Quick Take

Caliber Home Loans (HOMS) has filed to raise $345 million for its sole shareholder in an IPO of its common stock, according to an S-1 registration statement.

The firm provides residential mortgage loan origination and servicing services in the United States.

HOMS has seen significant revenue growth with ultra-low interest rates, but I’m pessimistic on its prospects for growth through the winter ahead which appears to show the beginning of a resurgence in Covid-19 cases, dampening the economy.

I’ll pass on the IPO, although interested investors may wish to watch the stock in open market trading to possibly pick a lower entry point.

Company & Technology

Coppell, Texas-based Caliber was founded in 2013 with the combination of an origination firm and a servicing company by Lone Star, a private equity firm.

Management is headed by Chief Executive Officer Mr. Sanjiv Das, who has been with the firm since 2016 and was previously on the executive committee of Fiserv and was CEO, president and Chairman of CitiMortgage, the mortgage lending sub of Citigroup.

Below is a brief overview video of home mortgage basics:

Source: The Dave Ramsey Show

Caliber’s partners or major customers include:

The firm is focused on the home purchase loan origination market and generally retains loan servicing rights.

Caliber has what it calls a Local and a Direct strategy. Its Local strategy has both retail and wholesale channels.

Its Direct strategy includes both a DTC (direct to consumer) and correspondent channels and management asserts it is ‘an important component of our future growth.’

Caliber has received at least $659 million from investors including Lone Star (LSF Pickens Holdings).

Customer Acquisition

Caliber acquires mortgage loans direct from consumers as well as through purchasing them from correspondent sources

Compensation & Benefits expenses as a percentage of total revenue have been variable but trending lower as revenues have increased, as the figures below indicate:

Compensation & Benefits

Expenses vs. Revenue

Period

Percentage

Six Mos. Ended June 30, 2020

51.7%

2019

70.0%

2018

58.9%

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Source: Company registration statement

The Compensation & Benefits efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Compensation & Benefits spend, swung positive to 1.2x in the most recent reporting period, as shown in the table below:

Compensation & Benefits

Efficiency Rate

Period

Multiple

Six Mos. Ended June 30, 2020

1.2

2019

-0.1

Source: Company registration statement

Market & Competition

According to a 2020 market research report by ATTOM Data Solutions, in the first quarter 2020, U.S. residential property mortgage originations reached 1.07 million refinancings for Q1 2020.

This result was 16% lower than Q4 2019 but up 87% from Q1 2019.

Interest rates dropped to all-time lows as a result of the Covid-19 pandemic and resulting lockdowns sharply reducing economic activity.

Homeowners took advantage of this lower interest rate environment and refinancings account for 55.7% of the 1.92 million home loans in Q1 2020.

However, the length and severity of the pandemic may ultimately push the mortgage market into a significant downturn, so the near-term future is one of uncertainty.

Major competitive or other industry participants include:

  • Quicken Loans/Rocket Companies (RKT)

  • loanDepot

  • Fairway Independent Mortgage Corp.

  • AmeriHome (AHM)

  • Guaranteed Rate

  • Movement Mortgage

  • CrossCountry Mortgage

  • Guild Holdings (GHLD)

Financial Performance

Caliber’s recent financial results can be summarized as follows:

  • Sharply higher topline revenue

  • Strong growth in operating profit and margin

  • A swing to high cash flow from operations

Below are relevant financial results derived from the firm’s registration statement:

Total Revenue

Period

Total Revenue

% Variance vs. Prior

Six Mos. Ended June 30, 2020

$ 1,134,618,000

165.4%

2019

$ 1,194,777,000

-3.6%

2018

$ 1,239,079,000

Operating Profit (Loss)

Period

Operating Profit (Loss)

Operating Margin

Six Mos. Ended June 30, 2020

$ 352,362,000

31.1%

2019

$ 21,243,000

1.8%

2018

$ 209,878,000

16.9%

Net Income (Loss)

Period

Net Income (Loss)

Six Mos. Ended June 30, 2020

$ 275,297,000

2019

$ 21,627,000

2018

$ 129,039,000

Cash Flow From Operations

Period

Cash Flow From Operations

Six Mos. Ended June 30, 2020

$ 1,255,469,000

2019

$ (4,187,867,000)

2018

$ (49,567,000)

(Glossary Of Terms)

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Source: Company registration statement

As of June 30, 2020, Caliber had $382.6 million in cash and $7.4 billion in total liabilities.

Free cash flow during the twelve months ended June 30, 2020, was negative ($1.77 billion).

IPO Details

Caliber intends to raise $345 million in gross proceeds from an IPO of 23 million shares of its common stock, offered at a proposed midpoint price of $15.00 per share. None of the proceeds from the IPO are going to the company.

The firm is raising $100 million in a concurrent private placement of Series A mandatory convertible preferred stock, selling two million Series A shares at $50 per share with a three year convert maturity.

Assuming a successful IPO, the company’s enterprise value at IPO would approximate $6.9 billion, excluding the effects of underwriter over-allotment options.

Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 19.3%.

Management says the net proceeds from the IPO will be used as follows:

The selling stockholder will receive all of the net proceeds from the sale of shares of our common stock offered pursuant to this prospectus. Accordingly, we will not receive any proceeds from the sale of the shares being sold in this offering, including the sale of any shares by the selling stockholder if the underwriters exercise in full their option to purchase additional shares.

Management’s presentation of the company roadshow is available here.

Listed bookrunners of the IPO are Credit Suisse, Goldman Sachs and Barclays.

Commentary

Caliber is seeking public market funding at a time when other mortgage firms have gone public, including Rocket (RKT) and Guild (GHLD).

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Guild didn’t fare too well in its IPO, with a downsized offering going out at a price below their proposed range.

Caliber’s financials show a similar pattern to Guild with enormous topline revenue growth in the current year due to high refinancing activities from ultra-low interest rates.

The firm has swung to high operating profit and cash flow from operations as well.

Compensation & Benefits expenses as a percentage of total revenue have been uneven but trending lower; its Compensation & Benefits efficiency rate has also swung well into positive territory.

The market opportunity for residential mortgage origination and servicing in the U.S. is large and currently experiencing a boom due to low interest rates.

As to valuation, compared to Rocket, the IPO appears reasonably valued, as Caliber is growing at a higher rate and the IPO is expected to be priced at a lower multiple than RKT.

However, as with my opinion on Guild’s IPO, I’m concerned with the rise in Covid-19 cases and the large number of refinancings already completed, as to whether Caliber can continue on its revenue growth trajectory.

I suspect it cannot do so through the winter season ahead.

I’ll watch the IPO from the sidelines. Interested investors may wish to see how the stock trades in the open market to pick a potentially lower entry point.

Expected IPO Pricing Date: October 28, 2020

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



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