GHLD - NYSE

Good afternoon, ladies and gentlemen, and welcome to the Guild Holdings Company First Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, this call will be recorded. I would now like to turn the conference over to Investor Relations. Please go ahead.

Thank you, and good afternoon, 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 and industry trends. 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 detail under the section titled Risk Factors in Guild's most recently filed Annual Report on Form 10-K and in other reports subsequently 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 to the corresponding GAAP measures can be found in our earnings release furnished today with the SEC and are also available on Guild's Investor Relations website. I'd now like to turn the call over to Chief Executive Officer, Terry Schmidt. Terry?

Thank you, Nikki. Good afternoon, everyone, and thank you for joining us to discuss our first quarter results and strategic update. I am joined by our President, David Neylan; as well as our Chief Financial Officer, Amber Kramer. I am pleased to share that we are continuing to effectively execute on our strategy and gaining market share as we leverage our platform to take advantage of market dynamics. At the same time, we are demonstrating the benefit of our balanced business model, which is focused on retail mortgage originations and complemented by our servicing platform. By staying focused on this strategy, we have again achieved attractive market share gains. In the first quarter, total originations were $3.9 billion, up by $300 million sequentially from the fourth quarter and up 40% year-over-year. This compares to an increase of 13% for the first quarter of 2024 as compared to the same period of the prior year as reported by the MBA, a clear indicator of our share gain. We also delivered positive adjusted net income and return on equity. Our mission remains unwavering: to deliver on the promise of homeownership through our leading product offerings and localized relationship-driven approach. This compelling strategy continues to resonate with customers and drive results even in a challenging environment. A key highlight of the quarter was the successful completion of the strategic acquisition of Academy Mortgage, which represents a 25% increase to our origination volume based on 2023 data. We onboarded approximately 1,000 new employees in just 2 weeks, and are very excited to welcome this group of like-minded individuals to the Guild family. As we have anticipated their corporate culture and values are closely aligned with our own. Consistent with our mission, we have expanded our offerings to help more families attain homeownership. This includes enhancing our down payment assistance program and launching our special purpose credit program, or SPCP, which are specifically designed to make loan qualification more accessible for underserved populations. We believe these initiatives will open doors for even more deserving homebuyers. Our balanced originations and servicing model continues to be a cornerstone of our success, providing earnings stability across market cycles. This allows us to effectively navigate challenges and capitalize on opportunities. We are executing judiciously across all our capital priorities, investing in our organic growth, selectively pursuing accretive acquisitions, and enhancing technology and servicing capabilities, while also returning capital to stockholders. I am pleased to announce that the Board has declared a $0.50 per share dividend. This is in addition to our ongoing share repurchase program that has been extended to May of 2025. Our prudent balance sheet management with low leverage is allowing us to continue to create value for our shareholders. We believe that our focus on purchase market originations, coupled with our strategy of retaining servicing rights, allows us to generate more reliable cash flow. Moreover, our commitment to maintaining strong customer relationships underpins our customers for life philosophy, positioning us as the leader of choice for our customers' future transactions. While still a challenging environment for originations, the current backdrop also presents an opportunity for us to further strengthen our position as the cycle turns. We have maintained a disciplined approach to capital management, enabling us to selectively pursue growth opportunities. We firmly believe that Guild is well-positioned to navigate the current landscape and emerge even stronger. We are confident in our strategy, our execution, and our ability to deliver long-term value for our shareholders. I'll now turn the call over to David.

