Guild Company - Earnings Call - Q1 2021
May 11, 2021
Transcript
Speaker 0
Good morning, ladies and gentlemen, and welcome to the Guild Holdings Company First Quarter twenty twenty one Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. As a reminder, this call is being recorded. I would now like to turn the conference over to Michael Kim, Investor Relations.
Please go ahead,
Speaker 1
Thank you, and good morning, everyone. Before we begin, I'd 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 Form 10 ks and 10 Q and other reports filed with the U. S.
Securities and Exchange Commission. Additionally, today's remarks will refer to certain non GAAP financial measures. Reconciliations of non GAAP financial measures, where appropriate, to the corresponding GAAP measures can be found in today's earnings release filed with the SEC as well as on Guild's Investor Relations website. Participating in the call today are Chief Executive Officer, Mary Anne McGarry President, Terry Schmidt and Chief Operating Officer, David Nalen. Now I'd like to turn the call over to Mary Anne McGarry.
Mary Anne?
Speaker 2
Thanks, Michael, and good morning, everyone. We've got a fair amount to cover today with our earnings and the acquisition we announced this morning. And we want to make sure to leave plenty of time to address questions. So let's get started. Teri and I will walk through highlights from our first quarter results and then we'll turn our attention to our acquisition of Residential Mortgage Services or RMS for short.
We posted a presentation on our website and we'll be referencing during our prepared remarks. So starting on Slide three, key highlights for the first quarter included strong growth in originations with funded volumes up 70% year over year. In turn, our net revenue more than tripled while our net income and adjusted net income were up strongly versus the prior year quarter. We believe our results reinforce our differentiated business model focused on purchase lending, which has generated more consistent origination volumes and higher returns versus refinancing activity across interest rate cycles. Furthermore, our expanding geographic footprint both through acquisitions and organic growth remains a key competitive advantage when it comes to driving profitable growth and shareholder value.
We are growing our business in existing MSAs and entering new markets by recruiting loan officers to our platform. Over the last five years, 80% of Guild's production has come from loan officers that are still with Guild. This approach results in our high retention rates and our ongoing coaching programs and system enhancements drive improving productivity for our existing loan officers. Technology continues to reshape the mortgage industry and we believe our proprietary platform will increasingly add value. Our data analytics help us optimize prospecting, while our digital capabilities provide clients with a full suite of production and fulfillment services.
And we focus on optimizing the servicing portfolio and client retention. Originating loan officers maintain relationships, which drives repeat business. And our data reinforces the efficacy of our model with our refinance recapture rate remaining strong at 69% for the quarter. So with that, I'd like to turn it over to our President, Teri Schmidt. Teri?
Speaker 3
Thanks, Mary Anne. We're pleased to again report strong financial results for Guild Holdings Company. For the 2021, we generated $9,800,000,000 of loan originations, representing 70% growth year over year. Net revenue totaled $526,000,000 up more than 200% from $170,000,000 in the 2020, while net income totaled $161,000,000 or $2.67 per diluted share. Adjusted net income, which excludes the change in fair value of MSRs due to model inputs and assumptions, acquisition related contingent liabilities and stock based compensation, was up 84% year over year to $106,000,000 primarily driven by the strong growth in origination volumes.
And we generated adjusted earnings per share of 1.77 for the quarter. Starting with our origination segment, volume growth over the year ago quarter remained strong. Pull through adjusted locked volume totaled $9,300,000,000 in the first quarter with 37% of closed loan origination volume from purchased business compared to the Mortgage Bankers Association average of 29%. Gain on sale margins on originations increased by 9% year over year to four fifty seven basis points, while the margin on pull through adjusted locked volume grew 61% year over year to four eighty basis points. Segment net revenue grew 86% year over year to $448,000,000 primarily driven by higher loan origination fees and gain on sale of loans.
Putting it all together, the origination segment net income increased to $160,000,000 for the quarter, up 133 year over year from $69,000,000 Turning to our servicing business, our unpaid principal balance grew 25% year over year to $63,000,000,000 as of 03/31/2021. Following suit, total loan servicing and other fees increased by 17% year over year to $45,000,000 for the 2021, with net income attributed to the servicing segment totaling $67,000,000 compared to a loss of $79,000,000 in the prior year quarter, largely reflecting a favorable turnaround in MSR fair value adjustments. Importantly, we retained servicing rights for 94% of total loans sold in the 2021, further reinforcing our symbiotic business model that drives sustainable growth across a variety of market and interest rate backdrops. Our balance sheet remains strong and highly liquid with $315,000,000 of cash and cash equivalents, excluding funds used to pay down our warehouse lines as well as $2,100,000,000 of warehouse lines of credit with unused capacity of $1,000,000,000 as of 03/31/2021. We remain focused on capital allocation to drive long term value for our shareholders.
