2 New Seeking Alpha Posts – Subprime Auto Loans and Real Estate

As the search for new investment ideas continues, I’ve been thumbing through a lot of annual reports.

A couple companies that were at the top of my list to check out; Zillow (Ticker Z or ZG) and Santander Consumer USA (Ticker: SC). What makes these two names interesting?

Zillow has recently announced that it will begin buying (and flipping) real estate in several cities. The move is intended to “improve liquidity” within the real estate market and give Zillow’s preferred agents some extra commission.

Making the move from software and ad sales to flipping thousands of pieces of property was an interesting move to me, so I wanted to take a closer look:

The big concern from investors about Zillow’s latest endeavor is the amount of capital that will be required to implement the project. Here is a quick rundown of Zillow’s estimates for how the program will operate and be financed, based on their most recent earnings call and presentation:

  • Zillow will put down between 20% and 30% on a house and will finance the rest.
  • The debt is non-recourse, meaning that the debt is secured by the home, not Zillow.
  • Zillow expects the typical home purchased to be around $250,000 +/- 30% (between $175,000 and $325,000).
  • Zillow estimates that by the end of 2018 they will own up to 1,000 homes.
  • Zillow expects net margins in the homes segment to be between 1% and 2%.

Balance Sheet Impact

What does all of this do to Zillow’s balance sheet?

The rest of the article can be found on Seeking Alpha, here:

Zillow’s Plan To Buy Homes Is A Distraction From Its Core Business

 

Next up is a look at the subprime loan market, specifically the automotive subprime market. I took a deep look into Santander Consumer USA, one of the largest publicly traded issuers of subprime auto loans.

The market for subprime auto loans has recently eclipsed all other types of consumer loans, and issuance now stands around $1.2 trillion:

total_loans

 

Some of this data was a huge eye opener for me:

In summary:

  • Default rates on auto loans are at their highest since 1996
  • Lenders are pulling back from the space, with subprime loan issuance down 10%.

While many banks like Bank of America (BAC) and Wells Fargo (WFC) have announced plans to reduce exposure to subprime auto loans, Santander Consumer USA (SC) [From here on referred to as SCUSA] continues to lend aggressively. Total loan originations at SCUSA are up 18% year over year, per their latest 10-Q. Is this really a smart move?

Background

SCUSA is one of the largest subprime auto lenders in America, and they are the preferred provider of loans for Chrysler, under the brand Chrysler Capital.

Here is a quick look at SCUSA’s subprime portfolio:

  • 82% of the bank’s retail auto loans are subprime (Down slightly from 83% in 2016)
  • Average APR for its auto loans is 16.4% (Unchanged from 2016)
  • 16.8% of its retail loans are delinquent by 30 days or more (Up from 16.3% in 2016)

The rising defaults in the bank’s portfolio along with the general economic environment are providing a lot of headwinds for SCUSA.

You can read the rest of this article, (Which was highlighted as an ‘Editor’s Choice’ article!) here:

Santander Consumer USA – Doubling Down On Worsening Subprime

 

 

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