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ONITY GROUP INC. (OCN)·Q2 2024 Earnings Summary

Executive Summary

  • Q2 2024 delivered solid operational performance: adjusted pre-tax income of $32 million and annualized adjusted pre-tax ROE of 28%, while GAAP net income was $11 million and diluted EPS was $1.33 . Revenue was $246.4 million, with servicing and subservicing fees of $210.8 million; the variance between GAAP and adjusted results reflected unfavorable MSR fair value adjustments driven by elevated hedge costs .
  • Liquidity and book value improved: total liquidity rose to $231 million and book value per share reached $57 by quarter-end; ending servicing UPB climbed to $304 billion and ending subservicing UPB to $173 billion, up 6% and 10% versus December 31, 2023 .
  • Strategic catalyst: Onity entered a letter of intent to acquire reverse mortgage assets from Waterfall Asset Management, intending to issue $51.7 million in new, non-convertible, cumulative preferred stock; management expects immediate accretion to earnings and cash flows upon closing in H2 2024 .
  • Estimates context: S&P Global consensus data was unavailable for OCN due to a mapping issue; third-party sources indicated an EPS miss of $0.03 and revenue miss of ~$22 million for the quarter, relative to publicized consensus figures .

What Went Well and What Went Wrong

What Went Well

  • Adjusted performance and ROE: Adjusted pre-tax income reached $32 million with 28% annualized adjusted pre-tax ROE, underscoring strong servicing segment execution . CEO quote: “This quarter’s results provide the clearest demonstration yet that our articulated strategy and financial objectives are sound, and our execution is strong” — Glen Messina .
  • Balance sheet and capital metrics improved: Total liquidity increased to $231 million; debt-to-equity ratio improved to 3.88:1; book value per share rose to $57 .
  • Growth in volumes and UPB: Originations volume rose 51% q/q to $7 billion, demonstrating MSR replenishment capability; total servicing additions were $19 billion (with $12 billion subservicing), and ending servicing UPB reached $304 billion (ending subservicing UPB $173 billion) .

What Went Wrong

  • GAAP results impacted by MSR valuation and hedge costs: MSR valuation adjustments were negative $32.7 million vs. negative $11.6 million in Q1, with management citing elevated hedge costs as a driver of the GAAP-adjusted gap .
  • Year-over-year revenue pressure: Total revenue declined to $246.4 million from $272.0 million in Q2 2023; servicing and subservicing fees fell to $210.8 million from $237.6 million y/y .
  • Net income and EPS lower sequentially: Net income was $10.5–$11.0 million vs. $30.1 million in Q1 and diluted EPS $1.33 vs. $3.74 in Q1, reflecting heavier MSR valuation headwinds and higher interest expenses in Q2 .

Financial Results

Revenue, EPS, and Net Income vs Prior Periods and Estimates

MetricQ2 2023Q1 2024Q2 2024Notes
Total Revenue ($USD Millions)$272.0 $239.1 $246.4
Net Income ($USD Millions)$15.5 $30.1 $10.5 Press release headline net income: $11 million
Diluted EPS ($USD)$1.95 $3.74 $1.33
S&P Global EPS ConsensusUnavailable*—Unavailable*S&P Global data unavailable
S&P Global Revenue Consensus ($USD Millions)Unavailable*—Unavailable*S&P Global data unavailable
External (3rd-party) Consensus Comparison——EPS miss $0.03; Revenue miss ~$22.1M External source, not S&P Global

*Values retrieved from S&P Global were unavailable due to mapping constraints.

