UWM Holdings Corp Q4 FY2020 Earnings Call

Good morning, afternoon, evening. My name is Cheryl, and I will be your conference operator today. At this time, I would like to welcome everyone to the UWM Holdings Corporation Fourth Quarter 2020 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. Matt Roslin, you may begin your conference.

Good morning. I'm Matt Roslin, EVP of Legal Affairs, Investor Relations. Thank you for joining us, and welcome to the fourth quarter 2020 earnings call for UWM Holdings Corporation. Before we start, I'd like to remind everyone this conference call includes forward-looking statements. For more information about factors that may cause actual results to differ materially from forward-looking statements, please refer to the earnings release that we issued yesterday. Now I'd like to introduce UWM Holdings Corporation and the United Wholesale Mortgage President, CEO and Chairman, Mat Ishbia.

Thanks a lot, Matt. Thank you all for joining. We appreciate it. We're excited for our first earnings call and to have you all join. We'll definitely take some questions at the end, and looking forward to that. Before we do that, I'll go into a little bit about the business and about the fourth quarter and the release that we put out yesterday. But thanks again for being here. We're excited about the growth ahead. 2021 is going to be a great year. We're really focused on mortgage brokers and helping make the process faster, easier, and cheaper. That's helped us become the number two overall mortgage lender, and hopefully, soon, we'll become the number one overall mortgage lender with our strategies that we'll discuss during the call today. Let's look back now briefly on the fourth quarter. It was an all-time record origination quarter for us. We did $54.7 billion, which is an all-time record at UWM. Our gain margin was 305 basis points, which is our second best of all time, and $1.37 billion of net income, which was almost $500 million beyond what some people expected for the quarter. It was a great quarter across the board. The full year 2020 was excellent, with $182.5 billion in mortgages, a 249 basis point gain margin, and $3.38 billion in net earnings. So it was a fantastic year across the board, and we're excited about where we stand. Some people might look and say you made a lot more money in the fourth quarter than a lot have projected, but your overall volume was slightly less than people thought. The way we looked at it is there's an opportunity as the leader in the market to gain margin and continue to make a lot of money and maybe do less volume in certain situations. We'll always do what's best for shareholders and our business for the long term, and so we had an opportunity, capitalized on it, and had a fantastic quarter by all accounts. Now, although it was a fantastic quarter by all accounts, we are past 2020. We're already on to 2021. We're in Q1, and we're making some big plays right now. We're more excited about the future. So our never-relax mentality here at UWM is key. 2020 wasn't a high point to us; it's a launching point from where we're going, and that's the plan. We're going to continue to build our business. We're well positioned for the future, and we expect 2021 to grow significantly from an origination perspective, and we're very excited about it. Now how are we going to do that? Let me discuss a couple of different things. The big thing I want to make sure we discuss and understand is our singular focus on brokers. The fastest, easiest, cheapest way to get a mortgage is through an independent mortgage broker at findamortgagebroker.com — we believe that. Most of the industry has already seen this now, as many people are realizing that the wholesale channel is the growth plan because it's best for consumers and is best for loan officers. As we go into this, we've been growing because of that singular focus. We've grown every year. I don't think there's any other mortgage company in America that can say they’ve done more volume. From 2014 through 2021, we've not had one year dipping back down like all of our competitors. We've also been profitable, obviously, every year, including those tough years. UWM has about 35% market share of the broker channel, and we believe that will continue to grow. A big investment in 2020 was technology. We rolled out several things that made a significant impact. Those investments we made in 2014, 2015, 2016, and 2017 is why we continue to maintain a dominant position in the wholesale channel. We will accelerate our growth in 2021. We have over 1,000 technology team members here at UWM and growing, and we're excited about that opportunity to continue to double down in technology. Now that we have access to liquidity and opportunities, we will continue to invest in technology and take it to another level with our homegrown-built system, which we'll show some results of in a minute. findamortgagebroker.com is another thing we're going to be spending a lot of time on, all about educating consumers. The best way to get mortgages through an independent mortgage broker — findamortgagebroker.com is how you find that loan officer. And we actually have a Super Bowl commercial that will be out Sunday, and it's already got some rave reviews. We're excited about it, about educating consumers. Once we educate consumers, what will happen inevitably is that the mortgage broker channel will grow, which means UWM is the number two overall mortgage company in America, and we're only playing in 20% of the market, the broker space, where all of our competitors play in 100% of the space. As that broker channel grows, and it will, we grow too. Everyone says that their technology is great. But how do you prove it? We believe ours is faster. We measure speed in the closing process. UWM was at 18 days in Q4, while the market was at 56 days, and in December, UWM was at 16 days. The whole point is 18 days to 56 days — we're 3x faster than the industry. Time kills deals. We focus on speed and efficiency, based on our proprietary technology that we built at UWM. We will never sacrifice being the best mortgage company and greatest product for the customer based on our operational excellence. We have all of our team members back here once it is safe for everyone to do so. This helps drive our lower costs for UWM. Our cost to originate, which I'm sure Tim will speak to, differentiates us. Of course, we can win in this market when we're doing these massive volumes. We'll also win in a rising-rate environment just like we did in 2018. From '16 to '18, rates went up, and our compound annual growth rate was 28%, when most were going down, whereas we've built our business for that tough environment. I understand the point of view that people are concerned about comparing with retail, but the reality is it is usually more expensive to go directly to a retail lender. Data shows that, in Q4, UWM’s average interest rate was 2.74% versus the industry average of 2.89%, which is a substantial difference for consumers. We've focused on doing the right loans, faster, easier, cheaper. Our average FICO in 2020 was 757, and we don't do non-QM loans or riskier loans. We have about a 30-35% lower delinquency rate than the market average. We've also been in business 35 years and will continue, putting focus on quality over quantity. We might do less volume for quality. Looking ahead, we're prepared for more growth, having doubled the size of our campus and having hired thousands of people. We have over 8,000 people here at UWM, all in Pontiac, Michigan, working mostly from home for now. We expect to continue to see solid dividends for our clients and technology investments; we focus on preserving liquidity while sharing incremental amounts with our stockholders. The regulatory environment is changing positively for UWM, as regulations help consumers. Recent administrative changes have been focusing on doing what is right by consumers, which ultimately helps UWM. Our goal is to dominate the wholesale channel as it continues to grow back to pre-crisis levels. In 2021, we'll have over $12 billion in purchases, and our full year 2021 outlook is strong; we expect production to grow significantly with much further growth in technology and service efficiency.

