Q4 2021 Loandepot Inc Earnings Call
Speaker 1: Good morning, my name is David and I'll be your conference operator today.
Good morning, My name is David and I'll be your conference operator today.
Speaker 1: At this time, I'd like to welcome everyone to the Lone Depot, Inc. fourth quarter 2021 earnings call. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press the star key, followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one once again.
At this time I'd like to welcome everyone to the alone at Depot, Inc. Fourth quarter 2021 earnings call. Today's conference is being recorded all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question and answer session. If you'd like to ask a question. During this time simply prestige Starkey followed by the number.
One on your telephone keypad, if you would like to withdraw your question Press Star one once again, you're hurt or daily with Investor Relations you May begin your conference.
Speaker 1: Gearheart or Daily with Investor Relations, you may begin your conference.
Speaker 2: Good morning, everyone, and thank you for joining our call. I'm Garrett Harder-Daley, Investor Relations Officer here at Loan Depot. Today, we will discuss Loan Depot's year-end and fourth quarter 2021 results. We are excited to share our financial results and other highlights with you.
And good morning, everyone and thank you for joining our call I'm, Gary Herder Daily Investor Relations Officer here at low depot today, we will discuss loan depots yearend and fourth quarter 2021 results. We're excited to share our financial results and other highlights with you.
Speaker 2: Before we begin, I would like to remind everyone that this conference call may include forward-looking statements regarding the company's operating and financial performance in future periods.
Before we begin I would like to remind everyone that this conference call may include forward looking statements regarding the Companys operating and financial performance and future periods.
Speaker 2: All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including, but not limited to, guidance to our pull-through weighted rate block volume, origination volume, and pull-through weighted gain on sale margin.
All statements other than statements of historical fact are statements that could be deemed forward looking statements, including but not limited to guidance to our pull through weighted rate lock volume origination volume and pull through weighted gain on sale margin.
Speaker 2: These statements are based on the company's current expectations and available information. Actual results for future periods may differ materially from these forward-looking statements due to risks or other factors that are described in the risk factors section of our filings with the SEC.
These statements are based on the company's current expectations and available information actual results for future periods may differ materially from these forward looking statements due to risks or other factors that are described in the risk factors section of our filings with the SEC.
Speaker 2: A webcast and a transcript of this call will be posted on the company's investor relations website at investors.loandepot.com under the events and presentations tab.
A webcast any transcript of this call will be posted on the company's investor Relations website at.
<unk> Dot loan depot dot com under the events and presentations tab.
Speaker 2: On today's call, we have Loan Depot founder, chairman and CEO , Anthony Shea, and Chief Financial Officer Patrick Flanagan to provide an overview of our quarter, as well as our financial and operational results, outlook, and to answer your question.
On today's call, we have loan depot, founder Chairman and CEO , Anthony Shay and Chief Financial Officer, Patrick flat again to provide an overview of our quarter as well as our financial and operational results outlook and to answer. Your questions. We are also joined by our chief capital market softens or Jeff the urine.
Speaker 3: We are also joined by our Chief Capital Markets Officer, Jeff DeGurian, our Chief Analytics Officer, John Lee, and our Chief Revenue Officer, Jeff Walsh, to help address any questions you might have after our prepared remarks. And with that, I'll turn things over to Anthony to get us started. Anthony? Thank you, Gerhard. I'm pleased to be with all of you on the call today. Thank you for joining us. I look forward to sharing my perspective and answering your questions.
Our Chief Analytics Officer, John Lee, Our Chief revenue Officer, Jeff Walsh to help address any questions you might have after our prepared remarks and with that I'll turn things over to Anthony to get US started Anthony. Thank you Gerard I'm pleased to be with all of you on our call today. Thank you for joining us I look forward to sharing my.
And answering your questions.
Speaker 3: 2021 demonstrated the success of our strategy to increase market share during a period of changing market conditions. This is quite an achievement for a company as young as ours. Just three weeks ago, we celebrated our 12th birthday. We aren't even a teenager yet, but Loan Depot is now the second largest independent retail mortgage brand in the country. We've grown at 49% compounded annual rate since our inception, and we plan to continue this growth in the long term.
2021 demonstrated the success of our strategy to increase market share during the period of changing market conditions. This is quite an achievement for a company as young as ours.
Just three weeks ago, we celebrated our <unk> birthday, we arent, even a teenager yet below depots now the second largest independent retail mortgage brand in the country.
Grown at 49% compounded annual rate since our inception, and we plan to continue this growth in the long term.
Speaker 3: Our growth is very intentional. We have built Loan Depot to succeed during all market conditions. Conditions like those we enjoyed in 2020 are when Loan Depot drives revenue, but the conditions we expect to navigate in 2022 give us an incredible opportunity to capture market share.
Our growth is very intentional we have built loan depots to succeed during all market conditions conditions like those we enjoyed in 2020 are well known.
People drives revenue, but the.
Conditions, we expect to navigate in 2022.
Give us an incredible opportunity to capture market share.
Speaker 3: Our business was purpose-built with periods of pressure in mind. Our proprietary tech stack, our intentionally diverse mix of channels, and our sophisticated performance marketing machine mean we control our need flow, our customer contact strategy, and the point of loan origination. This is a critical competitive advantage, enabling us to pivot and adjust our production as market trends demand.
Our business was purpose built with periods of pressure in mind, our proprietary tech stack are intentionally diverse mix of channels and our sophisticated performance marketing machine, meaning we control our lead flow our customer contact strategy and the point of loan origination.
This is a critical competitive advantage, enabling us to pivot and adjust our production as market trends demand.
Speaker 3: In fact, historically speaking, it's been during periods of decreasing volume that Loan Depot's unique strategy and differentiated assets have resulted in outsized market share growth. Those are the periods when we most demonstrate our ability to succeed.
In fact, historically speaking it's been during periods of decreasing volume that loan depots unique strategy and differentiated assets have resulted in outsized market share growth those are the periods. When we most demonstrate our ability to succeed.
We ended 2021 with a three 4% of market share compared to two 5% at the end of 2020 and grew purchase origination volume by 39% during 2021 as well.
