UWM Holdings Corp Q4 FY2021 Earnings Call

Good morning. My name is Chantal, and I'll be your conference operator today. I would like to welcome everyone to the UWM Holdings Corporation Fourth Quarter 2021 Earnings Conference Call. Thank you. Blake Kolo, you may begin your conference.

Good morning, everyone. This is Blake Kolo, Chief Business Officer and Head of Investor Relations. Thank you for joining us and welcome to the fourth quarter and full year 2021 UWM Holdings Corporation's earnings call. Before we start, I would like to remind everyone that 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 this morning. I will now turn the call over to Mat Ishbia, Chairman and CEO of UWM Holdings Corporation and United Wholesale Mortgage.

Thanks, Blake. I appreciate it. So let's jump into it. I appreciate you all joining the call today. First off, let's talk about 2021—it was an amazing year for UWM. I think it makes sense for me to focus on recapping our key achievements for the year before getting into the quarterly results and outlook for 2022. First, UWM set a new production record in 2021 with just under $227 billion in origination, up almost $44 billion from 2020. One of the most impressive aspects of this is that $87 billion of production was purchase business, which is the most in company history in any given year. In addition, we averaged about $25 billion in purchase production in each of the last three quarters of 2021. My second key point is our consistent growth and profitability quarter-over-quarter and year-over-year. 2021 marked our seventh consecutive year of origination growth and our 15th consecutive year of profitability. We delivered $1.6 billion in net income, our second most profitable year ever. Our continued focus on speed, service, and best-in-class technologies helped us deliver these results. However, our scale is now also a huge factor in our success. Our scale is what gives us increased capital and our continued ability to deliver strong and consistent results for all of our shareholders. My third point is our continued advancement in technology. In 2021, we launched many amazing technologies, but the biggest one of note is BOLT, the most advanced underwriting system in the industry. BOLT gives brokers more control in the loan origination process, and we've found that brokers with more control over the process naturally become more efficient and lower our cost per loan. We implemented UClose technology several years ago with the same goal of making the processing and closing more efficient, and that has been a huge success as well. Technologies like BOLT and UClose help us close loans faster than anyone in the industry and at lower origination costs. Lastly, I have to express that none of these accomplishments of 2021, which were amazing across the board, would have been possible without our amazing team members, our incredible broker partners, and the ideas we receive from them. The partnership we have has been a huge part of our success. With such great partnerships, I'm excited for continued success and growth together. Now let's talk about the fourth quarter. We delivered $55 billion in production, representing our best quarter of all time, beating our 2020 fourth quarter numbers. The $24.5 billion of purchase we delivered in the fourth quarter was a record for us, an astounding 103% year-over-year increase once again from Q4 on the purchase side. We know brokers are the dominant player in the purchase market. We're confident you will see us as the number one direct funded purchase lender again in 2022. We delivered $239.8 million of net income for the quarter, with margins at 80 basis points. Even with these being some of the lowest margins we've seen in the quarter's history, we still remained very, very profitable. I believe these margin numbers are near the bottom, and I expect the first quarter of 2022 to be very similar to the fourth quarter, somewhere between 75 and 85 basis points of margin, with $33 billion to $42 billion of production. We will remain profitable with these numbers, even if they are lower. Lastly, I want to focus on the most important part, which is 2022. The broker channel will continue to grow. The refinance business flows are seen, and we're witnessing retail also converting to the wholesale channel at a faster pace than in many years. We've dedicated teams helping these loan officers transition to ensure they're successful from day one. We're experiencing the most activity since the inception of our beamortgagebroker.com platform. I'm confident the broker channel is growing at a faster pace than we've seen in years. We observed some of this happening in 2018 and 2019, but this time it will be much more dramatic, and we're seeing early signs at this point. Secondly, we've achieved significant scale and remain laser-focused on becoming more efficient. We believe our cost of loan will decrease over the next 24 months with BOLT as it continues to gain adoption, and we will keep enhancing the technology. Finally, we are contemplating the best time to bring servicing in-house. We have a large servicing book and we aim to have the lowest weighted average coupons in the country. We'll likely finish 2022 with over $400 billion. We recognize there is considerable opportunity with this, and are exploring the financial upside of bringing servicing in-house. We also believe there is a great opportunity to develop our own best-in-class servicing platform, which will yield numerous benefits and create other business opportunities for UWM. I appreciate everyone on the call for spending time with us today, and I look forward to seeing many of you on our campus on May 12 for UWM Live, an event where many of our clients will be present. This is a very positive development for the broker channel, and we would love to invite many of you to join us. Now, I'll turn it over to our CFO, Tim Forrester, to give a few more details about 2021 and the fourth quarter as well.

