Better Home & Finance Holding Company

Thank you for standing by. My name is Pam and I will be your conference operator today. At this time, I would like to welcome everyone to the Better Home and Finance Holding Company first quarter 2024 results. 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 would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star 1 again. Thank you. I would now like to turn the conference over to Hannah Kosler, the Vice President of Corporate Finance and Investor Relations at Better. You may begin.

Welcome to Better Home and Finance Holding Company's first quarter 2024 earnings conference call. My name is Hana Khosla, and I am the Vice President of Corporate Finance and Investor Relations at Better. Joining me on today's call are Vishal Garg, Founder and Chief Executive Officer of Better, and Kevin Ryan, Chief Financial Officer of Better. Certain statements we make today may constitute forward-looking statements within the meaning of federal securities laws that are based on current expectations and assumptions. These expectations and assumptions are subject to risks, uncertainties, and other factors as discussed further in our SEC filing that could cause our actual results to differ materially from our historical results. We assume no responsibility to update forward-looking statements other than as required by law. During today's discussion, management will discuss certain non-GAAP financial measures which we believe are relevant in assessing the company's financial performance. These non-GAAP financial measures should not be considered replacements for and should be read together with our GAAP results. These non-GAAP financial measures are reconciled to GAAP financial measures in today's earnings release, which is available on the investor relations section of Better's website and when filed in our quarterly report on Form 10-Q filed with the SEC. I will now turn the call over to Vishal.

