WAC - Walter Investment Management

[jch548]

WAC reported this morning. Disappointing. Big goodwill write down in reverse mortgages and Servicing revenue down while expenses were up. They included a MSR fair value adjustment against revenue. Large jump in expenses for servicing. They cited increased costs associated with a growing portfolio. Confusing? I'll see how the earnings transcript reads. I wonder if this is increased compliance cost though they don't have the same regulatory pressures as Ocwen? 

[merkhet]

Rough goings for WAC this year. Down to a 52-week low.

[jch548]

I have been out of the stock for awhile. Surprising how low the shares have tanked. I'm tempted to take another look but that can wait I suppose.

 

 

[Picasso]

For those who remember Mr. Baker Street of Sears fame, it looks like he put 100% of his hedge fund ($200mm) in WAC. 

[Guest Grey512]

don't know how big the fund is but Baker Street did hold $200m of WAC stock as of Q2.

i've been through the Baker Street's deck on WAC and it was reasonsbly convincing. It's a bet on WAC management doing what they say they will on the corporate restructuring part

[Picasso]

For those who haven't seen the slide deck yet:

 

http://www.bakerstreetcapital.com/BakerStreet_WAC.pdf

 

I counted "asset-light" 28 times.  I didn't bother putting in a count for "high-touch."

 

It is funny to see the market recently infatuated with these "capital light" business models.  Those terms are probably thrown out too frequently with stocks that do not deserve the buzzwords for compounder.  SUNE has so far been a disaster.  Or AAMC. 

 

Had I know about investors love for these terms, I should have told my first girlfriends that I was "asset-light" and "high-touch" and as such was a valuable partner for the long-term.  Too late for me, but I suppose some of you can use those terms.

 

Going back to WAC, has anyone looked at the terms of the debt to see what kind of restrictions we have on capital allocation decisions?  I'm sort of intrigued by the debt yielding 10%+.

[Haasje]

Thats a funny observation. I am speculating but it might have something to do with these asset light businesses having come back to value territory? I have been looking at quite a few of them while before I was looking more often at deep value / distress and special situation type stocks. Idk maybe it is just random.

[ratiman]

Walter debt trading at 16%. Earnings tomorrow. Should be interesting.

[valueyoda]

It starts to get interesting, but concentrated hedge fund ownership is a big risk. Baker Street has a 100% of its AUM in WAC, and other funds that have been performing badly are large owners, so a further drop in the share price could set redemptions in motion which in turn could cause even further declines, eventually undermining Walter's turnaround plan. This year, SHLD, PAH and NOMD has shown us the risks of severe ownership concentration.

[ratiman]

Interesting. What is the risk here exactly? Prepayment risk? WAC is about at tangible book so that does provide some cushion.

[ratiman]

These servicers are weird. In terms of financial strength, the order goes

 

1. Nationstar 9% (ytm of unsecured debt)

2. Ocwen 14%

3. Walter  26% 

 

But if you look at discount to tangible book on the equity, here is what it looks like, roughly

 

Nationstar 73%

Walter    77%

Ocwen 33%

 

This is very rough and from memory, tangible book includes things like tax assets that aren't very tangible, but it gives you an idea. So why does the least financially secure (Walter) get the higher value in the equity? Maybe because Walter has a plan to get out of servicing (and into subservicing). Ocwen looks like it's in runoff, management just doesn't know it yet. Walter has some decent assets (Ditech and Greentree) and Nationstar is the biggest of the three but is committed to the high-capital MSR business. So I don't have a point except that I think the market may have overreacted to Ocwen's news and may be giving Walter some credit (vs the competition) for the Baker plan to get out of servicing. The bonds indicate that Ocwen is OK, even if there is no viable business there right now.

 

[Picasso]

You're comparing the convertible yield FYI... The senior unsecured trade at 15%.  That changes the picture a bit.

[ratiman]

Right, thanks. So Ocwen and Walter are in the same range. Walter bought back 2 million shares last quarter for around $22M, which is a little surprising. Nationstar is planning on doing a Dutch auction for the shares. Ocwen is authorized to buy back about 1/2 of the current market cap. We have seen companies in distress buying back shares (Sandridge comes to mind) but it's hard to believe the managements of all three would be buying back if distress were imminent.

[sampr01]

Anyone still following this company? and recent CEO resignation etc.

[ratiman]

If you want to own a servicer, really the only choice is NSM. WAC debt is up to 27%, Ocwen at 19%, and NSM below 10%, so no good reason to be long WAC. NSM recently did a buyback, I think it was a dutch auction.

[valueyoda]

I bought on Friday a very small speculative position in WAC's bonds. I agree that NSM is the better one to buy with a lower risk profile. In a situation where interest rates continue to go down, more writedowns are expected as prepayment risk remains high combined with higher cost structure due to the new regulations. Additionally, the concentrated hedge fund ownership position worries me a bit. Baker Street has 100% of its AUM in this stock, and has suffered YTD at least a 70% decline on its position. Redemptions could cause liquidity issues for the stock.

[Picasso]

When you say speculative position, what do you think is the potential bear case on the bonds at 45? 

[valueyoda]

The bear case is a convergence of bad circumstances. Decline in the total balance of serviceable mortgages, even lower mortgage rates, liquidity issues, blowout of CDS spreads, decline in the economy. The reason that I bought the bonds over the stock is that the risk-reward is better in the bonds, but I wouldn't be amazed if the bonds traded down in the 30s or 20s if things worsen, so it is a starter position until I get a better handle on the company.

[sampr01]

Have anyone compared WAC Q1 vs NSM Q1 results?. ;) NSM and WAC managements indicated that Q2 results will be seasonally better. 

[sampr01]

Little color on recent events by goodhaven ::)

 

http://www.valuewalk.com/2016/07/goodhaven-fund-interview-2/?all=1

[racemize]

As a holder for 3 years in my 401k, I sure am glad that morningstar highlighted 1 year returns and nothing else!  /s

[sampr01]

WAC SR notes are slowly getting closer to par ($46 to $84) and New CEO making all the right moves. They finally sold insurance (GTIC) for $125 mill and deleveraging the company. I think its good time to own servicing companies.

[gurpaul88]

down ~40% today, BV ~8/sh. cheap enough?

[Sunrider]

I wonder what people here think about the state of affairs - the market clearly has given up on this one, but how likely is bankruptcy? The bonds don't seem to have budged too much over the last couple of days and if the firm survives, would the equity be a bargain? I've only looked at it briefly and did not have time to dive into the financials but hope someone here has a view?

 

Thank you.

C.

[winjitsu]

I wonder what people here think about the state of affairs - the market clearly has given up on this one, but how likely is bankruptcy? The bonds don't seem to have budged too much over the last couple of days and if the firm survives, would the equity be a bargain? I've only looked at it briefly and did not have time to dive into the financials but hope someone here has a view?

 

Thank you.

C.

 

Outside of the Baker Street deck, this is the best thesis I found online: http://www.oozingalpha.com/wac-ocn-deja-vu/

 

Reading the financials is brain hemorrhage inducing. Read the 10k with caution  :) Not sure you can blindly look at metrics like BV since they have $12bn in "Residual Loans at Fair Value," with little to no insight on how that number if derived. No LEAPs available either.

 

Selling pressure could just Baker be liquidating their very large position after closing shop.