Thanks, Mat. The fourth quarter was successful for the company, even in a more challenging environment. Our volume in the quarter contributed solidly to a record year rooted in our strength in originating purchase loans. Originating purchase transactions is a more challenging endeavor, and our efficient execution is crucial in processing, underwriting, and closing a purchase transaction. Our operations are built for the purchase market, enabling our broker clients to provide a differentiated solution for American consumers. The competitive environment pushed margins lower compared to the record margins we saw in the fourth quarter of 2020 and dropped a bit from the prior quarter. Even with the increased competition, our financial performance remained strong, and our return on equity for the quarter was impressive. Another important item to consider is the composition of our gain margin. Our production volume was lower in Q4 compared to Q3. Our on-balance sheet loan balances were up, primarily due to the new loan limits and our retention of those loans until we sold them under the new limits in 2022. To give some context, we sold around $5.8 billion more in loans in the first week of January than we originated and around $9.5 billion more for the month. Due to incurring the hedging costs in our gain margin while also benefiting from our interest line items, this further pushed down the margins in an already competitive environment. Overall, it made sense for us to hold the loans; however, it shows up in different line items such as hedge costs in the gain margin and interest income and expense, both of which are higher or, in the case of interest expense, higher than they would otherwise be. While we consummated our first MSR sale in 18 months at the end of Q3, our servicing portfolio has increased and delivered additional substantive revenue for the quarter. While our servicing costs increased along with the larger portfolio, the revenue increase from servicing was significantly larger than the incremental servicing cost. As we continue to grow the portfolio, we will increase this benefit. This is important from both an earnings perspective and cash flows. As noted, we held a large balance of loans in Q4 to deliver more efficiently into agency MBS. While interest income increased, expenses actually declined, and the majority of that intra-period resulted from the self-warehousing of loans, where we self-funded to use our liquidity more effectively, which in turn helped keep down the interest expense. Given that our overall warehouse balances were increasing due to the retention of loans, the performance on interest expenses was very positive. The MSR portfolio was just under $320 billion at December 31, with a weighted average coupon of 2.94%. The portfolio was $285 billion at September 30, with a weighted average interest rate of 2.95%. That means our portfolio size went up a decent amount, and the rate slightly declined, which positions us well. Our forbearance rate is roughly 57 basis points, down from 83 basis points at the prior-quarter end. So, forbearance has not impacted us as much as others in the industry, and we expect that to continue. Our severe delinquency continues to remain under 1%, so we are observing better asset quality than the industry overall. Now that the Fed has indicated a clear path of rate increases is expected, our MSR book is well positioned to generate cash. The WAC is already well below the market, and further upward movement makes it more attractive. We issued a balanced tenure of unsecured debt in the quarter to support our MSR growth in line with our increased capital, maintaining an appropriate WAC ratio across the features. We believe our operational performance and credit discipline will continue to provide further unsecured debt opportunities if market conditions align with need. Cost per loan remained solid in the quarter; we experienced a cost per loan of $1,557 for Q4, continuing our performance from prior periods while maintaining discipline and efficiency and investing in our people and processes. For the year, we performed well in cost per loan and the relationship between fixed and variable costs. Beyond our immediate costs to produce a loan, the wholesale model has considerably less fixed cost to spread in lower volume environments. As we continue to invest in technology and innovation, we aim to enhance cost performance in the long term. As a reminder, our cost per loan is a fully loaded cost without exclusions. We do not exclude allocations, corporate costs, or measured costs on an incremental or direct basis. Our Board engaged with management in substantive discussions on the merit of a dividend and deemed it prudent to provide this to public shareholders. As noted in the press release, our Board authorized a regular dividend to be paid to public shareholders, consistent with our track record as a publicly traded company. We are comfortable with the amount and timing and believe it is appropriate to reward our stockholders. Okay, now I'll turn things back over to our Chairman and CEO, Mat Ishbia, for some closing remarks.

