loanDepot, Inc. (LDI) Q1 2021 Earnings Report, Transcript and Summary

Good morning, and welcome everyone to loanDepot’s First Quarter Conference Call. All lines have been placed on mute to prevent any background noise. [Operator Instructions] I would now like to turn the call over to, Nicole Carrillo, Chief Accounting Officer. Please go ahead.

Good morning, everyone, and thank you for joining our call. Today, we will discuss loanDepot's first quarter results. We are excited to share the financial information and other highlights of our quarter with you. Before we begin, I would like to remind everyone that this conference call may include forward-looking statements regarding the Company's operating and financial performance in future periods. These statements are based on the Company's current expectations and available information. Actual results for future periods may differ materially from those forward-looking statements due to risk factors that are described in the “Risk Factors” section of our filings with the SEC. On today's call, we have loanDepot’s Founder, Chairman, and CEO, Anthony Hsieh, and our Chief Financial Officer, Pat Flanagan, to provide an overview of the quarter, as well as our financial and operational results and to answer your questions. We are joined by our Chief Capital Markets Officer, Jeff DerGurahian; our Chief Analytics Officer, John Lee; and our Chief Revenue Officer, Jeff Walsh to help address any questions you might have after our prepared remarks. And with that, I will turn things over to Anthony to get us started. Anthony?

Thank you, Nicole, and good morning, everyone. I would like to begin by highlighting aspects of our results for this past quarter, and then I will address the evolving market conditions we are seeing across the mortgage industry more broadly and how loanDepot is uniquely positioned to thrive. This quarter, we reported record loan originations of $41.5 billion and adjusted diluted earnings per share of $0.98 per share. This was driven by a 11% increase in quarterly originations across our Retail and Partner channels reflecting the diversification in our strategy and strong consumer recognition of our brand. In another signal of the overall strength of our business and performance, and our commitment to our shareholders, we recently announced a special dividend of $0.61 per share. Our continued success is due to the innovative and purposeful way in which we built our company. Thanks to our Direct-to-Consumer and market retail and partnership channels we are able to serve customers where and how they want to be served. And importantly, because of our unique [indiscernible] model and the balance and diversification it offers, we are known to be incredibly nimble and strategic. We are well positioned, able to add new products and services and consider acquisitions, no matter to market environments. We are also known for our track record of creating strategically beneficial joint ventures. Q1 was no exception. Recently we entered into a partnership with Schell Brothers, a premier builder of energy efficient homes in Delaware and Virginia. The new joint venture, named Henlopen Mortgage, pairs Schell Brothers' innovative, highly personalized home options with loanDepot's highly efficient low cost lending platform, powered by our proprietary mello technology ensures customers’ experiences are seamless and rewarding. We take our responsibility to customers very seriously, which is why our mello technology and data enrichment capabilities helps set us apart. Thanks to our proprietary tech innovation and our unique approach to data, we were able to quickly match our customers with the right loan officer and the right product at the right price and right time, ensuring our customers are being served how they wish to be. This customer-centric approach and technology-driven mindset has been honed over the past 11 years. It had allowed our brand to become one of the most recognized in the industry today. loanDepot delivered on the promise I mentioned a few months ago. The promise of an extremely satisfying loan experience. Our net promoter score remains well above the industry average and on par with nationally recognized best-in-class consumer technology goods and service providers and that’s something we are extremely proud of. Our brand is special and we consider it to be one of our company’s most valuable and differentiated asset. This quarter, we initiated national partnerships with Major League Baseball and the Miami Marlins. It was an exciting quarter for us to say at least. loanDepot became the presenting sponsor of the American and National League Championship Series [and named] (ph) the Official Mortgage Provider of both Major League Baseball and the Miami Marlins. We also [unveiled] (ph) loanDepot park, the home of the Miami Marlins and world-class special events. In addition, we believe our position as the second most recognized mortgage brand grew even stronger this quarter through our ongoing national television ad campaign which has delivered more than 12 [million] (ph) household impressions since its launch in 2020. Our extensive data analytics also allowed us to capitalize on the 1.8 million average monthly website visits and 582 million online media exposures during the first quarter of 2021. At loanDepot, we measure engagement in multiple ways, of course, engagement is an important marketing metric, but for us engagement as a team and engagement within our communities is also extremely important. It’s one of the reasons we are so passionate about contributing to the local communities where our team members and customers live and work. This quarter, we announced several key initiatives that exemplify our strong commitment to communities nationwide, including the "Home Means Everything" Major League Baseball campaign whereby loanDepot will donate $25 to the Boys & Girls Clubs of America for each RBI during the 2021 regular season. We expect that this will generate a donation of more than $500,000 to an organization that does a tremendous amount of good for children, families and communities nationwide. Pivoting from our strong Q1 results, I’d like to spend some time addressing the recent shift in the mortgage market and further outline why we are confident and well positioned to further grow and succeed at any mortgage environment. Across the country, the first quarter was marked by rising interest rates, as well as the continuing slowdown in refinance volumes. Interest rates began to rise in late Q1 and there has been a corresponding reduction in market opportunities and gain on sales margins as a result. While we anticipate that the rise in interest rates the shift began earlier in 2021 than generally expected. Competitive pricing strategy pressures from other market participants also have a market-wide impact on margins. And finally, we continue to see strong demand for purchase transactions fuelled by interest rates that while rising remained at historically low levels, coupled with continued constraints on supply. LoanDepot’s differentiated model and diversified offering is builtexactly for the shifting market conditions. For more than eleven years, we have helped customers achieve their home purchase and refinancing goals with solutions that fit their needs. Our suite of products and services and powerful data analytics capabilities are intentionally constructed to account for changes to the market environment. Our dual focus on our Retail and Partner strategies enables us to raise awareness and generate leads broadening our "top of the funnel" consumer reach. These strategies position us to thrive despite changing rate cycles. This is exemplified by our industry-leading organic recapture rates that grew to 72% during the first quarter demonstrating that we have the right products for our customers that are able to offer to them at the right time because of our powerful data and analytics. Our technology-enabled platform allows us to scale our operations for changes in volume in a highly efficient manner. This platform coupled with our continuous focus on expenses, means we can continue to deliver value while adjusting to a changing market. And through our multiple sources of liquidity including loan funding warehouse facilities, MSR facilities, off-balance sheet gestation facilities, mello securitizations and cash on hand, we have established a sophisticated and flexible financing approach that allows the Company to fund its loan origination business and protect against foreseeable market risks. We are well positioned to capitalize on what we believe will be a period of consolidation in the market and we have the capability to efficiently integrate teams and build on our existing business momentum. I now like to turn things over to our CFO, Pat Flanagan, who will take you through our financial results in more detail. Pat?