Revenue Components

Component ($USD Millions)Q2 2023Q1 2024Q2 2024
Servicing & Subservicing Fees$237.6 $204.5 $210.8
Gain on Reverse Loans & HMBS, net$0.7 $15.4 $8.5
Gain on Loans Held for Sale, net$25.3 $10.9 $16.5
Other Revenue, net$8.5 $8.3 $10.6
Total Revenue$272.0 $239.1 $246.4

Operating Expenses and Other Income (Expense)

Line ($USD Millions)Q2 2023Q1 2024Q2 2024
MSR Valuation Adjustments, net$(48.9) $(11.6) $(32.7)
Total Operating Expenses$84.3 $104.4 $104.0
Other Income (Expense), net$(122.5) $(91.3) $(96.2)
Income (Loss) Before Taxes$16.3 $31.8 $13.5

Non-GAAP “Notables” and Adjusted Pre-Tax Income

($USD Millions)Q2 2023Q1 2024Q2 2024
Total MSR Valuation Adjustments due to rates & assumptions, net$(33) $20 $(16)
Total Other Notables (Expense + Other)$27 $(2) $(2)
Total Notables$(6) $18 $(18)
Adjusted Pre-Tax Income (Loss)$23 $14 $32

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Quantitative financial guidance (revenue/margins/OpEx)2H 2024Not providedNot providedMaintained: No explicit quantitative guidance in release
Reverse mortgage assets acquisition (Waterfall/MAM)H2 2024—LOI signed; expected close H2 2024; projected UPB ~$3B; target aggregate NAV ~$55M New strategic item
Financing terms (preferred stock issued to Waterfall)H2 2024—$51.7M par; 7.875% dividend for 5 years, +2.5% annually thereafter up to 15% cap; non-convertible, cumulative; callable after 4 years New capital instrument
Management expectation on acquisitionH2 2024—“Accretive to earnings and cash flows immediately upon closing” New qualitative guidance

Earnings Call Themes & Trends

TopicPrevious Mentions (Q4 2023)Previous Mentions (Q1 2024)Current Period (Q2 2024)Trend
MSR hedging & valuationIncreased hedge coverage to ~100%; optimizing strategy Continued balanced business; deleveraging actions Unfavorable MSR FV adjustments due to elevated hedge costs; variance GAAP vs adjusted Persistent headwind; active management
Subservicing growth & UPBFY23 avg servicing UPB +$10B; more capital partners Ending subservicing UPB up 8% vs 12/31/23 Ending servicing UPB $304B; subservicing $173B (+6%/+10% vs 12/31/23) Growing volumes
Originations mix & MSR replenishmentHigher-margin products increased to 39% in 2023 Mix of higher margin products 41% in owned MSR originations Originations volume $7B (+51% q/q), demonstrating MSR replenishment capability Improving
Capital & liquidityLiquidity $242M YE23; deleveraging senior notes Liquidity $219M; repurchased $47M PHH notes Liquidity $231M; debt-to-equity 3.88:1; book value $57 Strengthening
Strategic M&A (Reverse assets)Asset recovery transaction (FY23) Rebranding plan to Onity LOI to acquire reverse assets from Waterfall/MAM; immediate accretion expected New catalyst
Regulatory/legal & ratingsSTAR Performer (Fannie Mae); regulatory/compliance focus Moody’s upgrade to B3 in April 2024 Continued emphasis on regulatory approvals for transaction Positive rating optics; regulatory diligence ongoing

Management Commentary

  • “I’m thrilled with the performance of the Onity platform… This quarter’s results provide the clearest demonstration yet that our articulated strategy and financial objectives are sound, and our execution is strong.” — Glen Messina, Chair, President & CEO .
  • “We expect [the Waterfall/MAM] transaction to be accretive to earnings and cash flows immediately upon closing, while strengthening our position in reverse servicing as a hedge to forward MSRs…” — Glen Messina .
  • Q1 snapshot (for trajectory): “Our strategy of capital-light growth has enabled us to steadily grow our subservicing portfolio through new client acquisitions and capital partner relationships.” — Glen Messina .
  • Q4 snapshot (context): “We delivered another sequential quarter increase in adjusted pre-tax income, driven by our servicing segment… increased our target MSR hedge coverage ratio throughout the year, currently at 100%.” — Glen Messina .