Thanks, Tim. Before turning it over to your questions, I want to summarize a few key points. UWM remains steadfast in our commitment to the wholesale channel. The channel continues to grow its share in the industry, and we will see more retail loan officers migrate to the channel as rates rise. Even as our market share stays the same at 33%, I believe there is a big opportunity for UWM, and our market share will continue to rise. Our cost structure and scale enable us to be highly profitable at these margins, and our accelerated share repurchase demonstrates our commitment to our shareholders. We're really excited about 2022. It's going to be another great year at UWM. Now, I'm looking forward to taking your questions. Thank you.

Your first question comes from Doug Harter with Credit Suisse. Your line is open.

Thanks. Hoping we could get more into the cost side. As industry volumes come down in 2022, can you just talk about the mix, how much is fixed cost, and what we should expect the cost per loan to trend in the short- to intermediate-term?

Doug, it's Tim. Yes, I would expect that just like anything, when you have a smaller denominator, the cost will increase slightly, but our projection and target for 2022 is still going to remain at $1,500 per loan in cost. In the first quarter, normally you'll see a little bit higher cost per loan for a couple of reasons. You'll have a higher cost load due to various expenses in January, February, and March, as some of the limits hit a threshold, but also due to some of the lighter volume expected in the first quarter. So we do expect first quarter to have slightly higher costs, but that will be made up in Q2 and Q3 as volume comes through the seasonal process. As for the proportions, we generally see somewhere between 70% and 80%—of our costs being fixed relative to our cost to produce a loan. Comparatively, to the retail channel, our share of variable costs is higher, and there is more variability in the cost to produce a loan through the wholesale channel than there is in retail. So while we would expect 80% of our cost per loan, at $1,500 or $1,550 to be a fixed cost, the overall scale, including broker compensation, remains highly variable.

Great. Very much appreciate that. Thank you.

Your next question comes from Kevin Barker with Piper Sandler. Your line is open.

Thanks for taking my questions. I wanted to follow up on the guidance for the first quarter. It seems like your guidance would indicate nearly a 30% quarter-over-quarter decline in originations, which seems more in line with the refinance expectations for the quarter on a quarter-over-quarter basis. But it seems as though the brokers are more focused on the purchase side, which has experienced a little less decline. Is there some dynamic in the quarter-to-quarter trends that would cause it to be more refinance-heavy versus purchase-heavy, thereby leading to the decline quarter-over-quarter?

Yes, this is Mat. Thanks for the question. I think you're looking at it a bit differently. Part of the purchase growth in January, February, and March is typically less vibrant due to various factors, including seasonality. Additionally, the inventory throughout the market does affect the purchase market's vibrancy in the first quarter compared to the fourth quarter or third quarter. Our perspective is that the market will be stronger in the second quarter from a purchase perspective. Please note that if you look at our Q1 2021 versus our Q1 2022, the decline at UWM will be substantially less than all the other refinance shops you're speaking about, though it won't be as small a decline as we would hope if purchase inventory is stronger. Similarly, if you look at Q4 2020 versus Q4 2021, almost everyone went down in volume, but we actually grew our mortgage volume. So you'll start to see a trend difference with UWM's strength as we've shown in the fourth quarter with those volume numbers.

Okay. And then is your revenue recognition based on fallout adjusted locks, or is it on origination volume? Would that mean your fallout adjusted locks will be above or below your origination volume in the first quarter?

Yes, our revenue recognition is based on the origination of the loan. We do not recognize revenue when we receive an application, so there is a difference there. The fallout adjusted that you see in some of the other companies reporting doesn’t have a direct implication on immediate income or revenue; it's more of a forecast into future periods.

Okay. And then regarding Doug's questions about expenses, what order of magnitude do you expect the expenses to decline in the first quarter, given the decline in production volume? I know you addressed some of it as being variable expenses, but could you provide more detail on some of the potential expense decline, considering seasonality and changes in production volume?

I think the expenses will actually go up on an overall basis, both in a nominal sense due to some tax implications on how people are compensated. Therefore, I anticipate the overall expenses might be a bit higher, but we will offset that with adjusted staffing levels and how we manage costs in our ongoing operations, which may involve some adjustments. Overall, while the costs might increase on a per-loan basis, the overall fixed costs will also see a small pickup due to those tax features and other relevant items.