Thanks, Anthony, and good morning, everyone. We spoke to all of you a few days after our IPO as loanDepot completed a significant milestone in its 11-year journey and successfully entered public market. Since then, thanks to the continuous hard work of team loanDepot, we’ve achieved another quarter of excellent results. As Anthony mentioned, in the first quarter, our strong financial performance was highlighted by record loan originations of $41.5 billion, representing an increase of $4.1 billion or 11% from the fourth quarter of 2020. Our Retail and Partner strategies delivered $7.9 billion of purchase loan originations, and $33.6 billion of refinance loan originations during the first quarter. Of similar significance, our Retail channel accounted for 81% of our loan originations and our Partner channel accounted for 19% of our total loan originations. The increase in originations across both channels are a result of loanDepot’s unique and diversified business strategy and strong brand recognition. With our Partner channel, our joint ventures contributed fee income of $2.2 million in the first quarter of 2021, reflecting the wide ride with industry partners we work with. In fact, we entered into two new joint venture relationships with homebuilders and added one new joint venture relationship with a federally chartered savings bank offering banking and insurance services during the first quarter of 2021. Our rate loss volume of $45.8 billion for the first quarter resulted in total revenue of $1.3 billion, which was an increase of 1% from the fourth quarter of 2020. We reported adjusted EBITDA of $458 million and adjusted net income of $319 million, as compared to $530 million and $376 million in the fourth quarter of 2020. The decrease is driven by the decline in gain on sale margins and increased variable expenses from higher loan originations volume in the first quarter. Our total expenses for the quarter increased by $119 million from the prior quarter, primarily due to IPO-related expenses of $64 million, of $59 million was stock-based compensation expense related to the IPO stock grants. The additional increase in expenses is mainly related to higher direct expenses from record loan originations, additional personnel expenses to support the growth in our business and marketing cost associated with expanding our national brand campaign. As we focus on long-term growth trajectory and build on our momentum, we will continue to invest in brand, people and technology. Importantly, our disciplined and purposeful investments in loanDepot’s technology enabled a 2% decline in cost for loan for the first quarter of 2021 as compared to the fourth quarter of 2020. Complementing our origination strategy is our growing servicing portfolio, which ensures we can serve the customer through the entire mortgage lifecycle. The unpaid principal balance of our servicing portfolio increased x26%, to $129.7 billion, compared to the fourth quarter, driven by an increase in servicing-retained loan sales. This also resulted in a 28% increase in servicing income quarter-over-quarter. As of March 31, 2021, approximately 1.4%, or $1.9 billion of our servicing portfolio was in active forbearance. This represents a decline from 2.4%, or $2.4 billion as of December 31, 2020 and as mentioned in our previous range saw we are optimistic about the improvement in these trends as we move further into 2021. The fair value of our mortgage servicing rights increased by $644 million during the first quarter to a record $1.8 billion. This increase was driven by $530 million of new additions, and a $231 million increase in fair value due to decrease in prepayments fees and increased interest rates during the first quarter of 2021. This was partially offset by a runoff of $118 million. We have established a sophisticated and flexible financing approach that allows loanDepot to fund its loan origination business and protect against foreseeable market risks. Our total funding capacity with our lending partners increased to $10.3 billion at quarter end, up from $8.1 billion at December 31, 2020. The increase was due to the addition of one new long-term facility with a funding capacity of $500 million, as well as increases to our existing facilities. Our available borrowing capacity was $2 billion at March 31, 2021. We also completed an offering of $600 million of 6.125% unsecured senior notes due 2028 before the close of the quarter. The proceeds from which will be used for general corporate purposes, including to pay a special dividend and reduce other debt positions. As part of our capital allocation strategy, we make it a priority to return value to shareholders when appropriate for our leverage in liquidity levels. We declared a $200 million special cash dividend on our Class A and Class B common stock and the holders uphold to the units. The special dividend will be paid on May 8th 2021 to the company’s stockholders and LD Holdings’ members of record as of the close of business today. As we’ve previously stated, we intend to begin paying a quarterly dividend after the completion of the second quarter. And now, let me turn it back over to Anthony for closing comments.