Thank you, Hannah, and welcome to our first quarter 2024 earnings call. We appreciate everyone joining us today. I'd like to start by highlighting some of our key achievements during the quarter. As noted in our last earnings call, growth is our main focus, having emerged from a very challenging macro environment over the last couple of years, where the focus was on scaling back and significantly reducing expenses. I'm pleased to say that we are growing again while continuing to maximize our operating efficiency. This April, we more than doubled our monthly origination volume compared to our low point in November 2023. In the first quarter, we lean into certain growth expenses to drive increased market share, balance with continued efficiency improvements and disciplined cost management to target reaching profitability in the medium term. In short, we've delivered on growth in the first quarter while many other companies in the mortgage space were flat or down sequentially. Compared with the fourth quarter of 2023, funded loan volume rose by 25% and revenues rose by 26% in the first quarter of 2024. While still being a low-cost provider, we have been testing strategies to improve revenue for loans. This combined with additional income generated from prudently invested cash and investments helped contribute to our revenue growth. Further, the growth in the first quarter of 2024 was combined with continued strict management of expenses. with total expenses increasing 7% compared to a revenue increase of 26% sequentially versus Q4 2023. This also represented a 30% reduction in total expenses year over year and an even larger reduction compared to when we began downsizing in 2021. As discussed on our Q4 2023 earnings call, I'd like to remind everyone of our strategic priorities for 2024. Our first priority is thoughtfully leaning into growth, against which we showed early progress this quarter, increasing our funded volume and revenue since Q4 last year. Our second priority is improving operational efficiency, which we also demonstrated in the first quarter. While we leaned into certain growth expenses to produce higher volumes, we grew our revenue faster than our expenses, demonstrating operating leverage quarter over quarter sequentially. Our third priority is growing our B2B channel, enabling us to further leverage our industry-leading technology. We remain excited about the ongoing conversations we are having with potential partners. Now to provide an update on each priority from the first quarter. Starting with our first priority of leaning into growth, as I mentioned, over the past two years, we have been intensely focused on significantly reducing expenses and maximizing operating efficiency during the highly challenging macro environment. We are now seeing an opportunity to thoughtfully lean into growth to make sure we are well positioned when consumer demand returns in order to capture increased market share across our three main mortgage products, purchase, refinance, and home equity lines of credit. Looking at volume growth for each product compared sequentially with the fourth quarter of 2023, purchase loan volume increased 12%, refinance loan volume increased 232%, and HELOC loan volume increased by 54%. In purchase, we are seeing strong early results of the benefit of having experienced loan officers nurturing homebuyers through their journey. In refi, we are leaning into cash-out refi through improved sales and operational excellence, as well as consumer education around the suite of products available and helping them weigh their options against their financing goals. In our second lean product, we are seeing strong momentum given home values have appreciated while rates for primary mortgages have remained high. and customers are looking to access their home equity without resetting their first lien mortgage. We've been pleased with the strong reception to our one-day HELOC product and the still early launch of the Better Home Equity Loan, which is the latest addition to our suite of digital products. This product enables qualified homeowners to access up to 90% of their home equity as cash at a fixed interest rate in 30 states today. Eligible customers can borrow against primary, secondary, and investment properties with 10, 15, 20, or 30-year loan terms available. Throughout BetterTIS III, we have been the low-cost provider to consumers, but we are seeing opportunities to increase our revenue per loan while still remaining highly cost-competitive. In the first quarter, we saw pricing improvements, with gain-on-sale margin increasing to 2.37% in the first quarter of 2024 compared to 2.03% for the full year of 2023. Drivers of this margin improvement include increased pricing while still remaining the low-cost provider, efforts to limit the use of sales concessions, and a focus on driving consumer retention through improved service versus discounting, as well as continued efforts to optimize for the best execution across our network of loan purchasers, including the GSEs. We are also continuously evaluating our loan repurchase reserve and saw revenue benefits through realizing recoveries in the first quarter of 2024. Moving to our second priority of operational efficiency and variabilizing loan production expenses, As mentioned last quarter, we've adopted a new operating model and compensation structure for our sales teams with lower bases and higher commissions to better align costs with volumes and drive conversion outcomes, and also enable us to recruit seasoned loan officers and empower them via our tech platform in a way we were never able to do before. We continue to showcase that we can hire experienced loan officers to prepare for purchase season. We have seen positive early results of this shift on loan officer productivity, with our loan officers closing significantly more loans per month on average than a peer set of large independent consumer direct lenders, based on a third party benchmarking study Better participated in. From this study, we learned that in 2023, Better's loan officers closed an average 17.7 purchase loans per month, while the peer set average was in the mid single digits. We believe the future lies in Uberizing the loan officer, giving them leads generated by Better on our proprietary tech platform and customer interface, and having them be more productive. Additionally, we have continued leaning into marketing efforts, as discussed on our fourth quarter call. Our marketing and advertising expenses increased 27% from $3.6 million in Q4 2023 to $4.6 million in Q1 2024, and we expect these to further increase as the year goes on. These customer acquisition initiatives are highly programmatic and done in a controlled manner, predominantly through digital marketing on existing and new channels. We can immediately evaluate return on acquisition spend and modulate up or down based on performance. We are still early in our expansion into a handful of new marketing channels, but are seeing positive early results that we expect to scale as the year progresses. We are also excited to announce a leadership update for our mortgage business. Chad Smith joined us last week as President and Chief Operating Officer of Better Mortgage Corporation. Chad brings a wealth of experience to Better and has a proven track record of building sales and operations teams into high-growth mortgage industry-leading platforms. He joins us with over 25 years of mortgage experience under his belt, working with companies like Caliber Home Loans, Discover, Loan Depot, and LendingTree. Most recently, Chad served as CEO of Mission Home Loans. With Chad's valuable experience and deep expertise, I feel confident he will help drive our growth and contribute meaningfully to the success of Better. Chad will be responsible for helping us set our long-term strategy and scale our marketing sales and operations teams, as well as help drive performance and accountability for delivering results that align with our strategic vision. Finishing with our third priority of growing our B2B mortgage as a service distribution channel, we continue to see demand for our technology and origination capabilities from new partners with strong brands who are looking to offer mortgages to their customers in a cost-efficient way. We believe the conversations we are having as part of our continued pipeline demonstrate a strong product market fit for our B2B offerings and demand for our technology. Looking beyond 2024, the medium-term opportunity for better remains very exciting. We are focused on, first, enhancing our go-to-market with growth being our North Star, and second, continuing to invest in automation through the cycle. In terms of go-to-market, we expect our experienced loan officers to drive improved customer conversion in a cost-efficient manner, specifically converting website visitors to funded customers, particularly on the purchase side. We expect to manage costs through a highly variable sales compensation model and continued automation that drives down non-customer-facing costs. Further, we expect the expansion underway across our D2C acquisition channels, in addition to the B2B partnership pipeline, to expand the breadth of customers we are reaching. We continue to invest in Tin Man, our proprietary technology platform, to improve the customer experience and further drive down labor costs, making our platform more efficient and scalable and enabling us to provide our customers with lower rates, higher approvals, and certainty earlier in the mortgage process. Tin Man powers our highly differentiated competitive advantage and drives our better, faster, and cheaper customer experience. In summary, we have a large and attractive market opportunity, a track record of knowing how to scale for growth when the macro environment permits and how to reduce expenses when it doesn't, a business model that is balance sheet and credit risk light, a competitive advantage powered by our technology and industry-leading products, a medium-term plan for growth and profitability, and a healthy cash position. We are excited to be leaning back into growth in the first quarter of 2024 and excited about the market green shoots we are seeing thus far in Q2. With that, let me now turn it over to Kevin Ryan, our Chief Financial Officer, who will discuss the quarterly performance and our financial strategy. Kevin?

