Q1 2021 Guild Holdings Co Earnings Call

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 Michael.

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 form 10-K, and 10-Q and other reports filed with the U S. The.

<unk> and Exchange Commission.

Additionally, today's remarks will refer to certain non-GAAP financial measures.

<unk> of non-GAAP financial measures, where appropriate for the corresponding GAAP measures can be found in today's earnings release filed with the SEC as well as on Guild Investor Relations website.

Participating in the call today are Chief Executive Officer, Marianne Mcgarry price.

Didn't Terry Smith, and Chief operating Officer, David Neyland.

Now I'd like to turn the call over to Maryann Mcgarry.

Maryann.

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.

Terry and I will walk through of highlights from our first quarter results and then we'll turn our attention to our acquisition of residential mortgage services or our M. S for short.

We posted a presentation on our website and we will be referencing during our prepared remarks.

So starting on slide three.

Key highlights for the first quarter included strong gross and origination with funded volumes up 70% year over year.

In turn our net revenue more than tripled, while our net income and adjusted net income for <unk>.

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 the geographic footprint.

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 and existing msas and entering new markets by recruiting of loan officers to our platform.

Over the last five years, 80% of Guild projection has come from loan officers that are still with guilt.

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 the full suite of protection and fulfillment services.

And we focus on optimizing the servicing portfolio and client retention.

Origination loan officers maintain relationships, which drives repeat business and our data reinforces the efficacy of our model with our refinanced recapture rate remaining strong at 69% for the quarter.

So with that I'd like to turn it over to our President Terry Schmid share.

Three.

Thanks, Marianne we're pleased to again report strong financial results for Guild Holdings company for the first quarter of 2021, we generated $9 8 billion of loan originations, representing 70% growth year over year net revenue totaled 526 million.

Up more than 200% from $170 million in the first quarter of 2020, while net income totaled $161 million or $2.67 per diluted share adjusted net income, which excludes the change in fair value of Msr's due to model inputs and assumptions acquisition related.

Contingent liabilities and stock based compensation was at 84% year over year, two of $106 million, 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 remains strong pull through adjusted lock volume totaled $9 3 billion in the first quarter with 37% of closed loan origination volume for purchase business compared to the mortgage bankers Association average of 29%.

Gain on sale margins on originations increased by 9% year over year to 457 basis points, while the margin on pull through adjusted locked volume grew 61% year over year to 480 basis points segment net.

Net revenue grew 86% year over year to $448 million, 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 million for the quarter at the 133% year over year from $69 million.

Turning to our servicing business, our unpaid principle balance grew 25% year over year to 63 billion as of March 31, 2021, following suit total loan servicing and other fees increased by 17% year over year to $45 million for the first quarter of 2021.

With net income attributed to the servicing segment totaling $67 million compared to a loss of $79 million in the prior year quarter, largely reflecting a favorable turnaround in MSR fair value adjustments.

Importantly, we retain servicing rights for 94% of total loans sold in the first quarter of 2021 further reinforcing our symbiotic business model that drives sustainable growth across a variety of market and interest rate backdrop.

Our balance sheet remains strong and highly liquid with $315 million of cash and cash equivalents, excluding funds used to pay down our warehouse lines.

As well as $2 1 billion of warehouse lines of credit with unused capacity of 1 billion as of March 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 a dollar per share payable on or about.

May 'twenty eight 2021 to our class a and class B common stock holders of record on May 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.

<unk> volume was $2 8 billion and total pull through adjusted lock volume was approximately $2 5 billion.

And 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.

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 converging competition remains intense.

We are not immune to these macro headwinds, which we expect will impact near term trends across the 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 60 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 churn.

Moreover, our purchase business is different and 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 Maryann to discuss our exciting residential mortgage services acquisition.

Maryann.

Thanks Terry.

We're pleased to announce the acquisition of residential mortgage services we.

This transaction is compelling from a strategic and financial perspective, and represents a very attractive use of capital Terry 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 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 three and a quarter 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 interest.

More specifically the consideration includes the three year earn out that is capped at 50% of RMS as pre tax protection segment earnings subject to minimum profitability hurdles.

This transaction is expected to close in the third quarter of 2021, and RMS as management team and key personnel will continue to run their business.

Turning to slide nine let me walk through the transaction highlights.

Yeah.

The first RMS is 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 guilty of in house servicing capabilities technology, and expertise RMS will be better positioned to extend the length of client relationships and capture of repeat business.

Second on.

RMS is business mix is highly aligned in mirrors guilds in terms of their focus on purchase business through the retail channel since.

Since 2010 purchase origination volume as a percentage of total originations have averaged 69% at guild, and 70 per cent for Rms or 22% and 23% 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 the strategy and our client centric approach will allow us to provide clients with a consistent experience across the United States and efficiently integrate our M S.

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 2021 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 cultural alignment with both teams dedicated to supporting local communities and building trusted client relations.

Our similar values will enable guilty of efficiently and of great Rms and provide clients with a memorable customer experience across the United States.

