Must-know highlights of the Baupost Group’s 1Q 2014 positions (Part 5 of 7)
The Baupost Group and Fidelity National Financial
Seth Klarman’s Baupost Group initiated positions in Cheniere Energy Inc. (LNG), Keryx Biopharmaceuticals (KERX), and RF Micro Devices Inc. (RFMD), and the fund exited its positions in Fidelity National Financial (FNF) and Rovi Corp. (ROVI). The fund also pared its position in British oil company BP (BP).
The Baupost Group exited a position in Fidelity National Financial Inc. (FNF) that accounted for 1.82% of the fund’s total portfolio in 4Q 2013. The position was initiated in the same quarter last year.
Overview of Fidelity National Financial’s businesses
Fidelity National Financial is a provider of title insurance and transaction services to the real estate and mortgage industries. It’s the largest title insurance company in the United States and a leading provider of title insurance and escrow and other title-related services for real estate transactions. Through the third quarter of 2013, FNF’s insurance companies had a 32.2% share of the U.S. title insurance market, according to the American Land Title Association.
FNF’s FNFV segment comprises a 51% stake in Remy, a leading designer, manufacturer, remanufacturer, marketer, and distributor of aftermarket and original equipment components for automobiles, light trucks, heavy-duty trucks, and other vehicles. FNFV also includes 55% ownership interest in American Blue Ribbon Holdings, LLC (ABRH), the owner and operator of O’Charley’s, Ninety Nine Restaurants, Max & Erma’s, Village Inn, and Bakers Square. This segment also includes J. Alexander’s, which includes the Stoney River Legendary Steaks concept. FNF also has a share in the operations of certain equity investments, including Ceridian, Digital Insurance, and other smaller operations that aren’t title-related.
On January 2, 2014, Fidelity National Financial completed its purchase of Lender Processing Services, Inc. (LPS). for $3.4 billion, aiming to expand its core mortgage business. It also reorganized the former Lender Processing Services businesses into a wholly owned subsidiary, Black Knight Financial Services, Inc (BKFS). Black Knight offers the mortgage and finance industries’ leading provider of integrated technology, data, and analytics solutions and transaction services. Black Knight will have two operating segments, ServiceLink Holdings and Black Knight Financial Services.
A decrease in refinance transactions could impact business
Fidelity National Financial said that declines in the level of real estate activity or the average price of real estate sales will adversely affect its core title insurance revenues. It noted in its 10Q, “Since December 2008, the Federal Reserve has held the federal funds rate at 0.0%-0.25%, and has indicated that rates will stay at this level at least through 2014. Mortgage interest rates were at historically low levels through the beginning of 2013. During the last half of 2013, however, interest rates rose to their highest level since 2011. In 2014, interest rates have remained consistent with the fourth quarter of 2013.”
FNF cited data from the Mortgage Banker’s Association (MBA) in its 10Q filing and said the MBA predicted a 39.3% decrease in the total market in 2014, primarily due to a 62.0% decrease in refinance transactions in 2014, with the originations in 2015 remaining relatively consistent with those in 2014. It added, “During 2013 and through the first quarter of 2014, we experienced a moderate increase in existing home sales and we have also seen a decline in total housing inventory. However, we have experienced significant declines in refinance activity starting in the fourth quarter of 2013.” On commercial real estate transactions, FNF said “For the past several years, including the first quarter of 2014, we have experienced an increase in volume and fee per file of commercial transactions from the previous years, indicating strong commercial markets.”
Core operations revenue remains flat
FNF beat estimates in 1Q 2014 and posted adjusted net earnings of $84 million, or $0.30 per diluted share, down from $102 million, or $0.44 per diluted share in the corresponding period the previous year. The company saw total revenue of $2.1 billion in the first quarter versus $2.0 billion in the first quarter of 2013. The revenue increase comprised $17 million in the Remy segment, $11 million in the FNFV Corporate and Other segment, $2 million from the Restaurant Group segment and additional revenues of $187 million from the BKFS segment.
Core operations total revenue of $1.4 billion in the first quarter was flat compared to the corresponding quarter the year before. Total revenues for the Title segment decreased 12% to $167 million, as title premiums from direct operations decreased in 2014, primarily due to a fall in closed order volumes year-over-year. The decrease in order volumes was primarily related to a significant decrease in refinance transactions since the fourth quarter of 2014. First quarter commercial title revenue was $104 million, an 18% increase from the first quarter of 2013. FNF said, “Despite a slower purchase market and refinance order volumes that declined by 48%, we were able to generate a 5.5% adjusted pre-tax title margin and an adjusted EBITDA title margin of 6.8%. Our title business will benefit from a continued improvement in the residential purchase market.”
Black Night total revenue was $187 million, led by mortgage servicing technology revenue of $120 million. Management said, “We are experiencing strong demand for our industry standard loan origination and servicing technology products and are excited about the growing and recurring revenue, improving operating margins and strong free cash flow at Black Knight.”
Fidelity announced at the end of January that the board has approved a plan to create a tracking stock for its portfolio company investments. FNF would contribute these portfolio company investments into a new subsidiary, Fidelity National Financial Ventures (FNFV), and create and distribute a class of shares to FNF shareholders that tracks the performance of FNFV. Management said, “The stockholder vote is set for June 18, 2014, and we hope to close the transaction and distribute the shares of FNFV to FNF stockholders on a 1-for-3 basis on or near June 30, 2014.”
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