Home Point Capital Inc.
Q1 2021 Earnings Call Transcript

Published: 8 May 2021

[Operator:]

Good morning and welcome to Home Point Capital's first-quarter 2021 earnings call. I will now turn the call over to Gary Stein, head of investor relations at Home Point Capital. You may begin.

[Gary Stein:]

Thank you, operator. Welcome to our first-quarter 2021 earnings call. Joining me this morning are Willie Newman, President and Chief Executive Officer; and Mark Elbaum, Chief Financial Officer. During our prepared remarks, we will be referring to the slide presentation, which is available on the Events section of the Home Point investor relations website.

[Willie Newman:]

Thanks, Gary and good morning, everyone. During our prepared remarks, I'm going to touch on some highlights regarding our first-quarter performance. I'll then discuss a few elements of our differentiated business model that are driving our long-term growth. After that, Mark will provide more details on our results for the first quarter of 2021 as well as our financial outlook. We'll then open up the call to take your questions. First, as I did last quarter, I'd like to thank our outstanding team of more than 4,100 Home Point's associates for their extremely hard work and relentless dedication. I would also like to thank our more than 6,600 third-party partners and our more than 400,000 customers. As we go through our results this morning, I speak for the entire leadership team in noting that Home Point would not be where it is today without the tremendous support and commitment we receive every day from all of you. We entered 2021 with significant positive momentum, and this was reflected in our results for the first quarter. We generated a record funded origination volume of $29 billion for the quarter, which is up more than 3.5 times compared to the first quarter of 2020 and up 23% from last quarter. For the last 12 months ended March 31, our total funded volume was $83 billion. From a financial perspective, our strong funded volume helped drive total revenues in the first quarter of $422 million, which was a more than six-fold increase compared to our revenues of $68 million in the year-ago quarter. For the last 12 months ended March 31, our total revenues exceeded $1.7 billion. Our net income was $149 million for the first quarter of 2021, and it was $767 million over the last four quarters. From an operational perspective, we ended the first quarter of 2021 with more than 6,000 broker partners and 620 correspondent partners. In total, our third-party partner relationships, which are our cornerstone of our differentiated business model and a key driver of our long-term growth, have increased by 63% year-over-year and by 11% since last quarter.

[Mark Elbaum:]

Thanks, Willie and good morning, everyone. I'd like to spend a few minutes discussing our financial results for the first quarter of 2021 as well as our financial outlook and capital allocation strategy. Starting with Slide 4 of the earnings presentation, we delivered a solid performance across the Home Point platform in the first quarter of 2021 based on a number of operating and financial metrics, such as funded volume, broker partners and servicing growth as well as total revenue and net income. Before I dive deeper into our quarterly results, as you may have noticed in our earnings release, we have added several new disclosures this quarter. We're pleased to include this additional information based on feedback we received from a number of analysts and investors. We appreciate all of your input, and we welcome any other suggestions you may have to broaden our disclosures. On Slide 5, we have provided a list of the key disclosures we added this quarter, including gain on sale margins by channel, which many of you requested. I also want to highlight that we have added an Excel-based financial supplement to our website, which includes the last six quarters of our financial results and key performance indicators. We hope you'll find this incremental information helpful as you analyze our business. Turning to Slide 6, we have provided a summary of our financial results for the first quarter of 2021. Total revenue in the first quarter of $422 million grew more than six-fold from $68 million in the first quarter of 2020, driven by increased origination volumes, a higher gain on sale margin and a fair market value increase in our MSR asset due to the significantly higher interest rates in the quarter. In comparison to the fourth quarter of 2020, total revenue in the first quarter of 2021 declined by 7%, primarily due to a lower gain on sale margin, which was partially offset by higher origination volumes and the fair market value increase in the MSR asset. Net income of $149 million in the first quarter of 2021 was up from a net loss of $11 million in the first quarter of 2020. Quarter over quarter net income was down 19% from $185 million in the fourth quarter of 2020. The quarter-over-quarter decline was driven by the gain on sale dynamics I just mentioned. Our total expenses of $227 million for the first quarter of 2021 are up from $84 million in the year-ago quarter, which reflects the capacity we added to accommodate the tremendous growth we've generated over the last year. I'd also like to highlight that our total expenses in the first quarter of this year were essentially flat versus last quarter despite the fact that our funded volumes increased 23% during that same time frame. We believe this is a great example of how we can manage our expense base by driving efficiency and productivity across the platform at scale.

[Operator:]

Thank you. Our first question from the line of Don Fandetti with Wells Fargo. Please go ahead.

[Don Fandetti:]

Yes. Can you talk a little bit more about the competition in the wholesale channel? It sounds like you breakeven the revenue margin in April, is that your expectation that, that will continue through the rest of the quarter? And how is it changing competitively more recently?

