News Column

Nationstar Reports First Quarter 2014 Financial Results & Strategic Acquisition

May 8, 2014

  • GAAP EPS of $0.27
  • Pro forma EPS of $0.53, including impact of ($0.08) in net MSR mark-to-market
  • Servicing: Operating profitability increased to 7 basis points; 11 basis points target for '14
  • Solutionstar: 22% revenue growth to $78mm; 21% pretax income growth to $35mm
  • Originations: Returned to profitability
  • Agreement to acquire Real Estate Digital, LLC; building out integrated marketplace

    LEWISVILLE, Texas--(BUSINESS WIRE)-- Nationstar Mortgage Holdings Inc. (NYSE: NSM) (“Nationstar”), a leading residential mortgage services company, today reported financial results for its first quarter ended March 31, 2014.

    For the first quarter 2014, Nationstar reported net income of $24 million, or $0.27 per share, compared to a loss of $51 million, or ($0.56) per share in the fourth quarter 2013.

    Pro forma EPS for the first quarter was $0.53, excluding $39 million in one-time expenses. Pro forma EPS for the first quarter was up in comparison to a pro forma EPS loss of ($0.23) in the fourth quarter. Pro forma EPS includes the net MSR mark-to-market impact of ($0.08).

    Adjusted EBITDA (“AEBITDA”) for operating segments was $170 million, or $1.89 per share, for the current quarter versus $25 million, or $0.28 per share, in the fourth quarter 2013. In the current quarter AEBITDA margin was 36%.

    “Nationstar delivered improved performance across all of our business lines in the first quarter,” said Jay Bray, Chief Executive Officer. “After substantial growth in 2013, our 2014 focus is simple - continue to provide real solutions to homeowners and improve operating profitability and cash flow generation for our shareholders. In addition, we are executing on critical initiatives to drive long-term sustainability and growth. This includes our strategic acquisition of Real Estate Digital ("RED"), a fee-based real estate services company that provides online marketing, data, transaction management and digital media solutions. The acquisition accelerates our plan to offer a fully integrated digital marketplace that provides end-to-end services for every aspect of a real estate transaction. We welcome the RED employees to the Nationstar family.”

    Chief Financial Officer David Hisey said, “Our servicing segment continues to increase profitability by generating 7 basis points of operating profitability in the first quarter and is on track towards our 2014 goal of 11 basis points. Reflecting momentum in our fee-based real estate services business, Solutionstar profitability grew at an impressive rate, with revenue increasing 22% and pretax income advancing 21%. In originations, we returned to operating profitability and reduced expenses by 37%. We expect to generate significant investable cash over the course of the year that can be deployed into high return opportunities.”

    Reflecting external market conditions, Nationstar is providing updated 2014 guidance for AEBITDA per share of $12.00 - $12.75 and GAAP EPS of $4.00 - $5.00.

    First Quarter Business Highlights

    Servicing

    Servicing fee income, before MSR fair value adjustments, increased 6% to $329 million when compared to the sequential quarter in absolute terms. The increase reflects the higher average unpaid principle balance (“UPB”) balance, reduction in delinquencies, and continued growth in Solutionstar revenues.

    Nationstar’s servicing portfolio, as measured by UPB, ended the first quarter at $384 billion, nearly unchanged as compared to fourth quarter 2013 ending UPB of $391 billion. The average portfolio UPB for the first quarter 2014 was $388 billion, up slightly from the fourth quarter average of $383 billion.

    Nationstar’s 60-plus day delinquency rate decreased to 11.1% of UPB, down from 11.9% in the fourth quarter. Nationstar’s servicing portfolio CPR decreased to 11.9%, down from 14.8% in the fourth quarter.

    The pipeline of bulk and flow MSR acquisition opportunities totals in excess of $300 billion in aggregate UPB. Nationstar’s existing flow servicing agreements are expected to produce approximately $20 billion of UPB in annual volume.

