Guild Holdings Co (GHLD) 2020 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Guild Holdings Company Third Quarter 2020 Earnings Conference Call. (Operator Instructions) As a reminder, this call will be recorded.

I would now like to turn the conference over to Michael Kim, Investor Relations. Please go ahead, Michael.

Thank you, and good afternoon, everyone. Before we begin, I would like to remind everyone that comments on this conference call may contain certain forward-looking statements regarding the company's expected operating and financial performance for future periods. These statements are based on the company's current expectations. Actual results for future periods may differ materially from those expressed or implied by these forward-looking statements due to a number of risks or other factors that are described in greater detail under Risk Factors in Guild's IPO registration statement and prospectus filed with the U.S. Securities and Exchange Commission.

Participating in the call today are Chief Executive Officer, Mary Ann McGarry; President, Terry Schmidt; Chief Financial Officer, Amber Elwell; and Chief Operating Officer, David Neylan.

Now I would like to turn the call over to Guild's Chief Executive Officer, Mary Ann McGarry. Mary Ann?

Thanks, Michael, and good afternoon, everyone. I would like to thank all of Guild's employees for their continuing hard work and dedication throughout the year and during our transition to a public company. I would also like to thank all of our clients for continuing to trust us to help them with their financing needs. And I would like to thank and welcome all of our new shareholders. We look forward to continuing to build relationships with all of you.

As our first earnings conference call as a public company, we thought it would be helpful to provide an overview of our business and how we are differentiated. Terry will discuss our growth strategy, and then Amber will provide financial details on the quarter. We will then be joined by our Chief Operating Officer, David Neylan, and take some questions.

Guild is a leading mortgage banking company that has originated and serviced residential mortgage loans since 1960. We are focused on the purchase market. Over the last 5 years, ending December 2019, over 70% of our origination volume was in purchase business. Purchase business provides durable volume and consistent returns. Our focus on purchase business has allowed us to generate a consistent track record of profitability through many market and interest rate cycles. We also utilize a scalable, sales-centric and growth-oriented platform that leverages our strong reputation, team and technology. We've created a personalized client experience, from the time a loan officer takes an application, through the time when the loan pays off, and we have an opportunity to capture their next transaction. We've built a high-trust relationship model, where our local presence matters.

Our strong reputation in the neighborhoods and communities we serve helps to set us apart. Our servicing segment generates a recurring stream of cash flow. But we see it as more than just an asset. We view servicing as an extension of our origination teams.

Turning to some financial highlights for the quarter. We reported GAAP net income of $182 million and as we generated record originations of $10 billion, representing growth of 41% over the prior year's quarter level, reinforcing the strength of our differentiated business model and strategy.

Looking ahead, we believe Guild is well positioned to continue its success. We expect to continue to focus our platform on the purchase market. We are looking forward to continuing to grow our business and to enhancing shareholder value.

So with that, I would like to turn it over to our President, Terry Schmidt. Terry?

Thanks, Mary Ann. I'm going to discuss our growth strategy and why we believe we can build on our past success with our proven, scalable and repeatable model.

First, we remain focused on organically growing our business in existing MSAs and getting into new MSAs by recruiting new loan officers to our platform. Second, we expect to continue to use our technology to not only increase productivity, but also to recruit additional loan officers. And third, we remain focused on expanding our footprint through targeted and accretive acquisitions.

Stepping back, we operate in a large market with macro trends that continue to support robust mortgage growth. The Federal Reserve continues to signal that it expects interest rates to remain low through 2022. Furthermore, the mortgage market is highly fragmented. In 2019, the top 10 lenders in the retail channel captured just 24% of total originations, which provides a great opportunity to continue to capture market share.

Focusing on our organic growth strategy. In 2007, our retail business operated in only 7 states, and today, we operate in 31 states. We started our growth in the Western states and then we moved into the South, and we plan to expand in new territories as we broaden our footprint nationally. We also believe there's an opportunity to continue to penetrate new and existing MSAs. As an illustrative example, if we were able to capture an additional 1% of market share in the states where we currently operate, in in-state retail locations, we could add roughly $16 billion in volume annually.

Moreover, we believe we can further enhance growth as we add new loan officers and increase the productivity of our existing loan officers. Our organic growth and loan officer headcount has averaged 7% since 2007, excluding our acquisitions. And we've been very successful at retaining our loan officers, with 71% of our overall volume for the past 5 years being generated from loan officers that are still with us today.