Just to add to that, Kevin. It’s important to understand that we’re going to be highly profitable in the first quarter, just like we were in the fourth quarter. So considering expenses in the light of lower volume may invoke concerns, but with our technology and lower cost to originate, that's not going to be an issue. You will notice this in our first quarter numbers.

Your next question comes from the line of James Faucette with Morgan Stanley. Your line is open.

Thank you very much. I’m wondering if you think about the changes in the interest rate environment and the impact that this is having on refinancing generally. Where does cash out refinancing fit in, and can you discuss the traction you may have achieved with cash-out refinancing? Is this impacting your business planning for 2022?

Yes, thanks for the question. Interest rates are moving up, which we are all very aware of. As I’ve mentioned for over a year now, it’s a positive sign for the broker channel and for UWM from a market share perspective. Cash-outs are one way that many lenders will attempt to ramp up their business. We will pursue cash-out refinancing because there is considerable opportunity in that area. However, purchase business is the main driver of success in a rising rate environment. There are many different gimmicks and ways to generate refinancing business, and we will do both refi and cash-outs. Still, it's primarily about focus on purchase volume, and we will begin to see year-over-year indications of who depends on refi and who does not. Cash-out refinancing will be a larger part of the business in 2022, especially with equity in-house; however, it won’t be the saving grace that keeps volumes at levels we saw in 2021. So, when you see our first quarter volume, you will be confident in how we compare to the competition, driving our market share while aligning with the growth of the broker channel. Loan officers are moving to the broker channel, seeing a significant surge since 2018, and it's going to be even bigger than it was then. UWM only competes in 20% of the market via brokers, and as that market grows to 30%, we will grow even amid overall market declines.

Thanks. I also have a quick follow-up on expenses. I believe you touched on this earlier, but I would appreciate more color regarding the trends in production costs. Can you describe what is happening? Given the uplift in compensation expenses and increased production costs around the current quarter, how do you see the future efficiencies in mortgage servicing affecting your expenses overall?

So if you are referring to servicing, I want to clarify if you are inquiring about mortgage servicing or origination.

Yes, I was trying to refer primarily to origination.

Great, thanks for clarifying. As I mentioned earlier, a lot of different technology and efficiency initiatives are put in place, with BOLT being the main one. As that adoption continues, it will serve as a major catalyst for lower costs and more efficiencies. UWM is already the most efficient lender in the country, closing loans faster than the market by a significant margin, even within the purchase market. This is a considerable competitive advantage. Our origination costs are lower, as Tim already shared, which is why we remained highly profitable even when margins were low in Q4. We expect that will continue moving forward, with efficiencies improving as BOLT becomes more prominent. BOLT, along with UClose—our closing technology—are proprietary and effective technologies that help reduce costs, enhance efficiencies, and provide excellent service for our clients.

Your next question comes from Bose George with KBW. Your line is open.

I wanted to ask about the gain on sale margin outlook after the first quarter. Just curious about seasonalities improving, but also your thoughts on competition—will that intensify? What is your outlook for later in the year?

Thanks for the question. Being in the wholesale channel, our margins are generally lower than those in retail. The majority of compression is expected to come from retail lenders who will bring their margins down. As I mentioned in my remarks earlier, I believe we are about at the bottom levels, which is why I guided to 75 to 85 basis points, with the midpoint at 80 bps, which is exactly what we achieved this quarter. Will margins go up in the second, third, and fourth quarters? Yes, or they will remain flat, but I do not anticipate them going down. This is not driven heavily by competitive pressures, but rather by the opportunity to transition loan officers from retail to wholesale channels. Our business development strategy is working exceptionally well, and we feel optimistic about where we are headed. Thus, I do not foresee margins dipping below the 75 to 85 basis points range I provided earlier.

That sounds great. That's helpful. Also, regarding the decision to potentially move servicing in-house— is this purely a cost decision, or are there other benefits as well?

Yes. There are numerous benefits to potentially doing that. We consider a variety of factors, including cost but also service to our consumers and brokers. As our servicing book grows, it becomes a more significant part of our business overall. Thus, we examine every aspect when making this decision. While we currently have great sub-servicing partners delivering excellent service, we’re also actively analyzing the best approach to servicing.

Your next question comes from the line of Henry Coffey with Wedbush. Your line is open.

There’s been a lot of discussion regarding technology. If I were to open a brokerage firm tomorrow, how comprehensive would the United Wholesale offering be? Would I need other resources to originate loans, or can your service cover everything needed for successful loan origination?

