UWM Holdings Corp Q4 FY2022 Earnings Call

Good morning. My name is Chris, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the UWM Holdings Corporation's Fourth Quarter and Full Year 2022 Earnings Conference 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. Blake Kolo, you may begin your conference.

Good morning. 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 2022 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 Holding Corporation and United Wholesale Mortgage.

Thanks, Blake, and thank you, everyone, for joining us today. I appreciate you being here and look forward to going through another great quarter and an incredible year here at UWM. 2022 was great across the board. As I've been saying all along, a higher interest rate environment is where you'll see the best mortgage companies separate even further from the rest of the mortgage companies remaining, and we definitely saw that happen in 2022. I'm confident UWM is the best mortgage company in America because of our efficiencies and partnership with mortgage brokers. The broker channel is the best place for consumers to get a loan and the best place for loan officers to work, and we're seeing that happen in front of all of our eyes. With that being said, UWM is not slowing down. Regardless of interest rates, we continue to invest in our people and our technology. We continue to focus on our effort to help brokers win in the market. Our 54% market share of the broker channel in the fourth quarter is proof that partnership has never been stronger. And I'm sure everyone knows on this call that this is an all-time market share record in mortgage and a truly amazing accomplishment for the broker channel and for UWM as their partner. Before discussing the fourth quarter, I'd like to touch on a few full year financial and business highlights. So first off, the best purchase year of all time 2022, about $91 billion. Additionally, it's our third best production year with over $127 billion of total production. We delivered almost $1 billion in profit in a market where most lenders lost money, laid off people, or went out of business altogether. I'm also very proud to announce that it's our ninth consecutive quarter paying a $0.10 per share dividend, which is close to a 10% yield at today's stock price. I explained nine quarters ago, when we first went public, that I feel comfortable paying this dividend in various market environments, and we continue to demonstrate this in the best market conditions and even in very tough market conditions. This will continue. Lastly, and most importantly, while my competitors are cutting investments and laying off thousands of people, we continue to invest in technology, take care of our people, and have never laid off a single team member in our 37-year history. I'm extremely proud of our team members and the brokers we are continuing to push forward, grind, and ultimately win regardless of the market. 2023 is another huge opportunity for UWM and the broker community to continue to separate ourselves further from our competition, invest in the future, and continue to win together as a team. Now let's look closely at the fourth quarter. We closed $25.1 billion of production for the quarter, with about $21.7 billion of this coming from purchases. Brokers are dominant in the purchase market, and we see that continuing to happen in 2023 and beyond. As I mentioned earlier, UWM has 54% broker market share in the fourth quarter, the highest share reading ever, up from 41% in the third quarter. This is a result of our commitment to the broker channel. Our partners continue to improve and win regardless of the market. Helping our partners grow faster than the rest of the market has been a huge part of this success. We'll remain dedicated and committed to helping mortgage brokers across America dominate by providing the best service, rates, and technology to their consumers, so they can grow in their individual markets as they continue to win as well. The fourth quarter was our second consecutive quarter as the number one overall mortgage lender in America. To add perspective, this is the third consecutive year as the number one purchase lender, and the eighth consecutive year as the number one wholesale lender. As I said before, doing mortgages, everyone is doing mortgages; it looks decent when rates are low. Succeeding or failing in a high-rate purchase market is what sets us apart. If you actually look at the market, with brokers being about 20% and us being about 54%, we account for about 11% of the overall mortgage market, which is astonishing to think about, especially while we are only in the wholesale channel. This is great for brokers, great for UWM, and we’re continuing to win together as a team. Now in the fourth quarter, we reported a $62.5 million loss, but that's inclusive of about a $151 million decrease in the fair value of MSRs. So we are operationally profitable once again. Our gain margin was 51 basis points, well within our guidance. The momentum with the broker channel has never been stronger in the last six months since announcing our 'game on' strategy, as a result of more retail loan officers joining the wholesale channel than ever before. Additionally, January of this year was the second largest month of all time for retail loan officer conversions. Amazing numbers, and much of that takes six, nine, or twelve months for loan officers to get licensed and switch over. The benefits have not yet fully come to fruition. We're proud of the 'game on' strategy and all the great things it's done for the broker community and for UWM as a partner with brokers. As you can tell, I'm excited about 2023, a year in which we can expect our competitive advantage to continue to clarify to everybody as we continue to invest in our people, brokers, and our business. We know this formula works because we've seen it in similar market cycles and every time we've emerged stronger and more dominant. Right now, it is no different. Before I turn things over to Andrew Hubacker, I want to congratulate him on officially being named Chief Financial Officer. He has done great work since joining us over two years ago, and I'm excited for him to take this next step in his career and continue to help UWM grow and be more successful. So Andrew, take it away.

