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spk03: Good day, everyone, and welcome to this Onity Group's second quarter earnings and business update conference call. At this time, all participants are in a listen-only mode, but later you will have the opportunity to ask questions during the question and answer session. You may register to ask a question at any time by pressing the star and one on your touchtone phone. Please note today's session is being recorded, and I'll be standing by should you need any assistance. It is now my pleasure to turn today's program over to Senior Vice President of Corporate Communications, Deco Axaralian. Please go ahead, sir.
spk04: Good morning, and welcome to Onity Group's second quarter earnings call. Please note that our earnings release and presentation are available on our website at onitygroup.com. Speaking on the call will be Chair, President, and Chief Executive Officer Glenn Messina, and Chief Financial Officer Sean O'Neill. As a reminder, our comments today may contain forward-looking statements made pursuant to the safe harbor provisions of the federal securities laws. These statements may be identified by reference to a future period or by use of forward-looking terminology and address matters that are uncertain. Forward-looking statements speak only as of the date they are made and involve assumptions, risks, and uncertainties, including those described in our SEC filings. In the past, actual results have differed materially from those suggested by forward-looking statements, and this may happen again. In addition, the presentation or comments contain references to non-GAAP financial measures. such as adjusted pre-tax income. We believe these non-GAAP measures provide a useful supplement to discussions and analysis of our financial condition because they are measures that management uses to assess the performance of our operations and allocate resources. Non-GAAP measures should be viewed in addition to and not as an alternative for the company's reported GAAP results. A reconciliation of these non-GAAP measures to their most directly comparable GAAP measures and management's reasons for including them may be found in the press release in the appendix to the investor presentation. Now, I will turn the call over to Glenn Messina.
spk06: Thanks, Tico, and good morning, everyone, and thanks for joining our call. We're looking forward to sharing a few highlights for the second quarter and reviewing our strategy and financial objectives to deliver long-term value for our shareholders.
spk05: Please turn to slide three. I'll begin with three key themes today.
spk06: First, we delivered strong and compelling financial performance in the second quarter. We reported our seventh consecutive quarter of improved adjusted pre-tax income and the highest level in 11 quarters. We also continued to deleverage, increase book value, and delivered year-to-date return on equity on both a gap and an adjusted basis that is well above our target. Second, this quarter is the clearest demonstration yet that our strategy and financial objectives are sound and our ability to execute and deliver results is consistent and strong. Finally, we believe with the continued execution of our strategy and financial objectives positions Onity to close the valuation gap to our peers and analyst price targets. And that would translate into substantial value creation for our shareholders. Let's start to explore the second quarter in more detail on slide four. Our financial highlights for the quarter reflect improved performance across many of our key financial metrics. We reported adjusted pre-tax income of $32 million, which results in an annualized adjusted ROE of 28%. Both metrics have materially improved on a sequential quarter and year-over-year basis, driven by strong performance in both servicing and originations. We reported net income of $11 million and gap ROE of 10%. These results include heightened hedge costs from significant interest rate volatility. Average servicing and subservicing UPB increased on a year-over-year and sequential quarter basis, driven by $19 billion of total servicing additions for the quarter. We continued to focus on driving capital-like growth while we increased MSR originations to offset the impact of our recent MSR sales and maintain our targeted owned MSR range. Our strong financial performance also drove increased total liquidity, higher book value, and lower MSR debt versus the first quarter. And that combined allowed us to reach our near-term leverage objective. I would note that others were also taking notice of our performance trend, as witnessed by Moody's increasing our corporate family debt rating to B3, and KBW raising our stock rating to outperform. The highlights have continued after quarter end. I'm pleased to announce that we've entered into a letter of intent to acquire reverse mortgage assets from Waterfall Asset Management. More to come on this in a few minutes, but we expect this accretive transaction will increase pre-tax income, strengthen our position in reverse servicing as a hedge to our forward servicing, provide incremental asset management opportunities, and improve our capital structure. We greatly appreciate the partnership we have with Waterfall and look forward to completing this important transaction and pursuing future opportunities together.
spk05: Please turn to slide five.
