UWM Holdings Corporation (UWMC) Earnings Call Transcript & Summary

[Audio Gap] go through every one of them, at least I'm trying to get through every one of them. Hopefully make it as effective for everyone as possible. Before I get into that, obviously, from a second quarter perspective, operating income, over $180 million EBITDA -- adjusted EBITDA along with about $40 billion of business. We feel really good about UWM and the strength of the broker channel and the growth of the broker channel. So we feel great about where that's at.

Obviously, I got so many questions about Oaktree partnership, the dividend, Two Harbors, the hedging, we're going to get through all that stuff, and I'll try to get through it. Before I get into it, I wanted to start with the overall picture from where we are at UWM and the partnership with Oaktree. We feel great about Oaktree and the partnership that we have and are creating -- and Oaktree is not just capital, they're strategic partners of ours. They have MSR background, non-agency -- like they have a lot of mortgage related, and they're betting on housing, and they're betting on UWM. And so we're excited about the partnership and what it's going to do for our business long term, and that's what we always think about is how do we dominate long term. The mortgage market has been tough for the last 5 years now. And UWM has consistently made operating income. And Two Harbors have recognized the strength of our business and says, hey, how can we take this to the next level. And from a strategic perspective, we see a lot of the same vision about the brokers, about the operating model and infrastructure that we've built to help the independent mortgage channel grow and dominate. And that's really what we're about here at UWM. And housing and mortgages are going to be here and be strong. It's a huge market. And it's been a tough 4, 5 years, and we expect the next 4, 5 years to be significantly, significantly better. And in the tough years, we still are successful and profitable at UWM, as Oaktree points out many times, we spent time with them. And now it's like how do we take it to a whole another level. And so the balance sheet is fortified. The debt ratios that people are concerned about are non-question anymore, and we're ready to go forward in a really, really strong way. So with that being said, I know there's AI questions, there's dividend questions. So let me just go into all these questions and hopefully answer all of them. I'm going to try to mention a couple of people that ask the questions, but to be fair, I think we got the same questions from about 15 different people. So I won't try -- I won't do too many. But let's just start, I guess, with the dividend. I got some questions, Jason Stewart, Bose, Jeff. I mean, I got people. So I'm not going to name everyone's name that asked the question. But the basic question is, hey, Matt, UWM, why are we cutting the dividend now? And so the first part, how we got here, a lot of things tied to the dividend. We've always rewarded our shareholders, and we feel good about rewarding our shareholders, and we're going to always look at ways to do that. The decision to cut it right now is just capital allocation. Right now, our -- after this transaction, after the $2 billion plus, which is the largest capital raise, I think, in mortgage history, we're going to have over $3 billion of equity. And so how do we continue to build on that going forward. The dividend obviously comes -- takes out from that. And we made the decision that the right thing for our business for the long term is to continue to build up equity, continue to solve for the debt ratios, which are significant -- are well below industry norms now with the capital infusion and run the business in the most effective way. Will there be special dividends down the road? Possibly. Will there be -- will we go back to regular dividend? Possibly. Once again, we look at that stuff every single quarter. But the reality is liquidity matters, equity matters, and we have the best operating business and infrastructure for brokers to grow and dominate. And so if I can make sure the capital and liquidity are in a great position, then all the rest takes care of itself. And once again, it's been a tough 4, 5 years in the mortgage industry. The next 4 or 5 years are going to be significantly better. Oaktree believes in that. They believe in housing, they believe in UWM and so do we, and so do I, obviously. And so that's kind of how I think about the dividend. It's just the right time to pause that and suspend that process. And then we'll always evaluate every quarter with our Board of Directors and see what's best. But right now, I see a going-forward path of let's retain equity, retain earnings, continue to build, continue to grow and take advantage of the market that we have in front of us. All right. Let's see. Two Harbors, I guess we can talk -- Two Harbors, a couple of questions on the transaction. So let me just -- did that create the need for capital? So I don't really look at it that way. And so here's what I'll say. The way we look at it is how do we make sure we have a good amount of equity, we have good ratios, and we have a fortified balance sheet. So that's a big part of why we have the capital raise. And it's not just capital because if it was just capital and I could put money in myself or we can get random people put capital. This was a strategic