Thanks, Mat. We finished 2022 strong with fourth quarter production volume on the high end of our outlook and gain margin well within the range we expected. Our fourth quarter profitability was impacted by negative MSR fair value marks, but we delivered strong net income for 2022 in a challenging and volatile mortgage market. The rising rate environment throughout the year resulted in positive MSR fair value marks, but our core purchase business was strong in 2022 with a year-over-year increase in purchase origination volume. We've said this before, but it's worth repeating. Our servicing portfolio remains very strong, with a total UPB of approximately $312 billion as of the end of 2022, as newly originated and retained MSRs largely kept pace with sales and payoffs throughout the year. With a low delinquency rate and high asset quality, our MSR portfolio remains strong and continues to provide balance to our business model, a recurring quarterly cash flow stream and a strategic source of additional liquidity if and when we choose to sell our MSRs in the bulk secondary market. On the call last quarter, we discussed steps we took in Q3 to further enhance our access to liquidity, which included establishing a line of credit secured by our agency MSRs. Our available borrowing capacity on the secured facility was $750 million at the end of the year, and our total available liquidity increased to approximately $2.1 billion as of the end of 2022 compared to just over $700 million at the end of 2021. We believe the measures we took last year and plan to continue in 2023 to enhance our liquidity will allow for our continued investments in growing both the wholesale channel and our market share. On the cost side, we continue to focus on prudent cost management in the current origination environment. Excluding the impact of an incremental addition to our repurchase reserves recorded in Q4 due to changes in estimates and increased interest expense from borrowings under the secured line of credit, total expenses decreased in Q4. Year-to-date, total operational expenses are also down as our cost structure aligns with the current mortgage origination environment. Okay, I'll turn things back over to our Chairman and CEO, Mat Ishbia, for some closing remarks.

Yes. Thanks a lot, Andrew. Before the Q&A, I want to make a quick few points to everybody: 2023 will be the year that continues to separate the best lenders from the rest. We'll continue to support the broker channel, do everything we can to help them be successful and continue to grow. At UWM, we're investing in people, processes, and technology, continuing to deliver the best service experience for our brokers. In fact, this year, we're expecting to have over 20,000 loan officers come to our campus to get trained, improve their game, and continue to grow their business, including as many of you guys know, UWM LIVE!, which has been a huge success. Many of you on the call attended last year, but you can join us again this year on May 4. We expect that to be the biggest mortgage event of the year in the entire industry here at UWM. I'll be speaking at it. Tony Robbins will be speaking at it. We'll have a couple of great brokers there. It will be a great all-around event. We'd love to have some of you out there. Lastly, I want to touch on our business strategy, which I believe is undervalued by the investment community. We have control of our business. The decisions we make are intentional and for the long-term success of the business, what I continue to tell you on these calls continues to happen quarter over quarter. I think we continue to demonstrate great control of our margins and our business in general. I've consistently said that 75 to 100 basis points of annualized margin is what you can expect in a truly purchase-heavy market or a higher rate environment. As you saw, the full year ended in that range, and now we're back to guiding that range again for Q1 2023. With that said, we expect Q1 production to be between $16 billion and $23 billion, and our margins would be in the range of 75 to 100 basis points. We have complete control of our business, our margins, and what's happening here at UWM, and that we've been consistent with our strategy, and the results have shown that. I want to thank our amazing team members at UWM for a great year in 2022, and we look forward to dominating again in 2023. I'll pause now and turn it back over to Q&A for all of you, and I look forward to answering some of your questions.