    Servicing pretax income was $40 million in the current quarter. Excluding $18 million in one-time transaction expenses related to the sale of advances to New Residential and the $11 million net MSR mark-to-market loss, servicing pretax operating income was $69 million. Servicing pretax operating income was up 11% compared to the fourth quarter. Servicing pretax operating margin was 20% for the quarter, and pretax operating income as a percentage of UPB was seven basis points.

    Servicing AEBITDA decreased slightly in the current quarter to $144 million compared to $146 million in the fourth quarter 2013. Servicing AEBITDA margin was 42% in the current quarter.

    Solutionstar Update

    Solutionstar’s real estate services business sold nearly 3,600 properties in Q1’14, and expects to sell approximately 20,000 properties in 2014. The number of properties under management is increasing as a result of the successful closing of the private-label portfolio acquisitions from Bank of America in late 2013.

    Solutionstar generated over $78 million in revenue in the first quarter 2014, up from $64 million in the prior quarter. In the first quarter, Solutionstar produced $35 million in pretax income, up from $29 million in the fourth quarter. Solutionstar achieved a 45% pretax margin in the first quarter.

    Originations

    Nationstar funded $4.7 billion in the first quarter and right-sized its operations based on expected future volumes. These actions resulted in a $151 million improvement in originations pretax income and a more streamlined and productive operation.

    At quarter end, the total application pipeline was $3.5 billion and the locked pipeline was $2.7 billion. Nationstar’s recapture rate increased 200 basis points to 51% in the first quarter of 2014, providing solutions to our customers while creating long-term servicing assets.

    We remain focused on the core consumer direct channel, which presents a significant opportunity and partially insulates volatility in volume compared to the broader market. In the first quarter, Nationstar’s origination volume decreased by 13% from the fourth quarter 2013, outperforming bank peers and industry forecasts, which on average decreased by 28%. Volume from the consumer-direct channel, including recapture and Greenlight, was $3.3 billion, and correspondent volume was $1.4 billion.

    Origination revenue was $131 million, up from $45 million in the fourth quarter 2013. Originations generated $8 million of pretax income in the quarter, an increase of $151 million compared to the pretax loss of $143 million in the fourth quarter. In the first quarter, the originations segment incurred $16 million of expenses related to right-sizing the operations.

    Real Estate Digital Acquisition

    In May, Solutionstar entered into a definitive agreement to acquire substantially all of the assets of Real Estate Digital and its affiliate for $18 million in cash. RED, based in Aliso Viejo, California with 120 employees, is a fee-based real estate services company that provides online marketing, data, transaction management and digital media solutions. The acquisition price represents a 0.7x multiple on RED’s estimated full year 2014 revenue. The acquisition is expected to close in the second quarter of 2014 at which time Solutionstar will assume RED’s management team and employees.

    In online marketing, RED has created more than 25,000 real estate websites and provides technology services to over 300,000 agents, or approximately 30% of the market. In data services, RED has license to 98% of all Multiple Listing Service (“MLS”) listings. In transaction management, RED licenses end-to-end software to 125,000 real estate agents. RED is also a lead aggregator and provides search engine optimization services.

    RED will enable Solutionstar to diversify its revenue streams, gain access to a significant third-party customer base, and drive traffic to our websites. The acquisition enables Solutionstar to cross-sell services to RED’s existing third-party clients, while enhancing Nationstar’s purchase origination and servicing opportunities when properties are listed for sale. Over time, this acquisition should enable Nationstar to replace third-party vendors with enhanced RED-developed technology, resulting in both significant cost savings as well as new revenue opportunities. For additional information, please visit RED’s website at www.realestatedigital.com.

    Helping Homeowners

    Nationstar remains committed to providing mortgage solutions to our more than 2.3 million homeowners. In the first quarter, we helped nearly 23,000 customers avoid foreclosure, including approximately 15,500 loan modifications that lower payments. This also includes providing collateral workouts and other repayment plans to approximately 7,500 homeowners.

    We also helped 26,000 homeowners secure mortgages. The total includes approximately 9,200 homeowners whose mortgages were refinanced through the Home Affordable Refinance Program (“HARP”), which allows us to refinance a borrower with a very high loan-to-value ratio or a homeowner with negative equity in their house.