[Willie Newman:]

Hi, sure. Good morning, Don. So kind of stepping back, we're really in the middle of a competitor-driven dislocation between retail and wholesale rates and margins. And we do believe it's temporary, and I'll provide some context on that. So if you look at the April levels that Mark discussed as far as total revenue for us in the wholesale channel, and you add the broker compensation, which for us was an average of 168 basis points, the total revenue, which is comparable to a retail or a direct revenue number, it was just under 250 basis points. So if you look over the last eight years, the low distributor retail was 375 basis points, which is in 2019, and then 337 basis points in direct, which is in 2018. So if you translate that to interest rates at the customer level, retail and direct lenders rates are 1.8% to 3% higher than rates provided by wholesale industry brokers. And to me, if that disparity persists, I don't know why a customer wouldn't go to a broker 100% of the time. I mean, the disparity is so significant relative to historic norms. I think further, I'm not sure how companies that are in distributed or direct-to-retail and in wholesale can persistently charge retail customers' rates that much higher versus customers that come through wholesale? I think they have a real issue. So I think that outlines the nature of the dislocation. As Mark said, our working assumption is that wholesale revenues will recover, but only to the lows of the last eight years. So we look at 115 basis points is our marker for that. That was in 2018. Specifically, it was 113. But – and if you look at the revenue that broker compensation, and you add that back, that's still under 300 basis points. So still materially better for borrowers and retailer direct. So our focus is really addressing the elements we keep control. So as Mark talked about, increasing the pace of additions, broker additions and activations, accelerating our process and efficiency initiatives and very rigorous expense management. Ultimately, the actions that we're taking will give us the ability to achieve a baseline return on equity level or better at 2018 vintage revenue levels. As far as how long it lasts, I think it's – because it's competitor-driven, there's really no basis for us to try to determine how long it will last. But we do believe it will start to recover this quarter.

[Operator:]

Our next question is from the line of Kevin Barker with Piper Sandler. Please go ahead.

[Kevin Barker:]

Yes. So you just mentioned that you expect to recover this quarter. It seems fairly quick, just given the market dislocation. Is there any early indications that you are seeing out there, where you would see the recovery? Is there any additional flow as far as like productivity per broker or something along those lines?

[Willie Newman:]

So hey, Kevin. Good morning. Yes, I think the recovery will start this quarter. I didn't mean to say that it would get to the levels that I'd mentioned in this quarter. Right now, I'd say there's very small signs that we're starting to see recovery. There's certain elements of kind of the margin dynamics and pricing dynamics, but it's certainly not – it's not to the level that where we would expect a rapid recovery in this quarter.

[Operator:]

Our next question is from the line of Brock Vandervliet with UBS. Please go ahead.

[Brock Vandervliet:]

Thank you. How do you – in this environment, how do you think of the prioritization of profitability versus market share? Some of your competitors appear to be extremely focused on market share and just trying to get a sense from you kind of where you fall out on that?

[Willie Newman:]

Yes. Good morning, Brock. So we're trying as much as possible to achieve a balance. I think for us, the market share is more driven by our ability to reach out and sign up and activate new broker relationships. So as opposed to continuing to dig down in price in order to continue to grow the business in the channel. We're looking to really expand out. And as you know, our coverage is not as significant at this point as the two leaders. So we really have a lot of room to run there. And as you saw also, we increased our target. So we're seeing a really significant increase in interest, in broker just signing up with Home Point. And we're also seeing new entrants into the broker segment, about 35% of our new sign-ups in March are actually new entrants into the broker segment, new company.

[Brock Vandervliet:]

And if you could just elaborate on that, like how does that go? Is the increase, one, driven by you or inflow from brokers, number one? And I guess, number two, how long does the transition take from signing someone up to meaningful wallet share that really moves the needle for you?

[Willie Newman:]

Sure. So I think the flow is a combination of brokers looking at what happened in March and saying that they need another scale alternative. That's kind of what's driving, I guess, the interest, obviously, for us, both our in-market account executives and then the support they receive through our internal teams is what's going to continue to drive that flow in. I'd say from an activation standpoint, and this is something, obviously, we're acutely focused on. I'd say about a 90-day time frame. We would anticipate providing more information on activations, especially considering the nature of the growth in the sign-ups in the next quarter. But really, you think about it from a 90-day time frame as far as sign up to activation and then optimally to get a reasonable amount of market share and go from there or wallet share rather.

[Operator:]

Our next question is from the line of Doug Harter with the Credit Suisse. Please go ahead.

[Doug Harter:]

Thanks. Could you just talk about the dynamic between your lock volume and your funded volume? Box seems to be significantly below funded, but your outlook and the guidance you gave for funded volumes for next quarter served stability. Can you just talk about that dynamic?

