Nationstar Mortgage Holdings' (NSM) CEO Jay Bray on Q1 2014 Results - Earnings Call Transcript

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 |  About: Nationstar Mortgage Holdings (NSM)
by: SA Transcripts

Nationstar Mortgage Holdings (NYSE:NSM)

Q1 2014 Earnings Call

May 08, 2014 9:00 am ET

Executives

Elizabeth K. Giddens - Senior Vice President, Deputy General Counsel and Secretary

Jay Bray - Chief Executive Officer and Director

David C. Hisey - Chief Strategy & External Affairs Officer and Executive Vice President

Robert D. Stiles - Chief Financial Officer

Analysts

Douglas Harter - Crédit Suisse AG, Research Division

Daniel Furtado - Jefferies LLC, Research Division

Cheryl M. Pate - Morgan Stanley, Research Division

Bose T. George - Keefe, Bruyette, & Woods, Inc., Research Division

Bradley G. Ball - Evercore Partners Inc., Research Division

Michael R. Kaye - Citigroup Inc, Research Division

Henry J. Coffey - Sterne Agee & Leach Inc., Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Q1 2014 Nationstar Mortgage Holdings Inc. Earnings Conference Call. My name is Mark, and I will be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Elizabeth Giddens, Deputy, General Counsel. Please proceed, Ma'am.

Elizabeth K. Giddens

Good morning, everyone. Please note that this call and accompanying slide presentation are being webcast from the Investor Relations section of our corporate website, www.nationstarholdings.com. Please refer to that website for important information including the first quarter 2014 earnings press release. A replay of this call will be available on the website within a few hours. Today's slide presentation is also currently available for download.

Financial results in today's press release are unaudited, and the matters we will be discussing today include forward-looking statements and as such, are subject to risks and uncertainties that we discuss in detail on our documents filed with the SEC, specifically the most recent report on Form 10-K, which identifies important risk factors that could cause actual results to differ materially from those contained in the forward-looking statement.

The financial results in today's press release and the matters we will be discussing today include non-GAAP measures used by Nationstar. GAAP to non-GAAP reconciliation information is appended to our press release and investor presentation and is available on the website.

Joining us on the call today is Jay Bray, Nationstar's CEO; David Hisey, Nationstar's CFO; and Robert Stiles, Solutionstar's CFO.

And now, I'd like to turn the call over to Jay Bray.

Jay Bray

Thank you, Elizabeth, and thanks, everyone, for joining us today. Before going into details on the quarter, we wanted to give our views on the overall condition and long-term outlook for the business. Internally, we are executing on our goals that will ultimately lead to increased shareholder value. In servicing, profitability is increasing each quarter as we execute on our strategic initiatives. In Solutionstar, we are growing the top and bottom line as we diversify its services and customer base. In originations, we have rightsized the business and returned to profitability as we generate long-term servicing assets. So we feel good about the operational direction of our business, we also are excited about the new opportunities in front of us.

In servicing, while the recent transfer pace has slowed, activity is still occurring and more importantly, the long-term pipeline opportunities is very healthy. We are currently in dialogue with numerous banks who continue to express the desire to transfer servicing to entities that have a long track record of success in customer service and portfolio management. In fact, I feel better about the transfer outlook for the second half of the year in 2015 than I did last quarter.

Additionally, we have seen increased activity in the nonperforming and reperforming loan segments. Through government entities and other financial institutions, $25 billion to $30 billion nonperforming assets will be sold this year, and we are providing servicing and Solutionstar services to some of the existing buyers and we expect this business to grow.

In Solutionstar, there's a tremendous market opportunity to develop a comprehensive digital marketplace that provides end-to-end services for every aspect of real estate transactions.

Our acquisition of Real Estate Digital or RED is another step forward and demonstrates our commitment to grow our business across the $16 trillion residential real estate market.

In originations, we are actively developing an expanded purchase strategy in a non-QM program in which Nationstar is the fee-based fulfillment arm for loan investors.

Let's turn to the quarter. In short, Nationstar delivered improved results with GAAP earnings per share of $0.27, and pro forma earnings per share of $0.53, a significant increase quarter-over-quarter. It is worth noting that pro forma EPS includes the net MSR mark-to-market loss of $0.08.

In servicing, we continue to increase profitability and are making headway in our cost-reduction initiatives. Fee income before MSR fair value adjustments increased 6% quarter-over-quarter. The increase was a result of higher average servicing portfolio, lower delinquencies and continued growth in Solutionstar revenues.

We've made significant progress with Solutionstar since its launch. Solutionstar increased its revenues and pretax income quarter-over-quarter and achieved a 45% margin.

