New Residential Investment confidentially filed a draft registration statement with the Securities and Exchange Commission on its intention to spin off its NewRez subsidiary in an initial public offering, the company announced.
“Management had discussed this possibility on its third quarter earnings call so this filing is not a surprise,” said Bose George, an analyst with Keefe, Bruyette & Woods in a note on the move. “At that time, the company also noted that an IPO could be a positive for New Residential’s valuation since a mortgage bank could trade at a premium to book value.”
The common stock of New Residential, which is a real estate investment trust that also owns mortgage-backed securities, was trading at 80% of its third quarter book value of $10.86 per share before the market opened on Nov. 20, George pointed out.
But even after the announcement, New Residential was trading below that mark, opening on Friday at $9.30 per share.
During New Residential’s third quarter earnings call on Oct. 29, CEO Michael Nierenberg pointed to the mortgage companies that went public in the weeks prior.
“When we look at where those are trading, I am not going to compare us to Rocket, which trades at anywhere from 12 times to 16 times EBITDA, but when we look at … where this company could trade as a standalone company in the public markets, you know the comps are anywhere from 5 times to 6 times,” he said. “The one thing we know what we believe is that the sum of our products is greater than the whole. And we think that the value of the operating business is not captured in our equity price.”
Besides Rocket, Guild Mortgage completed its IPO, but two others, Caliber and AmeriHome, delayed theirs because of market conditions. Both United Wholesale Mortgage and Finance of America announced mergers with publicly-traded special purpose acquisition companies.
LoanDepot also filed a confidential statement with the SEC in a second attempt at an IPO, while Better.com, following a private equity raise, is reportedly considering an IPO in 2021.
NewRez is a mortgage lender and servicer that was acquired in New Residential’s purchase of Shellpoint Partners in 2018, where it operated as New Penn Financial. In October 2019, the company was the successful bidder for bankrupt Ditech’s forward mortgage business.
Since the pandemic started, NewRez has been the bright spot for New Residential. The company earned $77.9 million in the third quarter, compared with an $8.8 million loss in the second quarter. During the quarter that ended on Sept. 30, the origination business earned $236.1 million, while servicing earned $24.2 million.
New Residential originated $18.1 billion in the third quarter, up from $8.3 billion in the second quarter and $5.7 billion in the third quarter 2019.
The number of shares of common stock to be sold has not yet been determined, New Residential said in a press release. The initial public offering is expected to take place after the Securities and Exchange Commission completes its review process, subject to market and other conditions.