Next we expect to generate enhanced gain on sale margins for RMS and realized expense synergies over time further strengthening our proven M&A track record.

And finally.

This is our seventh successful acquisition since 2008, reinforcing our proven and disciplined M&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 it is the number one purchase lender in Maine, and New Hampshire.

Led by President and CEO, James Sealy, RMS maintains a strong and tenured management team.

While 2020 was a banner year for RMS with eight 5 billion of originations and more than $100 million of net income.

Even more impressive is the company is strong and consistent growth and business mix over time.

Origination volumes have compounded at an annual growth rate of 26% while purchase loans for the accounted for 70% of total origination volumes over the last 10 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.

We're 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 Terry to discuss the business in financial benefits in greater detail.

Thank you Marianne.

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 on.

The mess brings immediate scale to a new region with strong potential upsides for growth under Guild leadership, and there was a great deal of consistency across our two firm as it relates to business mix of distribution channel focused marketing strategies and corporate cultures.

We believe this the 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 the 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 the RMS already maintained attractive ROE on a standalone basis.

So the transaction opens up a sizeable on 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 10 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 250 loan officers in approximately 70 branch locations, bringing our total loan officer count to more than 1300 50 across 270 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 as business mix is strongly aligned consistent with the guild footprint given its purchase focused retail strategy.

Pro forma for the acquisition Guild with RMS combined generated 42 billion of retail channel originations last year ranking seventh amongst non bank lenders in 2020 as shown on the chart on the bottom left.

And looking at the five year period ended December 31, 2020 purchase loans accounting for 72% of RMS as origination volumes.

Our pro forma mix to 66% for 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.

More broadly we look to partner with management teams of 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 the 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 the acquisition.

Looking back across the six transactions completed over the last 12 years origination volumes for acquired companies increased by averages of 29% and 37% in the second and third years following each transaction closing.

Finally, slide 15 shows the timeline for the seven acquisitions, we have made since 2008 while.

While the transactions had varied in terms of sizes footprints and contributions we've been able to consistently enhance growth post the acquisition drivers include increasing market share and volumes enhancing gain on sale margins leveraging guild proprietary technology platform to improve efficiencies.

And of realized expense synergies.

<unk> 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&A opportunities should they arise.

Before we take questions, we wanted to wish Amber, our CFO and our new baby well.

So with that I will turn it back for the operator to open up the call for questions.

Operator.

Thank you we will now begin the question and answer session to join the question queue. You May Press Star then one on your telephone keypad, you will hear of atone acknowledging your request.

If you are using a speakerphone. Please pick up your handset before pressing any keys to withdraw your question. Please press Star then two.

We will pause for a moment this callers join the queue.

The first question comes from Don Vendetti with Wells Fargo. Please go ahead.

Hi, good morning.

It looks like gain on sale margin held up pretty well in Q1 in March.

Wondering if you could talk a little bit about the.

Near term outlook in April.

And going forward on gain on sale.

For adjusted Lock volume you know a lot of peers have talked about significant contraction of that margin.

Sure I can take that question and this is Terry Yeah. We we are.

Following on the industry as far as getting caught up with the capacity add.

And I'm seeing debt the.

The industry is.

Is it just the margins are tightening getting back to normalized levels. So historically, we outside of refinanced periods, we've averaged about a 380 basis points and gain on sale and expect that.

That too.

Type of trend is is we're starting to see that.

Similar to our historical levels.

Got it and then on the dividend.

On the one.

Of all of our special dividend is that going to be the sort of plan going forward that we'll see special rather than on a quarterly.

On a go on the dividend.

Yeah.

Yeah Ann.

Yes [laughter].

Okay.

Great. Thank you.

Thanks, Don.

The next question comes from Rick Shane with J P. Morgan. Please go ahead.

Thank you for taking my question and Don really hit upon it in terms of what you see in terms of normal.

Normalization of gain on sale.

Two things two.

The 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 were equal equilibrium is resetting and.

I actually exceeds demand.

Okay.

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 380 Mark.

But on the average again, we've we've over time been extremely consistent at the 380 Mark.

Got it and I appreciate it.

The debt is not guidance and also your willingness to.

Provide some contacts both both are helpful.

As that shift.

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.

I would say that would be the case because as rates rise the value of the MSR goes up.

So and we're already seeing that or you know MSR value because of the rate increasing the prepayments speed slowing down the values are starting to increase.

So it will change somewhat too.

To be a little bit higher weighted on msr's.

On the MSR side.

Got it and the and then last question when we think about that cash mix. When 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.

Historically, we've never we've never reached that point.

Okay, great. Thank you guys very much and congratulations for amber.

Thank you.

The next question comes from Trevor Cranston with JMP Securities. Please go ahead.

Alright. Thanks.

On the RMS acquisition for.

First just the point of clarification, when you mentioned the purchase price of the company's tangible book value.

Is the expected purchase price.

Just equal to the tangible book value or is there any sort of a premium to book broke up to the.

Okay.

Yeah.