Thank you, Terry. I'm pleased to report on our proven ability to successfully execute our strategy and gain market share even as the industry navigates continued headwinds from higher rates and limited housing supply. The over 600 licensed loan officers we onboarded from recent acquisitions are ramping up quickly. We are excited to have them on board given their close alignment to our culture, values, and approach of having local sales and fulfillment that supports our customer for life strategy. We expect them to start contributing more meaningfully to our origination volumes in the coming quarters. As Terry mentioned, introducing new products to serve evolving customer needs is a priority. In today's environment, loan qualification and down payments can be challenging, especially in underserved communities. We've recently added and expanded 2 key programs. First, our special purpose credit program, in partnership with Freddie Mac and Fannie Mae, offer lower interest rates, smaller down payments, or assistance with closing costs, saving qualified homebuyers thousands and increasing attainability. Second, our down payment assistant grant programs have expanded into new regions. These are designed for buyers who can afford monthly payments that lack sufficient funds for a down payment, often a roadblock for first-time homebuyers. Additionally, to provide more value and convenience to our customers, we've recently acquired Waterton Insurance, an agency focused on nationwide home insurance solutions. This enables a convenient insurance shopping experience for our mortgage customers, providing a more seamless and efficient home buying process. We remain focused on both originations and on our servicing portfolio with an unpaid servicing balance that has grown to $86 billion and generates consistent cash flow. In the first quarter, we retained servicing rights on 72% of our originated loans, and we continue to grow our servicing portfolio. This allows us to maintain an attractive income stream while preserving customer relationships for future purchase originations and refinancing opportunities. While near-term headwinds will likely persist throughout 2024, we are encouraged by our market share momentum and disciplined approach, which position us to deliver improved performance as conditions recover. Our confidence remains high in our strategy, business model and the powerful platform we've built. I'll now turn the call over to our Chief Financial Officer, Amber Kramer, to discuss the details of financials. Amber?

Thank you, David. As is our standard practice, my comments will focus on sequential quarter comparisons. For the first quarter of 2024, we generated $3.9 billion of total loan originations, compared to $3.6 billion in the fourth quarter. Net revenue totaled $232 million, compared to $57 million in the prior quarter, which generated net income attributable to Guild of $28 million, compared to a net loss of $93 million in the fourth quarter. Adjusted net income was $8 million or $0.13 per diluted share and adjusted EBITDA was $16 million. These results are primarily driven by higher origination volumes and higher servicing income, partially offset by the short-term earnings impact we had anticipated from the Academy acquisition as loan originators integrate into our pipeline and production volumes start to ramp on the Guild platform. Focusing on our origination segment, our gain on sale margin came in at 364 basis points, compared to 330 basis points in the prior quarter on funded origination. Gain on sale margins on pull-through adjusted locked volume were 290 basis points, compared to 347 basis points in the prior quarter. And total pull-through adjusted locked volume was $4.6 billion, compared to $3.3 billion in the prior quarter. The increase of gain on sale is primarily driven by timing of locked and funded volume and not indicative of our operational gain on sale margin. For our Servicing segment, our portfolio grew to $86 billion. We reported net income of $84 million, compared to a net loss of $72 million in the fourth quarter. Our Servicing portfolio continues to be a valuable source for ongoing cash flow, future opportunities for loan recapture, and it reinforces our customer for life strategy. Our balance sheet remains strong and provides us with the flexibility to continue to invest in our growth. Turning to liquidity. As of March 31, cash and cash equivalents totaled $95 million, while unutilized loan funding capacity was $540 million. And the unutilized mortgage servicing rights lines of credit was $300 million, based on total committed amounts and borrowing base limitations. Our leverage ratio, defined as total secured debt including funding divided by tangible stockholders' equity, was 1.6x. Book value per share at the end of the quarter was $19.86, while tangible net book value per share was $16.05. We believe we are well-positioned to both manage through the current more challenging operating environment while allowing us to invest to create additional value. In addition, during the first quarter, we repurchased approximately 17,747 shares at an average stock price of $14.16 per share. On March 7, 2024, our Board of Directors extended the share repurchase program to May 5, 2025. As of March 31, 2024, there was $10.9 million remaining under the original $20 million share repurchase authorization. As Terry mentioned, our Board of Directors approved a dividend of $0.50 per share of Class A common stock and Class B common stock, payable on June 6 to shareholders of record as of May 20. Our disciplined capital management and low leverage has allowed us to invest in growth while also returning capital to our stockholders. In April, we generated $2 billion of loan originations and $2.2 billion of pull-through adjusted locked volume. Looking to the remainder of the year, we anticipate continued pressure on origination volume and gain on sale margin. However, we remain confident in our balanced business model, which we believe results in more durable and sustainable performance across market cycles. And with that, we'll open up the call for questions. Operator?

[Operator Instructions] Our first question comes from Don Fandetti with Wells Fargo.

Yes. Amber, can you talk a little bit about the G&A cost for Q2? They came in higher than we were expecting in Q1, I think, because of the deal-related expenses?