Speaker 3: We ended 2021 with a 3.4% market share, compared to 2.5% at the end of 2020, and grew purchase origination volume by 39% during 2021 as well.
Speaker 3: Purchase volume growth demonstrated the power of our multi-channel strategy. If we include less interest rate-sensitive cash-out refinance volume to our purchase volume, growth was 56% year over year. While interest rates were increasing and refinance volumes were declining, we invested in growing our in-market retail branches and joint venture partners to drive this growth.
Purchase volume growth demonstrated the power of our multichannel strategy. If we include less interest rate sensitive cash out refinance volume to our purchase volume growth was 56% year over year, while interest rates were increasing and refinance volumes are declining we invested in growing our end market retail branches and joint venture par.
<unk> drive this growth.
Speaker 3: Our industry is a cyclical one, and the market conditions we face today have been faced before by Loan Depot's experienced leadership team, the members of which have collectively navigated many housing and interest rate cycles over the last 35 years.
Our industry is a cyclical one.
And the market conditions, we face today haven't faced before by loan depots experienced leadership team.
Members of which have collectively navigate in many housing and interest rate cycles over the last 35 years.
Today loan depots more than a mortgage company or digital Commerce company committed to serving our customers throughout the homeownership journey with a full suite of products and services that meet our customers' needs along that journey.
Speaker 3: Today, Loan Depot is more than a mortgage company. We're a digital commerce company committed to serving our customers throughout the home ownership journey with a full suite of products and services that meet our customers' needs along that journey. Our investment in building out our in-house servicing platform, including our recently announced Ginnie Mae servicing, allows us to deliver exceptional customer care throughout the customer lifecycle.
Our investment in building out our in house servicing platform, including our recently announced Ginnie Mae servicing allows us to deliver exceptional customer care throughout the customer lifecycle. Thus.
Speaker 3: This deepening of the relationship gives our customers another reason to return to us long after the initial home financing transaction is complete.
Thus deepening of the relationship gives our customers. Another reason to return to US long after the initial home financing transaction is complete.
Speaker 3: Lone Depot is growing, and we remain very true to our public statements about our strategies, abilities, and the ways in which we can, do, and will deliver for our customers. We have achieved much for such a young age, and while we are proud of our progress, we believe that times like these, when the market contracts, are when the assets we have built will lead our industry.
Home depot is growing and we remain very true to our public statements about our strategies abilities and the ways in which we can do and will deliver for our customers. We have achieved much for such a young age and while we are proud of our progress we believe that times like these when the market contracts or when the asset.
We have built will lead our industry.
Speaker 3: Our 2021 results are only a preview of what's to come as we leverage our brand, develop and apply innovative technology solutions, drive down costs, and add more products and services to help our customers successfully navigate one of the most important financial transactions of their lives.
Our 2021 results or only a preview of what's to come as we leverage our brand develop and apply innovative technology solutions drive down cost and add more products and services to help our customers successfully navigate one of the most important financial transactions that their lives.
Speaker 3: With that, I'll turn things over to our CFO , Pat Flanagan, who will take you through our financial results in more detail. Pat.
With that I'll turn things over to our CFO Pat plan again.
Take you through our financial results in more detail.
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Speaker 2: Thanks, Anthony, and good morning, everyone. Next week will be the first anniversary of our IPO, and I'm both excited and proud of what we've achieved during this short period of time as a public company thanks to the hard work of Team Loan Depot.
Thanks, Anthony and good morning, everyone next week will be the first anniversary of our IPO and I'm, both excited and proud of what we've achieved during the short period of time as a public company. Thanks to the hard work of team loan depot.
Speaker 2: During the fourth quarter, loan origination volume was $29 billion, a decrease of 9% from the third quarter of 2021. This was near the high end of the guidance we issued last quarter of between $26 and $31 billion.
During the fourth quarter loan origination volume was 29 billion a decrease of 9% from the third quarter of 2021. This was near the high end of the guidance, we issued last quarter of between $26 $31 billion.
Speaker 2: Our retail and partner strategies delivered $10 billion of purchase loan originations and $19 billion of refinance loan originations during that period.
Our retail and partner strategies delivered 10 billion of purchase loan originations and $19 billion of refinance loan originations during that period.
Our retail channel accounted for 77% and our partner channel accounted for 23% of our loan originations the consistent contributions across both channels signify the strong customer and mortgage broker relationships. We have built over time as well as the effectiveness of our innovative mellow technology platform to underwrite process and fund <unk>.
Speaker 2: Our retail channel accounted for 77 percent and our partner channel accounted for 23 percent of our loan origination.
Loans originated both in house and with our partners, while delivering an exceptional customer experience.
Speaker 2: Our pull-through weighted rate block volume of $23 billion for the fourth quarter resulted in quarterly loan revenue of $705 million, which represented a decrease of 24% from the third quarter. Rate block volume came in consistent with the guidance we issued last quarter of $18 to $28 billion.
Our pull through weighted rate lock volume of 23 billion for the fourth quarter resulted in quarterly loan revenue of 705 million, which represented a decrease of 24% from the third quarter rate lock volume came in consistent with the guidance, we issued last quarter of 18 to 28 billion the.
Speaker 2: The decrease in revenues is a result of lower rate block volume and gain on sale margins. Our pull-through weighted gain on sale margin for the fourth quarter came in at 281 basis points. This exceeded our guidance for gain on sale margin that we issued last quarter of between 210 and 260 basis points, but was down from the 299 basis points in the third quarter.
The decrease in revenues as a result of lower rate lock volume and gain on sale margins are pull through weighted gain on sale margin for the fourth quarter came in at 281 basis points. This exceeded our guidance for gain on sale margin that we issued last quarter of between 210, and 260 basis points, but was down from the 200 <unk>.
99 basis points in the third quarter.
Speaker 2: Our growing servicing portfolio perfectly complements our origination strategy and ensures we can serve our customers through the entire mortgage journey.
Our growing servicing portfolio perfectly complements our origination strategy and ensures we can serve our customers through the entire mortgage journey.
Speaker 2: The unpaid principal balance for servicing portfolio grew to a record level of $162.1 billion as of December 31, 2021, compared to $145.3 billion as of September 30, 2021. Servicing fee income increased from $64 million in the fourth quarter of 2020 to $114 million in the fourth quarter of 2021.
