Guild Holdings Company

Good morning, ladies and gentlemen, and welcome to the Guild Holdings Company first quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. As a reminder, this call is being recorded. I would now like to turn the conference over to Michael Kim, Investor Relations. Please go ahead, Michael.

Thank you and good morning everyone. Before we begin, I'd like to remind everyone that comments on this conference call may contain certain forward-looking statements regarding the company's expected operating and financial performance for future periods. These statements are based on the company's current expectations. Actual results for future periods may differ materially from those expressed or implied by these forward-looking statements due to a number of risks or other factors that are described in greater detail under risk factors in GILDS Form 10-K and 10-Q and other reports filed with the U.S. Securities and Exchange Commission. Additionally, today's remarks will refer to certain non-GAAP financial measures. Reconciliations of non-GAAP financial measures, where appropriate, to the corresponding GAAP measures can be found in today's earnings release filed with the SEC on as well as on Guild's Investor Relations website. Participating in the call today are Chief Executive Officer Mary Ann McGarry, President Terry Schmidt, and Chief Operating Officer David Nalen. Now I'd like to turn the call over to Mary Ann McGarry. Mary Ann?

Thanks, Michael, and good morning, everyone. We've got a fair amount to cover today with our earnings and the acquisition we announced this morning, and we want to make sure to leave plenty of time to address questions. So let's get started. Terry and I will walk through highlights from our first quarter results, and then we'll turn our attention to our acquisition of Residential Mortgage Services, or RMS for short. We posted a presentation on our website and will be referencing during our prepared remarks. So starting on slide three, key highlights for the first quarter included strong growth in originations with funded volumes up 70% year over year. In turn, our net revenue more than tripled while our net income and adjusted net income were up strongly versus the prior year quarter. We believe our results reinforce our differentiated business model focused on purchase lending, which has generated more consistent origination volumes and higher returns versus refinancing activity across interest rate cycles. Furthermore, our expanding geographic footprint both through acquisitions and organic growth, remains a key competitive advantage when it comes to driving profitable growth and shareholder value. We are growing our business in existing MSAs and entering new markets by recruiting loan officers to our platform. Over the last five years, 80% of Guild's production has come from loan officers that are still with Guild. This approach results in our high retention rates, and our ongoing coaching programs and system enhancements drive improving productivity for our existing loan officers. Technology continues to reshape the mortgage industry, and we believe our proprietary platform will increasingly add value. Our data analytics help us optimize prospecting. while our digital capabilities provide clients with a full suite of production and fulfillment services. And we focus on optimizing the servicing portfolio and client retention. Originating loan officers maintain relationships, which drives repeat business. And our data reinforces the efficacy of our model, with our refinance recapture rate remaining strong at 69% for the quarter. So with that, I'd like to turn it over to our president, Terry Schmidt. Terry?