spk06: Now, I promise I'm not gonna read each item on this page, but for those newer to the story, this gives you a sense of the high activity level of the company in recent years. Simply put, the financial results we achieved in the second quarter are the direct result of substantial and purposeful actions aligned with our strategy and financial objectives. The difference of where we are today versus where we come from is stark. Five years ago, we were a special servicer with large client concentrations, a shrinking portfolio, a bloated cost structure, and limited new business sources. Today, we're a growing, balanced, and diversified mortgage servicer and originator. We've invested heavily in technology throughout our operations and have an industry best-in-class servicing platform, and we've built broad capabilities. We've transformed our culture, bolstered our team with industry experts at many levels and across several disciplines. We have a tremendous team who've done an amazing job during a dynamic time in the mortgage industry. We're not the same company we were just a few years ago.
spk05: We're better, stronger, and we're delivering on our commitments. Please turn to slide six.
spk06: To punctuate the fact that this is not the same company, on June 10th, we officially rebranded to Onity and started trading under the Onit ticker symbol. Our rebranding symbolizes our transformation, growth, and expansion into a company that is delivering results. It reflects our ability to execute on stated strategic and financial priorities, the confidence we have in our future, and our commitment to getting it done for customers, partners, and shareholders. Our brand stands for what we believe in, placing customers first and being unrelenting in creating success for our borrowers, clients, and investors. Being better together and doing great things with our people, teams, customers, and partners. And doing what we'll say we'll do and delivering on our promises. The Onity brand also provides a platform to reintroduce our company to the investment community. And we look forward to continuing to expand our outreach to investors and analysts.
spk05: With that brief overview, I'll turn the call over to Sean to take us through the second quarter financial results.
spk02: Thank you, Glenn. Please turn to slide eight for second quarter financial performance. This was a strong sequential quarter for financial results, both GAAP and adjusted pre-tax income. We continued the positive themes from the first quarter with both our servicing and origination businesses extending their profitable trend. This resulted in a much increased adjusted pre-tax income as well as a positive GAT net income and growth in book value per share this quarter. Starting with the blue column to the right of the table, GAT net income was positive $11 million versus the prior quarter's $30 million. Operational performance as reflected in our adjusted PTI was up $32 million for the quarter driven by outperformance in both servicing and originations. Our MSR valuation adjustment net of hedge somewhat offset our strong adjusted PTI, but we had robust returns with a 10% gap ROE and an adjusted pre-tax ROE of 28%. Other key shareholder metrics include diluted earnings per share of $1.33, and a $1.37 increase in book value per share to approximately $57. I'd like to point out that over the last two quarters, our book value per share has grown an impressive $4.59, or 9%. Total liquidity remained strong in the quarter, ending at over $230 million. Finally, total servicing UPB grew by about $14 billion, bringing the quarter average to $305 billion. Please turn to slide nine. The second quarter was another sequential quarter improvement in adjusted pre-tax income and adjusted ROE, reflecting the execution of our strategy and financial objectives. Our financial objectives start with sustained adjusted pre-tax income performance and reduced earnings volatility. Next, we focus on improving ROE and capital ratios, including deleveraging metrics. Finally, we capitalize on market cycle opportunities This can range from selling or buying MSRs at the right time to some of our more recent asset management activities, either in the reverse or private label arenas. This came to fruition this quarter with an impressive adjusted pre-tax income result. Both servicing and originations contributed to this $18 million growth in profitability, reflecting a strong and balanced business. Please turn to slide 10 for an overview of our servicing segment in both forward and reverse. Servicing yet again improved its contribution to adjusted pre-tax for the quarter. This was driven by the forward servicing business, where higher revenues, including higher servicing fees and seasonally higher float, plus continued improvements in our cost structure, combined to generate an additional $16 million in adjusted PTI versus the prior quarter. Our average subservicing volumes grew significantly in the quarter as we added over $8 billion of UPB to the business, plus seasonal improvements in MSR runoff. Our capital partners and subservicing client base remain highly productive. We anticipate an additional $9 billion of bulk portfolios, plus additional flow volume to board in the second half of this year. More detail on how our servicing portfolio diversifies risk between the owned and subservice books, plus detail on various investor types, such as GENEs or the GSEs, can be found on page 25. For an overview of originations, both forward and reverse, please turn to page 11. Originations had a strong second quarter with the B2B channel, which is correspondent lending and co-issue, driving the bulk