IPO Launch: Caliber Home Loans Files For $345 Million IPO

IPOStreet

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

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).

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.

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.

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
  • Guaranteed Rate
  • Movement Mortgage
  • CrossCountry Mortgage
  • Guild Holdings (GHLD)

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:

caliberpl

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).

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.

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).

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.

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 negative (1.0%) since their IPO. This is a middle-tier performance for all major underwriters during the period.

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.

Also, Guild’s IPO disappointment, of sorts, should weigh on Caliber’s valuation as well.

My opinion on the IPO is NEUTRAL. Interested investors may wish to see how the stock trades in the open market to pick a potentially lower entry point.

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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