partnership with Oaktree because of their MSR background, they have a whole -- and also their -- just their knowledge and their sophistication around capital markets, which will help us in so many ways. And so we're excited about the partnership. Now the Two Harbors transaction, it definitely was unfortunate how it happened. And you'll see some litigation and some things that they did inappropriately, and we'll go through that process when that time comes. However, I'm not going to spend my time talking about that. What I'm going to talk about is that Two Harbors transaction was one of the strategies of helping from a cash, liquidity and equity perspective. And when that did not go the way we expected, we had another option. And it's great to have options. And once again, Oaktree wrote a massive size check to be part of this and to be next to me and UWM and help us grow together. And so if the deal would have closed, maybe the Oaktree thing would not have happened as quickly. The silver lining is Oaktree has so much better partnership for us than Two Harbors or anything else would have been. And so I think of it as a long-term upside for UWM the way it all played out, and we'll go through the litigation process with Two Harbors and CrossCountry and some of the inappropriate things that happened in that deal at that time. So I think that covers Two Harbors. I'm trying to think if there's anything else that -- look at some of the other Two Harbors questions. Let me go into the hedge loss because I think that's a handful of other questions here. Can you please explain the hedge loss, what caused it and how investors should think about it? So listen, hedging in general in the mortgage industry is expensive. And it's something I actually don't believe in, in general. We have never hedged our MSR, I say never. We don't traditionally hedge our MSRs. Our origination machine is so big and strong that if the rates drop, you'll lose MSR value and equity, but you'll do so much more business that you're good. And if rates go up, your MSR values go up and you do less originations, but your equity goes up. That's kind of how we've always played it. Well, when you're going through and acquiring a company like Two Harbors and a massive MSR book, then our MSR book became double the size of what we've always managed. And therefore, it created a little more risk. So when we did put a hedge on to protect against that risk and then a lot of things happen. Let's just be real with whether it's a war, a lot of different things that happened that created the 10-year to go up -- and then obviously, the Two Harbors transaction went away. And so a confluence of events that created a hedge loss. We hit a certain risk threshold that I said we're not going to continue hedging regardless because we didn't want to have more of an equity drain, and we took the hedge off. And of course, that's the strategy that we've always had is let's not hedge, let's run the business effectively. Once again, Oaktree has a strategic perspective on this, and I'll go through that with them after this process and whether we hedge going forward or not. But once you have $3 billion of equity, you're really not at a risk of the MSR values go down $400 million for this quarter or go up $400 million, it's less relevant. But when you're hovering around $1.5 billion or $2 billion, it becomes a little bit more relevant. And so that became an issue. We hedged -- and it was a onetime event, to be honest with you, because of Two Harbors, we were overhedged, if you think of it that way, protecting against the Two Harbors transaction. The market moved against us, and it's a onetime event that won't happen again. We feel like our hedging policies are much stronger now, but also we're not acquiring another company that has an MSR book like that, at least that's not the plan of now, and we know how to handle it differently going forward. So I think that covers it. It was a transaction-specific event. It's not a reflection of our operating business, by the way, at all. As you guys know, as I pointed out at the beginning of the call, $160 million to $200 million of adjusted EBITDA almost every quarter consistently, a little bit higher than that if you look at the numbers, but we're consistently making that much money. What did management learn from hedge loss? I kind of covered this one. A unique circumstance. Traditionally, we don't hedge MSRs at UWM. Definitely, with the size book we have right now, we wouldn't be hedging MSRs at that level. And once again, the market moved in a certain way, and it was an event that obviously unfortunate and not planned and not expected. But at the same time, we're looking forward now and know what our business is about and operating business is great. The balance sheet is fortified. It's never been stronger. I even looked at the balance sheet from 2020 and '21, I think $3 billion is kind of the high watermark, and we're going to be at that number when this capital raise is done. And at the same time, after another quarter or 2 of earnings as we're going to have, it will continue to grow. And with no dividend, that will make our balance sheet strong, liquidity is strong. And then just let's continue to build and dominate helping independent mortgage operate in this housing market with AI, all the things that we've really been building for years and years here at UWM can now go to the next level. So I think that