The unpaid principal balance of our servicing portfolio grew to a record level of $162 1 billion as of December 31, 2021, compared to $145 3 billion as of September 32021 servicing fee income increased from $64 million in the fourth quarter of 2020.
To $114 million in the fourth quarter of 2021.
Speaker 2: While relatively low market interest rates continue to result in faster prepayment rates, we were able to retain many of these customers as our organic recapture rate for 2021 increased to 72% as compared to 64% for 2020, highlighting the strength of our deepening customer relationship.
While relatively low market interest rates continue to result in faster prepayment rates, we were able to retain many of these customers as our organic recapture rate for 2021 increased to 72% as compared to 64% for 2020, highlighting the strength of our deepening customer relationships.
We are extremely proud of our progress because this growth was against the backdrop of a growing servicing portfolio in house and relying less on third party sub servicing partners. We have invested our in house servicing capabilities and by growing the portfolio and bringing more servicing in house, including our recently announced Ginnie Mae servicing we leverage.
Speaker 2: We are extremely proud of our progress because this growth was against the backdrop of our growing servicing portfolio in-house and relying less on third-party subservicing partners. We have invested our in-house servicing capabilities, and by growing the portfolio and bringing more servicing in-house, including our recently announced Ginnie Mae servicing, we leveraged the infrastructure and created the scale to increase the earnings contribution from this recurring counter-cyclical business line.
The infrastructure and create the scale to increase the earnings contribution from this recurring counter cyclical business line.
Speaker 2: This progress is demonstrated by the cost of servicing our portfolio as a percentage of the unpaid principal balance decreasing from 3.6 basis points in the fourth quarter of 2020 to 2.3 basis points in the fourth quarter of 2021. This figure represents all servicing costs, including subservicing, personnel, and other G&A costs. We expect this trend to continue as we grow our portfolio, leveraging our investment in this business while also providing a better customer experience.
This progress as demonstrated by the cost of servicing our portfolio as a percentage of the unpaid principal balance decreasing from three six basis points in the fourth quarter of 2020 to $2 three basis points in the fourth quarter of 2021. This figure represents all servicing costs, including sub servicing personnel another gene.
Hey costs, we expect this trend to continue as we grow our portfolio leveraging our investment in this business, while also providing a better customer experience.
Speaker 2: Our total expenses for the fourth quarter of 2021 decreased by 7% from the third quarter of 2021, due to lower variable expenses and lower loan origination volume and lower marketing expenses reflecting a seasonal decrease in spend. Our focus on efficiency and scale have resulted in total expenses as a percentage of total originations decreasing even as our market shares continue to increase in 2021.
Our total expenses for the fourth quarter of 2021 decreased by 7% from the third quarter of 2021 due to lower variable expenses on lower lower loan origination volume and lower marketing expenses, reflecting a seasonal decrease in spend our focus on efficiency and scale have resulted in total expenses as a percentage.
<unk> of total originations decreasing even as our market share has continued to increase in 2021.
Speaker 2: As we look ahead in the first quarter of this year, and assuming no material changes in interest rates.
As we look ahead in the first quarter of this year and assuming no material changes in interest rates or the competitive landscape, we expect pull through weighted rate lock volume of between 19, and 29 billion, reflecting the recent increase in interest rates and seasonal slowdown in demand. We also expect loan origination volume between $19.
One 4 billion, we expect first quarter pull through weighted gain on sale margins of between 202 hundred 50 basis points, reflecting the increased competitive pressure.
Considering the operating environment that we are that we are expecting we intend to continue paying our regular quarterly dividend currently yielding six 8% based on yesterday's closing price, providing an attractive current return to our shareholders.
Now, let me turn it back over to Anthony for some closing comments.
Thank you Pat.
Well pads have laid out our expectations for the first quarter, let me take this opportunity to share how we're thinking about 2022.
The mortgage bankers Association expects mortgage volumes decreased by 35% this year.
This is neither unexpected or unprecedented it's a repeat of the numerous cycles I've experienced over the course of my career.
It makes this one unique is that this may turn out to be the first sustained market decline since the passage of Dodd Frank.
Many of our competitors have not been tested during.
During both the significant market downturn and a more restrictive regulatory environment.
Many of our competitors may find it difficult to grow or even maintain their volumes without significant increases in customer acquisition and marketing costs at the same time loan officer compensation structures are less flexible in this post Dodd Frank environment. The result is that expense structure are going to be significantly tested.
Our diversified origination channels and market retail direct to consumer wholesale and joint venture partnerships.
Low us to flex as the market changes. Additionally, our investment in our in house servicing platform and growing servicing portfolio should prove to be valuable asset as interest rates increase.
Together with our investments in our tech stack and brand will bring a set of unique and differentiated assets that position us to successfully compete in a never before seen market environment.
These advantages are attractive.
And we see enormous opportunity to attract high performing loan officers to low depot as weaker models come under increasing pressure in the months to come.
We are also doing the necessary work to ensure our operations appropriately reflects our expectations for the changing market, we're adjusting our capacity to align our cost structure with our expectations for volume.
But we will continue to invest in technology to drive operational efficiencies.
And our in house servicing platform to drive deeper customer relationships, and our retail and JV origination capabilities to drive purchase volume and then our brand to drive top of the funnel consideration.
We have the capital liquidity brand awareness and employee talent to continue seizing market share even as total market origination volume fast balls.
We believe this will pay dividends when the market improves as we will be poised to start the next cycle and a dominant competitive position.
We are well positioned to demonstrate the long term value of loan depot by remaining focused on our strategic priorities, while seizing share from competitors that may not be capable of withstanding these challenging conditions.
As I noted in my previous comments, the real estate industry will consolidate and I believe we've already seen that begin.
There is an excitement and enthusiasm throughout loan depot as we prepare to demonstrate the power of the company to outperform when the market is challenging we are looking forward to sharing our success with all of you.
I am a strong believer in this company so much so that in the last quarter I personally bought $10 million of our shares on the open market.