In addition to funding originations, ongoing reinvestment in the business and the RMS acquisition, the Board of Directors declared a special cash dividend of $1 per share payable on or about 05/28/2021 to our Class A and Class B common stockholders of record on 05/21/2021. While we are not providing forward looking guidance, we did want to provide an update on the second quarter. To that point, for April 2021, our loan origination volume was 2,800,000,000.0 and total pull through adjusted locked volume was approximately $2,500,000,000 In looking ahead, as many others in the industry have communicated, we do anticipate several macro factors to challenge near term growth prospects for the mortgage industry more broadly. From a volume perspective, refinance activity likely continues to soften as interest rates rise. Turning now to profitability.
Gain on sale margins will likely normalize as supply and demand trends converge and competition remains intense. We are not immune to these macro headwinds, which we expect will impact near term trends across origination volumes, gain on sale margins, revenue and earnings. That said, we remain confident in delivering sustainable and profitable growth across cycles reinforced by our sixty year track record, reflecting our differentiated purchase focused business model and scale enabled retail distribution platform combined with our proprietary technology stack. More specifically, industry origination volumes are expected to increasingly favor purchase volumes as interest rate cycles turn. Moreover, our purchase business is different in that we compete on service, not price, and leverage our long standing relationships with existing referral partners and past clients.
Finally, the retail channel has historically driven higher gain on sale margins relative to the wholesale and correspondent channels. So now let me turn it back to Mary Anne to discuss our exciting residential mortgage services acquisition. Mary Anne?
Speaker 2
Thanks, Teri. We're pleased to announce the acquisition of residential mortgage services. We think this transaction is compelling from a strategic and financial perspective and represents a very attractive use of capital. Teri and I will provide some of the transaction highlights. Let me start by emphasizing this is a powerful combination that will be accretive to earnings with RMS increasingly leveraging Guild's scale, technology and in house platform to accelerate growth in originations, market share and profitability as we move forward.
The upfront purchase price equates to 3.25 times estimated 2021 earnings, which we believe is an attractive valuation multiple. The upfront consideration will consist of 91% cash and 9% stock. In addition, the transaction structure includes an earn out component to align our interests. More specifically, the consideration includes a three year earn out that is capped at 50% of RMS's pretax production segment earnings subject to minimum profitability hurdles. This transaction is expected to close in the 2021 and RMS's management team and key personnel will continue to run their business.
Turning to Slide nine, let me walk through the transaction highlights. First, RMS' impressive leading position in the Northeast will extend and complement our geographic footprint into key markets, thereby meaningfully enhancing our prospects for growth. By leveraging Guild's in house servicing capabilities, technology and expertise, RMS will be better positioned to extend the length of client relationships and capture repeat business. Second, RMS's business mix is highly aligned in mirrors guilds in terms of their focus on purchase business through the retail channel. Since 2010, purchase origination volumes as a percentage of total originations have averaged 69% at Guild and 70% for RMS or 2223% higher than the broader market respectfully.
We believe this positions us well to continue to generate durable volume and consistent margins post close. Similarities in strategy and a client centric approach will allow us to provide clients with a consistent experience across The United States and efficiently integrate RMS. Third, as I mentioned earlier, the transaction is very compelling from a financial standpoint. We are leveraging our strong and liquid balance sheet and we expect the transaction to be accretive to twenty twenty one earnings per share. Fourth, the deal represents a great opportunity to invest excess cash to generate an attractive return on capital.
Fifth, there's a strong culture alignment with both teams dedicated to supporting local communities and building trusted client relations. Our similar values will enable GIL to efficiently integrate RMS and provide clients with a memorable customer experience across The United States. Sixth, we expect to generate enhanced gain on sale margins for RMS and realize expense synergies over time, further strengthening our proven M and A track record. And finally, this is our seventh successful acquisition since 2008 reinforcing our proven and disciplined M and A strategy. Turning to Slide 10, RMS is an independent retail lender with a strong presence in the Northeast.