There is of a 80 $80 million a premium.

Cash premium that we're paying.

Paying.

Above book.

Tangible book.

Okay I got you.

Can you say how much of their book how much how large the servicing portfolio is that'll be coming over as part of the acquisition.

Sure. They have of 700 million dollar of approximate servicing portfolio. So it's very.

Small so we really looked at this transaction as a multiple of earnings.

Because of 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 90 days. So it's really an earnings multiple play.

Okay that makes sense.

And I guess.

As you laid out the sort of similarities in the companies and why it was an attractive on target for you guys to go after.

And as you mentioned the the synergies you expect to be able to realize over time.

I guess he had his arm, it's historically been a company that's been able to.

Recapture on servicing or is that not really been something the focus on debt.

A part of the sort of.

Synergy that you guys didn't come through for the combined company.

<unk> is bringing the recapture of expertise you guys out of two to the business of that they've been doing.

Trevor This is Marianne I can answer that.

We see if they have a strong purchase.

On hold and since they don't have the portfolio. They don't recapture and like we have for and John have we see that as the 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 the very.

Positive synergy going forward and with our platform and technology and ability to stay on.

Connected with our customers through the life of the alone we feel.

That they will benefit from our AR technology and CRM platform.

Yeah to the add to Maryann point there there their business model has been primarily to sell on the service released basis and and or sell the servicing on a flow basis. So they they're servicing was so small just when when the.

There was some liquidity issues back in March they started of retaining some some of volume but their long term plan has been to service released so they are.

Super Super excited to be of guild to be able to get that to to drive that life of of a life of loan and customer for life concept and that the big just feel like that's such a huge part of growing their business going forward. So we're really excited.

Okay that makes a lot of sense. Thanks for the comments.

Hmm.

Once again, if you have a question. Please press Star then one.

The next questioner is Giuliano Bologna with Compass point. Please go ahead.

Good morning.

Congratulations on the great and.

Productive quarter.

The dividend and the acquisition.

Just starting off with all of them.

On the.

The more housekeeping type of questions I'd be curious how much cash is.

Currently being used to pay down the.

The house loans and also the MSR loans, just to give the sense of kind of what your total <unk>.

Liquidity is and then.

Right.

Alright, I have a similar kind of cleanup of topic.

If theres any of Ginnie Mae <unk>.

On the period.

Yes.

Sure. So our cash at the end of Q1 was a 315 million in and our buy down on the.

On the warehouse side was $131 million. So if you add that our total cash was about 426 million 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 be.

Zero.

So we're in still a 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.

So it sounds very good and then switching over to the kind of the acquisition for cash.

Quickly.

Obviously, they've been sort of on service release basis, the majority of their production volume historically.

I'd be curious from a margin perspective, obviously there is there is some margin impacts of that.

I'm curious if there is theres margin outside of opportunities I realize it's not necessarily.

It's hard to hard to necessarily say exactly where that is going forward because of that.

For a number of states Android is there an update for Guild G and gross margins just by having the ability for us.

We maintain retain servicing and then also other opportunities on the backend of its recapture all the earn out of the MSR is et cetera.

So does the different factors that come into play here.

Yes, yes, we believe there there's a good opportunity to improve.

Improve the execution on the secondary side and by retaining the servicing so in the past we've been able to increase our improved the execution by <unk>.

2025 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.

That sounds good.

Historically, I think going back Jordan.

For the past decade, or so it has been the cash flow positive on origination.

Tax basis on that.

There are some factors.

So in terms of servicing released on kind of curious how are you.

And if they're on a similar.

If there would be in the similar possessing the phase shifted over to.

Youre kind of mix of servicing retained versus released.

Yeah, we believe it in over time day will mirror gelled as performance and their business mix of very.

It's very comparable to Guild, and we believe that day.

They will eventually when we're in a fully integrated.

Looked like a guild and everything else we have.

Yeah to Mary Anne's point of you got keep in mind that this is the big transaction and it's going to 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 Guild execution, and and retaining but it will take them through the end of the year.

The transition and then just the.

A very quick quick one on the I was curious if there was any of Ginnie Mae <unk>.

Kind of contribution on the quarter.

There was the PTC that recurring.

Ginnie Mae contribution you mean.

For them.

From from some of the early.

Thanks for your yes, there, yes, there has been alright.

Alright.

Got to 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 were we bought a decent amount.

Amount of loans for us the decent amount of loans. We did early buyouts of this first quarter. So.

It is yeah it is growing.

But it's not a material on there.

Yeah here it is.

Sound it.

It was about 1 million eight for Q1.

And compared to Q.

One of 2020, it was $1 million.

Okay, that's great and very helpful.

I appreciate the time and the.

I will jump back on the Qunar.

[laughter].

This concludes the question and answer session I would like to turn the conference back over to Mary on Mcgarry, the CEO for any closing remarks.

Well. Thank you everyone for your time and interest and we look forward to continuing to discuss our progress on future calls.

Thank you.

Yes.

Yeah.

This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.

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