20.88x Normalized Mulitple 16.25x
Solutionstar 13x 27x $16 - $33 Nationstar 13x 24x $42 - $78
Solutionstar Value $25.50 Remaning NSM Value $52.63 Range (wght
ave) 13x 25x $58 - $111
USD millions, except per share (8.6.2014)
Bloomberg statistics / NSM IR / SEC filings Key Statistics
Ticker NSM Price (8.6.2014) 32.92 Vol 3 months (000) 568 52 wk High
/ Low 24.50 / 57.95 Ownership Shares Out / Float 90.8 / 21.6
Fortress Ownership 67.7 Short Interest 6.6 Valuation 08.14 P/E
21.01 12.14 P/E 9.33
Mkt Cap 2,995 Debt 7,036 Cash (404) Enterprise Value 9,632 Price
Target Target 78.00 % Upside 137% Timeline (months) 18
Multiple Range 13x-25x Price Range $58 - $111
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! 2!
BUSINESS DESCRIPTION Overview
Nationstar Mortgage Holdings (NSM) is the second largest
non-bank residential mortgage servicer with a fully integrated
mortgage origination platform. The company can be viewed as three
divisions: mortgage servicing, loan originations, and Solutionstar.
Nationstars primary line of business is mortgage servicing in which
they allocate payments between the borrower and lender, among other
services. The integrated originations platform enhances its
servicing business by allowing Nationstar to originate and
recapture refinancing activity as portions of its servicing
portfolio are paid off over time. Along with this effort,
Nationstar has the ability to sell or securitize the conforming
mortgage loans to government-sponsored entities or other
third-party investors. Solutionstar, an in-house division of
Nationstar, offers fee-based mortgage-related services spanning the
life cycle of a mortgage loan to financial institutions and
originators, including brokerage, title insurance, loan settlement,
appraisal, and recovering processing services. Nationstars FY2014
estimated revenue is comprised of: 47.5% mortgage servicing
(forward and reverse), 24.0% originations (forward), and 28.5%
Solutionstar.
History Nationstar was founded in 1994 as a residential mortgage
originator under the name Centrex. From the mid-1990s to the
mid-2000s the company organically grew into a very profitable
originations business. In 2006, Fortress Investment Group took
Centrex private for $520 million, changing the name to Nationstar.
A year later the housing bubble popped, leaving the originations
business no longer able to create loans as a result of frozen
credit markets. In 2007, Nationstar rebranded itself as a mortgage
servicer expanding their new business eight fold over the next four
years (70.2% per annum) growing revenues from $3.9 million in 2007
to $858.6 million in 2011. In 2012, Fortress sold a 19% stake in
Nationstar to the public through an IPO raising $233 million. NSM
rose 120% in its first year of trading as investors capitalized on
zero interest rate policies and the reg cap trade. As the Federal
Reserve supressed rates near zero, refinancing surged steadily
attributing to Nationstars servicing business. Regulation also
played a role in the companys success as a non-bank servicer after
Basel III incentivizied banks to sell off their servicing
portofolios in order to meet new capital requirements. NSM hit an
all time high of $57.95 in September 2013, but since has lost value
due to fears of increased regulation and decreasing profitability.
