ONITY GROUP INC. Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Key Themes: Reported highest adjusted pre-tax income and ROE in 3 years; MSR hedge offset interest rate impact; originations had solid performance with $18B in servicing additions and 26% QoQ volume growth; executed debt deleveraging transactions, reducing debt by over $180M year-to-date.
• Strategy: Guided by 5-point strategy including balance/diversification, capital-light growth, industry-leading cost structure, top-tier operating performance, and dynamic asset management.
• Recapture Platform: Performance above industry average, with investments in talent, process, technology, data utilization, and product enhancements to improve recapture rate.
• MSR Hedge: Targets 90%-110% coverage ratio, performed well offsetting MSR value changes due to interest rate fluctuations.
• Corporate Debt Restructuring: Orchestrated multiple transactions to lower debt, increase EPS, issue new high-yield debt, reducing dilution from warrants and original issue discount (OID).

Segment Performance

• Servicing: Adjusted pre-tax income improved, with forward servicing revenue increasing and lower OpEx, though higher MSR runoff. Total servicing additions were $18 billion in the quarter, with $60 billion in gross additions year-to-date. The reverse business showed strong profitability due to a successful asset management transaction.
• Origination: Total origination volume was up 26% QoQ, with consumer direct recapture volume up 52% QoQ. Total funded origination volume increased 23% QoQ to $8.5 billion, though the B2B co-issue channel was affected by unanticipated GSE pricing changes.

Guidance

• Q4 Outlook: Estimated pre-tax earnings around $40 million, driven by servicing and origination performance, with limited impact from corporate restructuring initially.
• Long-Term Focus: Sustained adjusted pre-tax income performance, reduced earnings volatility, improved ROE, and capitalizing on market cycle opportunities through selective MSR sales and reverse asset transactions.

Risks

• Interest Rate Volatility: Affects MSR values and recapture performance.
• GSE Pricing Changes: Impact co-issue MSR channel due to random price changes by Fannie Mae and Freddie Mac.
• Subservicing and Client Negotiations: Uncertainty in subservicing add timings and client renewals (e.g., Rithm contract renewal negotiations ongoing).

Question and Answer

Q: About Q4 pre-tax earnings estimate and impact of corporate restructuring.

A: Q4 estimate is based on servicing and origination performance, with limited impact from corporate restructuring initially as the restructuring's full effect won't be felt until closer to November.

Q: Impact of transactions on warrants and diluted share count.

A: Reduction in dilution based on current share price, modeled in investor presentation with different settlement methods showing reduced dilution.

Q: Co-issue MSR channel pricing changes and cost structure.

A: GSEs can randomly change prices, affecting co-issue MSR channel; co-issue has a different cost structure vs traditional correspondent, with co-issue being more scalable with a smaller team.

Q: Leverage reduction, buybacks, and deferred tax asset.

A: Focus on reducing leverage to 2.0 or lower; deferred tax asset is over $170M but needs cumulative GAAP net income positivity to lift valuation allowance.

Q: Subservicing additions and Rithm contract.

A: No specific guidance on subservicing additions yet; Rithm contract renewal negotiations ongoing, with one portion of the contract continuing until December 2025 and the other under negotiation.