Yes, Henry, good question. We have the platform ready. I like to call it a turnkey solution; we refer to it as 'broker in a box' or however else we want to frame it. We can set someone up and running, although the longest hurdle is usually the state licensing or state recognition of the new broker shop. Some states allow this in 30 days, while others might take 90 days. We make the process seamless. Many loan officers reach out to us to start their shops or transition from the retail channel to the broker channel. It’s a broker-in-a-box solution, enabling them to utilize our technology for originating loans, closing loans, maintaining relationships with their past clients, etc. All of this technology is built in-house. Therefore, they won’t need to seek out various vendors to become mortgage brokers, providing us with a massive competitive advantage.

So, I don't need to go to Ellie Mae or another vendor if I'm content just being in the broker channel?

Absolutely.

You spoke a lot about the growth of the broker channel. We have seen some of that statistically in historical numbers. Could you share your thoughts on why you believe it will grow to 30% and over what timeframe?

Yes. It's going to grow to 33% by 2025-2026, which we have projected. You will witness a significant leap in the second, third, and fourth quarters of this year due to the migration of loan officers. We’ve seen multiple retail lenders cut compensation for loan officers, lose money, or struggle; we are not experiencing that. We’re here to guide those loan officers towards success in the broker channel. The major retail lenders tend to churn their servicing books to generate majority volume. So when they claim to retain all their business, that accounts for a significant portion of their origination volumes, which are not part of our origination volumes or that of brokers. This reliance on retail lenders for refinancing is a key reason for the overall increase in originations in the market; brokers don’t face the same scaling issues, and the broker channel will naturally grow as retail declines. It’s a win-win for us, and you will see our market share increase in 2022 to its highest ever.

In terms of overhead, can you provide some insight into what the origination cost to produce a loan was either in the third quarter of the prior year, and what you anticipate it will look like in 2022? Additionally, you mentioned that overhead will be higher in the first quarter, but is that mainly seasonal?

Yes. That’s more of a seasonal function. First of all, expenses tend to be higher in the first two months of the year. Additionally, volume is lower. We generally see the cost around $1,500 and might have been around $1,400 during peak volume in prior years. It can go up to higher levels during specific months; for instance, one month this year saw costs reach as high as $2,000 per loan. Even at those levels, we remain profitable. I don’t expect costs to increase to those levels in 2022 across any quarters. Looking at the overall retail cost structure, even in comparison to increased costs we remain positioned favorably.

Our final question comes from Kevin Barker with Piper Sandler. Your line is open.

Apologies for following up on expenses again, but when I look at your guidance for production income and gain on sale along with origination and servicing, minus the fair value of the MSR, we see about a 20% decline in revenue, while you're indicating that expenses might be flat or possibly up. Wouldn't that imply a strong decline in profitability? You suggested that you'd be quite profitable in the first quarter; could you elaborate on your definition of 'very profitable' or provide context around your projected profitability?

I believe your model may be incorrect, as my perspective is we will indeed be highly profitable. Even if you assume a decline in originations as projected, if we meet our expected figures, we will remain highly profitable. The definition of 'highly profitable' can vary, but you will notice our strong performance in the first quarter indicated by our business model. With low weighted average coupons, our MSRs will also rise, enhancing profitability.

Additionally, our staffing levels have naturally adjusted lower, which means that overall expenses will not reflect volume reductions as heavily. We will look closely at detailed metrics, as Mat stated we monitor this per loan and how it translates to volume. Hence, while the first quarter expenses might seem heightened against the backdrop of decreasing volumes, our overall per loan expenses will be more favorable as we've managed headcount efficiently.

We are not reducing workforce like other companies; this is about making sound business decisions. We aim for consistent growth and strong profitability. You will observe the forthcoming numbers reflecting robust performance across the board, including dividends, which are also strong. We believe in our technology and origination competence, and this will be evident in the numbers moving forward.

That will wrap up the Q&A portion. I would like to turn the call back over to Mat Ishbia for closing remarks.

Yes. Thank you all for your questions and feedback. We appreciate your time, and we are looking forward to another great quarter in 2022, aiming to have one of our best years ever once again. Thank you for your time, and I look forward to speaking with you all during our next quarterly call.

This concludes today's conference call. You may now disconnect.