Guild Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 8, 2023

There are 9 speakers on the call.

Operator

Good afternoon, ladies and gentlemen, and welcome to the Guild Holdings Company First Quarter 2023 Earnings Conference Call. At this time, all participants are in listen only mode. Later, we will conduct a question and answer session with instructions to follow at that time. As a reminder, this call will be recorded. I would now like to turn the conference over to Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, and good afternoon, 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 and industry trends. 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 other factors that are described in greater detail under the section titled Risk Factors in Gild's Form 10 ks and 10 Q and in other reports filed with the U. S.

Speaker 1

Securities and Exchange Commission. Additionally, today's remarks will refer to certain non GAAP financial measures. Reconciliations of non GAAP financial measures to the corresponding GAAP earnings release furnished today with the SEC and are also available on Gild's Investor Relations website. Now, I'd like to turn the call over to Chief Executive Officer, Mary Anne McGarry. Mary Anne?

Speaker 2

Thank you, Nikki. Good afternoon, everyone, and thank you for joining us. Today, I'm joined by our President, Teri Schmidt and Chief Financial Officer, Amber Kramer. Our Chief Operating Officer, David Nalen, will join us for Q and A after our prepared remarks. Our first quarter results were in line with our expectations.

Speaker 2

In the Q1, we generated $2,700,000,000 of total in house loan originations compared to $3,000,000,000 in the Q4 of 2022. While these results reflect a challenging backdrop of rising rates and limited inventories, we continue to gain market Share as we execute on our growth plan. Our origination volume from purchased business was 92% compared to the Mortgage Bankers Association estimate of 80%. Additionally, our model is built on long term relationships in communities. By focusing on purchase business, we see more consistency across interest rate cycles and believe our earnings are more durable and sustainable in all market cycles.

Speaker 2

Our servicing platform, along with our focus on customer service, also supports strong recapture rates. For the Q1 of 2023, our purchase recapture rate was 24% And we retained servicing rights for 87% of total loans sold in the Q1 of 2023 with strong retention driving ongoing growth in unpaid balance levels and related fees. We are pleased to see an uptick in volume in April. And while we can't control the constraints on the housing supply, We have taken steps to position Gild to continue to grow market share. During the quarter and subsequently, We have been effectively executing on our growth strategy.

Speaker 2

With the recent acquisitions and organic expansion that Terry will discuss, we are further building our foundation to drive growth and we anticipate gaining additional market share as the acquisitions are fully integrated and continue to ramp. We have a differentiated platform and our acquisitions and product offerings further bolster our position. As we continue to integrate our recent acquisitions, we expect to realize enhanced productivity. In addition, our pipeline of attractive opportunities continues to grow. And while we will remain disciplined, We believe the current environment provides a compelling window for external growth.

Speaker 2

Before turning the call over to Teri, I want to take a moment to comment on our previously disclosed management succession, which will be effective on July 1. It has been an incredible journey for Gild, and I could not be more proud of what we have accomplished and the foundation we have created to deliver ongoing growth and shareholder value. Gild is a company with a strong culture, technology platform and talented people. Since our management buyout in 2007, We have delivered tremendous growth and consistent returns due to our balanced business model, our focus on customer relationships and offering creative product solutions to our customers' financing needs. We believe Our combination of strong performance, culture and longevity is unique.

Speaker 2

I will remain on the Board of Directors and I'm very confident in the team that will be leading the company day to day. With Terry Schmidt's promotion to CEO and David Nalen as President and COO. Terry and I have worked together for almost 4 decades, and David has been with us since before the management buyout in 2007. As a result, I am certain the transition will be seamless. And I want to thank The entire Gild team for their hard work and commitment to executing on our mission of delivering the promise of home in neighborhoods and communities across the United States.

Speaker 3

Teri? Thank you, Mary Anne. I will start by expressing my gratitude to you for your vision, Leadership and partnership over the years, you have established a culture that has been foundational to our success. Where we are today certainly exceeded any expectation I had when we completed the management buyout more than 15 years ago, And I'm even more excited about the ongoing opportunity as we continue to leverage our incredible platform. Broader market disruptions are driving a flight to quality and Guild should be a net beneficiary given our long and successful history through numerous market cycles beginning in 1960.

Speaker 3

1 of Guild's goals is to leverage our scalable platform, extend our geographic reach across the country and increase our share in key markets. During the Q1 and subsequently, we completed 2 acquisitions and added a new district of loan officers. As previously disclosed in February, we added legacy mortgage the Guild platform, increasing our presence in the Southwest with the addition of their operations in the high growth states of Arizona, Colorado, Texas and New Mexico, where Guild now has the number 2 share of purchase mortgages according to CoreLogic data. In April, we also added Cherry Creek Mortgage to our retail network. Cherry Creek is another example of a synergistic acquisition bringing a complementary business to Guild.