covers those. Let me see if there's any other ones. So let's talk -- now there's a bunch of Oaktree questions, obviously. So let me talk about that. I talked a lot about it already, but why was Oaktree the right partner for UWM at this point of the cycle? So first, Oaktree has a great background, great reputation from their leadership to also just their mortgage knowledge and their housing belief. So they believe in housing, they believe in UWM, and we partner together. Once again, my background has always been, hey, I'll just do it myself. We don't really bring outside parties in. And that was really the path we're going to. We started having some in-depth conversations with Oaktree, and I realized the strategic benefit of bringing in someone next to me. And so instead of Mat putting in $1 billion or more, Mat will put in $500 million, $550 million. These guys put in $1 billion, $1.5 billion, and that's kind of how we get to $2 billion. And so that was the strategy there, but it's strategic money. It's not just capital. We can get capital from anyone, but strategic partner, we're going to have a member or 2 on the board as well. They're going to have some different conversations, and they have different belief systems on things that maybe can help us. They also believe heavily, heavily in the strategy and the vision of the UWM, the broker channel, the independent market. And I wouldn't be aligned with someone that didn't believe strategically and the same thing from housing, from the infrastructure we built for brokers, the AI investments that we're making and continue to make so they're aligned with us and how we're doing things. And so I think it's really been a perfect match. They understand the cycles of the industry as well. They understand that in most cycles, most mortgage markets, it's every 6, 7 years, it's $15-plus trillion of mortgages. And the last 5 have not been that. So they know the good years of the $2 trillion, $3 trillion, $4 trillion years are most likely coming in the next 3, 4, 5 years. So they understand that right now is an amazing time to be partnered with UWM. And I understand that as well, which is why I put a lot of money in as well. And obviously, I'm the biggest shareholder and also big in on this deal as well. So we believe in the market, we believe in UWM, and Oaktree is a great partner in that respect. So let's see. Let me see if I can cover more Oaktree. There's a lot of Oaktree questions here. So some people look at the size and cost of the transaction and think, is this -- how do we think about this from a strategic benefit? Is this -- Oaktree is getting a great deal is what people say, which they are, and they should get a great deal, and we're happy for them. When Oaktree makes a lot of money, so does every shareholder, so does UWM. Everyone is going to win together. And so I don't begrudge anyone from making a lot of money next to me. I wish them all the best along with everyone. And when the warrants become very profitable -- I guess one of the questions kind of ties to, will the warrants become very profitable? I think everyone that owns shares today will make a lot of money as well. And so the way we look at that is, yes, there's a lot of different pieces to it. And Oaktree wrote a $1.5 billion check. I'm putting it up to $550 million. I believe that, that's an opportunity for everyone to succeed, and it's putting the common shareholders, the debt holders, all in a better long-term position. And that's my job to run the business the most effective for the long term, not for whatever today is August 6. It's not about August 6, it's about '27, '28, 2030, 2032. And anyone that's partnered with us, Oaktree being one of them, me being a big shareholder and a lot of the shareholders on the call and people that pay attention to what we talk about, everyone is going to win together. And it's about UWM and the operating platform, the AI, the technology that we've built to dominate for the long term. And now our balance sheet is fortified and integrated. So yes, Oaktree is getting a great deal, and I'm happy for them. And when they make a boatload of money and are very successful, so will most of our shareholders and a lot of shareholders make even more because of based on where the stock is today. And so we're excited about everyone's winning together, and we're going to continue to win going forward. Let's see. So I think there's a question here about debt ratios and equity. And so the key thing is the total equity increases from $1 billion to roughly $3 billion and growing, right? And the nonfunding debt-to-equity declines from -- it was -- with the end of the quarter, it jumped up to a really high number because of the hedging and the negative we had in the second quarter to over 5x or I think it was 5.6x, but now we're down to 1.2x. So 1.2x is well below the industry norms. Most people operate 1.5x to 2x, maybe a little higher than that, but we'll call it 1.5x to 2x. We're well below it, and we have plenty of room to grow. And so we feel really good about where we are right now from a debt-to-equity ratios and overall, our business and balance sheet. So the key thing for me here on the Oaktree, the 2 -- the question kind of talks about the $2 billion capital raise and how that handles for debt ratios and equity. And I think, in general, it's a real big positive. Anyone wants to take a step back and says, is the company stronger today than it was 