Yes. Overall, the change from Q4 to Q1, there's a couple of things driving that. It's the addition of the employees bringing -- coming on for the Academy acquisition, so salaries related for that and other compensation. There's also, in overall costs, when you go into Q1, you have payroll taxes that increased. We had our annual sales event in Q1, and then just some other acquisition-related costs with that. So there is some onetime items in there and also just some timing differences going into Q1.

So how should we think about -- it was $29 million this quarter, I believe. Will Q2 be higher, lower? Can you just sort of provide some thoughts on that? Just because I don't know if you have more deal-related expenses flowing through. Were they all fully loaded?

Yes. I mean some of G&A is variable, right? So as volume increases, you're going to have that increase. So we have verification costs and other loan-related costs that go into that. So I would expect an increase going into next quarter.

Got it. And I think you mentioned the gain on sale. So we should maybe think of a gain on sale as more like the 330 range rather than the higher 364 this quarter, is that the way to think about it?

Yes, that's exactly right. This is -- I mean, this is typical for Q1 timing where we have this difference in the increase in the pull-through adjusted locked volume versus the originations, and you can see that difference in the gain on sale. And if you look back about 1.5 years, we're running about a 340 average. And so we haven't really seen meaningful changes in our operational gain on sale, so that really is just driven by timing.

And my last question is just on the Academy volume. I guess we won't see a lot of that this quarter, or maybe a little bit later in the quarter?

Q1 was minimal as they -- we closed the deal at the end of February, so we only had 1 month for that. So we would see a pickup of that in Q2, yes.

Okay. So the guidance includes -- or not the guidance, but the numbers you quoted, include some impact from Academy?

Yes. The April closings and pull-through adjusted locked volume would have Academy included in there. And there's also -- there is a pickup as well just from a market volatility and rates dropping. I think some people kind of jumped in unlocking in April. So we would expect some increase for the Academy and just some spring home buying as well.

Yes. One other point that I want to make is that, even though our cost structure went up, a lot of it was related to Academy, of course, but if you compare on the origination channel, if you compare the net loss -- change in the net loss quarter-over-quarter, we made some headway there in percentages. It was 9.7% better than it was in Q4. And if you look at Q1 '24, you compared that to Q1 '23, we're 26% better, so -- in the net loss that we have for the channel. So the scale is working and we should continue to see improvement there.

Our next question comes from Kyle Joseph with Jefferies.

Just wanted to ask about, saw an uptick in refi volume. Is that a function of second lien? Or was that just kind of January when we had a little respite from higher rates, or a combination of both, to be fair?

I noticed that too, and first quarter, I think some of that we have -- we are doing more second-lien product. We rolled one out the last -- towards the end of last year, and it's going very well. And I think the other part is just the tax season, people needing to refinance for various reasons. But it did tick up a tiny bit, yes.

Yes. And I think to your point, I think most of that was earlier in the -- when we had some of those rate drops, people capitalized on that. And it's 2% up from prior quarter, so not too significant.

Got it. And then just to rehash on capital allocation. Obviously, you guys have been very acquisitive over the last 18 months. And then obviously, the specials out there. But just kind of rehash us how you're thinking about capital allocation from here. Are there still attractive acquisition opportunities at this point?

Yes. We're still pretty busy. And we believe that our capital base can continue to support our growth initiatives and any investment we have in technology. And so we felt that it was a good time to distribute a dividend. Amber, did you want to add any more to that at all?

I mean I think the big thing is when we look at our leverage profile, and we still -- we don't have any unsecured debt, it's really only on the MSRs, and we're really focused on our percent of our fair value that we're leveraging, which is at 15% as of Q1. So we're very low. And as Terry said, we want to make sure we have the optionality to invest back in the business in our growth and return value to shareholders. And because of how we've managed our capital and liquidity over the last few years, we have the ability to do all of that right now.

Our next question comes from Rick Shane with JPMorgan.

Kyle really answered it -- or really asked it, and Amber really answered it, but I'd love to talk a little bit about the dividend. Help us understand how you size that dividend. Is it driven by earnings? The last 2 special dividends have both been $0.50, and it's not -- it does not seem per se correlated to earnings. Book value is down in that time. You talked about leverage being down. I'm just trying to think about, when you're determining that number, what are the variables and how do you size it?

First of all, the capital position we've been in has been extremely conservative, and we, over the last several years, we've kept a lot of capital in the business. And so we felt that it was reasonable to issue the dividend. And Amber, did you want to say something else?