My opinion at low depot represents an incredible value and I am confident we will continue to accelerate our growth increase our market share and serve our customers employees shareholders and communities while outperforming in the long term, we remain focused on our strategy of serving our customers through every stage of the homeownership journey.
And becoming the most trusted home owner fulfillment company in the World.
With that we're ready to turn it back to the operator for Q&A operator.
At this time I'd like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster. We will take our first question from Doug Harter with credit Suisse.
Thanks.
If I look at page 16 of your presentation, you're worried about your expenses that's had a downward trajectory can you just talk about your expectations for for the expenses in 'twenty, two and beyond in light of a smaller overall market.
Thanks, Doug Yes.
And this is a this is Patrick Flanagan. So yes, as we noted on the presentation. We have made steady progress in over the last five years taken our expenses from 369 basis points at the peak of total expenses down to 223 basis points and we're continuing to focus on adjusting.
Our capacity vendor consolidation changes in our and reductions in our real estate footprint as a result of capacity adjustments and increasing tax efficiencies.
As noted in and contracting markets, sometimes youll see marketing expenses increased slightly as theirs.
More competition.
We're reducing number of leads so although we're not providing specific guidance on the expense levels that our focus is continued.
Efficiencies. What you will also see is that we are going to continue to invest in technology and continue to invest in growing our balance sheet growing our servicing business.
Okay.
Got it yeah, and I guess just.
If you could just talk about you know kind of how you.
How comfortable you are with your current overall expense level Yo.
Compared to you know kind of where you see the gain on sale margins in the first quarter and you know kind of the ex U.
Your expected level of profitability in the near term.
Sure well as the CFO , we're always we're always working on becoming more efficient right.
We're very focused on that through the first quarter as we have we've been throughout the last year to make sure that we adjust our capacity to it to what the market size are.
The bigger unknown is where.
Gain on sale margins.
Well, we'll we'll be in the face of uncertainty and.
In in and.
In origination demand.
And I think.
We're expecting and we're dragging the business towards the guidance that we gave on on poultry weighted gate.
He alloxan lock margins for the quarter.
Hey, Doug It's Anthony So let me let me just complement pass.
Sponsored by sort of re winding up a bit and talking about total cost.
Yes, keep in mind that the pressure to goss as a reflection of the shrinkage in the marketplace going from four plus trillion dollars last year to three trillion. Historically anytime you have a <unk> three trillion dollar market. It's time for celebration, except for this year, because you're coming off of a $400 million high.
Which was a record breaker for the industry because the industry is trying to push out a trillion dollars of capacity you have this cost pressure and keep in mind that cost is going to continue to adjust.
According to some of the irrational behavior of competition try to keep its capacity full without layoffs or workforce reduction now I also want to point out the fact that even during.
Are pressured.
State like the industry is seeing today youre still looking at around 300 basis points all in from Cradle to grave and we have to remember, yes expenses labor is critically important for any sort of scale players such as loan depot and our competitors. The majority of cost in that cost is still marketing and <unk>.
Sales.
Marketing and sales is where the pressure is not necessarily the fixed expenses. So we need to pay particularly attention to that sales and marketing is well over 100 basis points and still climbing so as that sales and marketing eats up.
The biggest chunk of the available 300 basis points here in the wholesale business you are splitting that 300 basis points with your originated which is your mortgage broker. So you can really see where the pressure is to both sides. There is a lot of pressure to if your sales and marketing company and Theres a lot of pressure you're a funding our lending company.
Regardless say.
Sales and marketing performance lead management and marketing brand recognition and conversion is going to make a difference. So this is where we are highly confident going into this sort of Hep C. If you will simply because we have some of the differentiated asset that we've been working on for the last 12 years most of the cost.
Within that 300 basis points is still sales and marketing.
Great. Thank you.
Okay next we'll go to Kevin Barker with Piper Sandler.
Thank you.
Given you are continuing to drive market share here.
And margin to remain under pressure.
Do you feel like you can continue to sustain.
Positive earnings in the near term, even though there's quite a bit of pressure here.
Actually in the first quarter I understand it probably will get seasonally better in the second and third quarter, but do you feel like you have the the operating efficiency levers to be able to maintain.
That profitability and book value growth throughout 2022.
Yes, Kevin it's a great. It's a great question Frank.
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I think we tried to answer that with the guidance. We gave you we think that.
Sure.
That it's a little bit of a shrinking market with closed volume decreasing between 19 to 24 billion in the first quarter and pull through weighted locked.
In between 19 and 29.
As anthem, we are saying that you have where the pressures come in is is in marketing and sales, but we're very focused on our themes of profitable market share growth. So we haven't we haven't provided all of the answers and we understand that but we're we're busy adjusting capacity vendor.
<unk> and working on additional tax efficiencies with with the goal in mind of profitable market share growth.
Okay and then how.
How would you balance.
The opportunity cost.
Of.
Driving <unk>.
Market share gains.
Lower <unk>.
Profit margins today versus the potential for much greater profit margins in the future.
And maybe in other words can you estimate how.
What what's the difference in profitability May look like today versus what you think you can produce at some time in the future assuming we don't have another refi wave like we did in 2020 or early 2021.
Hey, Kevin It's Anthony So let me try to respond to your to your last question. So.
I would just.
Okay, everyone that profitability.
Could change instantly.
Has this pressure.
Darts to left.
This pressure could last another one to three quarters, but it will go away within that amount of time provided that the market stays right around three trillion now if it shrinks to try on two and a half that pressure will continue until the industry gets right sized and capacity.
What is important to me.
And I've seen this many times over as for us to continue to build on our assets. As an example, we are the second brand now as a non bank lender in the country.
Our brand lifted by 80% last year and brand awareness, our web traffic increased 50% year over year last year as we continue to build out a national brand that is hard to measure and profitability and we all know there are significant barriers to entry in this.
Marketplace. If you are not a scale top 10 lender today, most likely there will not be any newcomers in the top 10 for the next five to 10 years and is over or if youre not in the game today. While this market continues to adjust and this trend continues to mature the total addressable market just gets larger.
<unk> <unk>.