Thank you, Mat. I want to touch on mortgage servicing rights costs and liquidity. The MSR asset balance has increased by roughly $345 million, while the notional portfolio has grown from $153 billion to $188 billion. Within that change is a considerable amount of capitalization of new, lower-rate MSR assets, while the write-off of any paid-in-full mortgages typically have higher interest rates. Most importantly, our weighted average interest rate for our servicing portfolio has declined to 3.13% from 3.98% at the prior year-end. As volume has remained very strong, our cost to produce loans has been favorable. For the year, we were below the estimates of our cost of $1,500 to produce a loan. When adding the cost for broker compensation, the average cost to produce for the year on a comparable basis for UWM-originated loan is under $5,800. In comparison, the retail cost to originate loans averaged $8,872. We anticipate further investment in our technologies and service execution to continue our focus on the process and cost efficiencies. Our liquidity management has also grown. We ended 2019 with $133 million as our cash balance, and we've continued to grow our liquidity throughout 2020 and into '21, ending with $1.4 billion in liquidity. That figure is at the high end of the $1.2 billion to $1.4 billion range we've communicated that we seek for liquidity to run the business. As announced, we will have a dividend to our shareholders in the coming months. We believe this is consistent with our objectives to preserve liquidity while sharing incremental amounts with our shareholders.

Thanks, Tim. Before we jump into questions, a quick looking forward. The first quarter is always the slowest quarter from a cyclical perspective in the mortgage business. However, we expect to have a very strong first quarter. We expect production to be between $52 billion and $57 billion, with a gain margin between 200 and 235 basis points. All those numbers will be significantly over our 2020 numbers. And so we're excited to start the 2021 year off strong. With that, I'm going to turn it back to the operator, and we're going to take some questions. We're excited to talk about any part of the business. So please announce the questions, and we can go from there.

And our first question comes from Steve Delaney from JMP Securities.