Our origination segment significantly improved from our performance at the end of last year, as profitability in the first quarter increased by more than $150 million. We continue to view this platform as the most cost-effective way to acquire long-term servicing assets.

In summary, we remain focused on high return, fee-based opportunities that enable us to increase our profitability, generate strong cash flows and increase shareholder returns. The combination of servicing, Solutionstar and originations provides attractive return opportunities for the company and our shareholders. We are very excited about the opportunities ahead of us as we execute on our strategic objectives.

Turning to Slide 3. We are focused on providing real solutions to homeowners at lower mortgage payments through modifications and refinancings while at the same time, helping mortgage investors earn better returns on their investments. Converting a delinquent loan to a performing loan is a win for all parties: the consumer, the investor and Nationstar. We come to work everyday thinking about how we can provide solutions to our customers. Our commitment to consumer satisfaction is evident in our complaint statistics. We are an industry leader in terms of fewest complaints from our severely delinquent loan population. Notably, our complaint to delinquent loan ratio is 65% lower than the group average. We take complaints very seriously and even one complaint is more than we would like.

Since 2010, we have delivered 305,000 workout solutions, including 23,000 loan modifications in the first quarter alone. Our workouts enable customers to save $4,800 annually on average. We had over 9,000 HARP originations in the first quarter of '14, allowing borrowers who own more than their homes are worth to refinance into lower-cost mortgages. Our HARP originations reduce the homeowner's annual payment by $2,400 on average.

In total, Nationstar has helped more than 400,000 customers over the last 4 years. We are executing on our goal to provide solutions to our customers and keep them in their homes, while saving them money and making their mortgage more affordable.

Let's turn to Slide 4 for a recap of our servicing segment. Our core servicing business generates long-term recurring revenues and fairly predictable cash flows. We expect those cash flows to extend in duration as the economy improves and interest rates rise. We believe that we are well-situated, given the amount of servicing we acquired or originated at very low multiples over the last few years. The earnings tail should extend significantly as the economy continues to improve, further increasing servicing profitability as delinquencies fall.

In the first quarter, we delivered 7 basis points of pretax operating profitability. This represents an increase over 2013 levels, and we are on the path towards our target of 11 basis points for all of 2014. We expect profitability to grow throughout the year as we realize the full benefit of our various profitability initiatives. We made significant progress in recovering advances during the quarter, and reduced our advanced balance to UPB ratio by 24% quarter-over-quarter. We continue to make progress on driving down delinquencies. We ended the quarter with a 60-plus-day delinquency rate of 11.1%, an 80 basis point improvement over the fourth quarter. We also saw our prepay slow, and CPR rates dropped almost 300 basis points quarter-over-quarter to 11.9%.

Turning to Slide 5. As a reminder, our servicing profitability initiatives in 2014 are coming from 4 key areas: automation and workforce management, lowering delinquencies, driving down our vendor spend and increasing real estate services revenues.

Let's discuss a couple of examples of how we are executing on our profitability initiatives. We are targeting the 60-plus-day delinquency rate of 10% or lower. We are on our way to achieving this goal as our 60-plus-day delinquency rate decreased to 11.1% in the first quarter, which is impressive when you view it in the longer-term context of a 20% level in 2009.

We have a long track record of reducing delinquencies, which help the customers and reduces servicing cost, and I'm confident we will be able to hit our target for 2014.

Another benefit of lower delinquencies is a reduced advances in interest expense. We've made headway on recovered advanced balances through providing modification and work out solutions to our customer. Our product label securities portfolio advance ratio has dropped to 4%, and we are targeting a 3% ratio by the end of 2014. As we work our advanced balance and borrowings down, our expense structure in cash flows will materially benefit. Executing on our profitability initiatives translates into earnings and value for our shareholders.

Let's turn to Slide 6, where we can discuss an overview of our servicing pipeline. We continue to focus on acquisitions that meet our investment return requirements and are actively working our pipelines that total over $300 billion of bulk and flow servicing opportunities. Financial institutions continue to publicly signal their desire to shed additional servicing assets. Banks still control over 75% of the servicing market, so a tremendous opportunity lies ahead. Transfers are still occurring, and I feel good about our long-term pipeline. We continue to make progress on our flow servicing initiatives, and have executed flow agreements that are expected to produce over $20 billion annually. Our strong historical servicing performance and focus on the customer will help position us for continued growth.

Moving to Slide 7. Solutionstar, our fee-based services business continues to grow. In Q1, Solutionstar generated over $78 million of revenue and pretax income of $35 million. In total, our Solutionstar business generated a 45% margin in the quarter. We remain on track to hit our full year 2014 target.