of the improvements. All of our origination channels had higher volumes quarter over quarter to drive the 51% increase in funded volume where we hit $7 billion for the quarter. Details by channel are on page 26. Higher margins in the forward channel and enhancements to our cost per loan metric and other related metrics added to our improved results. Overall, We continue to operate an originations business that is profitable and able to adapt to any interest rate environment. Please turn to slide 12. The left side shows the growth in subservicing accelerated by our Capital Light approach. It also shows the impact of harvesting some opportunistic gains with targeted MSR sales of about $6 billion UPB that we alluded to last quarter. These sales provide room for originations to ramp up volume to replenish the owned portfolio with higher coupon current MSRs. This will be beneficial to our recapture strategy in a down-rate environment. Currently, the mortgage servicing rights that we originate are more cost-effective to produce organically versus purchasing in the bulk market, in part due to our continued focus on higher margin channels. Please turn to page 13 for details on the recent reverse mortgage asset transaction that Glenn alluded to. We are excited to announce a signed letter of intent with Waterfall Asset Management to acquire reverse mortgage assets with a projected UPB of $3 billion and a target total asset value of approximately $55 million. This deal is enabled by issuing preferred equity with a par amount of $51.7 million. The preferred is non-convertible, cumulative, and carries a seven and seven-eighths dividend with a step up after year five. It is callable by Onity at any point after year four. This transaction strengthens and expands an already healthy relationship between our two firms. as the Waterfall affiliate, MAM, has been a subservicing client of ours for some time now, though we know these assets well from a performance perspective. This deal is also accompanied by seller-provided financing, and it is accretive to both earnings per share and cash. Our intent is that on close, we use the proceeds to further reduce corporate debt by an anticipated amount of $40 million. The right side provides some of the key transaction metrics that I haven't mentioned. And on the next page, I will talk about how this transaction accelerates our deleveraging strategy. Our stretch goal is to close this transaction in the third quarter, subject to all required approvals from regulators. Please turn to page 14 for an update on our deleveraging strategy. In the second quarter, We had already exceeded our full year 2024 guidance by attaining a 3.9 debt to equity ratio. We will continue to work to drive this metric even lower. We did not retire any corporate debt in this quarter, partly due to the higher price and subsequently lower yield, but we did lower MSR debt amounts by $36 million or 4% quarter over quarter. As I mentioned on the prior page, we expect the transaction with waterfall will provide liquidity to pay down additional debt, and it will also increase equity through the preferred. We have included a pro forma second quarter debt to equity ratio to illustrate the impact of just this transaction, which should achieve a debt to equity ratio below three and a half to one. We expect all these efforts and others will lead to our ultimate goal for our corporate debt, which is a cost-effective refinance in the next three quarters. We are pursuing some other transactions that could provide additional liquidity to facilitate more deleveraging in the second half. Back to you, Glenn.
spk05: Thanks, Sean. I'd ask everybody now to please turn to slide 16.
spk06: The financial results Sean just covered are powerful and a direct result of our actions to transform the business. Our evolution starts with our culture, our people, and focusing on our mission, which is to create positive outcomes for homeowners, clients, investors, and communities. For those not as familiar with the company, our actions are guided by our five-point strategy and our financial objectives. Balance and diversification to deliver strong financial performance through interest rate cycles. prudent capital-like growth to reduce capital demand and interest rate risk exposure. Industry-leading cost structure to enhance our competitiveness, value proposition, and financial performance. Top-tier operating performance and capabilities to enable positive outcomes for borrowers, clients, and investors and improve the customer experience. And dynamic asset management to enhance earnings and cash flow. Our financial objectives remain consistent, sustaining adjusted pre-tax income performance through growth and continuous cost improvement, reducing earnings volatility associated with MSR fair value changes, improving return on equity and capital ratios by reducing debt and driving capital-like growth, and capitalizing on market cycle opportunities to enhance cash flow and returns. I'd like to briefly discuss how these strategies drive our performance and create value for shareholders starting on slide 17. Our continued focus on balance and diversification positions us to operate profitably in both high and low interest rate environments. For instance, while originations today is a modest earnings contributor, in 2021, when interest rates were lower, originations drove our earnings. As interest rates have risen, profitability in servicing has increased, offsetting the contraction in origination earnings. This balance between origination and servicing positions our business to deliver strong, consistent financial performance through interest rate cycles.
