UWM Holdings Corporation (NYSE:UWMC) Q4 2023 Earnings Call Transcript

UWM Holdings Corporation (NYSE:UWMC) Q4 2023 Earnings Call Transcript February 28, 2024

UWM Holdings Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning. My name is Regina and I will be your conference operator today. At this time, I would like to welcome everyone to the UWM Holdings Corporation Fourth Quarter 2023 and Full Year 2023 Earnings Conference Call. [Operator Instructions] Thank you. Blake Kolo, you may begin your conference.

Blake Kolo: Good morning. This is Blake Kolo, Chief Business Officer and Head of Investor Relations. Thank you for joining us and welcome to the fourth quarter and full year 2023 UWM Holdings Corporation’s earnings call. Before we start, I would like to remind everyone that this conference call includes forward-looking statements. For more information about factors that may cause actual results to differ materially from forward-looking statements, please refer to the earnings release that we issued this morning. I will now turn the call over to Mat Ishbia, Chairman and CEO of UWM Holdings Corporation and United Wholesale Mortgage.

Mat Ishbia: Thanks, Blake and thank you everyone for joining us today. Let’s jump right into a couple of thoughts. First off, 2023 was one of the best years in UWM’s history. It wasn’t the year that standout from a financial perspective, but will stand out from a dominance perspective. We separated from our competitors significantly on market share, growth, operational earnings and strategic investments. It was our second year as the number one overall lender. It was our third consecutive year as the number one purchase lender and our ninth consecutive year as the number one wholesale lender. As you heard me say many times before, the best mortgage companies shine in high rate markets and that’s exactly what we have done consistently here at UWM.

While there have been a lot of commentary about higher interest rates on the overall mortgage environment this year, UWM delivered our best purchase year of all time with almost $94 billion of purchase, about $20.7 billion of that being in the fourth quarter. We ended the year with over $108 billion of overall production and record market share across the board. In short, I am incredibly proud of our team’s performance throughout the year and believe this performance is also clear evidence of the strength of the broker channel. UWM and our broker partners have succeeded during times when many have failed. And now, we are uniquely positioned to take advantage of the lower rates and increased housing inventory and demand that I believe we will see over the next 6, 12 and 18 months.

Before talking about the fourth quarter, I’d like to emphasize a few key messages. First and foremost, the broker channel is strong and continues to grow its overall share of the industry. Loan officers continue to join the broker channel and real estate agents and consumers continue to see that brokers are the best choice for mortgage. Second is our investment in technology continues to give our brokers a competitive advantage on speed, price and process, always making the process faster, easier and cheaper as our focus. The gap between UWM and our competitors is only getting larger. It’s becoming that much harder to catch up given our relentless effort to continuously improve. Third, I have always stressed that UWM only competes for 2 out of 10 loans.

The good news is the broker channel team is growing and now we are competing for almost 2.5 out of 10 loans, soon that will be 3 out of 10 loans and maybe then 4 out of 10 loans. There is a tremendous upside to the broker channel and UWM is prepared to make the most of that opportunity in the future. Fourth and the point I am most proud of is unlike other mortgage companies, we have continued to invest in our people and grow our team. Since the beginning of 2023, we’ve grown our team by about 15%. We have never laid off a single team member in our 38-year history. The strength of our business gives us the ability to hire and invest in our people and we look forward to even more growth in 2024. Our culture and our team is a differentiator and people that have been to our office have been able to see that firsthand.

Finally, we remain committed to sharing our success with our shareholders. For the 13th consecutive quarter, we’ll be paying a $0.10 per share dividend. As I said multiple times before, the dividend will be paid out in good times and tougher times and is paying out in the year like 2023, should give complete confidence to the industry and to the market that it will continue going forward. Both UWM and the broker channel are ready to dominate in 2024. There is no doubt in my mind that we are strategically positioned to seize the opportunity ahead. Let’s look closer at the fourth quarter. We closed $24.4 billion in production for the quarter at the higher end of the guidance, with $20.7 billion of that coming from just purchased. Gain margin was 92 basis points, also well within guidance.