Solutionstar is principally focused on 3 initiatives in 2014. First, increase the number of properties sold through our HomeSearch.com platform. We sold nearly 3,600 units in the first quarter, and we expect the pace of sales to increase over the course of the year. We expect to sell approximately 20,000 properties in 2014.

Second, we are looking to further diversify HomeSearch.com's product offerings by expanding our services, as well as selling third-party REO in non-distressed properties. The acquisition of RED will help us develop HomeSearch into a transactional marketplace for all things related to real estate.

Third, we are focused on continued growth in our settlement services business through additional client wins and increased allocations from existing clients. Overall, we expect Solutionstar to generate $400 million in revenue and $215 million in pretax income for 2014. This represents nearly 190% bottom line growth year-over-year.

Let's move to Slide 8 and discuss our origination business. Our overarching strategy for origination segment remains unchanged to generate attractive long-term servicing assets and a profit that will sustain and grow our servicing portfolio. Our core focus remains on our consumer direct channel, and our portfolio offers significant refinance opportunities despite the rising rates over the last 12 months. Our recapture focus helps partially insulate us from the larger decline in volumes experienced industry-wide. With the improving macroeconomic landscape, we believe that there are going to be increased purchase origination opportunities, and we are starting to see the first signs of private capital returning to the market. We see an opportunity to leverage our heritage as a non-agency servicer to provide financial solutions to the developing market that could include portions of the nearly 68 million under banked consumers and 72 million millenials in the United States. We are currently evaluating non-agency and expanded purchase many strategies.

Turning to the first quarter, we funded $4.7 billion in originations. Over the last 2 quarters, we have been focused on rightsizing operations and returning to profitability. I want to thank our team for all the hard work that led to the significant improvement that we made in originations. For the last several quarters, we have indicated that we have a recapture goal of 50% plus. We are pleased to report that in the first quarter, we achieved 51% recapture.

Our consumer direct channel has traditionally been our highest margin and most profitable origination channel. There were some noise during the quarter related to rightsizing the business, but we believe that noise will moderate as we progress through the second quarter. We exited March with approximately 135 basis points of pretax income on new origination in consumer direct.

The addition of RED will also provide access to additional purchase origination opportunities. We'll discuss that more later.

Now let's turn to Slide 9 and discuss RED. Real Estate Digital is a fee-based real estate services company that provides integrated technology, media and data solutions. We believe this acquisition is a significant step forward in the development of our comprehensive digital marketplace that will provide end-to-end services across the entire real estate value chain. RED provides services to brokers, agents and lenders and has 4 main lines of business.

Online marketing produces and maintains over 25,000 real estate agent websites. Websites developed by RED generate over 3 million unique visitors per month, and RED has technology relationships with approximately 30% of the real estate agent market. The online marketing business will further diversify Solutionstar's revenue and provide access to an expand customer base, data services and standardized MLS data. RED arguably provides the most comprehensive aggregation of residential real estate data, with licenses to 98% of all MLS property listings. Over time, the data services business will provide Nationstar with an expanded ability to enhance the modification process, proactively identify short sales and increase originations by identifying prospects when borrowers list their property for sale.

RED's transaction management suite is a real estate transaction workflow system that will allow us to replace current technology expenses and eliminate third-party vendor spend. Today, RED provides licenses to 125,000 real estate professionals, utilizing the suite, which facilitates approximately 150,000 transactions per year. This suite offers the ability to reduce existing cost, and more importantly, turn expenses into profitable third-party revenue streams.

RED's digital media services is a lead generation and search engine optimization service, which will be utilized to enhance the value of our website properties and potentially eliminate current marketing call centers. RED will further diversify our earnings through additional third-party revenue streams and turn existing technology call centers into profit centers. The purchase price of $18 million represents 0.7x price to revenue multiple. We expect to close this acquisition in the second quarter. RED has a seasoned and well-respected executive team, and I would like to welcome RED's more than 120 dedicated employees who will be a strong addition to the Nationstar family.

Let's turn to Slide 10, where we provide an overview of our ultimate vision. Annually, there are 8 million real estate transactions in the United States, 5 million home transactions and 3 million refinancings. Our macro goal is to capture a fee component of as many U.S. real estate transactions as possible, while increasing profitability. If you think about a real estate transaction day and the fragmented way that a participant has to go to numerous touch points and vendors. Today, real estate search engines allow you to search for homes, find the estimated property value of your home, and somewhat, realistically, those of your neighbor's. However, these search engines are not currently designed to allow consumers to transact, and lack a comprehensive fee-based business model. In short, their value is generally limited to real estate catalogs supported by advertising.