Speaker 3

Cherry Creek has a similar experience to Guild with a 36 year history of successfully managing through multiple cycles and focusing on its retail strategy and customer relationships. With 68 branches In 45 states, our acquisition of Cherry Creek provides immediate additional scale. Furthermore, Cherry Creek has a strong reverse mortgage leadership team that has been in the industry for many years. We believe having the ability to Securitas and service reverse mortgages will continue to strengthen our product offerings and help us serve more customers. By integrating reverse mortgages into our traditional platform, we now offer our retail team the opportunity to have a more comprehensive offering for their customers from products focused on the underserved and first time homeowners now through to reverse mortgages, aligning with our customers for life strategy.

Speaker 3

In April, we also organically grew our footprint with the addition of a new district made up of 40 new Guild employees and 8 branch offices in California to serve home buyers throughout the region. This group's production was an estimated $350,000,000 in 2022, and we are excited they have joined our team. Following this addition, Guild has approximately 13 60 loan officers across more than 300 branches serving customers in 49 states. As Mary Anne mentioned, we are laser focused on leveraging Guild's platform and network of loan officers to continue to grow market share and to continue to position ourselves to accelerate growth as the market normalizes. In the Q1, we grew market share as we captured a higher percentage of the total industry origination volume than we did in the Q4.

Speaker 3

We are encouraged by the recent uptick in volume for April, but do anticipate there will be ongoing macro pressures in the near term. We believe our balanced business model of originations and servicing provides the stability to manage through this uncertainty, while our disciplined balance sheet management and liquidity should continue to allow us to take advantage of opportunities as they arise and drive profitable growth over the long term. I'll now turn the call over to our Chief Financial Officer, Amber, to discuss the financials in more detail. Amber?

Speaker 4

Thank you, Teri. As is our standard practice, my comments will focus on sequential quarter comparisons. For the Q1 of 2023, we generated $2,700,000,000 of total in house loan originations compared to $3,000,000,000 in the 4th quarter. Net revenue totaled $104,000,000 compared to $134,000,000 in the prior quarter, and we generated a net loss of $37,000,000 or $0.61 per diluted share. Adjusted net loss was $2,500,000 or $0.04 a share, while adjusted EBITDA was a positive $1,100,000 The adjusted figures for the Q4 exclude a $44,000,000 negative change in fair value of MSRs due to valuation assumptions compared to a $17,000,000 charge in the prior quarter.

Speaker 4

Focusing on our originations segment, Our gain on sale margin came in at 3 43 basis points, up from 3 31 basis points in the 4th quarter. Pull through adjusted lock volume totaled $3,300,000,000 in the Q1 compared to $2,800,000,000 in the prior quarter and we are pleased with the uptick. Our gain on sale margin on pull through adjusted lock volume was 284 basis points compared to 351 basis points in the prior quarter. The increase in pull through adjusted volume, up 21% over originations, creates a negative timing impact for gain on sale on pull through adjusted volume and is not indicative of future expected gain on sale margins. While Gild and the broader industry have both seen continued pressure on gain on sale, we remain confident in Gild's relative positioning given our balanced business model, which focuses on retail originations and servicing of the loans we originate.

Speaker 4

We believe this focus results in more durable and sustainable performance across market cycles. We are starting to see some stabilization as excess capacity is contracted, but anticipate continued in the near term and further improvement will depend on market rate and spread trends as well as broader inventory levels. For our servicing segment, we reported a $300,000 net loss in the Q1 versus $22,000,000 of earnings in the prior quarter, due primarily to $55,000,000 of downward fair value adjustments to the company's mortgage servicing rights due to slight rate decreases. Our balance sheet remains strong and provides us with the flexibility to continue to invest in our growth in a disciplined manner and our assets consist primarily of high quality loans and MSRs. Turning to liquidity.

Speaker 4

As of March 31, Cash and cash equivalents totaled $148,000,000 while unutilized loan funding capacity was $1,200,000,000 and the unutilized mortgage servicing rights Line of credit totaled $205,000,000 based on total committed amounts and borrowing base limitations. Our leverage ratio defined as total secured debt, including funding divided by tangible stockholders' equity was 0.9 times. We continue to focus on the best way to efficiently deploy capital while managing through uncertain times with financial prudency. Our strong balance sheet and liquidity enables us to invest in the business and strategically deploy capital in a disciplined manner to drive growth and shareholder value over time. During the Q1, we repurchased approximately 50,000 shares at an average stock price of $11.26 per share.