spk05: Let's turn to slide 18 to review our originations capabilities.
spk06: With the increasing likelihood for lower interest rates, we believe our broad and capable originations platform is well positioned to support portfolio replenishment and growth, which we demonstrated in the second quarter. Our portfolio exposure to refinancing is consistent with industry average, with roughly 22% of our portfolio having note rates above 5%. Our recapture platform is delivering 1.7 times the industry average recapture performance as reported by ICE Mortgage Monitor. This platform is now staffed with talent from some of the best recapture operators in the industry, and we believe it's only a matter of time before we realize the upside to industry best practice performance levels. Our RichNations platform, which we started largely from scratch back in mid-2019, is now a top 10 correspondent lender, top five reverse mortgage originator, and we also participate in the agency MSR exchanges. We believe our position as a top reverse lender creates additional earnings upside opportunity with lower interest rates. Reverse originations volume and profitability have historically increased with falling interest rates. Turning to slide 19, I'd like to make a few points about our core strength in servicing. We've built a strong and capable servicing platform that delivers industry-leading performance. We are continually winning new clients and have added nearly $30 billion of new subservicing to UPV this year. We support more than 1.3 million homeowners, over 100 clients, and over 150 investors with a servicing portfolio size of over $300 billion. We service forward, reverse, and small-balance commercial mortgage loans, and our clients include some of the largest financial investors and institutions in the U.S. Our platform is scalable with a highly competitive cost structure. We believe our cost structure will continue to deliver increased profitability as we grow total servicing UPB. We've been recognized by Fannie Mae, Freddie Mac, and HUD for industry-leading servicing performance for the past several years. and our progress in investment in technology has recently been awarded for Best in Class Intelligent Automation Center of Excellence. Our servicing performance has been a fundamental reason why we've been able to grow our portfolio largely through organic growth. Please turn to slide 20 to discuss our value creation potential. While we've meaningfully improved business performance capabilities and potential for growth, we do not believe our share price reflects the results we've delivered nor the potential for our business. We believe this spells opportunity for both existing and new investors. While several of our peers are trading at over book value, we're trading at a discount to both book and our analyst price targets. We're focused on closing the valuation gap relative to our peers through the continued execution of our strategy, delivering strong financial performance, ongoing deleveraging, and increased investor awareness.
spk05: Turning to slide 21, I'd like to make a few points to wrap up. I'm proud of the enormous progress our team has made.
spk06: I believe we are well positioned to navigate the market environment ahead and deliver long-term value for our shareholders. We've delivered a robust increase in profitability and returns in the first half of 2024, and made meaningful progress against our strategic and financial objectives. Our performance is driven by our demonstrated operational excellence, focus on prudent capital-like growth, and commitment to deleveraging the balance sheet while maintaining solid liquidity levels. All this comes together to suggest a share price that we believe has excellent upside, and we intend to continue to take the necessary actions and extend the outreach to close that gap for the benefit of all shareholders. Overall, we could not be more optimistic about the potential for our business. With that, Jim, let's open up the call for questions.
spk03: Mr. Messina, I'd be happy to. Thank you. And to our phone audience joining today, if you would like to ask a question, please press the star and 1 on your touchtone phone. You may remove yourself from the queue at any time by pressing the star and 2 if you find your question has been asked. Once again, that is star and 1 to ask a question, ladies and gentlemen. We'll hear first today from Bose George at KBW.
spk07: Hey everyone, good morning. I wanted to start with just a question on leverage. So you spoke about potential transactions over the next few quarters that could reduce leverage further. Would they look sort of like the preferred to waterfall? Could you see MSR sales where you switch that to subservicing or just give us a little color on what some of these could look like? Thanks.
spk06: Good morning, Bose. Yeah, some of the transactions we're thinking about are really more in the asset management realm. So it's more of executing similar asset management transactions we've done in the past, which have been great cash flow generators for the business, and we've been able to use that cash flow to help deliver our corporate debt.