We believe our unique ability to bring real estate data services and property leads together, allows us to make real estate simple through the creation of real estate exchange that enables consumer to search, evaluate and transact for real estate, all in one location. Our intent is to enhance the overall experience for homebuyers, home sellers, real estate agents and us as a lender and services provider. Specifically, we intend to utilize RED's capabilities to build HomeSearch 2.0, which will include search functionality and industry-leading residential real estate data. This data will allow consumers, realtors and investors to research properties and more importantly, transact in a number of ways.

Our business is rapidly evolving and we are positioning our company to provide end-to-end services that will create an exceptional customer experience, thereby, giving us a customer for life. I'd now like to turn the call over to our Chief Financial Officer, Dave Hisey, to discuss our company's financial results. Dave?

David C. Hisey

Thanks, Jay. Let's turn to Slide 11 to discuss the results for the quarter. The execution of our strategic plan has resulted in a nice turnaround quarter-over-quarter and produce improved earnings across all of our key metrics. Our revenue increased sequentially as a result of growth in our Solutionstar business and a pickup in origination revenue.

As Jay noted, we are focused on serving our customers while maximizing the profits from our portfolio in addition to growing our platform and generating new earnings streams. All of our profitability measures, revenue, adjusted EBITDA, pro forma pretax income -- and pretax income were significantly helped by the improvement of our origination business, growth in Solutionstar and the execution of our servicing profitability initiatives.

Our 2014 earnings profile continues to reflect a greater amount of recurring fee-based earnings that generate long-term cash flows and should carry a higher market multiple. As a result of this earnings and cash flow profile, and as we've previously stated, we expect to produce over $1 billion of investable cash flow in 2014.

Let's discuss our earnings guidance as shown on Slide 12. While we cannot control or predict major market changes, we remain focused on executing our outlined, strategic and profitability initiatives. As noted in the media and recently reported financial services results, mortgage market conditions are challenged. Due to these market conditions, Nationstar is updating its 2014 guidance for adjusted EBITDA per share to $12 to $12.75 and GAAP earnings per share to $4 to $5. We exceeded our budget for the quarter in each of our businesses, and as Jay noted, we feel good about the operational direction of our business and the opportunities in front of us.

And now I'll turn the call back over to Jay.

Jay Bray

Thanks, Dave. Before we close, I want to discuss an organizational change we are making to focus greater energy on growing our platform over the long term. As previously announced, after the filing of our 10-Q tomorrow, Dave Hisey will be transitioning in CFO responsibilities to Robert Stiles, the current CFO of Solutionstar. Dave will become our newly created Chief Strategy and External Affairs Officer upon the transition. We look forward to having Dave focus greater attention on future business activities for Nationstar, aligned to drive growth and implement the company's strategic plans.

Robert Stiles has served as CFO of Solutionstar since January of 2013. Many of you have met Robert through his great contributions to Solutionstar, and if you have not, we look forward to making the introduction in the coming days. We believe Robert adds substantial depth to the Nationstar's management team, and we are thrilled to have him on his new role.

To close, we remain critically focused on 4 key areas that will deliver increased value to our shareholders: servicing, Solutionstar, originations and our investable cash flow. In servicing, we are committed to executing on our previously outlined profitability initiatives. We've made progress in Q1 '14, and the team is on the right path for delivering increased profitability in 2014. Our best-in-class transfer experience and strong record of driving down delinquencies positions us well for future servicing acquisition wins. We also expect our servicing assets to appreciate in value in a rising rate environment as cash flows extend. We continue to grow Solutionstar into a premier provider of services for the real estate industry.

We are excited about the acquisition of RED, a big step in helping us diversify our revenues, service offerings and third-party business. We view our origination platform as the most cost-effective and profitable way to acquire servicing assets. Our core consumer direct channel continues to generate margins above industry benchmarks. We are evaluating opportunities for non-fume originations and the expansion of our purchase origination strategy to capitalize on the improving economy.

We expect to generate significant cash flow throughout 2014, which will provide nice optionality for capital management and future investments. We continue to explore additional ways to profitably grow our business and deliver exceptional value to our shareholders.

And with that, I'd like to open the call up for a question-and-answer session.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Douglas Harter from Crédit Suisse.

Douglas Harter - Crédit Suisse AG, Research Division

First question, could you give as an update on the 10 and 7/8s note. I believe that was callable in April and given the cash flow, you said you guys are generating this year?