Tim, I guess, or Mat, either of you. It was great to have the release with some fourth quarter data, and then also your update on the first quarter. Maybe how are you thinking about the rest of the year as far as back on November 17, we got some projections? I think it was Page 34. Just sort of 2021, 2022, a lot has changed since then in terms of Freddie, Fannie estimates of the size of the market. Are you thinking that for this year, take it quarter-to-quarter as you did last night with the information about the first quarter? Or at some point, are you thinking of some kind of a document or at some point update your full-year outlook relative to what the analysts received from Mark and Maria back in November?

Thanks a lot, Steve. Appreciate the question. So my quick take on that is we like to give guidance. We want to make sure that — I know there are other numbers that have been out there. We believe 2021 is going to be a fantastic year. We think there's a lot of upside in some of the numbers that have been reported. However, we want to really focus on each quarter to deliver certain numbers to our partners, such as yourself and our shareholders. The reality is we think focusing on the first quarter and dominating this quarter and preparing for a great second quarter is our plan.

Great. Well, you're already off to a good start because you beat us on volume and estimated margin in the first quarter. So we like the trend here. I got a question last night late from a client who said, 'Gosh, I'm reading the release, and it's got a lot of good information about the business, but no balance sheet, no classified income statement.' Is this simply because you haven't filed your K? Obviously, I don't know where the auditors are in their process. Going — let's look ahead to first quarter press release. Should we assume that when you — going forward, now that you've got the IPO behind and your March 31 numbers will fully reflect all the activity, right, debt, IPO, et cetera? Would you normally expect to give us a full balance sheet and income statement in the quarterly releases?

Hey, Steve. It's Tim Forrester. I appreciate the question. We anticipate that for this quarter, for this year-end, the balance sheet and the full income statement will both be in the 10-K once the auditors have completed their exercise and their audits. Going forward, for the quarterly reviews, we would anticipate sharing a more thorough balance sheet and income statement with the release.

Let me add my congratulations and observations to Steve's comments. Just a couple of items. Number one, when we think about the broker channel, you obviously are going to be spending a lot of money to promote it. And anybody who's done a digital close versus a broker close will never go back to the digital process again. I speak as an old man, so we'll leave it at that. But granted, I think you've done a great job of convincing a lot of people that it's a great channel. You're going to be spending heavily on that. When you think of the growth of the channel, how much of that do you think comes from bringing in new customers? And how much of that do you think comes from gaining share within the channel? And who does that share come from in your mind, the bottom of the business, where things consolidate to the top, and the top four or five growers? Or does it come from battling it out amongst the big 5?

Yes. Thanks for the question, Henry. I appreciate it, and thanks for the kind words. Obviously, as you just referenced, going through a mortgage broker is easier. What we've also done is build the technology so that brokers offer both that digital feel. We're expecting that channel to grow, and we will spend lots of money educating consumers. A big part of that is educating the findamortgagebroker.com channel. Additionally, when rates tick up, a lot of loan officers currently working at retail lenders begin to look around. We've seen that trend before. We expect the share to come from everywhere, but particularly from top players in the wholesale channel. We believe our growth will be substantial in 2021 and 2022.

I know you've given good guidance on that number, but the number one anxiety amongst investors is gain on sale. If you look at the primary and secondary spreads, they see that number has been contracting since August from a high level. We're aware how well the business works in different environments. But when we look at that as an input, given where the origination capacity of the industry is, rates, the yield curve, do you think we continue to see, during the course of the year, contraction there? Or does it stabilize in February or March?

Yes. Think of it this way, we had very large margins. A lot of people's margins went down much more than our 13 basis points from Q3 to Q4. Understand what a more normalized margin looks like. Our expectation for normalized work is around 1.60 to 1.90. So will margins compress? They won't be 305. But I don't think they will decline as quickly as what you might see in other companies. We expect to maintain strong margins in 2021.

Another way of thinking about it in between the third quarter and the fourth quarter, the average primary, secondary spread declined about 17 basis points. You were down about 13 basis points. Do you think you'll be able to continue to sort of outperform that benchmark going forward?

Yes, that's a great question. I don't particularly look at that benchmark. However, we believe, because of our value proposition, we will not decline in gain on sale margins as quickly as most competition. You'll see that in the numbers quarter after quarter.