Founded in 1991, the company has offices across 14 New England and Mid Atlantic states and is the number one purchase lender in Maine and New Hampshire. Led by President and CEO, James Seeley, RMS maintains a strong and tenured management team. While 2020 was a banner year for RMS with $8,500,000,000 of originations and more than $100,000,000 of net income, even more impressive is the company's strong and consistent growth and business mix over time. Origination volumes have compounded at an annual growth rate of 26% while purchase loans have accounted for 70% of total origination volumes over the last ten years as shown in the appendix. So in summary, we expect this transaction will strengthen our platform given the many synergies between our geographic reach, products, sales tools and servicing teams.
As a result, we are even more confident in being able to deliver profitable growth across cycles and drive long term value for shareholders. So with that, I will pass it back over to Teri to discuss the business and financial benefits in greater detail. Thank you, Mary Anne.
Speaker 3
I wanted to spend some time walking through the strategic and financial attributes for this transaction on Slide 11. At a high level, RMS fits well into our disciplined acquisition strategy given the firm's strong presence in local markets, purchase orientation and cultural alignment. More specifically, RMS brings immediate scale to a new region with strong potential upside for growth under Guild's leadership. And there is a great deal of consistency across our two firms as it relates to business mixes, distribution channel focus, marketing strategies and corporate cultures. We believe these similarities will facilitate a smooth integration process, ongoing excellence in customer service and sustainable origination volumes, margins and earnings even as the interest rate backdrop shifts.
From a financial standpoint, we expect acquisition to be highly accretive from an earnings perspective as we anticipate driving synergies over time reflecting our proven execution capabilities and operational expertise, even as RMS already maintains attractive ROEs on a stand alone basis. So the transaction opens up a sizable and previously untapped market for us with strong potential upside for growth, and you can see the strong and consistent growth RMS has generated over the last ten years on Slide 18 in the appendix. Moving over to Slide 12 maps out our geographic reach before and after the RMS acquisition. As clearly demonstrated, the acquisition of RMS further enhances our nationwide presence and provides a strong foothold in the Northeast. Through the transaction, we will add two fifty loan officers in approximately 70 branch locations, bringing our total loan officer count to more than thirteen fifty across two seventy retail branches.
On Slide 13, we lay out how adding RMS in the mix leverages our core competencies and enhances our competitive positioning and growth prospects. As mentioned earlier, RMS' business mix is strongly aligned consistent with the GILD footprint given its purchase focused retail strategy. Pro form a for the acquisition, GILD with RMS combined generated $42,000,000,000 of retail channel originations last year, ranking seventh amongst nonbank lenders in 2020, as shown on the chart on the bottom left. And looking at the five year period ended 12/31/2020, purchase loans accounted for 72% of RMS' origination volumes, bringing our pro form a mix to 66% or 15 percentage points above the overall market at 51%. In essence, we are doubling down on the purchase market with the retail channel, which we believe will drive more consistent earnings and more attractive gain on sale margins across interest rate cycles.
We have a history of growing through targeted acquisitions with a disciplined strategy and proven track record as shown on Slide 14. More broadly, we look to partner with management teams that share our values and commitment to innovation, creativity and collaboration. We continue to focus on companies that maintain strong positions in local markets with clearly defined approaches to driving sustainable growth. We prioritize incorporating meaningful earn outs as a key component of transaction structures to align interest and maintain attractive return on investment. And post acquisition, while we implement integration plans to optimize operational efficiencies, we also allow them to continue executing on the strategies that have driven historical growth and made them successful.
Another key component of our strategy is driving strong growth and realizing meaningful synergies post acquisition. Looking back across the six transactions completed over the last twelve years, origination volumes for acquired companies increased by averages of 2937% in the second and third years following each transaction closing. Finally, Slide 15 shows the timeline for the seven acquisitions we have made since 02/2008. While the transactions had varied in terms of sizes, footprints and contributions,
Speaker 2
we've
Speaker 3
been able to consistently enhance growth post acquisition. Drivers include increasing market share and volumes, enhancing gain on sale margins, leveraging Guild's proprietary technology platform to improve efficiencies and realize expense synergies. Looking ahead, we expect to continue to leverage our public currency and strong brand to further accelerate growth with ample balance sheet capacity to capitalize on incremental M and A opportunities should they arise. Before we take questions, we wanted to wish Amber, our CFO, and her new baby well. So with that, I will turn it back to the operator to open up the call for questions.
Operator?
Speaker 0
Thank you. We will now begin the question and answer session. The first question comes from Don Fandetti with Wells Fargo. Please go ahead.