Jay Bray

Yes, Doug, I think we still are looking at 10 7/8s, it is callable now. But as we've discussed previously, we continue to evaluate acquisition opportunities as well, so there's a significant pipeline out there, and there are some transactions that we think are going to be actionable in the second half of the year. And so we're going to spend the next kind of 35 to 45 days grounding that out. And then we'll make a decision on the debt from there. But I would say that, really, our approach haven't changed. We continue to kind of balance what are the investable cash opportunities versus our existing capital structure. But clearly, there's a lot of things we can do with the 10 7/8s and pay it off is clearly a goal. We just need to kind of get through the final analysis on these investment opportunities.

Douglas Harter - Crédit Suisse AG, Research Division

And then on the pipeline, on the servicing side, can you talk about your ability to get a deal through from a regulatory standpoint, kind of given the outstanding letter from New York, and then any conversations you might have had with FHFA?

Jay Bray

Yes. I mean, I think we, as always, have worked with all of our regulators whether it's FHFA or State of New York or any state. And I think we're highly confident that we can get transactions done.

Operator

Your next question comes from the line of Daniel Furtado from Jefferies.

Daniel Furtado - Jefferies LLC, Research Division

My first question is, what were Solutionstar property sales in the month of April?

Jay Bray

It was 3,600 for the quarter. I don't think we can comment on April. I think the upward trajectories continue, let me just say that, but...

Daniel Furtado - Jefferies LLC, Research Division

Got you. How about -- what was the trajectory over the first 3 months of the year?

Robert D. Stiles

I mean, it's -- typically -- this is Robert, sorry. It's typically what you would see meaning that there is significant seasonality in that business. January and February tend to be slow months. We tend to see a trend up beginning in March and really through August and September, sometimes in October, and then you'll see a trend back down. So real estate sales do follow weather patterns but the basic facts, and are seeing that same pattern.

Daniel Furtado - Jefferies LLC, Research Division

Okay. And then turning to the servicing business, the $17.9 million in onetime expenses, and I apologize if you outlined this earlier in the prepared remarks, but what is that in regards to?

David C. Hisey

Yes. Daniel, it's David Hisey. We had a servicing advance sale during the period and so it was really the cost associated without -- we had some financing cost that had to be written off, much like we've had in the past.

Daniel Furtado - Jefferies LLC, Research Division

Understood. And then my final question. In regards the origination segment, which was profitable this quarter, above our expectations, so congratulations there. But it looks like you've reaccelerated the correspondent business after kind of pointing out that late last year, and my rough math, based on the 80 basis points of pretax margin in the direct retail kind of indicates that the correspondent is breakeven. So I guess the question would be, is the correspondent breakeven and do you expect that to -- in essence, trend to breakeven despite the improvement in direct? And secondly, what was the kind of shift on the exposure to correspondent?

Jay Bray

Yes, I think the correspondent business for us is really a means to acquire servicing and it is breakeven just slightly profitable. And it's really a lever that we can kind of turn up and down, depending on what's going on in the market, and overall, servicing pricing. And so -- I mean, again we view it as opportunistically, it's a business that we can grow when we think the pricing is appropriate, and we can certainly turn it down when it's not. And so I don't know that there was really any strategic change or any different focus. It's primarily just where do we think the servicing assets are trending and is it a good value for us. So that's how we think about it.

Operator

Your next question comes from the line of Cheryl Pate from Morgan Stanley.

Cheryl M. Pate - Morgan Stanley, Research Division

I just want to touch base on the guidance. I think just, first, a clarification question. The new EPS guidance is on a GAAP basis. I think the prior guidance was more on an adjusted basis. Is this an apples-to-apples comparison or how should we be thinking about the change on an adjusted EPS basis?

Robert D. Stiles

Yes, Cheryl, we haven't changed the method of giving guidance. It's always been GAAP EPS.

Cheryl M. Pate - Morgan Stanley, Research Division

Okay. And then -- so maybe in terms of the contribution, you've been up 70%, 30% servicing to originations, has that changed and skewed more towards the servicing under the new guidance?

Jay Bray

That's roughly the same I mean, the origination business if you look at like a March run rate, for example, I think origination business made $6 million, $7 million for the month. So we're definitely seeing an upper trajectory there in the origination business and it's performing quite nicely, but I think the mix really won't change. I think it will still be in that 70% to 30%.

David C. Hisey

I think origination is coming off a really tough market there, probably the worst quarter in 10 years or so.

Jay Bray

As an industry.

David C. Hisey

As an industry. Right.

Cheryl M. Pate - Morgan Stanley, Research Division

Right. Okay, I guess then, just in terms of thinking about the servicing profitability and obviously, saw the move up this quarter. How should we be thinking about, obviously, there are some benefits from delinquencies coming down, advance balances coming down, prepayment amortization rates slowing. What sort of offset are you factoring in, in terms of higher regulatory costs and potential changes to the capital environment and things like that?