Because of household formation, new home sales average Loma increases Theyre, just more price for us at the around the next corner. So although this quarter next quarter is important that we certainly look at those numbers religiously every day, we're looking at expenses offsetting our competition, it's a long term view.
That allows us to be disciplined to continue to invest into technology efficiency brand and market positioning.
Okay.
I appreciate that and I think thats.
That makes sense and it will drive value over the long term.
I'm trying to find is is there any way to quantify.
What do you expect these investments to generate as far as.
Profitability targets, whether it's a return on equity return on assets or some type of long term profitability goalpost that you are targeting given these investments that you're making.
Yes, very very fair question.
And I get that.
The.
The hard part to quantify is the <unk> the return of the us.
So as I as I talked about for once that pressure starts to lift the industry is less likely a motivated sales dollar bills right. So that cost will return and that cost returns very fast in a very big way and much much faster than you are able to improve efficiency efficiency.
Gains over a long period of time gives you a competitive advantage during a downturn.
Profit is recognized in this industry when capacity starts to catch up and volumes return.
The dos that fuels the profitability not necessarily expenses expenses as your competitive advantage or in a market like this.
Got it alright, thank you for taking my questions. Thanks Anthony.
Course.
Next we'll go to James Faucette with Morgan Stanley .
Hey, Thanks, a lot Alan Thanks for taking the time. This morning wanted to follow up on the <unk> question. There Anthony in your comment when you look at the market overall I'm wondering.
How much are.
Are you reacting to what's happening with golf et cetera versus.
Being a player and what's happening there in an effort to try to gain market share and gain that long term advantage with the customer base.
And I ask that because you are now at a size, where you would think or at least I would think that we'd start to see you.
To be able to yourselves to be able to influence what those levels are at and so I'm just trying to think through like if youre looking for sure and others are and how much of an impact that may be having and why do you think that should abate over the course of 2022.
James.
We have daily morning, huddles on market conditions competitive pricing pressures and overall pricing strategy on a daily basis. So we are very close to the bifurcation of the road. If you will so far we have not been a <unk>.
Our test defense and creating the market pressures, we study what the market is doing and we certainly try to maximize our revenue opportunities, while making absolutely certain that we're competitive and there is no decay to our conversion.
We are a company that very much evaluates.
Our top line marketing return on investment we.
We are not a legacy mortgage company, where we're just waiting for loan officers to create business for us.
So there is a fine line between being aggressive on conversion.
Which is pricing versus making absolutely certain that we maximize what the market gives us. So I would say currently it doesn't mean, we want to be aggressive and to lead the market. We may but for now we constantly look at the market conditions on every morning, and we try to adjust our pricing.
Importantly.
That's really helpful context, Anthony and then my follow up question was just.
With the rising interest rates.
And you mentioned cash out refi.
Where does that specifically fit into the strategy and.
Is that meaningful enough of the segment.
Contribute to your outlook for 2022, just wondering how we should think about kind of the changing.
Potential products in the market overall, especially from from home depot.
We are we are in historical times.
Keep in mind that.
No cycle in previous history, where.
Sure.
Fannie Freddie FHA, VA or 90% of the fundings in our industry.
So going back to the last cycle.
60%.
Non government agency fundings, So let me say that again, so previous to Dodd, Frank and previous to the financial crisis of 2007 and for the three to four decades prior to that greater than 50% of the liquidity is driven by.
Private mortgage products.
Today after Dodd Frank that market has not returned non QM is a very small portion of the industry were greater than 90%. So the industry is still somewhat restricted to the type of credits that we are able to offer through ability to repay in the non QM rules and Dodd Frank.
So as I said in my opening comments. This is the first everybody. This is the first thing.
<unk> downturn in pressure that is completely different from cycles before because of our regulatory environment. So the purpose of low it doesn't change the product of the law the product of the loan is still pretty much. The same 90 plus percent Fannie Freddie FHA NVA, how the <unk>.
Consumer utilizes these products is changing simply because of rising interest rate the rate and term market is starting to disappear, but you have loss.
Consumption out there from consumers and the best way to leverage consumer credit is through still through a cash out refinance in the 3% range versus any other type of credit that a consumer can lever now the amount of volume through a cash out refinance is going to be much smaller the rate.
Chairman in 2020, but is still massive but if you have 10, if you have 10 people or 10 companies chasing after a consumers. This is what is creating the cost pressure, but that capacity will normalize in the das will retire. It does it does every time I can guarantee you that we have.
Believe that is going to happen in our opinion is the pressure is going to last anywhere from one to three quarters.
Just to add a little numbers.
Additionally, what Anthony said the transition for us and focus on less interest rate sensitive.
Consumers is well underway at the for the fourth quarter for example.
The percentage of loans that were purchased and cash out refi and our total originations with 75%.
So we've already made the transition and are continuing.
That's great. Thanks for all the data and input.
Thank you James.
Okay.
And next we'll go to Trevor Cranston with JMP Securities.
Alright, thanks, good morning.
A question on the servicing business.
The MSR assets, obviously grown pretty substantially over the last year or so.
And now that you.
If you look at it now it's larger than the company's equity base.
Can you talk about how much capacity you have to continue retaining the majority of your MSR is on originations.
Maybe in terms of like the financing you have in place for that.
And then second part of the question I think you mentioned that the expectation was that the cost to service should continue trending downwards over time I was wondering if you could maybe provide some context around kind of what level, we should think about that.
Kind of getting to over the next year or two.
Sure.
<unk>.
The level of Msr's.
Tangible net worth is a great question and it kind of falls into our capital management strategy. So.
And we continue to look at our balance sheet to make sure that we're maintaining healthy levels of both liquidity and leverage and the retention rates and construction of the MSR assets are a big lever that we can use to moderate that as noted we have very little leverage against the MSR assets.
We have additional capacity there to raise cash but we.
Also look at the market and from time to time sell.
So msr's in the form of bulk sales or co issue deals and we generally.
We generally try to be strategic and what we keep on balance sheet and we try to keep.
Loan profiles, where we have the best opportunity and chance to refinance the customer and build over the long term value and lifetime value of that customer so I think.
Youll see us maintain leverage and liquidity ratios that are similar to or close to where they currently are.
Great, Okay as far as as far as the cost of servicing.