Speaker 4
Hi, good morning. So it looks like gain on sale margin held up pretty well in Q1 and March. I was wondering if you could talk a little bit about the near term outlook in April and going forward getting on sale for adjusted lock volumes. A lot of peers have talked about significant contraction in that margin.
Speaker 3
Sure, I can take that question. This is Terry. Yeah. We we are following the industry as far as getting caught up with capacity and seeing that the industry is is just the margins are tightening, getting back to normalized levels. So, historically, we, outside of refinance periods, we've averaged about three eighty basis points in gain on sale and expect that that type of trend is we're starting to see that similar to our historical levels.
Speaker 4
Got it. And then on the dividend, the dollar special dividend, is that going to be the sort of plan going forward that we'll see special rather than a quarterly ongoing dividend?
Speaker 2
This is Diane. Yes.
Speaker 4
Okay. All right. Thank you.
Speaker 2
Thanks, Don.
Speaker 0
The next question comes from Rick Shane with JPMorgan. Please go ahead.
Speaker 5
Thanks for taking my question. And Don really hit upon it in terms of what you see in terms of normalization gain on sale. Two things to explore just a little bit further. As we reach equilibrium just like we saw, a period of gain on sale that exceeded historical norms, where do you think we could where historically have you seen a trough during the periods where equilibrium is resetting and supply actually exceeds demand?
Speaker 3
You know, we're not giving forward guidance on on, gain on sale. However, I would say that historically, the the the low was probably about 50 basis points below the three eighty mark. But on average, again, we've we've over time been extremely consistent at the three eighty mark.
Speaker 5
Got it. And I appreciate both that that is not guidance and also your willingness to provide some context. Both are helpful. As that shifts, should we think about the composition of gain on sale shifting a little bit in terms of mix of cash and MSR cap as well?
Speaker 3
I would say that would be the case because as rates rise, the value of the MSR goes up. So and and we're already seeing that our, you know, MSR value because of the rate increasing, the prepayment speed slowing down, the values are starting to increase. So it will change somewhat to be a little bit higher weighted on MSRs on the MSR side.
Speaker 5
Got it. And then and then last question. When when we think about that cash mix and we think about your commission expense, can you reach a level where the cash gain on sale is below commission, or is it going to it does it sort of do you just reach a point of breakeven? How should we think about that just from a cash flow perspective?
Speaker 3
Historically, we've never reached that point.
Speaker 5
Okay, great. Thank you guys very much and congratulations to Amber.
Speaker 3
Thank you.
Speaker 0
The next question comes from Trevor Cranston with JMP Securities. Please go ahead.
Speaker 1
Hi, thanks.
Speaker 4
So on the RMS acquisition, first, just a point of clarification. When you mentioned the purchase price and the company's tangible book value, is the expected purchase price just equal to tangible book value or is there any sort of premium to book built into that?
Speaker 3
There is a $8,080,000,000 dollar premium cash premium that we're paying above book, tangible
Speaker 5
book.
Speaker 4
Okay. I got you. And can you say how much of their book value? How much how large their servicing portfolio is that'll be coming over as part of the acquisition?
Speaker 3
Sure. They have a $700,000,000 approximate servicing portfolio, so it's very small. So we really looked at this transaction as a multiple of earnings because their balance sheet is really mostly short term inventory related, and the entire balance sheet outside of the MSR will probably turn in, you know, ninety days. So it's really an earnings multiple play.
Speaker 4
Okay. That makes sense. And I guess, you know, as you as you laid out the sort of similarities in in the companies and and why it was an attractive target for you guys to go after. And as you mentioned the synergies you expect to be able to realize over time. I guess, has has RMS historically been a company that's been able to recapture on servicing, or is that not really been something that they focus on?
And is that, you know, a part of the sort of synergy that you you guys then come through for the combined company over time is is bringing the recapture expertise you guys have to to the business that they've been doing? Thanks.
Speaker 2
Trevor, this is Mary Anne. I can answer that. What we see is they have a strong purchase hold. And since they don't have a portfolio, they don't recapture like we have and don't have we see that as a synergy going forward. But they have such strong customer relationships that they did do a fair amount of refinance transactions just from their own CRM and building relationships.
But we see that as a very, positive synergy going forward. And with our platform and technology and ability to stay, connected with our customers through the life of the loan, we feel, that they will, benefit from our, technology and CRM platform.