Jay Bray

Well, I mean, our view -- I mean, your always going to have regulatory costs, right, I mean it's the nature of our business, and so we're really not adjusting guidance or our views around cost from a regulatory standpoint. So that really is not going to have impact, any kind of material impact on core going forward. Again, it's kind of core to the servicing business. You were in a regulatory environment were regulated by every state, and it's just a function of the business.

Cheryl M. Pate - Morgan Stanley, Research Division

So your guidance.

David C. Hisey

The costs are built into our numbers, right. I mean, we're geared to be in a compliant servicer and the costs are built into the numbers.

Cheryl M. Pate - Morgan Stanley, Research Division

Okay. So higher regulatory costs are essentially already baked into your guidance is the way to think about it?

Jay Bray

Yes.

Operator

Your next question comes from the line of Bose George from KBW.

Bose T. George - Keefe, Bruyette, & Woods, Inc., Research Division

The $300 billion pipeline, can you break that out in terms of size to some degree? Are there a lot of small deals, are there any bigger deals? Also, is it -- are the sellers mainly banks or nonbanks? Any color on that would be nice.

Jay Bray

I would say there's one probably large deal in there that's greater than $50 billion, the rest are going to be in that $10 billion to $20 billion range. And it's primarily financial institutions. There's really no material nonbanks in the pipeline.

Bose T. George - Keefe, Bruyette, & Woods, Inc., Research Division

Great. That's helpful. Actually, switching to Solutionstar, can you just update us on your thoughts about potentially spinning that out, what would you kind of need to see, and also just anything on the regulatory landscape, change your views about whether that should be a separate company or not?

Jay Bray

Yes, as far as the spin-out, I mean, it's something that we continue to discuss but I don't think it's anything that we've made a decision on. Clearly, it's an extremely profitable business and it's hitting kind of all of the internal and external targets that we've established. So we're very, very pleased. I think RED -- if you really think about what RED is going to do for us, it's going to allow us to really build out HomeSearch and its capabilities. We'll have, I think, probably the best data available over the next few months at HomeSearch, and they'll allow borrowers, real estate agents, et cetera, to really transact with us in a number of ways, so really excited about that. I mean from a regulatory standpoint, we are -- we've been pretty maniacal about making sure that any transactions between Nationstar and Solutionstar have a governance process around that, that is tested and validated via third parties, and I don't see really any changes as a result of the regulatory environment. We kind of continue to plan -- we plan to continue to do business the same way. And we're using a lot of, I would say, third parties as well still in the auction business. We really think it's important to maintain diversity and the service providing, or service offering, so whether it's appraisal, title closing, auction, et cetera, we're going to use third parties as well.

Bose T. George - Keefe, Bruyette, & Woods, Inc., Research Division

Okay, great. And that's actually -- one more on Solutionstar. Can you just talk about the kinds of businesses that could complement sort of the growth further at Solutionstar?

Jay Bray

Yes. I think one of the most immediate, right, is what we're talking about with the RED. I mean, if you can -- once we pipe in the MLS data and what I would call, wrap-around data to that, I think you'll have a search engine there that can compete with some of the larger search engines that are out there. So what could come from that would be clearly, you have I think significant advertising revenue and income from that. And then again, the overall goal is to allow those consumers and real estate agents to come to the site and not only be able to manage their properties, but be able to sell their properties, list them, buy properties, look for downstream services such as providing origination capability to potential borrowers, as well as downstream title appraisal closing. So I mean, we're -- I think that is, frankly, the biggest opportunity that I've seen in the long time and won't create a lot of fee income and a lot of value to the company. Beyond that, Bose, I mean there's other acquisitions that we're looking at, right, bolt-on offerings. I think really with some of RED's technology, we're going to be able to replace some third-party technology that we're using today. So that will lower our overall cost and I mean that technology can provide solutions to third parties as well. So we're -- I'm extremely bullish on what we can do with this company.

Operator

Your next question comes from the line of Brad ball from Evercore.

Bradley G. Ball - Evercore Partners Inc., Research Division

Just a point of clarification regarding the pipeline. Are you able to close on MSR acquisitions today as we speak, or are you being delayed because of the New York DFS?

Jay Bray

No, we're able to close as we speak. And I think we're in contact with the DFS, and we're going to continue to work with them. And again, ultimately, I firmly believe that we are a great solution for this transfers. And if you look at delinquency levels and customer experience, we're not perfect but we are improving these portfolios and impacting in a positive way, customers lives. So the short answer is yes, we can transact as we speak.

