IPO Launch: AmeriHome Readies $250 Million IPO

IPOStreet

AmeriHome (AHM) aims to raise $250 million in an IPO of its Class A common stock, according to an S-1 registration statement.

Thousand Oaks, California-based AmeriHome was founded to originate, purchase and service residential mortgage assets in the U.S.

Management is headed by Chief Executive Officer Mr. James Furash, who has been with the firm since 2013 and was previously CEO of Countrywide Bank from 1999 to 2006.

Below is a brief overview video of different types of lending products:

Source: The Dave Ramsey Show

The company’s primary offerings include:

  • Correspondent (Purchase from third parties)
  • Consumer Direct (Origination)
  • Servicing

AmeriHome has received at least $1.1 billion from investors including Apollo Global and Athene, through A-A Mortgage.

The firm acquires mortgages through both purchasing them through correspondent mortgage providers as well as through originating them directly from consumers seeking mortgage loans.

The company also services mortgage loans.

Compensation expenses as a percentage of total revenue have been dropping as revenues have increased.

The Compensation efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Compensation spend, rose sharply to 2.6x in the most recent reporting period.

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.
  • Caliber Home Loans
  • Guaranteed Rate
  • Movement Mortgage
  • CrossCountry Mortgage
  • Guild Holdings (GHLD)

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

  • Sharp growth in topline revenue
  • Strong increase in net income
  • A swing to sharply positive cash flow from operations

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

amerihomepl

Source: Company registration statement

As of June 30, 2020, AmeriHome had $501.4 million in cash and $2.9 billion in total liabilities.

Free cash flow during the twelve months ended June 30, 2020, was $107.8 million.

AmeriHome intends to raise $250 million in gross proceeds from an IPO of 14.7 million shares of its Class A common stock, offered at a proposed midpoint price of $17.00 per share.

Class A common stockholders will be entitled to one vote per share and Class B shareholders will have ten votes per share.

The S&P 500 Index no longer admits firms with multiple classes of stock into its index.

Bayview Asset Management affiliates have indicated a non-binding interest to purchase shares of up to $50.0 million in the aggregate at the IPO price.

Also, Starwood plans to purchase $100 million of company stock in a concurrent private placement at the IPO price.

Assuming a successful IPO, the company’s enterprise value at IPO would approximate $2.85 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 20.22%.

Management says it will use the net proceeds from the IPO as follows:

to purchase 14,705,882 LLC Interests from the Existing Equity Owners at a price per unit equal to the initial public offering price per share of Class A common stock in this offering less the underwriting discounts and commissions and estimated offering expenses payable by us. We intend to use the net proceeds from the concurrent private placement to purchase 5,882,352 LLC Interests from the Existing Equity Owners.

Management’s presentation of the company roadshow is not available.

Listed bookrunners of the IPO are Credit Suisse, Goldman Sachs, J.P. Morgan, Wells Fargo Securities, Barclays, BofA Securities, Citigroup, RBC Capital Markets, UBS Investment Bank, Apollo Global Securities, Houlihan Lokey, Siebert Williams Shank.

Commentary

AmeriHome is seeking to go public in the wake of Rocket Companies’ successful IPO and while competitors such as Guild Holdings (GHLD) and Caliber Home Loans (HOMS) are preparing to tap public markets.

The firm’s financials show tremendous growth as interest rates have dropped to record lows and homeowners have refinanced in droves.

Topline revenue growth has been remarkable as has the company’s swing to profitability and strong cash flow from operations.

Compensation expenses have dropped sharply as a percentage of revenues; its Compensation efficiency rate has vaulted upwards.

The market opportunity for home mortgages in the U.S. is large and expected to be robust for at least several years as the Federal Reserve has signaled that interest rates will remain extremely low for an extended period.

Firm’s such as AmeriHome are seeking public capital to capitalize their ability to pursue market share and size during this historic financial period.

Credit Suisse is the lead left underwriter and IPOs led by the firm over the last 12-month period have generated an average return of 3.1% since their IPO. This is a mid-tier performance for all major underwriters during the period.

As to valuation, compared to already-public competitor Rocket Companies (RKT), the AmeriHome IPO appears reasonably valued, at least on an EV / Revenue multiple and considering the firm is growing revenue at a faster rate, albeit at a lower level of revenue.

However, I’m uncertain that the torrid rate of refinancings and new home purchases will continue at their previous trajectory, as the number of Covid-19 cases continues to rise in the U.S. as we enter the winter season.

Healthcare experts believe the winter season will see sharply higher cases as people are forced indoors.

Given my concerns about the trajectory of the firm’s revenue growth in the near term, my opinion on the IPO is NEUTRAL.

tstNEUTRAL

Expected IPO Pricing Date: October 28, 2020

Glossary Of Terms

(I have no position in any stocks mentioned as of the article date, no plans to initiate any positions within the next 48 hours, and no business relationship with any company whose stock is mentioned in this article. IPO stocks can be very volatile in the days immediately after an IPO. Information provided is for educational purposes only, may be in error, incomplete or out of date, and does not constitute financial, legal, or investment advice.)

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