UWM Holdings Corp. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. UWM originates and services residential mortgages exclusively through the wholesale channel. Its January 21, 2021 business combination created an Up-C structure; SFS Corp. held 93.6% of Holdings LLC’s economic interest at quarter-end.
Financial performance
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Total revenue, net | $1.190 billion | $455.5 million |
| Net income | $860.0 million | $20.3 million |
| Net income attributable to UWM Holdings Corp. | $48.0 million | Not presented |
| Adjusted EBITDA (non-GAAP) | $711.4 million | $173.7 million |
| Net cash from operating activities | $2.637 billion | $(636.1) million |
| Cash and cash equivalents at period-end | $1.593 billion | $56.2 million |
- Loan originations were $49.1 billion, up 16% year over year. Loan production income rose 166% to $1.075 billion; management attributed the increase to higher production volume and a reported gain margin of 219 basis points versus 95 basis points in Q1 2020.
- Loan servicing income increased 147% to $123.8 million. Interest income declined 11% to $45.9 million.
- Reported total expenses fell 27% to $317.0 million, but Q1 2020 included $218.8 million of MSR amortization, impairment and pay-offs. Excluding that item, expenses increased $100.6 million, primarily reflecting higher compensation and staffing.
- Net income attributable to non-controlling interests was $812.0 million. Basic and diluted Class A EPS were $0.47 and $0.33, respectively; these EPS figures cover only the post-combination period and are not directly comparable with Q1 2020.
- Operating cash flow benefited substantially from balance-sheet movements, including a $2.413 billion reduction in mortgage loans at fair value. It should not be read as a recurring earnings measure.
Financial position and material changes
- At March 31, total assets were $10.373 billion, total liabilities $7.595 billion, and equity $2.778 billion. Cash was $1.593 billion.
- Warehouse borrowings were $4.824 billion, down from $6.941 billion at year-end 2020. The company also reported $400 million outstanding on an MSR-secured operating line, $789.9 million of senior notes net of discount and issuance costs, and $25.4 million of equipment notes. The 2020 senior notes carry a 5.5% coupon and mature in 2025.
- Management reported compliance with debt covenants and agency net-worth and liquidity requirements. The most restrictive agency requirements were $567.4 million minimum net worth and $76.5 million minimum liquidity; UWM reported meeting both.
- Mortgage servicing rights (MSRs) were $2.300 billion. The company adopted fair-value accounting for MSRs on January 1, 2021, increasing opening MSR assets and retained earnings by $3.4 million. Q1 MSR fair value declined $59.3 million: a $197.8 million gain from valuation assumption changes was more than offset by $257.1 million from cash-flow realization and decay.
- Q1 2021 results reflect the new MSR accounting method, while Q1 2020 used amortized cost. Along with the January business combination and resulting non-controlling interest, this limits period-to-period comparability.
Outlook, risks and unusual items
- No specific earnings or origination guidance was provided. Management cited loan volume, interest-rate conditions, wholesale-market trends, technology and continued growth as factors affecting future performance.
- Management reported COVID-related forbearance on 1.47% of serviced loans at March 31, improving to 1.30% at April 30.
- Key exposures include interest-rate changes affecting origination volumes, hedges and MSR valuations; reliance on warehouse funding and secondary-market loan sales; collateral margin calls and counterparty or facility-renewal risk; GSE and agency dependence; credit and repurchase claims; competition; regulatory compliance; and cybersecurity. MSR valuation is particularly assumption-sensitive: a hypothetical 10% adverse change in prepayment speeds would reduce value by about $99.1 million at March 31.
- Off-balance-sheet commitments included $25.6 billion of commitments to extend credit, $18.3 billion of interest-rate lock commitments and $19.3 billion of forward MBS sale commitments. Commitments may expire undrawn and do not necessarily represent future cash needs.
- Q1 included $17.3 million of other income from a decline in the fair value of warrants. Warrants are recorded as liabilities and remeasured each reporting period, potentially adding earnings volatility.
- Subsequent events: UWM issued $700 million of 5.5% senior notes due 2029 in April and used part of the proceeds to repay and terminate its $400 million operating line. It also entered a Goldman Sachs mortgage repurchase facility of up to $1.0 billion. In May, the board declared a $0.10-per-share quarterly dividend and authorized up to $300 million of Class A share repurchases.
- The filing describes broker litigation, including a December 2020 commission-policy complaint and an April 2021 antitrust class-action complaint concerning restrictions on working with certain competitors. Management said ordinary-course matters were not expected to have a material adverse effect; outcomes remain uncertain.
Important facts for investors to verify
- How much of reported earnings and operating cash flow reflects recurring mortgage operations versus working-capital movements, fair-value changes and accounting-method differences.
- The sustainability of the reported 219-basis-point gain margin as interest rates and origination-market conditions change.
- MSR valuation assumptions, prepayment experience and the sensitivity of MSR value to changing rates and servicing costs.
- Warehouse capacity, facility renewals, covenant headroom and liquidity after the April debt issuance and repayment of the operating line.
- The effects of the 93.6% non-controlling economic interest, potential unit exchanges, dilution and the authorized share repurchase program.
- Developments in broker litigation, loan repurchase claims, COVID forbearance and other regulatory or counterparty exposures.