6 months or a year ago? Anyone would say yes. Everyone would say yes. And that's what I think about right now is how are we positioned for the future. We have never been better positioned not because of just the equity and capital and liquidity, which, of course, is a big part of it but also the Oaktree strategic partnership and all that they bring to the table. And then on top of that, we are the best and biggest mortgage originator in America. We brought servicing in-house. We are dominating in that respect. I know there aren't that many questions about all these things operating-wise, which I understand why, but that's okay. But operating wise, we have a massive moat around our business. The broker channel is growing and the infrastructure that we are built -- we've built and the AI we built to help power them to grow even further and waiting for not only big years because those will happen, but just the normal mortgage years -- in a traditional mortgage year, even in these bad years, we've been doing really well operating income-wise. And so we feel really good about the business and where we are at right now. Let me see. So I guess there's a couple of people asked about -- Mikhail Goberman, and a couple of people asked about why choose preferred equity with warrants instead of issuing common stock? So first off, a large issue -- common issuance at current trading levels would create significant and immediate dilution, and we can talk about dilution. The preferred equity rates, permanent capital in our business is a better upside for the business and our belief system. The warrants do create dilution as people will ask about, and I understand that. And to be honest with you, on the dilution because I know there's some dilution questions, it's definitely something we had to weigh heavily. However, the long-term benefit of us making significantly more money and building this business significantly bigger is the right decision for all shareholders, including myself. And so although the dilution is real, the dilution is only really real at a high level when the warrants are in the money. And the average of the warrants are $4, which is significantly higher than our stock price. And a lot of the warrants are at $6. And so that's how I look at it. This structure balances near-term capital with long-term shareholder upside. And we do not want to dilute the common shareholders more than necessary, and we feel great about where we're at right now and about what's going to happen going forward. Let's see. I think I kind of covered the dilution question there, too, but obviously can have no more. And by the way, I know I'm answering all these, and I appreciate all the questions. After the call, whether it's me or our Investor Relations team or even people from Oaktree, we're all available to talk through anybody's thoughts and strategy on all aspects of the business. We feel -- once again, I continue to tell you, I feel excellent about the business, the fortified balance sheet and the long-term strategic benefit of the Oaktree partnership and where we're going together. Let's see. Okay. So here's something that's interesting. How much interest savings does this transaction create? So a lot of people ask, there's another question that ties to the amount of the coupon that Oaktree is receiving. And so right now, a lot of the money that we're borrowing is between 6% and 8%, we'll call it. And yes, the coupon on this new partnership is 10%. But so it's not 10% on $1.65 billion to start because remember, and the question that you're basically asking here is, we are saving about $100 million by paying down MSR lines and paying off other things from an interest perspective, and then we're paying out $165 million in this example on a 10%. And so it's not truly $165 million more of expense because you have to net out the savings that we would be having because we are paying from a capital perspective right now on borrowing money against our MSR lines or other liquidity that we have. So the interest expense will go down roughly $100 million, but we're going to pay about $100 million and $165 million for the [ pref ] money. So I just want to make sure that's clear. So the question is talking about interest savings. Yes, there are interest savings. I don't really look at it -- I look at it as a net number as it's slightly more expensive in that perspective, but not the full amount, and it's not interest savings overall, although it might look like that. Let me see if there's other questions, a lot of Oaktree stuff. So well, we hit this -- I kind of talked to -- the next one was about total potential dilution from the warrants. And so once again, there's 330 million total warrants, 165 million warrants that can be exercised at $2, which is obviously higher than the stock price is today. Most people won't exercise the warrants until it's well above $2 in my perspective. So I believe that those warrants are probably in the money, more closer to $3 or $3.50 when people will exercise them. And then the other half or 165 million warrants are at $6. So same concept there that it will be probably exercised when they're higher than $6. And so that's to answer that question, just I don't think there's much more to it than just -- I think someone was just asking for clarification there. Jeff Adelson, Bose George, Mikhail, a bunch of people asked about -- so this is a little bit off of Oaktree now. Happen -- what happens to the MSR book from here if rates fall sharply? And so here's what I say. Rates fall sharply. That's a win for our mortgage business, right? The MSR, just like ours and everyone else will get -- will have a write-down if you have a massive MSR rates drop. When rates drop, though, our origination machine will kick in at a high, high level. And so if that happens, we're -- that's why I always -- I was kind of talking about earlier about the natural hedge and how we've always run our business is, we don't put a hedge on our MSR portfolio. We sit there and wait. If rates go up, our MSRs are worth more. Rates go down, we do a lot more loans. And so it's a win-win for our business. The only reason that was different in this situation was because of the Two Harbor transaction of having a double the size of the MSR book and obviously, a war happening and a couple of different things happening all at once and our equity levels being too low. So the confluence of those 3 things created us to hedge at the level that we did. And so I guess a long way of saying, it will be a really great thing if rates drop sharply, and we'll do a whole lot of loans. Obviously, we did $40 billion in a really tough mortgage market and $45 billion in the quarter before when rates were slightly lower. But overall, our origination machine can handle $250 billion to $300 billion as we stand today, if not more. And so I hope rates drop sharply, and we have to deal with the MSR write-down. That will be a fine problem to have because the origination machine will kick in. We'll do $60 billion, $70 billion, $80 billion in a quarter at big margins, and the brokers will grow, will grow and the overall shareholder base will be excited and positive about that opportunity. So we'll see what happens. We've been talking about rates dropping for a while. They haven't happened. When they do, we'll be ready. All right. Let's see. Is UWM becoming a servicing-focused company? No. No. UWM, we're -- like I said, I talk about is we're big in housing. We're big in AI. We're big in infrastructure to help mortgage brokers build and grow the independent channel, but we're an origination machine. And we have a moat around our business that people can't touch. And with some of these things happening, understanding that the barriers to entry to compete with UWM is significantly higher than it's ever been, even back to 2020 and '21 when we're doing a huge amount of volume, the capital and liquidity requirements were not at the level they are today. And so we look at that as a positive because our balance sheet is now fortified at a level that almost has never been done before at our size for UWM perspective-wise, and we're excited about it. So no, we're not a servicing focused company. We will continue to build our servicing book. We brought servicing in-house. I do see a question here, so I kind of hit this at once, expenses are higher on the servicing side right now because I've got both, right? I got internal and I'm -- still have external with Cenlar. And so having external servicing and internal and then I also have to pay the offboarding cost. So the servicing costs, I'm kind of getting double hit this year. Next year, we'll see those big benefits that we've talked about now. So you're kind of getting hit a double on that right now tied to the service. But we are not a servicing company. We are an origination company. We're an infrastructure and AI technology company, helping brokers dominate in this housing market, and we feel good about the moat around our business. And the servicing book is definitely a nice thing that we have, and we will continue to grow because we can originate loans at a level that almost -- actually, I won't say almost, we originate loans at a level that nobody in the market can do. Let me see. I'm trying to think of -- I've covered all those. I kind of covered the servicing for a higher rate perspective. Obviously, scale is a big part of servicing, and we are pretty close to that level. We obviously have one of the top 10 servicing books in America. But as we continue to grow and now one of the things that kind of tested the scale, are we going to continue to scale our servicing book? So let me answer that one head on. Can we continue to scale the MSR book? And the way we look at it is with the equity that we have now, we will continue to opportunistically sell our servicing when the time is right. And so we don't have a need to sell. If someone is going to pay a great price and it makes strategic benefit, we will sell the MSRs and bring in that cash and validate all of that. Or if we feel like it's the right time to continue to build, we can do that. And that's one of the benefits of Oaktree. They have an intimate knowledge of the MSR book and the MSR asset in general. And I feel really good about the partnership there because they have a lot of views on that and how we can build this the best way together. So I feel good about the MSR book and our ability. Once again, we don't have to go buy MSRs. We originate them, which is something that we have at the highest level in the country, which will help us continue to grow going forward. Let's see. I think there's some questions that are kind of -- let me try to knock some more of these out. So Jeff Adelson, as you build an in-house servicing platform, how are you balancing the strategic value of retaining MSRs and growing the servicing portfolio