Thank you, Pat. I will now use this platform to reiterate what I have always said as trying and believe. We gotten where we are today by thinking and doing differently. In terms of our path forward, we are excited about the challenges and opportunities that this shifting market conditions brings to our business. We have the experience and are confident that our differentiated offerings, and diversified operating model positions loanDepot for success in any environment. We are also extremely grateful for all of the hard work and relentless efforts of team loanDepot and we’ll continue to make investments into our people, brand and technology, as we forge ahead. With that, we are ready to turn it back to the operator for Q&A. Operator?

[Operator Instructions] Your first question comes from the line of Brian Nash with Goldman Sachs.

Hey, good morning, guys.

Morning.

Maybe we could just start off given the shifting markets, Anthony, with maybe just a broad outlook about how to think about the remainder of 2021? And can you maybe just talk about how gain on sale margins progress by channel over the quarter and just given the back up in rates, and increasing competition, maybe just talk about what your expectations are for margins by channel? Thanks.

Brian, let me back up a little bit for everyone on this call and just remind everyone that mortgage origination is volatile to [unpredictable] (ph) and during times, where at rising interest rates and decreasing volumes, this is the best opportunity for companies of scale and with differentiated assets to properly go through the pressure point and to increase market share. This is where customer acquisition cost is key and your scale and efficiency will get you through this type of market condition. Competitors with less scale and less efficiency will have overwhelming higher cost to burden through this cycle. So it’s important for everybody to understand that more pressure as this market presents itself for the rest of the year, the better it will be for loanDepot to extend our reach and our market share and to flex our differentiated assets. Now, the pressure to margin and earnings will be evident and this teeter-totter has been the same exact way for the 36 years that I’ve been in this business. The lower the margins, the higher the opportunity for market penetration and market share. We also need to understand that we are in a whole new world here post-Countrywide of 2008 and 2009. That company gave a 22% market share. We are now a top three overall as a 11-year old company and as third retail focused originator in the country, we have less than 3% market share. This is still very, very early in a baseball game is top of the second innings in this cycle. So we need to understand here that quarter-over-quarter, month-over-month, week-over-week, a good company, a good operating company will attack the pressure points and adjust accordingly. And our objective is to maximize and leverage market conditions. Interest rates drop, should it do that, we will continue to scale and maximize our profitability. If the market continues to tighten up, volumes decrease as higher interest rates are evident, there is still plenty of market share, there are tons of opportunities for cash out refinances, keep in mind that second mortgage market is now gone post-Dodd-Frank. Americans are enjoying record low loan to value and high equity. There is lots of consumption through all types of purchases as we all know in today’s market. So we are seeing a tremendous demand in increase in cash out refinance and as you know purchases continues to be very, very healthy. What do we expect? Keep in mind, that we are only one month into Q2. And one thing that I stopped doing is I stopped anticipating what this market is going to do. And be prepared for the pressures to come. But those pressure points is an opportunity, because the more the pressure, the harder it is becomes for our competition.

Got it. Thanks for the color and if I could just throw in a follow-up. So, you mentioned lower margins will create greater opportunity for penetration. Can you maybe just talk about some of the leverage you have on the volume side to open up some of your funnels, you just talked about cash refi as an example? And then second, you mentioned M&A several times in the prepared remarks. I am just curious what is your appetite to acquire now that you have a public currency and if we ought to consider deals, what would be the priority? Thanks.