Thanks, Mary Ann. We're pleased to again report strong financial results for Guild Holdings Company. For the first quarter of 2021, we generated $9.8 billion of loan originations, representing 70% growth year over year. Net revenue totaled $526 million, up more than 200% from $170 million in the first quarter of 2020, while net income totaled $161 million, or $2.67 per diluted share. Adjusted net income, which excludes the change in fair value of MSRs due to model inputs and assumptions, acquisition-related contingent liabilities, and stock-based compensation, was up 84% year-over-year to $106 million, primarily driven by the strong growth in origination volumes. And we generated adjusted earnings per share of $1.77 for the quarter. Starting with our origination segment, volume growth over the year-ago quarter remained strong. Pull-through adjusted locked volume totaled $9.3 billion in the first quarter. with 37% of closed loan origination volume from purchased business, compared to the Mortgage Bankers Association average of 29%. Gain on sale margins on originations increased by 9% year-over-year to 457 basis points, while the margin on pull-through adjusted locked volume grew 61% year-over-year to 480 basis points. Segment net revenue grew 86% year-over-year to $448 million, primarily driven by higher loan origination fees and gain on sale of loans. Putting it all together, the origination segment net income increased to $160 million for the quarter, up 133% year-over-year from $69 million. Turning to our servicing business, our unpaid principal balance grew 25% year-over-year to $63 billion as of March 31, 2021. Following suit, total loan servicing and other fees increased by 17% year-over-year to $45 million for the first quarter of 2021, with net income attributed to the servicing segment totaling $67 million compared to a loss of $79 million in the prior year quarter, largely reflecting a favorable turnaround in MSR fair value adjustments. Importantly, we retained servicing rights for 94% of total loans sold in the first quarter of 2021, further reinforcing our symbiotic business model that drives sustainable growth across a variety of market and interest rate backdrops. Our balance sheet remains strong and highly liquid with $315 million of cash and cash equivalents, excluding funds used to pay down our warehouse lines, as well as $2.1 billion of warehouse lines of credit with unused capacity of $1 billion as of March 31, 2021. We remain focused on capital allocation to drive long-term value for our shareholders. In addition to funding originations, ongoing reinvestment in the business and the RMS acquisition, the Board of Directors declared a special cash dividend of $1 per share payable on or about May 28, 2021, to our Class A and Class B common stockholders of record on May 21, 2021. While we are not providing forward-looking guidance, we did want to provide an update on the second quarter. To that point, for April 2021, our loan origination volume was $2.8 billion, and total pull-through adjusted locked volume was approximately $2.5 billion. In looking ahead, as many others in the industry have communicated, we do anticipate several macro factors to challenge near-term growth prospects for the mortgage industry more broadly. From a volume perspective, refinance activity likely continues to soften as interest rates rise. Turning now to profitability. Gain on sale margins will likely normalize as supply and demand trends converge and competition remains intense. We are not immune to these macro headwinds, which we expect will impact near-term trends across origination volumes, gain on sale margins, revenue, and earnings. That said, we remain confident in delivering sustainable and profitable growth across cycles reinforced by our 60-year track record. reflecting our differentiated purchase-focused business model and scale-enabled retail distribution platform combined with our proprietary technology stack. More specifically, industry origination volumes are expected to increasingly favor purchase volumes as interest rate cycles turn. Moreover, our purchase business is different in that we compete on service, not price, and leverage our longstanding relationships with existing referral partners and past clients. Finally, the retail channel has historically driven higher gain-on-sale margins relative to the wholesale and correspondent channels. So now, let me turn it back to Marianne to discuss our exciting residential mortgage services acquisition. Marianne?

Thanks, Terry. We're pleased to announce the acquisition of residential mortgage services. We think this transaction is compelling from a strategic and financial perspective and represents a very attractive use of capital. Terry and I will provide some of the transaction highlights. Let me start by emphasizing this is a powerful combination that will be accretive to earnings, with RMS increasingly leveraging GILD's scale, technology, and in-house platform to accelerate growth in originations, market share, and profitability as we move forward. The upfront purchase price equates to three and a quarter times estimated 2021 earnings, which we believe is an attractive valuation multiple. The upfront consideration will consist of 91% cash and 9% stock. In addition, the transaction structure includes an earn-out component to align our interests. More specifically, the consideration includes a three-year earn-out that is capped at 50% of RMS's pre-tax production segment earnings, subject to minimum profitability hurdles. This transaction is expected to close in the third quarter of 2021, and RMS's management team and key personnel will continue to run their business. Turning to slide nine, let me walk through the transaction highlights. First, RMS's impressive leading position in the Northeast will extend and complement our geographic footprint into key markets, thereby meaningfully enhancing our prospects for growth. By leveraging Guild's in-house servicing capabilities, technology, and expertise, RMS will be better positioned to extend the length of client relationships and capture repeat business. Second, RMS's business mix is highly aligned and mirrors Guild's in terms of their focus on purchase business through the retail channel. Since 2010, purchase origination volumes as a percentage of total originations have averaged 69% at Guild and 70% for RMS, or 22% and 23% higher than the broader market respectfully. We believe this positions us well to continue to generate durable volume and consistent margins post-close. Similarities in strategy and a client-centric approach will allow us to provide clients with a consistent experience across the United States and efficiently integrate RMS. Third, as I mentioned earlier, the transaction is very compelling from a financial standpoint. We are leveraging our strong and liquid balance sheet, and we expect the transaction to be accretive to 2021 earnings per share. Fourth, the deal represents a great opportunity to invest excess cash to generate an attractive return on capital. Fifth, there is a strong culture alignment, with both teams dedicated to supporting local communities and building trusted client relations. Our similar values will enable Jill to efficiently integrate RMS and provide clients with a memorable customer experience across the United States. Sixth, we expect to generate enhanced gain-on-sale margins for RMS and realize expense synergies over time, further strengthening our proven M&A track record. And finally... This is our seventh successful acquisition since 2008, reinforcing our proven and disciplined M&A strategy. Turning to slide 10, RMS is an independent retail lender with a strong presence in the Northeast. Founded in 1991, the company has offices across 14 New England and Mid-Atlantic states and and is the number one purchase lender in Maine and New Hampshire. Led by President and CEO James Seeley, RMS maintains a strong and tenured management team. While 2020 was a banner year for RMS, with $8.5 billion of originations and more than $100 million of net income, even more impressive is the company's strong and consistent growth and business mix over time. Origination volumes have compounded at an annual growth rate of 26%, while purchase loans have accounted for 70% of total origination volumes over the last 10 years, as shown in the appendix. So in summary, we expect this transaction will strengthen our platform given the many synergies between our geographic reach, products, sales tools, and servicing teams. As a result, we are even more confident in being able to deliver profitable growth across cycles and drive long-term value for shareholders. So with that, I will pass it back over to Terri to discuss the business and financial benefits in greater detail.