The first question is from Bose George with KBW. Your line is open.

Hey, good morning. So I wanted to start with a question just on market share. Obviously, a very impressive level just in terms of both the share overall and of the broker channel. Just can you remind us where you think the broker channel as a whole could go to? And with your share at 54%, do you think that's peaked? And where do you think that trends?

Yes. Thanks for the question. I appreciate it. If you go back to the roadshow when we went public, and that's why I think it's important for people to reference what we said back then because it is happening now. I stated that UWM could get to 40% market share in the broker channel, and that the broker channel should be about 30% of the overall market. I projected 33% by 2025 or 2026; I still believe in those numbers. A 54% share is incredibly high. We account for 11% of the overall market, but what I stated then was 40% of the broker channel, 30% of the overall industry's brokers would be about 12% of our market share. I still see that trend. Do I think UWM will stay at 54% forever? No, but I do believe that 11% to 12% of the overall market is realistic. Looking at our performance, we are less impacted by market cycles than our competitors. No one expected 2022, and we still made about $1 billion. We are doing very well in terms of market share and profitability, and we continue to pay the dividend. So the way I view market share is that the broker channel will reach 30%, eventually 33%, with us targeting 40%-plus of that share. Thus, 40% of a larger pie being 11% to 12% of the mortgage market overall is something I am quite proud of, particularly in a purchase market.

Okay, great. Makes sense. Thank you. I just have one question about the margin guidance. Does that suggest that Game On will have a reduced impact in the first quarter?

Yes. The way I look at it is that Game On has made a significant impact. We still have very competitive pricing, which is why the margins remain in that 75 to 100 range. However, I have control over that. I decide when we want to change things and tweak them, while doing things to help our brokers. As you can see with Game On, our pricing is still incredibly competitive. Brokers have competitive pricing, which is assisting them in growing their businesses. But I don't expect to see the investment of being at 50 basis point margins continue unless I choose to go down that path again. As of now, I do not have an expectation of that.

Okay, great. Thanks a lot.

The next question is from Eric Hagen with BTIG. Your line is open.

Hey, good morning. Good to hear from you. I have a couple of questions. We know that interest rate buy-downs have been popular for borrowers facing affordability challenges. Are there any limitations you see to continue offering that solution if rates rise even higher? Also, how valuable is that opportunity going forward?

Yes. Thanks for the question, Eric. I appreciate it. The buy-down opportunity is excellent. It's a 2-1 buy-down, 1-0 buy-down, and even a 3-2-1 buy-down. The key is that mortgage brokers are knowledgeable and understand they have those options available; those will continue to be viable. They don’t go away or change; they are robust opportunities. Whether it affects affordability or not, for us, it provides a borrower the consistency of a 30-year fixed mortgage but with a lower rate or payment for the first couple of years, depending on the buy-down product. It has been highly successful. Instead of real estate agents and sellers lowering their prices, they can contribute towards a buy-down, creating opportunity. We are witnessing a lot of this, and it's working quite well. As the largest purchase lender in the country, we are leading this initiative, and it's being utilized significantly right now.

Yes. That's really helpful detail. There's lots of focus on bulk MSR supply, which has a strong pipeline. I'm curious how you view the opportunity and value of selling MSRs against that backdrop, and how you view doing that versus drawing against the MSR financing you have? Thank you.

Yes. Thank you for the question. I think there is a lot more being made of this large amount of supply hitting the market than there is a real concern. UWM's liquidity is extremely strong. We believe the MSR market is actually more liquid than people are recognizing, and we are taking advantage of that. We can, if we want to, tap the MSR line or sell MSRs; we have multiple options. Liquidity is not a concern. It is always a consideration in the mortgage business, but it's not for UWM thanks to our finance team and our MSR sales team. We are opportunistic and are in the exact position we desire. Our MSR book is strong and produces significant liquidity. Moreover, if we decide to sell, we can. I believe there is more discussion surrounding this than the issue's actual severity, particularly for companies struggling with the perception of their operations. We are the strongest mortgage company in America, and people recognize that.