spk07: Okay. Yeah, that makes a lot of sense. Thanks. And then just switching over to the waterfall deal, a couple of little questions. What's the step up after year five from the coupon?
spk05: Yeah, Sean, do you want to take those questions?
spk02: Sure thing. Yes, the step up is 2.5% per year.
spk07: Per year, okay. And then just on the MSR that you'll be acquiring, what's the unlevered yield? And then what's in general on the reverse? How does the returns on that compare to the forward servicing?
spk02: In terms of reverse servicing, the returns are very strong. It just happens to be a smaller business. It's a smaller pool of either subservicing candidates or just fewer assets to originate and own. So as you can imagine, there is a correspondent in a broker market on the originations reverse side that we do participate in to acquire the reverse MSRs, but that doesn't have quite the volume that the forward market has. Continues to be profitable for us. And then what was the question more specifically on just the waterfall transaction within reverse?
spk07: Yeah, just the expected sort of the way to think about the return on that, either ROE, you know, return on the asset, or just ways to think about the return from that deal.
spk02: We haven't disclosed any returns yet because we're waiting for the deal to close and receive final valuation, you know, on both the assets and the preferred. But we expect that it will be a strong return. As I mentioned, it is both accretive to cash and earnings per share.
spk06: Okay, great. Yeah. Hey, Bose, maybe to help you frame that a little bit, you know, as we think about, you know, target returns and yields that we're seeing in the marketplace, you know, generally, you know, You know, GSE MSRs are probably in the 9% to 10% range, GDMAs in the 11% to 12% range, and irreverse servicing tends to be a little bit higher than GDMAs, around 12% to 13%. So, you know, that's how we see the economics based on, you know, our economic modeling assumptions.
spk05: Okay, great. Very helpful. Thanks, Ben. Next, we'll hear from the line of Derek Summers at Jefferies.
spk03: Please go ahead.
spk01: Hey, good morning, everyone. I was wondering if you could talk about the growth you guys saw in the correspondent-co-issue originations, maybe kind of break that down between what was correspondent and what was co-issue, and then kind of, you know, also seeing some pretty healthy incremental margins there and talk about those dynamics as well.
spk05: Yeah, I'll provide some high-level comments then.
spk06: Sean, I know you've got a page in the appendix. You can take us through some of the details on the specific channel details. But Derek, we saw, yeah, I think our originations team did a great job in the second quarter, 55% increase in MSR originations volume. The B2B channels for us have been a core staple for our business. You know, we do, you know, pretty much everything in the correspondence space, mandatory best efforts, non-delegated, and, you know, we participate in the MSR exchanges, SMP, CRX, and, you know, Ginnie Mae Pitt. You know, and our approach is, you know, look, we are on a relative basis agnostic to the delivery channel. Our customer wants to deliver product to us through delivery. And if it makes more sense for them to go through the MSR exchanges, great. If they want to go through mandatory best efforts non-Dell, great. Then we'll support that as well, too. So it's all part of a comprehensive strategy to meet the customer at the place where they want to transact and do business. Sean, maybe you could take us through some of the details on originations.
spk02: Sure thing. Morning, Derek. If you look at page 26 here, you'll see we don't split out volumes between co-issue and correspondent, but you can see collectively that we just call that B2B or business to business. You can see collectively that that channel increased substantially both in volume and in margin. So it's not like we were paying up to get more volume. We just have a pretty deep and broad range of corresponding clients that we work with, and we also participate heavily in the various agency MSR exchange markets. Obviously, the co-issue just results in an MSR moving over, so you can also look at, you know, funded volume on loans and make some inferences from that as well.
spk01: Got it. Thank you. And then just staying on page 26, is there any kind of color you guys could give on how run rates for August and the Consumer Direct channel have been trending? It seems like the 30-year rate is starting to cooperate with us a little bit.
spk06: Generally for Consumer Direct, the team has done a great job. As you can see by quarter, they've been inching up their performance from a funded volume perspective. And look, we laid out in our investor presentation, we've got portions of our portfolio stratified by note rate band. And assuming that the average consumer typically is willing to refinance with a 50 basis point incentive, our team is poised and ready to go. So as mortgage rates are coming down, our team is on it. And they're engaging with customers and doing everything they can to drive higher and better recapture rate, which is already performing at 1.7 times the industry average.