Bradley G. Ball - Evercore Partners Inc., Research Division

And then Jay, you've noted in your prepared comments that you thought that we might see an acceleration in the second half of this year and into next year, you feel better about it this quarter than you did last. What changed for you, what is driving that improvement?

Jay Bray

Well, I think it's -- clearly, we've been on a regulatory pause. I think the industry has as a whole, and we're just continuing to work with all the parties involved in these transfers, whether it's the regulatory bodies or whether it's the financial institutions, and just really, Brad, we just continue to move the ball forward there. And so we are transacting every month on smaller deals, right? I think we're now at a point where, again, we'll still have approvals and work that needs to be done, but we're at the point where we feel like we can start moving on in some of the larger opportunities.

Bradley G. Ball - Evercore Partners Inc., Research Division

Okay. And so that would suggest that the regulators are starting to better define their expectations and you see the end zone in terms of fulfilling those expectations?

Jay Bray

I think so. Right. I mean, it's going to continue to be a process, and I think we're going to continue to work really hard to make sure that we're doing everything they want us to do. But yes, I think we are definitely further along in that process and feel good about where we're at.

Bradley G. Ball - Evercore Partners Inc., Research Division

Okay. And then on Solutionstar, so I think Rob said that their seasonality in the REO sales, you'd expect that. But was there any unusual impact on REO dispositions in the first quarter due to weather?

Robert D. Stiles

Not really, not that we saw in our portfolio.

Jay Bray

And really, if you think about the pipeline, I mean, we boarded the PLS from BofA in the fourth quarter. And so our absolute numbers will be going up throughout the year. I mean, that's just due to the sheer volume of the portfolio we boarded late last year. So yes, there's some to Robert's point, modest seasonality impact but the trajectory should continue to roam.

Bradley G. Ball - Evercore Partners Inc., Research Division

And the 20,000 is entirely related to the BofA PLS?

Jay Bray

A big portion of it is. I mean, we obviously, had a PLS book prior to BofA. So it's a combination, but a lot of the growth is due to that acquisition.

Bradley G. Ball - Evercore Partners Inc., Research Division

And so you've got, I think, good visibility on the $400 million of revenue for 2014. Are you actually including revenue from RED in that number or would that go up a little bit, I guess, about $25 million or $30 million of annual revenue from RED?

Jay Bray

We're not including RED in that $400 million.

Bradley G. Ball - Evercore Partners Inc., Research Division

So you talked about 2015, would you expect that the unit sales to falloff in '15 and maybe be a little bit tougher to sustain $400 million of revenue in Solutionstar in '15 and beyond?

Jay Bray

Well, I think in '15, the answer is no. I mean, we still see -- if you look it kind of where our pipeline, our foreclosures and delinquencies, there is still going to be a strong trajectory through '15 and beyond. I think we think there's probably close to 65,000 properties that are going to be sold -- I'm sorry, 165,000 properties that are going to be sold over the next 4 to 5 years. So there are still a lot of runway for '15 and beyond. Robert, did you want to...

Robert D. Stiles

No, that's fine. You don't really see it to start the tail off until slightly in 2016 and then greater beyond that. But there won't be, if Nationstar was to acquire no additional portfolios, there wouldn't be as much growth, '15 to '14, as there was '14 to '13 but there would still be theoretically some growth in the REO business.

Bradley G. Ball - Evercore Partners Inc., Research Division

Great. And then finally on origination. So you talked about consumer direct normalized pretax margin of 135 basis points, is that what you are expecting going forward, or would you expect to get to higher pretax margins on the consumer direct business?

Jay Bray

I think that's a good one, I mean, I think, we said 125 to 135 basis points. I think those guys have done an excellent job rightsizing the organization and focusing on that overall profitability level. So I think that's the right level. And when you look at what we're experiencing now, I think that's very consistent. I will say, too, on the HomeSearch auction business. I mean, we are providing auction services to about 4 external clients now, and I think there's a lot of opportunity. We've got quite a bit of momentum on third-party side of that business as well. So you should think of it in -- clearly, if you look at just the Nationstar portfolio, there's going to be growth. But there's going to be a lot more attention and focus on the third party as well. And we've had some early wins and I think we'll get more.

Bradley G. Ball - Evercore Partners Inc., Research Division

Okay. And then, sorry, on originations, Jay, are you changing your volume origination -- volume outlook for 2014, is that part of what's driving the guidance lower?

Jay Bray

Yes.

Bradley G. Ball - Evercore Partners Inc., Research Division

What's the new volume target?