Yes that we expect continued improvement as we move off of the subservicer platform more towards in house I don't have specific guidance to give you on where those costs can go and it's it's.
Kind of a combination of the speed in which we.
Continue to transfer.
Thing.
And the economic conditions around delinquency levels and the retention rates as the platform scales, but there is there is more room to get more efficient for sure.
Okay.
Okay got it.
I think you mentioned in the prepared remarks, the intention to maintain the dividend level.
I was curious if you could just share some thoughts around.
Why are you guys are comfortable with that given the sort of near term competitive pressures on earnings.
If there is an environment that would potentially cause you to.
Revisit the level of the dividend currently.
Yes, well, we we started.
Our life as a public company.
With the idea of creating shareholder value through a multitude of tools and earnings is one of those and paying a dividend is another and we think it's.
We think it is.
Great opportunity to be a growth company that has and generates cash flows where we're comfortable paying that and we think that we're an incredible value in today's market to six 8% dividend yield based on yesterday's close price is certainly attractive in today's market and we continue to evaluate all the tools available to create shareholder value.
And when we have the free cash flow like we have.
We'll continue to want to maintain that regular dividend. We think it's one of the attractive things about our company.
Okay. That's helpful. Thank you.
Okay next we'll go to Erin <unk> with Citigroup.
Thanks, I guess just following up on that last question.
The midpoint of your guidance range.
Equates to about $540 million of gain on sale, which is a reduction from the <unk> level in <unk>.
You have made <unk> last quarter your dividend <unk>.
I know everybody is focused on cost, but we're not getting an answer that I think theme satisfactory from a car.
Cost standpoint, you talked about.
Overcapacity in the industry, but it seems like you have yourself overcapacity and that you need to right size our cost structure.
Yes, well I think I've mentioned multiple times already that that our focus on expenses is adjusting our capacity.
And gaining additional efficiencies and technology and so we are very mindful of.
Of what the market size is and I would point to the fact that in our quarter over quarter and year over year. We've continued to reduce our expenses and so I think our experienced management team we've been through these cycles before.
And we're well prepared to two <unk>.
Just our costs and continue to focus on the things that drive long term long term value.
Put us in a position to take advantage of opportunities when the market presents.
The other thing about low depot as we have and I think in my opening remarks.
Our focus is on profitable market share gains.
That will continue to be at and we've had a long history of our biggest market share grant gains have come in the toughest markets and shrinking environments and so those are our focuses going forward.
It seemed to me that the.
Have you and rocket actually gained market share in.
The disruptive environment of kind of the.
When the pandemic first hit it.
It seems to go against what you are saying about gaining market share in a tighter mortgage environment.
If there if there is indeed overcapacity and Theres more competition I, just don't I don't.
That does that equation doesn't really make a whole lot of sense to me that to gain market share when theres more people fighting for a smaller pie.
Well I think it's the strength of our business model that allows us to do that said the diversified channel.
With a nationally recognized brand gives us a competitive advantage.
When it comes to competing with.
Others in the marketplace for a shrinking number of customers and then the growing power of our balance sheet with with over half a million customers in our servicing book today and.
And so I think that the combination of all those things is what makes us attractive and I would just point back to our history, our biggest gains in market share growth.
Tom in the contracting markets, our biggest profit comes again and expansions of market.
<unk> 2020, but we had less market share gain.
In 2020 than we did.
In times of when the market shrinks.
Sorry, yes.
Yeah, Hey, Aaron It's Anthony share I think your question is.
As warranted.
Let me just.
Explain a little bit mechanically why loan depot is very very different and contemporary times today again post Dodd Frank we are arguably and we believe the most diversified.
Modern time originator in today's marketplace.
So in addition to having consumer direct end market retail joint venture.
Third party origination, which is the broker channel. If you look at our two largest competitor one is almost 50 50 between consumer direct.
And wholesale the other one is 100% wholesale they are all great businesses, they're great competitors, we certainly respect both of them, but if you look at our model. We are fishing from a lot more ponds than our competitors. So when it comes to different marketplaces, where there's consumer direct and consumer.
<unk> is a very hard model to bill because youre not relying on existing loan officer relationships that brings your business that is more of your end market loan loan officer universe, and Thats, certainly wholesale youre waiting for mortgage broker to be originated for U S consumer direct which.
Our number one competitor and arguably there's only two scale lender you have to have a very sophisticated marketing machine and you have to be able to generate leads offline online through multiple efforts and the track that need in a way that is performing like a digital business. So even today.
Day, we last year, we generate over $10 million top of the funnel leads and we expect to have at least that level going forward. This year in a market that's decreasing 30%. So if we just look at that alone.
This year, we would drive as many digital leads at the top of the funnel as we did last year, while the market is forecasted to decrease by 30% that's going to give us an opportunity to increase market share why because we have the scale. We have the brand and we have the performance marketing asset.
That most of our legacy competitors in the mortgage industry do not have.
I appreciate that.
And that was one of the reasons why we bought favorably of your company into this but the strategy doesn't appear to be resonating with investors and your.
Even folks that have.
Wholesale focused or correspondent lending business focused businesses are trading at higher multiples than you are so there seems to be a disconnect between your story and what investors are willing to pay for that.
To make that as my final call.
Yes, and my response to that is we're obviously disappointed as well, but this is the second inning of a long game here and we certainly are very disciplined to our approach.
Next we'll go to Stephen Sheldon with William Blair.
Hey, Thanks for taking my questions most of us can actually been Ben.
Absent answered, but curious what the new product pipeline looks like.
I think you mentioned before the potential add more products and services in 2022, so it'd be great to get some more detail on what that could look like and I guess, whether M&A factor into that at all.
Yes, Hi, this is Jeff <unk>. Thank you for the question.
Yes, we're going to continually.
The lift to surgically add products as we have done already as we've seen the kind of the product.
Loan purchase shift.
In the fourth quarter.
We have the capability due to our diversification to be surgical in terms of that.
Specific markets as well as specific channels, where.
Products can enhance our opportunity for.
Profitable market share growth and.
And that includes some potential non QM, but we're going to be very mindful about our.