MORTGAGE SERVICING
Industry Explanation Mortgage servicing involves managing the
relationship between the borrower and mortgage investor. A
servicers reponsibilities include: connecting monthly payments,
answering borrower inquires and resolving issues should borrowers
go deliquent. Once a loan is orignated and securtizied, a mortgage
servicing right (MSR) is created in which 25-35bps of the loans
interest is paid to the servicer. Originators can service MSRs
in-house to retain this fee or they can sell the MSR for cash
upfront (currently 1-2x the MSRs yearly revenue). Nationstar offers
primary servicing and subservicing (special servicing). A primary
servicer pays upfront to own the MSRs, receiving a fee based on the
portfolios unpaid principle loan balance (UPB). A subservicer
(special servicer) collects a contracted fee for their servicing
function on an outsourced MSR. Most of the servicing volume between
2008-2011 was driven by special servicing of high-touch loans often
60 days or more delinquent. Nationstar also acquires MSRs on a
capital-light basis by co-investing with a financial partner who
receives an excess MSR fee, cash flows outside of the basic
servicing fee. In these transactions, Nationstar provides the
servicing functions then shares the excess fee with its
co-investment partners on a pro-rata basis. This proves profitable
for both parties, as Nationstar only has to pay for a portion of
the MSR allowing the company to increase its ROE and leverage its
capital to further grow its UPB. Nationstars origination business
enhances the servicing portfolio through refinancing and organic
growth, extending the longevity of the servicing cash flows. With
interest rates rising, borrowers will become less likely to prepay,
extending the life of the servicing contract and duration of the
cash flows. This makes posessing MSRs attractive, because unlike
almost every other investment that loses value when interest rates
rise, MSRs increase in value.
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! 3!
67.8%million%
Americans%%%
43.2%million%Baby!Boomers! 24.6%million%Retirees!
REVERSE MORTGAGES Description
Reverse mortgages are not actually a mortgage, but a loan.
Available to homeowners over the age of 62 years old, these loans
convert home equity into tax-free income. The loan is due with
interest when the borrower dies, sells the house, or fails to pay
property taxes and homeowners insurance.
Growth Thesis Baby Boomers: The facts are this generation is not
financially fit for retirement, the majority of these 72 million
Americans have a mortgage, and over the coming years they will be
faced with few alternatives for aiding retirement as they deal with
light personal savings, disappearing pensions and the questionable
future of Social Security. A 2013 survey by Charles Schwab found
that 60% of baby boomers over the age of 55 have less than $100,000
in savings, excluding home equity. Buying a home with a 30YR
mortgage became a cultural phenomenon for baby boomers and over
many years of accumulating principal, has now resulted in a sizable
portion of their net worth. In order to tap into this equity
homeowners can (1) sell their home or (2) apply for a reverse
mortgage. A 2010 AARP study revealed that 73% of homeowners over 45
years of age stated a strong desire to live in their current
residence as long as possible. This means that potentially over the
next 10 years 43.2 million baby boomers (60%) will be entering the
market for reverse mortgages at a rate of ~4 million year.
Retirees: In 2010 Employee Benefit Research Institute cited in a
study that the average debt held by Americans over the age of 65
was $50,000, up 83% since 2001. The 2010 US Census cited a total of
~50 million Americans over the age of 65, of which EBRI notes 49%
hold debt. These statistics further increase the market growth
opportunity for reverse mortgages due to the fact that homeowners
do not have to own the home outright to qualify for a reverse
mortgage. These retirees could implement a reverse mortgage in
order to eliminate a remaining monthly mortgage payment or another
form of debt. Combined: The demographics of these two surveys
represent 67.8 million potential reverse mortgage borrowers through
2025.
Historical Highlights The current form of reverse mortgages was
founded in 1987 with the Federal Housing Administrations (FHA)
creation of the HECM program, insuring reverse mortgages and
offering liquidity to the market. Today 90% of the outstanding
reverse mortgages are backed by the HECM program. The market grew
slowly in the 90s then expanded eight-fold from 2001 to 2009.
Despite this impressive growth, by 2009 less than 1% of elible
seniors borrowers had been tapped (below right). In 2010 the big
bank lenders (Wells Fargo, BofA and Metlife) left the business due
to inflated, unpredictable home values and the rising level of
delinquencies on required real esate tax and insurance payments. On
June 24th, 2014 the complete pay off of SASC 1999-RM1 became the
second successfully paid off securitization trust of reverse
mortgages this year. SASC 1999-RM1 was the first reverse mortgage
securitization in US history carrying a principle balance of $317
milion secured by 2,500 homes. This securitization of reverse
mortgages weathered the financial crisis and the darkest years of
the mortgage crisis while never suffering a loss or write down,
showcasing the products securiztion feasabilty.