Yes, Brian. So, understand we purposefully built this organization to be the most well-diversified originations model in contemporary times. We have in market loan officers, one of the only – arguably two direct-to-consumer scaled sophisticated technology platforms, as well as developed the brand over the last 11 years, we also have an organically built top-10 wholesale lender within loanDepot and we are the largest joint venture home - new homebuilder lender in the country. All of these levers allows us to fish in different ponds as compared to our modern day competitors. It’s important for us to know that, because out of the $11 trillion outstanding markets, we certainly have more [hooks] (ph) out there in the marketplace and it gives us tremendous opportunity to really pull on each one of these different levers as the market continues to change.

Got it. Thanks.

Your next question comes from the line of Bob Napoli with William Blair.

Thank you. And also, good morning. I guess, Anthony, where – are you continuing to add in-market loan officers? And moving into the higher interest rate market with less refi volume expected, are you investing into that? Or are you focused on – while you are looking, I know, you are very clear on the opportunity to gain market share. I mean, are there areas where you are pulling back or where are you investing more aggressively in?

We are full core pressed in the refinance market and I’ll tell you why. There is plenty of refinance volume to go around – understand, in the event refinance volume gets haircut by 20% or 30%, there is still 70% left and what’s going to adjust is that defined demand curve, capacity is going to reduce. The capacity is going to reduce simply because the two highest cost in a refinance transaction to a mortgage company is the cost to acquire that customer. Many of them – most of them do not have brand or the data analytics to properly evaluate how to capture a customer at the top of the funnel and properly convert it as it gets the ultimate leverage on your marketing investments. Second is your labor cost, which is still significant in a mortgage. So utilizing technology to drive efficiencies to lower cost and to fulfill at scale, these two pressure points will be difficult for our competition. This is why we were able to grow so much over the last 11 years is because of these two fundamentals that we look at that that drives cost down. So that, as the mortgage market shrinks, we actually become more aggressive, simply because of the pressure points and this is where cost [indiscernible] market share. I also want to go back to the previous question that Brian asked. And then, I apologize, I skipped it on M&A and that is we are very active there. And we are looking at both in and outside the direct mortgage offering. I think within our brand, and known that the home purchase and refinance transaction is more than just a mortgage, we continue to evaluate our opportunities and are currently very active in that sector.

Thanks. Maybe in line with that, you talk about adding new products and services. Which new products and services are likely to be developed organically and what – when you say, outside of the mortgage market, you are talking about the personal loan market or what other products and services would you look at the – to acquire versus develop organically?

Yes, we are not prepared to discuss anything specific for obvious reasons, but what I will say is that, as the digital age continues to evolve and transition, adding adjacent products and services or bundling of service and understanding that the ultimate objective for a customer is to buy and sell a home and financing. And all of that becomes one all outfit, rather than singular pieces of clothing as we move forward and as a branded organization, an attractive brand that consumers identify with it becomes a bit easier and it becomes a more opportunistic for us to add adjacent products as we move forward, because we haven’t invested for acquisition costs.

Thanks. Maybe just last question. So, I mean, I guess, based on your comments, you would expect that over the – on a steady basis, so where – the second quarter through this year and next year, you would expect to see steady market share gains. I don’t know if you could quantify that at all and the market share trends?

Yes. In this industry, you have to prepare yourself for differentiated assets and wait for the market to come to you. The market is predictable in a sense that it’s going to change and when it does, you have to capitalize on it as we seen with 2020 and the scale on profitability loanDepot was able to achieve. Prior to COVID of 2020, you’ve seen companies that started organically in 2010 have grown on the average 50 plus percent year-over-year and has become the top three retail originator in the country. So, what we continue to look at and be very focused and disciplined at is, we don’t live for next quarter, we don’t live for today, we live for the next decade and that’s how we have developed our assets throughout our 11 year cycle. This is why we are extremely bullish and excited about the pressure points that are coming up.

Great. Thank you.

Your next question comes from the line of Brock Vandervliet with UBS.

Hi, good morning. Thanks for taking my question. I wanted to kind of go back to Brian’s initial one. Just, as we - as investors try to dimension the earnings profile here, I think what we are all looking for is, some kind of guardrails on the gain on sale. Margins – the volumes seems to be holding in better than expected, we could have a record year for purchase volume. All that’s good. I just – and can you give us anything really on gain on sale, either partner or the retail channel? Yes.

