UWM Holdings Corp. — Q3 2023 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2023. UWM originates, sells and services residential mortgages, primarily through the independent broker wholesale channel. Its reported results consolidate Holdings LLC, of which UWM Holdings owned approximately 5.9% economically; SFS Corp. held the remaining approximately 94.1% non-controlling interest.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue, net | $677.1 million | $684.2 million | $1,425.9 million | $2,070.2 million |
| Net income, consolidated | $301.0 million | $325.6 million | $391.2 million | $994.3 million |
| Net income attributable to UWM Holdings | $18.2 million | $11.7 million | $13.8 million | $42.0 million |
| Adjusted EBITDA (non-GAAP) | $112.1 million | $(1.4) million | $378.7 million | $222.0 million |
| Loan originations | $29.7 billion | $33.5 billion | $83.9 billion | $102.2 billion |
| Loan production gain margin | 0.97% | 0.52% | 0.92% | 0.83% |
Revenue and margins. Q3 loan production income rose 67.6% to $288.9 million, as the gain margin improved from the prior-year period, partly offset by lower originations. Nine-month loan production income fell 9.1% to $775.1 million as lower volume outweighed improved gain margin. Servicing income increased to $200.4 million for Q3 and $612.2 million for nine months. Q3 servicing costs declined 10.5% to $33.6 million; nine-month costs declined 20.9% to $102.2 million.
MSRs and interest. The fair-value change in mortgage servicing rights (MSRs) added $92.9 million to Q3 revenue, versus $236.8 million a year earlier. For the nine months, it reduced revenue by $219.7 million, compared with a $434.9 million increase in 2022. Net interest income, defined by the company as interest income less interest expense on funding facilities, was $44.0 million in Q3 and $147.4 million for nine months. Total interest expense was $93.7 million and $239.4 million, respectively.
Financial position, cash flow and liquidity
- At September 30, cash and cash equivalents were $729.6 million; total assets were $12.2 billion and total liabilities were $9.1 billion.
- Warehouse-line borrowings were $5.07 billion, secured-line borrowings were $500 million, and senior notes were $2.0 billion principal ($1.99 billion carrying value). Senior notes bear stated rates of 5.50%–5.75% and mature in 2025, 2027 and 2029. The company also had $97.3 million borrowed against investment securities.
- For the nine months, operating cash flow was $494.5 million, investing cash flow was $1.65 billion, and financing cash outflow was $2.12 billion. Cash increased $24.7 million from year-end 2022. Investing proceeds included sales of MSRs and excess servicing cash flows; cash-flow comparisons are affected by changes in mortgage loans held at fair value and warehouse funding.
- UWM reported compliance with warehouse, MSR-facility and senior-note covenants and applicable agency regulatory requirements. The most restrictive agency requirements cited were minimum net worth of $794.3 million, liquidity of $273.4 million and a 6% minimum capital ratio; UWM stated it met them.
Material changes and management commentary
- Q3 originations decreased 11.2% year over year; nine-month originations decreased 17.9%. Management attributed weaker production chiefly to higher mortgage rates and lower refinance activity, while purchase volume increased for the nine-month period.
- Consolidated net income decreased 7.6% in Q3 and 60.7% for the nine months. The nine-month decline principally reflected lower revenue, including the reversal in MSR fair-value contribution compared with 2022.
- Management reported Q3 Adjusted EBITDA of $112.1 million versus a loss in the prior-year quarter, and nine-month Adjusted EBITDA of $378.7 million versus $222.0 million. This is a non-GAAP measure; the filing cautions it is not a substitute for GAAP results or operating cash flow.
- UWM sold MSRs on loans with approximately $99.2 billion of unpaid principal balance for approximately $1.3 billion of proceeds during the first nine months. It also sold excess servicing cash flows for approximately $428.7 million. After quarter-end, it sold additional excess servicing cash flows on approximately $16.8 billion of loans for gross proceeds of approximately $159.9 million.
- After quarter-end, the board declared a $0.10-per-share Class A dividend payable January 11, 2024, and approved a $150.2 million proportional distribution to SFS Corp. The Q3 dividend and distribution were paid October 11, 2023.
Outlook, risks and contingencies
The filing provides no specific quantitative earnings or origination guidance. Management’s forward-looking statements identify mortgage rates and housing-market conditions, origination demand, secondary-market and agency access, warehouse and other financing availability, collateral valuation and margin calls, counterparty performance, competition, regulation, cybersecurity, and servicing and model risks as factors that could affect results.
- MSRs are a significant, valuation-sensitive asset: their fair value was $4.35 billion. The filing’s illustrative sensitivity analysis shows that a 10% adverse change in discount rate would reduce value by approximately $191.3 million; a 10% adverse prepayment-speed change by $129.5 million; and a 10% adverse servicing-cost change by $36.0 million. These sensitivities are hypothetical and not forecasts.
- Warehouse facilities are primarily variable-rate and include covenant and collateral provisions; the company depends on loan sales or securitizations to repay warehouse borrowings and fund further originations. Only $650 million of aggregate warehouse line amounts was committed as of quarter-end. Two warehouse agreements expired after September 30, 2023.
- Commitments to extend credit to potential borrowers totaled approximately $23.8 billion at quarter-end. The representations-and-warranties reserve was $63.1 million; repurchases totaled $201.9 million UPB for the nine months.
- The company described ongoing broker-related antitrust litigation and a dispute with former client America’s Moneyline, including pending motions. It stated that resolution of legal matters was not then expected to materially adversely affect financial position, performance or cash flows. It also disclosed indemnification obligations relating to litigation involving former Gores directors and officers and stated that it believes insurance covers any material liability.
- Related-party transactions include leases of facilities from entities controlled by the founder and CEO, legal services from a firm in which the founder is a partner, and a $500 million unsecured revolving facility from SFS Corp.; no amount was outstanding on that facility at quarter-end.
Important facts for investors to verify
- How sustainable the improved loan production gain margin is as mortgage rates, broker pricing and origination volume change.
- How MSR valuation assumptions, servicing portfolio runoff and further MSR or excess-servicing sales affect earnings, liquidity and future servicing income.
- Warehouse-line renewals and committed capacity, covenant headroom, variable-rate borrowing costs, and exposure to collateral calls or counterparty changes.
- The distinction between consolidated earnings and earnings attributable to UWM Holdings: approximately 94% of Holdings LLC’s economic interest belongs to SFS Corp.
- The terms and cash implications of distributions to SFS Corp., dividends, related-party dealings, and the pending legal proceedings.
- The composition and interpretation of Adjusted EBITDA and the reconciliation to GAAP results; the filing does not provide specific forward financial guidance.