Activist shareholder urges PHH to create a separate vehicle for MSRs
The idea is to unlock hidden value, analysts say
An activist investor that owns 5% of PHH Corp.’s (PHH) stock has big plans for the national lender and servicer, including a restructuring strategy that involves offloading the firm’s mortgage servicing rights to a captive finance vehicle.
The investment fund behind the plan, Orange Capital LLC, sent PHH’s CEO a complimentary letter, saying the firm has done well with its shares trading at 75% of tangible book value.
But the group sees more value locked up inside PHH and believes this 'unseen value' can be unleashed by employing a strategy that on its face looks very similar to an MSR-strategy used by Nationstar Mortgage Holdings (NSM).
First, Orange Capital recommends PHH create a separate vehicle that will own a stake in the company’s newly originated and existing excess MSRs. This sort of strategy mirrors that of Nationstar, which created a separate entity called Solutionstar to service and manage new and re-originated loans.
Orange Capital also advised PHH CEO and President Glen Messina to hire a financial advisor to launch a sale or initiate an IPO of the firm’s fleet management.
In addition, Orange Capital wants the firm to commence a share repurchase program or tender offer for $150 million of PHH’s common stock and resolve outstanding repurchasing obligations for loans while securing new financing for newly originated MSRs.
“With these steps, we believe PHH’s share price would likely increase by over 67%,” Orange Capital writes.
Analysts with Compass Point Research & Trading heard about Orange Capital’s recommended plans and reiterated its ‘buy’ rating for the mortgage services firms.
“Although we believe some of the valuations and the potential cash sources may be considered aggressive, we believe the overall concept of the proposed restructuring is reasonable,” wrote Compass Point analysts Kevin Barker and Steven Seperson.
"We currently estimate the fair value of the company at $26, but there is the potential it could be valued as high as $31+ per share if the company could effectively monetize certain assets, the litigation liability were expunged or if the company were for sale."
Both analysts said the Orange Capital plan is reasonable and “probably in the works or seriously being considered by management.”
Orange Capital, which bought 5% of PHH's outstanding stock, has a track record of buying a stake in firms to drive restructuring efforts.
“We have been expecting the company to start to show progress towards de-leveraging and believe any action would be a catalyst for the stock,” the Compass Point analysts added. “Now, with an activist shareholder in the mix, some of the deleveraging or MSR sales could be accelerated.”