So in looking at some of the components of the balance sheet that you shared with us, you've got $2.4 billion of equity. There are a whole bunch of adjusting transactions that occurred with the SPAC that you've detailed for us, including a large dividend upstream. Should we assume that this $2.4 billion includes none of those numbers, and then we should go back to some of your past filings to get a sense of where equity and book value are post-close?

Yes. The equity value that was shared in the press release is as of 12/31. It does not reflect the results of the merger transaction. Some of that information we shared previously, I think will be helpful in reconciling that. But as we continue to perform, what we expect in the first quarter, as Mat communicated, is a very solid first quarter.

I'd just echo the others' comments on the good quarter. Actually, I just wanted to follow up first on the gain on sale margin. Some companies book gain on sale margins on rate lock and some do it on closing. I just wanted to confirm how you guys do it.

Yes. Thanks for the question, Bose. The quick answer is we do it on closing because we believe it is a more certain way of doing it.

Okay. Great. And then actually, I wanted to ask about the decision to reduce the exposure to the FHA channel. Is that a risk issue? Just curious about the positioning there?

Yes. We have a large servicing book that is growing right now. When we looked at the analysis on the FHA loans, the delinquencies and forbearances were significantly higher than what we're comfortable with. We backed out of those products initially, focusing on quality rather than quantity. We've brought back FHA in December, and you’ll see that in our results in Q1.

Okay. No, that makes sense. Last question, just going back to the competitive landscape, can you talk about how loan officers have been shifting from retail to brokers? Are more coming from banks or non-banks? Any color on how that shift is happening?

Yes. We've had a substantial amount of people shift over, but when rates pick up, the floodgates will open, and many retail loan officers will explore mortgage broker channels. We have a team focused on Wholesale development, creating environments for loan officers to set up their own broker shops. Many are already discussing this move. We're confident that this trend will continue and benefit our business in 2021 and beyond.

Rocket's partner channel focuses not only on independent brokers, but also works with corporations like Charles Schwab, State Farm, Amex, etc. I don't recall hearing you talk about these corporate clients. Is there anything preventing you from going after these corporate partnerships?

First off, in Rocket's partner network, we understand that a significant percentage of that business comes from non-broker channels. We have decided not to engage in those partnerships because our strategy is singularly focused on supporting independent mortgage brokers. We're not going to compete with them; our focus is on their growth and success.

Great. Just another quick question. Both yourself and Rocket are now public, focused on the wholesale market. What do you see as the likelihood that the market becomes hypercompetitive again?

Yes. Rocket's attempt to focus on brokers is beneficial as it emphasizes the broker channel as the growth lane, and it shows that we are leading in the space. Our partnerships focus on growth without directly competing with brokers. That's why we continue to thrive in this market. Yes, competition may increase, but that's because the broker channel is the best.

Focusing on technology, can you provide any color on adoption for the InTouch mobile app and any initial feedback you might have received from brokers? On Blink+, what is its adoption rate?

Yes. The technology initiatives like Blink+ and the InTouch app have seen high rates of adoption. Thousands of brokers are leveraging these tools daily to check pipelines and enhance their workflows. Being faster, easier, and cheaper is our mission.

That’s very helpful color. For a follow-up, can you point to any other enhancements or products you're planning to launch over the next year?

I can't reveal specific details for competitive purposes, but I can say every time we invest in technology, it's aimed at making processes faster, easier, and cheaper. We have exciting developments in the pipeline.

It's Steve from Allianz. A question on UWM's average 18 days closing versus the industry that's increased to 56 days. Do you anticipate those trends to tighten further with your investment in technology? Can you help us understand what the snags are that hold up a loan going outside of UWM?

Time kills deals. We close in about 18 days compared to 56 days industry average because our technology allows us to move quickly. We manage to keep the loan process efficient, which results in higher closure rates for brokers feeding us business. Each day a loan is delayed can result in lost opportunities. Thank you for the trust and belief in our business, and thank you for the question. If you ever have anything, you can always reach out to us. We're excited about 2021. Thank you for all the support.

And that concludes our call for today. We thank you for your participation. You may now disconnect.