Larry Robbins’ Glenview Capital opens a new position in PHH

Market Realist

Glenview Capital Management's positions in the fourth quarter (Part 4 of 7)

(Continued from Part 3)

Glenview Capital Management and PHH

Glenview Capital’s new positions include Aetna, Inc. (AET), Comcast Corporation (CMCSA), and PHH Corporation (PHH). The fund exited Apple Inc. (AAPL) and Hospira, Inc. (HSP), and upped its stake in Monsanto (MON).

Larry Robbins’ Glenview Capital Management added a 0.49% new position in PHH Corporation (PHH), a leading outsource provider of mortgage and fleet management services. The company’s business activities are organized and presented under three operating segments: Mortgage Production, Mortgage Servicing, and Fleet Management Services.

Shares soared last year after PHH was urged by activist investor Daniel Lewis’ Orange Capital, which owns a 5.02% stake, to pursue an IPO or sale of its fleet management business. Orange also pushed for commencing a share repurchase program or tender offer for $150 million of common stock. PHH said in its fourth quarter earnings release in February that it has retained J.P. Morgan Securities LLC, Centerview Partners LLC, and Kirkland & Ellis LLP to assist in exploring ways to maximize shareholder value through the separation or sale of the fleet business, mortgage business, or both. PHH said it wants to complete a transaction by the second quarter. The PHH Arval fleet management segment provides commercial fleet management services to corporate clients and government agencies throughout the U.S. and Canada.

PHH reported a 22% drop in profits to $45 million or $0.67 per share, from $58 million or $0.89 per share in the same period last year. Net revenues for the quarter fell 14% to $675 million from $783 million in the same period last year.

PHH hedge
The Mortgage Production segment saw a loss of $45 million, primarily due to continued declines in applications. This was compared to a profit of $99 million in the fourth quarter of 2012. Mortgage Servicing segment profit in the fourth quarter of 2013 was $86 million, which included a favorable $50 million market-related fair value adjustment to its mortgage servicing rights or MSR, as mortgage interest rates continued an upward trend in the quarter. Mortgage applications declined 18% sequentially in the fourth quarter to $10.4 billion; interest rate lock commitments (IRLCs), expected to close, declined 27% sequentially to $2.1 billion. The company recently announced a round of layoffs reflecting the challenging environment for mortgage providers.

The company said during the fourth quarter of 2013, repurchase requests from government-sponsored enterprises or GSEs were less than anticipated. Additions to its repurchase and foreclosure-related reserves during the third quarter of 2013 were solely attributable to new loan sales, and the company did not record any repurchase and foreclosure-related charges during the third quarter of 2013. PHH believes the GSEs are complete with substantially all repurchase demands for loans originating prior to 2009.

Although PHH believes Fannie Mae and Freddie Mac have completed repurchase requests for pre-2009 origination years, losses associated with government-insured loan foreclosures could persist through 2014 and beyond, as loans continue to work through the foreclosure process; the company evaluates loans and expenses that may not be eligible for insurance reimbursement.

In the fourth quarter of 2013, Fleet Management Services segment profit was $22 million, up from $20 million in the fourth quarter of 2012. The growth in segment profit was primarily due to increases in truck lease syndication and services revenue.

A Morgan Stanley analyst was bullish on the stock and said in a note that, “Management is executing on its mortgage milestones, improving servicing profitability and exploring strategic options to enhance shareholder value. During the quarter, PHH resolved its repurchase backlog with the GSEs, is executing on alternative MSR funding strategies and is in the process of renegotiating / amending its private label securities (PLS) contracts.”

Continue to Part 5

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