Q&A Highlights

  • Themes discussed on the Q2 call included servicing-driven adjusted performance, hedge costs’ impact on GAAP vs adjusted results, subservicing pipeline growth, and strategic rationale/terms for the Waterfall/MAM reverse assets acquisition .
  • Management reiterated expected accretion and capital structure improvements from the Waterfall/MAM transaction; preferred stock terms were detailed: $51.7M par; 7.875% dividend for 5 years, stepping up thereafter; non-convertible, cumulative, callable after four years .
  • Liquidity and leverage were highlighted as improving, with debt-to-equity at 3.88:1 and book value per share at $57, supporting confidence in forward execution .

Estimates Context

  • S&P Global consensus data was unavailable for OCN due to a CIQ mapping constraint; we were unable to retrieve EPS and revenue consensus values for direct comparisons.*
  • External sources reported Q2 diluted EPS of $1.33 missing consensus by $0.03 and revenue of $246.4 million missing consensus by approximately $22.1 million .

*Values retrieved from S&P Global were unavailable due to mapping constraints.

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Quantitative financial guidance (revenue/margins/OpEx)2H 2024Not providedNot providedMaintained: No explicit guidance
Reverse mortgage assets acquisition (Waterfall/MAM)H2 2024—LOI signed; expected close H2 2024; projected UPB ~$3B; target aggregate NAV ~$55M New strategic item with qualitative accretion
Preferred stock financing termsH2 2024—$51.7M par; 7.875% dividend (5 years), stepping +2.5% annually thereafter up to 15%; non-convertible, cumulative; callable after 4 years New instrument

KPIs and Balance Sheet Metrics

KPIQ2 2023Q1 2024Q2 2024
Ending Servicing UPB ($USD Billions)——304
Ending Subservicing UPB ($USD Billions)——173
Total Servicing Additions ($USD Billions)——19
Subservicing Additions ($USD Billions)——12
Originations Volume ($USD Billions)——7 (up 51% q/q)
Total Liquidity ($USD Millions)119.1 (restricted cash only; total liquidity not disclosed) 219.0 231.0
Book Value per Share ($USD)—56 57
Debt-to-Equity Ratio——3.88:1
Balance Sheet ($USD Millions)Q2 2023Q1 2024Q2 2024
Cash & Cash Equivalents213.4 185.1 203.1
MSRs (fair value)2,675.7 2,374.7 2,327.7
Loans HFS1,356.5 1,028.9 1,107.0
Loans HFI (fair value)7,680.7 8,130.5 8,227.8
Total Assets13,216.0 13,090.1 13,084.7
HMBS Borrowings (fair value)7,486.4 7,945.0 8,035.4
MSR Financing Facilities (net)864.8 964.1 927.7
Senior Notes (net)605.0 552.0 555.2
Total Stockholders’ Equity433.8 432.1 446.2

Key Takeaways for Investors

  • Adjusted profitability and ROE outperformed despite GAAP headwinds from MSR valuation and hedge costs; servicing segment remains the earnings engine .
  • Balance sheet resilience: rising liquidity and book value per share, plus improved debt-to-equity position, enhance flexibility for H2 execution .
  • Strategic transaction (Waterfall/MAM reverse assets) is a potential near-term catalyst with expected immediate accretion and diversification/hedge benefits vs forward MSRs; watch for regulatory approvals and closing timeline .
  • Revenue mix shifts and originations recovery support MSR replenishment; continued growth in subservicing UPB underscores enterprise sales momentum .
  • Near-term trading: sensitivity to hedge cost dynamics and MSR valuations may keep GAAP results volatile; focus on adjusted pre-tax trend, liquidity trajectory, and closing of the reverse assets transaction .
  • Medium-term thesis: growing subservicing scale, disciplined capital structure, and targeted acquisitions could improve earnings durability across rate cycles; monitoring regulatory and financing conditions remains essential .
  • Estimates lens: With S&P Global consensus unavailable, external reports indicated small EPS and revenue misses; any shift in adjusted profitability trend or transaction timing could prompt estimate revisions .