Second, our technology platform is a proprietary end-to-end solution that enables everything, from prospecting to production fulfillment, servicing and client retention, all located on one system. Our platform enables us to generate strong scale, quality, operational efficiency and most importantly, a seamless client experience. We can provide a digital point-of-sale experience to our clients with online applications, automatic verifications, statuses, alerts and electronic closings. This is helpful in terms -- times of favorable interest rate environments, particularly as we think about refinances or if a client prefers to engage with us in this manner. This flexibility in our approach allows us to serve our customers as they prefer.

However, our differentiation really lies in our focus on purchase business that, on average, has generated higher and more consistent returns, where the expertise of our loan officers locally helps us to deliver a personalized home-buying experience.

Finally, in terms of our acquisition strategy, we look for business owners who are a good cultural fit, leaders who want to stay in the business and have a good foothold in their marketplace and can leverage our platform to accelerate growth. We enhanced our gain-on-sale margins using scale opportunities and the sophistication of our secondary marketing group and also seek to reduce their back-office expenses.

The success of our acquisitions is proven. Origination volumes for the businesses we've acquired increased 29% and 37% on average in the second and third years post transaction. Past acquisitions, including an earnout component designed to minimize upfront cash payment, increase alignment with the sellers and ensure attractive returns on investment.

Looking ahead, we believe our business remains poised to capture incremental growth in the coming years given the attributes of our multifaceted platform and our proven approach.

I would like to now turn to our Chief Financial Officer, Amber Elwell, to discuss the financials in more detail. Amber?

Thanks, Terry. As a reminder, we completed our IPO in October 2020, and we were not public in the third quarter of 2020. As Mary Ann mentioned, we generated very strong results for the third quarter, including total loan origination of $10 billion, up 41% compared to the third quarter of 2019. Net revenues of $564 million, representing 159% growth year-over-year. GAAP net income increased from prior year to $182 million. Adjusted net income more than doubled to $195 million year-over-year. This represents net income adjusted to exclude the change in fair value of MSRs due to model inputs and assumptions and contingent liabilities due to acquisitions. And lastly, adjusted EBITDA more than tripled to $267 million.

We're continuing to stay focused on purchase business while capitalizing on elevated refinance volumes and expanding margins. Our purchase originations represented 50% of our total origination volume in Q3. We have direct access to consumers through our established relationships and referral networks and are selling service, not price. As a result of this and because we don't pay an intermediary to capture the loan, we have generated higher and more consistent gain-on-sale margins.

Our gain-on-sale margins on originations increased to 562 basis points, a 48% increase year-over-year. Our pull-through adjusted lock volume increased 54% to $11.6 billion from the prior year, with gain-on-sale on pull-through adjusted lock volume at 489 basis points, which is up 36% for the same time period.

On the servicing side, the majority of our in-house servicing portfolio, which totaled $56.4 billion at the end of the quarter, has grown organically through our retail channel. We believe that this is an important distinction. With most of our production coming through retail, we already have established relationships in place with our clients for the time they enter our servicing segment. This is why we believe the relationship between the client and loan officer is important to preserve for future transactions, particularly new purchase loans. It creates a stickiness between the client, loan officer and the company.

Total loan servicing and other fees increased by 10% year-over-year to $40 million for the third quarter driven by the rise in the underlying servicing portfolio. We expect servicing fee income will -- to continue to be impacted by clients electing to accept forbearance relief under the CARES Act. Due primarily to the forbearance associated with the CARES Act, our 60-plus-day delinquency rate on our servicing portfolio increased to 3.6% as of September 30, 2020 from -- up from 1.3% a year ago. Our forbearance requests were at 4.3% of our overall portfolio as of September 30, which favorably compares to the MBA's industry data of 6.8% for the same period.

In terms of our MSRs, the fair value declined by $41 million to a value of $392 million during the third quarter, reflecting lower interest rates and higher prepayments. At the same time, for September quarter date, we had a refinance recapture of over 60%.

Turning to our balance sheet. We maintained ample liquidity with $252 million of cash and cash equivalents, excluding funds used to pay down our warehouse lines as well as $2.9 billion of warehouse lines of credit, with unused capacity of $1.1 billion. Our business is capital-light because we originate and sell the loans we service. This, in turn, leads to high ROEs, with an adjusted ROE at 130.5% for the third quarter.