Thank you, Mary Ann. I wanted to spend some time walking through the strategic and financial attributes for this transaction on slide 11. At a high level, RMS fits well into our disciplined acquisition strategy given the firm's strong presence in local markets, purchase orientation, and cultural alignment. More specifically, RMS brings immediate scale to a new region with strong potential upside for growth under Guild's leadership. And there is a great deal of consistency across our two firms as it relates to business mixes, distribution channel focus, marketing strategies, and corporate cultures. We believe these similarities will facilitate a smooth integration process, ongoing excellence in customer service and sustainable origination volumes, margins, and earnings even as the interest rate backdrop shifts. From a financial standpoint, we expect the acquisition to be highly accretive from an earnings perspective as we anticipate driving synergies over time reflecting our proven execution capabilities, and operational expertise, even as RMS already maintains attractive ROEs on a standalone basis. So the transaction opens up a sizable and previously untapped market for us with strong potential upside for growth, and you can see the strong and consistent growth RMS has generated over the last 10 years on slide 18 in the appendix. Moving over to slide 12 maps out our geographic reach before and after the RMS acquisition. As clearly demonstrated, the acquisition of RMS further enhances our nationwide presence and provides a strong foothold in the Northeast. Through the transaction, we will add 250 loan officers in approximately 70 branch locations, bringing our total loan officer count to more than 1,350 across 270 retail branches. On slide 13, we lay out how adding RMS in the mix leverages our core competencies and enhances our competitive positioning and growth prospects. As mentioned earlier, RMS's business mix is strongly aligned, consistent with the Guild's footprint given its purchase-focused retail strategy. Pro forma for the acquisition, GILD with RMS combined generated $42 billion of retail channel originations last year, ranking seventh amongst non-bank lenders in 2020, as shown on the chart on the bottom left. And looking at the five-year period ended December 31, 2020, purchase loans accounting for 72% of RMS's origination volumes, bringing our pro forma mix to 66%. or 15 percentage points above the overall market at 51%. In essence, we are doubling down on the purchase market with the retail channel, which we believe will drive more consistent earnings and more attractive gain-on-sell margins across interest rate cycles. We have a history of growing through targeted acquisitions with a disciplined strategy and proven track record, as shown on slide 14. More broadly, we look to partner with management teams that share our values and commitment to innovation, creativity, and collaboration. We continue to focus on companies that maintain strong positions in local markets with clearly defined approaches to driving sustainable growth. We prioritize incorporating meaningful earnouts as a key component of transaction structures to align interests and maintain attractive return on investment. And post-acquisition, while we implement integration plans to optimize operational efficiencies, we also allow them to continue executing on strategies that have driven historical growth and made them successful. Another key component of our strategy is driving strong growth and realizing meaningful synergies post-acquisition. Looking back across the six transactions completed over the last 12 years, origination volumes for acquired companies increased by averages of 29% and 37% in the second and third years following each transaction closing. Finally, slide 15 shows the timeline for the seven acquisitions we have made since 2008. While the transactions have varied in terms of sizes, footprints, and contributions, the we've been able to consistently enhance growth post-acquisition. Drivers include increasing market share and volumes, enhancing gain on sale margins, leveraging Guild's proprietary technology platform to improve efficiencies, and realized expense synergies. Looking ahead, we expect to continue to leverage our public currency and strong brand to further accelerate growth with ample balance sheet capacity to capitalize on incremental M&A opportunities should they arise. Before we take questions, we wanted to wish Amber, our CFO, and her new baby well. So with that, I will turn it back to the operator to open up the call for questions. Operator?