Our operational efficiency and the impact that that might have to our expense structure. So we want to have a very efficient products.
To the mix and in terms of M&A, we always are.
Open to M&A opportunities always curious about M&A.
While we won't be responsible there as well and they have to be the right deals and kind of a realistic context of value.
I haven't seen that as of yet, but hoping to see something in the future for sure.
Got it thank you.
And next we'll go to Mark Devries with Barclays.
Yeah. Thanks, I was hoping you could give us a sense of where your gain on sale margins trended in January and kind of where that is relative to the guidance range. You provided for the first quarter and also are you seeing any difference in the levels of margin resiliency across your different distribution channels are they all kind of under similar pressure.
So in January .
Don't have good answers for you.
<unk> ended just yesterday, so we haven't had a chance to do it but we're comfortable with the with the range that we provided.
200 to $2 50, I will tell you just in the last couple of weeks, we've seen a little more resiliency.
And margins across all of the channels.
And we have.
Yes, so we haven't really provided guidance <unk>.
Specifically.
But that resiliency is in both the partner side and the retail side that we're starting to see.
Okay got it.
Anthony let.
Let me just add my two cents on top of that generally generally and this year is no exception January is it looks better than December .
From a revenue standpoint, but it's too early to tell.
This trend is going to continue into all the way into tax season is typically what we when we look at is January all the way through April the.
The revenues hold up and then beyond April 15 packs a generally.
<unk>.
As a mortgage company start to earn.
Greater profit from from a seasonality standpoint.
But.
As of this point I think its still I still think it's very early to detect and I wanted to just go back to.
Sort of just.
Letting everybody know that the pressure is going to be on customer acquisition.
Relationship selling and mortgage business has been the vast majority of the methods through how a homeowner or a customer is found in the last few decades, but as digital disruption and devices changed the consumer's behavior.
Many of consumers are now looking at advertising branding.
To select their mortgage companies.
<unk> originate or.
Whether theyre doing direct mail or participating on Google search.
A brand it's a much harder effort.
For them to acquire customers digitally without scale without a infrastructure of our performance marketing team but.
In a year like 2020.
Everybody is a winter when it comes to customer acquisition. This year, a few will win when it comes to customer acquisition exercises.
The pressure point is more at the front end and Thats, what we paid most attention to acquiring a customer just like in any business is still the hardest thing to do.
So that.
That is what we watch carefully and we won't really know until the end of the first quarter, but so far in January we are seeing the same pattern as previous years.
Got it.
And I appreciate it's still quite early boat, but Anthony what are you seeing from your competitors.
To start removing capacity and whats.
Is your optimism that we can get to some new equilibrium kind of sooner rather than later.
We're the pressure today is already.
Now in the industry to share capacity.
So as that accelerates the faster that accelerates the faster you're going to see the return on on Goss.
So it depends on what the 10 year yield does if you look at what happened last year, we had a little blip in drop in rates and that gave the industry a little bit more life.
Capacity adjustment stops during those times.
But it's very active now as the industry is shedding capacity everyone is.
Sorting through what they need to do some companies will shrink more than others, but eventually it's going to get to a point where is the right size us with three trillion or whatever the volume is this year. So to answer your question. It depends on if the rates drop the abrasive the rates drop that's gone in to be a delay by profits will return in the short term.
And once profits go away and that Das gets pressured youre going to have capacity management again.
Okay.
Got it I appreciate it.
And next we'll go to John Davis with Raymond James.
Hey, good morning, guys.
Two quick ones first just on purchase versus refi, how do you see that playing out this year, obviously purchase will be a much bigger percentage of the market assuming rates stay here grind higher, but how does that impact loan depots market share gains.
As we shift to more of a purchase market.
Right there.
So it's Anthony J.
John So this is one of our.
Advantages as we have such a diversified origination strategy our end market loan officer.
And market strategies, along with our joint venture partners, primarily drive purchase business as the refinance business is a nice to have in those channels.
But the purchase business is our primary focus we made the decision to be in this business back in 2012 and made our first acquisition through 2013 successfully integrated and then we had our second acquisition for end market model in 2015 and successfully integrated that we've grown both.
So those businesses are successfully over the last few years, we continue to be very disciplined and very committed to this business along with our joint venture business and then on the consumer direct side. It gives us an opportunity to surgically go after non interest rate sensitive business such as <unk>.
Holiday <unk> cash out and we have seen Nash shift over the last quarter as well. So it gives us opportunities to shift because of the different types of origination channels that we have.
Okay. That's helpful. And then just it's been asked a couple of ways, but from a capital allocation perspective.
David maybe we can just start with how was that level.
Eight.
End of <unk>.
Decided upon at the time do you guys target on a multiyear basis, a certain percentage of payout of earnings and in the form of dividend. There is some sort of payout ratio just how should we think about that going forward and may make sense to buy back some of the bonds that are trading at similar or higher yields with that capital.
Maybe the push and pull of how you guys think about capital allocation will broadly.
Sure. So this is Pat I can I can take that we originally established the dividend as is.
In the range of a payout ratio and believe it is important to be to maintain a consistent dividend over time, and we understand the yield changes as a result of that but we're comfortable with returning that that level of capital back to our shareholders.
And we think we can do all the things that we talked about which is that we can continue to.
To grow organically, we can continue to invest strategically in the balance sheet and we can continue to.
<unk> value to shareholders in the form of regular dividends with the capital base and the business that we've constructed.
So.
Reading between the lines here, you guys feel comfortable with the 8% dividend yield not just for the quarter, but going forward as we go through the rest of the 'twenty one 'twenty two as well.
Im going too far there just is no we haven't.
We expect two two and intend to maintain our poorly Eric quarterly dividends.
Okay, Alright, thanks, guys.
Okay next we'll go to Ryan Nash with Goldman Sachs.
Hey, good morning, Anthony Good morning, Pat.
Good morning, Brian Good morning.
So.
Lot of questions asked regarding cost profitability and margin so.
Maybe just to go at it a little bit of a different way Anthony despite the pressures you seem to have some degree of confidence and margins improving over I think you said, 1% to three quarters, but when I think about the competitive dynamics in the industry. We obviously have some in the wholesale channel that are trying to shift capacity to that channel.