Thank you, Vishal. As mentioned, we are excited to report that Better is growing again, while continuing to be laser focused on maximizing operating efficiency. While we expect improvement in the mortgage market in the medium term, this will likely take some time. To that end, we will continue to thoughtfully lean into certain growth expenses to drive increased revenue and market share, which will be balanced by continued cost discipline to target reaching profitability in the medium term. I'll turn now to the financial results of the first quarter. This quarter, we made a number of changes to the presentation of our statement of operations, as well as reclassifications to the previously reported P&L to align with the new presentation. With these changes, we seek to provide increased transparency to the nature of revenue and cost and better align our P&L presentation to peer public companies. We reclassified our revenue reporting to line up with key components of our revenue, gain on loans net, net interest income, and other revenue. We also include loan repurchase reserves activity in gain on loans and net interest income generated by our large amount of invested cash and net interest income, both components of revenue. We also reclassified our cost line items to align with the key components of expenses, specifically loan origination expenses, compensation and benefits, marketing and advertising, technology, general administrative, and depreciation and amortization. During the first quarter of 2024, we generated funded loan volume of $661 million. This was above the high end of our prior guidance of approximately 600 to 650 million. We generated revenue of approximately $22 million and an adjusted EBITDA loss of approximately 31 million. Our first quarter funded loan volume is 54% generated through our direct-to-consumer channel, and 46% generated through our business-to-business partner channel. It was 80% purchase loans, 12% refinance, and the remainder was HELOC by dollar volume. Now, I'll touch briefly on our balance sheet and capital positioning. We ended the first quarter of 2024 with $509 million of cash, restricted cash, and short-term investments. We believe that our cash position is well in excess of other originators of our size. Therefore, we are well capitalized for growth, as our cash position provides us with the liquidity to continue executing against our vision and corporate objectives. In addition, we retain strong relationships with our financing counterparties to manage mortgage working capital, even in this lower volume environment. As of March 31, 2024, we had three warehouse facilities for a total capacity of $425 million. I'll turn now to our full year 2024 outlook. We are in growth mode. We continue to expect funded loan volume to increase in 2024 compared to 2023 as we prudently increase customer acquisition spend in the highest returning channels and increase origination capacity to limited hiring and production goals. For the second quarter of 2024, we expect to generate a funded loan volume of above $800 million. A quarter over quarter increase of more than 20% versus the first quarter of 2024, and more than 50% versus Q4 of 2023. As we grow and our volume increases, We have not forgotten cost management. We will continue to reduce our corporate overhead, our vendor costs, and other costs will reduce due to further automation. Accordingly, we expect operating leverage in the business during 2024. As a result of increased growth expenses offset by continued expense reductions, we expect total expenses to be approximately flat in 2024, compared to 2023 with revenue higher. Lastly, we expect customer conversion to improve with continued investment in Kinman, increasingly variable sales compensation plans, improved purchase product offerings, and investments in real estate agent relationships. Thank you for your interest in Better, and I'll now turn it back to the operator for Q&A.

in the question and answer session. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. If you are called upon to ask a question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Again, press star one to join the queue. And your first question comes from the line of Ryan Tomasello with KBW. Please go ahead.