    Conference Call Webcast and Investor Presentation

    Chief Executive Officer, Jay Bray, and Chief Financial Officer, David Hisey, will host a conference call for investors and analysts to discuss Nationstar’s first quarter 2014 results and other general business matters at 9:00 a.m. ET on Thursday, May 8, 2014. To listen to the event live or in an archive which will be available for 14 days, visit Nationstar’s website at http://investors.nationstarholdings.com. The conference call will also be accessible by dialing 800-706-7741, or 617-614-3471 internationally. Please use the participant passcode 84475753 to access the live conference call. An investor presentation will also be available at http://investors.nationstarholdings.com.

    Non-GAAP Financial Measures

    This disclaimer applies to every usage of “Pro Forma Earnings per Share,” or “Pro Forma EPS,” “Adjusted EBITDA” or “AEBITDA,” “Servicing Fee Income before MSR fair value adjustments,” "Servicing Operating Profitability," and “Pretax Operating Income” in this release. Pro forma EPS excludes certain one-time expenses, including advance sale and transaction expenses. Adjusted EBITDA is a key performance metric used by management in evaluating the performance of our segments. Adjusted EBITDA represents our Operating Segments’ income (loss), and excludes income and expenses that relate to the financing of our senior notes, depreciable (or amortizable) asset base of the business, income taxes, and exit costs from our restructuring and certain non-cash items. Adjusted EBITDA also excludes results from our legacy asset portfolio and certain securitization trusts that were consolidated upon adoption of the accounting guidance eliminating the concept of a qualifying special purpose entity. Pretax Operating Income excludes certain one-time expenses, including advance sale and transaction expenses. Pretax operating income is a metric that is used by management to exclude certain non-recurring items. Servicing fee income before MSR fair value adjustments is a metric that is used by management in an attempt to provide a better sense of the servicing fee income prior to any changes in the fair value of servicing assets. Servicing Operating Profitability is a key performance metric used by management in evaluating the performance of our business. Servicing Operating Profitability is calculated as pretax income excluding the net negative change in MSR mark-to-market adjustments plus one-time expenses related to the write-off of deferred advance financing facilities fees related to the NRZ advance sale. Servicing fee income before MSR fair value adjustments excludes fair value adjustment due to valuation inputs or assumptions for mortgage servicing rights, excess spread financing, and mortgage servicing rights financing liability, and the fair value adjustment due to other changes in fair value for mortgage servicing rights, excess spread financing, and mortgage servicing rights financing liability.

    About Nationstar Mortgage Holdings Inc.

    Based in Lewisville, Texas, Nationstar offers servicing, origination, and real estate services to financial institutions and consumers, Nationstar is one of the largest servicers in the United States and operates an integrated loan origination business that mitigates servicing portfolio run-off and improves credit performance for loan investors. Our Solutionstar business unit offers asset management, settlement, valuation and processing services. Additional corporate information is available at www.nationstarholdings.com.

    Forward Looking Statements

    Any statements in this release that are not historical or current facts are forward-looking statements, These forward-looking statements include, but are not limited to, statements regarding: estimates of our servicing segment’s growth and profitability; estimates of our origination’s segment’s profitability; the anticipated benefits of the RED acquisition; estimates of fiscal year 2014 guidance for AEBITDA per share and GAAP EPS; revenue and pretax income; profitability through our fee-services business; and expectations regarding cash flow. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results performance, or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-statements. Certain of these risks and uncertainties are described in the “Risk Factors” section of our most recent annual and quarterly reports and other required reports as filed with the SEC which are available at the SEC’s website at http://www.sec.gov. Certain amounts included in this release are presented strictly for illustrative purposes, and such amounts should not be viewed as a representation regarding management’s expectations or actual results. Management’s expectations and actual results could differ materially from statements made for illustrative purposes. Nationstar undertakes no obligation to publicly update or revise any forward-looking statements or any other information contained herein, and the statements made in this press release are current as of the date of this release only.