Yes. Brock, it’s Anthony. I understand what you are asking, but it’s not something that I think that number one, we can predict. We don’t know where the pressure points are coming. It depends – it depends on this fragmented market that we are in and how much competition decides the lower price to try to preserve the capacity. I mean, last year, obviously, everybody is still counting, but, we are looking at $4 trillion of capacity last year. And this year, we are looking at $3 trillion. There is $1 trillion of excess capacity that the industry needs to share. And everyone is always stubborn at shedding capacity until they understand they must, one capacity shed margins return. So, it’s hard to say. We have a highly, highly fragmented market. Our number one competitor has been – and us have 11% or 12% market share and the rest of it is highly, highly fragmented. You have some pricing wars between the top two wholesale lenders that are feeling more developers which is now 15%, 20% of market. So, it would be interesting see what type of pricing pressure that creates. We just don’t know. We don’t know what pricing pressures is going to do to us. But at the end of the day, nobody can sell $1 bill for $0.90 for long. And this is where it’s important for us all to understand that the pricing point and the pricing pressure is a dynamic development and nobody can predict. That’s the mortgage business. But at the end of the day, you’ll know that there is going to be a change. There is going to be pressure points, but exactly how much cost is going to come down, it is coming down. Why, because, we’ve seen the best offer as we have seen in the 36 years last year. So is it going to remain that high? I hope so, highly guarded.

Regarding the – some of the price war you mentioned, do you think there – is there any sort of a silver lining here in terms of that activity being able to pull forward some of this price erosion. So that we are not worrying about it for the next six quarters that it happens relatively quickly or it’s just – is that too soon to know at this point?

on competition and the better it is for our market share gain. So that’s generally how it works. It’s pretty simple that way, but it does create a lots of earnings pressure. So, do I anticipate pricing war to continue? No, but it generally happens at the start of a trend change is what we are seeing today. We have too much capacity out there. Last year, we are under capacity, because originations were on fire. Now originations started to taper off, and the entire industry hired up and now we have excess capacity. And that excess capacity has to work its way through the system.

Got it. Okay. Appreciate your candor.

Your next question comes from the line of Kevin Barker with Piper Sandler. Kevin, your line is open.

Yes. Thank you. Sorry about that. Could you help us understand how you can transition towards focusing on a purchase origination market as it starts to dominate? Or as it starts to become a purchase-dominated market if rates were to continue to move higher, you do have the distributed retail loan officers, which it appears to be an advantage, but you’ve been focused mostly on the refi opportunity. How do you get those loan officers to refocus on the purchase volume and go after that, that part of the market as we transition here?

Yes, it’s a great question. And again, I don’t want to monopolize getting through here, but, look, this is naturally – natural to me. I’ve been in this market for a long time. So let me just say that, we look at the purchase and refinance markets almost except for industries. So, when I – what my purchase to refi ratio is, I completely ignore that questions, because it’s completely two separate penetration the way I look at it. Purchase markets, we are one of the largest in-market loan officer platforms today and that is driven off of a brand and driven off the fact that it’s delivered through our proprietary technology. So, the consumers benefit from that, we see tremendous momentum in this business. We made the decision to be in this business back in 2012. When the world thought that we were not, by going back into what you want to perhaps call brick and mortar, but it’s not. Either in-market loan officers that are remote, that works and live in the communities that they serve. And we have tremendous momentum here with organic growth and we have some conversations with potential meaningful acquisition targets. In addition, we are one of the largest joint venture homebuilders – lenders in the country and we continue to have a healthy pipeline of other large institutions in the works. Or direct lending platform is a manufacturing plant and the way that I like the folks to understand is, this manufacturing plant, it is the hardest to build in mortgage lending. Arguably, there is only two at scale, ours and our number one competitor. The way to look at a direct lending operation is what type of raw materials you feed at the top of the funnel in order for the manufacturing change to make a final widget at the bottom. What that we thrown in second mortgages, personal loans, cash out refis, refinance of purchases, becomes an opportunity for the organization as we evaluate the different types of financial returns. Refinances will continue to be very, very attractive. As I stated earlier, even if we characterize refinances by 30% we are still looking at well over $1 trillion to $2 trillion of refinance opportunity. As we continue to go through this trend change, the next 2, 3, 4, 5, months, we’ll see pressure to margins, but as capacity is squeezed and pushed out of the industry, margins will return. You have to remember the industry is not here to sell $1 bill for $0.90. Margins will return it always does. But when, there is a change and there is overcapacity, that everyone starts to get aggressive because they don’t want to shed capacity. It happens every time. So, as we look at purchase and refis we look at both of them separately, because they are really different opportunities.

And so, if we look at your purchase originations now and the runrate you are at, is that what we should expect to continue and potentially grow significantly, just given your focus on that and separating out between the refi and purchase?