against the liquidity generated through MSR sales? And so I kind of answered that question, I think, a minute ago. And so I'm trying to think if there's anything else I'd want to add to it to help answer your question. But we will continue to grow the MSR book. We love what we've done. We will be the best servicer in America. We might not be the biggest servicer in America because we will opportunistically sell when it makes sense. But what we're doing for the consumers and the retention of those loans, giving them back to our broker channel has been a huge, huge benefit. We've always done a very good job of it. But now that we're handling the servicing process and not outsourcing it to Cenlar or other lenders or other servicers, we feel we can do a better job, which will hopefully only drive the refinance when the refinances come, a higher percentage come back to UWM. But as I've said before, although we don't have the biggest servicing book, we do 12%, 13%, I think, of all refinances in the market. We only have 2% or 3% of the servicing. So we don't have to own the servicing book to do the refinances. The broker channel is very efficient, and we help our brokers succeed with the technology and the infrastructure we provided for them to help them win, they will win in that market when the rates do drop for refinances. And so there's still a lot of refinances right now but it's obviously been a higher rate environment. And so in this example, our MSR book will continue to be stronger and continue to build going forward. Let's see. I've covered a lot of these questions. I'm trying to see if there's any other questions that I have not covered. This is an Oaktree question, kind of like, I guess, I kind of said it already, so I'll just kind of repeat myself, but just to kind of reiterate the question tied to Oaktree is, why is Oaktree the partner and not capital from other companies or bringing in other -- and Oaktree is a strategic partner, right? Capital is capital. Money is money. But if you get someone that could help you build your business and actually aligns with the vision and strategy that you have going forward, that's a different type of capital. And that's how we look at MSR as -- I mean, excuse me, Oaktree has strategic value, but they have MSR knowledge. They have -- there are some things we can do on the non-agency side. And they also have really strong leadership there and people that we're going to partner with that think of things in a way that maybe think a little differently and they give us different perspectives on things. But I'm going to continue to run this business the best way for our brokers, for our team members, for our shareholders and for Oaktree and for UWM. And once again, I'm one of the shareholders as well, so we're all doing it together. And we're all going to win together. And once again, in the question kind of alludes to Oaktree could you've gotten cheaper capital elsewhere, I'm sure we could have gotten cheaper capital elsewhere, but is that the right long-term benefit? I'm thinking about the size, yes, someone could put in $100 million, someone put $1.5 billion, and I put in $550 million or committed up to $550 million. Those are big numbers. And so I want Oaktree to make a lot of money. And Oaktree's warrants are in the money, everyone that's watching this [indiscernible] that cares about UWM is going to be extremely happy for Oaktree because they're going to make a lot of money as well. So we feel great about Oaktree, the partnership, but it's not just capital. They wrote a big check. They believed in housing. They believe in UWM and they're making their bet with us right next to me, and I feel great about that opportunity. I don't know, I feel like I've covered almost all of these. I don't know if there's any other questions. Here's what I'll say is, I'll kind of wrap up because I feel like a lot of questions are duplicative, and I want to make sure I cover everyone. If I do not cover your question, I'm personally happy to get on a call with people. Of course, Investor Relations, Blake, Mat Roslin, my CFO, Rami, everyone is available to talk. The Oaktree team is ready to talk. We're happy to talk about it with anyone. We're excited about the opportunity. The biggest thing is long-term winning. UWM is always about long term. We're not looking back at a bad month or a bad quarter or a bad trade. That's not what UWM is about. UWM has been in business 40 years, 40 years of helping brokers win, growing and continuing to put ourselves in a position to dominate in all cycles. In the last 5 years have been a down cycle and UWM has consistently made, what do you want to call it, $400 million, $500 million, but also I look at $150 million to $200 million of adjusted EBITDA pretty consistently. We are a strong operating business. And with the capital infusion and liquidity we have right now, the sky is the limit. And so I look at that from a perspective of how do we win long term together, and that's what UWM is about, and we are going to win with Oaktree next to us and all of our shareholders and partners, our brokers, our team members, we're going to win together going forward. And that's my job, long-term domination, and that's where UWM has never been better positioned than we are today. Thanks for the time. Look forward to talking to anybody about it. We appreciate the questions, the support and you being on the call with us. Have a great day.