I just think, Rick, it's a combination of a lot of factors, right? We're looking at the business now, what we think the future holds. We do stress tests on our MSR. And we're just ensuring that we have ample liquidity in any given situation. And then based on those factors, what do we feel comfortable with? And making sure that we stay in a strong position from a capital liquidity.

Got it. And look, you referenced a couple of different things during the call. And one of the things is you did say that the environment is going to remain challenging, and you guys are managing through that profitably and gaining share. When you think about a challenging environment and declaring a special dividend, is the consideration, hey, we believe that we're in a position where we are going to be profitable so we don't need to worry about sort of putting in the extra $0.50 -- saving the extra $0.50 of capital for now? And at the same time, if you were sort of looking forward to a market where you thought originations were going to be really strong, you might actually -- even though you know that profitability would improve, you might actually retain a little bit more capital because you might need it into a more vibrant market? Is that the sort of balance you're working here, which is thinking about profitability, but also thinking, hey, it's going to be a slow market we don't need as much capital?

We're constantly looking at what our opportunities are out there. And we feel like the opportunities for continued growth is still very strong through this year. And then we evaluate what capital do we have, what do we think we're going to need, and make sure that we've got plenty of access to capital and we're in a good position. I mean I do think again that the rest of the year is still going to be an opportunistic year. And what's really great about Guild is it doesn't matter what market we're in. Whether we're in this market, we can take advantage and gain share. Whether we're in a refi market and our loans in the portfolio are paying off, we can recapture. We recapture better than anybody. So whichever direction the market turns, we're in a good position.

Got it. And then last question -- and look, I understand that a special dividend sends a signal to the market. At the same time, you guys did increase the buyback. But finance theory would suggest that if you're trading at a discount to book, trading at a discount to tangible book, the more efficient way to return capital would be through repurchase. What's the rationale -- again, like if your stock is trading at a premium to book, the dividend makes more sense. But what's the rationale of returning the preponderance of the capital through dividend versus repurchase when you're trading at a discount?

Well, we're doing both, right? I mean we're continuing to do our share repurchase program and returning dividends. And we look at what makes sense on the price and where we're trading in tangible net book value and looking at that. So we feel like, like we said, we can do the share repurchase program, do the dividend, and continue to invest in both organic growth, acquisitions and technology back into our business.

Our next question comes from Eric Hagen with BTIG.

Hope you guys are well. I want to get your perspectives on the stability for gain on sale margins, especially for the purchased loans. And how much of an impact do you think the various concessions that you guys are offering have had on the margin, maybe even the trajectory for margins for the remainder of the quarter?

We really haven't been much change in overall margin. I mean we -- both on the pricing margin side and execution, it's about flat. Like I said, if you take out all the timing differences over the last 1.5 years, we're about 340 average. I think a couple of quarters ago, I said 330. And we haven't seen much change. And so I think until something else changes in the market, we're thinking, ideally, that it will be stable. We haven't seen anything else that has ticked it up or down right now, except within -- the volatility within certain days.

Yes. I would say that -- yes, that's right. I mean, we -- if the rates start declining, typically, we historically have found that that's when really there's more movement on the gain on sale, because then people have -- you're getting more business in and you're not fighting for every loan that you get. And until we're in a meaningful refinance situation, this is -- we're not seeing much change here on the gain on sale.

Got you. That's helpful. And I think you mentioned holding on to around 75% of your production and then selling MSRs for the remaining 25%. Can you kind of comment on conditions for selling MSRs? What are some variables that could get you to sell more MSRs than you've currently targeted for the remainder of the year?

Yes. Typically, we're always looking at on a daily basis the service released versus the service retained option. And when we've got correspondence that are out there that are paying up more than we think that loan is worth, we're going to look at service-releasing that loan if -- and majority of -- historically, it's typically our retention is about 80%, 85%. We're just in a little market -- a little different market just because we -- everybody, they're kind of wanting to get more production in the door. So we can change that strategy. But with our capital position we're at right now, we don't really need to. So that's our plan -- continuing to be our plan going forward.

We've reached the end of our question-and-answer session. I would like to now turn the floor back over to Terry Schmidt for closing comments.

Thanks, everybody, for your continued interest in Guild. And we will keep executing on our strategy. And we hope to hear from you next quarter. Thank you.