spk05: And again, we think there's upside to industry best practice levels. Got it. Thank you for the call. That's all from me. Our next question today comes from Eric Hagan at BTIG. Amortization expense on the servicing portfolio in the quarter.
spk00: Do you have that handy?
spk06: Eric, the first part of your question was chopped off. We didn't get your full question.
spk00: Looking for the amortization expense on the MSR portfolio. in the quarter, if you guys have that handy.
spk05: Yeah, Sean, do you have that handy? It may have been in our press release. Okay.
spk06: Yeah, so, yeah, hey, Eric, yeah, MSR evaluation adjustment net for June 30, 2024 was $32.7 million. Okay.
spk00: Yeah, looking for just the cash flow amortization expense portion of that. But maybe we could switch to how you guys are hedging the MSR portfolio for lower rates. Do you feel like there's a lot of mark-to-market risk in the MSR if the Fed does cut rates? How does the outlook for MSR volatility maybe change your outlook for buying back the debt that you guys are focused on doing? Thank you.
spk06: Yeah. Eric, as you know, we continue to target a relatively higher hedge cover trader than we have in the past. We're still operating in that 90% to 110% range with an eye towards falling rates. We want to protect book value and hedge that MSR as tightly as we can. We're evaluating our hedging strategy continuously to optimize the basket of instruments and make sure that we're maintaining that strong hedge performance. You know, generally speaking, I'd say, you know, we are still seeing, you know, bids in the MSR bulk market that are at or above, you know, the carrying value of our MSR. And that's, you know, as recently as, you know, trades that occurred this past week, quite frankly. So I don't know that we're actually seeing any degradation in market levels of MSR pricing with the prospect for declining rates. So that's not something we're necessarily concerned about here in the very near term. Yeah, so again, I think we've got good hedge coverage, good hedge protection, and we've got a recapture platform that's outperforming industry average by a wide margin with, I think, good upside potential.
spk00: Okay, yeah, that's helpful. Following up on the leverage, I mean, do you have a target leverage range in mind as you repurchase some of the unsecured debt? And would the leverage, you know, would that range maybe change if rates were lower? Or how do you see that range kind of evolving with rates?
spk06: Yeah, so, you know, obviously we consider our leverage targets in the context of what's happening in the overall market. You know, right now our objective is to continue to drive leverage you know, the leverage down, you know, to peer normative levels. We, you know, look, it takes time to get there. We recognize that. I think we've delivered substantive progress in a very short period of time and, you know, hit our target, you know, our near-term target, you know, about mid-year and, you know, demonstrated that with the waterfall transaction, we could drive it even lower. And as Sean mentioned, we're considering additional transactions to drive the leverage even lower. I think, as you know, a large portion of our capital structure, actually the largest portion of our capital structure, is not really corporate debt, either the on a T group debt or the PHH debt. It really is MSR financing. And MSR financing will decline as MSR values decline. And that's one of the reasons why we hedge. And we hedge with a high hedge coverage ratio so that it's fundamentally any... you know, the design is such that any, you know, margin calls in MSR debt is offset by cash proceeds from our hedge and our derivatives. So, you know, the derivative portfolio basically will help fundamentally pay back and deleverage the MSR debt.
spk05: Yeah. Okay. That's really helpful. Thank you.
spk03: Once more to our phone audience today, that is star and one, if you would like to ask a question, and we'll pause for just a few moments to give everyone the opportunity to signal. Once more, ladies and gentlemen, that is star and one. Also, a friendly reminder that if you're joining on a speakerphone, please return to your handset to be certain that your signal does reach our equipment. And we have no signals from our phone audience. I'd like to turn it back to the Onity leadership team for any additional or closing remarks.
spk06: Great, Jim. Thanks much. And look, I'd like to thank our shareholders and key business partners for their support of our business. I'd also like to thank and recognize our board of directors and global business team for all their hard work and their commitment to our success. And I look forward to updating everyone on our progress at our next quarter earnings call. Thank you.
spk03: Ladies and gentlemen, this does conclude today's teleconference, and we do thank you all for your participation. You may now disconnect your lines and have a great day.
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