And after adjusting for changes in the fair value of MSRs due to valuation inputs or assumptions, we generated pre-tax earnings of $39.2 million in the fourth quarter and $253.7 million for the year, both significant increases from 2022. In sum, we had a great quarter in a higher rate environment than fourth quarter 2022. And I am confident 2024 will be a better year in this industry than 2023. Volume and margins should be higher, but even whether they are or not, UWM will be successful and dominate with technology and service. I am now going to turn the call over to our CFO, Andrew Hubacker.

Andrew Hubacker: Thank you, Mat. Amidst the doom and gloom that many others have espoused during 2023, we were pleased with our operational performance during Q4 and for the entire year. Purchase business continued to lead the way as our total 2023 purchase originations were higher than both 2022 and 2021 even with the higher interest rate environment for all of 2023 and the significant decrease in industry-wide origination volumes. While our fourth quarter and full year GAAP results were negatively impacted by the significant Q4 market rate declines and resulting impact to the estimated fair value of our MSRs, our operational income before considering changes in the fair value of MSRs increased significantly in Q4 and for the full year.

Adjusted EBITDA for 2023 was $478.3 million as compared to $282.4 million in 2022. And for Q4, adjusted EBITDA was $99.6 million as compared to $60.4 million in Q4 of 2022. With respect to MSRs, unlike some of our competitors, we have not historically specifically hedged the MSR portfolio. Rather, we maintain our portfolio at levels such that we are confident that fair value impacts due to interest rate declines will over time be more than offset by an increase in origination income. We also hedge our MSR portfolio in what we believe to be the most efficient manner by regularly selling MSRs, which we continue to opportunistically do throughout the year. Notwithstanding the GAAP net loss for the fourth quarter and full year, our capital and leverage ratios remain within expected ranges in the current environment.

Furthermore, our liquidity and access to liquidity, including cash and accessible borrowing capacity, approximated $2.2 billion as of the end of the year, which is a significant increase from the end of each of the last 2 years despite what many would agree were challenging market conditions for mortgage originators in those years. We believe that our current financial strength positions us well for different market cycles. Okay. I will now turn things back over to our Chairman, President and CEO, Mat Ishbia, for some closing remarks.

Mat Ishbia: Thanks, Andrew. I’ll close with a few points before jumping into Q&A with all of you guys. We’ve been a public company for over 3 years now. In that time, we hope you see that we consistently deliver on what we say we are going to do. We made a lot of different comments through the years and you can go back and listen in and we’ve always hit those consistently. We believe in 2024 will be a better overall year for the housing and mortgage industry. But regardless of the market, we will remain the best mortgage lender in America and that recipe will not change. We will continue to build the best technology and provide the best service to the broker channel, take incredible care of our 7,000 plus team members by treating them like family, dominate purchase business and reward our shareholders with a consistent dividend.

I’ll conclude by saying I’ve zeroed out that the broker channel’s fastest, easiest and cheapest way for consumers to get a mortgage and undoubtedly, the best part of the business for the loan officer to work. And we remain 100% committed to the success of this channel. We expect Q1 production to be between $22 billion and $28 billion. Also, I’ve always said the toughest mortgage environment that the lowest you’d ever see our margin would be 75 to 100 basis points, and I’ve been guiding towards those numbers for a while now. As I see the purchase market stabilizing and the refi market starting to come on, I believe that the margins will increase. So I’m going to take off our recent lows and move it to 80 to 105 basis points going forward.

You can take that as new calling bottom or officially coming off the bottom with regard to our margins. I want to thank our amazing team members and our clients for a great year. And I look forward to growing in 2024 together. Now I’m going to turn it back over to the Q&A.

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Q&A Session

Operator: [Operator Instructions] Our first question will come from the line of Kyle Joseph with Jefferies. Please go ahead.

Kyle Joseph: Hey, good morning Mat and Andrew. Thanks for taking my questions. Just want to get a sense for kind of activity quarter-to-date. Obviously, you guys have your guidance, but give us a sense for the cadence of originations kind of pre and post CPI print and how that – and potential implications for the more active spring season?