Yes. That's helpful detail. Thank you very much.

The next question is from Doug Harter with Credit Suisse. Your line is open.

Thanks. Just to follow up, can you talk about how you see your market share trends now that you have pulled back from 'Game On' and how sticky you believe the additions of brokers will be?

Yes. Thanks for the question. I talked about this even when we rolled out 'Game On.' The expectation of my success was never solely about market share—it did help market share, certainly. The goal was to grow the broker channel, help the loan officer in the broker channel get new relationships, win more loans, and educate consumers about how it is $9,400 cheaper to go through a mortgage broker versus a retail lender or major bank. That's why the large banks are retreating and why companies like Rocket are struggling. 'Game On' accelerated that and highlighted it even further. It will be interesting to watch how this evolves. While I don't expect our market share to stay at 54%, I didn't foresee it reaching that level to begin with. We had seen this before during our last public offering in 2019. We know how to control the stickiness and ensure clients understand the value we offer. Once a loan officer experiences our offerings, they realize it is faster, easier, and cheaper with UWM. So many loan officers confirm that they can call any loan officer in the mortgage space, and those who have used UWM will tell you how compelling it is. While I don't believe we will maintain that 54%, I do believe we will solidly exceed our historic averages as time goes on.

I appreciate that. Thanks, Mat.

The next question is from Steve Delaney, a research analyst. Your line is open.

Thanks. Good morning, Mat, and everyone at UWM. There's a lot of focus on the originations side of the business, but I'd like to discuss servicing for a moment. With rising rates, the economy is holding steady in terms of employment, but at some point the higher rates will have an impact. Are you seeing any increases in delinquency, special servicing, servicing advances that can follow delinquency? Are you experiencing any pressure on your servicing costs per unit?

Yes. Thank you for the question and the focus on servicing; I understand that it is important. What we've done differently is that our performance has seen no negative impacts at all. Our delinquency rate at UWM is lower than almost anyone in the country. The FICO scores of the loans that UWM handles are among the highest across the nation. Thus, my servicing costs remain low, and my delinquency rates stay low. Employment statistics impacting the economy have less of an effect on us compared to others; we are less cyclical and are more secured due to our business model and the types of loans we handle.

That's helpful. And lastly, congratulations on your successful bid to acquire a leading NBA franchise. From an investor standpoint in UWMC, could you elaborate on the impact, if any, this opportunity may have on your equity commitment to UWMC moving forward?

Thank you for the question. I'm excited about the Phoenix Suns and Phoenix Mercury, an opportunity that is outside of UWM and has been a lifelong dream of mine. However, I want to emphasize that there will be zero impact on UWM; if anything, it will yield a positive effect. My involvement will enhance the recognition of UWM and the broker channel, educating consumers and expanding their reach. The increased visibility will benefit us, as people will be more aware of our offerings. This endeavor will not take more of my time; in fact, I may find myself having more time to focus on UWM moving forward. Hence, I don't foresee any impact on our equity commitment, and I remain dedicated to our investors. Thank you.

Thank you. I appreciate it.

Are there any other questions? I feel like there are some in the queue.

Operator. Are there any other questions? I see some in the queue. If not, we can close the meeting now. But I want to ensure I answer any questions that are out there. Operator, are there other questions? I see a couple from Kevin Barger; I hope he can speak. All right. Well, there seems to be an issue with the operator. If anyone wants to reach out, I see Kevin and a couple of questions there. You can contact Blake Kolo, our Chief Business Officer and Head of Investor Relations. You can also reach out to me directly. But I'll close with this: UWM had an amazing 2022, and I’m incredibly optimistic about 2023 and the opportunity ahead. We are the biggest and best mortgage company in the country. We will maintain that position and continue to grow, dominate, and increase our market share while helping brokers win and supporting consumers. UWM and our investors will see the benefits of our dividend and all the excellent things we've got planned. Thank you for your questions. We are excited about 2023.