Good morning, everyone. Thanks for taking the questions. You touched on it in your prepared remarks, but I was hoping you can provide additional color on the traction you're seeing in expanding the B2B channel, how the pipeline there is looking, and generally how conversations are moving around potential new relationships.

Sure. Hey, good morning, Ryan. It's Kevin. I'm sure Richelle will jump in as well. Look, our dialogue is as good as it's ever been in this channel, and I think there's a few components to that. I think we feel like we're at or hopefully just came through the low point of the cycle. So I think our primary targets on B2B are banks. A lot of banks have pulled back in mortgage. It's been tough to make money for them. but it's a core offering for their consumers. Anybody who's in consumer banking wants to offer mortgage. And so our dialogues are very strong. You know, we have a partnership with Emphasis. Emphasis is a, you know, like a BPO provider to hundreds of banks across the United States. They've helped us get some additional introductions to people that we were not talking to already. Obviously, we have a pipeline of people we're talking to. You know, the only... The thing to say about B2B, and we love the channel, we're going to grow the channel, and it's a big focus of ours, these things take time. People have legacy technology contracts that run two, three, four years before they would migrate over to our 10-man platform. That's a component to this. They have other strategic priorities, just given what's going on in the banking sector, for example. So that takes some time. So I think our dialogue is as high as it's ever been, certainly in the four years I've been here. This is the best dialogue we've ever had. But these things take time. They take time to win the business. They take time to set it up, to integrate, et cetera. And so we're very hopeful for 2025, 2026. And we're going to keep pushing ahead on it.

Great. And then as a follow-up here, a separate topic, if you could just elaborate on some of the efforts underway to improve conversion, any specific changes you're making throughout the funnel, And within the TINMAN platform that I think you alluded to, Kevin, any early stats there you can share around conversion, where it was, where it is, could be helpful, or generally where you think it could go over time if some of these efforts are successful?

Sure. Thank you. That's a great question. We've seen some dramatic improvements in conversion. Um, as we have been particularly in the purchase product, as we've been hiring experienced loan officers and getting them up and running, you know, we're taking loan officers that we're doing 1 to 2 loans a month and they're coming on board and we're in 2 to 3 months able to get them to do 10 loans a month. So that's a dramatic improvement in their productivity. One of the things that these experienced loan officers know how to do that I would admit that our unexperienced loan officers that we hired primarily for our refinance business in the first eight years of the company didn't know how to do was talk to the realtor and inject confidence into the product. So historically, one out of five deals where better was the pre-approval provider would would be the where better ends up being the loan that gets funded and so that means you know for every five pre-approvals we were issuing you know only one of them was actually turning into a loan if that person went to buy a house and so uh the other four were getting funded by other people and what we're seeing now is a dramatic change in that um so we think that that's going to improve our unit economics dramatically because you know, while we acquire customers, we're now going to be actually able to generate revenue from those customers in a much more meaningful manner. And we look forward to sharing that data with you in deeper granularity as we start to continue to make progress on the experienced loan officer hiring that we're doing.

Great. Thanks for taking the questions.

Your next question comes from the line of Reginald Smith with JP Morgan. Please go ahead.

Hey, good morning, and thanks for taking the question. I guess kind of a more of a bigger picture question. Thinking about the HELOC product, it feels like, just anecdotally, it's a product that consumers haven't really used or looked at in probably 15, almost 20 years. A question for you guys is how aware do you think consumers are of the product and does it require a level of education to get people on board with it now and have a follow-up?

Thank you. You're 100% right. We have to explain HELOCs and HELONs to an entirely new generation of American homeowners. as well as re-explain it to a generation of homeowners that haven't had access to it for almost 15 years. And as you know, there really isn't a dominant HELOC provider in the market. There's no brand associated with HELOCs. And so all of us are trying to do customer education and, you know, help consumers make the right choice between credit cards and personal installment loans, which now have had almost 10 years of education on the personal installment loan side, and obviously like 50 years of education on the credit card side. You know, we're trying to re-educate these consumers. We think there's huge potential out there, and we believe that the game has yet to even start. We're in the first inning of HELOCs, and we've got a industry leading product with one day HELOC where we're able to take a consumer from a click to a commitment letter on a HELOC within one day, which is, you know, unrivaled in the industry. And we believe that as we are able to ramp our marketing budget, explain the HELOC to the consumers, scale that, there's just significant growth ahead for us in that. The HELOC product also is very similar to the refinance product in that there isn't any realtor intermediation. And so we believe that in HELOCs we can long-term achieve the same kind of market share that we used to achieve in refinance, which is, you know, around 2%. So that's, you know, and that's just to get started on the HELOC product as we ramp it up. and make it more of a focus here at the company.