Thank you. We will now begin the question and answer session. To join the question queue, you may press star, then 1 on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then 2. We will pause for a moment as callers join the queue. The first question comes from Don Fandetti with Wells Fargo. Please go ahead.

Good morning. So, you know, it looks like gain-on-sell margin held up pretty well in Q1 and March. I was wondering if you could talk a little bit about the near-term outlook in April and going forward gain-on-sell for adjusted lock volumes. You know, a lot of peers have talked about significant contraction in that margin.

Sure, I can take that question. This is Terry. Yeah, we are – following the industry as far as getting caught up with capacity and seeing that the industry is just margins are tightening getting back to normalized levels so historically we outside of refinance periods we've averaged about 380 basis points in gain on sale and expect that that type of trend is we're starting to see that, similar to our historical levels.

Got it. And then on the dividend, you know, the dollar special dividend, is that going to be the sort of plan going forward that we'll see special rather than a quarterly ongoing dividend?

This is Diane.

Yes.

Okay. All right. Thank you.

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

Thank you for taking my question, and Don really hit upon it in terms of what you see in terms of normalization again on sale. Two things to note. explore just a little bit further. As we reach equilibrium, just like we saw a period of gain on sale that exceeded historical norms, where historically have you seen a trough during the periods where equilibrium is resetting and supply actually exceeds demand?

You know, we're not giving forward guidance on gain on sale. However, I would say that historically the low was probably about 50 basis points below the 380 mark. But on average, again, we've over time been extremely consistent at the 380 mark.

Got it. And I appreciate both that that is not guidance and also your willingness to provide some context. Both are helpful. As that shifts, should we think about the composition of gain on sale shifting a little bit in terms of mix of cash and MSR cap as well?

I would say that would be the case because as rates rise, the value of the MSR goes up. And we're already seeing that our MSR value, because of the rate increasing, the prepayment speed slowing down, the values are starting to increase. So it will change somewhat to be a little bit higher weighted on MSRs, on the MSR side.

Got it. And then last question. When we think about that cash mix and we think about your commission expense, can you reach a level where the cash gain on sale is below commission or is it going to, does it sort of Do you just reach a point of breakeven? How should we think about that just from a cash flow perspective?

Historically, we've never reached that point.

Okay, great. Thank you guys very much, and congratulations to Amber.

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

All right, thanks. So on the RMS acquisition, first just a point of clarification. When you mentioned the purchase price and the company's tangible book value, is the expected purchase price just equal to tangible book value, or is there any sort of premium to book built into that?

There is a $80 million premium, cash premium that we're – paying above book, tangible book.

Okay, I got you. And can you say how much of their book, how large their servicing portfolio is that will be coming over as part of the acquisition?

Sure. They have a $700 million approximate servicing portfolio, so it's very small. So we really looked at this transaction as a multiple of earnings, because their balance sheet is really mostly short-term inventory-related, and the entire balance sheet outside of the MSR will probably turn in, you know, 90 days. So it's really an earnings multiple play. Okay.

That makes sense. And I guess, you know, as you laid out the sort of similarities in the companies and why it was an attractive target for you guys to go after. You know, and as you mentioned, the synergies you expect to be able to realize over time. I guess has RMS historically been a company that's been able to recapture on servicing, or has that not really been something they focus on? And is that, you know, a part of the – but the synergy that you guys think comes through for the combined company over the time is bringing the recapture expertise you guys have to the business that they've been doing.