Yes, this is Jeff Walsh. We would anticipate that number increasing. We maintained a really strong focus on our purchase business through our in-market channel. And through the first quarter have actually really aggressively stepped up our hiring of what we call qualified in-market originators, which is specifically focused around the percentage of the purchase business that they – what we’ve done. In the first four months of the year, we’ve added over $4 billion of net origination through hire – organic hire of in-market originators and truthfully, even though it was a highly robust refi market last year, we only focus heavily on purchase in the retail channel, because those originators know in-market retail channels, because those origination, that’s their long-term success of their business is to maintain those referral relationships that drive that purchase business. And it’s April, and traditionally we see the seasonality, the upswing of the purchase market and as we add that kind of critical mass of in-market originators, we anticipate to get a larger market share of that. And as you mentioned very robust purchase market that we anticipate in 2021.

Okay. Anthony, real quick on the M&A opportunity was, what type of size are we – should we consider? Or what type of size of organization would you consider bringing in in-house?

What we are looking at is, two different categories for mortgage place. One is a roll up strategy, which are smaller tuck-ins. For the M&A concern, it has to be meaningful. So, it takes quite a bit to integrate any acquisitions and we’ve done few in our organization and we’ve done one in 2013 and another one in 2015. And what we are sensing is, obviously, with margins coming in, sellers’ expectations are a bit more realistic. And number two, the fact that we have a recognizable brand. It becomes very attractive to those loan officers that may onboard to us both through acquisitions organic growth. So, we are very active there and have – we are having lots of discussions.

Thanks for taking my questions.

And by the way, just to differentiate here, our number one competitor is not in this market. So, again, going back to having different – looking different ponds, this is a different opportunity as compared to our primary competitor.

Thank you.

Your next question comes from the line of Ryan Carr with Jefferies.

Hi, good morning, guys. Thanks for taking my question. Anthony, just the first question here is for you, specifically on rate sensitivity of borrowers in this market and then the purchase side. Curious to see, to hear what trends you are seeing with respect to that. We saw, in this quarter especially rates rise significantly and it doesn’t seem like the purchase demand has tapered off as much as one would think in a normal market. So, curious to hear your thoughts on that.

I am sorry, Ryan, your question is, what happens to consumers take on rates, was that your question?

More so, I think what trends you are seeing specifically related to the rate changes and maybe how this time maybe different than previous mortgage markets?

So, Ryan, anytime interest rates start to move up, consumers get a little sticker shock is kind of like, when you are evaluating, planning something that’s on sale and all is done the sale price is over, that doesn’t mean that is not valuable today. Interest rates are still fantastic. But if they start to shopping before rates went up, they have a little bit of a sticker shock. So, many consumers sit on the sidelines, especially but the rate in turn because there is no sense of urgency for a sit and wait to turn a refi, cash sell refi, yes. If you are waiting and if you take money out of your house and your equities as we monitor your kitchen, there is certainly a sense of urgency. But if you are looking at a wait to return if you are refinancing out of a arm, or any other purpose, you can wait a little bit. Many times and perhaps what has the consumer, what if he understand rates are not coming down, rates are still extraordinarily attractive and there is still a lot of mortgages that are in the money given rates – where rates are today. But there is generally a little bit of a pause, just because rates are not on sale anymore. But consumers usually will come back around again, it’s going back to my original comment earlier is, whatever the refinance market is, whatever the volume of originations is, for this year and next year, capacity will adjust margins to the right size. It just takes a while we get there and we just came off the larger – arguably, the largest mortgage volume market ever. There was $4 trillion in 2003. So last year was the biggest year since 2003. So now, the industry just has a ton of capacity to shed. Sharing that capacity will take some time and as the capacity sheds, the margins will return because no one likes to sell $1 bill for $0.90.

Okay. And so, and then kind of going off of that, I mean, your margins in the retail channel held up a lot better this quarter than they did in partner. But curious to hear where you are adding capacity or you are trending it moving forward, just given where the direction of the market is?

Hi, Ryan, it’s Pat Flanagan. So, the – I think when you look at our partner channel, it’s the margin compression that you are wrapping thing was much more concentrated in the broker channel, but the JV channels that are primarily purchase business with our joint ventures and as it was noted, there has been more – there has been way less margin compression in purchase side of the business overall. And so, I think that’s what you are seeing is the effects of the prices were on the broker channel.

Awesome. And then, just lastly, any view on that price war? Any – and directionally, where you see things maybe heading for at least the foreseeable future?

So, it’s hard for us to tell where that shakes out. I agree with what Anthony said, which is that, selling a product – selling at a loss doesn’t last long generally and sheds capacity. And so, it’s largely a question of pain tolerance for how long they want to – that they want to keep that going on. But, for us, like we said, we are well positioned to continuing to make money. Our other channels haven’t seen that level of price compression, as also when we’ll see if there is a continuity in effect that bleeds over to the other parts of the business. But we are still seeing – as you get attention record high demand for purchases, the housing market is large and well. We are adding new joint ventures in the partner side which support higher margins. There is still a tremendous refi opportunity and as we expand products, and opportunities into cash out and HELOC and other products that - so that demand is something we are in great shape to continue to be profitable and take market share.