Speaker 4

Book value per share at the end of the quarter was $19.93 while tangible book value per share was $16.43 In addition, our capital position and differentiated business model facilitates capitalizing on strategic M and A opportunities that complement our organic growth should they arise as we've done successfully throughout our firm's history. In April, we have generated $1,300,000,000 of loan originations and $1,300,000,000 of pull through adjusted lock volume. As we noted last quarter, we anticipate the current more challenging market conditions to continue through the first half of twenty twenty three. As we progress through this cycle, Gil will focus on seeking out additional opportunities, including potential acquisitions, which should position us to accelerate our growth over time as market conditions improve. We have a well positioned balance sheet, which will support the growth of our platform.

Speaker 4

And as supply continues to moderate, we anticipate being a beneficiary of purchase activity. And with that, we'll open up the call for questions. Operator?

Operator

We will now begin the question and answer session. Our first question will come from Don Fandetti with Wells Fargo. You may now go ahead.

Speaker 5

Hi, congratulations to Mary Anne and Terry and David. Amber, I guess question on the gain on sale, the pull through lock, I mean, definitely look lower than we were expecting. And I think in January, you provided a number much higher. Can you talk about the accounting and why that is low. And what you're thinking for April and seeing?

Speaker 4

Sure. So as I noted, the Originations and therefore sales is up 21% over the pull through adjusted lock volumes. So there is a timing difference of The execution we get at time of sale, that's not considered. And you can see that historically in Q1 numbers going backwards. It's typical in this Q1 as we start to Get an uptick in volume.

Speaker 4

And we don't provide guidance, but I will say that you can see from Q4 to Q1, if you exclude the That for the loan loss that I talked about on last earnings call in Q4, we're pretty much flat quarter over quarter going into Q1. And that's really what we're continuing to see, just not much change. And so I think as we noted, there's some stabilization, but we're not seeing that pickup quite yet. But I would really focus more on the gain on sale and originations versus the gain on sale on the pull through adjusted lock volume because of that timing difference.

Speaker 5

Okay. And on the G and A, can you talk a little bit about the run rate there? I know you've had 2 acquisitions sort of flowing through.

Speaker 4

Yes. The overall since we had the acquisitions in Q1, there is a slight impact in that and you would have some ramp up As they as their volume is brought on, and we're continuing to monitor just overall cost as looking at volume and making changes accordingly. And no big changes other than that, about 80% of our Personnel costs are variable. So the other fixed cost is just what we're picking up on the acquisitions and then The run rate of volume will ramp up over time too.

Speaker 5

Got it. Thanks.

Operator

Our next question will come from Kyle Joseph with Jefferies. You may now go ahead.

Speaker 6

Hey, good afternoon. Thanks for taking my questions. Just regarding Cherry Creek and then the California team you guys acquired, Can you give us any sense when those are expected to close and impacts on your leverage profile? And then follow-up to that would be Capacity for M and A going forward, I know you guys have been very active in the space.

Speaker 3

Sure. I'll answer that. On Cherry Creek, we closed on April 3. So it has officially closed. And The California Group, they onboarded about a month ago.

Speaker 3

And the volume about $300,000,000 $350,000,000 for the California Group and last year Cherry Creek funded about $2,500,000,000

Speaker 4

Okay. And Kyle, I can answer the question just in terms of our leverage profile. It's not going to swing anything. We have a strong balance sheet overall, and so it's going to really keep us and we're going to be in the same position. We're just increasing our market share of our volume and then overall that'll Flow to the bottom line in terms of revenue.

Speaker 4

And we, as you can see, have a strong balance sheet with the ability to borrow significantly more. And we're planning to use that capital for organic growth and acquisitions and we think that there's still opportunities out there and Are keeping our strong balance sheet positions to be able to capitalize on those opportunities?

Speaker 3

Yes. We still have a very active pipeline and we're going to keep Executing on our strategy this year.

Speaker 6

Yes. No, that makes all the sense in the world. And then not surprisingly as we think about the originations business versus kind of the UPB, obviously UPB has grown as originations have come down. How do you guys think about balancing that potentially selling MSRs in this environment? And Any thoughts in terms of like potentially hedging that?