     



    Financial Tables

     

    NATIONSTAR MORTGAGE HOLDINGS INC. AND SUBSIDIARIES

    UNAUDITED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

    (dollars and shares in thousands, except per share data)

     
     
      Three months ended
    March 31, 2014   December 31, 2013
    Revenues (unaudited)
    Servicing fee income $ 240,164 $ 281,624
    Other fee income   101,547     113,137  
    Total fee income 341,711 394,761
    Gain on mortgage loans held for sale   127,936     25,659  
    Total revenues 469,647 420,420
     
    Total expenses and impairments 321,133 398,002
     
    Other income (expense)
    Interest income 43,943 51,273
    Interest expense (156,600 ) (160,306 )
    Gain (loss) on interest rate swaps and caps   2,821     675  
    Total other income (expense) (109,836 ) (108,358 )
     
    Income before taxes 38,678 (85,940 )

    Income tax expense

      (15,001 )   35,033  

    Net income

      23,677     (50,907 )
     
    Less: Net loss attributable to noncontrolling interests   (359 )    

    Net income attributable to Nationstar Inc.

      24,036     (50,907 )
     
    Earnings per share:
    Basic earnings per share $ 0.27   $ (0.57 )

    Diluted earnings per share

    $ 0.27   $ (0.56 )
    Weighted average shares:
    Basic 89,342 89,475
    Dilutive effect of stock awards   733     1,166  
    Diluted   90,075     90,641  
    Dividends declared per share        
     

    NATIONSTAR MORTGAGE HOLDINGS INC. AND SUBSIDIARIES

    CONSOLIDATED BALANCE SHEETS

    (dollars in thousands)

     
     
      March 31, 2014   December 31, 2013
    Assets (unaudited)
    Cash and cash equivalents $ 404,073 $ 441,902
    Restricted cash 471,635 592,747
    Accounts receivable 4,057,477 5,636,482
    Mortgage loans held for sale 1,741,126 2,603,380
    Mortgage loans held for investment, subject to nonrecourse debt - Legacy Assets, net 204,392 211,050
    Reverse mortgage interests 1,620,879 1,434,506
    Mortgage servicing rights 2,590,780 2,503,162
    Property and equipment, net 119,306 119,185
    Derivative financial instruments 95,773 123,878
    Other assets   327,122   360,397
    Total assets $ 11,632,563 $ 14,026,689
     
    Liabilities and equity
    Notes payable $ 4,591,998 $ 6,984,351
    Unsecured senior notes 2,444,020 2,444,062
    Payables and accrued liabilities 1,189,430 1,308,450
    Derivative financial instruments 6,377 8,526
    Mortgage servicing liabilities 82,210 82,521
    Nonrecourse debt - Legacy Assets 86,529 89,107
    Excess spread financing (at fair value) 978,183 986,410
    Participating interest financing 1,202,252 1,103,490
    Mortgage servicing rights financing liabilities   39,737   29,874
    Total liabilities $ 10,620,736 $ 13,036,791
     
    Total equity   1,011,827   989,898
    Total liabilities and equity $ 11,632,563 $ 14,026,689
     

    SERVICING FEE INCOME BEFORE FAIR VALUE ADJUSTMENTS RECONCILIATION

    (dollars in thousands)

     
     
      Three months ended
    March 31, 2014   December 31, 2013
     
    Servicing fee income before all FV adjustments $ 235,202 $ 236,341
    Changes in fair value of MSR financing liability:
    FV adjustments due to valuation inputs or assumptions 4,407
    FV adjustments due to other changes in fair value (amortization)   6,381      
    Net change in FV of MSR financing liability 10,788 236,341
     
    Servicing fee income before ancillary servicing fee and MSR FV adjustments 245,990 236,341
    Ancillary servicing fee income   83,338     75,190  
    Total servicing fee income before MSR fair value adjustments $ 329,328 $ 311,531
     
    Changes in fair value of MSRs:
    FV adjustments due to valuation inputs or assumptions (20,645 ) 93,660
    FV adjustments due to other changes in fair value (amortization)   (57,704 )   (72,676 )
    Net change in fair value of MSRs (78,349 ) 20,984
     