Mat Ishbia: Yes. Thanks for the question, Kyle. Appreciate it. So overall, I think we are – I can’t go into all the details, but I think we are off to a great, great start this year. I think the interest rates as we saw such a massive decline in the fourth quarter, which hit the MSRs as you know, a lot of it has come back up. So you obviously kept some of that income back on the first quarter. But we have not seen a decline from a perspective of business. That’s why I guided actually higher on production and guided to higher margins in the fourth quarter. And if you compare that to the first quarter of 2023, I think you’ll see it very favorable based on my guidance and hopefully, the execution of that. So I think this quarter will be a great quarter.

And I think, like I said in the call, 2024 should be a great year. It’s kind of like everyone kind of feels not only rates will drop a little bit, but also inventory will open up a little bit. The purchase season usually starts March, April. We feel like it didn’t even stop, and January and February were pretty good from a purchase perspective. And so we’re feeling excited about what this year looks like.

Kyle Joseph: Got it. And then just one follow-up there. You mentioned kind of the refi channel is opening up a little bit with rate movements in December. But just based on the forward curve right now, how do you expect the mix of originations in ‘24 to compare to ‘23? And are there any sort of implications there in terms of margins? Are you guys kind of agnostic to channel?

Mat Ishbia: Well, yes, I mean, usually, when rates go down, margins will go up, and that’s because there’s more action, more volume. A lot of our competitors have taken capacity out of the industry. Therefore, they’re not able to handle the volume. So when you get out of volume when refis come and rates drop, they slow it down by adding margin. And so I think margins usually go up in a refi environment, and I think we’ve seen that in the past as well. And so I do think that the purchase refi mix, I think you saw last year, we’re 85% to 88% in that range of purchase and having record numbers. That will change where it’ll be more refis in 2024 will be – we’ll go down to 70% purchase or 80% or 50%, I don’t know.

That depends on when rates drop and how much they drop. But we’re still going to continue to focus on doing a lot of purchase business because that’s what the best mortgage companies do, and that’s what we’ve been able to do even in this higher rate environment.

Kyle Joseph: Got it. Thanks for taking my questions. I can hop back in the queue.

Mat Ishbia: Thank you.

Operator: Your next question comes from the line of Bose George with KBW. Please go ahead.

Bose George: Hey, good morning. Mat, from your commentary on the broker share, it sounds like the broker share now is up to around 25% of the market. Is that right? And where do you see that going in the next couple of years?

Mat Ishbia: Yes. So thanks for the question, Bose. I appreciate it. No, I don’t think it’s at 25%. I think it’s almost there. I think it’s getting there. I think one of the last means I saw was 22.84%. And I’ve always been saying 2 out of 10 loans, and now it’s like getting closer to 2.5, I don’t [indiscernible]. And I haven’t seen the fourth quarter numbers, but I expect it to be right around that 23% number 20 – so it’s definitely going. But my point was really is we’re competing for 2 or 2.5 loans out of 10. And we’re still in a dominant position as the broker channel continues to grow and get to 3 out of 10 or 4 out of 10 loans that we can compete for, UWM is going to grow as well. And so we feel like we have the upside of the market from a rate perspective, but the upside of the broker channel as well that none of our competitors really have at least in other public competitors.

Bose George: Okay. Great. Thanks. And I wanted to ask also about the Ginnie Mae percentage. That trended up a little more. Are they doing more on the purchase side? Is there – is it streamlined refis and is a mix of everything or just any commentary that would be great?

Mat Ishbia: Yes. No, it’s mostly purchase. The great majority of our business in the fourth quarter was still purchased and so streamlined refinances aren’t really relevant, although they will become very relevant when rates drop a little bit. Right now, they are still not relevant. There is still a little bit of ways out. There is different rules and requirements around FAG streamlines and VA rules [ph], which are both from the government bucket, which you have to have a – show enough savings to a consumer. I don’t think the market has dictated that yet. But when rates get down to the low 6s or high 5s, I think you’ll see a frenzy of activity. And so I wouldn’t say it’s tied to that. I think it’s still majority purchase, but that will start to come here soon.

Bose George: Okay, great. Thank you.

Operator: Your next question comes from the line of Steve Delaney with Citizens JMP. Please go ahead.

Steve Delaney: Thanks, good morning, Mat. You’re not rebuilt around refis. We’ve been hung up here around 7% and haven’t seen a refi market for what, 3, 4 years. How low does it – do you think a 30-year rate has to go to really spur any kind of a material refi event in the industry?