Onity Group Inc.

Good day, everyone, and welcome to the Onity Group's third quarter earnings and business update conference call. At this time, all participants are in a listen-only mode. Later, you'll 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 1 on your telephone keypad. Please note, today's call will be recorded, and we will be standing by if you should need any assistance. It is now my pleasure to turn today's conference over to Deco Axelarian, Senior Vice President, Corporate Communications. Please go ahead.

Good morning, and welcome to Onity Group's third 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 of the date they were made and involve assumptions, risks, and uncertainties, including those described in our SEC filing. 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 and the appendix to the investor presentation. Now, I will turn the call over to Glenn Messina.

Thanks, Tico. Good morning, and thanks for joining our call. We're looking forward to sharing a few highlights for the third quarter and reviewing our strategy and financial objectives to deliver long-term value for our shareholders. Let's get started on slide three. I'm going to begin with three key themes today. First, we reported our highest adjusted pre-tax income and return on equity in the last three years. Our MSR hedge performed very well, effectively offsetting the impact of declining interest rates, contributing to our reported net income of $21 million. Second, our RichNations team again delivered solid performance with $18 billion in total servicing additions, a 26% increase in total origination volume and a 52% increase in consumer directory capture volume, both versus the second quarter. Finally, we're executing a series of transactions to enable further deleveraging and a holistic corporate debt refinancing. Our debt to equity ratio closed the quarter at 2.9 to 1. We have almost $300 million in liquidity, and we reduced corporate and MSR debt by over $180 million this year. We've again demonstrated that we're delivering on our commitments and that our strategy and financial objectives are sound and our ability to execute and deliver results is consistent and strong. We believe the continued execution of our strategy and financial objectives positions on a team to create and capture substantial value for our shareholders. Let's move to slide four to see how our strategy has materialized in our financial performance. Our actions today and over the past several years are guided by our five-point strategy. It starts with balance and diversification to deliver strong financial performance through industry rate cycles. Capital-like growth to reduce capital demands and industry risk exposure. Industry-leading cost structure to enhance our competitiveness, value proposition, and profitability. Top-tier operating performance and capabilities to enable positive outcomes for borrowers, clients, and investors and improve the customer experience. And lastly, dynamic asset management to enhance earnings and cash flow. The execution of these strategies has enabled a remarkable improvement in our financial performance. Adjusted pre-tax income is up $162 million for the last 12 months and in September 30th versus the full year 2022. And we've delivered a 19% adjusted ROE over the last 12 months, up from a negative 17% in 2022. We've delivered meaningful book value accretion and significantly reduced our ratio of MSR and corporate debt equity, improving the quality of our business for lenders and shareholders alike. Let's turn to slide five to see how our servicing and origination platforms drive performance through interest rate cycles. Our servicing and origination platforms complement each other very well. As you can see, even with the sharp increase in interest rates from 2021 and a material decline in origination income, our total business is delivering improved performance. As interest rates have risen, profitability in our servicing platform has improved materially. We did see a significant and short-lived drop in interest rates during the third quarter. Even with that drop, servicing was still the earnings engine with origination earnings continuing to improve versus the prior year. We expect the earnings trends we've seen during the first three quarters of 2024 to continue for the fourth quarter. with servicing being the predominant earnings contributor and origination earnings continuing to improve. We believe having scale operations in originations and servicing provides the balance necessary to deliver strong financial performance through interest rate cycles. Please turn to slide six and we can talk more about our growth strategy. As I mentioned earlier, our growth strategy is focused on capital light subservicing, coupled with a disciplined investment management strategy for our MSR portfolio. Year to date, we've added $38 billion in third-party subservicing additions, significantly more than our total subservicing additions for the full year of 2023. Since the end of 2020, we've delivered over 80% growth in our subservicing portfolio, while growing our own servicing and ESS portfolios by about 57%. We continue to dynamically manage our owned MSR portfolio to maintain a range of $115 to $135 billion in UPB, including excess servicing spread transactions. Consistent with this objective, this year we've originated a purchase $23 billion in owned MSR UPB and sold $16 billion above our book value, capitalizing on favorable bulk market pricing. In addition, to enhance MSR returns, We focus on origination channels and products that offer higher margins, which comprise 39% of our MSR originations, almost double the level we achieved in 2022.