Thanks guys very much.

Your next question comes from the line of Timothy Chiodo with Credit Suisse.

Great. Thank you. Good morning. Wanted to change gears a little bit and talk a little bit more about the combination of brand marketing and the performance marketing in light of not only the MLB partnership that you have, but also the recent stadium naming rights with Marlins, maybe if you could just briefly touch on some of the benefits you expect longer term from those branding efforts? And then, also how that helps with your marketing efficiency on the performance side? And then at the risk of asking a little bit too much here, if you could just talk about how you expect that marketing efficiency on the performance side to look sort of in the next few months or so and how the branding might support to an extent?

Yes. Sure. Great question. So, it is really a comprehensive strategy when it comes to customer acquisition overall strategy. I’ll come back to how we view performance marketing and building our brand and how we look at recapture as well as conversion in a second, but what I will comment on is, building this brand over the last 11 years has been the key focus for us. And as we move into the different diversified origination platforms such as in-market, joint venture and wholesale, one of the surprising benefits that we received is building the brand and how much it has lifted our in-market business. Not only did it lift as our partners, whether it’s a builder or a real estate institution as they introduced customers to loanDepot, the brand being so well recognized really cements and develops even stronger relationship with us in our homebuilder and our real estate partners. In addition, it allows us to aggressively recruit additional in-market loan officers, because that’s a differentiated asset for in-market loan officer that typically either work for a bank or work for another non-bank with little or no brand. So, the brand build has given us more lift and what we actually have planned for. Now that said, a direct lending and the leads that we are currently producing. We currently evaluate and monitor our brand momentum and the brand is experiencing very attractive build over the last two years, specifically. We are now generating hundreds of thousands of digital mortgage leads on a monthly basis. What that allows us to do through performance marketing is the recognizable brand and image that ultimately increases our opportunity of conversion and pull through. That top of the funnel data analytics, and John Lee, our Chief Analytics Officer is on the phone and maybe he want to chime in after I am finished with my comments, it’s a very sophisticate for us how we look at the top of the funnel and through sophisticated algorithm and contact strategy, we are able to increase our conversion and ultimately drop the cost of customer acquisition. This is one of the primary difficulties of building out a direct lending platform. And this is why after 25 years, arguably 30 years of direct lending model, innovation, there is arguably only two direct lending models out there at scale that’s able to find customers on – and synergist portfolio defines. John, if you are on the phone, if you want to chime, please do so.

Yes. So, absolutely, Anthony. So, I mean, brand is very important, especially, as the refi lead market gets more competitive, you fill out a lead form today or generate response to an advertisement, it’s likely you are going to get a lot of phone calls in this environment. And brand helps to read out that noise for loanDepot. It allows us to get a higher – really, contact rate and pull through on our lead. So, as the market gets much more competitive, I see branding becoming more and more important to loanDepot. It allows us to get through the noise of the rest of the market and it’s very highly fragmented market with lots of lenders out there. In addition, brand is going to play a role in helping us drive demand. So, as the market transitions out of the rate in term refinance market into a more hybrid market with cash out and other opportunities, we’ll be able to help build some of that demand by educating borrowers on the product availability and then, obviously, attracting those borrowers through high brand awareness and consideration. So it’s a very simple strategy, but it’s very effective as the market gets very competitive.

Thanks for all the context. I appreciate it.

Your next question comes from the line of Mark DeVries with Barclays.

Yes. Thanks. I just had a follow-up question on that topic. Your pull-through rate was already pretty high and – but it was up pretty significantly this quarter. How much of that do you attribute to all the investments you’ve made in brand? And could you also give us some context on the arc of that on your recapture rate over kind of the – are you seeing kind of accelerating benefits now as you put more and more into your brand?

Do you want to take that, Jeff DerGurahian?

Got it. And then, are you seeing benefits from just retaining more of their servicing also kind of having that looking into your customers, is that helping your recapture, as well?

Yes, I mean, we continue to look at add consumers where there is a claim in itself to the speaker on a consumer is likely to come back and want to transact with loanDepot again. So, we continue to tailor that servicing portfolio really lend itself to future opportunities.

Okay. Got it. And then just one last question on spend on brand, how should we think about that being impacted if at all by kind of receiving refinance activity and maybe all revenues?

So, the brand and performance marketing as we get through this change is actually going to improve. Now, I know that sounds illogical, but it actually does and I’ll tell you why. And that is, as the industry continues to shed capacity, one of the top of the funnel things that they decide to do at first is to cut marketing. So, your supply and demand curve actually start to get rise at the top of the funnel first meaning that the industry is going to shed marketing before it sheds labor. So, just understanding that, which means that if refinance market drops by 30% in your marketing and the drops by 30% or 40%, it’s – you are playing hard, then it doesn’t change. So, we are going to start seeing that relatively soon and then you are going to see the labor shed within the next 60 to 120 days. But that’s generally the timing and that’s what we are forecasting.