Trevor, this is Marianne. I can answer that. What we see is they have a strong purchase hold, and since they don't have a portfolio, they don't recapture anything. like we have and don't have, we see that as a synergy going forward. But they have such strong customer relationships that they did do a fair amount of refinance transactions just from their own CRM and building relationships. But we see that as a very positive synergy going forward. And with our platform and technology and ability to stay connected connected with our customers through the life of the loan, we feel that they will benefit from our technology and CRM platform.

Yeah, to add to Marianne's point, their business model has been primarily to sell on a service release basis and or sell the servicing on a flow basis. So Their servicing was so small just when there was some liquidity issues back in March, they started retaining some volume. But their long-term plan has been to service release, so they are super, super excited to be at Guild to be able to get that, to drive that life of loan and customer for life concept and service. that they just feel like that's such a huge part of growing their business going forward. So we're really excited. Okay.

That makes a lot of sense. Thanks for the comments.

Mm-hmm. Once again, if you have a question, please press star, then 1. The next questioner is Guglielmo Bologna with Compass Point. Please go ahead.

Good morning and congratulations on a great and productive quarter with the dividend and the acquisition. I guess starting off with a little bit more housekeeping types of questions, I'd be curious how much cash is currently being used to pay down the warehouse lines and also the MSR lines just to get a sense of what your total liquidity is and then a similar kind of clean-up topic is if there's any genuine EVO contribution in the period.

Sure. So our cash at the end of Q1 was $315 million, and our buy-down on the warehouse side was $131 million. So if you add that, our total cash was about $426 million. And then we actually paid down our MSR financing at the end of the year, and so our MSR is leveraged at about 30%, so we've got a lot of capacity there to borrow. So we're in still very good shape from a cash perspective, and we feel like we have a lot of different levers to get to liquidity if we needed it, and so we feel very comfortable where we're at.

That sounds very good. Then switching over to kind of the acquisition for quite quickly, obviously they've been selling on a service release basis the majority of their production volume historically. I would be curious from a margin perspective, obviously there's some margin impacts to that, and I'm curious if there's margin upside opportunities. I realize it's not necessarily, it's hard to necessarily say exactly where that is going forward because the forward numbers will change, but is there an opportunity for guilds to increase margins just by having the ability to retain servicing and then also there are opportunities on the back end with recapture, also earning out the MSRs, et cetera. I'm kind of curious if those are different factors that could come into play here.

Yes. Yes, we believe there is a good opportunity to improve the execution on the secondary side by retaining the servicing. So in the past, we've been able to – increase, improve the execution by, you know, 20, 25 basis points at a minimum with past acquisitions. And we believe that we'll be able to do that as well with going forward with RMS.

That sounds good. And I think historically, I think going back, you know, Guild has, you know, for the past decade or so has been cash flow positive on origination going kind of pre-tax basis. And that There's some factors also beyond that around selling some servicing released. I'm kind of curious how RMIT sits in if they're in a similar position, if they would be in a similar position if they shifted over to your kind of mix of servicing retained versus released.

Yeah, we believe that over time they will mirror GELD's performance, and their business mix is very similar. very comparable to Guilds, and we believe that they will eventually, when we're fully integrated, look like Guilds and everything else we have.

Yeah, to Marianne's point, you've got to keep in mind that this is a big transaction, and it's going to take us, we feel, through the end of the year to completely integrate them onto our platform. So once they're completely on our platform, then we're going to experience, they will experience the gain on sale margins based on guild execution and retaining. But it will take through the end of the year to transition.

And then just a very quick one on that. I was curious if there was any Ginnie Mae or Ginnie Mae EBO contribution in the quarter if there was, if you see that recurring.

Ginnie Mae, contribution, you mean?

From some of the early buyouts, if you're... Yes, there has been.

I've got to get that number for you. I can respond by... I'll have to look at the number, but yes, there has been, and it is increasing. We bought a decent amount of loans for us, a decent amount of loans. We did early buyouts this first quarter. So it is, yeah, it is growing.

But it's not a material number.

Yeah, here it is. I found it. It was about $1.8 million for Q1. And compared to Q1 of 2020, it was a million.

That's great and very helpful. I appreciate the time and congratulations to Amber. I will jump back into Q now.

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

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

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