New HECM Regulation In late 2013, the FHA implemented new
regulation to the HECM program in a move to strengthen the product
as a long-term financial planning tool. New rules include: (1)
borrowers will be limited to withdraw 60% of the available loan
amount in the first 12 months, (2) previous loan types, the saver
and the standard are now consolidated into a new proprietary
version deriving the loan amount based on age, home value and the
prevailing interest rate, (3) the loans cost will now be based on
LTV withdrawn in addition to the annual insurance premium of 1.25%
the appraised value, (4) lenders will be required to audit income
sources and credit history when factoring whether the homeowners
can continue to pay property tax and insurance payments over the
life of the loan and (5) borrowers who can not meet #4 will have to
set aside money from exisiting cash or a portion of the reverse
mortgage proceeds. One major exception to the new regulation is
that a borrower can surpass the 60% LTV limit if the proceeds are
being used to pay off their exisiting mortgage or other federal
debts.
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! 4!
VALUATION How NSM got here?
Shares of NSM rose 314% from going public at $14 in March 2012
to an all time high of $57.95 in September 2013. This tremendous
growth culminated from quadrupling the servicing UPB and collecting
large origination fees. Since this high, shares have lost 42% in
value. Reasons: (1) Increased regulation on special servicing
because the broader mortgage servicing industry was expanding too
fast and the special servicers were gathering complaints from
delinquent borrowers, (2) decreasing servicing profitability and
(3) declining origination revenues and rising rates and the
exhausted HARP loan program. Rebuttal: (1) Compass Point wrote a
report addressing the overhyped regulation fears stating, we have
found special servicers have lower servicing-related complaints at
the Consumer Financial Protection Bureau per delinquent loan,
higher than average marks from Fannie Mae in their STAR program and
inline to below average servicer ratings from the rating agencies.
So regulatory risk not only regards a small fraction of Nationstar
(11.1% Q1 2014 UPB) but also has little substance to inflict real
industry change. (2) Nationstar has attacked this market sentiment
head on detailing a path to 11bps of profitability FY2014 (1bp = 4%
growth in EPS). Management hit 9bps in Q2 2014 and is implementing
increased automation and improving delinquency levels among other
methods (above left) to hit its FY 2014 11bps target. (3)
Nationstar is evolving from largely a HARP loan origination
business pre-2013 to servicing business going forward.
Short Squeeze Taking 90.8 million shares outstanding and
factoring in the four largest long shareholders (3/31/2014)
Fortress 69.4mm, Hayman Capital 4.8mm, Select Equity Group 4.4mm
and BHR Capital 1.8mm, the true market float is 10.4 million
shares. Given that 6.6 million of those shares are short, NSM has
an effective 64% short interest. Any positive news on NSM could
trigger a significant short squeeze in the shares.
Solutionstar Spin-off Within the next 9-12 months I believe
shareholders will see straightforward conversation from management
about Solutionstars spin-off and expected date. In January 2013,
Nationstar acquired Equifax Settlement Services for $12.5 million
and re-branded it as Solutionstar, which currently has two business
lines: sales of REO properties and settlement services such as
titles, appraisals, and closing services. The division has since
improved revenue and pretax margins (below left). In Q1 2014, the
division acquired Real Estate Digital (RED) for $18 million, a
provider of online marketing data, transaction management and
digital media solutions as well as the company has organically been
growing Homesearch.com. These strategic moves have broadened
Solutionstars industry reach and I believe once they are fully
integrated into Solutionstar the division will be spun-off. A prime
example of the spin-off opportunity is Ocwen
Financials (OCN) spin-off of Altisource Portfolio Solutions
(ASPS). OCN is also a mortgage servicer and ASPS operates almost
identical to Solutionstar. In 2009, ASPS went public climbing 303%
in the first 12 months of trading. Using Solutionstars projected
2014 revenue and assuming neutral sentiment of 0% revenue growth
YOY into 2015 the divisions EPS would be ~$1.22 ($400 Rev / Q1
pretax margin of 45% / 38.4% tax rate). Applying the average
current P/E multiple of 20.88x from three comparables, Solutionstar
would be valued at $25.50 a share by the end of 2015. These results
convey sell sides neutral outlook on the
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! 5!
divisions 0% YOY growth and continued pretax margin of 45%.
