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ANALYSIS
n business school we learned never to buy something priced above its intrinsic value. So, what does an investor buy when they buy the stock of a residential lender, especially if there is no servicing? Very few lenders think about “going public,” but there are several dozen companies involved in residential lending that investors can own a piece of if they so desire, many with billions on their books of servicing. But is there value within these companies over the long term for investors? First, some theory. The value to a potential buyer of a lender, whether it is the entire company or a few shares, will depend on different factors. But three main variables are typically analyzed: loan volumes, margins (including cost structure and profitability), and the current policies, procedures, and business model. Also incorporated ROB CHRISMAN into analyst’s thinking is the overall future of the overall industry, and of the U.S. economy. When analysts are looking at the fair market value of a publicly traded lender, this can be clouded by ownership percentages. When small lenders are bought or sold, and there are minority owners, there would be a minority discount and a lack of marketability discount (reflecting a closely held entity). The combination of those two factors might reduce the selling partner’s share by a minimum of 40% and possibly as much as 75%. Indeed, some lenders have not sold the entire company to stockholders, but a small percentage.
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SEASONS OF CHANGE n addition, in looking at general business conditions, the management of recent IPOs (such as Rocket, Guild, UWM, and Home Point Capital) has demonstrated that most of these companies are subject to the same seasonal and economic fluctuations that other lenders are. The ability to achieve consistent net income margins and sustained profitability is not evident in some cases. There are good and bad quarters, good and bad years. The fact that 2020 was a record-breaking year for most lenders in terms of volumes and profitability has nudged the majority owners of some of these lenders to want to “take their chips off the table” and sell at what they view as the high of the market. Analysts apply a variety of models in their valuation analysis, but most can be grouped into three types: the Market Approach (based on market multiples derived from other publicly traded companies or actual sales of comparable companies or assets), the Cost Approach (based on the value of the underlying assets and liabilities of a business to estimate the equity value of the firm, including servicing), and the Income Approach (based on the premise that the value of a business depends on its future earnings). Enhancing value are servicing assets, a low cost structure, or an exhibited way of doing business that competitors don’t have. Factors that detract from value include a minority ownership position (with its lack of ability CONTINUED ON PAGE 16
MORTGAGE LENDER IPO WOES REFLECT HOUSING MARKET PEAK By DAVID F REN CH and CHIB U IKE OG U H, REUTER S Investors fueling an initial public offering bonanza are snubbing many U.S. mortgage providers’ stock market debuts over concerns that the sector might have reached its peak. Five mortgage vendors have scaled back or canceled plans to go public in the last four months, as investors flinched at their frothy valuations. This may bode poorly for IPOs by other home loan providers such as Better.com and NewRez. Many lenders have never had it so good, as affluent professionals fleeing big cities during the COVID-19 pandemic take out large loans to buy homes in the suburbs, and as near-record low interest rates fuel refinancings. Yet investors and analysts say IPO hopefuls in the sector have not priced in an expected housing market slowdown in 2021. “Investors don’t like buying into a company at the start of a down cycle, and mortgage originations are an extremely cyclical business,” said Matthew Kennedy, a senior strategist at IPO-focused research firm Renaissance Capital. LoanDepot Inc was forced to cut its IPO by 75% to $54 million this month, after investors balked at its request to be valued as highly as $6.8 billion. Home Point Capital Inc downsized its IPO by 40% at the end of January to $94 million, giving up hopes of an up-to-$2.9 billion valuation. This is despite 62% of U.S. operating companies that went public in January having upsized their offerings on strong investor demand, according to data compiled by IPO expert Jay Ritter, a professor at the University of Florida. HOLDING BACK Two other mortgage vendors, AmeriHome and Caliber Home Loans, pulled their IPOs in October. AmeriHome’s owner, private equity firm Apollo Global Management, clinched a deal last week to sell the company to regional bank Western Alliance Bancorp at a 23% discount to the $1.3 billion valuation it was seeking in the IPO. The investor pushback reflects concerns about the industry outlook, as mortgage rates gradually creep up with the economic recovery, and home price inflation begins to weigh on purchases. The Mortgage Bankers Association is forecasting a 49% decline in the number of refinancings in 2021. Other warning signs have emerged. Shares in Rocket Companies Inc, parent of America’s largest mortgage CONTINUED ON PAGE 16
MORTGAGE BANKER | MARCH 2021 15