Looking ahead, we believe we are well positioned to continue to generate profitable growth across market cycles, reflecting our unique positioning, existing scale and infrastructure and strong relationships.

And with that, we'll go ahead and open up the call for questions. Operator?

Our first question comes from Don Fandetti with Wells Fargo.

I wanted to see, Amber, what your thoughts are in terms of Q4 for gain-on-sale margins and also funded loan originations.

We are not providing guidance for Q4. We do have our pull-through adjusted lock volume in the Q, in the earnings release, at $11.6 billion. Overall, in terms of margins, again, not providing guidance, I would look through to the gain-on-sale basis points for that, which has increased in Q3. Q3 year-to-date is 436 on pull-through adjusted lock volume.

Overall, the industry is -- the MBA Forecast is expecting and forecasting volume to drop about 2.5%. So they are now thinking that the refi business will expand and continue really into Q4 and Q1. And that just the overall supply and demand of that, you can take that into account when you're thinking about gain-on-sale margins and what will happen over the next few months.

Okay. So no guidance there. I guess for Q3, it seemed like, if I look at the production segment, the expenses as a percentage of funded originations was a little bit higher Q-over-Q. Did that come in line with your expectation in terms of comp and also G&A? Or was it a little higher?

It was a little bit higher than original expectations. Our sales-related compensation as people have hit higher tiers with those high volume -- all of our salespeople are tiered, so those high-volume numbers that we're hitting, they're hitting higher amounts. I think the key is that, overall, our expenses quarter-over-quarter to last year and year-to-date in basis points still -- are still lower than last year. So we're still getting scale as we grow. But because of that, those higher tiers in the sales compensation, it is -- it was a little bit higher than original expectations.

(Operator Instructions) Our next question comes from Rick Shane with JPMorgan.

Look, you talked a little bit about the strength of the mortgage market, and you also talked about the long-term expansion strategy. I am curious, as you see your competitor firms try to scale up business, what is happening with retention? Are you seeing any turnover in your employee base? Are you actually finding that originators want to join Guild at this point?

I can handle that. Well, we are not seeing a pickup in turnover at this time. And our platform is very attractive to retain and recruit new talent. So I can turn it over to David, and he can tell you more about our platform and why we believe it -- why it helps us retain our talent. They're just more successful and more productive under our technology platform that we have.

So David, would you like to expand on that?

Sure. Thanks, Mary Ann. We are not seeing a reduction on our side. We believe that we have built a better mousetrap to attract and retain loan officer talent through a combination of our proprietary technology tools that we provide them, our differentiated approach to recapture and also our commitment to help them grow their business, particularly through programs like our internally developed coaching program that we call Elevate. In fact, we have seen a tremendous amount of success in retaining loan officer talent.

Over the last 5 years, 71% of the production that we have produced is -- has been by loan officers that are still with the company today. So even in today's market, we're seeing loan officers hit new records. Our value proposition is helping them to continue to grow. And we're seeing increased productivity through our loan officers, and we're continuing to see them outperform industry standards. And so we're really seeing good success in retaining our loan officers and continuing to work to grow our sales force.

Great. That's very helpful. And then my second question, the last question is for Amber. Just curious in terms of the servicing portfolio. Were there any sales or purchases of MSRs during the quarter? We can see what the -- what was retained, but I just want to make sure we understand all the moving parts there.

No, there was not.

Our next question comes from Giuliano Bologna with Compass Point.

And congratulations on your first quarter as a public company. I guess jumping in on the origination side, it would be interesting to get kind of a -- your input, now that we're a little more than 2/3 of the way through the quarter, and I realize I'm not looking for a full quarter outlook. I'm just curious how the initial part of the quarter has kind of shaped up versus your original expectations. And if you're seeing any kind of trends in terms of fundings, obviously, fundings get a little bit -- they move around, around Thanksgiving, Christmas, et cetera, so I'm just kind of curious how the initial part of the quarter is trending on that side.

Well, again, we can't provide guidance on the fourth quarter in totality. I would point to the MBA Forecast and their expectations of the fourth quarter only dropping 2.5% from Q3.