Speaker 4

We think about our servicing portfolio and our originations as a natural hedge And which really is what you're seeing right now, our overall with our adjusted net income of about breakeven. And we do look at our risk Profile on our portfolio itself to ensure that we're in a strong position is where originations are compared to our portfolio and where the WACC is. We You don't have a strong asset on our servicing portfolio with a low WACC, and so we don't believe that there's risk and our strategy has been clients for life and we have recapture programs to continue to add to our portfolio, which is a great value proposition for loan officers as well. And because we've managed our balance sheet, so well, we don't need the cash to sell MSRs. And so right now, we don't have any plans to

Speaker 1

do so.

Speaker 3

Yes, the note rate is only 3.7% on the coupon on the portfolio. And to Amber's point, We manage to how the current par rate is to the coupon stack. And we're looking at if we've got definitely a smaller group that may be a year from now refinanceable, but All of that since we've built all this through our retail channel, we've got the boots on the ground, the loan officers that can recapture That refinance, if it's the right time to recapture it, that we've been really successful at that. And so that's really been the way we've hedged and we plan to continue to do so. But The nice thing is we have options, right?

Speaker 3

We can sell the MSR if we needed to in the future. We can borrow against it, so and we can service release more products. We've got multiple outlets that we can Tap into if we needed to change our strategy, but we're sticking with the strategy we've had so far.

Speaker 6

Got it. That's it for me. Thanks a lot for answering my questions.

Operator

Our next question will come from Giuliano Bologna with Compass Point. You may now go ahead.

Speaker 7

Congratulations on the continued strong execution. And one thing I'd be curious about, and I realize that you've kind of touched on this already is The impact of some of the acquisitions on kind of operating expenses and also down on sale margin, I'd be curious if there's a way to think about the impacts during 1Q and Some potential impacts related to the acquisitions that are in the process of closing during 1Q and even beyond 1Q over the next few quarters?

Speaker 4

The impact is minimal. I think generally speaking, if you look at our adjusted net income at negative $2,500,000 Be about breakeven without the acquisition. So you can see from the revenue and the expenses, It's not a huge impact materially on the expense side. And the gain on sale, I still what I said earlier was gain on sale overall being flat is what we're seeing. There's no change to that.

Speaker 7

That is correct. And then

Speaker 3

I would say

Speaker 7

that the

Speaker 3

way we look at this is when we're acquiring These companies is we expect that by month 6, that they're in they're starting to turn a profit. And between month 12 18, Dave, we've recouped any type of net expense that we've had. And so that's what we Expect on these acquisitions as well if that kind of helps.

Speaker 7

That's very helpful. And then thinking about the strategy going forward, Joel has obviously done an incredible job expanding through M and A and expanding geographies within within the U. S. I'd be curious if there are any large markets that are still kind of left untapped at this point or Are you looking to fill in some markets where you have you might be under penetrated from a market share perspective?

Speaker 2

Yes, there's some states that

Speaker 3

we still don't have very much And a lot of states that we don't have, we're not in the top 5. So any area where Any state where we're not in the top 5 outside of New York, we are interested in expanding. So we've got a lot in the Midwest. There's so much opportunity in the South and the Southeast that we'd love to continue to expand there as well.

Speaker 7

That's great. Thank you very much and I will jump back in the queue.

Operator

Our next question will come from Brian by Alino with Wedbush Securities. You may now go ahead.

Speaker 8

Thanks for taking my question. Just a quick one on the reverse mortgage business specifically. I guess, could you kind of just frame what that opportunity looks like? What got you And getting into reverse mortgage and I guess is there any sort of ramp up time associated with getting that expanded out to your existing branches?

Speaker 3

Yes, last year, we've the last 10 years, we've wanted to get into reverse. And Just there's been a lot of other just operationally other areas that we've continued to focus on. But This opportunity with Cherry Creek came to us and they've been in the business. They've got some Executives that have been in the industry for 20 plus years have a great reputation. Last year, they did about $250,000,000 and we think we can expand that dramatically.

Speaker 3

I would say we're looking at Probably end of Q2, Q3 to start expanding it In our own retail footprint and but they're already growing without our retail footprint. So we believe that there's a lot of opportunity there.

Speaker 2

Yes. I would add, this is Mary Anne, that What we see in our vision for reverse mortgages with such a low weighted average coupon in our portfolio Yes. That this product will become more in demand as you have an aging population. And this way, they can tap into Their equity and stay in their home, which is what we want is to help people stay in their homes as well as provide homeownership. So that's going to be another outlet look an outlet, Another lever we can pull for our customers and we think there's a good future, strong future I had with reverse mortgages.

Speaker 8

Great. Thank you.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Mary Anne McGarry for any closing remarks.

Speaker 2

Thank you, everyone, for joining us today. And

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Guild Q1 2023
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