    Changes in fair value of excess spread financing:
    FV adjustments due to valuation inputs or assumptions 5,103 (44,455 )
    FV adjustments due to other changes in fair value (amortization)   (1,734 )   4,351  
    Net changes in fair value of excess spread financing: 3,369 (40,104 )
     
    Servicing fee income 254,347 292,411
    Other fee income   86,802     87,655  
    Total servicing fee income $ 341,149   $ 380,066  
     

    PRO FORMA EARNINGS PER SHARE RECONCILIATION

    (dollars and shares in thousands, except per share data)

     
     
      Three months ended
    March 31, 2014   December 31, 2013
    (unaudited)
    Net income attributable to Nationstar Inc. $ 24,036 $ (50,907 )
    Net loss attributable to noncontrolling interests   (359 )    
    Net Income 23,677 50,907
     
    Income taxes   15,001     (35,033 )
    Income before taxes 38,678 (85,940 )
    Ramp expenses 4,140
    One-time expenses   39,252     47,228  
     
    Pro forma pretax income 77,930 (34,572 )
     
    Income taxes (using Q1’14 and Q4'13 tax rate)   (30,237 )   14,093  
    Pro forma income   47,693     (20,479 )
     
    Average share count 90,075 90,641
     
    Pro forma EPS $ 0.53   $ (0.23 )
     
     

    SERVICING: PRETAX OPERATING INCOME RECONCILIATON

    (dollars in thousands)

     
    Three months ended
    March 31, 2014December 31, 2013
    (unaudited)
    Pretax income $ 40,085 $ 74,990
    Ramp expenses 4,140
    One-time expenses   17,900     32,640  
    Total ramp and one-time expenses 17,900 36,780
     
    Change in fair value due to inputs or assumptions
    MSR financing liability (4,407 )
    MSRs 20,645 (93,660 )
    Excess Spread   (5,103 )   44,455  
    Net Change in fair value due to inputs or assumptions 11,135 (49,205 )
     
    Servicing pretax operating income $ 69,120   $ 62,565  
     

    AEBITDA RECONCILIATION

    (dollars and shares in thousands, except per share data)

     
     
      Three months ended
    March 31, 2014   December 31, 2013
    (unaudited)
    Net income attributable to Nationstar Inc. $ 24,036 $ (50,907 )
    Less: Net loss attributable to noncontrolling interests   (359 )    
    Net Income 23,677 (50,907 )
    Plus:
    Net loss from Legacy Portfolio and Other 8,997 18,409
    Income tax expense   15,001     (35,033 )
    Net income from Operating Segments $ 47,675 $ (67,531 )
    Adjust for:
    Interest expense from unsecured senior notes 50,297 50,503
    Depreciation and amortization 7,555 8,814
    Change in fair value of mortgage servicing rights 78,349 (20,984 )
    Amortization/accretion of reverse mortgage servicing 338
    MSR financing liability (10,788 )
    Restructuring Costs 12,078
    Share-based compensation 2,823 2,434
    Fair value changes on excess spread financing (3,369 ) 40,104
    Fair value changes in derivatives (2,556 )
    Ineffective portion of cash flow hedge       (390 )
    Adjusted EBITDA   170,324     25,027  
     
    Adjusted EBITDA per share $ 1.89   $ 0.28  
    Earnings per share $ 0.27   $ (0.56 )
     

    SEGMENT INCOME STATEMENT & AEBITDA RECONCILIATION

    (dollars in thousands)

     
     