That makes sense. And then on a slightly different kind of angle. When I think about how the servicing and the amortization rate, especially in the fourth quarter, as we see kind of a pickup in -- if volumes are not down that much with purchase, obviously, most likely coming down in the fourth quarter, should we expect a little bit of tick-up in the amortization rate in the fourth quarter?

In terms of how many -- how much loans are running off, paying off?

That's right. Kind of how you will be then from a dollar perspective?

Sure. So the MBA is forecasting the refis to go up slightly in Q4. So I would use that as a proxy. So in Q3, they have a 50% purchase. In Q4, they were 48%. We were running -- I'm sorry, Guild is at 50%. And so I think using that as a proxy for what's going to happen in Q4 for the servicing portfolio is the best bet. And what would happen with the refis, we are continuing to recapture about 60% of the portfolio and feeding that back into originations and continue to focus on that going forward.

Our next question comes from Trevor Cranston with JMP Securities.

The first question is around the acquisition landscape. Can you guys maybe provide some color in terms of what you guys are seeing out there in terms of if there are maybe more companies who are potentially looking to sell or be acquired at this point relative to what we might have seen like over the last couple of years? Any color you could provide around that would be helpful.

So we always have a list of companies that we talk to and are always ready for any opportunities that arise so that we can negotiate a transaction. So -- but I can turn it over to Terry to tell you more about our strategy going forward and what we expect.

Thanks, Mary Ann. Sure. I would say that based on the many years that we've been in business, what we typically see is that when the purchase market starts becoming stronger, refis kind of start subsiding, volumes kind of contract a little bit. Typically, those sellers that were maybe on the fence, they really want to just kind of get a sense of what's out there. And so the appetite traditionally has increased for acquisitions. And so if based on our path, that would be -- we would see something similar going forward.

Got it. Okay. That's helpful. And then a question on the servicing side. I guess first, can you say how much of the servicing portfolio at this point is Ginnie Mae? And then also, I was curious if there was any meaningful amount of early buyout activity in 3Q and how are you thinking about that going forward.

We are not doing a heavy amount of early buyouts. We really haven't changed our stance on the early buyouts we wanted. We're looking at, overall, what's going to happen with the forbearances. And we still have that as an option with our early buyout line, but we did not do any in Q3 that aren't related to our regular modifications that we would do in a normal course of business. And we still have the capacity on our early buyout line to do about $45 million of that. And overall, Ginnie Mae is consistent with what -- in our portfolio, it's about 35% of our overall portfolio in servicing.

Our final question comes from Derek Hewett with Bank of America.

Circling back to the earlier M&A question. Kind of over the near term, will the focus be on gaining share in those -- in the existing markets in the 31 states organically? Or could we see significant growth through M&A in the near term?

Well, we're always looking to grow our market share. And our -- organically is we will grow market share, we expect to as well as through additional increased productivity with our technology platform and our loan officers and opportunistic acquisitions. Terry, would you like to expand on that at all?

Sure. As I think we said earlier, we typically, on the organic side, grow -- we've averaged about 7% growth every year. And we've got some -- a good amount of -- we've kind of taken a more of a geographic footprint to where we've kind of centralized our recruiting division, which we think we're going to have some even better success there. And -- but as Mary Ann said, we're always looking at growing organically, backfilling our existing offices, getting loan officers that we know we can take them to the next level in their career, and we've been very successful at doing that with mid-tier loan officers. And then we're always being opportunistic as far as acquisitions. We are always interested within our existing 31 states as well as getting into new territory.

Okay. And then my last question is just given the focus on the retail channel, is there any interest in entering either the wholesale or correspondent channels at this point?

Not at this point. We have a little bit in correspondent, but we aren't focused on growing that. We're focused on growing our retail channel and gaining market share. And I would just add that back to the M&A that, typically, historically, whenever there's been any market dislocation, that's when we've been able to take advantage of that market and grow. And we've grown the most during that and we've grown 14x in our market share since 2007, and we've grown this year in market share. So we're definitely focused on gaining market share with all the 3 components I mentioned earlier.

There are no further questions at this time. I would like to turn the floor back over to management for any closing remarks.

Okay. Well, thank you, everyone, for your time and interest, and we look forward to continuing to discuss our progress on future calls. And thank you, thank you.

Ladies and gentlemen, this concludes today's webcast. You may now disconnect your lines at this time. Thank you for your participation, and have a great day.