Speaker 3
Yeah. To to add to Mary Anne's point, their their their business model has been primarily to sell on a service release basis and and and or sell the servicing on a flow basis. So they their servicing was so small just when when the there was some liquidity issues back in March. They started retaining some some volume, but their long term plan has been to service relief. So they are super, super excited to be at Guild to be able to get that to to drive that life of of life of loan and customer for life concept.
And that that they just feel like that's such a huge part of growing their business going forward. So we're really excited.
Speaker 4
Okay. That makes a lot of sense. Thanks for the comments.
Speaker 0
Mhmm. The next questioner is Giuliano Bologna with Compass Point. Please go ahead.
Speaker 6
Good morning and congratulations on a great and productive quarter with the dividend and the acquisition. Guess starting off with a little bit more of a kind of a little more housekeeping types of questions. I'd be curious how much cash is currently being used to pay down the warehouse lines and also the MSR lines, just to get a sense of kind of what your total you know, liquidity is. And and then in a a similar kind of cleanup topic is if if there's any Ginnie Mae, EVO contribution in the period.
Speaker 3
Sure. So our cash at the '1 was $315,000,000 and our buy down on the warehouse side was $131,000,000 So if you add that, our total cash was about 426,000,000. And then we actually paid down our MSR financing at the end of the year, and so our MSR is leveraged at about 30%. So we've got a lot of capacity there to borrow. So we're in still very good shape from a cash perspective, and we feel like we have, you know, a lot of different levers to get to liquidity if we needed it.
And so we're we feel very, comfortable where we're at.
Speaker 6
That sounds very good. Then switching over to the account of the acquisition for quite quickly. Obviously, they've been selling on a service release basis the majority of their production volume historically. I would be curious from a margin perspective, obviously, some margin impacts to that. And I'm curious if there's margin upside opportunities.
I realize it's not necessarily it's hard to necessarily say exactly where that is going forward because the forward numbers will change. But is there an opportunity for Guild to increase margins just by having the ability to retain servicing and then also there are opportunities on the back end with recapture, also earning out the MSRs, etcetera. I'm kind curious if there's a different factors that could come into play here.
Speaker 2
Yes. Yes. We believe there is a good opportunity to improve the execution on the secondary side and by retaining the servicing. So in the past, we've been able to increase, improve the execution by twenty, twenty five basis points at a minimum with past acquisitions. And we believe that we'll be able to do that as well with going forward with RMS.
Speaker 6
That sounds good. And I think historically, I think going back, Gildan's for the past decade or so has been cash flow positive on origination going on a pretax basis. And that there's some factors also beyond that around selling some servicing release. I'm kind of curious how are MedAssets in if they're in a similar position if they would be in a similar position if they shifted over to your kind of mix of servicing retained versus released?
Speaker 2
Yeah. We believe that in, over time, they will mirror Guild's performance and their business mix is very, very comparable to Guild's. And we believe that, it they will eventually, when when we're fully integrated, look like Gil and everything else we have. Yeah. To Mary Anne's point,
Speaker 3
you gotta keep in mind that this is a big transaction and it's gonna take us, we feel, through the end of the year to completely integrate them onto our platform. So once they're completely on our platform, then we're gonna experience they will experience the the the gain on sale margins based on Gil's execution and retaining, but it will take through the end of the year the transition.
Speaker 6
And then just a very quick one on that. I was curious if there was any Ginnie Mae or Ginnie Mae EBITDA contribution in the quarter? And if there was, if you see that recurring?
Speaker 2
Ginnie Mae contribution, you mean?
Speaker 6
From from from some of the the early buyouts, if you're
Speaker 2
Yes.
Speaker 3
There yes. There has been. I I've I've gotta get that number for you. I can I can respond by I'll have to look look at the number? But, yes, there there has been, and it is increasing.
We bought a decent amount of loans for us, a decent amount of loans. We did early buyouts this first quarter. So it is, yes, it is growing.
Speaker 2
But it's not a material number. Yeah.
Speaker 3
Here it is. I I found it. It was about a million 8 for q one, and compared to 2020, it was $1,000,000
Speaker 6
That's great and very helpful. I appreciate the time and congratulations to Amber. I will jump back in queue now.
Speaker 0
This concludes the question and answer session. I would like to turn the conference back over to Mary Anne McGarry, the CEO, for any closing remarks.
Speaker 2
Well, thank you everyone for your time and interest, and we look forward to continuing to discuss our progress on future calls. Thank you.
Speaker 0
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.