      For quarter ended March 31, 2014
    Servicing   Origination   Operating   Legacy   Eliminations   Total
    (unaudited)
    Revenues
    Servicing fee income $ 254,347 $ $ 254,347 $ 298 $ (14,481 ) $ 240,164
    Other fee income   86,802     14,792     101,594     (47 )       101,547  
    Total fee income 341,149 14,792 355,941 251 (14,481 ) 341,711
    Gain on mortgage loans held for sale   (1,695 )   116,200     114,505     (672 )   14,103     127,936  
    Total revenues 339,454 130,992 470,446 (421 ) (378 ) 469,647
    Total expenses and impairments 205,963 108,320 314,283 6,850 321,133
    Other income (expense)
    Interest income 18,664 21,521 40,185 3,380 378 43,943
    Interest expense (114,626 ) (36,603 ) (151,229 ) (5,371 ) (156,600 )
    Loss on interest rate swaps and caps   2,556         2,556     265         2,821  
    Total other income (expense) (93,406 ) (15,082 ) (108,488 ) (1,726 ) 378 (109,836 )
     
    Income before taxes 40,085 7,590 47,675 (8,997 ) 38,678
    Interest expense on corporate notes 35,620 14,677 50,297 50,297
    MSR valuation adjustment 78,349 78,349 78,349
    Excess spread adjustment (3,369 ) (3,369 ) (3,369 )
    Amortization of mortgage servicing obligations 338 338 338
    MSR financing liability (10,788 ) (10,788 ) (10,788 )
    Depreciation & amortization 4,588 2,967 7,555 1,237 8,792
    Stock-based compensation 1,823 1,000 2,823 (12 ) 2,811
    Fair value adjustment for derivatives (2,556 ) (2,556 ) (265 ) (2,821 )
    Hedge ineffectiveness                        
    ADJUSTED EBITDA (1) $ 144,090   $ 26,234   $ 170,324   $ (8,037 ) $   $ 162,287  
     
    Pretax income (loss) 40,085 7,590 47,675 (8,997 ) 38,678
    One-time expenses   17,900     15852     33,752     5,500         39,252  
    Pro forma pretax income (loss) 57,985 23,442 81,427 (3,497 ) 77,930
     
    Earnings per share - Diluted $ 0.27
    Pro forma EPS           $ 0.53  
    AEBITDA per share $ 1.60   $ 0.29   $ 1.89   $ (0.09 ) $   $ 1.80  
     

    (1) Adjusted EBITDA includes $359,000 loss attributable to noncontrolling interests.

     

    SEGMENT AEBITDA AND PRO FORMA PRETAX INCOME RECONCILIATION (continued)

    (dollars and shares in thousands, except per share data)

     
     
      For quarter ended December 31, 2013
    Servicing   Origination   Operating   Legacy   Total
     
    Adjusted EBITDA $ 145,777 $ (120,750 ) $ 25,027 $ (16,784 ) $ 8,243
     
    Interest expense on corporate notes (35,717 ) (14,786 ) (50,503 ) (50,503 )
    MSR valuation adjustment 20,984 20,984 20,984
    Excess spread adjustment (40,104 ) (40,104 ) (40,104 )
    Amortization of mortgage servicing obligations
    Depreciation & amortization (6,008 ) (2,806 ) (8,814 ) (1,115 ) (9,929 )
    Stock-based compensation (1,738 ) (696 ) (2,434 ) (2,434 )
    Fair value adjustment for derivatives 285 285
    Restructuring Charge (8,594 ) (3,484 ) (12,078 ) (795 ) (12,873 )
    Hedge ineffectiveness 390     390     390  
    Pretax income (loss) 74,990 (142,521 ) (67,531 ) (18,409 ) (85,940 )
    Income tax 35,033  
    Net income (loss) (50,908

    )

     
    Pretax income (loss) 74,990 (142,521 ) (67,531 ) (18,409 ) (85,940 )
    Ramp expenses 4,140 4,140 4,140
    One-time expenses 32,640   14,588   47,228     47,228  
    Pro forma pretax income (loss) 111,770 (127,933 ) (16,163 ) (18,409 ) (34,572 )
     
    Earnings per share $ (0.56 )
    Pro forma earnings per share         $ (0.23 )
    AEBITDA per share $ 1.61   $ (1.33 ) $ 0.28   $ (0.19 ) $ 0.09  
     
     
     





    Nationstar Mortgage Holdings Inc.

    Marshall Murphy, 469-549-3005

    Source: Nationstar Mortgage Holdings Inc.


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