Using Nationstars outlook of 54% per tax margin (detailed on prior
page) would value the division as much as $30.60 a share
FY2015.
Value in Reverse Mortgages The reverse mortgage market today is
underpenetrated and positioned for growth in the coming years as
baby boomers transition into and finally begin preparing for
retirement. Nationstar has been active in the reverse mortgage
space since the financial crisis acquiring Bank of Americas reverse
mortgage servicing portfolio in 2011 and MetLifes in 2012.
Nationstar currently holds 32% of the outstanding reverse mortgage
servicing market with their $28.9 billion portfolio. In June 2014,
Nationstar began winding down a small reverse mortgage origination
business they received through their 2013 acquisition of Greenlight
Financial. The division originated 678 loans in 2013 barely
attributing to Nationstars overall top line. The CEO commented, Our
emphasis in reverse has always been and continues to be on
servicing. Although the company is giving up future potential
origination fees (~$3,850 per loan based on FHA costs), the capital
required to grow the origination business would have been extremely
costly, only further subjecting Nationstar to the more cyclical
part of the mortgage sector of originations. A better use of this
capital would be growing the servicing portfolio. Going forward the
company is uniquely positioned to be competitive in capturing
increased market share as opportunities come available. From its
history and size in the market, Nationstar has experienced
knowledge of the costs and administration efforts required to
service reverse loans that its competitors do not. Also as the
second largest non-bank servicer of forward mortgages, the
portfolio immediately allows for scalability with Solutionstar
providing attractive economics, cutting cost of third party
appraisals among other services. While the true market size for
reverse mortgages is difficult at best to define, a couple of
noteworthy statistics include:
%$4.97%trillion%of%
senior%home%value%outstanding%(above%right)%
%
%~4%million%baby%
boomers%hitting%age%62%every%year%through%2025%
%
%Ocwen's%market%projection%of%$1.9%
trillion%compared%to%$90%billion%outstanding%
%
%As%of%2009,%less%than%1%%
of%the%potential%of%reverse%mortgage%
borrowers%had%been%tapped%%
DOWNSIDE RISKS Nationstar does not capture market share. Reverse
mortgages have been around since the early 1990s, yet only $90
billion of the loans are outstanding. I believe this has mainly
been caused by (1) a suffering public image from headlines about
retirees losing their home for missing required tax / insurance
payments and (2) the young age of the product compared to forward
mortgages which have been around since the 1930s. However, there is
a possibility that these two reasons continue to mitigate the
markets growth. Regardless of the massive potential for the reverse
mortgage market, there is the possibility that Nationstar is not
able to secure a material market share in the originating or
servicing business.
Regulatory scrutiny. Since mortgage servicing is a fairly new
and developing industry, there will most likely be some form of
further oversight to come. Regulation could harness scalability and
profitability.
Ownership concentration. Cited in Nationstars 2013 annual
report, If the ownership of our common stock continues to be highly
concentrated, it may prevent new investors from influencing
significant corporate decisions and may result in conflicts of
interest. The interest of [Fortress] may not always coincide with
our interest or other stockholders. This includes: election of
directors; mergers, consolidations and acquisitions; decisions
affecting the capital structure; the amendment of our certificate
of incorporation and our bylaws; and our winding up and
dissolution. Fortress owns 74.5% of the common stock and therefore
controls the majority interest over all matters requiring a
stockholder vote.
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! 6
WHY THE OPPORTUNITY EXISTS? In the table below, the Market Price
column analyzes the markets view and why investors have placed such
a low valuation on Nationstar. The Price Target column refutes
these misconceptions with facts and solid reasoning, culminating in
my view of where NSM shares should be valued in 18 months.
Topic Market Price Price Target
Solutionstar
Investors, sell side research, and NSMs management were planning
/ commenting on the possible spinoff of Solutionstar since 2012.