That could mean that as this is prolonged you could end up with pressure on margins lasting for longer. So how do you think about those competitive dynamics getting factored in and then second if this doesn't prove to be one to two 1% to three quarters, but it's six or eight or lasts longer.
What's plan B in terms of in terms of managing the profitability of the company.
Ryan all great questions and comments I'll just tell you. This I've been doing this since 1986, so minus the confident that you hear my voice is not from any sort of a head fake exercise I've seen this before many many many times.
And this is very early we also need to understand that as much as respect I have for all of you. This is a whole new community understanding of this industry post financial crisis. So we're all getting educated together on this particular cycle. This is a very unique.
<unk> industry. It is a phenomenal very exciting industry a lot.
When you have an industry that it can adjust 30% year over year youre going to have to work on your manufacturing plant youre going to have to squeeze the efficiency and youre going to have to work on your cost youre going to have the local work on new machines and the overall size of your manufacturing plant now that said the <unk>.
I look at it and what I believe is <unk>.
You get right sized and work on your efficiency in order for you to maintain and penetrate additional market share and you need to survive.
But the ultimate in this business is Europe your ability to scale when the market comes back because as soon as it goes down 30%. One of these years of one of these quarters, it's going to go up by 20% or 40% or in the year of 2020, we can look at how much volumes went up from 2019 to too.
'twenty and you have to maintain that Optionality and you have to be ready to scale and as the first year of our public as a public company in 2020, we printed $2 billion and pre tax earnings of a company that was organically startup just 10 years ago. So not too bad companies was created de novo as though.
Organic start at 10 years later <unk> $2 billion in profitability and we maintain that Optionality and next time when the market comes back NOL and that total addressable market is going to be larger and the barrier to entry is going to consolidate this market and we're going to be ready now in the meantime, we need to continue to be very disciplined quarter over quarter.
Week over week morning over morning, as we look at our pricing structure, but that is a bit of a noise for for me because I look at cycles and I look at trends and we have to be ready for the next cycle as this trend continues to develop.
Got it appreciate the color.
Yes.
Right.
And is the strength of the balance sheet. So we made a lot of money in 2020, we elected.
To reinvest a lot of that and growing the servicing book and so if you look at we're now over 500000 customers in over 162 billion on the servicing and so.
Growing the balance sheet.
Having countercyclical revenue streams, including non other non mortgage origination so growth in title and other things help insulate that.
And that earnings for power from the balance sheet start to be significant for us.
Got it.
Makes sense.
As a follow up Anthony just one comment I think I think a lot of us are looking at the economic backdrop potential for higher rates.
And I think we're having trouble just seeing how did the cyclical pressures and competitive pressures abate and this type of environment. So maybe any color you can give on that and then a more specific question for Pat can you maybe just talk about the level of revenues our margin to be cash flow breakeven and maybe you can just remind us.
Some of the levers you can use to generate cash flow in the short to medium term and what's the comfortable level of cash to run it. Thank you.
So Ryan let me take that and I don't want you or anybody who think that.
Ever being slippery with my answers because.
I'm, not and I'm going to be always very direct and very transparent, but let me just give you an example.
The most.
The.
At the highest level of analysts in our industry is the mortgage bankers Association.
They are obviously the trade.
Mortgage bankers association of over the course of last six years have provided guidance in December of what they believe the original four year origination market is for the following year.
They have missed it by 36% actually no 40 something percent for the last six years.
So forecasting mortgage volume.
He is very very difficult to do and even though the MBA and Fannie and Freddie get that wrong every single year, what is consistent about controlling our business is to be able to pivot with our low cost structure and then having the option.
Allergy to penetrate market share that's why when I came back when we came back in 2010, we purposely went after all of the Dd's different asset diversify origination channels and building our brand none of this happened by mistake or an accident. All of this was purposely built so.
As this trend continues to deepen pressure is good pressure is what allows a great company to be better positioned when the trend changes. So it's very difficult for us to tell you exactly what the expense structure is going to be because if I was just a wholesaler I can just tell you what it was.
Cost once the mortgage broker gives me alone when I set it up when I fund it want to underwrite at capital markets cost, but I am not just a wholesaler we are a digital business that all day, all we look at how to acquire a customer customer acquisition is our <unk>. That's what gives us our unique competitive edge is that.
Customer acquisition ability that makes us a disruptor, but that's also hard to forecast. So we're not trying to be slippery, but we need to understand that our model is uniquely different.
Got it thanks for that.
Okay.
Brian I can give you some some other some numbers.
Yes, so some of the numbers just so if you look on the investor deck on page 16 for the year, we had 223 basis points of expenses. Most of that is cash expense and so that gives you that gives you a fairly good proxy to understand where cash flow breakeven would be without the balance sheet just on originated origination activity.
And so we have a lot of levers so.
I would say that if you were keeping 100% of your servicing right you would have to you'd have to have cash the cash portion of the security sales or whole loan sales be above that to be cash flow breakeven, but the reality is we don't keep we retain somewhere and it depends on market conditions and our need for cash we we keep.
A good portion of invested in but we can and that's one of the levers. We have is what are we selling in whole loans, what are we selling and co issue deals on a monthly basis to generate cash flow and then we have very modest leverage against that $2 billion in servicing assets and we have elections for cash flow.
Two ways. There one is in short term borrowings secured by our MSR and which credits readily available.
Secondly is sales into an MSR market and it's a very robust MSR market. So we continuously look at that.
Capital management, and we have ratios that we look at as far as.
MSR is the tangible net worth and leverage and liquidity and the minimum amount of cash and so just as a benchmark and that's not a hard guideline.
We feel like if we have cash on hand, plus immediately available liquidity in the form of lines of credit that's equal to at least 5% of our total assets were were in good shape.
Thanks Pat.
Okay, and we've heard time and those with any additional questions should reach out to gearhart or daily I'll now turn the call back over to Anthony <unk> for any additional or closing remarks.
Well. Thank you all again for joining us and for your questions.
To look forward to build our relationship with all of you over the long term.
Thank you and have a great rest of your day.
This concludes today's conference call you may now disconnect.
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