Yeah, I mean, we will, we get like data on web traffic and stuff. People searching for what is a HELOC, how, you know, how can it help me is really high compared to a traditional mortgage. So as Michelle said, Reggie, we 100% agree with you. And we look in a higher for longer scenario, which seems more and more likely, just given economic data, very few home transactions high hpa so people have a lot of equity in their homes and given consumer debt as you've kind of run through the covid stimulus this is a very attractive alternative as michelle said to credit cards personal loans etc so our our gut is the industry will grow meaningfully over this next 12 months meaning he locks um and we have a really big part to playing out and we have a one-day offering so we think we have the best offering in the marketplace

Now, that makes a lot of sense. And I guess if we could dig in a little bit deeper. So thinking about today, how you get a HELOC customer, I would imagine that, like you said, maybe they're searching for it and they're coming in that way. Is that the case or are you maybe partnering or is an opportunity maybe to partner with other financial institutions that may offer, I don't know, personal loans that are turning those people down? Like, it seems like there's an opportunity to kind of collaborate. And I guess I'm curious, like, how are you thinking about that? Am I totally off on that? Because there seems to be, you know, I cover personal loan companies, and they're tightening up. And this product, the HELOC product, lower interest rate than personal loans, credit cards, et cetera. So my question is, how are you thinking about collaborating with others in the industry?

We're thinking about collaborating with the personal installment loan players. We're thinking of collaborating with the folks that now that we have the one day HELOC product that usually would have gone to the home installment loan or home improvement loan players. And we're working on collaborating with a few banks on HELOC as a service, where these banks have mortgage divisions that are fairly active and have a large servicing book, but don't have a HELOC product to offer to those customers. So we're out, you know, pitching that to across a broad range of financial institutions.

Sounds like a good opportunity. Thanks for taking my question.

Your next question comes from the line of Jamie Friedman with Susquehanna. Please go ahead.

Hi, good morning. I just had a kind of higher level question, and some of this has been addressed with Reggie's question earlier, but I was Wondering if you could share your perspective as to which product areas in general you're expecting will drive the volume growth in 2024 and beyond.

Yeah, I mean, I'll start and Michelle jump in. Certainly HELOC. If we think about, you know, we're guiding, as we said, we're guiding up a bunch again, Q2 versus Q1, which is up a bunch, Q1 versus Q4. I think HELOC, cash out refi are a big part of it, right? I mean, the purchase market remains slow. We're clearly going to grow there as well. We're going across the board actively, 20% plus a quarter, but HELOC will be a big part of it.

Yep. I actually have very high hopes for the purchase product, particularly as we enter into home buying season. And as we... onboard the experienced loan officers to help address the conversion issues we've historically had on the purchase product that plus our efforts to recruit realtors onto the better agent match program and the better duo program are likely to start paying significant dividends in the coming quarters ahead both in 24 and looking into 25 particularly for the purchase side Where I see purchase today from a growth and unit economics perspective is pretty similar to where I saw refi back in 2018, 2019 when we were small but growing quite rapidly. Our position in the refi market and, you know, this was before even COVID hit and the rates dropped, rates were higher then, but we were able to make significant meaningful market share gains leveraging the technology. And so I see purchase today very similar to where we were with refi in 2018, 2019. And I think there's a lot, a lot of room to grow on that.

Great. Thank you for the perspective. I appreciate it. All the best.

There are no questions. I will now turn the conference back over to Hannah for closing remarks.

Thank you, everyone, for joining us for the earnings update, and we really look forward to seeing you again next quarter.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.