But with a falling stock price, management chose to delay the
spinoff in order to pursue acquisitions for the division and grow
earnings. The market has largely forgot about this opportunity and
left Solutionstar to be undervalued at the lower servicing and
origination multiples.
Once Solutionstar is able to stabilize its acquisitions and
present annualized division financials to investors, plans of the
spinoff will resume presenting a very profitable opportunity for
NSM shareholders. I believe this 12-18 month effort has begun as of
the most recent quarter. For the first time ever, Nationstar
segmented its earnings from 2 divisions to 3: servicing,
originations, and now Solutionstar. This is the first step in
valuing the division at a correct multiple and executing the
spinoff in the future.
Reverse Mortgages
The opportunity of RMs is unknown by the majority of market
participants and therefore is not priced into the shares. In
addition, sell side research has projected little to zero growth in
NSMs financials of servicing RMs.
Although at this point RMs added value is too ambiguous to
accurately calculate, I believe the opportunity will benefit
Nationstar for many years to come and can currently be best viewed
as added upside for NSM shareholders on top of the already
fundamentally undervalued shares.
Neutral Rating
Of 11 sell side analysts that follow NSM: 2 OW, 7 N and 2 UW.
The 12-month consensus price target is currently $34.00 citing
industry wide concerns and uncertainty.
NSM shares will drastically outperform the market over the next
18 months as the company hits profitability targets, provides
clarity on Solutionstars spinoff, continues to complete MSR
acquisitions, and separates itself from the industry concerns.
Future upgrades will reinforce this upward price movement.
Profitability
The market has been skeptical of Nationstars announcement to
increase servicing pretax profitability from 7bps in Q1 2014 to
11bps for FY 2014. Evidence of the markets lack of confidence can
be seen in the low FY2014 P/E multiple.
Q2 2014 servicing pretax profitability was 9bps, hitting NSMs
quarter target and reconfirming the path towards FY 2014 target of
11bps. For every 1bp increase, servicing EPS grows by 4%. In
combination of hitting the FY 2014 target, NSM shares will price in
these higher margins.
Regulation Fears
In Fall 2013 Ocwen Financial (OCN) was approached by regulators
due to concerns of the companys special servicing practices over
delinquent mortgages. This news along with concerns of the rapid
growth in the non-bank industry expanded to fears of inability to
acquire future MSRs and increased expenses. These fears have
culminated in the majority of downward pressure on NSM shares over
the past 9 months.
Q2 earnings results were a prime example of why I believe
regulation fears for NSM are overhyped. OCN shares lost 26% of
their value on news of increased legal expenses. In the days
following OCNs announcement shares of NSM also sold off on similar
fears. Following Nationstars earnings release, shares surged 9.6%
as company did not incur the same level of fees. I believe this
negative sentiment on the non-bank servicers will begin to move
from an industry wide perspective to specific companies such as
Ocwen. As this market view changes, shares of NSM will properly
value higher.
UPB
Past valuation expansions for non-bank servicers have come on
news of increasing UPBs. NSM shares rose 314% on repetitive MSR
acquisitions following the financial crisis. But since regulation
fears have slowed down MSR acquisitions, investors and sell side
research have priced in their concerns on the future UPB pipeline
based purely on the numeric value reported.
It is worthy to highlight the current quality of Nationstars UPB
has drastically improved compared to the constant uncertainty of
the UPB in the past. From 2010-2013 although MSR acquisitions
rapidly occurred, the UPB was constantly being turned over through
refinancing activity. Today, Nationstars UPB has never had better
dynamics strong underwriting, stringent appraisals, and rising
interest rates which in culmination will provide years of stable
cash flows. In addition, Nationstar has reported MSR acquisition
commitments exceeding $20B in Q3 as well as an increased cash
balance of $624mm from $404M Q1. This cash balance will aid in
future MSR acquisitions.
Ownership
The market holds some apprehension towards investing in
Nationstar on worries of Fortresss concentrated ownership.