[Willie Newman:]

Sure, Doug. I'm going to pass that one on to Mark.

[Mark Elbaum:]

Sure. Thanks, Willie. Hey, Doug. So a couple of things you might have observed. We've marked roughly $23 billion in fallout-adjusted locks, $9 billion. So I suspect that's what you're looking at. And there were several dynamics in the first quarter that I think are worthy of note. Number one, starting in the fourth quarter of 2020, we built up a fair amount of capacity and capability and managed through certain service level issues that enabled us to pull-through a greater portion of the loans that we locked, that fallout-adjusted lock number is on day 1, what we expect to pull-through. So it's a best estimate on the first day that we lock alone and what we think that pull-through percentage will be. At the time that we locked those loans, we had a certain track record in terms of pull-through that we've since improved as a result of, like I said, on that capacity and creating some operational improvements. The other thing that happened in the first quarter was a profound increase in interest rates and an increase in interest rates creates greater pull-through because less likely that a borrower is going to want to fall out because their alternative way is going to likely be a higher rate than they otherwise would have had. So you end up with a higher pull-through. So we saw a pretty significant dynamic in terms of pull-through here in the first quarter relative to lock volume. As we look forward, we now know more about what our operational capacity and capabilities are. And so we will be making adjustments to that fallout-adjusted lock pull-through expectation. And I would expect that going forward, you'll see a closer relationship between those two numbers barring any significant change in interest rates.

[Doug Harter:]

So Mark, does that that better actual pull-through experience? Where does that show up in terms of gain on sale?

[Mark Elbaum:]

So there's the other – if you look at the disclosures that we provided, you'll see the channel level gain on sale, and then you'll see this other category. That other category would be capital market activities, which includes a number of things, one of them would be changes to the pull-through ratio. So what we attribute to the channels is what we expect on day one when we lock alone and then subsequent changes to the value of those loans because of pull-through or other things would be in the other category.

[Operator:]

Our next question is from the line of Rich Shane with JPMorgan. You may go ahead with your question.

[Rich Shane:]

Good morning, everybody and thanks for taking my question. I want to follow-up on the last question. When we think about pull-through in locks, I'm curious how much of the gain on sale pressure that you're describing for the second quarter as a function of increasing the hedge ratio on the lock volume?

[Willie Newman:]

You want to take that also, Mark?

[Mark Elbaum:]

Sure. I don't think that's – well, I think it's a couple of dynamics. Number one is the dynamics that Willie described in terms of this dislocation. And I think, clearly, we have higher pull-through and higher capacity. So there's more room in the funnel in terms of the supply demand economic relationship. But I think that's part of the pressure, and that was, frankly, expected. I think the reason for the increased pressure is this competitive dynamic. So I would say some of that, but that would be the expected component, which is why we would go from, let's say, 158 basis points to what we would describe a more normalized level of 115. The reason we're below that now I think is unrelated. And I think it has to do with this unique competitive environment we're in.

[Rich Shane:]

Got it. Thank you. And thank you for sort of bucketing in both of those two factors. That's very helpful. Thank you guys.

[Operator:]

Our next question is from Ryan Nash with Goldman Sachs. Please go ahead.

[Ryan Nash:]

Hey, good morning, guys.

[Willie Newman:]

Good morning.

[Ryan Nash:]

Willie, maybe just given the competitive dynamics to follow-up on that, you gave some interesting stats on the relative margins across different channels. I guess, but given tons of liquidity in the market, companies are looking to put capital to work, I guess, why isn't the risk that retail comes down as opposed to wholesale coming up? And second, are you seeing any competitive pressures accelerating in the direct channel? Thanks.

[Willie Newman:]

Yes, sure. No, that's a great question, Ryan. Good morning. So I think one or two things can happen here. And obviously, they're not mutually exclusive. There could be a combination. One – you're right. One is that retail margins could come down to, let's say, match or come around, where that combined revenue level is. I guess what I point to is that, historically, retail margins have not gotten anywhere near, I'll call it, let's say, 300 basis points is the demarcation line. They haven't gotten anywhere near that. So I think it would be significant stress – especially on distributed retail, it would be significant stress to – for those companies to try to get down to the levels that we think are normalized in wholesale let alone what we're experiencing today. So for us on the direct side, again, it's a little bit different dynamic because we're – I don't really feel like we should charge our borrowers, who are coming back to us more than we charge through – that we de facto charge through our brokers. And so our margins, to a certain extent, are suppressed and direct by the fact that we're not going to go to our customers and say, hey, you should have a higher rate because we're having a challenge in the seller channel. So I can't speak to what others are doing. But frankly, I don't feel comfortable charging our own customers meaningfully more than we charge de facto through brokers. So I'd say the pressure there is that – I mean, there's also a little bit of pressure because if you look at the nature of our servicing book, it's newer, and therefore, we have less in the money than kind of I'll call normalized book. So there's a little bit of pressure there. But more so, it's us ensuring that we're taking care of our customers as well as we take care of the customers that come through our broker partners.