Got it. Thank you.

Your next question comes from the line of Trevor Cranston, JMP Securities.

Hey, thanks. Most of my questions have been asked and answered already. I guess to add one more in. You guys mentioned the opportunity for maybe increasing cash out refis. We also saw the FHFA announced a new option for lower income borrowers to be able to take advantage of the current street market as last week. Just curious if you thought new programs like that allowing people who may not been able to access the market yet, nor likely to have a material impact, and if you think there could be other sort of programs or products that come out over the course of the year that help maybe through the refi demand or the kind of higher than where we might expect to just given what we know.

This is one of the reasons why we put our head down and created and build several components to the mello text asset. When it comes to our point-of-sale origination platform, our proprietary pricing component, our proprietary eligibility engine, the program that you just mentioned allows us to program into our offering and have that available to over 2,000 of our employee loan officers. Without relying on outside third-parties to input new programs and input new eligibility and input new guidelines. This is one of the punch lines that allows us to be agile, although we are large, we got to run around like a sea boat and this is one of the things that we do and do well is we understand that when the market changes, you have to be in control of that change. And programs such as this, along with 20 other or 25 other programs that’s about to be announced in a changing market, all of those combined as an offering will have a material impact, because it allows us align our funnel to offer more products and services to the consumer and we work very hard to get at the top of the funnel. So, where do we drive, 100,000 leads or 200,000 leads on a monthly basis, the more products we produce at better branded opportunity gives us a higher percentage conversion.

Got it. That makes sense. Appreciate the comments. Thank you.

Your next question comes from the line of John Davis with Raymond James.

Hey, good morning guys. One for you Pat, you mentioned you guys would pay a dividend on a go-forward basis. Just curious you guys done a strategy or currently maybe a percentage of net income is how you think about dividends and kind of mixing them with the M&A strategy you might thought you do about.

Yes, as we’ve stated previously, the recurring dividend we are targeting currently is $0.08 per share on a quarterly basis starting at the second quarter. As far as any – to pay special dividends in the future, we are primarily focused on trying to grow the origination business and continue to gain market share. And so, we look at special dividend opportunities where we have the excess cash build up and can deploy it in a way that we’ll meet the returns that we want to provide to our shareholders. So, we always look at that as an option. But our first option is to continue to grow the business on a go-forward basis and then grow – we’ll look at the size of the quarterly dividend probably after a year or so to see if it’s appropriate to what we expect would be the right kind of dividend yield along with the total value of the company.

Okay. So that will defines X percent or not essentially a quarter, but like a year basis will you expect to return a certain percentage 20% to 30% to shareholders is just going to be on in terms of as needed go-forward basis depending on what the organic growth opportunities are?

Well, yes, that’s - I think that’s a fair statement with regards to any kinds of special dividends on a going forward basis on the current dividend. We should have established what we think it should be for this year and what we think, this is a nice enhancement to return capital along, but we think we are compelling in our ability to build shareholder value through growth in the franchise and expansion of the multiple as we continue the journey towards kind of bubble services and other products and services to activate consumer brands.

Okay. And I have one quick one for you, Anthony. We talked a lot about the near-term pricing dynamics than, which I have said many times we’ve seen this movie before, but just curious are there any – do you see any sort of structural changes that title got a longer timeframe that there was any material changes to what gain on sale would be over a 2, 3, 4 year period?

That’s a great question and the simple answer is, I don’t know. This market is truly unique, because of the fact that capacity with non-banks specifically has been built up over the last 12 years, post financial crisis and Dodd-Frank. So, you have a highly, highly fragmented market with lots of Tier-2 and Tier-3 non-banks out there today. There is more power in non-banks today than any other previous market meaning collectively, because of the fragment in the market. So, I think that’s unique. I think it is also unique coming off of pandemic. That’s not something that any one of us has witnessed before. I think that we need to keep a close eye on the current administration. And what happens to the interest rates and inflation and it’s hard to determine. But one thing I can tell you is that, we’ve done the hard work to be prepared. So - and we continue to be very bullish and very confident about our positioning. The $11 trillion addressable market does not go away, pressure it well. And we just need to have confidence that we’ve built the right company to handle the pressure with rates and that during the pressure and coming out of pressure, we are going to win with additional market share.

Okay. Great. Thanks guys.

As there are no further questions at this time, Anthony Hsieh, I turn the call back over to you.

Thank you all again for these great questions and joining us. We look forward to continue building our relationship with all of you over the long term. And are excited about where we go from here. Thank you again and have a great rest of the day.

This concludes today's conference call. You may now disconnect.