Fortress has the job of returning maximum profits to its
shareholders. I feel having Fortress as the majority owner
increases the attractiveness of this opportunity, as they will
continue to hold their ownership until NSM shares are properly
valued.
Short
Interest
Currently 6.6mm NSM shares are held short. Similar short
interest levels have built up across all non-bank mortgage
servicers over the past 9 months following regulators interest of
further oversight for the industry.
Q2 2014 earnings showed signs of this trade ending for short
sellers following NSMs 9.6% jump on positive results compared to a
competitors 26% selloff. I believe going forward investors will
start looking at specific names to short versus the whole industry.
As traders exit their short position in NSM, shares will benefit
from a short squeeze as the true float comprises of only 10.4mm
shares.
PRICE TARGET (1) (2)
Solutionstar Nationstar FY2015 Value FY2015 Rev $400.00 FY2015
Rev xSolutionstar $1,791 Solutionstar $25.50 Pretax Margin 45.0%
Pretax Margin 26.7% Nationstar $52.63 Pretax Income $180.00 Pretax
Income $ 477.42 PRICE TARGET
(4) $78.13 Tax Rate 38.4% Tax Rate 38.4% Net Income $110.88 Net
Income $294.09 Shares Out. 90.8 Shares Out. 90.8 FY2015 EPS $1.22
FY2015 EPS $3.24 Valuation Range
(5) Multiple Price
Solutionstar 13x 27x $16 - $33 Peer Multiple (3) 20.88x Current
Multiple 16.25x Nationstar 13x 24x $42 - $78 Solutionstar Value
$25.50 Remaining NSM Value $52.63 Range 13x 25x $58 - $111 (1)
Values in USD millions except per share data. (2) The above
financials present a baseline case for 2015 EPS of $4.46. (3)
Solutionstars peers include: CoreLogic (CLGX), Altisource (ASPS)
and First American (FAF). (4) The PT does not take into
consideration the short squeeze or reverse mortgage opportunity,
although I believe these events will positively impact the
price over the next 18 months. At this time their added value is
too ambiguous to accurately calculate. (5) The range includes low
to high multiples from FY2013. The range for both is the weighted
average based on net income.
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! 7!
COMPETITOR ANALYSIS
Comp Set Market
Cap FY2014
P/E 1Yr Rev Growth
EBIT % EBITDA % ROA ROE
NSM 2,995 9.3 116.3% 16.1% 39.8% 1.7% 19.5% Average 2,294 9.1
99.3% 24.4% 44.1% 2.0% 14.8% OCN 4,820 10.4 142.9% 20.9% 36.6% 4.2%
17.8%
WAC 1,026 6.8 188.9% 27.4% 42.3% 1.6% 22.6% PHH 1,388 - 3.6%
10.5% 52.2% 0.5% 2.6% PFSI 1,168 9.8 45.0% 47.1% 49.5% 1.8%
11.6%
FINANCIALS / STREET ESTIMATES
Account FY2011 FY2012 FY2013 Est.
FY2014 Est.
FY2015 Interest Income 66.8 71.6 197.2 (Interest Expense) 105.4
197.3 538.8 Net Interest Income -38.6 -125.7 -341.6 Trading Account
Profit 109.1 487.2 702.8 Commissions & Fees Earned 233.4 462.5
1084.2 Other Operating Income 35.2 34.7 300.0 Net Revenue 339.2
858.6 1745.4 2084.6 2164.8 Provisions for Loan Losses 3.5 2.4 13.3
Net Revenue After Provisions 335.6 856.2 1732.1 Non-Interest
Expense 302.6 579.7 1389.0 Operating Income 33.0 276.5 343.1 703.5
840.5 Net Non-Operating Losses (Gains) 12.1 -0.1 -3.1 Pretax Income
20.9 276.6 346.3 578.3 661.5 Income Tax Expenses 0.0 71.3 129.2 Net
Income 20.9 205.3 217.1 357.0 416.3
Basic EPS - 2.41 2.43 3.40 4.46