Jay Bray

I think it's $15 billion to, call it, $16 billion. And really, it's a function of the market. When we just look at what's happened in the first quarter industry-wide, and then you look at what the projection is for a kind of rates going forward, I think it's a function of that. And then we obviously did not board any large portfolios in the first half of the year. So that has some impact as well. And really, the way I think about the guidance, I mean, the primary driver and change in the guidance almost all of it is just due to the delays, if you will, in the servicing transfers in the first half of the year. And not only has a servicing impact but has an origination impact. So that's really how you should think about it.

Operator

Your next question comes from the line of Michael Kaye from Citigroup.

Michael R. Kaye - Citigroup Inc, Research Division

Do you have any update on that tax structure change you talked about a couple of quarters ago?

Jay Bray

No. I think it's a -- continues to be reviewed and looked at. We are in a process of having some more talent brought on, I think, on the tax side to help Robert. And Robert has significant experience in this area. So I do feel like we'll make progress, but there's really -- there's nothing to really talk about today.

Michael R. Kaye - Citigroup Inc, Research Division

When do you think we could potentially hear something on that, somewhere in 2014 you think or beyond?

Jay Bray

Well, I think it's clearly a goal of ours to focus of that. We have been focused on it. I think -- I don't think you should think of it as a big bang, we're not going to take our taxes from down by 20 points or anything like that. It will be an incremental process. And I think, hopefully, in the latter half of the year, we'll definitely have some updates and some thoughts around what the plans are there.

Operator

Your next question comes from Henry Coffey from Sterne Agee.

Henry J. Coffey - Sterne Agee & Leach Inc., Research Division

If we're trying to sort out the regulatory picture, and I know you have to be sort of careful with your words, you seem to have one agency in New York, essentially one individual, the Department of Financial Services trying to sort of super regulate or over regulate from their position as a state regulator. And then you have a bunch -- and in a very loud and I won't go on, manner. Then you have a bunch of other parties that are looking, and talking and discussing and, of course, we see this in the press a lot and everything. On the 2 issues, one of service or transfers, and then the other, which is sort of concerns about third-party ancillary services like the real estate services business, can you get -- we know what the DFS says. It says anything that gets attention, but can you give us a sense of what the other parties involved like in May, what's their view on this issue, the rating agencies, I mean there are a bunch of other parties that are slightly more rational?

Jay Bray

Well, I think, Henry, we really don't view it that way. I mean, ultimately, if you just step back and think about it from a regulatory perspective, there has been a lot of transfers, right? And the fact that they want to know more about Nationstar and our processes and the customer experience, I mean, we welcome that. I think that's right thing to do and I think that's -- frankly, it's not surprising. And so I think our view, our approach has always been is to work with the regulators to develop a kind of a process where we provide them information, we're transparent, and we work with their constituents and customers to get to the right place. So I don't -- and so I don't necessarily view New York as an outlier, I mean I think we want to work with all the states and we are working with all the states. And I think, ultimately, again, when you look at the results, we feel very proud of what we've done and accomplished here. And when you look at the delinquency levels and the customer complaint levels, et cetera, we're going to continue to focus on getting better. But I think we've done a good job. And so it's the nature of the beast, right? I mean, when you look at the industries grown a lot, it's getting a lot of attention, it's not surprising. I mean, whether it's the CFPB, whether it's FHFA, whether it's the states, we understand their questions and their concerns and we're going to address them and work with them and that's our approach.

Henry J. Coffey - Sterne Agee & Leach Inc., Research Division

Very well, on the real estate services business, for example, is there a high probability that other parties such as Fannie Mae will start to let you [indiscernible] prices for them the way they do with IBM [indiscernible]?

Jay Bray

Yes, I mean that's our goal. I really do believe, and again, the numbers will support that what we're executing on HomeSearch is actually a win for all parties. I mean, when you look at it, we're getting an average of 9.2 bids for every property in the auction. Our selling price is 3% to 5% higher than a traditional retail. If you look at the turn time there, we're selling those properties 65 days faster, which is money for everybody than in traditional sale. And so I think, again, ultimately, you got to do what's right for the customer. You got to do what's right economically. And I think the auction and what we've done on HomeSearch is right for all parties. And so we -- I do believe that we will and we are having dialogue with large financial institutions and large government organizations about utilizing those services and I think we'll be successful, I really do.

Sorry, I think we're going to -- there's another company that has earnings call, I think 10 minutes from now or 5 minutes now, so we're going to close this out to be respectful of some of our peers. But we really appreciate everybody's time and we'll be around today for follow-up questions, et cetera. But thank you very much.

Operator

Thank you very much. This concludes today's conference. Thank you for your participation. You may now disconnect and have a great day.

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