[Ryan Nash:]

Got it. Thanks for the color.

[Operator:]

Our next question is from Mihir Bhatia with Bank of America. Please go ahead.

[Unidentified Analyst:]

This is actually Nate Richmond on for Mihir. I want to ask what you're seeing in the corresponding channel. I mean, originations were up for wholesome direct. And I'm just curious, like what the credit and correspondent and 1Q to be quarter to date as well.

[Willie Newman:]

Yes, sure. Good morning. So we saw – even last year, we saw correspondent margins kind of normalize much more quickly, and we're seeing a little bit more pressure on those margins as well. We've moderated our activity. As we've talked about previously, we look at correspondent as primarily an aggregation vehicle for our servicing platform and portfolio. So we've moderated our activity some to ensure we're optimizing the return against the level of production, you should expect to continue to see that in the second quarter.

[Unidentified Analyst:]

Got it. Thanks for the question.

[Willie Newman:]

Sure.

[Operator:]

We do have a follow-up question from the line of Kevin Barker with Piper Sandler. Please go ahead.

[Kevin Barker:]

Thank you. Thanks for the comments regarding operating expenses per broker through year-end. But can you just give us an idea of how to balance your comments around breakeven? Because it seems like there's a near-term revenue pressure that's occurring, but you're developing operating efficiency as we move through the year. So eventually, like you're going to see an inflection point. At what point do you feel like we can start to see that as we move through 2021, specifically around the broker channel?

[Willie Newman:]

Thanks, Kevin. Mark, do you want to take that?

[Mark Elbaum:]

Sure, sure. Thanks, Kevin. So the way we think of it, number one, is that – and this is just kind of the math that I think about. If we're at, let's say, 70 basis points in our average cost per loan right now is, let's say, 54, that's roughly a 25 basis point margin. I'm going to assume for this purpose that servicing breaks even. I think over time as amortization slows, and we're already seeing that, servicing will become unprofitable to us. But let's just put that aside. We have to cover about $17 million a month of overhead, $51 million divided by 3. So that leads you to fund circa $7 billion, $8 billion a month. And we're well on that run rate. The efficiency gains that we're expecting to create will improve those margins, and we're comfortably below 50. That's number one. And number two, we don't think we're going to be in a 78 basis point environment for a long period of time. We do – we don't know how long we'll be in that period, but we don't think it will be protracted. However, we also aren't planning on our margins grow much beyond the 115 basis points. To the extent they do that, of course, will benefit from that. So you couple all of that with the fact that we are, in fact, by adding brokers to the platform and activate that should ensure that we're able to get that additional volume. So hopefully, that's addressing the question. But as far as I think about long-term profitability, if we continue to improve our cost and add brokers to the platform, then we should have no problem showing good returns into the future. And with regards to your – sorry, go ahead, go ahead, Willie.

[Willie Newman:]

I would say that there really isn't kind of a per se inflection point because obviously, a lot of it's dependent on what the revenue side is. But the cost decrease is fairly steady. There is – actually, this month is – one of the things that we've done is, we've actually reduced our basis point compensation to our sales force. They've really been – I mean, people typically look at sales. People is not leaders, but we don't. So our sales force has actually been a leader in helping us become more cost competitive. So there are certain points in time that there will be inflections down from a cost standpoint. But overall, it's a fairly steady decline during the year. But as Mark said, we expect the volumes to be in the range where we're going to be able to get a benefit from that.

[Kevin Barker:]

And just to clarify, your breakeven level that you're talking about on gain on sale margin is specifically to a wholesale channel, not as a company as a whole, right?

[Mark Elbaum:]

It would be – well, the – so yes. Let me clarify that. The 55 basis points, 54 basis points would be the company as a whole. I tend to focus on gain on sale margins in the wholesale channel because that's, frankly, 70%, 80% of our business, but my comments were with respect to the company as a whole.

[Kevin Barker:]

Okay. Thank you for taking my questions.

[Operator:]

And speakers, we have no further questions at this time. You may continue with your presentation or closing remarks.

[Willie Newman:]

Great. Thanks, operator. Thanks everyone for joining us this morning for our quarterly earnings call. Please feel free to contact me if you have any questions, and we'll look forward to speaking with you again soon.

[Operator:]

And that does conclude the conference call for today. We thank you all for your participation and kindly ask that you please disconnect your lines. Have a great day.